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The Fiscal Implications Following Nairobi City County’s Function Transfer

By Victor Odanga – PFM Specialist, Expertise Global Consulting Ltd

Constitution implementation to Kenyans’ satisfaction seems to be miles away. Yet its interpretation to unseen matters especially the ones that surround devolution may likely to hinder economic growth.

The latest case of inadequacy of the Constitution to conclusively guide a process was evident two weeks ago when Nairobi City County Governor Mike Sonko handed over key functions of the county, to the national government.

The reaction to the matter was huge as Kenyans were caught unaware, since public consultation wasn’t adhered to per the constitutional framework.

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While it is of national interest that the residents of Nairobi City County are not denied services, devolution as a required constitutional practice runs in parallel with an attendant set of values, declared in Article 10 of the constitution: rule of law, democracy, participation of the people, human dignity, equity, social justice, inclusiveness, equality, human rights, non-discrimination, the protection of the marginalized.”

From a financial perspective, several questions are of most concern.

Firstly, how will the two governments implement and resource the functions? And secondly, what are the fundamental fiscal transfer issues that might cause implementation challenges?

Article 187(2)(a) of the constitution highlights that if a function or power is transferred from a government at one level to a government at the other level— (a) arrangements shall be put in place to ensure that the resources necessary for the performance of the function or exercise of the power are transferred.

According to Expertise Global Consulting Ltd., a firm that provides advisory services in Public Finance Management, the complexities of the intricate framework of budget formulation and implementation from both levels of government will make or break the temporary management of those functions by the national government.

For one, the framework under which the resources are to be transferred through is not provided for. Similarly, the special gazette notice dated 25th February 2020 that anchors the Deed of Transfer of functions, does not provide for the disbursement modalities.

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Furthermore, the 2019/20 fiscal year is well underway; how will existing pending bills be paid, including for on-going commitments for the transferred functions?

Expertise Global Consulting advises that it would be important for the Ministry of Devolution and ASAL to allow the county to directly offset the verified eligible pending bills to the suppliers without transferring this responsibility to the National Government in order to make a cleaner transfer of responsibilities, and make clear demarcations on who made what decision when.

Additionally, the constitutional provision on the law of subsidiarity would dictate that the County is allowed to retain that function of offsetting the pending bills considering they have direct contacts with the respective suppliers.

Thus, the county should retain this responsibility until the end of the current financial year after which the functional responsibility can be fully transferred and performed by the National Government.

Secondly, will the Nairobi City County disburse funds to the Ministry of Devolution and ASAL for subsequent transfer to the relevant line Ministries where the other four functions have been transferred?

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The Constitution of Kenya does not explicitly provide for a bottom up disbursement arrangement of funds from counties to the national government. Therefore, for this to be effectively implemented, it is important that the two levels of government to strengthen the relevant sector working groups for the purposes of ensuring adequate sectoral allocation during the county budgeting making process. This will ensure an inclusive county budgeting process of all the devolved functions, while at the same time giving the national government the opportunity to identify the requirements for the transferred functions.

Alternatively if the Ministry of Devolution intends to have the allocations transferred to the national government, the firm recommends that just like Counties are required through the County PFM Regulations 2015 under Section (76.) (1) which stipulates that for the purpose of disbursement of project funds, there shall be opened and maintained a project account for every project at Central Bank of Kenya, it is advisable for the Ministry of Devolution and Asal to facilitate the opening for each function a special account by the respective line Ministry at the Central Bank to ensure that the County’s resources are not consolidated with the line ministries funds.

It is important to note that the Constitution does not provide for any deduction of the County’s share of equitable revenue at source by the National Treasury. All expenditures regarding Counties functions shall be made directly through the County Revenue Fund Account. That means that it will still be the responsibility of the County to transfer the total budgetary allocations to the national government.  Article 219 of the Constitution provides that a county’s share of revenue raised by the national government shall be transferred to the county without undue delay and without deduction, except when the transfer has been stopped under Article 225.

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This second case scenario might prove cumbersome considering that County disbursements are made on a monthly basis by the National Treasury as provided for in the County disbursement schedule under Section 17(7) of the Public Finance Management Act. Considering the consistent delays in the monthly disbursements by the National Treasury, the Ministry of Devolution &Asal will similarly face the same challenges in receiving the transfers from the County.

Thirdly how will the Nairobi City budgeting process be undertaken in the 2020/21 financial year? 

We propose that for this to effectively be implemented, the two levels of government should strengthen the specific sector working groups for the purposes of ensuring adequate sectoral discussions and allocation during the county budgeting making process. This will ensure inclusive county budgeting process of all the devolved functions while at the same time give the National Government the opportunity to identify the requirements for the transferred functions.

For effective accountability by the two levels of government; the firm proposes that while the national government shall directly implement the functions, the two levels shall both capture the allocations in their respective budgets; the county shall capture the sectoral allocations as appropriation in aid to be implemented by the national government. This is because all monies received by or on behalf of the county government are directly deposited at the County Revenue Fund Account for which all shall be budgeted for under the County Government.

This proposal is backed by the Constitution under Article 187(2)(b) which notes that if a function or power is transferred from a government at one level to a government at the other level constitutional responsibility for the performance of the function or exercise of the power shall remain with the government to which it is assigned by the Fourth Schedule.

While our opinion is based on the fiscal relations, we note that for this transfer of functions to be effectively implemented, the citizens must be given adequate opportunity to provide their views on the whole process.

 

About Edwin Ochieng

Edwin Ochieng is living true to the calling of Journalism, He is passionate about issues of Business and Politics. Edwin Ochieng is a graduate from St Paul University and East African School of Media Studies (EASMS).

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