Why counties lose more than Sh25bn every year

COUNTY governments could be losing more than Sh25 billion in own revenue every year due to dishonest officers who pocket some of the collections, weak systems, and poor data management.

A new report by the Mary Chebukati-led Commission on Revenue Allocation reveals significant deficiencies and gaps costing the counties billions of shillings.

The report on county governments' own source revenue potential and the tax gap, prepared by the CRA in collaboration with the World Bank, shows that counties have an annual OSR potential of Sh93 billion.

However, in the last fiscal year, the 47 devolved units generated Sh67.5 billion, leaving a massive shortfall of Sh25.7 billion, which could be lost to dishonest revenue officers or due to revenues that go uncollected.

The study examined just six revenue streams including property rates, building permits, business licenses, liquor licensing fees, vehicle parking fees, and outdoor advertising.

This is even as it is emerging that counties have over 146 potential revenue sources that they can tap into the end their perennial cash woes.

This means that the loss could be massive if all the revenue streams were examined.

“Counties appear to have the potential to substantially improve their collection of revenues through revising their current policies and collection systems - for example, by streamlining taxation and fee structures and allowing automatic and cashless payment systems,” the report obtained by the Star says.

The report further uncovers widespread inconsistencies in how the devolved units report revenues.

It emerged that many officers fail to declare collections, while others rely on manual systems that encourage leakages. In several cases, counties have little or no data on key revenue streams.

For instance, only 15 counties reported on revenues from property rates in the financial year 2014-15, eight counties in 2015-16, and 10 counties in 2016-17.

Just 27 counties reported on revenues from business licenses in FY 2014-15, 32 in FY 2015-16, and 40 in 2016-17, while 24 counties reported on revenues from parking fees in 2014-15, 30 in 2015-16, and 34 in FY 2016-17.

“County governments use the category ‘others’ to report revenues from various sources that could be classified under existing categories, for example, administrative fees, property rates, etc,” the report notes.

The CRA review found that most counties lack basic data on the number of businesses, properties, or parking spaces within their jurisdictions.

In some cases, data is deliberately withheld to conceal collections.

“County governments not collecting data on parking space usage should be encouraged to work with parking offices and other relevant agencies to ensure parking data is shared regularly,” the report states.

Manual collection remains widespread, with the governments relying heavily on cash payments that encourage tax evasion and corruption.

The CRA urges counties to adopt automated and cashless systems to improve accountability and efficiency.

“Revenues are collected manually for the most part, mainly relying on cash payments. This approach often results in tax evasion and can also affect revenue collectors’ welfare and performance,” the report states.

 “It is suggested that an automatic and cashless system would improve performance substantially.”

The report further reveals that many small businesses remain unlicensed, despite being legally required to hold operating permits. This has deprived counties of significant revenue.

“Businesses are legally required to have a license in order to operate in Kenya. Still, many small businesses are unlicensed,” the report states.

Nairobi and other urban counties have a higher number of people employed in businesses that are required to pay for annual licenses by the county governments.

But despite the huge population, Nairobi county realised a paltry 24 per cent of its potential on this stream while Nakuru realised 15 per cent, with Machakos at 11 per cent, Kakamega at six per cent, and Kiambu at 14 per cent.

“Most of the county governments appear to generate less than 10 per cent of their revenue potential,” the report says.

Property rates are another major area of under-collection, according to the dossier tabled in Parliament.

The total value of commercial and residential properties in Nairobi was estimated at Sh4.1 trillion in 2019-20, representing 40 per cent of all properties in Kenya.

“The total value of commercial and residential properties in Nairobi City is estimated at around Sh4.1 trillion in financial year 2019-20. It accounts for 40 per cent of the total value of properties across Kenya,” the report says.

Kiambu and Mombasa jointly account for nearly 15 per cent of the total property value in the country.

According to the report, most counties have not updated their valuation roll, resulting in a massive loss of revenue.

On parking fees, many counties do not have data on the actual number of parking, leading to a loss of revenue.

“It is recommended that county governments with existing data collections on usage of parking spaces put efforts towards data sharing mechanisms,” the report states.

For instance, Nairobi failed to hit its potential by 65 per cent, Kiambu by 78 per cent, Kajiado by 93 per cent, Nakuru by 47 per cent, and Kisumu by 68 per cent.

This is also the case with the advertising, where most counties lacked crucial data on the advertising services.

“In line with the best practice, county governments should invest in collecting consistent data on usage of county advertising services from businesses based within the county as well as outside the county borders,” the report says.

“For example, relevant departments within county governments could explore the scope for collaborating with KNBS to design and regularly carry out a new survey to collate information on outdoor advertising services.”

To seal the loopholes, the CRA recommends stronger data-sharing mechanisms and inter-agency collaboration.

This would enable counties to monitor their revenue base more effectively and make evidence-based fiscal decisions.

The findings mirror those of the Controller of Budget, who in a recent report red-flagged counties over outdated manual systems, weak enforcement systems, and poor record keeping.

In the review period, Siaya, Kajiado, Machakos, Isiolo, Taita Taveta, Bungoma, Kisumu and Kakamega, were among counties that reported the lowest OSR performance.

The danger, according to Margaret Nyakang’o, was that counties couldn’t implement all planned activities due to budget deficits.

This was even as it emerged that automation efforts have either stalled or remain incomplete in some devolved governments.

As a result, counties remain heavily dependent on national equitable share transfers, limiting their fiscal autonomy and ability to invest in local development.