IPF

Why We Need Genuine Budget Offices in our County Assemblies

IPF — Sat, 25 Apr 2020 05:45:00 +0000

The principle behind legislative oversight of executive activity is to ensure that public policy is administered in accordance with legislative intent, and by inference, the citizens’ aspirations. With the advent of devolution in Kenya, our county assemblies were handed the role of scrutinizing the budget estimates from the executive in order to ensure that they conform to the legal requirements and are in line with the aspirations of the people.

There are now numerous technical documents tabled in the assembly throughout the year that require discussion and amendment by assembly members. These documents include; the Annual Development Plan, County Budget Review and Outlook Paper, Debt Management Paper, the County Fiscal Strategy Paper and the executive budget proposal. While these documents are presented periodically to the assembly, there are also reports which should be presented quarterly, semiannually and annually on budget implementation.

All these documents require that the technical capability of the people reviewing them be above average in order to guide both the public and the county assembly. Public access of these documents from the executive still remains a challenge. My organisation’s interaction with the officers responsible for supporting county assemblies in reviewing the budget estimates suggests that these officers are facing certain key challenges, including failure by the Members of the County Assemblies to take their advice, uncooperative County Executive budget teams, and a technical skills gap.

The budget officers at the county assembly should be officers who command a lot of respect from the MCAs due to their knowledge of the budget process. While the ultimate decision to approve the budget or not rests with the Members of the County Assembly, it is critically important that the MCAs give adequate attention to these officers. The county executive budget team has unrivalled capacity at the county level in generating budget estimates and accompanying documents and also costing government programmes.

This does not however mean that county assembly budget officers should not be provided with information that they require as the purpose of these two offices should be to collectively serve the best interests of the county. While county assemblies are evolving, the technical skills gap will continue to be evident as the budget officers or fiscal analysts (as they are known) continue to transition from other fields like accounting and finance to perform these roles. Others are doubling up as auditors and accountants while playing the budget officer role.

These challenges could be resolved by having a county assembly budget office. The budget office would be an independent, objective, nonpartisan office ensuring provision of high quality research and analysis on fiscal policy directed to the county assembly. This research and fiscal analysis would be pegged on the budget cycle, but would also assess the financial implications of other executive proposals received by the legislature throughout the year. An ideal assembly budget office has six core functions which are: offering economic forecasts that are independent from the executive branch, making baseline estimates of revenues and expenditures based on current laws, analysing the executive budget proposal, developing budget projections beyond a single year and examining proposals for new programs and preparing policy briefs for existing programs.

Kenya’s Parliamentary Budget Office (PBO) was established in the year 2007 as a unit under the Directorate of Information and Research services following a resolution of Parliament. The Public Finance Management Act 2012 re-established the PBO and further enhanced its roles, thereby giving it a strong footing as a reliable institution held in high regard by the National Assembly Budget Committee in matters budgeting. The goodwill extended to the PBO by the National Assembly is a result of many years of quality work in the budget process and I believe that we should be able to witness a similar situation at the county level as devolution progresses. While there is a clear framework guiding the establishment of the Parliamentary Budget Office in Kenya, there is no such framework at the county levels, meaning that the county assemblies are potentially missing out on critical technical inputs from budget experts.

Should a county assembly budget office be established under the county assembly? I believe that counties should drive their own agenda in matters budgeting while observing constitutional principles. In Kenya, the devolved governments have been in existence for two financial years and this financial year 15/16 should present a good opportunity for counties to conduct interim assessment of the capacity of county assembly budget offices (if any exists) in terms of numbers of personnel involved, whether we have the right people serving in those budget offices, the challenges they are facing and the skills they possess. While we acknowledge the challenges being faced by the County Assemblies, the need to invest in the budget offices and provide a legal provision should form a key priority in the coming financial year 2016/17.

It will take some time to develop adequate capacities of the county assembly budget offices, but it is important for all players to understand that a strengthened county assembly budget office means effective oversight of the Executive by the County Assembly in the budget process.

Budget documents availability in the East Africa region has deteriorated

IPF — Sat, 25 Apr 2020 05:54:00 +0000

Transparency and accountability by governments in spending helps to check corruption, promote fiscal responsibility and allows for greater and more meaningful participation by citizens. Generally, we are concerned about transparency on government spending because we know that transparency helps us in understanding how governments collect, determine spending, spend and report on our taxes. Budget transparency also encourages fiscal responsibility. It is evident that budget transparency reduces potential fraud and corruption by opening government operations to its citizens.

According to the Africa Economic Outlook report 2016 by the Africa Development Bank and partners, East Africa was the continent’s fastest-growing region and is expected to continue its high growth path in 2016/17. This growth translates to ordinary taxes and Foreign Direct Investments (FDIs) increasing over the same period. While the FDIs can be expected to accelerate in Africa due to economic fundamentals, the lack of transparency may eventually drag down them. In the paper the Impact of Transparency on Foreign Direct Investment by Zdenek Drabek and Warren Payne, the authors note that on average a country could expect 40 percent increase in FDI from a one point increase in their transparency ranking. This means that for the East Africa region decrease in budget transparency could lead to reduced investments which in turn could lead to reduced investments in critical sectors of the economy.

The International Budget Partnership’s (IBP) bi-annual tracker of budget documents availability was recently released in March. This allows us to assess how the countries of East Africa compare to others around the world. One key finding is that Kenya did not make publicly available the in-year reports in December 2016, while these reports were available in 2015.

In-year reports provide a view of the budget’s implementation during the budget year. These reports require the government to develop the systems and staff expertise necessary to track aggregate budget spending and revenue trends. Uganda continues to perform better in budget documents availability to the public with the only document unavailable online being the citizens budget. The citizens budget is defined as a nontechnical version of the budget estimates designed to reach and be understood by the widest possible section of the population. In 2015, the citizens budget was not produced while in 2016 this document is unavailable online.

In Tanzania, based on the December 2016 budget tracker, the country further retrogressed. From six documents available online in 2015, only three were made publicly available or available online by December 2016. This is a fifty percent decrease in how much budget information was available to the public.

In Rwanda, the 2015 budget documents tracker indicated that the eight key budget documents were publicly available, while the December 2016 tracker indicated that only five were publicly available. Finally, Burundi was not assessed for budget documents availability in 2015, but in 2016 only two of eight key budget documents were publicly available online in a timeframe consistent with international standards.

Institutions that continue to provide budgetary support to governments like World Bank, International Monetary Fund (IMF), USAID, DFID among others should step up their game in demanding for more action on budget transparency. There is no reason provided by these countries on why budgetary information cannot be made publicly available and on time for use by citizens and interested parties.

While to achieve the Sustainable Development Goals (SDGs) requires that governments commit adequate resources towards their realization, it is imperative that at the same time commitment be made to make information on public expenditure around the same goals available. Lack of budget information to monitor the available finances will hinder the ability to determine whether we are headed in the right direction as far as SDGs targets are concerned and make it difficult to hold governments accountable.

CBEF: Are they the only legal mechanism of public participation at the county level?

IPF — Sat, 25 Apr 2020 05:57:00 +0000

If there is any one phrase that has been mentioned over and over in this country since the promulgation of the new constitution, it is the phrase public participation. Across the counties, from Makueni to Kisumu to Kwale, every participant in meetings I have attended seems to feel that the county governments are not involving them in decision-making.

In every decision that government makes, it is a cardinal requirement by the Constitution of Kenya 2010 that people must be involved. Section 104 (4) of the County Government Act calls for involvement of the non-state actors in the planning process of the county. This call for non-state actor’s participation in the planning process in the county is further strengthened by section 137 of the Public Finance Management Act, 2012 (PFM Act). The PFM Act emphasis is on the County Budget and Economic Forum (CBEF) as a mechanism for county-level consultation with the public on matters relating to budgeting, the economy, and public financial management.

In my scouting for ways and means by which the public should participate in the Kenyan governance system, I have not found any other means that is as elaborate as CBEF. The International Budget Partnership, in its 2015 paper, “Devolution in Kenya: The Establishment of County Budget and Economic Forums,” notes that the CBEFs are the only specific, legally required mechanism for public participation in the budget.

While the current process of public input into the County Fiscal Strategy Papers 2016 is ongoing, it is unfortunate that the participation process to be undertaken by the county executive with the support of the bodies like CBEF looks a mere formality in order to meet the criteria for public participation. Some counties have put the call for public participation in the national press while providing no reference to the materials that will be subjected to public scrutiny. While the instance itself of putting the call out for public participation is commendable, the use of a body like the CBEF would go a long way in making the participation effective and meaningful. CBEF members as a quasi-part of the executive in budget making process should have access to these documents early in order to enable them provide strategic direction to their members on how to engage with the county government. Taking the cue from the National Treasury, it is important to note that the National Treasury called for public input and provided the draft Budget Policy Statement so that people could have the basis for engagement while being guided on the possible resources that the country has. And this should be the minimum we should expect from the counties as well.

So what is the situation as regards the County Budget and Economic Forums? While the nomination, composition and functioning of CBEFs remains a challenge, it is imperative to note that without a national framework on public participation the CBEF presents the country with the most ideal opportunity to strengthen the engagement between the county governments and the county residents. The PFM Act notes that CBEF representatives are supposed to be persons representing interest groups embedded in the county and actively involved in driving the county agenda. CBEF members should possess adequate knowledge on matters budget and economics.

These are clear indications that this should not be an opportunity to reward political cronies but an opportunity to strongly involve the county residents in the budget making process. While the county executive holds sway in the appointment of the CBEF members, they should know that the support accorded to the CBEF can be instrumental in ensuring their reach within the county is felt. Agencies like Kenya Private Sector Alliance, Kenya Chamber of Commerce and Kenya Association of Manufacturers jointly with other actors working on entrenching devolution should remain on the forefront in ensuring the representation of interest groups in the CBEFs is firm.

While most counties have established the CBEFs, their operational independence has come into question despite elaborate guidelines by the Commission on Revenue Allocation. The requirements to establish the office of the CBEF secretary is still a dream in Kwale while in Makueni the CBEF is nonexistent and this leads to the question whether there is real interest in the functioning of the forums by the county governments?

So, will we see more and meaningful participation of the county residents in the FY 16/17 Budget process and are the County Budget and Economic Forums (CBEF) going to be provided resources for engagement with the stakeholders they represent? Indeed we expect to see meaningful engagement between the county residents and their government while ensuring that resources allocated for public participation are commensurate to the task.

The Budget preparation process with a focus on County Fiscal Strategy Papers (CFSP) and the Executive Budget proposals (EBP) should have in them clear direction on how the CBEF is expected to engage with the public including on how to monitor the effectiveness of public participation. This, in the end will provide interest groups an opportunity to effectively engage with the county governments on the budget process devoid of political manipulation.

Are County Governments Planning for the Financial Year 2018/2019?

IPF — Sat, 25 Apr 2020 06:01:00 +0000

The just concluded general elections in Kenya on 8th August 2017, threw the budget process in a spin at the county level. While section 126 of the Public Finance Management Act, 2012 anticipates that the first key budget document in each budget cycle will be the Annual Development Plan submitted to the County Assembly by the 1st September of each year and made public within seven days of tabling, this has largely gone without being honored by most of the counties occasioned by the delays in county assemblies settling down for business among other reasons. The Annual Development Plan is an extract of a five-year plan called the County Integrated Development Plan (CIDP) as defined by section 108 of the County Government Act, 2012.

The CIDP should have clear goals and objectives, an implementation plan with clear outcomes, including a projection of the financial resources that are needed for capital project developments and operational expenditure. The first CIDP that was produced by counties about five years ago set out the development agenda for county governments for the period 2013-2017. All counties are now expected to produce new CIDP’s in this five-year period from 2018 until 2022, which will lead to developing of Annual Development Plans for the respective counties.

To support prudent use of public finances, Section 104 of the County Government Act, 2012 talks of the obligation to plan by counties and that no public funds shall be appropriated without a planning framework developed by the county executive and approved by the county assembly. The Annual Development Plan which is the planning document that guides appropriation of public finances in a coming financial year should include among other things; county priorities in the medium term that reflect the county government’s priorities and plans, show how a county is responding to changes in the financial and economic environment, programmes to be delivered and details of each program ( like where they are derived from, the program status (new or ongoing), the program/project cost implications, opportunities for monitoring and evaluation), description of significant capital development and a summary budget in the format required by regulations.

While the ADP is the primary document at the commencement of the budget year, there are other budget documents that rely on it and feed into it to aid in planning for another financial year. A review of county websites carried out on Monday 2 nd October 2017 by our organization ( www.ipfkenya.or.ke) on all the 47 counties websites revealed that only three counties had made their FY 2018/19 ADP publicly available. We define a document that is publicly available as that which is “published on the official website of the county government issuing the document within the time frame specified in the PFM Act 2012 and that all citizens can obtain it free of charge”.

In this review of county websites, only Makueni, Siaya and Nairobi counties had published their FY 2018/2019 ADPs but neither of these had their CIDP 2018-2022 published. Publicizing the ADPs as a principle of budget transparency and accountability implies that a county’s citizens have the right, as individuals or in association in the form of civil society organizations, to make and express judgments on the county’s budget. This requires that budget documents be widely available. According to the international Open Budget Survey, a government budget document can be considered publicly available if it meets two criteria (a.) It must be published within a reasonable timeframe by the institution or agency responsible for producing the document; and (b.) It must be available at minimal or no cost to any person who wishes to access the document (i.e. the government must not make documents available selectively, or only to certain individuals or groups).

In this case, we can conclude that counties are performing poorly in terms of publicity of the ADPs which will aid for planning and budgeting for FY 2018/2019. Counties have failed to comply with the timelines stipulated in law and are not taking advantage of technology to disseminate this crucial information through their websites as our review of county websites on Monday 2nd October 2017 found out.

This is despite the lapse of the period envisioned in law which is “within 7 days” after tabling of the ADP to the county assembly on 1st of September.

It is imperative for county government officials to note that the advantage of using online systems to share public information is that; it’s a cheap means of sharing information unlike having to develop print outs of the documents and disseminating them which will incur other unnecessary costs, the websites will have the information shared widely for those who have access to internet and this eliminates the old bureaucratic process of obtaining public information.

Finally, when we have budget information on the official websites then we can conclude that counties are really open on budget information and plans for FY 2018/2019 are underway in the case of the ADP. Unfortunately, the situation we are currently facing is filled with opaqueness and we cannot tell if there are any plans for spending public finances.

Kwale county pending bills was Ksh 989.9 million as at the end of FY 16/17. How do pending bills arise?

IPF — Sat, 25 Apr 2020 08:34:00 +0000

Since the onset of devolution, counties have grappled with a lot of formative challenges among them the issue of managing the public finances. In a bid to provide services to the citizens, government as a consumer in the economy procures services and goods from different entities and subsequently honors payments as soon as the obligation has been met by the supplier. However, most of the times, county governments find themselves facing cash shortages because of myriad factors which include, delayed transfers from national government, local revenue shortages, disputed payments, delayed legislations among others.

In the financial year 2013/14 the Controller of Budget Annual Report, analysis of expenditure by economic classification indicated that counties spent Ksh 3.7 billion on debts and pending bills and in 2014/15 spent Ksh2.24 billion on debt repayment and pending bills. The Controller of Budget further reported that by 30th June 2016 counties had accumulated Ksh37.36 billion on pending bills which consisted Ksh10.45 billion for recurrent expenditures and Ksh26.92 billion for development expenditure. Nairobi County had the highest pending bills at 5.04 billion, followed closely by Nakuru County at sh3.68 billion.

Looking closely at Kwale county, 2015/16 annual implementation report produced by the Controller of Budget, disclosed that as at June 30, 2016, Kwale County, had accumulated account payables amounting to sh1.45 billion, of which 1.44 billion were pending bills on development expenditure owed to contractors, this further reduced to sh989.9 million in FY2016/17. However, this is not the case across all counties, some counties like Mombasa saw their pending bills increase significantly from sh875 million in FY2015/16, to sh3.9 billion in 2016/17. But how do pending bills arise?

Government financial statements are prepared on cash basis format. Cash basis accounting format provides that funds should be spent as they are received. Consequently, creditors and debtors are not recognized in the financial statements and should not arise. However, there are various reasons that causes unpaid bills to accrue at the end of the year. With focus on county governments, we try to explain these reasons below;

Firstly, when there are delays in the release of the equitable share to the counties, projects that had been budgeted for and executed will remain unpaid by the end of the financial year.

Secondly, there are lots of work- in- progress at the end of the financial year which includes ongoing projects that may not have been completed by the end of the financial year.

Thirdly, the last few days of the month of June are characterized by overloading of the Integrated Financial Management System (IFMIS), since virtually all the counties are making payments of the completed projects before the expiry of the appropriation act which expires on June 30th.

Fourthly the delays in the enactment of crucial laws that authorizes payment of funds to the counties, like the County Allocation of Revenue Act and the Division of Revenue Act leading to counties exercising prudence by delaying payment to the suppliers and contractors in order to retain some funds to cater for salaries and wages and other essential services in the months of July and August, as they wait for the funds to be credited to their account in the months of September or October.

Lastly, when the revenue targets are not achieved, and the budget is fully committed, there will arise projects that will have been executed but without funds to match.

Evidentially, pending bills can and have become a challenge to counties because when commitment of funds is not matched with the funds available, the county governments are overburdened with debts and this may threaten the provision of essentials services in future. Secondly, when bills remain pending for too long, investor confidence is eroded, and the counties may lose reliable suppliers and contractors.

Finally, it erodes the ability of firm decisions to be taken by county assemblies. When commitments have been made at the close of the year, it means that the room for the county assembly to alter the budget estimates presented for approval remains limited.

Placing this in context, over the past three financial years, the average amount of pending bills in Kwale County, based on the approved budgets and the Annual Controller of Budget Reports is about 18%. In the budget approved by the County Assembly for the FY2017-18, the commitments brought forward on pending bills amounted to sh1.8 billion against a Total Budget of sh9.7 billion which is 18.6% of the Total Budget. This is an increase from the 15.2 % in FY 2016/17 and the 18.4% in 2015/16. The Report of the Auditor General on the Kwale County Financial Statements in 2015/16 however indicated an excess vote, since the pending bills did not match the cash and bank balances.

To address the challenge of pending bills, it is important to recognize that Section 122 (5) of the Public Finance Management Act provides that county treasuries shall submit both quarterly and annual reports of all loans made to the county government to the county assembly. In addition, frequent reporting on the buildup of the pending bills may ensure monitoring of these bills to ensure they remain within acceptable limits, and finally, at the end each quarter, an analysis on the revenues should be done to ensure realistic projections are done and the budget adjusted accordingly. This will ensure that there are no unfunded projects that are initiated.

Allow counties to implement Big Four agenda

IPF — Sat, 25 Apr 2020 04:48:00 +0000

It is that time again when your government plans how to spend Sh2.08 trillion of your hard-earned money, which you pay as taxes, in the 2019-20 budget. One of key documents that the government will generate is the 2019 budget policy statement which the National Treasury has made publicly available so that you can provide comments.

But what is a budget policy statement? This is a document prepared pursuant to Section 25 of the Public Finance Management Act, 2012. It is submitted to Parliament (both Senate and National Assembly), by February 15 each year and thereafter approved within 14 days with or without amendments.

This document reflects the culmination of the strategic planning phase of the budget process. The national government broadly aligns its policy goals with the resources available and takes into consideration the total amount of expenditure, revenue, and debt for the upcoming budget year. At the county level, this document is equivalent to the county Fiscal Strategy Paper.

In the budget for 2019-20, government, through the budget policy statement, plans to heavily invest in the President’s legacy christened Big Four agenda. The Big Four are housing, universal healthcare, manufacturing and food security. While government is heavily investing in the Big Four, it is important to note that Kenya continues to rely heavily on donors for delivery of critical services such as immunisation and purchase of ARVs.

These partnerships with donors are very important but there are pertinent questions that need to be asked, including whether we are investing in this nation’s human capital as effectively as we should. While the President’s agenda sets a good foundation for future growth, the focus on brick and mortar component of the Big Four agenda moves money from other important areas that are of greater priority.

Allocating so much money to the national level agencies and ministries as the Budget Policy Statement (BPS) 2019 has done further concentrates resources at the national level, running counter to Schedule Four of the Constitution.

Schedule Four assigns functions to counties and these functions, which are either shared or exclusive, can best be achieved where service is closest to the public. Of the President’s Big Four agenda, housing, agriculture and health are shared functions between the national and county governments.

Good intentions notwithstanding, the Senate should rise to the occasion and question the effectiveness of having the President’s agenda implemented by national level agencies and whether it is more effective for counties to implement the same under conditional grants while we strengthen national oversight authorities?

The Senate, as custodian of county interests, should also help us understand the equity question when most of the resources are left with ministries and agencies at the national level.

Counties should tell us how they spend our cash

IPF — Sat, 25 Apr 2020 04:53:00 +0000

County governments have struggled to raise sufficient revenue of their own. There have also been reports of poor use of available resources. Worth appreciating is that county budgets are largely dependent on the nationally shared revenue. As per its constitutional responsibility, the CRA proposes a revenue allocation formula indicating how counties will share funds.

The formula must be approved by Parliament every five years. Between 2013 and June 2019, two formulas have been used and great lessons drawn from them. Two great lessons that I believe we have learnt as a country are: 1 ) that we cannot use the equitable share parameter to serve multiple objectives and still claim equitability in revenue allocation and 2 )that by having a greater allocation weight pegged to poverty, we are incentivising counties to remain poor.

In December, the CRA published the proposed third-generation formula that will be used to allocate funds to counties for five years between 2019-20 and 2023-24. It is available for public input. The following parameters have been proposed: health 15 per cent; agriculture 10 per cent; water three per cent; urban services and environment three per cent; county services 18 per cent; public administration 20 per cent; land area eight per cent; county road network three per cent; poverty 15 per cent; revenue collections two per cent and prudence three per cent.

In these parameters, two of them are of interest as they have the potential to strongly support efficiency and effectiveness of how counties collect and deploy resources. These are revenue collection and prudence. Let me draw the commission’s attention to the Open Budget Survey (OBS) 2017 conducted by IBP Inc.

Kenya dropped two basis points on the Open Budget Index from 48 to 46 largely on account of not making the citizens budget for 2016-17 publicly available, among other concerns. The OBS assesses budget transparency based on the amount and timeliness of budget information governments are making publicly available. In 2017 it was conducted in 115 countries.

Based on our Public Finance Management (PFM) Act 2012, there are practical ways on how the commission can objectively assess prudence and revenue collection. On revenue collection, one of the things the commission should do is to emphasise respect for the PFM law on making budget documents publicly available. Counties have an obligation to make all information about their revenue collection public.

How will we as citizens know how much money counties collected if there exist no documents or documents are made publicly available months after the time stipulated by the PFM Act? For this to work, counties that make documents publicly available should be rewarded and those not doing so be penalised.

The PFM Act clearly stipulates that these documents should be made available to the commission when they are being given to other agencies. However, it is not the responsibility of the commission to make them available to citizens, but of the counties.

On prudence, it is imperative that we understand that public finances are very much exposed to greater risks, especially in our nascent devolved system where a few public servants seem to be on a path of self-aggrandisement and enrichment. When counties make data on public sector assets, liabilities and wealth public and update them quarterly or as and when new acquisitions are made, we will have moved a step forward.

In most of the Auditor General’s reports, one of the major concerns is unavailability of ownership documents on assets by counties. Finally, let us consider incentivising counties that have unqualified opinions on their audit reports and whose key audit issues do not recur while fully enforcing the provision of the law on revenue collection and spending.

By working closely with the office of the Auditor General, the prudence parameter will have scored a quick win and these two parameters will contribute greatly to enhancing equity at the county level.

This article originally appeared in the star Newspaper. Here

WILL PRESUMPTIVE TAX HAVE A TAX INDUCED BEHAVIOR?

IPF — Sat, 25 Apr 2020 05:07:00 +0000

In January 2008, the Turnover tax which has been replaced by the presumptive tax in January 2019 was introduced with the purpose of simplifying how the small business file and pay their taxes in Kenya. The turnover tax was a tax on income of small businesses whose income was less than Kshs 5,000,000 per year and more than kshs 500,000 per year. However, in June 2018, the Cabinet Secretary National Treasury acknowledged that turnover taxation has largely been unsuccessful, and the levels of compliance have remained low due to the profile of the sector and thus proposed to introduce the presumptive tax at fifteen (15%) percent based on the business permit or trading license fees.

It is imperative to understand that the collection of taxes from the many small unregistered business operators is clearly a challenge that KRA has been grappling with. Majority of these small business operators are highly mobile with weak accounting systems and simple management structures. This then presents a difficulty in having them pay for taxes month in month out like other formalized businesses. Therefore, a simple way of getting these small businesses to pay their fair share of tax is by defining what is the easiest option of getting to them. By adopting presumptive taxation, KRA generally accepted that these businesses have income that is presumed rather than actual due to their weak accounting system and that local authorities where these businesses are operating are in a much better position to monitor them.

KRA defines presumptive tax as a final tax payable by a resident person whose turnover from business does not exceed Kshs. 5 million during a year of income and costs 15% of the single business permit value as issued by a county government. Considering that tax collection is still hampered by a large informal sector in Kenya and an underperforming tax authority, it leaves the formalised sector prone to government overzealous supervision. While it is evident that majority of small-scale businesses and self-employed professionals are not registered for tax purposes, it is important to understand that at the local level where they operate, they are highly formalized by the business permits issued by the local authorities and thus become an easier target by the revenue authority with enforcement powers being delegated to the county government issuing the business permit.

Presumptive taxation should involve simple and cost-effective techniques to capture domestic transactions and sources of income that frequently escape taxation under conventional norm. Further, while the government has acknowledged the failure of the turnover tax due to the nature of the informal sector, it is imperative to understand whether the presumptive tax will have a tax induced behavioral changes that could result in reduced output. Is it possible that more people will avoid paying for business permits and in turn avoid paying presumptive tax and in turn deny county governments revenue?

Taxing all persons and businesses that qualify for taxation and distributing the taxes prudently in the economy reduces inequalities and with it comes more goodwill from citizens. However, in an environment where mistrust exists due to misappropriation of resources, poor service delivery and failing local infrastructure, the government should do much more than just collect taxes and levies.

