Why counties go broke

Counties go broke because they live beyond their means, splurging billions on salaries and perks – and in some cases looting – at a rate that far exceeds their revenues.

An analysis of the Controller of Budget financial reports for the past eight years shows that while each year neat county budgets are prepared, delays in Treasury disbursements, spiralling wage bills, motunting debt, corruption and poor revenue collection have messed up finances.

The review shows the total expenditure for the 47 counties has increased at an average of Sh27 billion each year.

But counties have spent more on fattening perks for officials – perhaps not much for employees given their persistent cries over salary delays - while only paying lip service to what matters most to residents, development.

Expenditure on personnel emoluments - wages and benefits - has increased by an average of Sh12 billion each year.

And budgets for operations and maintenance, which include domestic and foreign travel for county officials, have risen by an average of Sh7 billion each year.

However, the spending on development has only grown by an average of Sh18 billion each year, despite extravagant expenses by globetrotting county officials - and their relatives - as was revealed during the impeachment of a governor who senators heard paid for her daughter’s New York trip from county coffers.

Despite the sharp rise in counties’ expenditure, their equitable share of revenue – their portion of national revenue – has only grown by an average of Sh15 billion annually.

The devolved units’ financial situation has been worsened by stagnation in revenue collections through property rates, parking fees, trade permits and other taxes – suggesting leakages and theft.

The highest amount the counties have collected was Sh40 billion in the 2018/19 financial year – an achievement largely made possible by 13 counties that exceeded their annual targets during that period.

Yet counties have the potential to collect between Sh55 billion and Sh173 billion each year, according to a 2018 World Bank report that lamented the average of Sh35 billion collected annually.

“The own source revenue (OSR) annual collection is stagnant and declining in some counties. The dwindling OSR annual collection by counties is attributable to policy and legal gaps, lack of information and poor reporting, low institutional capacity, and weak political commitment,” states this year’s Parliamentary Budget Office (PBO) report.

A majority of counties show gaps of 35 per cent to 94 per cent between actual and potential revenue collection. This means that counties can actually fund a higher share of local services from OSR if the potential is realised.

Heavy burden

The counties’ revenue collection figures have fallen or stagnated as Kenyans are struggling with a heavy burden of new and higher taxes, particularly business licences and building approval fees.

While some have spent millions to instal automated revenue collection systems, corruption explains the poor performance that the Controller of Budget has consistently flagged over the years.

With poor revenue collection, counties are at the mercy of the National Treasury, but the exchequer releases have neither been reliable nor adequate.

Apart from the persistent delays, both parties sometimes don’t agree on accurate records of the cash flows, as happened in January when governors and the Treasury clashed.

On January 14, Treasury Cabinet Secretary Ukur Yatani stated the ministry had transferred Sh133 billion - Sh120.2 billion in equitable share and Sh13 billion in conditional grants - to county governments for the 2020/21 financial year.

The CS acknowledged that because of the adverse effects of Covid-19, disbursements to county governments were falling behind by two months.
The following day, the then chairman of the Council of Governors, Wycliffe Oparanya, countered that the total amount of equitable share transferred to counties for 2020/21 was Sh93.9 billion.

Mr Oparanya, the Kakamega governor, insisted the amount “does not in any way cover the entire monies owed for the four months of October, November, December and January”.

Residents suffer

Disbursement delays lead to the shutting down of services in counties and residents suffer.

And counties also fail to pay suppliers on time, as demonstrated by huge pending bills. As of June 30, 2021, county governments reported pending bills totalled Sh96 billion.

Other counties have resorted to breaking the law by diverting funds, as the Controller of Budget exposed in the report for the 2019/20 financial year.

Some 19 counties are indicted for incurring expenditure above approved budget allocations and approved exchequer issues.

“This is an indication of weak budgetary controls, failure to refund unspent funds to the CRF (County Revenue Fund) at the close of the financial year as required by Section 136(2) of the PFM Act, 2012, and/or use of revenue at source,” states the report.  

