82656 ACHIEVING SHARED PROSPERITY IN KENYA ACHIEVING SHARED PROSPERITY IN KENYA August 2013 TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS i FOREWORD iii ACKNOWLEDGEMENTS iv OVERVIEW v Human Development and Resilience 1. Reducing poverty and promoting the well-being of Kenyans 2 2. Jobs as the path to a brighter future for Kenyans, higher productivity for the economy 8 and greater cohesion in society 3. Education and training for long term growth 13 4. Making a healthy Kenya 24 5. Protecting the vulnerable 32 6. Promoting a sustainable Kenya 42 Growth and competitiveness 54 7. Rebalancing Kenya’s economy 54 8. Unleashing Kenya’s export potential—regionally and globally 66 9. Fuelling growth: energy 73 10. Infrastructure for growth: priorities for the transport sector 79 11. Modernizing and boosting agriculture 85 12. Reaching new heights: broadening financial sector deepening and stability 94 Governance 106 13. Spending people’s money well: reforming public finance management 106 14. Improving transparency and accountability for service delivery 115 15. Judicial reforms: a journey of turmoil and opportunities 125 16. Delivering on the promise of devolution: seven challenges ahead 135 REFERENCES 151 LIST OF FIGURES Figure 1: Kenya’s big transitions: demography and geography v Figure 2: Job creation remains largely in the informal sector vi Figure 3: Kenya is underperforming its peers vii Figure 4: Shared prosperity in Kenya viii Figure 1.1: Map of poverty rates by county 2006 4 Figure 1.2: Fractions of citizens reporting difficulty obtaining services, wealthiest 5 20 percent versus poorest 20 percent of Kenyans 2011 Figure 1.3: Percentage of citizens paying bribes to obtain services, Kenya versus Tanzania 6 and Uganda (2005) Figure 2.1: Wage jobs & self-employment have increased, employment on family farms 8 have remained constant Figure 2.2: Breakdown of Kenya’s working age population by employment status 9 Figure 3.1: By 2020, Kenyans with a university degree will exceed those no education 15 Figure 3.2: Education sector in Kenya are high relative to other countries 17 Figure 3.3: Increase in sector spending has not kept pace with enrolment rates 18 Figure 4.1: Trends in infant and child mortality 24 Figure 4.2: Projected trends in mortality by cause groups 25 Figure 4.3: Trends in total health expenditure 26 Figure 4.4: Women in Nairobi and Central regions are three times likely to use skilled 27 care during childbirth compared to those in Western and North Eastern regions Figure 4.5: Women belonging to highest wealth quintile are four times more likely to use 27 skilled care during birth compared to those belonging to the lowest Figure 5.1: Sources of financing for the social protection sector (KES billions) 33 Figure 5.2: Number of recipients in the largest social protection programs, 2010 34 Figure 5.3: Recipients of relief and recovery and other social protection programs 35 compared to poverty rates, 2005-2010 Achieving Shared Prosperity in Kenya Figure 5.4: Geographic coverage of social cash transfer programs in Kenya (2010) 38 Figure 7.1: Kenya’s GDP growth is picking up but still remains low compared to SSA 55 and early post-independence period Figure 7.2: Kenya’s GDP per capita is growing at a slower rate relative to its peers 56 Figure 7.3: Contribution to GDP growth 2003-2011 (expenditure method): constant 2001 prices 57 Figure 7.4: Kenya’s savings and investment rates below its peers 58 Figure 7.5: Kenya’s debt levels in comparison with others 58 Figure 7.6: High growth in private sector credit has increased inflationary pressure 59 Figure 7.7: Current account has deteriorated sharply and being financed by short term flows 60 Figure 7.8: Bilateral exchange rates relatively stable but the shilling has appreciated in real 61 Figure 8.1: Kenya’s share in world merchandise exports has shrunk 68 Figure 8.2: Kenya’s exports as a percent of GDP have remained virtually the same for a decade, while 69 they have grown in comparator countries. Kenya’s service exports have been growing sharply Figure 9.1: Projected percentage shares of sources in electricity supply 75 Figure 10.1: Only 11 percent of Kenyan roads are in good condition 80 Figure 11.1: Sugar production, consumption and imports (MT), 2000-2012 90 Figure 12.1: Financial sector has experienced substantial growth 95 Figure 13.1: Comparison of 2006, 2008 and 2012 PEFA results for Kenya 108 Figure 13.2: Trend of deviations within the recurrent and development budgets, 2002/03-2011/12 109 Figure 13.3: A comparison of PEFA results for Kenya (2012), Uganda (2009), Tanzania (2010) and Rwanda (2010) 112 Figure 14.1: Selected governance indicators for Kenya, 1996-2011 116 Figure 14.2: Government effectiveness ranking for selected countries, 1996-2011 116 Figure 15.1: Kenya ranks lowest in rule of law compared to its neighbors 126 Figure 15.2: Why Kenyans have confidence in the