Public Finance Under the New Constitution

 

 

 

 

 

 

Prudence. Equity. Accountability

 

Contents

Introduction


Structure

 

 

Kenya's New Constitution provides for a total of 47 political and administrative Counties (listed in the First Schedule of the Constitution of Kenya 2010), under a limited devolved system of government. Consequently, the structure of Public Finance in Kenya has been remodeled to conform to this new concept of devolution.

Going forward, all public revenue will be kept in one of several Constitutional Funds: Revenue raised by or allocated to a County will be kept in County Funds, while that raised by the National government will be kept in various National Funds. 

Allocation

The New Constitution provides that each year, a minimum amount of all the revenue raised nationally shall be disbursed to the Counties. The formula used in the disbursement has two components. The first component measuring at least 15% of national revenue, will be shared out to all the 47 Counties, and factors the size, population, area, poverty levels etc., of a County.

The second component measuring a fixed 0.5% of national revenue, will be shared between those Counties considered to have sizeable areas within them that are classified as marginalised.

Basically, the first component provides for equitable sharing of revenue (fiscal devolution), while the second introduces an equalization component to revenue share (an affirmative action).

Administration

County Funds will be administered by County governments. National Funds will be shared and managed by different State Organs including the National Executive, the Judiciary, the Registrar of Political Parties, Treasury, etc.

Every Public Fund will be subject to the oversight of an elected body, the authority of the Controller of Budget and the scrutiny of the Auditor-General.

The Governor of a County is the only elected official under the CoK2010 who will directly be involved in the day-to-day administration of a Public Fund.

 

 

Introduction

 

As has been noted in the table above, the Constitution of Kenya 2010 provides for a total of 47 political and administrative Counties (listed in the First Schedule of the New Constitution), under a limited devolved system of government. Kenya's devolution is therefore inter alia, designed to restore the people's authority over Public Finances. Indeed, devolution is one of the many changes contained in the New Constitution's underlying theme of retaking the instruments of power from a central authority to regional governments and representatives.  The need to correct past executive excesses and abuses was a major influence on this theme in which the idea of fiscal decentralization has taken a prominent status.

While devolution introduces new layers of government and associated costs, it is the hope of everyone that with time, the hoped-for improvements in the democratic and governance frameworks as promised by the New Constitution would more than compensate for the additional costs and actually deliver cost savings. Secondly, each level of government has been sufficiently empowered by the constitution and the law to apply maximum leverage on innovative home-grown models to raising internal revenues. And thirdly, a truly empowered National Assembly and a new Senate working together with powerful constitutional Commissions and Independent Offices have been mandated to protect the people's sovereignty and control over Public Finance as well as to conduct regular audit of those finances.

It is not hard to see that previous 'devolution funds' such as the Constituency Development Fund CDF, the Economic Stimulus Program ESP, the Health Sector Services Fund HSSF, the Local Authorities Transfer Fund LATF, etc., have no place in the new constitutional dispensation of devolved governments. County governments are therefore a timely idea with respect to devolved funds in that, "These governments stand to reconfigure development through not merely a transfer of resources, but also a transfer of responsibility for a county's development" (Nyamori, R 2013)

Most of these funds were generally weak in administrative structures, planning, accountability and audit. In particular, the CDF and the ESP, were hijacked by the elite and shared out using weak policy frameworks of political expediency rather than equitable fiscal decentralisation desired by the people of Kenya. For example, CDF's very formula, which relied largely on a weakly-computed poverty index function, failed to address more important considerations that devolution ought to consider like size, population, equity and marginalisation of people, etc.

Furthermore, the area member of parliament or MP, was the implementer-in-chief of the Fund, a function, clearly not intended for law makers; meaning huge challenges of transparency and accountability dogged the Fund every year.  Indeed, the yearly audit reports of the CDF made (and continue to make) for very sad and depressing reading.

Equally, the ESP also failed to 'treat unequals equally': "For example, in the 2010/11 Budget, funds for the Economic Stimulus Programme (ESP) were shared equally among the constituencies, irrespective of variations in population and poverty levels, which would be open to questions under the principle of equity. Money for employment of teachers was similarly allocated equally to each constituency. In both cases, no attempt appears to have been made to assess the actual needs on the ground, for example, the number of schools per constituency. In the case of teachers, some constituencies have fewer than ten secondary schools in total while others have more than 50" (Kirira, N 2011). 

For reasons quite at odds, in my view, with the new constitutional dispensation, the (Jubilee) Government that was formed after the first General Elections of 2013 under the New Constitution, maintained a spirited campaign against the abolition of these funds with the well-sounding promise to revamp their reach, function, and administration. In fact, it established yet another 'national' fund in September 2013 under the Ministry of Devolution and Planning known as the Uwezo Fund, and arguing that the fund goes beyond merely lending money to its target groups, it emphasised that it (the Fund) offers entrepreneurship training, business skills, business incubation, industrial promotion, and catalyses innovation amongst its borrowers.

These funds have not, however, lacked public support especially given that the Jubilee Government promised that 30% of government tenders must be given to women, youth and persons living with disability -  the target group of Uwezo. Similar funds as the Uwezo include the Youth Enterprise Development Fund YEDF - described as a revolving fund, and the Women Enterprise Fund, WEF.

 


 

Structure

 

Most of these funds under the old constitution were generally weak in administrative structures, planning, accountability and audit. In particular, the CDF and the ESP, remained shackled by the political elite who shared them out using weak policy frameworks for political expediency rather than equitable fiscal decentralisation desired by the people of Kenya for decades. For example, CDF's very formula, which relied largely on a weakly-computed poverty index function, failed to address more important considerations that devolution ought to consider like size, population, equity and marginalisation of people, etc.

Furthermore, the area member of parliament or MP, was the implementer-in-chief of the Fund, a function, clearly not intended for law makers; meaning huge challenges of transparency and accountability dogged the Fund every year.  Indeed, the yearly audit reports of the CDF made (and continue to make) for very sad and depressing reading.

Equally, the ESP also failed to 'treat unequals equally': "For example, in the 2010/11 Budget, funds for the Economic Stimulus Programme (ESP) were shared equally among the constituencies, irrespective of variations in population and poverty levels, which would be open to questions under the principle of equity. Money for employment of teachers was similarly allocated equally to each constituency. In both cases, no attempt appears to have been made to assess the actual needs on the ground, for example, the number of schools per constituency. In the case of teachers, some constituencies have fewer than ten secondary schools in total while others have more than 50" (Kirira, N 2011). 

For reasons quite at odds, in my view, with the new constitutional dispensation, the (Jubilee) Government that was formed after the first General Elections of 2013 under the New Constitution, maintained a spirited campaign against the abolition of these funds with the well-sounding promise to revamp their reach, function, and administration. In fact, it established yet another 'national' fund in September 2013 under the Ministry of Devolution and Planning known as the Uwezo Fund, and arguing that the fund goes beyond merely lending money to its target groups, it emphasised that it (the Fund) offers entrepreneurship training, business skills, business incubation, industrial promotion, and catalyses innovation amongst its borrowers.

These funds have not, however, lacked public support especially given that the Jubilee Government promised that 30% of government tenders must be given to women, youth and persons living with disability - the target group of Uwezo. Similar funds as the Uwezo include the Youth Enterprise Development Fund YEDF - described as a revolving fund, and the Women Enterprise Fund, WEF.

However, the new structures of Public Finance closely follow the devolution model. This means that Public Finance has both a National and a County component. The following table presents a summarised layout of the new constitutional structures mandated to manage Public Finances:

 

Table 1: Structure of Public Funds Under the New Constitution

 

National Revenue
County Revenue

Consolidated Fund

Equalisation Fund

Contingencies Fund

Revenue Fund 

Judiciary Fund

Political Parties Fund

 

 

 

 

Thus, every resource categorised as Public Finance will be in either of two Funds i.e., in either a national Revenue Fund or a county Revenue Fund, collectively known as Public Funds.

It is in this light that most experts, led by no less than the Commission for the Implementation of the Constitution CIC from the get go consistently voiced their opposition to the enactment of the Constituency Development Fund Act 2013 advising that it contravenes the Constitution. They contended that the Act purports to create a 'third' Fund for use in the Counties, contrary to the spirit and letter of the Constitution of Kenya with respect to devolution. 

Indeed, on the 20th of February 2015, the High Court ruled that the CDF Act 2013 was "unconstitutional and therefore invalid". The ruling followed an application by a civil rights organisation - The Institute for Social Accountability (TISA) - "........ and sought to address four main issues; whether process of the enactment of the CDF was constitutional, whether it violated the principles of finance and division of revenue, whether it violated the division of powers and functions and whether the CDF Act 2003 offends the principle of separation of powers." (Capital News, 2015).

