BUDGET REVIEW AND OUTLOOK PAPER

Transcription

1 BUDGET REVIEW AND OUTLOOK PAPER SEPTEMBER 2015

2 Finance & Economic Planning 2015 Page ii

3 FOREWORD This Budget Review and Outlook Paper (BROP), prepared in accordance with the Public Financial Management Act, 2012 is the third to be prepared under the current Constitutional dispensation of devolved governments. It presents the recent economic developments and actual fiscal performance of the 2014/2015 Financial Year. The new Public Financial Management Law enacted in 2012 has ushered in a paradigm shift in budget making. Apart from introducing reforms in our public financial management system, the new law has entrenched the Medium Term Expenditure Framework budgeting. The Budget Review and Outlook Paper (BROP) present the fiscal outcome for 2014/15 and how it affected the financial objectives set out in the 2014/2015 County Fiscal Strategy Paper (CFSP). It is appreciated that this is the third time the Nairobi City County is preparing a budget review and Outlook. Under these circumstances, we remain steadfast in maintaining macroeconomic stability, even in the face of expenditure pressures associated with devolution of functions to the County and a swollen wage bill. The transition to County Government dispensation has been undertaken smoothly, with most of the devolved functions being fully fledged. Fiscal discipline has been maintained, and more important, greater transparency and high quality management of public finances at Nairobi City County will be necessary to achieve the aspirations of the Nairobi residents for a globally competitive city offering adequate incentives for the residents, workers and investors. The fiscal framework presented in this paper provides a strong basis for building our common future under the new constitutional dispensation. More details will be provided in the Annual performance Report and the next County Fiscal Strategy Paper which will be prepared as required by the PFMA. GREGORY SILVANUS MWAKANONGO COUNTY EXECUTIVE COMMITTEE MEMBER FINANCE AND ECONOMIC PLANNING Finance & Economic Planning 2015 Page iii

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5 ACKNOWLEDGEMENT The County Budget Review and Outlook Paper was prepared with the cooperation and collaboration of many actors both in the County Government. We would like to appreciate the role played by these individuals. Special thanks go to the Committee Executive Member for Finance and Economic Planning Mr Gregory Mwakanongo for offering sound leadership and support he offered during the entire process of writing the plan. We also appreciate the role played by Mr Maurice Okere, Mr James Ngunjiri, Mr Charles Karani Mugo, Ms Esther Ndegwa, Ms Peris Githinji, and Ms Elizabeth Nderitu. Special appreciation to the team of Economists who pieced up the document, led by The Director of Economic Planning Mr Kefa O. Omanga and Economists; Ms Grace Chabari, Ms Molly Achieng, Mr Chege Sianga and Mr Andrew Kigen. We are also grateful for the support given by the Kenya National Bureau of Statistics in providing the relevant data. Mr Luke Gatimu, Chief Officer, Finance and Economic Planning Finance & Economic Planning 2015 Page v

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7 TABLE OF CONTENTS FOREWORD... III ACKNOWLEDGEMENT... V TABLE OF CONTENTS... VII LIST OF ABBREVIATIONS... IX LIST OF TABLES... X CHAPTER I: INTRODUCTION BACKGROUND LEGAL FRAMEWORK FOR THE PUBLICATION OF THE BUDGET REVIEW AND OUTLOOK PAPER FISCAL RESPONSIBILITY PRINCIPLES IN THE PUBLIC FINANCIAL MANAGEMENT LAW OBJECTIVES OF CBROP ORGANIZATION OF THE DOCUMENT... 3 CHAPTER 2: REVIEW OF FISCAL PERFOMANCE IN 2014/ DEVELOPMENT OBJECTIVES 2014/ OVERVIEW OF FISCAL PERFOMANCE 2014/ REVENUE PERFOMANCE EXPENDITURE RECURRENT EXPENDITURE EMPLOYEE COSTS OPERATIONS & MAINTENANCE DEVELOPMENT EXPENDITURE DEBTORS PAYABLES ENFORCEMENT OF FISCAL RESPONSIBILITY PRINCIPLES CHAPTER 3: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK RECENT ECONOMIC DEVELOPMENT MACROECONOMIC OUTLOOK AND POLICIES COUNTY SPECIFIC OUTLOOK 2015/ MEDIUM TERM FISCAL FRAMEWORK RISKS TO THE OUTLOOK MEDIUM-TERM EXPENDITURE FRAMEWORK /16 BUDGET FRAMEWORK BUDGET OUTLOOK 2016/ MODEL FOR CAPITAL BUDGET SHARING CHAPTER 4: CONCLUSION APPENDIX 1: REVENUE PERFORMANCE PER SECTOR Finance & Economic Planning 2015 Page vii

8 APPENDIX 2: REVENUE AND EXPENDITURE PROJECTIONS FOR FY 2015/16, 2016/17 AND 2017/18(MILLIONS) APPENDIX 3: RESOURCE ENVELOPE APPENDIX 4: BUDGET CALENDAR FOR 2016/ Finance & Economic Planning 2015 Page viii

9 LIST OF ABBREVIATIONS BROP CBK CIDP CFSP DANIDA EPZ FY GDP GOK ICT JKIA KENHA KURA NCC NHC NSSF PFMA SBP SSA WAEMU BUDGET REVIEW OUTLOOK PAPER CENTRAL BANK OF KENYA COUNTY INTEGRATED DEVELOPMENT PLAN COUNTY FISCAL STRATEGY PAPER DANISH INTERNATIONAL DEVELOPMENT AGENCY EXPORT PROCESSING ZONE FINANCIAL YEAR GROSS DOMESTIC PRODUCT GOVERNMENT OF KENYA INFORMATION COMMUNICATION TECHNOLOGY JOMO KENYATTA INTERNATIONAL AIRPORT KENYA NATIONAL HIGHWAY AUTHORITY KENYA URBAN ROADS AUTHORITY NAIROBI CITY COUNTY NATIONAL HOUSING COOPERATION NATIONAL SOCIAL SECURITY FUND PUBLIC FINANCE MANAGEMENT ACT SINGLE BUSINESS PERMIT SUB SAHARAN AFRICA WEST AFRICAN ECONOMIC AND MONETARY UNION Finance & Economic Planning 2015 Page ix

10 LIST OF TABLES TABLE 1.1 FISCAL OUTTURN IN FINANCIAL YEAR 2014/15 6 TABLE 2.1 OPERATION AND MAINTAINANCE PER SECTOR 12 TABLE 2.2 DEVELOPMENT EXPENDITURE PER SECTOR 13 TABLE 2.3 SCHEDULE OF OUTSTANDING DEBTORS 15 TABLE 2.4 PENDING CLAIMS 16 TABLE 3.1 SUMMARY OF KEY ECONOMIC INDICATORS Finance & Economic Planning 2015 Page x

