The theory of fiscal decentralization in Kenya

TABLE OF CONTENTS

1. Introduction

2. Pillars of fiscal decentralisation
2.1 Political autonomy
2.2 Expenditure responsibility
2.3 Revenue assignment
2.4 Intergovernmental fiscal transfers
2.5 Sub-national borrowing

3. Application of the pillars of fiscal decentralisation in Kenya and how the 2010 Constitution mitigates demerits of decentralisation
3.1 Application of political autonomy under the 2010 Constitution
3.2 Application of expenditure responsibility under the 2010 Constitution
3.3 Application of revenue assignment under the 2010 Constitution
3.3.1 Taxation powers
3.3.2 Budgetary autonomy
3.3.3 Transparency and accountability
3.3.4 Hard budget constraint
3.4 Application of intergovernmental fiscal transfer under the 2010 Constitution
3.5 Application of sub-national borrowing under the 2010 Constitution

4. Concluding remarks

REFERENCES

Abstract

The Constitution of Kenya 2010 introduced a devolved system of government in which functions, powers and resources are devolved to decentralised units commonly referred to as counties. The devolution of resources to counties is achieved through a theory of fiscal decentralisation which is well entrenched under the Constitution. This essay critical analyses this theory of fiscal decentralisation and rationalises how the Constitution is prepared to mitigate any demerits of decentralisation. It discusses the pillars of fiscal decentralisation including political autonomy, financial autonomy (revenue assignment), expenditure responsibility, intergovernmental fiscal transfers, and sub-national borrowing, and the application of these pillars in Kenya and how the Constitution mitigates the demerits of fiscal decentralisation.

Key words

Devolution, Fiscal decentralisation, Political autonomy, Financial autonomy, Expenditure responsibility, Intergovernmental fiscal transfers, Revenue assignment, Sub-national borrowing, Budgetary autonomy, Hard budget constraint

JUNE 2019

1. Introduction

Kenya adopted a new Constitution on 27th August 2010, that introduced the devolution of political power, functions, and resources to the newly formed forty-seven county governments. This is what has been described as a devolved system of government in which the Kenyan people were determined to devolve governance and decision-making powers to counties so as to give them greater say on how their resources could be harnessed and utilized.¹ With devolution, two levels of government were created, that is, the national and county governments.² Although these levels of governments are distinct, they remain interdependent of each other and as a result, they have an obligation to conduct their mutual relations on the basis of consultation and cooperation.³ This means that devolution is not based on the principle of absolute autonomy, but instead, on the interdependence and cooperation between the national and county governments and amongst county governments. As a result, governments at both levels are required to observe cooperative intergovernmental relations and fulfill their obligations of cooperative government. The 2010 Constitution positioned devolution centrally and at the core of Kenya’s national life and is identified as one of the national values and principles of governance.⁴ The Kenyan system can correctly be described as a cooperative system of devolved governance.

Through the 2010 Constitution, Kenya adopted a fiscal decentralisation model. Decentralisation can be defined as the dispersion of power and responsibilities from a central government to regional or local managed units that act as agents and execute certain functions on behalf of the central government.⁵ A decentralised system involves the transfer of powers by a central government to sub-national units that exercise those received powers under the control and supervision of the central government that is transferring the powers to them.⁶ There are two categories of decentralisation. The first category involves the mere transfer of authority to sub-national units with the central government retaining the power to make final decisions. The second category involves the decentralisation of political power in which the central government transfers political, administrative and financial power to sub-national units which make decisions independent of the central government.⁷ For purposes of this study, the second category is adopted as the working definition whenever decentralisation appears in this paper.

