Sequential theory of devolution, Change management theory and Expediency theory of taxation

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter involved the focus of theoretical frameworks where theories relating to the topic were discussed and include the following; Sequential theory of devolution, Change management theory and Expediency theory of taxation, conceptual framework giving a guide on how the variables were linked to the study, empirical review, critique of existing literature, Research Gap and the Summary of the chapter.

2.2 Theoretical Framework

A theoretical framework is defined as a reasoned set of prepositions, which are derived and supported by data or evidence and explains a phenomenon (Mathooko et al., 2011). This research viewed Sequential Theory of devolution, Lewin’s Change Management Theory and The Expediency Theory of Taxation in evaluating the determinants of Revenue Maximization in devolved units in Kenya.

2.2.1 Sequential Theory of Decentralization

Sequential theory of decentralization developed by Falleti (2010) and used to support the understanding of the variable of the legal frameworks on revenue maximization in devolved units in Kenya. The theory includes decentralization as a process, takes into account the territorial interests of bargaining actors and incorporating policy feedback effects where it provides a dynamic account of institutional evolution. Decentralization as a Process is a set of policy reforms that are in place for transferring responsibilities, resources, or authority from higher to lower levels of government, (Blokker, 2012). Decentralization policies belong to one of three categories — administrative, fiscal, and political — depending on the type of authority devolved: – Administrative decentralization entails the devolution of the decision–making authority over these policies, but this is not a necessary condition. If revenues are transferred from the centre to meet the costs of the administration and delivery of social services, administrative decentralization is funded (And coincides with fiscal decentralization). If devolved units bear the costs of the administration and delivery of decentralized services with their own pre-existing revenues, administrative decentralization is not funded (Kahler & Lake, 2012).

Fiscal decentralization refers to a set of policies intended to grow the revenues or fiscal autonomy of subnational governments. Fiscal decentralization policies can assume different institutional forms. An increase of transfers from the national government, the establishment of new decentralized taxes, and the subsequent delegation of tax collection authority that was previously national are all examples of fiscal decentralization (Torome, 2013).

Political decentralization is the set of constitutional amendments and electoral reforms designed to open new-or activate existing but dormant or ineffective-spaces for the representation of subnational institutions. Political decentralization policies and procedures are also designed to devolve electoral capacities to devolved units and their actors. Examples of this type of reform are the popular election of mayors and governors (who were previously appointed), the creation of subnational legislative assemblies, or constitutional reforms that strengthen the political autonomy of decentralized governments, (Mwenda, 2010).

Regarding the imports of each type of decentralization, administrative decentralization usually has either a positive or negative impact on the autonomy of county executives. If administrative decentralization improves local and state bureaucracies, fosters the training of local officials or facilitates learning through the practice of delivering new responsibilities, it will likely increase the organizational capacities and competencies of subnational governments (Hankla, 2008). The converse is also true if administrative decentralization takes place without the transfer of funds. This reform may decrease the autonomy of officials of the devolved units, depending on subsequent national fiscal transfers or subnational debt for the delivery of public social services. Similarly, fiscal decentralization can have either a positive or negative impact on the degree of autonomy of the subnational level. The result largely depended on the design of the fiscal decentralization policy applied.

The theory involves the delegation of powers to lower levels in territorial hierarchy whether the hierarchy is one of the governments with a state or offices with a large scale organization (Wandera, 2014). Decentralization, therefore, involves the creation of smaller territories and/or establishment of political and administrative institutions.

Saideman (2012) further asserts that devolution establishes the best measure of decentralization within the unitary system of government. An effective devolved system is expected to motivate the poor to actively participate in the decision-making, to decide and lobby for their interests, bringing about their ‘empowerment’ as well as contributing to pro-poor policies, (Kaiser, Eaton & Smoke 2010).

Higher levels of automatic transfers increase the independence of subnational officials because they gain from higher levels of resources without being responsible for the costs (political and bureaucratic) of collecting those revenues. On the contrary, the assignment of taxing authority to subnational units that do not have the requisite skills and competencies to collect new taxes can set serious constraints on the local budgets, and increase the reliance of the local officials on the transfers from the centre. Prosperous decentralized units prefer to collect their own taxes, but poor states or municipalities are adversely impacted every time the collection of taxes is decentralized and, as a consequence, the horizontal redistribution of transfers from rich to poor subnational units is affected. Finally, political decentralization should always have a positive impact on the degree of autonomy of subnational officials from the centre, decentralization policies is unpacked in a way that, decreasing the power of subnational officials with regard to the national executive. This is a feature of decentralization that both advocates and critics have failed to take into account (Ndunda et al., 2015).

The primary aim of devolution is empowerment (Oloo, 2012). On the other hand, according to Paulos (2007) devolution is the most far-reaching type of decentralization. It is intended to reduce the gap between government and local population and also to increase control and direction over utilization of resources and ensure effective and efficient service delivery (Ademolekun, 1999). In terms of effectiveness and efficiency, stated, “the development performance of the local government is more often than not affected by the financial and human resource available to them.’’ Devolution improves the HRM functions by placing a greater degree of authority and answerability in the hands of managers at the department and regional level. The study ensured that the civil services had the capacity to do the HRM tasks in an effective and efficient way by giving them the power to attract, to recruit and select, to promote, to train and to reward accordingly. Studying devolution helped in understanding the administrative, political, fiscal and geographical aspects of decentralization. This study, therefore, viewed decentralization as the transfer of decision-making power and authority from the centre to local entities, which were officially delineated geographic and functional realms.

2.2.2 Lewin’s Change Management Theory

The theory was developed by Lewin in 1940 and asserts that change is a common thread that runs through all businesses regardless of size, industry and age and will always affect human in their daily lives. Our world is changing fast and organizations must change quickly, too. Organizations that handle change well thrive and human will always comply with the rules, whilst those that do not may struggle to survive will always engage in malpractice activities in an organization. The theory tends to address the Human factor and evolve around the operation of human life.  The thought of “change management” is a familiar one in most government units today. But how government units manage change and how successful they are at it varies enormously depending on the nature of the governance, the change and the people involved (Ndunda et al., 2015). A crucial part of this depends on how well people within county unit governance understand the change process leading to efficient human participation and inclusivity within the organization. By focussing at change as a gradual process with separate stages, you can prepare yourself for what is coming and make a plan to manage the transition – looking before you leap. All too often, people go into change thoughtlessly, causing much unnecessary turmoil and chaos. To begin any successful change process, you must first start by understanding why the change must take place. The motivation for change must be engendered before the change can occur. One must be helped to re-examine many cherished assumptions about oneself and one’s relations with others. This is the unfreezing stage from which change begins.

Unfreezing stage of change involves preparing the government unit to accept that change is necessary, which involves breaking down and introspecting the existing status quo before you can build up a new way of operating. Key to this is developing a compelling message showing why the existing way of doing things cannot continue. Old habits and behaviours on ways of thinking, processes, people and organizational structures must all be carefully examined to show employees how necessary a change is for the organization to create or maintain a competitive advantage in the marketplace. This is easiest to frame when you can point to declining Revenue collected figures, poor financial results, worrying taxpayers’ satisfaction surveys, or such like. These show that things have to change in a way that everyone can understand. To prepare the government units successfully, you need to start at its core – you need to challenge the beliefs, values, attitudes, and behaviours that currently define it leading to staff motivation and commitments in an organization. Using the analogy of governance, you must examine and be prepared to change the existing foundations as they might not support new changes. Unless this is done, the whole government unit may risk folding (Schein, 1992).

Time and communication are the two keys to the changes occurring successfully. People need time to understand the changes, and they also need to feel highly connected to the organization throughout the transition period. When you are managing change, this can require a great deal of when the changes are taking shape and people have embraced the new ways of working, the organization is ready to refreeze to symbolize the act of reinforcing, stabilizing and solidifying the new state after the change leading to a stable organization chart, consistent job descriptions, and so on. The refreeze stage also needs to help people and the organization internalize or institutionalize the changes. This means making sure that the changes are used all the time, and that they are assimilated into everyday business. With a new sense of stability, employees feel confident and comfortable with the new ways of working. The rationale for creating a new sense of stability in our ever-changing world is often questioned. Even though change is a constant in many organizations, this refreezing stage is still important. Positive rewards and acknowledgement of individualized efforts are often used to reinforce the new state because it is believed that positively reinforced behaviour will likely be repeated. Without it, employees get caught in a transition trap where they aren’t sure how things should be done, so nothing ever gets done to full capacity. In the absence of a new frozen state, it is very difficult to tackle the next change initiative effectively (Kayaga, 2010).

