## _cr0899

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---

### Executive summary — scope and progress
- Assessment based on discussions with authorities, IMF fiscal transparency questionnaire responses, and other sources including the 2006 PEFA assessment.
- Kenya has made significant progress since 2003 in improving fiscal transparency and accountability through key legislation, but further work is needed to conform with best international practices.

### A. Clarity of roles and responsibilities — key findings
- Fiscal roles of branches of government and between central and local government are clearly defined in law and practice.
- Main weaknesses:
  - Blurred line between general government and the rest of the public sector, complicating measurement of extra-budgetary spending.
  - Very limited coverage of the Government Financial Management Act (GFMA) has weakened the Ministry of Finance’s (MoF) ability to ensure adherence to financial regulations.
- Institutional/sectoral observations and statistics:
  - Many government-owned non-profit institutions are classified under the State Corporations Act (1986) creating classification ambiguity (SAGAs and EBFs).
  - Authorities reported 101 SAGAs and 42 Fund Accounts (FAs).
  - Public sector employment (KNBS, 2005): 654,200 workers in the public sector (around 36 percent of formally registered wage employment).
  - Formal wage employment: 1.8 million; total formal and informal employment: 8.3 million.
  - Public employment estimated at 7.9 percent of total employment; share of public employment in total labor force (2004 estimate 11.4 million): 5.7 percent.
  - Of more than 40 financial corporations, 12 have government participation; 9 are 100 percent government-owned; 3 under direct/indirect control.
  - Over 40 public nonfinancial enterprises across multiple sectors.

### Quasi-fiscal activities, privatization, and profit transfers
- QFAs present in agricultural, transport and energy sectors; examples include subsidized electricity/water services and special government projects.
- QFAs are generally compensated by public corporations but are not clearly identified in the central government budget as subsidies.
- Specific QFA: 2006/07 arrangement provides an annual price subsidy of around Ksh 2.6 billion among KPLC, KENGEN and the government.
- Privatization framework: Privatization Policy Paper (1994) and Privatization Act (2005); privatization receipts specified to be paid into the Consolidated Fund.
- MoF guidance: Boards of public enterprises instructed to define dividend policies; Central Government’s budget records aggregated payments of taxes, royalties and dividends.

### Business environment
- Kenya ranks mid-range in World Bank ease of doing business and among the highest in Sub-Saharan Africa.
- Recent regulatory reforms: abolished/simplified 118 licenses in the past two years (from an estimated total of 1,325 business licenses).
- Business Regulatory Reform Unit (MoF) working to reduce licenses and simplify procedures.

### B. Open budget preparation, execution, and reporting — findings
- MTEF progress has contributed to a generally open annual budget process; medium-term fiscal objectives are clearly stated in budget documents.
- Shortcomings:
  - No analysis of contingent liabilities, particularly government pension schemes.
  - Accounting and reporting systems evolving; data sharing and coordination lacking.
  - Internal audit function is weak.
- Improvements noted in revenue administration, cash-flow planning, and procurement.

### C. Public availability of information
- Central government fiscal information is fairly comprehensive and publicly available, but:
  - No “citizen’s guide” to the budget.
  - Local government reports are untimely.
  - No consolidated general government fiscal data are available.

### D. Assurances of integrity — audit and oversight
- Kenya National Audit Office (KENAO) is independent of the executive.
- Timeliness of audit report submission improved; backlogs for local governments persist.
- Parliamentary review of audit reports often delayed by 3–4 years, diminishing effectiveness.

### Main recommendations (high level)
- Put in place building blocks for PFM reform:
  - (i) revise the GFMA and financial regulations;
  - (ii) give budget execution, accounting and internal audit firmer legal and institutional basis;
  - (iii) consolidate the Exchequer Account to function as a Treasury Single Account (TSA);
  - (iv) clarify the concept of general government and embody it in law;
  - (v) track and manage growth of autonomous agencies and funds.
- Enhance external audit effectiveness by reducing backlogs and ensuring timely follow-up of audit findings.
- Quantify contingent liabilities, implement mitigation policies, establish legal/institutional PPP framework and develop PPP risk-assessment capacity.

### Legal and administrative PFM framework — status and gaps
- Core laws: Constitution, GFMA (2004), External Loans and Credit Act (1967), Internal Loans Act (1978), Central Bank Act (1966, revised 1996 — caps overdraft to 5 percent of latest audited revenues), Guarantee (Loans) Act (1961), Public Audit Act (2003), Public Procurement and Disposal of Public Assets Act (2005), KRA Act, Local Government Act (1986, revised 1998), State Corporations Act (1986).
- In practice, staff still use Government Financial Regulations and Procedures (1989, revised 1992) and treasury circulars.
- Computerized systems:
  - Integrated Payroll and Personnel Database (IPPD) in most line ministries.
  - Integrated Financial Management Information System (IFMIS) (Oracle-based) being rolled out.
- External Loans and Credit Act (Cap 422) amendment increased Minister’s external borrowing ceiling from Ksh 320 billion to Ksh 500 billion; Guaranteed Loans Act (Cap 461) ceiling increased from Ksh 40 billion to Ksh 80 billion in July 1993.

### Reforms since 2003 — selected status items
- Prior to 2003: Kenya met 4 out of 16 PEM-AAP benchmarks.
- Implemented/ongoing reforms include:
  - GFMA (2004) — revision underway.
  - Public Procurement Act (2003) — being implemented in 2007.
  - Public Audit Act (2003) — implemented.
  - Publication of QBR on MoF website — implemented (available between 2 and 4 months from end of quarter).
  - IFMIS roll out — on-going (24 line ministries out of 43 votes using IFMIS from July 2007 for headquarter operations).
  - IPPD implemented; payroll cleanup ongoing.
  - Stricter limitations on tax expenditures at KRA — implemented but needs monitoring.

### Role and capacity of the Ministry of Finance
- MoF’s role in fiscal management is comparatively weak; PS Treasury lacks significant assigned PFM duties.
- MoF uses consensus and outreach to achieve compliance; has difficulty enforcing financial regulations and Treasury circulars.
- PPP regulatory framework not yet developed; World Bank TA underway (consultants submitted report on PPP Policy Framework).

### Coordination and scale of extrabudgetary activity
- Significant extrabudgetary activity estimated at around 3 percent of GDP.
- Aggregate spending of FAs, SAGAs, EBFs, and regional development authorities estimated at around Ksh 60 billion (over 10 percent of budgetary resources).
- SAGAs and EBFs reporting to MoF quarterly and annually since 2004, but compliance incomplete and data not widely circulated.
- Budgets of SAGAs submitted to MoF before government budget finalization but subject to limited scrutiny and not incorporated into policy framework.
- Constituency Development Fund (CDF):
  - Established 2003.
  - CDF Act sets allocation at 2.5 percent of ordinary revenues; translates to just under US$0.7 million per constituency (per text).
  - Implementation concerns: coordination, recurrent costs not fully taken into account, limited oversight/audit.

### Exchequer, TSA, cash management and pending bills
- TSA principles not followed; significant cash balances held outside Exchequer Account (line ministry accounts, some 40 public fund accounts, donor project accounts).
- Government deposits in the banking system exceed Ksh 73 billion (around 3.5 percent of GDP) — March 2007 QBR statistic.
- Exchequer releases managed via Treasury Funding Account and transitory zero-balanced sub-accounts; these are not considered part of a TSA.
- Pending bills reduced from Kh 18 billion in 2002/03 to K Sh 12 billion in 2004/05; decline from 9 percent to 4 percent of total expenditures. New arrears continued: QBR reports increase of Ksh 450 million in 2005/06 over 2004/05.
- Example suspense/imprest irregularity: imprest-related suspense account balance Ksh. 419,770,823 at end of 2004/05.

### Public debt management and reporting
- External borrowing governed by External Loans and Credit Act (1967); guarantees under Guarantees (Loans) Act.
- DMD records public debt; front office functions shared among ERD, CBK and DGIPE; domestic debt management outsourced to CBK.
- Formal debt management strategy not yet adopted.
- Publication: CBK publishes gross government domestic debt in weekly report; CBK Monthly Economic Review publishes total gross public external debt and guaranteed external public debt; MoF reports debt in QBR.
- Limitations: domestic debt reported only for central government; does not include domestic debt from state-owned enterprises and local governments; domestic debt arrears not captured.

### Revenue/tax policy and administration — key points and figures
- Legislative basis for taxation: clear and comprehensive; KRA (autonomous) has performed tax administration for 12 years.
- Tax exemptions estimated by KRA at about Ksh 15 billion (1.0 percent of GDP) in 2005/06.
- KRA funded through a 1.65% fee on tax collections; also charges 2 percent fee acting as collecting agent for some earmarked/local taxes.
- Refunds: KRA efforts to process VAT refunds within 30 days; refunds requiring verification can take up to 60 days. KRA retains part of the take to cover refunds; increased from Ksh 900 million to Ksh 1 billion in July 2007.
- Discretionary waiver limits: Commissioners can waive penalties/interest up to Ksh 500,000; above that requires Minister approval.

### Medium-term fiscal policy and MTEF
- Government medium-term fiscal objective: maintain domestic debt sustainability; stated in all budget documents.
- Three-year rolling MTEF guided by limit on domestic borrowing, projections for domestic revenues, and external resource availability; sets sectoral/ministerial ceilings for year t, t+1 and t+2.
- Parliament sessional paper set debt ceilings:
  - limit on size of external and government guaranteed debt at Ksh 500 billion (27.4 percent of 2006/07 GDP);
  - limit on government guaranteed debt at Ksh 80 billion (4.3 percent of 2006/07 GDP).
- Under PRGF arrangement government refrains from nonconcessional external borrowing.
- Fiscal Management Bill seeks to limit recurrent expenditure to recurrent revenues of the same year; bill not yet passed.
- Sensitivity analysis and fiscal risk: BSP discusses risks (oil prices, weather, investor confidence, delays in privatization and donor disbursements) but does not present quantified sensitivity analysis for lower growth, higher interest rates, or large contingent liabilities.
- Debt sustainability analysis: joint IMF-World Bank analysis relied on; draft DSA prepared and being finalized.

### Budget documentation, transparency, and timing
- Budget documents laid before Parliament in June 2007: BSP, Revenue Estimates Books, and two Sets of Estimates Books (recurrent and development) with three-year details by administrative and economic classifications.
- Estimates Books provide current year approved budget, current year revised estimates, proposed budget, and two outer years’ projections; do not include past year’s actuals or current year estimated outturn in detailed estimates.
- BSP presents summarized provisional actual data for previous year and multi-year forecasts.
- Publication practices:
  - QBRs available on MoF website but usually with a two-or-three month lag (QBR for Q2 2006/07 published in March; QBR Q3 2006/07 published in May 2007).
  - No legal requirement to publish fiscal data; advance release calendars not announced.
- Recommended improvements to budget documents include adding actuals for last year, including statements on tax expenditures, subsidies, outstanding debt/guarantees/contingent liabilities, summaries of SAGAs/EBFs/FAs operations, fuller fiscal risk discussion with quantification, and a “citizen’s guide”.

### Internal audit, procurement, and IFMIS rollout
- IAGD established under GFMA 2004; scope, coverage and duties not yet fully prescribed.
- IAGD staffing around 420; coverage extends to 70 percent of central government units.
- Audit committees set up in 95 percent of government organizations but committees often do not meet regularly; minutes inconsistently recorded.
- Public Procurement and Disposal Act (2005) implemented with Regulations in 2006; Public Procurement Administrative Review Board effective; PPOA establishment delayed but recently ratified by Parliament.
- IFMIS (Oracle Financials) rollout: 24 line ministries out of 43 votes started using IFMIS from July 2007 for headquarter operations (modules: general ledger, accounts payable, purchasing); Legacy Electronic Vote Book still used in parallel.

