The objective of the Kenya 2022 PEFA is to assess PFM performance in the country since the last PEFA study was conducted, in 2017. Specifically, this assessment is aimed at: (i) providing evidence-based scores and analyses on the overall performance of Kenya’s PFM systems and institutions regarding aggregate fiscal discipline, strategic resource allocation, and efficient service delivery by utilizing the PEFA 2016 framework; (ii) addressing environment and climate change matters in Kenya through evidence-based analysis and findings to aid government policy direction in climate change; (iii) addressing gender inequality issues based on findings emanating from gender PFM assessment.
The 2022 PEFA assessment is in three folds: (i) PFM assessment using the standard 2016 PEFA framework; (ii) gender responsive PFM (GRPFM) assessment using the January 2020 supplementary guidance for gender-responsive PFM; (iii) climate responsive PFM (CRPFM) assessment using the August 2020 PEFA climate module. As this is the first gender and climate responsive PFM assessments, the findings/results will provide baseline for monitoring and evaluating the extent to which gender and climate change are mainstreamed into the central government PFM systems.
This assessment was funded by the European Union. Dr. Julius Muia, CBS (Principal Secretary, National Treasury) was the chair of the oversight team; he was replaced by Dr. Chris Kiptoo, CBS, Principal Secretary, National Treasury. They provided general leadership and guidance to this assessment. Mr. Julius Mutua (Programme Coordinator, PFM Reform Secretariat) was the assessment manager and a member of the oversight team. He was ably assisted by Dr Dickson Khainga (the Coordinator for GESDeK) and Mr. Stephen Maluku (Programme Manager, PFM Reform Secretariat). Dr Khainga and Mr. Maluku were responsible for organising all meetings from the Government side, and ensured the timely submission of information required for this assessment. Mr. John Njoroge Mungai of the EU Delegation to Kenya also organised all meetings from the donor community. Dr Khainga and Mr. Stephen Maluku (Programme Manager) were instrumental in the organisation of the PEFA training workshop held in Naivasha - Kenya, for three days, from 20th to 22nd July 2022. Other members of the oversight team representatives from Ministry of Environment and Forestry, Ministry of Public Service and Gender, the PFM Reform Secretariat, European Union Delegation to Kenya, Agence Française de Développement (AFD), UNICEF and UNWomen.
Scope, Coverage, and Timing
The assessment covered central government ministries and departments (specifically the National Treasury and Planning: Budget Department, Macro and Fiscal Affairs Department, State Department for Planning, Public Debt Management Office, Internal Auditor-General Department, Inter-governmental Fiscal Relation Department, Public Investment Management Department, Government Investment & Public Enterprises Department, Public Private Partnership Directorate, Office of Accounting Services, PFM Reform Secretariat, Climate Finance Unit, IFMIS, National Assets & Liabilities Department); Office of the Auditor-General; Ministry of Health; Public Procurement Regulation Authority; Ministry of Education; State Department for Gender; Ministry of Devolution; Public Service Commission; Office of Controller of Budgets; Kenya Revenue Authority; Parliament; National Gender & Equality Commission; National Environment Management Authority; counties for purposes of assessing PI-7 and PI-10.2; National Social Security Fund; extra budgetary units; and public enterprises (in so far as they affect central government fiscal risk). The assessment team had a virtual meeting with civil society organisations. In attendance were representatives of the International Budget Partnership (IBP) Kenya, the Institute of Economic Affairs (IEA), and the Institute of Public Finance (IPF).
The fiscal years for this assessment are FYs 2018/2019, 2019/2020, and 2020/2021. The last budget submitted to Parliament for purposes of this assessment was FY2021/2022 budget submitted in FY2020/2021. The cut-off date was 30th June 2021.