It has been the view of this author that the drafters of the Constitution were careful enough to create a healthy balance between centralised and devolved structures of administration of Public Funds by providing for the establishment of additional (vertical) Public Funds through legislation. To this end, the Public Finance Management Act 2012 and the Contingencies and Emergency Fund Act 2011 provides for the following expanded structures of Public Funds:

 

Table 2: Expanded Structure of Public Funds Established by Legislation as at 2015

 

National Revenue
County Revenue

Consolidated Fund

Equalisation Fund

Contingencies Fund

Revenue Fund

Emergency Fund 

Judiciary Fund

Political Parties Fund

Parliamentary Fund

Uwezo Fund

Youth Enterprise Development Fund

Women Enterprise Fund

 

 

   

 

The Cabinet Secretary for Finance is empowered by legislation to establish additional national Funds. Section 24 of the Public Finance Management Act 2012, excerpts:

24. (4) The Cabinet Secretary may establish a national government public fund with the approval of the National Assembly.

Similarly, Counties are permitted notably by the Constitution itself, to establish specialised County Funds. Chapter 12 - Public Finance, Part 2 - Other Public Funds:

207. (4) An Act of Parliament may— (b) provide for the establishment of other funds by counties and the management of those funds.

Indeed, Section 116 of the Public Finance Management Act 2012 empowers the County's Executive Committee member for finance to establish other local (specialised) public funds:

116. (1) A County Executive Committee member for finance may establish other public funds with the approval of the County Executive Committee and the county assembly.

Within the framework of devolved structures of Public Funds it is possible to demand strict accountability and transparency, as well as inclusivity in their allocation and management, more so when their target is the marginalsised and minorities at the local level. Part 1 - Principals of Public Finance, Article 201:

201. (a) there shall be openness and accountability, including public participation in financial matters;

Every Fund, State Organ and government will be structured such that there is a designated accounting officer - with whom the buck stops on matters of Public Finance. Excerpts from Article 225 in Part 6 - Control of Public Money:

226. (1) An Act of Parliament shall provide for— (b) the designation of an accounting officer in every public entity at the national and county level of government.

Thus whether it is a member of the public, or a committee of a County Assembly, or the Controller of Budget, or the Auditor General, or Parliament, or a Commission asking the hard questions, a specific accounting officer of the Fund in question is obligated to provide answers. The constitutional provisions on the structure of both National and County Funds and on the people to manage them, are expounded in the lengthy Public Finance Management Act 2012 which came to effect upon the conclusion of the first General Elections under the New Constitution in March 2013.

 


 

 

Allocation

 

One of the fundamental statements in the Constitution of Kenya 2010 is on the 'national cake'; that it must be shared equitably. Hence allocations of Public Finances is closely tied to the new governance model of devolution. This model is designed to facilitate the fair sharing of the Public Revenue. Excerpts from Article 201 in Chapter 12 - Public Finance, Part 1 - Principals and Framework of Public Finance:

201. The following principles shall guide all aspects of public finance in the Republic— (b) the public finance system shall promote an equitable society, .......(ii) revenue raised nationally shall be shared equitably among national and county governments; and (iii) expenditure shall promote the equitable development of the country, including by making special provision for marginalised groups and areas; 

Whether for emphasis or otherwise, the same is repeated:

202. (1) Revenue raised nationally shall be shared equitably among the national and county governments.

The details of the actual amounts allocated to the National Government in the 2014/15 financial year are beyond the scope of this discussion. However, the interested reader may follow this link on the budget amounts: "Understanding what the Kenyan Government spends money on." 

Equitable sharing of public revenue must be wholesome in its allocation - covering the entire gamut of all monies coming in or going out of the entire Public Finance system, i.e., tax, allocation, expenditure and debt:

201. The following principles shall guide all aspects of public finance in the Republic— (b) the public finance system shall promote an equitable society, and in particular— (i) the burden of taxation shall be shared fairly;

214. (1) ........ an Act of Parliament may provide for charging all or part of the public debt to other public funds.

Furthermore, equitable allocation and sharing of the entire public finance also means it must be evenly spread over time:

201. (c) the burdens and benefits of the use of resources and public borrowing shall be shared equitably between present and future generations;

The Public Finance Management Act 2012 spells out the details that govern these allocations, and in particular, establishes a Public Debt Management Office to oversee both national and county debts, in direct fulfillment of the Constitution's demands for prudence with regard to debt.

Sharing of the national cake will not be a case of "throwing good money after bad" just to fulfill a law. Every County's allocations or any financial request/need will be considered on its own merit. Key amongst the financial and accounting considerations to be made with every allocation will be prudence, discipline, capacity, GDP, positive affirmation of minorities, etc, all the while keeping tabs on the national collective good:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter— (a) the national interest; (b) any provision that must be made in respect of the public debt and other national obligations; (c) the needs of the national government, determined by objective criteria;
(d) the need to ensure that county governments are able to perform the functions allocated to them; (e) the fiscal capacity and efficiency of county governments; (f) developmental and other needs of counties; (g) economic disparities within and among counties and the need to remedy them; (h) the need for affirmative action in respect of disadvantaged areas and groups; (i) the need for economic optimisation of each county and to provide incentives for each county to optimise its capacity to raise revenue; (j) the desirability of stable and predictable allocations of revenue; and (k) the need for flexibility in responding to emergencies and other temporary needs, based on similar objective criteria.

Indeed, given the sharp political emotions that often accompany resource allocations anywhere, the country is likely to find itself engaged in constant bickering fueled by the political class no less, especially where the said allocations have caveats imposed on them, or have been skimmed to enforce prudence in the use of Public Funds.

It should come as no surprise therefore, that the Secretary for Finance has authority to stop any allocation that in his/her opinion would jeaopardise the sound management and accountability of any public finances to devolved Governments:

219. A county’s share of revenue raised by the national government shall be transferred to the county without undue delay and without deduction, except when the transfer has been stopped under Article 225.

The powers to stop a transfer of Public Funds vests with the Secretary of Finance and extend to any State organ (since it is a manager of Public Funds):

225. (3) Legislation under clause (2) may authorise the Cabinet Secretary responsible for finance to stop the transfer of funds to a State organ or any other public entity— (a) only for a serious material breach or persistent material breaches of the measures established under that legislation; ........

The details of the legislation referred to above is contained in the Public Finance Management Act 2012's Part III. 

To be fair to the affected State Organ or County, these powers have limitations in scope and period lest they became punitive. Clauses (4) to (7) of Article 225 detail the involvement of Parliament and the Controller of Budget in the facilitation of an amicable and just resolution should a public body find itself in the unfortunate situation whereby its funding is suspended, or frozen altogether. That involvement is discussed under the roles of the National Assembly and Senate, and the Controller of Budget, respectively.

Various Bills and legislation considered in the relevant House of Parliament, will govern the criteria to be used in the allocation of Public Finance into the relevant receiving Fund. This legislative process may involve the people directly, and will be subject to technical input from the Commission on Revenue Allocation CRA. For example, Parliament did indeed invite the public to participate in the preparation of the first Division of Revenue Bill after the first General Elections in 2013 under the Constitution of Kenya 2010.

The amount allocated to the Counties is set at a minimum 15 per cent of National Revenue:

203. (2) For every financial year, the equitable share of the revenue raised nationally that is allocated to county governments shall be not less than fifteen per cent of all revenue collected by the national government.

Some scholars have suggested that this (low) percentage is an indication that Kenya's devolution is of a limited degree. Others, who prefer to see the glass as half-full, counter by pointing out that it is a minimum and not a fixed amount.

Indeed, barely a few months into the new dispensation after the General Elections of March 2013, there emerged sustained calls from a cross-section of the political class calling for a constitutional referendum to raise this minimum to 40 per cent ostensibly to "fully empower County Governments". Those opposed to the calls for a referendum argued that by allocating over 32 per cent of (audited and approved) revenue to County Governments in its first budget, the National Government had zealously demonstrated its commitment to Article 203. (2), and by extension, to devolution.

The debate and politics around the call for increased allocations soon fizzled out. However, in the following year, debate on the same issue resumed, taking even greater public prominence particularly around July and August of 2014, as part of a wider set of demands by the political opposition alliance CORD and the Council of Governors (COG), at a time when debate in Parliament on the Division of Revenue Act No. 12 of 2014 for the 2014/2015 financial year was on-going. 

Although this 2014 Act allocated 43% of revenues, this translated to just 226 billion shillings in a year when national revenues were projected to reach close to 1 trillion shillings, as the Act's amounts were based on the 2008/2009 accounts. These happened to be the last audited-and-Parliament-approved accounts at the time:

(3) The amount referred to in clause (2) shall be calculated on the basis of the most recent audited accounts of revenue received, as approved by the National Assembly.

