PBO pokes holes in Fourth Basis revenue sharing mode
By Rawlings Otieno, February 11, 2025Parliamentary Budget Office has poked holes in the new Fourth Basis of Revenue Sharing Formula as proposed by the Commission on Revenue Allocation (CRA).
Pursuant to Section 10 of the Public Finance Management Act, as a Fiscal Council, the PBO is a non-partisan professional office of the Parliament whose primary function is to provide professional advice to the legislature with respect to budget, finance, and economics.
The PBO in its review of the formula, argues that the Fourth Basis has incorporated a new arbitrary parameter christened a stabilization factor.
According to PBO, the index is given to each county as a stabilization index lacks a scientific basis. This is after CRA argued that the factor has been introduced to promote harmlessness in the allocation factor to counties.
“Using baseless factors in determining revenue allocation among counties would be detrimental. The future of revenue allocation should point to some stability and predictability but not lean on holding harmless. It would be prudent if the transition effects from one basis to another were fixed by a scientifically generated deviation parameter,” reads PBO’s review.
The Fourth Basis revenue sharing framework for county governments aims to share revenue equitably to facilitate service delivery and to share revenue equitably for counties to address economic disparities to promote development.
The Fourth Basis for revenue sharing introduces five critical parameters which include Equal share pegged at 22 per cent, population (42), Geographical size (9), poverty (14) and income distance (13) per cent respectively.
Equitable share
Additionally, in determining allocations to county governments for the financial year 2025/26, the recommended equitable share by CRA is Sh417.425 billion, an amount which reflects an upward adjustment from the previous financial year 2024/25 allocation of Sh387.43 billion, aligning with the increasing resource demand to support devolved functions and ensure efficient service delivery across the 47 counties. Given a total proposed county allocation of Sh417.425 billion, a share which translates to Sh91.83 billion directed specifically towards equal needs across the 47 devolved units.
Consequently, each county would receive approximately Sh1.953 billion as a foundational allocation to support critical government functions, regardless of population or geographic differences.
According to PBO, the Fourth Basis for revenue sharing allocates a 42 per cent weight to the population parameter, reflecting the importance of population size as a key determinant of county funding needs. PBO argues that the allocation has, however, not had a steady pattern with weights of 45, 45, and 18 per cent on the first, second, and third basis, respectively.
Out of the total proposed allocation of Sh417.425 billion earmarked for counties, approximately Sh175.32 billion is explicitly designated to address population-based demands across the 47 counties.
“The proportion assigned to the population parameter is derived from data from the 2019 Kenya Population and Housing Census (KPHC). The index for each county is calculated by dividing the county’s population by the total national population,” PBO observes.
PBO further argues that the correlation between population size and allocation levels is based on the principle that more populated counties must manage more significant service delivery requirements. Based on the proposed framework, counties with larger populations, like Nairobi, Kiambu, Nakuru, Kakamega, and Bungoma, will receive proportionately higher funding levels than other counties with less population.