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Ideas & Debate

How Senate can end the county revenue sharing stalemate

Mandera Senator Mahamud Mohamed speaks to the media on July 7
Mandera Senator Mahamud Mohamed speaks to the media on July 7, flanked by his colleagues opposed to the third generation revenue sharing formula. PHOTO | JEFF ANGOTE | NMG 

Over the last few weeks, the public has been treated to what seems to be a political standoff on how devolved funds should be shared among Kenya’s counties.

The role of coming up with a mechanism to share revenue among counties is given to the Commission on Revenue Allocation (CRA), which tabled its proposal to the Senate in early 2019.

The role of approving the mechanism is given to the Senate by Kenya’s public finance-related laws. The current formula that is under review is supposed to be used for five years. The first two formulas were to be reviewed after three years each.

What is the issue and what are we missing in this debate? There are four angles missing in this debate.

First and sadly, the Senate has done very little to help the public understand what the CRA tabled before them for consideration. Here is a quick summary.

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The proposed formula has four main sections based on different parameters. First, it has introduced parameters that are more directly related to services such as health and agriculture. Second, it has parameters meant to address marginalisation such as poverty, access to roads, health facility gaps and land area. Third, it has a section meant to incentivise counties that work harder to raise their local revenue.

Lastly, there is a section meant to encourage prudent use of devolved resources. Here there are parameters such as the type of audit opinion from the Auditor-General and adherence to the threshold for allocation to development expenditure. This formula moves closer to the definition of ‘funds follow functions’ and gives more importance to the public demand that counties should spend their resources well. Therefore, there is nothing fundamentally wrong with the formula and it’s an improvement from the first two formulas.

As formulas change, they will create changes in the equitable share received by individual counties. The redistribution of resources is made with an objective of building up service delivery in marginalised areas so that they can move towards levels enjoyed in other areas. Therefore, over time, the indicators will start shifting and that will affect the share of resources going to different counties. For example, in the first formula, poverty data at the time indicated that 5.2 percent of poor people lived in Turkana County. In the latest poverty data from KNBS, that proportion has dropped to 4.1 percent. Therefore, even if the parameters were kept at the same level, the share of resources going to Turkana from the poverty parameter would reduce.

If these scenarios are not properly debated in the Senate and communicated to the public, Kenya will have this very same stand off each time a formula comes up for debate. Therefore, the Senate and the CRA should make KNBS their best friend, with clear direction on the type of indicators that should be measured over time to capture the development changes happening across counties. South Africa updates data used to allocate resources to their provinces annually in a transparent manner and we can learn to do that as well.

Third, the proposed formula remains redistributive and that is another aspect that is not coming out clearly in the political conversations. Let me use an illustration here. In the 2012/13 financial year, the resources that were spent by the central government on the services that are now devolved was Sh171 billion.

Twenty-seven percent of that amount was spent in the 17 counties whose share of equitable share is reducing in the proposed third formula. In the first generation formula, their share went up to 36 percent which was indicative of the redistributive objective of allocating more resources to marginalised counties.

In the second generation formula, the share went up further to 37 percent. In the proposed formula the share goes down to 34 percent. Therefore, the formula remains redistributive and does not go back to pre-devolution era allocations. The formula has also come up in the Senate at a time when the equitable share to counties is not going up and that has also contributed to the number of counties getting less than what they received in the 2019/20 financial year. If the amount were adjusted even just by the rate of inflation, then the number goes down from 17 to 12 counties.

The principle of any revenue sharing mechanism is that no county should be affected negatively by changes in such formulas. Therefore, even after taking all the issues discussed here into consideration, there are still 17 counties that could get less funds.

The Senate should create a cushion that would ensure these counties at a basic minimum receive what they did in the year before. In public finance this is known as the holding harmless principle which aims to ensure that services are not disrupted by sudden reduction in resources.

This is not new in Kenya. In 2013/14 the first formula saw 15 counties, mostly the former provincial headquarters, with less resources than had been spent on services in 2012/13 that would be devolved the next year.

The Treasury proposed a Sh17.3 billion holding harmless allocation to cushion these counties. While, the proposal was rejected in the National Assembly then, the Senate can do better this time around. There are already two proposals in the Senate on how such a conditional mechanism can be applied in the case of the third formula.

Kinuthia is the Senior Programs Officer, International Budget Partnership

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