Universal Health Coverage (UHC) in Kenya will collapse unless our health budgeting is improved

IPF — Sat, 25 Apr 2020 05:27:00 +0000

Kenyans peculiar habit include moving on swiftly from serious national conversations even without asking ourselves what solutions have been provided. Few weeks ago, a mother who had given birth to quintuplets died in a national referral hospital and two of the children had died barely a month after birth. Demand for accountability came through Kenyans online under the hashtag #maternalnegligenceke with parliament and county assemblies who are incharge of oversight still waiting for the next state of nation and county address. I am still looking for the official government response on such a serious issue like maternal death. But why will we continue experiencing maternal and infant deaths today as we trumpet for Universal Health Coverage (UHC)?

While our ability as country to address health equity challenges is improving gradually, Improved health budgeting is key if we are to achieve the desired UHC outcomes. It is further important to understand that investments in universal health care is not about how many people register for the NHIF card, it is much more including reforming the health care system, providing bigger and better budgets at the county level, consolidating donor funding, improving on budget absorption and improving internal controls, oversight and overall accountability of health funds.

In the financial year 2018/19, a lot of numbers have been provided on how much we are spending on the UHC ranging from Kenya shillings 2.0 billion to Kenya shillings 3.8 billion. However, no one has asked how much of these funds are committed from our taxes and how much is coming in from donors in form of grants and loans. As a lower middle-income country, our dependency on donors is increasing being challenged and this evident with the impending exit of Global Alliance for Vaccine Initiative (GAVI) in the next eight years or so from the Vaccine support program that Kenya receives annually. In the FY 2018/19, recurrent Allocation for Kenya Expanded Programme Immunization (KEPI) decreased from shillings 20 million to shillings 9 million while the development vote allocation continues to be constant with Kenya contributing shillings 703 million and GAVI contributing shillings 2.6 billion. Are we then likely to achieve UHC when we can’t fund it ourselves?

Understanding that the UHC pilot is heavily donor dependent, the government of Kenya should take some quick urgent measures.

Firstly, as a country we should Provide bigger and better budgets for health services at the county level; the health function is a fully devolved function apart from policy work and that means there is no reason why national level health budget continues to increase and not at the same rate as the county level health budgets. Secondly, we should not keep allocating resources to those who are not spending. In FY 2017/18, the ministry of health allocation was shillings 78 billion and only shillings 50 billion was spent indicating that only 63% of the available resources were spent to support the health care system at the national level. With government providing very scanty information on why the ministry did not spend the resources, there is no justification on why more resources should be domiciled at the national level instead of being devolved through conditional grants. Finally, we should improve on internal controls, oversight and overall accountability for health funds: It is possible that we can deliver better health outcomes if we invest in PFM controls.

Kenyans are generally worried by wasteful use of our taxes with a good case being the container clinics that were dumped in Mombasa after being procured for use in the slum upgrading projects. To build trustworthy public expenditure in the health sector we should improve on transparency and accountability by providing space for robust engagement with citizens, improving our health sector internal controls, improved financial reporting and enhanced oversight by the legislature. The ministry of health, national treasury and parliament can take lead in improving the controls and understand that these controls will serve the interest of well-meaning citizens and not tenderpreneurs.

We all desire that UHC becomes a success and the government have made great strides on encouraging citizens to enroll into the UHC dream. However, if we don’t improve our health budgeting, UHC will remain just that, a dream and more people will fall into poverty increasing inequalities and making SDG number one a mirage.

Timely Budget implementation reports are a key route to checking inequalities

IPF — Sat, 25 Apr 2020 05:35:00 +0000

Government decisions on how money is spent should be made known to people in a timely manner if we are to maintain high levels of accountability in management of public finances. As at January 2020, a quick scan for quarter one budget implementation reports around the web by the Institute of Public Finance Kenya for county budget implementation reports for the FY 2019/20 found out that only Baringo County had made the report publicly available as required by the PFM law.

How then will citizens keep their governments accountable if budget documents access is a challenge?

What are the county assemblies doing in ensuring transparency and accountability of public funds? Section 166 of the PFM Act 2012 is very clear on quarterly reporting obligation of the county treasuries. So, whose failure is it that counties are not making disclosures on how funds entrusted to them are being spent?

It is imperative to understand that the effects of budget transparency need to be seen in the context of how much effort the government puts in to ensure that citizens understand and interact with the budget itself. The International Budget Partnership defines budget transparency as the public availability of key budget documents (“available” is defined as those documents published online on an official government website in a timely manner) and from the perspective of the comprehensiveness of the information they contain.

The taxes collected by government in order to fund public programmes for reduced inequalities and improved quality of life is essentially a social contract between the governing and the governed and this requires that the governments make available budget documents that provide information on how that social contract is being executed.

Over the years, governments across the world have continued to respond to demands for increased level of transparency on how collected taxes are planned for and the process under which systems are deployed to effectively manage them. However, an independent, comparative assessment of the three pillars of public budget accountability: transparency, oversight and public participation by International Budget Partnership in 2017 showed a modest decline in average global budget transparency scores, from 45 in 2015 to 43 in 2017 for the 102 countries that were surveyed in both rounds (scores are out of a possible 100). Kenya’s transparency score dropped from 48 to 46 between 2015 and 2017 which was as a result of failing to publish a Mid-Year Review online, Producing and publishing a Citizens Budget (“the Mwananchi Guide”) in the year under review, and failure to increase the information provided in the Year-End Report by including detailed actual outcomes for expenditures and comparisons between planned nonfinancial outcomes and actual outcomes among other reasons.

As years progress and our Public Finance environment mature, the Office of the Controller of Budget is slowly but surely maturing within the same pace. The Controller of Budget has a constitutional mandate in reporting on how public funds are being spent and that should not replace the county government treasuries obligation on reporting to citizens on how funds are being spent. In the current financial year, the first quarterly report on county budgets implementation, though annoyingly late, has greatly improved with regards to quality of data compared with previous editions. The report has considered sub program level reporting for some counties and not others. While this is a good start, key things we look forward to seeing in future reports is the consistency with the formats under which the program-based budgets are produced and approved.

There is critical data that is contained in the budgets and missing in the reports and which include targets, key indicators and responsible administrative units under which they are monitored. Other key issues that they controller of budget should consider include the amount of resources that counties are spending in monitoring and evaluation of budget implementation and especially on what steps the government is taking to include vulnerable and under-represented parts of the population in the implementation budget. These considerations will be important to ensure that there is deliberate effort in addressing inequalities and including the most vulnerable of our citizens in determining how taxes are spent and reported on.

Opening the government sector working groups to taxpayers will increase budget transparency

IPF — Sat, 25 Apr 2020 05:40:00 +0000

Every August of each year, and as required by section 36 of the Public Finance Management Act 2012, the Cabinet Secretary for National Treasury issues guidelines to ministries, departments, national government agencies, constitutional commissions and independent offices, parliament and judiciary on how the budget for the coming financial year will be prepared.

The budget guidance by the Cabinet Secretary means that the allocation of funds and justifying why we are allocating the funds commences in earnest with sector working groups being activated to provide reports of past years spending and projections for the coming financial year and in the medium term. Working groups reports at the National level, guide the National Treasury decisions on allocation of resources by February of each year when the budget policy statement is presented to parliament with limits on how much resources should be allocated to each sector. In Kenya there are ten sector working groups organized within the context of the UN-classification of the functions of government (COFOG) and which range from Health, Education, Governance, Justice, law and Order (GJLO), Social Protection, Culture and Recreation, Agriculture, Rural and Urban Development (ARUD) among others. Further, the specific state departments are then clustered in their respective sector working groups.

Considering how our National level budget is known to be buttressed with unnecessary plans and costs, that lead to wastage and leakages, the sector working group level is where Kenyans need to be worried about very much. This is the point where large infrastructure projects are conceived, resources prioritized and allocated. Interestingly, the resource requirements based on budget reports across sectors for past financial years l have seen have not been met both in disbursement and absorption levels. At the sector working group level, this is where conspiracies to fleece the taxpayers occurs and plans are prepared to ensure that the mischief is not detectable. Taken into context this ensure that all projects are well within the planning framework at the onset of the budget process and it is worth remembering that in the recent past among the cases that the Office of the Director of Public Prosecution (ODPP) has taken to court, some of the charges preferred include engaging in a project without prior planning and at the working group level where bidding of resources happen each ministry has to justify their plans and resources they need in order of priority.

According to the budget circular released on 28th August 2019 by the CS National Treasury, the structure and composition of Sector Working groups should comprise of government employees, representative of donor agencies and a representative of the private sector. While this budget circular required the strong involvement of stakeholders, the process of joining or actively participating in the working group is not documented to guide citizen engagement with a sector of their choice and this raises critical questions. These questions include the level of taxpayer involvements in this level of decision making at the sector working group level, whether the private sector is supposed to represent taxpayers’ interest or business interests and whether the government should consider opening further the working groups to a wider audience?

In pursuit of budget transparency, equality and equity in resource allocation and ensuring that we seal corruption loopholes which are well planned during the budget formulation stage, it is high time as a country we opened the sector working groups to a wider group of stakeholders both at the national level and the county level.

ARE WE MEETING THE CRITERIA OF PUBLIC PARTICIPATION IN THE BUDGET PROCESS AT THE COUNTY LEVEL?

IPF — Sat, 25 Apr 2020 05:48:00 +0000

In Kenya today Public participation in the budget process especially at the county level is both “means” and “ends” of well-functioning county government. The county government is both the County Executive and the County Assembly. By properly, efficiently and timely engaging the public, demands for the government to be more efficient, responsive, transparent and accountable will increase. It is also clear out of this that the county governments, in turn will become more open to the public’s input and their participation.

As the public hearings for the budget estimates draws to a close, we have noted how active county assemblies have become in placing adverts in the newspapers calling for public participation. Most of the County assemblies are falling in the same category of county executive in placing adverts calling for public participation to avoid the Kiambu county incident where the Courts declared the Finance Act 2013 unconstitutional for lack of input from the public. But what is public participation? Article 10 of the constitution of Kenya, talks of national values among them Participation of the people, Article 118 also clear states that parliament shall facilitate national legislation on public participation and article 196 talks of the county assemblies facilitate public participation.

Despite lack of a guiding national framework on public participation, we are clear as a nation that the reason why an overwhelming majority voted for the new constitution is the believe that the central government rarely involved Wanjiku in the running of the government and development of responsive policies. With the onset of devolution, it has become clear that what happens at the county level, at minimum Wanjiku must be given an opportunity to engage with the county executive and the county assembly.

Effective public participation especially at the ward/sub county level should at minimum meet certain threshold. In his brief Proposal for ward level Budget Hearings, Kenya County Budget process 2014/15 Jason Lakin, Ph.D. provides some pointers on how the process can be made effective. It is also important for the county assemblies to ask themselves questions like, what should each ward hearing discuss? What should we provide to the citizens before the hearings starts? How should these hearings be conducted and how much time should be allocated? Who should we consciously target so as to get maximum input in the hearing process? Should these ward hearings allow for sector bargaining? What are we expecting the public to comment about during the budget hearings? What would convince people that their contribution is being taken seriously and should they expect feedback?

In the dailies on 7th June 2014, at least two county assemblies placed adverts calling for public participation to review the budget estimates for financial year 2014/15 starting the 9th June 2014. What does this tell us? This is a clear evidence of lack of capacity to manage the core elements of our laws as regards to public participation. One startling thing was the request for feedback from members of public and then the lack of provision of the reference document. Being that 7th June 2014 was a Saturday and 9th June 2014 was a Monday what meaningful participation should we expect from the public as far as inputs in the budget process are concerned?

This experience has shown that it is now important more than ever to have a guiding national framework on public participation. The OECD journal on budgeting notes that effective Public engagement creates mutual benefits: citizens become better educated about public policies and government activities; and by tapping into the experience and expertise of their constituents, officials can build more effective and responsive government. This in doubt applies to Kenya and specifically the county governments which are the units of governance closer to the citizens.

COVID-19: Kenya Urged to Take ‘Swift & Effective’ Public Finance Response

IPF — Fri, 27 Mar 2020 05:56:00 +0000

Our organisation, the Institute of Public Finance Kenya, is now urgently calling for measures that will ensure that our public finance system is responsive and all-inclusive.

Chief among these measures is the re-prioritizing of national and county government spending via new supplementary budget estimates for the 2019/20 financial year.

https://www.indepthnews.net/index.php/the-world/africa/3410-covid-19-kenya-urged-to-take-swift-effective-public-finance-response

CORONA VIRUS PANDEMIC ON THE KENYA PUBLIC FINANCE ENVIRONMENT: A CALL TO ACTION!

IPF — Sat, 21 Mar 2020 06:00:00 +0000

During this period when the Novel Coronavirus (COVID-19) pandemic has hit the country, The Institute of Public Finance Kenya calls for

The National and county governments to reprioritize spending by quickly preparing supplementary budget estimates for the FY 2019/20. This should focus on spending cuts for non-core areas like
foreign travel, training and hospitality which according to Controller of Budget cumulatively spent Ksh6.8 billion in the first quarter of FY 2019/20 at the national level.
The National Treasury and county treasuries to prioritize resourcing for frontline health workers like Community Health Workers (CHW) from the contingency fund and emergency funds respectively.
The Cabinet Secretary National Treasury to initiate a process for deferment of Value Added Taxes
(VAT) for March 2020, April 2020 and May 2020 and for VAT payments to be made on payments received and not on invoices issued.
The County governments to responsibly utilize emergency funds as allocated under the various FY 2019/20 county’s appropriation Acts and pursuant to section 110 to 114 of the Public Finance Management Act 2012.
The Parliament through its established systems like parliamentary committees to ensure accountability of public resources during this period by requiring adequate transparency through publication and
publicizing of emergency response disbursements on monthly basis.

CORONA-VIRUS-PANDEMIC-ON-THE-KENYA-PUBLIC-FINANCE-ENVIRONMENT Download

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Who does the Kenya Parliamentary represent?

IPF — Tue, 27 Jul 2021 09:34:00 +0000

By Daniel Ndirangu,

The Budget and Appropriations Committee (BAC) in its report on the Budget Policy Statement (BPS) dated March 4^th, 2021, had categorically stated, that it would not approve a budget deficit above KES930 billion or 7.5 percent of the GDP whichever is lower.

However, on 8th of June 2021, following the submission of the budget estimates to the National Assembly by the National Treasury, the Budget and Appropriations Committee (BAC) recommended that parliament approve a budget expenditure of KES3.66 trillion with the total revenue collection projected at KES2.039 trillion which brings the gap between the revenue and expenditure equivalent to KES1.6 trillion almost as twice as the deficit that the budget committee had approved in February 2021.

Considering that the budget committee did not change its membership composition between 4th March and 8th June clearly indicates that our national assembly does not walk its talk neither that of the electorate but that of the national treasury!

Revenue Updates in Kenya between July and November 2020

IPF — Wed, 20 Jan 2021 09:45:00 +0000

Citizen access to relevant and timely budget information on how government is raising and spending taxes is a worth opportunity that enables them to contribute effectively in decision making. Section 28(7) of Public Finance Management act, 2012 authorizes the National Treasury to give monthly statements on actual revenue collected in the accounts relating to Article 206 of the Constitution to the Commission on Revenue Allocation. Further, section 46 (2) of the PFM Act 2012 requires that within twenty-one days after the end of each month, the Cabinet Secretary shall publish in the Gazette

a statement of actual revenues collected by category and net exchequer issues by the National Treasury.

As of November 2020, total revenue collected for FY 2020/21 was Kshs. 1.002 Trillion which is equivalent to 35% of the total targeted revenue of Kshs. 2.83 Trillion. This was a decline compared to the same period for financial year 2019/20 where total actual revenue receipts were Kshs. 1.023 Trillion or39% of the revenue estimates. The revenue for the period compared to the same period in last financial year decreased both in absolute terms and in proportionate terms.

What Does it Mean When the Government Borrows from the Local Commercial Banks?

IPF — Wed, 12 Aug 2020 09:50:00 +0000

This brief presents analyses of Kenya’s domestic debt that is held by commercial banks, especially the top-performing domestic commercial banks in the country. The research adopted a desk-top review method where data was extracted from the central bank of Kenya’s website and documents and the domestic commercial banks’ website and documents.

The research findings indicated that domestic debt was more expensive than external debt, the ratio of total domestic debt: total external debt was approximately at 50:50 and that the domestic commercial banks held 50% of the total domestic debt. Further, for the years between 2017 to 2019, Kenya Commercial Bank, Equity Bank and Cooperative Bank of Kenya were the largest commercial banks in the country based on asset and customer portfolio, yet they were the largest holders of the government’s domestic debt held by commercial banks.

ONLY MORE REVENUE WILL BREAK STALEMATE

IPF — Wed, 12 Aug 2020 15:37:00 +0000

The senators return to the senate for a record eighth time on Tuesday August 11, 2020 to try and reach an agreement on the contentious third basis for sharing revenue among the Counties. The Commission on Revenue Allocation submitted to the Senate the third basis for the financial years 2020/2021 to 2024/2025 on 30/04/19 for approval, the deliberations on this formula have turned into a protracted and divisive engagement.

This has caused delays in approval of the County Allocation of Revenue Act (CARA) 2020 meant to trigger disbursement of funds for FY 2020/21 from the National treasury to the counties. This standoff has resulted in disruption in delivery of services like healthcare to the extreme poor and vulnerable, delayed salaries and threatens to slow down the fight against Covid-19 pandemic.

What is the cause of this deadlock?

The new formula has varied the parameters and weights upon which the revenue is shared. In aggregate, it allocates 65 per cent of the revenue for enhancing delivery of public services, 31 per cent for promotion of balanced development, and 4 percent to incentivize revenue collection and fiscal prudence. Due to these changes, it has been perceived to reallocate funds from the poorer, less populated, and historically marginalized counties to relatively richer and more populated counties. Under the new formula, at least 17 counties have their revenues cut, some of the greatest losers include Wajir whose revenue will be cut by Sh.1.9 billion, Mandera (Sh1.8 billion), Marsabit (Sh1.8 billion), Garissa (Sh1.2 billion), Tana River (Sh1.5 billion), Mombasa (Sh1.6 billion), among others.

The top gainers include Kiambu (Sh1.3 billion), Nairobi (Sh1.2b), Uasin Gishu (Sh923m), Nandi (Sh788m), Kajiado (Sh765m), Nakuru (Sh744m), Laikipia (Sh660m, Trans Nzoia (Sh656m), Kirinyaga (Sh538m), Baringo (Sh537m), Bomet (Sh456m) and West Pokot (Sh444m). Senators rejected a proposal by the majority whip Sen. Irungu Kang‘ata to have the formula deferred to 2022/2023 to allow time for more resources going to the Counties to ensure no county loses funds.

On Tuesday, the Senators are expected to debate amendments proposed by Sen. Johnson Sakaja and Sen. Mithika Linturi. Sakaja proposes that the formula used for FY 2019/20 continue to apply for equitable share not exceeding Kshs. 316.50 billion and that the third-generation formula apply for equitable share and above Kshs. 316.50 billion. Linturi’s amendment is closely related to Sakaja’s but only lowers equitable share for which the second-generation formula will apply to between 250.00 billion and 270.00 billion. The exact amount is still under negotiation.

It should be remembered that the 316.5 billion available for counties in FY 2020/21 is the same amount received in FY 2019/20. The impact of Covid-19 is projected to worsen revenue collection beyond FY 2020/21 dampening hopes for more revenue in the next FY. The senators should consider the effect of new data. For example, new population data has shifted from 2009 to 2019 census, poverty data from 2009 to 2015/16 Kenya Integrated Household Budget Survey (KIHBS), fiscal effort data from 2017/18 to 2018/19 revenue. Updating the parameters in second-generation formula results in some Counties losing funds and others gaining. Updating the population parameter results in at least 30 Counties getting less revenue while updating poverty and Fiscal Effort data results to 26 and 12 Counties having their revenue cut respectively. When all the parameters are updated, while holding the second basis for revenue sharing constant 27 counties with less revenue than they received during FY 2019/20.

In conclusion, the senators may not achieve their goal of ensuring that no County gets less funds than is currently receiving using the Sakaja’s and Linturi’s proposed amendments. In this context, the recommendation of the CRA for a phasing-in of the formula to avoid disruption in service delivery and development programs by setting aside 15 percent of the equitable share increment to cushion counties which would see a reduction in their equitable share in a quantum in excess of 5 percent is more persuasive.

This approach ensures that County governments can perform their functions and guarantees stable and predictable allocations of revenue provided in article 203(d) and (j) of the Constitution. Counties should focus on strategies which enhance own source revenue generation to reduce overdependence on exchequer releases and ensure public funds are used in a prudent and responsible way.

https://www.nation.co.ke/kenya/blogs-opinion/opinion/-more-revenue-will-break-stalemate-1915166

Public Debt Service during Covid-19 Crisis to increase Miseries of the Poor in Kenya

IPF — Sun, 12 Jul 2020 15:42:00 +0000

This brief reviews trends in public debt service and its potential results on public expenditure on pro-poor sectors in the Kenyan between the financial year (FY) 2017/18– 2020/21. The review zooms in on COVID-19 pandemic period when public expenditure on pro-poor services is highly desirable. The pro-poor sectors considered were the health, water and sanitation, education, and the social protection. It adopted a desktop review method and data analysis was conducted using Microsoft excel.

The analysis revealed that the growth observed in Kenya’s expenditure has majorly been fueled by the high public debt spending. This has been at the expense of pro-poor sectorial spending such as spending in the health, social protection, water and sanitation and the education sectors.

The situation has worsened because of the Novel Corona Virus Disease. In its report on the estimates of revenues and expenditures for FY 2020/21, the Budget and Appropriations Committee indicated that the fiscal deficit is projected to increase to 7.3% of Gross Domestic Product (GDP) from the initial projection of 4.9% of GDP as had been earlier indicated in its report on the Budget Policy Statement of 2020.

Highlights of the Finance Bill 2020

IPF — Fri, 15 May 2020 05:01:00 +0000

The Government of Kenya intends to finance the FY 2020/21 budget through two main sources; taxes and public debt. The Finance Bill 2020 outlines the revenue raising measures that the government plans to use to finance its budget through introducing new taxes or enhancing existing taxes targeting a wider base. Considering COVID-19 pandemic, the government of Kenya fiscal leg room is very limited. The government notes that the possible revenue to be collected in FY 2020/21 is approximately Ksh 1.85 trillion while total expenditure will be approximately Ksh 2.71 trillion leaving a financing balance of Ksh 858 billion which will be realized through grants and borrowing.

In the FY 2018/19 national budget we celebrate small wins and mourn big losses

IPF — Sat, 25 Apr 2020 08:49:00 +0000

In an era of renewed fight against corruption, I believe that 14th June 2018 will bring renewed hope of proper stewardship of our taxes. The Cabinet Secretary for Finance in the Republic of Kenya, Mr. Henry Rotich will deliver the budget statement in the National Assembly highlighting the budget policy and revenue raising measures for fiscal year 2018 /19 and which will inform the country of how the ambitious Kenya Shilling Three Trillion and Seven Billion (KES 3.07 Trillion) budget will be financed. A ten-month formulation and approval stages in the budget process will be coming to an end with one last budget document (Appropriation act) remaining to be assented by the president upon approval by National Assembly.

But how have the processes been like? The Public Finance Management Act, 2012 reshaped our budget making processes both at the national and county level and introduced layers of engagements and multiple players in the equation. Previously, the national treasury was the alpha and omega of budgeting in Kenya with the Parliament playing a rubber stamping role. That is now gone and its evident with what the Hon. Kimani Ichungwah led National Assembly Budget and Appropriations Committee has done with the estimates submitted to national assembly in 2018. With parliament’s role now grounded in law, we have seen the budget committee visit counties for public participation and invite organized interest groups to make submissions on the budget estimates.

The committee in its report to the National Assembly notes that there was overwhelming demand from the public on new projects to be funded but only few could be considered. In this process by the national assembly budget committee to collect views on the budget estimates two clear wins come out; First, public participation has been entrenched and that parliament has a responsibility to take in views from the public while concluding the budget process.

As a result of citizens engaging directly with budget committee, the National Assembly has been called by the committee to approve and allocate resources to projects that were not previously in the budget estimates submitted for approval and these projects include; Riruta-Dagoretti-Kawangware Road ( Nairobi County) which has been allocated Kenya shillings 60 Million, Thwake Bridge (Makueni County) allocated Kenya shillings 150 Million, Kenya shillings 20 million allocated to Coast General Hospital (Mombasa County) for construction of a drugs rehabilitation center, Kenya shillings 40 Million allocated for fencing of Kapenguria Museum (West Pokot) among others.

These allocations by the budget committee show that meaningful public participation is possible. In meaningful public participation, voices of citizens voluntarily participating in the process are heard and everyone intending to participate gets an equal chance to contribute. Secondly, oversight and accountability of public funds has been entrenched in this budget through extra funds allocation to the office of the Auditor General. The Budget and Appropriations committee has proposed an allocation of Kenya shillings one billion for the office of the auditor general with a third of the funds dedicated for outsourcing of audits and other consultancies.

This is a big win for the transparency and accountability as adequate funding to the independent office of the Auditor General is one way of promoting confidence in our public finance management system. While there are clear wins in the budget estimates for the FY 18/19, notable funding cuts should be recognized, and questions asked. One of the notable funding cuts is on the Restorative Justice Fund. It is still fresh on our minds that on 25th March 2015 during his State of the Nation Address H.E Uhuru Kenya, offered a public apology on behalf of the government for all past human rights violations and other historical injustices.

He also instructed the National Treasury to establish the Kenya shillings 10 Billion Restorative Justice Fund of which the purpose is to offer relief to the victims and survivors of past human rights violations and other historical injustices. In the FY 2018/19 budget estimates submitted to parliament, an allocation of Kenya shillings 1 billion was made to the fund, however in the report tabled in the assembly by the budget committee, this funding has been reduced by Kenya shillings 500 million. While the purpose of the fund is to offer relief to the victims and survivors of past human rights, the need to have the funds availed to serve the purpose under which the fund is created cannot be overemphasized.

Other notable cuts include reduction of funding for the leather industries under the Ministry of Industrialization of which the manufacturing pillar of the big four agenda lies and key plank for employment creation for our young people. These wins and losses in this budget process indicates the need for sustained and concerted efforts to ensure participation is not left to a few pockets of citizens and groups and that the most vulnerable and marginalized participate in the process of how their taxes fund their priorities. It is upon all actors in the budget space to make the process deliberative and question choices made in the budget. There should be clear justification for the choices made and each party (government) and (the public) ought to take turns in making claims in the budget.

