SPECIAL ISSUE Kenya Gazette Supplement No. 32 (National Assembly Bills No. 9) REPUBLIC OF KENYA KENYA GAZETTE SUPPLEMENT NATIONAL ASSEMBLY BILLS, 2023 NAIROBI, 20th March, 2023 CONTENT Bill for Introduction into the National Assembly — NATIONAL ASSEMBLY] DIFECIORATE OF LEGAL SERVICES RECEIVED 21 MAR 2023 P.O. Box 41842 - 00100, NAIROBI "PRINTED AND PUBLISHED BY THE GOVERNMENT PRINTER, NAIROBI
123 THE DIVISION OF REVENUE BILL, 2023 ARRANGEMENT OF CLAUSES Clause 1—Short title 2—Interpretation 3—Object and purpose of the Act 4—Allocations to National Government and County Governments 5—Variation in Revenue SCHEDULE EQUITABLE SHARE OF REVENUE RAISED NATIONALLY BETWEEN THE NATIONAL AND COUNTY GOVERNMENTS FOR THE FINANCIAL YEAR 2023/24 APPENDIX EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE BILL, 2023
The Division of Revenue Bill, 2023 MEMORANDUM OF OBJECTS AND REASONS The principal object of this Bill is to provide for the equitable division of revenue raised nationally among the national and county levels of government as required by Article 218 of the Constitution in order to facilitate the proper functioning of county governments and to ensure continuity of county services delivery to the citizens. Clauses 1 and 2 of the Bill provide for the short title of the Bill and the interpretation of terms used in the Bill, respectively. Clause 3 of the Bill contains the provisions on the objects and purpose of the Bill. Clause 4 of the Bill prescribes the allocations for the National Government and the County Governments from the revenue raised nationally for the financial year 2023/24. Clause 5 of the Bill outlines the mechanisms for adjusting for variations in revenues emanating from revenue performance during the financial year in which this Bill relates to. ; Dated the 16th March, 2023. NDINDI NYORO, Chairperson, Budget and Appropriations Committee.
The Division of Revenue Bill, 2023 APPENDIX EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE BILL, 2023 Background 1, This memorandum has been prepared as an attachment to the Division of Revenue Bill (DoRB), 2023 in fulfilment of the requirements of Article 218(2) of the Constitution and section 191 of the Public Finance Management Act, 2012. 2. Article 218 (2) of the Constitution requires that the Bill be submitted to Parliament every year together with a memorandum explaining: (a) the proposed revenue allocation set out in the Bill; (b) the extent to which the Bull has taken into account the provisions of Article 203(1) of the Constitution; and (c) any significant deviations from the recommendations of the Commission on Revenue Allocation (CRA). 3. Section 191 of the Public Finance Management Act, 2012 requires that the Bill be accompanied by a memorandum which explains: (a) the extent, if any, of deviation from the recommendations of the Intergovernmental Budget and Economic Council; and (b) any assumptions and formulae used in arriving at the respective allocations proposed in the Bill. Explanation of the Allocations to the National and County Governments as Proposed in the Bill County Governments' Equitable Share 4. The Bill proposes to allocate County Governments KSh. 385.425 billion for the financial year 2023/24 as equitable share of revenue raised nationally. The equitable share allocation has been proposed to increase from a base of KShs. 370 billion allocated in the financial year 2022/23, to an allocation of KSh. 385. billion in FY 2023/24. The equitable share allocation in the financial year 2023/24 has also been proposed to include KSh. 425 million as attendant resources for the pay roll relating to the library services transferred from the Kenya National Library Services. Library services is a devolved function as provided for under Part I of the Fourth Schedule to the Constitution.
