By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publisher of the Year 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and Nominee for African Arbitrator of the Year 2022. He is invited as a Guest Speaker at East African International Arbitration Conference 2022 to speak on the theme: Resettling for the New Age of Arbitration in Africa: Climate Change, Global Partnerships & Sustainable Development.*

The unveiling of the Sustainable Development Goals (SDGs) in 2015 meant that most developing countries would have to step up their efforts to raise domestic resources to finance needed domestic investment as support from development partners and private sector investors would not be enough. While there are various external mechanisms of funding that are available to countries for exploitation, there is a need for African countries such as Kenya to enhance their domestic resources mobilization mechanisms. Indeed, this is acknowledged by the UNCTAD which points out that ‘strengthening domestic public resource mobilization is crucial for Governments in financing national sustainable development strategies and implementing Agenda 2030 for Sustainable Development and the Addis Ababa Action Agenda.

In addition, the particular role of fiscal revenues in public resource mobilization lies in their greater stability and predictability compared to other sources of long-term finance. According to International Monetary Fund (IMF) estimates, for low-income countries, average domestic taxes would have to increase by about 5 percentage points if they were to meet the SDGs in five key areas (education, health, roads, electricity, and water), with the financing needed in sub-Saharan Africa being larger given their development level. It is also worth pointing out that investment in human, social, and physical capital, are at the core of sustainable and inclusive growth and represent an important share of national budgets—specifically, education, health, roads, electricity, and water and sanitation.

IMF estimates that delivering on the SDG agenda will require additional spending in 2030 of US$0.5 trillion for low-income developing countries and US$2.1 trillion for emerging market economies. To achieve this, IMF points out that countries themselves own the responsibility for achieving the SDGs, especially through reforms to foster sustainable and inclusive growth that will in turn generate the tax revenue needed, and their efforts should focus on strengthening macroeconomic management, combating corruption and improving governance, strengthening transparency and accountability, and fostering enabling business environments.

Combating Corruption

Arguably, domestic revenues can lead to improved development only if they are translated into productive and beneficial public expenditure. Thus, it is not only revenue collection that is important but also revenue expenditure. There is a need to strengthen institutions charged with combating corruption as well as strengthening the oversight measures across all sectors in order to prevent corruption. This is because corruption elimination cannot be a one-institution affair. It must involve all stakeholders of good will as well as political good will from all governance institutions in both public and private sectors. This is the only way to not only ensure that revenues or development resources are raised but are also well utilized towards achieving development goals and empowering citizens to be productive and meaningful participants in the development agenda.

Capacity-Building in Revenue Collection and Management

It has been argued that increasing tax revenues in low-income countries is essential to address future development finance requirements. It has been argued that under different conditions, the policies and reforms associated with aid may increase revenue, through promoting growth, encouraging more efficient tax structures, or supporting reforms to tax administration. Some of the ways through which the World Bank Group is seeking to help developing countries in Sub-Saharan Africa mobilize domestic resources fairly and efficiently include: focusing on administering value-added taxes, removing cost-ineffective tax expenditures, increasing excise taxation, improving property taxation, and closing international tax loopholes for multinationals and wealthy individuals. This is because Sub-Saharan Africa remains the region with the largest number of economies below the minimum desirable tax-to-GDP ratio of 15%.

Mobilizing tax revenue is considered to be key if developing countries are to finance the investments in human capital, health and infrastructure necessary to achieve the World Bank Group’s goals of ending extreme poverty and boosting shared prosperity by 2030. The World Bank observes that relatively low tax collections in the Sub-Saharan Africa region reflect weaknesses in revenue management, including widespread tax exemptions, corruption, and shortfalls in the capacity of tax and customs administrations. It proposes that most African economies can mobilize more in taxes through: better tax administration (including value-added taxes); broadening the tax base by removing cost-ineffective tax expenditures; increasing excise taxes (including on alcohol, tobacco, and soft drinks); introducing efficient carbon-pricing policies and effective property taxation while and closing international tax loopholes that permit aggressive tax avoidance and evasion by multinationals and wealthy individuals; and reducing structural bottlenecks to improve revenue outcomes; improving taxpayers’ trust; and by moving tax administrations to the digital frontier.

Kenya has been taking some steps towards moving tax administration to the digital frontier through such steps as the i-tax platform as well as the introduction of the Digital Service Tax (DST) (that is, Digital Service Tax and Value Added Tax on Digital Marketplace Supply), tax payable on income (gross transaction value) derived or accrued in Kenya from services offered through a digital marketplace. While some key issues have been raised in relation to such measures as the digital service tax, it is a commendable step towards increasing domestic resource mobilization which will hopefully move the country towards reducing its over-reliance on external debts to finance the budget. Notably, the introduction of digital services tax in Kenya follows in the footsteps of such countries as France, India, Singapore, United Kingdom, among others.

The Tax authorities in Kenya may also need to work more towards looping in the informal economy into the tax payment bracket in order to increase its annual collection.81 However, tax measures ought to take into account the rising cost of living and the government should thus make efforts towards ensuring that tax on basic commodities does not affect the poor so much but also continually work towards creating job opportunities for the sake of raising purchasing power as well as having a bigger number of citizens affording and paying taxes.

Trade and Investment for Domestic Resource Mobilization

The 2030 Agenda for Sustainable Development acknowledges that international trade is an engine for inclusive economic growth and poverty reduction, and an important means to achieve the SDGs. 83 There is a need for increases in long-term and high-quality investments which the United Nations argues will lead to a sustainable rise in economic growth, with additional public and private investment and financing required to meet the large investment needs associated with the SDGs, particularly in infrastructure.

Cooperation between National and County Governments

It is worth pointing out that the role of subnational governments in mobilizing revenue as well as in spending on service provision should be part of the broad domestic resource mobilization agenda. The Constitution of Kenya, 2010 provides for a system of devolved government wherein each of the 47 county governments is required to work closely with the National Government in resource mobilization and service provision. There is need to address the corruption issues, huge wage bill as well as working with the private sector in growing the investments portfolio to create job opportunities and put the allocated funds to proper use.

The Public Private Partnerships Act, 2013 which was enacted to provide for the participation of the private sector in the financing, construction, development, operation, or maintenance of infrastructure or development projects of the Government through concession or other contractual arrangements; the establishment of the institutions to regulate, monitor and supervise the implementation of project agreements on infrastructure or development projects and for connected purposes together with other Government initiatives and measures such as the Government Support Measures Policy Document 2018 can go a long way in creating the necessary framework in boosting active participation of the private sector in domestic resource mobilization for the realization of the sustainable development goals and Kenya’s Vision 2030 blueprint. While the public sector remains the dominant funding and financing source of social investment, there is potential for additional private capital flows into SDG sectors, provided there is greater clarity on invested assets and project incentives.

*This article is an extract from the Article “Resource Mobilization for Sustainable Development in Kenya” by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized among the top 5 leading lawyers and dispute resolution experts in Kenya by the Chambers Global Guide 2022.

References

Muigua, K., “Resource Mobilization for Sustainable Development in Kenya,” (KMCO, 2021), Available at: http://kmco.co.ke/wp-content/uploads/2021/03/Resource-Mobilization-for-Sustainable-Development-in-Kenya-Kariuki-Muigua-24th-March-2021.pdf (accessed on 15th June 2022).