Submission on the Mombasa Budget Estimates 2020-21

IPF — Sat, 25 Apr 2020 08:57:00 +0000

CIPE is committed to facilitate private sector collective action for inclusive governance in Kenya. CIPE’s objective is to expand private sector participation in the budget making process so that they can hold the government accountable for the services they offer.

IPF-K with the support of CIPE is working with three County Chambers (Uasin Gishu, Mombasa and Embu) to build their capacity to engage in the budget making process with the County Executive and Legislature. It is on this basis that the Institute offered Mombasa Chambers technical support to prepare a written submission to the County Executive on the Budget Estimates 2020/21.

The Budget Estimates are prepared pursuant to section 129 (1) of the Public Finance Management (PFM) Act. The Estimates which should be submitted to the County Assembly by 30th April of each year set the final spending at the departmental level.

SUBMISSION-ON-THE-MOMBASA-BUDGET-ESTIMATES-2020-21 Download

KEYNOTE PAPER: The Integration of Climate Change into Budgeting and Finance

IPF — Tue, 19 Oct 2021 15:01:00 +0000

Climate change, previously only considered an environmental and development challenge, is now widely acknowledged as a pressing fiscal concern. African governments are now committing to setting aside public resources to tackle climate-induced disasters such as droughts, floods and cyclones.

According to the Collaborative Africa Budget Reform Initiative (CABRI) paper, ‘‘…climate change is projected to cause an average annual loss of more than 3% of gross domestic product (GDP) for Africa between 2015 and 2050, with some countries forecasting even higher average losses.’’

The Inclusive Budgeting and Financing for Climate Change in Africa Programme (IBFCCA) aims to strengthen links between national climate change policy and domestic public finances, with the aim of promoting climate resilience.

The first IBFCCA Peer Exchange brings together officials from ministries of finance (MoFs) across Africa with an aim to facilitate collaboration on how best to integrate climate change into public financial management (PFM) systems.

Some highlights of this keynote paper include;

Climate change is unequivocally impacting the growth and public finances of African economies.

Addressing climate change means adopting mainstreaming tools and approaches. Mitigation and adaptation can be best achieved by integrating climate change into regular public expenditure programmes.

The climate budgeting literature suggests that budget processes do not adequately prioritise climate change. The Ministry of Finance must prioritise climate change adaptation/mitigation investments with a clear understanding that climate change is not a ‘Ministry of Environment issue’.

This keynote paper was written by Stephanie Allan, with contributions from Kit Nicholson. Assistance with the background research for the country reviews was provided by, among other established professionals, the Institute of Public Finance Kenya’s Senior Fiscal Analyst Winnie Mageto under the guidance of the CEO James Muraguri.

Read more on climate change integration into budgeting and finance here.

Parliamentary Budget Office: Budget Watch for 2021/2022

IPF — Thu, 02 Sep 2021 17:44:00 +0000

The Parliamentary Budget Office (PBO) is a non-partisan professional office of the Parliament of the Republic of Kenya. The primary function of the Office is to provide professional services in respect of budget, finance and economic information to committees of Parliament. PBO released the Budget Watch for 2021/2022 which presents very informative findings on key areas to watch out for.

Among other highlights, the Budget Watch report mentions the following:

- 2021/2022 budget facilitation for sustainable and inclusive economic recovery

According to PBO, the 2021/2022 budget is an economic recovery budget that is expected to spur economic activities in the country thereby enhancing growth prospects. Currently, the country is showing signs of economic recovery even as the Covid-19 pandemic wrecks havoc with its adverse effects.

For instance, the education sub-sector which had a massive decline in 2020 has fully resumed duties, as well as the transport and wholesale/retail sectors. However, the accommodation and restaurant sub-sectors are yet to recover due to increase in the social distancing activities as directed by the government.

It is largely expected that increasing the vaccination coverage coupled with implementation of the strategic priorities of the government under “the Big Four agenda” and the “Post covid-19 Economic Recovery Strategy (ERS)” will bring about economic recovery.

- Implementation challenges of the Economic Recovery Strategy 2021

ERS 2021 is expected to provide fiscal support to the Kenyan economy. It seeks to enhance investment in key economic sectors including the development of critical road, rail, energy and water infrastructure; agricultural transformation, stimulating tourism recovery as well as sustainable land use and management.

However, the ERS interventions as contained in the policy document have not been clearly linked to the 2021/2022 budget which makes it difficult to monitor implementation. Implementation of the ERS 2021 will define the country’s ability to achieve a sustained and inclusive economic growth trajectory.

2.Covid 19 vaccines procurement, distribution and uptake to ensure proper jumpstart of the economy

Through COVAX facility, Kenya has been allocated 3.56 million doses of which 1.73 million doses of the AstraZeneca-Oxford vaccine had been disbursed to the country as at July 2021. However, only 2.3 percent of adult Kenyans have so far been fully vaccinated – which indicates that only 20 percent have received full doses.

The challenge to the vaccine rollout has been attributed to citizen apathy due to the lack of awareness on vaccine importance and poor public health campaigns on Covid-19 vaccinations by the government. This can be solved through Covid-19 campaigns and enhanced testing and awareness campaign programmes – with a target to engage health specialists.

Additionaly, the report also mentions that Kenya’s public debt stock will continue to increase and with it, increased risk exposure and a reducing fiscal space. The debt stock is projected to reach Ksh. 8.7 trillion in FY 2021/22, due to the forecasted fiscal deficit of Kshs. 1.014 trillion.

Conclusion…

A report by the Institute of Public Finance Kenya analysed Kenya’s Public Debt Profile and recommendations on how the government can improve the country’s debt profile to promote economic recovery. The current economic conditions are unfavourable for maintenance of Kenya’s high debt stock and increasing debt servicing expenditures are likely to result in liquidity constraints that could impact fiscal policy implementation.

Find attached the full report here for more information and in-depth insights.

Webinar: Making Revenue Sharing Equitable

IPF — Thu, 16 Sep 2021 17:53:00 +0000

Article 202 of the Constitution of Kenya stipulates that revenue raised nationally shall be shared equitably between the National and County governments. The Article also states that both the National and County governments should share the revenue equally, as raised from national taxes.

In March 2018, the Constitution of Kenya Amendment Bill (CAB) 2020, which proposes amendments to several articles in the Constitution of Kenya 2010 was established. This bill proposes to increase the number of constituencies in Kenya from 290 to 360 (additional 70 new constituencies); increase equitable share of revenues raised nationally allocated to county governments from the current minimum of about 15% to a minimum of 35%; cap allocation between counties based on per capita and determine the participatory process in the Building Bridges Initiative (BBI).

As a highly emotive and political process, revenue allocation required an independent arbitrator who considered public views and interested parties participation. The Commisision of Revenue Allocation (CRA) was therefore established with a mandate to lead the revenue sharing process by making recommendations on the basis of equitable share among county governments and between national and county governments.

The Institute of Public Finance Kenya, People Powered, Open Governance Institute, Center for Fiscal Affairs and Pathways Policy Institute conducted a webinar to discuss the potential implications of these changes as proposed in CAB 2020;

Increase the number of constituencies in Kenya from 290 to 360 (70 new constituencies)

This will reduce Constituency Development Fund (CDF) allocations to the existing constituencies if the CDF Act is not amended to increase the total allocation to CDF from the current 2.5% of the national government’s revenue. Each existing constituency received an average CDF allocation of Kshs. 137 million in the FY 2020/21 and this will reduce to Kshs. 110 million. Kisii, Garissa and Wajir counties will lose the highest amount in CDF allocation at Kshs 239 million, Kshs. 159.9 million and Kshs. 159.7 million respectively. Nairobi and Kiambu counties on the other hand will gain the highest amount in CDF allocations if the CDF Act is amended gaining Kshs. 1,645 billion and Kshs. 823 billion respectively.

2. Cap allocation between counties based on per capita and to create additional constitutional offices

Lamu County had the highest per capita allocation in the FY 2021/22 at Kshs. 21,579 while Nairobi County had the lowest per capita allocation at Kshs. 4,378. Subjecting the county allocations to the per capita criterion, seven counties would lose a cumulative amount of Kshs. 8.12 billion. Lamu and Tana River Counties would lose an equivalent of 39% and 36% of their equitable share allocation respectively. Tana River County will lose Kshs. 2.378 billion which is Kshs. 270 million more than its allocation to compensation of employees in the FY 2020/21 budget. All the seven counties that would lose resources through the per capita allocation criterion have higher poverty incidences as compared to the national average.

3.Determine the participatory process in the Building Bridges Initiative (BBI)

Public participation in the CAB 2020 process appears to be tokenistic in nature. This led to concerned citizens and various civil society organizations to file eight constitutional petitions at the High Court of Kenya challenging the building Bridges Initiative and the subsequent CAB 2020. They raised various concerns including lack of effective public participation in the process, hurried nature of signature collection and approval and usurpation of constitutional offices by the Steering Committee. They sought the interventions of the High Court to declare the entire process unconstitutional. The High Court of Kenya concurred with the petitioners and ruled the Constitution Amendment process unconstitutional due to limited public participation.

Recommendations from the Webinar

CAB 2020 if implemented in its present form might increase inequality in the country. In conclusion, it was established that the Commission of Revenue Allocation (CRA) and the Senate have the mandate to recommend revenue sharing basis. The following suggestions were proposed;

National Assembly should amend NG-CDF Act 2015 to increase allocation to CDF if the CAB 2020 proceeds to referendum. This will prevent existing constituencies from losing resources to finance the additional 70 constituencies. The National Assembly is to develop legislation to further devolve functions to the county governments in line with the increased equitable share (a minimum of 35%) from a current minimum of 15%.

The Senate, together with CRA to develop a more equitable revenue sharing framework while leading discussions on any change to revenue sharing framework affecting the county governments. As revenue allocation increases, so do the conflicts on how to share the allocated revenues.

Commission on Revenue Allocation (CRA) should sensitize the political class on the revenue sharing basis, especially the data that informs the formulas. Any recommendations on revenue sharing frameworks should be publicly available in various sectors. CRA to convene citizens’ engagement forum to make future recommendations on revenue sharing process have a bottom-up democratic approach. Engagements should start at the development of revenue sharing basis rather than validation.

National and County Executives to ensure public participation is effective through provision of ample time for citizen engagement and conduct civic education on important governance aspects especially in the budget process. Provision of citizen friendly versions of crucial policy documents is necessary to enable effective engagement during public participation.

For more information, kindly find the full report here.

It’s time Kenya government, including counties, invested more in immunization

IPF — Sun, 18 Jul 2021 17:56:00 +0000

By Reena Atuma

Vaccine invention is the greatest public health intervention and gift of science in the history of humankind.

Vaccines provide individuals and communities with the necessary immunity to prevent the outbreak of disease, avert a future disability and protect against other social and economic consequences of pandemics.

While there are great strides in developing vaccines to curb diseases, there are challenges experienced in financing for research, production, purchase, and administration of vaccines. Read More

Highlights of the FY 21/22 National Budget and the Finance Bill 2021

IPF — Sat, 12 Jun 2021 06:01:00 +0000

The overall budget for FY 2021/22 is estimated at Kshs. 3.66 Trillion. The budget for the three arms of Government is estimated at; The Executive (Kshs. 1,895.14 Billion), Parliament (Kshs. 46.61 Billion) and the Judiciary (Kshs.17.92 Billion). On tax performance, the National Treasury has consistently set overambitious revenue targets during the budget-making process. Actual tax revenue collection in 2019/20 was Ksh. 1,584 billion against the printed estimates target of Ksh. 1,758 billion. The National Treasury projects a total revenue collection of Ksh. 2,039 billion (16.4% of GDP) in 2021/22 of which, ordinary revenue will be Ksh. 1,776 billion (14.3% of GDP).

Highlights-of-the-FY-21-22-National-Budget-by-IPFK Download

Uhuru’s legacy remains one of implementing the largest public debt budgets ever

IPF — Fri, 11 Jun 2021 06:08:00 +0000

Today’s budget reading as we go into Uhuru Kenyatta’s final year as President, threatens his legacy of leaving a united country as envisioned in the March 2018 handshake. Instead, the legacy is now that of overseeing Kenya’s largest public debt budget ever. As the Cabinet Secretary to the National TreasuryMr. Ukur Yatani reads the budget statement for the next financial year (2021/22) this afternoon, it is time to reflect on how the current budget ending this month has fared. One importance of keeping history is that it helps us to understand the present and predict the future, therefore how does the last
10 months of FY 2020/21 look like?

Uhurus-legacy-remains-one-of-implementing-the-largest-public-debt-budgets-ever Download

IPF/RSM/KEPSA Webinar – Overview of The Finance Bill 2021

IPF — Wed, 12 May 2021 18:15:00 +0000

On 12th May 2021, IPF-K was part of the KEPSA/RSM webinar that discussed the Overview of the Finance Bill 2021. The Bill which was published in May 5th 2021 has certain tax provisions that become effective on 1^st July 2021, which coincides with the beginning of the Government’s fiscal year. If you missed out, worry not, you can access the discussion of the Overview of Finance Bill Presentation here. Get to understand in-depth about the reasons why the Finance Bill 2021 was published early and its implications it has.

Public Debt and Health Service Delivery Conversations

IPF — Tue, 11 May 2021 18:19:00 +0000

If you missed this event, you can still get to watch it here as our CEO gets to speak on Public Debt and Health Service Delivery at the Rotary club of Nairobi East.

Curb dependence on donor support for health programmes

IPF — Mon, 18 May 2020 18:21:00 +0000

The earliest countries to experience large-scale community transmission of COVID-19, such as China, Iran, Italy and Spain, offered incontrovertible proof that the pandemic required unprecedented mobilization of health systems. Without urgent action, health systems would be – and in some cases were – overwhelmed. Few can argue that coronavirus is proving to be the greatest and least expected tragedy in living memory. By the time we are done with it and it is done with us, a lot of things will have changed.

In Kenya as in many other countries, several health tools and approaches have already been deployed to reduce transmissions. The government’s action in areas such as travel restrictions, bans on social gatherings, testing and contact tracing, healthcare surge capacity and increased provision of personal protective equipment (PPE) to health workers have all been met with some success. Nevertheless, Kenya, with 912 confirmed cases and 50 deaths as of 17 May 2020, still has the highest number of cases recorded in East Africa.

In time of emergency, lack of planning in health care systems creates its own compounding emergency. Knowing what is happening globally, the pressure that Covid-19 is exerting on health systems globally, even for progressive countries, Kenyans and Africans are right to be gravely worried. In 2001, the Abuja Declaration called for Africa governments to invest 15% of their annual budgets on health systems, but by 2017 even then though not consistently, only Rwanda, Botswana, Niger, Zambia, Malawi and Burkina Faso had reached or surpassed that target. Of even greater concern, in light of those limited accomplishments, is that the Abuja Declaration did not suggest that this funding level would be adequate to meet a country’s health needs. It simply indicated the need for governments to commit to the prioritisation of the health sector in overall national expenditure.

The government of Kenya has prepared a raft of amendments in the budget for the 2019/20 financial year, through a supplementary budget and which seeks to give financial and legal backing to the proposals announced by the president on the 25th March 2020. The supplementary budget is a standard way of addressing unforeseen expenditures that arise during the budget implementation period. Needless to say, COVID-19 more than meets the definition of an unforeseen expenditure. Perhaps the most noteworthy shift in the government’s supplementary budget was the reduction in key areas such as the Ministry of Health’s development budget (a cut of Ksh 11 billion), while increasing funding for the presidency to support the newly established Nairobi Metropolitan Services. This was done despite the Public Finance Management (PFM) Act 2012 being very clear that no new program should be introduced during a supplementary budget.

While it is difficult to understand the thinking behind budgetary decisions such as these, some moves are worth commending.

Initial allocations have been maintained for programs that will have important future impact on population control, such as the Procurement of Family Planning & Reproductive Health Commodities, and Vaccines and Immunizations, although admittedly those initial allocations were insufficient. The World Health Organisation offers a salutary reminder of how important domestic investments are when it estimates that one dose of measles vaccine can prevent approximately 10.6 future deaths, and that a single dollar invested in vaccines over a decade results in a return of 16 times the cost.

As Kenya continues its battle with COVID-19, what role must public finance play? Firstly, it is essential that the Ministry of Finance increase its budget transparency levels and tell Kenyans what reallocations are being made from both domestic and donor-funded programs. Prominent among the donors upon which Kenya relies on for health budget support is the Global Alliance for Vaccine Initiative (GAVI) which is helping to adapt routine immunisation programmes so they can continue during the pandemic without the risk of spreading COVID-19, thereby protecting populations from the risk of other disease outbreaks.

Secondly, as we have come to learn Kenya is still very unprepared in dealing with emergencies, and while we commend the government on its response to pandemic, we should be concerned by the levels of transparency around the expenditure during this period. Owing to the ambiguity of our national accounting systems, there is still no clarity on how much money Kenya is spending in this battle; understandably, this increases mistrust between our state and the citizens.

The government’s mysterious silence over the functioning of the constitutionally provided contingency fund that should have a permanent capital base of Ksh 10 billion is a source of great concern and Parliament should step up and demand more transparency through monthly disclosure of expenditure by state departments on their public-facing websites, as an essential democratic complement to the Controller of Budget’s quarterly implementation reports.

Thirdly, the Kenya supplementary program-based budget is still a long way from aligning with best practice with regards to public participation, and this must be addressed. The National Treasury practice has traditionally been to ignore public input during the supplementary budget, and leaves Parliament very limited time in engaging with citizens on the same. We urge the National Treasury to remove this veil of opacity during the preparation of supplementary budgets.

COVID-19 has shown us much: the fragility of human life and the limitations of our man-made systems in the face of a virus, but also the resilience, courage and dedication of so many individuals and organisations in facing this pandemic. We have seen, in Kenya and around the world, that domestic investment in health care systems cannot be overlooked or given short shrift. Financing our hospitals, our clinics and our prevention programmes is every bit as important as investing in mega projects. Without a healthy population to use and maintain them mega projects are valueless: monuments only to the hubris of those who commissioned them.

We have also seen that a country’s dependency on donors for health sector support is not only a weakness, but a grave lack of foresight by those who have been entrusted by millions of people to make the most important and far-reaching decisions on their behalf. COVID-19 has shown us that when donor countries are as overwhelmed by the pandemic as we are, they cannot respond as fast as recipient countries that depend on their philanthropy would like. This reality demands a long, sober and searching review of our priorities as a nation. Relying on external funders rather than Kenyan taxpayers to fund the nation’s healthcare is not merely a matter of poor public finance management. In times of pandemic, we see that it is literally a matter of life or death.

James Muraguri CEO, Institute of Public Finance, Kenya, & an Atlantic Fellow for Social and Economic Equity. @jkmuraguri

For devolution to succeed, County assembly budget resolutions must be respected.

IPF — Sat, 25 Apr 2020 18:34:00 +0000

In February this year, counties submitted to their respective assemblies the fiscal strategy papers which have been used to finalize the development of the executive budget estimates. The county fiscal strategy paper (CFSP) is a policy document that provides for the priorities that a county is pursuing in the coming financial year and is a requirement of Section 118 of Public Finance Management Act, 2012. Further, the County Fiscal Strategy Paper should be submitted to the county assembly by 28 February of each year and be approved before the lapse of fourteen days with or without amendments. The conclusion of the approval process of the CFSPs by the respective assemblies forms the basis of preparation of budget estimates by the executive and these estimates show how a county will translate those priorities into specific projects.

The Fiscal Year (FY) 2018/2019 executive budget estimates have recently been tabled in the respective assemblies at the county and national level. To understand how far the county treasuries, respect the decision of the county assemblies coming out of the approval process of the County Fiscal Strategy Paper, the Institute of Public Finance Kenya analyzed the FY 18/19 Agriculture sector budget estimates for Busia County as submitted to the assembly as well as the County Fiscal Strategy Paper 2018/19 and the Budget and Appropriations Committee report on the same document. We found that the initial CFSP 2018/19 projections for the sector was Ksh 472, 249,207 comprising of Ksh 244,200,000 for development and Ksh 228, 049,207 for recurrent expenditure. On reviewing the CFSP, the Busia county Budget and Appropriations Committee (BAC) recommended a total sector reduction of Ksh 99,540,000. The development expenditure was reduced by Ksh 91,100,000 and recurrent expenditure was reduced by Ksh 8,440,000 bringing the total proposed allocation for this sector to Ksh 372, 709,207 as the final figure for use in the preparation of the executive budget estimates.

Further, it is important to note that the specific programmes in the Agriculture Sector which the Budget and Appropriation Committee recommended to be affected by these changes included the Agriculture Development Fund whose allocation was reduced from Ksh 40 million to Ksh 20 million and reduction on Agriculture input subsidy by Ksh 4.6 million from Ksh 15 million to Ksh 10.6 million. The Budget and Appropriations committee further revised to nil the allocation of Marginalized and Vulnerable Social Protection through input access project from an initial allocation of Ksh 5.4 million in the CFSP 2018/19 to zero. While this project under the Crop Production and Management could have been targeted to the most vulnerable in the county and whose focus the county is on to improve their lives, there is no adequate narrative in the CFSP submitted to the assembly to inform the assembly on why it is a priority area, and this could be one of the reasons why it was affected. Further, while we may not have or know the wisdom behind the reductions by the county assembly, it is important to recognize that in the budget approval process changes will occur, and they may take a south or north direction. With the Busia CFSP 2018 approved with various changes, the executive Budget Estimates submitted by the county treasury adhered to these recommendations in the agriculture department and maintained the allocations as proposed by the committee.

What does this tell us? The constitution of Kenya, 2010 gave the county assembly and parliament budget making powers which must be respected. This means that for devolution to succeed the executive must or should be seen to respect the resolutions of the assembly and the Busia case is a classic example of how the counties should respect the resolutions of the county assembly. In addition to counties respecting the ceilings, it is equally important that in cases where ceilings have been rejected or allocations changed, adequate explanations should be given for those changes

Kenya’s Macro Fiscal Analytic Snapshot 2020

IPF — Sun, 07 Feb 2021 05:50:00 +0000

Kenya has been growing robustly for many years, but has not used this opportunity to reduce vulnerability to shocks – deficits have been unsustainably high, and debt service is so high that Kenya has to be cautious about expanding non-concessional debt even during a crisis. The budget deficit approached 8% in 2019, following years of rapid expenditure growth and worsening revenue performance.

The gradual decrease in revenue as a share of GDP is likely linked to the changing structure of Kenya’s economy, with the informal sector growing faster than the formal sector, and tax incentives remaining commonplace and generous. Despite this, revenue remains a strength in Kenya compared to its peers, at 18.2% of GDP (compared to 12% in Ethiopia, for example). Kenya’s economy is diverse and services have grown strongly in recent years.

The First Shadow Budget Launched by Institute of Public Finance

IPF — Wed, 29 Apr 2020 05:55:00 +0000

The 28^th of April 2021 saw the launch of the first Kenya’s Shadow Budget for the FY 2021/22 ahead of reading of the Budget Statement by the Cabinet Secretary of the National Treasury, Hon. Ambassador Ukur Yatani , on June 10^th, 2021. The launch was led by non-profit think tank, Institute of Public Finance-Kenya in collaboration with Oxygene Marketing and Communications Limited and Kenya Private Sector Alliance (KEPSA).

The 2021/22 shadow budget analyzes expenditures across the different sectors for the previous financial years in terms of percentage changes in allocations and budget absorption rates as well as comparing the National Government priority policies to resource allocations in the forthcoming financial year. It also provides an overall analysis of the macroeconomic situation in Kenya with a specific focus on public debt and taxation.

It aims to scrutinize government’s spending priorities for the FY 2021/22 to promote policy discussions and informed debates for efficient and transparent allocation and use of public resources. The production of the Shadow budget was motivated by current state of engagement between the state and the public on matters related to budget allocations, expenditures, and actual service delivery outcomes which is mostly focused on printed and actual figures and narratives already approved for execution. Not only will the shadow budget be a great benefit to the County and National governments but an alternative point of reference for the Citizens and nonstate actors. It will be a tool to be used for more meaningful engagements with policy makers for the upcoming financial years.

The launch comes at a time when the government is spending a larger share of the country’s taxes on debt repayment at the expense of provision of critical services such health care, education, electricity, agriculture, cash transfers to the people with disabilities, the elderly, and a pandemic at hand. Presently, the total public debt stands at Ksh 7.6 trillion which approximately 6 million taxpayers are meant to pay. This also means that the country has also breached all the three public debt sustainability thresholds for overall debt and two out of four in external debt. The Shadow budget highlights some of the issues and key recommendations that are pertinent in solving majority of Kenya’s financial drawbacks.

The shadow budget has never been done before in East Africa more so in Kenya. Though it is not new to many developed countries such as the United Kingdom and Pakistan.

SHADOW-BUDGET-FY-2021_22-2 Download

Government Fingered for Non-Disclosure on How Sh 465B IMF Loan Was Used

admin — Sun, 23 Oct 2022 11:22:00 +0000

The Institute of Public Finance (IPF Kenya) now wants the government to develop a clear legal framework that will make it easier for oversight bodies to track performance of public funds.

IPF says oversight institutions including Parliament and the Office of the Auditor General should be able to hold the government to account and to entrench transparency and accountability in Special Drawing Right (SDR) use in line with the Constitution of Kenya.

A Special Drawing Right (SDR) is an interest- bearing international reserve asset created by the IMF to provide liquidity and to supplement the operating capital of its member states. According to IPF Kenya, from their review, they could not establish whether the government directed the SDR allocation to specific sectors or programmes.

This partly because the IMF does not attach conditional ties on the use of SDRs by recipient countries.

Similarly, the government has not developed a legal framework on SDR utilization and reporting, thus creating a room for little or no transparency and accountability around the use of SDRs.

Milton Ogada (Center) the Programme Officer for Economic and Climate Justice, Christian Aid says Fiscal stability has remained a matter of necessity post COVID-19 as economies struggle to recover.

“We request for accountability for the recent and the fund’s largest allocation of Sh456.5 billion which was approved on 23rd August 2021 and was aimed at addressing the global need for reserves, foster confidence, and support a resilient and sustainable global recovery,” said Ogada.

