Kenya Governance Support Programme

Transcription

1 Annex B: Component 2 Support to Public Financial Management Government of Kenya and Ministry of Foreign Affairs of Denmark Kenya Governance Support Programme Component 2 Public Financial Management Date: November 2010 J. nr. 104.Kenya

2 Table of Contents Table of Contents... 1 Abbreviations... 2 Cover Page National Sector Context Objectives Strategy and outputs Expected outputs and activities Cross-cutting issues Budget Management and Organization Financial Management and procurement Monitoring and Reporting Key Assumptions and Risks Annex 1: Sector Budget Support Assessment

3 Abbreviations EoD GoK IFMIS KGSP MFA MoU MTEF MTP PFM PFMR PSR RDE SC Sida TA Embassy of Denmark Government of Kenya Integrated Financial Management Information System Kenya Governance Support Programme Ministry of Foreign Affairs Memorandum of Understanding Medium-Term Expenditure Framework Medium-Term Plan Public Financial Management Public Financial Management Reform Public Sector Reform Royal Danish Embassy Steering Committee Swedish Agency for International Development Technical Assistance 2

4 Cover Page Country: Kenya Component title: Public Financial Management National partners: Government of Kenya Ministry of Finance Starting date: 2011 Duration: 5 years Overall budget: DKK 40 million This component document describes Danish support for the Government of Kenya s Public Financial Management Reforms over the period The support contributes towards one (Public Financial Management) of the three core areas of focus within the Danida Strategy for Effective and Accountable Public Sector Management. The budget amounts to DKK 40 million over a fiveyear period. The component is part of the larger Danish support in the area of governance the Kenya Governance Support Programme (KGSP) with another two components. These will support selected drivers for accountability to enhance the commitment to reform, combat impunity of those who abuse power as well as drivers which are seen to be able to implement key reforms; and, support to the promotion of peace and security as the basis for democratic development at the coastal areas of Kenya respectively. The component falls under KGSP s immediate objective II which is the same as the Government of Kenya s Medium Term Plan goals to which PFM reforms contribute; that is Maintaining macro-economic stability and accelerating growth; and, developing transparent, accountable, ethical and results-oriented Government institutions 1. Under the component, support will be provided in harmonisation with other development partners to the Ministry of Finance through the PFM Reform Secretariat. This will be a continuation of previous support by Denmark through a PFMR basket/pooled fund which will be subject to a local appraisal/assessment in conjunction with other donors after June 2011 when the current PFM strategy expires. Danish support will be used to implement the Governments Strategy to Revitalise Public Finance Management and its successor strategy to be developed for the GoK FY GoK, Vision 2030 Medium Term Plan,

5 The support includes DKK 5 million for technical assistance to be provided on demand for particular components, to enhance the capacity of the PFM secretariat to manage the reforms, and for overall risk management measures e.g. annual external audits. 4

6 1 National Sector Context Background Kenya s Vision 2030 defines public expenditure and financial management reforms as one of the priority structural reforms. The goal as defined in the Vision is to accelerate reforms in public financial management in order to improve efficiency, enhance transparency and accountability under a coordinated strategy to revitalise public finance management (PFM) 2. The Medium Term Plan of the Vision ( ) describes two key goals to which PFMR contributes. They are described under macro-economic framework on maintaining macro-economic stability and accelerating growth 3 and under the political pillar on transparent, accountable, ethical and results-oriented Government institutions 4. Reforming public financial management is clearly at the heart of Kenya s aspirations to alleviate poverty and sustain economic growth as indicated in the country s national plans. For many years weak PFM systems have contributed to facilitating significant wastage of public resources through corruption and inefficient expenditure. GoK Policies and Reforms The Strategy to Revitalise Public Finance Management is Kenya s current PFM strategy. The strategy comprises 6 pillars and 15 components as described in the table below. Table 1.1 PFM strategy pillars Pillars Financial Sustainability and Budgeting Resource Mobilisation Budget Execution Procurement Oversight and Evaluation Cross-cutting Issues Component Macro-fiscal framework Budget formulation and preparation External resources Debt and guarantee Taxes, customs and excise Budget execution Accounting and reporting Payroll and pensions Procurement Parliament oversight External audit Internal audit Electronic service delivery and IFMIS PFM legal framework Capacity building and service conditions 2 Vision 2030, Medium Term Plan, p Ibid, p Draft PFMR Monitoring & Evaluation Framework, May 2010 p 3 5