new CJ and other senior judicial staff 127 Figure 15.2: Only 18 percent of the current judiciary’s budget of KES 15.9 billion is available 135 for development Figure 15.3: A breakdown of the judiciary’s 2012/13 development budget 135 Figure 16.1: Kenya’s devolution presents massive challenges for political and administrative restructuring 136 Figure 16.2: Flows of revenues from different sources for county governments 138 Figure 16.3: Per capita equitable share allocations to counties (2013/143) 141 Figure 16.4: Elements of social accountability systems 147 LIST OF TABLES Table 1.1: Selected economic trends 2007 - 2011 5 Table 1.2: National trends in key indicators of well-being in Kenya 5 Table 3.1: Trends show that Kenya has made successes in getting children into school 10 Table 3.2: Spending on education maintained at about 6.5 percent of GDP 17 Table 7.1: Contribution to GDP growth 2003-2011 (expenditure method): constant 2001 prices 56 Table 7.2: Selected macroeconomic outcomes (percent of GDP) 57 Table 8.1: Kenya’s high cost of doing business for trading across borders 71 Table 11.1: Key Indictors of agricultural production 87 Table 14.1: Selected governance indicators for Kenya and other countries 117 Table 16.1: Components’ source, weights and objectives in the CRA consultation formula 140 LIST OF BOXES Box 1: Nine priorities for the new Kenyan government x Box 3.1: Studies in Kenya show positive effects of contract teachers on learning outcomes 18 Box 3.2: Evidence of early childhood development impact 20 Box 5.1: International examples of the national-level impacts of safety nets 34 Box 5.2: The potential benefits of a single beneficiary registry 41 Box 5.3: The Mbao Pension Plan: extending pensions to the informal sector 41 Box 6.1: Environmental degradation is not helping climate change pressures in Kenya 47 Box 10.1. Role of government in management or concession contracts 84 Box 11.1: Agriculture as a source of growth 87 Box 11.2: Critical agriculture challenges for Kenya 87 Box 11.3: Kenya’s grain sub-sector 88 Box 11.4: Need for disaster risk reduction 92 Box 14.1: Hong Kong: lessons on anti-corruption reforms 120 Box 14.2: A participatory approach to anti-corruption reforms, lessons from South Africa 121 Box 15.1: Major changes heralded by the Constitution for the judiciary 127 Box 15.2: Court facility problems identified by court users in interviews, 2009 132 Box 16.1: What is the meaning of devolution? 136 Achieving Shared Prosperity in Kenya ACRONYMS AND ABBREVIATIONS AFC Agricultural Finance Corporation AG Attorney General APR Annual Progress Report ASALs Arid and Semi-Arid Lands ASDS Agricultural Sector Development Strategy BPS Budget Policy Statement CDF Constituencies Development Fund CG Act County Governments Act CRA Commission for Revenue Allocation CUCs Court Users Committees DoRB Division of Revenue Bill EAC East African Community EACC Ethics and Anti-Corruption Commission ECD Early Childhood Development ERC Energy Regulatory Commission EU European Union FDSE Free Day Secondary Education FMA Act Financial Management Act FPE Free Primary Education GDP Gross Domestic Product GJLOS Governance, Justice, Law and Order Sector GOK Government of Kenya GPI Gender Parity Index HDI Human Development Index HIPC Heavily Indebted Poor Countries ICT Information and Communications Technology IFMIS Integrated Financial Management and Information System IPPD Personnel and Payroll Database IPSAS Progress towards International Public Sector Accounting Standards IRA Insurance Regulatory Authority JSC Judicial Service Commission JTF Judicial Transformation Framework KENAO Kenya National Audit Office KCPE Kenya Certificate of Primary Education KEMSA Kenya Medical Supplies Agency KEPSS Kenya Electronic Payments and Settlement System KNBS Kenya National Bureau of Statistics Achieving Shared Prosperity in Kenya i KPLC Kenya Power and Lighting Company KRA Kenya Revenue Authority MDAs Government Ministries, Department and Agencies MDGs Millennium Development Goals MDTS Medium Term Debt Management Strategy MfDR Managing for Development Results MFIs Microfinance institutions M&E Monitoring and Evaluation MTEF The Medium Term Expenditure Framework MTP Medium Term Plan NACF National Anti-Corruption Forum NCAJ National Council on the Administration of Justice NAP The National Anti-Corruption Programme NCLR National Council for Law Reporting NER Net Enrolment Rate NHIF National Hospital Insurance Fund NSSF National Social Security Fund OCT Over the Counter OGP Open Government Partnership PFM Public Financial Management PEFA Public Expenditure Financial Assessments PEFA Public Expenditure and Financial Accountability PMIS Pension Management Information System PPDA Public Procurement and Disposal Act PPOA Public Procurement Oversight Authority PPPs Private-Public Partnerships PTR Pupil Teacher Ratio RMLF Road Maintenance Levy Fund RTGS Real Time