And despite this financial distress, counties continue to dig themselves into a deeper financial hole through wasteful spending – and in some cases outright theft – if the corruption cases in courts against county officials are anything to go by.

This spending spree with no corresponding significant rise in income means counties inevitably run broke as witnessed earlier this year.

“The delay by the national government to disburse funds slows down growth as counties can’t pay workers, contractors or implement projects.

That means jobs won’t be created,” says Machakos Governor Alfred Mutua.

The county governments’ total expenditure has nearly tripled in eight years.

It has risen from Sh169 billion in the 2013/14 financial year to Sh501 billion in 2020/21.

As a pointer to the wage bill crisis, out of Sh501.7 billion spent in 2020/21, recurrent expenditure was Sh314.9 billion, representing 63 per cent of the annual recurrent budget.

That year, counties spent only Sh186.9 billion on development or slightly more than a third of their total expenditure, pointing to poor growth in some regions.

Dr Mutua says the poor financial position counties find themselves in illustrates the sorry state of the nation’s economy.

“It’s a symptom of an economy that is not growing. The economy has stagnated, there is no robust growth such as that witnessed during President Kibaki’s era,” Dr Mutua argues.

The Machakos governor concedes corruption has contributed to the hard economic times witnessed under the Jubilee government.

“The level of corruption, misuse of funds and delays in implementation of development projects has been high during President Uhuru’s administration because of the fractious nature of his government due to his wrangling with his deputy William Ruto,” Dr Mutua argues.

“The demand for devolved services has become higher than anticipated. Health is eating up a huge chunk of the budget – hiring workers, (maintaining) medical facilities and equipment – yet it’s considered recurrent and not development budget.”

One of the challenges flagged in the Controller of Budget’s report for 2019/20 is the high expenditure in counties on personnel emoluments – Sh171.83 billion or 44.8 per cent of the total spending for the period.

Annual target

This exceeds by far the maximum allowed limit of 35 per cent of their total revenue.

Yet despite these growing expenses, the equitable share of revenue for counties has increased only by slightly more than a half – from Sh193 billion in 2013/14r to Sh316.5 billion in 2020/21.

In the same period, revenue collection in counties has only ranged between Sh26 billion and Sh40 billion.

The Sh35.7 billion raised in 2019/20, which was 65.2 per cent of the annual target of Sh54.9 billion, is still the second-highest collection.

During the year, only five counties - Homa Bay, Taita-Taveta, Machakos, Lamu and Bomet - exceeded their annual targets.

Counties that recorded below 50 per cent against annual targets were Meru, Nandi, Busia, Siaya, Wajir, Kajiado and Kisii.

Nairobi City County generated the highest amount of revenue (Sh8.72 billion), followed by Mombasa (Sh3.26 billion) and Nakuru (Sh2.55 billion).

Counties that generated the lowest amount were West Pokot (Sh107.18 million), Tana River (Sh64.47 million) and Wajir (Sh60.42 million).

In 2015/16, when counties collected the third-highest amount (Sh35 billion), Nakuru, Kericho, Laikipia, Trans Nzoia and Baringo counties scooped top honours.

Dr Mutua warns counties can no longer depend on property rates and levies on existing businesses as their only sources of revenue.

“We need to diversify into new sources that will only come through ventures like Foreign Direct Investment (FDI). We have to encourage private-sector investment in, say, factories and public private partnerships,” he suggested.

“Unfortunately, it’s difficult for a county to get a foreign investor because of the bureaucratic bottlenecks.”

He said the country cannot continue borrowing and that a change of leadership is needed and leaders with “better economics” embraced.

Counties should cut their reliance on allocations from the national government and generate more revenue.

Experts have tipped counties to harmonise their Single Business Permits (trading licences) regime by simplifying guidelines. These reforms may gradually unlock trade licence revenue of up to Sh23.4 billion from 2022/2023 financial year and the medium term, according to the PBO.

Counties should also tame runaway wage bills and comply with the law that requires devolved units not to spend more than 35 percent of their total revenues on salaries.

If counties continue with wasteful spending, they will be walking further down the path to financial ruin.

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