Article 202 of the Constitution of Kenya provides for the vertical sharing of national revenue in Kenya. Vertical sharing refers to the sharing of revenue raised nationally (equitable share) between the national and the county governments.
The national and county governments should share the revenue collected nationally equitably between them. Article 202 also provides for additional allocations to the county governments from the national government’s share of revenue. These allocations can be either conditional (conditional grants) 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 equitable share
The term “equitable share” refers to the unconditional allocation for both the national and the county governments. For this share of revenue, both levels of government can spend it to offset their functions without any restrictions from either of them.
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 county governments’ equitable share (revenue from the vertical sharing of national revenue) is unconditional. Therefore, 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 the remaining 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 equitable share for the counties
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 should 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.
Some people and some media outlets say that the 15% is the amount of money that counties receive as equitable share. However, that is not the case. The division of revenue (Under Article 218) is based on the cost of functions for each level of government in the Fourth Schedule of the Constitution.
Apart from the costing of functions, other factors may be considered such as assumptions on revenue growth (e.g. by what percentage national revenue has grown in a particular year), and inflation.
The 15% acts as a baseline for determining whether the amount of equitable share of revenue allocated to the counties is equitable. The money allocated to the county governments has always been above this threshold since the threshold is quite minimal.
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 defunct Transition Authority and the Commission on Revenue allocation came up with a manual for the costing of functions between both levels of government. Before that, the costing of devolved functions relied on the cost the national government incurred in providing the services before they were devolved.
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 sharing of the counties’ share of national revenue among the 47 counties is the horizontal sharing (Article 217 and 218 of the Constitution).
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 see the county governments could 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.