11 CHAPTER I: INTRODUCTION 1.1 Background This Budget Review and Outlook Paper (BROP) is the third to be prepared by the Nairobi City County as provided for under the Public Financial Management Act, 2012 section 118. In line with the law, the BROP contains a review of the fiscal performance of the financial year 2014/15, updated macroeconomic forecast, and the experiences in the implementation of the budget estimates for financial year 2014/ Legal Framework for the Publication of the Budget Review and Outlook Paper The Budget Review and Outlook Paper is prepared in accordance with Section 118 of the Public Financial Management Act, The law states that: (1) The County Treasury shall prepare a County Budget Review and Outlook Paper in respect of the County for each of the financial year and submit the paper to the County Executive Committee by the 30 th September of that year. (2) The Budget Review and Outlook Paper shall include: a) Actual fiscal performance in the previous year compared to the budget appropriation for that year; b) The updated economic and financial forecasts with sufficient information to show changes from the forecasts in the most recent County Fiscal Strategy Paper; c) Information on any changes in the forecasts compared with the County Fiscal Strategy Paper; and how actual financial performance for the previous financial year may have affected compliance with the fiscal responsibility principles, or the financial objectives in the County Fiscal Strategy Paper for that financial year; Finance & Economic Planning 2015 Page 1

12 d) Reasons for any deviation from the financial objectives in the County Fiscal Strategy Paper together with proposals to address the deviation and the time estimated for doing so. (3.) The County Executive Committee shall consider the County Budget Review and Outlook Paper with a view to approving it, with or without amendments, within fourteen days after its submission. (4) Not later than seven days after the County Budget Review and Outlook Paper is approved by the County Executive Committee, the County Treasury shall a) Arrange for the Paper to be laid before the County Assembly; and b) As soon as practicable after having done so, publish and publicize the Paper. 1.3 Fiscal responsibility principles in the Public Financial Management Law In line with the constitution the Public Financial Management Act 2012 sets out the fiscal responsibility principles to ensure prudency and transparency in the management of public resources. The PFM law under Section 107 states that: 1) The County government recurrent expenditure shall not exceed the county government s total revenue. 2) Over the medium term a minimum of 30% of the county government s budget shall be allocated to development expenditure. 3) The county governments expenditure on wages and benefits to employees shall not exceed a percentage of the county government s total revenue by regulations. 4) Over the medium term, the government s borrowings shall only be used only for the purpose of financing development expenditure only; and short term borrowings shall only be restricted to management of cash flows and shall not exceed five (5%) of most recent audited county government revenue, Finance & Economic Planning 2015 Page 2

13 5) The County debt shall be maintained at a sustainable level as approved by County assembly. 6) Fiscal Risks shall be managed prudently 7) A reasonable degree of predictability with respect to the level of tax rates and tax bases shall be maintained, taking into account any tax reforms that may be made in future. 1.4 Objectives of CBROP The objective of the BROP is to provide a review of the previous fiscal performance in the financial year 2014/2015 and how this impacts the financial objectives and fiscal responsibility principles set out in the last Fiscal Strategy Paper. This together with updated macroeconomic outlook provides a basis for revision of the current budget in the context of Supplementary Estimates and the broad fiscal parameters underpinning the next budget and the medium term. The BROP will be a key document in linking policy, planning and budgeting. PFMA 2012 has set high standards for compliance with the MTEF budgeting process. 1.5 Organization of the document The rest of the document is organized as follows. Chapter two provides a review of the fiscal performance in financial year 2014/15 and its implication on the financial objectives set out in the last CFSP. In chapter three, the achievement in the implementation of various projects and programs by sectors is highlighted. The last chapter gives a brief of recent economic development and macroeconomic outlook and policies. Finally the conclusion and way forward is stated. Finance & Economic Planning 2015 Page 3

14 CHAPTER 2: REVIEW OF FISCAL PERFOMANCE IN 2014/ DEVELOPMENT OBJECTIVES 2014/15 Prioritization of resource allocation was based on the County Integrated Development Plan , broad development policies of the County Government in term as well as the medium term priorities identified during the County-wide public consultative forums held at the wards between 6 th February-18 th February The development objectives stipulated in the CFSP for FY 2014/15 were geared towards achieving the following: a) Trade and Enterprise Development: Creating a conducive business environment for the private sector. This included deepening ongoing structural and governance reforms and reducing the cost of doing business. b) Improving security in order to encourage investment, economic growth, expansion of employment opportunities and poverty reduction. c) Public Works, Transport and Infrastructure: Investing in first class infrastructure to improve connectivity in the County, reduce time loss, loss of energy in order to reduce cost of production thus boosting the competitiveness of our products. This included improving traffic management, construction and rehabilitation of access roads, expanding water infrastructure and modernizing our sanitation and drainage systems. Investing in affordable and quality housing and sustainable environmental management was critical. In infrastructure and public works Vision 2030 projects included, improvement of Public Road Transport, County Roads, Street Lighting Installation and Maintenance, Fire and Disaster Management, Traffic and Parking, Storm Water Management Systems in Built-up areas. d) Water and Environment: Investing in the development and expansion of water infrastructure, improving drainage systems, enhancing sewerage services and employing technology in waste disposal and management in order to improve the state of the environment in the County. Finance & Economic Planning 2015 Page 4

15 e) Education, Youth Affairs, Culture, Children and Social Services: The County was dedicated to improving the educational standards in all institutions and facilities under its care and promote activities that endear the youth and children to responsible behavior, productive living and preservation of culture and social wellbeing of its residents. The overall objective was to promote and manage education services in the county including stand-alone programmes for the Youth, Children, Women, Persons living with disabilities and Artists. In Youth Training, the county intended to increase enrolment, equip and rehabilitate youth Polytechnics, Equip Youth Polytechnics, Rehabilitate infrastructure in Youth Polytechnics, Technical and Vocational training institutions. In addition the county was to promote, preserve, develop and manage all aspects of Culture for sustainable development, promote sports and culture activities and recreation facilities. f) Health Services: The County focused on Investing in quality and accessible healthcare. County Health Services Vision 2030 Projects included, Rehabilitation of County Health Facilities and Pharmacies, Rehabilitation of Pumwani Maternity Hospital, Provide prompt Ambulance services. Promotion of Primary Health Care, expansion of Cemeteries, Funeral Parlours and Crematoria Services, Epidemiology and Disease Control Activities. g) Planning, Lands and Housing sector was to formulate Integrated Urban Development Master Plan, Regeneration of Public spaces in Nairobi, Safer Nairobi Initiative, Regularization of unauthorized developments, Issuance of Occupation Certificates, Enforcement of Building code and other related laws, Survey of County and allotted Properties, Profiling of Informal settlements, Develop a policy and legislation on outdoor advertising and signage s, Enforcement of Tenancy Agreements, Removal of illegal structures in NCC rental housing estates,repair and Maintenance NCC rental housing estates,issuance of Development and Construction Permits, Preparation of a valuation roll, Sustainability and improvement of old County sites and service schemes. Recovery of material loans from tenants ( ), Delivery of security of land tenure, Urban Renewal of old County Institutional Housing in Eastland s and Review of a valuation roll. h) Agriculture, Livestock and Fisheries sector: Agriculture being the mainstay of the Kenyan economy thus the County government was dedicated to enhance innovative and Finance & Economic Planning 2015 Page 5

