Erratic aid flows, big spending promises and the slow delivery of natural resource revenues are driving East African governments to improve domestic revenue collection, with the mobile money sector high on the list.

From public sector pay rises in Uganda and infrastructure spending in Tanzania, to a raft of public spending promises in post-election Kenya, East Africa’s finance ministries are looking for cash. Draft budgets are currently being debated and refined in their respective parliaments.

Bond issuances have been one revenue-raising option explored of late, but smaller economies cannot take on too much debt, and many - including Tanzania and Uganda - are not yet rated. And while natural resource estimates are steadily growing across EAC countries, serious revenue is some way off.

Against this backdrop, the mobile sector is now in the sights of regional revenue authorities. Kenya, Uganda and Tanzania boast the highest rates of mobile money transfer in Africa according to a Gallup survey last year. Mobile operator revenue in Africa topped $41bn in 2012, up 11 percent over the previous year, and Vodacom just posted a 23 percent rise in full year profit. Two thirds of the adult population of Kenya - more than 17 million people - send 1.1 trn Ksh - more than a quarter of Kenya’s GDP - through Safaricom’s M-Pesa network.

To get its share of the action, Kenya’s government introduced a mobile money transfer tax back in February - part of a broader financial transactions tax. It was not popular. Safaricom boss Bob Collymore recently warned against ‘killing’ the promising mobile banking industry.

There is already a 10 percent excise duty on mobile airtime in Kenya, Tanzania and Uganda, levied in addition to high rates of VAT, giving East Africa “the highest level of consumer-facing taxation on mobile usage anywhere in the world,” says Gabriel Solomon, head of public policy at the GSMA, the industry association, which has criticised Kenya’s move

Close interaction among East African Community members suggests this tax could be considered elsewhere. Uganda’s 2013/14 budget calls for a 1 percent levy on the gross income of telecoms, international calls and mobile money transactions. “For a region trying to be one of global hubs for ICT usage to drive social and economic development, this sends out the wrong message,” says Mr Solomon. “It certainly doesn’t portray a positive message for companies wanting to innovate in the mobile broadband platform such as in healthcare, agricultural productivity and the provision of clean water.”

Whilst unpopular, Kenya’s tax did not reduce mobile money transfers even though companies passed on the tariffs in the form of higher prices.

“There was uproar from consumers regarding the excise tax but the transaction volume never went down,” says Jemimah Mugo, associate director of international tax and transfer pricing services at Ernst and Young. However, Africa’s mobile phone boom has largely been driven by price wars, which cannot go on indefinitely, and many people are still unable to take advantage of these technologies.

From the perspective of Kenya’s revenue authorities, a stronger tax take is needed to fund the country’s development programmes. Over the fiscal year 2012-13, infrastructure was highlighted as a top constraint on doing business. Bottlenecks include inadequate terminal capacity at port of Mombasa - which the new President Uhuru Kenyatta has promised to fix - and the need for improved efficiency across the Northern Transport Corridor. Government grants to state agencies in infrastructure and transport grew substantially over the period 2008-2011, with loans to Kenya Airports Authority increasing from 663,558,000 Ksh ($7.8m) to 1,965,519,000 Ksh ($23.27m), and to Kenya Railways Corporation from 51,572,000 Ksh ($610,600) to 1,500,000,000 Ksh ($17.7m).

Gains from the new mobile transfer tax could make a significant contribution to public spending needs, Ms Mugo adds. “If you were to take the financial statements of Safaricom, which is the biggest mobile money agency, and see the kind of revenues they made from mobile money - M-PESA - I think it gives you an idea of how much we are talking about at a 10 percent rate,” says Ms Mugo.

But more revenue measures will be needed. “The Kenyan campaign manifesto needs a lot of funding to be realised and taxation plays a major part in it,” says Ms Mugo. “Going forward the budget requirements can only get bigger and bigger.” Other options could be privatising those parastatals or public bodies which have a commercial nature, she says, and there is talk of re-introducing a capital gains tax. In addition, a wider pickup in growth should help. Kenya’s government said the economy is forecast to expand 6 percent in 2013, the fastest pace in six years.

Additional research by Adrienne Klasa.