Thus going forward, there is urgent need for greater efficiency and speed on the part of the National Assembly to dispense with the audit reports of national revenues in order to prevent the current situation where the National Government continues to retain what is by far, the lion's share of revenue raised nationally in a given year. Having said that, even if these accounts were to be approved on time, the allocations to the 48 Governments ought to and must be calculated using fresh, up to date data on the twin costs of national and devolved functions.

No such accurate data exists or is forthcoming from the Counties or from the COG in support of their demands. Ideally, such data should be provided by the Commission on Revenue Allocation CRA in whose mandate it is to determine allocations.

The Commission received its fair share of criticism for failing to shepherd the debate on what should be the correct share percentages of the national cake:

"The Pesa Mashinani initiative by governors is also unconstitutional ....... . Those promoting this initiative have, in effect, illegally usurped the functions of the Commission for Revenue Allocation as set out at Article 216. Incredibly, even the commission itself is constrained on how to go about its work. It is actually baffling that Mr Micah Cheserem and his team are sitting by watching a band of politicians take over their constitutional mandate without a fight! We should expect the Commission for Revenue Allocation to protect their constitutional mandate, in court if necessary. The bottom line is that the determination of the amounts to be allocated to counties and among counties is a professional undertaking that requires very demanding and specific core competences that our governors do not possess."(Kiriro wa Ngugi, September 2014).

Be that as it may, some experts feel that allocating 45% of national revenues is risky and would likely harm the operations of the National Government. "....... a fixed figure of, say 40 or 45 per cent of the budget, going to counties negates the constitutional flexibility of Parliament to negotiate allocation of funds to both levels of government." (Murkommen, 2014).

Moving on, money allocated to a County is sent to its respective County Fund. This is where the Senate plays a major role in the formulation of the allocation criteria governing these devolution Funds. This formula generally follows the 5-year cycle of General Elections:

217. (1) Once every five years, the Senate shall, by resolution, determine the basis for allocating among the counties the share of national revenue that is annually allocated to the county level of government.

Article 217 (1) affirms that the process of determining these allocations must be insulated from political roller coasters that daily politics generates. "The institutional arrangements in the new Constitution are designed to avoid discretionary decision making and a repeat of past abuses, so as to reduce the influence of political and vested interests in resource allocations" (Kirira, N 2011).

It (the process) will also be quite inclusive - key players and stakeholders (including Governors, professionals and the general public) will be invited to engage with the Senate in the preparation of the formulae that will govern these allocations of fiscal devolution:

217. (2) In determining the basis of revenue sharing under clause (1), the Senate shall— (a) take the criteria in Article 203 (1) into account; (b) request and consider recommendations from the Commission on Revenue Allocation; (c) consult the county governors, the Cabinet Secretary responsible for finance and any organisation of county governments; and (d) invite the public, including professional bodies, to make submissions to it on the matter.

These invitations to the public and professional bodies to participate in the Budget-making process are provided for in Section 207 of the Public Finance Management Act 2012. The section is most inclusive and fair as it goes even further to provide for the "receipt, processing and consideration of petitions, and complaints lodged by members of the community;........"

Although the review process by the Senate is most inclusive, the first draft proposal prepared by the Commission for Revenue Allocation in 2012 elicited sharp reactions from various stakeholders, spearheaded, no less, than by sitting members of the 10th Parliament.

A peek at the draft by CRA reveals the following highlights of allocation for the 2013 - 2017 election cycle:

 

Table 2.1 County Equitable Share Formula First Proposed by the CRA

 

County Equitable Share Formula Parameters and Weights of the Formula

EQUITABLE SHARE Ca= ∑ (Pi + PVi +Ai+BSi+FDi)

WHERE

Ca     =    COUNTY REVENUE SHARE

P       =    COUNTY’s SHARE OF POPULATION COMPONENT

PV     =    COUNTY’s SHARE OF POVERTY COMPONENT

A        =    COUNTY’s SHARE OF LAND AREA COMPONENT

BS     =    COUNTY’S EQUAL SHARE COMPONENT

FD     =    COUNTY’S SHARE OF FISCAL DISCIPLINE COMPONENT

cra's parameters-and-weights-of-the-county equitable share formula

 

Finally a consultative engagement between stakeholders settled on the following general formula, subject to regular (at least yearly) reviews:

 

Figure 2.1 County Equitable Share Formula Revised by the 10th Parliament

 

CRAs revised Division of Revenue Formular for 2013

Source: CRA Website

 

Given the wide demographic disparities that exist between the 47 Counties of Kenya, it is not hard to see why due consideration ought to have been given to the following key sub-clauses of Article 203 in particular in the preparation of the County Allocation of Revenue Bill 2013:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter—  (d) the need to ensure that county governments are able to perform the functions allocated to them; (e) the fiscal capacity and efficiency of county governments; (f) developmental and other needs of counties; (g) economic disparities within and among counties and the need to remedy them; (h) the need for affirmative action in respect of disadvantaged areas and groups; (i) the need for economic optimisation of each county and to provide incentives for each county to optimise its capacity to raise revenue;

The CRA admitted in November 2014 when releasing the second allocation formula that it did not have real data to enable it meet the threshold of Article 203 (1). "The use of a sector based approach to revenue sharing requires the establishment of unit cost of different services in different counties based on acceptable norms and standards. The Commission on Revenue Allocation together with the Transition Authority has commenced the process of commissioning a comprehensive study to establish unit costs of key devolved functions in different counties based on acceptable standards and norms in each sector.. The Kenya National Bureau of Statistics is also in the process of commencing collection of data and information using county integrated household and budget surveys to measures various outcome indicators. These processes of generating new information will take some time to complete." Thus only minimum changes from the first allocation were proposed.

Furthermore, the Council of Governors did not help matters in August 2013 when it led a spirited public chorus of condemnation against the Transition Authority's measured transfer of devolved functions - which essentially sought to have devolved funds follow ability i.e., (measurable) human, infrastructural and fiscal capacity of individual Counties to provide efficient services. 

Although the heat generated in the public space over resource allocations for the 2013-2014 financial year later cooled down, many experts on public budgeting, governance, and policy, were of the view that there is need for an urgent review of the formulae used by the CRA and by extension, the Senate, for the 2013/2014 allocations and those after that. There is widespread concurrence that these formulae were too generalised and gave scant attention to the sub-clauses highlighted in Article 203 above.

For example, the three-pronged gist of the International Budget Partnership IBP budget brief on what should be the correct and true definition of fair sharing of public finance, begins by making the point that resource allocation must be guided by a comprehensive evaluation of what are the precise needs of a people - County by County; that there must be incisive application of wider demographic data in the determination of the capacity of different social-economic groups within and across Counties, to contribute to their well-being and hence, access to their rightful share of resources; and thirdly, there must be clear and unambiguous positive (or negative) consequences in how well a County or locale uses (or abuses) resources given to it. While discussing the place of need in resource allocation, the brief lends credence to the Constitution's thematic and recurrent emphasis on positive affirmation of minorities and the marginalised by highlighting their unique circumstances. The same principals ought to as a matter of course, be used to guide a County's budget allocations to its different sub-Counties where minorities and the marginalised are found.

From the onset, the CRA has had its work cut. It must stay the course during every budget cycle and focus on the constant need of managing public expectations by countering the often-skewed and misleading opinions of the political class. Indeed, the two Houses of Parliament happily played the political card in public when they differed sharply over the amounts to be shared by the County governments and the National government in the Division of Revenue Bill for the 2013/2014 financial year, causing the more important details of the proposed budget estimates to be lost in the resultant din. The disagreements arose firstly because the Senate was unhappy with the decision of the National Assembly to totally ignore its proposed amendments to the Bill in which it (the Senate) sought to raise the allocation to the counties from KShs 210 to KShs 258 billion; and secondly because it felt slighted by the National Assembly's opinion that "the Senate has no constitutional role" in the preparation of "a money Bill", although, curiously, its Speaker happened to have forward the said Bill to the Senate for consideration!

The Senate sought in June 2013, an advisory opinion from the Supreme Court, accusing the National Assembly of monopolising the process of revenue division, "The question was: whether the National Assembly was right in monopolizing law-making powers on the very financial question which, alone, would determine the success or failure of the operations of counties, and of the whole scheme of devolved government which lies at the core of the current constitutional order." The Court ruled on November 1, 2013, and generally in favour of the Senate affirming that, "......., it was unconstitutional for the Speaker of the National Assembly to by-pass the Senatorial process, by not going through the mediation arrangement provided in the Constitution." (Advisory Opinion 2 of 2013).

Interestingly, the Supreme Court's ruling on the nature of the Bill was not unanimous; one dissenting Judge was of the opinion that the Bill was a money Bill and therefore fell, "....... within the exclusive mandate of the National Assembly and out of the competence of the Senate.

