Document of the World Bank. IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA41460-Trust Fund No.:TF57287,TF56158) ON A CREDIT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA41460-Trust Fund No.:TF57287,TF56158) ON A CREDIT IN THE AMOUNT OF SDR 17.3 MILLION (US$ MILLION EQUIVALENT) TO THE GOVERNMENT OF KENYA FOR AN INSTITUTIONAL REFORM & CAPACITY BUILDING PROJECT March 29, 2012 Public Sector Reform and Capacity Building Unit Country Department 5 Africa Region Report No: ICR2129

2 CURRENCY EQUIVALENTS (Exchange Rate Effective: December 22, 2011) Currency Unit = Kenya Shillings (KES) KES 1 = US$0.01 US$1.0 = KES 89.9 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS AAP AIE BMS CAS CFAA CIDA DFID DPM EFMAP ERS ERSSC EU FLSTAC FMISS GFRP GITS GJLOS GOK HIPC IDA ICT IFC IFMIS IP-ERS IPPD IPR IT KACA KCA KENAO KMC KRA LA Africa Action Plan Authorizations to Incur Expenses Budget Monitoring System Country Assistance Strategy Country Financial Accountability Assessment Canadian International Development Agency Department for International Development Department for Personnel Management Enhanced Financial Management Action Plan Economic Recovery Strategy Economic Recovery Strategy Support Credit European Union Financial and Legal Sector Technical Assistance Credit Financial Management Information Systems Strategy Government Financial Regulations and Procedures Government Information and Technology Service Governance, Justice, Law and Order Society Government of Kenya Highly Indebted Poor Country International Development Agency Information Communication and Technology International Finance Corporation Integrated Financial Management Information System Investment Program for Economic Recovery Strategy Integrated Payroll and Personnel Database Independent Procurement Review Information Technology Kenya Anti-Corruption Authority Kenya Coffee Auctions Kenya National Audit Office Kenya Meat Company Kenya Revenue Authority Local Authority

3 MOA MOF MTEF MTR M&E NORAD PBK PE PEM PEMAAP PFM PIP PPD PPOA PRGF PS PS/AO PSC PSMTAP PSR RBM SA SAGA SIDA TOR TTL USAID Ministry of Agriculture Ministry of Finance Medium Term Expenditure Framework Mid-Term Review Monitoring and Evaluation Norwegian Agency for Development Pyrethrum Board of Kenya Procuring Entities Public Expenditure Management Public Expenditure Management Assessment and Action Plan Public Financial Management Project Implementation Plan Public Procurement Directorate Public Procurement Oversight Authority Poverty Reduction and Growth Facility Permanent Secretary Permanent Secretary/Authorizing Officers Coordinating Committee Public Service Commission Public Sector Management Technical Assistance Project Public Sector Reform Results-Based Management Special Account Semi-Autonomous Government Agencies Swedish International Development Agency Terms of Reference Task Team Leader United States Agency for International Development Vice President: Country Director: Sector Manager: Task Team Leader: ICR Primary Authors: ICR Team Leader: Obiageli Katryn Ezekwesili Johannes Zutt Anand Rajaram Roberto Panzardi George Larbi, Reynaldo Castro & Lucas Ojiambo George Larbi

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5 Implementation Completion and Results Report (IDA41460-Trust Fund No.:TF57287,TF56158) CONTENTS A. Basic Information... i B. Key Dates... i C. Ratings Summary... i D. Sector and Theme Codes... ii E. Bank Staff... ii F. Results Framework Analysis... iii G. Ratings of Project Performance in ISRs... x H. Restructuring (if any)... x I. Disbursement Profile... x 1. Project Context, Development Objectives and Design Context at Appraisal Original Project Development Objectives (PDO) and Key Indicators (as approved) Revised PDO Main Beneficiaries Original Components (as approved) Revised Components Other significant changes Key Factors Affecting Implementation and Outcomes Project Preparation, Design and Quality at Entry Implementation Monitoring and Evaluation (M&E) Design, Implementation and Utilization Safeguard and Fiduciary Compliance Post-completion Operation/Next Phase Assessment of Outcomes Relevance of Objectives, Design and Implementation Achievement of Project Development Objectives Efficiency Justification of Overall Outcome Rating Overarching Themes, Other Outcomes and Impacts Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Bank Performance Borrower Performance Lessons Learned... 32

