Australian Capital Territory, 2018

providers US$20 per each new water connection and adds US$1.50 to each sold metro ticket and US$0.75 to each cubic meter of water billed and collected), and very often labor- and pension-related contingent liabilities. Financial liabilities are moving targets since they tend to change day to day by payments of due amounts, expiration of old accounts, or committing new liabilities.

Experience suggests that cities in developing and emerging economies should refrain from issuing bonds in or borrowing from international markets, especially in the long term (15–20 years), because they do not have revenues in foreign currencies, nor do they have the capacity to hedge against huge contingent liabilities of foreign exchange risks. This is a vital issue in managing financial liabilities.

In short, managing financial liabilities is part of prudent financial management, ALM, and liquidity management. Best ALM practices include provisioning of some specific contingent liabilities like guarantees provided or pension liabilities. Comparing the financial liabilities portfolios of ACT and NCC again helps draw important lessons on financial liabilities in developed and developing countries (see figure 6.6).

Debts. Debts include loans, bonds, or short-term instruments such as overdrafts. Debts are substantial in both NCC and ACT, and they are natural parts of the local government business. However, there are remarkable differences in these two structures. Inherited NCC debt is quite large (65 percent of the total inherited liabilities) and sizable (about 150 percent of the total budget of the 2016/17 fiscal year). Furthermore, about three-quarters of the loans were borrowed with national government guarantees from international donors and are nonperforming, some for over a decade. This means that the National Treasury services NCC’s debt, committed before and after devolution. However, the treasury (not NCCG) accounts these guarantee payments as liabilities against NCC

FIGURE 6.6

Composition of financial liabilities of Nairobi City County, 2017, and Australian Capital Territory, 2018

70

Percentage of total financial liabilities 60

50

40

30

20

10

0

Termination and pension benefits Employee benefits Other Payables Advances received

Nairobi City County Australian Capital Territory Debt

Sources: ACT 2018; NCC CALC 2017.

that are not reflected in the NCC figures. This means that the present value of debt liabilities is much greater than the reported nominal value. In contrast, ACT loans are well accounted, professionally managed, and served in a timely manner. This is evidenced by the fact that ACT maintains a AAA long-term credit rating (ACT 2018).

Termination and pension benefits. These often are regulated by national law and often lead cities into difficult situations both in developed and developing countries (Grubišić, Nušinović, and Roje 2009; Holder 1998; Peskin 2001). The reason is that cities tend to address these labor liabilities as secondary to more urgent payments, such as wages, electricity, or fuel. Another reason is that these liabilities are less visible and do not cause immediate harm if transfer of the due amounts is delayed sometimes for years. This is particularly compelling when the cities manage the respective pension funds themselves (called a “superannuation fund” in Australia). Another mistreatment of these funds, which are also off-budget, is that cities may transfer money back to the budget to prevent liquidity crises or even for fraudulent purposes and fail to return the money later. Such a case happened in Kampala in the early 2000s (Kopanyi and Franzsen 2018).

Deferred payments to national pension funds. In many countries, cities must pay labor- and pension-related contributions into national or sectoral pension funds but suspend such due payments if money falls short, despite highinterest penalties and perpetual warnings. This was the case of the CCN predecessor local government of NCC. There are often tacit agreements between the funds and the cities, in part because the fund managers are aware of how difficult it is to enforce these payments, but also they may expect that the national government will eventually bail out the cities instead of letting them go bankrupt.

Pension liabilities. NCC, as previously discussed, has inherited a sizable volume (about 15 percent of total inherited liabilities) of overdue liabilities on pension funds since predecessors failed to transfer statutory deductions to national pension funds (for example, LAPFUND and LAPTRUST). The amount is not only sizable but is growing daily at a 15–35 percent annual rate of penalties since devolution in 2013. The NCC’s liability is overdue and thus no longer contingent but direct debt. In contrast, the ACT inherited a gigantic volume of contingent liabilities due to the regulatory changes that moved the pension benefit system from a pay-as-you-go system to a defined benefit scheme in Australia in 2005, although employees who were in the earlier system must be paid out from the old scheme.

The good aspect of this is that ACT clearly calculated this contingent liability based on the number of employees and their employment profiles and adopted a long-term plan to gradually extinguish this contingent liability by paying in a timely manner and fairly the due benefits at the day of retirement, but also gradually replenishing a special fund that would back the contingent liability fully by 2030. A lesson also worth noting is that such big liabilities require both strategic decisions and time to work out. Thus, figure 6.6 reflects two very different situations regarding termination and pension benefits. Finally, the ACT liabilities are gigantic but under control, while the NCC liabilities are out of control; they became direct payables with no clear workout plan.

