1. Sensitization on conditional grants/allocations
Kenya School of Government (KSG)
6 December 2018
CPA Stanley Igati
FRU – National Treasury

2. Conditional grants - definition
Conditional grants offer the Government of Kenya an opportunity to ensure basic services, achieve international commitments such as the MDGs, fund under-resourced services or infrastructure, and hold counties financially and programmatically accountable. Donor funding as one of the sources of County Government revenue in Kenya involves aid from international donors. The international donors provide the aid in form of loans and grants. The County Governments can receive additional allocations from the National Government’s equitable share of revenue. These additional allocations are known as conditional allocations or conditional grants. They are conditional when the National Government imposes restrictions on how County Governments will spend them. They are unconditional when the National Government does not impose any restrictions concerning their expenditure. Most of these additional allocations are conditional allocations or grants. The County Governments should spend them on specific items in the budget. They cannot divert them for other purposes. For example, if a county receives a conditional grant for level five hospitals, it should not divert the money for other purposes other than these hospitals.

3. Conditional grants – definition (continued)
The conditional grants include the Equalization Fund (Article 204 of the Constitution) that benefits certain areas that CRA recognizes and categorizes as marginalized. Other examples are money for Level Five hospitals, Compensation for user fees forgone (reimbursements for services County hospitals render) and Fuel Levy Fund (for maintaining county roads).

4. Disbursement of conditional grants
Conditional grants can be disbursed to the Counties as follows:
Through the National Treasury - The County Treasury should recognize receipts directly from the NT under Note 1 on ‘Exchequer releases’.
National Government ministries, departments and agencies (MDAs) - Conditional grants sent directly to the Counties through the National Government ministries, departments and agencies (MDAs) should be captured under Note 2 on ‘Transfers from National Government Entities’.
Conditional grants can be sent directly to the Counties should recognized under Note 3 on ‘Proceeds from Foreign Grants/Development partners’.

5. Budgeting
The budget process in Kenya is an important part of government planning and decision- making. In itself, the budget-making process in Kenya is a comprehensive process. It begins in August of the current financial year to December of the next financial year. The budget planning process in Kenya allows the national and county governments to prioritize the needs of the people. The process also allows them to align the needs of government policy. The Constitution and the Public Finance Management Act act as the guide for the budget process in Kenya. This process takes place at both the national government and the county governments. The County Governments should use CARA to prepare their original budgets. These budgets ensure that grants are spent on specific items as in the budget. They cannot divert them for other purposes. For example, if a county receives a conditional grant for level five hospitals, it should not divert the money for other purposes other than these hospitals.

6. Donor conditions
Conditional grants may come with other conditions. For example, a conditional grant may require that a county also put in “matching funds”. For instance, a county may receive a grant for 75 per cent of the cost of some service, such as a hospital, and be expected to put in 25 per cent on its own. If it refuses, it may not receive the grant. It is also important to note that not all Counties receive some conditional grants. For example, only the counties with level five hospitals receive the regional grant for level five hospitals. In addition, only those areas recognized as marginalized using CRA’s criteria receive the Equalization Fund.

7. Donor conditions (continued)
Examples of donor conditions that County Government may be required to meet as specified in the grant agreement like:
Cannot not be diverted for spending on activities outside the financing agreement
Increased accountability mechanisms or improve the capacity of county staff in monitoring and expenditure of donor aid;
Strict adherence to budget utilization/implementation; and
Preparation and submission of timely financial reports.

8. Consequences of non-compliance with donor requirements
Failure to comply with specified donor conditions by County Governments may result to the following:
Withdrawal of funding by the donors
Where there is misappropriation of donor funds, then a recommendation to refund the donor may be made.
-Bomet County missed on DANIDA disbursement because the County did not meet certain conditions.
-In the FY 2017/2018, only 13 counties received disbursement for KDSP level 2 grant as they met set donor conditions based on the Annual Capacity and Performance Assessment 1 carried out last year. Audit opinions formed a basis of some set of the donor conditions during the assessment.

9. Conditional grants in the FY2018/2019
International donors in the current financial year include: Transforming Health Systems for Universal Care Project (WB) IDA (World Bank) credit (National Agricultural and Rural Inclusive Growth Project (NARIGP) IDA (World Bank) - Kenya Climate Smart Agriculture Project (KCSAP) IDA (World Bank) credit: Kenya Devolution Support Project (KDSP) " Level 1 grant IDA (World Bank) credit: Kenya Urban Support Project(KUSP)- Urban Development Grants (UDG) DANIDA Grant (Universal Healthcare in Devolved System Program) EU Grant (Instruments for Devolution Advice and Support- IDEAS) IDA (World Bank) credit: Water & Sanitation Development Project (WSDP)

10. Conditional grants/allocation in the FY2018/2019 (continued)
Examples of conditional allocations disbursed through the National Treasury and National Government ministries in the current financial year:
Level 5 H (National Treasury);
Development of Youth Polytechnics (National Treasury);
User Fees foregone (Ministry of Health/National Treasury); and
Roads Maintenance Levy Fund (State Department of Infrastructure).
NB: State Department of Infrastructure is yet to disburse funds for Roads Maintenance Levy Fund as they are currently visiting counties to carry out assessments.

11. End
Q & A