What counties must do to boost own revenue collection figures 

Eleven years ago, Kenyans voted to devolve power and resources to 47 county governments. One of the critical factors for successful implementation of devolution is reliable sources of revenue to enable county governments to govern and serve their people effectively.

However, county governments continue to face serious financial challenges, which result in disruption of services to the poor and vulnerable households that depend on the government for food, healthcare, education, cash transfers, agricultural inputs, water and sanitation, among other basics.

Counties run on cash transfers from the national government and own-source revenue (OSR) in form of taxes, charges, fees, loans and grants. Between 2013 and 2021, counties’ OSR was extremely low, accounting for less than 15 per cent of their budgets, implying over-dependence on tranfers from the national government. 

In the Financial Year 2020/2021 for example, all the 47 counties combined raised Sh34 billion, which was 63 per cent of the annual target of Sh54 billion. This was a decrease compared to Sh36 billion generated in the Financial Year 2019/2020.

The total expenditure by county governments in 2020/2021 was Sh398 billion, meaning the Sh34 billion they generated covered only 11 per cent of this expenditure. This is only enough to pay salaries and allowances for only 20 per cent of the county employees. 

The counties spent about Sh175 billion on employees’ pay. This explains why county workers go for two or three months without pay whenever cash transfers from the National Treasury are delayed; as happens most of the time.

County revenue potential

Most counties’ OSR relative to Gross County Product (GCP) has been below 2 per cent, which is far below the best practice for Sub-Saharan African countries’’ Revenue to GDP level, which is about 25 per cent.

Additionally, in FY 2020/2021, the average revenue generated by all counties from their own sources was about one-third of their potential, which points to vast unexploited county revenue potential. 

However, Laikipia County under Governor Ndiritu Muriithi stands out. The county generated Sh840,396,632, which is 92 per cent of the county’s OSR potential of Sh917,500,000. 

The second in performance is Tharaka-Nithi under governor Muthomi Njuki, which collected Sh254,745,602 or 75 per cent of the county’s OSR potential of Sh333,500,000, as estimated by the Commission on Revenue Allocation (CRA). 

None of the remaining 45 counties attained half of their potential. Kisumu, Nairobi City and Turkana counties are the worst performers at 12 per cent, 13 per cent and 14 per cent respectively. 

In FY2022/2023, which starts on July 1, 2022, the National Treasury expects to collect about Sh2.1 trillion in taxes. Of this, Sh1.7 trillion has been allocated to the national government, Sh370 billion to county governments as equitable revenue share and Sh7.1 billion to the Equalisation Fund.

Setting revenue targets

The national government has retained the counties’ equitable share at Sh370 billion despite the increased need for more resources by the counties. The future budgets drawn by the National Treasury indicate the government will cut its expenditure on grounds of increased uncertainty in revenue mobilisation due to the impact of Covid-19 pressures.

It also seeks to lower the fiscal deficit, slow down debt accumulation and debt repayment expenses. Government projections indicate that the expenditure cuts will be achieved primarily by cutting current expenditure and fiscal transfers to counties while protecting the investment budget. 

The Laikipia County Revenue Board attributes its success to the use of a cashless mode of payment, installation of CCTVs in key revenue streams as well as a vibrant and dynamic workforce. These factors have minimised revenue leakages and thus enhanced performance. 

Another secret is setting revenue targets per quarter. Additionally, the way the county executive relates and works with the board – where the governor chairs monthly revenue roundtable meetings – has contributed to its sterling performance.

Cuts in fiscal transfers to counties combined with population growth time value of money imply that county per capita spending will decline over the next two to three years unless counties’ OSR performance is significantly enhanced to close the resource gap.

The writer is Head of Research Institute of Public Finance – Kenya