Fiscal decentralisation comprises of the financial aspects of devolution to regional and local governments. Devolution has been defined as a ‘system of multilevel government under which the Constitution creates two distinct and interdependent levels of government- the national and county that are required to conduct their mutual relations in a consultative and cooperative manner.’⁸ The Kenyan High Court has also had the opportunity to pronounce itself on what is meant by devolution, thus:

…Devolution as a form of decentralisation can be defined as the process of transferring decision-making and implementation powers, functions, responsibilities and resources to legally constituted, and popularly elected local governments known as Counties. The Constitution of Kenya, 2010 has established a multilevel system of government often referred to as a devolved system of government.⁹

Fiscal decentralisation involves the devolution by the central government to local governments of specific functions together with the administrative authority and fiscal revenue to perform those functions.¹⁰ This is the aspect of decentralisation that defines how and in what way expenditures and revenues are organised between and across different levels of government in the national polity.¹¹ This is in line with the principle of financing counties, that is, funds must follow and match functions. Fiscal decentralisation is therefore defined as the ‘transferring of the authority of tax collection or expenditure from the national level to sub-national units for the purpose of attaining more efficient public services aimed at improving the public welfare of residents.’¹²

This paper discusses the theory of fiscal decentralisation under the Kenyan devolved system of government and rationalises how the Constitution of Kenya, 2010, mitigates the demerits of decentralisation for the realisation of the objects of devolution in Kenya. Part II gives a description of the pillars of the theory of fiscal decentralisation. Part III discusses the application of the pillars of fiscal decentralisation under the Kenyan devolved system of government and rationalises how the 2010 Constitution mitigates the demerits of decentralisation. A comparative analysis of the Republic of South Africa(RSA) is adopted throughout this study. The RSA provides instructive lessons for Kenya for the proper implementation and sustainability of an effective fiscal decentralisation system in Kenya. The last part of this study gives some concluding remarks.

2. Pillars of fiscal decentralisation

Effective fiscal decentralisation is founded on five key pillars. These key pillars are: (a) political autonomy; (b) expenditure responsibility; (c) revenue assignment; (d) intergovernmental fiscal transfers; and (e) sub-national borrowing. These key pillars are not independent of each other. Instead, they are complementary to each other and as a result, they equally contribute to an effective fiscal decentralisation.

2.1 Political autonomy

Political autonomy is the most crucial element of a decentralised system.¹³ It encompasses that the regional, devolved or local units are not created by the central or national government. According to this pillar, the decentralised units are relatively autonomous entities from the central government and their leadership is directly elected by the local people during elections. This means that the accountability of the local leadership would be down to the local people which in turn creates a system where the efficiency gains central to decentralisation strategies are well captured.¹⁴ The decentralised units also elect their own political structures which they control thus making their governments distinct from the central or national governments.

2.2 Expenditure responsibility

Functions, powers, and responsibilities are usually assigned to different levels or spheres of government in any given country with a decentralised system of government. This entails a framework of the distribution of functions, powers, and responsibilities between the national or central and regional, decentralised, local or county governments to whom financial resources are expected to be decentralised.¹⁵ The assignment of functions is usually based on the subsidiarity principle that requires that government functions should be assigned to the lowest level or sphere of government that is capable of efficiently and effectively performing the function.¹⁶

2.3 Revenue assignment

One of the principles of public finance is that funds must always follow and match functions. This means that the regional, decentralised or local units should have adequate financial resources to enable them effectively and efficiently discharge their assigned functions. Revenue assignment entails giving the decentralised units a significant amount of revenue collection powers, budgetary autonomy, transparency, and a hard budget constraint. This calls for the central or national government to establish the expenditure needs of each level or sphere of government before tackling the question of revenue assignment.¹⁷

2.4 Intergovernmental fiscal transfers

Intergovernmental fiscal transfer as a pillar of effective fiscal decentralisation recognizes that the assignment of revenue sources rarely provides devolved units with adequate revenues to fund their expenditure functions.¹⁸ In order to address the budget deficiencies, there is a need for the establishment of a framework of transferring funds from the national or central government to the devolved units. This framework should ensure that the budgetary autonomy of the devolved units is preserved and that the policy of fiscal transfer does not impede local revenue mobilisation initiatives of the devolved units.¹⁹

2.5 Sub-national borrowing

The pillar of sub-national borrowing recognizes that budget deficits need to be addressed through a well-defined framework for borrowing and issuing bonds by the devolved units.²⁰ It is important to note that such a framework needs to be balanced so as to curb the tendency of devolved units incurring debts which they cannot repay and facilitate responsible borrowing by the devolved units.²¹

3. Application of the pillars of fiscal decentralisation in Kenya and how the 2010 Constitution mitigates demerits of decentralisation

The Constitution of Kenya, 2010 entrenches the pillars of effective fiscal decentralisation in its model. This part discusses the extent to which the 2010 Constitution has adopted the theory of fiscal decentralisation and how it mitigates any demerits of decentralisation. South African constitutional jurisprudence on fiscal decentralisation is used for comparative purposes. The Republic of South Africa(RSA) is chosen because she adopted devolution long before Kenya and has to a greater extent successfully implemented a system of fiscal decentralisation. Kenya's devolved system of government borrowed heavily from the RSA's devolution, which further makes the RSA a viable option for comparative analysis.

