County Own Source Revenue Potential

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By CPA Charles O Lwanga

 Glaring and Misleading Report

 Enhancement of County own source revenue remains a key plank in the attainment of County Development agenda through provisions of public goods and services. 

 This is why a study commissioned in 2022 by World bank through CRA which is constitutionally mandated  under article 261 to make recommendations on financing of county governments including enhancement of own source revenue was  welcomed.

 However this is as far as the February 2022 report “The assessment of comprehensive own source revenue potential and tax gap  study went as a recent report by the controller of budget in the ensuing period of 2022/2023 saw a major decline in own source revenue collected by counties.

The improvement in County revenues is majorly dependent on components of its revenue value chain. This entails activities such as legislation that set obligations for tax collection, mapping of revenue bases, adoption of automated collection system, adoption of payment platform (citizen application which allows remote access. This is in addition to enhancing system reporting and accounting for collection, enforcement, oversight, citizen education through taxpayers’ forum and capacity building and general welfare of revenue staff.

In relation to the revenue value chain activities, the 2022 world bank/CRA study majorly focused on establishing revenue tax bases “mapping of counties revenue potential.”  Unfortunately , the outcome of own source revenue potential “ mapping “ based on desktop review approach adopted for the study  remains  questionable and has proved to be very  inaccurate. The use of the resultant statistics by counties is thus short of reality, misleading and may not be much value.

Focus is drawn on the revenue potential report with assertion of  major revenue streams for county governments in Kenya namely property tax, advertisement, licences, parking fee, royalties, hospital fees and market fees  and the figure advanced thereon. Using frontier analysis (page 39 of the report)the study  ranked advertisement with a potential of generating kshs 80.826 billion at number 1 with property tax listed at number 5 with the potential of generating kshs 14 billion annually by county government. On The flipside the study using the top down ranked market place and centre collection for Kenyan counties at kshs 77 billion ahead of other known sources including single business permits and parking fees contrary to the norm. A look at  the above indicate a totally misleading outcome given the fact that property tax has a more determinate tax base as compared to advertisement which is the outcome of private investment and is with county collections restricted to physical advertisement media as opposed to the print media. On the other hand market places are based on existing data and therefore cannot be based on subjective estimates as is the case with the method of analysis adopted by the study.

Having worked as a Receiver of Revenue in the past two years, I wish to take Nakuru County as a case study. The report of revenue potential despite eliciting attention of key stakeholders is misleading.  Take a case in point where advertisement in nakuru county is ranked as number 1 having the highest potential at Kshs 4.7 billion annually though Nakuru averages kshs 1.7 billion annually from all it sources( excluding market fees) over the past 10years(excluding facility improvement funds).  Nakuru has 11 Sub Counties with 5 Sub Counties  rated  urban  with the 6 remaining sub counties are classified as rural  with  farming as the major economic  activity and hence with low potential on the six major source county revenue with the a few exception  .

The question remains how did CRA establish the revenue potential of kshs 9.2 billion for market centres and kshs 4.7 billion on advertisement for Nakuru county on account of top down and frontier analysis method adopted for “The assessment of comprehensive own source revenue potential and tax gap  study”(refer table 32 to page 101 ) as no empirical evidence is offered. The outcome of the study  irrespective of the method of analysis adopted resulted in both instance huge statistical disparities. This is evident in ranking of  market collection at kshs 9.2 billion and advertisement collection at kshs 4.7 with property tax ranking lower both analytical methods for nakuru county. It safe to collude that this is one of most glaring aspect of the study with the methods of analysis adopted being merely hypothetical as the finding on potential for most  of the revenue streams having huge variation  outside acceptable margin of errors as would apply in a pragmatic empirical study and current actual collections.

 It is worth noting that the Nakuru County has a data base for it existing market place and centres and to conclude that collection could move from the current kshs 57 million registered to kshs 9.2 billion is absurd and boarding on fiction which ever empirical method of analysis is applied. Further on the disputed revenue potential its is public knowledge that counties are not in the business of  advertisement  and neither does it own the advertisement objects and hence the said revenue potential is an overwhelming overstatement .This coupled with the fact that highest ever collection from advertisement in a fiscal over the ten years was 131 million. Logically the study by CRA is indicative of a 2.7 % effort by county government of Nakuru with respect advertisement a totally misleading outcome of the study if you ask me. The misconception does not end there as the study in page101 of the said report  indicate that past data for advertisement in Nakuru was not available yet the advertisement potential was as a result of extrapolation.

The most glaring finding was the fact that property tax which is  expressly provided for under article 209 of the constitution as a source of county revenue with a determinate tax base did not feature as the number 1 in Nakuru County whichever method of analysis is reviewed. This is despite the fact that it has remained the main source of revenue for most counties over the years despite a lack of enabling legislation for collection and management of property tax. The case of Nakuru the property tax had a book debt of kshs 7 billion as per audited report 2021/2022 this coupled with the fact that parcel of land has determinate and almost permanent bases as compared to advertisement objects which are indeterminate .It is safe to conclude that the outcome of CRA study was mythical hence subjective as opposed to being objective/ scientific underpinning. It is safe to conclude that CRA finding from the study is not only glaring and misleading with Nakuru County said to have a potential of kshs 12 and 22 billion respectively for the top down and frontier method of analysis. Finally the use of empirical model developed for the study   majorly relied on secondary data and where such data was missing as purported in the study the limitation of the study abound. CRA in this circumstance chose to please the donors and met the timelines as opposed to inspiring the county and fulfilling its constitutional mandate.  There is need for triangulation of CRA assessment with Gross county product report and KRA’s existing data of such streams as they form the basis of taxation with advertising companies also eligible for payment of income taxes.

I would therefore recommend that CRA base its future research on past data and existing data base. In addition they should in connection with their 2022 own source revenue potential report –

  1. Triangulate of its source with KRA and especially on business  compliance with at county level
  2. Align its potential with legal provisions especially advertisement.
  3. Review the determinate  tax base with respect to existing tax base such as the valuation roll and property tax potential especially for more urban counties
  4. Review existing audit report and opinion on collection and management of own revenue
  5. Develop a statistical model to guide the forecasting of revenue potential of county revenue streams.
  6. Review all revenue value chain activities with the aim of enhancing own source revenue

If the above issues are not reviewed the report by CRA may end up being the infamous “wild goose chase boarding on opaqueness” and counties through successive administration may end up focusing on the wrong revenue strategy.

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