Governance in Public
Expenditure Management: Key
Issues and Challenges in Kenya
Dickson Khainga
Benson Kiriga
Shem Ouma
James Njeru
Macroeconomics Division
Kenya Institute for Public Policy
Research and Analysis
KIPPRA Discussion Paper No. 77
December 2007
Governance in public expenditure management: Key issues and challenges in Kenya
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Published  2007
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ii
Abstract
This paper develops a conceptual framework for applying good
governance to systems of public expenditure management (PEM), and
analyses governance in public expenditure management in Kenya. An
overview of some key governance challenges in public expenditure
management in Kenya is provided. The framework identifies three key
stages in PEM: national budget formulation and preparation;
execution and reporting; and monitoring and evaluation. Good
governance is one of the principal inputs in the PEM system that is
often neglected, particularly with regard to the principles of
transparency, accountability, predictability and participation. While
the country has made considerable progress in strengthening
governance in PEM, this paper argues that various challenges need to
be addressed. Some of the key challenges require enhancement of
predictability and accountability in budget formulation and
preparation. In the ‘bottom up’ process, this can be done through
strengthening the legal and administrative framework. The paper also
argues that there is room for strengthening the link between
monitoring and evaluation, and the budget planning process so as to
enhance transparency, accountability and predictability. The adoption
of results based management (RBM) systems in PEM has improved
accountability and performance but needs to be further
institutionalized and properly anchored within the PEM system. While
the various PEM reforms that have been initiated have an important
bearing on enhancing good governance, the greatest challenge relates
to further deepening of the current reforms and continuous
improvement.
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Governance in public expenditure management: Key issues and challenges in Kenya
Abbreviations and Acronyms
AIEs Authority to Incur Expenses
APR Annual Progress Review
APRM Africa Peer Review Mechanism
AUCPCC Africa Union Convention for Prevention and
Combating Corruption
BMD Budget Monitoring Department
BOPA Budget Outlook Paper
BSP Budget Strategy Paper
C&AG Controller and Auditor General
CGD Centre for Governance and Development
DDC District Development Committee
DFRDS District Focus for Rural Development Strategy
DIDCs District Information Dissemination Centres
ERS Economic Recovery Strategy
FOs Financial Officers
GFRP Government Financial Regulations and Procedures
IEA Institute of Economic Affairs
IFMIS Integrated Financial Management Information
Systems
IMF International Monetary Fund
IP ERSWEC Investment Programme of the Economic Recovery
Strategy for Wealth and Employment Creation
KACC Kenya Anti-Corruption Commission
KIPPRA Kenya Institute for Public Policy Research and
Analysis
KNAO Kenya National Audit Office
M&E Monitoring and Evaluation
MTEF Medium Term Expenditure Framework
MTR Medium Term Review
NCPB National Cereals and Produce Board
NEPAD New Partnership for Africa’s Development
ODA Overseas Development Assistance
OECD Organization for Economic Cooperation and
Development
PAC Public Accounts Committee
PEM Public Expenditure Management
PER Public Expenditure Review
PIC Parliamentary Investment Committee
PPOA Public Procurement Oversight Authority
PRSP Poverty Reduction Strategy Paper
QBRs Quarterly Budget Reviews
UNCAS United Nations Convention Against Corruption
UNPSA United Nations Public Service Award
iv
Table of Contents
Abstract ................................................................................. (iii)
Abbreviations and Acronyms ........................................................ (iv)
1. Introduction ............................................................................ 1
2. Public Expenditure Management in Kenya .......................... 3
3. Conceptual Framework on Governance and Public
Expenditure Management ......................................................7
3.1 Budget Formulation and Preparation ............................. 9
3.2 Execution and Reporting ............................................... 13
3.3  Monitoring and Evaluation ........................................... 18
4. Conclusions and Recommendations ................................... 22
References ............................................................................ 23
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Governance in public expenditure management: Key issues and challenges in Kenya
vi
1.  Introduction
The concept of governance covers the social, economic, corporate,
political and cultural aspects of how power is exercised in an organization
or society. In the literature on governance, the common principles in
the exercise of power include: accountability, transparency,
participation, performance, fairness, predictability, legitimacy and voice.
Some of these principles overlap and are interrelated. Due to the multi-
faceted nature of the concept, there is no accepted definition of
governance, but different authors tend to emphasize different aspects.
However, researchers at the World Bank Institute have attempted to
bring together the different dimensions of governance (political,
economic, and institutional), into six aggregate governance indicators:
voice and accountability; political stability and absence of violence;
government effectiveness; control of corruption; rule of law; and
regulatory quality. Using these indicators, Kaufmann, Kraay, and Zoido-
Lobatón (1999) and World Bank (2006) have established a large causal
effect running from improved governance to better development
outcomes. These empirical analyses support the now widely accepted
principle that good governance plays an important role in the
development process. In Kenya, enhancement of good governance was
identified as one of the three pillars of the Economic Recovery Strategy
(ERS) adopted by the government in 2003, the key areas being reforms
in the Judiciary, strengthening the rule of law, fight against corruption,
and improved security as well as enhancing transparency and
accountability in public administration systems (Government of Kenya,
2003b).
The concept of governance as described above can be applied in
different levels of the society or institution. This paper applies the
concept of governance to systems of Public Expenditure Management
(PEM) using Kenya as a case study. Public Expenditure Management is
one of the key policy instruments of public policy concerned with how
resources are allocated and used, while at the same time ensuring that
economic stability is not undermined. It is, therefore, one of the key
instruments in realising the general public policy goals of growth,
stability and poverty reduction. Macroeconomic stability is maintained
by ensuring fiscal discipline while the other goals (growth and equity)
are impacted upon directly through the allocation and utilization of
public expenditure. Whereas recent PEM reforms have focused more
on the technical infrastructure such as skills, accounting systems, and
1
Governance in public expenditure management: Key issues and challenges in Kenya
development of better macroeconomic projections upon which the
processes of planning and budgeting are embedded, this paper provides
a governance perspective to  PEM reforms. Consequently, it attempts
to contribute to a better understanding of the importance of good
governance in the systems of PEM. The paper is organized as follows:
After the introduction in section 1, section 2 discusses the problems of
public expenditure management in Kenya while section 3 discusses a
conceptual/analytical framework. The framework is used to explore the
relevance of good governance in public expenditure management, with
special reference to Kenya’s PEM system. Section 4 summarizes the key
conclusions and makes recommendations.