Gross Settlement SACCO Savings and Credit Co-operative Society Limited SAGAs Semi-Autonomous Government Agencies SASRA SACCO Societies Regulatory Authority SFS Strategic food reserve SGR Strategic Grain Reserve SMEs Small and Medium-sized Enterprises SSA Sub-Saharan Africa SUN Scale Up for Nutrition TA Transition Authority TIVET Technical, Industrial, Vocational and Entrepreneurship Training TSA Treasury Single Account TVVP Technical and Vocational Vouchers program UAC Act Urban Areas and Cities Act ii Achieving Shared Prosperity in Kenya FOREWORD K enya has just experienced one of the most successful and peaceful national elections in its history. A dynamic new administration has assumed the levers of power and begun to fundamentally shape the country’s future. Guiding the new leadership is the 2010 Constitution, which ushered in a sweeping new system of devolved government that will have a profound impact on Kenya’s future. Against this momentous backdrop, Kenya’s leaders will need to grapple with an extensive range of issues, as they strive to launch Kenya’s economy on the path of high economic growth. The purpose of this book, Achieving Shared Prosperity in Kenya, is to offer a comprehensive yet digestible assessment of the challenges and possible responses for Kenya’s leadership to consider, as it plans its strategy for sustained economic growth. The analysis and policy recommendations that are presented here were developed by the World Bank in consultation with a wide number of Kenyans from the government, the academia and the private sector. There was widespread consensus among all the participants and reviewers that the issues presented here are fundamental to a sound working economy, and should not have any political affiliation. This book is organized around three overarching themes under which various topics are aggregated. The first concerns human development and resilience, and discusses issues related to poverty, education, health and social safety nets. This is the human chapter, dealing with crucial areas that are central for the successful development of individual Kenyans. The second theme, growth and competitiveness, delves into the structural issues that need attention for the economy to grow and become more competitive in the international scene. This section of the book discusses needs for infrastructure investments and energy development, along with steps Kenya needs to take to unleash its export potential. The third theme, governance, addresses issues around strengthening public financial management, improving transparency and accountability, and consolidating judicial reform. The chapters in the book are presented as stand alone discussions, each with a set of policy recommendations. Make no mistake, actions are needed across all these themes for Kenya to grow at a high rate for an extended period of time. For example, in order for manufacturing in the private sector to experience robust growth, not only does Kenya need better roads and more reliable low-cost energy, but it also needs a skilled and healthy labor force, and the ability to do business without corrupt behaviors dragging down its productivity and revenue. This is an exciting time for Kenya. The World Bank looks forward to its continued partnership with the new government, as it moves forward with confidence and determination. Diariétou Gaye Country Director for Kenya, Rwanda and Eritrea Achieving Shared Prosperity in Kenya iii ACKNOWLEDGEMENTS T his report has been produced by the World Bank in close partnership with key stakeholders inside and outside the Kenya government. The team was led by Wolfgang Fengler and Jane Kiringai, together with Mike Eldon and Roger Sullivan. Core contributors are Nathan Belete, Gunhild Berg, Winston Cole, Sarah Coll-Black, Helen Craig, Gabriel Demombynes, Christopher Finch, Ganesh Rasagam, Paola Granata, Roger Gorham, Paul Gubbins, Geoff Handley, Philip Jespersen, Andrew Karanja, Aurelien Kruse, George Larbi, Yira Mascaro, Philana Mugyenyi, Stephen Mukaindo, Michael Munavu, Catherine Ngumbau, Nightingale Rukuba-Ngaiza, Miriam Omolo, Kyran O’Sullivan, Fred Owegi, Christian Peter, Halla Maher Qaddumi, Gandham Ramana, John Randa, Ravi Ruparel, Gustavo Saltiel, Josphat Sasia, Aaron Thegeya, Smita Wagh, Solomon Waithaka, Fredrick Wamalwa, Carolyn Wangusi, Kathy Whimp and William Wiseman. World Bank peer reviewers are Celestin Monga and Lada Strelkova. A distinguished panel of Kenyan advisors—Prof. Michael Chege, Dr. Nehemiah Ngeno and Dr. Gituro Wainaina— guided the team in finalizing the report. Pablo Fajnzylber and John Zutt provided strategic guidance to the team. Production was supervised by Lucy Wariara, with design and layout provided by Robert Waiharo. Additional support was provided by Caroline Wambugu and Patricia Karani. The views expressed in this publication are those of the authors. The findings, interpretations and