6 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP... 76

7 A. Basic Information Country: Kenya Project Name: Project ID: P L/C/TF Number(s): Institutional Reform and Capacity Building Technical Assistance Project IDA-41460,TF ,TF ICR Date: 03/30/2012 ICR Type: Core ICR Lending Instrument: TAL Borrower: Original Total Commitment: Revised Amount: XDR 6.85M Environmental Category: C Implementing Agencies: MINISTRY OF FINANCE Cofinanciers and Other External Partners: B. Key Dates GOVERNMENT OF THE REPUBLIC OF KENYA XDR 17.30M Disbursed Amount: XDR 6.85M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 11/30/2004 Effectiveness: 07/19/ /19/2006 Appraisal: 10/03/2005 Restructuring(s): Approval: 01/24/2006 Mid-term Review: Closing: 11/30/ /31/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Substantial Moderately Unsatisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Implementing Moderately Satisfactory Unsatisfactory Agency/Agencies: Overall Bank Moderately Overall Borrower Moderately Satisfactory

8 Performance: Unsatisfactory Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project Yes at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Moderately Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General public administration sector Sub-national government administration Theme Code (as % of total Bank financing) Administrative and civil service reform Managing for development results Other public sector governance Public expenditure, financial management and procurement Tax policy and administration E. Bank Staff Positions At ICR At Approval Vice President: Obiageli Katryn Ezekwesili Gobind T. Nankani Country Director: Johannes C.M. Zutt Makhtar Diop Sector Manager: Anand Rajaram Helga W. Muller Project Team Leader: Roberto O. Panzardi Sahr John Kpundeh ICR Team Leader: ICR Primary Author: George Addo Larbi George Addo Larbi Reynaldo P. Castro Lucas A. Ojiambo

9 F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The development objective of the project is to strengthen public financial management (PFM) systems to enhance transparency, accountability, and responsiveness to public expenditure policy priorities as well as enhance public service delivery through the effective implementation of Results Based Management (RBM). Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : External audit reports prepared and published in a timely fashion in accordance with the Public Audit Act Value quantitative or The external audit reports External audit are currently not available reports are Achieved with Moderate Qualitative) to the public. publicized. satisfaction (MS) Date achieved 07/31/ /31/ /31/2011 Rating: Moderately satisfactory (MS). Comments KNAO is up to date in production of its annual audit reports, but reports are not (incl. % made public in a timely fashion. The KNAO report for FY2009/10 has not been achievement) made public due to delays in PAC. Indicator 2 : National budget is aligned with explicitly stated government priorities in the IP- ERS. Value Alignment of quantitative or Qualitative) There is no alignment budget and policy achieved Fully achieved (S) Date achieved 07/31/ /31/ /31/2011 Rating: Satisfactory (S): Budget is aligned with the Policy Framework of Vision Comments 2030 MTP Government resource allocations are consistent with (incl. % strategic objectives. Resources are directed towards supporting critical flagship achievement) projects in vision Indicator 3 : Adoption of a Risk Based Internal Audit approach and establishment of effective Ministerial Audit Committees. Value Risk Based Limited Risk Based Internal Audit quantitative or Internal Audit Achievement Approach not in existence Qualitative) Approach adopted. (MU). Date achieved 07/31/ /31/ /31/2011 Rating: Moderately unsatisfactory (MU): A Risk-based Internal Audit approach Comments has been adopted and ministerial audit committees have been established in all (incl. % line ministries. Thus, strictly speaking, the target is achieved. However, the achievement) committees are not functioning effectively. Indicator 4 : Skilled Public Accounts and Public Investments Committees of Parliament submitting reports on an annual basis and eliminate backlog within the second

10 Value quantitative or Qualitative) year of project implementation. Reports not submitted on annual basis and are irregular Public Accounts Committee up to date on the audit reports. Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Rating: Moderately satisfactory (MS): PAC and Investments Committee produce Comments and submit reports fairly regularly. The backlog of PAC reports has been (incl. % reduced from four years in 2009 to one year in This is significant progress, achievement) though it did not occur within the second year of project implementation. Skilled Finance Committee is undertaking its statutory functions and complies Indicator 5 : with the budget cycle Value quantitative or Qualitative) Skilled Finance Finance Committee is undertaking Committee its statutory functions and undertaking complies with the budget statutory functions cycle Fully achieved (S) Date achieved 07/31/ /31/ /31/2011 Rating: Satisfactory (S): The Parliamentary Budget Committee is fully and Comments legally entrenched in the budget-making process. The Implementation (incl. % Committee of Parliament is established and following up on implementation of achievement) the Finance Committee report of Parliament. Indicator 6 : Budget allocation and actual expenditure disparities Value quantitative or Qualitative) No target provided. Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Rating: Moderately Satisfactory (MS): Overall aggregate disparity between Comments budget allocation and actual expenditure was reduced from about 11% in (incl. % 2004/05 to 2.4% in 2010/11. This is a remarkable achievement on average. achievement) However, disparity in development budget is significant. Indicator 7 : Predictability of annual/mid-term cash allocation flows to line ministries. Value quantitative or Qualitative) Less than 80% No target information provided Not achieved (U). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Unsatisfactory (U): There has not been marked improvement in the predictability of cash flows to line ministries. Cash follow to line ministries has remained at an average of 85 percent over the three years ending June Indicator 8 : Accountability and capacity of public servants enhanced for the delivery of public service. Value quantitative or Qualitative) No Baseline information Results-Based Management (RBM) approach adopted by the public sector in order to enhance public service Achieved with moderate satisfaction (MS).

