Fiscal Decentralization, Revenue Independence and Technical Efficiency of County Governments in Kenya

Abstract

Since independence, Kenya has implemented various programmes for fiscal decentralization and revenue independence to enhance technical efficiency in public service delivery. The 2010 Constitution emphasized fiscal devolution as a vital driver of economic growth by lowering costs, promoting transparency, and improving allocative efficiency. As county funding increases, technical efficiency is expected to improve as more resources are allocated to smaller government units. However, despite increased allocations and greater independence through tax powers, there is no clear evidence of improved efficiency, with no significant gains in health and agricultural services and a decline in county GDP over time. Revenue collections remain low and declining despite higher targets. The study aimed to assess how fiscal decentralization and revenue independence influence fiscal efficiency, using a Tobit Model to identify the factors that affect it. Findings indicate that fiscal decentralization only boosts efficiency beyond a threshold of Ksh. 512.8 billion annually; below this, increased funds diminish efficiency, while above it, efficiency improves by 8% for each 1% rise in funds. Revenue independence, however, negatively affects efficiency. The study recommends gradually increasing devolved funding towards the threshold or re-evaluating devolution structures if targets are unattainable, and reforming revenue assignment to improve own-source revenue capacity.