Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized DEVOLUTION WITHOUT DEVOLUTION Pathways to a successful newKenya asuccessful to Pathways DISRUPTION DISRUPTION DEVOLUTION WITHOUT DISRUPTION Pathways to a successful new Kenya November 2012 TABLE OF CONTENTS Acronyms and abbreviations i Foreword iii Acknowledgments iv Executive summary v Part I: Seeing the future from the perspective of the past Chapter 1: Kenya’s devolution in context 4 A turning point in a long historical process 4 Deep-rooted political economy dynamics 6 Chapter 2: The scale, scope and complexity of Kenya’s devolution 12 How the public sector functions today, and where it has failed 12 How the public sector will function after devolution 13 Implications of the transformation for public administration and service delivery 14 Implications for governance and the role of Parliament 17 Chapter 3: Demographic and geographic diversity of Kenya’s counties 20 Midgets and giants: Wide variations in population, density and urbanization 20 Poverty disparities, service inequities and social outcomes 21 Dealing with patterns of marginalization 24 Part II: Equity between levels of Government Chapter 4: Why it all starts with function assignment 30 Designing a framework for function assignment across levels of government 32 Clarifying function assignments 36 Guiding the function assignment process successfully 40 Refining function assignment going forward 44 Chapter 5: Determining how much counties need 46 Determining county needs 46 Simulating aggregate county expenditure needs 47 Converting the simulation into a real estimate of aggregate county needs 53 Finding the fiscal space to move beyond historical spending 55 Implications for design of intergovernmental financing arrangements 56 Chapter 6: Solving the intergovernmental division of revenue jigsaw 58 How will counties be resourced in practice? 58 Estimating the 15 percent? 63 Part III: Equity across Kenya’s diverse counties Chapter 7: Funding from within: County own revenue powers and capacity 68 Legal framework for own revenue powers of county governments 68 Estimating capacity from current local authority collections 73 Getting the legal framework right for own revenues 76 Addressing challenges in existing local own revenues 78 County fees and charges 80 The case for additional county revenue sources 81 Design of subnational tax regime 83 County tax collection 85 Chapter 8: Allocating the share capital equitably but carefully 90 A powerful constitutional mandate: Equalization across Kenya’s forty-seven counties 91 The CRA proposal: An important step toward redistribution 92 Managing the transition: Equalizing over time to avoid fiscal stress 94 Chapter 9: Strings attached? The scope for conditional transfers 106 The rationale for conditional transfers 106 Supporting national priorities at the local level 109 Filling gaps in the transition 113 Stimulating performance at the local level 114 Chapter 10: Making the most of the Equalization Fund 120 How much does the Fund amount to? 120 What objectives should guide its allocation? 121 What will the Fund finance and where? 122 Though small, the Equalization Fund can still be effective 123 Part IV: Translating the vision, with a smooth transition Chapter 11: Promoting intergovernmental coordination 128 Why intergovernmental relations is important in Kenya 129 Structure of intergovernmental relations in Kenya 131 Models for sector coordination 133 Challenges of parallel systems 135 Chapter 12: Managing money for county development 140 Kenya’s new budget process 140 Relationship between national and county governments 147 Budgeting and spending at the county level 151 Transitioning to the new systems 156 Helping counties manage finances accountably 157 Chapter 13: Social accountability: Transparency, accountability and participation 162 The basic elements of a social accountability system 163 Learning from past experiences with devolved funds 166 Supporting institutions for a functioning social accountability system 168 Chapter 14: Financing and management of urban areas 172 Urban development is good for economic growth 172 Urban management under devolution 173 Estimating capacity from current local authority collections 73 Comparing Kenya with international experience 175 Getting the legal framework right for own revenues 76 Gaps in the Urban Areas and Cities Act 176 Addressing challenges in existing local own revenues 78 County fees and charges 80 Chapter 15: Decentralizing public services 186 The case for additional county revenue sources 81 Existing administrative arrangements 186 Design of subnational tax regime 83 Legal framework for managing county public services 187 County tax collection 85 Balancing central control