Public Sector and Infrastructure Insight 2023 | Part 11

Public Finance Management Reforms (PFMR) in Kenya

Blog
2 minute read
October 09, 2023

At the heart of Kenya's Public Finance Management Reforms (PFMR) lies a strategic framework forged by the substantial progress witnessed in the realm of public sector transformations over the last two decades. In the pivotal year 2003, the Government took a significant step by adopting the Economic Recovery Strategy (ERS) for Wealth and Employment Creation. This comprehensive approach was a response to the identified issues of underperforming economic policies, administrative inefficiencies, and weakened governance structures, all of which had contributed to a decline in the quality of life for Kenyan citizens in the preceding years. The ERS, built upon three fundamental pillars, focused on stimulating economic growth, equity and poverty reduction, and ensuring good governance, security, and the rule of law.

Focused accelerating transformation of the human resource and public finance reforms on delivery of core government services. Focused on deepening Medium-Term Expenditure framework (MTEF) approach and processes, strengthened public expenditure management, improved reporting and accountability

2003 - 2007

Themed “Revitalization of Public Financial Management System in Kenya.” At the end of implementation period, many of the reforms had not been completed due to major policy changes brought about by the new constitution including creation of two levels of government and introduction of the Public Finance Management Act that expanded the need for further PFM reforms

2006 - 2011

Themed “A Public finance management system that promotes transparency, accountability, equity, fiscal discipline and efficiency in the management and use of public resources for improved service delivery and economic development.” This focuses on reforms to include the provisions of the constitution including recognizing need for PFM reforms at county level

2013 - 2018

Themed “A Public finance management system that is efficient, effective and equitable for transparency, accountability and improved service delivery.” Results-oriented strategy aiming at broader sustainable and predictable fiscal spaces. These include strategic and transparent spending in public investments, value for money procurement, performance and accountability, effective management of public resources, disciplined resources, disciplined financial management and accurate reporting, accountability and oversight.

2018 - 2023

Achievements of the ERS in numbers

5.4% increase in economic growth. Economic growth increased from 0.6% in 2002 to 6% in 2007.
10% reduction in poverty.
Poverty reduced from 56% in 2002 to 46% in 2007.
13% reduction in malaria mortality rates Malaria mortality rates reduced from 30% in 2002 to 17% in 2007.

The overall implementation of the ERS was successful. Among the achievements, but not limited to, were:

Attainment and surpassing of economic growth targets.
Improved access to and quality of education.
Improved delivery of public health services.
Strengthened governance and rule of law.

To further these reforms, at the culmination of the ERS, Kenya introduced its economic blueprint, Vision 2030, in 2008. This vision sets out to establish a globally competitive and prosperous nation with a high quality of life by the year 2030.

Anchored on three key pillars (Economic, Social, and Political Governance) the Vision is executed through successive 5-year Medium-Term Plans (MTPs) that guide the Medium-Term Expenditure Frameworks (MTEFs).

The fifirst 5 years of the Vision’s implementation resulted in successful achievement of key milestones, notably promulgation of the new Constitution that set platform for signifificant reforms evident today, among them, in public fifinance. Chapter Twelve of the Constitution elaborates Kenya’s public fifinance landscape including provisions on the following:

Principles of public fifinance
Resources sharing between the two levels of government and;
Institutional arrangements and mandates on policy and legal framework on planning, budgeting, budget implementation, and oversight.

Parliament passed legislation that govern Kenya’s PFM practice. Some of the key institutions that were established with PFM mandates include the National Treasury, Commission on Revenue Allocation (CRA), Offiffice of the Controller of Budget, and Offiffice of the Auditor General.

Sample of progress on planned key steps in current strategy.

KRA 1: Joint revenue strategy, staffing NT tax policy unit, upgraded tax procedures, guidelines and OSR policy for counties developed, framework and forecasting model in place.
KRA 2: Update of SCOA finalised, budget manuals updated,
KRA 3: Standards for funds transfer from KRA to revenue collection accounts to CF and CRFs developed.
KRA 4: Public procurement policy and regulations gazetted.
KRA 7: IPSAS compliant MDAs automated in IFMIS; county financial reporting templates issued.

PFM is implemented at Ministries, Counties, Departments, and Agencies (MCDAs) that are required to comply with provisions of the Constitution and the legal framework during their planning, budgeting, and budget implementation for service delivery. To better enforce its Constitutional mandate, the National Treasury has led in coordinating successive PFM reform strategies since 2006. To date, three strategies have been implemented, the first one that covered the 2006-2011 period and the second 2013-2018, and the third covered 2018-2023.