2
Public expenditure management in Kenya
2. Public Expenditure Management in Kenya
Public Expenditure Management is concerned with how public resources
are utilized in the realization of public policy goals. A properly
functioning PEM system contributes to economic growth, stability and
poverty reduction by enhancing aggregate fiscal discipline, improving
strategic allocation or prioritization, and operational efficiency in terms
of maximizing ‘value for money’ or realizing outputs or delivery of public
services at the least cost. In this regard, PEM is a key public policy
instrument in realizing national development goals. A sound PEM
system encourages prudent management by instilling fiscal discipline
that supports a stable macroeconomic environment that will not result
in unsustainable fiscal deficit that can lead to high inflation, unstable
interest rates and excessive current account deficits and, thus,
undermine a country’s economic growth.
One of the early attempts to assess systems of Public Expenditure
Management in Kenya was the 1997 Public Expenditure Review (PER).
The PER sought to assess whether expenditure trends were consistent
with sustainable fiscal management, and growth and equity strategies
as articulated in different government policy documents following
Sessional Paper No.1 of 1986 on Economic Management for Renewed
Growth.1 On PEM, the Sessional Paper lamented “…there is not adequate
provision for supplementary resources, such as transport, typewriters,
even paper and pencils, that are required to make these officers
productive …Eventually many services may cease to be offered at all,
while officers continue to draw salaries’. To address this problem, the
government started implementing public service reforms that included,
among other things, retrenching staff  and rationalizing the wage bill as
well as increasing budgetary allocations to operations and maintenance.
By 2000, 23,448 civil servants had been retrenched. The core civil service
was reduced from 272,000 in 1992 to 191,670 in 2003. However, in spite
of the retrenchment programme, public service delivery continued to
degenerate (Government of Kenya, 2003a).
1 The Sessional Paper No.1 of 1986 proposed, among other reforms, economic
liberalization to spur private sector development, and public sector reforms to
enhance efficiency and effectiveness of the public sector.
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Governance in public expenditure management: Key issues and challenges in Kenya
The review revealed that the composition and trends in public
expenditure were not consistent with policy goals, especially growth and
equity. In particular, there was a big divergence between the budget
and its implementation. Public expenditure allocations did not reflect
policy priorities, and investments were of poor quality. The government
had adopted informal fiscal management systems that led to an
accumulation of pending bills and weak institutions of expenditure
control that bred rampant corrupt practices (Government of Kenya,
1997). The annual reports on government accounts by the Controller
and Auditor General continued to reveal massive corruption. Based on
these reports covering the period between 1990/91 and 1996/97, the
Centre for Governance and Development (CGD) estimated that the
government had lost about US$ 4 billion through fraud and wasteful
spending through payment for non-existent items or goods, irregular
payments and un-surrendered or uncollected revenue  (The East
African, 23 June 1999). The government had nevertheless been able to
restore macroeconomic stability following the economic disruptions of
early 1990s, which included the ‘Goldenberg Scandal’.
Although the 1997 PER made important recommendations to
strengthen PEM systems, uneven commitment undermined reform
efforts and it was not until 2000/01 that the government started
adopting the reforms. These included: the adoption of the MTEF budget
process; establishment of a Directorate of Public Procurement;
introduction of Integrated Financial Management Information System
(IFMIS); and efforts towards institutionalization of the PER process as
an integral component of the national budget process.
Another Public Expenditure Review conducted in 2003 concluded
that most problems (notably ministerial) that had been identified in
PER 1997 still persisted. Ministerial expenditure reviews revealed many
instances where the composition of public expenditure was not
consistent with public goals, and there was weak budget implementation,
low development expenditure allocations, large payment arrears and
stalled projects, and inadequacies in reporting and audits. Since 1997,
the Kenyan economy stagnated, with GDP growing at an average rate of
about 1.3 percent per annum; much lower than population growth rate.
This dismal economic performance contributed to increasing poverty.
The percentage of those living in poverty increased from 51 per cent in
1997 to over 56 percent in 2002 (Government of Kenya, 2003c).
4
Public expenditure management in Kenya
When the NARC government came to power in December 2002, good
governance was identified as one of the three pillars of the Economic
Recovery Strategy (ERS) that was unveiled in 2003. According to the
ERS, most of the problems bedeviling Kenya and its people arose from
the many years of bad governance and poor economic management.
Improving governance has, thus, remained one of the key focus area for
the government. Through the implementation of the ERS, various
measures have been undertaken to enhance fiscal discipline, expenditure
prioritization and operational efficiency.