11 delivery. Date achieved 07/31/ /31/ /31/2011 Rating: Moderately satisfactory (MS): The Results for Kenya program Comments contributed to a general improvement in the way that the Govt. manages for (incl. % results and laid the foundation in institutionalization of the Results Based achievement) Management (RBM) in public services. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Within year deviations of actual expenditure from printed estimates reduced by 30% by Within year deviations of Variations do not exceed actual expenditure Achieved with 8% in line ministries from printed satisfaction (S). estimates reduced by 30% by 2008 Date achieved 07/31/ /31/ /31/2011 Rating: Satisfactory (S): Reduction of within year deviation from 8% to 5%. Not Comments more than one out of the last three years has the overall actual expenditure (incl. % deviated from budgeted expenditure by an amount equivalent to more than 5% of achievement) overall printed budgeted expenditure. Payment arrears reduced to no more than average monthly expenditure of Indicator 2 : Government. Value (quantitative or Qualitative) Payment arrears of more than 3 months average of non-salary expenditure exist Payment arrears of more than 1 month average of nonsalary expenditure exist Not achieved (U). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Not achieved (U). Payment arrears have been reduced from 3 months to 2 months instead of 1 month. This represents moderate improvement, but the target is not achieved. Indicator 3 : Financial reporting by semi-autonomous government agencies and local authorities on budget and contingent liabilities Value (quantitative or Qualitative) About 30% of agencies currently report on budgets and contingent liabilities About 90% of agencies report on budgets and contingent liabilities Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Achieved with moderate satisfaction (MS): Over 72% (121 out of 167 agencies) of the SAGAs had submitted their annual reports to KENAO, and these reports were tabled in Parliament. These SAGAs have also adopted the IPSAS.

12 Indicator 4 : Value (quantitative or Qualitative) Timely and reliable financial statements in accordance with acceptable accounting standards are produced through the IFMIS Financial No Financial statements statements are are being produced Not achieved (U). being produced through IFMIS through IFMIS Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Unsatisfactory (U). Out of the six (6) modules for IFMIS, three (3) modules were rolled out for the automation of financial reporting of the targeted ministries, but these were not operational. Indicator 5 : IFMIS is operational in the MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development. Value (quantitative or Qualitative) IFMIS operational in MoF, Agriculture, Trade and Industry, IFMIS not yet operational Local Government, Planning and National Development. Not Achieved (U). Date achieved 07/31/ /31/ /31/2011 Comments Rating: Not achieved; unsatisfactory (U), for the same reasons as intermediate (incl. % indicator 4 above. achievement) IPPD is rolled out to MoF, Agriculture, Trade and Industry, Local Government, Indicator 6 : Planning and National Development. Value (quantitative or Qualitative) IPPD currently used as stand alone system but yet to be linked through Wide Area Network IPPD is rolled out to MoF, Agriculture, Trade and Industry, Local Government, Planning and National Development. Fully achieved with satisfaction. (S). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Fully achieved with satisfaction (S). IPPD has been rolled out to all Government ministries, including MOF, MOA, MOT&I, MLG and MPND and 9 SAGAs and functioning. Indicator 7 : Public procurement entities have achieved full capacity to comply with procurement procedures. Value (quantitative or Qualitative) Procurement capacity is weak. The Public Procurement Oversight Authority Board established and capacity built in procurement Limited achievement, moderately unsatisfactory (MU).

13 entities. Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Limited achievement, moderately unsatisfactory (MU). The Public Procurement Oversight Authority (PPOA) is established and implementing procurement reforms for the purpose of effectively managing public resources. Indicator 8 : An IT strategy is developed and owned by government Value (quantitative or Qualitative) No IT strategy exists An IT Strategy exists Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Rating: Moderately satisfactory (MS). Comments Although an IT strategy has not yet been fully developed, part of the draft IT (incl. % Strategy is already being implemented by the ICT Board and the Ministry of achievement) Information. Indicator 9 : Annual audits are executed in a timely, effective and efficient fashion. Value (quantitative or Qualitative) Only 50% of ministries/departments and agencies are audited. 95% of ministries/departm ents and agencies are audited. Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Moderately satisfactory (MS). All line ministries are audited in timely fashion and reports regularly submitted and presented to Parliament, though not published on time. MoF, Agriculture, Trade and Industry, Local Government, Planning and National Indicator 10 : Development have well established internal audit units and above ministries/departments implement recommendations Value (quantitative or Qualitative) MoF, Agriculture, Trade and Industry, Local Govt, Planning & Independent and effective National IA units do not exist in all cases. Limited evidence of use of audit results. Development have well established internal audit units and they all implement recommendations Limited achievement. (MU). Date achieved 07/31/ /31/ /31/2011 Rating: Limited achievement (MU). : Comments Internal Audit units have been established in the selected ministries (and in all (incl. % ministries), and ministerial audit committees have been established and staff achievement) capacity enhanced. Annual Procurement audits indicate improvement in compliance with Indicator 11 : procurement regulations Value (quantitative or Qualitative) Procurement not covered as a focus area for Internal Audit Internal audit on procurement carried out in 90% of ministries Not achieved. Procurement not yet covered as a focus area for Internal