and local autonomy 190 A robust framework for managing decentralized staff 195 Chapter 8: Allocating the share capital equitably but carefully 90 A powerful constitutional mandate: Equalization across Kenya’s forty-seven counties 91 Chapter 16: Managing a complex transition 200 The CRA proposal: An important step toward redistribution 92 Putting Kenya’s devolution in context 200 Managing the transition: Equalizing over time to avoid fiscal stress 94 Institutional arrangements for managing transition 202 Implementing transfer of functions 205 Chapter 9: Strings attached? The scope for conditional transfers 106 Transfer of public servants 208 The rationale for conditional transfers 106 Establishing Public Financial Management systems 211 Supporting national priorities at the local level 109 Transitioning from Local Authorities to County Governments 212 Filling gaps in the transition 113 Engaging where it matters 213 Stimulating performance at the local level 114 Main conclusions and recommendation 216 Chapter 10: Making the most of the Equalization Fund 120 How much does the Fund amount to? 120 ANNEX What objectives should guide its allocation? 121 Annex 1: Overview of FDKP 228 What will the Fund finance and where? 122 Though small, the Equalization Fund can still be effective 123 FIGURES Figure 1: Kenya’s devolution presents massive challenges for political and administrative restructuring vi Part IV: Translating the vision, with a smooth transition Figure 2: Flows of revenues from different sources for county governments viii Chapter 11: Promoting intergovernmental coordination 128 Figure 3: Vertical imbalance: Applying the CRA formula, only two counties would receive ix Why intergovernmental relations is important in Kenya 129 less than half of their resources from transfers Structure of intergovernmental relations in Kenya 131 Figure 4: Per head equitable share allocations to counties (assuming 15 percent equitable share) xiii Models for sector coordination 133 Figure 5: A massive reallocation of funds across counties under a fiscally prudent scenario xiii Challenges of parallel systems 135 Figure 6: Counties where Local Authorities ran budget surpluses in 2008/09 xvi Figure 7: Elements of social accountability systems xvii Chapter 12: Managing money for county development 140 Figure 8: Despite rapid urbanization, most counties are still predominantly rural xx Kenya’s new budget process 140 Figure 1-1: Number of bills considered by parliament per year 4 Relationship between national and county governments 147 Figure 1-2: Various government systems at the local level in Kenya 8 Budgeting and spending at the county level 151 Figure 2-1: Kenya’s devolution presents massive challenges for political and administrative restructuring 14 Transitioning to the new systems 156 Figure 2-2: How Kakamega will integrate former districts and Local Authorities in a new 15 Helping counties manage finances accountably 157 county administration Figure 2-3: In the heath sector, 9 out of 10 personnel will be moved to county governments, 16 Chapter 13: Social accountability: Transparency, accountability and participation 162 even though they are likely to remain in the same pay station The basic elements of a social accountability system 163 Figure 3-1: There are significant inequities within counties 22 Learning from past experiences with devolved funds 166 Figure 3-2: Poverty is as dispersed between counties as population density 22 Supporting institutions for a functioning social accountability system 168 Figure 3-3: There is a strong correlation between poverty and social outcomes, particularly education 22 Figure 3-5: Kenya’s spatially unbalanced growth is due to its geographic diversity and inequity 24 Chapter 14: Financing and management of urban areas 172 Figure 3-6: The uneven pattern of Kenya’s infrastructure development 26 Urban development is good for economic growth 172 Figure 4-1: Unbundling ensures there is clarity about who funds what 36 Urban management under devolution 173 Figure 5-1: Except for a spike in 2009/10, development spending has seen relatively constant 54 growth from 2005/6 to 2010/11 Figure 6-1: Flows of revenues from different sources for county governments 60 Figure 6-2: Four basic options for financing counties 60 Figure 6-3: The chosen rate will apply to a lagged base 63 Figure 7-1: Water and sewerage fees, once major Local Authority revenues, have fallen dramatically 72 Figure 7-2: Kenya will become increasingly reliant on intergovernmental transfers to finance 74 subnational spending under devolution Figure 7-3: Subnational resources as a percentage of total general government spending 74 - international comparison Figure 7-4: Subnational resources as a percentage