Today change is constant and organizational leaders who anticipate change and react rapidly and responsibly become successful. However, the organizational leaders who anticipate and invent the future are even more successful because as they initiate the change they automatically become leaders in their industry. Other organizations are followers that adapt to change, while others simply do not survive. There are many models that can be used for successful organizational change. Winners respond to the pace and complexity of change, they adapt, learn and act quickly. Losers try to control and master change in the environment. It is essential for organizational leaders to identify and use a model for transformation that will help their organizations endure the dynamics in the external environment (Eaton & Smoke, 2010).

In change management process the critical aspect is the organization’s ability to win the buy-in of their organization’s employees on the change. Effectively managing organizational change involves four-step processes which include recognizing the changes in the broader business environment, developing the necessary adjustments for their company’s needs, training their employees on the appropriate changes and winning the support of the employees with the persuasiveness of the appropriate adjustments (Simiyu, 2010). While singling out county staff may be inadequate, innovative revenue mobilization processes face a myriad of challenges ranging from staffs that are not keen on reinforcing compliance to corruption in the pay bill accounts (Institute of Social accountability, 2016). Consequently, taxpayers are reluctant to use the new systems to pay taxes and quickly fall back to the manual systems. Using both manual and electronic systems concurrently creates cumbersome reconciliation processes and is open to manipulation.

The theory calls for a comprehensive and transformative review of practices, procedures and processes in revenue mobilization. This is for the simple fact that financial management at the county level seeks to raise, spend and account for the funds needed for county expenditure. Basu (2004) is of the view that since revenue is derived from citizens it is morally incumbent upon governments to spend this money efficiently and economically. If not done it endangers alienation of the very citizens who legitimize such governments.

Organizational Change Management aligns groups’ expectations, communicates, integrates teams and manages people training. It makes use of performance metrics, such as financial results, operational efficiency, leadership commitment, communication effectiveness, and the perceived need for change to design appropriate strategies, in order to avoid change failures or resolve troubled change projects (Gikandi & Bloor, 2010).

2.2.3 The Expediency Theory of Taxation

The expediency theory of taxation was developed by Anyafo in 1996 and later improved by Bhartia in 2009 and states that every tax revenue collection proposal must pass the test of practicability, which must be the only consideration when the county government is choosing a revenue collection proposal thereby addressing existing policies governing revenue collection. The proposition is that the economic and social objectives of the government should be treated as irrelevant since it is useless to have a tax which cannot be levied and collected efficiently. However, there are pressures from economic, social and political groups. Every group tries to protect and promote its own interests and county governments are often forced to reshape tax structure to accommodate these pressures (Bhartia, 2009).

In addition, the administrative set up may not be efficient to collect the tax at a reasonable cost of collection. Taxation provides a powerful set of policy tools to the authorities and should be effectively used for remedying economic and social ills of the society such as income inequalities, regional disparities, unemployment, cyclical fluctuations and so on (Bhartia, 2009). The expediency is relevant to the present study in that it seeks to explain the considerations that lead to tax rates, processes of reinforcement and the resources availed for tax collection processes.

The decentralization theory focusses on the powers devolved to the county governments and the need to devolve power and resources to the people while giving the people mandate to make decisions that are relevant to them. Change management, on the other hand, concentrates on creating capacity at the institutional level to manage resources at disposal competitively. Lastly, the expediency theory looks at what is practicable. How many resources are at disposal, who are the taxpayers (establishing databases) and what is their capability (economic empowerment) and what methods can best be used to mobilize tax effectively considering the cost of available methods, (Riaga, 2012).

2.2.4 Institutional Theory

The theory was developed by DiMaggio and Powell in 1987 and state that, institutional environment strongly influence the development of formal structures in business units, and advocate for innovative structures that improve technical efficiency within a legitimized system. The theory stresses that those innovations should reach a level of legitimization where failure to adopt them is seen as “irrational and negligent” (or they become legal mandates). At this point, the new and existing devolved unit will adopt the structural form even if the form doesn’t improve efficiency.

Meyer and Rowan (1991) also argued that institutional myths are normally accepted in order for the organization to gain or maintain legitimacy in the institutional environment and this is what the devolved units in Kenya tend to achieve. County governments adopt the “vocabularies of structure” prevalent in their environment, Commission on Revenue Allocation (CRA), Controller of Budget (CoB), Auditor General and Council of Governors. Other institutions include the National and County Assembly, County Executive Committee and the senate. The adoption and prominent display of these institutionally-acceptable “trappings of legitimacy” help preserve an aura of organizational action based on “good faith” and this is done during revenue collection. Legitimacy in the institutional environment helps ensure the maximization of revenues.

However, these formal structures of legitimacy can reduce efficiency and hinder the organization’s competitive position in their technical environment. To reduce this negative effect, organizations often will decouple their technical core from these legitimizing structures. Organizations will minimize or make evaluation ceremonial and neglect program implementation to maintain external (and internal) confidence in formal structures while reducing their efficiency impact.

The theory concludes that the net effect of institutional pressures is to increase the homogeneity of organizational structures in an institutional environment. Counties will adopt similar structures as a result of three types of pressures. Coercive pressures come from legal mandates or influence from central policies they are dependent upon. Mimetic pressures to copy successful forms arise during high uncertainty. Finally, normative pressures to homogeneity come from the similar attitudes and approaches of professional groups and associations brought into the firm through hiring practices.

Institutional theory is relevant to this study since it informs the governance structures and legislative framework. The theory applies well when it comes to reviewing, analysis and relevance of each independent institution in regard to the effective discharge of devolved functions at the county level and these institutions are; Commission on Revenue Allocation (CRA), Controller of Budget (CoB), Auditor General and Council of Governors. Other institutions include the National and County Assembly, County Executive Committee and the senate. The theory largely influences the amount of revenue the counties are likely to collect.

All these institutions seek to establish the determinants of Revenue Maximization in devolved Units in Kenya and ascertain what constitutes the best ways of optimizing revenue collection. It is widely acknowledged that Revenue maximization is a critical factor in devolved unit development (Westman, 2004). Counties need to be aware of the factors that lead to the maximization of revenues. Accountability and transparency during revenue collection is another factor to be considered and this may result either to high or poor collection of the revenues.

In spite of the above, governance issues in devolved units vary due to non-adherence to existing institutional structures. Literature has confirmed that there have been breaches in regulation even in instances where people are aware of factors leading to maximization of Revenue.

According to Bigambo, (2012), all governments enter into a social contract with its citizens to collect taxes and manage those taxes responsibly by delivering services to them. County governments undertake to mobilize taxes from citizens to meet some of their budgetary allocations. Successful revenue collection means that resources are easily available to undertake development projects for the good of the citizens. On the other hand, when counties fail to optimally collect requisite revenues, the public is negatively affected through denial of services. Consequently, if revenues collected are not managed in a prudent manner and for the common good, this leads to spillage in the form of corruption, skewed development, ethnic biases, bloated workforce and other expenditures as well as poor planning; the effect of which is a dissatisfied citizenry. The clamour for increased revenue allocation from the central government to county governments as witnessed in Kenya by the council of governors and the underperformance in revenue collection as reported by the controller of budget has raised eyebrows amongst researchers.

2.3 Conceptual Framework

According to Mugenda and Mugenda, (2003), conceptual framework involves forming ideas about relationships between variables in the study and showing these relationships diagrammatically in the study, the main independent variables were the existing institutions and their capacity, the policies, existing legal frameworks and human factors. The dependent variable was the maximization of Revenue. For the purpose of this research, figure 2.1 below was developed to display how the independent variables impact on the dependent variable.

Independent Variable                                                                              Dependent variable

Figure 2.1 Conceptual framework

2.3.1 Influence of Institutional Capacity on Revenue Maximization

The Constitution provides for a phased transfer of functions from national to sub-national governments depending on the capacity that the counties have. The Constitution provides in Section 6, Article 15 that the National Government will build the capacity of County Governments to take over their functions. The Transitional Authority set up under the Transition to Devolved Government Act 2012 is in charge of facilitating the analysis and the phased transfer of functions provided under the 4th Schedule of the Constitution. The realization of these functions, however, is dependent on several other institutions created under the constitution. The following section discusses the relevance of each independent institution in regard to the effective discharge of devolved functions at the county level.

The Commission on Revenue Allocation (CRA) is an independent Commission set up under Article 215 of the Constitution of Kenya 2010. Its core mandate is to recommend the basis for equitable sharing of revenues raised nationally between the national and the County Governments, and among the County Governments, (GOK, 2010).

