Revenue allocation formula needs to focus on growth

The Commission on Revenue Allocation (CRA) determines distribution of resources to counties based on a formula that considers population, poverty index, basic equal share, land area and fiscal responsibility. The first three measures contribute 90 per cent weight to the formula. But this seems flawed due to several aspects that seem to punish productive counties compared to less productive ones.

Population carries a weight of 45 per cent in the revenue allocation formula, meaning that the more citizens a county has the more funds it wll receive. This is one of the fairest measures included in the formula and the proportion should probably be increased. When you add the poverty index, which has a 20 per cent weight, it means that a highly populated county will be allocated more if its poverty level is higher than another county with similar population but less poverty.

The problem with the poverty index is that a county like Nairobi has extremes in terms of the poor and the rich. Thus its poverty level will have an average that is distorted by the high incomes of the billionaires and millionaires. Using poverty as a parameter may discourage counties from uplifting the lives of their citizens so that they remain poor at least statistically since poverty is rewarded.

The formula discourages productivity. As the CRA role suggests, it is all about allocating revenue and less to do with revenue generation. Perhaps the formula should in future consider a productivity element or maybe a revenue generation arm. We have seen the formula reward poor counties.Counties with larger land areas are also advantaged regardless of whether the area is productive or not. This means that the formula uses revenue generated from all counties and allocates it in favour of the less productive counties.

Looking at the 2014/15 numbers, per capita allocation for Nairobi is Sh3,603, Kiambu (4,000), Meru (4,165), Kisumu (5,101), Kakamega (4,667) and Isiolo Sh18,557. A resident of Isiolo is allocated five times the amount of his Nairobi counterpart. On the other hand per capita income of Nairobi maybe at least be five times that of Isiolo. Looking at Kenya as a business, Vision 2030 may be compromised. You cannot progress by taking money away from profit making departments and allocating it to the loss making ones. Consider the business example below.

A brewery that operated thousands of bars in the US found that renovation increases the performance of a bar. The brewery made an equal investment renovating eight high performing bars and eight struggling ones. It made an interesting discovery – the return on investment was seven times higher in the high performing bars than it was in the struggling ones.

In addition the bars that were performing well retained their new high level performance a year later while those that were underperforming returned to poor performance within a year. This is an example in the book ‘‘Leading from a Strength-based Perspective’’ by Penille Brun and Ejsing, which is based on the idea that whatever you focus on grows.

The formula should help the country to focus on the right things for growth to happen.

The writer is the marketing director of SBO Research. E-mail:, Twitter @bngahu

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