16 commercially oriented agriculture. The overall sector objective was the development of periurban productivity in agriculture, livestock and fisheries, and also the investment in value addition as well as promoting local and global marketing. i) Information Communication and E- Government: the County sought to automate all county services in order to provide enhanced operational efficiency and effectiveness in service delivery annually. To identify information silos in the County in order to provide a data bank for assets as information streams in the media daily, and provide effective technical support in the maintenance/upgrading of computer systems and equipment at the same time ensuring that these equipment are in good operational condition daily. j) Investing in restoration of public utilities and lands in private use for the common enjoyment of the relevant public. 2.1 OVERVIEW OF FISCAL PERFOMANCE 2014/15 The fiscal performance was generally satisfactory despite the cuts in development expenditure in the supplementary budget. The Approved budget for 2014/15 was Kshs 28.8 billion (67.3% for recurrent and 32.7% development expenditure) which was later revised to 25.6 billion (73% for recurrent and 26.7% for development). The fiscal performance for the year 2014/2015 is as tabulated here below: Table 1.1 Fiscal outturn in FY 2014/15 FISCAL OUTTURN IN FY 2014/2015 ITEM Approved Budget Revised Budget Actuals % Performance A) REVENUES EXTERNAL REVENUES EXCHEQUER 11,000,000,000 11,340,191,382 11,340,191, DANIDA - 24,920,000 24,920, TOTAL 11,000,000,000 11,365,111,382 11,365,111, INTERNAL SOURCES Finance & Economic Planning 2015 Page 6

17 FISCAL OUTTURN IN FY 2014/2015 ITEM Approved Budget Revised Budget Actuals % Performance RATES 3,700,000,000 2,800,000,000 2,593,325, PARKING FEES 5,000,000,000 2,800,000,000 2,015,507, SINGLE BUSINESS PERMITS 2,000,000,000 2,200,000,000 1,814,196, BLDNG PERMITS (1.25 of construction cost) 1,000,000,000 1,300,000,000 1,348,673, BILLBOADS & ADVERTS 1,000,000, ,000, ,930, RENTS 340,000, ,000, ,318, EASTLANDS 330,000, ,000, ,372, LIQUOR LICENSES 1,000,000, ,000, ,769, DECENTRALIZATION- WARDS 215,000, ,000, ,553, LEASE FEES NWSC 204,000, ,000, ,696, FIRE INSPECTION CERT 140,000, ,000, ,211, CONSTRUCTION SITE BOARD 100,000, ,000, ,315, REGUL. OF BLDNG /CHANGE /AMALG/SUB 150,000, ,000, ,230, WAKULIMA MARKET 150,000, ,000, ,696, OTHER MARKETS 170,000, ,000, ,365, OTHERS 2,263,590,000 1,629,722,061 1,297,285, TOTAL 17,762,590,000 13,323,722,061 11,583,448, TOTAL 28,762,590,000 24,688,833,443 22,948,560, B) EXPENDITURES RECURRENT EXPENDITURES 19,349,390,000 18,736,017,853 18,724,240, DEVELOPMENT EXPENDITURES 9,413,200,000 6,852,815,590 2,298,322, TOTAL EXPENDITURES 28,762,590,000 25,588,833,443 21,022,563, REVENUE PERFOMANCE By the end of June 2015, total cumulative revenue including central government transfers amounted to Kshs 22.9 billion against a revised budget of Kshs 25 billion. County revenue collection was impressive but still below expectations, with only 82.2 per cent of the revised Finance & Economic Planning 2015 Page 7

18 budget target being met. The table above shows revenue per revenue stream in the financial year under review. Internal Revenue Total actual local revenues amounted to Kshs 11.6 billion against a revised budget of Kshs 13.2 billion. The shortfall in internal revenue in 2014/15 was much lower at 14 % compared to the preceding year when the shortfall stood at 23.1%. The CFSP anticipated 40% of Internal Revenue to be generated from six key revenue streams. Although there was a significant downscaling of the projections during the supplementary budget, most of the targets still remained unmet. High default rates among rate payers coupled with an outdated valuation roll, lack of an updated business register and low uptake of e-payment platform in car parks largely contributed to the shortfall experienced. Revenue Shortfall per Revenue Source The major revenue streams in the county are rates, building permits, rents, Single Business Permits and parking fee. Rates High default rates and weak enforcement mechanism led to low rates collection. Court cases by resident associations also hampered collection of rates. The future implementation of the proposed rating bill 2015 will strengthen enforcement on rate collection while review of the valuation roll will widen the ratable properties. A high percentage of county residents who own land are rate defaulters and this poses a risk to revenue collection. To encourage rate defaulters to pay land rates, the county will waive penalties. Parking Fees Weak enforcement, low level of awareness in the E-platform and user resistance to technology was the main challenges facing collection of parking fee. However, since the uptake of E- Finance & Economic Planning 2015 Page 8

19 payment, parking fees collections have been on the rise. To enhance revenue collection by using E-payment the following will be undertaken; improve network connectivity; reduce system failure and increase enforcement. Building Permits Non-disclosure and adherence of county building regulations, poor enforcement of building standards and regulations have led to low revenue collection from building permits. Adoption of E-construction and increase in enforcement of building regulations will enhance revenues from building permits. There exist huge potential in this revenue stream. In order to realize this potential, legislation was enacted in However, an existing court injunction following a legal challenge by a section of industry players continue to hamper its operationalization. Single Business Permit (SBP) During the 2014/15 period, revenues in this stream grew by 28% compared to 2013/14 fiscal year. This was an impressive performance although it was below target by 17%. Following the completion of a business register in the City, it is expected that with enhanced enforcement, the stream is poised for further growth in 2015/16. Late implementation of devolved functions collection laws e.g. Liquor Legal challenges on finance act on rates Legal challenges on betting and control ACT Non remittance from hospitals collections and reimbursement for free maternity care Low level of awareness on County charges and the responsibility to pay by the public. Nurses strike which interfered with normal operations of hospitals Lack of revenue from billboards from road reserves; and no revenues from street poles on KURA and KENHA roads. External Revenue Finance & Economic Planning 2015 Page 9

20 By end of the Fiscal period 2014/15, the national government had released a total of Kshs 11.4 billion including Kshs 24.9 million being grant from DANIDA in support of health facilities support. 2.3 EXPENDITURE Total expenditure by commitments amounted to Kshs 21.0 billion against a revised budget of Kshs 25.6 billion,representing an under spending of Kshs 4.6 billion.the shortfall was attributed to shortfall in the absorption of development expenditures by the various sectors. Out of the total expenditure of 21.0 billion, compensation to employees amounted to Kshs 13.9 billion including salary arrears of 1.1 billion. Figure 1: BUDGET ALLOCATION AND ACTUAL EXPENDITURE 2014/15 Absorption rate for development was 33% while that of recurrent vote stood at 99.9%. The aggregate absorption rate of the 2014/15 resource outlay stood at 82.3%. Finance & Economic Planning 2015 Page 10

21 2.4 RECURRENT EXPENDITURE Total Recurrent Expenditure by commitments amounted to Kshs billion against a revised budget of Kshs billion reflecting an absorption rate of 99.9%. Figure 2: Recurrent expenditure 2.5 EMPLOYEE COSTS Out of the total recurrent expenditure, Kshs 13.9 billion was in respect of compensation to employees, representing 74% of total expenditure. In addition, the employee costs includes Kshs 1.1 billion being the final installment of salary arrears paid in the year 2014/2015.(table for salaries paid) 2.6 OPERATIONS & MAINTENANCE Total cumulative operational and maintenance expenditures amounted to Kshs 4.8 billion including the County Assembly, representing only 24% of total recurrent expenditures. This also includes Kshs 230 million for car and mortgage for the members of the county assembly. Finance & Economic Planning 2015 Page 11