With or without the partisan and competing interests from Parliament, the Commission must therefore go full throttle to educate the public on what the terms 'equitable' and 'equalisation' really mean in the context of the Constitution of Kenya 2010. Article 249 is apt:

249. (1) The objects of the commissions ........ are to— (a) protect the sovereignty of the people; (b) secure the observance by all State organs of democratic values and principles; and (c) promote constitutionalism.

In early August 2013, the Senate enacted the County Allocation of Revenue Act No 34 of 2013, that spells out how the devolved Funds would be allocated. The Act has three schedules detailing the actual allocation of amounts as largely advised by the Commission on Revenue Allocation CRA, as follows: 

The First Schedule gives the weighted parameters of the shareable revenue (amounting to KShs 190 Billion) to the 47 Counties as given on Table 2.1 above. The Second Schedule gives the actual amounts allocated to each County. Finally, the Third Schedule of the Act tabulates the conditional allocations to be made to each County (amounting to a further KShs 20 Billion).

The well-designed International Budget Partnership - Kenya infographic below ably provides a useful visual of how much money was assigned to each parameter of allocation:

 

Figure 2.2: Distribution of Equitable Share Among Counties for the 2013/2014 Year

 

Source: International Budget Partnership - Kenya.

 

The next question then becomes, what does this mean in terms of what an individual County received? The answer lies in tabulating the comparative size of each County's parameters (i.e., population, poverty, land area, etc.) to its peers and mapping that to the share allocated for that parameter for the entire 47 Counties. Once again, the infographics from IBP - Kenya demonstrates this process clearly:

 

Figure 2.3: How Individual County Allocations are Arrived At

Source: International Budget Partnership - Kenya.

 

As was noted earlier, both the general public and professionals are obligated to give their own views and opinions on the sharing of revenue. To illustrate this point, the reader is invited for a moment to revisit Article 217 of the Constitution:

217. (2) In determining the basis of revenue sharing under clause (1), the Senate shall— (d) invite the public, including professional bodies, to make submissions to it on the matter. 

A lot of engagement on the matter took place in 2014 between the Senate, the Commission for Revenue Allocation, the public and professionals in readiness for the 2015/2016 financial year given that the first two reviews of the basis of revenue sharing must take place at three (and not five) year cycles Excerpt from the Sixth Schedule - Transitional and Consequential Provisions - Part 4 - Devolved Government:

16. Despite Article 217 (1), the first and second determinations of the basis of the division of revenue among the counties shall be made at three year intervals, rather than every five years as provided in that Article.

Some of these submissions - notably from professionals from the International Budget Partnership, advocated for a radical rethink of CRA's old formular that had been in use since the 2012/2013 financial year, and instead suggested a more modern basis of determination based on need (measurable community programs), capacity, and effort of an individual County.

In the end, all the stakeholders (and especially the Council of Governors) participating in the determination of these formulae will do well to remember that revenue sharing and indeed the entire process of constitution making is a give and take process designed to deliver peaceful political outcomes. 

 


 

Administration

 

The administration of Kenya's Public Finance is expected to be professional, well planned and disciplined:

201. The following principles shall guide all aspects of public finance in the Republic—  (d) public money shall be used in a prudent and responsible way; and (e) financial management shall be responsible, and fiscal reporting shall be clear.

The New Constitution is clear about the consequences of irresponsible management of Public Funds:

226. (5) If the holder of a public office, including a political office, directs or approves the use of public funds contrary to law or instructions, the person is liable for any loss arising from that use and shall make good the loss, whether the person remains the holder of the office or not.

Good as these requirements may be, the New Constitution has placed checks and balances on the administration of Public Funds by requiring that oversight legislation (which essentially assigns national and sub-national assemblies the task of monitoring and oversight), be enacted. Given that Kenya's devolution encompasses the executive and legislative arms of government, the administration of Public Finance is subject to the cooperation between the National/County Executives  and Parliamentary/County Assemblies respectively. In other words, Public Finance will be managed under the respective Funds by either the national or county executive, while subject to National or County legislation and oversight as the case may be, or both. Parts II and IV of the Public Finance Management Act 2012 not only provide for the consequence of misuse or abuse of these monies by a public or State official, but provide for the oversight roles of national and county legislative bodies over the same.

A properly functioning Public Finance system will take time to mature given the rot in the Public Service and the Legislature. As the Judiciary undergoes a rebirth, and appointments in the Public Service follow merit and begin to reflect the face of Kenya, and (hopefully), cleaner lawmakers are ushered in after the 2013 elections and beyond, the Kenyan public is likely to witness a revamped Public Finance order - one that is better managed, with clear controls, and publishes timely and accurate reports. Additionally, an efficient Director of Public Prosecution and an effective Ethics and Anti-Corruption Commission will also play a critical role in the punishment and deterrence of those who may be inclined to dip their hand in the public till.

With everyone mandated to ensure responsible and transparent utilisation of public funds playing their rightful and constitutional roles, the public expects decisive action on those who have flouted procurement regulations and fleeced the public:

227. (2) An Act of Parliament shall prescribe a framework within which policies relating to procurement and asset disposal shall be implemented and may provide for all or any of the following— (c) sanctions against contractors that have not performed according to professionally regulated procedures, contractual agreements or legislation; and (d) sanctions against persons who have defaulted on their tax obligations, or have been guilty of corrupt practices or serious violations of fair employment laws and practices.

The Constitution stipulates that clear, specific legislation be enacted that compels regular reporting of fiscal administration of Public Finance to the people's elected representatives; timely reports on how Public Finance is being administered at every stage including how lower levels of sub-national governments are managing it. Excerpts from Article 225 and 226 in Part 6 - Control of Public Money:

225. (2) Parliament shall enact legislation to ensure both expenditure control and transparency in all governments and establish mechanisms to ensure their implementation.  

226. (1) An Act of Parliament shall provide for— (a) the keeping of financial records and the auditing of accounts of all governments and other public entities, and prescribe other measures for securing efficient and transparent fiscal management; ........

Once again, Articles 225. (2) and 226. (1) are effected via the detailed Public Finance Management Act 2012, especially in its Part IV. It is noteworthy that Public financial management reforms did not begin with the enactment of the New Constitution in 2010 and the Act. As a matter of fact, back in 2006, the National Treasury had launched a 5 year (2006-2011) public financial management strategic plan whose flagship project is the technology-based Integrated Financial Management Information System (IFMIS) that is expected to be rolled out to all National and County Government offices as devolution takes shape. IFMIS bundles all financial management functions into one suite of applications, thus enabling both levels of Government to employ a common end-to-end platform and standardised template, beginning from budget requests, to banking, to procurement, to fiscal management, to reporting and internal audit.

IFMIS is also designed to provide real-time financial information that can be accessed by key stakeholders such as the Controller of Budget, the Auditor-General, and Parliament. Thus by the time the New Constitution was enacted, Treasury was well on its way to fulfilling its mandate to develop and implement such an integrated financial system that could be used by all public offices and state organs. This mandate is operationalised in, Article 12. (1)(e) of the Public Finance Management Act of 2012:

12. (1) Subject to the Constitution and this Act, the National Treasury shall— (e) design and prescribe an efficient financial management system for the national and county governments to ensure transparent financial management and standard financial reporting as contemplated by Article 226 of the Constitution:......

As key players in the Public Finance ecosystem, State bodies and Agencies are also expected to adhere to similar financial management and reporting regulations as Governments. Article 226 of the Constitution, excerpts:

226. (2) The accounting officer of a national public entity is accountable to the National Assembly for its financial management, and the accounting officer of a county public entity is accountable to the county assembly for its financial management.
(3) ........ the accounts of all governments and State organs shall be audited by the Auditor-General.

It will not be possible for County or National executives to make unilateral withdrawals out of a Public Fund. Generally, any withdrawals from any Fund must get the green light from the Controller of Budget. Chapter Twelve - Public Finance, Part 7 - Financial Officers and Institutions, Article 228:

228. (4) The Controller of Budget shall oversee the implementation of the budgets of the national and county governments by authorising  withdrawals from public funds .......
(5) The Controller shall not approve any withdrawal from a public fund unless satisfied that the withdrawal is authorised by law.

This is true especially where inter-Fund transfers are concerned - and which by default, involve large sums of money. For example, the COB must give the Cabinet Secretary for Treasury approval to instruct the Central Bank to release devolution Funds from the Consolidated Fund to the County Revenue Funds. Such approval would of course be anchored on the authority of the County Allocation of Revenue Act, and in tandem with the gazettement by the Transition Authority to the effect that particular functions are and have been properly transferred to a particular County.

The Act was not without controversy, however. Its Section 7. (6) seems to suggest that County Governments could, in the short term at least, get away with budget deficits:

7. (6) Where the allocation of monies to a county results in a county being allocated an amount that is less than the amount commensurate to the cost of the functions devolved to the county, the national government shall allocate part of its share of revenue to provide the additional resources needed.