Impact of PFM systems on the three main budgetary and fiscal outcomes
Aggregate fiscal discipline
The performance of aggregate fiscal discipline is basic. Strong PFM laws and regulations are in existence, a positive signal to strengthening aggregate fiscal discipline. The assessment concludes that the Public Debt Management Framework is good enough to support fiscal discipline, nevertheless, debt levels have been increasing over the last three years, which is a major concern. The management of domestic and foreign debt and guarantees is found to be satisfactory, with complete and accurate recording and reporting of debt and guarantees, positively impacting on fiscal discipline. A medium-term debt management strategy is also published, contributing positively to fiscal discipline. Sound internal control framework, coupled with a relatively low stock of pending bills (based on budgeted central government only) have contributed to strengthening fiscal discipline. Total national government stock of expenditure arrears (pending bills), including state corporations were Ksh359.5billion as at 30th June 2021, made up of Ksh36.4 billion for budgeted central government institutions (ministries, state departments and agencies) and Ksh323.2 billion for state corporations – these pose a significant threat to national government fiscals. Counties pending bills stood at Ksh153.2 billion with Nairobi County alone contributing Ksh99.6 billion as at June 2021. There is proper segregation of duties but expenditure commitment system still allows to commit expenditure without cash, and could lead to accumulation of expenditure arrears (pending bills). Nevertheless, this was not the case as at June 2021 due to measures such as charging pending bills to approved current budgets. Payments fully comply with government rules and procedures. The relatively high levels of in-year budget adjustments weakens fiscal discipline.
Fiscal discipline is however weakened by the unreliability of aggregate revenue outturn, caused by over optimistic targets. The aggregate expenditure outturn is also found to be poor, a threat to fiscal discipline.
The assessment concludes that government operations outside the budget are relatively high, but not at the levels that significantly impacts negatively on fiscal discipline. That said, this has a future threat if not controlled and managed. Contingent liabilities and other fiscal risks are quantified and published, but the overall performance of government’s management of assets and liabilities is at average levels, not enough to support fiscal discipline. Public investment and assets management performed above average, indicating the need for improvements to strengthen these areas.
Strategic allocation of resources
The strategic allocation of resources is basic at aggregate level. Kenya’s national budget is comprehensive and transparent in terms of required documentation for public use. Budget classification is also sound, as it meets international standards. These contribute to strengthening the strategic allocation of resources. Despite a good budget classification system and budget comprehensiveness, the high level of expenditure composition variance demonstrates that resources are not being allocated to originally approved priority areas and programmes – this is a weakness to strategic resource allocation. The transparent and rule-based system of horizontal allocation of all transfers for devolved sectors to county governments from central government is a sign that resources are strategically allocated. That said, the delays with respect to reliable information for county government budget preparation is a serious concern, as it lends itself to an unpredictable and unreliable budgeting system at the county levels, thereby affecting service delivery.
The smooth budget preparation process with a comprehensive and clear budget circular issued to MDAs, covering total budget expenditure for the full fiscal year, and reflecting ministry ceilings approved by the cabinet prior to the circular’s distribution to budgetary units, contributes to the strategic allocation of resources. The timely approval of the annual budget enables budget units to begin their annual programmes and activities on time to ensure maximum utilisation of allocated resources, thereby improving service delivery. The performance of revenue administration and accounting framework is reasonable but not enough to support strategic resource allocation. The cash management framework is weak; it does not support the allocation of resources in a strategic manner – this has the potential of negatively affecting service delivery.
Efficient service delivery
Efficient service delivery is also basic at aggregate level. Good budget classification and comprehensiveness strengthens efficient service delivery – this is the case in Kenya. However, the unreliability of the expenditure budget at the composition level negatively affects efficient service delivery. Payroll management shows good performance – a strength to efficient service delivery. The transparent and non-frequent in-year budget adjustments enable the budget to be utilized for initially intended priority areas – this is a strength to efficient service delivery. The good public access to fiscal information, coupled with the public availability of service delivery performance information contributes positively to strengthening the efficiency of service delivery, as it provides a good opportunity for citizens to demand accountability. Public investment management performs averagely, with relatively good economic analysis and project selection framework. The strong system of medium-term expenditure budgeting, as described under fiscal discipline, provides greater predictability for budget allocations in the medium-term, strengthening both strategic resource allocation and efficient service delivery.
The comprehensiveness and timely public access to fiscal information improves efficiency of service delivery, as it encourages public accountability. That said, the lack of complete data on procurement methods used means that the procurement framework is not functioning well to assure competitive public procurement needed for improved service delivery. Efficient service delivery is further negatively affected by the absence of a framework to track all resources received by frontline service delivery units. The inability to track resources to frontline service delivery units could lead to shortages in some areas and surpluses in other areas.