14 Audit Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Not achieved. (U). Guidelines for annual procurement audits have been developed and regulations are in place, but procurement audits are not yet mainstreamed into the audit process. Indicator 12 : Quality and use of recommendations of Parliamentary Committees improved Value (quantitative or Qualitative) No evidence that Public Accounts Committee recommendations are implemented Public Accounts Committee recommendations are implemented in 90% of ministries Limited achievement (MU). Date achieved 07/31/ /31/ /31/2011 Rating: Limited achievement (MU): Implementation Committee of Parliament Comments established but the ICP does not seem to take further action to ensure that the (incl. % Central Government regularly implements annual audit reports recommendations achievement) that are endorsed by Parliament. Indicator 13 : Results Units established in the piloted ministries to roll out RBM Value (quantitative or Qualitative) None exist Results Units established in 95% of the piloted ministries to roll out RBM Achieved with satisfaction. Date achieved 07/31/ /31/ /31/2011 Rating: Satisfaction (S): Results Units/Ministerial Management Units (MMUs) Comments have been established in all piloted ministries and beyond. The RRUs/MMUs are (incl. % expected to champion public sector reforms in their respective ministries. achievement) Ministerial Management/results Units established in piloted ministries. Code of Values and Ethics developed in line with the "Guide to Values and Indicator 14 : Ethics in RBM" and implemented in the piloted ministries Value (quantitative or Qualitative) None adopted Code of Values & Ethics implemented in 95% of piloted ministries. Achieved with moderate satisfaction. Date achieved 07/31/ /31/ /31/2011 Rating: Moderate satisfaction: (MS): Code of values and ethics has been Comments (incl. % achievement) developed in line with the Public officer ethics Act of Implementation of code compliance was 55% against the target. GOK indicated that inculcating a culture of values and ethics takes time. It therefore continues to pursue action to help create structures and systems for internalizing values and ethics. Management Procedures in the piloted ministries aligned to RBM guidelines for Indicator 15 : managing for results. Value (quantitative or Qualitative) None exist Management Procedures aligned to RBM guidelines for managing for results in 95% of

15 piloted ministries. Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Indicator 16 : Value (quantitative or Qualitative) Rating: Moderately satisfactory (MS). (i) All MDAs now have strategic plans and annual work plans that align with the MTP for Vision 2030; (ii) Performance Contracting (PC) now cascaded to State Corporations and lower levels within institutions (68 tertiary institutions on PC); and (iii) Extensive training on PC has been carried out (over 3000 public officers trained). Thus substantial progress has been made on PC, which is now widely understood and accepted as key performance management tool. Periodic evaluation reports on progress in developing effective results-driven transformative leadership competencies in the piloted ministries Periodic evaluation reports not being done. Periodic evaluation reports being done in 95% of piloted ministries Achieved with moderate satisfaction (MS). Date achieved 07/31/ /31/ /31/2011 Rating: Moderately satisfactory (MS): All ministries are annually assessed Comments and ranked according to their level of achievement of the indicators that (incl. % achievement) are stated in the performance contracting documents. The results of this assessment exercise are publicly made available. Indicator 17 : Results units established to roll out RBM in the focus ministries Value (quantitative or Qualitative) None exist Established MMUs in all focus ministries Achieved with Satisfaction (S). Date achieved 07/31/ /31/ /31/2011 Comments (incl. % achievement) Rating: Achieved with satisfaction (S). A mentioned under intermediate indicator 15, MMUs established in all piloted ministries, thus the target value has been achieved. Targeted ministries use the Capacity Building Facility to support Rapid Result Indicator 18 : Action Plans Value (quantitative or Qualitative) Capacity Building Facility not yet used Capacity Building Facility fully utilized by targeted beneficiaries Achieved with satisfaction. Date achieved 07/31/ /31/ /31/2011 Comments Rating: Satisfactory: Indicator met. All the five initially targeted ministries have (incl. % implemented their action plans and in some cases achieved remarkable results. achievement)

