Article 202 provides for the vertical sharing of national revenue in Kenya. The national and county governments should share the revenue collected nationally equitably between them. It also provides for additional allocations to the county governments from the national government’s share of revenue. These allocations can be either conditional or unconditional.
Article 201 of the Constitution stipulates the principles of public finance. It provides for an equitable society promoted by the public finance system. This results from, among other factors, the vertical sharing of national revenue.
The county government’s revenue from the vertical sharing of national revenue is unconditional. The county governments can spend it without any restrictions from the national government. Conditional allocations have terms under which county government should spend. The county governments cannot reallocate the money for other purposes.
For conditional allocations (or grants), one condition might be for county governments to put in “matching” funds. For instance, a county government may receive a grant for 75 per cent of the cost of some service. Let’s say the service is the construction of a hospital. The county should put in 25 per cent on its own. If it refuses or is unable to, it may not receive the grant.
Article 203(1) states the criteria to follow in determining the equitable shares under Article 202. It also considers any legislation concerning county governments in relation to Chapter 12 of the Constitution. One obligation is the need to ensure county governments can execute their functions. The other is their fiscal capacity and efficiency, among others.
Threshold for vertical sharing of national revenue
A key area to note on the vertical sharing of national revenue is Article 203(2) and (3). The two stipulate the equitable share of revenue going to the counties for each financial year. The revenue shall not be less that 15 per cent of all the revenue collected by the national government. The base for this amount is the most recent audited accounts approved by the National Assembly.
Equitable share refers to the ordinary revenue raised nationally by the national government. This amount is shared equitably between the national and the county governments.
The 15 per cent is not the actual amount of money that county governments should receive. It acts as the threshold for determining whether the national government meets the requirement for equity. That is, whether the amount of money it allocates to county governments is above 15 per cent.
The national government has been achieving the 15 per cent target since it is quite minimal. The allocations to county governments from the FY 2013/14 have always met this threshold.
Costing of functions
The vertical sharing of national revenue relies primarily on the costing of functions. The Fourth Schedule of the Constitution divides the functions between the national and the county governments. When allocating the money, the national government should determine the costs of performing the individual functions.
For example, what is the cost of providing health services in relation to security? Here, health is a county function and security a national function. The costing of functions will determine the amount of money that each level of government should receive based on their functions.
The now defunct Transition Authority handled the costing of functions for the county governments. The national treasury handles the costing of functions for the national government. The final costing should also incorporate the views of independent bodies such as CRA and SRC.
The vertical sharing of national revenue can also incorporate adjustments on issues like inflation and public debt. Other conditions (may) include those set under Article 201 and 203(1) of the Constitution.
The revenue sharing between the national and the county governments is known as vertical sharing because it is just between the two levels of government.
The vertical sharing of national revenue takes place through the Division of Revenue Bill. This is under Article 218(1) (a) of the Constitution and Section 191 of the Public Finance Management Act.
We also saw the county governments can receive additional funding from the national government’s share of revenue. The additional funding is in form of conditional allocations such as the Equalization Fund (Article 204).
Others are grants for free maternal healthcare and grants for level five hospitals. The county governments may also receive grants for leasing medical equipment and healthcare facilities compensation for foregone user fees.