4.14 Budget execution rates, by county, FY2014/15–FY2018/19

A further success is that counties receiving higher allocations of the equitable share have used them to increase the number of staff to deliver those services. (For further discussion, see the section on staffing in chapter 5 of this report).

Persistent challenges The downside to county expenditure management is that budget execution rates are highly unstable in many counties. Figure 4.14 shows these rates by county across FY2014/15–FY2018/19, with counties ordered by the standard deviation of their budget execution rates.

There are large differences in execution rates across counties but also large differences in the execution rates across years in the same county. The counties to the left of the figure spend a similar proportion of their budget each year, while those to the right perform very differently in different years. This instability in spending suggests weaknesses in PFM and is not likely to be conducive to the smooth running of public services if the funding available from year-to-year is fraught with uncertainty—meaning that sectors cannot plan on a sound basis. Development budget execution is the key driver of the variation.

Development budget execution rates are significantly lower and more unstable than salary and operating budget execution. Delays in the release of the equitable share do not explain variations in execution rates between counties, suggesting that some counties are coping with these late releases better than others. Even in years when the late release of the equitable share was not a major factor, development budget execution has been much lower, and much more variable, than overall budget execution.

Salary budget execution, on average, was close to 100 percent across all years and had low dispersion across counties. Operating budget execution averaged about 85 percent in FY2014/15 and FY2015/16, dropping slightly to 80 percent in

FIGURE 4.14

Budget execution rates, by county, FY2014/15–FY2018/19

100

Budget execution rate (%) 90

80

70

60

50

40

30

20

10

0 BusiaKiambuKwaleMombasaKisii BungomaKilifiKitui MachakosElgeyo…Tharaka NithiUasin GishuNyeriNarokSamburuSiayaKajiadoLamu NyandaruaBomet Trans NzoiaMakueniVihigaHoma Bay

Source: World Bank calculations from Controller of Budget data. Note: Each dot indicates the budget execution rate in a given year for each county. Counties appear in order (left to right) of the standard deviation of their budget execution rates.

FY2016/17. Development budget execution, however, averaged only about 65 percent across all three years and was more widely dispersed. In FY2017/18, because of late releases of the equitable share, the average development budget execution dropped to 47 percent.

The drivers of poor development budget absorption are not well understood. None of the commonly advanced reasons for the underperformance of development budget execution—such as delayed releases from the national government, cumbersome procurement processes, high personnel expenditures, underperformance of local revenue collections, and IFMIS connectivity— explains the variation in execution rates across counties and across years. The county public expenditure and financial accountability (PEFA) assessments conducted in 2018 in six counties, however, do suggest some reasons for the variation in county budget execution: fluctuations in revenue collection, monthly declarations on settlement of pending bills, stock of expenditure arrears, and limitations on in-year resource reallocations.

Manual exchequer processes also delay the transfer of funds from national to county governments. Once the equitable share has been released by the National Treasury to the County Revenue Fund (CRF), the current process involves each county manually requesting the Controller of Budget to approve individual requisitions for payments. These approved requisitions are then submitted to the Central Bank of Kenya (CBK) to honor. This process is cumbersome and extremely time consuming. Although some counties prepare this documentation in advance to save time (for example, Nakuru and Kwale), the manual process is still extremely slow. The National Treasury, Controller of Budget, and CBK have begun to automate this process, starting with the national government entities, and subsequently rolling it out to counties.

Poor cash management practices have also hampered service delivery. Sector departments do not reliably receive their operating budget allocations. Administrative county departments such as the Governor’s Office, County Assembly, and county administration have higher operating budget execution rates than service delivery departments. From a sector department perspective, this situation leads to unpredictable and delayed access to operating budgets, the reasons for which are not well understood. Subcounty sector offices and frontline service delivery units have been affected by a further issue of concentration or resources and decision-making over resources at the county headquarters “recentralization within decentralization” and are not receiving operating funding on a reliable basis.

Furthermore, decisions for allocation of cash are centralized, and cash in many counties is not transferred to health facilities. Whereas all health facilities used to receive funds directly, now many hospitals and health centers do not receive a reliable flow of funds. Similarly, in the urban sector, decisions and financing are constrained by the tensions not to decentralize further beyond the County Treasury and urban department and to allow space for the newly established urban boards and committees to perform. These issues are also discussed chapter 3, on county management of service delivery. In addition, the incentive for health facilities to collect user fees is undermined by the requirement to transfer collections to the CRF, since facilities are not confident that those funds will be remitted back to them.

County budget reporting

County budget reporting is taking place. Counties are producing County Budget Reviews and Outlook Papers (CBROPs), as required by the Public Finance Management Act 2012. At the national level, the Controller of Budget provides quarterly and annual reports on county budget implementation. As with progress on county budgeting and planning processes, it is a significant achievement that these processes have been implemented within the first five years of devolution. However, as with county planning and budget processes, the focus now needs to be on improving the quality of reporting (particularly relating to service delivery outcomes).

Despite their progress, counties are not reporting on the results of their spending, and many sectors do not have functioning management information systems to support this. The basic idea behind program budgeting is that it should require counties to forecast and report not just on spending but also on the results being achieved with that spending. This is not currently occurring, because few counties are reporting against the indicators and targets that they set in their program budgets. Service delivery results are not routinely included in CBROPs, some of which do not discuss any detail of spending by county departments. Even if this were done, its usefulness would depend on the quality of the indicators included and the reliability of the data. Here, there is a clear role for the national government to set standards and systems for indicators and data collection.

In addition, county reports do not provide comparable expenditure data on county functions to support policy analysis and development. There is no common departmental structure across counties and so no common basis for comparing public expenditure on subdepartmental functions. This makes it hard to compare spending data across counties, thus hampering policy analysis of aggregate expenditures and spending across counties.

The accuracy and consistency of county expenditure data also vary between various sources, making it difficult to analyze and make conclusions about county spending. There are inconsistencies between data collected by the Controller of Budget and county reporting through IFMIS. While these differences are relatively small at the aggregate level, they can be large for individual counties and types of expenditure. The lack of a standard, authoritative dataset for county expenditure is a concern if different conclusions can be drawn for individual counties from the two datasets.

Oversight of county public financial management

Counties are largely complying with fiscal responsibility principles. Looking at the requirement to spend at least 30 percent of their budget on development, in FY2016/17 all but one county budgeted at least 30 percent of their budget for development, and all but two in FY2017/18 (figure 4.15).

National oversight bodies are effectively scrutinizing county spending. The Controller of Budget has refused to release funds when counties have not complied with the rulings of oversight bodies or when counties have tried to spend on areas it does not consider to be permitted by legislation.

Unfortunately, however, counties are not effectively tapping into some of the available technical support from key oversight institutions. As provided in the Public Finance Management Act 2012, institutions such as the CRA provide