### Assurances of integrity — KENAO capacity and timeliness
- KENAO (CAG) independent; mandate covers central government, local authorities, SAGAs, special funds, state corporations, entities with government holdings > half equity.
- Audit staff: 915 (722 Auditors and Examiners; 193 Administrative and Support Staff) against an authorization of 1300.
- Numbers of financial statements to be audited:
  - Central Government entities: 237
  - Local Authorities: 175
  - State Corporations and SAGAs: 167
  - Donor funded project accounts and Special Fund Accounts: 116
- Timeliness: backlog for FY 2001/02–2003/04 eliminated; audit report for 2005/06 submitted to Minister of Finance in May 2007 (five month delay). Delays persist for local government audit reports and in legislative review by PAC and PIC.
- Audit fees: state-owned corporations and local governments pay audit fees as determined by CAG (Public Audit Act, Sections 19 and 28); fee arrangement flagged as potential conflict of interest.

### Contingent liabilities and defense expenditures
- Government guaranteed debt as of end-June 2005: Ksh 18 billion.
- Survey suggests outstanding guarantees end-June 2006: Ksh 43.5 billion (includes Ksh 18.4 billion for National Bank of Kenya and Ksh 6.5 billion for Kenya Telkom).
- May 2007: government took over guaranteed debt to NBK via issuance of a Ksh 20 billion special purpose bond (mostly related to parastatals that defaulted on loans).
- Planned takeover in Kenya Telkom restructuring: some Ksh 11 billion of contingent liabilities expected to be assumed.
- Central government accumulated pension claims: Ksh 271 billion (25 percent of 2004/05 GDP) per August 2005 actuarial study.
- Parastatals’ defined benefit pension scheme deficit: Ksh 28.6 billion.
- NSSF accumulated deficit end-June 2006: Ksh 16.7 billion.
- Overall contingent liabilities could be close to 20 percent of GDP (per staff commentary).
- Defense spending: included in budget but bulk shown as a one-line item; detailed defense expenditures only in aggregate.

### Performance auditing, MTEF and forward-looking reforms
- Government implemented MTEF and considers moving to program/performance-based budgeting.
- Need to evolve accounting and audit systems to provide monitoring and evaluation for output-focused allocations; move toward value-for-money and performance audits with specialized auditor training.
- Key PFM reform strategy components (funding and structure):
  - Funding agreed at US$114 million over five years; coordinator appointed.
  - Components cover macro-fiscal policy, budget preparation, external resources, debt management, taxes/customs, budget execution, accounting/reporting, payroll/pensions, procurement, parliamentary oversight, external audit, internal audit, electronic services delivery (IFMIS/IPPD), legal framework harmonization, and capacity building.

### Specific operational recommendations (selected)
- Consolidate Exchequer Account to a TSA: survey all government bank accounts, time-bound incorporation program, underpin with treasury general ledger and professional cash managers, deliver cash on just-in-time basis via EFT.
- Clarify and legislate concept of general government and formalize treatment for SAGAs, EBFs and commercial state corporations.
- Track and manage growth of SAGAs and EBFs; agree strict guidelines for creation of new SAGAs; strengthen reporting and coordination with MTEF and budget processes.
- Complete IFMIS rollout urgently; make AGD responsible for consolidated in-year budget execution reporting including general government wage bill and debt position.
- Broaden Exchequer Committee membership to include CBK and KRA.
- Quantify contingent liabilities; include yearly estimate in BSP and incorporate in borrowing decisions; consider pension reforms given sharply rising liabilities.
- Establish Privatization Commission and legal/institutional PPP framework; finalize Public Procurement Authority and implement all Public Procurement Act provisions.
- Improve transparency of tax expenditures and subsidies: include a statement of tax expenditures and subsidies as a Budget Annex.
- Enhance capacity to analyze public servants’ wealth declarations and consider making ministers’ and senior officials’ wealth declarations public.

### Selected key statistics and figures (preserve source values)
- Government deposits in the banking system: exceed Ksh 73 billion (around 3.5 percent of GDP) — March 2007 QBR.
- Aggregate extrabudgetary spending (FAs, SAGAs, EBFs, regional authorities): around Ksh 60 billion (over 10 percent of budgetary resources).
- QFAs subsidy example (2006/07): around Ksh 2.6 billion annual price subsidy.
- Tax exemptions estimated by KRA in 2005/06: about Ksh 15 billion (1.0 percent of GDP).
- KRA retention for refunds: increased from Ksh 900 million to Ksh 1 billion — July 2007.
- Commissioners’ waiver limit: Ksh 500,000.
- Pending bills: Kh 18 billion in 2002/03 → K Sh 12 billion in 2004/05; pending bills as percent of total expenditures: 9 percent → 4 percent.
- Reported increase in new arrears: Ksh 450 million in 2005/06 over 2004/05.
- Central government accumulated pension claims: Ksh 271 billion (25 percent of 2004/05 GDP) — August 2005 actuarial study.
- Parastatals’ defined benefit pension deficit: Ksh 28.6 billion.
- NSSF accumulated deficit end-June 2006: Ksh 16.7 billion.
- Debt ceilings in parliamentary sessional paper:
  - External and government guaranteed debt limit: Ksh 500 billion (27.4 percent of 2006/07 GDP).
  - Government guaranteed debt limit: Ksh 80 billion (4.3 percent of 2006/07 GDP).
- Variance between budgeted and actual outturns (Table 2, selected):
  - 2002-03 Aggr. Total: 1.51; Comp. Total: 14.87
  - 2003-04 Aggr. Total: 3.13; Comp. Total: 13.33
  - 2004-05 Aggr. Total: 16.34; Comp. Total: 0.38
  - 2005-06 Aggr. Total: 3.54; Comp. Total: 4.34
  - Recurrent variances (Aggr. / Comp.): 4.68 / 5.08; 1.35 / 14.21; 5.98 / 5.67; 6.95 / 7.01
  - Development variances (Aggr. / Comp.): 24.85 / 16.53; 20.24 / 12.73; 42.70 / 0.00; 30.73 / 13.89
- KENAO staffing: 915 (722 Auditors and Examiners; 193 Administrative and Support Staff) against authorization of 1300.
- Financial statements to audit: Central Government entities 237; Local Authorities 175; State Corporations and SAGAs 167; Donor-funded project accounts and Special Fund Accounts 116.
- IAGD staffing total component: around 420 (two internal auditors per district; up to eight or nine internal auditors in central ministries/departments).

*Source: IMF staff report excerpt — _cr0899.*

### Executive Summary

### Executive Summary

### Overview and scope
- Assessment of fiscal transparency practices in Kenya relative to the IMF Code of Good Practices on Fiscal Transparency based on: discussions with the authorities and other organizations; the authorities’ response to the IMF fiscal transparency questionnaire; and other sources of information, including the 2006 PEFA assessment.
- Reference to the IMF Manual on Fiscal Transparency for further explanation of terms and concepts.

### Progress since 2003
- Kenya has made significant progress since 2003 in improving fiscal transparency and accountability.
- Introduction of key legislation establishes some important building blocks for a sound fiscal management system.
- Some requirements of the fiscal transparency code are met, but further work is needed to conform with best international practices.

### A. Clarity of roles and responsibilities
- Fiscal roles of branches of government and among different levels of government are clearly defined in law and practice.
- Main weaknesses:
  - The blurred line between general government and the rest of the public sector makes it difficult to accurately establish the full extent of extra-budgetary spending or to clearly define general government.
  - Very limited coverage of the Government Financial Management Act (GFMA) has weakened the Ministry of Finance’s ability to ensure adherence to financial regulations.
- Specific institutional and sectoral observations:
  - Central and local government well defined in law and practice; many government-owned non-profit institutions are classified under the State Corporations Act (1986), creating lack of clarity between government and public sectors.
  - Non-profit institutions include semi-autonomous government agencies (SAGAs) such as universities and hospitals, and extrabudgetary funds (EBFs) such as the Kenya Roads Board and the Constituency Development Fund (CDF).
  - Over the years, a variety of fund accounts (FAs) have been set up to channel earmarked revenues for specific operations, many undertaken by SAGAs.
  - The Ministry of Finance recognizes the need for clarity, particularly in the context of MTEF reforms.
- Public corporations and state assets:
  - Of more than 40 financial corporations, 12 have government participation; 9 are 100 percent government-owned, the remaining 3 are under direct or indirect government control.
  - There are over 40 public nonfinancial enterprises across multiple sectors.
  - According to KNBS, some 654,200 workers were employed in the public sector in 2005, representing around 36 percent of formally registered wage employment.
  - Formal wage employment in the private and public sector totaled 1.8 million; total formal and informal employment was 8.3 million. Public employment is estimated at 7.9 percent of total employment. Compared to the total labor force (estimated at 11.4 million in 2004), the share of public employment in the total labor force is 5.7 percent.
  - The Department for Government Investment and Public Enterprises (DGIPE) is responsible for overall management and oversight of state assets and approves, on behalf of the MoF, major decisions on subsidies, investment, budgets, and privatization.
- Quasi-fiscal activities (QFAs):
  - QFAs exist in agricultural, transport and energy sectors.
  - Examples: free transport, subsidized services in electricity and water sectors, and special projects carried out on behalf of the government.
  - Public corporations are generally compensated for QFAs and reflect them in their budgets, but these are not visibly presented in the central government’s budget as subsidies nor clearly distinguished from grants.
  - The total cost of subsidies is not readily known; however, QFAs can be aggregated from central government budget books with considerable difficulty.
  - Specific QFA example: a three way arrangement in 2006/07 between KPLC, KENGEN and the government provides for an annual price subsidy of around Ksh 2.6 billion.
- Privatization and profit transfers:
  - Privatization guided by the Privatization Policy Paper of 1994 and now managed under the Privatization Act of 2005, which envisages a Privatization Commission and specifies privatization receipts are to be paid into the Consolidated Fund.
  - MoF has instructed Boards of public enterprises to define individual dividend policies; annual reports provide details on profit, retained earnings, other uses of profit, and dividend payments. The Central Government’s budget records aggregated payments of taxes, royalties and dividends from state corporations.
- Business environment:
  - Kenya ranks in the middle of the World Bank’s global ease of doing business indicators and among the highest in Sub-Saharan Africa.
  - Recent regulatory reforms include abolishing or simplifying 118 licenses in the past two years (out of an estimated total of 1,325 business licenses).
  - The Business Regulatory Reform Unit in the Ministry of Finance is working on reducing licenses and simplifying procedures.

### B. Open budget preparation, execution, and reporting
- Progress in developing the MTEF has contributed to an annual budget process that is generally open.
- Medium-term fiscal objectives are clearly stated in budget documents.
- Shortcomings:
  - No analysis of contingent liabilities, in particular those related to government pension schemes.
  - Accounting and reporting system is still evolving; data sharing and coordination is lacking.
  - Internal audit function is weak.
- Improvements noted in:
  - Revenue administration.
  - Cash-flow planning.
  - Procurement.

### C. Public availability of information
- Fiscal information on central government is fairly comprehensive and readily available to the public.
- Gaps:
  - There is no “citizen’s guide” to the budget.
  - Local government reports are untimely.
  - Local authorities have begun to hold public hearings on their budgets to enhance community involvement.

### D. Assurances of integrity
- Kenya National Audit Office (KENAO) is independent of the executive.
- Timeliness in submission of audit reports has improved, but backlogs for local governments persist.
- Reviews of audit reports by Parliament are still conducted with delays of 3-4 years, diluting their effectiveness.

### Main recommendations
- Put in place the building blocks for PFM reform by:
  - (i) revising the GFMA and financial regulations;
  - (ii) giving budget execution, accounting and internal audit a firmer legal and institutional basis;
  - (iii) consolidating the Exchequer Account to function as a Treasury Single Account;
  - (iv) clarifying the concept of general government and embodying it in the law;
  - (v) tracking and carefully managing the growth of autonomous agencies and funds.
- Enhance the effectiveness of the external audit function by reducing backlogs and ensuring that the follow-up of audit findings are timely and sustained.
- Quantify contingent liabilities and implement policies to mitigate their impact, and establish a legal and institutional framework for PPPs and develop appropriate capacities to assess risks in PPP arrangements.

