PROPOSED NEW FAIR AND EQUITABLE COUNTY REVENUE ALLOCATION FORMULA

The raging debate in Kenya’s Senate on revenue allocation formula to counties is needlessly divisive and yet a sign of political maturity among politicians who refuse to “take orders from above”. Whereas it is a healthy debate that underscores democracy, methinks the focus is completely misplaced. It fails to cogently address the real challenges that bedevils the country inherent in the devolved units i.e. mismanagement, corruption and waste of taxpayers’ money. I don’t think it really makes a big difference how less or additional cash the counties end up receiving – truth is only a small fraction of those shillings ever gets to the grassroots or used for purposes intended. It is often gobbled up in County administrative offices and corruptly converted for personal enrichment by the political class at county mansions and assemblies before any of it trickles to the grassroots, the local communities are always left scraping from the bottom of the barrels. Word on the street is that most of it is funding opulent lifestyles and capital investments in swanky neighborhoods in Nairobi and its suburbia owned by governors and senior staff (of course in their cronies and proxies names). Therefore at a time of such strife and economic turmoil due to corruption and exacerbated by Coronavirus, perhaps, just perhaps, stopping the waste and corruption should be the primary focus on any debate or at least be a part of the debate. We have to reign in waste and corruption by removing discretionary spending of nationally allocated funds.

End Discretionary spending – It is common knowledge that corruption in Kenya is a devolved function. To mitigate this, county governments’ spending must be reined in. This means disincentivizing them from a) stealing and b) wasting revenue. All county budgets and spending should be preapproved in advance and proactively assessed for accuracy, reasonableness and procurement compliance. The country must end the “Audit” culture of chasing after corruption after the fact and prevent it beforehand. Inflated and phantom projects need to end now.

 

REVENUE ALLOCATION FORMULA & THE CENSUS

This topic comes at the heels of last year’s released census that showed a significant population gain in Central Kenya while other regions either stagnated or lost populations. So there is healthy suspicion, rightly so, that the move advanced by President Uhuru Kenyatta and Mt. Kenya legislators is a wealth redistribution ploy hatched last year and now being effected that will disproportionately benefit Mt. Kenya at the expense of the other counties. It is an extreme imperative that the census data be validated to remove these suspicions be addressed and remedied now otherwise they will simmer and become an even greater source of painful reckoning in the future. Use accurate data ladies and gentlemen, don’t cheat. The formula being proposed is not new or unique to Kenya, no! Countries around the world, notably the United States use census data as a primary tool for resource allocation. In Kenya, this should not be an epiphany to politicians, this should have been in effect at the start of devolution but because of parochial and special interests reasons, it wasn’t and like every other policy in Kenya, this is now coming to haunt the country when we least can afford. Nonetheless, it has to be addressed, it should be as hard as it is for these Senators to resolve it because the bone of contention is the proposed formula will inevitably mean lost revenues to some counties particularly North Eastern Counties and yes it will unless modified.

MODIFIED UNIFORM REVENUE ALLOCATION FORMULA (MURAF)

In the grand scheme of things, the 316 Billion shillings counties are fighting over out of a national budget of 2,500 Billion Shillings (2.5 Trillion) is paltry in relative terms and methinks the following proposed formula is an innovative one that not only mollifies the warring parties but also streamlines revenue allocation for posterity, not just temporarily. Kicking the can down the line is not an option, let’s fix this once and for all and it is really simple. This weighted modified two step formula recognizes and satisfies all parties and ensures equity. It recognizes that irreversible errors were made in the past while establishing a baseline upon which future allocations will be based. It grandfathers in the current county funding levels and ensures that counties that would otherwise lose funding or be ineligible for current level or incremental funding due to low demographics still retain their current level funding while counties with higher populations are equitably served on a per capita basis as it should have always been.

Proposed Formula:

New Proposed County Revenue Allocation Formula

In this illustrative formula, per capita Nairobi ‘s allocations will be at 29 Billion Shillings while Lamu’s will be 954 Million Shillings. Understandably Lamu would be unhappy to lose funding it now depends to advance its development agenda and so under step 2 of the modified formula it will retain it is current funding. Nairobi’s funding will be increased to achieve its equitable levels if it currently receives under 29 Billion Shillings. This means that the state will have to increase overall funding levels to make up the incremental differences in the formula. By what percentage of the national budget we will have to run the numbers and see.

 

CONTROL SPENDING – Kenya must learn to live within its means. She has one of the most retrogressive and punitive tax regimes on earth and it explains why her economy underperforms. The problem is not revenue collection but spending. Nine states in the United States, Alaska, Florida, Nevada, South Dakota, Washington, Wyoming, Tennessee and New Hampshire have NO income taxes on their residents. Their budgetary spending are primarily funded by Sales & Use Tax revenues at a rate under 10%. These state governments are fiscally disciplined, by law they have to Balance their budgets. On the other hand, Kenya has multiple tax layers and rates including 16% sales tax (VAT) on every product and service sold, a 20% Payroll tax and a personal income tax of about 30% not to mention 1% mandatory tax on ALL sales where you make profit or a loss. Kenyans basically work for the government, taxed to oblivion. But even with the taxes the government collects it is still running huge deficits that have accumulated the national debt to 6 Trillion shillings and counting. When the government borrows as much as Kenya does, it competes and crowds out private sector from raising capital to grow business and create jobs. Kenya’s credit rating is “JUNK” meaning the country’s cost of borrowing external capital is extremely high. Additionally, the increasing exchange rate risk compound the country’s cost of borrowing, point being the country is rapidly losing its fiscal grip and must tighten its belt even more tightly. Economists will tell you that the more you tax of something the less of it you get and as a consequence the economy contracts instead of expanding. Lowering taxes expands the tax base, stimulates and ultimately grows the economy. Kenya has failed on this front. Left unchecked soon there won’t be anything left to tax and the economy will collapse. One prevent this from happening is to control government spending and waste.