Current Revenue Sharing Practices in Kenya: How … · Current Revenue Sharing Practices in Kenya: How Fair? ... 13th Finance Commission (2007) 14th Finance Commission

Current Revenue Sharing

Practices in Kenya: How Fair?

John Kinuthia

Research Analyst

20/09/2016

Equity: From Principles to Practice

• We have discussed 6 key principles of equity

• Most revenue sharing approaches globally

incorporate need

• Many incorporate at least some of the other 5

principles as well

• Let’s look at how well Kenya’s national and county

programs incorporate principles in practice

www.Internationalbudget.org/kenya 2

National Level

• National Constituency Development Fund

• Level 5 Hospitals

• Equalization Fund

County Level

• Equitable Development Act - Elgeyo-Marakwet

• Ward Development Funds in Baringo and Meru


National


National Government Constituency Development

Fund (CDF)

• CDF is 2.5% of the national government share of

revenue.

• 75% of the fund is distributed equally among the

constituencies and 25% is shared based on the

number of poor people as a share of the national total.

• CDF is mainly a capital fund but there are no direct

measures of infrastructure needs in the distribution

criteria.


Is the CDF distribution mechanism fair?

• CDF does not directly measure needs for all the issues

it allocates money to.

• The high equal distribution does not take into account

population differences.

• Lamu East has the lowest number of poor people but

receives 20 times the per capita allocation in Mandera

South which has the highest poor population.

• The poverty data used is adjusted by a factor of 0.23

for urban areas in favour of rural constituencies. Not

clear why this adjustment was made…


Level 5 Hospitals

• 7 former provincial hospitals and 4 other high volume

facilities.

• They are managed by host counties but funded

through a conditional grant.

• Before devolution allocations to level 5 facilities were

based on the formula below


Variable Weight

Poverty 20%

Beds Utilized 40%

Outpatient Cases 20%

Accident Prone Facilities 5%

Fuel Costs 15%

Total 100%

After devolution…

• In 2013/14 and 2014/15 the criteria used has been

unclear.

• In 2015/16 and 2016/17 the allocations were

based on the bed occupancy rates.

• The higher the rate, the more money a facility

receives.


Is the Level 5 grant distributed fairly?

• The bed occupancy rates ignore the actual number of

beds whose occupancy drives costs.

• For example Nakuru and Meru have the same

occupancy rates but Nakuru has almost twice the

number of beds than Meru.

• However both facilities received Ksh 356 million each

in 2016/17. Is this fair?

• In addition these facilities provide other services that

drive their costs beside inpatient services


Share of allocations in 2016/17 based on bed

occupancy


1 2 3 4 5 6 7 9

Facility

Bed Occupancy

Rates Bed capacity Occupied Beds

CARB 2016

County Allocation

(Million)

Share of County

Allocation based on

the CARB Criteria

Share of Occupied

Beds to the Total

Allocation Based on

Number of Occupied Beds

as a Share of the Total

(Million)

Machakos 79% 375 296 365 9% 8% 339

Embu 62% 618 383 287 7% 11% 439

Garissa 71% 224 159 328 8% 5% 182

Kakamega 88% 449 395 407 10% 11% 453

Meru 77% 306 236 356 9% 7% 270

Mombasa 80% 499 399 370 9% 11% 457

Nakuru 77% 588 453 356 9% 13% 519

Nyeri 84% 323 271 388 10% 8% 311

Kisumu 76% 457 347 351 9% 10% 398

Thika 85% 265 225 393 10% 6% 258

Kisii 86% 379 326 398 10% 9% 373

Total 4,483 3,491 4,000 100% 100% 4,000

Equalization Fund

• EF established by constitution to target “marginalized”

areas: access to health facilities, water, roads and

electricity lags behind other areas

• CRA marginalization policy identifies 14 counties to

receive funds based on assessment of development

and historical marginalization.

• Half of the fund is shared equally and the other half is

shared based on a formula based criteria.


Equalization Fund distribution parameters


Category/Dimensions Weight Indicator Weight

Poverty gap 16% i Poverty 16.0%

Infrastructure 28% i Roads 9.3%

ii Electricity 9.3%

iii Water 9.3%

Health 28% i Immunization 9.3%

ii Sanitation 9.3%

iii Deliveries in Health Facilities 9.3%

Education 28% i Literacy 14.0%

ii Secondary education 14.0%

Total 100% 100%

Is the distribution of the Equalization Fund fair?

• The marginalization policy includes parameters that

are not in the constitution: education and poverty.

• The CRA policy does not explain how these weights

were arrived at. For example, health and education are

given the same weight of 28 percent. Why?

• Why are certain variables used for the parameters and

not others?

• For example, immunization is part of the health

parameter but child nutrition is not.


EF continued…

• The selection of counties as the measurement unit

locks out poor areas in non-marginalized counties.

• When shared equitably the range of allocations is

between 5%-11%

• When shared with the equal share the range

reduces to 6%-9%.