*Executive Summary — _cr0899*

### Section 148.

### _cr0899 - Section 148.

### Banking sector oversight and licensing
- The 2007/08 Finance Bill proposes to eliminate 205 licenses and simplify another 371.
- The government maintains a direct oversight role in the banking sector through the Banking Act, which empowers the MoF to approve changes to bank charges and fees.
- The government has proposed changes in the governance structure of the central bank which would establish a Monetary Policy Committee to be chaired by the Governor of the CBK. The Board of Directors would have responsibilities over issues other than monetary policy.

### Central Bank of Kenya (CBK) financial relations with government
- Government deposits at the central bank are not remunerated.
- The CBK issues debt instruments on behalf of the government, and is compensated through a levy which the government pays on all debt issues.
- The levy is set at 1.5 percent of every debt issue, but with a cap of Ksh 3 billion from this fiscal year onward.
- Profit transfers from the CBK are regulated by the CBK Act:
  - Any excess profits of the CBK, after taking into account all operating expenses and necessary provisions, including those into the General Reserve Fund of the CBK, are transferred to the government Consolidated Fund, and are clearly identified as transfers from the CBK in government revenue estimates and accounts.
  - The government must compensate the CBK directly from the Consolidated Fund for any net losses that cannot be met through its General Reserves Fund, irrespective of whether there is any appropriation for this in the budget.
  - Unrealized profits or losses due to exchange rate movements are treated as book operations and are specifically excluded from the above arrangement.

### Fiscal roles of branches of government
- The fiscal roles of the executive, legislature and judiciary are clear and enshrined in the Constitution.
- Article 48 limits the financial powers of the Parliament to decreasing taxes and/or expenditures in the annual estimates laid before it by the Minister of Finance.
- The sole exception is the budget of the Parliament itself, which, under Article 45B (5), is prepared by the Parliamentary Services Commission and adopted by the National Assembly.
- Under Article 99, the Parliament may enact laws that establish special purpose funds or earmarked (retained) revenues.
- The Government Financial Management Act (GFMA) of 2004:
  - Assigns overall responsibility of managing the Consolidated Fund to the Minister of Finance, and specific powers to the Treasury.
  - Defines duties and responsibilities of Accounting Officers.
- The Public Audit Act (PAA) of 2003:
  - Defines oversight powers and responsibilities of the Controller and Auditor General (CAG).
  - Under this Act, the CAG both authorizes withdrawals from the Consolidated Fund and audits the government accounts.
  - The CAG submits the audit reports to Parliament through the Minister of Finance.
- The GFMA provides for specific penalties (financial and prison terms) for public officers convicted of major contraventions of its provisions.

### Fiscal relations among different levels of government and local authorities
- The Local Government Act of 1986, revised in 1998, defines expenditure and revenue responsibilities of the 175 Local Authorities in Kenya.
- Typical local expenditure responsibilities: provision of communal and urban planning services, control over trade and transport services, maintenance of rural and urban roads.
- The wealthier seven city councils have primary education and primary health services devolved to them.
- The Minister of Local Government may approve further devolution as revenue capacities improve.
- Local Authority Transfer Fund (LATF) Act of 1998:
  - Provides formula-based block grants, distributing five percent of previous year’s national income tax collection earmarked for Local Authorities.
  - Variable part of the formula is based primarily on total population, with urban population as a secondary element.
  - LATF confirms block grant amounts early in the budget process (around February).
  - Conditionalities for receiving grants include timely submission of budgets and annual revenue and expenditure reports, and proof of clearance of past debts.
  - Local Authorities are obliged to provide quarterly reports, but because these are not tied to disbursement, some reports are delayed beyond the 15 day submission limit or not sent at all.
- Local Authorities are allowed to borrow under the Local Government Act.

### Legal and administrative framework for budget management (PFM)
- The backbone of the legal framework for public finance management rests with the Constitution, the GFMA, and outdated Government Financial Regulations and Procedures.
- The legal framework has limited coverage of key areas of government financial management and does not reflect recent reforms such as the MTEF, new budgetary classifications, new approaches to internal control and internal audit, the introduction of Finance Officers, the roll-out of computerized systems, and production of quarterly budget reports.
- The Government Financial Regulation and Procedures are currently under review.
- Current PFM legal framework elements listed:
  - The Constitution of 1963 (Chapter VII).
  - The Government Financial Management Act of 2004 (revision underway).
  - External Loans and Credit Act of 1967; Internal Loans Act of 1978; Central Bank Act (1966, revised 1996) which caps government overdraft borrowing to 5 percent of the latest audited revenues; Guarantee (Loans) Act (1961).
  - The Public Audit Act of 2003.
  - The Public Procurement and Disposal of Public Assets Act of 2005.
  - The Kenya Revenue Authority (KRA) Act.
  - The Local Government Act of 1986 (revised 1998) and the State Corporations Act of 1986.
- In practice, day-to-day public finance management staff still refer to the Government Financial Regulations and Procedures of 1989 (revised in 1992) and to numerous treasury circulars.
- Computerized systems in use or rolling out:
  - Integrated Payroll and Personnel Database (IPPD) provides decentralized payroll and personnel management systems in most line ministries.
  - Integrated Financial Management Information System (IFMIS) is an Oracle-based software package currently being rolled out to all line ministries, initially for budgetary and accounting functions.
- The External Loans and Credit Act (Cap 422) amendment effectively increases from Ksh320 billion to Ksh 500 billion the maximum amount the Minister can borrow from external resources. The maximum under the (Cap 461) Guaranteed Loans Act was increased from Ksh 40 billion to Ksh 80 billion in July 1993.

### Reforms since 2003 (summary)
- Prior to 2003, Kenya met only 4 out of 16 PEM-AAP benchmarks.
- Key reforms and status (selected):
  - Government Financial Management Act (2004): revision underway.
  - Public Procurement Act (2003): Being implemented in 2007.
  - Public Audit Act (2003): Implemented.
  - Strengthened monthly expenditure returns process: On-going (significant improvements but still delays of up to two months).
  - Improvements in reporting on SAGAs and EBFs: On-going (reports more readily available – but information still incomplete and only occasionally published).
  - Publication of Quarterly Budget Review on MoF website: Implemented, but needs improvement (available between 2 and 4 months from end of quarter).
  - Computerization: legacy systems gradually being replaced by modern IFMIS – roll out to ministries/agencies, districts in second phase (On-going).
  - Stricter limitations on tax expenditures at KRA: Implemented, but needs monitoring.
  - Improved cash management: releases based on cash flow projections from ministries/agencies (On-going).
  - Public Service Commission Regulations 2005: Implemented.
  - Cleanup of payroll: IPPD introduced, implemented but needs further effort.
  - Improved fiscal framework: greater reliability of macro-economic forecasts, improved revenue projections, realistic ceilings for budget preparation, MTEF — Good progress made, on-going.
  - Wider consultation during budget preparation: On-going.

- Other legal reforms: Public Officer Ethics Act (2003); Anti-Corruption and Economic Crimes Act (2003); Privatization Act (2005); Statistics Act (2006).
- Administrative reforms: outlawing harambees, establishing a ministerial code of conduct, introducing performance contracts for all SAGAs and SOEs, reforming tax administration (KRA), simplifying licensing regimes for businesses.
- Remaining challenges: making public the wealth declarations of senior officials, operationalizing the Privatization Commission and the Public Procurement Oversight Authority.

### Role and capacity of the Ministry of Finance (MoF)
- The overall role of the MoF in fiscal management assigned in both the GFMA and the Constitution is comparatively weak.
- The PS for the Treasury is not assigned any significant public financial management (PFM) duties and responsibilities.
- As a result, the MoF has had difficulties in ensuring adherence to financial regulations and Treasury circulars and instructions.
- The MoF has developed a consensus and outreach approach to achieve compliance.
- Regulatory framework for public-private partnerships (PPPs) has yet to be developed; technical assistance by the World Bank is underway (consultants have recently submitted their report on the PPP Policy Framework).

### Coordination and management of budgetary and extrabudgetary activities
- There is significant extrabudgetary activity in Kenya, estimated at around 3 percent of GDP.
- Aggregate spending of fund accounts, SAGAs, EBFs, and regional development authorities is estimated at around Ksh 60 billion (over 10 percent of budgetary resources).
- SAGAs and EBFs are funded through a mix of transfers from the budget, earmarked taxes, and own revenues; governed by their own Boards with Treasury and parent ministry representation.
- Since 2004, SAGAs and EBFs must report financial operations to the MoF on a quarterly as well as annual basis, although compliance is not complete and data are not widely circulated.
- Budgets of SAGAs are submitted to the MoF before finalization of the government budget, but are subject to limited scrutiny and are not incorporated into the policy framework.
- External grants providing goods and services in kind, or payments made offshore, are generally reflected in the budget as Appropriations-in-Aid (AIAs) but are not adequately tracked in the accounts.
- Budget documents do not include annexes summarizing the activities of SAGAs and EBFs.
- Because SAGAs are grouped with state corporations of a commercial nature, it is not possible to identify their deposits in the CBK banking sector surveys or establish their overall sectoral impact in KNBS statistical publications.

### Extrabudgetary spending (Box 4 highlights)
- Authorities reported 101 SAGAs (list out of date; several new ones planned or in process).
- Reported 42 Fund Accounts (FAs).
- The Constituency Development Fund (CDF):
  - Established by Parliament in 2003.
  - Size of the CDF allocation is set in the CDF Act at 2.5 percent of ordinary revenues, which translates to just under US$0.7 million per constituency.
  - National oversight by a board including the PS Treasury; small committees select projects at constituency level; execution overseen by District Development Officer.
  - Implementation concerns: (a) lack of coordination between CDF, local planning and central government planning; (b) recurrent costs of CDF projects not fully taken into account at project selection; (c) limited oversight and few CDF projects properly audited.

### Table 1 — Summary of budgeting and reporting status of SAGAs and FAs (as reported)
- SAGAs: No. 101 — Included in Budget Documents: Yes — Regular and Detailed Reporting: Transfers: Most; Earmarked revenues: None; Expenditures: Annual; Transfers: Most; Earmarked revenues: Quarterly.
- FAs: No. 40 — Included in Budget Documents: Yes — Regular and Detailed Reporting: Transfers: Most; Earmarked revenues: None; Expenditures: Annual; Transfers: Most; Earmarked revenues: Annual.

*Source: _cr0899 - Section 148.*

### 15. The legislative basis for taxation is clear and comprehensive.

### 15. The legislative basis for taxation is clear and comprehensive.

### Clarity and coverage of tax legislation
- The tax legislation is described as clear and comprehensive and administrative guidelines are widely distributed.
- A tax appeal mechanism has been implemented; laws are regularly reviewed and updated during the annual budget process.
- Self-assessment has been a prominent feature of the tax system in Kenya since the 1990s, in particular for income tax (from 1993) and VAT (introduced in 1990).
- Tax administration has been performed by an autonomous agency, the Kenya Revenue Authority (KRA), for the last 12 years.
- KRA’s internal procedures ensure regular technical reviews of tax rulings and contentious issues, and the preparation of technical briefs which are widely circulated to staff and stakeholders.
- Tax laws expressly limit the scope for discretionary interpretation by tax officials.
- Each tax law has its own separate tax procedures code, including appeal, tribunal and recourse to the courts. A common and unified tax procedures code is currently under preparation.

### Exemptions, tax expenditures, and discretionary powers
- Each tax law clearly identifies exemptions that can be applied, and they are generally not subject to discretion.
- The tax expenditure is not always assessed as part of the exemption procedure.
- The KRA strictly applies the exemptions provided for in the various laws, and has challenged exemptions granted by the Minister of Finance that do not conform to these laws.
- Taxes are mostly levied on ad valorem basis with exception of some excise taxes that are based on specific rates; specific rates are not indexed for inflation but are reviewed on an annual basis and adjusted as the need arises.
- The power of the Minister of Finance and the Commissioners to waive penalties and interest, and to write-off of uncollectible tax debt, is discretionary:
  - Commissioners are empowered to grant a waiver of penalties and interest subject to a limit of Ksh 500,000 while any requests above that limit require the approval of the Minister.
  - The discretionary ability to waive penalties is noted as not recognized under the East African Community Customs Management Act (EACCMA), though the EACCMA contains a provision to grant the commissioner of customs the power to waive penalties and interest that relate to matters before the commencement of the customs union.
- Generalized guidelines for writing-off uncollectible taxes and criteria for guiding decisions on waivers using a weighted waiver template have been developed by the KRA in consultation with the MoF.
- The discretionary area of waivers and write-offs is identified as a potential subject of abuse at both the MoF and the KRA, given the punitive nature of the penalty rate imposed on unpaid taxes (set two percent per month).

