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November 15, 2018

Fiscal devolution and its learning curve

President Uhuru Kenyatta chats with Nairobi Governor Evans Kidero at Tom Mboya Labour College in Kisumu County during the opening of the 2nd Annual Devolution conference on Tuesday. Looking on is former PM Raila Odinga.Photo PSCU
President Uhuru Kenyatta chats with Nairobi Governor Evans Kidero at Tom Mboya Labour College in Kisumu County during the opening of the 2nd Annual Devolution conference on Tuesday. Looking on is former PM Raila Odinga.Photo PSCU

Out of the three dimensions of devolution, fiscal devolution has dominated administrative and political dimensions in public discourse in the recent past. Perhaps because of the fact that figures are more of a reflection of how well the other dimensions are working. Matters of inadequate budgeting, late financial reporting, unpaid salaries and overspending on recurrent expenditures at the expense of development expenditure are some of the bottlenecks facing fiscal devolution. 

The report that some county governments have run short of cash before the end of the financial year means that operations are at risk. Suppliers have to wait longer for payments, while for other counties there is no cash for sitting allowances and even salaries. In short, some counties are threatened with insolvency. 

Inadequate allocation from the national revenues is a key discussion point especially among the affected counties. Nevertheless, some lessons will be learnt especially on budgeting, estimation of local revenue collection and budget monitoring. In the midst of scarce resources, the successful county is one that will prioritise its responsibilities while on the other hand seeks innovative ways of raising additional revenues. 

It is a steep learning curve. Most counties have so far learnt that arbitrarily introducing taxes in the form of chicken taxes and burial taxes are not only socially unacceptable, but also economically not viable. The picture of a tax collector moving from household to household counting the number of chickens and goats is not one that may be welcome in an independent Kenya. In a country with over 46 per cent living below the poverty line, some of the homesteads may be too poor to afford the tax, so will the tax collector pick one of the chickens as tax?  Besides, the salary of a revenue clerk is likely to be too high to be economically deployed to collecting such revenue. 

The lessons learnt by most county governments is that they cannot tax anything and everything they can lay their hands on. In fact, to attract investments, county governments will need to spend more on development. Water and waste management are some of the basic infrastructure that is the responsibility of county governments that many investors will look for in evaluating the suitability of an investment destination. To differentiate themselves and attract investment, a rebate on services provided may be necessary. This means that even where county governments may be offering a potentially chargeable service, they may choose to forgo the fees in order to remain competitive. Investors will be shopping around for tax-friendly county governments when deciding on investment destinations. Besides business taxes, individual taxes such as that on domestic animals like chicken that are a source of food and meagre livelihood for many rural households is likely to lead to impoverishment and not prosperity. Investors are looking for a county location with some purchasing means not one which is impoverished. 

The Commission on Revenue Allocation in a bid to curb overspending introduced ceilings on budget lines. In the county 2014-2015 reporting, 28 had fully complied with the ceilings. Although some of the compliant counties have outstanding liabilities, they are nevertheless an example of fiscal discipline. 

Going forward, fiscal discipline is a crucial requirement for any successful financial management. Even at personal, company and national level, fiscal discipline is a cornerstone of economic success. Many are aware from the example of Greece that lack of fiscal discipline has painful consequences, even at the national level. 

Furthermore, since county governments look forward to the authority to borrow, both from the financial market and international market, fiscal discipline will be key in evaluating their credit worthiness. Lower credit worthiness will be penalised with higher borrowing rates, while higher credit worthiness will  borrow at better interest rates. It is also likely that the national government will take this into account when approving any county borrowing, especially because constitutionally, debts by the county government are required to be guaranteed by the national government. 

Besides, a county government that builds its fiscal discipline early will be better equipped to negotiate with the national government for  larger borrowing approval and guarantee. It is also a strong basis with which to negotiate with potential credit providers. 

Regardless, successful fiscal devolution is an anchor for both administrative and political devolution. This is because delivery of economic growth and prosperity will depend on the efficiency of this pillar and its resilience particularly in times of political transition. The county that gets this right will be walking on the path to prosperity. 

As the county governments deliberate on the success of the last two years of devolved government, we hope they will build on the successes and take into account lessons learnt as a basis to build a successful future. 

Karen Kandie is a financial & risk consultant with First Trident Capital and a PhD candidate in Finance at Catholic University of Eastern Africa.  [email protected]

 

 

 

 

 

 

 

 

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