Finally, when one keeps in mind that the Constitution of Kenya 2010 is a Constitution of devolution and of equalisation, then it is easy to understand the rational contained in Article 227. The attention of the reader is directed to keywords contained in the Article such as "equity", "preference", etc., and especially sub-clause (2) (b) that is unambiguous on affirmative action:

227. (1) When a State organ or any other public entity contracts for goods or services, it shall do so in accordance with a system that is fair, equitable, transparent, competitive and cost-effective.
(2) An Act of Parliament shall prescribe a framework within which policies relating to procurement and asset disposal shall be implemented and may provide for all or any of the following— (a) categories of preference in the allocation of contracts; (b) the protection or advancement of persons, categories of persons or groups previously disadvantaged by unfair competition or discrimination;

 


 

Equalisation Fund

 

Money in the Equalisation Fund is public finance set aside to accelerate the level of services in marginalised areas of Kenya in order to bring them up to par with the rest of the country. Oddly, this fund has never taken off to date despite allocations by the CRA.

This revenue is to be distributed among Counties that have sizeable areas that are classified as marginalised. It is a national Revenue Fund.

 
Constitutional Provision

 

The Equalisation Fund is a Constitutional Fund. Chapter 12 - Public Finance:

204. (1) There is established an Equalisation Fund ........

 

Allocation

 

The amount of revenue set aside into the Equalisation Fund is set at a fixed percentage of National Revenue whose audited receipts have obtained the approval of the National Assembly. Article 204, excerpts:

204. (1) ........ into which shall be paid one half per cent of all the revenue collected by the national government each year calculated on the basis of the most recent audited accounts of revenue received, as approved by the National Assembly.

This Fund is allocated to improve the basic infrastructure services in those areas and regions categorised as marginalised:

(2) The national government shall use the Equalisation Fund only to provide basic services including water, roads, health facilities and electricity to marginalised areas to the extent necessary to bring the quality of those services in those areas to the level generally enjoyed by the rest of the nation, so far as possible.

 

Administration 

 

Being a National Revenue, the Fund will be administered by the National Executive. However, the government may elect to delegate the administration of this Fund to the County government by converting it into a grant. Article 204, excerpts.

204. (3) The national government may use the Equalisation Fund–– (b) either directly, or indirectly through conditional grants to counties in which marginalised communities exist.

The authority to spend any money contained in the Fund cannot be granted unless there is a proper request (in the form of a motion) detailing what the money will be used for. Such a motion is what is known as an Appropriation Bill:

204. (3) The national government may use the Equalisation Fund–– (a) only to the extent that the expenditure of those funds has been approved in an Appropriation Bill enacted by Parliament; .......

The process of legislation to authorise the use of this Fund, must consider technical input from the Commission for Revenue Allocation, CRA. After all, the CRA makes the recommendations on which regions are deserving from the Fund:

(4) The Commission on Revenue Allocation shall be consulted and its recommendations considered before Parliament passes any Bill appropriating money out of the Equalisation Fund.

When the concerned government is ready to spend any equalization money, it must, as part of checks and balances, seek and obtain the approval of the Controller of Budget:

(9) Money shall not be withdrawn from the Equalisation Fund unless the Controller of Budget has approved the withdrawal.

The Equalisation Fund is expected to achieve its aims after 20 years; although both Houses of Parliament may revive the Fund after a six year break:

(6) This Article lapses twenty years after the effective date, subject to clause (7).
(7) Parliament may enact legislation suspending the effect of clause (6) for a further fixed period of years, subject to clause (8).
(8) Legislation under clause (7) shall be supported by more than half of all the members of the National Assembly, and more than half of all the county delegations in the Senate.

 


 

Contingencies Fund

 

The Contingencies Fund is the National Fund that holds money set aside for a rainy day. It is therefore a national Revenue Fund.  

 

Constitutional Provision

 

The Contingencies Fund is a Constitutional Fund. Article 208 of Chapter 12 - Public Finance, Part 2 - Other Public Funds, excerpts:

208. (1) There is established a Contingencies Fund, ........

 

Allocation 

 

Although the authority to withdraw money from the Fund is governed by an Appropriation Bill, the Finance Secretary may give permission for a swift withdrawal from the Fund in emergency situations: 

208. (2) An Act of Parliament shall provide for advances from the Contingencies Fund if the Cabinet Secretary responsible for finance is satisfied that there is an urgent and unforeseen need for expenditure for which there is no other authority.

The last part of Clause 208. (2) above "........ for which there is no other authority.", implies that the Contingencies Fund is not only a Fund of last resort, but its administration places expediency above procedure in times of an emergency. The Finance Secretary can authorise an expenditure on money that came from the Fund under a different appropriation. Article 223 of Part 5 - Budgets and Spending. Excerpts:

223. ........ the national government may spend money that has not been appropriated if— (b) money has been withdrawn from the Contingencies Fund.

 

Administration

 

The Contingencies Fund is part of the National Revenue and is administered by the National Executive (Treasury) with Parliament's approval. Any withdrawals from the Fund must adhere to the law, even though the withdrawal is of an emergency nature:

208. (1) ........ a Contingencies Fund, the operation of which shall be in accordance with an Act of Parliament.

To give effect to Article 208. above, the 10th Parliament enacted in August 2011, the Contingencies Fund and County Emergency Funds Act, 2011. As its name implies, the Act authorises the creation of similar (contingencies) funds at the County level under the respective administration of County Governments. Hence, a County government may request the National Government for an advance from the Fund into its County Emergency Fund. A well-run County Government should also be able to set aside some revenue into its County Emergency Fund to use 'for a rainy day'.  

The nature of the Fund not withstanding, an emergency withdrawal from the Contingencies Fund must be regularised by Parliament within 2 months:

223. (2) The approval of Parliament for ........ spending ........ shall be sought within two months after the first withdrawal of the money, ........

Or if Parliament happens to be adjourned, approval must be secured within two weeks after it resumes:

(3) If Parliament is not sitting during the time contemplated in clause (2), or is sitting but adjourns before the approval has been sought, the approval shall be sought within two weeks after it next sits.

Eventually, the requisite belated Appropriation Bill must be passed by Parliament to legalise the withdrawal and expenditure of that money: 

(4) When the National Assembly has approved spending ......., an appropriation Bill shall be introduced for the appropriation of the money spent.

 

 


 

Revenue Fund

 

This is the main repository of all funds raised by or allocated to a County. The Revenue Fund is discussed in greater detail under the 'County Finance' link under the Devolution link.

 

 


 

Consolidated Fund & Treasury

 

The Consolidated Fund is the main Fund to which all revenue due to the National government is channeled. It is therefore a type of national Revenue Fund.

 

Constitutional Provision

 

The Consolidated Fund is a Constitutional Fund. Excerpts from Chapter 12 - Public Finance:

206. (1) There is established the Consolidated Fund .........

 

Allocation

 

Revenue due to the National Government goes into the Consolidated Fund. Article 206, excerpts:

206. (1) ........ the Consolidated Fund into which shall be paid all money raised or received by or on behalf of the national government, .......

Likewise, the Consolidated Fund is the 'principal' Fund to which the Public Debt is charged. Part 3 - Revenue Raising Powers and the Public Debt, Chapter 12, excerpts:

214. (1) The public debt is a charge on the Consolidated Fund, ........

This Fund can be thought of as the 'master' fund for it is from it that all other Funds, except the county Revenue Fund, receive their allocations. For example, the Judiciary Fund (discussed in more detail under the Judiciary link) gets its funding from the Consolidated Fund:

173. (1) There is established a fund to be known as the Judiciary Fund ........
(4) On approval of the estimates by the National Assembly, the expenditure of the Judiciary shall be a charge on the Consolidated Fund and the funds shall be paid directly into the Judicary Fund.

The Consolidated Fund is the fund from which the national government draws its recurrent and development expenditure. Indeed, if an office draws its funding from the Fund, then it is a "public office". Article 260 of Chapter 17 - General Provisions of the Constitution of Kenya 2010:

260. In this Constitution, unless the context requires otherwise—  “public office” means an office in the national government, a county government or the public service, if the remuneration and benefits of the office are payable directly from the Consolidated Fund ........

Key Constitutional Officers such as those of the President and Deputy President, Judges, Commissions and Parliament are examples of "public offices" that draw their "remunerations and benefits" from the Consolidated Fund, perhaps to ensure that they always continue to smoothly discharge their duties. Excerpts:

151. (1) The remuneration and benefits payable to the President and the Deputy President shall be a charge on the Consolidated Fund.

160. (3) The remuneration and benefits payable to or in respect of judges shall be a charge on the Consolidated Fund.

250. (7) The remuneration and benefits payable to or in respect of a commissioner or the holder of an independent office shall be a charge on the Consolidated Fund.