CHALLENGES NCC CALC FACED DURING VERIFICATION AND VALIDATION OF INHERITED ASSETS AND LIABILITIES IN 2017

In their report, the CALC teams highlighted major challenges they faced during the verification process. Many of these are mentioned in the previous sections, but following is a summary of some critical challenges and impediments that hampered and lowered the quality of the verification and the report.

• The field-team members were not trained properly on how to carry out the verification and validation exercise. As a result, their performance was lower than expected; some provided inconsistent information to the CALC secretariat and prepared likewise inconsistent reports with different length, scopes, and quality. • Severe shortages of transport options and fuel hampered fieldwork. There was a transport hitch due to a grave shortage of vehicles for CALC. When they were available there was no fuel for days. (Some vehicles were made available only because there was no fuel for regular users.) • The officers who worked in verification field-teams were not released from their normal duties, so they had limited energy and time for and attention to verification. • Severe shortages of stationery and office equipment such as cameras, computers, laptops, printers, and scanners hampered the verification work during both the back-office and field stages. • CALC did not reconvene after July 2017 and hence was not accessible to receive updates or advise on the way forward. • Political uncertainty and demonstrations hampered fieldwork during the election campaign and postelection period in July–November 2017 (the peak of the asset verification period).

NCCG ACHIEVEMENTS IN DEVELOPING A FRAMEWORK AND INSTRUMENTS AND MANAGING COUNTY ASSETS

The NCC Integrated Development Plan 2013–17 states that NCC should implement an asset management system; create a plan and procedures to ensure assets are adequately maintained and used effectively, efficiently, and for intended purposes; and develop an integrated asset register and processes for regular updating (NCC 2014, 85). Also, the asset management (disposal, inventory, maintenance, repair, and so forth) and asset maintenance programs should be rolled out to the subcounty level. NCCG set up an AMDR in early 2016, under the Finance and Economic Planning division, with the objective of institutionalizing an integrated approach to the acquisition, monitoring, operation, maintenance, relocation, upgrading, and disposal of assets in a cost-effective manner. The following are the stated functions of the AMDR:

• Exercise stewardship over all assets. • Maintain the county asset management system. • Create and maintain the county master asset register. • Develop and review an asset management policy and plans. • Prepare annual financial statements data for capital assets. • Schedule and perform physical asset verification of fixed assets.

• Approve and coordinate the final disposition of all surplus and obsolete assets. • Facilitate the insurance of county movable and immovable assets. • Revaluate assets.

NCCG has been working at the forefront of Kenya’s devolution reforms, including establishing a framework, adopting instruments, and managing assets as a good bearer daily. NCCG established the first AMDR in Kenya in 2016; this is strong evidence of recognition of the importance of and the need for professional and high-level management of county assets. AMDR also started to position itself toward other departments and service sectors, albeit in a modality that leans toward accounting-oriented asset management. AMDR also early on approached international donors (including the World Bank and USAID) to seek technical assistance to boost asset management knowledge and professional capacities on a fast-track mode. The main results to date include the following:

• The county has a well-established AMDR with qualified staff. • AMDR became the secretariat of the Nairobi CALC, with the pivotal role of organizing and managing field verifications. • There is a draft county asset management policy (NCC 2017b), the first of its kind in Kenya. (It is used as one source of the asset management policy template presented in appendix A.) • There is a draft asset management strategy (NCC 2017a) built on key strategic documents such as county vision, county strategy 2015–25 (NCC 2018c), master plan, detailed development plan, and so on presented in appendix B. • The initial asset management plan (NCC 2017c) focused on establishing the asset management framework, entities, and instruments presented in appendix C. • AMDR has become an informal leader and guide on asset management, and with shared documents has informed and inspired other smaller counties to work on asset management more systematically. • AMDR has drafted ToR (presented in appendix D) for establishing a highlevel strategic asset management advisory committee (the Asset and Liability

Supreme Committee, or ALSC) to scrutinize, support, and propose strategic asset management decisions for top county administration and governing bodies, and more important, to back AMDR, which has achieved only a lightweight position in the county administration. But the ALSC is still to be established. • AMDR has completed a number of asset-management trainings for various county entities. • NCCG has appropriated a budget and drafted ToR for hiring a qualified firm for tagging and registering fixed assets (NCC 2018a).

AMDR has made heroic, substantial, logical, and systematic efforts toward developing a framework, a system, and procedures for modern asset management in NCC. However, the higher governing bodies (assembly, county cabinet, and governor) have not approved these drafts, in part because of the subsequent second county election after devolution in 2017. The outgoing governing bodies and personnel were busy with the election and postponed dialogue and decisions about asset management, and then the incoming new county government and governor initiated a substantial rotation of high-level staff and put asset management reform into a second group of priority actions. Despite a low level