22 Table 2.1 Operations & Maintenance per sector Sector Approved Revised Cumulative % Absorption Budget Budget Total 1 County Public Service Board 62,214,892 47,433,192 12,085, Governor s Office 335,694, ,993,880 30,792, Security Compliance & Disaster 115,465, ,865, ,214, Management 4 ICT,E-Government & Public 16,244,960 16,244,960 12,842, Communications 5 Finance & Economic Planning 1,161,943,697 1,127,934,929 1,123,544, Health 817,929, ,871, ,307, Physical Planning, Lands & Housing 83,595,481 68,961,338 24,958, Public Works & Infrastructure 378,078, ,575, ,993, Education, Youth Affairs,Sports Culture 300,171, ,500,130 63,357, & Social Services 10 Trade,Co-operative, Industrialization 94,613,625 75,690,902 75,678, Public Service Management 733,312, ,394, ,042, Agriculture, Livestock & Fisheries 108,993,825 87,145,109 40,590, Development 13 Water, Energy Environment Forestry & 353,230, ,615, ,001, Natural Resources 14 County Assembly 780,962, ,836, ,208, Total 5,342,451,137 5,320,063,844 4,808,617, Source: Sector accountants Two sectors notably absorbed their recurrent allocation by over 100%. These are environment ( %) and security, compliance and disaster management ( %). This was largely due to commitments incurred in the environment department on contracted garbage collectors and legal costs that were not contemplated in the revised budget. 2.7 DEVELOPMENT EXPENDITURE Total cumulative development expenditure by commitments by the end of financial year 2014/15 amounted to Kshs 2.3 Billion against a revised budget 6.8billion. This reflects an absorption rate Finance & Economic Planning 2015 Page 12

23 of about 33% of the total revised budget of Kshs 6.8 Bilion. This poor performance is attributed to lack of clear implementation plans across all sectors contributed to this low absorption rate. Table 2.2 Development expenditure per sector Sector Approved Budget Revised Budget Cumulative Total % Absorption 1 County Public Service Board 50,000,000 28,000,000 3,638, Governor s Office 516,000, ,000, ,504, ICT,E-Government & Public Communications 4 Finance & Economic Planning 450,000, ,000,000 93,739, ,000,000 72,000,000 18,768, Health 910,500, ,000, ,377, Physical Planning, Lands & Housing 7 Public Works & Infrastructure Education,Youth Affairs Social Services 9 Trade, Co-operative, Industrialization 555,000, ,000, ,359,000,000 4,289,189,353 1,156,153, ,000, ,000,000 77,495, ,000, ,000,000 7,595, Public Service Management 42,000,000 22,000, Agriculture, Livestock & 50,000,000 20,000,000 17,877, Fisheries Development 12 Water, Energy Environment 160,600, ,600, ,513, Forestry & Natural Resources 13 County Assembly 320,100, ,026, ,659, Total 9,413,200,000 6,852,815,590 2,298,322, In 2014/15, there is an observed under spending on planned capital programs by 67% translating to a development index of 12.3% against the 2014/15 CFSP target of 36.4%. The CFSP 2015/16 targets to achieve a 33.6% proportion of total budget outlay to development, translating to a development index of 55.6%. There was no significant change in the development index comparing 2014/15 with the previous financial year. The 0.5% drop in the index can be attributed to increased wages, influenced by payment of salary arrears in 2014/15; the actual expenditure in development was however higher than in 2013/14. Finance & Economic Planning 2015 Page 13

24 TOWARDS ADDRESSING CONSTRAINTS TO SUSTAINABLE DEVELOPMENT IN THE COUNTY Constraint Description Proposed Outlook/ Mitigation Delay in Procurement Procurement process takes long Decentralize procurement services to the implementing sectors. High Wage Bill The CG inherited a labour force of 11,000 employees from the defunct council with a monthly wage bill of Ksh 0.7 B per month and following the transfer of devolved functions an additional 3,300 employees were seconded to the County. This scenario coupled with implementation of a pending CBA agreement of Ksh 2.9 B and new recruitments in health personnel drove the monthly wage bill to Ksh 1.09 B. With the SRC s recommended salary and allowances harmonization, the monthly bill on personnel is expected to rise to Ksh 1.2B. A freeze on non-essential recruitments, outsourcing non critical services and explore voluntary retirement package. Enhancement of revenue. Fiscal deficit Stands at 66% of recurrent budget and 42% of the total annual budget. The City has huge financial obligations arising from its status as a capital city, a diplomatic centre and a major hub for commerce and industry. The CRA formula for revenue sharing does not appreciate these facts as well as the City s immense contribution to the national GDP. Nairobi continues to shoulder additional obligations arising from heightened rural-urban migration thus raising the cost of service provision significantly. The CRA allocation for Nairobi is inadequate. Local revenues have not corresponded well with projected targets. Negotiation with the CRA and the Senate on revision of the formula to accommodate the City s merited enhanced allocation. Review of valuation roll. Enhancing local revenue through enactment of the reviewed County Finance Bill to give effect to new revenue streams recently devolved. Tightening enforcement across all revenue sources. The County has embarked on alternative sources for supporting the capital budget. These include PPP and joint ventures. Finance & Economic Planning 2015 Page 14

25 Constraint Description Proposed Outlook/ Mitigation Culture change programme has been developed towards improving productivity. Receivables pending Debts Resolution Judgement/De cretal debts Institutional challenges CILOR owed by National Government institutions totalling Ksh 15B, Unpaid Rates by private property owners worth Ksh 66.3 B and other defaulters at Ksh69.9 B. The County government inherited a debt portfolio from the defunct city council which continues to weigh heavily on the County s performance. As at end of FY 2014/15 the outstanding debt stood at Ksh 40 Billion. Arising from legal challenges inherited from the defunct City Council, the County Government has been a subject of multiple legal actions that continue to accumulate huge costs in legal fees. Inefficiencies in implementation processes of budgeted programmes including; project conceptualization, design, costing, procurement and execution. Non-resolution of pending bills and delays in effecting payments for works done. Introduction of reward and recognition mechanisms for top revenue performers. -Govt to Government engagements on resolution of outstanding debts. -Incentives to defaulters including waiver of penalties -Enforcement action including legal action and auction of properties in default. Negotiate with National Government to write off or pay up some debts such as pension obligations. Debt renegotiation and rescheduling. Tighten fiscal discipline to ensure financial commitments are based on approved budget. Strengthening the legal department and utilizing alternative dispute resolution mechanisms. Institutional reform process is ongoing and capacity building in technical areas. Decentralization of core-services such as designs and procurement to eliminate delays. Enhanced monitoring of plans, budgets and programmes. Embrace G-Pay Finance & Economic Planning 2015 Page 15