### Extent and reporting of tax exemptions (tax expenditures)
- Tax exemptions are fairly extensive and tax expenditures are not reported.
- Various tax laws provide a wide range of exemptions aimed at promoting investment, assisting disadvantaged groups and social causes, and meeting diplomatic obligations.
- In the customs area, exemptions mainly target food (in particular sugar); domestic tax exemptions mainly target NGO and charity organizations.
- These exemptions were estimated by the KRA at about Ksh 15 billion (1.0 percent of GDP) in 2005/06.
- Conditions to qualify for exemptions or tax holidays are published and readily available to taxpayers. Each request for exemptions is individually reviewed by the KRA to determine whether conditions have been met; discretionary powers are generally limited.
- Scope for customs exemptions has been limited in recent years by the East African Community Customs Union.
- Commissioners make assessments of foregone tax for exemptions and tax holidays; only in the case of customs is this done on a systematic basis, and this information is not published.

### Tax administration, processes, and taxpayer rights
- Tax administration is clearly defined and well coordinated with overall fiscal management.
- No legal limitations prevent tax officials from demanding third party information and enforcing collection of arrears (e.g., banking transaction information is frequently requested and received).
- Tax administration is functionally based and generally in line with best practice, except the domestic tax department which is headed by two commissioners (large taxpayers and other taxpayers), creating two accountability centers for the same taxes.
- The unique taxpayer identification number (TIN) is used for all taxes and across all revenue departments.
- Income tax uses a well established PAYE system for payrolls and annual income tax returns based on self-assessment.
- Customs and excise duties are reviewed on a case-by-case basis.
- Time taken for KRA to process refunds is variable:
  - Efforts are made to process VAT refunds within 30 days, although refunds that require verification can take up to 60 days.
  - Until recently, each VAT refund required pre-audit before payment; in July 2007 KRA moved to a three-pronged approach (payment without audit, payment with post audit, or pre-audit) and is moving to a full risk-based approach for its large taxpayers.
- KRA retains part of the take to cover refunds; this was increased from Ksh 900 million to Ksh 1 billion in July 2007.
- VAT withholding arrangements are in place for goods and services delivered to government departments and state corporations, where VAT payable to the supplier is instead directly remitted to the KRA.
- Tax officials have very limited discretionary authority and there is an elaborate process for handling objections and appeals:
  - Objections/appeals are initially handled by well-established internal mechanisms independent of audit units.
  - Dissatisfied taxpayers can appeal to independent committees/tribunals (currently each tax has its own appeals committee or tribunal) or go to the courts.
  - Various tax laws set specific time limits for KRA to deal with objections/appeals.
  - A unified tax procedures code is under preparation.
  - KRA has a code of conduct, an internal affairs division handling staff integrity/corruption matters, and a corporate level disciplinary committee; these mechanisms are reported to be working well.
- Taxpayers’ legal rights and obligations are specified in the taxpayers charter, but the charter has no legal standing.
- Taxpayer education has been centralized under the Taxpayer Services Division since 2005 to ensure coherence and encourage compliance.
- Frequency of appeals is low in Kenya. The draft tax procedures code will provide a unified approach across all taxes and entrench some rights and obligations in law.

### Coordination with Ministry of Finance and funding of KRA
- KRA maintains close working relations with the MoF during budget preparation and execution to ensure effective monitoring of tax revenues.
- KRA is a member of the Macro Working Group and is closely involved in formulation of revenue projections in the MTEF.
- KRA has a performance contract with the MoF with monthly and tax-specific revenue targets.
- During the fiscal year KRA officials regularly meet the Economic Affairs Department (EAD) from the MoF to discuss revenue collection and remedial measures.
- KRA brings recommendations on tax legislation changes to the MoF for incorporation in the Finance Bill.
- KRA is currently funded through a 1.65% fee on tax collections. KRA also acts as a collecting agent for some earmarked and local taxes, for which it charges a two percent fee.

*Source: _cr0899 - 15. The legislative basis for taxation is clear and comprehensive.*

### 28. A statement on medium-term fiscal policy objectives is included in the budget

### 28. A statement on medium-term fiscal policy objectives is included in the budget

### Medium-term fiscal objectives and debt sustainability
- The government’s medium-term fiscal objective: to maintain domestic debt sustainability; this objective is clearly stated in all budget documents.
- The government has relied on the joint IMF - World Bank debt sustainability analysis; no long-term financing reports are produced.
- A draft debt sustainability analysis has been prepared and is currently being finalized.
- The three-year rolling MTEF is guided by:
  - a limit on domestic borrowing,
  - projections for domestic revenues,
  - external resource availability.
- In this MTEF framework:
  - expenditures are limited,
  - sectoral and ministerial ceilings for expenditures are set for year t, t+1 and t+2.

### Fiscal rules and borrowing limits
- Parliament, through a recent sessional paper, has set debt ceilings:
  - limit on the size of external and government guaranteed debt at Ksh 500 billion (27.4 percent of 2006/07 GDP),
  - limit on government guaranteed debt at Ksh 80 billion (4.3 percent of 2006/07 GDP).
- These ceilings are presently not binding.
- Under the PRGF arrangement the government is committed to refraining from nonconcessional external borrowing.
- The Fiscal Management Bill (currently with parliament) seeks to limit recurrent expenditure to recurrent revenues of the same year; the bill has not yet been passed.

### Estimates of new initiatives and budget documentation
- Estimates of new initiatives and ongoing costs:
  - Not presented in budget documents submitted to parliament.
  - Available in sector working group reports which are publicly available.
- Sector working group reports:
  - Distinguish between cost of ongoing and new policies,
  - Are used as inputs into the MTEF.
- Budget documents shortcomings:
  - Budget speech highlights main new initiatives but documents submitted to Parliament do not provide detailed quantification of newly introduced tax and expenditure measures.
  - Budget documents do not include performance indicators that link budgetary outlays to MTEF objectives.

### Sensitivity analysis and fiscal risks in budget documents
- The BSP includes a descriptive discussion on risks from:
  - oil prices, weather, investor confidence, delays in implementation of reforms, political uncertainties, delays in donor disbursements.
- The BSP does not present quantified sensitivity analysis for other important variables such as:
  - lower growth,
  - higher interest rates,
  - large contingent liabilities that may surface.
- Risks not consistently included or quantified:
  - risks from delays in privatization and contingency measures.
- The budget does not present a list of externally guaranteed debt; annual accounts audited by the CAG and reports by the MoF and CBK do.

### Clarity and legal framework for control of budget execution
- Basic accounting and internal control procedures:
  - Frequently modified,
  - Not legally enforceable.
- Financial administration governed by Government Financial Regulations and Procedures (GFRP) dated 1989; many regulations are no longer followed.
- Changes implemented by Treasury circulars which:
  - Have not been codified,
  - Rarely reference legal authority,
  - Are probably not legally enforceable.
- Box 6 summary of budget execution procedures:
  - Issue of budget authority: Presidential Warrant → Treasury Warrant → AIE recorded in expenditure ledgers.
  - Commitment control: Commitments registered when LPO raised; approval only if amount covered by an AIE. GFRP prescribes annual AIEs but Treasury issues quarterly AIEs.
  - Issue of cash limits: Treasury transfers cash from Exchequer Account to line ministry CBK accounts (Exchequer Releases) proposed by the Accountant General and authorized by the CAG.
  - Devolution: Accounting Officers may devolve AIEs to district offices backed by cash transfers to commercial bank accounts.
  - Payment: Invoice checked against LPO; goods verified; payment recorded in vote book and cash book.
  - Bank reconciliation: Bank statement reconciled with cash book entries.
  - Computerization: IFMIS being rolled out; computerized systems running in parallel with no clarity on basis for internal control during interim phase.

### Accounting application, suspense accounts, and pending balances
- Application of accounting methodology varies across ministries due to weak capacities and unclear legal framework.
- Reconciliation and clearance of suspense accounts should be completed by the end of the year.
- Auditor General’s findings indicate substantial year-end balances in suspense accounts pertaining to outstanding imprest balances with ministries and departments and district cash fund accounts.
- Specific irregularities noted by the Auditor General:
  - poor and inadequately maintained accounting records,
  - material errors in bookkeeping (double-posting, omission of expenditure),
  - discrepancies between ledger balances and financial statement figures,
  - lack of analysis of suspense balances and unidentified balances not properly classified.
- Example figure: imprest-related suspense account balance Ksh. 419,770,823 at the end of 2004/05.

### Consolidated Fund, Treasury Single Account (TSA), and public fund accounts
- Legal framework for a Consolidated Fund is in place, but TSA principles are not being followed.
- Significant cash balances held outside the Exchequer Account:
  - accounts managed by line ministries,
  - some 40 public fund accounts,
  - a number of donor-funded project accounts.
- Account locations:
  - Some accounts held in the CBK,
  - District level units and many project/public fund accounts held in commercial banks.
- Exchequer Account at CBK not functioning as a unitary account:
  - Exchequer releases held in a Treasury Funding Account with the CBK;
  - cash transferred to transitory zero-balanced sub-accounts of individual line ministries daily;
  - end-of-day balances returned to Treasury Funding Account.
- Treasury Funding Account and transitory zero-balanced accounts are not considered part of the TSA.
- Local governments: General Rate Fund balances held in commercial bank accounts; local governments hold a number of accounts outside the General Rate Fund.

### Pending bills and arrears
- Large stock of pending bills inherited in 2003 mostly audited and partly cleared.
- Reported reduction: pending bills reduced from Kh 18 billion in 2002/03 to K Sh 12 billion in 2004/05.
- As a percentage of total expenditures: decline from 9 percent to 4 percent.
- New arrears continue to accumulate:
  - QBR reports an increase of Ksh 450 million in 2005/06 over 2004/05.
- Pending bills may be understated because the main reporting source is unpaid payment vouchers.
- Pending bills on development spending largely under control; unpaid bills accumulating under recurrent expenditure (particularly utilities).
- Weak internal audit and lack of adequate commitment control limit Treasury’s ability to establish extent of unreported pending bills.

### Cash flow planning and Exchequer Committee operations
- Cash flow planning implemented at beginning of FY 2005/06 and has stabilized and is working well.
- Process:
  - Ministries submit annual cash plans and rolling three-monthly cash flow plans every month.
  - Weekly exchequer releases based on rolling cash flow plans approved by the Exchequer Committee.
- Exchequer Committee meets every two weeks and receives information from:
  - Cash Management Unit (AGD),
  - AGD (cash and bank balances),
  - EAD (weekly revenue collections reconciled with KRA),
  - EAD and BSD (budget outturn reports).
- Exchequer Committee makes recommendations on exchequer releases; CBK not represented on the Committee.
- Notes on representation:
  - CBK and KRA are not represented on the Exchequer Committee; CBK is in daily contact with AGD.
- Financial note: even though law allowed CBK overdraft up to Ksh 13 billion by end-June 2006, the overdraft was only Ksh 41 million.

