Is devolution in Kenya sustainable?

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Editor: Nic Cheeseman
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Decentralisation has been a hot topic in Kenya for years, but are we asking the important questions? In his regular column for the Daily Nation, our Co-Editor Nic Cheeseman investigates.

We are now over one year into Kenya’s experiment with devolved government and there has been a lot of talk about whether or not it is working. However, very few people are talking about a different but just as important issue: is it sustainable? This is not just a question of whether the national government will allow the counties to flourish. It is also a question of the capacity of the counties to raise revenue locally in order to supplement the central transfers they receive through the Commission on Revenue Allocation. In this column, I argue that the signs are mixed because devolution appears to be politically sustainable but economically problematic. Unfortunately, these points are often missed because much of the reporting on devolution has been sensationalist and misleading. To put this right, I also try to correct some misconceptions about the way in which devolution is playing out.

Has there really been decentralization?

Many of the policies that have “decentralized” power in Kenya over the last forty years have pretended to move power closer to the people while actually strengthening the control of central government. Think back to the District Focus for Rural Development policy introduced by Daniel arap Moi in 1982. Moi justified District Focus on the basis that it would enable the government to be more responsive to the needs of the people. But in reality, Moi was less interested in decentralizing power and more interested in restructuring the state in order to break up the administrative and political networks that had grown so strong under the presidency of his predecessor, Jomo Kenyatta.

As a result, Moi manipulated the District Focus reforms in order to create new political of networks that he could trust and to strengthen his political control. In the process he did not decentralize power but “deconcentrated” it. In other words, rather than creating more autonomy for local leaders the changes introduced through District Focus led, in the words of Joel Barkan and Michael Chege, to “the posting of greater numbers of more central personnel to an expanded number of field offices to exert greater control over development initiatives on the periphery”.

Following the introduction of the 2010 constitution, many commentators expected a similar story to occur with the country’s latest attempt at decentralization: administrative control would be kept in Nairobi, the money would not flow to the counties, and county level political leaders would be co-opted by the national government. Despite some efforts by the Jubilee Alliance and the civil service to bring just these outcomes about, this has not occurred. According to Dominic Burbidge, an astute observer of Kenya, between 22% and 43% of government revenue has been distributed to the counties depending on which set of figures you choose to believe (more on which later). Even if we stick with the lower number, this is a remarkable change to Kenya’s economic landscape, especially when you add in the Constituency Development Fund.

It is therefore clear that considerable financial clout has been devolved to the counties. What of political power? Here, too, counties have done rather better than many sceptics initially predicted. As we have seen, there are few – and many would say too few – constraints on how county governments can use their budgets. It is true that counties have specific services such as healthcare that they are constitutionally obliged to fund and run, but beyond this there is considerable scope for Governors to pursue their own priorities – if they can persuade the Members of the County Assemblies (MCAs) to back them up, of course.

County Commissioners and national civil servants have sought to limit the scope of activities that Governors can pursue, but the great variation in the budgets that have so far been presented demonstrates that countries are genuinely in control of how to spend their own revenues. At the same time, the fact that so many counties are now controlled by opposition Governors – or at least by Governors that were not elected as members of President Kenyatta’s former party, The National Alliance (TNA), means that Kenya now features a set of influential regional leaders who have a vested interest in defending and strengthening the system of devolution.

It is also of great significance that counties have the capacity to raise their own revenues, most notably through property taxes, but also taxes on entertainment. This is something that central governments typically try to prevent, because the ability to generate an independent source of income gives local governments an economic freedom that has the potential to liberate them from central government control. That Kenyan counties enjoy this privilege is a clear sign that – at present at least – we are seeing real decentralization rather than deconcentration.

Is devolution financially sustainable?

The last year has seen a pitched battle between county leaders and the central government over the proportion of national funds that have been devolved. As part of this war of words, different figures for the proportion of state funds are devolved to the county level have been bandied about. It is important to understand where these different figures come from, because this has much to tell us about the country’s political and economic position.

