In accordance with the requirements of Article 216 (1) of the Constitution of Kenya, the Commission on Revenue Allocation presents the recommendation on the third basis for equitable sharing of revenue among county governments. The basis is expected to be used for sharing of revenues for financial years 2019/20 to 2023/24.
This recommendation builds on lessons learnt from a comprehensive review of the second basis, a comparative analysis of financing transfer systems from other countries, and extensive consultations with national government, county governments, public finance experts, and the public.
This recommendation seeks to address four primary objectives; to enhance service delivery, to promote balanced development, to incentivise counties to optimise capacity to raise revenue and to incentivise prudent use of public resources. These objectives are actualized through a framework that links revenue sharing to devolved functions using three components, namely; service delivery, balanced development and, incentive. In aggregate, the framework allocates 65 per cent of the revenue for enhancing delivery of public services, 31 per cent for promotion of balanced development, and 4 percent to incentivise revenue collection and fiscal prudence.
The service delivery component uses a health index constructed from data on health facility gaps, primary health care visits and in-patient days. The transfer variable for agriculture is based on a county’s proportion of rural households while that for other devolved functions is based on a county’s proportion of total population. Further, the service delivery component also incorporates a basic minimum allocation to each county.
The balanced development component has four variables; roads, urban services, land area and poverty. On roads, the framework uses a rural access index, urban service uses number of urban households while land area uses the proportion of the land size of a county. On poverty, the framework uses the proportion of poor people.
The incentive component of the framework has two measures; the fiscal effort and prudence indices. The fiscal effort index measures a county’s effort to raise own source revenues from the economic activities within the county. The fiscal prudence parameter is a composite index that measures county’s fiscal responsibility. It takes into account; Auditor General’s audit opinion on county utilisation of resources, average county expenditures on development, establishment of internal audit committee and the County Budget and Economic Forum by a county.
The specific weights assigned to the transfer variables in each revenue component were developed using information on existing policies, agreed conventions, actual county government expenditures and transfer shares for devolved functions.
On implementation of the third basis, the Commission recommends a phasing-in of the formula to avoid disruption in service delivery and development programs. The proposed approach is to set aside 15 percent of the equitable share increment to cushion counties which would see a reduction in their equitable share in a quantum in excess of 5 percent. This is in line with the provisions of Article 203(d) and (j) of the Constitution.