### Public debt management and reporting
- External borrowings governed by External Loans and Credit Act (1967); guarantees under Guarantees (Loans) Act.
- MoF responsible for contracting external debt and guarantees, subject to parliamentary approval.
- Internal Loans Act governs contracting of domestic debt.
- Debt Management Department (DMD) functions as back office for settlement and recording of public debt and records government guarantees.
- Front office functions: ERD, CBK, and DGIPE.
  - ERD services external concessional financing (loans and grants).
  - Management of domestic debt outsourced to the CBK.
  - DGIPE manages on-lending of donor funds to public enterprises.
- Formal debt management strategy has not yet been adopted, though MoF ensures debt level and growth are sustainable.
- Publication and reporting:
  - Gross government domestic debt published in CBK weekly report.
  - CBK publishes total gross public external debt and guaranteed external public debt in Monthly Economic Review.
  - MoF reports debt data in QBR, including government guarantees and stock of government debt by instrument and holder.
  - Annual reporting by DMD on public debt management reintroduced; report includes currency and maturity structure, stock of debt, and guarantees.
  - Both CBK and MoF reports available on respective websites.
- Limitations:
  - Domestic debt reported only for central government; does not include domestic debt from state-owned enterprises and local governments.
  - Domestic debt arrears are not captured.
- CS-DRMS used for recording and reporting domestic and foreign debt transactions, and on-lending.

### Domestic borrowing targets and market operations
- Annual targets on domestic borrowing set by MoF through consultative process with CBK.
- At start of fiscal year, CBK advised by MoF in writing about government cash flow forecasts; CBK draws up annual program for debt issuance and clears it with MoF.
- Main instruments of domestic debt:
  - 91 and 182-day T-Bills,
  - Treasury Bonds in maturities of 1 to 15 years.
- Change in debt maturity composition:
  - Short-term to long-term T-Bill mix changed from 70:30 (in 2001) to 30:70 (in 2006).
- Issuance of debt for Treasury operations is managed separately from issuance for monetary policy; CBK bears interest costs for monetary policy issuance.
- T-Bill auctions administered by an auction committee chaired by the Governor of CBK with MoF representation.
- CBK convenes a market leaders forum every month to gauge market perception and requirements.

### Internal audit legal framework
- Internal Auditor General’s Department (IAGD) established under GFMA 2004.
- Scope, coverage, duties, and responsibilities of Internal Auditor General not yet prescribed.
- Internal auditors in ministries, departments, and districts continue to operate under outdated Treasury circulars.
- PS MoF issued:
  - a circular in October 2005 revising the mandate and guidelines of ministerial audit committees,
  - an internal audit manual in November 2005 intended as a handbook for internal auditors.
- Current legal basis for internal audit remains weak and fragmented despite manual replicating international best practices.

*Source: _cr0899 - 28. A statement on medium-term fiscal policy objectives is included in the budget*

### 40. Internal audit procedures are evolving and are not yet effective in practice.

### 40. Internal audit procedures are evolving and are not yet effective in practice.

### Evolution and institutional consolidation of internal audit
- Before the creation of the IAGD, internal audit was carried out within ministries by their own internal audit wings.
- The IAGD is consolidating oversight by merging internal audit units of individual ministries into a unified internal audit service centralized under the IAGD in the MoF.
- The IAGD has recently also been entrusted with the oversight of internal audit in local governments from the 1st of July 2007.
- Total staff component of the department is around 420—each district has two internal auditors and there are up to eight or nine internal auditors in the central government ministries and departments.
- Internal auditors in some government units continue to conduct pre-audit of each transaction, while most organizations are moving ahead with modern audit techniques such as risk-based audit.
- A study of the pilot implementation of risk-based audit in three ministries identified significant deficiencies in the planning and implementation of the reform.
- Internal audit lacks a strategic corporate plan for internal audit reform to ensure reforms are carried out sequentially and in tandem with organizational absorption capacity.

### Coverage, follow-up, and ownership
- The coverage of internal audit is not yet comprehensive as procedures are still evolving and the department is being consolidated.
- Presently the audit of the IAGD extends to 70 percent of the central government units.
- Audit committees have been set up in 95 per cent of the government organizations to monitor the functioning of internal audit and to follow up on their findings and recommendations.
- Committees are not meeting on a regular basis, minutes of meetings are not consistently recorded, and there is little ownership of the process within line ministries.
- Mid-year compliance audit reports have alerted ministry management to slow progress of expenditures and collection of AIAs; special compliance audit reports have revealed deficiencies in management of government assets such as stores and vehicles.
- Findings and reports are not made available to the public, but there are moves to acquire software to enable the IAGD to warehouse reports in a single data base and make it accessible to the public through a website.

### Public procurement framework and implementation issues
- The Public Procurement and Disposal Act was enacted in 2005 followed by the Public Procurement and Disposal Regulations in 2006; they apply to the general government sector and prescribe open tendering as the preferred procurement method, rules for outsourcing and disposal, and procedures for constituting implementation committees.
- Penalties against interference in the procurement process are prescribed in the law; the law allows the Director General of the Public Procurement Oversight Authority (PPOA) to inspect all procurement proceedings.
- The Public Procurement Administrative Review Board has been very successful; the review process is time bound to be completed within 104 days of lodging a complaint, with appeal to the High Court to be disposed within 30 days of lodging.
- Assessment via questionnaires indicates the level of implementation is satisfactory in ministries and state corporations; local authorities still face challenges.
- The Public Procurement Act is being implemented by the Public Procurement Department (PPD) within the MoF from 1st of January 2007 while formal establishment of the Public Procurement Oversight Authority awaited confirmation of the interim Director-General and Board appointments (note: “This has recently been ratified by Parliament.”).
- The Public Procurement Appeals Tribunal has been established; there have been 42 cases of appeals under the law since January 2007.
- Certain provisions are not fully implemented due to lack of capacity: annual procurement plans are prepared but not closely monitored; procuring entities are required to file returns on procurements exceeding Ksh 5 million but the PPD is not yet able to ensure data completeness; data on non-competitive procurement methods is not fully available.
- Capacity for monitoring and evaluating the law’s implementation is limited and there are long lags in web posting of procurement contracts.
- The PPOA is negotiating MOUs with the CAG, IAG, and KACC to audit implementation of procurement systems.

### Civil service employment procedures
- Public service employment and termination procedures are overseen by the Public Service Commission (established under the Constitution of 1963 and provided for in the Service Commissions Act of 1963).
- The Public Service Commission Regulations of 2005 define clear and detailed recruitment procedures and tightened qualifications required for each position.
- Under new rules: all positions must be advertised (even where internal promotions are considered); interviews and selection are undertaken by a recruitment panel including a professional in the relevant profession.
- Recruitment for upper grades is carried out by the Public Service Commission; recruitment of lower grades is usually delegated to Accounting Officers.
- New rules include an appeal mechanism and an obligation to ensure regional balance in recruitment.
- Remunerations are set by pay scales; discretion is limited to some types of allowances (the DPM is in the process of rationalizing allowances—about 77 are on the books—but progress has been slow).
- Where discretionary allowances are to be offered, the ministry must make a special case to the Ministry of State for Public Service and Permanent Remuneration Salary Review Board; similar arrangements apply to Teachers, Judicial, and Defense Commissions.

### Tax administration internal controls and independence
- Tax administration at KRA has effective internal monitoring and control mechanisms, with most departments routinely using computerized tax administration systems.
- Major investments to integrate tax administration systems are expected over the next few years; these systems will significantly improve capacity to perform internal monitor and control.
- There are internal and external audit departments ensuring financial accountability of tax collection staff and systems; the internal audit department reports to the Board of Directors through a Board Audit Subcommittee.
- KRA has established an internal affairs department that handles matters of integrity and corruption among staff.
- Advance tax liability rulings can be requested on particular transactions but are not legally binding; authorities have not been keen to introduce legislative amendments for binding advance rulings.
- The Kenya Revenue Authority is given legal protection from political interference; KRA was established by an Act of Parliament as an autonomous agency under the MoF, subject to the State Corporations Act, and administered by a Board of Directors with specified composition and voting arrangements.

### In-year accounting, reporting, and IFMIS rollout
- The Electronic Vote Book system (Legacy) captures stages of in-year budget execution from monthly exchequer releases to checks to suppliers.
- Ministries are still using the Legacy system for accounting and budget control while a more comprehensive IFMIS system is being rolled out.
- Kenya has chosen the Oracle Financials system for their IFMIS, under a project started in 2002.
- Currently IFMIS has been rolled out to 24 line ministries (out of the 43 votes) which have started using the new system from July 2007 for their headquarter-based operations; operational modules include the general ledger, accounts payable, and purchasing modules.
- In-year reports from Legacy are communicated electronically or in hard copy to the MoF as part of monthly expenditure returns.
- Within the MoF: BSD prepares aggregate in-year budget execution reports for expenditure; EAD adds revenue reports from KRA, ERD provides external flows reports, and DMD provides debt reports to complete monthly fiscal tables; EAD prepares quarterly tables for QBR.
- The aggregate cash position is prepared weekly by the AGD compiled from: (i) returns on exchequer releases; (ii) expenditure returns received; (iii) revenue returns received; and (iv) returns on donor funded projects received from the ERD.
- There is a need to improve and coordinate data processing and sharing within the MoF to improve fiscal reporting and broaden it to general government.
- Budgetary entities submit monthly expenditure returns separately to AGD, BSD and EAD; follow up for timely submission is fragmented among these three departments.
- According to Treasury circulars, expenditure returns are to be submitted by the 15th of the following month; two to three weeks delay is not unusual and there are some cases of delays of up to two months.

### Gaps in fiscal reporting and consolidation
- Reporting consolidated general government fiscal data remains elusive; most reporting and analysis focus on Central Government data with limited and less frequent reporting on sub-national governments, SAGAs, EBFs and FAs.
- Data collection arrangements exist but remain fragmented and untapped for general government reporting purposes.
- A few local governments fail to comply with quarterly reporting obligations prescribed under the Local Government Act, making consolidated quarterly reports incomplete (there is limited follow up of submission of quarterly reports, which is not tied to transfer of funds under LATF, although the Act provides for imposition of fines for late submission).
- In 2004, DGIPE established an annual and quarterly data collection system for State Corporations (including the bulk of the SAGAs and EBFs), but compliance with reporting has been declining as DGIPE has limited capacity and handles data manually without a computerized recording system.
- Consolidation is challenged by the absence of an overarching legal framework for a uniform budget and accounting classification system across government.
- The basis of accounting differs: local governments and state corporations use accrual, Central Government uses cash.
- There has been no legal requirement so far for submission of consolidated general government accounts.
- There is no standard format for donors to submit disbursement data; efforts are being made to reach agreement with donors on this and other accounting matters.

### Legislative reporting, audits, and timeliness
- Under the GFMA the Treasury prepares two reports on budget execution: the first covering the first half of the financial year and the second covering the entire fiscal year; the Minister of Finance is required to lay these reports before Parliament (the Act does not prescribe a time frame for submission).
- The mid-year report is the basis for the supplementary budget.
- The legal requirement is submission of audited final accounts to Parliament within six months of the end of the fiscal year.
- There was a backlog of annual audit reports for FY 2001/02 to 2003/04 which has now been eliminated.
- The audit report for 2005/06 was submitted to the Minister of Finance in May 2007, a delay of five months.
- Submissions of audit reports of state corporations and donor-funded projects are current; long delays persist in submission of audit reports of local government authorities.

### Budgeting for results and public availability of fiscal information
- Objectives and expected results from government activities are defined in broad terms in Sector Reports, but not formalized in the budget; performance indicators are not yet integrated into the budgetary process (authorities intend to move toward program/performance budgeting over the medium term).
- During budget formulation and finalization, published documents include the BOPA, Sector Reports, the BSP, and the budget speech; the government does not publish a simplified layman’s guide to the budget.
- Local authorities have started organizing public budget hearings to improve community involvement.
- Reporting on revenue, expenditure, and financing is on a gross and net basis and classified by economic and administrative categories, but not by function; the economic classification is compatible with GFS 2001.
- EAD publishes fiscal information in QBRs covering economic and fiscal developments and outlays on core poverty programs; comprehensive budget outturn information for SAGAs, State Corporations and Local Governments is not included.
- QBRs are published on the MoF website but usually with a two-or-three month time lag: the QBR for the second quarter 2006/07 was published in March and the QBR for the third quarter 2006/07 was published in May 2007.