Dominic Burbidge recently reminded me that the constitution only requires the government to transfer not less than 15% of government revenues to the counties based on the last year of audited and approved national accounts. At present, the last set of accounts that were both audited and approved by the National Assembly date from 2009/2010. This means that constitutionally the government is only required to transfer 15% of revenues based on that year. This is significant, because these figures are now considerably out of date. As the Kenyan economy continues to grow, the central government can meet the 15% threshold from 2009/2010 by allocating a lower and lower proportion of its current revenue. It is on this basis that members of the Jubilee Alliance have been able to claim that the proportion of revenues devolved to the county level has increased since 2013, and now stands at over 40%.

Against this, one could argue that it is in the spirit of the constitution that the calculation should be made not on the basis of old data from 2009/2010, but rather on using figures from the last financial year. Indeed, this is what the constitution anticipated, as government finances are supposed to be audited and approved on an annual basis. If you were to calculate the proportion of funds that are distributed to the counties on the basis of the 2014/2015 financial year, the proportion going to the counties would be significantly lower, at 22%. Although this is still above the constitutional threshold, it is considerably lower than the amount that the central government tends to cite when it is in dispute with the county governments. It is also possible that this figure will dip below 15% in the future unless a more recent set of government accounts are both audited and approved.

The more modest sums that are being devolved to the county level raise serious questions about the financial sustainability of decentralization in Kenya. As the CRA is well aware, the ability of many counties to live up to the expectations of their citizens will depend on their capacity to generate revenue locally. But how feasible is this? All counties can levy the same taxes, but this does not mean that they will raise the same revenues. Property taxes have the potential to raise far more funds in large urban areas, as do entertainment taxes, but this is unlikely to be replicated in rural locales. The figures that we have available already bear this out. Dominic’s data on the funds raised by county governments reveal that only a small number of counties have been able to generate significant local revenue. The exceptions are Nairobi, and to a lesser extent Kiambu, Narok, Nakuru Machakos, and Mombasa. The rest have made very little impression whatsoever – despite estimating considerable local revenues in their budgets.

Of course, it is still early days, but this should serve as an important wake up call that not all counties will be able to generate significant income locally. While some counties are struggling to raise money because they have not yet established effective systems of taxation and tax collection, in others the problem is that there is not much that can profitably be taxed. In other words, for counties that do not enjoy high levels of tourism, large industrial sectors, or high property values, it may cost more to administer new taxes than these places can hope to raise in revenues. Moreover, although it is possible to bring the agricultural and informal sectors into the tax net, doing this overzealously risks making these activities unprofitable, which would have a negative impact on poverty and employment.

One way to boost county revenues would be for national and county governments to work together to come up with a new process through which land can be re-valued and effectively taxed. Doing this would increase the revenue generating potential of many counties, but at present the combination of a challenging legal situation and strong vested interests are preventing it from taking place – something that I will talk about at greater length in my next column.

The way forward

It is therefore important to take seriously the prospect that some counties may remain dependent on central government transfers for over 95% of their funds. If this occurs, three things will need to happen. First, counties with limited capacity to raise their own funds will need to face reality and stop including overly optimistic estimates for locally generated revenue in their budgets. Unless this is done, the budget process will be a farce and counties will not be able to effectively plan their development expenditure. Second, and relatedly, counties with low revenue generating capacity will need to cut their cloth accordingly, which will mean adopting more modest economic plans.

The third thing that would need to happen is more far-reaching that then first two, because it would change the way that Kenyans think about decentralization itself. If poorer counties with lower self-generated funds turn out to be unable to provide the core functions that they have been entrusted with, the central government, donors, civil society and the Kenyan people will need to recognize that the system may have to be modified. More specifically, the redistributive element of the formula used by the CRA to determine county allocations would need to be revised to take into account not only poverty, population, and land, but also the deep inequalities that are likely to emerge in terms of locally generated revenue.

This would be a significant change, especially in a country where the idea of progressive taxation does not have a long history, but it may be necessary to ensure the financial sustainability of Kenya’s new political system.

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