Purpose and Management of the PEFA Assessment
The Public Expenditure and Financial Accountability (PEFA) Assessment Framework is an important tool for monitoring improvements and diagnosing challenges in the country’s PFM system. The 2012 PEFA assessment helped to inform the preparation of the Government of Kenya (GoK)’s PFM Reform Strategy 2013-2018. In the same way, this 2017 PEFA assessment will help to inform the preparation of the next PFM reform strategy.
The purpose of the assessment is twofold: (i) utilize the new 2016 PEFA Framework to assess GoK’s PFM systems and establish a baseline for future PEFA assessments to track PFM performance again; and (ii) where applicable, to assess change in PFM performance since the 2012 PEFA assessment.
The results of the assessment will help GoK to determine whether any revisions to its current PFM Reform Strategy, 2013-18, are necessary in order to meet PFM reform objectives, and, if so, how these should be managed and what sort of donor partner assistance might be required.
The PFM Reform Secretariat, based in the National Treasury, is in charge of managing the PEFAassessment, preparing PFM reform strategies, managing and monitoring their implementation, and liaising with those donor partners who are assisting with the planning and implementation of PFM reforms.
Coverage and Timing
The assessment is at national government level only, focusing on central budget institutions only. It does not cover State Corporations, which comprise autonomous government entities, both commercial and non-commercial. The expenditures of Central Government budget institutions comprise about 85% of the total National Government (central plus counties) expenditure. A separate PEFA assessment of the PFM systems of a sample of County Governments is being planned, which will be conducted later on in 2017. The fieldwork for the assessment was conducted during February/March 2017. Assessment is backwards looking up to the situation at the time of the assessment. Depending on the type of indicator, the assessment may cover the last 3 completed financial years (the last completed
financial year was FY 2015/16 at the time of the fieldwork), or the last completed financial year, or the situation at the time of the assessment. The time coverage is indicated under each indicator assessment in Section 3.
PFM strengths and weaknesses: Impact of PFM system performance on the three main budgetary outcomes.
1. Aggregate Fiscal discipline
As was the case at the time of the 2012 PEFA assessment, and as is apparent from budget documentation, GoK considers that preservation of aggregate fiscal discipline is a pre-requisite to maintaining overall macroeconomic stability, itself a pre-requisite for budget predictability. Weaknesses in fiscal discipline could quickly translate into rising budget deficits, rising debt, and eventually external debt crises. In such an environment, budgets are likely lack predictability and predictable public service delivery would suffer as a result. As was the case at the time of the 2012 PEFA assessment, GoK has been quite successful in preserving aggregate fiscal discipline, although this has not always been easy in the face ofrevenue shortfalls and pressures from MDAs and politicians for budget adjustments and extra spending. The main means of doing this have mainly consisted of ensuring a credible medium term macro-fiscal framework (PIs-13-14) and ensuring that budgets can only be executed during the year according to the cash available (i.e. cash rationing) on a monthly basis. This has helped to keep end-year payment arrears down (PI-22), though these are still an issue due to approval of
expenditure commitments being based on approved budgets rather than cash availability. Cash rationing is a crude and inefficient form of budget execution, however, and can be improved through strengthened accuracy in budgeting (PIs 11, 16-17), and active cash and debt management (PIs 13 and 21). This would allow MDAs to plan their monthly/quarterly expenditures for a whole year according to well-prepared cash flow forecasts with the confidence that the cash will be available when needed to pay bills (PI-21). This is not the case at present, although it was planned to be the case at the time of the 2012 PEFA assessment.
2. Strategic resource allocation
Adopting a medium term strategic perspective to budgeting has tended to be challenging in the face of both the challenges of maintaining aggregate fiscal discipline over the short term and the challenges in budgeting on an annual basis, let alone a medium term basis. Nevertheless, the Medium Term Plans (MTP) of GoK and the references to these highlighted in annual budget statements indicate that GoK knows what it wants to achieve over the medium term and how it will do this. The MTEF processes that have been put in place in recent years, combined with the relationship between these and the MTPs indicate that the mechanisms are in place for achieving a strategic allocation of resources consistent with medium and long terms development plans. More emphasis could be placed on the preparation of forward spending estimates (also known as baseline estimates) that project costs of delivering services on the basis of services currently being delivered. These costs would include the projections of recurrent cost that would be generated by the completion of already committed capital investment projects (e.g. construction of schools, health facilities, roads). Such estimates would help to improve the accuracy of annual budgeting (PIs 11, 15-17).
3. Service delivery
The main purpose of any democratically elected government is to provide the public services that a are necessary for socio-economic development. Budget constraints that face any country imply that such services should be provided as efficiently and effectively as possible, as evidenced by reports and audited financial accounts, the latter pointing out areas of possible wastage and inefficiency. PFM reforms help to mitigate against these.
GoK’s progress in implementing its PFM reform agenda over the last few years has been slower than planned, partly because of capacity constraints, and insufficient prioritizing and sequencing of reforms taking into account these constraints. This is the case in most countries attempting to strengthen their PFM systems. Nevertheless, though slower than planned for, some progress has been made in implementing the IFMIS reengineering strategy and strengthening of controls, that has led to some strengthening of revenue administration, budget execution, accounting and reporting (PIs 19-21, 22, 27-29). Such strengthening has been facilitated through strengthening of internal controls (PIs-23-26), covering payroll, procurement, non-salary controls and internal audit. All these efforts help to strengthenservice delivery, in terms of both quantity and quality.
Strong external oversight can result in pressures being placed on the executive branch ofGovernment to strengthen PFM systems in support of strengthened service delivery. The Office of Auditor General and the Public Accounts Committee (PAC) generally perform well in this regard, but their effectiveness tends to be limited by the slow progress made by MDAs in implementing their recommendations (PIs 30-31). On-Going and Planned PFM Reform Agenda As described in Section 5, a PFM Reform Strategy (2013-18)is currently being implemented. It covers all the PFM reform areas. Issues are analysed and discussed in Section 3. The pace of implementation has not been as fast as planned, partly because of capacity constraints. These were already well-known, implying that the Strategy should have prioritized more in relation to addressing the most critical PFM weaknesses. Section 5 elaborates. PFM System performance since the 2012 PEFA assessment Change in performance since the 2012 PEFA assessment is summarised in Annex 1.b (using the 2016 PEFA Framework) and Annex 4 (using the 2011 PEFA Framework) on an indicator by indicator basis. In terms of the impacts onbudgetary outcomes of change in performance, these are summarized as follows.
• Aggregate fiscal discipline: This was already positive at the time of the 2012 Assessment and has generally stayed that way. The need to preserve aggregate fiscal discipline in support of macro-fiscal stability has tended to take priority over the other two budget outcomes, with the risk of detriment to these;
• Strategic Resource allocation. The planning and budgeting mechanisms for achieving an allocation in the best interests of society have in principal been in place for some time. They have changed little since the 2012 PEFA Assessment. The actual allocations may be different from budgeted allocations due to issues with the other two outcomes;
• Efficiency of Service Delivery. In principal, efficiency has improved mainly due to the positive impacts (in terms of the resultant strengthening of internal controls), and of the implementation of the IFMIS Re-engineering Strategy and the strengthening of the procurement system.
Further improvement is expected in line with the continuation of the implementation of the Strategy. Nevertheless, the primary focus on preservation of aggregate fiscal discipline may in some circumstances be at the expense of efficient service delivery (e.g. delays in releases of resources during the year in response to revenue shortfalls and/or unexpected extra expenditure demands will have a negative impact on the cost efficiency of service delivery).