### Coverage and quality of budget documents
- The following budget documents were laid before Parliament in June 2007: (i) the BSP; (ii) the Revenue Estimates Books; and (iii) the two sets of Estimates Books (recurrent and development) providing details for each vote for the next three years by administrative and economic classifications.
- The BSP sets out key macro-economic indicators, macro-fiscal framework, key policy initiatives and government priorities, three-year aggregate forecasts of resources and spending, and highlights of sector initiatives with summary tables.
- The Estimates Books provide data only, although Ministries provide explanations during budget hearings.
- The BSP, the Budget Speech, and other fiscal documents are published on the MoF website; the Estimates Books can be bought from the government printer.

*Source: _cr0899 - 40. Internal audit procedures are evolving and are not yet effective in practice.*

### 54. Defense expenditures are included in the budget, but only in aggregate.

### 54. Defense expenditures are included in the budget, but only in aggregate

### Defense budget presentation and scope
- The Defense and National Security Intelligence Service budget is included in the annual estimates, but the bulk of the spending is shown as a one-line item.
- State-owned defense industries are not included in the budget or reported under the State Corporations Act.
- State-owned defense industries are subject to external audit by the Controller and Auditor General, as is the Ministry of State for Defense.
- Receipts collected by the Ministry of State for Defense are shown as AIAs, with the bulk relating to peace-keeping operations.

### Past and forecast fiscal data in budget documents
- The detailed budget provides data on the budget year and two years beyond the budget year; actual data are included only in aggregate presentations.
- The Estimates Books provide:
  - current year approved budget,
  - current year revised estimates,
  - proposed budget,
  - two outer years’ projections.
- The Estimates Books do not include past year’s actuals or current year’s estimated outturn.
- The accompanying BSP presents summarized provisional actual data for the previous year, initial and revised budget for the current year and likely outturn, proposed budget and projections for two outer years along key economic items (wages, interest payments, pensions, defense, development, financing).
- The BSP also presents summary analysis tables by sector and vote, and a table identifying poverty-reducing expenditures.

### Budget treatment of off-budget fiscal activity and contingent liabilities
- Government guaranteed debt is reported; other contingent liabilities are not well reported nor quantified in budget documents.
- Total publicly guaranteed debt as of end-June 2005 was Ksh 18 billion.
- A survey suggests outstanding debt at end-June 2006 amounted to Ksh 43.5 billion (including Ksh 18.4 billion for National Bank of Kenya and Ksh 6.5 billion for Kenya Telkom).
- In May 2007, the government took over guaranteed debt to the NBK through issuance of a Ksh 20 billion special purpose bond, mostly related to parastatals that defaulted on loans to the NBK.
- The government is in the process of restructuring Kenya Telkom and will, in the process, take over some Ksh 11 billion of its contingent liabilities, apart from other restructuring costs.
- Central government accumulated pension claims: Ksh 271 billion (25 percent of 2004/05 GDP) per an August 2005 actuarial study.
- Parastatals’ defined benefit pension schemes had an accumulated deficit of Ksh 28.6 billion.
- National Social Security Fund (NSSF) accumulated deficit at end-June 2006: Ksh 16.7 billion.
- Other contingent liabilities in state-owned corporations are difficult to assess due to manual monitoring of financial positions.
- DGIPE is conducting a study on contingent liabilities in 24 state-owned enterprises and in the NSSF.
- Overall, contingent liabilities could be close to 20 percent of GDP.
- Once PPP policy is implemented, the government will face the challenge of assessing and reporting contingent liabilities arising from PPPs.

### Tax expenditures and reporting
- Statements on tax expenditures are not included in the budget documents.
- There is no comprehensive assessment of tax expenditures; KRA indicates amounts are significant.
- Commissioners make assessments of foregone taxes continuously, but these are not consolidated, not reported, and not included in budget documents.

### Publication of government debt and financial assets
- Information on gross government debt is published regularly by the CBK and the MoF in weekly, monthly and quarterly reports.
- Information on government financial assets is published by the MoF as part of the annual Appropriation Accounts.
- Published information includes central government cash balances with the CBK, cash balances in special fund accounts, government investment in local companies, participation in quasi-government organizations and other statutory organizations, and on-lending.
- Similar information is required to be published by local governments in their annual accounts.

### Commitment to timely publication of fiscal data
- It is not currently a legal requirement to publish fiscal data.
- The MoF publishes key budget documents and QBRs on its website.
- Advance release calendars are not announced.
- Kenya meets or exceeds the GDDS recommendations for serviceability and timeliness of all disseminated data (cited as Kenya Data ROSC – IMF, October 2005).

### Assurances of integrity — accuracy and reconciliation of budget data
- Revenue estimate accuracy has improved significantly in the last two years.
- Expenditure reliability:
  - Reasonable accuracy in aggregate recurrent spending.
  - Significant variance in aggregate development spending.
  - Variance between budgeted and actual recurrent spending at sector and vote level is slightly more significant.
- Variance between budgeted and actual outturns is published with a time lag and shown in the 4th Quarter Budget Review; outturn data are based on expenditure returns that include unreconciled accountable advances to districts and may differ from final accounts submitted to the CAG.
- Final accounts are not available until the CAG completes the audit and reports are printed and tabled in Parliament, which has been more than one year after year end in recent years.
- Provisional data from final accounts submitted to the CAG are used internally in the MoF and included at aggregate level in documents such as the BOPA (generally issued mid-year).

Key statistics from Table 2: Variance Between Budgeted and Actual Outturns—2002–06 (In percent)
- 2002-03 Aggr. Total: 1.51
- 2002-03 Comp. Total: 14.87
- 2003-04 Aggr. Total: 3.13
- 2003-04 Comp. Total: 13.33
- 2004-05 Aggr. Total: 16.34
- 2004-05 Comp. Total: 0.38
- 2005-06 Aggr. Total: 3.54
- 2005-06 Comp. Total: 4.34
- Recurrent variances by year (Aggr. / Comp.): 4.68 / 5.08; 1.35 / 14.21; 5.98 / 5.67; 6.95 / 7.01
- Development variances by year (Aggr. / Comp.): 24.85 / 16.53; 20.24 / 12.73; 42.70 / 0.00; 30.73 / 13.89
- Note: Composite sector variance calculated using prescribed PEFA methodology for Indicator 2.
- Note: These calculations are based on original budget versus actuals and differ from the 2006 PEFA report which used revised budget data instead of original budget.

### Assurances of integrity — accounting policy and reconciliation
- Statements on accounting policy are not included in budget and final accounts documents.
- GFMA 2004 authorizes the Treasury “to establish accounting procedures and system for the government to properly account for government money and property” but does not prescribe authority to set public sector accounting standards.
- Central government accounts are maintained on a cash basis; state corporations and local authorities accounts are maintained on an accrual basis.
- Procedures for recording transactions on a cash basis are prescribed in the Government Financial Rules and Procedures of 1989; these procedures are not uniformly applied.
- Reconciliation between budget appropriations and accounts is automated in IFMIS (and manual in Legacy system); majority of ministries submit reconciled accounts within a month, but delays occur due to late receipt of bank statements.
- Reconciliations are not shown explicitly in accounts.
- The AGD reconciles Exchequer Account transactions reported by the CBK with exchequer releases and actual revenue inflows recorded in accounts.
- Reconciliation and clearance of suspense accounts should be completed by the end of the year, but CAG findings indicate substantial year-end suspense balances pertaining to outstanding imprest balances (Ksh. 419,770,823 at end of 2004/05).
- Discrepancies between Appropriation Accounts and Statement of Assets and Liabilities submitted by Vote Holders have been documented.
- Debt and deficit data are reconciled in the DMD.

### Independent oversight — KENAO mandate, capacity, and timeliness
- KENAO is independent of the executive and the legislature; authority derives from the Constitution and the Public Audit Act of 2003 (PAA).
- The CAG is appointed by the President and may be removed only under specific circumstances and only by the President on recommendation of a tribunal.
- PAA established the Kenya National Audit Commission (KENAC) which approves KENAO’s budget and determines remuneration and other terms for staff; KENAO functions under delegated authority of the Public Service Commission for human resources management.
- The PAA mandates that the KNAO has the staff the CAG believes necessary to carry out audit functions (Public Audit Act, Section 35).
- KENAO’s statutory mandate covers central government ministries and departments, local authorities, semi autonomous government agencies, special funds, extra budgetary funds and state corporations, and entities where government holdings exceed half the total equity.
- The PAA provides wide-ranging powers to KENAO to access documents and property, demand explanations, and conduct performance audits; few performance audits have been undertaken.
- Timeliness:
  - CAG required to submit audit reports to the Minister of Finance; Minister required to table reports in the National Assembly not later than seven days after Assembly meets.
  - Law permits direct submission of audit reports to the National Assembly if the Minister delays tabling.
  - PAA requires CAG to submit audit report within six months after end of financial year (National Assembly may extend due date).
  - Backlog of annual audit report submissions for FY 2001/02 to 2003/04 has been eliminated.
  - Audit report for 2005-06 was submitted to the Minister of Finance in May 2007 — a delay of five months.
  - Submissions of audit reports of state corporations and donor funded projects are current; audit reports for local government authorities face inordinate delays due to limited CAG resources and poor or non-existent accounting statements.
  - Delays persist in examination of government accounts by PAC and PIC.
  - Proposals exist to amend Standing Orders to allow discussion of more than one annual audit report at once and to enable committees to discuss the most recent report before the backlog.
- Audit fees:
  - PAA requires state-owned corporations and local governments to pay audit fees as determined by the CAG (Public Audit Act, Sections 19 and 28).
  - This fee arrangement may create a conflict of interest; international best practice suggests stating fee components and providing an arbitration process if clients disagree with proposed fees.
- Audit capacity and workload:
  - Numbers of Financial Statements to be audited:
    - Central Government entities: 237
    - Local Authorities: 175
    - State Corporations and SAGAs: 167
    - Donor funded project accounts and Special Fund Accounts: 116
  - Audit work to be completed within three months to meet deadline for Annual Audit Report submission by 31st December.
  - KENAO staff: 915 (722 Auditors and Examiners and 193 Administrative and Support Staff) against an authorization of 1300.
  - Capacity weaknesses hamper KENAO, particularly in computerized and performance audit areas.
- Legislative scrutiny:
  - PAC and PIC review audit reports; all audit reports are publicly available.
  - Delays in submission and legislative review reduce effectiveness of oversight.
- Public availability and transparency initiatives:
  - KENAO has created a website (www.kenao.go.ke) for posting audit reports; site is under development and content is presently limited.
  - Parliament has passed a resolution to open PAC proceedings to the public.

### External scrutiny of macroeconomic assumptions
- During the budget process, public hearings on key sectors include discussion of the macroeconomic framework.
- Since the 2006/07 budget, outside experts have been invited to chair or serve as discussants on the macroeconomic framework hearing.
- The KIPPRA-Treasury Macro Model is used as an input into the macroeconomic framework; its formulation and estimation are described in KIPPRA publications and the underlying database for simulations is available upon request.
- The BOPA and BSP are presented to development partners, though delays in formulation may limit meaningful feedback.

*Source: _cr0899 - 54. Defense expenditures are included in the budget, but only in aggregate.*

### 71. The national statistics office is given legislative assurance of autonomy.

### 71. The national statistics office is given legislative assurance of autonomy.

### Background: Statistics Act and KNBS
- Under the Statistics Act (2006) the Central Bureau of Statistics was replaced in July 2007 by the Kenya National Bureau of Statistics (KNBS), established as a SAGA under the Ministry of Planning and National Development.
- The new KNBS is overseen by a board of directors.
- In collecting, compiling and publishing economic and financial data, the KNBS is guided by explicit provisions under the Act for public access and dissemination of information.

### IMF Staff commentary: overall assessment of fiscal transparency
- Kenya meets some of the requirements of the fiscal transparency code.
- Significant progress since 2003 in improving fiscal transparency and accountability through introduction of key legislation, including:
  - Public Officer Ethics Act
  - Anti-Corruption and Economics Crimes Act (establishing KACC)
  - Public Audit Act
  - Government Financial Management Act
  - Public Procurement and Disposal Act
  - Privatization Act
  - Statistics Act
- These initiatives help comply with some requirements of the fiscal transparency code, but more is needed to establish a sound PFM system and conform with best international practices.