16 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 09/18/2006 Satisfactory Satisfactory /02/2006 Satisfactory Satisfactory /05/2006 Satisfactory Satisfactory /14/2007 Satisfactory Satisfactory /26/2007 Satisfactory Moderately Satisfactory /30/2008 Satisfactory Satisfactory /26/2008 Satisfactory Satisfactory /26/2009 Moderately Satisfactory Moderately Satisfactory /31/2009 Moderately Satisfactory Moderately Satisfactory /30/2010 Moderately Satisfactory Moderately Satisfactory /31/2011 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Not Applicable I. Disbursement Profile

17 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. During the two decades preceding appraisal for this project in 2005, public sector management was hampered by several governance challenges. This had a negative impact on Kenya s economic growth and development, increased the cost of doing business in the country, discouraging private investment, and proved an obstacle to addressing widespread poverty and improving the quality service and of life of its citizens in general. Key governance problems at that time included: lack of efficient, transparent, and accountable decision-making in the management of the country s public sector, perverse incentives and existence of high level corruption, weak economic and financial management and weak rule of law, inefficient service delivery mechanisms, and weak administrative practices. Despite several reform initiatives to address these problems in the 1970s and 1980s, only modest results were achieved. 2. The Kenya African National Union (KANU) party, which ruled the country since independence in 1963, made effort to improve and reform public sector governance. Its measures included restructuring the public sector by reducing the number of ministries from 28 to 15, implementing a staff retrenchment program combined with improved pay and benefits, reforming the legal and judicial system, and promoting greater engagement with civil society. A new Government, formed by the National Alliance Rainbow Coalition (NARC) which won the General Election and took office in December 2002, promised to enhance the public sector reform program with increased determination to address governance challenges, opening up of democratic space and undertaking key policy and institutional reforms to improve both the environment for private sector investment and service delivery to the people. 3. The new Government s strategy to improve public sector effectiveness was outlined in its Poverty Reduction Strategy Paper (PRSP), titled the Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS, ), prepared with the full participation of non-governmental organizations, civil society organizations, development partners, and other stakeholders, and was debated and approved by Parliament. The Strategy centered on three inter-linked pillars: (a) strengthening economic growth; (b) enhancing equity and reducing poverty; and (c) improving governance. The World Bank s Board discussed and approved the Strategy on May 6, 2004 and the International Monetary Fund s Board discussed and approved it on May 10, The new Government made some progress on reforms under the public sector management technical assistance project with specific reforms led to noticeable improvement in civil service performance, including, reduction of backlogs in the audits of Government accounts; strengthening of the civil service wage policy, retrenchment and abolition of overmanned posts, and establishment of a Remuneration Board to oversee the implementation of the pay reform policy approved by Cabinet. It established 1

18 an institutional framework comprising a Cabinet Sub-Committee, a National Steering Committee on Public Sector Reforms, and a Public Sector Reform and Development (PSRD) Secretariat responsible for coordinating the implementation of various on-going reform initiatives in the public sector. As part of its efforts to develop an integrated sector-wide monitoring and evaluation (M&E) system to improve the allocation and use of public resources, the Government established a Monitoring and Evaluation Department within the Ministry of Planning and National Development (MPND). To improve management and quality of public service delivery, performance contracts were introduced for all Permanent Secretaries and Accounting Officers in all Government ministries and departments. These performance contracts were tied to the ministerial or departmental strategic plans and required that they report their performance and resource utilization in the delivery of services to the people through parliament and other communication channels. All chief executive officers and board of directors of all stateowned corporations were also expected to sign these performance contracts. 5. The Government also took a number of actions to address corruption, including: (a) implementation of the Economic Crimes Act (2003), which lead to the establishment of an Anti-Corruption Commission; (b) establishment of a Department of Governance and Ethics in the Office of the President; (c) enactment of the Public Officers Ethics Act in 2003, that required all public officials (including the President) and employees, as well as their families, to declare their assets and took steps to make these declarations public; and (d) undertook judicial reform, including the establishment of the Ministry of Justice and Constitutional Affairs, appointment of a new Chief Justice, and firing of corrupt and inefficient judges. The Government also enacted key legislation aimed at improving governance and public service delivery which included: the Government Financial Management Act, the Public Procurement and Disposal Act, the Public Audit Office Act, and the Privatization Act. The Government also launched an enquiry into a major corruption case (Goldenberg). Further, it took action against those involved in corruption in the Bank-funded projects especially the Kenya Urban Transport Infrastructure Project (KUTIP), in which both Government officials and Bank staff members were found to have been involved in corruption. 6. The Government implemented an action plan in to accelerate and consolidate reforms although it was not meant to represent the totality of the Government s action on anti-corruption. Specific actions highlighted by the by then Minister of Finance included: (a) timely completion of annual project audits; (b) clearance of public accounts backlog; (c) introduction of risk-based internal audit throughout Government; (d) simplification of payment processes, and more importantly, governance review of selected projects, whose objective was to identify areas of governance weaknesses that expose projects to fraud risks. 7. Additionally, the 2005/2006 budget was for the first time compiled without factoring in donor support. Although donor support remained critical, government officials argued for a strategy that allows them to plan within their own resource constraints. The success of the strategy, however, depended on addressing broader economic and fiscal governance challenges, including efficient revenue collection by the 2