7 The strategy is implemented through annual workplans that take account of the prevailing context and emerging priorities within each component. The Secretariat is currently implementing the final workplan for 12 months for FY 2010/11 (July 2010-June 2011) that will mark the end of the current PFMR basket fund arrangement, which provides the bulk of financing for the PFMR programme. The workplans have been used to determine Governments priorities during this period for purposes of defining Danida support. In addition work has advanced to develop a monitoring and evaluation framework for PFM reforms. The framework which is yet to be validated captures outcome and output level indicators drawn from a combination of PEFA, WB PAD 5 and GoK and incorporates quarterly output level reporting from each component and an aggregate quarterly output level report from the PFMR Secretariat. Outcome level reporting will be compiled semi-annually by the secretariat and will be an important input to the semi-annual joint donor and GoK reviews of PFMR. The Secretariat aims to roll out the framework by July 2010, so it will have been tested for one annual cycle before the end of the current strategy. It is anticipated that GoK will develop a new 5 year PFMR strategy in 2011 to cover the period from July 2011 to June However given the limited progress made on the current strategy and the standard requirements of a robust PFM system, the strategy is not likely to change immensely in substance. Nevertheless, it is expected to take account of recommendations from various reviews which include better sequencing, providing a sharper focus on fewer components at a time, instituting monitoring and evaluation and assuring the working of sound steering, coordination and operational management arrangements. The period of transition to a new strategy also provides a significant opportunity for GoK to re-ignite sectorwide ownership and co-ordination of the PFM reform agenda through a widely consultative strategy development process. It also provides development partners an opportunity to review options for enhancing the efficiency of their support primarily through stronger alignment to GoK systems. Challenges and Lessons Learnt The PEFA assessment concluded in March 2009 provides a snapshot of the status of PFM in Kenya. In addition, progress in implementing the PFM reform strategy is relatively well documented in the aide memoires of biannual Joint Reviews since 2006 including the most recent mid-term review of September 2009, and in Governments first annual report on PFM reforms covering FY 2008/09. Overall Kenya s PEFA ratings are higher than many countries in sub-saharan Africa and comparable to some middle income countries. The table below shows indicators on which Kenya scores highest. 5 The World Bank Project Appraisal Document (PAD) for PFMR and the PFMR Basket Funding arrangement provides indicators aligned to the PFMR strategy. 6

8 Table 1.2: Highest PEFA Indicators Indicator Original Score 2006 Revised Score 2006 Score 2008 PI-2 Composition of expenditure out-turn A A B compared to original approved budget PI-3 Aggregate revenue outturn compared to C C A original approved budget PI-4 Stock and monitoring of expenditure B B B payment arrears PI-6 Comprehensiveness of information B B B included in budget documentation PI-8 Transparency of intergovernmental fiscal B B B relations PI-10 Public access to key fiscal information B B B PI-13 Transparency of taxpayer obligations and B B B+ liabilities PI-16 Predictability in the availability of funds for commitment of expenditures B+ B+ B+ PI-17 Recording and management of cash B B B balances, debt and guarantees PI-19 Competition, value for money and B B B controls in procurement Based on these ratings, areas where progress has been made include external audit and payroll and in timeliness and regularity of accounts reconciliation, amongst others. However, there has been little or no progress in cores areas of the PFMR programme and the scores are average or below. These include quality and timeliness of in-year budget reports and annual financial statements, legislative scrutiny of the annual budget law, follow-up on external audit reports, as well as the effectiveness of internal controls for non-salary expenditures. At the same time, some areas appear to have back-slid including orderliness and participation in the annual budget process, extent of unreported government operations, and availability of information on received by service delivery units. (PFMR Kenya, Joint Review Aide Memoire, September 2009). Table 1.3: Main areas of concern PEFA rating D Indicator Original Score 2006 Revised Score 2006 Score 2008 PI-7 Extent of unreported government C D+ D operations PI- Effectiveness in collection of tax payments D+ D+ D+ 15 PI- 23 Availability of information on resources received by service delivery units B B D 7

9 Indicator Original Score 2006 Revised Score 2006 Score 2008 PI- Quality and timeliness of annual financial D+ D+ D+ 25 statements PI- 27 Legislative scrutiny of the annual budget law D+ D+ D+ PI- Legislative scrutiny of external audit D+ D+ D+ 28 reports D-1 Predictability of Direct Budget Support D D D D-2 Financial information provided by donors for budgeting and reporting on project and program aid D D D+ D-3 Proportion of aid that is managed by use of national procedures D D D The last joint Medium Term Review of the PFM reform programme in September 2009 identified several key issues that needed to be addressed to enhance progress. They are as follows: 1. Refocusing of PFMR: while keeping the scope of the strategy unchanged, there was an agreement during the MTR that prioritisation is necessary to speed up progress of the core reform challenges. 2. Results Focus: the PFMR monitoring has been is too input focused with an insufficient emphasis on results. The need for a results oriented monitoring and evaluation framework was noted as an urgent priority. 3. Use of basket resources: utilisation of basket funds had been consistently low and uneven across components. And even what was used was largely directed towards financing procurement of equipment, routine printing, vehicles and short term training and overseas trips, and not as a channel for supporting PFM Reforms. The review noted that an agreement was needed with GoK on exactly which activities were to be funded from the basket (and ideally for all donor support to PFM reforms) and work plans for the coming period needed to be adjusted so as to ensure that objectives of the programs were reached and utilisation of basket funds optimised 4. Improved dialogue with development partners: including constituting the Joint Working Group (JWG) as per the MOU for the PFMR and to hold regular meetings of this JWG, at least on a quarterly basis. 5. Improved dialogue between Components, Secretariat and MOF political leadership. Significant progress has been made towards addressing these issues. There are strong signs of renewed political commitment to the reforms, the Steering Committee is convening on a quarterly basis as planned, a PFM coordinator has 8

