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Can Counties Support Themselves With The Revenues They Raise?

Yes and no. There are some counties that have the potential to raise a significant amount of own-source revenues, and others that have a limited ability to do so. The question raised by this blog post is an important one, since most counties are highly dependent on the equitable share,and have twice now been left in limbo following squabbles over the equitable share. The only revenues that counties have full control over are their own source revenues. 

So to answer the question, let’s look at three different counties: Nairobi county – the main economic hub of the country, Lamu – a small, rural county at the coast, and Makueni – a metro-adjacent county with significant upward mobility.

Nairobi

Nairobi County raises the most own-source revenues of all counties. This makes sense because it houses the capital city and packs a punch in terms of economic activity. But with  all it has to offer, its own source revenues have stagnated, falling by 16% in 2019/20 compared to the previous year. This has been the largest drop since the implementation of devolved government. On the other side, the budget continues to rise, making it harder for the county to make up the difference. From 40% in 2013/14, own-source revenues now cover a paltry 23% of the budget. 

Nairobi County, in our view, has the potential to raise enough to finance its budget and more. Its potential (by far) lies in property rates. Why? Because at present the county bases its rates on property values evaluated 40 years ago, in 1980. Clearly there is a lot of value on the table. Additional fees can be collected by tightening up outdoor advertising fees and parking fees.

Figure 1: Nairobi county’s OSR collections have stagnated over the years while its budget requirements have expanded at the average growth rate of  7% leading to a declining OSR to total budget share.

Source: Office of the Controller of budget (OCoB)

Lamu

Lamu county’s population is the least throughout Kenya,  yet it is also a main site of one of Kenya’s largest infrastructure projects: the Lamu Port-South Sudan-Ethiopia-Transport (LAPPSET). 

The land in Lamu is fast becoming a hot commodity as the economic potential of the county is about to multiply significantly as a result of the port. Lamu’s own-source revenue collections have risen by over 200% since 2013/14, driven by growth in infrastructure and equipment; but these revenues have only contributed to 2% of its budget on average. 

Our view is that Lamu, through its port, has high latent value – especially in property rates and single business permits which anchor on the activity coming in from the port. Lamu would do well to lay the right groundwork to ensure it can capture this prospective revenue growth.

Figure 3: Both OSR and total budget for Lamu County grew at 26% and 23% respectively, while OSR remained approximately 2% of budget. 

Source: Office of the Controller of budget (OCoB)

Makueni

Makueni county has become the poster child of the potential success of the devolution model for all counties. In its first years, Makueni faced political turmoil with an embattled Governorship that inhibited its ability to run government operations. This affected revenue collections which dipped from 4% in 2013/14, to 2% in  2016/17. The county has been able to recover, and has gone back up to 4% budget cover. Beyond that, revenue growth has been strong: 170% in 2018/19, only dipping slightly in 2019/20. 

But even though Makueni has invested in several areas in order to raise its revenue growth, and any potential it has looks years away from being attained. Makueni is semi-arid and sparsely populated, but it has invested in its agro-processing of fruits and cotton. In our view however, Makueni’s potential to cover its budget with own-source revenues is very limited, even with its current investments.

Figure 2: As the total budget expanded at an average growth rate of 28%, the ratio of OSR to total revenue declined rapidly during the first 4 years of devolution in Makueni County. However, the ratio slightly grew in the subsequent years given that the total budget expanded marginally compared to OSR. 

Source: Office of the Controller of budget (OCoB)

Thus, in answering the question, some counties like Nairobi have the capacity to raise revenues to cover the budgets – they just need to plug leakages and update their frameworks; others like Lamu have potential that they can tap into to make the difference; while others like Makueni may not be able to cover their budget at all. The equitable share will remain a significant revenue stream for all counties for the short to medium term, and suffer the vagaries of the revenue sharing process at the start of each fiscal year.

To begin to change the tide, counties should invest in revenue enhancement reform. This includes: strong legal frameworks, responsive revenue automation, clear HR policies for staff, and realistic forecasting and planning frameworks. EGCL will be rolling out an own-source revenue course for all counties to begin building these for themselves, and we look forward to supporting their initiatives.

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