conclusions expressed herein do not necessarily reflect the views of the World Bank Group, its Board of Executive Directors or the countries they represent. iv Achieving Shared Prosperity in Kenya OVERVIEW By Wolfgang Fengler and Jane Kiringai K enya has almost everything going for it. Its people are well-educated and energetic, its location is superb, and its neighbors and new challenges. Even though the dependency ratio is expected to continue declining, Kenya’s workforce is set to double are growing strongly and using Kenya as a by 2045. Urbanization is also accelerating, gateway. So why is Kenya underperforming and by 2033, half of Kenya’s population will compared to its peers? Why does the average be living in cities (see Figure 1). Kenyan earn only half of what the average African south of the Sahara does? Figure 1: Kenya’s big transitions: demography and geography Kenya remains a country of stark contrasts: 60 100 Dependency Ratio extraordinary success stands side by side with 90 50 disappointing failures, socially, economically 80 and institutionally. Between examples of 70 Dependency Rati o 40 60 success and failure lies a broad continuum of Millions 30 50 mixed performance, that sets the agenda for Labour Force (millions) 40 the next administration. These discrepancies 20 30 Urban Population span all aspects of Kenya’s development (millions) 20 10 agenda. 10 0 0 Historically, Kenya has had strong 2000 2005 2010 2015 2020 2025 2030 2050 macroeconomic management, but in recent Source: World Bank projections years, increasing imports, especially of food and oil, have created complications. High Development is fundamentally about international food and oil prices have fueled helping individuals to realize their full inflation, especially during periods of low potential and to live in dignity. Many domestic food production, such as the 2009 Kenyans are not able to achieve their full and 2011 droughts. A growing reliance on potential, because they are living in poverty, food imports (due to a growing population or so close to poverty, that they need to focus and declining agricultural productivity) all of their attention on meeting basic needs. and oil imports (including to fuel electricity Almost half of Kenyans still live on less than generation) have further increased Kenya’s US$ 1.25 per day, and more than 40 percent vulnerability to external price shocks in of Kenyans do not have enough to eat. recent years. About one in four Kenyans lives in areas A new administration has come into office that are arid or semi-arid, where drought at a time when Kenya is at the beginning of is increasingly common and intense. The major demographic, geographic, education threat of climate change looms large, and will and health transitions. Kenya is adding more impact both rain-fed agriculture and irrigated than one million people a year, and by 2030, export crops, which rely on fresh-water lakes it will be home to an estimated 63 million and rivers for irrigation. Kenyans living in arid people. Most of this future population growth and semi-arid lands will be particularly hard will comprise of adults, and will take place in hit. They will require targeted support in the urban areas, bringing both new opportunities future, including support for food security. Achieving Shared Prosperity in Kenya v Overview A fundamental challenge for development find jobs in the modern sector (see Figure in Kenya is lifting people out of poverty, and 2). Youth unemployment is particularly high helping them to remain above the poverty at 25 percent, even though it declines once line, so that they can share more sustainably Kenyans enter their 30s. and equitably in Kenya’s growing prosperity. Figure 2: Job creation remains largely in the informal sector Enabling people to realize their potential involves, at the most basic level, ensuring Job creation: Average annual (2000-2011) that they are healthy, that they are educated Informal 466 Sector and have basic life skills, and that they are able to participate in social and economic 34 Services life. Where people cannot participate fully in social and economic life, due to age or Industry 11 "Modern sector jobs are scarce, disability or natural disaster, social protection at about 50,000 a year" systems must supplement their abilities Agriculture 3 directly to achieve their potential. - 100 200 300 400 500 Thousands Kenya has made progress in human Source: World Bank estimates based on Kenya Economic Update 2012; economic survey various issues development, and is now at a critical junction needing to transition from Kenya’s human development sectors now increasing access to essential services to need to achieve “second generation” improving their quality. Kenya is achieving reforms. Much can be done through getting gender parity in primary school enrolment, more value for money out of current which is now almost universal, and spending: Kenya is achieving a lot, but not secondary school graduates will triple by as much as it can, given how much it spends. 