Table 2.1 shows selected fiscal indicators for the period 1999/00 to
2006/07. It can be seen that the fiscal that had turned into a surplus in
2002/03 has not been maintained. Between 2005/06 to 2006/07, the
fiscal deficit (commitment basis) is estimated at an average of about
3.8 per cent. The country also relies more on domestic than foreign
financing of the fiscal deficit. There have been deliberate government
efforts to enhance strategic allocation of public expenditure by allocating
more resources to the development budget and also enhancing
Table 2.1: Key indicators of aggregate fiscal indicators (as %
of GDP)
1999/ 2000/ 2001/ 2002/ 2003/ 2004/ 2005/ 2006/
00 01 02 03 04 05 06 07*
Total revenue 19.2 19.4 19.1 19.4 21.0 21.2 21.5 24.2
Recurrent exp. 16.8 20.1 19.5 20.3 20.2 18.9 20.4 21.0
Dev. exp.  2.0  3.4  2.4  4.0   3.1   3.3   5.6   6.3
Total expenditure 18.8 23.5 22.0 24.3 23.3 22.2 26.9 27.6
Domestic interest   2.2  2.3  2.3  2.5   1.9   1.7   1.8   2.3
Foreign interest  0.9 0.8 0.6 0.8   0.5   0.5   0.6   0.3
Deficit incl. grants
(Comm. basis)  0.8 -1.7 -2.2 -3.7 -1.0  0.1 -4.1 -3.5
Deficit incl. grants
(Cash basis)  0.2 -1.3 -2.7 -3.5 0.0 0.5 -3.2 -3.4
Financing -0.2 1.3 2.7 3.5 0.0 -0.5 3.2  3.4
Foreign -2.1 1.3 -1.3 -1.1 -0.7 0.0 0.4 0.5
Domestic 1.9 0.1 4.0 4.3 0.7 -0.5 2.4 2.9
* Authors’ estimates
Source: Calculated from Quarterly Budget Reviews (QBRs), various
5
Governance in public expenditure management: Key issues and challenges in Kenya
functional allocation of expenditure to social sectors and infrastructure,
in line with the Economic Recovery Strategy. Development expenditure
as a percentage of GDP that averaged about 3.5 per cent between 2002/
03 and 2004/05 was increased to an average of about 6 per cent between
2005/06 and 2006/07.
A review of various Budget Strategy Papers indicate that the share of
expenditure allocations to infrastructure in total government
expenditure  increased from about 11.2 per cent  in 2002/03 to about
21.8 per cent in 2006/07. In addition, the social sectors (health and
education) continue to take about one third of total public expenditure.
In PEM, the government’s initial efforts to enhance operational efficiency
by introducing performance contracts dates back to 1989 and 1990 when
performance contracting for Kenya Railways and the National Cereals
and Produce Board (NCPB) was started. These initial efforts failed due
to lack of political will, coupled with a weak performance incentive
system. Performance contracting was re-introduced in 2003, after a new
government came into power and was committed to enhancing public
sector performance. By December 2004, 16 state corporations had signed
Performance Contracts on a pilot basis. By 31 September 2005,
performance contracting was extended to major municipalities, namely,
Nairobi City Council, Mombasa, Kisumu, Nakuru and Eldoret.
Significant improvements have been noted in the management of the
participating public agencies (Kobia and Mohammed, 2006). On 26 June
2007, Kenya was among 14 countries that won the prestigious United
Nations Public Service Award (UNPSA) for its extensive system of
performance-based contracting for fostering responsiveness and
accountability in the civil service. The other countries that won UNPSA
are: Australia, Austria, Azerbaijan, Chile, India, Lebanon, Morocco,
Korea, Singapore, South Africa, Switzerland and United Arab Emirates.
6
3. Conceptual Framework on Governance and
Public Expenditure Management
Figure 3.1 provides a representation of the Public Expenditure
Management system capturing its key features and how they relate in
the realization of expenditure outcomes. In this study, the analysis of
governance in the PEM relates to how the principles of good governance
are applied or promoted within the PEM cycle. The PEM cycle consists
of three main stages in the expenditure planning and budgeting
processes: budget formulation and preparation; execution and
reporting; and monitoring and evaluation. The PEM cycle is not uni-
directional. In reality, processes at the various stages may be interactive
and two or more budgets may overlap at any one time, and thus be at
different stages of formulation and preparation, execution and
monitoring or evaluation—depending on the nature of projects or
progammes. For instance, the formulation and preparation stage for
large infrastructure projects in Kenya spans more than one annual
budget cycle; this has been blamed on lengthy procurement processes.
PEM is mainly concerned with the management practices and the
decision making processes, and how they impact on the goals of efficient
allocation of public resources (according to national priorities), efficient
and effective use of public expenditures while at the same time ensuring
aggregate expenditure discipline that is supportive of macroeconomic
stability. Governance principles include: accountability, transparency,
participation, performance, fairness, predictability, legitimacy and voice
(World Bank, 1994; 2006; Organization for Economic Cooperation and
Development—OECD, 2001; and, International Monetary Fund Code
Figure 3.1: Governance and public expenditure management
cycle
  
INPUTS PEM SYSTEM  OUTPUTS
1. Good Governance 1. Fiscal Discipline 
• Accountability  
• Participation 2. Strategic Allocation 
• Predictability  
• Transparency 3. Efficient and 
 Effective use of 
2. Technical Public Expenditure 
Infrastructure 
• Recording, reporting MONITORING AND BUDGET FORMULATION 
and accounting EVALUATION AND PREPARATION 
systems 
• Management OUTCOMES 
controls  
 Stability, Growth 
3. Human Resources and Equity  
  
4. Complementary  
Equipment EXECUTION AN D  REPORTING
7
Governance in public expenditure management: Key issues and challenges in Kenya
of Good Practice on Fiscal Transparency). These principles overlap and
may be self-reinforcing. In this study, accountability, participation,
predictability and transparency are considered.
The operations of the PEM system have important consequences to
the society in terms of realization of the broad goals of economic policy;
that is growth, stability and equity. These consequences arise largely
from the realization of PEM goals, which we refer to in the schematic
presentation (Figure 3.1) as outputs. Good governance is a key ‘soft’
input in PEM system that is often neglected. Others include: technical
infrastructure such as appropriate accounting systems; and human
resources as well as complementary equipment such as information
technology. These inputs give the PEM system its dynamic nature as
information is processed, goals are set and public resources are allocated
and utilized towards the realization of development goals. Good
governance enhances the dynamism of a PEM system in realizing the
expected outputs, as it helps address the inherent problems in PEM such
as information asymmetry between different players within the system,
high transaction costs involved in getting feedback from beneficiaries,
civil society and implementing agencies, as well as incompatibilities in
incentives or the agent-principal problem, where politicians and
bureaucrats behave opportunistically. The dynamism of the PEM system
should, therefore, be enhanced by developing formal mechanisms for
transparency, participation, accountability and predictability.