The allocation came at time when many economies most especially developing economies were struggling with the adverse impacts of the COVID-19 pandemic. Revenue collections were severely affected during the pandemic, resulting in heightened debt accumulation.

Public debt increased from Ksh 5.8 trillion in June 2019 to Ksh 6.7 trillion in June 2020 and further to Ksh 7.6 trillion in June 2021 and Ksh 8.5 trillion as at June 2022. As a result, the IMF by approving the SDR allocation offered a much-needed reprieve for the Kenyan government as the fiscal space shrunk further during the pandemic.

SDRs are IMF’s units of account. The usage of SDRs is a country’s prerogative and sovereign decision. Countries can employ them in transactions by trading their SDRs into freely usable currencies or in processes approved by the Fund.

“The use of SDR holdings needs to be structured to maintain macroeconomic sustainability, including external and monetary sustainability. Kenya benefited from this allocation and received SDR 520.2 million (US$ 737.6 Million) equivalent of Ksh 83.7 billion as part of the multilateral lender’s bailout of global economies and to alleviate balance-of-payments constraints that were faced by all economies.”

In a letter of intent to the IMF, the Kenyan government indicated that half of SDR allocation would be on-lent to the National Treasury, while the other half would be retained at the Central Bank of Kenya (CBK) to boost the country’s official foreign exchange reserves that had come under intense pressure from the rising cost of the imports as well the appreciation of the US dollar.

Kenya's Global Ranking in Transparency Remains the Same

admin — Thu, 02 Jun 2022 11:26:00 +0000

Kenya’s position in a global survey, the Open Budget Survey, has remained stagnant since 2019. The global survey is conducted every two years and looks at how countries perform on national budgets’ transparency, public participation and budget oversight.

The last global survey conducted in 2019, rated Kenya at 50/100 in budget transparency, while the recent 2021 survey, gave Kenya a similar score of 50/100. There have been no significant steps to improve the transparency of budgets. Any country that scores 61 or above, shows that the country is publishing enough material to support informed public debate on budgets. With regard to public participation and budget oversight, Kenya got a score of 31/100 and 54/100 respectively. The Open Budget Survey is the world’s only independent, comparative measure of central government budget transparency and it is done every two years by the International Budget Partnership, and locally through its partner, the Institute of Public Finance.

The survey shows where countries rank in budget transparency and openness. The study looks at government websites to assess how much budget information is available freely and accessible. It also looks at how citizens access government budget information.

Institute of Public Finance, Chief Executive Officer, James Muraguri says, “Clearly more needs to be done to improve Kenya’s ranking with regard to budgets’ transparency, public participation and budget oversight. Whilst we acknowledge a few steps were made, this was not enough to improve the rankings and we call upon the next government to take practical steps towards improving overall rankings and to demonstrate its commitment to improve transparency, public participation and budget oversight.’’

He adds, ‘‘Further, we call upon the next Parliament to improve public participation by holding budget implementation review meetings at constituency level, to improve public participation. The Public Audit report for the Financial Year 2019/20 and the Mid-Year Report should also be published online and in a timely manner. These steps will go a long way in instilling trust and confidence by the citizens in how the Kenyan government shares budgetary information.”

Dr. Abraham Rugo, the Country Manager at the International Budget Partnership Kenya, says, “The improvements in oversight are significant as it means we have much more visibility as to what the National Government is doing with public resources. This should then make it possible to address the current public concerns on public debt and COVID-19-related spending. The National Treasury will need to further strengthen public participation beyond Nairobi as well as provide more detailed non-financial reports on budget implementation.”

See the full report here.

The Institute of Public Finance is a premier Public Finance Management think tank that focuses on research, training and capacity strengthening on public finance.

The 2022/23 National Annual Shadow Budget by IPFK™: 2nd Edition

admin — Tue, 08 Mar 2022 11:28:00 +0000

The 2022/23 National Annual Shadow Budget by IPFK™ for Kenya is the second edition, and it is one of its kind in the country. It is prepared to support engagement between the state and non-state actors in the budget process, enhance access to budget information, particularly on revenue and public expenditure performance, public debt contracting and servicing. 2022/23 National Annual Shadow Budget by IPFK™ comes at a time when the Covid-19 pandemic has caused great damage to the economy, businesses, and households’ livelihoods to which about 2 million people were pushed into poverty.

The National Treasury projects a GDP growth of 6 per cent in 2021 after a contraction of 0.3 per cent in 2020 and a growth of 5 per cent in 2019. However, this growth faces threats from ongoing droughts affecting 23 arid and semi-arid counties where more than 2.3 million Kenyans need relief food and other humanitarian assistance. In addition, the inflation rate in Kenya has remained high, at 5.8% compared to the average of 3.5% for Sub-Saharan Africa whose main driver is the food and energy prices.

This is further complicated by the weakening of the Kenya shilling in comparison to major currencies particularly the US Dollar and Sterling Pound. The shilling has depreciated by about 11 per cent between November 2016 and November 2021 against the dollar. The Central Bank’s expansionary monetary policy has supported a decreasing trend of interest rates for the period August 2016 to August 2021.

Moreover, disruptions to the business environment from the impact of COVID-19, high levels of employment especially among the youth, high cost of food prices and uncertainties surrounding the general elections scheduled for August 2022 and high public debt levels where the International Monetary Fund (IMF) continues to assess Kenya as being at a high risk of debt distress with constrained fiscal space are among the key things to monitor going forward.

Find the full report here.

SPECIAL DRAWING RIGHTS (SDRs) FOR PEOPLE’S RECOVERY IN KENYA

IPF — Fri, 25 Nov 2022 19:40:00 +0000

The study reviewed Special Drawing Rights (SDRs) allocations, use, and reporting by IMF member countries, with a focus on Kenya. SDRs are a form of international reserve asset that the IMF created to augment official reserves held by its members that serve as a financing tool and are utilized as an alternative line of credit by developing economies. The August 2021 SDR general allocation was made to build resilience and stability of the global economy and help the most vulnerable economies deal with the economic consequences of the COVID-19 pandemic.

The US$ 650 billion allocation approved in August 2021 benefited all IMF member countries, with over two-thirds of the allocation (US$ 418.4 billion) going to advanced economies, the balance falling well short of developing countries’ financial needs. Kenya received an allocation of US$ 737.6 million worth of SDRs, (2.18% of Africa’s US$ 33.8 billion allocation) half of which the Central Bank of Kenya (CBK) on-lent to the National Treasury for budgetary support.

The National Treasury in the draft Budget Review and Outlook Paper (BROP) reports IMF’s SDR allocation of Ksh 40.8 billion as part of government borrowing that financed its fiscal deficit in FY 2021/22 part of which went into cushioning the poor from the adverse effects of the COVID-19 pandemic, purchase of COVID-19 vaccines and external debt redemption.

The review established that compared to other sources of global liquidity, the allocation was insufficient which supports a case for an additional allocation. Further, given the lower utilization levels of SDRs by developed countries they could channel their unused SDRs to developing countries through the Poverty Reduction and Growth Trust (PRGT), Resilience and Sustainability Trust and regional development banks to support their recovery process.

What is in the public finance in-tray for our legislators at the national and county level in September and October 2022?

IPF — Mon, 05 Sep 2022 20:04:00 +0000

The PFM Act requires that not later than the 30th of August in each year, the Cabinet Secretary for finance shall issue to all national government entities a circular, setting out guidelines to be followed in the budget process. Similarly, the County Executive committee member for finance shall do the same and guide County government departments on the budget process.

Specifically, the PFM Act requires that the circular at both the national and county levels shall include:

key dates by which various budget documents are to be completed.

the procedures for the review and projection of revenues and expenditures.

key policy areas and issues to be taken into consideration when preparing the budget.

how the members of the public shall participate in the budget process.

the format in which budget information and documents shall be submitted; and

any other information that may assist the budget process.

As soon as the Members of Parliament and County Assemblies, respectively, are sworn in by the 9th of September, which is 30 days after the general election, the budget process for the financial year 2023/24 will have commenced and they will need to set up the budget and appropriation committees to hit the ground running.

At the county level, the PFM Act requires that the Annual Development Plan be submitted to the county assembly by 1st September each year for the county assembly to approve with or without amendment, paving way for the rest of the budget documents to be prepared by the county executive.

Both at the national and county level, the Budget Review and Outlook Paper (BROP), which is the end-year report of the previous financial year will be submitted to the respective legislatures by the 21st of October 2022. Key information that will be contained in BROP and which the legislators must pay attention to include:

Actual fiscal performance in the previous financial year compared to the budget appropriation for that year.

Updated economic or macro-economic and financial forecasts with sufficient information to show changes from the forecasts in the most recent Budget Policy Statement or the County Fiscal Strategy Paper.

Information on how actual financial performance for the previous financial year may have affected compliance with the fiscal responsibility principles or the financial objectives.

The reasons for any deviation from the financial objectives together with proposals to address the deviation and the time estimated to do so.

Over the last ten years, the Parliament and County Assemblies have not done justice to the budget implementation reports which are submitted to them diligently by the Controller of Budget. There is no evidence of publicly available reports on decisions by the respective legislators on these reports which are intended to support the oversight role of the legislators. The Controller of Budget reports will be available as soon as the legislators are sworn in, and we should expect engagement with these reports and action taken on how public funds are being utilized to improve the lives of Kenyans.

The 13th and 3rd sessions respectively, of the legislative business at the national and county level must not let the country down in the next five years. Oversight of the public funds is a key demand of them by our constitution and this must not be taken lightly.

After all, our taxes pay legislators to oversight how our taxes are being spent on our behalf.

Author: James Muraguri – Chief Executive Officer, Institute of Public Finance.

Prioritize Own-Source Revenue Collections to Supplement Budget, Counties Told

IPF — Fri, 25 Feb 2022 20:29:00 +0000

The Constitution of Kenya 2010 has enhanced citizen participation, which gives a chance for the people to determine how the Government of Kenya runs matters in the country. For the citizens to meaningfully participate and play their oversight role in the governance process, they must be aware of the laws of devolution. A devolved system of governance, therefore, allows the transfer of powers to the 47 county governments – giving citizens a right to exercise their sovereign power.

While the Constitution ascertains various sources of revenue for County Governments such as the national equitable share, own revenue collection, and borrowing subject to Article 212, County Governments are also empowered to generate own-source revenue which consists of property rates, entertainment taxes and any other tax as authorized to impose through an Act of Parliament. Further, these counties are also permitted to levy charges for services provided (Article 209 (3), Constitution of Kenya).

However, according to an article by Business Daily this week, titled ‘Treasury fails to send Sh51bn to counties in six months’, the National Treasury has failed to transfer Sh51.2 billion to counties in the six months to December, explaining the cash crunch that hit devolved units. According to the Commission of Revenue allocation report: County Own Source Revenue Report 2019, only 11 out of 47 counties can finance more than 10% of their overall budget which implies that the majority of the county governments finance close to 90% of their budgets through transfers to county governments.

According to the First Half of the Quarterly Economic and Budgetary Review for Financial Year 2021/2022, the total revenue and external grants increased from Kshs 819,052 million in 2020/21 to Kshs 1,044,148 million in 2021/22. This growth in total revenue and external grants represents 8.3 per cent in FY 2021/22 compared to 7.3 per cent in FY 2020/21 of total revenue as a percentage of GDP.

From the 2021/22 first half collections, national transfer to the County Governments amounted to Kshs 144,983 million which is higher than Kshs 128,691 million paid over the same period in FY 2020/21. Although there was a growth of 12.7 per cent in the payments to the county governments, there was a variance of Kshs 51,181 million from a target of Kshs 196,164 million representing 73.9 per cent payments. From an analysis of the Office of Controller of Budget reports, this variance leads to under-absorption in the development vote which has implications on how effective services are delivered in the counties.

The National Treasury Secretary Ukur Yatani said in the Quarterly Economic and Budgetary Review report for the first half of 2021/2022, “total transfers to County Governments for the period ending 31st December 2021 amounted to Sh144.9 billion, against a target of Sh196.1 billion.” This lack of sufficient funds to the counties means that the counties cannot spend on development projects like roads and sewerage, which ultimately creates an acute unemployment crisis for the youth.

Policy Brief: Kenya’s Journey To Self-Reliance On Immunization Financing

IPF — Fri, 11 Nov 2022 20:41:00 +0000

Immunization remains the most cost-effective health intervention for saving the lives of children and protecting them from disability and preventable diseases as well as saving families and communities from financial distress. Immunization is also a prerequisite for an effective health system, with every shilling invested in immunization saving an average of 16 shillings in the health system.

The wider economy also benefits by more than 44 shillings per child, by preventing later health complications that burden the health system and supporting the economy by keeping parents and other caregivers at work. Despite all these values derived from immunization, funding for this critical health intervention in Kenya is overly dependent on donors and development partners whose support is declining and the decline is expected to continue following the rebasing of our economy in 2014 into a lower-middle income category.

Government budget expenditure remains low, about one-third of total budget expenditure with the balance coming from donor funding where Global Alliance for Vaccines and Immunizations (GAVI) is the major contributor.

Recommendations

- There is a need for the government to continue filling up the funding gaps left by donors and development partners from domestic public resources for they are more predictable, equitable, efficient, and sustainable than other sources.

- The National Assembly should therefore approve the increase and provide strict oversight for timely release of immunization funds and ensure every shilling released to Afya House for immunization is spent in an open manner with public involvement and fully accounted for

Climate adaptation in Kenya: Why local governments need more support

IPF — Mon, 12 Jun 2023 11:11:00 +0000

Kenya has failed to provide adequate resources and guidance to counties for them to fulfill their mandate in promoting climate adaptation. While some counties have made efforts to integrate climate actions into their CIDPs, the level of implementation varies across counties. Improving implementation will require action by both national government and counties. Counties lack access to funds (in part due to slow transfers from the national government), but also need a robust legal framework, expertise, and adequate monitoring from the national government, as well as mechanisms for cross-county coordination. At the same time, counties need to do more to incorporate the views of the public into climate strategies.

Financing climate at the county level has suffered, like all county programs, due to delayed disbursement of equitable share transfers from the national government. A recent press statement from the Council of Governors highlighted the delay of 29.6 billion for the 47 counties for March 2023 allocation. This means that the counties lack adequate funds to implement programs including those related to climate adaptation. The national government needs to ensure timely disbursements to allow counties to implement adaptation programs.

Counties also need technical support from the national government.

According to the CoG and the National Treasury, funding from the national government to build capacity and provide technical support at the county level is insufficient. A policy brief by the Adaptation Consortium in 2019 highlighted that county officials in charge of climate adaptation lacked the necessary competence to identify and prioritize adaptation interventions. The Draft National Green Fiscal Incentives Policy Framework by the National Treasury published in December 2022 also highlighted the need to allocate more resources to strengthen the capacity of the counties in promoting adaptation. The national government should therefore organize capacity building programs on climate risk assessments, monitoring and evaluation, and public participation in climate adaptation. There have been efforts do this through the Financing Locally Led Climate Action (FLLoCA) Program, which is pioneering the first national model of devolved climate finance with an emphasis on social inclusion, governance, and citizen participation.

While timely receipt of funds and TA from national government are necessary for implementing climate programs, they are not sufficient. Counties must also take further action. According to the CoG Statutory Report 2019, only 6 counties have established climate change funds and developed regulations to be able to set aside an average of 2 percent of their development budget for adaptation. Counties also need to appoint designated officials to coordinate climate change affairs and establish robust mechanisms to track progress towards achieving climate adaptation goals.

Counties must also do more to engage communities at the local level. County officials should ensure that the public is well aware of the participation spaces available and that their input will be taken into consideration to inform climate action priorities. A baseline study conducted by Crawn Trust in Nyandarua, Kwale and West Pokot found that community members do not participate in activities that require public participation in climate issues. The study found a need to raise awareness among locals about public participation in budget making, policy making, and county planning.

Finally, county governments should promote horizontal coordination to enhance their ability to manage climate-related risks. They should work together to assess the impacts of climate change on interdependent sectors such as agriculture, water, and mining. For example, the counties in the Mara River Basin have established a collaborative mechanism called the Mara River Basin Coordination Unit (MRBCU) to address climate impacts in the basin. The MRBCU brings together county governments, water users, and other stakeholders to develop joint solutions to manage climate risks. Other counties that share resources could adopt this mechanism. Weak or non-existent climate change coordinating units in the counties have frustrated efforts at coordination. Counties should build capacity of these units so that they can work more closely across county borders.

In sum, while counties have started taking steps to address climate in their planning processes, there are still numerous gaps. Some counties are including climate change as a priority area in their CIDPs and other planning frameworks, but this is not ultimately reflected in their budgets. This is because climate adaptation and mitigation measures do not always align with political demands that counties face in the short term. The counties should therefore foster collaboration among various stakeholders including government officials, policymakers, community representatives, and advocacy groups to encourage open dialogues to find common ground and identify win-win solutions that address both short-term political demands and long-term climate goals. In conclusion, there is a need for urgent action by the national government, county government and development partners to address the funding, technical and policy challenges identified here to enable county governments to fulfill their intended mandate in promoting climate action.

Climate Adaptation Blog – Edna

Government should explore private funding options to sustain service delivery amidst fiscal consolidation

IPF — Tue, 16 May 2023 11:15:00 +0000

On April 2, 2021, the International Monetary Fund (IMF) Board approved a multiyear credit facility amounting to USD 2.34 billion for Kenya to support post-Covid recovery and reduce the country’s debt vulnerabilities through fiscal consolidation . Fiscal consolidation (a progressive reduction in the fiscal deficit) would be achieved through growth in revenue and controlling expenditures. Fiscal consolidation requires a careful balance between reducing debt levels and protecting service delivery. While striking this balance is a challenge, the government can partially achieve it by exploring non-debt sources of financing including privatization of State-Owned Enterprises (SOEs) and targeted Public-Private Partnerships (PPP).

For many years, Kenya has committed to pursue fiscal consolidation with little success. Expenditure pressures from wages, social spending and mega infrastructural projects have seen expenditure grow yet revenue growth has lagged increases in spending, leading to the widening of the fiscal deficit. The government in the 2023 Budget Policy Statement (BPS) plans to pursue growth-friendly fiscal consolidation through slowed growth in public debt without hurting service delivery. But if the past is anything to go by, it will take more than a commitment in the BPS for actual fiscal consolidation to be achieved.

Even though the government has made efforts to cut wasteful expenditures by directing agencies to reduce spending on non-priority areas such as printing, training, foreign and domestic travel, and routine road maintenance, it is not clear that this effort is based on clear evidence. First, even what might initially appear to be non-priority spending could support priority areas. Second, it is not clear that enough can be cut in these areas to really address the challenge. While some of these cuts may be warranted, they were undertaken without critical review and, as a result, may lead to a disruption in public services.

What are the alternatives? One option would be privatization of State-Owned Enterprises (SOEs), which could be a source of additional revenue in the short term and increase the efficiency and productivity of SOEs. The Parliamentary Budget Office (PBO) estimates that the government can raise Ksh. 30 billion from privatization annually over the medium term. However, the government must take caution before placing national interests and strategic investments in the hands of the private sector. Proceeds from privatization should also be reserved for capital projects that have the potential to generate more revenue. Still, privatization may only resolve the short-term fiscal crunch while failing to address longer-term challenges.

A second policy option is the expanded use of Public-Private Partnerships (PPPs) to ease pressure on the government balance sheet, accelerate economic development and improve efficiency in delivery of public services. The government targets to raise Ksh 50 billion through PPPs to finance commercially viable projects in key sectors including water, housing, roads, trade, and industry in FY 2023/24. This is a good start, but Kenya should target to raise even more funds through PPPs in subsequent budgets.

These policy options would yield an estimated Ksh 80 billion for FY 2023/24 compared to a fiscal deficit of over Ksh 660 billion: therefore, these proposals are only a partial solution. Addressing the full problem requires further expenditure controls in line with more modest revenue performance. The Kenya Kwanza manifesto committed to cap growth in expenditures at 75 percent of growth in revenue, and this was achieved in the Budget estimates for FY 2023/24, with projected revenues growing by 18 percent and expenditure by just 7 percent. However, actual revenue performance in the FY 2022/23 has been way below target (at 67 percent of original revenue estimates as at March 2023). Capping expenditures as a share of revenues only works if the government cuts back expenditure when actual revenues come in below target.

In summary, fiscal consolidation is needed to decrease Kenya’s debt vulnerabilities. However, we need to find an approach to consolidation that avoids cutting critical services or undue taxation pressure on the poor. Privatization of SOEs promises to raise additional revenue for the government in the shorter term, but SOEs that are of strategic importance and are of national interest should be spared from privatization. In addition, efficient, transparent, and equitable PPP processes will build confidence in government and lock in private investment. These measures will not eliminate the need to broaden the tax base, but they can reduce the extent of the increase in the tax burden as well as debt vulnerabilities. Finally, the government must institutionalize revenue and expenditure policy reforms to ensure that expenditures are revised each year in line with actual revenue performance.

Why Developing Economies MUST Adopt “Green Public Finance Management” in tackling Climate Change Predicaments in Post-COP27 pledges

IPF — Fri, 25 Nov 2022 11:17:00 +0000

As the name defines it, “Green PFM” helps to integrate environment and/or climate-friendly perspective into PFM practices, systems, and frameworks. Countries at the COP27 climate summit agreed to set up a fund to help poorer countries being battered by the effects of climate change. According to World Bank Report on climate change impact on developing economies, climate -related events is anticipated to squeeze more than 132 million people into poverty worldwide with African countries losing between 10 and 15 percent of their GDP by 2050. During COP26, developed economies pledged at least $100 billion a year in climate funding which is yet to be fulfilled despite being two years past its deadline.

Time is now for the developing economies to effectively adopt “Green PFM” strategies that allows them to independently deal with climate change predicaments without wholly depending on developed economy pledges.

Generally, the PFM cycle comprises of four major phases-planning and policy development, budget formulation, budget execution, and financial reporting and audit/assurance. These phases are generally affected by the adaptation and loss and damage which LDCs put as a demand in COP27. Internally, these countries must embed environmental consideration in these phases. Importantly, re-looking at the Moving Toward Climate Budgeting publication by the world Bank (2014) and Paris Collaborative on Green Budgeting [2017]) is a major enshrined aspect in achieving green PFM.

Helsinki Principles by the Coalition of Finance Ministers for Climate Action in 2019 recognized merits of the public finance role in addressing climate change. It’s now or never to fully integrate national climate action framework plans in the fiscal policy of every LDCs. Let’s not forget that even Public Expenditure and Financial Accountability (PEFA) program has acknowledged key role of central finance agencies in addressing climate change, by developing a framework for assessing climate responsive PFM. For instance, PEFA Climate framework is a set of indicators build on the PEFA framework to collect information on the extent to which a country’s PFM system is ready to support and foster the implementation of government climate change policies.

While the importance of green PFM is increasingly being recognised, green PFM practices, however, remain nascent in developing economies with Sri Lanka, Indonesia, Bangladesh, and Philippines being the only middle-income countries currently implementing it partially- leave alone the developed economies where 10 countries are implementing green budgeting. The “Green PFM” therefore provides the necessary apparatus for the LDCs to signal the desire on focusing on sustainable management of natural resources and environment protection by providing a clear mechanism for policymaking and action

It is not a dream, neither theoretical that policy makers in developing economies are aware that green PFM is a powerful tool to pursue and achieve environmental policies. However, its effectiveness requires further steps for its implementation. This will lead to what we commonly refer to policy-implementation trick down effect. Or else, the Loss and damage and climate financing from developed economies would not be enough to mitigate Climate change predicaments in LDCs if these countries do not come to realization of “Green PFM’ implementation plan!

Author: Joshua Shem, Public Finance Management Research Fellow. Institute of Public Finance.

IPF Attends the African Conference on Debt and Development II (AfCoDD II)

IPF — Fri, 02 Sep 2022 14:41:00 +0000

The African Forum and Network on Debt and Development (AFRODAD) and its partners hosted the second African Conference on Debt and Development (AfCoDD II) from 24th to 26th August 2022 in Lilongwe, Malawi, themed “From Recovery to Reform: Sisi Ndio Tuko Stop the Bleeding”. The conference provided a platform to discuss and chart Africa’s path towards political, economic, and social self-determination.

Among other partners, the Institute of Public Finance participated in a panel discussion on the evolution of Kenya’s public debt and its impact on the economy under the Okoa Uchumi Coalition. As part of the discussions, the panelists pointed out that the government of Kenya has continuously accumulated more debt to finance a burgeoning budget. While there have been infrastructural developments, there is a growing need for deeper and meaningful political engagement to drive reforms especially increased transparency in debt contracting and reporting.

The conference was held against a backdrop of high debt levels across Africa, a situation that was exacerbated by the COVID-19 pandemic and the resultant containment measures. Many governments were forced to leverage fiscal policy and monetary policy to safeguard livelihoods at the height of the pandemic. As result, there was an unprecedented accumulation of fiscal deficits which led to a faster accumulation of public debt. With economies bouncing back from the adverse effects of the COVID-19 pandemic, it is expected that countries will recommit to fiscal consolidation, a goal they were already pursuing before the pandemic.

The high cost of debt service is another key issue that many African countries are grappling with. The Debt Service Suspension Initiative (DSSI) and the IMF’s Special Drawing Rights (SDRs) provided a temporary reprieve, but African countries continue to repatriate a considerable amount of their revenues to developed countries to cover debt services. This notwithstanding, African countries are losing revenues through base erosion and profit shifting, export of cheaper raw materials as well as the importation of expensive finished products. With global shocks materializing, the interventions instituted are proving futile due to the fractured global debt and financial architecture. It is against this background that AfCoDD II sought to drive a conversation on dismantling the existing global debt and financial architecture towards the creation of a new architecture that establishes “Africa as a rule maker and not a rule-taker”.

In one of the break-out sessions, The Tax Justice Network Africa (TJNA) led a discussion on the need to sustain the call for an international tax system at the United Nations toward a more democratic system for the benefit of Africa. Another break-out session focused on essay presentations on national legal frameworks for debt contracting in select countries in Africa.

These presentations magnified the need for increased transparency in debt contracting across the continent.

