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Wednesday, August 16, 2017

Truth about county revenue

MICAH
MICAH

In the last four years, county finance bills have seen the corridors of the courts more than any other county document. Businesspersons and ordinary citizens have reacted strongly to new and arbitrary charges introduced by the counties through these documents. The famous “chicken tax” remains a memorable example.

While the counties may have erred in proposing so many new charges, it is easy to understand their motivation: They are under pressure to increase total revenue and reduce their reliance on national transfers. But though many people are pushing the counties to raise more revenue on their own, there is a tendency to ignore systemic issues in local revenue collection that predate devolution and make this difficult.

As background, recall that the revenue generated by the counties actually makes up a very small part of their total budgets. In 2015-16, only 12 per cent of county budgets were funded through local revenue collected by the counties. Notably, this is a lower proportion than in 2013-14 ( 16 per cent), the first year of devolution.

Very few, mostly urban counties, account for a big proportion of this local revenue. For instance, the top five counties, Nairobi, Mombasa, Kiambu, Nakuru and Narok, collected 60 percent of the total revenue collected by the 47 counties in 2015-16. Nairobi alone collected a third of the money raised by all counties. Local revenue in many rural and poorer counties is a very small part of their funding, and it is shrinking over time.

Revenue collection is also highly erratic in most counties. Between 2013-14 and 2014-15, 43 counties saw their local revenues grow. The growth was welcome after low performance against targets in 2013-14. However, the revenue raised in 2015-16 shows a trend that goes in the opposite direction. Revenue collection decreased in 21 of the 47 counties when compared to what they collected in 2014-15.

Why did this happen? Available budget implementation reports from government do not explain these patterns across the counties. The Office of the Controller of Budget has highlighted the fact that the counties are not hitting their local revenue targets, but nothing in OCOB reports explains why the counties are not meeting those targets. The National Treasury identifies specific challenges in county revenue collection: Lack of guidelines, loopholes in revenue systems and lack of proper forecasting. But these explanations do not explain variation across the counties or over time in performance.

The revenue sources available to the counties are the same as the now-defunct local authorities used to collect. So, were things any different before devolution? We looked at revenue data from 2005-06 to 2012-13 under the local authorities. We found that it was also very erratic across most localities and most revenue sources. Because the main revenue sources for the counties are the same as for local authorities, we conclude that the unpredictable growth of county revenue did not start under devolution. Looking at 10 years’ worth of data from 2005-06 to 2015-16, it is clear that the counties inherited inconsistent revenue sources that make it difficult to predict annual growth.

Even if these revenue sources were not inconsistent, the counties still have very little taxing authority under current law. The only taxes the counties can collect legally are property rates and entertainment taxes. Beyond this, they should only collect charges related to business permits and specific services.

We looked at the implications of this in only two counties that have published budget implementation reports this year: Kirinyaga and Baringo. The figures from these counties show the majority of their revenue is from service charges. This includes collections such as market fees, game park charges and fees collected from agricultural produce. Taken together, only two per cent of these county budgets are funded by property rates and single business permits. Most of what the two counties collect is to provide certain services and cannot be used for general budget support.

Given that most counties are rural, most of the revenue they collect will continue to come from service charges. Considering the counties have few revenue sources, and those that they do have are erratic, it is not surprising that they are becoming more reliant on the national government over time. If we want the counties to become more autonomous, Parliament needs to look at county revenues afresh and consider expanding the types of revenue they can collect.


Kinuthia is a research analyst at International Budget Partnership Kenya
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