19 Kenya Revenue Authority and prudent spending by line ministries. The Government also took a major step in passing the Public Procurement and Disposal Bill, The initiatives in procurement anti-corruption, financial management and other improvements in the various sectors were aimed at improving the quality of governance and service delivery for communities, the private sector, and civil society in general. 8. A number of development partners offered to provide assistance to support the Government to implement various governance activities, including support to the justice and law and order sector, based on the Government demonstrating its strong leadership in the effort to eradicate corruption and pursue reforms. The Government subsequently entered into partnership with development partners to plan and implement the Public Financial Management (PFM) Reform Program with the aim of enhancing financial governance in the public sector for effective and efficient resource utilization for economic growth and poverty reduction. UNDP supported the government through a program to alleviate poverty through strengthening capacity and participation of governance institutions and civil society organizations including NGO's and Community Based Organizations on public governance and coordinated support from bi-lateral donors to the Office of the President on improving public sector management, coordination and networking with the long-term objective to improve public sector management for more efficient, transparent, and accountable delivery of public services. 9. Despite the government s renewed commitment to improve governance and delivery of services to its citizenry with support from the development partners, significant systemic challenges could not be fully addressed. For instance, the Civil service continued to be bloated and service quality remained unstable and poor in key economic sectors such as the telecommunication, ports, and energy. Pay reform was problematic because of the lack of a pay policy. In addition, poor harmonization of donor support to Kenya had led to uncoordinated interventions. This fragmentation was a huge drain on the capacity of the Government and ran counter to the commitments made under the Paris Declaration on aid effectiveness. There had also been several missed opportunities for organized scaling up of implementation (e.g. in using rapid results approaches, etc.), throughout the Government. 10. Therefore, as part of a new initiative, the government articulated a new vision and institutional framework for improving public sector performance and service delivery as part of its broader strategy for reinvigorating its program of growth and structural reforms for wealth creation. The approach focused on enhancing the change management capacity of leaders in the Public Service and their teams in delivering Results for Kenyans. The initiative intended to enhance the development and promotion of a value system and code of ethics developed from the existing legislation as well as best global practice as a tool to rejuvenate the service orientation and accountability for public servants by focusing on results and by providing a clear picture of what areas and outcomes the Government is engaged in. 11. The focus of the new program was on improving public service delivery and strengthening PFM with the aim of reducing discretionary powers accorded to its chief 3

20 executives, improving its service delivery system and enhancing transparency in government transactions, including procurement reforms, and consequently the creation of the environment for needed foreign investment. Emphasis was placed on monitoring and evaluation and the strengthening of feedback systems. 12. To help implement its new public sector management reform program, the Government sought assistance from the Bank and other development partners in the following areas: a) Demand-driven capacity building that is aligned with and directly supportive of the performance-based management; b) Focus on some key ministries (that are critical for successful implementation of the ERS, e.g., Ministry of Finance, Ministry of Planning and National Development, Ministry of Trade and Industry, Ministry of Local Government, and Ministry of Agriculture); c) Assistance to Parliament in its oversight role by supporting the various parliamentary committees in the area of economic management (budget preparation, budget execution, and expenditure control), and provision of technical and logistical support for effective oversight by the Public Accounts and Public Investment Committees; and d) Improvement in the effectiveness of donor support in critical areas of capacity building, governance, etc., by ensuring that they are better aligned and coordinated, especially in areas such as PFM. 13. The IRCB project was thus designed with strong emphasis on improving governance and restoring the rule of law articulated both in the Investment Program for Economic Recovery Strategy (IP-ERS), and the joint World Bank-IFC CAS, Thus IRCB was fully aligned to both the Government and the Bank s strategies. At the time of the design of the project there was high level government commitment and ownership to provide a good authorizing environment for reforms. 14. The Bank responded through the IRCBP in close collaboration with the several bilateral donors who showed interests in the project, including the Department for International Development (DFID), European Commission (EC), Swedish International Development Agency (SIDA), Canadian International Development Agency (CIDA) and (DFID, SIDA, EU CIDA, and Norway. The DPs agreed to support the PFM program through pooling of funds around a Basket Fund arrangement. Some DPs, namely the United States Agency for International Development (USAID), Development Cooperation of Germany (GTZ) and United Nations Development Program (UNDP), provided support directly to GoK outside of the pool. 15. Following the agreement to support PFM reform component of the IRCB project through a basket fund arrangement, a Memorandum of Understanding (MoU) was signed in the late 2006 between the Government of Kenya and Development Partners (DPs) comprising of the World Bank, CIDA, Denmark, DFID, EC, GTZ, Japan, SIDA, USAID and UNDP. The main objective of the MOU was to support the implementation of the 4

