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What is holding harmless? Why is it such a bone of contention in county finances?

Wednesday February 22 2017

I have written before in this column about the incessant focus on so-called development spending in Kenya, and why I believe it is misplaced. I have also written before about the fact that in the absence of proper guidance from the National Treasury on budget classification, it is very difficult to compare counties in terms of the share of their budget that goes to development.

Each county follows its own rules, and a cursory review shows that many of them classify items as development that they should not.

I have also pointed out several times that even if we could compare counties, it would not necessarily tell us much, since the capital needs of counties vary tremendously and we would therefore not expect them to invest similar amounts in capital development.

Nevertheless, I was asked to speak again on the matter of county budgets last week to ICPAK’s annual Economic Symposium, and one of the items I was asked to address was the issue of county development budgets.

In preparing for those remarks, I decided to look again at the most recent data we have on county development spending, which is the 2015/16 Controller of Budget’s annual implementation report.

I thought that it was worth taking this data at least partly seriously, in spite of all the objections above, on the grounds that even after considering all of my criticisms, it might still reveal something about what is happening in counties.

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This would be true if, in spite of the many ways in which the data is not comparable, there were still systematic differences across counties in terms of their development spending that could be explained by other factors. The alternative would be that the figures were completely random, and there was nothing to be learned from them.

On its face, it was not clear which of these was more likely to be true, so the only way to know was to look at the numbers and see whether any patterns emerged.

As it happens, I found one very strong pattern. This pattern is an indicator of the strong pull of history in areas where the dominant narrative is about the good or bad choices that county governments are making.

Back in 2013, when the National Treasury was preparing the first Division of Revenue Bill to allocate funds to counties, a fight broke out between various factions, which were then considered to be “pro” and “anti” devolution.

These tags were too simplistic, but the issues were not widely understood at the time. The fight was over a seemingly obscure item that Treasury had included in the original Division of Revenue Bill known as “holding harmless.”

The basic idea behind this provision was that as the country shifted from allocating funds in whatever way it had historically done so, to allocating funds on the basis of the new Commission on Revenue Allocation formula, there were some counties that would receive less under the new approach than they received under the old approach.

The impact of this would be that these counties would not be able to maintain the level of services they were providing in 2012/13.

Treasury proposed to include a special grant to “hold harmless” those counties, meaning they would be given as much as they had in 2012/13, even as the formula redistributed vast new resources to traditionally marginalised counties. Treasury proposed to use about Ksh17 billion to hold counties “harmless”; my organisation calculated it would cost about Ksh20 billion to maintain services in 22 affected counties.

At the time, CRA argued vociferously against holding harmless, as did many “pro-devolution” forces, and parliament rejected it. The claim was that holding harmless was biased in favour of counties that had historically been better off, and this money should be redistributed to marginalised counties.

While there was some truth to this, it was flawed in several respects: Many of the counties affected were not well off (Taita Taveta, Elgeyo Marakwet, etc); the amount needed would still have allowed for considerable redistribution; and it was not wealthy people who would suffer if some counties could not maintain services.

Why rehearse ancient history? If you look at the top 10 counties in terms of share of development expenditure in 2015/16, not one of them was affected by the failure to hold harmless.

If you look at the bottom 10, all but one were affected. This suggests that the counties struggling to meet the minimum 30 per cent development threshold are the counties that were most fiscally constrained by the shift to a new formula in 2013 and could barely maintain services.

History matters. Along with the failure to address inherited debts and wage costs, the failure to hold harmless has enduring consequences for a substantial number of counties.

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

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