County governments have the potential to collect up to Kshs 216 billion in revenue from their key revenue streams compared to the present Kshs 31 billion annually. This is according to the second edition of the Commission on Revenue Allocation’s (CRA) and World Bank Group’s Comprehensive Own Source Revenue Potential and Tax Gap Study of County Governments Report which was launched on 5th October, 2022.
The report shows that all the 47 county governments can generate nearly seven times more than they currently realize in OSR, which could finance a significant portion of their annual budgets. Detailed estimates of OSR revenue potential, have been included, to enable County Governments and other users to assess county performance, benchmark against best practices and identify their revenue raising capacity.
During the launch, CRA Chairperson, Dr Jane Kiringai noted that the counties could raise substantial resources to supplement their annual budgets. “If you add Ksh. 216B to the Ksh. 370B the counties get in form of equitable share, we are talking about in excess of half a trillion shillings for financing devolution.
While observing that most counties were spending more than 35% of their revenues on wages and salaries, contrary to the law, Dr. Kiringai cautioned that the current economic times and contracted fiscal space were likely to last a little longer. This, she noted, did not give much room for increased allocations from nationally raised shareable revenues.
“Nairobi County, for example, spends in excess of 50% of its revenue on wages. Nairobi, which currently spends only 15% on development, can collect more than Ksh. 50B and would not struggle to adhere to their fiscal responsibility principles. Many counties that have huge debts have the potential to meet the requirement of spending at least 30% of revenues on development,” she said.
The tone at the top is critical for counties
While emphasizing the need for effective leadership and commitment by county governors to increase local revenues, Dr. Kiringai challenged the new leaders to follow the example of Laikipia and Bungoma counties, which had not only automated their revenue administration systems but also established boards and targets.
“Laikipia county has significantly increased revenues from half a billion to close to one billion shillings,” She said.
She further observed that establishing or updating valuation rolls to guide the collection of revenues from property taxes could be adopted. The property valuation system could be set in a way that minimizes resistance and litigation.
OSR can insulate counties against persistent cash deficits
The Chief Guest, Hon Amason Kingi, the Speaker of the Senate noted that over the past 10 years of devolution, collection of OSR has been a game of hit and misses for counties, in many cases stagnating between 10-12% of county budgets.
Hon Amason Jeffa Kingi, Speaker Senate of Kenya
“This suboptimal performance created a need for concerted efforts by all stakeholders to interrogate and get fresh insights into how OSR can be enhanced and reintegrated to bolster county governments financial standing,” he said.
He further noted that OSR is an important feature of any bid to insulate county governments against perennial cash shortfalls triggered by near complete reliance on shared revenue from the national coffers.
OSR provides counties more money for development
H.E. Fernandes Barasa, the Governor of Kakamega County and Chairman of the Finance Committee in the Council of Governors, said that the new county administrations were set to exploit the 15 revenue streams to finance their activities.
“Definitely we will have more money for development and capacity building, which is a recurrent expenditure,” he said.
H.E. Fernandes Barasa, the Governor of Kakamega County
Governor Barasa hinted at plans to integrate the report’s recommendations in the third generation of County Integrated Development Plans.
OSR Report to enable counties accurately carry out budget revenue projection
The PS Treasury, Dr Julius Muia was represented by Director General Accounting Services & Quality Assurance Mr Bernard Ndungu. He said that the launch came at an opportune time when the new governments are being formed and also as county governments are developing their budget estimates for the next financial year. He noted that county OSR collections are way below their potential. He also noted that counties consistently project revenue collections way above actual collections, leading to expenditures continuing based on false revenue estimates. His is a leading cause of pending bills in counties:
“We are excited that this study has been finalised today and will enable counties have a firm basis upon which they can form their own source revenue targets going forward for the next five-ten years. It will help counties expand their fiscal space and therefore enhance their service delivery,” he noted.
National Treasury Director General Accounting Services and Quality Assurance, Mr Bernard Ndungu
County OSR will foster accountability in county governments
Mr Julius K. Korir, the PS Ministry of Devolution pointed out that strengthening county OSR mobilisation allows county government to have greater ownership and control over their own development agenda and has a potential to foster political and administrative accountability of county officials to their constituents.
He further noted that over the years, counties have been collecting less than 30% of their potential. Counties with more economic diversification collect more OSR compared to those with lower diversification. Therefore, it is important for counties to expand their macro-economies.
In addition, Mr Korir indicated that in the current economic situation globally and locally OSR growth will cushion the country from increasing public debt burden that is currently threatening the fiscal and socioeconomic well being of our country.
Mr Julius K. Korir, the PS Ministry of Devolution
CRA Commissioner Dr Irene Asienga pointed out that this study is the second study on OSR revenue. The first study was carried out in 2018 and set the baseline for this second study. In the first study only 6 revenue streams were researched, however in this study, it was improved to 15 revenue streams.
In addition, she pointed out that the new study used the latest data including the 2019 census data, the 2017 Urban Areas and Cities (Amendment) Act among others. In addition, the Commission used the deterministic frontier approach and came up with 216 billion as the potential for counties to collect. She also noted that if county governments collected their full potential, they would be able to fund 40% of their budgets.
CRA Commissioner Dr Irene Asienga
World Bank’ s Senior Social Development Specialist Muratha Kinuthia pointed out that the World Bank has been a big supporter of devolution and is very encouraged by what they see. In their current portfolio they have about 2 billion dollars that is direct support to counties and about 3 billion in projects that are very active at the county level. The conversation on OSR is a critical discussion as it is really about how we finance devolution.
He said that he was very encouraged by the collaborative method that CRA had taken in doing the report and he assured the Commission and participants that the World Bank will continue to work in the spirit of collaboration.
World Bank’ s Senior Social Development Specialist Muratha Kinuthia
The study was carried out by Alma Economics who were commissioned by CRA in collaboration with World Bank Kenya. A deterministic frontier analysis framework was used to produce reliable answers to the core research question: How much revenue would each County Government generate from each of the OSR streams if it operated in line with the best performing counties in Kenya?
Individual models were developed for each OSR stream drawing from various sources, including County Government Finance Acts and Bills, audited data on revenue collections made available by the Office of the Auditor-General in the County Governments’ Financial Statements, as well as from surveys and interviews with County Government representatives.
The analysis identifies the best performing counties in raising revenues for each OSR stream (considering the county-specific economic base for each stream) and estimates the maximum revenues that County Governments can generate from each stream if they operated in line with best practice.
Download the OSR Potential Report: https://cra.go.ke/downloads/#