21 GoK s Strategy to Revitalize Public Financial Management Reform (PFMR Strategy) towards the improvement of financial governance in the public sector through: (a) enhanced macroeconomic and fiscal forecasting, better budgetary management; (b) improved revenue collection and tax administration, enhanced procurement; (c) strengthened accounting and financial reporting processes; (d) strengthened internal and external audit systems; (d) integrated financial management systems; and (f) enhanced capacity of parliament to play its oversight role in public resources management. The PFMR Strategy is part of the broader framework of national development policy set out in the ERS, and is implemented through the GoK Annual Budget and Medium Term Expenditure Framework (MTEF). 16. The MoU formalized the DPs commitment to the principles of aid effectiveness, harmonization and mutual accountability as laid down in the Paris Declaration of Aid effectiveness dated March 2, The MoU called for the highest degree of harmonization between the DPs and alignment with the budgetary and accountability system and legislation of the Republic of Kenya, so as to reduce the administrative burden on the GoK and to enhance the effective implementation of the Program. With the exception of the EU, most donors provided funds directly to GOK under the pooling arrangements. EU funds in the amount of Euro 4.75 million were provided through a Trust Fund Administrative Agreement (TF070601) dated December 19, 2007 between the EU and the World Bank. Of this amount, Euro 4.59 million was provided to the PFM component of the project under a Grant Agreement dated September 8, 2008 between GoK and IDA. The remaining balance was earmarked for administrative purposes including costs incurred by the Bank in supervising the project. The complexity of implementing the basket fund and the different interests of donors later got have in the way of effective coordination and funds flow to the project and provide lessons that are discussed later in the report. 17. A PHRD Grant was also formally established on July 3, 2006 in the amount of US$3.1 million to co-finance the IRCBP. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 18. The original PDO of the IRCB project was to strengthen PFM systems to enhance transparency, accountability, and responsiveness to public expenditure policy priorities as well as enhance public service delivery through the effective implementation of Results Based Management (RBM). 19. It is must be pointed out from the onset that the ICR captures the performance of the project with the support of financing from the IDA credit, the Multi-donor Trust Fund (PFM Basket Fund) and the EU Trust Fund. The Key Performance Indicators of the project captured the emphasis on sound fiduciary arrangements in the context of an evolving framework of results based management and assessed whether the development objectives have been achieved. The PDO has two main parts: (a) PFM, with seven indicators and (b) RBM with one indicator. The PDO indicators and the results at the end 5

22 of the project, as shown in Table 1 below, indicate that two indicators out of eight were fully achieved satisfactorily, three were moderately satisfactory, while three were either unsatisfactory or moderately unsatisfactory at project closing date (relevant information on the final results of the intermediate indicators are provided in the Data Sheet and Table 1 below): Table 1 PDO Indicators & Final Outcomes Indicator Baseline End of Project Outcome 1. External audit reports prepared and published in a timely fashion in accordance with the Public Audit Act National budget is aligned with explicitly stated government priorities in the IP-ERS. 3. Adoption of a Risk Based Internal Audit approach and establishment of effective Ministerial Audit Committees hearings at the National Level. 4. Skilled Public Accounts and Public Investments Committees of Parliament submitting reports on an annual basis and eliminate backlog within the The external audit reports are currently not available to the public. Achieved with moderate satisfaction (MS). While KNAO is up to date in production of its annual audit reports, these are not made public in a timely fashion. The KNAO report for FY2009/10 has not been made public due to delays in the PAC to present reports to the Parliament for discussion and subsequent release to the general public. Thus while annual audit reports for central government are prepared on time within the statutory period, publication is not timely and recommendations are usually not followed up. Despite these challenges, the structures are now in place and KNAO has been strengthened. The delays in publication of audit reports have been brought to the attention. There is no alignment. Achieved (S): The Budget is aligned with the Policy Framework of Vision 2030 MTP MTEF Budgets are prepared. Stakeholder participation in the National Budget through Sector hearings at the National Level. Government resource allocations are consistent with the national strategic objectives pursued by the Government as a basis of allocation of public resources. Resource allocation towards development expenditures including donor funded projects increased by 10.7 percent of GDP in 2011/12. Most the resources were directed towards supporting critical physical infrastructure, especially road and air transport facilities, which is expected to attract private sector investment in the flagship projects identified under Vision Risk Based Internal Limited achievement; moderately unsatisfactory. (MU). Audit Approach not in Risk-based Internal Audit approached is adopted and existence. ministerial audit committees established in all line ministries. Thus the target is achieved. However, the committees are not functioning effectively in most line ministries as expected. The committees have not been meeting regularly partly because the terms of reference have not been given legal backing. For the committees to be effective, they will need to be supported with some regulations given the legal backing. Reports not submitted on annual basis and are irregular Achieved with moderate satisfaction (MS). PAC and Investments Committee produce and submit reports fairly regularly. The backlog of PAC reports has been reduced from 4 years in 2009 to one year in This is significant progress, though not within the second year of project implementation. 6

