The importance of Own Source Revenue (OSR) as a key factor in growing County’s budgetary needs has become increasingly evident, especially in the last few months deadlock over the equitable share transfer to county governments.
The Own-Source Revenue Potential and Tax Gap Study of Kenya’s County Governments done by the National Treasury in 2018, assessed the performance of 19 specific revenue streams between 2013 and 2017. The study revealed that the top three streams over the period were land rates(28%), followed by Single Business Permits (22%) and County hospital fees and Collections from royalties/cess which tied at 11%.
However, most notable was the uneven pace of revenue growth of the bottom 15 revenue streams, all with a cumulative contribution of 21%, and each below 6%. Among them is a stream known as Market fees, which cumulatively collects 2%.
So what are market fees? Market fees are revenues collected for use of market facilities provided by the counties. They are collected from traders to access the markets and are charged , by the type and quantity of product they plan to sell, and rental of stalls. Agriculture sector is the mainstay of Kenya’s economy and amongst the first sectors to be fully devolved. According to FAO, it contributes 26 per cent of the Gross Domestic Product (GDP) and employs more than 40 per cent of the total population and more than 70 per cent of Kenya’s rural people. This explains why the Counties should be generating significant revenues from this stream.
I have visited several markets as part of revenue studies undertaken by the counties. On market days, the markets are a beehive of activity. Significant amounts of revenue are generated by traders in these markets. But when one looks at the revenue collection figures, the numbers do not add up. Further research into why market fee collections are low revealed three key constraints.
The first is poor infrastructure maintenance. Majority of the traders have to put up with perforated and dilapidated stalls, which for instance in the rainy seasons, traders and their wares are rained on. . In addition, there are no parking provisions for wholesalers supplying products, nor for customers.
The PFM law (2012) specifies that a minimum of 30% should be allocated to development expenditure. However expenditure reports overall show that approximately 24.4% was spent on development expenditure in the first nine months of Financial Year 2018/19. With market infrastructure failing, traders have high resistance to compliance with fee payments and engage in evasion, protests and sometimes even violence towards revenue collectors.
Second is administrative weaknesses. The operational structures in place for many Counties have not been designed well nor structured clearly to respond to the county context. A point of reference is asset management where enforcement unit use a single vehicle to marshal the whole County. Tools of trade – for example storage facilities for impounded goods, uniforms, gumboots, shelter and other paraphernalia are not provided despite budget provisions. Budget implementation is considered to be priority spending process and for this reason, escalated revenue issues in the markets receive nominal attention since they are perceived to be less urgent. The number of tax evaders has increased overtime due to weak enforcement structures. There are no standard operating procedures in place to collect market fees while the limited staff available to collect revenues are highly demotivated.
Third, the lack of a policy and legal framework. A legal framework is the basis for the clear implementation of market operation policy – which is also non-existent. A legal framework is needed to identify what the county is supposed to provide, what is expected of market users, and the services thereunder. Penalties and enforcement structures are also identified here. Without this policy and legal framework in place, there can be no clear operational standards or structures. And this has proven to be the case.
There are several other issues plaguing the successful realisation of market fee revenues, but addressing these three key issues by i)investing in the development and maintenance of markets ii) implementing strong administration and operations processes and procedures iii) developing and passing a clear policy and legal framework for market fees.
It should also be noted that these issues are also replicated in other revenue streams. Counties therefore need to develop an all encompassing revenue reform strategy, including a market fee reform strategy, to address constraints in revenue enhancement.
Our work at Expertise Global Consulting involves working on the same with Bomet, Laikipia and Makueni. We look forward to sharing our findings in this arena with you soon.