Allocation

 

One of the fundamental statements in the Constitution of Kenya 2010 is on the 'national cake'; that it must be shared equitably. Hence allocations of Public Finances is closely tied to the new governance model of devolution. This model is designed to facilitate the fair sharing of the Public Revenue. Excerpts from Article 201 in Chapter 12 - Public Finance, Part 1 - Principals and Framework of Public Finance:

201. The following principles shall guide all aspects of public finance in the Republic— (b) the public finance system shall promote an equitable society, .......(ii) revenue raised nationally shall be shared equitably among national and county governments; and (iii) expenditure shall promote the equitable development of the country, including by making special provision for marginalised groups and areas; 

Whether for emphasis or otherwise, the same is repeated:

202. (1) Revenue raised nationally shall be shared equitably among the national and county governments.

The details of the actual amounts allocated to the National Government in the 2014/15 financial year are beyond the scope of this discussion. However, the interested reader may follow this link on the budget amounts: "Understanding what the Kenyan Government spends money on." 

Equitable sharing of public revenue must be wholesome in its allocation - covering the entire gamut of all monies coming in or going out of the entire Public Finance system, i.e., tax, allocation, expenditure and debt:

201. The following principles shall guide all aspects of public finance in the Republic— (b) the public finance system shall promote an equitable society, and in particular— (i) the burden of taxation shall be shared fairly;

214. (1) ........ an Act of Parliament may provide for charging all or part of the public debt to other public funds.

Furthermore, equitable allocation and sharing of the entire public finance also means it must be evenly spread over time:

201. (c) the burdens and benefits of the use of resources and public borrowing shall be shared equitably between present and future generations;

The Public Finance Management Act 2012 spells out the details that govern these allocations, and in particular, establishes a Public Debt Management Office to oversee both national and county debts, in direct fulfillment of the Constitution's demands for prudence with regard to debt.

Sharing of the national cake will not be a case of "throwing good money after bad" just to fulfill a law. Every County's allocations or any financial request/need will be considered on its own merit. Key amongst the financial and accounting considerations to be made with every allocation will be prudence, discipline, capacity, GDP, positive affirmation of minorities, etc, all the while keeping tabs on the national collective good:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter— (a) the national interest; (b) any provision that must be made in respect of the public debt and other national obligations; (c) the needs of the national government, determined by objective criteria;
(d) the need to ensure that county governments are able to perform the functions allocated to them; (e) the fiscal capacity and efficiency of county governments; (f) developmental and other needs of counties; (g) economic disparities within and among counties and the need to remedy them; (h) the need for affirmative action in respect of disadvantaged areas and groups; (i) the need for economic optimisation of each county and to provide incentives for each county to optimise its capacity to raise revenue; (j) the desirability of stable and predictable allocations of revenue; and (k) the need for flexibility in responding to emergencies and other temporary needs, based on similar objective criteria.

Indeed, given the sharp political emotions that often accompany resource allocations anywhere, the country is likely to find itself engaged in constant bickering fueled by the political class no less, especially where the said allocations have caveats imposed on them, or have been skimmed to enforce prudence in the use of Public Funds.

It should come as no surprise therefore, that the Secretary for Finance has authority to stop any allocation that in his/her opinion would jeaopardise the sound management and accountability of any public finances to devolved Governments:

219. A county’s share of revenue raised by the national government shall be transferred to the county without undue delay and without deduction, except when the transfer has been stopped under Article 225.

The powers to stop a transfer of Public Funds vests with the Secretary of Finance and extend to any State organ (since it is a manager of Public Funds):

225. (3) Legislation under clause (2) may authorise the Cabinet Secretary responsible for finance to stop the transfer of funds to a State organ or any other public entity— (a) only for a serious material breach or persistent material breaches of the measures established under that legislation; ........

The details of the legislation referred to above is contained in the Public Finance Management Act 2012's Part III. 

To be fair to the affected State Organ or County, these powers have limitations in scope and period lest they became punitive. Clauses (4) to (7) of Article 225 detail the involvement of Parliament and the Controller of Budget in the facilitation of an amicable and just resolution should a public body find itself in the unfortunate situation whereby its funding is suspended, or frozen altogether. That involvement is discussed under the roles of the National Assembly and Senate, and the Controller of Budget, respectively.

Various Bills and legislation considered in the relevant House of Parliament, will govern the criteria to be used in the allocation of Public Finance into the relevant receiving Fund. This legislative process may involve the people directly, and will be subject to technical input from the Commission on Revenue Allocation CRA. For example, Parliament did indeed invite the public to participate in the preparation of the first Division of Revenue Bill after the first General Elections in 2013 under the Constitution of Kenya 2010.

