The annual debate on sharing of nationally raised revenues is underway. As in the past, a lot of the discourse is bound to be erroneous.
One midweek caption reported that governors “demanded 425 billion from the National Treasury”. To be precise, the Constitution of Kenya 2010 shares total taxes raised between the two levels of government.
The National Treasury may be the country’s financial manager, but the resources belong to the citizens. Taxes are collected to provide services. Since the Constitution specifies the functions (services) that each level of government is to provide, the revenues (taxes) must be divided. That is why this division is called equitable share.
It has always been a tough sell to the centralists, who are wont to quip that treasury is “giving” counties money.
At issue is the 2023/24 equitable share. As per the Constitution, a minimum of 15 per cent of the most recently audited and approved revenue must go to counties.
You might think sharing is simple arithmetic, but it is a highly political process, complete with smoke and mirrors.
The National Assembly has, rather conveniently, neglected to consider the audited accounts. As a result, the denominator used is seven years old. Using the old base, the national government can argue that counties are getting well over 35 per cent of revenues.
In addition, some levies accruing from county functions are collected by the national government. The catering levy, now renamed tourism fund, is one such.
All this ignites the broader debate on resource mobilisation for and by counties. Two routes are available to complement the equitable share – growing own-source revenue and utilising the capital markets.
For the capital markets, securities by well-managed counties are a superior asset class compared to individual corporates.
First, equitable share is a constitutional dictate. Second, when counties issue bonds, the law requires a Treasury guarantee. No corporate bond comes with such enhancements.
A guarantee, however, only offers additional comfort, as the issuing entity must have strong cashflows, which takes us back to how well counties are doing in their own source revenue.
Counties can improve their own tax collection by sealing loopholes, using cashless systems and widening the tax base. The latter in part involves ensuring that all county functions are carried out effectively. Some big ones are licensing of betting, casinos and other forms of gambling; and electricity and gas reticulation.
Globally, devolved units — states, provinces and counties — often use their power on gambling (betting, casinos, etc.) to run lotteries, besides licensing the private sector.
For instance, the Canadian province of Nova Scotia on the Atlantic coast, (pop 971,000), had US$ 258 million in lottery sales in 2021. Assuming a 25 per cent net, that is nearly US$65 million into state coffers.
Devolution of energy reticulation offers a chance to savvy counties to become competitive and attractive to manufacturing, by licensing more efficient reticulation.
Kenya has high energy distribution losses, sometimes running as high as 22 per cent. A county can avoid these losses altogether.
For instance, a solar generator in a special economic zone like Konza can connect to customers, leading to lower tariffs.
@NdirituMuriithi is an economist