Devolution and asset management in transition: International experiences of relevance to current Kenyan challenges Institutional frameworks and procedures for transfer and

• Having low understanding and control over contingent liabilities granted to

PUCs that often remain hidden, unmeasured, and unaccounted for until the demand for payment is called

In sum, counties in Kenya should put a high emphasis also on professionally managing PUCs in the course of strategic AM, not only because they are legally invested assets, but also because they have strong impacts on budgets (this is the case in all seven surveyed counties, discussed in part II), expenditure control, and services and AM practices. These responsibilities are well regulated in sections 183–185 of the PFM Act 2012 in Kenya. On the other hand, the counties inherited an overly complicated and somewhat dysfunctional governance framework for the water services that includes the following:

• Water service boards (WSBs) established to develop, own, and lease water assets to county governments (dissolved in 2016) • The Water Services Regulatory Board (WASREB) as the regulator that provides licenses and approves water tariffs with lease fees payable to the

WASREB • Water works development agencies (WWDAs) with a mandate to develop cross-county public water works

As a result, the counties are unable to fully function as owners and regulators over their water companies; counties are constrained in developing assets, because WWDAs and WSBs often had undertaken most large developments without consulting with counties or water companies about the need, technical modalities, or financial feasibility. Consequently, counties and their water companies are not in full control of assets and expenditures. The Constitution and the Water Act 2016 require WASREB and WWDAs to hand over all assets and liabilities regarding the county water companies to the counties. However, this is a part of the tasks mandated by the Transition to Devolved Government Act of 2012 (TDG 2012) that has not been completed, that is, transferring assets from the national entities. This unclear and incomplete transition creates major losses and undermines the viability of the water companies, and in the longer term weakens viability of the counties’ water services.

DEVOLUTION AND ASSET MANAGEMENT IN TRANSITION: INTERNATIONAL EXPERIENCES OF RELEVANCE TO CURRENT KENYAN CHALLENGES

The Kenyan devolution program was built on international experiences. It established a solid legal, regulatory, and institutional framework and assigned service delivery functions (expenditure assignments) adequate to the Kenyan situation and the characteristics of the new county governments. It also assigned largely adequate revenues with good own-source revenue mandates (revenue assignment) and a reliable system of transfers from the national government to counties. The equitable shares that are unconditional transfers provide a reliable and substantial source of revenue with apparent equalization effects, although NCC seems to be slightly underfinanced as measured by the per capita equitable shares, which are about half of the national average. This underfinancing might need closer scrutiny.

This section focuses on one critical aspect of devolution, namely, transferring assets and liabilities across government entities, especially from defunct to new local governments in Kenya, without aiming to analyze the Kenya devolution program or discuss and summarize the enormous literature of devolution or decentralization around the world (KADP 2018).

The Kenya devolution in 2013 has numerous similarities to the devolution programs in Central and Eastern Europe (CEE) that occurred in the early 1990s, but also significant differences. The lessons of CEE may offer helpful examples and solutions for several burning issues still unresolved nine years into Kenya’s devolution. A most critical issue is the transfer of all assets related to the devolved functions, which has remained incomplete. The counties have received and partially taken over assets of the defunct local governments, but assets from national government entities have not yet been transferred. The other critical unresolved question is the counties’ takeover of disputed fixed and financial assets and liabilities and resolution of disputes. This section summarizes related international experiences to highlight options for Kenya.

Several other developing countries have reorganized their intergovernmental systems in recent decades with frameworks like CEE countries. For instance, Pakistan took a centralized approach under a military regime that sought improved legitimacy; the National Reconstruction Bureau guided and implemented the devolution in Pakistan starting in 2001. The devolution program was focused on setting up a devolved system for provinces and local governments in parallel. The National Reconstruction Bureau had strong power to delegate functions and responsibilities that experienced Pakistani academics modeled after devolved federal systems (Paracha 2003; World Bank 2004). The devolution in Nepal that started in 2015 has emulated devolution models from Pakistan and even learned lessons from Kenya’s devolution (Husain 2017).

Many Southeastern European countries also implemented decentralization or devolution programs by amalgamating small local governments into larger ones. Transferring inherited liabilities became a major problem in most of these countries, such as Albania, Bosnia and Herzegovina, and Montenegro, and most issues remained unresolved after three or four years or more in devolution (Merkaj, Zhllima, and Imami 2017). For instance, Montenegro’s finance ministry settled liabilities with creditors and then accounted them as loans to the new municipalities, which became overburdened with huge debts that have paralyzed their development capacities for decades to come (Kopanyi et al. 2018). This was a questionable solution that saved creditors but left all burdens on the shoulders of the new municipalities. Municipal associations and the finance ministry keep fighting to find workable and pragmatic solutions for this debt burden on municipalities.

Kenya’s devolution combined elements of both a big bang and a gradual transition. The devolution started as a big bang on March 27, 2013, with an immediate transfer of powers and responsibilities from defunct local entities to county governments as more than 1,500 entities were amalgamated into 47 counties. The transfer of assets and liabilities started a year before the local government elections, but it remained incomplete by the election. Instead, the transfer of assets and liabilities followed a gradual path and continued for over nine years. Unfortunately, this transition of assets has not been smooth, and it has generated substantial losses in both fixed and financial assets (see the Nairobi City County case study, chapter 6). Important actions are still needed and possible; these are the subject of this section.