By JASON LAKIN

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Last week, Kenya’s Commission on Revenue Allocation (CRA) released a new proposal for how to share revenues across the 47 counties.

The first formula revision under the Jane Kiringai-led CRA looks set to take revenue sharing in a new, more transparent direction. We only have a rough sense of what the proposed formula will include.

A small but important change in the formula is presentational; it is now organised around four objectives, which clarify what the formula is aiming to achieve.

These are, to paraphrase, funding services, “balanced development,” incentivising revenue collection, and encouraging prudent use of resources. This acknowledges that revenue sharing is about multiple, complementary, but also competing agendas.

For example, the core purpose of a revenue sharing formula is to ensure that subnational units have enough funding to meet the cost of ongoing services for their population. Thus, a county with 100 children needs more funding for education than one with 20 children.

However, revenue sharing is also about addressing historical inequalities.

When we share revenues across levels of government, we also have to think about incentives. Counties that are investing in revenue collection may decide not to do so if they can get more money from the national government. And they may not use money from the national government as prudently as the money they collect on their own as the former is not “their” money.

Revenue sharing should also address these challenges by encouraging local revenue collection and proper use of funds.

It is important to distinguish these goals because some counties may qualify for more funding on one criteria, but not another. A transparent formula explains its goals, and makes it easier to see how the characteristics of different counties translate into allocations. This is the foundation of social legitimacy.

Proxy measures

The biggest shift in the proposed formula is away from the use of population as the main measure of service needs. The current formula uses population as a proxy for service need. This is a reasonable first cut — it does cost more to provide services to 100 people than to 20. However, this does not account for actual service needs. While 100 people need more health services than 20 people, if those 20 people are sicker on average than the 100, then we need to take that into account as well.

CRA proposes to reduce the crude use of population by more than half, and replace it with measures of service need for health, agriculture, urban services, and water.

Now, the devil is always in the details when it comes to the measures we use in formulas. While including a measure for health is better than a raw measure of population, it is still just a proxy. We cannot have a formula that is so complex it accounts for every conceivable factor driving costs.

On the other hand, some proxy measures are less useful than others. It remains to be seen how health is actually going to be measured.

For agriculture, the measure is “rural population.” This may be an acceptable proxy for the need for extension services (for example), but it may also be possible to do better.

Basic equal share

When it comes to revenue collection and fiscal prudence, the proposal is vague. Ideally, we want to give more to counties with lower revenue generating capacity, and to counties that make more of an effort to raise revenue.

Measuring these concepts is challenging, however. Revenue raising efforts should ideally be measured as a percentage change to avoid punishing poor counties that can only increase revenues by small absolute amounts each year, even with considerable effort.

The proposal moves decisively to start reducing the size of the basic equal share (from 26 to 20 per cent). The basic equal share is highly inequitable, as it gives an equal share of resources to large and small population counties. While a small equal share is justified to cover certain services that have the same cost across counties (such as the governor’s salary), it should be circumscribed, as it is in most other countries.

This was one of the major blind spots of the previous commission, and the current CRA deserves credit for taking on this politically contentious issue. Of course, the exact weight that should be given to this, or any parameter, is a matter of debate.

Jason Lakin is head of research at the International Budget Partnership.