Counties


County approaches to revenue distribution

Two common approaches to distribution by counties:

• First, mimic the CRA formula in some form

• Second, adapt the CDF criteria in some form

• Many counties are not fully implementing these laws

but they give an idea of thinking about equity


Quick review: CRA and CDF

• The first CRA formula had five parameters that

determined the horizontal allocation of revenue

among counties.

• The parameters are population, poverty, basic

equal share, land area and fiscal responsibility.

• CDF approach has a big proportion of the fund

shared equally (75%) and remainder shared

based on poverty numbers in each constituency.


EDA in Elgeyo-Marakwet

• The Equitable Development Act guides distribution of

the full development budget among EMC wards.

• 60% of development budget in each department is

shared equally and 40% is shared based on a formula

borrowed from CRA’s 2012 criteria.

• However, the EDA appears to be more re-distributive

compared to the CRA formula. More weight on poverty

and less on population


EDA Formula


EMC CRA (2012)

Parameters Weights Weights

Population 38% 45%

County Flagship Projects 23%

Poverty Index 22% 20%

Land Area 8% 8%

Emergencies 5%

Fiscal Responsibility 2% 2%

Arid and Semi-Arid Areas 2%

Is the EDA Fair?

• The formula does not directly address the needs and

the high equal share assumes the development needs

in wards are almost similar.

• Example: the share of people without access to water

ranges from 2%-9%,while the allocations to wards in

that department is between 2%-6%.


Is the EDA fair? (continued)

• The county distributes the whole development budget

through the EDA: leaves very little funding for county-

wide projects.

• It does seem the county changed the formula

(informally) to allocate more resources to county flagship

projects.

• The adjustments made in the formula are not clear and

the county has not published these changes

(undermines fair process)


Baringo County WDF

• Seems to borrow from CDF in one part and CRA

in another part of the law.


Baringo Approach to Ward Distribution

• The act requires 10% of the development budget be

distributed to wards.

• Baringo’s modified CDF approach requires 85% of the

fund be distributed equally and 15% based on ward

population. Does not measure poverty (unlike CDF).


Is the Baringo approach fair?

• The CDF approach has a very high equal share (75%)

but Baringo’s is higher at 85%.

• Population might give an idea of pressure on

infrastructure but does not give a true picture of current

deficits in the wards.

• A smaller portion is allocated to the wards compared to

EMC but the distribution is highly equal.

• For example, share of people without access to

improved water ranges between 1%-6%

• Fund allocations per ward range between 3%-4%


Meru County WDF

• The sets aside at least 22.5% of “ordinary revenue” to

a Ward Development Fund.

• 85% of the fund is to be shared equally and the

remaining 15% shared based on population size,

poverty levels, and infrastructure differences among

the wards.


How fair is Meru’s approach?

• Meru is the only county among the three analyzed that

has a direct measure of infrastructure need in its

distribution criteria.

• Use of an “infrastructure differences” parameter means

that Meru’s fund take into account infrastructure needs

directly.

• But, the very high equal share means the formula is

unlikely to be equitable.


How does Kenya compare globally?

Look at India

• In recent years, India's formulas have taken into

account fiscal need, capacity and effort.

• There has been a relatively high weight attached to

fiscal capacity compared to other parameters over

time.

• Notable that India has deemphasized fiscal discipline

in its current formula, which is an area where many

Kenyans believe there should be more weight.


India’s revenue sharing formula


Criteria and Weights13th Finance Commission (2007)

14th Finance Commission (2013)

Population 25% 17.50%

Demographic Change Not Included 10%

Fiscal Capacity Distance 47.50% 50%

Area 10% 15%

Forest Cover Not Included 7.50%

Fiscal Discipline 17.50% Not Included

Total 100% 100%

South Africa

• South Africa’s provincial revenue sharing approach

mainly emphasizes fiscal needs.

• South Africa uses parameters that measure actual

service needs, such as the number of school age

children as a measure of education needs.

• The weight for the equal share in Kenya’s formula

(now 26%) is more than five times that of South Africa

(5%)


South Africa’s revenue sharing formula


Component Weights

Education 48%

Health 27%

Basic (Shared based on population) 16%

Institutional (Equal share) 5%

Poverty 3%

Economic Output 1%

Total 100%

Conclusions

• Fiscal need is the main driver of resource distribution

in Kenya, but not always well-measured.

• Many programs use different approaches to measuring

poverty and marginalization, not all of which are

consistent or fair.

• Kenya tends to put inordinate weight on equality over

equity.

• Equality stands out when compared to the low weight

given to equal shares in South Africa and India.

• Little attention has been given to fiscal capacity or

fiscal effort in Kenya, though these are given

considerable weight in other countries like India


At County Level…

• Counties are making attempts to share revenue

among their wards and are borrowing from CDF and

the CRA formula.

• This approach has meant some measure of need is

applied by the formulas

• However, equality seems to outweigh equity in all the

counties.

• Projects funded in each ward are determined exclusive

of the main budget process and this parallel process

might create challenges (as it has with CDF)


Documents

Current Revenue Sharing Practices in Kenya: How … · Current Revenue Sharing Practices in Kenya: How Fair? ... 13th Finance Commission (2007) 14th Finance Commission