OFFICE OF THE CONTROLLER OF BUDGET 4 YEARS IN FOCUS: BUDGET IMPLEMENTATION BY COUNTY GOVERNMENTS – STATUS, CHALLENGES, GAPS AND RECOMMENDATIONS PRESENTED DURING THE INDUCTION OF GOVERNORS AND DEPUTY GOVERNORS by FCPA Agnes Odhiambo, CBS Controller of Budget Diani Reef Beach Resort & Spa, Kwale 15th December, 2017

Presentation Outline Introduction Mandate of OCOB OFFICE OF THE CONTROLLER OF BUDGET Presentation Outline Introduction Mandate of OCOB Overview of Budget Performance for the period FY 2013/14 to FY 2016/17 Challenges and Gaps in Budget Implementation Recommendations Conclusion

Introduction The main departure between the Constitution promulgated in 2010 and the previous Constitution is the introduction of the devolved system of governance with decentralized fiscal management. The devolved system of governance ensured that power and resources are devolved to more centers of authority which are distinct, interdependent and operate on the basis of consultation and mutual respect. This was necessitated by public demand for more transparency and accountability in the management of public resources.

Introduction..2 Article 1 of the Constitution of Kenya, 2010 states that “All sovereign power belongs to the people of Kenya and shall be exercised only in accordance with the Constitution”. To protect this sovereignty, among other oversight institutions, the Constitution established Commissions and Independent Offices (Art. 249). One of these oversight institutions is the Office of the Controller of Budget established under Article 228 of Constitution of Kenya, 2010.

Introduction..2 The Office was established to separate financial management functions i.e. monitoring, controlling and reporting on budget implementation and auditing which were hitherto, performed by the Treasury and Controller and Auditor General respectively.

Mandate of the Office of the Controller of Budget

Mandate of OCOB The main mandate of the Office of the Controller of Budget is to oversee the implementation of the budgets of the national and county governments by authorizing withdrawals from public funds (Equalization fund, Consolidated Fund and County Revenue Fund) (Article 228 (4)) if satisfied that the withdrawal is authorized by law (Article 228 (5)). In addition, the Controller of Budget reports on the implementation of budgets of both the national and county governments to each House of Parliament every four months (Article 228 (6)) and ensures the public has access to information on Budget Implementation (Section 39(8), PFMA).

Overview of Budget Performance for the period FY 2013/14 to FY 2016/17

Individual County Governments Revenue from FY 2013/14 to FY 2016/17 Equitable Share + Conditional grants (88.26%) Counties are highly dependent on National Transfer Local Revenue (11.74%)

Aggregate Actual Local Revenue vs Local Revenue Target from FY 2013/14 to FY 2016/17

Local Revenue Highlights by County from FY 2013/14 to FY 2016/17 Average 60% Most counties cannot meet 60% of their annual local revenue target 22 counties achieved 60% of their 4 year cumulative local revenue targets

Aggregate County Allocation to Recurrent and Development from FY 2013/14 to FY 2016/17 Kshs.791.69 billion (71%) Total Kshs.1.354 Trillion Kshs.562.29 billion (29%) NB: Counties have allocated more resources to development expenditure

Aggregate Recurrent and Development Expenditure from FY 2013/14 to FY 2016/17

Recurrent and Development Expenditure by County from FY 2013/14 to FY 2016/17 68%-Recurrent Expenditure 32%-Development Expenditure

Expenditure Analysis from FY2013/14 to FY 2016/17

Recurrent Expenditure from FY 2013/14 to FY 2016/17

Development Expenditure Absorption Level from FY 2013/14 to FY 2016/17

Challenges Affecting Budget Implementation Key Challenges Affecting Budget Implementation

Challenges Underperformance in local revenue collection: Only 22 counties attained an average of 60% and above of their 4-year local revenue targets. 25 Counties achieved less than 60% of their target. However, aggregate local revenue improved from Kshs.26.3 billion in FY 2013/14 to Ksh. 35.0 billion in FY 2015/16 before declining to Kshs.32.5 billion in FY 2016/17. Absorption of Development funds: The aggregate absorption of development funds for the 4 years is 57.3%. Overall absorption rate of development funds increased to 65.3% in FY 2016/17 from 36.4% in FY 2013/14. Use of locally generated revenue at source: Counties have continued to use local revenue at source contrary to Article 207(1) of CoK, 2010; Persistent breach of the law may result in stoppage of release of funds to the County. Delay in release of the equitable share by the National Treasury affects the execution of planned activities. Wrangles between the County Executive and the County Assembly affected effective budget execution.

