Several counties are still struggling to get a handle on their fiscal affairs, a decade after they were set up, punishing their suppliers, employees and service delivery through perennial cash woes that have kept them fully dependent on Treasury’s disbursements.
The drafters of the constitution saw counties as an answer to the longstanding problem of poor resource distribution in the country, especially development funds which were traditionally wielded as a political tool by the central government.
As a result, the counties are expected to allocate at least 30 percent of their budget to the development vote.
At the same time, to cut the wastage of resources, the devolved units are meant to ensure that expenditure on wages and benefits does not exceed 35 percent of their total revenue in any given year.
For the year ending June 2022, a majority of counties flouted the budgetary allocation limits. They also missed the target for own-source revenue (OSR) collections, collectively netting Sh35.9 billion against the target of Sh60.4 billion for the fiscal year.
“Only four county governments (Turkana, Migori, Lamu and Vihiga) were able to collect more than one hundred percent of their annual OSR target in the fiscal year,” said the National Treasury in disclosures contained in the 2023 draft Budget Policy Document.
These missed milestones, experts say, point to revenue mobilisation weaknesses that are borne out of the fact that many of the counties do not have an economic base that can generate taxes, and yet have to meet the costs of a wide range of services to their residents.
A June 2022 study by the Commission on Revenue Allocation (CRA) estimated the revenue potential of county governments at Sh215.6 billion, which is six times the actual collections in the past fiscal year.
The scope of taxes they can levy is also limited, coupled with leakages that the CRA reckons can be cured by the adoption of automatic and cashless payments systems and streamlining of taxation and fee structure by the counties.
“Devolution did not consider [the] economic reality that few counties would break even. They collect low taxes—there is no income tax from employees and VAT from consumption--and property tax is also low,” said Prof XN Iraki, an economist at the University of Nairobi.
“The constitution gives them little leeway to impose taxes. But even if they got leeway, the sources are limited, unlike Nairobi or Mombasa with industries.”
Given the limited resources available, and the periodic delays in disbursement of the equitable share (Sh399.6 billion in the current fiscal year) due to revenue raised nationally, the expectation would be that the counties would cut their spending to reflect their limited fiscal wriggle room.
The opposite is true, however, with 36 out of the 47 devolved units busting the 35 percent cap on wages and benefits spent in relation to revenue.
Of the 11 that met the wage cap threshold, the top performers were Tana River, Mandera and Isiolo, at 28 percent of revenue.
Meanwhile, Machakos, Garissa and Kisii Counties spent the highest share of revenue paying workers at 62 percent, 60 percent and 58 percent respectively.
The Treasury data shows a strong correlation between containment of wage expenditure and improved spending on development in counties.
Only 12 out of the 47 counties spent more than 30 percent of their annual outlay on development programmes. Half of these 12 counties were also on the list of the 11 that kept their wage expenditure below the required limit.
The worst offenders were Nairobi, Garissa and Narok Counties, which directed just 10.7 percent, 12.5 percent and 12.6 percent of their budgets respectively to non-recurrent expenditure in the period.
On the other end, Marsabit (41.8 percent), Uasin Gishu (37.1 percent) and Nakuru (35.3 percent) spent the largest share of their budgets in development projects, with the latter two investing significantly in urban infrastructure as they chased city status for their largest towns.
In the approved budgets laid down at the beginning of the fiscal year, all but two counties (Nairobi and Kiambu) had allocated 30 percent of expected expenditure to development, pointing to changes in expenditure priority during the year due to funding shortfalls.
One of the ways being mooted to address the recurrent-development budget imbalance is for counties to make better use of the debt market, where they can issue bonds to support development projects.
Laikipia County has so far made the clearest effort to access the formal debt market for development funds with its Sh1.16 billion bond proposal, meant to fund 16 projects in water and sanitation, transport and urban planning in the county’s urban centres.
The debt market, Prof Iraki added, is a good starting point for counties as it will help them develop the infrastructure needed to jump-start investments.
However, given the fiscal indiscipline seen over the past 10 years, especially in relation to the hiring of staff, the debt option needs to come with tight oversight by the national government and county assemblies.
Article 212 of the Constitution stipulates that a county government may borrow only if the national government guarantees the loan and with the approval of the county government's assembly.
“Fiscal discipline is needed to put more resources into development, not salaries. The national government can use its guarantee to discipline the counties, with certain conditions before the guarantees…if not they will use debt to pay salaries and bloat their payrolls further,” said Prof Iraki.
The longer-term solution, he added, is for counties to focus on attracting investment in their economic strengths such as agriculture, minerals or tourism, which will lead to higher income from taxes and levies.
The national and county governments have also developed the National Rating Bill and the County Governments (Revenue Raising Process) Bill, which are meant to help counties enhance their OSR by outlining the processes and means of unlocking property taxes, fees and levies.
The two bills, which lapsed in the 12th Parliament, are being resubmitted for consideration.
Another revenue measure outlined by the government is by reviving the Contribution in Lieu of Rates (CILOR) plan through which counties are supposed to receive funds from the Central Government in lieu of rates for public land within their jurisdiction.
The collapse of the plan that was previously in place for the defunct local authorities has been blamed on an inadequate legal framework to stipulate how counties can claim the fee, outdated land valuation rolls and a lack of familiarity with the CILOR procedures at the county level.