Though the recommendations of the CRA are of a technical nature, they are not made unilaterally or in ignorance, given that the sharing of revenues is by its very nature, a part of a wider political process. The CRA’s formulae are to be guided by a legislative framework enacted mostly by the Senators in their capacity as political representatives of the people of the counties. The CRA and the Senate must, therefore, maintain a close working relationship.

The Office of the Controller of Budget (OCOB) of Kenya is also an Independent Office established under the Constitution under Article 228. The COB will exercise control over the expenditure of national and County Governments. All Public Funds are subject to the oversight and authority of the Controller of Budget and this office will have representation in at least all of the 47 counties. It is thus not possible for County or National executives to make unilateral withdrawals out of a Public Fund. Generally, any withdrawals from any Fund must get the green light from the Controller of Budget (GOK, 2010).

The Office of the Auditor-General is established under Article 229 of the Constitution. It acts as a watchdog office for the people of Kenya, to protect how their public funds are used and deviating from the past when the office was combined by that of Controller of Budget under the office of the Controller and Auditor-General. The office is mandated to audit and report on finances of National and County Governments, and other state organs (public body and any entity that is funded from public funds including political parties). Therefore, the Auditor-General role is to assure Kenyans that public resources are safeguarded from misuse and above all employed efficiently and effectively for the benefit of all Kenyans.

According to D’Arcy and Cornell (2016) to ensure that the devolved government carries out their functions without interference, Article 248 and 249 of the Constitution provides for the independence of the Office of the Auditor General. According to Article 93 of the Constitution, Parliament of Kenya consists of the National Assembly and Senate both charged with the enactment of the laws through the two chamber system, one chamber to review the laws and decisions of the other chamber regarding devolution. The Constitution sets the role of the National Assembly under Article 95, which includes among other things: “to enact legislation, determining the allocation of national revenue between the levels of government, appropriating funds for expenditure by the National Government and other national State organs and exercising oversight over national revenue and its expenditure, (GOK, 2010).

The county assembly in Kenya is the law-making organ of the county government to which the state organs through the Constitution delegates power. Each of the 47 counties has representatives from each ward in the county elected to its county assembly popularly referred to as Members of the County Assembly (MCAs). The role of the county assembly in Kenya is to; evaluate and approve nominees for appointment to county public offices, exercise the legislative authority of the County government, approve the budget and expenditure of the county government, approve borrowing by the county government and also to approve county development plans.

Among the roles of interest to this study at hand is the legislative power of the assembly. The Constitution vests the legislative authority of the county on the county assembly permitting them to exercise this authority.  The county assembly can make any laws that enable the county governments to perform efficiently and effectively. The performance involves the functions and exercise of the powers of the county government under the Fourth Schedule. The county assembly in Kenya exercises oversight over the county executive committee as well as any other county executive organs. The assembly plays this role without directly meddling in the functions of the county executive or observing the separation of powers. In addition, the county assembly can also receive, review and approve plans and policies for the management and utilization of the county’s resources; and development and management of its infrastructure and institutions.

In performing this role, Articles 201 and 203 of the Constitution guides the county assembly on matters that relate to doctrines of public finance, equitable share and other finance laws respectively. In this provision, a county government cannot borrow external funds without the approval of the county assembly and surety from the National government. Another significant role of the county assembly in Kenya is to approve county development plans.  Every county government plans for the county and all allocations and expenditure is hinged on this framework. The county executive committee is guided by the county assembly master plan. There are four types of county development plans in the County Governments Act which include: county integrated development plan (CIDP), a five-year plan; the county sectoral plans, a ten-year plan; county spatial plan, a ten-year plan; and cities and urban areas plans (city or municipal plans) under the Urban Areas and Cities Act, (GOK, 2010).

Lastly, the executive authority of the county is vested in and exercised by, a county executive committee. The county executive committee consists of; The county governor and the deputy county governor; and members appointed by the county governor, with the approval of the assembly, from among persons who are not members of the assembly. The members of the executive committee are answerable to the governor.

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The Responsibilities of the County Executive Committee include: Implementing county legislation as well as the national legislation as may be required. They also design a performance management plan to evaluate the county’s public service and the implementation of county policies. They also develop the County Integrated Development Plan (CIDP), annual development plans, sectoral plans and spatial plans for approval by the County Assembly as well as the county budget for approval by the County Assembly.  They are in charge of implementing county plans and budget, preparing and proposing legislation for consideration by the County Assembly. They also provide the County Assembly with full and regular reports on matters relating to the county and any other functions conferred on it by the Constitution or any other national legislation.

2.3.2 Influence of Policies on Revenue Maximization

Policy enactment refers to the execution of legislation. Operationalized, this will constitute the process of putting public policy into practice at the grass-root level. This concept signifies the execution of policy decisions through a directed change in the environment with a view to attaining the objectives at an acceptable and anticipated cost (Hannah, 2013). According to Bennett, Corluka, Doherty, Tangcharoensathien, Patcharanarumol, Jesani and Arkins (2011), policy implementation and policy-making are interconnected and policy-making and policy implementation at times occur simultaneously. Establishing under what situations and circumstances a positive correlation between policy objectives and desired results can be obtained is important in realizing success in the functions of a devolved system of governance. Public policy is dynamic and therefore adoption is aligned to changing circumstances, however, changes are not always welcome and more often than not these changes are countered with resistance from proponents of the status quo (Ewa & Udoayang, 2012). Resistance need not deter these changes and once envisioned, a gradual implementation process would foster acceptance.

Dewey and Rogers (2012) recommend certain conditions for the successful policy implementation: Public policy must be based on realistic perceptions of the relationship between changes in the behaviour of the target group and the achievement of policy goals. At times the behaviour and attitude of the target group is the objective of policy. Therefore, at the policy implementation stage, this condition must be borne in mind. Interest groups and legislations must support public policy throughout the implementation stage and the judiciary should be either supportive or neutral (Quade, 1982). Legislators and the executive officers must support the policy program by allocating resources for the implementation of policies. At times it may be necessary to obtain support from an active pressure group so as to influence local government action.

Consequently, effective policy implementation may be influenced by relations between authorities particularly when either level of governance central or devolved have vested interests or successful implementation of a particular policy has direct implication on certain desired results Bennett et al (2011) Changes in socio-economic conditions should not be permitted to interfere with the relative importance of policy objectives. The policy environment is dynamic and policy issues are interrelated Wahl & Weisman (2003). Political support for a particular policy can reduce as other issues become more essential or receive more public support (Dewey & Rogers, 2012). Thus, when implementing policy, this condition must be borne in mind. Administrative skills refer to the ability to exercise effective financial control, recruits and deploy human resources effectively, and creates conducive working procedures and atmosphere (Hannah, 2013) Political skills refer to the ability to maintain good working relations with public officers, mobilize potential support, use of media effectively and provision of fair treatment at the local government level. Hence, the commitment of public official and political support is essential for the successful implementation of public policy (Common, 2007).

Legislation and policy decisions must embody unambiguous policy guidelines that will structure the implementation process. Guidelines should define the objectives and also indicate the order of priority. Moreover, resources such as finance, human capital, material, and equipment must be available for the implementation of policy (Hannah, 2013). This is an essential component of policy implementation.

2.3.3 Influence of Legal Framework on Revenue Maximization

The first stage of the County implementation process comprises the development of policy and legislation. This was done by the Taskforce on Devolved Government (TFDG) under the Ministry of Local Government (MoLG). The TFDG was mandated to make recommendations on necessary legislation and administrative procedures for a smooth transition to county governments. The Taskforce prepared a policy report, a policy sessional paper and six devolution Bills in 2011. Parliament has enacted several of these laws, including the Urban Areas and Cities Act, 2011, the Transition to Devolved Government Act, 2012 and the Intergovernmental Relations Act, 2012 among others. The transfer of responsibilities for public functions is tantamount to the distribution of political power and is consequently important in every devolved system. The Transition to Devolved Government Act, 2012 establishes a framework for the changeover to devolved government in accordance with section fifteen (15) of the sixth schedule of the Constitution of Kenya, 2010 (TISA, 2012). Parliament also legislated the Intergovernmental Relations Act, 2012. The Act provides a framework of consultations and cooperation between the national and county governments as well as between county governments themselves. The Act also provides for the resolution of intergovernmental disputes pursuant to Articles 6 and 189 of the Constitution. There are few studies on legislation at the county levels but are incorporated in political systems of devolved governments.

