What’s the constitutional basis for sharing revenue among counties?

A month into the 2020/2021 financial year, Senate is yet to decide on revenue division among the 47 counties.  Senators and the Commission on Revenue Allocation (CRA) have fundamentally differed on the third-generation revenue formula.

Article 200 (b) (iii) of the Constitution affirms “the public finance system shall promote an equitable society and in particular, expenditure shall promote the equitable development of the country, including by making special provision for marginalized groups and areas.”

Article 203 (1) itemises the criteria for determining the equitable shares.  Some of the criteria include: “…the need to ensure that county governments are able to perform the functions allocated to them; developmental and other needs of counties; economic disparities within and among counties and the need to remedy them; the need for affirmative action in respect of disadvantaged areas and groups; the need for economic optimization of each county…; etc.”

The Constitution mandates Senate to determine the basis of allocation of national revenue among the counties, taking into account CRA recommendations. The commission has, on three occasions, generated a revenue-sharing formula for Senate’s consideration.

The first formula covering 2012-2015 proposed county allocation be shared as follows: population 45 per cent; basic equal share to each county 25 per cent; poverty index 20 per cent; land area 8 per cent, and fiscal responsibility 2 per cent.

SUBSTANTIAL REDISTRIBUTION

Jason Lakin and Robert Mudida in a 2015 academic paper argue that the first revenue sharing formula “achieved substantial redistribution.”

This meant that hitherto under-developed, less populated counties, often with substantial land mass, began to access considerable revenue from the center.

The Constitution, rather than political patronage and tokenism, henceforth guaranteed flow of national resources and affirmative development to previously neglected regions. However, Lakin and Mudida also observe that the first-generation formula failed to endorse the “holding harmless” principle.

This principle guarantees that while resource reallocation to cushion formerly marginalised areas guarantees a measure of equity, equally existing privileged counties should not be made to suffer a diminution of services.

The authors argue that a national government conditional grant of about 20 billion to counties, which lost revenue in 2013/14, could have satisfied the “holding harmless” standard.

The second generation formula covering 2016-2019 did not drastically depart from the first. Only the equal share rose by 1 per cent, poverty level was reduced by 2 per cent, and a development factor of 1 per cent was introduced.

Through the third generation formula, CRA boldly created a nexus between county revenue and service delivery.

Health was assigned 17 per cent, agriculture 10 per cent, other county services 18 per cent, infrastructure (rural access) 4 per cent, and urban services 5 per cent, totalling to 54 per cent.

This was tantamount to raising the population factor from 45 per cent to 54 per cent while at the same time linking it to delivery of services.

Land mass remained at 8% per cent, poverty level criterion was reduced to 14 per cent, fiscal effort was pegged at 2 per cent, and fiscal prudence at 2 per cent. Basic equal share was reduced to 20 per cent.

For the first revenue-sharing formula, the population figures and poverty index used were those of 2009.

For the second generation formula, the 2015/16 Kenya Integrated Household Budget Survey poverty index and the 2009 population census were used to calculate county revenue.

Even in the current formula, this is the same data used since CRA unveiled the formula before the 2019 census.

SIGNIFICANT LOSSES

Reliance on the 2015/16 poverty figures occasioned significant losses of revenue for some counties. For example, in 2009, Makueni’s poverty level was 60.6 per cent, while six years later in 2015/16, it was declared to be 34.8 per cent, thereby resulting in a potential loss of about 300 million, majorly because of the new poverty index.  This sharp decline in poverty level is yet to be verified.

The CRA-Senate tug-of-war stems from the fact that 19 counties are big losers in terms of revenue drop under the proposed new formula. Some of these are expected to lose huge sums of revenue and development opportunities.

Strikingly, the argument of equitable distribution of revenue is being fronted by both sides of the debate.

One side argues that, equity means non-discrimination against any single citizen. As a result, national resources should be shared equally, bearing in mind, first and foremost, a county’s population. Hence the clarion call of “one shilling, one vote, one man/woman.”

The counter argument is that most former populous regions of Nairobi, Central, Western, Nyanza and Rift Valley have since independence dominated government and hence enjoyed the lion’s share of development resources.

David Ndii recently argued that through Sessional Paper No. 10 of 1965, resources were, as a matter of national policy, directed to areas with great development potential.

REVENUE SHARING

Recently, Murang’a Senator Irungu Kang’ata introduced an amendment to the revenue-sharing proposal before senate. He recommended that the current second generation formula be retained for two years, after which the third generation formula would kick in.

Senate rejected the proposal.

On the Senate floor now is Senator Johnson Sakaja’s proposal that no county should lose its current revenue.

Seemingly, Senate has reclaimed a measure of independence. It has defied party positions.  The minority voice supports revenue-sharing based on population because they expect votes from that numerical majority. To deny national revenue to their electorate is plain political suicide.

Some senators have decided to support minority rights come rain or shine.

Most senators in the current debate are focusing on the 15 percent  of national revenue shared among counties. What of the 85 per cent reserved for the national government?  The national government budget has funds for health, agriculture, other county functions and also conditional grants. The above funds can be used to ensure that each Kenyan citizen has the same quantum of services.

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Moreover, the 15 per cent revenue to counties can be raised by a simple Act of Parliament or even through exercise of executive authority since the constitutional 15 per cent is a floor, not a ceiling.

Ultimately our democracy must guarantee that we don’t leave any county or citizen behind. Our legislators must expeditiously work to achieve a win-win third generation revenue sharing formula.

The writer is the Governor of Makueni County