As shown schematically above, the outputs of the PEM system are
ideally aggregate fiscal discipline, efficient allocation of resources, and
efficient and effective use of public expenditure. There is no guarantee
that the system will aim at these goals or rather get captured for the
benefit of special interests, say through corruption and inefficiencies.
Development of formal systems that enhance good governance helps
ensure that deviations from the stated goals are minimized.
Accountability requires that public officers are responsive and
answerable. Effectiveness in accountability requires that performance
measures are established and oversight mechanisms are effective to
ensure that standards are met and maintained. The oversight
mechanisms in PEM are mainly at two levels: financial and economic
oversight. The latter function relates to whether public resources are
being allocated strategically and being used efficiently and effectively.
Some of the tools used at this stage for economic evaluation include:
client service delivery surveys, expenditure tracking surveys and public
8
Conceptual framework on governance and public expenditure management
expenditure reviews or other institutionalized performance monitoring
and reporting mechanisms. Financial oversight ensures that the
execution of plans meets proper accounting standards. It includes the
audit functions as well the legislative oversight through parliament.
These fall under the monitoring and evaluation stage within the PEM
system. The principle of participation is key both in budget formulation,
monitoring and evaluation. Involvement of stakeholders is important
in identifying priorities as well as appraising performance. Transparency,
on the other hand, requires that information is available on government
processes, budgets and performance and thus supports accountability.
The other important principle of good governance relates to
predictability. This arises basically from not only a sound legal
framework for PEM but also administrative regulations that provide
clarity of roles and responsibilities for the different players within the
PEM system. The legal and administrative frameworks should be applied
fairly. Predictability is also important in the flow of resources from the
centre to the implementing agencies. Various formal mechanisms can
be adopted and enforced to enhance good governance in PEM.
3.1 Budget Formulation and Preparation
Budget formulation and preparation sets the framework for  realization
of the three goals: fiscal discipline, strategic allocation and operational
efficiency. In PEM cycle, this is the stage at which the policy-budget
link is initiated by translating policies into implementable expenditure
programmes and projects. As noted above, governance institutions are
necessary to mitigate political and/or bureaucratic expediency or
opportunistic behaviour. Several countries have adopted ‘fiscal
responsibility’ legislation aimed at ensuring discipline and efficiency
through various fiscal rules and managerial processes. The rules apply
to budget deficits, borrowing requirements and transparency clauses.2
One of the instruments that many countries employ is a Medium
Term Budget Framework where a macro-fiscal framework underpins
the budget. The macro-fiscal framework ensures that the budget is
consistent with resource constraints and does not undermine
macroeconomic stability, including price stability and sustainable debt
position. It does this by ensuring that expenditure programming takes
2 For OECD experiences, see OECD Economic Outlook No. 72 (2002).
9
Governance in public expenditure management: Key issues and challenges in Kenya
into account revenue constraints and the macroeconomic implications
of the different ways of financing the deficit. If revenue forecasts are
over-estimated, payment of arrears may result at the budget execution
stage. Therefore, for fiscal discipline to be achieved, the MTEF should
be accompanied by hard budget constraints.
The key activities at budget formulation and preparation stage
include: issuance of budget guidelines to line ministries and agencies,
preparation of budgets, negotiations on budget issues with Ministry of
Finance, finalization of the draft budget by the Ministry of Finance,
Cabinet approval, and submission to Parliament.
The principle of participation is important in budget formulation
and preparation so as to get feedback and help coordinate the activities
of those involved in it. Key players should be involved in setting the
goals to be pursued as it enhances ‘ownership’ and ensures that minimal
alterations are made on the budget at the subsequent stages.
Transparency of the budget is determined by the nature and amount of
information that is available on the budget. Different players require
reliable and timely information so as to give feedback. Reliable
information on the costs of competing projects and programmes is
critical for prioritization and design of projects and programmes.
Accountability and predictability requires that the rules and regulations
governing the budget formulation and preparation process are clear,
and are respected uniformly. Clarity of roles and responsibilities of the
different players is essential as it ensures that one can be held
accountable in the budget planning process. Performance orientation
or indicators is a formal mechanism that ensures that targets are set at
this stage and enhances accountability in subsequent stages.
Performance orientation in budget formulation may also involve making
decisions on privatization, divestitures and contracting out certain
services to improve performance, efficiency and effectiveness of public
expenditure.
In 2000/01, the Government of Kenya made an important step in
strengthening the budget planning process by adopting the Medium
Term Expenditure Framework (MTEF) budget process. The MTEF
budget process was recommended in the 1997 Public Expenditure
Review (PER) report. The key goals of the MTEF budget process are to
enhance the policy-budget link, ensure aggregate fiscal discipline and
efficiency in the allocation and use of public resources (World Bank,
1998). The MTEF budget process is, therefore, instrumental in realizing
10
Conceptual framework on governance and public expenditure management
the goals of PEM. It provides a framework through which ‘needs’ can be
reconciled with ‘available resources’ within an environment of
macroeconomic stability, while at the same time ensuring that sector
priorities are respected. The government also sought to improve the
administrative framework by establishing the following institutions:
MTEF Secretariat to coordinate the budget process; Budget Monitoring
Department (BMD) to strengthen budget monitoring and reporting;
Directorate of Public Procurement to enhance efficiency and
transparency in procurement; and introduction of Finance Officers
(FOs) to oversee budget management in line ministries (Government of
Kenya, 2003c).