10 been recruited, a M&E Specialist has been recruited and is engaged on work to develop a monitoring and evaluation framework for PFMR which is at an advanced stage. Other vacancies within the secretariat are being filled and a new Directorate for IFMIS has been established within the ministry to drive IFMIS implementation. The Joint (donor and GoK) Working Group has begun to convene regularly quarterly. The latest component plans are more output and outcome focused and an implementation guide is being developed to standardise management processes of the reform programme. In addition the PFM donors are considering ways of making their support more effective including establishing a division of labour for closer technical support to the PFMR components. The PFMR basket fund which is the main donor financing mechanism runs until June 2011 when the current PFM strategy draws to a close. The basket funds are channelled to a GoK designated/special account in Treasury (Ministry of Finance), which enables separate accounting, reporting and auditing based on a combination of GoK and WB procedures. Procurement on the programme is subject to no objection from the WB Task Team Leader (TTL) based in Washington and periodic independent external audits are used to provide further fiduciary assurance. The PFMR Secretariat was expected to provide quarterly reports to all contributing donors, but this has not worked very well in practice. However, the joint annual reviews envisaged within the Joint Financing Agreements have been conducted as planned and have provided a platform for strategic dialogue amongst the donors and between the donors and Government. Denmark is an active participant in ongoing discussions to promote the efficiency of the basket funding arrangement including strongly endorsing WB plans to recruit a locally based Task Team Leader. For support to the new PFM strategy, Denmark in collaboration with other like minded development partners and Government of Kenya will explore options for further enhancing alignment, while maintaining, and improving where possible, the harmonisation achieved so far. Future support will be based on the following principles: Alignment to an overarching prioritised PFM strategy and monitoring and evaluation framework Alignment to Government of Kenya systems with appropriate (limited intrusion) fiduciary safeguards Harmonisation with other development partners Annual disbursements against comprehensive progress reports (of the previous year) and costed workplans showing all sources of finance Quarterly output monitoring reports from the Secretariat Biannual outcome level monitoring reports from the Secretariat Annual joint reviews These principles should provide the basis for the options review, design and subsequent appraisal of the second phase of support of the PFMR Strategy, including implementation modalities. 9

11 Further, within the emerging framework of a division of labour for technical support to the various components within PFMR, the new implementation framework should also explore options for availing the kind of short term technical assistance that has been difficult to mobilise in the past. This could be in the form of a pooled fund or coordination of bilaterally procured technical assistance. In addition to a move towards greater alignment and reinvigorating the JWG for technical cooperation, future dialogue between donors and Government should be aimed at promoting the emerging outcome focussed monitoring and evaluation framework fostering the leadership and coordination required to achieve sector outcomes including the wider PFM framework led by other entities such as the Ministry of Local Government and providing a forum for citizen/civil society participation in the reform agenda. Table 1.4 below summarises the main features of the PFMR basket fund arrangement utilised for current Danish support and the potential for further alignment harmonisation and focus on results. Table 1.4: The PFMR Basket Fund arrangement Feature Description - present status Scope for improved effectiveness Foundation in national plans/strategy Monitoring system Result based indicators Management and coordination setup The PFMR basket fund directly supports Government's reform programme for the sector, it funds workplans drawn from the Strategy to revitalise Public Finance Management, which is mentioned in the National Medium Term Plan and Vision However the workplans have tended to highlight only those activities funded by the PFMR basket fund. The annual (and current 6 month) workplans are used as the monitoring framework and are reviewed jointly by GoK and donors on a biannual basis. Monitoring of the present PFM strategy has so far focused on inputs and activities. The PFM Steering Committee has the role of strategic guidance, oversight and crossgovernment co-ordination By including all the PFMR related activities funded by Government and other development partners within one integrated workplan. By developing a comprehensive monitoring and evaluation framework which includes inputs / activities, outputs and outcomes By shifting the emphasis of the monitoring, reporting and dialogue towards results and outcomes By complete establishment and operations of the PFMR management and coordination set up 10

