March 27, 2013

demarcations and land records and general safe handling of biological assets are urgent follow-up steps counties should commence.

Current assets CALC teams have reported three types of financial assets: current assets, shares, and term deposits in banks or other financial institutions. As indicated previously, estimating the face value of financial assets as of March 2013 is an accounting approach, but it is a questionable practice doing it many years later for financial analysis and AM. Table 2.7 summarizes the value and composition of inherited current assets. However, these inherited claims or collectibles were already over five years old at the time of verification, so the present values of many of these claims could be way below the listed nominal or face values as of 2013. IGRTC proposes that counties consider writing off uncollectable claims with reference to section 150 of PFM Act 2012, and sections 145–159 of County PFM Act Regulation 2015.

Furthermore, it would have been justified to provide some estimation of present values. For instance, interviews suggest that counties used up the inherited cash and bank deposits, and most likely the inherited inventories of materials, spare parts, or fuel. Thus, the real challenges relate to inherited collectibles, such as taxes as well as compensation in lieu of rates (CILOR), rents, and wayleave claims (rights of way fees). The IGRTC 2018 report is surprisingly brief on discussing the current assets; the section is limited to presenting aggregate figures and a few county-specific cases without qualification and guidance.

Property tax arrears. Inherited uncollected taxes (called “property rates” in Kenya) represent over three-quarters of inherited current assets, and NCC inherited most of them (table 2.7). The K Sh 84 billion value would be sufficient to pay out all inherited liabilities, but this is far from being real cash, and it is questionable if it is a current asset, due to its historic value and unverifiable source (Kelly 2002). At the time of the verification in 2018, these overdue tax claims were all over five years old, and some possibly were over 10 years old (Kelly, White, and Anand 2020). However, the claims estimated at K Sh 84 billion as of March 2013 could have substantially increased, because delinquent payers continued nonpayments and accumulated five more years of arrears above the initial amount. For instance, annual tax revenues in NCC have remained flat (K Sh 2.5 billion) between 2013 and 2018 (Kopanyi 2018). But also, applying regular penalties would have increased this amount further; in short, claims are likely to have exceeded K Sh 100 billion at the time of verification.

TABLE 2.7 Summary of inherited current assets of Kenya’s 47 counties, March 27, 2013

ASSET CLASSES

Property tax Plot and house rent

Cash and bank balances

Staff debtors

CILOR

Other (wayleave, charges)

Inventories

Total

Source: IGRTC 2018. Note: CILOR = compensation in lieu of rates. K Sh (BILLIONS) % OF TOTAL

84.5 76.2

3.5 3.2

2.3 2.1

0.8 0.7

5.2 4.7

14.2 12.8

0.4 0.4

110.9 100.0

Nairobi City County’s County Asset and Liability Committee (NCC CALC) verification team has attempted to verify the property tax arrears and learned that the records existed in financial department files but were only partially reflected in the Local Authorities Integrated Financial Operations Management System (LAIFOMS) or the fiscal cadaster. Thus, verification of many claims and identification of taxpayers appeared to be not only difficult but nearly impossible. The situation is presumably similar in other counties. Some countries’ legislation permits tax forgiveness, and others do not. The accountant general may permit NCC to write off apparently uncollectable claims.

Options for corrective measures include the following:

• Commence a detailed analysis of available files and disaggregate tax claims by years. • Adopt tax policy to annul tax claims older than five years (or more, up to 10 years) and annul claims older than 10 years with reference to PFM Act 2012 and County PFM Act Regulation 2015. • Resume verification of claims that are supposed to be collected under the adopted tax policy. • Announce a campaign to collect inherited tax arrears with rebates, say, 20 percent per year for those older than three years (at four years the owner pays 80 percent, five years 60 percent, six years 40 percent, seven years 20 percent) if owner pays within 12 months of the announcement.

The main objective is not only revenue maximization, but rather clearing files of financial assets and creating realistic and reliable databases. Some experts question tax rebates because they may incentivize owners to wait until their claims are annulled, but clever rules can eliminate such perverse incentives.

