Public debt, political opportunism greatest risks to devolution's future

DP Rigathi Gachagua when he chaired an extraordinary session of the Intergovernmental Budget and Economic Council to further consult on the 2023/2024 Budget Policy Statement at his Harambee House Annex office on February 1, 2023. [DPCS]

The Inter-Governmental Budget and Economic Council (IBEC) held its 20th session this past week under the chairmanship of Deputy President Rigathi Gachagua. The frequency of IBEC meetings have increased under the new administration despite some muted questions as to Kenya Kwanza’s commitment to devolution.

The elephant in the room necessitating the increased activities are questions on equitable revenue share allocation and delays in cash release to counties. While the law does not exclusively define a timeline, it is expected that the Treasury will disburse money in a predictable manner. This is because each county has an approved annual development plan, a procurement plan and a cash plan to guide their expenditures.

While politics has taken centre stage on this administration’s commitment to the devolution agenda, everybody seems to miss out on the real monster. These are the impacts of the public debt on the constitutionally shareable revenue, and bad politics that have taken over key institutions that support devolution.  

Contrary to the popularly accepted truth in public opinion, county governments have not been short-changed on the shareable revenue; and county governors are not the designated members of IBEC. Before anyone throws stones at me, let’s face the law first.

The law

The constitutional provisions on revenue sharing are found in Article 201 and 203 of the Constitution. Specifically, Article 201 (b)(ii) defines equitable sharing of revenue between the national and county governments as one of the fundamental principles of public resource management. Article 202 exclusively provides that revenues raised nationally shall be shared among the national and county governments equitably.  

Article 203(3) defines the shareable revenue as the ordinary revenue based on the most recent audited accounts, and approved by the National Assembly. Further, Article 203(1)(b) requires that any criteria for sharing such revenue must take into consideration any provision that must be made in respect of public debt and other national obligations.

Technically, this means allocation towards payment of interest on public debt and principal redemption must be removed before deciding on the shareable revenues. The principal amount borrowed is not part of the ordinary revenue either. If these provisions were the intended desires of the drafters of the Constitution, then here comes the shocker!

For the fiscal year 2023/24, the Hustler government ceded ground following a nuisant political bickering from county bosses and advocates of devolution to allocate Sh385.4 billion to counties. The question then is: does this amount meet the 15 per cent threshold envisioned under the Constitution?

To answer this question with both facts and the law, we must refer to the audited revenues of the national government. The most recent published accounts, available at the Auditor General’s website, are for the fiscal year 2021/2022. However, these accounts are not complete until the relevant committees of the National Assembly have considered and approved them, as envisioned under Article 203(3).

To the best of my knowledge, the National Assembly has been operating on a three year backlog, despite the obligation under Article 229 (8) to consider and take appropriate action within three months of receiving Auditor General’s reports. Thus, under the law, the last audited accounts to be used in considering shareable revenue for the fiscal year 2023/24 are the revenue accounts for 2019/2020.

Based on this understanding, the actual revenue of the National Government for the fiscal year 2019/20 is Sh1.619 trillion. The audited public debt expenditures for the same year is Sh704.8 billion (it is important for this analysis to take note that this year, the government received considerable relief on debt repayment owing to the Covid-19 economic impacts). If we net off public debt repayment, the shareable revenue comes down to about Sh914 billion.

Thus, in the fiscal year 2023/24, counties have been allocated at least 42.2 per cent (385.4/914) of the last audited revenues of the government. Even if it was for argument sake that we take the 2021/22 audited accounts before approval by the National Assembly as the basis of sharing the revenues, things get worse. The actual revenue audited under this accounts is Sh1.941 trillion while the debt expenditure total Sh1.041 trillion. The net shareable revenue would be Sh899.7 billion. Thus, using the 2021/22 audited accounts, counties have been allocated at least 42.8 per cent of revenue raised nationally as per the Constitution.

The implication of this is that if we are to adequately fund the counties in the future as provided in the law, the debate must shift into taming debt appetite at the national level. The only other sustainable measure would be to compel counties to become fiscally independent and to fund own budgets internally and reduce dependency on shareable revenues. This leads us to the next point.

Enemy within  

While there cannot be any justifiable reason to arbitrarily deprive counties of their constitutionally allocated revenues, the greatest threat to the future of devolution is the counties themselves. For avoidance of doubt, Section 187 of the Public Financial Management Act (2012) that established the IBEC never envisioned this to be a political entity. The Act deliberately designed it to be a technical forum of consultation and consensus-building on matters finance among the two levels of government.

The official members of IBEC under the Act are the DP (chair); Treasury CS (chairs if DP not present); a representative each from Parliamentary Service and Judicial Service commissions; chairs of Commission on Revenue Allocation and Council of Governors; all 47 County Executive Committee Members of Finance; and the CS responsible for intergovernmental relations.

The responsibilities of the council as per the Act are on the contents of the Budget Policy Statement, integrated development, borrowing guarantees by national government to counties, schedule of disbursements, policy legislations and recommendations on equitable distribution.

How this mutated into a high octane political forum of the DP and county governors remains a mystery. More worrying is how the devolved funds have been spent. From the Controller of Budget annual reports analysis between 2013 and December 2022 (first half of fiscal year 2022/23); counties have received at least Sh2.835 trillion in equitable share and raised Sh839.12 billion internally.

This totals to at least Sh3.2 trillion for the first 10 years of devolution. Of this, 70.4 per cent has been spent of recurrent expenditure, with salaries alone accounting for over 65 per cent on average. Development expenditure totals to  a paltry 26.6 per cent, below the constitutional threshold of a minimum of 30 per cent.

If it is true that numbers do not lie, then the candid question we must ask going forward is whether we desired devolved consumption centres or true engines of development. This must shape the agenda to the 8th devolution conference slated for August 2023 in Eldoret, Uasin Gishu County!