A third of state powers are being transferred to the counties

A historic transition is under way in Kenya that could have profound implications for its economy: as part of the implementation of its 2010 constitution, the national government is devolving about a third of its powers and responsibilities to 47 newly created counties. The ultimate objective of the process is to usher in a more decentralised approach to public service delivery, which, while challenging and involving substantial short-term costs, is designed to address regional inequalities and improve localised development. The largest areas to be transferred include health care, local transportation infrastructure, and the control of rivers and lake basins, as well as some planning, investment and licensing policies.

The risks involved include a complex implementation process, while the experience of other countries that have gone through similar processes, such as Indonesia and Nigeria, have prompted concerns over the proliferation of new government bureaucracies and inadequate funding.

Although devolution may be a challenge to successfully and smoothly implement for Kenya, the project promises significant benefits over the long term, and a number of counties have taken aggressive approaches to maximising the advantages devolution confers. As of early 2014, for example, Machakos County, a small territory bordering the eastern edge of Nairobi, has begun courting investment with some success, seeing several billion shillings worth of commitments. “There is a massive cost to building strong institutions,” Njuguna Ndung’u, governor of the Central Bank of Kenya, told OBG. “There is going to be a transition, and we should not avoid that. The new constitution has given us the chance to have these new institutions, and they will be very positive over the long term.”

Cause & Benefit

Owing to a variety of factors, Kenya’s regions vary significantly in terms of their development prospects. Wealth has traditionally been focused in Nairobi, in the fertile south-west region and in Mombasa on the Indian Ocean coast. The arid north is poorer, which has exacerbated disparities in production and employment, given that the region is prone to drought and most of the country’s agriculture is rain-fed. There are a number of plans under way at the national level to help reduce these differences, but devolution is seen as a vital tool to empower county governments, attract investment and tackle local priorities.

The new counties are set to court investment on their own, and the national investment promotion agency, the Kenya Investment Authority (KenInvest), has been exploring the possibility of establishing a business climate ranking for the counties, comparable in nature to the World Bank’s “Doing Business” reports or the World Economic Forum’s competitiveness index. Generally speaking, the business climate in the country has been a concern, as it has been slipping in these types of international rankings, dropping from 72nd in 2008/09 to 129th in 2013/14 in the World Bank’s report.

History

When Kenya gained independence in 1963 the first constitution featured a similar sub-national structure, with regions in control of roughly a third of government functions. But the system was abrogated a year later, as the regional bodies failed to establish themselves in the face of a national government keen to concentrate power. As a result, governments at the sub-national level in Kenya from 1964 onwards were controlled by the central government, instead of elected.

A second chance at devolution began in earnest after the 2010 constitution was passed. The March 2013 elections saw 47 governors voted into office to oversee the new local bodies. Kenya’s 47 counties take over from eight provincial administrations, 175 local authorities and around 540 other sub-national administrative bodies, according to the World Bank. The constitution stipulates that no more than two-thirds of any such representative body can be composed of either gender. For their executive arms each county is to establish a Cabinet called the County Executive Committee, and these can have a maximum of 10 members, each overseeing a particular department or ministry. As per the 2010 constitution, the national government and the counties are to be perceived as equal and without either having authority over the other. In practice, however, during the current transition phase the counties are to an extent under greater national control and supervision, and as a result, confusion over the details has already created some disputes.

Facilitating Bodies

At the national level, several new bodies have been created to help facilitate the devolution process. Two of the most important are the Transition Authority, created by legislation in 2012 to oversee the process, and the Commission on Revenue Allocation (CRA), an entity created by the 2010 constitution to determine, in conjunction with the National Treasury and the legislature, the annual value of financial transfers to the counties.

Broadly, the national government will get 84.5% of national revenue, and the counties will receive a minimum of 15%, with the final half-percent going into a fund to aid marginalised areas. The CRA is responsible for applying a formula based on population and human development measures to determine how the 47 counties share their portion of state funding. Over the past two fiscal years, according to KenInvest, the counties have received closer to an average of 30% of the total revenues.

Sharing Power

The body responsible for establishing the specifics of the breakdown of power is the Transition Authority, which is tasked with delegating the assignment of specific functions overseen by the national government to the counties. The separation of powers between the two levels of government has left state affairs such as foreign policy, security and the judiciary to the national government. The counties will have partial or full control in areas such as cultural affairs; planning and development; trade and investment; education; transport; public works; fire-fighting and disaster response; agriculture; and animal control. In education, for example, the counties are charged with pre-primary and vocational training, while the national government continues to oversee primary, secondary and university policies (see Education chapter). In areas where there may be future conflicts, control defaults to the national government, according to the constitution. The state also has the authority to unilaterally transfer powers to the counties.

