Effects of Intergovernmental Fiscal Transfers on County Own Source Revenue Generation in Kenya

Abstract

Intergovernmental fiscal transfers, both conditional and unconditional constitute the principal source of revenue for sub-national governments in many transitioning nations. These transfers which come in form of equitable share of revenues and conditional grants have been perceived to swarm out local own source revenues by discouraging the efforts of sub-national governments to enhance their fiscal capacities. In Kenya for example, the proportion of aggregate, county own source revenues to total county revenues declined consistently between FY 2013/14 and FY 2020/21, recording a downward trajectory in their performance trends. This proportion of revenue that falls within the full disposition of county governments has been insufficiently low in the country, hovering at around 9% of total county revenues on average, with little capacity to deliver on county governments’ budget cover. Consequently, counties across the board have been unable to realize their full estimated annual financing, and have continuously struggled to deploy their budgets efficiently and effectively due to shortages in own source revenue generation. The present study thus, strived to examine the effects of equitable share of revenues transfers and conditional grants transfers on aggregate county own source revenue generation in Kenya with two views: to assess whether these transfers are stimulatory or substitutory in nature to county own source revenue generation in Kenya; and to provide the policy tools and frameworks with which county governments in Kenya can adopt, develop and enhance their own source revenue governance and fiscal independence. The study sought to provide empirical evidence to three critical questions: (i) what effect does equitable share of revenue transfers have on aggregate county own source revenue generation in Kenya? (ii) Do conditional grant transfers affect aggregate county own source revenues generation in Kenya? and, (iii) what policy proposals can be extracted from the empirical results of the study? The study’s theoretical foundation was underpinned by two theories; the theory of fiscal federalism by Richard Musgrave (1959) and the resource dependence theory by Jeffrey Pfeffer and Gerald R. Salancik (1978). Empirical literature was adequately reviewed and existing research gaps identified. A correlation research design was adopted as the appropriate design for the study. Annual panelized data for the period between 2013/14 and 2020/21 was collected from authoritative sources for the study’s empirical analysis using STATA software version 14. The robust fixed effects model was preferred in estimating the two study objectives in order to obtain valid and consistent results due to the presence of serial correlation and heteroskedasticity in the data set. The empirical results of the robust FEM revealed that the unconditional transfers of equitable share of revenues from the National Treasury had a negative effect on the aggregate county own source revenue generation in Kenya, but the effect was found not to be significant in nature. However, conditional grants transfers were found to have a positive and significant effect on the aggregate county own source revenue generation in Kenya. The results showed that a 1% increase in national government’s conditional grants transfers brought about a 17% increase in county own source revenue generation in Kenya, underscoring the stimulatory nature of conditional grants on OSR generation in Kenya. These empirical findings which point out the stimulatory nature of conditional grants on aggregate county OSR generation in Kenya informed the key policy recommendation in favor of the National Treasury conditional grants transfers as effective instruments of promoting county own source revenue generation in Kenya. The study also recommended as a matter of policy, that the utilization of conditional grants transfers to county governments be channeled to development projects in order to foster more productive activities that translate constituents’ economic activities to increased own source revenue generation within the respective county governments in form of taxes, fees and respective user charges.