Supporting Sustainable Development through Research and Capacity Building '·. ,. . • - - :\.. ... ,---. ... ...,... ... - ··� .•· -'"'. .. . -----: - ---· - . _- . }' - Ar. i1A. �-���$.'m�n ' ·1�9f. the Public Expenditure and Financial · - �ccountability in Kakamega County By Christopher H. Onyango, Kenneth Malot and Manaseh 0. Otieno Introduction ---- -- Estimated total population (KNBS 11,812,330 I The Public Expenditure and Financial Accountability 2015) (PEFA) assessment was carried out in the County 932,645 of Kakamega and five other counties, namely: Females I Nakuru , Kajiado, Makueni, West Pokot and Baringo. Males 879,685 I The exercise, which was undertaken by KIPPRA in Population density per km2 66.4 conjunction with the World Bank (Kenya Office) in the year 2017, is the first sub-national PEFA assessment County contribution to national GDP 2.4% carried out in Kenya following the devolved system of Gross county product (2017) 182.6 Ksh government. The rationale for the PEFA assessment is billion to provide a clear and deeper understanding about the Poverty levels (%) 36 functioning of the PFM system and the organizational i aspects of existing institutions at county level. The main objectives of the assessment include: i) assess the Key Findings of the PEFA Assessment state of financial management capacity in the County Government; ii) identify gaps in terms of capacity, (a) Budget reliability systems, policies and processes in PFM; iii) provide a basis for PFM reforms; and iv) facilitate and develop a A budget is considered reliable if implemented in self-assessment capacity at the county level. accordance with the approved estimates before the beginning of the year. Kakamega County implemented The users of PEFA include the private sector, civil the budgets in accordance with the approved society organizations, faith-based organizations and estimates. However, there was significant deviation of international development institutions. The PEFA scores the actual aggregate expenditure from the originally and reports allow all users of the information to gain a approved budget. There was over-budgeting especially quick overview on the strengths and weaknesses of the in the first financial year (2013/14) after devolution but County's PFM systems. The importance of PEFA is to with improvements in budget estimation in subsequent facilitate in the attainment of fiscal discipline, strategic years. The main reasons for low absorption included resource allocation, and efficient service delivery. lengthy procurement procedures and low collection of own source reve T nuh ee . a Es xs ie sts insm g e cn ht a c lleo nve gr ee sd sa u cp he r aio s d of three (3) fiscal years, 2013/14, 2014/15 and 2015/16. It focused on over budgeting and low revenue collection undermined seven (7) key pillars of the PEFA framework, namely: fiscal discipline and the ability of the County to control expenditures and manage fiscal risks. This also affected (i) budget reliability; (ii) comprehensiven�ss �nd the ability to effectively plan and allocate resources to transparency; (iii) management of assets and h�b .1h.t 1es; (iv) policy-based fiscal strategy and budge strategic policy priorities. �mg; (�) predictability and control in bud�_ et execution; \vi) There was over projection of non-specified revenues accounting and reporting; and (vu) external scrutiny in the budgets. Accurate revenue forecasts are a and audit. prerequisite for preparation of a credible budget. The County Government budget, however, did not provide County A�min!strativ! �nd Development Indicators_ a reliable basis for policy implementation. Location Western Kenya (b) Comprehensiveness and transparency of Area 3,050.3km2 public finances No. of Cconstituencies 12 The key focus is on comprehensiveness of budget, No. of county assembly wards 60 fiscal risk oversights, accessibility by the public to the KIPPRA Policy Brief No. 73/2018-2019 1 fiscal and budget information. Transparency of public Kakamega Golf Hotel was not documented as an asset finances was not comprehensive, consistent, and in the annual financial statements. accessible to the public. The budget classification of County budget and accounts was consistent with The County did not have a debt management strategy international standards although not sufficiently. As nor a debt management unit. putting the maintenance a result, this failed to adequately facilitate budget of fiscal discipline at risk. The County had not borrowed tracking in formulation, execution and reporting. The any money but inherited debt from the defunct transparency of government revenue and expenditure local authorities. Effective management of assets was low because there were no financial reports for and liabilities was further undermined by delays in extra-budgetary operations. transferring assets and liabilities from the defunct local authorities to the counties. The in-year and annual budget execution reports County Governments Budget Implementation Report The County had not developed standard operating (CBIRR) were published as guided by the PFM Act 2012 procedures for disposal of assets. This was because on Office of the Controller of Budget (CoB) website. counties were prohibited from disposing public assets Whereas the County did not publish audited financial until full transition is affected by the Intergovernmental reports in time, the same were available in the website Relations Technical Committee (IGRTC). of the Office of the Auditor General (OAG) although not within twelve months after the end of the year. (d) Policy-based fiscal strategy and budgeting Performance results for outputs and outcomes Kakamega County prepared the budget documents were presented in the Medium-Term Expenditure including the budget estimates in line with the Public Framework (MTEF) but this was not done in a format Financial Management Act 2012. The County neither comparable to the plans previously adopted within the carried out independent macroeconomic forecasting annual or medium-term budget and did not meet the nor undertook macro-fiscal sensitivity analysis due SMART criteria. Inclusion of performance information to technical capacity gaps and lack of baseline data. within budgetary documentation strengthened the The County prepared both revenue and expenditure