26 2.8 DEBTORS In the Fiscal year the total debtors grew from Ksh 63.8 billion in 2013/2014 to Kshs billion as at 30 th June 2015). Rates debtor s accounts for about 99% of all debts. Table 2.3 Schedule of outstanding debtors as at 30 th June 2015 SOURCE DETAIL LAND RATES ANNUAL RATES 3,209,770,169 3,160,582,125 PRINCIPAL RATES ARREARS 6,548,536,613 9,398,617,750 GROUND RENT 461, ,389 OTHER CHARGES 18,886, ,369 ACCUMULATED PENALTIES 89,825,725, ,028,398,356 ADJ.Rates on Gok & exempted properties) -36,500,000,000-36,500,000,000 SUB-TOTAL 63,103,380, ,088,711,989 2 RENTAL EASTLANDS 46,774,279 47,703,746 E.O.T.E 46,949,999 54,912,525 MARKETS/TPS ESTATES 22,268,899 33,461,492 SUB-TOTAL 115,993, ,077,763 3 S.B.P ANNUAL PERMITS 81,868, ,191,000 SUB-TOTAL 81,868, ,191,000 4 SUNDRY DEBTORS GROUND RENTS 194,870, ,892,750 INSTITUTIONAL HOUSES 5,231,000 8,226,500 COUNCIL PREMISES 2,619,679 2,608,520 SUB-TOTAL 202,721, ,727,770 5 PARKING LOADING ZONES-G.O.K 139,200, ,200,000 LOADING ZONES-PRIVATE 5,800,000 8,040,000 SUB-TOTAL 145,000, ,240,000 6 WAYLEAVES WAYLEAVE FEES 86,401,443 92,945,783 7 BILLBOARDS ADVERTISERS 34,105,820 39,214,022 8 H.D.D SITE & SERVICE SCHEMES 37,330,341 25,186,433 GRAND TOTAL 63,806,800, ,919,294, PAYABLES The provisional debts owed to third parties as at 30 th June 2015 stood at Kshs 40 billion including contingent liabilities. The high debt portfolio continues to impact very negatively on the county operations Finance & Economic Planning 2015 Page 16

27 Table 4: Pending claims Balance as at Balance as at DESCRIPTION (Kshs) (Kshs) PAYE 1,423,492,282 2,543,360,607 NSSF 672,853, ,793,255 LAPTRUST 2,844,168,193 5,070,572,475 LAPFUND 3,055,165,951 4,755,553,009 General Suppliers& Contractors 1,948,777,204 1,788,007,459 Legal Creditors 1,196,522, ,205,205 Kenya Power 505,626, ,612,874 Bank Loans KCB Loan 2,927,244,106 2,925,153,543 CONTIGENT LIABILITIES LAPTRUST (actuarial deficit as at ) 1,194,414,310 1,194,414,310 LAPTRUST (disputed interest as at ) 1,429,958,263 1,429,958,263 GOK Guaranteed loans 3,815,640,733 3,815,640,733 On lent water loans 15,328,285,074 15,328,285,074 Total 36,342,148,510 40,233,556, ENFORCEMENT OF FISCAL RESPONSIBILITY PRINCIPLES In line with section 107 (2) (a-g) of the PFMA Act 2012, The Nairobi County Fiscal Strategy Paper 2014/2015 undertook to ensure that the following principles are enforced; A) That the recurrent expenditure shall not exceed the County government s total expenditure. In this regard, out of an approved budget of Ksh 28.7 billion, an allocation of Ksh Billion was allocated for recurrent expenditure and Ksh 9.41 Billion was appropriated for development expenditure. This translated to 32% allocation for development and 68% allocation for recurrent. In the revised budget of Ksh Billion, Ksh Billion and Ksh 6.85 billion were appropriated for recurrent and development expenditure respectively. Effectively, the revised budget availed 26.5% of the budget resources for capital expenditure with 73.5% being approved for recurrent expenditure. This scenario was largely occasioned by unmet target for both internal and external revenue estimates. Finance & Economic Planning 2015 Page 17

28 Figure 3: Recurrent verses Capital expenditure B) The county s total expenditure on employee wages and benefits amounted to Ksh 13.9 billion translating to 54% of the revised budget of 2014/15. This figure was aggravated by a payout of Ksh 1.1 Billion being the final payment of pending salary arrears. The County government is committed to bringing down the proportion of expenditure on wages to below 50% in the medium term. The most viable option proposed in the CFSP in accelerating wage bill containment is a general slowdown on recruitment of non essential manpower, outsourcing non-core services and working towards enhancement of internal revenue. C) The County treasury proposed to maintain a ceiling for borrowing at 15% of the most recent audited annual revenue. This is articulated in the County debt management strategy paper. It is instructive that borrowing will be exclusively for capital expenditure whenever it becomes necessary to pursue this option for capital financing. Finance & Economic Planning 2015 Page 18

29 D) Though the finance act 2014 has been revised it has largely remained unchanged save for a few amendments to include omissions such as the devolved functions earlier omitted in the finance act Finance & Economic Planning 2015 Page 19

30 CHAPTER 3: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 3.1 Recent Economic Development The global economy registered a growth of 3.3 per cent in 2014, a similar rate to Various major economies and regions however, reported divergent levels of economic growth. Global growth was supported by a fall in crude oil prices, lower inflation rates and increased internal demands in individual economies. Slowed growth in global trade reflects the reduction in import demand, especially in advanced economies. Growth in Sub-Sahara Africa (SSA) rose from 4.4 per cent reported in 2013 to 5.1 per cent in The highest growths in 2014 were recorded in West African Economic and Monetary Union (WAEMU) and the East African Community (EAC) at 6.6 per cent and 5.8 per cent, respectively. Tanzania and Rwanda recorded the highest growth rates of 7.2 per cent and 6.0 per cent, respectively (Economic Survey, 2015). Kenya s economy is estimated to have expanded by 5.3 per cent in 2014, compared to a growth of 5.7 per cent in From the demand side, growth was mainly driven by an increase in private final consumption and a rapid growth in capital investment. From the supply side, the major drivers of the economy were agriculture, forestry and fishing; construction; wholesale and retail trade; education; and finance and insurance. However, accommodation and food services (hotels and restaurants) sector contracted for the second year in a row. During the year, the main macroeconomic indicators remained relatively stable. The Kenya Shilling generally held firm against the major trading currencies despite its depreciation against the US dollar, Sterling pound and Euro, while weighted average commercial banks leading rate remained relatively high but stable. Despite the drop in prices of fuel, electricity and some food commodities, inflation rose slightly but remained within the Central Bank (CBK) target. The Balance of Payments position improved mainly on account of proceeds from the sale of the Eurobond. However, the current account deficit worsened due to deterioration in trade deficit. Government fiscal policies in the 2014/15 national budget, focused on increased revenue mobilization and containment of growth in recurrent expenditure. Consequently, the share of the Finance & Economic Planning 2015 Page 20

31 development expenditure increased to 44 per cent of the total budget in 2014/15 fiscal year from 33 per cent in 2013/14 (Economic Survey, 2015). Performance of the labour market remained modest with employment growing at 5.9 per cent to an estimated 14.3 million jobs in Employment within the informal sector dominated the job creation resulting in an increase in its share of total employment to 82.7 per cent during the year. A summary of key economic indicators are shown in the table below. Table 3.1 Summary of Key Economic Indicators, * Population (Millions) Real GDP-Market Prices(Kshs 3,169, ,725, ,261, ,730, ,357,671.7 Million) Real GDP Growth at constant prices (per cent) Consumer Price Index (Feb =100) Money Supply (M3) (Ksh Mn) 1,271, ,514, ,727, ,957, ,329,980.0 GDP Per Capita: Current (Kshs Mn) 82, , , , ,709.6 GDP Per Capita: Constant(Kshs 80, , , , ,240.5 Mn) Export Volumes (2009=100) Import Volumes (2009=100) Total Expenditures (Kshs Mn) 956, ,016, ,241, ,532, ,924,885.9 Tourism Earnings ( Ksh Mn) 73, , , , ,080.0 Wage Employment (No. in 000) 2, , , , ,370.2 NSE 20 Share (1966=100) Real Wages (Per cent) Source: Economic Survey, 2015 *Provisional Finance & Economic Planning 2015 Page 21