The Division of Revenue Bill, 2023 129 Table 1: Equitable Revenue Share Allocation to County Governments, FY 2023/24 BUDGET ITEM AMOUNT (KSH. MILLION) County Equitable Revenue Share for FY2022/23 370,000 Add: Adjustment for Revenue Growth Transfer of Library Services Equitable Revenue Share allocation for FY 2023/24 : Source: National Treasury Evaluation of the Bill against Article 203 (1) of the Constitution 8. Article 218(2) of the Constitution requires Division of Revenue between the two levels of government and across County Governments to take into account the criteria set out in Article 203(1) of the Constitution. The criteria include factors such.as: national interest, public debt and other national obligations and needs of the disadvantaged groups and areas, among others. 9. Table 2 provides an assessment of the extent to which the requirements of Article 203 (1) of the Constitution have been incorporated in estimating the Division of Revenue between the National and County levels of Government in the financial year 2023/24.
132 The Division of Revenue Bill, 2023 These national interests include: activities aimed at» enhancing security operations; national irrigation and fertilizer subsidy initiatives; Youth Empowerment; provision of national social safety net for vulnerable groups, and school examination fees subsidy. Revenue allocation for these programs is expected to increase slightly from KSh. 90.7 billion in 2022/23 to KSh. 92.5 billion in 2023/24. 11. Public Debt: The Bill has fully provided for all public debt related costs. These comprise the annual debt redemption cost as well as the interest payment for both domestic and external debt. In financial year 2023/24, the revenue allocation for payment of public debt related costs is expected to increase from KSh. 930.4 billion allocated in financial year 2022/23 to KSh. 1,250.7 billion allocated in the financial year 2023/24. 12. Other National Obligations: As provided for under Article 203(1) (b) of the Constitution, the Bill has also taken into account the cost of other national obligations, such as, mandatory pension contributions and/or payments, financing for constitutional offices, including Parliament as well as expenses relating to other statutory bodies. These are estimated to cost KSh. 673.9 billion in financial year 2023/24 up from KSh. 595.3 billion allocated in the financial year 2022/23. 13. Fiscal Capacity and Efficiency of County Governments: Fiscal capacity for County Governments refers to the potential revenues that can be generated from the tax bases assigned to the Counties when a standard average level of effort is applied. In its recommendations to Parliament on the Third Basis for Sharing Revenue among County Governments, the Commission on Revenue Allocation (CRA) included a 'fiscal effort' parameter with a 2%, weight intended to incentivize OSR collection by the Counties. This is consistent with the approach in other jurisdictions, where the formula for horizontal revenue distribution among subnational governments typically incorporates measures of fiscal capacity alongside those of expenditure need. CRA's fiscal effort parameter was defined in terms of each County Government's actual revenue collection relative to the County's Gross County Product (GCP) as computed by the Kenya National Bureau of Statistics (KNBS). 14. In approving CRA's recommendations however, Parliament did not include the fiscal effort parameter, effectively shifting the 2% weight to other parameters. The formulae, therefore, does not incentivize counties to strengthen their local revenue collection efforts. There is, therefore, need for County Assemblies, in conducting their oversight role to ensure that County Governments enhance their own source revenue collection. It is expected that future revenue sharing formulae may consider reinstating
134 The Division of Revenue Bill, 2023 Schedule of the Constitution. Accordingly, counties will have to allocate a prescribed minimum to specific functions contained in the Third Basis. 20. Thus, the proposed vertical division of revenue proposed in the Division of Revenue Bill, 2023, therefore, takes into account the cost of County Governments' developmental needs and it is expected that County Governments will have the ability to perform the functions assigned and transferred to them as contemplated under Article 203(1) (f). 21. Economic Disparities within and among counties and the need to remedy them: Allocation of the sharable revenue (i.e., equitable share of KSh.385 billion) among counties is based on the Third-generation formula approved by. Parliament in September, 2020 pursuant to provisions of Article 217 and Section 16 of the Sixth Schedule of the Constitution. The Third Basis formula which should be applicable from FY 2020/21 to FY 2024/25 has taken into account the following parameters; (i) Population (18%); (ii) Health Index (17%); (iii) Agriculture Index (10%); (iii) Urban Index (5%); (iv) Poverty Index (14%); (v) Land Area Index (8%); (vi) Roads Index (8%), and; (vii) Basic Share index (20%). The horizontal distribution of County Governments' equitable revenue share allocation of KSh. 385 billion for FY 2023/24 shall be based on the Third Basis Formula. It should be noted that the Third basis formula applied in FY 2023/24, takes into account disparities among counties and aims at equitable distribution of resources across counties. 22. Further, it should be noted that KSh. 8.368 billion has also been set aside for the Equalization Fund in FY 2023/24 which translates to 0.5 per cent of the last audited revenue accounts of governments, as approved by the National Assembly. This Fund is used to finance development programmes that aim at reducing regional disparities among beneficiary counties. 23. Need for Economic Optimization of Each County: Allocation of resources to County Governments was guided by the historical costing of expenditures for functions assigned to the County Governments. The equitable share of revenue allocated to County Governments in the financial year 2023/24 is KSh. 385.425 billion, an allocation which is 15.425 billion higher than that for FY 2022/23. This is an unconditional allocation which means that the County Governments can plan, budget and spend the funds independently. With the resources, therefore, County Governments are in a position to prioritize projects and consequently allocate resources thus optimizing their potential for economic development.
