Penny wise, pound foolish: Counties target low-hanging fruit to raise revenue

By Business Beat Team

Kenya: County governments’ push to increase revenue collections by levying new taxes may bring in money now, but this strategy will cripple growth in sectors that would have created more income and jobs, experts warn.

Governors across the country have been unveiling new taxes, and in some cases enforced old ones, from levying charges on rearing of chicken to increased rates for business licences.

The dilemma facing counties is that residents want their roads fixed, water and sewerage systems improved, security enhanced and clean, well-structured areas to trade from. And they want these services now.

Little left over

However, even with allocations from the central government and current revenue collections, these governments have little left over for such county development needs as they are grappling with a huge wage bill and deep debt.

To resolve this conundrum, the knee-jerk reaction from most governments has been to seek a share of the cash traders are currently raking in.

The problem is that this is happening when most economic activities in the counties have yet to be scaled up to the point where it makes sense to impose levies on them.

“Most counties are in rural areas, and the main economic activity in these regions is agriculture. If governors promoted agricultural value addition instead of taxing chicken rearing, this would expand their tax base and create employment — providing even more revenue-generating avenues,” said Mr Paul Otung, an economist.

For instance, Mr Otung said, in Kiambu and Kisii counties that produce a lot of bananas, governments would earn more revenue if they helped farmers turn some of the produce into crisps.

“Telling farmers they have to pay Sh30 on every bunch of bananas produced, as is to happen in Kiambu, will only discourage production.

“Encouraging value addition through inviting investors to set up a processing plant would create jobs and lead to the production of products that can be consumed locally or exported. There is a lot to gain in the agricultural value chain — from cattle to farm produce — that could turn around regions.”

There has also been the eye-catching tax of Sh20 to be levied on any chicken kept in urban areas in Kakamega, which has drawn a lot of criticism.

“The tax increases seem to be an initial stab at increasing revenues to develop counties, but unfortunately, it may be going too far —chickens! I believe it is important for counties to team up with the private sector to increase development, create employment and, thereby, generally improve life for residents,” said Mr Nikhil Hira, a tax partner at Deloitte East Africa.

The central government will have released Sh66.5 billion by mid this month to county governments since devolution came into force after the March 2013 elections. 

The accusations

However, governors have faced accusations, including from Deputy President William Ruto, that they are spending most of the money on non-priority items like travel, with little money allocated for development projects.

But Council of Governors Chairman Isaac Ruto has defended his colleagues, saying the money counties have received was for paying salaries, with the National Treasury having delayed disbursing funds meant for development.

According to a report by the Office of the Controller of Budget, counties spent only Sh13 billion of Sh40 billion allocated to them between July and the end of September last year.

Mr Ruto, who is also the Bomet governor, said the money was not spent “because we did not have procurement plans. You don’t just spend Government money because it is there. We had to have proper procedures.”

This then raises questions on just how well prepared the counties are to utilise the additional revenue they are hoping to raise through this current series of rather unpopular taxes.

Following the governors’ forum held last week, Otung said some the ideas that were arrived at were a step in the right direction, but may not get counties to where they need to be.

“Sacking workers countrywide has great social costs, while more funding, though desirable, is not feasible due to fiscal absorption constraints.”

So what are the feasible choices for governors?

“Investments in social infrastructure will make all the difference in how counties perform. Social infrastructure means building good institutions and coming up with policies that align the personal and social interests of people. The taxes being introduced do not seem to be in synch with the aspirations of the residents – which are things like job creation, food security and infrastructure development,” said Mr Otung.

“Remember, individuals will always look for personal benefits through rent seeking. This occurs in forms like crime, bribery, nepotism, tax dodging and even politicking. These activities have zero social returns, thus waste precious social capital. To grow, counties must minimise the negative effects of rent-seeking activities, and increasing taxation and spending money on buying governors’ mansions will do the opposite.”

Mr Ruto, however, has said the revenue increments were passed through all stakeholders, with the public invited to participate, and added that those aggrieved are at liberty to appeal against the financial laws that contain the tax levies.

Investment data

County governments could also utilise some of the investment data that has been collected by the Kenya Investment Authority (KenInvest).

The State agency has prepared a handbook on the investment opportunities available in the counties.

KenInvest Managing Director Moses Ikiara said it also provides a glimpse into the capital requirements of different projects. 

“We will also be available to offer advisory services to the counties on the risks involved in the counties as they seek to lure investors,” Dr Ikiara said.

The State agency charged with offering investment advisory services has been involved in collecting data to guide potential investors on the returns to be made across various sectors.

“We will also make them [investors] aware of what makes one county more competitve than another, in terms of investment opportunities,” he said.

Ikiara added that KenInvest would also market the counties in local, regional and international forums to ensure Kenya achieves its long term development objectives.

“We will showcase how well positioned a county is to attract businesses,” he said.

Mr Lazarus Kimang’a, the chairman of the Institute of Certified Securities and Investment Analysts (ICSIA), also suggests that counties “inculcate a culture of investing the revenue they receive to generate income.”

As the governments recruit personnel and lay the foundations for future prosperity, Mr Kimang’a urged them to leverage professionals to create wealth and jobs.

“The counties must involve the experts to guide others on how to generate income through various investment vehicles,” he said.

ICSIA will be organising an investment meeting mid this year in an effort to have county leaders brainstorm on the best possible way to attract industries and businesses to create jobs and wealth for the youth.

bizbeat@standardmedia.co.ke

— By Emmanuel Were, Jevans Nyabiage and Winsley Masese