### Clarity of roles and responsibilities
- Fiscal roles of the executive, legislature, and judiciary are clear and enshrined in the Constitution; relations between Central Government and local government are well defined in law and practice.
- Lack of clarity arises because most government-owned NPIs (including SAGAs and EBFs) have traditionally been classified together with state-owned enterprises under the State Corporations Act, complicating:
  - Accurate establishment of the full extent of extra-budgetary spending.
  - Clear definition of general government consistent with GFS principles.
- Steady growth in the number of SAGAs and EBFs is a concern; there is a pressing need to clarify their status.
- Relationships between central government and public nonfinancial and financial corporations are generally clearly defined.
- Quasi fiscal activities (QFAs): public corporations are generally compensated and these are mostly reflected in their budgets, but the total value of subsidies is difficult to determine from central Government budget information, raising transparency and parliamentary accountability concerns.
- The legal framework for management of public funds is neither clear nor comprehensive:
  - Government Financial Management Act (GFMA) 2004 is the only general PFM act but has very limited coverage and does not reflect recent reforms (e.g., MTEF, new budget classification, new approaches to internal and external audits, introduction of finance officers).
  - PS Treasury is not assigned significant PFM duties and responsibilities.
  - MoF has had difficulties ensuring adherence to financial regulations and other instructions.
  - FAD PFM mission of August 2006 noted the legal framework requires significant revision to align with international best practice; authorities adopted a PFM reform strategy in the second half of 2006.
  - Drafting of revised GFMA (Fiscal Management Bill) has included broad consultations but not Parliament; a legislative proposal by a member of Parliament is awaiting final reading in Parliament.
  - Urgent need to initiate dialogue between government and Parliamentary Committees on the legislative framework for PFM.
- Legal and administrative framework for tax policy and administration is generally sound:
  - Legislative basis for taxation is clear and comprehensive; tax administration is clearly defined and coordinated with overall fiscal policy.
  - Domestic tax department is headed by two commissioners (large and other taxpayers), creating two accountability centers for the same taxes; consideration should be given to a structure based on best practices over the medium term.
  - Each tax law has its own tax procedures code and there is a need to unify them.
  - Wide range of tax exemptions under the law and tax expenditures are not quantified nor reported.
  - Tax officials have limited discretionary authority over exemptions; tax commissioners have overall discretion in granting waivers on penalties and interest.
  - Taxpayers’ legal rights are well defined with recourse to administrative reviews and tribunals.
- Public Officer Ethics Act establishes framework for ethical conduct, including requirement for senior public officials to prepare a declaration of assets; Anti-Corruption and Economic Crimes Act and KACC verify wealth declarations of ministers and publish a quarterly report on its activities on its website.

### Open budget preparation, execution and reporting
- Annual budget process is generally open and budget documentation is partly consistent with international standards.
- Annual budget cycle improved under MTEF reforms; well defined and structured, communicated to budgetary entities, and generally adhered to despite delays in preparation.
- Coordination between planning and budgeting functions (split between two ministries) seems to be working well.
- Cycle does not allow Parliament to adopt the budget before the start of the fiscal year.
- Budgetary and accounting classifications include administrative and economic classifications, but do not include functional or program-based classifications.
- Budget forecasts and underlying macroeconomic assumptions are clearly presented within a medium-term framework and have been generally realistic over the last two years.
- Further improvement needed in forecasting development expenditures, both domestically and foreign financed.
- Government’s medium-term fiscal objectives are clearly stated in budget documents but analysis of fiscal risk is lacking; need for sensitivity analysis and discussion of contingent liabilities, particularly government pension schemes.
- Urgent need to develop accounting and risk analysis capability for PPP arrangements.
- Basic accounting and internal control are not underpinned by consistent and legally enforceable financial regulations.
  - Legal framework for a consolidated fund and banking arrangements exist, but many bank accounts operate outside Treasury control with significant balances.
  - Cash-flow planning and debt-management systems have been efficiently managed contributing to more effective budget execution.
  - Internal audit system legal framework is weak and disjointed; internal audit procedures and mandates are evolving from pre-audit to risk-based and performance audits; coverage is limited and follow up weak.
  - Need for a strategic corporate plan to address capacity, skills and ownership issues for modern internal audit techniques.
- Public procurement law and regulations provide a sound basis for open and competitive procurement; outreach effective; Public Procurement Administrative Review Board successful in reviewing aggrieved bidders.
  - Implementation of certain provisions (including establishment of Public Procurement Oversight Authority) has been slow, impeding full operationalization of the new system.
- Civil service employment procedures are clear and well understood under the Public Service Commission Regulations of 2005.
- Tax administration has effective internal monitoring and control mechanisms and KRA is given legal protection from political interference.
- Accounting and reporting system is evolving: fragmented legacy systems are being replaced by a modern IFMIS; coordination and data sharing between MoF departments is still lacking.
- Regular fiscal reporting is essentially limited to central government; audited annual accounts are not available within the prescribed period. Audit reports for local governments are substantially in arrears.

### Public availability of information
- Fiscal information on central government is fairly comprehensive and readily available to the public but with some delay.
- There is no simplified “citizens’ guide” to the budget.
- Local authorities began with the 2007/08 budget to have live presentations of their respective budgets to inhabitants, enhancing public awareness and accountability.
- No consolidated data on general government are available.
- Information on gross government debt and financial assets is published regularly.
- Government guaranteed debt is reported, but statements on contingent liabilities and tax expenditures are not included in budget documents.

### Assurances of integrity
- Budget data are still not reliable:
  - Accuracy of revenue forecasts has improved significantly in the past few years.
  - Reliability of expenditure data remains mixed: reasonable accuracy in aggregate recurrent spending but significant variance in aggregate development spending.
  - Statements on accounting policy are not included in budget and final accounts documents.
  - In practice, central government accounts are maintained on a cash basis while local government accounts, SAGAs and state-owned enterprises are on an accrual basis.
- KENAO is independent of the executive with statutory authority across all components of the general government sector.
  - Timeliness of submission of audit reports has improved but significant backlogs persist for local governments.
  - Reviews of audited accounts by Parliamentary committees are conducted with delays of three–four years, diluting the effectiveness of independent audit function.
  - Audit capacity is currently not adequate for KENAO to fully address its functions, including value-for-money audits.

### Main areas where further improvements are required (High priority)
- Kenya needs to put in place the building blocks for PFM reform.
- Authorities, with development partners, issued a PFM reform strategy and action plan in 2006.
- The following recommendations (some detailed in the August 2006 FAD mission TA report) support this reform strategy.

### Key recommendation: revise and expand legal framework for PFM
- The legal framework for public finance management should be revised and made more comprehensive than the GFMA adopted in 2004.
- The revised GFMA, or Organic Budget Law, should:
  - Cover all areas of PFM and apply to all parts of government (Central Government, Local Government, SAGAs, EBFs, and FAs).
  - Strengthen technical management of PFM and vest primary responsibility for oversight of PFM in Kenya in the PS Treasury.
  - Ideally incorporate elements of the Fiscal Management Bill within general guiding principles and reporting obligations to Parliament.
- Elements of the Fiscal Management Bill are important but not sufficient by themselves to create the new standards of PFM expected by Parliamentarians.

### Box 8: Kenya’s new PFM Reform Strategy (components and objectives)
- Funding for the plan has been agreed at US$114 million over a five year period; a coordinator has been appointed and responsibilities assigned for each component.
- The plan stresses the need to clarify PFM roles, professionalize PFM staff, and strengthen the legal framework for PFM to support sustained economic growth, poverty reduction, improved service delivery and good governance.
- Components and key objectives (component — manager — objectives):
  - Macro-fiscal policy & Planning — Economic Affairs Department — To develop a macroeconomic model and refine the macro framework for the budget, improve revenue estimation and capability to analyse effects on poverty.
  - Budget Preparation and Formulation — Budget Supply Office — Develop budget document which is comprehensive and from which the government’s priorities and policy changes are explained and possible to identify, and which is developed within a multi-year framework.
  - External Resources — External Resources Department — Enhancing coordination of external finance with the budgetary process through establishment of reporting procedures, databases and forum for dialogue, ensure exhaustiveness of resources accounting for better predictability and budget statistics.
  - Debt and Guarantee Management — Debt Management Unit — Develop and implement a debt management strategy and debt database. Deepen the domestic market for government securities.
  - Taxes, Customs and Excise — Kenya Revenue Authority — Improvement of customs administration and risk management, improvement in effectiveness of domestic tax administration, and improved taxpayer education.
  - Budget Execution — Accountant General’s Dept., Exchequer unit — Develop and implement improvements in the cash based release system to obtain better predictability for spending units, improved commitment control and increased efficiency throughout the public sector.
  - Accounting and Reporting — Accountant General’s Department — Review of the legal and regulatory framework, accounting and reporting system, development of a professional cadre, institutional arrangements for reporting, records management and filing, monthly reporting and bank reconciliations.
  - Payroll and Pensions — Dept. of Personnel Management, Pensions Dept. — Develop and implement personnel databases, payroll and pension systems integrated with the financial management system.
  - Procurement — Public Procurement Directorate — Develop and implement new legal and regulatory framework, create professional cadre, establish workable institutional arrangements, support internal control and commitment control and provide expertise to the MDAs to implement their plans and budgets through procurement for better cash management.
  - Parliamentary Oversight — Public Accounts Committee — To develop the capacity of the Parliament to play its oversight role in public resources management. Legislative scrutiny of the annual appropriations bill and review of external audit reports.
  - External Audit — Controller and Auditor General’s Office — Review and amend legal framework, Develop regulations and manuals, establish policies, expand scope of professional cadre and train, review institutional arrangements, develop mechanisms for upgrading methodologies.
  - Internal Audit — Internal Auditor General’s Office — Develop regulations and manuals, establish policies, develop and train, review institutional arrangements for greater independence, support management in implementing reforms.
  - Electronic Services Delivery (IFMIS, IPPD) — Accountant General’s Department — To improve public expenditure management through an on-line integrated financial management system in order to improve accuracy and timeliness of financial reporting and to enhance both transparency and accountability.
  - Consistent Legal Framework for PFM — Ministry of Finance — To review and harmonise existing legislation on PFM and in the broader context of Public Sector Reform. To build capacity to undertake legislative reforms relating to PFM.
  - Capacity Building and Service Conditions — Min. of Finance HRD unit, Inst. of Public Accountants Kenya, Inst. of Internal Audit, Universities — Review the Kenyan Accountancy Regulations, develop training curriculum, develop and promote public finance specialisation, Promote international standards, Revised Conditions of service for PFM staff.
- The PFM reform Plan has been operational since late 2006, although progress to date has been slow, with the exception of activities which had started before adoption of the Plan.

### Budget execution, accounting and internal audit: institutional/legal priorities
- The new GFMA should enable replacement of outdated government financial regulations and procedures with a framework aimed at strengthening relationships between MoF staff and counterparts in line ministries.
- New financial regulations should clearly define:
  - (i) duties and responsibilities of the Accountant General in all matters related to accounting and reporting of government financial transactions;
  - (ii) stages of budget execution controls and assignment of responsibilities for exercising these controls;
  - (iii) duties and responsibilities of the Internal Auditor General and internal auditors, as well as the audit committees.
- Regulations need to be supplemented with manuals giving detailed guidelines and procedures for training staff.
- New legal framework should be backed by credible and enforceable sanctions and penalties.
- Internal audit area would benefit from preparation of a strategic corporate plan to guide effective introduction throughout government.

*Source: IMF staff report excerpt on fiscal transparency and PFM reforms (sections 71–76).*

### 77. Steps should be taken to consolidate the Exchequer Account to function as a

### _cr0899 - 77. Steps should be taken to consolidate the Exchequer Account to function as a

### Treasury Single Account (TSA) and Exchequer consolidation
- Introduce a TSA approach in which all cash is consolidated and managed efficiently by professional cash managers in the Treasury.
- Deliver cash to users on a just-in-time principle using the latest banking techniques, in particular electronic funds transfers.
- Start with a full survey of all government bank accounts, including donor-funded project accounts.
- Establish a time bound program to progressively incorporate the operations of each account under the TSA before closing it.
- Underpin the TSA with an effective treasury general ledger system to manage user sub-accounts under the TSA in a transparent and efficient manner, building on the software planned by the CBK.
- Key statistic: government deposits in the banking system exceed Ksh 73 billion, or around 3.5% of GDP (March 2007 QBR).

