budget

Kenya’s budget making flawed

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This article first appeared in my weekly column in the Business Daily on September 25, 2016

Last week I attended an event organised by International Budget Partnership (IBP) Kenya that analysed whether National and County budgets share resources fairly. IBP made the point that one of the key drivers of constitutional reform was to enhance the fair distribution of resources in the pursuit of equity.

IBP defines equity and fairness in the context of budget as constituting six principles: need based on the idea that people who need more should get more; capacity considers the extent to which a person/population can meet their own need; effort is rooted in the idea that people deserve more when they make more of an effort; efficiency that argues that resources should be allocated where they will be used most effectively to increase total welfare; basic minimum principle that everyone deserves at least some minimal share of resources and finally, fair process where resource allocation outcomes are decided in an open and transparent way and justifications are given for decisions.

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(source: http://cdn.publishyourarticles.net/wp-content/uploads/2015/06/equity.jpg)

These principles are by no means exhaustive and do not include elements such as fiscal responsibility, however IBP’s analysis of county budgets with these principles in mind revealed glaring problems. First of all, budgets in Kenya are dominated by the notion of equal share. In the case of  the Constituency Development Fund (CDF) in which KES 35.2 billion were dispersed in 2015/16, 75 percent of the fund is shared equally among the 290 constituencies and only 25 percent is distributed based on the proportion of all poor people in Kenya that reside in a particular constituency. The massive portion in equal share is fundamentally problematic because the current CDF provides each geographical unit with a similar amount regardless of the size of the population in the constituency. So in densely populated areas, much less is received per person (per capita allocation) than in sparsely populated areas. An example, is Kitutu Masaba and Mwatate which both have a poverty rate of 50 percent, yet there are three times as many poor people living in Kitutu Masaba than in Mwatate.

Even in cases where proportions are used, problems emerge. Allocations are made to Level 5 hospitals which have a regional catchment area and serve as referral hospitals for more than one county, yet are managed by individual host counties. So a conditional grant was introduced to finance Level 5 hospitals. According to IBP, in 2015/16 the single criterion for allocating the grant among the 11 hospitals was the bed occupancy rate. The concern is that given the wide variation in the actual number of beds in each facility, using bed occupancy rates introduces a distortion. For example, both Meru and Nakuru had occupancy rates of 77 percent so both were allocated KES 356 million. Yet Meru has 306 beds and Nakuru, almost double this amount with 588 beds. https://i0.wp.com/www.the-star.co.ke/sites/default/files/styles/new_full_content/public/articles/2015/10/02/1215234.jpg

(source: http://www.the-star.co.ke/sites/default/files/styles/new_full_content/public/articles/2015/10/02/1215234.jpg?itok=uKtZ9WXQ)

Finally the issue of process in budget allocation, particularly at county government level, is worrying. Political power and considerations routinely trump the fair distribution of resources at county level. In some cases, county cabinet secretaries skew allocations towards their village areas at sub county level. Thus communities with no representative in county level cabinets are financially marginalised. In some counties, budget allocations are based on lists of projects drawn up by Members of County Assemblies (MCAs). How those projects were chosen, why they were chosen, whether they are in line with County Development Plans is not clear. And allocating funds based on MCA lists facilitates nepotism and fiscal indiscipline. Further, presently at county level, little or no justifications are made as to why resources have been allocated as they have been.

Clearly there are fundamental problems with how public funds are allocated in Kenya. A key step that would make budget making a tool that facilitates equitable development is to reduce the amount allocated in equal share and rather base most allocations on well thought through weighted criteria. Further, given the mismanagement of funds especially at county level, the principle of fiscal discipline should carry considerable weight and reward demonstrated responsible use of resources.

Anzetse Were is a development economist; anzetsew@gmail.com

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The State of Kenya’s Economy- TV Interview October 15, 2015

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In this interview I talk with TeryyAnne Chebet of Citizen TV Kenya on the State of Kenya’s Economy.

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.

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(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.

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(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.

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(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

Development yet to get right fuel in yearly allocations

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This article first appeared in my column with the Business Daily on June 21, 2015

The 2015/16 Budget of more than Sh2 trillion indicates the government will raise expenditure by 17 per cent. But is the budget pro-development? A useful way of determining whether development is the focus of a Budget is looking at allocations to health, education, water and youth.Health and education are important as they invest in the country’s human capital that often drives economic growth and development. Water is important as a basic human right.

Given that more than a third of the population is youth (aged 18-35), it is important the segment get budget support to build up skills, employability and employment opportunities for Kenya to reap the youth dividend of innovation, energy and affordable labour.

(source: https://mahaslaztv.files.wordpress.com/2013/08/empowering-youth-in-kenya.jpg)

In addition to this, one should take note of the ratio between allocations and expenditure related to recurrent versus development costs; a pro-development budget has higher outlay for development.

A quick analysis of the key sectors reveals education previously got 26 per cent of the total; in this Budget that figure is 22 per cent. The last budget allocated four per cent to health; it is unchanged. Water (and regional development) got four per cent in both budgets. In the last budget, youth (alongside gender and culture) received less than one per cent, the same as this year.

Juxtapose these percentages with security (15 per cent) and infrastructure and energy (27 per cent), both of which the government openly stated are top priorities.

Although one can argue peace and infrastructure are the foundations of development, but shouldn’t the focus be promoting and defending national economic development? Because without defeating poverty, Kenya will remain weak and vulnerable, no matter how many roads and fighter jets it has.

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(source: http://www.kenyanaviation.com/wp-content/uploads/2012/10/KAF_Harbin_Y-12_by_Antoisurf_sm.jpg)

The 2015/16 Budget seems to say development-related sectors are becoming less of a priority for government. However, there are some steps the Budget takes that are pro-development; for example, an additional pro-youth element of the budget is rebates to corporate bodies hiring new graduates and supporting them to build the relevant skills and experience.

To qualify, employers must provide internships/apprenticeships to a minimum of 10 youths for a period of six to 12 months. Although this is commendable it may be a misplaced strategy because it doesn’t get to the root of the problem: the failure to offer relevant curricula.

Perhaps, the government should consider deploying strategies to revamp training offered in the first place.

One also has to analyse allocations to recurrent versus development expenditure and audit that spending.

International Budget Partnership (IBP) indicates that in 2013/14, the government allocated 58 per cent of the Budget to recurrent but spent 78 per cent on the same. In 2014/15, recurrent was allocated 58 per cent but IBP projects government will eat into 63 per cent of the Budget.

This year, the recurrent versus development stands at 52 per cent to 48 per cent. In short, in all the past three budgets, recurrent allocations trump development and even worse, actual recurrent is higher than what was allocated. This is a concern.

(source: http://bestforexsoft.com/pictures/trailingwizard/chart_icon.jpg)

Also note that an analysis of Q4 2014 of the budget by the Institute of Economic Affairs (IEA) revealed a failure to spend 48 per cent of the development budget.

So, the government is overspending on recurrent expenditure such as salaries but underspending on development. The government would do well to push for more austerity in recurrent expenditure.

Ms Were is a development economist. anzetsew@gmail.com; @anzetse