CILOR arrears. Payments dues by national government entities to counties in lieu of property taxes seem to be easier to collect because of the small number of payers as compared with private taxpayers (dozens compared with 150,000 in Nairobi). However, the power structure and the lack of political will combined with the shortage of money at the national level have made it difficult for counties to collect these unquestionable claims. For instance, the NCC government has attempted to swap CILOR claims for NCC liabilities—a logical and standard practice in the business and public sectors in many countries—but NCCG failed to reach a mutually acceptable agreement. This case underscores the need for high-level political support and national intervention (Summit, auditor general, and National Treasury via NALM, and maybe IGRTC as a policy facilitator).

Plot and house rent. Textbooks suggest that collecting house and plot rent is obviously much easier than collecting property taxes, because the benefit principle is more apparent, the number of payers is much lower than the total number of taxpayers, and the identification is easy and simple. Inherited uncollected property rents (K Sh 3.5 billion) are substantial and still mostly left unattended for five years into transition. Interviews suggest that most counties have improved collecting the annual house and plot rents after 2013, but few have solid plans for collecting rent arrears. It is also a fairness issue, because the rents are artificially low, so in fact implicitly subsidized and outdated, and when left unpaid, it is unfair to those who are willing to pay but unable to obtain a rental dwelling or shop.

Wayleave and other collectibles. Inherited claims on wayleaves that are uncollected fees from state corporations (national electricity company, telecom company) to compensate counties using their land based on right-of-way are very

substantial (K Sh 14 billion as of March 2013) and make the bulk of inherited fee collectibles. Many of these claims are also disputed, and the state corporations are unwilling to pledge and pay these claims, and certainly the subsequent dues between 2013 and 2018. For instance, the NCC government has attempted to swap wayleave claims for unpaid electricity bills that are among inherited liabilities, but negotiations failed due to resistance of the electricity company. Furthermore, one large, disputed claim not reflected in the IGRTC summary is a claim by the defunct City Council of Nairobi (CCN) dated 1997 against the Department of Defense (DoD), which took over a 900-hectare parcel for a military garrison but never paid for that land. The defunct council commenced a court procedure that ended up with the High Court, but then an interministerial decision led to an out-of-court settlement that is still to be reached after over 20 years of dispute. These cases also underscore the need for high-level political support and national intervention (Summit, auditor general, and National Treasury via NALM, and maybe IGRTC as a policy facilitator).

Staff debtors. Staff debtors are minor items as compared to the other inherited collectibles or claims. The IGRTC report is silent on the present status of these claims, but anecdotal evidence suggests that most of them are being served by debtors, thus these are inherited but performing claims and loans. Or it is unclear if these are overdue payments by debtors or the face value of the loans. Counties should revisit these claims and clarify what part of this portfolio is performing and what part is nonperforming, and then counties may proceed with collection or write off nonperforming loans, while accounting the performing items as financial investments or loans instead of current assets.

Investments Two types of investments are included in the IGRTC and CALC reports: shares or shareholdings and term deposits that counties inherited from the DLAs.

Shareholdings. Most shareholdings are in water and sewage companies that had been transferred to DLAs before transition. DLAs also invested in local commercial entities, presumably for revenue-generation purposes such as dairy farms, mining or manufacturing companies, and hotels or lodges. The list of such investments needs clarity about the number of shares or size (percentage) of shareholdings, and the book and present value of shareholdings. The CALC reports are brief and provide vague or only preliminary information about shareholdings.

Lacking information prevented IGRTC from establishing a national aggregate value of shareholdings; county estimates of present value show a wide variety, from unknown to inflated. Furthermore, the IGRTC report lists as investments those included in the TA unaudited inventory but excluded from CALC reports, which may reflect errors in the TA list or rather improper verification by CALC field teams. For instance, the NCC government listed a K Sh 56 million book value of 100 percent shareholding in the Nairobi City Water and Sewerage Company (NCWSC) but estimated present value as K Sh 25 billion (discussed in the NCC case study in part II). Finally, one can conclude that the list of shareholdings suggests that the counties manage these vital and valuable investments with insufficient care and are left underinformed and maybe underrepresented among shareholders.

Corrective measures may include the following:

• Commence investigation into each shareholding and clarify the number of shares, percent of shareholdings, voting rights, and power of the county in shareholder voting.