The Division of. Bill, 2023 Revenue 24. Stable and Predictable Allocations of County Governments' Vertical Share of Revenue: The County Governments' equitable share of revenue raised nationally has been protected from cuts that may be occasioned by shortfall in revenue raised nationally more so in the advent of the effects of projected global economic downturn in 2023. According to clause 5 of the Division of Revenue Bill (DoRB) 2023, any shortfall in revenue raised nationally is to be borne by the National Government, to the extent of the threshold prescribed in Regulations by the Cabinet Secretary. 25. Need for Flexibility in Responding to Emergencies and Other Temporary Needs: Included in the equitable share of revenue for the National Government is an allocation of KSh.4.0 billion for the Contingencies Fund established pursuant to Article 208 of the Constitution. This Fund will be used to meet the demands arising from urgent and unforeseen needs in all Counties that suffer from calamities in the manner contemplated under Section 21 of the Public Finance Management Act, 2012: In addition, the Public Finance Management Act, 2012 and the PFM (County Governments) Regulations, 2015 requires each County Government to set up a County Emergency Fund. County Governments are expected to set aside at least 2 % of their budget as part of their allocation for this purpose. 26. It should be noted that after taking into account all the other factors contemplated under Article 203(1) of the Constitution, including the needs of County Governments, there is minimal resources left to finance other National Government needs, such as, defence, roads, energy etc. In fact, this leaves a balance of KSh. 143,529 million. This is not sufficient to finance the National Government functions such as defence, roads, energy and may occasion additional borrowing which may distort the fiscal framework already set out in the 2023 Budget Policy Statement. Response to the Recommendations of the Lomein on Revenue Allocation (CRA) 27. The Division of Revenue Bill, 2023 proposes to allocate County Governments an equitable share of KSh. 385.425 billion from the shareable revenue raised nationally. The CRA, on the other hand, recommends County Governments' equitable share of revenue of KSh. 407 billion as an unconditional allocation to be shared among County Governments on the basis of the formula for sharing revenue approved by Parliament under Article 217 of the Constitution. The difference in the Commission on Revenue Allocation (CRA) recommendation and the DoRB 2023 proposal emanates from the different approaches used to
138 The Division of Revenue Bill, 2023 pressure on the fiscal framework occasioned by increase in Consolidated Fund Services (CFS) and the persistent under performance of the ordinary revenue. 30. The proposed equitable share allocated to County Governments in the Division of Revenue Bill, 2023 has also taken into account the approved Third Basis for Revenue Allocation. The proposed KSh. 385.425 billion allocation among County Governments pursuant to Article 217 of the Constitution is equivalent to 24.5 per cent of the FY 2019/20 revenue which is the most recent audited and approved revenue by the National Assembly. This is above the minimum threshold required under Article 203(2) of the Constitution.