To be fair, not all revenue belonging to the National government passes through the Consolidated Fund. Sometimes it makes practical sense for some of it to go directly to a specialised Public Fund or to be retained by the agency that collects it to meet its operational costs. But even these special circumstances must be within existing legislation. Excerpts from Chapter 12 - Public Finance, Article 206:

206. (1) ........ the Consolidated Fund into which shall be paid all money raised or received by or on behalf of the national government, except money that— (a) is reasonably excluded from the Fund by an Act of Parliament and payable into another public fund established for a specific purpose; or (b) may, under an Act of Parliament, be retained by the State organ that received it for the purpose of defraying the expenses of the State organ.

 

Administration

 

The bureaucracy in-charge of the Consolidated Fund is known as the Treasury. Article 225 of Part 6 - Control of Public Money: 

225. (1) An Act of Parliament shall provide for the establishment, functions and responsibilities of the national Treasury.

The term 'Treasury' generally refers to the Ministry of Finance. Thus the Cabinet Secretary for Finance will be the head of the Fund to oversee its administration and report on it to the National Assembly and to the public. For example, the County Allocation of Revenue Act 2013's Section 10 requires Treasury to make quarterly reports on the disbursements to the devolved governments' County Revenue Funds:

 

10. The national treasury shall publish a quarterly report on actual transfers of allocations to the county governments.

The New Constitution has given the 'Cabinet Secretary responsible for Finance' various roles many of which involve working closely with Parliament in the preparation of money Bills and in particular, Appropriation Bills. Therefore the office of the Secretary for Finance is an important player in the allocation and administration of Public Finance. 

 


 

Political Parties Fund

 

The Political Parties Fund is a National Revenue Fund to be shared by registered political parties. As has been highlighted in our article on Political Parties System Under the New Constitution, political parties must first fulfill stringent terms and conditions of registration in order to ensure that any pubic funding to them is responsible, equitable and accountable. 

 

Constitutional Provisions

 

The Constitution of Kenya 2010 is of the considered view that public funding of political parties is an enhancer of democratic principals. Chapter 7 - Representation of the People, Part 3 - Political Parties. Excerpts:

92. Parliament shall enact legislation to provide for— (f) the establishment and management of a political parties fund;

The Political Parties Act No 11 of 2011's Section 23 established the Fund.

 

Allocation

 

As stated above, the Fund is a National Revenue Fund and is by law set at 0.3% of National Revenue. Section 23 of the Political Parties Act No 11 of 2011: Excerpts:

24. (1) The sources of the Fund are— (a) such funds not being less than zero point three per cent of the revenue collected by the national government .......

That as it may be, the Act pegs funding on a Party's performance at the General Elections, (among other requirements):

25. (2) ...... a political party shall not be entitled to receive funding from the Fund if— (a) the party does not secure at least five per cent of the total number of votes at the preceding general elections; ......

No sooner were the results of the 2013 General Elections gazetted, than many political parties protested the provisions of Section 25. (2) because only a few parties managed to garner the stipulated 5% of votes. Indeed, only the TNA, ODM, and URP Political Parties secured the 5% minimum votes. The protesting parties argued that the provision discriminated against 'small' parties.

 

Administration

 

The Registrar of Political Parties is empowered by the Act to administer this Fund:

23. There is established a Fund to be known as the Political Parties Fund, which shall be administered by the Registrar.

Essentially, the Registrar will ensure that the monies are used for those party activities that enhance democratic principals. As with every Public Fund, the Political Parties Fund is subject to the authority of the Controller of Budget and the review of the office of the Auditor-General.

 

 


 

Public Debt

 

Generally, Public Debt is defined as borrowings by governments to finance expenditures not covered by current tax revenues and other incomes. 

 
Constitutional Provision

 

It is instructive that the Constitution of Kenya 2010 makes mention of the Public Debt. Excerpts from Article 214, in Part 3 - Revenue Raising Powers and the Public Debt:

214. (2) ........, “the public debt” means all financial obligations attendant to loans raised or guaranteed and securities issued or guaranteed by the national government.

In Kenya's context of a two-tier government, Public Debt refers to borrowings by both the National and County governments. 

 
Allocation

 

The New Constitution permits a County government to borrow to finance expenditure, subject to approvals from a willing National Government as guarantor, and from its County Assembly in the framework of checks and balances:

212. A county government may borrow ......... (a) if the national government guarantees the loan; and (b) with the approval of the county government’s assembly.

The keen reader may note from the National Government Loans Guarantee Act of 2011 that the Cabinet Secretary responsible for Treasury is the official mandated to guarantee such a loan on behalf of the National Government. However, the Act also allows a County to petition Parliament in the event that the Secretary declines to guarantee a loan request. It is easy to see that this process is likely to draw public interest and attract political contests if not well handled by all involved.

The Act is silent on whether the Cabinet Secretary can review (downwards), the amount requested by a County Government. Thus a County would have to restart a loan request if the initial one is declined. The Act does provide for the Cabinet Secretary to petition a Court of law in the event that a County Government is unable to repay a debt, so it can be permitted to recover from future allocations of devolved funds to the County in question. It should not also be lost on the reader that upon approval, the loan money is only given to the County upon the authority of the Controller of Budget in line with all withdrawals from any Public Fund. Section 6 of the National Government Loans Guarantee Act of 2011:

6. (2) Money payable under a guarantee may be paid only if the payment has been approved by the Controller of Budget.

Besides the two conditions for borrowing given above in Article 212., the amount of Public Debt a County is servicing will be factored into new requests and could hinder any future allocations out of both the Equalisation and the Consolidated Funds:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter(b) any provision that must be made in respect of the public debt and other national obligations;

Indeed the whole issue of Public Debt (including external debt) has a social aspect to it, and the New Constitution acknowledges the same when recommending caution and prudence in its allocation:

201. The following principles shall guide all aspects of public finance in the Republic—  (c) the burdens and benefits of ......... public borrowing shall be shared equitably between present and future generations;

Every Public Debt will in future be governed by legislation. This is a good measure to ensure prudent borrowing. As if that's not enough, transparency will be the by-word on matters of Public Debt: on how, why and from whom the government intends to or has just borrowed from. Further to this, the Secretary for Finance is obligated by the New Constitution to prepare regular public reports of updated details of Kenya's indebtedness:

211. (1) Parliament may, by legislation— (a) prescribe the terms on which the national government may borrow; and (b) impose reporting requirements.
(2) Within seven days after either House of Parliament so requests by resolution, the Cabinet Secretary responsible for finance shall present to the relevant committee, information concerning any particular loan or guarantee, including all information necessary to show— (a) the extent of the total indebtedness by way of principal and accumulated interest; (b) the use made or to be made of the proceeds of the loan; (c) the provision made for servicing or repayment of the loan; and (d) the progress made in the repayment of the loan.

It is not enough that there is money to be borrowed. There must be reasonable justification to do so and ability to repay comfortably.

 
Administration

 

It is refreshing to observe that as the supreme authority of the land, the people of Kenya (through their elected representatives) have taken control of all Public Finance including Public Debt. Therefore, adequate checks and balances have been incorporated into the New Constitution to govern a County government's intentions of borrowing. The County must seek the authority and approval of its legislature - County Assembly - and a guarantee from the National Government for the debt. Excerpt from Article 212:

212. A county government may borrow only— (a) if the national government guarantees the loan; and (b) with the approval of the county government’s assembly.

These guarantees by the National Government will also be subject to similar open and transparent checks and balances as those that oversee borrowing by a County government. 

213. (1) An Act of Parliament shall prescribe terms and conditions under which the national government may guarantee loans:

These terms and conditions are captured in the National Government Loans Guarantee Act of 2011. The Act emphasises a uniform set of laws to guide the National Government, so it may treat unequals equally with respect to all Counties. As usual, for purposes of checks and balances and separation of powers, the National Government must report to the National Assembly to explain its rationale for any debts it guarantees to a County government:

(2) Within two months after the end of each financial year, the national government shall publish a report on the guarantees that it gave during that year.

In spite of the provision that the National Government has to guarantee every Public debt taken by Counties, Kenya's system of devolution means such a debt can be charged on any of the Public Funds mentioned in this discussion:

214. (1) The public debt is a charge on the Consolidated Fund, but an Act of Parliament may provide for charging all or part of the public debt to other public funds.

This author holds the view that the reason that perhaps informed the provision in Article 214. (1) was that Public Fund money not spent in a given financial year, should be available to off-set debt. 

The issue of Public Debt was discussed early in the term of the First Senate, whereby the Senators wanted the National Government to take over all outstanding debts owed by local authorities and which were inherited by the County Governments after the 2013 General Elections, in order that the regional governments can begin on a clean financial slate - unshackled by debt. However, this motion was vehemently opposed by public financial experts who argued inter alia, that this was "....... tantamount to punishing those local authorities that exercised prudence and fiscal discipline in the management of the (Local Authority Transfer Fund) LATF. ....... it is also a way of condoning financial irresponsibility and impunity in public institutions." (Njeri, W wa, 2013).

