A sound revenue system for subnational governments is a critical prerequisite for the success of fiscal decentralisation in Kenya. Adequate mobilisation of own-source revenue (OSR) – income generated by subnational governments from local sources in the form of taxes, charges and fees – is key to improved provision of various public goods and services to eradicate poverty and achieve development goals.
Strengthening OSR mobilisation can improve fiscal autonomy through more predictable access to revenue. This would allow county governments to have greater ownership and control over their development agenda. Own-source revenue also has the potential to foster political and administrative accountability of county officials to their constituents.
This report looks at the progress that has been made in strengthening OSR mobilisation in Kenya in the first five years of fiscal decentralisation, covering the period of 2013/14 to 2017/18. It identifies the counties that have made significant progress in enhancing OSR mobilisation and those that are left behind. It also considers the challenges associated with OSR mobilisation, and opportunities for improvement.
- Several policies have been developed at the national and county level to strengthen OSR mobilisation. Nevertheless, there are gaps in the legal and policy framework that may result in counties being off-track in meeting their OSR mobilisation targets.
- The volume of OSR across counties is still small in volume, as is its percentage of national gross domestic product (GDP). Its volume has been decreasing since 2016/17 and contributed less than 1% of national GDP between 2013/14 and 2017/18.
- Own-source revenue is concentrated in ten counties that have high levels of urbanisation and diverse economic activities. The OSR raised in these ten counties accounted for 72.8% of the total OSR raised by the 47 counties between 2013/14 and 2017/18.
- The share of own-source revenue in total county revenue is very small – it averaged 10.8% between 2013/14 and 2017/18 – and has been decreasing since 2015/16. Nairobi has the lowest level of fiscal dependence given that 45.3% of its total revenue for the period 2013/14 and 2017/18 came from own sources.
- Annual own-source revenue collection targets were largely missed in the first five years of fiscal decentralisation. In 2013/14 the 47 counties achieved 48.5% of their annual OSR target (actual OSR collected as a percentage of annual target). This increased to 67.2% in 2014/15 and 69.3% in 2015/16. However, achievement of annual OSR targets reduced to 56.4% in 2016/17. Although achievement increased to 66% in 2017/18, a lot remains to be done to attain the best practice of 95% to 100%.
- Mobilisation of OSR is constrained by legal, policy, institutional and technological challenges. However, there are opportunities for enhancing OSR mobilisation through automation of revenue collection, tapping into unexploited own-source revenue streams and investing in infrastructure and services aimed at attracting businesses and investment opportunities in counties.