12 Feature Description - present status Scope for improved effectiveness The PFM secretariat has the main role in the operational coordination and budget allocation of PFMR funds within the sector. The coordination focuses on activities under the PFMR strategy but has tended to concentrate mainly on the activities funded by the WB managed PFMR basket fund On-budget On-parliament On-treasury A Joint (donor and GoK) Working Group is supposed to support technical co-ordination but is yet to convene The PFMR basket fund is onbudget and included in the budget framework paper The PFMR basket fund is included in the budget framework paper presented to parliament The PFMR basket funds are disbursed to a separate subaccount of the Ministry of Finance On-accounting The PFMR basket fund is accounted for separately On-audit The PFMR basket fund is by the Auditor General and by independent external auditors PFMR basket funds are onbudget. However annual workplans and budgets could be better aligned with the budgeting cycle to ensure accurate reflection. PFMR basket funds are included in the budget framework paper and hence presented and approved by Parliament. By integrating future support directly into the Ministry of Finance consolidated account, stronger ownership could be achieved which could also induce greater consideration of the coherence between development and recurrent requirements to increase the sustainability of reforms By using Government accounting classifications and procedures By using the Auditor General audit reports (however in the short term independent external auditors would be required to provide the necessary fiduciary 11

13 Feature Description - present status Scope for improved effectiveness safeguards - and could be phased out over time) Reporting Procurement Harmonised donor positions and support Separate reporting and auditing of PFMR funds Procurement follows a combination of GoK and WB procedures for national procurement and WB procedures for international tendering Five key donors have been harmonised within the WB PFMR basket fund arrangement, but this has been traded off with greater alignment. Other donors adopt different bilateral approaches. By using the reporting systems established within the PFMR management structure particularly the quarterly reporting to the Steering Committee By using GoK procurement procedures only for national procurement Enhanced harmonization could be achieved by promoting greater alignment from the partners providing bilateral support, whilst discouraging the proliferation of different approaches. A more effective donor response could be achieved by harmonizing donor approaches to disbursement based on performance against robust indicators within a comprehensive M&E framework. Overall the PFMR basket fund modality, despite being relatively aligned to GoK systems, suffers considerable delays to the procurement process. Consequently funds have been very poorly absorbed, and programme implementation hampered. Whereas steps have been taken to enhance expenditure efficiency, there is still scope for further improvement which should be taken into account in the design of the implementation and funding framework for support to the next PFMR strategy. 12

14 2 Objectives Support for Public Financial Management Reform (PFMR) is one of the three components of the broader Kenya Governance Support Programme (KGSP). It falls under KGSP s second immediate objective drawn from the goals in the Medium Term Plan to which the PFMR contributes. That is to: Maintain macro-economic stability and accelerate growth and develop transparent, accountable, ethical and results-oriented Government institutions. The primary aim of the component is to support Government's achievement of the priority objectives for PFMR Reform. A key element of the component will be follow up and dialogue by the Danish Embassy in collaboration with other development partners with the Ministry of Finance and other PFM stakeholders on sector policy issues, co-ordination, prioritisation and sequencing and implementation progress (including the development of a new strategy for ) based on agreed desired results. In addition technical capacity will be availed on request to the PFM Secretariat to enhance their capacity to coordinate the reforms and to enhance their internal management; and for overall risk management measures e.g. annual external audits. Support will be provided to the PFMR programme whose objective is: to strengthen PFM systems to enhance transparency, accountability and responsiveness to policy priorities. A comprehensive monitoring framework including a matrix of outcome indicators incorporating the PEFA is being developed by the PFM secretariat and is at an advanced stage. Key indicators for the component are provided in Table 2.1 below: Table 2.1 Key indicators for Component II Objective Indicator Source Notes Annual growth rate of GDP Maintaining macroeconomic stability and accelerating growth, and developing transparent, accountable, ethical and results-oriented government institutions. Strengthened PFM systems that enhance transparency, accountability and responsiveness to public GDP per capita in US$ (disaggregated by gender, ethnicity, region etc) Annual increase in revenue collection on account of improved compliance National Reporting Framework for Vision 2030, p6; Economic Survey National Reporting Framework for Vision 2030, p6; Economic Survey PFM M&E Framework (draft) Stated baseline of 7.1 for 2007; stated targets for the next 5 years; Stated baseline of US$ 792 for 2007; stated targets for the next 5 years; Stated target of KShs 15 billion per annum 13

15 expenditure policy priorities Quality and timeliness of public financial statements index Legislative scrutiny of external audit reports index PEFA Reports & PFM M&E Framework (draft) PEFA Reports & PFM M&E Framework (draft) Stated baseline of D+ for 2008/09; Stated baseline of D+ for 2008; stated target of B for PFM contributes to creating an enabling environment for private sector investment and to ensuring Government has the resources and capacity to implement its political, economic and social programmes. Strong PFM is therefore pivotal to Kenya s economic growth and capacity to alleviate poverty and deliver on the millennium development goals 14