The amount allocated to the Counties is set at a minimum 15 per cent of National Revenue:

203. (2) For every financial year, the equitable share of the revenue raised nationally that is allocated to county governments shall be not less than fifteen per cent of all revenue collected by the national government.

Some scholars have suggested that this (low) percentage is an indication that Kenya's devolution is of a limited degree. Others, who prefer to see the glass as half-full, counter by pointing out that it is a minimum and not a fixed amount.

Indeed, barely a few months into the new dispensation after the General Elections of March 2013, there emerged sustained calls from a cross-section of the political class calling for a constitutional referendum to raise this minimum to 40 per cent ostensibly to "fully empower County Governments". Those opposed to the calls for a referendum argued that by allocating over 32 per cent of (audited and approved) revenue to County Governments in its first budget, the National Government had zealously demonstrated its commitment to Article 203. (2), and by extension, to devolution.

The debate and politics around the call for increased allocations soon fizzled out. However, in the following year, debate on the same issue resumed, taking even greater public prominence particularly around July and August of 2014, as part of a wider set of demands by the political opposition alliance CORD and the Council of Governors (COG), at a time when debate in Parliament on the Division of Revenue Act No. 12 of 2014 for the 2014/2015 financial year was on-going. 

Although this 2014 Act allocated 43% of revenues, this translated to just 226 billion shillings in a year when national revenues were projected to reach close to 1 trillion shillings, as the Act's amounts were based on the 2008/2009 accounts. These happened to be the last audited-and-Parliament-approved accounts at the time:

(3) The amount referred to in clause (2) shall be calculated on the basis of the most recent audited accounts of revenue received, as approved by the National Assembly.

Thus going forward, there is urgent need for greater efficiency and speed on the part of the National Assembly to dispense with the audit reports of national revenues in order to prevent the current situation where the National Government continues to retain what is by far, the lion's share of revenue raised nationally in a given year. Having said that, even if these accounts were to be approved on time, the allocations to the 48 Governments ought to and must be calculated using fresh, up to date data on the twin costs of national and devolved functions.

No such accurate data exists or is forthcoming from the Counties or from the COG in support of their demands. Ideally, such data should be provided by the Commission on Revenue Allocation CRA in whose mandate it is to determine allocations.

The Commission received its fair share of criticism for failing to shepherd the debate on what should be the correct share percentages of the national cake:

"The Pesa Mashinani initiative by governors is also unconstitutional ....... . Those promoting this initiative have, in effect, illegally usurped the functions of the Commission for Revenue Allocation as set out at Article 216. Incredibly, even the commission itself is constrained on how to go about its work. It is actually baffling that Mr Micah Cheserem and his team are sitting by watching a band of politicians take over their constitutional mandate without a fight! We should expect the Commission for Revenue Allocation to protect their constitutional mandate, in court if necessary. The bottom line is that the determination of the amounts to be allocated to counties and among counties is a professional undertaking that requires very demanding and specific core competences that our governors do not possess."(Kiriro wa Ngugi, September 2014).

Be that as it may, some experts feel that allocating 45% of national revenues is risky and would likely harm the operations of the National Government. "....... a fixed figure of, say 40 or 45 per cent of the budget, going to counties negates the constitutional flexibility of Parliament to negotiate allocation of funds to both levels of government." (Murkommen, 2014).

Moving on, money allocated to a County is sent to its respective County Fund. This is where the Senate plays a major role in the formulation of the allocation criteria governing these devolution Funds. This formula generally follows the 5-year cycle of General Elections:

217. (1) Once every five years, the Senate shall, by resolution, determine the basis for allocating among the counties the share of national revenue that is annually allocated to the county level of government.

Article 217 (1) affirms that the process of determining these allocations must be insulated from political roller coasters that daily politics generates. "The institutional arrangements in the new Constitution are designed to avoid discretionary decision making and a repeat of past abuses, so as to reduce the influence of political and vested interests in resource allocations" (Kirira, N 2011).

It (the process) will also be quite inclusive - key players and stakeholders (including Governors, professionals and the general public) will be invited to engage with the Senate in the preparation of the formulae that will govern these allocations of fiscal devolution:

217. (2) In determining the basis of revenue sharing under clause (1), the Senate shall— (a) take the criteria in Article 203 (1) into account; (b) request and consider recommendations from the Commission on Revenue Allocation; (c) consult the county governors, the Cabinet Secretary responsible for finance and any organisation of county governments; and (d) invite the public, including professional bodies, to make submissions to it on the matter.