3.1 Application of political autonomy under the 2010 Constitution

The 2010 Constitution establishes two levels of government, that is, the national and county levels.²² It also provides for elected governments at both the national and county levels. Political autonomy encompasses that the forty-seven counties are not created by the national government. Instead, governments at the county level are created by the 2010 Constitution as an exercise of the sovereign power of the Kenyan people. Governments at the county level are elected directly by the people. The Kenyan people at the county level elect leaders of their own choice during elections. Furthermore, each level of government elects its own political structures which it controls thus making these governments distinct. The county governments as devolved units are relatively autonomous from the national government. As a result, they are not subject to the control of the national government.

The county governments are made up of their respective County Assemblies and County Executive Committees.²³ This is akin to the constitutional requirement that county governments should have their own legislative and executive structures. Politically, the national government is only required to enact some legislation and policy and let counties implement the same autonomously and with their own discretion but within the law. The County governments have mandate directly from the Kenyan people, independent from the influence and control of the President. As a result, county governments are only accountable to the electorate.

The President cannot sack the County Governors. However, he or she is empowered to suspend a county government. This could be a demerit of decentralisation in the sense that the President could misuse these powers to suspend county governments arbitrarily. The drafters of the 2010 Constitution contemplated such possible misuse of power and safeguarded the same by requiring the suspension of county governments to be effected under limited circumstances of emergency arising out of internal conflict or war and any other exceptional circumstances.²⁴ The President can only suspend a county government with the recommendation of an independent commission of inquiry and subject to the approval of the Senate.²⁵ Furthermore, a suspension of a county government can be terminated by the Senate at any time²⁶ and can last for a period of ninety days only after which a new county government is elected by the electorate.²⁷ It is submitted that the 2010 Constitution alleviates the role of the Senate above the President in the suspension of a county government as a safeguard against any arbitrary intervention by the President on the affairs of county governments.

The 2010 Constitution obliges county governments to be based on democratic powers and reflect the principle of separation of powers.²⁸ County governments accomplish this requirement by making the Governor and the County Executive Committees accountable to their respective County Assemblies. It can be safely concluded that the 2010 Constitution grants county governments a considerably political autonomy from the national government.

The drafters of the 2010 Constitution contemplated the tension brought about by complete political autonomy. In order to ease this tension, Kenya opted for intergovernmental relations and cooperative government as envisaged under articles 6(2) and 189. The system of cooperative intergovernmental relations obligates both levels of government to fulfill their cooperative government obligations for the realisation of the objects of devolution in Kenya. For instance, in the preparation of plans and budgets, the national government allocates funds by the Division of Revenue Bill and county governments prepare and adopt their own annual budgets and Appropriation Bills on the expenditures of the funds they receive.²⁹

In the South African Republic, the government is constituted by the national, provincial and local spheres which are distinctive, interdependent, and interrelated³⁰ while in Kenya there are two levels of government. Despite these contextual differences, both countries have instituted measures to safeguard the autonomy of each sphere or level of government such that one level cannot interfere with the functioning of the other level(s) or sphere(s). The Provincial Governments of South Africa are relatively autonomous which is secured through the provision that the national government must secure the approval of the National Council of Provinces before intervening in the functioning of a Provincial Government.³¹ The National and Provincial governments are required not to compromise or impede a municipality’s ability or right to exercise its powers or perform its functions.³² The autonomy of Municipal Governments is protected by stringent conditions that Provincial governments must meet before intervening in their functions.³³ The spheres or levels of government of both countries support the principles of intergovernmental relations and work towards fulfilling their cooperative government obligations upon which the relationship of the governments is based.