32 3.2 Macroeconomic Outlook and Policies The macroeconomic stability experienced in 2014 has spilled into the better part of 2015 and is likely to continue to the rest of the year. In 2015, macroeconomic stability has been supported by a projected stable low inflation, moderate interest rates and a possible restraint in domestic government borrowing. Improvement in the investment climate, coupled with further structural and legal reforms are expected to improve competitiveness of the private sector and promote overall productivity in the economy. Overall inflation reduced to 5.84% in August 2015, from 6.62% in July 2015 and 6.6% in September 2014 on account of low pump prices and food items (Economic Survey, 2015) Transport and storage, Information and Communication, taxes on products, energy, manufacturing, tourism, building and construction were the key growth drivers in Nairobi County in Trade worsened in the sense that there were more imports than exports the most affected being mineral fuels, animal and vegetable oils, machinery and transport equipment. Tourism Nairobi County is a major centre of tourism in the region. It is rich in biodiversity despite the accelerated pace of urbanization and development.tourism sector continued to be an important source of foreign exchange earnings in During this period, the sector experienced decreased performance owing to a number of factors. This included insecurity mainly associated with terror attacks, adverse travel advisories and continued spread of Ebola in West African countries. As a consequence, the tourism earnings decreased by 7.3 per cent from KSh 94.0 billion in 2013 to KSh 87.1 billion in This was attributed to a decrease of 11.1 per cent in the number of international visitor arrivals over the same period mainly due to adverse negative travel advisories by key source markets. The number of bed-nights occupied in hotels decreased by 4.8 per cent from 6,596.7 thousand in 2013 to 6,281.6 thousand in 2014 translating to the drop in average length of stay to 12.3 days from 13.2 days in The number of local conferences held increased by 8.0 per cent from Finance & Economic Planning 2015 Page 22

33 2,849 in 2013 to 3,077 in However, international conferences decreased by 19.4 per cent in The number of visitors to national parks and game reserves declined from 2,337.7 thousand in 2013 to 2,164.6 thousand in Similarly, number of visitors to museums, snake parks and other historical sites went down by 10.4 per cent to stand at thousand in 2014 compared to thousand in These declines were mainly attributable to the decrease in the number of international visitor arrivals particularly through Moi and Jomo Kenyatta international airports. Building and Construction Infrastructure development in building and construction remains a priority area for both the national and county governments. During the 2014/15 financial year, the government commenced construction of phase 1, and feasibility studies and preliminary design for phase 2 of the Standard Gauge Railway (SGR) at a cost of KSh billion. In addition, the works to replace line 5 of the Mombasa-Nairobi pipeline with a new one measuring 20 inches in diameter began during the year under review. Construction of Terminal 1A at the Jomo Kenyatta International Airport (JKIA) was also completed and opened for use, during the period under review. In 2014, the construction industry registered an accelerated growth of 13.1 per cent compared to a revised growth of 5.8 per cent in Total expenditure for the State Department of Infrastructure is expected to rise substantially by 37.6 per cent to KSh billion in 2014/15. Similarly, total development expenditure on roads for the financial year 2014/15 is also expected to rise from KSh 64.4 billion in 2013/14 to KSh 94.7 billion. Funds disbursed by the Kenya Roads Board (KRB) for road repair and maintenance activities are expected to increase by 11.2 per cent to KSh 25.8 billion in 2014/15. This is partly attributed to increased investment in existing road networks. In 2014, the National Housing Corporation (NHC) completed 243 residential units in Nairobi at a cost of KSh million. Actual government expenditure on housing increased from KSh 3.5 billion in 2012/13 to KSh 6.1 billion in 2013/14. The value of reported private building works Finance & Economic Planning 2015 Page 23

34 completed in the Nairobi City County (NCC) increased from KSh 52.3 billion in 2013 to KSh 59.1 billion in Cement consumption increased by 21.8 per cent, in tandem with the growth in the building and construction sector. Manufacturing The manufacturing sector s contribution to Gross Domestic Product (GDP) has remained at an average of 10 per cent for more than ten years. However, the Vision 2030 stipulates that the sector should account for 20 per cent of GDP. Achieving this goal requires addressing some underlying constraints that hinder faster growth. These include high input cost, decline in investment portfolio for some activities, transport infrastructure, high cost of credit and stiff competition from imports. In an effort to spur growth in the sector, the Government continues to invest in both infrastructure development projects and cheap energy supply mainly in geothermal and wind energy. Essentially, this will improve competitiveness of manufactured products in the domestic and global markets. Equally, the Government initiative to attract investors through the Special Economic Zones (SEZs) programme which allows lower levels of taxation and fewer regulatory hurdles is expected to boost the country s industrial output. In 2014, the manufacturing sector real output expanded by 3.4 per cent compared to a growth of 5.6 per cent in The sector s volume of output increased by 4.5 per cent in The modest inflation during the year under review contributed to capital accumulation in the sector, thus boosting production. The decrease in oil prices in the second half of the year also contributed to reduction in input costs. Over the review period, Export Processing Zone (EPZ) programme recorded improved performance in most of the indicators. These included exports, imports, employment, number of gazetted zones, and local expenditure on goods and services. However, the number of operating enterprises, domestic sales and cumulative investments reduced. The total value of manufacturing projects approved by financial institutions rose by 30.3 per cent to KSh billion in Finance & Economic Planning 2015 Page 24

35 Formal employment in the manufacturing sector rose by 2.9 per cent to 287,456 persons in Some of the activities which had high increases in employment numbers were manufacture of pharmaceutical products, paints and varnishes, animal feeds and dairy products. Similarly, total wage earnings increased by 12.4 per cent from KSh 98.3 million in 2013 to KSh million in Energy After five years of relatively stable albeit high prices, Murban crude oil prices in the international market, plummeted by more than 40 per cent to US Dollars per barrel in December 2014 from US Dollars per barrel in June In 2014, oil supply outstripped demand mainly due to a sluggish world economy in major oil consuming countries. Surging shale oil production in the United State of America (USA) and weak global demand especially in China and Europe were the main reasons for the slip in prices. In addition, crude oil production level from Organization of Petroleum Exporting Countries (OPEC) remained at 30 million barrels per day during the period. Murban crude prices decreased to an average of US Dollars per barrel in 2014 down from an average of US Dollars per barrel the previous year. The low international crude oil prices translated indirectly to cheaper refined petroleum products in the domestic market. The total quantity of petroleum products imported into the country increased by 11.7 per cent from 3,996.2 thousand tonnes in 2013 to 4,464.5 thousand tonnes in The total import bill of petroleum products rose by 5.6 per cent to KSh billion. The total value of petroleum products exported, including re-exports, also went up significantly to KSh billion in Total domestic demand for petroleum products increased from 3,739.2 thousand tonnes to 3,937.9 thousand tonnes in the same period Total effective capacity for electricity expanded from 1,717.8 MW in 2013 to 1,798.3 MW in 2014, representing a 4.7 per cent increase. Similarly, total electricity generation expanded by 8.2 per cent from 8,447.9 GWh in 2013 to 9,138.7 GWh in The domestic demand for electricity recorded an increase of 12.1 per cent to 7,768.6 GWh in 2014 from 6,928.1 Gwh in Finance & Economic Planning 2015 Page 25

