World Bank’s county wealth report now sparks debate over revenue sharing formula

Corporate News

Micah Cheserem, the chairman, Commission on Revenue Allocation. PHOTO | FILE 

By DAVID HERBLING, hdavid@ke.nationmedia.com

Governors have questioned the quality of data and formula used by Kenya’s revenue-sharing agency to divide the national cake to devolved units, after a World Bank report revealed fresh insights on the wealth of counties.

The county heads want the gross domestic product — the total value of output for each devolved unit — to be considered in the formula used by the Commission for Revenue Allocation (CRA) to share cash to the 47 sub-governments.

The World Bank study, has for the first time ever, computed the wealth per capita of each county, handing CRA an important metric that has hitherto been missing in the agency’s planning.

Siaya governor Cornel Rasanga has dismissed the current CRA formula saying it has led to a situation where Nairobi gets the lion’s share because of its perceived richness.

“The new GDP indicators should now be used to inform revenue sharing formulas from the one that is currently used by CRA,” said Mr Rasanga, whose county is ranked as posting the fastest growth in the last decade.

The fresh World Bank findings put Nairobi’s input to Kenya’s GDP at 12.7 per cent, debunking the myth that the capital city contributes more than 60 per cent of total output.

“This contribution is lower than commonly thought. This can have ramifications,” says the research paper. Kiambu is ranked Kenya’s richest county with a GDP per capita of $1,785 followed by Nyeri ($1,503), Kajiado ($1,466), Nakuru ($1,413), and Kwale ($1,406).

The list of the bottom five counties in terms of wealth per capita is Mandera ($267), Bomet ($282), Elgeyo Marakwet ($293), Samburu ($298) and West Pokot ($307).

The World Bank report does not incorporate Kenya’s rebased or updated national accounts unveiled in September 2014.

Baringo Governor Benjamin Cheboi also faulted the revenue sharing formula, saying the statistics are outdated and place too much emphasis on population size.

“I’m not happy with the CRA formula. The statistics used are not accurate,” said Mr Cheboi.

He said that CRA needs to rethink its current revenue sharing weighted formula: population (45 per cent), equal share (25 per cent), poverty index (20 per cent), land mass (eight per cent) and two per cent based on fiscal responsibility.

READ: Nairobi ranked 8th on World Bank list of rich, poor counties

CRA chairman Micah Cheserem agrees that the current revenue sharing formula is flawed as it does not factor in sub-national GDP figures.
“Perhaps the most glaring omission is information on county contributions to Kenya’s GDP which to date has not been disaggregated below the national level,” said Mr Cheserem in the latest report dubbed County Fact Sheets.

The World Bank is now calling for a re-think on how funds are shared between the national government and devolved units, taking into account county-level GDP.

“In addition to affecting how including county-level GDP in the revenue sharing formula, in the case of Kenya, can considerably affect resource allocation among individual counties, estimating subnational economic activity also has other uses,” reads the World Bank report.

“Counties themselves may want to know and understand what drives growth within their borders, and how they stack up against others.”

The Constitution stipulates that at least Sh15 out of every Sh100 earned by the government as revenue should be allocated to county governments.

XN Iraki, a senior lecturer at the University of Nairobi’s School of Business, says it is no surprise that Kiambu is Kenya’s richest county and links this to its proximity to the capital city.

“Kiambu has always been an economic leader because of proximity to Nairobi and encounter with western capitalism before other counties,” said Dr Iraki in an interview.

There is need to interrogate the World Bank report further and CRA should use it to inform revenue sharing, he said. Dr Iraki disagreed with the ranking of Bomet as Kenya’s second poorest county despite its lush tea estates and dairy farms.

“The report underestimates the GDP of agricultural rich counties and Bomet is one of them,” he argued. Bungoma governor Kenneth Lusaka said the current formula gives counties a raw deal because the statistics used are not up to date.

“We must use the latest statistics. We should have a formula that takes into account two key factors: population and poverty index,” said Mr Lusaka.

CRA’s wealth ranking is based on the 2005 Kenya Integrated Household Budget Survey. It places Kajiado as the richest county followed by Kirinyaga, Meru, Lamu and Kiambu. Turkana was classified as the poorest county with a poverty score of 67.5, followed by Mandera, Samburu, Marsabit and Wajir.

There are glaring differences between the CRA and World Bank rankings of counties’ wealth. Kwale, which is ranked as a marginalised county by CRA, made it to the top five wealthy counties courtesy of resources such as tourism, minerals (titanium and rare earth) and agriculture (sugarcane).

CRA identifies a total of 14 counties as poor and marginalised, making them eligible to receive grants from the Equalisation Fund which is allocated 0.5 per cent of government revenue.

Of these, four — Kwale, Kilifi, Taita Taveta and Tana River — posted GDP per capita higher than the national GDP of $694, further putting to question the quality of CRA data.

The World Bank study shows that only a third or 15 counties have a GDP per capita which is above the national average, highlighting the huge disparities among Kenya’s devolved units.

Mombasa governor Ali Hassan Joho also criticised the CRA formula, saying it should also consider revenue retention from recurrent county levies to foster competition among the devolved units.

“Retention should be added so that counties can compete on productivity,” said Joho.

The report is authored by Apurva Sanghi, a lead economist at the World Bank, Geographic Information Systems (GIS) expert Laban Maiyo and Tom Bundervoet, a senior economist at the bank’s Kigali office.

The Bretton Woods institution used the night lights approach to estimate the economic activity in the counties, which was then summed up with agricultural output, to measure the wealth of each county.

This new method involves use of satellite imagery to capture economic activity, which assumes a correlation between nightlights and consumption as well as investment activities.

Intensity of night lights

“In recent years, the intensity of night lights as measured from space has increasingly been used to estimate economic activity,” reads the report.

For example, Kenya’s growth of night lights was recorded at four per cent between 2000 and 2012, nearly the actual annual GDP growth rate of 4.2 per cent recorded during the period.

“The assumption that as almost all consumption and investment activities in the evening or night require lighting, the intensity of night lights — or its growth over time — can be used as a proxy for the intensity of economic activity or economic growth,” the authors argue.

Night lights intensity was used to measure output from secondary and tertiary sectors, which refers to manufacturing and service respectively.

The researchers then aggregated this with agricultural output to come up with the GDP size for each county. Nairobi and Mombasa were not allocated any score on agricultural GDP because the 2009 national population census classified them as purely urban, the researchers said.

“This may underestimate their GDP if agricultural activity does take place in these counties,” the report said.

Treasury secretary Henry Rotich doled out Sh259.7 billion to counties in the current fiscal year and a further Sh27.3 billion as grants.

This means that county governments have so far pocketed Sh723.7 as shareable revenue from the central government since March 2013 when the new constitution ushered in the devolved order.