Oversight of the devolution process and of the counties more broadly falls to the Senate, the upper house of the bicameral legislature. While the constitution calls the two levels of government distinct and independent, it also explicitly delegates supervision of the counties to the Senate.

The question of checks and balances between the two levels of government is a strength of the new system, particularly insofar as it leads to stronger governance. Kenya is aiming to ensure that its decentralisation process avoids some of the problems faced by other similar initiatives in Asia and Africa. For example, according to a World Bank report on devolution, in Indonesia and Nigeria where local governments were given expanded powers in recent decades, sub-national governance has often been weaker than at the national level, a result in part due to insufficient staffing and training. Kenya is aiming to sidestep these challenges by ensuring transparency of payrolls and procurement procedures, as well as by maintaining robust oversight.

Sharing Revenue

The national government expects the counties to generate revenue in three ways. The primary method is via transfers from the national level, with grants and the Equalisation Fund playing a smaller role. The fund is a pool equivalent to 0.5% of annual national revenues that will be directed toward providing basic services in marginalised areas. Counties are also expected to generate income from fees and licensing, but are barred from raising taxes. However, they have the ability to turn to debt markets and are expected to borrow from private sector lenders and perhaps issue bonds in the future. Regardless of this, funding is still expected to remain a challenge. According to the World Bank, the responsibilities being devolved will likely require more than a 15% allocation of total government resources, based on previous spending.

Parliament has adopted the CRA’s proposal that counties share 15% of national revenues, and the allocation formula will be reviewed every five years or as needed. The two most important factors in determining the split of funds are population and the poverty index figure of each county. A benefit of this approach is that it is simple and transparent, according to the US-based think tank Brookings Institute. However, the downside of this option is that it may leave some counties ill prepared to actually deliver services. Brookings’ research found that “there is a need to go beyond the generalised approach and instead focus more specifically on the cost of delivering specific services that are under the management of the county governments”. Such a shift would require line-item budgeting for specific services provided by the counties. Another option is to base sharing on the cost of services, as counties vary widely in size, terrain and population.

For their inaugural budgeting years, according to the CRA, county budgets totalled KSh210bn ($2.39bn), and ranged from the KSh2.21bn ($25.19m) planned expenditure of Lamu County to the KSh30.3bn ($345.4m) in Kisii. Six counties had budgets of more than KSh10bn ($114m). CRA analysis shows that overall 69% of revenue will come from national transfers and 31% from elsewhere. Out of all counties, 11 planned a budget surplus and a further 11 aimed to break even. Eight counties anticipated a budget deficit of more than 20%.

Budjeting Principles

One of the chief challenges for the counties will be to focus spending on development as opposed to on wages. The Public Finance Management Act of 2012 holds counties to a set of fiscal responsibility principles, such as allocating a minimum of 30% of spending to development and using debt financing for development only and not for recurring expenditure. The spending mix has been a major concern for Kenya in recent years. A state-wide audit of hiring and wages was ordered in early 2014, and counties were instructed to put recruitment on hold temporarily. Corruption is again a factor, as ghost workers bloat payrolls.

Counties had been criticised early for failing to meet the 30% threshold. For example, a total of 7% of overall expenditures were for development purposes in the first quarter of the fiscal year 2013/14, according to the Office of the Controller of Budget, well short of the minimum requirement. However, by the end of the fiscal year, this number had increased substantially, with the counties spending 21.6% of their total expenditures on development programmes. This substantial improvement over the year should not be particularly surprising, as much of the first part of the year was spent establishing the new county-level institutions.

Outlook

The implementation of devolution, as laid out in the 2010 constitution, has opened the door for greater equality across the country, should the local and national authorities work together to successfully avoid the pitfalls of decentralising government responsibilities. As county governments take on new responsibilities with regards to financing and governance, and as new revenue-sharing arrangements are tested, there are likely to be challenges that will require effective coordination at both levels. Additionally, counties are expected to begin seeking their own investment to complement state funding, which should usher in a new period of possibilities for investors and Kenyan citizens. Devolution has largely proceeded smoothly and, provided trends continue, Kenya could become a role model for other countries seeking to do the same.