Since its introduction, the MTEF budget process has undergone
various reforms to make it relevant and more effective. By and large,
the Kenyan process has four important characteristics: a ministerial PER
process; medium term framework; a top-down fiscal framework; a
‘bottom up’ process of preparing sectoral budgets for achieving sector
policies and targets; and a bidding process for reconciling the ‘bottom
up’ and ‘top-down’ processes. The adoption of MTEF has improved
participation, as the process includes annual consultations through
public sector hearings during the budget formulation and preparation
stage. In addition, the Ministry of Finance requests and receives pre-
budget submissions from key stakeholders. The ‘bottom up’ process of
the MTEF requires that grassroot or sub-national prioritization and
expenditure programming is undertaken as inputs to the budget process.
Within Kenya’s MTEF budget process, there are District MTEFs that
are supposed to facilitate sub-national participation in the budget. The
participation of civil society in the budget preparation process still falls
short of expectations as the civil society is not effectively represented.
The civil society participated actively in the Poverty Reduction Strategy
Paper (PRSP) preparation process and in the consultations leading to
the preparation of the final version of ERS. However, their participation
in the annual budget process is limited. Further, District MTEF
Committees that are supposed to provide forums for participation in
the budget preparation process at the district level have not been fully
operationalized and institutionalized. One of the leading civil society
bodies that participates in the budget process is the Institute of Economic
Affairs (IEA). However, the participation has been mainly through
organization of pre-budget hearings rather than through the formal
mechanisms of MTEF public hearings.
11
Governance in public expenditure management: Key issues and challenges in Kenya
As indicated above, an important aspect of budget transparency
relates to the nature of budget information, its coverage and
documentation. In recent years, the government has made efforts to
enhance transparency by providing more information through
information communication technology. For instance, the Ministry of
Finance provides budget documents on its website, such as Budget
Outlook Paper (BOPA); Budget Strategy Paper (BSP) and the MTEF
Sector Reports. However, although line ministries prepare Ministerial
Public Expenditure Reviews that inform the budget, they hardly publish
this information for public consumption. The MPERs review past
expenditure trends and composition, and PEM at the ministry level and
thus form an important basis for budget decisions. The presentation of
the budget to Parliament provides the opportunity for the legislature,
media and the public at large to see the budget and discuss it. The key
documents that form the package that is presented to  Parliament
include: Budget Speech; Budget Estimate Books; Finance Bill and
Statistical Annex to the budget. Beginning 2003, the government started
implementing public finance reforms through which budget coverage
and classification would be improved to enhance budget transparency.
International budget classification systems include: economic
classification, functional classification and territorial classification. They
go beyond the traditional classification by ministries and departments
(by votes, sub-votes, heads and line items). Although the traditional
administrative classification is more useful for the purpose of control
of budget by administrative units, it is limiting in terms of information
and transparency if one needs to analyze the budget to understand the
purpose of expenditure and geographical location. Problems still exist
because of lack of reliable and consistent data on the budget’s functional,
programme and territorial or geographical classification. Once the key
international budget classification systems are in place, the disclosure
of fiscal information will be greatly improved, and it will be much easier
to scrutinize and analyze fiscal decisions on allocation of expenditure,
fiscal risks and impact on the economy.
Dissemination of information on government policy is done through
various means, including sectoral and ministerial bulletins,
dissemination seminars, conferences, workshops and press releases. A
public communication office was also established in 2003 to inform,
clarify and respond to information gaps. At the sub-national level, the
District Information Dissemination Centres (DIDCs) are used as
resource centres by the public and other institutions. Nonetheless, the
12
Conceptual framework on governance and public expenditure management
governance survey conducted through Africa Peer Review Mechanism
(APRM) revealed that more than half of Kenyans were not aware of
District Development Committees (DDCs) that coordinate development
activities at the sub-national level. It is not clear whether the Official
Secrets Act (CAP 187), which provides for the preservation of state
secrets by public officers, hampers public access to information.
However, the government is now working on a Freedom of Information
Policy to culminate in the development of a legal framework to enhance
public access to information and transparency.
The New Partnership for Africa’s Development’s (NEPAD’s) Africa
Peer Review Mechanism country assessment revealed that
parliamentary oversight over budget formulation was weak. There have
been efforts to strengthen legislative oversight by establishing a budget
office. The Fiscal Management Bill 2006 before Parliament aims at
strengthening legislative oversight. In addition, it provides for the
establishment of the Fiscal Analysis and Appropriations Committee.
However, the bill in its current form does not provide for effective
participation or involvement at the early stages of formulation that
include PER processes and preparation of Budget Outlook Papers.
The Presidential Circular No.1/2004 that spells out the key mandates
of ministries, moved functions of MTEF and budget monitoring to the
Ministry of Finance so as to address organizational problems in budget
coordination. Initially, matters of budget preparation and execution used
to be contained in the Government Financial Regulations and
Procedures (GFRP) 1989. The GFRP remains out of date as reforms have
been undertaken to strengthen the legal framework for PEM. For
instance, matters related to audit are now covered under the Public Audit
Act 2003, and execution and reporting under the Government Financial
Management Act 2003. Likewise, procurement issues now fall under
the Public Procurement and Disposal of Assets Act 2005, while budget
formulation still lacks a clear legal framework, ‘though it may be
considered as an executive amendment to the Programme Review and
Forward Budget procedure’ (NEPAD, 2005). However, one key problem
still remains; there is no clear legal framework underpinning the MTEF
budget process that clearly gives the roles, responsibilities and
procedures for the budget process. The process is mainly driven by
Treasury Circulars that are sometimes delayed and do not clearly spell
out the roles of different players in the budget process. Kenya, therefore,
needs to consider developing an organic budget law to enhance
predictability in the budget formulation and preparation process.