The overall external audit and legislative scrutiny functions are generally weak, not supportive of efficient service delivery. Though the coverage of both internal and external audit is satisfactory, management response to internal audit, a necessary tool to assess the efficiency of service delivery, cannot at this stage be determined due to inadequate information from the NT/IAD. There is considerable weakness regarding legislative scrutiny of audit reports, a delayed scrutiny process coupled with the non-existence of a systematic PAC follow-up mechanism – this is a serious threat to efficient service delivery.
Overall, there has been improvement in PFM performance as evidenced by the number and categories of scores. “A” scores have improved from 3 in 2017 to 4 in 2022. Whilst “B+” scores have dropped from 4 in 2017 to 1 in 2022, “B” scores have improved from 6 in 2017 to 8 in 2022. There has also been an increase in “C+” scores from 4 in 2017 to 9 in 2022. “C” scores have however remained unchanged at 4 in 2017 and 2022. “D+” scores have reduced from 6 in 2017 to 4 in 2022, indicating a shift towards higher scores, which is an improvement. Likewise, “D” scores have reduced from 4 in 2017 to 1 in 2022, also reflecting an improvement in performance.
Strong PFM laws and regulations have continued to be a feature of the Kenyan PFM environment, contributing positively to fiscal discipline. There is no substantive change between assessments (2017 and 2022) when it comes to fiscal discipline. Compared to 2017, aggregate fiscal discipline has deteriorated as it has been weakened by the unreliability of aggregate revenue outturn, caused by overly optimistic targets and unreliable aggregate expenditure outturn. Comparatively, the current assessment concludes that revenue and expenditure outside government financial reports are relatively high, based on available data; however, in 2017, there was no sufficient data to assess the impact of government operations outside the budget. Internal controls on non-salary expenditure remain satisfactory under both assessments, with proper segregation of duties and payments complying with government rules and procedures. Expenditure arrears (pending bills for budgetary central government, excluding those from public enterprises) are kept to a minimum, with the monitoring mechanism thereof improved in the current assessment. Under both assessments, the low levels of in-year budget adjustments have strengthened fiscal discipline. A notable improvement in fiscal discipline is the quantification and publication of contingent liabilities and other fiscal risks, including PPPs, which was not the case during the previous assessment. Public investment management remained the same while marginal improvement was made on assets management, with the strengthening of non-financial assets monitoring and asset disposal. Payroll controls have remained satisfactory, unchanged in both assessments.
Strategic allocation of resources
Budget comprehensiveness and transparency has seen significant improvement since 2017, thereby strengthening the strategic allocation of resources. This is further supported by the improvement in 2022, of the budget classification system to the GFSM 2014 standards to meet international standards. This means improvement in the traceability of public resources. Despite a sound budget classification system and good budget comprehensiveness, the high level of expenditure composition variance, especially in the current assessment (which could be as a result of COVID-19), demonstrates that resources are not being allocated to originally approved priority areas and programmes. The transparent and rule-based system of horizontal allocation of all transfers for devolved sectors to county governments from central government during both assessments improves the strategic allocation of resources. That notwithstanding, the excessive delays in the passage of CARA, needed for county revenue allocation, contributes to budget unreliability and inefficient service delivery at the county levels – this has not changed since 2017.
The government’s inability to estimate the fiscal impact of changes in expenditure policy proposals is a weakness in strategic resource allocation – this has remained unchanged since 2017. On a positive note, the fiscal impact of changes in revenue policy is estimated. The Budget preparation process remained strong. In both assessments, the smooth budget preparation process, with a comprehensive and clear budget circular issued to MDAs, covering total budget expenditure for the full fiscal year, and reflecting ministry ceilings approved by the cabinet prior to the issuance of the circular to budgetary units, contributes to the strategic allocation of resources. The legislative scrutiny of the budget and approval systems have improved and strong, providing an enabling environment for budget units to fully utilize their annual budget allocations. Revenue administration improved slightly with regard to provision of information to taxpayers on rights and obligations for revenue measures and revenue risk management, positive contribution to support resource allocation and efficient service delivery. Nevertheless, the cash management framework, in both assessments has shown weaknesses in terms of not being able to consolidate central government daily cash position, a pre-requisite to efficient cash management.
