What the Treasury should do to share county funds fairly

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This article first appeared in my weekly column with the Business Daily, on July 5, 2015

It’s that time of the year again where government arms and agencies grab a piece of the pie from the Treasury. The 47 counties share the funds this way: population is weighted at 45 per cent, poverty index 20 per cent, land area eight per cent, basic equal share 25 per cent and fiscal responsibility two per cent.

https://i2.wp.com/www.magazinereel.com/wp-content/uploads/2015/05/BUDGET-BRIEFCASE.jpg

(source: http://www.magazinereel.com/wp-content/uploads/2015/05/BUDGET-BRIEFCASE.jpg)

Population, poverty and land area are used to determine the cost of service delivery: the larger the population and land area, the more money is required. The poverty index acknowledges that if a county is poor, it needs more money to pull to the level of other counties. The basic equal share provides a basic, equal amount to all counties and is intended to cover administrative costs. Fiscal responsibility is meant to measure how well a county manages public finances; currently, all receive the same amount.

But is this how allocation should be determined? The International Budget Partnership (IBP) suggests that there are three key factors that ought to be considered during budget allocations: need, capacity and effort.

Need addresses part of the poverty question in that more should be given to those counties that need more, particularly if marginalised in the past. It also addresses the population density and land area as it encompasses what it will cost to deliver ongoing services to county citizens.

Capacity addresses the poverty issue and is rooted in the sentiment that poor counties should get more because rich counties are better placed to pay to meet their needs.

https://i2.wp.com/blogs.worldbank.org/africacan/files/africacan/images/africacan-measuring-poverty-and-inequality-sub-saharan-africa-knowledge-gaps-and-ways-address-them-540.jpg

(source: http://blogs.worldbank.org/africacan/files/africacan/images/africacan-measuring-poverty-and-inequality-sub-saharan-africa-knowledge-gaps-and-ways-address-them-540.jpg)

Effort rewards hard work and is based on the idea that more should be given to those who work harder to advance themselves.

A central problem is that it is not clear in the current formula whether counties are receiving enough money to meet needs of their residents. This is an inherently tricky question because the “need” of counties is affected by issues such as poverty, land area and population density, but there are additional problems such as inefficiency and corruption.

So in time it may emerge that some counties are not getting what they “need” but a careful analysis is required to determine whether this is because they genuinely do not have enough money to meet the needs of citizens or if this is due to issues such as financial mismanagement and poor organisational efficiency. Perhaps to make the revenue allocation fairer the government needs to develop a system of determining what counties actually need.

As IBP points out, in South Africa they measure health facility visits and risk of disease by province to estimate health service costs. They also look at school enrolment to measure education need. Although both of these are highly correlated with population, one can argue that they get closer to meeting actual needs.

However, such measures are flawed in that in remote areas, government facilities may be visited less not because fewer people need the services, but because fewer people can get to the facilities. The fiscal capacity issue is a tricky one as it is premised on the idea that counties that can better meet own needs (through levies) should get less from the government. No county will tell the central government they want less money. Also this fiscal capacity issue may disincentivise counties from raising generation capacity, seeding a further reliance on central government.

https://libraryeuroparl.files.wordpress.com/2013/12/05-legalandinstitutionalaffairs-05-01-budgetsandbudgetarycontrol-thematic_week-picture_week.jpg?w=350&h=200&crop=1

(source: https://libraryeuroparl.files.wordpress.com/2013/12/05-legalandinstitutionalaffairs-05-01-budgetsandbudgetarycontrol-thematic_week-picture_week.jpg?w=350&h=200&crop=1)

Perhaps focusing on effort can counter the capacity issue because effort rewards those who manage their funds well, premised on transparency and compliance. Effort also measures and rewards the percentage increase in revenue collection over time and will incentivise fiscal independence.

In short, although the revenue-sharing formula will be refined over time, it is important Kenyans begin to engage in these issues so that we can all make informed contributions to future changes in the formula.

Ms Were is a development economist; E-mail: anzetsew@gmail.com; twitter: @anzetse

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