16 3 Strategy and outputs The component builds on previous support for PFMR. The main differentiating consideration for this next phase of Danish support is a stronger emphasis on outcomes through a closer focus on strengthening technical and management capacity for the reforms, including the provision of technical assistance on request to enhance the capacity of the PFM secretariat to deliver. The Danish strategy behind the component will consist of the following elements: Financial support to Ministry of Finance PFM Secretariat. Provided in conjunction with other development partners to the Ministry of Finance Budget for the PFMR strategy. Denmark will contribute DKK 40 million over a five-year period subject to the development of a new PFM strategy by July 2011, with DKK 5million earmarked for Technical assistance. Policy dialogue on key sector issues. As a member of the PFM donor group, Denmark will play a proactive role in engaging with government on the key policy issues that confront PFMR and on the development and use of a robust monitoring and evaluation framework for PFMR strategy implementation. Denmark will promote priority setting by GoK, a division of labour within the donor group based on the PFMR components in the current and new strategy and the various institutions within the sector, and movement towards greater alignment by all donors. Promotion of maximum ownership, alignment and harmonisation. To maximise ownership and effectiveness of the support, Denmark in conjunction with other development partners will actively promote further alignment of PFM support to the national systems and procedures. Technical Assistance in strategic areas. In addition to the funds provided for PFMR strategy implementation and policy dialogue, Denmark will provide technical assistance and training as required for strategic functions within the PFM Secretariat and within the components of focus by Denmark. These are likely to include strategic planning and co-ordination, financial management and monitoring and evaluation for the PFM secretariat 3.1 Expected outputs and activities The draft monitoring and evaluation framework for PFMR identifies over 60 output indicators. The draft outcome level indicators are as follows: 1. National Budget is aligned with explicitly stated government priorities in the Vision 2030 and MTP (previously the IP and ERS) 2. Budget allocation and actual expenditure disparities reduced 3. Predictability of annual/mid-term cash allocation flows to line ministries improved by Treasury 4. Timely capturing of accurate and verifiable data of budget execution for improved financial reporting 15

17 5. Improved payroll management, reliability and control 6. Effective procurement system by reducing time spent and ensuring that there is value for money on procurement 7. External audit reports prepared and published in a timely fashion in accordance with the Public Audit Act Adoption of a Risk Based Internal Audit approach and establishment of effective Ministerial Audit Committees 9. Skilled Oversight Committees of Parliament in undertaking their statutory functions, submitting reports on an annual basis and eliminate backlog 10. Skilled Budget Committee in undertaking its statutory functions complies with the budget cycle 11. Accountability and capacity of public servants enhanced for the delivery of public service The outcome level indicators contribute directly to achieving one of the three core areas of focus in the Danish Strategy for Effective and Accountable Public Sector Management which is defined broadly as Public Financial Management. They also contribute to the other two areas within the strategy which are: fight against corruption, and local service delivery and governance. The indicators are yet to be validated and will be later revised to align with the new PFMR strategy from July 2011 to June Cross-cutting issues The PFM support will address cross-cutting issues and priority themes related to the PFM as feasible. Gender is mainstreamed in the current PFMR by supporting more transparent and equitable public sector management to enable equal opportunities for men and women. A less corrupt and more accountable public sector is furthermore expected to deliver equitable services to men and women. The component is aimed at making the Executive more transparent and accountable for the delivery of services to the citizens, and at limiting the misuse of public funds. An accountable and transparent public service and government is seen as a precondition for enabling citizens to hold the government to account. The programme will not have specific interventions targeting HIV/AIDS, but the emphasis on ensuring accountable and transparent public sector will also benefit the service delivery in the health sector. There are no specific interventions targeting the environment. Having said this, a more accountable government that shows respect for the rule of law will in the long run improve the environment in Kenya. 16