36 The number of customers connected under the Rural Electrification Programme expanded by 16.5 per cent to stand at 528,552 customers as at July 2014 up from 453,544 customers in July, the previous year. Transport and Storage The transport sector is vital in facilitating economic growth and sustainable development. Towards this end, the government through the Ministry of Transport and Infrastructure intensified efforts aimed at improving transport infrastructure comprising; roads, railways, airports, pipelines and ports. The performance of transport sector continued to improve during the period under review, with the sector total output value expanding by 13.7 per cent. In 2014, three new locomotives were imported and rehabilitation of the existing fleet undertaken, resulting in increased freight tonnage. In addition, the Global Positioning System (GPS) software was installed allowing for online monitoring of train movement, to increase efficiency. In the maritime sub-sector, the Port of Mombasa recorded an increase of 11.5 per cent of total cargo throughput to stand at 24,875 thousand tonnes in The container traffic registered a growth of 13.2 per cent from thousand Twenty-foot Equivalent Units (TEUs) handled in 2013 to 1,012.0 thousand TEUs in Cargo traffic transported via rail increased by 24.3 per cent to 1,509.0 thousand tonnes over the review period. Total pipeline throughput of white petroleum products expanded by 7.7 per cent from 5.2 million cubic metres in 2013 to 5.6 million cubic metres in Registration of new motor vehicles grew by 9.1 per cent to 102,606 units in However, newly registered motor cycles dropped from 125,058 units in 2013 to 111,124 units over the same period, reflecting a decline of 11.1 per cent. Road safety measures undertaken by the government are bearing fruits as reflected by the 8.6 per cent decline in the number of reported road traffic accidents from 6,205 in 2013 to 5,672 in Total commercial passengers handled at the airports rose from 8,231.6 thousand in 2013 to 8,882.0 thousand in 2014, representing a growth of 7.9 per cent. Similarly, cargo traffic handled at the airports posted a growth of 6.8 per cent to thousand tonnes in Finance & Economic Planning 2015 Page 26

37 Nairobi County hosts Jomo Kenyatta International Airport (JKIA) which is the biggest airport in East and Central Africa, and is the focal point for major aviation activities in the region. Its importance as an aviation centre makes it the pacesetter for other airports in the region. JKIA is served by 49 scheduled airlines and has direct flight connections to Europe, the Middle East, Far East and the rest of Africa. Wilson airport is the second airport in Nairobi County. The Outbreak of Ebola in West African countries has forced the Kenya Airways to stop flights to the affected countries. Consequently this has slowed social economic activities between Kenya and the affected countries. Nairobi County has 11 functional railway stations. The completion of Makadara and Imara Daima railway stations and expansion of Nairobi platform has improved public transportation in Nairobi for socio-economic development. Posts and telecommunication sub-sector has experienced mixed growth in 2014 and 2015.While the county has 35 post office branches, the growth of postal services has been declining due to increased mobile telephony. Mobile telephony has the highest coverage in Nairobi with over 95 per cent of the inhabitants having access to mobile communication. This has greatly improved direct feedback communication. Information Communication Technology (ICT) Information and communication technologies keep evolving leading to easier and more affordable ways of transferring information and conducting business. Over the last decade, the performance of the Information and Communication Technology (ICT) sector has been robust resulting in it being a major driver of economic growth. Kenya has managed to keep in tandem with the rapidly evolving technology and is a leading country in mobile money transfer system. The rapid expansion of the ICT sector continued in 2014 as reflected by improvement of key indicators. Internet usage has increased exponentially especially after the laying of the undersea fiber optic cables along the Kenyan Coast. This is in addition to formulation and implementation of supporting policies such as the National Optic Fiber Backbone Infrastructure (NOFBI). The Finance & Economic Planning 2015 Page 27

38 Government is implementing the National Cybersecurity Strategy and National Surveillance, Communication and Control System to enhance security. In 2014, value of ICT output increased by 12.7 per cent to KSh billion. During the same period, mobile telephone capacity increased by 18.2 per cent while mobile telephone subscriptions rose by 7.4 per cent to stand at 33.6 million. Mobile penetration rose from 74.9 per cent in 2013 to 78.3 per cent in 2014 while the internet subscriptions increased by 6.7 percentage points to 38.3 per cent in The number of both international and domestic messages sent via Short Message Service (SMS) increased by 38.5 per cent to KSh 27.5 billion in This increase was attributed to the increase in domestic SMS during the same period. The total amount of money transferred increased to KSh 2,372 billion from KSh 1,902 billion in the period under review. The total value of imported ICT equipment stood at KSh 41.7 billion in 2014 with that of telecommunication equipment s accounting for 56.7 per cent of these imports. The value of exports declined by 45.3 per cent, to stand at KSh 1.3 billion in Taxation Nairobi County has simplified, modernized and reduced cost of compliance in tax collection. Moreover, the county has expanded the tax base, increased efficiency in tax collection and the sealing of leakages in revenue collection system in 2014 and This has in turn increased tax compliance and revenue collection. There is however need to improve on enforcement of existing policies to ensure even higher revenue. 3.3 County Specific Outlook 2015/2016 The outlook for Nairobi County for the financial year 2015/16 is envisaged to provide a development oriented environment, which will ensure an improved environment for business while at the same time seeking to provide a conducive working and residential space for the population. Improvement of health services, investment in physical infrastructure, refinement of ECDE learning and provision of social amenities are strategies that will be used to achieve this favourable environment in the County. Finance & Economic Planning 2015 Page 28

39 Infrastructure Infrastructure will remain a top priority in the county during the 2015/16 fiscal year. Emphasis will be on expanding and improving road network, development of NMT facilities and addressing congestion. Investing in public lighting, drainage and road safety will also be a key focus area. Health Improved access to high quality health care; through expansion of existing health infrastructure, investment in modern diagnostic facilities, improving of the county ambulance system and enhancing staff capacity in specialized areas of Medicare will be sought for in the period hence a better health sector. Trade Improving and expanding the business environment for enhanced production, trade and employment creation will be a key focus for the Trade & Cooperative sector. The city will be aggressively marketed as a preferred tourist destination coupled with developing unique products for enhanced tourism activity. ICT The ICT platform holds greater potential for service transformation in the county. The County will continue investing in modern ICT infrastructure while progressively building human resource capacities for optimal outcome. Physical Planning Investing in housing facilities through urban renewal program, enhanced enforcement of the building code, regeneration of public spaces and the finalization of the valuation roll will be addressed on priority. Finance & Economic Planning 2015 Page 29

40 Education Focus will be on enhanced education standards, accelerating expansion of youth training facilities in order to equip the youth with skills and competencies for the labour market. Programs for promoting good cultural practices, sports and recreational facilities for sustainable development will be implemented. Finance and Economic Planning Emphasis on efficient and cost effective technologies for resource mobilization, research and development, evidence based planning, county statistics, economic policy formulation and enhanced public participation in planning, budgeting, and expenditure will guide the focus of this sector. Reconstruction and updating of the county asset register, timely provision, of financial systems and tightening expenditure controls are expected to enhance prudence in public financial management. Environment Environmental sustainability in a clean city will be the key focus of the sector. Conservation of ecosystems in order to maintain existing urban nature and biodiversity will be a major priority of the sector. Expansion of the existing water and sewerage network in order to serve a larger spectrum of Nairobians will be undertaken. Agriculture Urban and Peri-urban agriculture will be the key priority area to be addressed in this sector. Value addition and Agri-business development coupled with animal disease control and integrated agricultural extension services will be improved to enhance food security and boost income generation. Finance & Economic Planning 2015 Page 30

