The new new formula: Proposal from CRA makes small strides in the right direction

Saturday November 28 2015

 

By Jason Lakin

Almost exactly a year ago, my colleagues and I were working furiously to finish recommendations to the Senate on the revisions to the revenue sharing formula that divides money among the 47 counties. We expected the Senate to take action before the end of 2014 and wanted to influence that discussion.

The Senate did not take action at the end of 2014. They took action only several months later, when they rejected the 2014 Commission on Revenue Allocation proposal. Nine months later, CRA has now made a new proposal. What does it contain?

The first thing to note is that the biggest proposed change is not in the formula parameters, but simply a change in the data used.

The shift from using 2005/6 household survey data to newer poverty data based on the 2009 census, even without changing anything else, has a substantial impact on the distribution of funds for a number of counties.

For example, the new data push poverty allocations in Kilifi up by 66 per cent while Kwale nearly doubles. Turkana, on the other hand, declines by nearly half.

The parameter revisions that CRA has proposed seem to be both improvements and regressions from both the current formula and the first proposal to revise that proposal from 2014.

I begin with the improvements. First, the proposal still contains the minor shift from the use of poverty to the use of a new composite variable called “development.”

This is an improvement because the development parameter, though tiny, starts to measure access to specific services that counties provide and is a better measure of fiscal need than a general poverty measure, which is not directly related to county functions. In my view, the development parameter should have been increased further and poverty decreased further.

Another improvement, both from the current formula and from the first proposed revision, is with respect to fiscal responsibility. Fiscal responsibility in the current formula has a two per cent weight but has never actually been measured and was simply given to all counties equally.

The first proposed revision reduced this to one per cent and half of this was to be given equally. Moreover, while the CRA claimed that the other half was a measure of effort, it was actually a measure of capacity, giving the most to counties collecting the most own revenue in a single year.

The new proposal retains the parameter at two per cent and is now based on changes over time in revenue collection, rather than a single year’s data. This is essential: Effort is about how we improve upon our current position and must be based on incremental change.

The way the increment is measured has an impact on who benefits. Unfortunately, CRA has not quite got this right. The increment is based on change in per capita revenue. That is somewhat better than total revenue, because it does allow smaller population counties that make an effort, like Lamu, to benefit.

However, it continues to make it difficult for poor counties to benefit. Because the increment is in absolute terms, it is virtually impossible for counties with small economies and low revenue bases to benefit, regardless of effort.

For example, West Pokot increased its total own source revenue by 76 per cent between 2013/14 and 2014/15. Mombasa increased by 45 per cent. But Mombasa receives 11 per cent of the total available for this parameter, while West Pokot receives 1 per cent. That is because West Pokot’s absolute revenue base is very low and with a 76 per cent increase it is still very low compared with Mombasa. But is this then really a measure of effort?

The first proposed revision contained a parameter to help cushion counties that had inherited large payrolls. That has been removed. I argued previously that this parameter was important but should have been introduced as a conditional grant.

It appears that CRA is headed in this direction, which will cushion counties that inherited large payrolls until the staff rationalisation process is complete. In general, this will dampen the redistribution in the first formula, which is very high and left some counties without enough resources to maintain services.

Finally, there is the issue of the basic equal share. I recently argued, based on research my organisation released in September, that the basic equal share was far too large. This parameter should cover costs that are essentially equal across counties, such as paying the governor’s salary.

We calculated those costs at less than 15 per cent, while the current formula puts them at 25 per cent, and the new proposal would raise this to 26 per cent. This favours small counties at the cost of providing services in larger counties.

So, the new proposal from CRA makes small strides in the right direction, but leaves more to be done.

Jason Lakin is Kenya country director for the International Budget Partnership. E-mail: [email protected]