There is no consensus on the perceived benefits of legally recognized self-government (Belanger, 2008). There are also conflicting perspectives in the academic realm regarding the desirability and potential consequences of devolution and political decentralization. Arguments against decentralization fall into two categories, focusing either on national effects or local effects (Azfar et al, 2004). At the national level, scholars have argued that the establishment of sub-national (or sub-provincial/territorial) governments can lead to fiscal deficits, as local government debts are reluctantly absorbed by the central government (Treisman, 2007). At the local level, rather than increasing democratic accountability, it has been argued that local elites can benefit disproportionately from devolution, effectively creating ―authoritarian enclaves in local settings (Hutchcroft, 2001).

GOK (2014) also noted that the Kenyan county governance system is composed of four tiers of county government, namely: Cities, Municipalities, Towns and County Councils. These councils are corporate entities that are established under the County Government Act Chapter 265, overtaken by the new constitution. In addition to the Act, the county governments draw their legal powers from the Constitution of Kenya, other Acts of Parliament, Ministerial Orders and By-Laws. Currently, there are county governments in Kenya. It further points out that the above legal bodies constitute county Government in Kenya, the local governance framework in Kenya is broader than the county government. It consists of provincial, district, location and sub-location administration with technical staff drawn from various ministries. Inherent in the gamut of county Government and local governance system are various public and private institutions, including civil society organizations. Kenya has no decentralization policy that rationalizes power-sharing, responsibilities, and resources between the central government ministries, parastatals, District Development Committees, and the private sector. This has been a problem at an operational level, with most of the institutions and organizations lacking synergy. New Constitution in place, the county government has an advantage since they already have a participatory electoral framework in place (Maina, 2010).

Ronald (2011) observed that despite the fact that there are constitutional provisions for statutory allocations and internally generated revenues, local governments are tightly controlled and subordinated by state governors through sundry mechanisms, including manipulation of the disbursement of financial transfers to them. Local governments in Nigeria mobilize their funds solely from external sources. The external sources include federal and state governments financial transfers like grants, statutory allocations, the share of Value Added Tax (VAT), receipts and loans. These external sources introduce a dependency syndrome in local government revenue mobilization efforts. Any setbacks from the external sources have an adverse effect on the administrative machinery and execution of some local government viable projects. This also has weakened its internal revenue mobilization capacity (Sander, 2003).

Kari (2014) observes that state control is imposed on local government revenue mobilization capacity by central government through constraining local government budget. Even after approval, post-budget controls still impose further restrictions on what local governments can do. The delay in the passage of an annual budget for local governments poses a great problem in the sense that the budget sometimes takes 3 months before approval. Invariably, this will cause a delay in the execution of local government functions including payment of the staff salaries and hinder infrastructural facilities to be put in place. In 1996, some newly elected Chairmen of Local Governments in Nigeria condemned in its entirety the horizontal sharing formula of the local government‘s allocation from the federation account which was equality (40 per cent) population (30 per cent), landmass/terrain (10 per cent) social development factor (10per cent) and internally generated revenue (10 per cent). This formula will continue to yield less revenue for many local governments especially when more local governments are created.

The reform programmer has recognized the importance of county government in enhancing economic governance, improving public service delivery, and increasing economic efficiency, accountability and transparency (GOK, 2014). The reforms have also included putting in place Fuel Levy Fund, Contribution in Lieu of Rates, user charges rationalization, single business permits and most greatly Integrated Financial Management System (IFMS). These programs aim at restructuring the local public sector and more importantly, strengthening local level accountability mechanisms. The Kenya Local Government Reform Program (KLGRP) was conceptualized by the government of Kenya in the early 1990s and became operational in 1996. The program has three components: rationalization of central-local fiscal relationship, enhancing local financial management and revenue mobilization and improving local service delivery through greater citizen participation. KLGRP focuses on deepening the legal, financial management and institutional reforms in Local Government sector and this began with financial reforms aimed at enhancing inter-governmental fiscal transfers, improving financial management, debt resolution, streamlining budgeting system and service provision capacity building for Las (KLGRP, 1998).

Chapter 12 of the Constitution addresses public finance issues in Kenya including revenue allocation which is critical to devolution. This section has focused on the provisions of Chapter 12 that form the legal framework guiding revenue allocation in Kenya, ranging from the guiding principles, sharing of revenues between national and County Governments, as well as the reporting and accounting mechanisms. Public revenue collection is an essential component of fiscal policy and government in any economy for it has an influence on national government processes and the grassroots. “It is the energy of every single government since it’s the key mechanism through which government funding is ensured. Revenue collection should conform to the best practices of equity, ability to pay, economic efficiency, convenience and certainty” (Visser & Erasmus, 2005). If a government is to compare its performance with the needs and expectation of its Citizens, it should escalate its fiscal penetration minus inviting costly recurring expenses (Gidisu, 2012).

Kenya has experienced a significant political change in the last few years, the most significant being the recent implemented of a new constitution. In this new constitution, the government’s operations have been devolved from a national management level to 47 county governments. Each County is self-governing with some support from the national government.

According to Kamolo (2014), it is inconsistent for county governments to exclusively look to the national government for revenue to establish or maintain programs whose benefits have a local reach. Programs like feeder roads, garbage collection, establishment and maintenance of sewerage systems, keeping the street clean, rural access roads, development of markets and urban centres should be financed by local revenues. County governments need to collect much revenue by way of taxes to face the increasing financial expenditures budgeted by the county and to ensure a balance between county budgetary allocations and county revenue collection through tax instruments.

Following the establishment of devolved governments, county governments are expected to collect their own revenue to mitigate between the allocation of revenue from the central government and their own budget. This has called for automation of revenue collection systems from Local Authority Integrated Financial Operations Management System (LAIFORM) to the Integrated Financial Management Information System (IFMIS). This is intended to enhance collection from multiple revenue streams including single business permits, market stalls, parking fees, real estates, land rates, and to achieve real-time transaction reports on a secure central server that must be accessible on the web and mobile platforms. One major administrative problem today for many county governments is their inability to cost-effectively collect fully the revenues due to them. Here the emphasis will be on the cost-effectiveness of revenue collection in county governments (UNCTAD, 2008).

The Constitution provides for an equitable share of 15% which is to be divided among the counties in accordance with the criteria outlined under Article 203 (1) of the Constitution. This equitable share should be allocated in such a way to ensure that counties have similar capacities to deliver public services. Bahl and Linn in their taxonomy of intergovernmental transfers discussed three common approaches to determining the size of the vertical share of revenue between levels of government. Kenya’s vertical revenue sharing is determined as a percentage or as a share of the total National Government revenue. The Constitution requires that the revenue allocated to the County Governments must be at least 15% of all revenue collected by the National Government. This is an unconditional transfer that is guaranteed to the County Governments. The aim of this unconditional transfer is to ensure that the objects of devolution as outlined under Article 174 are achieved to the fullest extent possible.

Article 217 stipulates that Senate shall, once every five years, “by resolution, determine the basis for allocating among the counties, the share of national revenue that is annually allocated to the county level of government”. Towards this goal, the Constitution requires that the Senate takes into consideration recommendations from Commission on Revenue Allocation (CRA), views from county governors, the cabinet secretary responsible for finance, as well as public participation and consultation.

2.3.4 Influence of human factors on revenue maximization

GOK (2010) noted that the human resource plans that address training and development of employees, inadequate staffs as well as empowering the staffs on the ethical behaviours free from fraud and corruption enhances optimal revenue collection. Training and development should be an ongoing process in any organization. Training is the formal and systematic adaptation of behaviour through continual learning which occurs as a result of education, development and practice (Armstrong, 2011). On the contrary, staff development refers to the development of supporting, technical and professional staff in organizations, such us local authorities, in which such staff form a large proportion of those employed. Its objective is to enable such employees to perform their current and future roles efficiently and effectively. Effective training can reduce learning cost; improve the individual, team and corporate performance, speed and overall output, upgrade operational flexibility by extending the range of skills possessed by employees, attract high quality employees by giving them learning and development opportunity. It increases the job knowledge and enhances their skill thus enabling them to be more competent in the collection of the revenue (Collin, 2011). The staff structure across all county government is weighed down by a huge workforce that is too heavy with support staff and semi-skilled cadres- making it difficult to attract and sustain qualified professionals due to the unattractive remuneration offered. The staffing problem should be addressed in tandem with the transformation exercise through several measures aimed at rationalizing excess lower cadre staff (COK, 2010). Collecting revenue in Local Authorities is an involving process that requires proper preparations before embarking on the exercise. Collection of revenue includes preparing and issuing bills, informing debtors on amounts through sending demand notices in their mail. It can also be done through revenue collectors efforts. Record keeping provides timely information on persons receiving services and follows up on amounts outstanding. It requires staffs that are diligent, well-trained and committed to their work (Brautigam, 2008).