These invitations to the public and professional bodies to participate in the Budget-making process are provided for in Section 207 of the Public Finance Management Act 2012. The section is most inclusive and fair as it goes even further to provide for the "receipt, processing and consideration of petitions, and complaints lodged by members of the community;........"

Although the review process by the Senate is most inclusive, the first draft proposal prepared by the Commission for Revenue Allocation in 2012 elicited sharp reactions from various stakeholders, spearheaded, no less, than by sitting members of the 10th Parliament.

A peek at the draft by CRA reveals the following highlights of allocation for the 2013 - 2017 election cycle:

 

Table 2.1 County Equitable Share Formula First Proposed by the CRA

 

County Equitable Share Formula Parameters and Weights of the Formula

EQUITABLE SHARE Ca= ∑ (Pi + PVi +Ai+BSi+FDi)

WHERE

Ca     =    COUNTY REVENUE SHARE

P       =    COUNTY’s SHARE OF POPULATION COMPONENT

PV     =    COUNTY’s SHARE OF POVERTY COMPONENT

A        =    COUNTY’s SHARE OF LAND AREA COMPONENT

BS     =    COUNTY’S EQUAL SHARE COMPONENT

FD     =    COUNTY’S SHARE OF FISCAL DISCIPLINE COMPONENT

cra's parameters-and-weights-of-the-county equitable share formula

 

Finally a consultative engagement between stakeholders settled on the following general formula, subject to regular (at least yearly) reviews:

 

Figure 2.1 County Equitable Share Formula Revised by the 10th Parliament

 

CRAs revised Division of Revenue Formular for 2013

Source: CRA Website

 

Given the wide demographic disparities that exist between the 47 Counties of Kenya, it is not hard to see why due consideration ought to have been given to the following key sub-clauses of Article 203 in particular in the preparation of the County Allocation of Revenue Bill 2013:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter—  (d) the need to ensure that county governments are able to perform the functions allocated to them; (e) the fiscal capacity and efficiency of county governments; (f) developmental and other needs of counties; (g) economic disparities within and among counties and the need to remedy them; (h) the need for affirmative action in respect of disadvantaged areas and groups; (i) the need for economic optimisation of each county and to provide incentives for each county to optimise its capacity to raise revenue;

The CRA admitted in November 2014 when releasing the second allocation formula that it did not have real data to enable it meet the threshold of Article 203 (1). "The use of a sector based approach to revenue sharing requires the establishment of unit cost of different services in different counties based on acceptable norms and standards. The Commission on Revenue Allocation together with the Transition Authority has commenced the process of commissioning a comprehensive study to establish unit costs of key devolved functions in different counties based on acceptable standards and norms in each sector.. The Kenya National Bureau of Statistics is also in the process of commencing collection of data and information using county integrated household and budget surveys to measures various outcome indicators. These processes of generating new information will take some time to complete." Thus only minimum changes from the first allocation were proposed.

Furthermore, the Council of Governors did not help matters in August 2013 when it led a spirited public chorus of condemnation against the Transition Authority's measured transfer of devolved functions - which essentially sought to have devolved funds follow ability i.e., (measurable) human, infrastructural and fiscal capacity of individual Counties to provide efficient services. 

Although the heat generated in the public space over resource allocations for the 2013-2014 financial year later cooled down, many experts on public budgeting, governance, and policy, were of the view that there is need for an urgent review of the formulae used by the CRA and by extension, the Senate, for the 2013/2014 allocations and those after that. There is widespread concurrence that these formulae were too generalised and gave scant attention to the sub-clauses highlighted in Article 203 above.

For example, the three-pronged gist of the International Budget Partnership IBP budget brief on what should be the correct and true definition of fair sharing of public finance, begins by making the point that resource allocation must be guided by a comprehensive evaluation of what are the precise needs of a people - County by County; that there must be incisive application of wider demographic data in the determination of the capacity of different social-economic groups within and across Counties, to contribute to their well-being and hence, access to their rightful share of resources; and thirdly, there must be clear and unambiguous positive (or negative) consequences in how well a County or locale uses (or abuses) resources given to it. While discussing the place of need in resource allocation, the brief lends credence to the Constitution's thematic and recurrent emphasis on positive affirmation of minorities and the marginalised by highlighting their unique circumstances. The same principals ought to as a matter of course, be used to guide a County's budget allocations to its different sub-Counties where minorities and the marginalised are found.