18 4 Budget The budget allocation of DKK 40 million (see table 4.1) is based on: (a) the projected needs (b) the need to make a sufficient contribution to make a difference, and (c) not overloading GoK with funds that they are unable to absorb. DKK 5 million (about 10% of the budget) will be earmarked for technical assistance to be provided on demand to enhance the capacity of the PFM secretariat and for overall risk management measures e.g. external audits. Table 4.1 Budget for Danish contribution to PFMR Denmark Commitment in million DKK Grant 35.0 Technical assistance 5.0 Total 40.0 The total resource envelope for the current 5 year PFM strategy is USD 114 million, making it one of the largest PFM programmes in the world. The programme utilised approximately USD 7 million from 2006 to The six month workplan (Jan2010 Jun 2010) developed by the PFM Secretariat in collaboration with the component managers, has a budget of KShs million or about USD 12M. Of this approximately USD 1M is already available and USD 10 is expected to come from development partners the bulk of which would be from the PFMR basket fund, and approximately USD 1 million plus recurrent costs from the GoK 6. The overall budget and allocations within the programme would be affected by significant changes in the political environment. They are likely to be affected by an affirmative outcome in the constitution referendum (expected to conclude by September 2010). The new constitution includes significant changes to the public finance framework including devolution, which would shift significant resources to new region and county level entities. The new PFMR strategy would therefore need to be reviewed significantly in the event of an affirmative referendum outcome with changes instituted to establish the mechanisms to facilitate the operationalisation of the new financing arrangements in collaboration with other key players such as the Ministry of Local Government. The other significant event which is likely to impact fund absorption in the programme is the next general elections planned for Historically absorption rates decline during the immediate pre and post election periods. Denmark in collaboration with other development partners will monitor the political environment and ensure that any significant issues are well analysed and considered in the emerging new strategy, and consequently in the design of future support and allocation of resources. 6 However due to the fragmented or dispersed nature of the PFM sector, these figures cannot be taken to represent the total envelope available for PFM across the entire Government. 17

19 5 Management and Organization Kenya s planning and budgeting framework does not identify PFM as a sector; however the strategy described above is defined as a SWAP and includes all the supply side institutions with a role to play on PFM, as follows: Ministry of Finance Ministry of Planning Ministry of Public Service Line Ministries Local Authorities Kenya Revenue Authority Public Procurement Oversight Authority Auditor General Parliament The Ministry of Finance has the policy lead for PFM and co-ordinates implementation of the PFM strategy. Therefore, the Government budget for the core reform programme including cross-cutting issues is allocated to the Ministry of Finance. A separate PFM programme exists within the Ministry of Local Government to support PFM reform within Local Authorities including the development of Local Authority Integrated Financial Operations Management Systems (LAIFMOS). And other significant reform programmes target public procurement and the oversight role of Parliament. Other Government entities including Line Ministries are expected to plan and budget for their specific PFM requirements and some such as the Ministries of Education and Health have made significant efforts to improve their systems, with some direct support from the PFM programme Demand side institutions are not formally included in the arrangements for the PFM strategy implementation. However they engage on an adhoc issue basis with Parliament in support of the oversight role 7. This institutionalised fragmentation complicates co-ordination of PFMR. The management arrangements for the PFMR strategy include: A PFM Reform Steering Committee; chaired by the PS in the Ministry of Finance and comprising PS in the Ministry of Planning, the Secretary PSTD, Component Managers, Directorate of Personnel Management and 3 representatives from line ministries (Education, Health and Local Government) and providing strategic guidance and co-ordination 7 Support for PFM demand (civil society) is included in the Drivers of Accountability Programme. 18

20 A PFM Secretariat; providing operational co-ordination of strategy implementation Component managers; providing technical leadership on component implementation Technical Groups; providing cross-government technical leadership on crosscutting PFMR issues Working Groups in each line ministry; providing user feedback and implementation support In addition, under a joint Memorandum of Understanding, there is a Joint Working Group bringing together development partners supporting PFM and Government including all component managers who meet on a quarterly basis to further enhance co-ordination and monitor implementation of the strategy The development partners supporting the PFMR strategy are: Sweden, Denmark, Norway, Germany (GTZ), Canada, European Union and World Bank through the PFMR basket fund. GTZ, USAID, JICA, AfDB and IMF also provide bilateral support directly to the Government of Kenya. Since the last joint mid term review of September 2009, the weaknesses identified in the management arrangements have been significantly improved upon and are now working more effectively. Work is in progress to develop an implementation guide for the programme will provide a framework for standard management practices which should further enhance efficiency. Plans are also underway to strengthen linkages between PFMR and other related initiatives through stronger participation in the wider Government of Kenya and development partners coordination architecture. PFMR will be incorporated in the emerging public sector working group of the Medium Term Plan, which is aligned to the MTEF sector of Public Administration. Development partners will also align their support to this emerging MTP sector framework. With respect to donor harmonisation, the donor PFM Group is part of the umbrella Democracy and Government Donor Group. Participation in these wider forums will promote coordination and efficiency in realising the benefits expected from PFMR. The follow-up programme to be supported post-2011 will be formulated by GoK and be subject to a joint local appraisal. Denmark will participate in this appraisal locally through the Embassy. The appraisal will assess the viability of the programme in accordance with the Danida Guidelines for Programme Management. 19