13
Governance in public expenditure management: Key issues and challenges in Kenya
Budget transparency aims at full disclosure of relevant fiscal
information on a timely and systematic manner. Additional areas where
reforms have been initiated relate to coverage of the budget, so that it is
made comprehensive enough to consolidate all the financial activities
of the general government and those of all entities controlled by the
government, including extra budgetary funds, special fund accounts,
and  expenditures financed through external sources.
3.2  Execution and Reporting
The budget is executed through the release of funds by Treasury to the
spending agencies responsible for disbursement to contractors and
suppliers. In the budget execution, spending agencies follow laid out
rules and regulations to ensure that procurement procedures are
followed and that there is compliance with parliamentary
appropriations. The disbursement mechanisms may be slightly different
if some transactions are centralized. At the spending agency level, the
execution process involves the following steps: commitment of funds,
verification (once approved, the spending agency can place an order or
enter into contract), delivery of goods and services, and payment.
Sometimes, there may be delays in the processing of payments that may
result in pending bills or arrears. Additionally, difficulties may arise in
bank reconciliations due to delays in presentation of data by spending
agencies. At the end of the budget year, final accounts are prepared,
which are audited by the Controller and Auditor General responsible to
Parliament.
Within the context of PEM goals, this stage is important in ensuring
that deviations from the budget are minimized. This is important because
in most cases, those executing the budget may not have information
about the policy priorities that are being implemented. At the execution
level, it is important to have procedures and rules or governance
institutions that ensure alterations to the budget are minimized and
efficiency is promoted. Table 3.1 attempts to show governance principles
that are key at different stages of PEM.
Sound budget execution requires that the management of
procurement (purchase) and use of public resources is carried out
efficiently and cost-effectively. This is the stage in PEM where good
governance is even more key, as the avenues for corruption or misuse
abound especially in the procurement and supply of goods and services.
14
Conceptual framework on governance and public expenditure management
Service delivery points have also been recognized as points where
corruption occurs especially through bribes. Public expenditure tracking
surveys have established that there have been leakages before reaching
the intended recipients. For instance, a Kenya Institute for Public
Research and Analysis (KIPPRA) study in 2003 established that in 2001/
02, only about 59.1 per cent and 88 per cent of drug supplies reached
dispensaries and health centres, respectively (Nafula et. al., 2004). This
could be explained by weak governance systems, as the study also
established that there were lesser leakages where annual audits were
regularly undertaken. In this regard, independent oversight institutions
such as corruption control agencies, external auditing agencies,
parliamentary oversight committees, and professionalizing the civil
service may help reduce resource misuse.
Transparency in budget execution also ensures that irregularities are
detected easily. Within any organization, management controls are put
in place. However, management can circumvent those controls and
misuse public resources. In an atmosphere of transparency and
accountability, subordinate officers who detect such irregularities may
report. This may also be provided for in legislation. The United Nations
Convention Against Corruption (UNCAC) and the African Union
Convention for Prevention and Combating Corruption (AUCPCC)
provide for the protection of whistle blowers.
In Kenya, the governance institutions for budget execution have been
strengthened with the enactment of the Public Audit Act 2003,
Government Financial Management Act 2004 and Public Procurement
and Disposal of Assets Act 2005. The Government Financial
Management Act 2004 provides the legislative framework for
management of public financial affairs, including reporting by
accounting officers. The Public Procurement and Disposal of Assets Act
2005 establishes the framework for streamlining the procurement
system. As part of its operationalization, Public Procurement and
Disposal Regulations 2006 were developed and came into effect from 1
January 2007 through a Gazette notice. Although it is too early to assess
the effectiveness of this piece of legislation, it provides for the creation
of an autonomous Public Procurement Oversight Authority (PPOA)
whose functions include, among others, ensuring compliance and
monitoring performance of the procurement system. The law makes
mandatory the publication of procurement information, including
contract awards and gives a framework for disposal of public assets to
15
Governance in public expenditure management: Key issues and challenges in Kenya
minimize irregular disposal of public assets. The law also covers security
procurements, which have been a major area of concern due to
corruption scandals, including the Aglo-leasing scandal.3
 Other recent reforms that have implications for governance in budget
execution include: the enactment of the Anti-Corruption and Economic
Crimes Act 2003, leading to the establishment of the Kenya Anti-
Corruption Commission (KACC). The KACC annual reports reveal
enormous cases of corruption within the public sector. For instance,
according to the 2005/2006 report, KACC was undertaking
investigations in cases of corruption estimated at about Ksh 75.1 billion.4
The Commission also made some efforts to implement the Ndung’u
report on irregular allocation of public land and recovered about 223
acres of land valued at about Ksh 144 million. The annual report also
reports that 7,888 complaints had been received by KACC. However,
only 15 per cent fell under the mandate of the Commission. This perhaps
underscores the establishment of the Office of Ombudsman to help in
resolving complaints against government authorities.
As discussed in section 3.2, it is important to set legislative framework
that encourages the society to participate in the fight against corruption.
Kenya has already signed and ratified UNCAC and signed the AUCPCC,
which is yet to  be ratified. However, until the Witness Protection Act
2006 was passed into law, the Kenyan legislative system did not provide
protection for whistle blowers.5
3 A special Audit Report by the Controller Auditor General on financing,
procurement and implementation of security-related projects, April 2004,
established that government’s financial commitments on 18  projects, as of 30
June 2005 totalled about Ksh 56.3 billion made outside the budget process and
without the approval of Parliament. There was also no linkage between payments
made and actual project implementation.
4 Includes Anglo-leasing type of contracts.
5 David Munyakei could not survive the aftermath of whistle-blowing on the
Goldenberg Scandal. He was sacked from Central Bank of Kenya and remained
unemployed until his death in 2006. The KACC Annual Report 2005-2006 also
notes that prospective witnesses in corruption cases feign ignorance, which
hampers the preparation of cases.