Challenges ...2 Huge Pending Bills: Counties have been accumulating huge pending bills. This disrupts the implementation of planned activities in the subsequent year. The figure stood at Kshs. 35.84 billion in FY 2016/17. Huge Wage Bill: County public expenditure on wage bill stood at 41.1% of the total expenditure in FY 2016/17 against 35% provided for in Regulation 26(1)(a) of the PFM Act, 2012. This reduces resources available for productive activities. Bloated workforce has largely contributed to this position. Capacity challenges especially among some County staff; Counties have had inadequate capacity in preparation of budgets, financial reports, etc. leading to challenges in budget execution. Delays in submission of reports from the County Treasuries: Counties have consistently delayed in submission of quarterly financial reports to the COB, which affects timely preparation of the quarterly budget implementation reports.

Challenges ...3 Incomplete Documents to Support Exchequer Requisitions by the County Treasuries resulting in delays in release of funds, which affects budget execution. Current staff changes: Changes in County Treasuries in some counties have affected signing mandates to the County Revenue Funds leading to delays in the release of funds. High expectations from the public Ineffective use of IFMIS to process financial transactions due to connectivity challenges and downtimes

Gaps in Budget Implementation

Gaps in Budget Implementation County Budget and Economic Forum; Some counties did not establish effective Budget and Economic Forums as stipulated in Section 137 of PFM Act, 2012 to provide means for consultation on planning, budgeting and financial management at the county level. Effective Internal Audit Departments and Committees: A number of counties did not establish effective Internal Audit Departments and Committees to strengthen internal control mechanisms as envisioned under Section 137 of PFM Act, 2012. Project Monitoring Units; Counties are expected to establish Project Monitoring teams to monitor budget implementation in order to improve absorption of development funds. Public Participation Frameworks; Most Counties are yet to establish effective public participation frameworks as required by the law (Section 207 of PFMA). Revenue Collection Frameworks- A number of Counties are yet to establish effective revenue collection frameworks and mechanisms to seal loopholes leading to revenue leakages such as e-revenue. Staff Rationalization- Counties inherited staff from the former local authorities and the National Government. They also employed new staff at different levels. This led to bloated workforce and hence high wage bill. There is need to harmonize the salaries of the three categories of staff.

Recommendations Local revenue; The County Treasuries should formulate and implement strategies to enhance local revenue collection such as automation and training of the revenue officers. Low Absorption; Counties should come up with measures to improve the absorption of development funds such as the linkages between procurement plans and budgets as well as establishing Project Monitoring units to improve implementation of projects. Use of Local Revenue at Source; All funds received by or on behalf of the county should be deposited in the CRF account. Failure to transfer all funds to CRF affects implementation of planned activities. Persistent breach may lead to stoppage of funding to the Counties by the Cabinet Secretary in-charge of the National Treasury. Huge Pending Bills: The County Treasuries should develop a debt management strategy in line with Section 123 of the PFM Act, 2012 and ensure it is approved by the County Assembly. This will address the escalating pending bills at the counties.

Recommendations ...2 High Wage Bill; The County Public Service Boards should establish and adopt optimal staffing levels in terms of numbers and skills to address the over-employment challenges and ensure sustainable wage bill. A high wage bill reduces the resources available for development activities. County Budget and Economic Forum; Counties should establish effective Budget and Economic Forums as stipulated in Section 137 of PFM Act, 2012 to provide means for consultation on planning, budgeting and financial management at the county level. Effective Internal Audit Departments and Committees: Counties should establish effective Internal Audit Departments and Committees to strengthen internal control mechanisms as envisioned under Section 137 of PFM Act, 2012. Skills/Capacity Challenges; Counties should continue to improve the capacity of their technical staff through continuous training.

Recommendations ...3 Late submission of Financial reports; The County Treasuries should ensure timely preparation and submission of financial reports to the Controller of Budget in line with Section 166 of PFM Act, 2012 in order for the Office to meet its statutory obligations. Delay in release of Equitable share of Revenue: The National Treasury should ensure timely release of funds as per the disbursement schedule approved by the Parliament. Incomplete Exchequer Requisition Documents: County governments should endeavor to submit complete exchequer requisitions documents to avoid delays in release of funds, which affects budget execution. Current staff changes: Counties should ensure there is minimal staff changes especially in the County Treasuries so as not to affect county operations.

Conclusion Over the last four years, Counties have witnessed a lot of development particularly in infrastructure (roads), Health, Education (ECD) and the Water sectors. However, the challenges and gaps highlighted herein can claw-back some of these gains if not addressed in good time.

OFFICE OF THE CONTROLLER OF BUDGET