21 6 Financial Management and procurement The Danish support until June 2011 will continue to be contributed to the PFMR basket fund and managed through a combination of GoK and WB procedures. The WB will be responsible for providing fiduciary oversight and safeguards. Support from July 2011, is subject to the detailed design work to be undertaken by GoK in collaboration with development partners. It is anticipated that the support will be managed more closely in line with Government procedures for financial management and procurement. This includes the Government Financial Management Act (2004) and related guidelines (including treasury circular updates) and the Kenya Procurement and Disposal Act (2005) and related guidelines (2006). Due to a gap in Kenya s procurement regulations, international tendering would continue to be undertaken in line with WB procedures. In addition, where necessary, fiduciary safeguards may be enhanced. This would include procurement audits which should cover: a procurement capacity and risk assessment and a thorough evaluation and documentation of the procurement cycle for sample contracts 8. The audits would be used in conjunction with the annual external audits by KENAO to assess any fiduciary risks and to facilitate mitigating action. 8 This guidance on procurement audits is drawn from a Study of Kenya s Procurement System completed for SIDA in August

22 7 Monitoring and Reporting The PFM Secretariat has recruited a full time M&E officer and is at an advanced stage in developing a monitoring and evaluation (M&E) framework for PFMR. The framework will include input, output, outcome and impact indicators drawn from the strategy and be aligned as far as possible to the PEFA indicators. The Danish Embassy in conjunction with other donors will be consulted on the emerging M&E framework as it is the intention that both GoK and donors would use the same platform for monitoring and evaluation of the reforms. The Danish Embassy will draw primarily on this emerging M&E framework for monitoring progress and the effectiveness of Danish support. In addition they will use the quarterly reports prepared by the PFM secretariat for the PFM Steering Committee and the joint GoK and donor reviews currently conducted biannually with leadership from the WB. Subject to developments with the PFMR basket fund, the biannual reviews may be managed differently in future but are likely to remain a feature of the programme. Further adhoc joint reviews will be undertaken for example shortly after the completion of the new PFMR strategy and in the event of an affirmative outcome in the referendum.. A major mid-term review will be conducted by independent consultants in 2013 and a final evaluation at the end of the support period in In summary monitoring will be based on: Political and other context related information - provided at various forums Quarterly reports from the PFM Secretariat to the PS/PFM Steering Committee Annual joint reviews Annual Audit report from an independent auditor Annual Auditor General report Mid and end-term reviews / evaluation reports 21

23 8 Key Assumptions and Risks The overall risk of the Danish support to PFM is medium. This is primarily because the support is planned over a 5 year period when two significant political events are planned to take place; the constitution referendum planned for August 2010 and General Elections planned for The support is also building on a history of underperformance of PFM reform. However these high level risks are partly mitigated by the evidence of renewed impetus for PFMR led by the Deputy Prime Minister and Minister for Finance, including stronger commitment from the steering committee and a more fully established and operational PFM reform secretariat. Table 8.1 Risks and mitigating factors Strategy Risks 9 Likelihood Impact Mitigation A lack of sustained commitment and political will to continue to drive what is a complex and long term effort reforms Lack of capacity to implement a comprehensive reform programme of this nature Poor or slow procurement procedures Implementing an unsuitable programme management structure Medium High Sustained high level dialogue between donors and GoK. In particular to ensure that the PFMR steering committee remains engaged and provides the necessary leadership for the Medium Medium Joint GoK and donor monitoring of component 15 of the strategy on capacity building and service conditions. Promotion of greater prioritisation and sequencing in the subsequent strategy ( ) aligned with capacity building. Promotion of stronger coordination within the sector Medium Medium Promotion of alignment with GoK procedures for national procurement and WB procedures for international procurement. Promotion and monitoring of proactive procurement planning and adoption of best practice by the PFM secretariat and component managers Low High (The defined programme structure is suitable, but to date it has not operated as conceived). Joint donor engagement with GoK on establishing or reinvigorating the activities and relationships of the management arrangements for PFMR 9 Drawn from the PFMR strategy. 22

24 Strategy Risks 9 Likelihood Impact Mitigation Not implementing a monitoring and evaluation framework framework Delays in formulating new PFMR strategy ( ) High Medium Joint donor engagement with GoK on current plans to complete and systematically utilise an M&E Medium Medium Joint donor engagement with GoK to encourage early planning for follow on strategy. Danish / donor provision of technical assistance on request to support new strategy formulation Modality Risks Likelihood Impact Mitigation Delay in designing and activating the funding framework for the new PFMR strategy Inadequate financial management capacity within the PFM secretariat Poor procurement practice Medium High Engagement with other PFM donors and plan for design work to commence by Sep 2010 and coordinate with timelines for new strategy Medium High Engagement with the PFM Coordinator and FM Specialist and provision of short term TA on request to enhance capacity for financial management Low High Promotion of pro-active procurement planning by PFM secretariat and Component Managers and monitoring of best practice by the Procurement Specialist within the PFM Secretariat 23