16
Conceptual framework on governance and public expenditure management
Since the introduction of the MTEF, information on budget execution
has been improved through the Budget Monitoring Department (BMD)
that publishes quarterly data on the budget. In 2000, the government
started introducing the Integrated Financial Management Information
System (IFMIS) aimed at integrating budget preparation, execution,
control and financial accounting and reporting in one system. However,
progress has been slow.
As noted above, the government introduced a performance
contracting system to enhance efficiency and effectiveness in public
sector management. However, the system is not anchored in the budget
cycle, especially for the ministries, such that the targets are never clearly
integrated in the budget formulation process. In practice, the
performance contracting system does not work within the national
MTEF budget process. For instance, MPERs require that ministries set
up targets to be realized, yet the targets are rarely the same as those
given in the performance contract. Although the system appears to be
realizing improved performance, the parliamentary Public Investment
Committee (PIC) has expressed concerns that some ministries micro-
manage state corporations under them, thereby undermining board
decisions and could dilute the principles that underpin the performance
contracting system (National Assembly, 2006).
Weak governance institutions contribute to coordination problems
in budget execution, which leads to poor absorption of donor funds by
ministries and various government agencies. The absorption rate has
been estimated at 33 to 40 per cent, especially with regard to Overseas
Development Assistance (ODA). The government has been preparing
an External Aid Policy whose implementation will partly improve
absorptive capacity, management of ODA and donor coordination and
harmonization. In the past, predictability in the flow of funds from
Treasury to spending units has sometimes been untimely and unreliable.
This was manifested in several ways, for example, through delays in the
release of ministerial ceilings to districts, delays in the release of
Authority to Incur Expenses (AIEs) to districts, release of AIEs not
matched with corresponding exchequer, and AIEs not issued according
to returns on output and set targets on performance. The Treasury
Circular 5/2005 dated 26 April 2005 to all Accounting Officers
introducing Cash Flow Planning System and Zero Balance Drawing
Accounts was intended to tackle this problem.
17
Governance in public expenditure management: Key issues and challenges in Kenya
3.3 Monitoring and Evaluation
Monitoring involves collection of relevant information on execution and
implementation of public expenditure programmes and projects.
Evaluation, on the other hand, relates to using monitoring and other
information available to make improvements on expenditure
management. It provides the feedback loop from M&E to plan
formulation, whereby past experience can be used to inform and
improve, use and allocate public resources (Figure 3.1). The monitoring
and evaluation information is, therefore, important in enhancing
transparency, accountability and predictability in the PEM system.
Monitoring and evaluation is mainly at two levels,  monitoring of
financial administration of the budget, and physically monitoring of the
implementation of projects and programmes. Financial monitoring
requires that the financial administration of the budget is monitored at
various stages of budget execution, including release of funds,
commitments, verifications, alterations/virements and payments. This
information is useful in detecting difficulties in financial administration
of the budget. It may provide important indications on whether fiscal
targets and priorities are being respected during budget execution.
Monitoring the implementation of projects and programmes at the
physical level may look at the input process and output performance
targets. Therefore, monitoring and evaluation should provide
information on whether the goals of PEM are being realized. Some of
the key tools for M&E include: public expenditure reviews; client surveys;
expenditure tracking surveys; and cost-benefit analysis.
The monitoring and evaluation function within PEM management
in Kenya has not received adequate attention despite efforts to establish
a strong M&E system in early 1980s. Consequently, the link between
M&E, planning and budget formulation has been weak. First, serious
attempts to establish a M&E system came with the District Focus for
Rural Development Strategy (DFRDS) that was adopted by the
government in 1983. As a result, Provincial and District M&E
Committees were established. Despite these early efforts, the M&E
system was not integrated within the budget planning process.
Therefore, M&E activities remained institution or project-based without
serious attentions on data analysis and dissemination on budget
execution and implementation and use of the same data for budget
planning. Linkages between the different levels of government remained
weak.
18
Conceptual framework on governance and public expenditure management
It is not surprising that the ERSWEC 2003 advocated for the
establishment of a National Integrated M&E System that would provide
the government with reliable mechanisms to measure efficiency and
feedback on policy implementation (Government of Kenya, 2003a). As
part of institutionalizing  the M&E system, the government established
the Monitoring and Evaluation Directorate in the Ministry of Planning
and National Development to spearhead the process. In addition, Central
Planning and Project Monitoring Units were established in all ministries
to support the project monitoring function. The M&E Directorate has
coordinated the preparation of Annual Progress Review (APR) reports
and Medium Term Review (MTR) reports on the implementation of the
government’s economic recovery strategy. In addition, the M&E
Directorate now coordinates the PER process, which is a diagnostic tool
for assessing the realization of PEM goals. In spite of the progress, there
exists challenges that require immediate attention.
• The M&E function is not well integrated in the PEM cycle.
Currently, the production of the annual and medium term
progress reports are not clearly synchronized within the budget
cycle. There is a PER process that precedes the preparation of
ministry budgets. However, this process runs parallel with the
APR and MTR process. The integration of the M&E system with
the PEM cycle would be an important step in institutionalizing
the system.
• The PER provides the diagnostic review of expenditures that
inform the preparation of MTEF sector reports for the budget.
The weakness of the process is that it is still localized at central
Ministries and few parastatals undertake this diagnostic review.
• Those that have undertaken the system is yet to be fully extended
to the district level. Most of the indicators are output rather than
efficiency-oriented. As a result, the system does not promote the
practice of collecting data on unit cost or least time incurred to
provide a service or output.