In conclusion, the conference amplified the need for Africa to have a seat at the decision table. It stressed that the current debt problem cannot be addressed without dismantling the existing financial structure. This can only be achieved if all countries in Africa speak in one voice and capitalize on their strength as a continent. This would particularly be important to drive an international tax system at the United Nations. The Okoa Uchumi Coalition particularly highlighted the need for heightened political engagement to drive the transformation agenda on public debt management.

First Draft of COP26 Climate Deal is Published

IPF — Fri, 12 Nov 2021 14:48:00 +0000

The first draft of an agreement setting out how countries will cut emissions to avoid temperature rises of above 1.5C has been published. Released by the UK, the draft outlines how the countries plan to cut emissions, and for the first time, calls for the phasing out of coal and fossil fuel subsidies.

The six-page document is the first version of the agreement that focuses on adaptation – helping countries deal with the effects of climate change – and finance, a controversial issue because poorer countries blame richer countries for not contributing enough.

This draft acknowledges the devastating impacts of the coronavirus disease 2019 pandemic and the importance of ensuring a sustainable, resilient and inclusive global recovery, showing solidarity, particularly with developing country parties. It recognizes the importance of international collaboration on innovative climate action, including technological advancement across all actors of society, sectors and regions, in contributing to progress towards the objective of the Convention and the goals of the Paris Agreement.

Additionally, it urges parties to ”revisit and strengthen the 2030 targets in their nationally determined contributions, as necessary to align with the Paris Agreement temperature goal by the end of 2022″.

During the Summit, more than 100 world leaders promised to end and reverse deforestation by 2030, including Kenya, where President Uhuru Kenyatta has been calling for the rest of the world to help Africa deal with the effects of climate change.

The draft does not solve the current climate crisis, but attempts to steer COP26 towards a series of significant steps that will prevent global temperature rises from going above 1.5C this century.

COP26: World Leaders Gather to Discuss Urgent Action on Climate Change

IPF — Thu, 04 Nov 2021 14:58:00 +0000

LEADERS ACROSS THE WORLD GATHER AT COP26 TO DISCUSS URGENT ACTION ON CLIMATE CHANGE

Extreme weather conditions and high record temperatures are pushing the planet to dangerous climate catastrophe, that needs urgent aversion. The need to create a better environment for our future has never been more clearer. This week, around 120 leaders from all over the world, attended the launch of the COP26 at Glasgow – to help determine whether humanity can drive change and urgent action towards climate change.

President Uhuru Kenyatta, who attended the summit, urged world leaders to work together with Kenya to improve the development of clean technologies and sustainable solutions towards green energy. Addressing a COP26 event on ‘Accelerating Clean Technology, Innovation and Deployment’, he said, “We join the World in launching the Breakthrough Agenda. Kenya is committed to work together with other countries to accelerate the development and deployment of clean (energy) technologies and sustainable solutions.

Specifically, we endorse the proposed Glasgow breakthroughs pertaining to Power and Green hydrogen in the energy sector and look forward to transitioning and eventually exiting from use of coal to clean power,” President Kenyatta said.

At the World Leaders Summit, UK Prime Minister Boris Johnson pledged the first major deal during the ‘Action on Forests and Land Use’ event. “We have to stop the devastating loss of our forests, these great, teeming eco-systems, three trillion pillared cathedrals of nature that are the lungs of our planet and the destruction together with agriculture and other change of land use that accounts for almost a quarter of all global emissions,” Boris said.

As part of the UK’s Clean Green Initiative, Boris also announced a funding package and pledged to support the rollout of sustainable infrastructure and revolutionary green technology in developing countries. The package guarantees to the World Bank and the African Development Bank to provide £2.2bn ($3bn) for investments in climate-related projects in India, supporting India’s target to achieve 450 GW of renewable energy installed capacity by 2030, and across Africa.

The event that brought together renowned leaders, experts and various alliances – government, corporate and nonprofit – was instrumental in pushing the message home to everyone. World marathon champion Eliud Kipchoge also addressed the conference, urging Western countries to work with Kenya to achieve sustainable climate change.

Kenya was among 105 countries that promised to end and reverse deforestation by 2030. In the past, Kenya has demonstrated its ability to achieve its development while using green and renewable energy. The President noted that renewable energy currently accounts for 73% of Kenya’s installed power generation capacity while 90% of electricity in use is from green sources among them geothermal, wind, solar and hydro-electric installations. He currently leads the Kenyan delegation, where he has been calling for the rest of the world to help Africa deal with the effects of climate change.

Attending the summit was Kenyan’s environment and climate activist Elizabeth Wathuti who said, “We need you to respond with courage to the climate and ecological crisis…for these next two weeks – which are so critical for the children, for our species, for so many other living beings – let us step into our hearts.”

Call for Public Finance Management (PFM) Research Fellows for the 2023/24 Cohort!

IPF — Thu, 18 May 2023 05:09:00 +0000

Government Fingered for Non-Disclosure on How Sh 465B IMF Loan Was Used

IPF — Mon, 03 Oct 2022 05:16:00 +0000

The Institute of Public Finance (IPF Kenya) now wants the government to develop a clear legal framework that will make it easier for oversight bodies to track performance of public funds.

This partly because the IMF does not attach conditional ties on the use of SDRs by recipient countries.

Similarly, the government has not developed a legal framework on SDR utilization and reporting, thus creating a room for little or no transparency and accountability around the use of SDRs.

Milton Ogada (Center) the Programme Officer for Economic and Climate Justice, Christian Aid says Fiscal stability has remained a matter of necessity post COVID-19 as economies struggle to recover.

“The use of SDR holdings needs to be structured to maintain macroeconomic sustainability, including external and monetary sustainability. Kenya benefited from this allocation and received SDR 520.2 million (US$ 737.6 Million) equivalent of Ksh 83.7 billion as part of the multilateral lender’s bailout of global economies and to alleviate balance-of-payments constraints that were faced by all economies.”

Read more on this article by Michelle Anzaya.

Kenya’s Global Ranking in Transparency Remains the Same

IPF — Thu, 02 Jun 2022 05:22:00 +0000

The Open Budget Survey is the world’s only independent, comparative measure of central government budget transparency and it is done every two years by the International Budget Partnership, and locally through its partner, the Institute of Public Finance.

The National Treasury will need to further strengthen public participation beyond Nairobi as well as provide more detailed non-financial reports on budget implementation.”

See the full report here.

The 2022/23 National Annual Shadow Budget by IPF: 2nd Edition

IPF — Tue, 08 Mar 2022 05:27:00 +0000

The 2022/23 National Annual Shadow Budget by IPF for Kenya is the second edition, and it is one of its kind in the country. It is prepared to support engagement between the state and non-state actors in the budget process, enhance access to budget information, particularly on revenue and public expenditure performance, public debt contracting and servicing. 2022/23 National Annual Shadow Budget by IPF comes at a time when the Covid-19 pandemic has caused great damage to the economy, businesses, and households’ livelihoods to which about 2 million people were pushed into poverty.

Find the full report here.

Macro-Fiscal Analytic Snapshot 2021 and Kenya’s 2022 Economic Outlook

IPF — Thu, 13 Jan 2022 05:33:00 +0000

Kenya’s economic damage caused by Covid-19 is worse than originally anticipated, with a downturn that leaves the GDP approximately 9 per cent below the pre-crisis forecast by 2023. Prior to the Covid-19 crisis, Kenya’s public finances were managed in an unsustainable manner, which made the country vulnerable to shocks, stopped the government from mounting a very significant stimulus in 2019/20, and now leaves it with a pressing need for fiscal consolidation going forward.

The Institute of Public Finance Kenya and Oxford Policy Management’s Macro-Fiscal Analytic Snapshot outlines the following key issues to monitor;

Whether the government sticks to its committed path for fiscal consolidation in the upcoming 2021/22 budget revision and 2022/23 budget. Given the government’s failure to bring the deficit under control in past years, there is reason to question whether it will do so this time, despite the greater urgency.

The development of the new National Tax Policy Framework. Due to be released in 2021/22, the new national tax policy framework promises to outline new measures to boost revenue performance, including the reversal of the many exemptions and exclusions that have plagued Kenya’s performance for many years. It is especially important, but is politically difficult, so must be monitored closely.

The impact of fiscal consolidation on county government finances. Government plans for fiscal consolidation are set to have a major impact on the finances of county governments, which if carried through, will have major implications for service delivery going forward.

The impact of continued delays in transfers to counties on service delivery. So far in 2021-22, transfers are on average behind schedule by two months.

James Muraguri, the founder and CEO at Institute of Public Finance, says, ‘‘the PFM system in Kenya still faces some critical weaknesses. The national government has continued to make efforts to strengthen budget transparency, but county information is limited. At the time of writing, county governments had not made their FY 2021/22 budgets publicly available, and there continues to be no ‘one-stop shop’ for accessing county budgets.’’

The Institute’s Head of Research, John Nyangi, adds ‘‘to achieve the current Universal Health Care (UHC) health reforms, Kenya must increase per capita health funding from $55 recorded in 2018 to the international benchmark of $86 through fast-tracking of National Health Insurance Fund (NHIF) reforms.

Out-of-pocket (OOP) per capita spending has also increased to $22 in 2018, as compared to $19 in 2017. There is a need to reduce OOP expenditure to cushion citizens and reduce financial risks when accessing healthcare. Additionally, the government should prioritize the allocation of adequate resources to the National Immunization and Vaccines Program (NVIP) as well as Covid-19 vaccination rollout’’

Fiscal deficits of 8 per cent of GDP in 2019/20 and 2020/21 (estimated) are expected to push debt to over 70 per cent of GDP by the end of 2021/22, with Kenya continuing to be assessed as being at high risk of debt distress by the IMF. Government plans to narrow the deficit imply significant cuts to public spending from 2022/23 onwards, at both levels of government.

Here’s the full report.

Report on the Big Four Scorecard in Embu, Uasin Gishu and Mombasa Counties

IPF — Tue, 26 Oct 2021 05:38:00 +0000

According to the study done across the three counties of Mombasa, Embu and Uasin Gishu to assess plans and budgets and to determine their linkage with the national government’s Big Four Agenda, county governments channelled more investments towards affordable universal health care. This was closely followed by agriculture as part of ensuring food security.

The achievement of manufacturing was mainly attributed towards value addition being undertaken in the agricultural sector such as milk, mangoes and maize processing plants and had very little to do with industrialization as envisioned in the Big Four Agenda. In all the three counties, however, the implementation of the Big Four Agenda remained behind schedule with less than a year before the Big Four Agenda implementation comes to an end.

“It is unlikely that the Counties will have realized the objectives of the Big Four Agenda by the end of the current government’s tenure in office. The implementation has been impassive with the Counties having their own set of programs designed to achieve these interventions,” The Institute of Public Finance Kenya Chief Executive Officer, James Muraguri, said during the launch of the Report.

Access to affordable, quality primary healthcare is the cornerstone of Universal Health Coverage (UHC), but many people across the country still struggle to fulfil their basic healthcare needs. The study shows that counties are not only setting up health facilities but are also introducing various initiatives to reduce out of pocket expenditure and improve access to health care services such as enrolment of households to the National Health Insurance Fund, and expanding the scope of services being offered at the sub-County level.

Under the agricultural pillar, counties have concentrated most of the efforts towards value addition as a way of not only ensuring food security but also improving the livelihoods, creating employment and acting as a source of income to rural households. Across the three counties, the achievement of manufacturing was mainly attributed towards value addition being undertaken in the agricultural sector such as milk and maize processing plants and had very little to do with industrialization as envisioned in the Big 4 Agenda.

“The citizens in the Counties are yet to fully benefit from the projects in housing and manufacturing. This has been largely attributed to inadequate resources and late disbursement of funds from the National Treasury. The commitment has been there and has seen many programmes and projects initiated and implemented ongoing. There is a benefit in leadership continuity as this ensures that all projects are completed as was intended,” Center for International Private Enterprise Country Representative Ben Kiragu noted.

“The County should establish mechanisms in collaboration with the private sector that will allow for participation throughout the budget process. This will allow citizens to identify projects whose implementation is not going according to plans and call for action before the end of the implementation period,” Mr Kiragu added.

The Report further recommends for the county governments to prioritize all the stalled and ongoing projects especially those geared towards UHC, food security, manufacturing and affordable housing in the coming financial year; improved domestic resource mobilization to ensure that the Counties have adequate resources for the project and program implementation.

“The devolved units should increase their capacity to generate their own source revenue and reduce its dependence on the equitable share. The County transfers from the National Government are often occasioned by delays and this affects project implementation. As a result, the County will have adequate resources to implement the intended projects and programmes,” Mr Muraguri highlighted.

There is also a need for proper linkage between the county plans such as the County Integrated Development Plans and the Annual Development with the County Budgets. This is to ensure a smooth transition of the intentions made through the plans, what is budgeted for and eventually implemented.

To promote the engagement of the private sector with key decision-makers at the County level, particularly on the Big Four, the Institute of Public Finance Kenya (IPFK), with funding from the Center for International Private Enterprise (CIPE), assessed County plans and project implementation to determine their linkage with the Big Four. The assessment was done using a balanced score through analysis of county plans and budget documents and face-to-face interviews with key decision-makers involved in county planning and budgeting in the three Counties.

The Big Four agenda is an economic blueprint that was developed by President Uhuru Kenya’s government in 2018 to foster economic development and provide a solution to the various socio-economic problems facing Kenyans for the period between 2018 and 2022.

The Big Four Agenda aims at accelerating economic growth through Four Pillars: deliver 100% food security and nutrition through increasing large-scale production of staple foods; Provision of affordable universal health care by 2022; Provision of affordable housing through the construction of at least 500,000 low-cost houses in a partnership with the private sector; and Enhancing the manufacturing sector through the promotion of local manufacturing industry to create employment and reduce the current trade deficit.

Download the full report here and in case you were not able to attend the event, here is a link.

Kenya’s Debt Profile Report

IPF — Tue, 26 Oct 2021 05:46:00 +0000

An analysis of Kenya’s public debt profile on opening the dark corners of the budget to ensure greater public debate and oversight of Public Finance Management decision-making processes.

Kenya, like many other developing countries, has faced high competition for public resources in an effort to offer public services. The Covid-19 pandemic has also led to an increase in the stock of public debt in the East African States, as the countries contracted new loans to mitigate the spread of the virus. This, in retrospect, has necessitated borrowing either domestically or externally to offset the budget deficits.

Read the full report here.

What is the way out of Kenya’s Debt Conundrum?

IPF — Fri, 04 Aug 2023 10:26:00 +0000

Kenya has been experiencing an alarming increase in debt levels in recent years, which has become a source of concern for policy makers and development practitioners. The country’s total public debt has risen sharply from Ksh.2.1 trillion in end 2013 to Ksh.8.2 trillion in end 2021, equivalent to about 68% of GDP. The current level of debt is unsustainable and poses a significant risk to the country’s economic growth and stability.

Resolving Kenya’s looming debt crisis would involve a combination of measures aimed at improved transparency, managing borrowing and lending more effectively, implementing better strategies for handling shocks and crises, and boosting alternatives to borrowing.

Improve transparency of debt reporting

Without greater transparency, the real debt risks that Kenya faces remain obscured. Despite the National Treasury required under the law to publish a monthly public debt bulletin, the only information available is up to March 2023. Similarly, information on loan contracts remains scanty. In the case of the SGR deal for example, the government made public the particulars of the contract, but the details of the collateral put up against the loan that financed Kenya’s largest infrastructure project were conspicuously missing.

Establishing robust mechanisms for monitoring and reporting on public debt is crucial. Regular audits, transparency in loan contracts, and public disclosure of debt-related information can enhance accountability and discourage irresponsible borrowing and lending practices. The public disclosure of lending contracts would allow parliaments, journalists, and civil society organisations to examine them so as to hold the government accountable, and also allow other lenders to have the full information before making further loans.

Managing borrowing and lending more effectively

Despite Debt Sustainability Analysis (DSA) being critical in debt management as early warning systems of debt distress, Kenya has inadequate capacity to undertake such analysis. As a result, the DSAs currently in use are developed by the World Bank and IMF. However, the standardized approach adopted by the IMF has been criticized for not fully accounting for country specific characteristics and vulnerabilities. It is therefore critical to strengthen the capacity of institutions such as the Public Debt Management Office (PDMO) to undertake regular and comprehensive DSAs unique to the Kenyan context. This can be achieved in collaboration with international financial institutions, development partners and regional organizations.

Implementing better strategies for handling shocks and crises

Kenya is susceptible to external shocks arising from a huge chunk of external debt denominated in foreign currency. The country’s financial obligations increase as the shilling weaken against the currency the debt was issued in. It is necessary to explore alternative sources of finding that that are less susceptible to currency risk, such as concessional loans from international financial institutions or issuing debt in local currency. Concessional loans also attract lower interest rates with a longer repayment period than commercial loans.

Lenders should also be at the forefront in improving the borrowing options available to countries like Kenya. For instance, State Contingent Debt Instruments (SCDIs) can be valuable tools in managing public debt when offered by creditors. These instruments provide flexibility and risk-sharing mechanisms that align debt servicing obligations with a country’s economic performance, including pausing debt servicing when a country faces difficulties in repayment. For instance, several official creditors have extended loans with state contingent features (such as the Agence Française de Développement’s countercyclical loans where maturity and grace period has been extended by up to 5 years). Also, Sri Lanka’s private creditors(bondholders) are reported to be considering a proposal to swap defaulted bonds with new securities that would have cash flow linked to future GDP growth.

The flexibility of creditors and the international system is important. Resolving sovereign debt crisis through restructuring has been on the international radar and should be revived as the best solution. The IMF suggests creating a framework offering a debtor country legal protection from creditors that stand in the way of a necessary restructuring, in exchange for an obligation for the debtor to negotiate with its creditors in good faith and to put in place policies that would prevent a similar problem from arising in the future. This would encourage Kenya and its creditors to reach agreement of their own accord.

Boosting alternatives to borrowing

Kenya is currently under a 38-month IMF program aimed at enhancing fiscal consolidation. While this is a welcome move, tackling the use of offshore financial centres and financial secrecy (which allows for tax avoidance and evasion) remains key. It is estimated that the government has been losing an average of KES 40 billion every year through illicit financial flows since 2011. Addressing the problem of IFFs would play a significant role in improving the government’s fiscal position and reducing the reliance on borrowing. This could be achieved through enhanced inter-agency coordination, and promotion of financial transparency by implementing robust regulations on beneficial ownership disclosure, anti-money laundering measures, and combating tax evasion.

In conclusion, implementing these measures will help the country to reduce its debt burden, stimulate economic growth, and improve its financial standing in the international market. Fundamentally, preventing an impending debt distress is not the sole responsibility of Kenya as a borrower: Serious changes are urgently required on the part of creditors and the international system.

By Eddy Ochola – Research Assistant, Institute of Public Finance

Domestic Resource Mobilization in Kenya: What’s taxing the rich got to do with it?

IPF — Wed, 26 Jul 2023 10:37:00 +0000

The ongoing polycrisis, characterized by the global economic slowdown, the Ukraine-Russia war, rising interest rates, climate change, high levels of indebtedness and uncertain future foreign investment and aid inflows has given new impetus to dialogue on domestic resource mobilisation in Africa.[1] In Kenya alone, notable interventions geared towards domestic resource mobilization include the establishment of institutions and rules to curb tax evasion[2],and widening of the tax base to reach untapped sectors of the economy, such as the informal sector[3]. While these interventions are critical, they will be insufficient without a focus on taxing the rich.

In a 2022 report by Oxfam International[4], it is estimated that imposing a wealth tax on Kenya’s super rich has the potential to earn the country up to 125 billion Kenyan shillings in additional revenue –nearly double the current budget for Social Protection (Kshs. 68.6 billion for FY 2023/24)[5]. Wealth taxes have the potential to enable government to fund key services and can help the tax administration meet some of its revenue targets.

Government has previously considered increasing taxes on the rich, and the idea may be gaining momentum again. In 2018, National Treasury proposed key changes to the Income Tax Act to impose a higher maximum tax rate of 35% on an income of more than 9 million shillings annually or 750,000 shillings monthly[6]. The proposal, however, was withdrawn by the Treasury, citing a lack of public support. Last year, however, President William Ruto revived this very proposal to impose higher taxes on Kenya’s super rich, endorsing the introduction of a wealth tax, which Parliament had previously rejected

[7].Taxing the rich might seem like common sense, but does it effectively contribute to domestic resource mobilization efforts? Indeed, taxing the rich has several benefits. First, taxing the wealthy can generate significant revenue to pay for public services, as mentioned above. Kenya aims at growing tax revenues above 18% of GDP over the medium term, scaling-up revenue collection efforts to Sh3 trillion this year and Sh4 trillion over the medium term[8]. While taxing the wealthy alone is not sufficient to meet these ambitious revenue targets, it can supplement other revenue generating measures pursued by the government.

But in addition to generating needed revenue, taxing the wealthy is a vital tool for tackling inequality. In Kenya, for example, the gap between the richest and poorest has reached extreme levels. Less than 0.1% of the population (8,300 people) own more wealth than the bottom 99.9% (more than 44 million people). Additionally, the richest 10% of Kenyans earned on average 23 times more than the poorest 10%[9]. By implementing progressive tax polices that impose higher rates on higher income brackets, the government can ensure that the wealthiest citizens contribute their fair share to the nation’s development. Taxing the rich can also be a powerful statement of the government’s commitment to social justice and equitable development.

Finally, taxing the rich is a more promising path to domestic resource mobilization than taxing the informal sector, whose inherent volatility poses challenges for consistent revenue generation. The rich have more consistent and predictable revenue streams that can be monitored over time. Furthermore, the rich typically have formal financial records, which facilitate efficient tax assessment and collection. However, taxing the wealthy is not easy: in many countries, including Uganda where wealth taxes have been imposed, taxing the rich has been characterized by new forms of tax avoidance and evasion, with the political and economic elite sheltering their assets in tax havens and offshore accounts. [10] As such, taxing the rich necessitates a multi-faceted approach that includes equipping tax authorities with new capacities to deal with such elites within their respective jurisdictions

In conclusion, taxing the rich presents a viable and promising option for domestic resource mobilization in Kenya today, though only as part of a larger package of reforms. Whatever tax policies the government pursues, however, must be well-designed, transparent, and supported by effective governance to ensure that all revenue collected is effectively utilized for the benefit of all citizens.

References

[1] The Global Financial Crisis and Domestic Resource Mobilization in Africa – African Development Bank (2009): https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working%20Paper%20101%20-%20The%20Global%20Financial%20Crisis%20and%20Domestic%20Resource%20Mobilization%20in%20Africa.pdf

[2] Laws to minimize tax avoidance in Kenya. https://www.business-humanrights.org/en/latest-news/laws-to-minimise-tax-avoidance-in-kenya/

[3] Kenya Revenue Authority – Presumptive Tax to Tap into the Informal Economy. https://www.kra.go.ke/individual/filing-paying/167-presumptive-tax

[4] Oxfam International (2022). Survival of the Richest: How we must tax the super-rich now to fight inequality. https://policy-practice.oxfam.org/resources/survival-of-the-richest-how-we-must-tax-the-super-rich-now-to-fight-inequality-621477/

[5] National Treasury and Economic Planning. The Mwananchi Guide – Financial Year 2023/24 Budget. https://www.treasury.go.ke/wp-content/uploads/2023/06/Budget-Highlights-The-Mwananchi-Guide-for-the-FY-2023-24-Budget.pdf

[6] Wealth Tax: A solution to Inequality in Africa – Kenya Revenue Authority. https://www.kra.go.ke/news-center/blog/1892-wealth-tax-a-solution-to-inequality-in-africa#:~:text=Proposed%20measures%20for%20imposing%20Wealth%20Tax%20in%20Kenya&text=In%202018%2C%20the%20Treasury%20sponsored,750%2C000%20a%20month.

[7] Ruto: We shall tax wealth, consumption, income and trade (2022). https://ntvkenya.co.ke/news/ruto-we-shall-tax-wealth-consumption-income-and-trade/

[8] https://www.the-star.co.ke/business/kenya/2023-05-01-micro-small-businesses-as-a-panacea-to-low-tax-revenue/

[9] Oxfam International. Kenya: Extreme inequality in numbers. https://www.oxfam.org/en/kenya-extreme-inequality-numbers

[10] International Centre for Tax and Development. Small Nets for Big Fish? Tax Enforcement on the Richest – Evidence from Uganda. https://www.ictd.ac/publication/small-nets-for-big-fish-tax-enforcement-on-the-richest-evidence-from-uganda/

Supplementary Budgets: A Threat to Good Governance & Fiscal Consolidation

IPF — Thu, 20 Jul 2023 10:42:09 +0000

Every year, the executive proposes, and parliament approves multiple supplementary budgets without exercising its oversight role effectively. These have consistently increased the overall budget each year: each revision has reduced revenue targets while increasing expenditure limits. The net effect of this behavior has been an average increase in the budget deficit by 26 percent every year in the last 6 years with dire consequences for the whole economy.

To be clear deficits are also caused by unrealized revenue targets. However, only an average of about 10 percent of the budget deficits reported between 2017 and 2022 were explained by low revenue collection. The supplementary budget is the main culprit: analysis of ordinary revenue performance between 2017 and 2022, shows that revenue projections are usually revised downwards to more realistic estimates in the supplementary budget, with an average revision of Ksh 110 billion every fiscal year while expenditure was actually revised upwards by an average of Ksh 142 billion each year, further widening the gap between revenue and expenditure by an additional Ksh 241 billion every year.

While changes to the budget during implementation are provided for in Article 223 of the Constitution of Kenya, the way that the government has typically used them goes against the spirit of our national values and principles. The Public Finance Management (PFM) Regulations emphasize that supplementary budgets are exclusively for unforeseen and unavoidable circumstances. Any expenditure that was known at the time the original budget was finalized should not be considered unforeseen. While in-year budget changes are necessary to respond to emerging issues, such provisions should not be misused as an opportunity to alter the original policy objectives or to introduce new projects or programmes without robust public participation and Parliamentary approval.

The 2022-23 Supplementary Budget I exemplify the above challenges. For example, the approach to food security and drought mitigation appears to be ad hoc and reactionary despite being predictable. The supplementary budget introduces a new policy through creation of a Department of Irrigation as a new service delivery initiative that is inconsistent with supplementary provisions. We also observe an arbitrary 60 percent increase in the Kenya Secondary Education Quality Improvement Project that is meant to increase financing for scholarships, which can neither be categorized as unknown or unforeseen. These are just a few of the budget changes in the supplementary budget that do not meet the requirements of the law.