25 Annex 1: Sector Budget Support Assessment Governance 1. Good governance, encompassing a minimum respect for human rights, a free press, pluralistic democracy and rule of law, including independence for the judiciary. The latest 2007 elections were determined by the Kriegler Commissions to have been flawed, and the outcome of the Presidential election could not be verified. The post-election violence agreement of the formation of a Grand Coalition Government has rendered Kenya without an official parliamentary opposition. Kenya has a fairly free and vocal press, which serves as an important watchdog in society. Accountability of the state is however weak and the powers of the executive are extensive coupled with a lack of a clearly independent judiciary. Kenya has ratified all major treaties but human rights abuses are extensive (latest documented by the UN report on extra-judicial killings by the Kenyan Police) and impunity strife. A draft constitution which would significantly enhance the governance landscape in Kenya will be subjected to a referendum in Anti-corruption with implementation of prevention and control measures, as well as follow-up with a view to improving the country s standing in the international corruption league table. Kenya ranks 147 in Transparency International s Corruption Perception Index together with Bangladesh. The civil service is perceived as corrupt and inefficient, with top officials accused of ethnic favouritism. In the last year alone, the Kenyan newspapers have exposed mismanagement and possible misuse of GoK funds by ministers and GoK officials related to food aid, education aid and fuel. Kenya has an anti-corruption commission (KACC), which Denmark has supported in the past, but which has not been effective. No prosecutions have been achieved for grand corruption scandals despite significant evidence being adduced in public hearings. The high degree of corruption is one of the main reasons for the relatively low level of Foreign Direct Investments to Kenya. (see DFID Kenya Governance Assessment 2008 and ODI Power and Change analysis for Kenya 2008). Poverty reduction policies 3. Solid poverty reduction strategy and the will to implement it. Kenya has introduced a vision for the development of the country till 2030 called Vision Vision 2030 is supported by five years Medium Term Plans (MTP). The MTP has comprehensive analysis of the development needs and prioritised support. However the monitoring and evaluation framework is weak. 24

26 The MTP is supported by sector wide strategic plans, most of which have been formulated. However commitment to implementing key governance reforms within the current MTP are lagging behind, in particular in areas such as justice and police reform. 4. Positive experiences with development cooperation generally and budget support specifically, as well as ongoing documentation of concrete development results. Denmark has a long development experience with Kenya. In the last five years emphasis has been on supporting the governance sector through GJLOS and public sector management basket funds. While there has been some progress within PSR and PFM, reforms under GJLOS have come to a stalemate. There is no previous Danish experience with the provision of budget support or SBS to Kenya. Other donors, including the World Bank, have so far refrained from the provision of direct budget support. An alignment study has been commissioned by Denmark. Public finance management 5. The Finance Act process, with publication of budget and accounts, as well as parliamentary consideration. The 2009 PEFA report assess that the budget has become a more credible instrument in terms of budget allocation, revenue collection and distribution of resources. However the report also finds a need for improving allocative efficiency. Furthermore functional reporting does not take place. Parliament is involved in the budgeting process, albeit at a very late stage but in accordance with the constitution. Overall Kenya has improved its performance in the budget process since 2006, most significantly in the budget credibility (scoring: A) with some setbacks related to the extent of unreported government operations (scoring: D). 6. Rules for public procurement broadly in accordance with international standards. A new public procurement regulation was gazetted in 2005 and operationalised in The regulation makes it mandatory to use open tenders for procurement with clear separation of duties of accounting officers, tender committee, evaluation committee as so forth. The PEFA 2008 found that efforts were being made to comply with the regulations but that there are non-compliance challenges. There are still cases of state employees acting behind front companies and leaking of qualified information. 25

27 7. Presence of an independent National Audit Office or similar functioning inspection body. Kenya has a National Audit Office (KENAO) with a mandate of authorization of issues from exchequer account and audit of all Government accounts, Courts, commissions and bodies (see below) 8. Expert appraisal of quality and capacity in public finance management. The PEFA 2008 report also found that the Internal Control system, including commitment control, has not been very effective and found evidence of the occurrence of many deficiencies. Furthermore, the report highlights poor status of annual financial statements reflecting mismanagement and poor control. Furthermore poorly functioning Parliamentary oversight as a consequence of a weak constitution will need to be addressed as part of the constitutional review. Progress has however occurred in PFM, including the initiation of the rollout of IFMIS after the successful rollout of IPPD. Outdated legislation has or is in the process of being revised, such as the Government Financial Management Act and the Public Procurement Act. Partnership 9. Mutual observance of agreed obligations. In the PFM sector there has in the past been good cooperation though the PFMR programme. However, utilisation of the funds has not been optimal and opportunities for enhanced alignment and harmonisation through alignment should be explored in the future. 10. Consensus among all budget support donors regarding approach (incl. rules for transfer and monitoring) and conditions for general budget support. No budget support has been provided by like-minded donors so far. 26