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Wages rise hurts counties’ growth seven years later

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More than half of the county governments continue to breach the Public Finance Management (PFM) Act, seven years after the commencement of devolution, as they struggle with low revenue collections and rising spending.

For instance, in the financial year ending August 2019, only 18 counties spent 30 percent of their total expenditures on development projects, according to the Public Finance Management (PFM) Act 2012.

The counties have been accused of misplaced priorities while executing their budgets, ultimately hampering delivery of key development projects, including roads, hospitals, schools and airports.

The government’s quest to speed up economic growth has been hitting strong headwinds as most counties fail to spend development funds as budgeted.

”Even though the approved county budgets comply with this requirement, actual development expenditure for most of the counties fall below 30 percent,” says the 2020 Budget Policy Statement (BPS).

Among the counties with the lowest percentage of development to total expenditure are Nakuru, Kiambu, Kirinyaga, Wajir and Nairobi, all scoring below 20 percent.

In contrast, the county governments have seen their wages increase to account for about 43.2 percent of their total expenditure, making it impossible to comply with yet another regulation, PMF Act 2015.

Their wage bill shall not exceed 35 percent of their total revenue, the law says.

Only five counties, namely Tana River, Marsabit, Turkana, Mandera and Kilifi reported expenditure on personnel emoluments that was within the maximum allowed limit of 35 percent of their total expenditure in the year, at 34 percent, 32.7 percent, 29.2 percent, 24.2 percent and 21.1 percent respectively.

Some regional units, including Nakuru, Baringo, Nyamira and Homa Bay had wage expenditures above 50 percent of their total revenue.

“On average, county governments have struggled to stay within the legal wage spending threshold since FY 2014/15,’’ notes the BPS report compiled by the National Treasury.

The office of Controller of Budget identified high expenditure on personnel emoluments and delay in submissions of financial reports by counties as the challenges hindering effective budget execution by the devolved units.

“County governments should establish an optimal staffing level to ensure that expenditure on personnel emoluments is within the set limit of 35 percent of the County’s total revenue as provided in Regulation 25 (1) of the Public Finance Management (County Governments) Regulations, 2015,” the Controller of Budget advises.

The office also recommends that expenditure on non-core activities, such as travelling, should be rationalised in order to free funds for key development programmes.

Kisii, Kitui and Isiolo top the list of counties with the highest allocation on development to total expenditure at 48.3percent, 47.8percent and 43.5percent respectively.

The COB has also raised eyebrows on the counties’ delay to submit financial reports. The agency claims that the devolved units lack budgetary control that have resulted in expenditure above approved budget.

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For instance, some nine counties delayed to submit expenditure reports of car loan, mortgage fund, and bursary fund contrary to Section 168 of the PFM Act, 2012. These counties include Nakuru, Siaya, Taita Taveta, Embu, Homa Bay and Makueni.

The total expenditure in financial year 2018/19 was Sh376.43 billion, which comprised Sh269 billion for recurrent expenditure and Sh107.44 billion for development expenditure.

The aggregate own-source revenue raised by County Governments hit Sh40.30 billion, which was 74.8 percent of the annual target of Sh53.86 billion. This was a significant improvement compared to Sh32.49 billion generated in 2017/18.

According to the report from the Controller of Budget, 12 counties surpassed their revenue targets in the financial year 2018/19.

These counties include Bungoma (104.7 percent), Elgeyo Marakwet (108.8), Isiolo (107.2), Kiambu (100.2), Kirinyaga (100.6), while Kwale got 103.9 percent. Laikipia’s read 102 percent, Lamu (116), Nakuru (104.8), Narok (109.1), Taita Taveta (110.9) and Tana River hit 104.4 percent. This could be attributed to improved revenue collection or better revenue forecasting.

However, revenue collection performance at Migori, Wajir, Kisii and Meru were below par at 25 percent, 30 percent, 36 percent and 44.8 percent respectively.

Many counties have not met their revenue targets in the past, a clear indication that own-source revenue forecasting remains a challenge.

To address this, the National Treasury says it will secure partnerships to help in training of county governments on Tax Analysis and Revenue Forecasting.

Moreover, County Governments are still facing challenges to settle their financial obligations resulting in high pending bills. As at the end of June 2019, Counties reported accumulated pending bills amounting to Sh34.54 billion.

Counties that reported the highest pending bills were Mombasa at Sh4.02 billion, Kwale at Sh2.66 billion, and Kiambu (Sh2.53 billion).

“Based on Section 94 (1) of the PFM Act, failure by County Governments to make payments as and when due, or default on financial obligations may indicate material breach of legally-established measures. The National Treasury has been receiving a number of complaints from members of the public that some County Governments are reluctant to settle their dues even where the correct procedure had been followed and the right documentation provided.

“Therefore, in line with Section 96 (3) of the PFM Act, the National Treasury requested the Auditor-General to undertake a special audit to assess the status of the County Governments pending bills,” says the BPS report

For compliance, significant resources have been made available to the counties to settle pending bills. As at January 8,2020, the National Treasury had released to County Governments Sh 126.57 billion as their equitable share of revenue raised nationally and Sh7.05 billion as conditional grants in the FY 2019/20. Processing of subsequent disbursements will be based on submission of monthly reports on payments of pending bills in line with the county governments payment plans submitted to National Treasury and Controller of Budget.

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