It will be interesting to see what course of action the heavily indebted County Governments will take should the Senate's resolution fail to pass into legislation, given the convoluted and costly judicial process that accompanies any attempts at public debt recovery and corruption prosecutions. 

 


 

Central Bank

 
Authority

 

While the Central Bank of Kenya CBK, was not a Constitutional body under the Old Constitution, it has been given a new enhanced status as a Constitutional State Organ under the Constitution of Kenya 2010. Chapter 12 - Public Finance, Part 7 - Financial Officers and Institutions, Article 231, excerpts:

231. (1) There is established the Central Bank of Kenya.
(3) The Central Bank of Kenya shall not be under the direction or control of any person or authority in the exercise of its powers or in the performance of its functions.

The authority and autonomy of the CBK is important when one recalls that a weakened CBK was at the very center of the Goldenberg mega-scandal which siphoned billions of shillings out of Kenya's currency reserves in the late 1980s and early 1990s. 

 

Roles and Functions

 

(2) The Central Bank of Kenya shall be responsible for formulating monetary policy, promoting price stability, issuing currency and performing other functions conferred on it by an Act of Parliament.

The CBK has traditionally played other roles not mentioned above such as the mobilisation of internal Public Debt and extension of overdraft facilities to the National Government. This is expected to continue as the country legislates and implements the provisions of the New Constitution.

The Public Finance Management Act 2012 assigns the Central Bank the custody of both National and County Funds. Having said that though, the Act does permit a County Secretary responsible for Finance, to opt for a private Bank for the custody of the County Revenue Fund. Otherwise, it is generally expected that most public funds will be kept with the Central Bank once a national ICT inter-connectivity is in place.

 
Composition

 

The New Constitution is silent on the composition and tenure of the Directors of the Central Bank and instead allows legislation to provide for this:

(5) An Act of Parliament shall provide for the composition, powers, functions and operations of the Central Bank of Kenya.

One can only hope that the CBK Act will be fine-tuned to fit in with the new constitutional dispensation currently sweeping the country.  

 


 

The Secretary for Finance

 

The Constitution of Kenya 2010 has put in place an orderly engagement between the people's representatives (Parliament), and the Secretary for Finance in matters of Public Finance. This engagement process, is governed by 3 broad steps. The first step encompass budget-making; the second covers the preparation of money Bills and in particular, Appropriation Bills, and the third step covers resource allocation and administration in accordance with (money) Acts of Parliament. It is perhaps appropriate at this stage to clarify what the drafters of the New Constitution categorised as a money Bill in the context of Public Finance. Chapter 8 - The Legislature, Part 4 - Procedures for Enacting Legislation, Article 114:

114. (3) In this Constitution, “a money Bill” means a Bill, other than a Bill specified in Article 218, that contains provisions dealing with— (a) taxes; (b) the imposition of charges on a public fund or the variation or repeal of any of those charges; (c) the appropriation, receipt, custody, investment or issue of public money; (d) the raising or guaranteeing of any loan or its repayment; or (e) matters incidental to any of those matters.

Article 218 mentioned above, excludes the Division of Revenue Bill and the County Allocation of  Revenue Bill. These two Bills are really 'facilitation' Bills because they respectively, provide for the division of revenue raised by the national government among the national and county levels of government, and for the division among the counties of the revenue allocated to the county levels of government.

 
Authority

 

As was noted on the general discussion on the allocation of County Revenue, the Secretary for Finance is empowered by law to stop the transfer of funds to an irresponsible County government:

225. (3) Legislation ........ may authorise the Cabinet Secretary responsible for finance to stop the transfer of funds to a State organ or any other public entity— (a) only for a serious material breach or persistent material breaches of the measures established under that legislation; ........

The Secretary for Finance has also been granted the discretionary authority to make an advanced payment out of the Contingencies Fund in the event that an emergency situation that has arisen, and which is found to be outside of any of the Acts that govern public expenditure. Chapter 12 -  Public Finance:

208. (2) An Act of Parliament shall provide for advances from the Contingencies Fund if the Cabinet Secretary responsible for finance is satisfied that there is an urgent and unforeseen need for expenditure for which there is no other authority.

In effect, Clause (2) above, confers a legal status to an 'extralegal' action by the Secretary.

 

Roles and Functions

 

A few provisions in the Constitution of Kenya 2010 have redefined the office of the Secretary of Finance and granted it more legislative authority than before. For example, no sooner is a Bill determined as a money Bill, than the input of the Secretary of Finance is sought and factored into the Bill before the legislative process can proceed into the Committee stage. Chapter 8 - The Legislature, Part 4 - Procedures for Enacting Legislation, Article 114, excerpts:

114. (2) If, in the opinion of the Speaker of the National Assembly, a motion makes provision for a matter mentioned in the definition of “a money Bill”, the Assembly may proceed only in accordance with the recommendation of the relevant Committee of the Assembly after taking into account the views of the Cabinet Secretary responsible for finance.

This requires the office of the Secretary of Finance to remain well-informed in the law and in what the National Assembly is doing, to enable it properly perform its advisory role with respect to legislation. This is perhaps the reason that the national budget-making process has been accorded generous time-lines by the New Constitution -  the Executive via the Secretary of Finance, will no longer ambush Parliament with budget proposals. Chapter 12 - Public Finance, Part 5 - Budgets and Spending:

221. (1) At least two months before the end of each financial year, the Cabinet Secretary responsible for finance shall submit to the National Assembly estimates of the revenue and expenditure of the national government for the next financial year to be tabled in the National Assembly.

The Secretary of Finance (aka the Cabinet Secretary for the National Treasury) did promptly table the first such estimates after the first General Elections under the New Constitution for the 2013/2014 financial year. The Secretary of Finance will similarly advise and guide the Senate when it is considering how to allocate the County Revenue. Part 4 - Revenue Allocation, excerpts from Article 217:

217. (2) In determining the basis of revenue sharing ........, the Senate shall— (c) consult ........ the Cabinet Secretary responsible for finance ........

 
Membership

 

As the National Executive's lead on matters of Public Finance,  the Secretary of Finance is a member of or is represented in select Commissions. Excerpts from various Articles of the New Constitution:

230. (2) The Salaries and Remuneration Commission consists of the following persons ........— (d) one person each nominated by— (i) the Cabinet Secretary responsible for finance; ........

215. (1) There is established the Commission on Revenue Allocation. (2) The Commission shall consist of the following persons ........ (d) the Principal Secretary in the Ministry responsible for finance.

 


 

National Budget

 

A public finance discussion cannot be said to be complete if it fails to examine the budget-making process. In this section we will not only highlight the provisions in the Constitution of Kenya that govern the processes and time-lines of budge-making, but identify the key players involved in its administration and management as shown in the figure below.

 
Figure 3. National Budget-Making Process 

figure 3 is a work in progress.  it will give a pictorial schematic of the various stages involved in the process of the making of the national budget as provided for in the constitution.


The Team

 

The details of the Kenyan budget-making process has historically been hidden deep within the confines of the Executive's Ministry of Finance. Parliament and the public remained in the dark as the technocrats in the Ministry went about preparing the budget estimates, and only got round to knowing the full details of their government's budget at the last minute when the Minister presented the estimates in Parliament! Mixed reactions and divided opinions on the pros and cons in the estimates would quickly follow, ranging from accusations of political marginalisation of sections of the society, to being elitist or otherwise, ad infinitum. The professionals would, on the other hand, accuse the Minister of having ignored certain 'key' departments such as health, education, etc. Naturally, these reactions had no effect, as the unpleasant truth was that the people of Kenya and their elected representatives had been over-looked in the budget-making process.

Under the Constitution of Kenya 2010, the process is more transparent and inclusive, allowing for the full participation of Government, Parliament and Commissions. In fact, the National Budget is actually made up of three separate budgets, each of which is prepared by a team representing the respective arm of government. The three teams are the Ministry of Finance which prepares the estimates of the executive, the Parliamentary Service Commission PSC, whose estimates concern Parliament, and the Chief Registrar at the Judiciary, whose budget covers the operations of the Judiciary. Indeed, the New Constitution has appropriately demarcated the budget-process by assigning it into the respective arms of government, obviously to allow for independence and devolution of the exercise, among other considerations. Various Articles capture this new requirement of the budget process:

221. (1) ........ the Cabinet Secretary responsible for finance shall submit to the National Assembly estimates of the revenue and expenditure of the national government for the next financial year ........

Chapter 8 - The Legislature, Part 6 - Miscellaneous:

127. (1) There is established the Parliamentary Service Commission.
(6) The Commission is responsible for— (c) preparing annual estimates of expenditure of the parliamentary service and submitting them to the National Assembly for approval ........