The current strategy adopted a results-oriented approach aiming at deepening PFM reforms in areas identified by stakeholders and diagnostic studies. The result areas aim to ensure the following:

Sustainable and predictable fiscal space to deliver priority programmes,
Strategic and transparent spending on public investments and service delivery in line with national and county policy priorities,
Reliable cash for service delivery and public investments,
Value for money in procurement and contract management,
Value for money, performance, and accountability in staffing for service delivery,
Education institutions, health, and other service facilities effectively manage public resources,
Disciplined financial management and accurate reporting and;
Accountability delivered through audit, oversight, and follow-up.

The MCDAs have specific responsibilities in ensuring the planned key steps are implemented to achieve the desired outcomes in the 8 result areas.

Development Partners have also continued to support the National Treasury in deepening PFM reforms. The World Bank and Agence Française de Développement (AFD) are providing reforms support through the Governance for Enabling Service Delivery and Public Investments in Kenya (GESDeK). Under the current PFMR strategy, the European Union (EU), through the Public Accountability and Service Delivery (PASEDE) programme, is providing technical assistance to select MDAs to implement their planned key steps.

The Kenya Kwanza administration is citizen-centric, and reforms driven. In organising government to deliver the Bottom-up Economic Transformation Agenda (BETA), the President issued Executive Order No 1 of 2023, that, among others, established the State Department for Performance and Delivery Management; responsible for overall public sector reforms, specifically, supervising the technical monitoring and evaluation of Government policies. Arguably, positioning of the Department in the Presidency is not only an indication of evidence of the administration’s commitment to ensure accountability, productivity, openness, and transparency in service delivery but also to ensure central command and coordination of effective public service reforms.

PFM reforms must lead to specifific outcomes and improve delivery. While reforms have focused on strengthening the PFM ecosystem, linkages to reform outcomes and service delivery are missing. Reforms in improving macro-economic management and resources mobilisation, public investments management, budget execution processes, and oversight must be linked to outcomes and impacts demonstrable through improved service delivery.

To ensure positive impacts at the bottom of the pyramid and improve inclusion, for instance, PFM reforms leading to improved social sector spending in health, education, agriculture, and water must link directly to better indicators and desired changes including healthy citizens, reducing levels of poverty and inequality.

The role of the legislature has not been emphasised in the previous PFM reform strategies. At both levels of government, the executive designs and implements PFM process while the legislature provides approvals and oversight. Lessons from previous strategies point out ineffectiveness by the executive in implementing recommendations of the Office of the Controller of Budget (OCOB) on budget implementation and follow-through of the issues flagged by Office of the Auditor General (OAG). There is need to incorporate strategies in the reforms aimed at strengthening oversight roles, implementation of recommendations and follow-through mechanisms.

Positioning PFM reforms with policy-level decision makers and how PFM reforms implementing institutions are structured determine effectiveness in achieving desired results. Implementation of PFM reforms by Ministries, Counties, Departments, Agencies (MCDAs) is coordinated by the National Treasury’s PFMR Secretariat that needs strengthening both in terms of its technical capacity and positioning. Under the Kenya Kwanza administration, Office of the Prime Cabinet Secretary (OPCS) is responsible for overall public sector reforms and there is need to integrate it in the PFM reforms’ institutional arrangements. To hold the reforms implementors accountable, there is need to integrate the strategy’s implementation framework to the performance management system.

Strengthening PFM reforms at in the devolved system of governance.

There is need for the next strategy to substantively address PFM reforms at county level and intergovernmental relations institutions and their role in supporting county governments.

In conclusion, Kenya's Public Finance Management Reforms (PFMR) have marked a significant stride in the nation's development journey. The successful implementation of the Economic Recovery Strategy (ERS) and subsequent launch of Vision 2030 have set a robust framework for sustainable economic growth, equity, and good governance. The shift towards a results-oriented approach in PFMR strategies underscores the commitment to achieving tangible outcomes, particularly in vital sectors like education, health, and public services. However, challenges persist, highlighting the need for continued focus on linking reforms to impactful outcomes, strengthening oversight, and enhancing institutional integration, especially at the county level. These endeavors are pivotal in ensuring a prosperous and inclusive future for all Kenyan citizens.

Sources used:

Public Finance Management Act, County Governments Act, and Public Procurement and Assets Disposal Act,
Article 225 of the Constitution
Article 215 of the Constitution
Article 228 of the Constitution
Article 229 of the Constitution
Kenya’s Public Expenditure and Financial Accountability (PEFA) reports
Executive order No.1 issued by the executive office of the President