Why debate on how to share revenue is escapist

Kenya is nothing without political cacophony. “The formula” has replaced coronavirus on prime time news. Yes, we’re talking about the new basis for horizontally sharing the overall county equitable share of the budget for 2020/21 across counties. Between “Team Kenya” and “One Man, One Shilling”, the Senate has inflicted much trauma on our tentative state of pre-2022 “BBI vs non-BBI” stability.

Not unusually, our top political leadership is playing mum, and dumb. After seven failed attempts at agreeing a basis that would trigger passage of the County Allocation of Revenue Act, and bail out cash-starved, Covid-riven counties, a nine-person Senate committee will now reconcile “the people and the land” while ensuring no winners or losers. It is easy to smell misdirection and diversion here.

The Commission of Revenue Allocation (CRA) has doggedly explained its technical rationale; even contributing to two webinars in the past week. Yet, message interference persists by the time the Senate speaks. Let’s strip out the “noise” and make four points for reflection by the Senate.

First, let’s get this basis/formula) out of the way. The first basis pursued two objectives: service delivery and redistribution. The first objective (80 percent of total) was to be achieved through a mix of population (45 percent), equal share (25 percent), land (8 percent) and fiscal responsibility (2 percent, eventually shared equally). Redistribution was to be achieved through the poverty factor (20 percent). Using this basis, Sh966 billion was disbursed to counties between 2013/14 and 2016/17.

The second basis was a refinement directed at three objectives: funding for assigned functions, correction of economic disparities and the “development gap”, economic optimisation and incentives to optimise revenue-raising capacity. New words, right? Population remained at 45 percent, equal share went up to 26 percent, poverty dropped to 18 percent, land and fiscal effort remained at 8 and 2 percent respectively, and one percent was spared for the “development factor” (roads, water etc). Some Sh933 billion was disbursed to counties between 2017/18 and 2019/20 (last financial year).

We’re now debating the third basis. It identifies several problems with the first two. Disconnect between the basis (formula) and actual functions assigned to counties. Use of a single transfer to address multiple objectives. Use of population as a proxy for all expenditure needs (surprise, surprise!). Over-weighted (and hence, non-incentivised) equal share. Inappropriate measure of poverty (poverty gap, rather than proportion). Inadequate weighting of development effort.

The third basis sets four objectives: enhanced service delivery (65 percent), balanced development (31 percent), optimised revenue raising capacity and prudent use of public resources (two per cent each). Health, agriculture, urban and other services, as well as roads, land and poverty are parameterised in the formula, which is ambitiously aimed at specific functions. Within the region, only South Africa has pursued this “service/sector” approach to resource sharing. The jury on outcomes is still out.

Back to the four reflections. First, “winners and losers”. The current debate is about 19 “losers” against 28 “winners”, and discourse has taken a decidedly regional slant (marginalised losers vs prosperous winners). Two points are missing from the discussion.

One, as CRA has demonstrated, counties have gained and lost before. Between the first and second basis in 2016, 29 counties saw their equitable shares fall, only 18 experienced gains. Two, the mere update of data, rather than change of basis, leads to dramatic gains and losses.

Using the second basis, and updating poverty data from 2009 to 2015/16 would have dropped 26 counties; while updating population data from 2009 to 2019 would have slashed equitable shares for 30 counties. A population only formula would create 27 losers. There is a deeper unanswered question to ponder here around stability and volatility across and between the formula and the data.

At a more practical level, and as a second point, how does CRA and the Senate get predictable equitable share guidance to counties that are working within five-year development plans and three-year expenditure frameworks? Put differently, is the basis “chicken or egg”?

Which leads us to a third point. The more specific the basis is to functions, the less it is an unconditional transfer, and the more it looks like a block grant. In which case, of what significance is the health or agriculture element in the basis/formula to actual health and agriculture budget allocations across counties with different priorities? Is there a danger that counties with a different focus (say, water) may suffer in their equitable share allocation if they invest less than the formula “prescribes” for health?

Finally, many have argued that that the vertical share (between national and county governments) is just as important as the horizontal share. There might be a bigger point. Here are some numbers to ponder.

Total public spending in the past seven years – Sh14.2 trillion. Total equitable share allocations to counties in that time – Sh1.9 trillion. Total revenue – Sh9.5 trillion. Overall revenue shortfall/deficit – Sh4.7 trillion, which equals the growth in public debt from Sh1.9trillion in 2013 to Sh6.6trillion today.

Since devolution began, county equitable share is up by 67 percent; total revenue by 80 percent and total spend by 120 percent. National government spend is up by 130 percent. Are we scapegoating the formula? Do we see results and impacts, or misdirection and diversion? Food for thought.