### Clarifying and legislating the concept of general government
- Clarify the distinction between state corporations that perform non-profit government service delivery or regulatory functions (belong to general government under GFS) and those that are essentially commercial in nature (belong to the rest of the public sector).
- Formalize by: (i) including appropriate definitions of general government and public sector in relevant laws, in particular the new GFMA; and (ii) establishing different treatment for each with respect to PFM, regulatory oversight, banking statistics, and government finance statistics.
- Once completed and reporting is established, consider routine inclusion of general government fiscal reports in the QBR, and preparation of consolidated general government annual accounts.

### SAGAs, EBFs, CDFs: growth, controls, and reporting
- Track and carefully manage the growth of SAGAs and EBFs; strengthen spending control procedures and reporting.
- Review whether currently operating SAGAs can still be justified.
- Agree strict guidelines for conditions under which new SAGAs can be created.
- Clarify division of responsibilities and establish procedures to improve coordination.
- Engage SAGAs and EBFs more in the MTEF and budget formulation and execution processes, including spending through CDF.
- Strengthen regular reporting from SAGAs and EBFs.
- Periodically review earmarked revenues assigned to SAGAs and EBFs to determine appropriateness of resource levels.
- For CDFs: enhance coordination with government planning, account for recurrent costs in project selection, and reinforce oversight and audit functions.

### In-year accounting, IFMIS, and reporting improvements
- Complete ongoing efforts to computerize budget execution and accounting (IFMIS) as a matter of urgency.
- Once IFMIS rollout is completed, make the Accountant General’s Department (AGD) primarily responsible for collection, consolidation and timely provision of in-year information on budget execution to all users within the MoF and beyond.
- In-year reporting by the AGD should include the debt position and the wage bill of general government.
- Include timely submission of monthly and quarterly accounts-related reports in performance contracts of Vote Holders and heads of other institutions of the general government.
- AGD should review received reports and present a monthly assessment of trends in budget execution to the PS Treasury.

### Parliamentary oversight and audit follow-up
- Enforce effectiveness of Parliamentary oversight by ensuring timely and sustained follow up of audit findings by Parliamentary Accounts and Investment Committees.
- Clear the backlog of accounts to be submitted to the CAG and the backlog of audits completed by the CAG as fast as possible (Local Authorities may require decisions on opening balances).
- Review procedures for processing and printing reports for presentation to parliament and the timetable for discussion; identify and remove bottlenecks.
- Cooperate with Parliament on a timetable to clear the backlog of accounts to be reviewed by PAC and PIC so these committees become current.
- Put in place rules and procedures to prevent future delays in processing and follow up of audit findings.

### Contingent liabilities and fiscal risk management
- Carefully quantify contingent liabilities and take them into account in government borrowing decisions; implement policies to mitigate them.
- BSP could include a yearly estimate of contingent liabilities and updated fiscal sustainability analysis; government borrowing decisions should be taken in that context.
- In pensions, consider alternative pension schemes in view of sharply rising liabilities of the current civil servants’ pension system.
- Establish a mechanism to continually assess contingent liabilities in state-owned enterprises and other fiscal risks.
- First step: compile and share data collected on a quarterly and annual basis from state corporations.

### Other urgent institutional tasks
- (i) Establish the Privatization Commission.
- (ii) Establish a legal and institutional framework for PPPs and develop appropriate capacities to assess risks in PPP arrangements.
- (iii) Implement all provisions of the Public Procurement Act.
- (iv) Finalize and make public the report of the closing committee on pending bills.
- (v) Identify all quasi-fiscal activities and transparently report compensation for them as subsidies subject to normal budget procedures.

### Budget timing and credibility
- Adopt the budget before the start of the fiscal year; review and agree with Parliament actions that enable adequate scrutiny and debate to allow voting before the start of the financial year.
- Use the proposals in the Fiscal Management Bill as a starting point; may need supplementation under the new GFMA.
- Release the Budget Strategy Paper in a more timely manner to allow early discussion on the budget framework.
- Continue measures to improve budget quality and in-year monitoring to limit the need for supplementary budgets.
- Short-term: carefully review the share of donor commitments included in the development budget and align with expected disbursements and project implementation capacity.
- Medium-term: improve allocative efficiency by adopting program and performance budgeting techniques.

### Exchequer Committee composition
- Review composition of the Exchequer Committee to broaden membership to include CBK and KRA representatives.
- Rationale: CBK as banker to the government and manager of domestic debt can better coordinate cash requirements and monetary operations; KRA can provide accurate revenue-side information.

### Enhancing Budget documents and transparency
- Recommendations for Budget documents:
  - Add actuals, or even ‘provisional’ actuals, for last year in the detailed estimates.
  - Include a statement of tax expenditures and subsidies as a Budget Annex (avoid misclassifying subsidies in the Estimates Books).
  - Include a statement of outstanding debt, guarantees and contingent liabilities as a Budget Annex.
  - Include a summary of the operations of SAGAs, EBFs and FAs.
  - Identify all quasi-fiscal activities and transparently report and explain these in the BSP.
  - Include a fuller discussion of fiscal risks in the BSP, preferably with some quantification of major risks or description of contingency measures.
  - Include summaries of employees by agency and grade, with total costs (consider discontinuing detailed listing of employees under each Vote in the Estimates Books).
  - Expand budget summary tables, e.g., add summaries by economic and functional classifications.
  - Prepare a “citizen’s guide” to the budget.

### Revenue administration reforms
- Complete reforms underway:
  - Adopt and disseminate a unified tax procedures code to simplify and streamline tax procedures and clarify taxpayer rights.
  - Complete preparation of clear procedures for granting waivers on tax arrears to limit discretion.
  - Replace the current arrangement in the Domestic Tax Department (DTD) with two Commissioners by a best-practice recommendation to have only one accountable head of the DTD over the medium term.
  - Phase back VAT withholding arrangements gradually.

### Public servants’ wealth declarations
- Enhance capacity to analyze information on public servants’ wealth declarations.
- Initiate periodic analysis of wealth declarations and comparison with tax returns.
- Consider making wealth declarations of ministers and senior officials public as best practice.

### Medium-term: MTEF outer year forecasts
- Enhance outer year forecasts in the MTEF by:
  - (i) improving the macro-fiscal projection models; and
  - (ii) strengthening strategic planning and general planning capacities in the MOF and within line ministries.

*Source: _cr0899 - 77. Steps should be taken to consolidate the Exchequer Account to function as a (PDF).*

### 91. Move towards performance audits. The government has implemented MTEF

### 91. Move towards performance audits. The government has implemented MTEF

### Performance audit reform and requirements
- The government has implemented MTEF and is considering moving towards the implementation of program/performance based budgeting.
- For these reforms to be effective in the long run, the accounting and audit systems should evolve to provide monitoring, feedback and evaluation essential to output focused allocation of resources.
- Audit reports should include a report on the economy, efficiency and effectiveness of government expenditures which assesses and comments on the achievement of performance targets and indicators.
- New training programs for auditors will be required to include specialized audit techniques, such as value for money and performance audits.
- Such changes will need to be carefully planned and sequenced to ensure maximum benefit is derived.

### Key observations from Summary Tables (selected PFM dimensions)
- Clarity of roles and responsibilities
  - General government is not defined consistently with Government Finance Statistics (GFS) principles. Recommendation: The concept of general government should be clarified and embodied in law.
  - Mechanisms for coordination and management of budgetary and extra-budgetary activities are not adequately defined; coordination is complicated by the large and growing number of Semi autonomous government agencies (SAGAs).
  - Relationships between central government and public nonfinancial and financial corporations are generally clearly defined but include some quasi-fiscal activities (QFAs).
  - Privatization: guided by Privatization Act of 2005; the Privatization Commission needs to be established to operationalize the Act.
- Legal and administrative framework for fiscal management
  - The legal and administrative framework for public finance management is neither clear nor comprehensive. Recommendation: A new organic budget law is needed to put in place building blocks of PFM reform.
  - The overall role of the MoF in fiscal management assigned in both the GFMA and the Constitution is comparatively weak.
- Public availability of information
  - The budget documents cover central government fiscal activities comprehensively but provide no data on general government. Recommendation: In the medium-term, reporting on general government should be introduced.
  - Fiscal information is fairly comprehensive, but available with a time lag. Timeliness of QBRs has improved in the last year.
  - Government guaranteed debt is reported, but other statements on contingent liabilities are not included in budget documents. Recommendation: Contingent liabilities need to be carefully quantified and taken into account when making government borrowing decisions.
- Open budget preparation, execution, and reporting
  - A statement on medium-term fiscal policy objectives is included in the budget document, but fiscal sustainability analysis is not presented. Note: A debt sustainability analysis is under preparation.
  - Program budgeting could be introduced in the medium term.
  - The annual budget process is generally open, but the budget is not generally adopted until after the start of the fiscal year. Recommendation: The budget should be adopted before the start of the fiscal year.
  - Spending through SAGAs, extra-budgetary funds (EBFs), and fund accounts is not recorded in budget documentation. Recommendation: Budget documentation should include a summary of the operations of SAGAs, EBFs and FAs.
- Procedures for execution and monitoring
  - The in-year accounting and reporting system remains inefficient and fragmented. Recommendation: IFMIS should be further introduced to the districts.
  - The legal framework for a Consolidated Fund is in place but the principles of a Treasury Single Account are not being followed. Recommendation: Steps should be taken to consolidate the Exchequer Account into a TSA.
  - New arrears continue to accumulate as controls remain inadequate.
  - The cash flow planning system is functioning well.
  - New public procurement law and regulations provide a sound basis for open and competitive procurement practices but implementation issues remain and the Public Procurement Oversight Authority has not yet been established.
  - The legal framework for the internal audit system is weak and fragmented; internal audit coverage is limited and follow up is weak. Recommendation: A firmer legal basis for internal audit is needed as a building block for PFM reform.
- Assurances of integrity and external scrutiny
  - Budget data are still not reliable and the variance between budgeted and actual outturn of main fiscal aggregates is published but with a time lag.
  - External audit is independent of the executive and the legislature, with a mandate across all components of the general government sector, but audit capacity is not fully adequate.
  - The timeliness of submission of audit reports has improved but challenges remain in legislative scrutiny and in following up on audit findings. The KENAO and Parliament are taking measures to improve public availability of information on audit reports.
  - Accountability will be significantly enhanced with more timely discussion and follow up of audit findings.

### Select public availability points (from Table 4)
- Central government (CG) budget estimates: Included in budget estimates and available to the public.
- CG Defense Expenditures: Included in budget and available to the public.
- CG EBFs (including special development funds, social security funds, resource revenue funds): Not included in CG budget; not available to the public.
- CG Budget outturns: Yes. QBR and BSP have broad categories of revenues, expenditures and financing, available for past two years; available on internet.
- CG Budget forecasts: Yes. BSP has broad categories of revenue, expenditures and financing for 3-year forecast; available on internet.
- CG Contingent liabilities: No; not available to the public.
- CG Tax Expenditures: No; not available to the public.
- Analysis of fiscal risks/sensitivity analysis: No; not available.
- Sustainability Analysis: No; not available.
- General government budget estimates and general government monthly/quarterly reports on fiscal outturn: No; not available.
- CG Monthly/quarterly reports on fiscal outturn: Yes. QBR is available about 2 months after the end of the quarter; available on internet.
- CG Final Accounts: Yes. Annual appropriation accounts are submitted to parliament with audit report of Controller and Auditor General, but with delay; available from government printer.
- Consolidated general government Final Accounts: No; not available.

*Source: IMF country report excerpt (Section 91 and Summary Tables).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0899.pdf_