Citizens’ efforts are also often nullified without meaningful public participation in the preparation and approval of the supplementary budgets. After 10 months of involvement throughout the budget formulation process, the original budget incorporates public priorities. But these are then revised contrary to what had been approved without further public engagement. This blatant abuse of a cardinal requirement by our constitution on public participation by both the National Treasury and the National Assembly should be challenged by citizens and civil society groups through petitions and submission to compel these two institutions to seek public views and consider them each time they are discussing supplementary budgets.

Snubbing fiscal consolidation efforts

The Kenya Kwanza government has suggested that it is keen to pursue fiscal consolidation to pave way for sustainable and balanced growth. It has, however, presented a supplementary budget that follows the tradition of expansionary policy, deferring consolidation. Instead of reducing the budget by Ksh 300 billion as promised, the budget was instead increased by Ksh 36 billion.

Furthermore, the government has opted for optimistic revenue projections which, taken together with increasing expenditure, will further augment the deficit. In IPF’s recommendations in the Annual National Shadow Budget, we recommended a conservative estimate for economic growth which would yield lower revenue estimates.

While the National Treasury projects a slower rate of economic growth in 2023 of 5.1% given the high food and energy prices, it has also projected to increase ordinary revenue by Ksh 366 billion to a total of Kes1.8 trillion, which will be the highest collection ever in Kenyan history. As noted above, however, Kenya’s actual revenue collections are consistently lower than the budgeted levels. Revenue collections for the first half of FY 2022/23 continue this trend: revenue was under collected by Ksh 11 billion. Clearly, the current administration still lacks realism about revenues, which may undermine fiscal consolidation.

Yet need to pursue fiscal consolidation is urgent and cannot be ignored. Citizens, civil society organizations, private sector and other stakeholders must actively participate and hold the National Assembly and the National Treasury responsible for their handling of supplementary budgets. They should demand adherence to the constitutional mandate for public engagement in the budget process, transparency, and accountability. The National Treasury should also consider all macro-economic assumptions during budget preparation to ensure that credible and accurate budgets are presented to Parliament for approval.

Further, there is also a need to strengthen oversight beyond Parliament that discuss supplementary budgets ex-post. One way to achieve that is through the Office of the Controller of Budget that is mandated to oversee implementation of the budgets for both national and county government. The COB has recently shown that it is monitoring supplementary budgets: pointing out that the Executive has introduced illegal expenditures and reallocated funds to projects that had been rejected during public participation. It should therefore be more aggressive in ensuring that in-year budget changes are consistent with the law and pursues policy objectives in the original budget before authorizing any expenditure.

Why Kenya should prioritize Mental Health Financing: A Call to Action

IPF — Mon, 26 Jun 2023 11:08:00 +0000

Kenya is facing a significant burden of mental illness, as it is estimated that for every five Kenyans, one will have a mental illness in their lifetime. Depression is a particular concern, with 1.9 million Kenyans affected, placing the country 4th in terms of prevalence in Africa. The growing concern about mental health resulted in a proposal by the Ministry of Health in 2021 for the recognition of mental illness as a national public health emergency of epidemic proportions. Despite this, mental health financing in the country is relatively low, which has resulted in limited access to quality mental health care services and a high financial burden on individuals seeking mental health care. To address this urgent issue, the government should seek innovative financing approaches such as impact bonds to prioritize mental health financing.

Current expenditure on mental health is insufficient, as it accounts for only 0.01 percent of the total government expenditure on health, despite mental illness accounting for 13 percent of the entire disease burden. This is an expenditure of approximately 15 cents per capita. This is in stark contrast to the global median mental health expenditure per capita of US $2.5 (Ksh. 250), accounting for 1.8 percent of governments’ expenditures on health internationally. In addition to this, Kenya’s current expenditure is significantly lower than the estimated economic costs of the mental illness burden in Kenya of approximately 0.6 percent of the GDP in 2020.

Not surprisingly, chronic underfunding has resulted in a mental health care system that is poorly equipped to handle Kenya’s mental health crisis. A report by the Office of the Auditor General (OAG) indicates that there is a shortfall in the professionals required to provide mental healthcare services. For example, the psychologist-patient ratio is at 1: 4,600,000 against an ideal ratio of 1: 15,000 as established by the Ministry of Health. In addition, few mental health care centres are adequately equipped in the country. Psychiatric units are only available in 25 counties, leaving patients in the other 22 with the extra burden of travelling to seek services in a different county. Of the 19 psychiatric units audited by the OAG, 15 lacked all the basic equipment, 4 had at least one machine and only 2 had functional ECT machines.

For better outcomes, the government should increase budgetary allocations towards mental health at both the national and county levels. While donor funding may be relied upon in the short term, it is unsustainable over the long term. A common revenue source for mental health financing globally is ‘sin taxes’, which discourage consumption of unhealthy products such as alcohol while also providing for increased health budgets. While these taxes are sometimes criticized for hurting the poor, they can provide a great incentive for behavioural change, resulting in significant benefits that are considered pro-poor. These include improved health, fewer medical bills and higher labour productivity, resulting in higher incomes.

Given that such taxes already exist, the government should consider raising excise tax rates for products with high inelastic demand, such as beer. The additional revenue generated should then be earmarked for mental health financing. This would be effective as price increases for these products are unlikely to result in significant declines in consumption. A study undertaken by KIPPRA found that a 10 percent increase in the price of beer would only result in a decline of 3.7 percent in consumption. Furthermore, ongoing government efforts to combat illicit brews and alcohol would discourage the shift in consumption towards these harmful alternatives.

Another alternative and emerging financing option for mental health is Social Impact Bonds (SIBs). These bonds are preferred due to their outcome-driven nature, where investor returns are dependent on the program’s success in attaining predetermined goals. For an SIB targeting a mental health concern like depression, the investors would identify and fund evidence-based interventions such as therapy and support programs, and the government would repay the investors if the program successfully reduces the depression rates.

While most successful mental health SIBs have been implemented in developed countries, the successes of other impact bonds implemented domestically, such as the Adolescent Sexual Reproductive Health Development Impact Bond, imply that they are a viable means of financing in Kenya. With proper implementation and careful consideration, SIBs hold the potential to be effective in supporting mental health initiatives. However, it is crucial for the government to thoroughly assess its capacity to fulfil repayment obligations to the investors before engaging in such financing arrangements.

Author: Gladys Wachira – Research Assistant, Institute of Public Finance

INVITATIONS FOR QUOTATIONS FOR THE FINANCIAL YEAR 2023 – 2024

IPF — Wed, 21 Jun 2023 04:54:00 +0000

The Institute of Public Finance invites applications from interested and eligible candidates for pre-qualification for the supply of goods, works and services for the period of 2023.

Note the following;

All existing suppliers are required to participate alongside prospective suppliers in order to be evaluated and considered.

All participants are required to send their applications for the prequalification process and then they will be notified of the outcome.

Date and Place of Submissions

To submit your application, fill this Google form: https://rb.gy/vdkt5 and send in all required documents as highlighted in the form to: procurement@ipfglobal.or.ke no later than Friday 14th July, 2023 by 5.00pm EAT.

Kenya’s Tax Expenditure: Is it a hit or a miss?

IPF — Wed, 13 Sep 2023 17:28:00 +0000

Around the world, governments use tax exemptions and zero-rating (otherwise known as tax expenditures) to provide benefits to companies in the hopes of increasing investment, employment, and economic growth. Yet tax expenditures (TEs) are often opaque, and it is often not clear whether they actually achieve targeted goals. As a result, in recent years, global institutions like the IMF and civil society actors like Tax Justice Network have called on governments to be more transparent about these incentives, and to restrict their use where benefits are not demonstrated. Regular and comprehensive TE reporting is a good practice that enhances transparency. Such reporting should clarify the criteria for administering tax exemptions, deductions, credits, special rates, detail the types of beneficiaries, and assess the economic implication of foregone revenue.

In Kenya, the government spends nearly 3 percent of GDP on tax expenditures, but lack of transparency makes it hard to know what these exemptions are for and whether they have an impact. While the government has recently begun to produce TE reports, these do not meet international standards and do not assess the economic impact of TEs.

Kenya’s National Treasury has published TE reports 2021 and 2022 TE reports. However, these reports are generic, and fail to produce evidence on the impact of the country’s generous tax incentives on the economy. While an estimate of the costs of tax expenditures is provided, there is no estimate of the benefits. The government’s approach to defining the benchmark tax system—that is, what the tax system would look like in the absence of tax expenditures—leads to some tax benefits (including some that are likely costly and deserve analysis) dropping out of the analysis.

At the same time, the benchmark tax system report is not publicly available thus undermining the principle of transparency and accessibility of information. The 2022 TE report only gives a summarized criteria for defining a benchmark tax system, but this summary is not sufficient to know if the general tax regime is beneficial or not when tax relief and exemptions are granted. Moreover, the TE report does not count preferential tax measures such as exemptions, waivers, deductions, or reliefs given to Companies located in Export Processing Zones and Special Economic Zones (SEZ) as tax expenditure hence an under-estimation of revenue foregone. The TE report also refers to a national tax policy that to date has not been finalized as the criteria for defining a benchmark tax system.

Another gap in the TE report is the failure to disaggregate CIT expenditure into resident and non-resident corporates. This denies the public an opportunity to establish which category of corporates takes the highest TE and why. VAT, on the other hand, is broken down by domestic VAT and VAT on imports as shown in Table 1

Even here, however, failure to break down TEs for VAT on imports and domestic VAT by goods and services makes it hard to assess whether the revenue foregone on some commodities and inputs achieves the goal of easing the cost of living for the vulnerable in society.

The TE reports reveal that Agriculture, Manufacturing and Construction and Service (Financial and Insurance Activities) are among the sectors that recorded high growth in exemptions and zero-rating to encourage investment and stimulate production (shown in Figure 1b).

Ideally, a TE incurred today should have a long-term positive impact on the targeted sectors including growth in value addition (net output of a sector after adding up all outputs and subtracting intermediate inputs). It is difficult to assess whether or not this is true, given a lack of transparency in reporting. Moreover, the COVID pandemic has disrupted trends in exports and value addition. At a glance, however, the data suggest a need for more research to establish whether there is any link between TEs, exports and value addition, as there are not clear trend lines demonstrating improvements in exports and value addition over time.

These inconsistencies (see Fig. 1c) signals there could be gaps worth further investigation such as distorted incentives where businesses engage in tax planning strategies to maximize benefits from exemptions, ineffective targeting that result to tax exemptions and zero rating being directed towards sectors or activities that do not genuinely need support for value addition, and misallocation of resources especially when businesses focus on activities that benefit from tax exemptions rather than investing in value-added activities.

Moreover, there is also not a clear link between export growth and preferential tax measures given to Companies located in Export Processing Zones and Special Economic Zones (SEZ) with a goal to promote exports (see inconsistent trendline in Fig. 1d).

Although there has been a notable decline in TEs as shown in Fig. 2, tax expenditures still account for a substantial share of economic activity. Foregone revenue from these incentives could improve public finances in a country that has been struggling with high fiscal deficits and inadequate transfer to the counties. Evidence from available data (shown in Table 2) establishes that the amount of foregone revenue between 2018 and 2020 as tax expenditure would have been enough to finance transfers to the counties. Or it could have reduced fiscal deficits by more than a third.

In summary, TEs diminishes the available funds for service delivery, necessitates elevated tax rates to generate the same amount of revenue foregone, and/or contributes to an expansion of the budget deficit. The question remains whether the costs are worth bearing. To assess this, the government need to adopt a best practice in making publicly available comprehensive TE reports indicating the beneficiaries and amounts and expiry periods to analyze whether this is so. Such information would facilitate scrutiny and mitigate the risk of abuse by politicians and those close to power. Further, a diagnostic of TEs against policy goals is required to identify distorted incentives, ineffective targeting, and misallocation of resources.

Author Bernard Njiri

Senior Research Analyst

Institute of Public Finance

Successful taxation of High-Net-Worth Individuals (HNWIs): Lessons from Uganda

IPF — Thu, 21 Sep 2023 14:02:00 +0000

The famed American thief Willie Sutton was once asked why he robbed banks. “Because that’s where the money is!” was his laconic response. Today, many countries want to tax the super-rich for the same reason. But doing so has proven to be no easier than robbing a bank. Some countries have managed to make more progress than others, however. Uganda reformed its approach to taxing high net worth individuals (HNWIs) in 2015 and within three years, filing of tax returns by HNWIs increased from 13 percent to 78 percent. Tax revenue from this segment also increased, from Ush 19.7 billion in FY2014/15 to Ush 106.9 billion in FY 2021/22.

While this increase in revenue is modest, Uganda’s experience provides evidence that taxing HNWIs is possible. As Kenya grapples to increase revenues, it should follow the Ugandan approach and set up a special unit to focus on taxing HNWIs, actively engage with taxpayers, use available information on the wealthy opportunistically rather than trying to be comprehensive, and focus on taxpayer education. With political commitment from the top of the revenue authority, such reforms can lead to real revenue gains.

The idea of taxing the rich is not new in Kenya. Kenya’s Vision 2030 proposed various tax reforms, including taxation of HNWIs. This would be achieved through interventions such as exchange of tax information with other countries. The Kenya Revenue Authority (KRA) 8th Corporate Plan also recognizes HNWIs taxation as a key source of revenue but little progress has been made in actually taxing them.

By contrast, Uganda created a dedicated unit to tackle HNWI taxation back in 2015. Uganda initially had two different units tracking HNWIs and VIPs. Because VIPs were high net worth, politically influential, and very busy, they were similar to HNWIs, so tax officials needed similar skills to engage them. Uganda also recognized that HNWIs were different from large corporations, so the HNWI/VIP tax unit was separated from the Large Taxpayers Office (LTO). This is considered a good international practice: the International Monetary Fund (IMF) argues that dedicated HNWIs units are vital to improve customer service, understand taxpayers, and manage compliance risks effectively.

Several additional factors have contributed to the success of Uganda’s HNWI unit. First, active engagement and commitment from Uganda Revenue Authority’s (URA’s) top management played a crucial role in the decision to tax HNWIs. Second, URA focused on taxing HNWIs it could identify easily, starting with publicly available information to generate a list of possible HNWIs. Only later would Uganda develop a formal criterion for identifying HNWIs. Third, a close collaboration between the HNWI unit and the URA’s research division ensured that the unit’s approach was evidence-based. Moreover, HNWI unit staff were picked based on their communication skills; it was crucial for these staff to balance assertiveness and respectfulness to effectively handle HNWIs and communicate tax matters in a simplified way. Lastly, the HNWIs unit initially focused on tax education to gain their commitment to pay taxes, rather than solely resorting to harsh enforcement measures.

While Uganda’s case exemplifies good practices, it is also a cautionary tale, as improved HNWI tax compliance did not result in a significant increase in revenue. This segment of taxpayers is known for aggressive tax planning. Because most of their income is from assets whose residency is spread across many jurisdictions, it is challenging for a single country to effectively tax HNWIs.

This suggests that international collaboration through exchange of information and effective use of data is a core element in successful taxation of HNWIs. Being a signatory of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, Kenya can leverage on information acquired to effectively tax HNWIs. Kenya can also learn from other countries that have successfully implemented voluntary disclosure programs to address non-compliance .

In conclusion, Kenya should follow Uganda’s lead and establish a dedicated HNWI unit separate from the Large Taxpayers Office (LTO). Taxing HNWIs efficiently necessitates a balanced strategy that includes teamwork, openness, and targeted policy measures. It would also be critical to build the technical skills of the HNWI unit to address tax evasion more effectively. KRA should assess Kenya’s legal framework for taxing HNWIs, given the complexity of their financial planning, potentially requiring a specialized workforce to handle complex tax issues and related litigation.

Author: Veronicah Ndegwa, Senior Research Analyst- Tax Policy and Public Debt

The education budget falls short of adequately meeting its performance indicators

IPF — Tue, 26 Sep 2023 14:13:00 +0000

The Education sector should set realistic targets that align with the available budget. Despite spending nearly 100 percent of its budget in the 2021/22 fiscal year, the sector continues to face challenges and falls short of meeting its goals. Kenya has one of the highest primary school dropout rates in East Africa, with over 1.2 million children currently out of school, as reported by UNESCO. The shortage of teachers is another critical issue, with an estimated deficit of approximately 60,000 teachers in the country. As a result, classrooms are overcrowded, with teachers having to manage up to 100 students instead of the recommended ratio of 1:40. This overcrowding has negatively impacted the quality of education provided.

Kenya’s education sector is riddled with inequalities. Furthermore, marginalized communities have limited access to education, leading to increased inequality and perpetuating the cycle of poverty. Marginalized communities, including those in rural areas and informal settlements, face additional barriers, including lack of infrastructure, limited resources, and inadequate teacher deployment. Also, Kenya’s national examination results, such as the Kenya Certificate of Primary Education (KCPE) and Kenya Certificate of Secondary Education (KCSE), consistently reveal huge variations in performance across schools and regions where public schools in rural areas are mostly affected by poor performance.

In order to address these gaps, the government allocates a large share of Kenya’s total resources to education every year, but the sector still not meeting targets. We know that the problem in the sector is ambitious targets because even when programs spend their full budgets, they fall short of goals. For instance, in the fiscal year 2021/22, the education sector in Kenya utilized 98 percent of its budget but only managed to achieve an average of 67 percent of its Key Performance Indicators (KPIs), as stated in the 2022 SWG report.

In the FY 2021/22 the Secondary Education programme targeted to construct 1481 new classrooms but only achieved 808 yet it absorbed 96 percent of the allocated budget. The Quality Assurance and Standards programme had a budget absorption of 94 percent but only achieved 44 percent of its KPIs. To improve the quality and standards in schools, the programme targeted 18,500 learning institutions but only managed to assess 13,465 institutions. To facilitate co-curricular activities, 1787 schools were targeted to participate in science fairs organized at the Sub-County level, yet reported performance was 0.

In some cases, programs failed to meet their targets after experiencing budget increases. For instance, the Primary Education Program received a 39 percent budget increase, but its achievement of KPIs, such as providing sanitary towels to schoolgirls, was only 52 percent.

The education sector should base its goals on comprehensive data and analysis in order to identify current performance levels, gaps, and potential areas of improvement. When goals are data-driven, they are more likely to be attainable and can be objectively measured for progress. Also, engage relevant stakeholders in the goal-setting process. This includes representatives from different levels within the sector, as well as external experts and the public. Involving stakeholders ensures that goals are grounded in practicality and reflect the needs of those directly impacted by the sector’s activities. The sector needs to acknowledge potential risks and challenges that may hinder goal achievement. Develop contingency plans to address these risks proactively and demonstrate a realistic understanding of potential obstacles.

Some may argue that the reason the Education sector has failed to meet its targets is not unrealistic targets but underfunding. Increasing the budget allocation would enable the sector to meet its targets more effectively. However, while it is true that underfunding can hinder the Education sector’s ability to achieve its targets, it is important to consider that simply increasing the budget allocation may not guarantee success. Before requesting an increase in the budget, the Education sector should focus on optimizing the utilization of the existing funds. This includes identifying areas of inefficiency, reducing wastage, and improving financial management practices. By ensuring that the available resources are effectively utilized, the sector can maximize the impact of its budget without solely relying on increased funding.

While increased funding is desirable, it is crucial to first align targets with the allocated budget. Setting achievable targets helps in building public confidence and accountability within the Education sector. When targets are met consistently, stakeholders, including parents, teachers, and policymakers, are more likely to support further investments in education. This, in turn, can contribute to increasing funding for the sector over time.

It is important to note that revising targets should not imply accepting low standards or compromising the quality of education. Instead, it means setting realistic goals that consider the available resources and the unique challenges faced by the Education sector. By doing so, the sector can make significant progress in reducing educational disparities, promoting equity, and fostering inclusivity.

Author Felix Masikonte, Project Officer, IPF

Why the Public Financial Management Programme Budget Should Be Prioritized

IPF — Mon, 09 Oct 2023 06:20:30 +0000

County public finance management is an emerging issue as identified in the 2023 Budget Policy Statement. The National Treasury in the financial year 2022/2023 through a Multi-Agency Taskforce identified challenges faced by County Governments in the management of public finance and proposed several measures for intervention going forward.

The Public Financial Management programme under the National Treasury, aims to promote transparent and accountable management of public resources, and it is this programme that should address the issues raised by the taskforce. For example, this programme closely supports public finance management improvements in county governments, and fosters the devolved system of governance. Despite this, the programme budget was cut, which may undermine these goals this and the budget cuts should be reversed.

According to the Taskforce, there is evidence showing that there is a technical capacity gap amongst county government officials on PFM related areas that limits their efficiency in the execution of public financial management decisions and thus, the government should prioritize this programme. Continuous capacity strengthening of county governments officials on PFM related areas is recognized as an important measure to address some of the challenges and one of the Taskforce’s recommendations towards improving public finance management in county governments.

Budget cuts to the programme have previously affected the realization of some of the planned targets. For example, the Sector Working Group report on performance for Medium Term Expenditure Framework period 2019/20-2021/22 shows that some programme targets were not met due to budget cuts. Notably, under the Public Financial Management Reforms sub-programme, the National Treasury targeted to enhance skills and capacity of 7,500 officers in Public Finance Management through training but only trained 7,000, which is attributed to budget cuts. Furthermore, the cut in the FY 2023/24 is very likely to affect the National Treasury’s commitments for this year.

The Public Financial Management programme has been a well-performing programme against others, raising questions as to why it was targeted for budget cuts and without justifications. In addition, it posted a relatively high budget absorption rate of 86.5 per cent in FY 2021/2022. Contrastingly, one of the programmes by the name Government Clearing Services for example, whose absorption was the least of all the programmes under the National Treasury at 71.3 per cent, has the least budget cut. However, no justifications are provided as to why this is the case.

The programme plays a critical role in supporting public finance management improvements in county governments by promoting transparent and accountable management of public resources and should thus be prioritized. The budget cut to the programme this year is very likely to affect the National Treasury’s commitments and targets and should therefore be reversed.

References

2023 Budget Policy Statement.

2022 Budget Review and Outlook Paper.

https://www.treasury.go.ke/wp-content/uploads/2022/12/PAIR-Sector-Report.pdf.

Author: Victoria Wausi, Programmes Officer, Institute of Public Finance

Transparency and Citizen Action in Health: Prescriptions for an Ailing Sector

IPF — Tue, 31 Oct 2023 07:17:27 +0000

The health sector ranks as the second most corrupt in Kenya, according to the National Ethics and Corruption Survey, 2021.^[1] This is particularly alarming, as health sector decisions have life or death implications. The prevalence of corruption in the sector drains scarce financial resources, undermining operations and procurement of essential supplies. Ultimately, it weakens Kenyans’ trust in health care services, poses significant risks to health outcomes, and exacerbates existing health disparities. To tame corruption, there is need for greater involvement by civil society and citizens through interventions such as expenditure tracking and social audits. This external pressure complements internal reforms such as strengthened audit functions, by providing an independent oversight mechanism.

In 2023, the Ethics and Anti-Corruption Commission (EACC) launched a damning report on the health sector, demonstrating that there is corruption in all four phases of health sector project management: budgeting, commitment, verification and payment. Each phase is marred by inflation of costs, early termination of projects and misappropriation of funds, with costs inflations occurring in 83.7 percent of projects in the budgeting phase.^[2]

Corruption has consequences. Research shows that child mortality is more highly correlated with national corruption levels than even vaccination rates. Additionally, countries with high levels of corruption tend to have higher rates of infant, child and maternal mortality.^[3] Persistent corruption therefore poses a significant threat to health outcomes in Kenya.

How can corruption be controlled, however? Reform starts with greater transparency. There is an urgent need for frequent monitoring and evaluation of health sector budgets and projects. Public Expenditure Tracking Surveys (PETS) have proven to be instrumental in identifying budget leakages and acting as a catalyst for financial management reforms. In Uganda for example, dissemination of PETS findings led to a decline in leakages of school disbursements from 80 percent to 20 percent. However, experiences from Uganda and other countries indicate that the success of PETS relies on a strong commitment from government to act on the findings.

Furthermore, it is essential that CSOs do more than just execute the technical aspects of PETS: media exposure is essential. CSO’s frequently fail to invest in dissemination and advocacy around the results of PETs exercises, undermining their impact. To be more effective, CSOs can work closely with the media to ensure that the PETS findings receive extensive coverage. Media exposure will generate public awareness about misuse of funds. CSOs can also actively engage citizens by organizing town hall meetings and workshops as platforms to discuss the findings from the surveys.

Transparency is often not enough, however, and must also be coupled with active citizen engagement in direct oversight through mechanisms like social audits. To achieve this, improving public participation within the health sector before and during project implementation is critical. Informing the public about the projects being undertaken in their areas, including timelines and intended impacts, allows communities to have a comprehensive understanding of the initiatives. This information enables citizens to actively engage and hold decision-makers accountable for the management of public resources.

Peru illustrates the potential of social audits to drive change. Proetica, a leading CSO, coordinates citizen audits under the Anti-Corruption Brigades Initiatives. The findings are compiled into publicly accessible reports that are widely covered by the media and shared with authorities, including the supreme audit institution. This puts pressure on the government to act, and the results are clear: citizen oversight has led to a cost reduction of approximately 50 percent in monitored public projects compared to non-monitored ones.^[4]

What works in Peru can work anywhere, including here at home where organizations such as Muslims for Human Rights (MUHURI) have successfully conducted social audits. In Kisauni, for instance, a social audit revealed the closure of a vital dispensary for HIV patients which the local Community Development Fund (CDF) committee initially attributed to renovations. However, further investigation revealed that there were no budgetary allocations for the dispensary and the land had been unlawfully sold. The findings were presented to the authorities, resulting in the cancellation of the illegal land transaction.

Subsequently, funding was allocated, and the dispensary was reopened.^[5]

External scrutiny by citizens and civil society acts as a catalyst for internal reforms as the pressure compels government officials to proactively work towards improving performance. With greater transparency and accountability, Kenya’s health sector can make strides towards more effective and equitable delivery of health care services to all.