accountability of the executive for the planned and forecasts for the budget year and the two following fiscal achieved outputs and outcomes of government ones. However, the forecasts were not accompanied programmes and services. Budget documents such by the underlying assumptions and explanation of as CIDP, ADP, CFSP and CBROPs were available in the the main differences from the forecast made in the County website. However, audit reports were published previous year's budget. In addition , there was limited with delays after the lapse of a financial year. ability to develop and assess the fiscal impact of revenue and expenditure policy proposals to support (c) Management of assets and liabilities the achievement of the County Government's fiscal goals. The County has not assessed the fiscal impact of Effective management of assets and liabilities is revenue and expenditure policy proposals developed necessary to ensure public investments provide value during budget preparation process for the three fiscal for money. The management of assets and liabilities years analyzed. was weak due to lack of a comprehensive fixed asset register, formalized investment appraisal practice and Expenditure budgets were developed for the medium fiscal debt risks which are not adequately monitored. term within budget expenditure ceilings. However, they Besides, there was no formalized project selection were not submitted together with the budget circular. criteria, and therefore it was difficult to ascertain if There was no clear alignment of strategic plans and the projects undertaken by the County were of type medium-term budgets, and no consistency of the and nature that would support social and economic budgets with previous year's estimates. development objectives. The County did not carry out in-depth economic analysis and feasibility studies for e) Predictability and control in budget investment projects to inform the budgeting process. execution At County level, car loan and housing mortgage The County did not have an organized system for schemes were being made available for Members of revenue collection to detect and prevent potential County Assembly (MCAs). These mortgage schemes revenue risks. Information on the stock of revenue were not established in law and there was no framework arrears was not disclosed in the annual financial to ensure compliance in terms of repayment. Other statement. In addition, there was no evidence provided contingent liabilities for staff were social contribution to indicate the frequency of assessment , collections, payments including the National Hospital Insurance arrears and transfers to County Treasury revenue Fund (NHIF), National Social Security Fund (NSSF), collection accounts. Further, not all accounts of the Local Authorities Provident Fund (LAPFUND) and the County were held in the CBK, thereby making it difficult Mkopo Mashinani Loan Fund. Some of these liabilities to ensure proper functioning of revenue collections and were quantified in the financial reports but the risks transfers. Budget execution lacked effective control and were not covered. predictability leading to revenue shortfalls and poor allocation of resources. �egard!ng financial assets, the County had cash and its equivalents in the bank, and 20% shares at the Regarding revenue accounting, there are clear Kakamega Golf Hotel as financial assets. However, procedures for recording and reporting revenue collections, consolidation of revenues collected and reconciliation of revenue accounts. However, there 2 KIPPRA Policy Brief No. 73/2018-2019 was no reconciliation of arrears and monitoring recommendations for improvement by the executive the difference between outstanding revenues and was poor. The audit reports were issued with delay, payments. There was no Treasury Single Account, hence scrutinized late and no effective hearings were therefore cash balances could not be identified and carried out. There was no evidence that the Executive consolidated for the purpose of informing the release of implemented the actions on recommendations from the funds. This created difficulties in making management County Assembly. decisions in predicting cash resources availability. Payroll controls were fairly good. There were no delays On-going and Outstanding Reforms in recording a change in personnel status to personnel records and to payroll data which was done monthly. The The County was undertaking reforms in various areas public could access the legal and regulatory framework aimed at enhancing governance, administration and (Public Procurement and Assets Disposal Act 2015) decision making for better service delivery. for procurement freely from the Public Procurement and Regulatory Authority (PPRA) website. Data on For instance, on budget reliability, the County was resolution of procurement complaints was available undertaking capacity building of staff on policy online as published by the Public Procurement and formulation, planning, programming and budgeting Administrative Review Board (PPARB). The tendering with assistance from Ahadi Kenya, USAID and the World opportunities were available on the County website. Bank. The County was also in the process of recruiting more qualified technical staff to enhance efficiency in There were regular feedbacks to management about service delivery. the performance of the internal control systems through an internal audit function. Although the Audit On budget predictability and budget control execution, Committee had not been established, the Internal Audit the County was in the process of adopting the Treasury function applied risk-based approach in selection of Single Account (TSA) at County Government level for audit object and audit subject and prepared annual the purposes of cash balance consolidation. audit work plans. On transparency of public finances, County reforms (f) Accounting and reporting were geared towards building capacities in project costing and evaluation for recurrent and development Financial data integrity was relatively sound with expenditure in budget execution. This was aimed presence of the accounting processes that supports at strengthening strategic planning and budget integrity of financial data through the Integrated Financial formulation by providing strong integrated