41 3.4 Medium Term Fiscal Framework The macroeconomic stability experienced in 2014 has spilled into the better part of 2015 and is likely to continue to the rest of the year. In 2015, macroeconomic stability has been supported by a projected stable low inflation, moderate interest rates and a possible restraint in domestic government borrowing. Improvement in the investment climate, coupled with further structural and legal reforms are expected to improve competitiveness of the private sector and promote overall productivity in the economy. 3.5 Risks to the Outlook In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors. A rebound in activity in a number of distressed economies is expected to result in a pickup in growth in The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth (World Economic Update-IMF, 2015). Policy priorities to address the risks to economic growth are; support demand through tax reforms and spending reprioritization and; adopt structural reforms to raise production and remove production bottlenecks. The main risk to the county outlook remains the challenges associated with the outlook remains the timely release of resources from the National Government to the Counties. The observed tussles between the various governments agencies involved in effecting the transfer of funds to the County will definitely affect the performance if they recur. Secondly, effecting the proposals contained in the Finance Bill continue to face legal challenges posed by prospective payers. It is however hoped that following the wide scope of consultations Finance & Economic Planning 2015 Page 31

42 and enhanced public participation in the process of formulation, the 2015/2016 bill will be effective. Thirdly, E-payment platform is anew innovation upon which the County hopes to launch an accelerated revenue collection campaign. The risk that the slow pace of uptake, system slow down and outages as it is common with technology ought to be perceived and mitigated accordingly. Another major risk to the outlook is appreciating US dollar which creates balance sheet challenges for dollar debtors countries, sharper-than-expected slowdown in China, lower commodity prices, wage pressures, the implementation of the constitution and the increased corruption cases in the country may limit continued funding. The widening of the current account deficit continues to pose a serious threat to the macroeconomic stability. Should these risks materialize the county government will undertake appropriate measures to safeguard macroeconomic stability. 3.6 Medium-Term Expenditure Framework The favorable macroeconomic conditions envisaged to prevail in the country this financial year will provide a significant development platform for this county. However, there are myriad of challenges to be encountered; ranging from high wage bill, high debt, low tourism, unfavourable commodity prices, El Nino, appreciating US dollar and a weak global economy. The implementation of the CIDP will assist in the achievement of the development targets and streamline the resource allocation and utilization. MTEF budgeting will provide an important platform for adjusting non-priority expenditures to cater for the priority sectors. This initiative will embrace thorough public participation as provided for in the constitution and it will be an important tool to ensure the achievement of objectives and targets set out in the CIDP. Preparation of annual development plans is also a necessary step to improve the absorption capacity which is still low at an average of 82.3 percent. The sectors will be required to develop Finance & Economic Planning 2015 Page 32

43 quarterly plans which will guide on the resource utilization and project implementation. The plans will provide a guideline on how best objectives will be achieved without overstretching or clustering. There is also need to streamline the procurement procedures which have been a hurdle in utilization of funds. Preparation of, and adhering to procurement plans is a strategy which will be used to smoothen the process to ensure timely achievement of objectives. Outcome and impact targeted expenditure will be a guiding principle in utilization of funds. Feasible and measurable indicators will be set for each sector and will guide in output based implementation of projects. Tangible results will be used to monitor the effectiveness of the funds used /16 Budget Framework The 2015/2016 budget framework will be set against the background of the CIDP and the Medium Term Plan. The budget will be optimistic in regard to the overall performance of the economy. Inflation is expected to remain low and stable, reflecting continued implementation of a prudent monetary policy and stable food prices. The business environment is expected to remain conducive, with the threats of terrorism and political instability on a decline. Balanced budget approach to budget preparation will be used to ensure matching of resources to needs in the county. This is necessary to ensure that all sectors are provided a substantial allocation of funds as per the resources available. There is also need to avoid off budget spending as this may lead to failure in achievement of set objectives. Budget Estimates FY 2015/2016 The County seeks to finance a total budget of Ksh 30.8 billion during the fiscal period 2015/16. A total of Ksh 17.5 billion will be raised from internal sources while the balance of Ksh billion will be funded externally, largely from the National government transfers. Finance & Economic Planning 2015 Page 33

44 Figure 4: Internal Verses External Revenue Finance & Economic Planning 2015 Page 34

45 Development Vs Recurrent Projections The County seeks to utilize a total of Ksh Billion in recurrent expenditure against a development vote of Ksh 11.0 Billion. Focus should be on improving absorption rate for development from the current 33% to above 90%. Figure 5: Development Vs Recurrent Allocation 3.8 Budget Outlook 2016/2017 Revenues The 2016/17 resource envelope is projected at a total outlay of Ksh33.9 Billion constituting of Ksh 14.7billion being exchequer release and Internal resources of Ksh 19.2Billion. This scenario translates to 43.3% resources from National government allocation and 56.7% internally mobilized resources. This outcome remains the same as in 2015/2016 in the proportion of internally mobilized resources from the 2015/16 fiscal target. Internal resources will constitute county levied taxes and user fees as well as resources mobilized through Public private Partnerships (PPPs), grants and loans. Finance & Economic Planning 2015 Page 35

46 Expenditures Expenditure is broadly categorized into capital and recurrent. The County is projected to incur a recurrent expenditure of Ksh 21 Billion representing 62% of the total budget and a development allocation of Ksh 13 Billion equivalent to 38% of the total budget. The budget seeks to achieve a development index of 62%. Recurrent expenditure is further categorized into salaries and wages at Ksh 14.2 Billion (67.6%), O&M of Ksh 5.2 Billion (24.8%) and Ksh 1.7 Billion (7.6%). 3.9 Model for capital budget sharing Three clusters have been identified as a basis for sharing the development budget among implementing sectors. Due consideration have been taken on the County s development priorities and the relative weight of each sectors role in achieving the development objectives espoused in the CIDP and the County s Strategic Plan These three are; Physical infrastructure & Productive sectors, Governance, social & service sectors and Economic sectors. Physical Infrastructure and productive sectors 1. Public works, Roads and Transport 2. Water, Energy, Environment and Natural Resources 3. Agriculture, Livestock development & Fisheries 4. ICT Governance, Social and Service sectors 1. Governor s Office 2. County Public Service Board 3. Public Service Management 4. Health/ Public Health 5. Education, Youth, Culture, Children and Social Services Finance & Economic Planning 2015 Page 36

47 Economic Sectors 1. Finance and Economic Planning 2. Trade, Industrialization and Cooperative development 3. Physical Planning, lands and Housing Capital Budget Sharing Model CTB = 0.35% CTB+ 0.5% CTB CTB CTB CTB = SB +PIB + EB CR = IR + NGR + ER 1. CTB = RT (EC+O&M) DB Where: RT = IR + NGR + ER CTB = Total Capital Budget EC = Employee Compensation O&M = Operation & Maintenance Cost DB = Debt Resolution IR = Internal Revenues NGR = National Government Transfer ER = External Revenues 2. CTB = 0.35 CTBD+0.5TB+0.25TB+0.35TB = SB +PIB+EB Where: SB = Governance, Social & Services Sectors PIB = Physical Infrastructure & Productive Sectors EB = Economic Sectors Finance & Economic Planning 2015 Page 37

48 N/B: Prior to sharing capital budget, a 5% deduction on the County revenue is mandatory as per the Ward development Fund, This amount is set aside for ward based capital projects. See appendix II for the revenue and expenditure projections for the financial years 2016/17 and 2017/18 Finance & Economic Planning 2015 Page 38