According to Baurer (2015), inability in dealing with corrupt tax administration employees may create problems for the business community. Bird (2003) argues that flaws and weaknesses in revenue collections lead to inadequate tax collections. Developing countries according to the scholar face problems of inefficient and ineffective tax administration. The foregoing problem is attributed to insufficient administrative staff with requisite skills, and high level of illiteracy among taxpayers and tax collectors.

Kayaga (2010) further asserts that financial limitations have led to the hiring of tax officials who lack understanding of the tax laws they are administering, and the concept of accounting that are essential to studying returns. The scholar further posits that the problem of inexperienced and unqualified personnel is heightened by the lack of adequate training facilities and opportunities. Franken (2007) conducted a study in Dar es Salaam, Tanzania indicated that public officials are more effective as revenue collectors than their private counterparts. Fjeldstad and Haggstad (2012) affirm that measures are required to improve the accountability of revenue collectors and elected officials. The foregoing, according to the scholars, can only be realized through political goodwill from both the county and national government. The foregoing findings disagreed with the findings of Pashev (2014) and Chiumya (2014) that noted that turnover tax was hampered by illegal practices like the reduction of deductions and collusion of County Government revenue collectors. The study also observed that, indeed, tax administrators colluded with taxpayers to reduce charges in exchange for illegitimate payments.

Public Participation is viewed as one of the landmarks of a democratic government. This is because participatory democracy provides a mechanism for involving people to participate in governance processes. Local government is the closest to the people for allowing participatory democracy to flourish. Democracy is often referred to as “government by the people” or “by the people elected representatives” (Bekker, 2003). Public participation further encourages democratic principles such as political equality, majority rule, popular sovereignty and widespread consultation (Dewey & Rogers, 2012).

In democratizing the governing process, public participation brings to fore valuable information about public needs and demands to policy-makers and implementers, and vice versa. At the same time, it promotes responsiveness and awareness of public needs and simplifies the processes of policy implementation and community development (Bekker, 2003). Public participation in public policy-making and policy implementation also keeps public officials in check (Chiumya, 2014).

Participation is closely linked with empowerment. Empowering participants represents progress in democratic governance. Empowerment, in simple terms means to enable, to allow or to permit and can be conceived as both self-initiated and initiated by others (Murrell 1990). Empowerment is also an act of building, evolving and increasing power through cooperation, membership and working together. Empowerment also refers to the development of an operative support system (Pashev, 2014).

People demand accountability from public officials at all spheres of government. Accountability is not merely a matter of exercising control; it is also a matter of rendering account and provides scrutiny by the citizens who act as overseers over the actions of public functionaries (Richards, 1995). Every member of the public has a role to play in demanding accountability. The citizen plays an essential role in ensuring that public functionaries act and chase goals for the public interests. Apart from the local government policy that influences public participation at the county government level, information provision to policy-makers and implementers has an impact on public participation. Policy-makers make public policies on behalf of the citizenry (Connelly, 2003). It is essential for policy-makers to understand the needs of members of the public. In the county governments, the emphasis is placed on the needs of the public. In order to get information on public needs, county governments depend on effective communication and feedback.

Public access to local government information stimulates public participation in the making and implementation of the policies. The most advanced democracies have come to realize that they have inherited, a tradition of secrecy in government institutions which is incompatible with the public’s right to know how public affairs are conducted (Marsh 1987). Public access to information advocates that information controlled by local government institutions is public information and can legitimately be requested by the public if it does not severely impinge on the privacy rights of individuals (Meyer 1995). Another view is that access to information means that right of public access to information, documents and records held by local government institutions, except for matters that are narrowly defined (Meyer, 1995).

In explaining the right of access of the public to government held information, (Cleveland, 1986) states that: “Government is information.” Its staff is merely all information workers, its raw material is information inputs, and its product and/or finished products are those inputs transformed into policies, which are simply an authoritative form of information. Baxter (1984) is of the opinion that free access to government-held information is neither practical nor desirable. Disclosure of information may threaten state security, upset economic policies and may enable individuals to gain an unfair profitable advantage over competitors. Privacy may be invaded by disclosure of sensitive personal information.

According to Goel (2007), requests for information can be declined if disclosure of the information constitutes an infringement to a government institution, if the disclosure is in contravention of a responsibility bestowed on an institution and if disclosure can cause serious harm to a person’s health. However, according to Graham & Van Dyne (2006), valid information is essential to one’s ability to influence and inspire others. For example, a well-informed individual is likely to perform better in negotiations than an ill-informed person with the same capability and skill.

This shows that public participation can flourish if relevant information is made easily available to members of the public. Dissemination of information to the public constitutes a foundation for public knowledge and views since one’s knowledge and opinions are dependent on the information at one’s disposal. Consequently, dissemination of information is essential for public participation in the making and implementation of policy at local government. Public participation is also swayed by responsiveness to public needs and aspirations. Responsiveness to public needs can be defined as a process of taking appropriate timely actions by a public official in response to needs voiced out by the community (Chiumya, 2014). The requirements for responsiveness to public needs are as follows: Members of the public must express their needs; policy-makers must deliberate on and take the needs expressed by the public, and there must be good mechanisms for receiving expressed public needs.

2.3.5 Revenue Maximization

Article 209 gives the County Governments power to levy: (a) property rates; (b) entertainment taxes; and, (c) any other tax that it is sanctioned to impose by an Act of Parliament. Additionally, County Governments are given the power to impose charges for the services they provide. However, these revenue raising powers should not be exercised in ways that “prejudices national economic policies, economic activities across county boundaries or the national mobility of goods, services, capital or labour.” Presently, these taxation sources are insufficient to sustain County Governments and therefore they are wholly dependent on transfers from the National Government (COK article 209 (4, 5)). The Constitution also gives the CRA the responsibility for assisting County Governments to tap into additional sources of raising their own revenue.

Interest in enhancing revenue mobilization in developing countries is increasing. Most developing countries are emerging from the crisis with their fiscal prospects broadly intact (IMF, 2010), but with many still facing a fundamental need to raise more revenue from their own tax bases (Westman, 2004). Achieving the Millennium Development Goals, for instance, has been suggested to require increasing domestic revenues in low-income countries (LICs) by around 4 per cent of GDP (United Nations, 2005). Infrastructure needs are also extensive (IMF, 2010a), and there are climate challenges to address. Advanced economies are increasingly focused on improving their support of these revenue mobilization efforts.

2.3.5.1 Sources of Revenue for County Governments

There are two main types of revenue by the county government which are; Tax revenue and Non-tax revenue. Taxes are compulsory payments to the government without expecting direct benefit or return by the taxpayer. Taxes collected by the government are used to provide common benefits to all mostly inform of public welfare services. Taxes do not guarantee any direct benefit for the person who pays the tax. The government collects tax revenue by way of direct and indirect taxes, direct taxes include; corporate tax; personal income tax capital gain tax and wealth tax. Indirect taxes include custom duty, central excise duty, VAT and service tax (Blind, 2005).

The revenue obtained by the government from sources other than tax is called Non-Tax Revenue. The sources of non-tax revenue such as Fees are other important sources of revenue for the government. A fee is charged by public authorities for rendering a service to the citizens. Unlike tax, there is no force involved in the case of fees. The government provides certain services and charges certain fees. For example, fees are charged for issuing of passports and driving licenses. Fines or penalties are imposed as a form of punishment for breach of law or non-fulfilment of certain conditions or for failure to adhere to some regulations. Like taxes, fines are compulsory payments without quid pro quo. But while taxes are generally imposed to collect revenue, fines are imposed as a form of punishment or to prevent people from breaking the law. They are not expected to be a major source of revenue to the government (Eden, 2009).

Eissen (2010) suggests that the Government also gets revenue by way of surplus from public enterprises. In an article, Guldentops (2001) asserts that gifts are Voluntary contributions by individuals or institutions to the government. Gifts are significant source of revenue during war and emergency. A grant from one government to another is an important source of revenue in the modern days. Grants from foreign countries are known as Foreign Aid. Developing countries receive military aid, food aid and technological aid, among others from developed countries.