frameworks. Management Information System (IFMIS) where data was processed and verified against documents. The Regarding control of budget execution, the County was County budget execution reports were generally in the process of implementing comprehensive cash comprehensive and accurate. The annual financial management by strengthening commitment control statements were also complete, timely, and consistent and reporting and enhancing in-year budget monitoring with generally accepted accounting principles and and reporting. standards. The county prepared annual financial statements (AFS) as per the International Public-Sector Under management of assets and liabilities, the County Accounting Standards (IPSAS) cash based standards Finance Office at the County Assembly was developing according to the requirements of the Public-Sector a comprehensive framework to ensure loan payments Accounting Standards Board. The standards used in were deducted through a check-off-system. the preparation of the statements were not disclosed and did not appear as notes in the AFS. Variations On accounting and reporting, the County adopted between international and national standards were not the use of accounting principles and national disclosed and gaps were not explained in the reports of standards that was consistent with International Public the Office of the Auditor General. The annual financial Sector Accounting Standards (IPSAS) to enhance statements. however, needed improvement especially accountability and transparency throughout the entire concerning the quality of the financial statements PFM system. submitted for external audit that were often returned because of incomplete and erroneous data. The budget execution reports were prepared on quarterly basis and Conclusion and Policy Recommendations were generally comprehensive and accurate. Regular reporting was part of an effective monitoring and Considerable efforts have been made towards control system to ensure that budgets were executed establishing the foundations of a sound PFM system as intended. in Kakamega County. There is still much work to be done to ensure that PFM systems impact significantly (g) External scrutiny and audit on the achievement of outcomes of aggregate fiscal discipline, strategic allocation of resources The external audit and scrutiny by the legislature in and efficient service delivery at local, regional and Kakamega County were not strong and effective in national levels. Other than addressing institutional and holding the County Government accountable for its human capacity issues, the internal and external audit fiscal and expenditure policies and their implementation. systems require strengthening to provide full oversight The public finances were independently reviewed of the effectiveness of the internal control system. but external follow-up on the implementation of identified weaknesses undermine their efficiency and effectiveness in identifying irregularities and errors in to allow for accurate revenue forecasts, which the PFM. Considering the findings of the assessment, form the prerequisite for preparation of a credible the following recommendations are suggested: budget. There is also need to assess the fiscal impact of revenue and expenditure policy proposals 1) Budget reliability: There is need to enhance and developed during budget preparation process. improve own revenue sources. This can be done by These should be done by capacity building of automation of revenue collection and fast-tracking cour' policy makers to enhance their ability to formation of a semi-autonomous revenue agency. develop and assess the fiscal impact of revenue There is further need to educate and sensitize and expenditure policy proposals to support the the citizens on importance of payment of various achievement of the County Government's fiscal fees and levies for services offered by the County goals. Government 5) Predictability and control in budget execution: 2) Comprehensiveness and transparency of public The County needs to monitor revenue arrears finances: There need to re-align budgets to through automation of revenue collection systems departmental strategic plans, the County Integrated to enhance detection and prevention of potential Development Plans to the Vision 2030 framework, revenue risks and sensitization of revenue payers and enhance budget reliability. on existing levies, charges and fees and their importance in service delivery to enhance own 3) Management of public assets and liabilities: source revenues. The County needs to develop a debt management strategy and debt management unit for effective 6) External scrutiny and audit: The County needs management of assets and liabilities. This will go a to strengthen the legislative oversight role and long way in maintaining fiscal discipline and reduce scrutiny to ensure all audit recommendations the delays in transferring assets and liabilities from are implemented by the County Government the defunct local authorities to the County. accordingly for accountability and improvement of service delivery. 4) Policy based fiscal strategy and budgeting: There is need for capacity building in macroeconomic 7) Accounting and reporting: There is need to forecasting (revenue and expenditure forecasting), strengthen and build capacity for the accounting MTEF budgeting, macro fiscal sensitivity analysis, and reporting unit to verify financial data integrity fiscal impact analysis, and economic analysis of and produce more quality and complete annual investment projects in budget making process financial statements. About KIPPRA Policy Briefs For More Information Contact: KIPPRAPolicyBriefsareaimedatawidedisseminationofthe Kenya Institute for Public Policy Research and Analysis lnstitUte'spolicyresearchflndlngs. Thefindings areexpected Bishops Road, Bishops Garden Towers to stimulate discUssion and also build capacity in the public P.O. Box 56445-00200, Nairobi policy making process in Kenya. Tel: 2719933/4, Cell: 0736712724, 0724256078 KIPPRA acknowledges generous support from the Email:admin@kippra.or.ke Government of Kenya and the Think Tank Website: http://www.kippra.org Initiative of IORC. who have continued to support the lnstitute's Twitter: @kippra.kenya activities aver the years. 4 KIPPRA Policy Brief No. 73/2018-2019