2030, but educational attainment remains Three priorities stand out. First, Kenya needs low by international standards. In the health to ensure a more equitable distribution of sector, Kenya has made notable progress basic health and education services, focusing in controlling communicable diseases particularly on historically-disadvantaged (tuberculosis, HIV/AIDs, and malaria), and areas like North Eastern province, where has sharply decreased child mortality, but a ‘no child left behind’ strategy would be other Middle-Income health challenges are appropriate. One way to achieve higher equity emerging. In social protection, a number of fast is through a unified and scalable social successful interventions are being scaled-up, protection program, which can also respond though programs are fragmented, with low to crises fast. Second, Kenya needs to shift coverage and limited linkages to disaster riskits focus away from increasing the quantity management. of children educated (as universal access is now nearly achieved), to increasing the For most healthy able-bodied people, living quality of the education received. The easiest a life of dignity and reaching full potential way to achieve higher learning outcomes is involves having meaningful employment. to increase the numbers of hours teachers So far, Kenya has not created enough jobs spend in the classroom. Third, with a large to absorb the large number of Kenyans portion of the population exposed to weather who enter the labor market every year. The and other shocks, especially droughts, current levels and patterns of growth are Kenya needs to reduce vulnerabilities, both seriously inadequate: every year, only 10 by improving the management and use percent of Kenyans reaching working age can of its water resources to expand irrigated vi Achieving Shared Prosperity in Kenya Overview agriculture, and also by establishing a social export performance and poverty reduction protection program that can respond quickly achievements have been more limited than to disaster when it occurs. could have been the case. Kenyans who reach their potential will make Kenya’s recent average growth rate translates a bigger contribution to the economy, and to about 1.3 percent growth in incomes a strong economy in turn helps Kenyans to per person. This is plainly not sufficient to fulfill their aspirations even more. Over the make a significant dent on poverty. Figure last decade, Kenya has been growing at a 6 shows the average growth in income per moderate 4 percent per annum. This is higher person, comparing Kenya, Sub-Sahara Africa than in the 1980s and 1990s, but substantially and Low Middle-Income countries. Over the lower than the growth experienced by its East last decades, the economy has experienced African neighbors and Sub-Saharan Africa very uneven performance. Between 1980 as a whole-where growth has averaged 5 and 2000, the economy stagnated, and percent per annum, and 6 percent if South growth even declined in per-capita terms. Africa is excluded (Figure 3). Kenya has been Since 2000, per-capita income has recovered, growing at a slower rate than “stable Africa”, and Kenya will possibly reach US$ 1,000 per due to interruptions in its growth momentum, capita by 2020, the threshold for Middle- which since 2008 have included post-election Income economies. violence and several years of drought. Over the last few years, Kenya’s external Figure 3: Kenya is underperforming its peers position has been weakening. The current 5 Average growth in GDP per capita (1960-2010) account deficit has reached record levels Lower Middle Income (10 percent of GDP in 2011), driven mainly 4 by rapidly rising imports. Nevertheless, the 3 Sub-Saharan exchange rate has remained broadly stable, Africa supported by increasing financial inflows, Percent 2 Kenya especially remittances. This has led to an 1 appreciation of the real exchange rate which 0 is hurting Kenya’s exports. 1961/70 1971/80 1981/90 1991/00 2000/10 -1 Kenya’s prospects for attracting job-creating -2 and sustainable Foreign Direct Investment Source: World Development Indicators flows are improving, driven among other factors by governance improvements and the Kenya’s moderate growth has been driven favorable conditions created by the country’s by domestic demand, mainly consumption, booming service sector. Improvements as well as a strong service sector. Sound in transportation, telecommunications macroeconomic policy and a broadly and finance have increased Kenya’s supportive approach to private business attractiveness as a “port of entry” for have led to the turnaround in sectors such as East Africa. Moreover, recent oil and gas telecommunications and finance. Agriculture discoveries in Turkana county are already remains