Preceding investments and existing natural resources are critical in influencing the capacity levels of the counties. They also predetermine the capacity of the counties to raise their own revenue for sustainability. The law is silent on the issue of entitlement to benefits from natural resources whose benefits are shared nationally or benefit more than one county. A good example includes the recently discovered oil reserves in Turkana, The Maasai Mara Game reserve that is among the top tourist attractions in Africa, the Port in Mombasa among others. There is a spirited move by local communities where these resources are located to control their perceived assets. While the local communities’ participation in the management of natural resources is important, there must be some oversight by the national government. This can be done through the county government. If the management of these natural resources is left entirely to the local communities, the country’s macro-economic structure may be at risk.

The Mining Bill 2014 proposes to ensure that there is equitable sharing of resources between the National government, the County Government and the communities living in the resource-rich mining areas. The Bill provides that there shall be the sharing of benefits derived from the minerals, and further provides the exact percentage to be shared. This is similar to the principle of derivation that is practised in Nigeria as discussed under chapter 4. The Bill imposes strict conditions on the communities in order for them to receive their share of the national resources. The communities are to provide an annual report on the usage and the management of the resources. This is to promote transparency and accountability on the use of the resources.

The Constitution makes a provision for borrowing by County Governments under Article 212 subject to the loan being guaranteed by the National Government after being approved by the County Assemblies.

The County Governments can borrow from the National Government, local financial institutions as well as foreign lenders. However, there is a need for regulation of these borrowing powers. Where sub-national Governments are allowed to borrow without restriction, decentralization may result in inefficiency as debt levels could grow to unsustainable levels. The Public Finance Management Act contains provisions that govern borrowing by the County Governments. The provisions of the Act with specific regard to borrowing by County Governments reflect the provisions of Article 213 of the Constitution that provides for an Act of Parliament to prescribe terms and conditions under which the National Government may guarantee loans. For loans to be guaranteed by the Cabinet Secretary in charge of Treasury on behalf of the National Government, a number of criteria must be satisfied.

A county Government may make short term borrowing arrangements for purposes of managing cash flows. Longer-term borrowing may be made for capital projects such as infrastructure. The Act also provides that the guarantee should not exceed the limit set by Parliament and if does, a resolution of both houses of Parliament is prerequisite. The resolution must, however, take into consideration that the loan is in public interest, borrowers must be in a good financial position to repay the loan and accompanying charges and the loan must be directed at stimulating the County’s economic growth. It has been argued that the above provisions undermine the autonomy of County Governments and goes against the spirit of devolution. Besides, the process of having all loans guaranteed by the National Government creates a lot of unnecessary delays to fund crucial projects. This is one control that the central government has over the County Governments spending.

2.3.5.2 Revenue Collection Methods and Management

Governments are working towards maximizing on their revenue collection methods to ensure that they raise enough revenues to run and manage the affairs of county governments at the grassroots. Increase in revenue collection can be achieved through employing county revenue instruments for tax collection as well as exploiting and harnessing all available sources of revenue in their localities and devising a cost-effective means of collecting revenues.  The county government ensures the proper policies and procedures that are in harmony with the citizens to facilitate the smooth flow of activities and development initiatives. Ensure proper management of funds, efficient and effective internal control systems to maintain a fair play in the administration and management of county resources (GOK, 2004).

There are two main methods of revenue collection, namely electronic revenue collection and manual systems. Electronic Revenue Collection System (ERCS) is a comprehensive solution for the electronic collection of government fees, taxes and custom duties (Agbeyegbe, Terence, Stotsky & WoldeMariam, 2004). This method serves as a means to achieve a cashless environment via the introduction of virtual funds and automates all revenue collection processes, allowing government agencies to exploit the full capabilities of the technology to transform its services to the public. ERC system provides various electronic methods that enable the government to collect all revenues related to the government services, customs and taxes and so forth.  Manual systems of revenue collection are centrally from one place and unlike the electronic systems of revenue collection, they inhibit autonomy done using manual receipts. Manual systems of revenue collection lead to high costs for collection, fraud, underpayment and leakages in revenue. County governments can apply effective revenue collection methods, for example, making an assessment of taxpayers and ascertaining the number of taxpayers for that year (Sen Gupta, 2007). This helps in determining the amount of tax to be collected from them annually in order to plan and budget for development agenda (Holger, 2009). A reminder notice is sent to taxpayers in a period of 2-3 weeks before taxes are due for collections in order to ensure that there are no tax arrears. This helps them to file returns on time and mitigate irregularities and inconsistencies on revenue collected and thus creating harmony between citizens and county government (Lymer & Oats, 2010).

According to Mitullah, et al. (2005), designate revenue collection points for convenience and efficiency. In addition, losses through corruption and tax evasion need to be reduced by applying stiffer penalties to corrupt officials and tax evaders. This can be achieved by contracting collections to a private collection agency; thus increasing revenues from existing sources and also reducing cost. County governments should adopt this method in order to increase revenues and improve their efficiency in revenue collection.

Traditional rulers should be appointed in the collection of community taxes; this will lead to a reduction in costs, for example, limiting the number of surplus staff appointed to collect taxes. Most traditional rulers are well respected and can easily collect community tax since they understand the geographical location of communities. Measures are required to enhance taxpayers’ compliance and to improve the accountability of tax collectors. The local governments can devise a means of allowing taxpayers to pay their taxes online. Here they get registered and connected using the internet with the revenue office/collector such that they can be reminded or compelled to pay their taxes online as at when due and automatically identify defaulters for further action. This would make the job of revenue collection a lot easier and cheaper (Australian Aid & World Bank, 2012). The previous empirical studies found that most of the tax structures were highly significant and related to the economic and business growth in a country. One of the earlier studies done by Marsden (1983) mentioned that change in tax policy will affect the economic planning and business activities of a country.

According to Mathew (2014), a countries economy may be affected differently due to any changes in each tax components this has a huge implication on the performance of businesses and firms. Studies by Fofana (2013), examined the relationship between the ratios of tax revenue to GDP (TAX/GDP) and found it was relatively low in the developing countries and this had a significant impact on the performance of businesses in the country. This explains why some businesses in developing countries perform poorly as compared to developed ones. In his argument, Musgrave indicated that a government is able to collect sufficient revenue if an economy is able to invest more resources in the development and this provides an enabling environment for the growth of businesses in a country.

Blokker (2012) argues that corruption is a strong inhibitor to the development of an economy. Corrupt revenue collection officials prevent the government from collection enough revenue for development purposes. This also paves the way for inequity and inconsistencies leading to a gap between the rich and the poor and making it difficult for businesses to thrive due to inequitable circulation of money in an economy.

Non-automated systems are manual systems of revenue collection which are centrally from one place. Before the introduction of automated systems of revenue collection, local authorities used manual systems of collections by using manual receipts. Problems such as high costs for collection, fraud, underpayment and leakages in revenue were worse by massively expanding the current taxable base without the use of adequate computerized solutions (Fjeldstad & Heggstad, 2012). Non-automated systems of revenue are attributable to problems of tracking and identifying fraud or rogue revenue collectors and are compounded by the usage of manual or centralized systems due to the resources and overheads needed to monitor and control such problems. Manual collection of payments at several service points lead to delayed customer service with a built‐in risk of manual cash management with minimal payment channels. Separate payment applications and lack of integration to the back office applications bring about delayed and possibly erroneous analysis and reporting (Prichard, 2010).

An automated revenue collection system involves investing in modern technologies, for example, ICT in order to upgrade the revenue system to achieve integration and information sharing to enhance the efficiency and effectiveness of the system. All sectors of the County should put in place an effective and efficient revenue collection system and monitoring framework that ensures adequate supervision of the budgeted programs and project activities to enhance accountability and absorption of resources (Amin, 2013). Automation of revenue collection systems and structures is instrumental in improving and simplifying the administration of taxation through the utilization of modern technologies.

With a modern system of revenue collection, the County Government can mobilize additional revenue by increasing collection efficiency as well as by expanding its revenue base. With increased reach and fiscal depth, the many challenges facing governments can be addressed in some measures by simply having access to more financial resources. As such, the primary aim of computerized revenue collection must be to increase cash receipts in order to effectively sustain the utility and generate an acceptable return on investment related to the system. Leakages that occur because of untimely collection, fraud and under-collection could be reduced by streamlining and automating the revenue collection process. Penalties may be automatically applied to late payments. Daily in reporting of cash receipts and due payments to be collected should be automatically generated by the system (Kamolo, 2014).