Author - Gladys Wachira, Research Assistant, Institute of Public Finance

^[1] National Ethics and Corruption Survey 2021. Link

^[2] Report on Corruption and Unethical Conduct in Kenyan Health Care Projects: A Study of Procurement and Financial Management Practices. Link

^[3] Health sector corruption: A matter of Life and death. Link

^[4] Social Audit in 20 Steps. Lessons Learned from Fighting Corruption in Guatemala, Peru and Ghana. Link

^[5] Conflict Prevention in Kenya: Combating Corruption through Non-Violent Action. Link

Do Away with Perennial Revisions of The Tax Laws for a Predictable Tax System

IPF — Wed, 15 Nov 2023 13:26:40 +0000

Governments, like people and businesses, make plans every year. But we usually expect those annual plans to fit into some kind of longer-term scheme that does not change constantly. Frequent changes in government plans upset the expectations of households and taxpayers. A predictable taxation plan ensures that the government meets current revenue needs while avoiding surprises for taxpayers.

The International Monetary Fund (IMF) emphasizes the importance of transparency, clarity, and predictability in tax systems to support private investment.^[1] Frequent revisions affect investment decisions and make tax compliance harder, ultimately affecting government revenues and inhibit economic growth.^[2] Kenya’s government should therefore eliminate perennial revisions of tax laws, ensure that more analysis of tax proposals is done before they are introduced, and adopt a collaborative approach to tax policy design involving the finance ministry, tax authority, and external stakeholders.

Every year, the National Treasury prepares and submits a Finance Bill containing amendments to various tax laws to Parliament for enactment. In some cases, new taxes and taxation rules enacted through a Finance Act are changed or even reversed in the subsequent year’s Finance Act. A subset of all of Kenya’s tax laws seem to be targeted for nearly constant review. Various actors including the Kenya Association of Manufactures (KAM) have long complained that these revisions affect investment decisions. In addition, numerous reforms to the treatment of investment deductions, foreign exchange losses and interest restrictions have a negative impact on investment decisions and cashflow for businesses.

Predictable tax systems allow governments to meet their goals of enhanced private investment and revenues.^[3] Predictability fosters taxpayers confidence, encourages voluntary compliance and supports effective tax administration- all of which bolster revenue mobilization in the short and longer-term. Stable tax policy also supports longer-term private investment, leading to increased revenues for the government through income and consumption taxes.

In light of these benefits, why does the government introduce significant changes to the tax code every year? One possible reason is that the National Treasury does not conduct proper analysis of the impact of proposed taxes prior to introducing them. The draft National Tax Policy recognizes this and prescribes more robust assessments to quantify the impact of proposed tax changes before their introduction.

It is also possible that the National Treasury fails to sufficiently engage key stakeholders before amending tax laws. The challenge with tax reforms is that they are not only technical, but also highly political.^[4] If key interests are ignored, policy may turn out to be unimplementable or sub-optimal.

The International Monetary Fund (IMF) and the G20, for example recommend a collaborative tri-partite approach involving the finance ministry, tax authority, and external stakeholders to ensure well-informed tax law design. Furthermore, they emphasize the importance of public consultation, legislative approval, and post-implementation monitoring as critical practices for enhancing certainty and the effectiveness of tax policies.^[5]

Kenya already has good examples of how to implement greater consultation around tax reform. For example, KRA’s experience in reviewing the VAT refunds formula demonstrates that stakeholder engagement can lead to better outcomes. Manufacturers rejected the first formula introduced in 2017, arguing that the formula was impractical, especially for exporters. This then triggered a review of the formula, but this time round KRA deliberately engaged multiple stakeholders. KRA held various consultative forums with all the key players including the private sector, the National Treasury, and the National Assembly. The result was a superior formula in 2019 that allowed exporters to fully claim their share of input tax relating to zero rated supplies.^[6]

If they can be implemented, Kenya’s draft National Tax Policy has a set of robust recommendations to address unpredictability including: a comprehensive review of tax laws every five years to align them with other government policies; periodic review of the tax laws in response to emerging trends in the business environment and government agenda; and review of the tax code in response to emergencies, pandemics, or natural disasters. ^[7] These proposals along with broader stakeholder engagement will address most of the drivers of unpredictability in the tax system.

In conclusion, to address the challenges associated with an unpredictable tax regime, it is important for the government to reduce the frequency of discretionary changes to the tax code.

At the same time, the government should set a definite timeline for a new tax provision to be operational before it is reviewed, especially for tax incentives targeted at promoting investments as proposed in the draft National Tax Policy. While one might argue that this may lock-in ‘bad’ tax policies, the chances of having a bad tax policy will be significantly reduced if the government conducts thorough impact analysis before proposing tax changes. Better analysis and citizen engagement are the key to improved revenues.

references

[1] https://www.imf.org/external/pubs/ft/pam/pam49/pam4904.htm

[2]https://african.business/2023/06/finance-services/tax-policys-role-in-attracting-investment-for-global-development

[3] https://taxjustice-and-poverty.org/fileadmin/Dateien/Taxjustice_and_Poverty/Introduction/05_Principles.pdf

[4] https://internationalbudget.org/wp-content/uploads/politics-of-tax-reform-october-2020.pdf

[5] https://www.imf.org/external/np/g20/pdf/2017/031817.pdf

[6] https://www.kra.go.ke/images/publications/Achieving-Effective-Stakeholder-Engagement_A-Case-Study-of-VAT-Refunds-Formula.pdf

[7] http://www.parliament.go.ke/sites/default/files/2023-05/The%20National%20

Treasury%20and%20Economic%20Planning%20National%20Tax%20Policy-2.pdf

Kenya’s Public Financing crisis: Is debt rescheduling a viable option?

IPF — Tue, 05 Dec 2023 09:21:18 +0000

Kenya’s finances are on the ropes, with more than 50% of tax revenue spent to debt servicing and a growing risk of debt distress. Adding to this pressure is the upcoming maturity of Ksh. 242bn Eurobond in February 2024 and an additional Ksh. 942bn over the next five years^[i] ^[ii]. While the disputed Finance Act 2023 introduced higher taxation measures to boost revenue, this is not sufficient to address the debt challenge. Does Kenya need to consider more drastic alternatives?

Debt rescheduling is a policy tool that allows debtor countries to renegotiate debt terms with creditors, potentially extending repayment periods, reducing interest rates, or granting temporary debt payment moratoriums^[iii]. By renegotiating its debt terms, Kenya can gain immediate financial relief, redirect resources to priority sectors, and lay the groundwork for future growth. However, debt rescheduling, while instrumental in debt management, does not address the root causes of debt accumulation and may affect access to credit markets in the future. Therefore, successful rescheduling requires a delicate balance of fiscal responsibility, governance reforms, and ongoing efforts to foster economic prosperity.

Although there is potential for debt rescheduling in Kenya, its success depends on government's willingness to adjust its fiscal indicators. First, Kenya needs to raise adequate revenue to sustain new repayment plans and finance its development agenda. This is evidenced by IMF’s case-by-case analysis for rescheduling, which considers, among other indicators, continued availability of financing needed for long-term growth and development^[iv]. Kenya’s tax reforms have gradually yielded revenue growth, from Ksh.1.5 trillion in 2017, to approximately 2 trillion in 2022. Whereas this is laudable, tax revenue-to-GDP ratio has stagnated, at 17 percent. IMF reports observe that for countries whose tax-revenue-to-GDP ratio is low, revenue-mobilizing approaches are essential for tackling public debt.

Secondly, the success of debt rescheduling depends on the willingness of creditors to renegotiate debt terms^[v]. Some creditors may be reluctant to agree, complicating the process. Even when creditors agree to cooperate, rescheduling may happen on the creditors’ terms^[vi]. If Kenya is to re-negotiate its debt obligations, caution must be exercised to secure the best possible terms. Studies have shown that debt restructuring involving coordinated mechanisms among different creditors are more successful. Zambia's experience provides valuable insights, as it faced similar debt challenges, including a similar creditor profile comprising both official bilateral and private sector lenders. Under the G20 Common Framework for Debt Treatment, an Official Creditor Committee (OCC) was established, with China and France serving as co-chairs. This OCC successfully brokered a mutually agreeable compromise for all parties, including China.^[vii].

Additionally, it is imperative for Kenya to improve its creditworthiness, which has declined in recent years from stable to negative in global agency ratings. Downgrades convey a negative message to existing and potential lenders, suggesting a higher risk of financial default. More specifically, for pre-emptive debt rescheduling (where outstanding debt is renegotiated before government misses any payments), the debtor country’s credit ratings could influence creditors' decisions. Low creditworthiness may hinder favourable terms in rescheduling.

Improving Kenya’s credit ratings requires addressing factors that contribute to unfavourable assessments. Some of these factors require long-term reforms, but there are also more immediate steps that the government can take. These include ensuring consistent, timely, and trustworthy economic data, continued fiscal consolidation, boosting foreign reserves, and reducing dependence on domestic financing.^[viii]. Although debt restructuring signals a country’s inability to pay, and could potentially impact short term credit rating, the UN Department for Economic and Social Affairs^[ix] and the Africa Peer Review Mechanism^[x] both note that enhancing dialogue and liaison between the credit rating agencies and governments could foster a deeper understanding of government policies, and close information gaps that often contribute to lower ratings, especially under circumstances of debt sustainability initiatives.

Finally, empirical evidence shows that strong debt management institutions and policies are important in public debt sustainability and mitigating the risk of sovereign defaults^[xi]. Moving forward, Kenya needs to strengthen crucial areas of debt management and by extension, public finance management systems. Reschedule or not, Kenya’s oversight institutions such as Parliament should play a stronger role to ensure that debt decisions are transparent, participatory, and accountable, and that all resources raised are utilized efficiently, equitably and effectively. This will avoid such crises in the future.

^[i] ^{Budget-Summary-for-the-FY-2023_24.pdf (treasury.go.ke)}

^[ii] ^{FIB_Kenya-Debt-Series-Report_10.03.2023.pdf}

^[iii] ^{Debt rescheduling: what does it mean? in: Finance & Development Volume 20 Issue 003 (1983) (imf.org)}

^[iv] ^{Questions and Answers on Sovereign Debt Issues (imf.org)}

^[v] ^{Financial Crises: Causes, Consequences, and Policy Responses - Restructuring Sovereign Debt: Lessons from Recent History; Udaibir S. Das, Michael G. Papaioannou, Christoph Trebesch; August 2012 (imf.org)}

^[vi] ^{How China lends: a rare look into 100 debt contracts with foreign governments | Economic Policy | Oxford Academic (oup.com)}

^[vii] ^{Zambia: A template for debt restructuring? - Atlantic Council}

^[viii] ^{Moody's confirms Kenya's ratings at B3, changes outlook to negative | Rating Action | Moody's (moodys.com)}

^[ix] ^{PB_131.indd (un.org)}

^[x] ^{KENYA-Tech-Support-Mission-on-Int-CREDIT-REPORT-sm.pdf (aprm-au.org)}

^[xi] ^{https://www.emerald.com/insight/content/doi/10.1108/JFEP-12-2022-0294/full/pdf?title=unpleasant-surprises-debt-relief-and-risk-of-sovereign-default>}

Bridging The Gender Gap Through Tax Policy

IPF — Mon, 03 Jun 2024 12:46:06 +0000

Gender equity is not only about fairness; research has shown that it can generate significant economic benefits too.^[1] The World Bank estimates that achieving gender equality could increase global human capital by over 20 percent and global total wealth by 14 percent.^[2] The International Monetary Fund (IMF) reports that Organisation for Economic Co-operation and Development (OECD) countries would boost their GDP by over USD 6 trillion if their female employment rates were to increase to Sweden’s level.^[3] With such significant gains on the table, it is not surprising that governments have implemented various policies such as increased funding to the education sector to increase female school enrolment and investment in economic empowerment programmes for women to bridge the gender gap. While such interventions have yielded positive results, recent research shows that the relatively neglected area of Tax Policy can also play a role in bridging the gender gap.^[4]

Taxation of labour income has the most significant impact on gender equality compared to other forms of taxation such as consumption taxes. A progressive tax system can enhance gender equality in two ways: firstly, it addresses general inequality by ensuring that those with higher ability to pay, pay more taxes. With women earning 34 percent less than men on average^[5],

progressive taxes ensure that those who earn more pay more, partially offsetting these inequalities. Progressive taxes also support female employment. Since women are overrepresented in lower paying jobs, their marginal tax rate is lower, which increases their incentive to work. Therefore, enhancing the progressivity of a tax system can support labour force participation and encourage women to re-enter job markets after events such as motherhood.^[6]

Secondly, dependent tax credits and deductions are a progressive step towards enhancing gender equity, especially if designed to specifically target women who are employed and head single-parent households. Women often take on more unpaid care work, perpetuating income inequality by limiting their time for paid work, education, and other economic activities, while also affecting the type and quality of employment they can pursue. In Kenya, for example, employed women on average spend 4 hours per day on unpaid work compared to one hour that men spend.^[7] To alleviate the burden of unpaid care work, some governments have implemented tax deductions related to dependent care pegged on number of dependents such as children and disabled family members. OECD member countries, for example, have included credits or allowances in their personal income tax regimes to improve gender impacts of their tax systems.^[8] Such deductions alleviate some of the financial burden of caregiving that is mostly borne by women.

Access to financial resources is another area where women face challenges, particularly in entrepreneurship. Women have lower access to credit, assets for collateral, and financial literacy and face higher interest rates compared to men.^[9] The 2022 Kenya FinAccess Household Survey revealed that there is a 4 percent gap in financial access between men and women.^[10] This is one of the reasons why 55 percent of business that are wound up are female-owned.^[11] Women therefore lag behind their male counterparts in growing their income, leading to unequal distribution of capital income. Differentiated taxation of labour and capital income therefore exacerbates inequality. In Kenya for example, capital gains tax rate is 15 percent while labour income is subject to progressive tax rates with the highest tax band at 35 percent. Whereas there is no consensus on the optimal balance between taxing labor and capital income, progressive taxation across all income types is crucial for a fair tax system.

To sum up, Gender-responsive tax systems, such as these discussed above, can significantly contribute to narrowing the gender gap. However, while crucial, they are insufficient on their own. The effectiveness of these measures relies on advocacy efforts and policymakers’ awareness. Complementary strategies such as advocating for equal pay, bolstering women’s entrepreneurship, and enhancing their representation in decision-making positions are also vital. Furthermore, obtaining gender-disaggregated tax data is essential for monitoring progress and assessing policy impacts.

^[1] ^{Baer, K et al. (2023). Gender and Revenue Administration: Principles and Practices. Link.}

^[2] ^{The World Bank (2022). Unrealized Potential: The High Cost of Gender Inequality in Earnings. Link.}

^[3]^{International Monetary Fund (2018). Pursuing Women's Economic Empowerment. Link.}

^[4] ^{Organization for Economic Co-operation and Development (OECD) (2022). Tax and Gender Equality: A Stock take of Country Approaches. Link.}

^[5]^{World Economic Forum. Global Gender Gap Report. Link}

^[6]^{Gendered Taxes: The interaction of Tax policy with Gender Equality. Link.}

^[7] ^{Kenya National Bureau of Statistics (KNBS)} (2021). Kenya Time-Use Survey. Link.

^[8] ^{OECD (2022). Link.}

^[9] ^{OECD (2024). Addressing gender disparities in access to finance for business creation. Link.}

^[10] ^{FSD Kenya. Putting women at the centre of inclusive finance. Link.}

^[11] ^{Kenya National Bureau of Statistics, “Micro, Small and Medium Enterprises Basic Report. Link.}

Mainstreaming Participatory and Deliberative Democracy

IPF — Mon, 15 Jul 2024 07:38:30 +0000

Overview

Participatory budgeting, citizens' assemblies, and participatory policymaking are among the innovative democratic practices recently experimented with by governments and civil society organizations to amplify people's voices in decision-making. Most of these experiments have been pilot programs and have not been sustained or integrated into standard governance practices. In partnership with People Powered and the Open Government Partnership (OGP), we are implementing a two-part program. First, the program will synthesize best practices for mainstreaming diverse democratic innovations into a learning curriculum and training materials. Second, we will launch this learning program with a pioneering global cohort of government reformers and civil society leaders, working with them to develop and implement action plans for mainstreaming democratic innovations in their countries.

Objectives

Enable civil society and government leaders around the world to have access to pedagogically effective learning curriculum for mainstreaming PDD, for diverse methods and at diverse scales.
Build the capacity of 15 government reformers and civil society leaders to develop and start to implement action plans to more effectively mainstream PDD in their governments.
Build greater skills and capacity of a consortium of key global and regional organizations to support the mainstreaming of PDD.

Research and Synthesis (July to October 2024)

Join our global partners as they gather primary and secondary data on the mainstreaming of participatory democracy and deliberation (PDD) processes in their regions. Participation of opportunities include sharing case studies, policies and legislation, communications content, resources, and expert guidance. You can participate by contributing to surveys, interviews, and submitting case studies. Additionally, look out for our upcoming learning webinars designed to provide clarity and answer any questions you may have about how to get involved.

Launch of the Learning Program (September 2024 - March 2025)

We will open applications from September 2024 to November 2024 to recruit participants for the first cohort of the program. Once selected, we will convene the partners for a kickoff meeting in Nairobi in March 2025.

Who can apply?

The application is open to all governments and civil society organizations worldwide that meet our specified criteria. These criteria will be published in advance for your review and familiarization. In the meantime, please refer to our Frequently Asked Questions for more information (FAQs).

Other opportunities, dissemination and evaluation

The consortium will follow participants for at least one year to evaluate their success in mainstreaming participatory democracy and deliberation (PDD) in their localities and to address challenges in future cohorts.

We will disseminate project learnings and resources globally through public events and communications. In partnership with project collaborators, we will share relevant materials and facilitate learning opportunities.
Additionally, we will plan for the continued use of the learning curriculum and program by project partners, including further OGP leadership collaboratives and regional activities.

Outlook of the learning program

We envision the learning program accommodating more cohorts of government and civil society participants over the long term. Our evaluation of the first cohort will inform our next steps. Stay tuned for updates, successes, challenges, and new opportunities.

Events and opportunities

We are organizing webinars and information sessions throughout the program's duration. Below are details of our upcoming events, along with information on past sessions.

CAREERS

IPF — Fri, 19 Jul 2024 06:47:52 +0000

Trust Takes Years To Build: How Can The Government Mend The Broken Public Confidence Post-Finance Bill 2024 Protests?

IPF — Fri, 30 Aug 2024 06:15:54 +0000

Montesquieu, in “The Spirit of Laws” argues that taxation requires “great wisdom and caution” as it involves the delicate task of determining what rightfully belongs to citizens.^[i] Recognizing this challenge, modern democracies seek to base their tax policies on legal principles such as transparency and equity. However, the anti-Finance Bill 2024 protests revealed that Kenyans lack confidence in the government’s ability to exercise “great wisdom and caution” in the development of taxation measures. This revelation reflects the fact that tax laws in recent years have deviated from constitutional principles of public participation, equity, transparency, and accountability. With Kenya aiming to increase its revenue-to-GDP ratio from 14 percent to 20 percent by 2027, the government must anchor future tax reforms on these fundamental constitutional principles to restore confidence in the country’s public finance management. ^[ii]

Starting with participation, the state must seriously consider the public's proposals and provide concise feedback on differing views. The recent Court of Appeal judgement on the Finance Act 2023 found that there was no feedback on various controversial tax measures, such as the doubling of VAT on fuel or the lowering of the threshold for turnover tax from Ksh 50 million to Ksh 1 million.^[iii] Similarly, in the 2024 Finance Bill, although lawmakers attempted to respond to public concerns, the lingering distrust caused by the flawed public participation process in 2023 reignited frustrations, sparking protests that culminated in the Bill’s entire rejection.^[iv] It is therefore imperative that, lawmakers change their approach towards public participation in tax legislation by ensuring that they meaningfully involve and listen to citizens at every stage of the process.

When it comes to equity, both the Finance Act 2023 and Finance Bill 2024 proposed various inequitable measures, such as the housing levy and the motor vehicle tax. While these measures aimed to broaden the tax base and promote public benefits, they also undermined horizontal equity. The housing levy was deemed inequitable by the High Court as it was based on scanty legal framework that failed to provide a clear rationale for its imposition and unjustifiably excluded informal earners who could have contributed to affordable housing. ^[v]^{,^[vi]} Although the Affordable Housing Act 2024 extended the levy to informal sector earners, a clear policy framework for implementation is still lacking.^[vii] Additionally,, the motor vehicle tax was inequitable as it applied to all vehicles, including those not generating income, without accounting for the multiple layers of taxation already paid by vehicle owners.^[viii] It is thus crucial to draft or revise tax provisions with caution, informed by thorough analyses of their potential impacts on equity.

Lastly, the state should strengthen transparency and accountability by comprehensively communicating the rationale and expected revenue of new tax measures, as well as ensuring that the tax collected is used responsibly. Both the Finance Bill 2024 and Finance Act 2023 failed to offer reasons for the proposed tax measures and their expected revenue generation. Additionally, the state continually fails to adhere to the principle of accountability in the prudent management of revenue by funding unconstitutional offices and duplicating functions between state departments.^[ix] This undermines the validity of new tax measures, as the generated revenue finances the unconstitutional wants of the state. To restore the lost confidence, the government should endeavour to promote greater transparency and accountability by communicating effectively on tax measures and reducing wastage in fiscal expenditure.

In conclusion, the anti-Finance Bill 2024 protests vividly demonstrated that Kenyans have lost confidence in the state’s ability to manage taxation. To foster public support for future tax reforms, the state should ensure that tax reforms rest firmly on constitutional principles of public participation, equity, transparency, and accountability.

Written by Daniel Murakaru, Legal- Research Fellow.

^[i]^{C Montesquieu, “The Spirit of Laws: Of the Relation Which the Levying of Taxes and the Greatness of the Public Revenues Have to Liberty” [1748] vol. 1.}

^[ii] ^{Republic of Kenya the National Treasury and Economic Planning, “The Medium-Term Revenue Strategy: An Approach for Enhancing Domestic Revenue FY 2024/2025 -2026/2027” (2023) p 19.}

^[iii]^{The National Assembly and another v Okiya Omtata Okoiti and 55 Others [2023] para 187-190.}

^[iv] ^{See, Republic of Kenya National Assembly, “Orders of the Day, Tuesday June 25^th 2024 at 9:30 a.m.” (2024) p 1486 -1536;Also see Hansard Reports 25^th June 2024 can be accessed at https://www.youtube.com/watch?v=NOYKR8I1_dE&feature=youtu.be}

^[v] ^{Republic of Kenya the National Treasury and Economic Planning, “2023 Budget Policy Statement: The Bottom-Up Economic Transformation Agenda for Inclusive Growth” (2023) para 17; The Affordable Housing Act 2024 (Title).}

^[vi] ^{Okiya Omtata and 6 Others v The Cabinet Secretary National Treasury and 3 Others [2023] para 21-217.}

^[vii] ^{The Affordable Housing Act 2024, s 4(2).}

^[viii] ^{Finance Bill 2024, Clause 9.}

^[ix]^{Institute of Public Finance, “Annual National Shadow Budget 2024/2025: Budgeting in an Era of Fiscal Consolidation: Protecting Key Priorities” (2024).}

Optimizing Public Investments: Addressing Challenges and Maximizing Value for Money in Kenya

IPF — Mon, 09 Sep 2024 13:07:00 +0000

Introduction

As of 2020, the estimated value of stalled government projects in Kenya was nearly Ksh 9 trillion, spanning several administrations. This includes nearly 700 projects under the National Government Constituency Development Fund (NG-CDF) and over 500 managed by other government agencies.^[1]. Stalled projects refer not only to those that were never completed, but also to those that were completed but never operationalized. Amid these stalled projects, Kenyans remain underserved as the government struggles to meet development and service demands. If this issue is not addressed in a timely manner, Kenya will continue to lose resources it cannot afford to waste. The stalling of projects results from various causes including, limited feasibility assessments to ascertain viability and value for money, inefficient public contracting processes and weak oversight.^[2] These challenges highlight systemic weaknesses in Kenya's public investment ecosystem.

To address these challenges, the government introduced the Public Investment Management (PIM) Regulations in 2022. However, exemption of certain projects from feasibility and appraisal processes, existing weaknesses in procurement laws and inadequate parliamentary oversight both at appraisal and implementation stages limit the effectiveness of these regulations. Moving forward, the government should adopt a risk-based approach to project evaluation that prioritizes in-depth appraisals for all high-risk or complex projects, regardless of their cost and size. Additionally, the government should adopt clearer and stricter justifications for exempting public investments from competitive procurement procedures and ensures the separation of powers between project execution and oversight roles, particularly in the management of NG-CDF funded projects.

An attempt to strengthen Kenya’s Public Investment Governance: The Public Investment Management (PIM) Regulations 2022.

Kenya’s PIM regulations, aligned with international standards such as the OECD's Integrity Framework for Public Investment and IMF recommendations, were designed to enhance the management of public investments. These regulations introduce a standardized approach to project cycle management, mandating comprehensive appraisals of public investments.

The PIM regulations provide for the implementation of an accessible Public Investment Management Information System (PMIS), which emphasizes citizen participation throughout the project cycle while providing real-time access to project implementation status informing the investment decision-making process. Public Investment Management Units are responsible for analyzing, reviewing, and appraising proposed projects before approval while a Resource Allocation Panel is responsible for reviewing project implementation performance including documentation and reporting of ongoing projects and their future financial commitments.

These institutions aim to create an objective investment system that is synchronized with the budget process, preventing the approval and financing of inefficient and cost-ineffective public investment projects while safeguarding against the financing of new projects ahead of ongoing and incomplete ones.

Challenges and opportunities

However, significant challenges persist. Firstly, the PIM Regulations exempt projects costing less than Ksh. 500 million from feasibility studies and appraisals. The absence of proper evaluation makes it difficult to ensure that these numerous small projects, whose total costs can add up to a significant portion of large projects, deliver maximum value for every shilling spent. For example, there are 263 small road projects in the 2024/25 State Department of Roads budget valued at Ksh. 19 billion, accounting for 17 percent of the total project value. In sectors such as health and education, these small projects include hospitals and classrooms whose operational costs, if completed, could put significant pressure on the budget.