23 second year of project implementation. 5. Skilled Finance Committee is undertaking its statutory functions and complies with the budget cycle. 6. Budget allocation and actual expenditure disparities 7. Predictability of annual/mid- term cash flows to line ministries 8. Accountability and capacity of public servants enhanced for the delivery of public services Skilled Finance Committee is undertaking its statutory functions and complies with the budget cycle Achieved (S). Departmental Committee of implementation established on 10 th December 2008 Standing Order No. 196 available as a PDF doc on (New Standing orders)parliamentary Budget Committee fully and legally entrenched in the budget making process and follows up implementation of Finance committee report % Achieved with moderate satisfaction (MS). The deviation of aggregate expenditure of budget allocation from actual expenditure was reduced from about 11% in 2004/05 to 2.4% in 2010/11. The GoK was able to narrow the recurrent expenditure difference through implementing its fiscal framework that was anchored on continued maintenance of a strong revenue effort and containing the growth of total expenditure, while shifting the composition of expenditure from recurrent to capital expenditure and eliminating unproductive expenditures and leakages through improved public financial management. However, its performance relating to development expenditure was not satisfactory. The difference in the development expenditure reduced from a high of 35% in 2005/06 to 18.0% in 2008/09 but increased to 27.0 % in 2009/10 due to low absorption capacity of donor funds, and to huge expenditure on Constitutional referendum. However, the Constitutional expenditure was a onetime off expenditure, and therefore it is expected that Government will be able to contain the differences in future budget outturns. Issues of improving the Government s absorption capacity are being addressed by the quarterly meetings organized between project team members from the Government, the World Bank and other development partners. Less than 80% Not achieved (U): Available information reveals that there has not been marked improvement in the predictability of cash flows to line ministries. Cash follow to line ministries has remained at an average of 85 percent over the three years ending June 2011 and this is a fairly significant limitation to MDAs and their operations. No baseline Achieved with moderate satisfaction (MS): All the five initially targeted ministries have implemented their action plans and in some cases achieved remarkable results. Through RRI and provision of civil service training financed under capacity building fund, over 100 MDAs have achieved significant impact in providing services to the public. A user satisfaction survey conducted in 2009 showed high satisfaction levels of the various customers of and employees of Government of Kenya. The overall customer satisfaction index was 63.5 per cent. This compares favorably with those of New Zealand (68 percent in 7

24 2007) and Canada (67 per cent in 2005). A joint Government/DPs evaluation conducted in March 2011 also concluded that this component of program contributed to a general improvement in the way that the Government manages for results and in laying the foundation for institutionalization of RBM. 1.3 Revised PDO Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 20. The PDO and key indicators were not revised. 1.4 Main Beneficiaries 21. The PDO and the key performance indicators suggest that the target beneficiaries broadly included the Ministries of Finance, Agriculture, Planning and Development, Trade and Industry, Local Government, Kenya Revenue Authority and other ministries, departments, agencies (MDAs) benefiting from the financial management, public sector and procurement reforms and ultimately the local people who benefited from funds that supported the overall shift toward effective management of key parts of the economy to fulfill commitments under the ERS and the Vision 2030 Medium Term Plan for The improvement in responsiveness in service delivery (e.g. immigration, passports, police etc) as a result of RBM and the Results for Kenyans program was of benefit to service users generally. The user satisfaction survey done in 2009 showed high levels of satisfaction (63.5%) of the various customers of government services which is comparable to overall customer satisfaction index in advance countries such as Canada (67% in 2005) and New Zealand (68% in 2007). 1.5 Original Components (as approved) 22. At the time of approval on January 24, 2006, the project components were as follows: Component 1 - Budget and Public Financial Management (US$16.65 million): 23. Strengthening the management of public expenditure is central government. There is an urgent need to improve fiscal discipline, bring resource allocations in line with development priorities articulated in the IP-ERS, and improve the budgeting preparation and execution, reporting and evaluation processes. The objective of this component was to make budget processes and PFM more transparent, accountable, and responsive to policy priorities. It was aimed at strengthening financial resource planning, budget preparation and implementation, strengthening financial controls, ensuring that allocation of government resources was consistent with policy priorities outlined in IP- ERS, and reducing fiduciary risks by making procurement transparent and efficient and enhancing expenditure monitoring and audit. This component had the following subcomponents. 8