2.3.5.3 Impacts of Revenue System Automation on Revenue Collection

The public revenue collection challenge should be broadly conceptualized within the tax reform initiatives. System modernization is key to improving the efficiency and effectiveness in revenue collection. No doubt the traditional form of fiscal receipts will always be an essential part of the tax administration system (UNCTAD, 2008). Through system automation, a tax collection agency will be able to meet their revenue collection targets at the grassroots as well as less tax avoidance and evasions. Automation of the customs system falls under the Public Administration sector and its objective is to improve the efficiency and effectiveness both at the national level and in the county governments.

According to Sohne (2003), for a county government to match in performance with the growth and expectations of its constituents, it must dramatically increase its fiscal depth without incurring costly recurring overheads and further noted that automated systems have proven to be capable of introducing massive efficiencies to business processes that can result in increased revenue. Applying technological solutions towards achieving key goals by the government is a key step towards transforming government into an entity that can keep abreast of the needs, requirements and expectations of today’s modern world.

2.3.5.4 Challenges of Automating Revenue Collection

The challenges of automating revenue collection faced by the county government include resistance from the employees in the county. When attempting to change business culture, managers must frequently deal with employee resistance. Most employees are comfortable with the way they operate and do not want to change (Shaver, 2006). The management must continually reinforce the new behaviours and seek to keep employees from reverting to the old ways of doing business for accountability (Spencer & Casey, 2007).

The other potential problem with implementing organizational change is the training requirements that come with it. Simonson (2005) notes that when you want to change the behaviour of an entire company, you have to invest in considerable amounts of training for everyone. This can be expensive and can significantly reduce productivity.

The management of the organization should consider many factors when making a decision to introduce any form of change. When a business is performing poorly it may be obvious that changes are needed (Voehl & Harrington, 2016). Choosing the proper route can be a difficult process. If upper management chooses the wrong way to go about change, it can hurt the company significantly. Managers may not be able to tell if the new system is a bad fit or if the employees are just going through a transitional phase (Simonson, 2005).

The management needs to develop a plan that acts as a guide to the new change, process and procedures they intend to put in place to implement the change. Organizational change requires a comprehensive plan (Simonson, 2005). Most organizations make the mistake of implementing change without seeing it all the way through. Management requires developing a step-by-step plan for organizational change and then enforcing it.

For example, if an organization is transitioning to a new management system, the management will need to know if the new system is compatible with the old system. The timeline for change is also a key component for successful implementation of change (Shields, 1999).

Failure to communicate with all employees may be hinder successful change implementation process, particularly if you’re facing major changes for example automation of revenue collection systems. Employees should be informed about the change management process (Shaver & Katherine, 2006). Top management should involve employees in the decision-making process, employees should be allowed to give their views on the change process this is achieved by keeping employees updated regularly about the plans and progress toward the change implementation. Involve all employees as much as possible through meetings or brainstorming sessions to help during the planning and implementation phase (Schweiger & DeNisi, 1991).

2.4 Empirical Review

According to Bigambo, (2012), all governments enter into a social contract with its citizens to collect taxes and manage those taxes responsibly by delivering services to them. County governments undertake to mobilize taxes from citizens to meet some of their budgetary allocations. Successful revenue collection means that resources are easily available to undertake development projects for the good of the citizens. On the other hand, when counties fail to optimally collect requisite revenues, the public is negatively affected through denial of services. Consequently, if revenues collected are not managed in a prudent manner for the common good leading to spillage in the form of corruption, skewed development, ethnic biases, bloated workforce and other expenditures as well as poor planning; the effect is a dissatisfied citizenry. The clamour for increased revenue allocation from the central government to county governments as witnessed in Kenya by the council of governors and the underperformance in revenue collection as reported by the Controller of Budget has raised eyebrows amongst researchers. This study reviews relevant studies done in Kenya seeking to identify challenges, barriers to effective revenue collection and maximization of revenue at the county level with an intention of providing solutions and identifying best practices for increased resources for effective service delivery to the citizens at the grass-root level.

Odoyo et al (2013) found that there is a relationship between Information Systems and both efficiency and effectiveness in revenue collection, there is a strong positive relationship between Internal Control Systems and revenue collection as reported by 97% of the respondents, and that resistance to change by the council staff was derailing the full implementation of Information System.

Ndunda et al. (2015) revealed that the level of tax payment (compliance) affected optimal revenue collection. The recommendations by the study were that the county government needed to increase the competence of revenue clerks and other County officials and attract skilled and competitive employees for the purpose of increasing revenue collection performance. Nyongesa (2014) recommended a decentralized ICT based tax collection systems and offices in the sub-counties and adoption of differentiation strategies in revenue collection role in Mombasa County. Among other strategies were the remission of cash to the nearest bank and not to the cash offices, improved tax rates, widened tax base, devolution of the tax base to county government departments, improved controls on management of cash. However, the use of automation of revenue collection system would widely increase the revenue collection. The study recommended that the County Government of Mombasa needed to automate its revenue collection, through partnering with the regional banks whereby the taxpayers would be given the option of paying county fees through mobile money or branded credit cards via a new revenue collection system. The study also recommended the development of a revenue management capacity by training personnel and establishing proper revenue management mechanisms, in order for the County to provide quality services to the people. A report on revenue collection in Kitui County by the Sectoral Committee on Finance and Planning (2016) identified challenges to revenue maximization as inefficient tax administration systems, rampant corruption, tax evasion, non-compliance on payment by residents, incompetence of employees and poor remuneration. The report further recommended secure payment systems, real-time monitoring of revenue collection, minimizing cash handling by revenue clerks to enforce accountability and citizen participation.

Otwani et al (2016) on factors affecting revenue collection in Trans-Nzoia County recommended computerization as an effective way of internal controls. Overall, a study done on the determinants influencing revenue collection on the performance of Kenya Revenue Authority by Mburugu (2016) identified ICT adoption, Tax regulatory framework, organization resource as well as corporate governance as critical in streamlining the revenue collection process.

Muema et al. (2014) study indicated that Nairobi county and the parking industry were generally ready to adopt the mobile parking management system, although as with any technological adoption it was bound to face some barriers which could be overcome. A study by Kinyanjui and Kahonge (2013) revealed that the use of e-payment by mobile phone-based technology on parking increased parking fees collection. However, there is a need to develop application software to manage traffic flow, allocation and availability of parking space within the streets of Nairobi, which is a major concern to every motorist.

Otieno et al. (2013) study found that there is a correlation between Information Systems (IS) on one hand and efficiency and effectiveness in revenue collection on the other, resulting to a strong positive relationship between Internal Control Systems and revenue collection. However, resistance to change by the council staff was disrupting the full implementation of IS. The study is useful to the present study for full integration of IS, and more specifically e-payment system, in revenue collection. Wahab (2012) established that the adoption and use of the e-payment system were found to be low mainly due to shortage of point of sale terminals at shopping points among others. These affected the perceived ease of use even though the perceived usefulness of e-payment systems is strongly present among individuals and businesses. The study recommended customer education and widespread distribution of e-payment point of sale terminals to merchants.

Kayaga (2010) study showed that new technology alone is not enough unless the government recognizes the need for skilled tax officials. The scholar further states that effective tax administration requires qualified tax personnel with requisite skills and competencies to maintain these systems and operate them to their fullest potential. Simiyu’s (2010) study established that tax officers accepted bribes when offered to reduce tax liability and demanded bribes whenever they visited, a situation that hugely affected revenue collection in Nairobi county, Kenya. Gikandi and Bloor (2010) study found that some factors tended to inhibit the adoption of e-commerce in Kenya. These include; lack of resources, constant change in technology, time available to develop systems, the lack of spread of accessibility and use of the Internet by the general population, especially in the rural areas. Organizational, governmental and developmental issues were also identified as constraints to the adoption of e-commerce in the banking sector in Kenya. The study proved that e-banking introduced new risks requiring new risk management strategies, including Internet security, customer and legal related issues. The study concluded by emphasizing the role of Kenya Government in achieving a secure environment for e-banking activities by; putting in place clear laws, rules and regulations and providing relevant technical training to the regulatory authority to empower them to enforce the laws effectively.

