There exists a prospect in the capital market for the counties to issue bonds and raise capital from investors.
Increasing the efficiency of county governments’ own-source revenue (OSR) remains crucial in enhancing public service delivery. Domestic revenue shortfalls have occasioned fiscal deficits compounded by escalating pending bills and recurrent expenditures, as well as non-innovative revenue generation systems. The result is poor public service delivery at the county level.
Therefore, harnessing and revitalising domestic revenue mobilisation opportunities remains a top priority for county governments in Kenya to strengthen service delivery.
Devolution as enshrined in the Constitution of Kenya 2010 mandates counties to devise sustainable approaches for augmenting revenue mobilisation to enhance socio-economic development. The goal remains elusive as no particular county is financially self-reliant. The focus has been on the National Treasury with little attention given to increasing sustainable OSR generation at the county level to reduce over-reliance on national funding.
In the 1st half of the Financial Year (FY) 2023/24, the OSR only contributed to 24.9 percent of the aggregate annual target of Sh80 billion. Over the same period, only five counties attained over 50 percent of local revenue collection against the annual target.
The following initiatives revitalise counties’ ability to realise their full potential in own-source revenue mobilisation and generation.
Utilisation of financial instruments
There exists a prospect in the capital market for the counties to issue bonds and raise capital from investors. The ease of access to such funds will lessen the financial distress, with the proceeds financing public investment projects that have defined income streams. While infrastructure bonds have been touted as viable mechanisms to raise funds for development, counties are yet to fully exploit this opportunity.
Initiatives to leverage revenue mobilisation at counties through the bonds were pioneered by the Treasury with the support of the World Bank in 2020. Selective counties including Kisumu, Makueni, Laikipia and Bungoma were piloted to establish their credit ratings as part of the primary condition for accessing the bonds. Since March 2020, these counties have been eligible to borrow through the Nairobi Securities Exchange (NSE) and other external markets.
The underutilisation of the County Credit Worthiness ratings initiative by the select model counties narrows down options that exist for the devolved units to internally mobilise revenues. The policy framework of the initiative enables them to borrow from the capital markets up to 20 percent of their last audited total revenue. Only Laikipia County has ventured into the bond market by successfully floating for a Sh1.16 billion infrastructure bond in 2022.
Strengthening domestic revenue mapping
Article 209 (3) of the Constitution mandates counties to impose taxes on property, entertainment, and other levies. The majority of the counties have not fully exploited this avenue and the revenue mapping shortfall creates inefficiencies in identifying areas of economic strength for exploitable streams of revenue and income. These may include marine sports, mining, agriculture, or tourism. The creation of a conducive investment environment in these areas has the potential to improve the confidence levels of investors, thereby widening the prospects for increased income from taxes and levies.
The low revenue collection rates are majorly attributed to inadequate data on the specific economic activities in various wards and sub-wards, and the misclassification of businesses and properties. There is a lack of real-time data on the counties’ potential revenue streams such as the total number of business enterprises in their jurisdiction at a given time. This hampers their ability to set targets and efficiently track the revenues collected. Consequently, the situation limits their enforcement capacity.
Streamlining revenue administration approaches
County governments usually have ad-hoc fiscal collection strategies that are applicable in the short run, ordinarily within a year. This creates a high degree of unpredictability and uncertainty in the OSR policy direction. Manual systems of revenue collection and the failure to tailor tax collection to systematised databases abound. These strategies fail to give confidence and certainty to citizens and investors, thus impeding the creation of more opportunities to generate revenue.
This is significantly attributed to delays in adopting and cascading the comprehensive National Tax Policy and the Medium-Term Revenue Strategy (MTRS) for the period FY 2024/25 – 2026/27 at the county level to intensify prospects for counties to develop medium-term county tax policy strategies. In addition, the generation of revenue can be supported by end-to-end digitization of tax administration to establish a digital one-stop shop to minimize tax leaks. Also, streamlining tax processes, technical capacity enhancement, and setting up digital databases can boost the approaches. Countries such as Ghana, Benin, and Peru, have embraced some of these approaches to seal tax leaks at the local level.
There are tendencies by county regimes to contract new digital payment systems once they get into office without adequate public participation. In addition, the service provider’s tenure is limited to the wish of the appointing authority and can be terminated at any given point. The lack of a policy framework to ensure that the tenure of the digital collection system goes beyond a county regime to enhance the sustainability of revenue data mining and collection.
Conclusion
Moving forward, there is a need for counties to intensify adopting and cascading the comprehensive National Tax Policy and the Medium-Term Revenue Strategy (MTRS) for the period FY 2024/25 – 2026/27 by developing medium-term county-specific revenue mobilization strategy as opposed to the annual fiscal strategies; awareness creation of infrastructure bonds; absolute digitization of revenue collection; develop policy framework that ensures the tenure of digital collection system beyond a county regime to enhance the sustainability of revenue data mining and collection; and frequent updating and harmonization of revenue-generating activities, businesses, and assets database.
Mr Nduvi is a research fellow at the Global Centre for Policy and Strategy (Gloceps). [email protected].
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