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Monday, March 27, 2017

What Does The Constitution Say About Public Finance And Are We Implementing It? Part 2

CUTTING THE CAKE: Chairman of the Commission on Revenue Allocation Micah Cheserem. ‘Annually CRA makes recommendations on the proper division of resources between the two levels of government, known as the “equitable share.” This is subject to a minimum level of funding for counties: 15% of revenues using as the basis the last audited and approved financial statements of the government.’
CUTTING THE CAKE: Chairman of the Commission on Revenue Allocation Micah Cheserem. ‘Annually CRA makes recommendations on the proper division of resources between the two levels of government, known as the “equitable share.” This is subject to a minimum level of funding for counties: 15% of revenues using as the basis the last audited and approved financial statements of the government.’

Constitutional Framework

This article builds on a previous one about public finance and the constitution. Here we focus on issues related to revenue sharing with counties and the devolution of public finances.

Devolution is one of the major achievements of the new constitution. The financing of devolution is largely dealt with in Chapter 12.

The constitution aimed to provide counties with adequate financing and considerable autonomy, but also to ensure uniformity in the management of public funds around the country.

Parliament’s expanded powers in public financial management, discussed in the previous article, also extend to regulation of county finances.

The issue of financing for counties occupies roughly a third of the chapter and the procedures for sharing revenue are elaborate.

The process is to be driven primarily by the Commission on Revenue Allocation, which makes proposals and offers advice, while the final decision belongs to Parliament.

The composition of CRA is notable: it combines political and technical legitimacy. Members are meant to represent the parties in Parliament in proportion to their strength in both houses, but must also have “extensive professional experience” in financial matters.

Annually CRA makes recommendations on the proper division of resources between the two levels of government, known as the “equitable share.”

This is subject to a minimum level of funding for counties: 15% of revenues using as the basis the last audited and approved financial statements of the government (Article 203).

The National Treasury then prepares a bill based on this recommendation (it does not have to follow them entirely but must explain any differences).

Article 95 states that the National Assembly “determines the allocation of national revenue between the two levels of government.”

But the Senate has the role of representing and protecting the counties, which seems to be impossible to fulfil without playing at least some role in influencing the resources they receive.

How the counties’ share is distributed between the counties is to be fixed every five years. Again, CRA leads the process but this time Senate takes the next step, and adopt a resolution on the formula to be used.

The National Assembly may change the Senate’s decision by a two-thirds majority of all its members; if the two houses cannot agree, a joint committee of both houses must mediate.

Counties may also receive additional funds from the national government in the form of conditional or unconditional grants. And the constitution creates the Equalisation Fund comprising 0.5% of the revenue raised nationally, to be spent by the national government directly or given as a conditional grant to counties, and to be used to provide basic services in marginalised areas.

The distribution of funds between the two levels of government and among the counties is meant to be informed by an exhaustive set of principles laid out mainly in Article 203.

These principles include an assessment of the needs and functions of the different levels of government, ensuring adequate funds to meet public debt payments, an assessment of the “national interest”, the fiscal capacity of counties, the efforts counties make to fund themselves, and a set of factors generally related to equity considerations (including affirmative action for the “disadvantaged”).

The chapter ensures that counties follow the same basic procedures as national government. Their budgets must follow a certain basic format that is to be further detailed in parliamentary legislation (the Public Finance Management Act).

Financial control is exercised at county level by the Controller of Budget, just as it is at national level. And financial audit is exercised by the Auditor General, just as at national level.

County debt must be guaranteed by the national government, ensuring a role for National Treasury and Parliament in approving county borrowing.

Implementation

How has the scheme of the constitution been implemented? Much of the operationalization of Chapter 12 has been done through the Public Finance Management Act.

This provides details on the form and timing of the budget process, and improves on some elements of the constitution. For example, the constitution only requires the annual Division of Revenue Bill to be tabled two months before the end of the financial year, far too late to allow for rational decision-making at national or county level.

For counties, it would mean that they would be tabling their budgets before the “equitable share” was even debated by Parliament.

The PFM Act requires that CRA recommendations are sent to Parliament by January 1 every year and the Division of Revenue Bill tabled by February 15.

What has happened in actual practice? The annual sharing of revenue has been a contentious process. The ambiguities regarding the role of the Senate saw senators locked out of the 2013/14 revenue sharing process.

However, an advisory opinion from the Supreme Court held that the Senate should have a role in the annual determination of the vertical share, and this has been happening since the debate over the 2014/15 budget.

Negotiations between the two houses continue to be acrimonious and this has led to severe delays in passage of the Division of Revenue Act each year, which has in turn created fundamental uncertainty for counties about their revenue bases each year.

Another area of controversy has been about the amount that should go to counties. There is a concern that the functional assignment process to be led by the Transition Authority was never completed, meaning we do not know exactly how much counties need for their functions (one constitutional criterion for sharing).

There has also been a lack of state reform in areas that are clearly county functions, particularly related to restructuring of national parastatals in the water, roads, and agriculture sectors.

In spite of this, counties have received far more than 15% of the last audited accounts, in fact just over 20% of current shareable revenue each year.

Nevertheless, there have been a number of campaigns to increase this funding, arguing (without much evidence) that counties are cash-strapped.

While the evidence in favour of under-funding on a massive scale is weak, there do appear to be some substantial liquidity challenges causing delays in county receipt of funds each year.

In 2014, CRA began the process of revising the revenue sharing formula with a view to securing Senate agreement on a new formula for 2015/16. The Senate eventually voted on the new formula only in March 2015, rejecting it.

As of November 2015, the Senate has not been able to agree on a new approach to revenue sharing. Given that this is one of the few areas where the Senate has an unambiguous role, it is surprising that they have not invested more effort in negotiating a solution.

The battles over the annual revenue share and the formula have exposed a fundamental weakness in the constitution, however.

While governors have participated in the annual division of revenue through the Intergovernmental Budget and Economic Council, and engaged with CRA around the formula, there are deep rifts between governors and the senators who supposedly represent the counties.

This has led to an unanticipated scenario where governors seem to be able to negotiate directly on these matters and come to agreements which are then not accepted by senators. This in turn has led to delays in legislation that actually hurt counties.

The Controller and the Auditor have both embraced their oversight roles and produced a growing set of reports on counties.

Although these reports are imperfect, they are feeding a healthy debate about county finances.

However, there have been oversteps as well, with the Controller trying to enforce limits on how much counties could spend on executive and assembly operations that were subsequently found illegal.

The same perceived problem—county assemblies overspending on unproductive items—has led to a set of PFM regulations, of questionable constitutionality, designed to control county assembly amendments to the budget.

Unfortunately, the constitution did not leave us with many tools to deal with this problem, relying instead on principles of cooperation and robust relationships between representatives and their constituents that appear not to be fully up to the challenge.

The author is the country manager of the International Budget Partnership Kenya Office


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