Chapter 10 - Judiciary, Part 4 - The Judicial Service Commission:

173. (3) Each financial year, the Chief Registrar shall prepare estimates of expenditure for the following year, and submit them to the National Assembly ........

 

The Process

 

By devolving the budget-making process, the Constitution expanded the space for participation. Therefore, departments, offices and organs within the respective arms of government will be better represented in the process as they will be discussing their proposals with people of like-mind. The public process kicks in when the three accounting officers of the three arms of government i.e. the Secretary for Finance, the Secretary of the PSC, and the Chief Registrar, submit separately, their respective estimates to (a Committee of) the National Assembly as captured in Clauses 221. (1), 127. (6) (c) and 173. (3), above:

221. (4) Before the National Assembly considers the estimates of revenue and expenditure, a committee of the Assembly shall discuss and review the estimates and make recommendations to the Assembly.

These estimates will be publicised to enable the public consider them, make their contributions and present their input as they so wish. The public engagement will be at the committee stage of the budget process. This committee is obligated to factor-in the public's views:

(5) In discussing and reviewing the estimates, the committee shall seek representations from the public and the recommendations shall be taken into account when the committee makes its recommendations to the National Assembly.

(3) The National Assembly shall consider the estimates submitted (by the Secretary for Finance) ........ with the estimates submitted by the Parliamentary Service Commission and the Chief Registrar of the Judiciary under Articles 127 and 173 respectively.

What follows after the three estimates have been approved, is the introduction of an Appropriation Bill in the National Assembly which once enacted, will authorise any transfers of funds.  

(6) When the estimates of national government expenditure, and the estimates of expenditure for the Judiciary and Parliament Budget estimates and have been approved by the National Assembly, they shall be included in an Appropriation Bill, which shall be introduced into the National Assembly to authorise the withdrawal from the Consolidated Fund of the money needed for the expenditure, and for the appropriation of that money for the purposes mentioned in the Bill.

This is one of those Bills that must be passed and enacted into law in good time because the Constitution is categorical that the budget-making process is incomplete unless the Bill becomes an Act of Parliament. Hence the very last step in the making of the National Budget is the enactment of this Bill:

206.  (2) Money may be withdrawn from the Consolidated Fund only— (a) in accordance with an appropriation by an Act of Parliament;

109. (1) Parliament shall exercise its legislative power through Bills passed by Parliament and assented to by the President. 

An Appropriation Act is really the Act that will allow for Public Funds to be transferred from the Consolidated Fund to the Judiciary Fund. At the moment, no special Fund exists to receive the expenditures of the Parliamentary Service Commission. Hence it is assumed, the PSC and the National Government will be making direct access to the Consolidated Fund.

For purposes of checks and balances even with the coming to force of the Appropriation Act, the Controller of Budget must give the green light before any withdrawals (or transfers) in the Appropriation Act can go ahead. The Controller must therefore be conversant with the Appropriation Act and other laws. This makes the Controller an integral player in the budget process because s/he will be expected "...... to protect the peoples sovereignty and promote constitutionalism".

206. (4) Money shall not be withdrawn from the Consolidated Fund unless the Controller of Budget has approved the withdrawal.

228. (5) The Controller shall not approve any withdrawal from a public fund unless satisfied that the withdrawal is authorised by law.

 

The Time-lines

 

The public process of budget-making begins at the very latest, two months before the end of the financial year when the National Assembly receives the budget estimates from the Secretary of Finance:

221. (1) At least two months before the end of each financial year, the Cabinet Secretary responsible for finance shall submit to the National Assembly estimates of the revenue and expenditure of the national government for the next financial year to be tabled in the National Assembly.

It is safe to assume that the Chief Registrar and the Secretary of the PSC will submit their respective proposals at that same time. Thereafter, a lot needs to happen before the start of the next financial year. The processes described in the previous subsection must be completed. This is to say, that enactment and publishing in the Kenya Gazette, of the Appropriation Bill, must take place at the very latest, 2 weeks before the start of the next financial year:

116. (1) A Bill passed by Parliament and assented to by the President shall be published in the Gazette as an Act of Parliament within seven days after assent. (2) ........, an Act of Parliament comes into force on the fourteenth day after its publication in the Gazette, unless the Act stipulates a different date on or time at which it will come into force.

The above description on time-lines is based on the ideal situation. What if the Appropriation Bill is time-barred; perhaps because the President has declined to assent to it, or an application in Court has blocked the enactment? The Constitution of Kenya has addressed itself to such scenarios by giving the National Assembly the authority to make way for limited transfers and withdrawals in Article 222:  

222. (1) If the Appropriation Act for a financial year has not been assented to, or is not likely to be assented to, by the beginning of that financial year, the National Assembly may authorise the withdrawal of money from the Consolidated Fund.
(2) Money withdrawn under clause (1) shall— (a) be for the purpose of meeting expenditure necessary to carry on the services of the national government during that year until such time as the Appropriation Act is assented to; (b) not exceed in total one-half of the amount included in the estimates of expenditure for that year that have been tabled in the National Assembly; and (c) be included, under separate votes for the several services in respect of which they were withdrawn, in the Appropriation Act.

Article 223 goes on to provide further details on the circumstances under which the authority to order withdrawals will be exercised by the National Assembly; essentially to legalise those circumstances and to avert a budgetary and legal crisis:

223. (1) Subject to clauses (2) to (4), the national government may spend money that has not been appropriated if— (a) the amount appropriated for any purpose under the Appropriation Act is insufficient or a need has arisen for expenditure for a purpose for which no amount has been appropriated by that Act; or (b) money has been withdrawn from the Contingencies Fund.
(2) The approval of Parliament for any spending under this Article shall be sought within two months after the first withdrawal of the money, subject to clause (3).
(3) If Parliament is not sitting during the time contemplated in clause (2), or is sitting but adjourns before the approval has been sought, the approval shall be sought within two weeks after it next sits.
(4) When the National Assembly has approved spending under clause (2), an appropriation Bill shall be introduced for the appropriation of the money spent.
(5) In any particular financial year, the national government may not spend under this Article more than ten per cent of the sum appropriated by Parliament for that financial year unless, in special circumstances, Parliament has approved a higher percentage.

Public Finance is obviously a key component of the New Constitution and must be handled well by all concerned to avoid frivolous protestations given that the process of budgeting, allocation, administration etc., will be an open one.

 

 


 

References:

1. Constitution of Kenya, 2010. National Council for Law Reporting. The Attorney General.

2. The National Government Loans Guarantee Act of 2011. National Council for Law Reporting. The Attorney General.

3. Njeru Kirira (2011). "Public Finance under Kenya's new Constitution". Constitutional Working Paper Series No. 5. Society for International Development, SID.

4. Ethics and Anti-Corruption Act, 2011. National Council for Law Reporting. The Attorney General.

5. Nyamori, Robert (2013). "CDF has no role in constituencies any more; transfer it to county governments". Daily Nation Opinion, Retrieved 23 May 2013.

6. Commission on Revenue Allocation website. Revenue Allocation Formula. Retrieved May 2013.

7. Website of the Integrated Financial Management Information System IFMIS. The National Treasury.

8. Public Finance Management Act 2012. National Council for Law Reporting. The Attorney General.

9. The Contingencies Fund and County Emergency Funds Act, 2011. National Council for Law Reporting. The Attorney General.

10. Political Parties Act No 11 of 2011. National Council for Law Reporting. The Attorney General.

11. Only three parties qualify for state funds. The Star newspaper. Accessed August 2013. 

12. County Allocation of Revenue Act No 34 of 2013. Government Printer. Government of Kenya.

13. Website of the Youth Enterprise Development Fund

14. Website of the Uwezo Fund. Ministry of Devolution and Planning.

15. International Budget Partnership Kenya website. Accessed October 2013.

16. Lakin J and Kinuthia J, (2013). "Budget Brief 18A. What is Fair? Sharing Resources in Kenya." International Budget Partnership website. Accessed October 2013.

17. Speaker of the Senate & another v Hon. Attorney-General & another & 3 others [2013] eKLR. Advisory Opinion Reference No. 2 of 2013. National Council for Law Reporting. The Attorney General.

18. The Division of Revenue Act No 12 of 2014. Government Printer. Government of Kenya.

19. wa Ngugi, Kiriro (2014). "We do need an audit of the Constitution but this is hardly the way to go about it". Daily Nation Opinion, Retrieved 16 September 2014.

20. International Budget Partnership Kenya website. Accessed October 2014.

21. Murkommen, K 2014. "Why referendum debate is founded on distorted understanding of devolution". Daily Nation online Opinion. Retrieved October 12, 2014.

22. "Court gives govt 12 months to amend unlawful CDF Act". Capital News. Accessed February 20, 2015.

23. Institute of Social Accountability & another v National Assembly & 4 others [2015] eKLR. National Council for Law Reporting. The Attorney General.

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