Secondly, the regulations may be rendered ineffective due to weaknesses in the Public Procurement and Disposal Act (PPDA) 2012. Although Kenya has established protocols for competitive bidding, a recent study reveals that over 75 percent of procurement records in the Public Procurement Information Portal (PPIP) bypassed competitive procurement. Ambiguous justifications for exemptions under Ksh30 million raise concerns about the efficiency of procurement processes in safeguarding public investments. Even if project design follows best practices, these efforts can be undermined at the implementation stage if procurement, which represents more than 10 percent of Kenya’s economy, is flawed.

Thirdly, the Project Implementation Management System (PIMS) remains largely non-operational, two years after the PIM Regulations took effect, highlighting significant gaps in implementation. As of this writing, the system records only 50 ongoing projects, with no completed or stalled projects listed. It is highly unlikely that only this small number of projects has been implemented since the regulations were enacted, or that there have been no stalled projects in Kenya, despite official public records.

Lastly, the success of the PIM Regulations depends on parliamentary oversight during both the appraisal and implementation stages. However, for some procurement processes, such as those carried out under the NG-CDF, Parliament faces a conflict of interest. The involvement of Parliament in project implementation under NG-CDF weakens the legislative oversight expected by the PIM Regulations. While these NG- CDF projects constitute a small portion of overall procurement in Kenya, they impact every corner of the country.

Recommendations

To reduce the stock of stalled projects, changes to the current regulations and legal frameworks are necessary. Rather than exempting projects from the PIM regulations below a certain threshold, Kenya should adopt a broader approach to risk-based review. While individual small projects may not pose high financial risks, their cumulative volume carries substantial fiscal risk exposure. Lower-risk projects could undergo a streamlined evaluation process that safeguards against both qualitative and financial risk exposures. Therefore, the government should develop cost-effective methods for appraisal, including leveraging technology, ensuring that value for money and low fiscal risk remain priorities without incurring excessive appraisal costs. Additionally, PIMS should be fully operationalized to provide a complete register of all projects in Kenya, along with their costs and completion status.

At the same time, Kenya should strengthen protocols for competitive bidding by setting stricter requirements for exempting project contracts from competitive procurement. Similarly, measures should be put in place to safeguard the separation of powers between the three arms of government, beginning with the removal of NG-CDF management from Members of the National Assembly to provide the much-needed oversight in the execution of projects

Conclusion

In conclusion, by implementing an objective public investment system that mandates feasibility studies and appraisals for all high-risk projects alongside their cost and committing resources for ongoing projects, Kenya can optimize its public investments within the current constrained fiscal space.

By Timothy Kiprono, Project Assistant.

References

^[1] ^{http://libraryir.parliament.go.ke/handle/123456789/2678}

^[2]^{http://www.parliament.go.ke/sites/default/files/2021-01/Budget%20Options%20Final%2028.1.2021.pdf}

Strengthen the Assessment Process for State Owned Enterprises’: Debt Guarantees to Safeguard Kenya’s Fiscal Stability

IPF — Mon, 23 Sep 2024 11:58:17 +0000

Strengthen the Assessment Process for State Owned Enterprises’: Debt Guarantees to Safeguard Kenya’s Fiscal Stability

Introduction

The 2024 Medium Term Debt Management Strategy^[i] suggests that contingent liabilities, particularly those arising from debt guarantees to State-Owned Enterprises (SOEs), pose significant fiscal risks. Currently, loan guarantees are issued without sufficient checks to ensure the SOEs receiving them meet criteria that would promote responsible use of these funds. Interestingly, some loans are being guaranteed despite the SOEs being flagged for financial mismanagement and underperformance, this is partly because the existing law lacks a robust mechanism for assessing the eligibility of SOEs for debt guarantees.

To address this, the assessment process should be tightened by considering additional performance indicators of SOEs. These indicators should include, the enterprise’s gross turnover, its profitability, debt default trends, financial mismanagement such as embezzlement of funds and non-financial information such as transparency in procurement.

The Fiscal Impact of SOE Debt Guarantees, and what the Current Law Requires

As of June 2023, the total publicly guaranteed debt had accumulated to Ksh 170 billion, comprising for just three SOEs -KENGEN, KPA, and KQ ⁱ. To put this into perspective, the debt of these SOEs exceeds the Fiscal Year 2024/2025 budgetary allocations for the State Departments for Medical Services, Public Health and Professional Standards, and Agriculture combined^[ii]. This guaranteed debt represented roughly 10 percent of the Ksh 1.6 trillion increase in total debt during the FY 2022/23^[iii]. Notably, during the FY 2023/24, the guaranteed debt owed by KQ, amounting to Ksh 88 billion, was fully assumed by the National Treasury, making taxpayers responsible for the burden ^[iv]. However, prior to these guarantees, reports from the Ethics and Anti-Corruption Commission (EACC) highlighted significant financial mismanagement and a lack of transparency at KPA^[v], while audit reports revealed significant losses at KQ^[vi]. This underscores a flaw in the qualifications used to assess an SOE's eligibility for debt guarantees.

What does the current law require? The National Government Loans Guarantee Act (2011) states that a loan should finance capital projects, the borrower must be capable of repaying the loan, and their financial position must be satisfactory in the medium term ^[vii]. However, the law fails to distinguish between SOEs facing temporary financial difficulties, where a guarantee could help improve medium-term sustainability, and those with persistent financial challenges, where a guarantee would not be effective.

Additionally, the Act does not specify the financial and non-financial information needed to assess eligibility for guarantees, nor does it address how to handle entities flagged for financial mismanagement, such as embezzlement of funds.

Recommendations for Strengthening the Legal Framework

To address this challenge, the National Government Loans Guarantee Act should be strengthened by establishing clear and stringent financial and non-financial qualifications. Key financial metrics should include analysing the SOE's gross turnover and profitability to identify unprofitable activities that may be hidden. Debt guarantees should not be granted to SOEs with persistent structural financial challenges, where previous debt financing has failed to generate enough revenue to cover debt service obligations or improve financial performance. Similarly, guarantees should be denied to SOEs flagged for fund misuse or fraud. Guarantees should primarily support industrial growth and innovation rather than resolving liquidity problems.

Finally, the criteria should also include an evaluation of non-financial indicators, such as procurement policies and transparency in reporting. For example, do firms use open tendering to ensure value for money? If guarantees are used to advance industrial policy, they must also be tied to targets associated with enhanced market share or job creation.

Conclusion

SOE debt guarantees currently pose a risk to the budget without a clear return. Kenya is providing loan guarantees to public entities without clear criteria, many of which are also dealing with financial mismanagement and underperformance. As a result, the guaranteed debt by June 2023 accounted for about 10 percent of the Ksh 1.6 trillion debt increase in FY 2022/23. Therefore, the Institute of Public Finance recommends establishing a robust legal assessment mechanism to exclude unqualified SOEs from receiving guarantees and to protect Kenya's fiscal stability.

Written by Charles Gichu, Research Assistant Macro and Debt Unit

^[i] ^{2024 Medium Term Debt Management Strategy link}

^[ii] ^{Supplementary Estimates 1 for FY2024/2025 PBB link}

^[iii] ^{Annual public debt management report for financial year 2022/2023 link}

^[iv]^{Report on consolidated fund services expenditures: supplementary estimates II- FY 2023/24 & Budget Estimates- FY 2024/25 link}

^[v] ^{Report of Activities and Financial Statements for the FY 2013/2014 for the EACC link}

^[vi] ^{Kenya Airways Annual Report and Financial Statements 2017 link}

^[vii]^{National Government Loans Guarantee Act 2011 link}

Blockchain: A Game-Changer for Transparency and Fraud Prevention in Kenya’s Public Finance Management

IPF — Tue, 19 Nov 2024 17:27:35 +0000

In 2023, Siaya and Turkana counties , were among counties hit by a series of incidents in which millions of shillings were lost through fraudulent deals in procurement scandals in Kenya. These incidents points to the dire need for reforms in Public Finance Management (PFM). Conventionally, public finance systems are controlled by human beings, and therefore susceptible to manipulation and data tampering. Blockchain - a decentralized ledger mechanism that records any sort of transaction across computers in a network- in a tamper-proof way - enhances decentralized authority to make transactions traceable, hence preventing fraud. However, implementing a blockchain system alone is insufficient; stringent regulatory frameworks must also be established in public finance management.

Every year, Kenya loses billions of shillings through manipulation in financial data, procurement, and fraudulent tender allocations. There have been attempts to curb such vices through strict auditing processes, enhanced manual scrutiny, and the adoption of e-procurement systems, unfortunately, these attempts continue to fall short due to, human interventions, and lack of transparency that still offer leeway for manipulation of data. Blockchain, by making a different approach through decentralizing control, tamper-proofing financial transactions, and enhancing transparency, may offer a solution.

Why Blockchain System is the Future for Public Finance Management: How it works

Records on blockchain are immutable; once a record is logged onto the chain, it cannot be altered or deleted. This makes it useful in the fight against fraudulent manipulation of data, one of the biggest problems in PFM. Verification of a transaction by a “typical consensus” from multiple participants known as nodes in the network needs to be done before recording of a transaction. In the case for the Kenyan government these nodes would be from government agencies, independent auditors, regulatory bodies, and trusted third parties that verify the transactions. Having decentralized control and consensus mechanisms prevents collusion; no single entity controls the system. Thus, corrupt actors cannot manipulate the network without the agreement of all the independent participants in it. Once verified, it finds its permanent place in the blockchain ledger. If applied to the Kenyan public finance system, blockchain would ensure that procurement contracts, budget allocations, and payment receipts have been recorded correctly, verified by authorized parties, and immutable. It provides an extremely transparent record that is secure and accessible for auditing and oversight.

Smart contracts minimize human involvement, reducing discretionary changes which may lead to corruption. In the case of government procurement, a smart contract would automate the confirmation of the arrival of supplies based on pre-defined conditions set using GPS tracking or confirmation from Internet of Things (IoT)- a network of connected devices that gather and share data over the internet. These systems, such as sensors or tracking devices attached to goods, ensure that payment is processed only when the delivery is confirmed, eliminating opportunities for manipulation by intermediaries.

While traditional processes are concerned with periodic reporting that may be liable to errors and manipulation, blockchain adds value during audits by making real-time monitoring of financial data possible. This monitoring would grant the Office of the Auditor General (OAG) to move beyond retrospective audits to continuous monitoring of high-risk areas. Real-time insight into current financial data allows auditors to track mismatches much earlier in the audit cycle. This rationale shifts resources utilized toward auditing areas that reflect the highest level of risk, while blockchain ensures security and immutability for data integrity. This further reinforces audit productivity and efficiency with no compromise on oversight or data quality.

Countries like Georgia and the United Arab Emirates (UAE) showcase blockchain's potential in PFM. Georgia uses blockchain for secure land registries and economic efficiency, while the UAE has taken blockchain-based initiatives to digitize the government transactions and display access to real-time, confirmed information, such as the Dubai Blockchain Strategy and Emirates Blockchain Strategy.

Conclusion

Blockchain technology promises an excellent weeding out of fraud, corruption, and lack of transparency in the management of Kenya's public finances, with immutable records and auditing automatically enabled. Therefore, it is imperative that both the national and county governments embrace the use of blockchain system, even as they enhance stringent regulatory frameworks, to ensure there is transparency in public finance management. Citizens, in turn, should advocate for greater transparency and push for the adoption of such transformative technologies.

Bridging the Gaps in Kenya’s Social Health Insurance Act to Create a Path to Sustainable Universal Healthcare

IPF — Wed, 11 Dec 2024 08:24:58 +0000

Bridging the Gaps in Kenya’s Social Health Insurance Act to Create a Path to Sustainable Universal Healthcare

The Social Health Insurance (SHI) Act 2023 takes Kenya one step closer to Universal Health Coverage. However, for it to succeed, there is a need to address several gaps in the legislation. Rural and remote areas lack adequate healthcare facilities and often face challenges such as traveling long distances to receive healthcare. The introduction of telehealth can reduce some of this burden. The informal sectors often face challenges due to their fluctuating income, hence there is a need to facilitate flexible payments for these workers. Lastly, the law currently does not, but should provide a detailed guideline for the empanelment of private healthcare providers. Addressing these gaps will make the SHI Act inclusive and sustainable.

The SHI Act outlines an encompassing package of healthcare services that should be accessible to all.^[1] However, insurance alone cannot guarantee access to healthcare services if there is an underlying issue with healthcare infrastructure, particularly in rural and remote areas. The use of telehealth could help. Telehealth is the use of telecommunication technologies to support remote delivery of all medical diagnostic and treatment-related services.^[2] Telehealth could provide patients with quick and easy access to medical professionals resulting in early diagnosis and treatment. This model is efficient in remote areas and those with provider shortages as it provides access to resources and care for patients, reduces the need for patients to travel long distances, and is also often less expensive than in-person healthcare services. Although in-person visits are important in situations where there is a need for physical examinations, telehealth can be used as an additional tool for non-exam-based care and remote consultations.

Although the act decrees that informal sector workers should contribute a certain percentage annually to the SHIF, this method fails to take into account the uneven incomes of these workers. To ensure these workers can participate in the insurance scheme, the act should introduce a more flexible contribution regime that corresponds to informal sector earning patterns.^[3] This would allow the workers to contribute a certain percentage of their earnings during high-earning periods and lower or no contributions during lean periods. To ensure that this works, SHIF could work with mobile platforms such as M-pesa to link the earnings of the informal sector workers who receive their incomes through M-pesa to monitor their income flow and ensure that they contribute whenever they receive their income.

The act states that health providers or facilities seeking to be empaneled must apply to the body responsible for accreditation. Once they are empaneled a list will be published on its website. After empanelment, the authority has up to thirty days to contact the providers and facilities for the provision of services to beneficiaries, and the accreditation body can revoke the accreditation if the provider fails to meet the required standards. However, it does not have detailed criteria regarding selecting these healthcare providers and the decision-making process for inclusion or exclusion from the empaneled list. It lacks sensible quality indicators to evaluate whether a provider meets the standards of empanelment, and it says nothing about what to do if healthcare providers fail to offer quality care. The act should have criteria for the empanelment of healthcare providers and their removal (qualifications, quality guidelines, and type of inspections).^[4] It should also put in place a monitoring mechanism to periodically check healthcare facilities for compliance with the standards mentioned. Non-compliance should be followed by graduated disciplinary measures that include warnings, suspensions, or bans (based on the seriousness of violations) built within this act along with an appeal process for fairness. This would increase accountability, maintain quality care, and prevent abuse of the system.

In conclusion, the SHI Act is a positive movement towards the attainment of the UHC. However, it is crucial to make adjustments and establish measures to address these gaps and ensure its effectiveness. Integrating telehealth services into the act as part of the essential healthcare package could greatly enhance healthcare access in rural and remote areas. Furthermore, the issue of varying incomes for informal sector workers could be managed through regulations that introduce flexible income contributions. Lastly, to ensure the quality and fairness of the healthcare provider empanelment the act itself needs to be modified. These changes would help create a more inclusive and sustainable path to Universal Health Coverage.

^[1] Kenya Law. (n.d.). Social Health Insurance Act, 2023. Link

^[2] KUTRRH. (2023, June 16). New frontier in healthcare in Kenya – Telemedicine – Kenyatta University teaching, referral & research hospital | KUTRRH. Kenyatta University Teaching, Referral & Research Hospital | KUTRRH – Quality Patient-Centred Care. Link

^[3] ILO. (2024, February 1). Extending Social Security to workers in the informal economy: Lessons from international experience. International Labour Organization. Link

^[4] Ministry of Health. (2014, July). Kenya Health Policy 2014-2030. Universal Health 2030 - Health Publications. Link

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Investing in Kenya’s Climate Future: Why Transparent and Accountable Financing Matters

IPF — Wed, 11 Dec 2024 08:54:03 +0000

Kenya is facing the harsh realities of climate change. In the north, droughts dry up wells and decimate livestock, while the south struggles with devastating floods that wash away homes and roads. These extreme weather events are no longer distant news, and they are the daily struggles of millions. Climate change is already here, and it's wreaking havoc on agriculture, food security, and livelihoods. How much longer can Kenya bear the cost of these climate shocks, which already drain up to 3% of its GDP every year? Despite the urgency of the situation, Kenya is not receiving the funds it needs to tackle these issues head-on. It has also not set up the institutions necessary to manage these funds transparently.

The government has committed to action, but the necessary climate strategies require significant funds. From 2020 to 2030, Kenya needs KSh. 6,775 billion (USD 65 billion), about KSh. 677.5 billion each year. But in 2018, only KSh. 243.3 billion was made available, just 35.9% of what is needed. This funding gap leaves Kenya in a vulnerable position, unable to protect its people, agriculture, infrastructure, and economy from the increasingly extreme effects of climate change.

Attracting private investment is key but needs to be supplemented by public sources. The World Bank estimates it could bring in an additional KSh. 220.1 billion (USD 1.55 billion) by 2030. International climate funds, like those from the Green Climate Fund, could also contribute KSh. 150 billion (USD 1.35 billion) annually. A carbon tax could raise KSh. 71 billion (USD 500 million) per year. However, introducing a carbon tax in the wake of other recent tax hikes could be controversial.

Both private investors and the public need reassurance that climate funds are being used well. Currently, however, it is difficult to know exactly how much Kenya is spending on climate change efforts. Recent research from the Institute of Public Finance (IPF) and Bajeti Hub points out that Kenya lacks a system to track climate finance effectively. This lack of transparency leaves the door open for inefficiencies, mismanagement, and, worse still, the funds not reaching the communities that need them the most. Developing a clear, transparent system for tracking climate finance is urgent.

Decentralizing climate fund management to regional hubs in Kenya could really boost transparency and accountability. By focusing on specific local needs, like droughts in the north and floods in the south, we can make sure the right help gets to the right places. But to truly bridge the transparency and trust gap, we need a solid system to track spending and outcomes at all levels. Local Development Organizations (LDOs) and community groups can keep an eye on how funds are used, but they need a strong national framework for reporting and auditing to be effective. Independent monitoring bodies, possibly with support from international agencies, could step in to conduct audits and prevent mismanagement. This approach, combining regional decentralization with oversight from the Office of the Auditor General (OAG), would help close the transparency gap. It would reassure both public and private investors and ensure that resources reach the communities that need them most. By involving local communities and holding all levels of governance accountable, Kenya can create a climate finance system that is both responsive and trustworthy. This way, we can make sure funds are used effectively to tackle the climate crisis. Building trust will be critical if Kenya is to close its climate finance gap.

The government must lead the way by being transparent in its budgeting, reporting regularly to the public, and allowing independent oversight to ensure that funds are being used as intended. Citizens must also demand more from their leaders, advocate for stronger climate finance tracking, and support local initiatives that are already making a difference. Climate change is a collective problem, and it will require a collective response from the government, the private sector, and the people to tackle it.

The situation is urgent, but it’s not hopeless. By improving transparency and empowering local communities, Kenya can attract new resources and raise more revenue, so that it can close the climate finance gap and create a sustainable, resilient future. The government, businesses, and citizens all have a role to play in this effort. Together, we can ensure that Kenya has the resources, and the accountability needed to confront the climate crisis head-on. The future of Kenya and the generations that follow, depends on it.

Is Carbon Trading the Solution to Kenya’s Climate Finance Problem?

IPF — Wed, 11 Dec 2024 09:06:57 +0000

Is Carbon Trading the Solution to Kenya’s Climate Finance Problem?

Kenya faces inadequate budgetary allocation towards climate finance. In the 2024/25 Budget, environmental protection, water, and natural resources were allocated KSh. 128.0 billion, predominantly for completing water projects and natural resource management, leaving minimal funds for climate action and emergency-related expenses^[1]. While Kenya advocates for global climate initiatives, adaptation spending by the government is below the Nationally Determined Contributions (NDC) commitment^[2]. The diversion of resources from the health and education sectors to help mitigate the effects of climate change (e.g. 2024 floods) exposed the inefficiencies of our climate action funding. As such, the need for alternative sources of climate finance in Kenya is urgent, and carbon trading offers a viable solution.

Carbon trading involves buying and selling credits permitting an entity to emit a certain amount of greenhouse gases or carbon dioxide, rewarding emission reductions while financially penalizing continued emissions^[3]. It can generate funds for climate projects, e.g. reforestation and renewable energy. When polluters in other countries need to cover their emissions, they can pay for reduced or avoided emissions in Kenya through the newly established compliance markets under Article 6 of the Paris Agreement, as discussed at COP29, which include Internationally Transferred Mitigation Outcomes (ITMOs) for bilateral or multilateral carbon credit trading and the Paris Agreement Crediting Mechanism (PACM) for standardized and transparent credits. Kenya’s pledge to plant 15 billion trees by 2032 along with projects like the Lake Turkana Wind Power, enhance its carbon credit potential^[4]. Protecting forests like Mau and Mount Elgon, through evicting encroachers and planting more trees, supports conservation and could become viable carbon credit projects.

Expanding into international compliance markets is crucial for increasing revenue but requires Kenya to align its offerings with global standards. International purchasers will only buy Kenyan credits if they are recognized internationally. This involves authorization to prevent double counting and ensuring emissions reductions are counted by the investor country toward its Nationally Determined Contributions (NDCs) under the Paris Agreement^[5]. Despite the Climate Change Amendment Act 2023, regulatory roles need definition, alignment with international standards, stronger regulations, and agency capacity building. Clarifying land rights, carbon credit ownership and educating market players on legal and benefit-sharing opportunities will ensure effective participation in international markets. Additionally, Kenya should optimize the 15% corporate income tax incentive for companies operating a carbon market exchange or emission trading system to attract foreign investors.

Countries with established carbon markets show that carbon trading generates substantial revenue while promoting sustainable development. In 2023, Emissions Trading Systems (ETS) revenues from international and domestic markets reached USD 74 billion, with the EU ETS generating 47.4 billion USD (63% of the total)^[6]. While most of the revenue comes from domestic carbon markets, international compliance markets generated around USD 30 billion in 2023, demonstrating the substantial potential of compliance markets to provide adequate funding for climate projects. Countries like Brazil, Chile, India, and Turkey have reinvested proceeds from their carbon markets into reforestation, renewable energy projects, air quality improvement, and forest conservation efforts. Furthermore, Uganda's success in using carbon credits from forest protection to support local communities and conservation efforts further demonstrates the potential of carbon markets^[7]. These indicate that carbon markets can provide critical funding while stimulating economic growth through co-benefits providing a strong foundation for Kenya to follow.

Focusing on emission reduction projects, such as avoided deforestation, reforestation, and green energy initiatives, provides valuable funding through carbon credits. However, earning these credits requires verifiable emission reductions, which often involve investing in alternative solutions^[8]. Verification by organizations like Verra or Gold Standard ensures carbon credit credibility. Prioritizing emission reductions over local development may divert resources from essential sectors like health, education, and infrastructure, causing potential unrest. Ignoring emission reductions could miss global climate mitigation opportunities and raise future costs. Wise reinvestment of carbon credit revenue in local projects is crucial to meeting climate and development goals, addressing pressing needs, and ensuring progress.

In conclusion, Kenya faces significant budgetary constraints in addressing climate action. Carbon trading offers a viable alternative source of climate finance. By following successful models, Kenya can enhance its carbon credit potential through reforestation, renewable energy, and forest conservation. However, balancing emission reductions with local development needs is essential to ensure funds effectively address local priorities.

^[1] ^{National Treasury. (2024, February). 2024 Budget Policy Statement. The National Treasury – The National Treasury of Kenya. link}

^[2]^{Budget Adaptation? What we know about how Kenya’s budget is evolving to tackle climate adaptation. link}

^[3] ^{Wang, Z., Zhao, J., & Li, M. (2017). Analysis and optimization of carbon trading mechanism for renewable energy application in buildings. Renewable and Sustainable Energy Reviews, 73, 435-451.}

^[4]^{Kenyan Youth Perspectives on Forests. link
^[5] ^{The Paris Agreement and NDCs. link}}

^[6] ^{State and Trends of Carbon Pricing, 2024. link}

^[7] ^{Trees for Global Benefits. link}

^[8] ^{Record High Revenues from Global Carbon Pricing Near $100 Billion. link}

Let's Create a Safer, More Accountable, and Prosperous World.

IPF — Thu, 13 Mar 2025 19:14:47 +0000

Let's Create a Safer, More Accountable, and Prosperous World.

The words safer, stronger, and prosperous world are just about to be buzzwords for the next four years. They define how the Trump administration views the world. From my standpoint, a safer, accountable, and prosperous world is not an abstract idea; it is an achievable reality when governments and institutions prioritize transparency in revenue collection, budgeting, and expenditure. It's a reality when citizens and businesses engage with their administrations. It is the reality that Public finances are the lifeblood of any country, influencing everything from infrastructure development to social welfare programs. However, when mismanaged, it has the potential to breed inequality, corruption, and inefficiency, eroding public trust and stalling national progress.

To make the world a better place, a safer place, and prosperous, citizens and businesses have the right to know how their taxes are collected, allocated, and spent. They have a right to know how taxation is determined. There is no doubt that open budget processes, timely reporting of expenditures, and independent audits ensure that resources are used effectively for the benefit of society. When governments make public budget data easily accessible and understandable, they empower citizens to engage in governance and hold institutions accountable.

At the Institute of Public Finance (IPF), we advocate for fiscal transparency and accountability as a non-negotiable pillar of economic governance. Through research, advocacy, and strategic engagement, we work to ensure that public resources are allocated and spent correctly, that elected leaders remain accountable, and that citizens and businesses engage in a meaningful public finance conversation.

To us at the Institute, fiscal justice is not only about fairness in taxation; it is also about how taxation and spending happen. It is about ensuring that tax policies do not disproportionately burden few people and the most vulnerable while facilitating the wealthy to evade taxation. Equally important is ensuring that public funds are channelled toward essential services such as healthcare, education, and infrastructure, reducing economic disparities and fostering shared prosperity.

It is important that we acknowledge at the onset that accountable public finance is more than an economic imperative toward a safer and prosperous world; it is a moral and social commitment to safeguarding national resources for present and future generations. Globally, by advocating for transparency and accountability, we move closer to a world where public finance drives sustainable growth and social equity. The road to a safe and prosperous future lies in a collective commitment to accountability, and governments, civil society, and the business community must work together to ensure that public finances are managed with integrity, efficiency, and inclusivity.

At IPF, we remain dedicated to this accountability mission, paving the way for a safer and more prosperous world. We believe that together, we can create a safer, more accountable, and prosperous world.

The writer is the CEO, Institute of Public Finance

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