2.5 Critique of Existing Literature

Ronald (2011), the proponents of the fiscal federalism theory advocate for greater fiscal autonomy of the devolved units. Where the devolved units rely solely on grants from the central governments, economic efficiency may not be achieved as the process may be open to political manipulation with hefty grants being allocated to “favourable regions.” This has been experienced in Nigeria. Counties in Kenya should be encouraged to raise their own revenue where possible. The National Government obviously should be in charge of collecting the major tax bases such as income tax, VAT and Corporate tax. Federations like the USA and Canada are designed in a way that gives the states discretion over their own taxes as most states levy their own corporate tax and personal income taxes. However, the danger here is that this can lead to disparities amongst the counties as their revenue raising capacities may vary, and an additional risk of misappropriation of funds due to weak administrative capacities. In order to succeed, Kenya must strengthen the counties’ capacity to raise and collect revenues in order to empower counties (Cottarelli, 2011). This will lessen their dependence on the National Government and thereby go a long way to provide services to the people. However, there should be some limits imposed on fiscal autonomy. Jurisdictions with different levels of income and wealth will have very different tax resources at their disposal, and the need to ensure that citizens have access to a roughly equal level of public services will imply some degree of redistribution between sub-central governments. For this reason, no country has opted for complete fiscal autonomy. Best practice dictates that redistribution of resources can be achieved through the use of transfers funded from national revenue, or by implementing tax-sharing arrangements designed to benefit poorer states.

Maina (2010), best international practice dictates that allocations to the subnational governments should be in accordance with the sharing of the expenditure responsibilities. This essentially means that finance should follow functions. This is the case in South Africa. Unfortunately, in Kenya the approach taken is that of “how much does each county get”. The current calls of amending the constitution through a referendum to increase the 15% equitable share is a reflection of this reality yet the counties cannot manage the amount allocated to them. Furthermore, the phasing of functions from the National Government to the County Governments is yet to be completed, therefore this move may be premature (Bigambo, 2012).

The lower tiers of government in virtually all jurisdictions are faced with the common challenge of horizontal imbalances which occur naturally in decentralization when it comes to revenue sharing arrangement. If one state or county or province has less fiscal capacity than the other, then it would be disadvantaged in providing basic facilities to its residents and would result in both inefficiency and inequity on those jurisdictions. The revenue allocation formula to distribute revenue among the states must factor in all parameters to ensure as much as possible that equity is achieved as that is one of the most fundamental principles when it comes to revenue sharing in any decentralized system of government. The concept of equalization ought to be constitutionalized, as in the case with Germany. Kenya’s Constitution provides for an equalization fund but it does not contain provisions on how this equalization is to take place. Germany’s equalization system has a considerable effect on redistributing disposable per capita income and thereby reducing disparities in the states by about 37%. This results in ensuring that all the states have the financial capacity to provide public services to their residents (Boadway & Watts, 2004). An example in Kenya is the overlapping role of the CDF fund that has made efforts towards health care and education but many projects have been abandoned due to the duplication with the county governments.

In decentralized governments, it is common to find shared jurisdiction or at times overlapping jurisdiction between the different levels of government. The importance of intergovernmental cooperation and dependence needs to be emphasized for successful fiscal decentralization to take place especially when it comes to crucial functions such as tax collection and harmonization. Another important aspect of intergovernmental interdependence would be to avoid duplication of functions and avoid wastage. Article 6 (2) of the Constitution of Kenya provides that the governments at the national and county levels are distinct and inter-dependent and shall conduct their mutual relations on the basis of consultation and cooperation. This is a best practice in that it combines to a certain extent the autonomy of the counties at the same time encouraging joint and collaborative action and decision making.

Nigeria is the only federation that practices the principle of derivation whereby a state retains a share of revenue obtained from the exploitation of its natural resources within its territory. This is embedded in the Nigerian Constitution to ensure that mineral producing states benefit from their share of revenues to the federal government. Currently in Nigeria, the oil-producing states are authorized to retain 13% of the total revenues derived from oil mining, although there are calls to have this percentage increased. Germany to lesser extent practices what is known as the principle of local revenue, which is more or less similar to the principle of derivation in Nigeria. This is however not entrenched in the German Constitution. The principle of local revenue in Germany applies to income tax and corporate tax where revenues from the inhabitants of the respective states are retained by the individual states. This ensures resource-rich counties benefit from their resources- to some extent and are not drowned by the equalization agenda. Devolution in Kenya has not granted counties the mandate to collect all local revenue as witnessed in the fight by the Mombasa Governor Hassan Joho over the Port of Mombasa (Star Online, 2014).

The local governments in Kenya were replaced by the County Governments. In Germany, the roles of the local governments (municipalities) in financial arrangements are expressly provided for in the constitution. Similarly, in South Africa, the local governments’ share of the national revenue is provided in the Constitution. They have control over the property taxes, Municipalities are mandated to generate income from selling services such as water, electricity and sanitation, which accounts for 70% of their income. The remainder of their income is from the equitable share of the Basic Law Article 28(2) and Part X Articles 104a-115. It, however, should be noted that three of the 16 federal states are city-states (Berlin, Bremen and Hamburg). These three federal states do not separate their municipal budgets from their respective federal budgets and thus only have a federal budget, revenue raised nationally as well as conditional grants. In Kenya, no reference is made in the Constitution regarding the funding of lower levels of governments such as municipalities (Bigambo, 2012).

Some lessons can be drawn from the above. First, the measure of accountability that a devolved unit owes its residents is directly related to the amount of revenue it collects from them. In South Africa, the provinces receive almost all their revenue from the National Government and therefore they are totally accountable to the National Government. In contrast, the municipalities are dependent on their residents for revenue and are directly answerable to its residents.

2.6 Research Gap

On a keen analysis and assessment of the past literature, it’s worth stating that there are gaps both contextual and conceptual in the evaluation of the determinants of revenue maximization in devolved units in Kenya.

County Governments’ Budget Implementation and Review report, (2016) showed an improvement in the levels of revenue collection across counties compared to previous years, the performance by some counties was dismal with Mandera at 28%, Garissa 15.6% and Tana River at 15%. Despite the recorded improvement Nairobi County was crowned best performer collecting 9.62 billion against a 20.2 billion target. Nevertheless, the county failed to reach its internal revenue target since its inception in 2013 forcing the assembly to supplement the budget leading to more study to be done on ways in which the devolved units can use to achieve the stated budget.

The highest performer against the set target was Laikipia at 78% followed by Homabay at 76% and Baringo at 67.5% in that order. From the foregoing report it’s evident that despite various studies particularly the local ones identifying issues affecting the non-performance by county governments, majority of the counties have not hit the 50% mark against the set targets. Consequently, studies reviewed sought to identify barriers to effective revenue collection as opposed to determinants of revenue maximization, which as discussed in this study constitute an ecosystem of mandate at policy level and for that matter the constitution, institutional mandate and capacity, human factors as well as efficiency of the revenue collection process. Besides the studies are not keen on revenue maximization but revenue collection and for this reason even issues of expanding the current tax base do not feature prominently albeit in one (Nyongesa, 2014).

Gyamfi (2014) on revenue mobilization by districts assemblies in Ghana found that some of the complications undermining revenue mobilization are poor record-keeping on revenue sources, lack of enforcement of revenue mobilization by-laws, inadequate revenue collectors and their training, the study was conducted in Ghana with different statute system and did not focus more on how the maximization of the revenues can be achieved.

It is for this reason that the study at hand sought to evaluate the current status informed by the poor performance as indicated by the controller of budgets report and explore avenues of eliminating inefficiencies in the current revenue maximization practice and also explore further new revenue sources and innovative yet sensitive ways of increasing revenues for devolved units in Kenya. The outcome of this study turned to be a holistic design that not only singled out the inadequacies of revenue collection per-se but also drawn a comprehensive working formula which enabled understanding and clearly outlining the roles of each stakeholder animate and inanimate as well as pursuing revenue sources that may not be incorporated in the current tax base.

2.7 Summary

It is widely acknowledged that revenue maximization is a critical factor in devolved unit development (Westman, 2004). Counties need to be aware of the factors that lead to the maximization of revenues. Accountability and transparency during revenue collection is another factor to be considered and this may result either to high or poor collection of the revenues.

In spite of the above, governance issues in devolved units vary due to existing institutional capacities, policies, legal frameworks and human factors. Literature has confirmed that there have been breaches in regulation even in instances where people are aware of these determinants of revenue maximization.

In line with the findings of Falleti (2010), Sequential theory of decentralization has an effect on various ways upon which the devolve units tend to maximize their revenues. However, due to the scarcity of relevant studies on the subject matter, contradictions in findings and poor collection and budgeting with the resources that are being allocated to the devolved units has led to insufficient revenue utilization that has been witnessed in all the counties in Kenya. The study sought to establish the determinants of revenue maximization in devolved units in Kenya and ascertain what constitutes the best ways of optimizing revenue collection in devolved units. Some major findings from the interviews and questionnaires carried out to evaluate the determinants of revenue maximization in devolved units in Kenya are discussed in chapter four.