Elusive Own Source Revenue – Is There a Silver Bullet?

By middle of this fiscal year, counties had collected about Ksh.20 billion in Own Source Revenue (OSR), the highest amount since devolution.  Growth in OSR is good news for Counties as they seek innovative ways to finance service delivery in agriculture, health, water, early childhood education, and other critical devolved functions.

At current trajectory, the annual collection will still be less than 30% of the assessed potential, a disappointing outcome.  And this is just the sort of problem that clever technocrats, development partners and well-meaning political leaders like to dig into.

Since this second round of devolution started in 2013, there has been several dozen reports, studies and initiatives aimed at optimizing own source revenue.  We have had five rounds of training on tax administration based on the Tax Administration Diagnostic Assessment Tool (TADAT) facilitated by Commission for Revenue Allocation (CRA), Kenya Revenue Authority (KRA) and the TADAT Secretariat. We have had papers by the Kenya School of Revenue Administration and by KIPPRA.

We have also had several major studies. Two readily come to mind.  First, the Own-Source Revenue Potential and Tax Gap Study of Kenya’s County Governments prepared for the National Treasury and financed by the World Bank in 2018.  Building on that earlier work, the CRA published the Comprehensive Own Source Revenue (OSR) Potential and Tax Gap Study in June 2022.  County governments are making frequent reference to it.

Trying to be helpful, the Cabinet weighed in 2018, approving the National Policy to Support Enhancement of County Government’s Own Source Revenue. The overarching goal of the policy is to achieve a standardized policy, legal and institutional framework for local revenue-raising measures and enforcement that applies to all counties.  Supported by AHADI, it came complete with a proposed bill.

AHADI was itself the eloquently (sic) sounding Agile and Harmonized Assistance for Devolved Institutions.  A project funded by United States (USAID) and United Kingdom (UKAid) Governments, it was implemented by an American University and consulting firms whose names sound like non-governmental organizations.

It may surprise you then, that with all these efforts, and experts local and foreign, growing own source revenue has eluded most counties for ten years.  But not all. Some counties have made major strides.  Begging the questions, what works?  Is there a silver bullet?

By way of best practice, the Commission for Revenue Allocation recommends that counties form independent tax units – typically a county revenue board.  Many have.  Further, all counties have attempted to automate revenue collection. Almost all counties are on their third or fourth attempt at automation. With a few exceptions, automation has not yielded desired results.  In part, because it has been done poorly.

In response, the Jubilee Administration proposed to procure one revenue system that all counties could use. A technical working committee of county executives and senior staffers from the National Treasury, led by the director of IFMIS, seemed to settle on the system then in use in Kwale.  But the matter stalled.  It later emerged that intellectual property (IP) issues of the Kwale system were unresolved.

The Kenya Kwanza administration has recently revived this idea.  They too want to buy a system to help counties along.  In both instances, the Council of Governors would have not of it, alleging micro-management.

Automation has been poorly done because IT projects are notoriously difficult for most bureaucracies to implement.  Here is an example.  The Integrated Financial Management System (IFMIS), was once taunted as the holy grail for public finances.  It was adopted by many African countries, particularly the poorer lot.

Shock on you though, it is complicated, difficult to use, and can routinely produce gibberish reports, as many county governors can attest.  One governor was famously raked over hot coals by the Public Accounts Committee when IFMIS reports showed that he was financing the State House and the African Union!  Of course, he was doing no such thing! But the now fouled air followed him to impeachment.

Then, there was the erroneous view that point of sale devices (POSs) represented automation. They don’t.  A POS typically requires a human being to operate.  Automation is when you remove human intervention, so that I, the citizen, can pay without assistance. Today there are multiple payment channels, leading ones being mobile money.  Automation is therefore much easier to do.

One way to reflect on what works is to observe those counties which have made rapid progress.  Laikipia. Homa Bay. Kisumu. Recently, Nyamira.  One commonality is that these counties have focused on tracking service delivery as the key driver of revenue collection.  What many experts, studies, reports and automation efforts miss is that county revenues are largely fees for services. Property taxes being the exception.

Health services are the best example. If doctors are not attending to patients, there are no consultation fees.  If the pharmacies have no medicines to dispense, you cannot expect payments!  The same can be said of meat inspection, AI services, livestock movements permits and so on.

Unless properly positioned, revenue boards find it very frustrating.  Line departments abdicate service delivery, expecting that the business of collecting revenue belongs to the revenue board.  Except that if the VET does not issue a livestock movement permit, if she does not provide the AI service, there is no revenue to collect!

The silver bullet – Performance Management – turns out to be just as elusive as the revenue.  Those counties that have done a better job at cascading performance targets from CEC level, through chief officers, directors, and on to the service level staff are doing very well in revenue collection!

Bureaucracy is nothing if not complicated. The folks in charge of performance management are not the revenue boards.  Rather, it is the County Public Service Boards who hire personnel, and the Salaries and Remuneration Commission (SRC), which determines what everyone is paid.  Finding the silver bullet is the subject of a major OSR Growth Conference next month at the Kenya School of Monetary Studies.


@NdirituMuriithi is an economist

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