As already discussed, there are two levels of monitoring and
evaluation, namely financial and economic. The financial oversight
function is mainly undertaken through the Kenya National Audit Office
(KNAO), where the Controller and Auditor General reports to
Parliament. The KNAO has focussed on the traditional financial audits
but there  are efforts to introduce performance audits. The PAC and the
19
Governance in public expenditure management: Key issues and challenges in Kenya
PIC have been the most active committees of Parliament. They play an
oversight role that ensures the Executive is accountable to Parliament
in the use of public finances as voted by the House. While PAC examines
the Controller and Auditor’s General (C&AG) report on all accounts of
government ministries, PIC examines the accounts of State corporations
and reports on the state of government investments. To play their roles
effectively, the two committees are dependent on the quality, accuracy
and timeliness of the audit reports of KNAO. After reviewing the reports,
when need arises, the Committees summon accounting officers to
explain any irregularities. They then report to Parliament on such
irregularities and recommend necessary actions. However, the 13th
report of PIC, Volume 1, 2006 decries the slow pace of implementation
by government of recommendations from previous reports. The Fiscal
Management Bill 2006 is an important innovation in strengthening
governance. Related to the oversight functions of Parliament, it proposes
the establishment of a parliamentary budget office as well as
strengthening the oversight function of the legislature over the budget
process.
Table 3.1 summarizes the key dimensions of governance at each stage
in PEM. For instance, during budget formulation and preparation,
accountability and predictability are enhanced through a sound legal
and administrative framework for budget formulation and preparation
with clear roles and responsibilities for the different players. In addition,
it is important to set performance or expected outputs at the budget
formulation and preparation stage. Participation is important to ensure
that budget formulation benefits from past experience as well as feedback
from key stakeholders, including monitoring and evaluation
information. Transparency requires that reliable information is available
on the budget and its coverage is comprehensive.
20
Conceptual framework on governance and public expenditure management
Table 3.1: Key aspects of governance in PEM
Formulation and Execution and Monitoring &
preparation Reporting Evaluation
Accountability Clarity of roles and Management controls External
responsibilities in include: internal financial
budget formulation and accountability systems audit
preparation for expenditure controls
and implementation Economic
Establishment of (commitment, audit of
performance verification, payment performance
indicators/orientation and delivery of goods
and services)
Participation Feedback and Feed back on
coordination of budget quantity and
inputs. Stakeholders quality of
include: civil society, services (e.g.
private sector players, client
legislative review and surveys,
donors public
expenditure
reviews)
Predictability Sound legal and • Timely release of M&E
administrative funds and payments information is
frameworks for budget • Deviations from the used to
formulation and budget improve PEM
preparation • Rules and regulations
for budget execution
are clearly applied
Transparency Budget coverage, Regular fiscal reporting M&E
classification and on budget execution and information
documentation implementation is available
and used to
Transparent improve
procurement procedures PEM
21
Governance in public expenditure management: Key issues and challenges in Kenya
4. Conclusions and Recommendations
This paper presents a conceptual framework that views good governance
as one of the key inputs in a PEM system. Good governance in public
expenditure management has the potential of enhancing budget
outcomes while improving confidence and legitimacy in public
institutions. Good institutions of governance help mitigate the problems
that arise due to information asymmetry between different players in
PEM, incompatibility of incentives especially relating to political and
or bureaucratic expediency, and high transaction costs involved in
obtaining feedback on the planning and budgeting process. In recent
years, the Government of Kenya has been undertaking a different
approach in PEM reforms that impacts  positively on governance.
Fiscal transparency contributes significantly to the achievement of
good governance. It also leads to better-informed public debate about
the design and results of fiscal policy. In addition, fiscal transparency
makes the government accountable, strengthens credibility and
improves public understanding of fiscal policies and choices.
Predictability requires the legal and administrative processes that govern
expenditure management to provide clarity on the roles of the different
players in the PEM system, hence encouraging accountability.
Governance institutions that encourage participation enhance feedback
and use of M&E information to enhance decision making.
To enhance wider public participation in PEM, there is need to
promote and strengthen non-state actors’ capacity in the PEM process.
Currently, the MTEF process provides that window. There is need to
build output and performance-based data so as to support performance
orientation. An important area of research in this regard relates to how
Chief Executives are given some flexibility in budget execution to reach
their targets while not undermining accountability. To improve on the
oversight role of parliamentary committees over PEM, PAC and PIC
reports, the capacity of parliamentarians needs to be enhanced in the
ongoing reforms to establish a parliamentary budget office. Predictability
in budget formulation and preparation should be enhanced through the
development of a legal framework for budget formulation, which should
be synchronized with the Fiscal Management Bill 2006.
22
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Governance in public expenditure management: Key issues and challenges in Kenya
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24
Other Related KIPPRA Papers
1. Nafula N N, Kimalu P K, Kiringai J, Owino R, Manda D K and
Karingi S (2004), Budget mechanisms and public expenditure
tracking in Kenya, KIPPRA Discussion Paper No. 37.
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Kenya: The need for a coherent policy framework. KIPPRA
Discussion Paper No. 62.
4. Were M, Ngugi R W, Makau P, Wambua J and Oyugi L (2005),
Kenya's reform experience: What have we learnt? KIPPRA
Working Paper No. 12.
5. Karingi S, Wanjala B, Nyamunga J, Okello A, Pambah E and
Nyakang'o E (2005), Tax reform experience in Kenya. KIPPRA
Working Paper No. 13.
6. Ouma S., Khainga, D., Kiriga, B. and Wasala, W (2005), Review
of the 2005/06 budget.KIPPRA Special Report No. 9.
7. Ouma S., Khainga, D., Kiriga, B. and Wasala, W (2006), Review
of the 2005/06 budget.KIPPRA Special Report No. 10.
8. Decentralized funds in Kenya: Source book (2006).
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10. Social budgeting initiative in Kenya.  Proceedings of
dissemination workshops held in Isiolo, Kwale and Turkana
districts, 2005.
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Governance in public expenditure management: Key issues and challenges in Kenya
26