South Africa's Premiers of the Provincial governments and the Chairpersons of the Municipalities are elected by the Provincial legislature and Municipal councils respectively. In comparison with Kenya, the County Governors are elected directly by the Kenyan people during elections. The South African Republic requires the Chair and Deputy Chair of the National Council of Provinces, Speakers and Deputies of the National Assembly and Provincial Legislatures to be elected from members of their respective legislatures. In Kenya, Speakers of the National Assembly, Senate, and County Assemblies are elected by their respective legislatures or assemblies from persons who are not members of the legislatures. However, their deputies are elected from members of the legislatures.

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¹ Francis Njihia Kaburu, ‘Fiscal Decentralisation in Kenya and South Africa: A Comparative Analysis,’ Africa Nazarene University Law Journal (2013) <https://profiles.uonbi.ac.ke/fkaburu/files/fiscal_decentralisation_in_kenya_and_south_africa_a_comparative_analysis.pdf> 79 (accessed on 22 May 2019).

² Constitution of Kenya, 2010, Art. 1(4) provides that ‘The sovereign power of the people is exercised at— (a) the national level; and (b) the county level.’

³ Art. 6(2).

⁴ Art. 10(2)(a).

⁵ F.N Kaburu (2013) 77.

⁶ J.M Kangu, ‘An Interpretation of the Constitutional Framework for Devolution in Kenya: A Comparative Approach’ LLD Thesis, Faculty of Law, University of the Western Cape (December 2014) <http://etd.uwc.ac.za/xmlui/bitstream/11394/4390/1/mutakha_jk_lld_law_2014.pdf > 34 (accessed on 19 May 2019).

⁷ J.E Kee, ‘Fiscal Decentralisation: Theory as Reform’ (2003) Journal of Public Policy and Public Administration < https://www2.gwu.edu/~clai/working_papers/James%20Kee%20Fiscal%20Decentralization%20paper%202003.pdf > 5 (accessed on 24 May 2019.

⁸ J.M Kangu (2015) 32.

⁹ International Legal Consultancy Group v Senate & Clerk of the Senate, Constitutional Petition No- 8 of 2014 eKLR para. 34.

¹⁰ J.E Kee (2003) 5.

¹¹ UNDP, ‘Fiscal Decentralisation and Poverty Reduction’ (2003) UNDP Primer <http://unpan1.un.org/intradoc/groups/public/documents/un/unpan030970.pdf > 2 (accessed on 25 May 2019).

¹² F.N Kaburu (2013) 77.

¹³ F.N Kaburu (2013) 81.

¹⁴ F.N Kaburu (2013) 81.

¹⁵ F.N Kaburu (2013) 82.

¹⁶ See J.M Kangu (2015) 78 in referring to De Visser J, ‘Institutional subsidiarity in the South African Constitution’ (2010) 21 (1) Stell LR 90-115 and Kuhnhardt L, ‘Federalism and subsidiarity: Reflections on a German and European question’ in Thesing J (ed) The Example of Federalism in the Federal Republic of Germany (1994) 21-30.

¹⁷ F.N Kaburu (2013) 82.

¹⁸ Bahl, R. (2008). The pillars of fiscal decentralization . 30 CAF Working paper, 2008/07, Caracas: CAF. Retrieved from <http://scioteca.caf.com/handle/123456789/257> (on 23 May 2019).

¹⁹ R Bahl (2008) 30.

²⁰ 20 Nicoletta Feruglio, ‘Fiscal Decentralisation: An Overview’ (2007) <http://siteresources.worldbank.org/PSGLP/Resources/FeruglioandAndersonoverviewofFiscaldecentralization.pdf> 6 (accessed on 26 May 2019).

²¹ N Feruglio (2007) 6.

²² Art. 1(4).

²³ Constitution of Kenya, 2010, Art. 176(1) read together with the First Schedule.

²⁴ Art. 192(1).

²⁵ Art. 192(2).

²⁶ Art. 192(4).

²⁷ Art. 192(5) & (6).

²⁸ Art. 175(a).

²⁹ See Art. 218 & 224.

³⁰ Constitution of the Republic of South Africa, 1996, Art. 40(1).

³¹ Art. 100.

³² Art. 151(4).

³³ Art. 139. The intervention must be approved by the Minister for Local Governments, the relevant Provincial Legislature and the National Council of Provinces.