From the onset, the CRA has had its work cut. It must stay the course during every budget cycle and focus on the constant need of managing public expectations by countering the often-skewed and misleading opinions of the political class. Indeed, the two Houses of Parliament happily played the political card in public when they differed sharply over the amounts to be shared by the County governments and the National government in the Division of Revenue Bill for the 2013/2014 financial year, causing the more important details of the proposed budget estimates to be lost in the resultant din. The disagreements arose firstly because the Senate was unhappy with the decision of the National Assembly to totally ignore its proposed amendments to the Bill in which it (the Senate) sought to raise the allocation to the counties from KShs 210 to KShs 258 billion; and secondly because it felt slighted by the National Assembly's opinion that "the Senate has no constitutional role" in the preparation of "a money Bill", although, curiously, its Speaker happened to have forward the said Bill to the Senate for consideration!

The Senate sought in June 2013, an advisory opinion from the Supreme Court, accusing the National Assembly of monopolising the process of revenue division, "The question was: whether the National Assembly was right in monopolizing law-making powers on the very financial question which, alone, would determine the success or failure of the operations of counties, and of the whole scheme of devolved government which lies at the core of the current constitutional order." The Court ruled on November 1, 2013, and generally in favour of the Senate affirming that, "......., it was unconstitutional for the Speaker of the National Assembly to by-pass the Senatorial process, by not going through the mediation arrangement provided in the Constitution." (Advisory Opinion 2 of 2013).

Interestingly, the Supreme Court's ruling on the nature of the Bill was not unanimous; one dissenting Judge was of the opinion that the Bill was a money Bill and therefore fell, "....... within the exclusive mandate of the National Assembly and out of the competence of the Senate.

With or without the partisan and competing interests from Parliament, the Commission must therefore go full throttle to educate the public on what the terms 'equitable' and 'equalisation' really mean in the context of the Constitution of Kenya 2010. Article 249 is apt:

249. (1) The objects of the commissions ........ are to— (a) protect the sovereignty of the people; (b) secure the observance by all State organs of democratic values and principles; and (c) promote constitutionalism.

In early August 2013, the Senate enacted the County Allocation of Revenue Act No 34 of 2013, that spells out how the devolved Funds would be allocated. The Act has three schedules detailing the actual allocation of amounts as largely advised by the Commission on Revenue Allocation CRA, as follows: 

The First Schedule gives the weighted parameters of the shareable revenue (amounting to KShs 190 Billion) to the 47 Counties as given on Table 2.1 above. The Second Schedule gives the actual amounts allocated to each County. Finally, the Third Schedule of the Act tabulates the conditional allocations to be made to each County (amounting to a further KShs 20 Billion).

The well-designed International Budget Partnership - Kenya infographic below ably provides a useful visual of how much money was assigned to each parameter of allocation:

 

Figure 2.2: Distribution of Equitable Share Among Counties for the 2013/2014 Year

 

Source: International Budget Partnership - Kenya.

 

The next question then becomes, what does this mean in terms of what an individual County received? The answer lies in tabulating the comparative size of each County's parameters (i.e., population, poverty, land area, etc.) to its peers and mapping that to the share allocated for that parameter for the entire 47 Counties. Once again, the infographics from IBP - Kenya demonstrates this process clearly:

 

Figure 2.3: How Individual County Allocations are Arrived At

Source: International Budget Partnership - Kenya.

 

As was noted earlier, both the general public and professionals are obligated to give their own views and opinions on the sharing of revenue. To illustrate this point, the reader is invited for a moment to revisit Article 217 of the Constitution:

217. (2) In determining the basis of revenue sharing under clause (1), the Senate shall— (d) invite the public, including professional bodies, to make submissions to it on the matter. 

A lot of engagement on the matter took place in 2014 between the Senate, the Commission for Revenue Allocation, the public and professionals in readiness for the 2015/2016 financial year given that the first two reviews of the basis of revenue sharing must take place at three (and not five) year cycles Excerpt from the Sixth Schedule - Transitional and Consequential Provisions - Part 4 - Devolved Government:

16. Despite Article 217 (1), the first and second determinations of the basis of the division of revenue among the counties shall be made at three year intervals, rather than every five years as provided in that Article.

Some of these submissions - notably from professionals from the International Budget Partnership, advocated for a radical rethink of CRA's old formular that had been in use since the 2012/2013 financial year, and instead suggested a more modern basis of determination based on need (measurable community programs), capacity, and effort of an individual County.

In the end, all the stakeholders (and especially the Council of Governors) participating in the determination of these formulae will do well to remember that revenue sharing and indeed the entire process of constitution making is a give and take process designed to deliver peaceful political outcomes. 

 

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