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Equity should inform sharing formula not disparity

By Eliud Owalo | August 3rd 2020 at 12:00:00 GMT +0300

Over the last few weeks we have witnessed emotive debate arising from the Senate and elsewhere over the basis for sharing revenue among county governments for the financial years 2020/21- 2023/24.

It is a constitutional requirement for the Senate to once every five years, by resolution; determine the basis for allocating among the counties the share of national revenue. In so doing, the Senate should request and consider recommendations from the Commission on Revenue Allocation (CRA).

To this end, CRA’s latest recommendations have elicited mixed reaction and debate among the political class and experts. The most notable one and highly contested is that a number of counties especially those in the ASAl areas have had their equitable share of revenues tremendously and deliberately reduced. Obviously due to lack of information, a number of people have even proposed that the CRA’s proposal should be done away with as it is a “population based” formula.

Now, Kenya determines its vertical revenue share through a bargaining process between the two levels of government. Our Constitution currently sets a lower limit of 15 percent of the nationally raised revenues for the equitable share to the counties. This basic amount is revised annually based on the projected annual national revenue growth and adjusted accordingly to take care of inflation. However, the reality is that actual transfers have historically deviated from the projections.

Since the onset of devolution in 2013, the equitable share allocated to counties as a percentage of the country’s GDP has decreased from 4.6% in 2014/15 to 2.8% in the 2019/20 financial year. In absolute figures there has been zero growth in equitable share of revenues allocated to the counties between 2019/20 and 2020/21 fiscal years.

The figures have remained at Sh316 billion translating to just 17% of the total shareable revenues projected at Sh1.8 trillion in the 2020/21 fiscal year. The first allocation disparity is at this point. If Article 203 of the Constitution was to taken into consideration, how do you explain this disparity in allocation between the two levels of government? The Senate should therefore commence their debate towards protecting the interest of counties at this point. On the horizontal allocation, international best-practice and experience reckons that a formula approach is preferred by countries trying to correct inequitable distribution of resources plagued by ad hoc allocations by the central governments to sub-national governments. It’s desirable due to its objectivity.

To be fair to CRA, the parameters recommended were submitted to the Senate in April 2019 with the assumption that the equitable share of revenues negotiated by the Senate to the counties will increase. We now know the share did not increase hence based on the CRA recommendations, 17 counties will have their equitable share for the 2020/21 substantially reduced with the highest reduction being Sh1.4 billion and the least being Sh96 million.

The question, therefore should be, why are these counties losing their equitable share and how best can they be cushioned against the same? My best bet is that there has been an update of data used in the parameters, a case in point being the 2019 census.

A review of the previous formulas against the new data which includes the updated census data of 2019, Poverty data of 2015/16 and the revenue data of 2018/19 reveal that about 27 counties would lose out and have their equitable share of the national revenue reduced. The inference we draw from this is that the formulas hitherto applied are not good either.

So what options do we have? Having looked at the proposed Senate amendments on the CRA formula; Senator Johnson Sakaja’s motion and the Senate committee proposals, it is obvious that the issue is about protecting the loss in the identified counties rather than changing the parameters identified by CRA.

Therefore, in the long-term we need a middle ground formula that adequately responds to the prevailing social and economic gaps in all county governments. While population is an important element in service provision, it is and should not the only one.

For example, disease prevalence could be an indicator of a need for a particular county. There is therefore need for a mix between the expenditure needs approach that has been used by the CRA and the outcome-based approach to ensure that while we allocate money based on the functional responsibilities of the counties, their uniqueness in terms of developmental standards, peculiar situations and emerging issues should equally be considered. The health index used by CRA with a weight of 17% for example uses three measures; health facility-gaps, three years average number of primary health care visits to levels 2 and 3 health facilities and three years average in-patient days in levels 4 and 5 hospitals. It would be difficult for a county without facilities to benefit from the inpatient and outpatient parameters which are sub-components of the health index.

In the short-term, because counties are unable to receive their first tranche of disbursement in the 2020/21 fiscal year due to lack of a desirable formula, the Senate should devise a mechanism to cushion the 17 counties identified and envisaged to lose out.

Counties losing out due to lack of financial prudency and fiscal effort to generate own source revenues should not be cushioned. However, those negatively affected owing to the change of data in population and poverty levels should be cushioned through a deduction to a commensurate level from the counties deemed to have substantially gained within the new formula.

-The writer an economist practising as a management consultant.


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