Efficient service delivery
Compared to 2017, the efficiency of service delivery improved as a result of improvement in budget classification to conform to GFSM 2014 standards. The comprehensiveness of the budget documentation also supports efficient service delivery, an improvement in 2022 compared with 2017. However, under both assessments, the unreliability of the budget at the composition level negatively affects efficient service delivery. The transparent and non-frequent in-year budget adjustments during both assessments provides a platform for budget utilisation according to original government priorities, a strength to efficient service delivery.
The performance information for service delivery has remained unchanged, satisfactory under both assessments. This, coupled with the good public access to fiscal information in 2017 and 2022, contributes positively to strengthening the efficiency of service delivery. Public investment management framework has remained unchanged at the aggregate level, even though slightly improved in 2022 in terms of performing economic analysis of investment projects. Medium-term expenditure budgeting remained strong in both assessments, providing greater predictability for budget allocation in the medium-term, thereby strengthening service delivery efficiency.
A major deterioration from the previous assessment is on the procurement management, where there is currently no complete procurement data and no accurate information on procurement methods used. This is a setback to efficiency in service delivery, as competitive public procurement improves service delivery. Another weakness to efficient service delivery is government’s inability to track resources, especially in kind, to all primary service delivery units. This has been the case since 2017, although the previous assessment seemed to have overrated this dimension. Public access to fiscal information, which helps to strengthen the efficiency in service delivery by holding public officials accountable, has remained unchanged, good enough to support demand-side accountability.
In 2017 and 2022, internal and external audit coverages have been good, a strength to efficient service delivery. Nonetheless, excessive delays in external audit with consequential delays in legislative scrutiny, have weakened the entire accountability chain, thereby contributing to less effective service delivery framework. The financial non-independence of the OAG, coupled with the non-existence of a systematic legislative follow-up mechanism, do not support the accountability framework, prerequisites to strengthening efficient service delivery.
PFM Reform Agenda
Government’s Medium-Term Plan III guides PFM reforms. PFM reforms are covered under chapter 3.5 (public sector reforms) of the MTP III. Ongoing PFM reforms are based on the 2018-2023 PFM reform strategy. It has eight result areas, namely:
- Sustainable and predictable fiscal space to deliver government programs
- Strategic and transparent spending on public investment and service delivery in line with National and County Policy Commitments
- Reliable cash for service delivery and public investment
- Value for money in procurement and contract management
- Value for money, performance & accountability in staffing for service delivery
- Education institutions, health, and other service facilities effectively manage public resources
- Disciplined financial management and accurate reporting, and
- Accountability delivered through audit, oversight and follow up
Below is a summary (details of achievement are presented under chapter 5.2 of this report) of achievements so far with respect to the implementation of the 2018-2023 PFM reform strategy:
- Sustainable and predictable fiscal space to deliver priority programs: This result area has a total of 23 key steps of which 7 (30% ) were not achieved, 8 (35% ) are partially achieved and 8 (35% ) were fully achieved.
- Strategic and Transparent Spending on Public Investment and Service Delivery in Line with National and County Policy Commitments: There are 17 key steps, out of which 8 (47% ) were not achieved, 5 (29% ) were partially achieved and 4 (24% ) was fully achieved.
- Reliable Cash for Service Delivery and Public Investment: There are a total of thirteen (13) key steps out of which 7 (54% ) were not achieved, 1(8% ) was partially achieved and 5(38% ) was fully achieved.
- Value for money in procurement and contract management: There result area has a total of 5 key steps out of which 2 (40% ) was not achieved, 1 (20% ) were partially achieved and 2 (40% ) were fully achieved.
- Value for money, performance & accountability in staffing for service delivery: There are 14 key steps, 5 (36% ) not achieved, 8 (57% ) partially achieved and 1 (7%) was fully achieved.
- Education Institutions, Health and other Service Facilities Effectively Manage Public Resources: There are 11 key steps out of which 3 (27% ) were not achieved, 5 (46% ) were partially achieved and 3 (27% ) was fully achieved.
- Disciplined Financial Management and Accurate Reporting: There result area has 10 key steps. Of these, 6 (60% ) were not achieved, 1 (10% ) were partially achieved and 3 (30% ) were fully achieved.
- Accountability Delivered through Audit, Oversight and Follow up: There are 9 key steps out of which 3 (33% ) were not achieved, 2 (22% ) were partially achieved and 4 (45% ) were fully achieved.