the source of livelihood for most leading to sizable investments by foreign Kenyans, and the main vehicle for generating energy companies. Going forward, Kenya will export revenues, but much of the sector has need to rebalance the sources of growth, been neglected, with the result that Kenya’s so that it relies less on current domestic Achieving Shared Prosperity in Kenya vii Overview consumption, and more on investment and government institutions and services, that diversified exports. This rebalancing will are more accountable and responsive to require broad-ranging and persistent efforts citizens. The Constitution also mandates to improve Kenya’s investment climate— the implementation of a highly-ambitious including both its physical infrastructure and program of decentralization, which will bring regulatory frameworks—as well as to export government and service delivery much closer competitiveness. At the same time, it will be to the citizens, than in the past. important to continue to promote domestic savings and avoid excessive reliance on Converting the aspirations of the short-term speculative foreign exchange Constitution into tangible benefits for inflows, as the main source of financing for citizens and businesses, will depend on the current account deficit. Short-term flows whether and how policymakers, the private are attracted by quick returns in Kenya’s open sector and civil society translate the provisions financial markets and the ease by which they of new laws and policies into lasting changes can quickly exit when conditions change. in government institutions. Moreover, they tend to be associated with larger levels of foreign exchange volatility, What concrete steps can incoming with particularly deleterious effects on policymakers take to improve governance? export-oriented sectors. The government can help Kenya achieve shared prosperity in two ways (Figure 4). First, Kenya’s new policymakers and government, it can provide the foundation for economic at both the national and county levels, will growth, through better infrastructure, and have an historic opportunity to strengthen security. Second, it can provide good-quality governance—the traditions and institutions public services, such as health care and by which authority is exercised in Kenya1. education, which directly impact the lives of As the experience of many countries has citizens. Good governance, as demonstrated shown, improving governance goes hand-in- through efficient government institutions and hand with achieving the sustained economic effective regulations, is essential in ensuring growth and efficient and equitable service that these investments and services, deliver delivery, that Kenyans expect and demand. sustained and equitable growth. Figure 4: Shared prosperity in Kenya The 2010 Constitution provides renewed momentum to efforts to improve governance in Kenya’s economic, political Shared Prosperity and social institutions. In implementing the Competitiveness Pillar 2: Growth and Resilience Pillar I: Human Development Constitution, initial steps have been taken and to strengthen the judiciary, which will be critical to addressing the impunity that has long undermined good governance and anti- Pillar 3: Governance corruption efforts. The Constitution and ns A it io co nt ns u ry a raft of new laws provide newly-elected of co n t ra s t s a h e a d o f m aj o r t ra national policymakers and county governors with a strong policy and legal basis, better Source: World Bank to manage public resources and to build 1 The exercise of economic, political, and administrative authority to manage a country’s affairs at all levels. It comprises mechanisms, processes, and institutions through which citizens and groups articulate their interests, exercise their legal rights, meet their obligations, and mediate their differences. viii Achieving Shared Prosperity in Kenya Overview Under the multiple governance reforms progress in public financial management— envisioned in the Constitution, four areas improving controls in public spending and warrant particular attention by incoming quality of public expenditure—through policy makers. First, devolution will bring fully implementing the Integrated Financial important opportunities to improve Management System, both at the center governance, and in turn service delivery, and sub-national levels. Considerable but it will also bring new risks that could progress has been made in public financial result in lower growth and a disruption in management reforms, and in moving the service delivery if the devolution process public service closer to “Results-Based is not appropriately managed. Incoming Management”, through the introduction of governors face major challenges in making tools such as Service Charters, Performance devolution work, given the scope, scale and Contracts, a revised Performance Appraisal timing of devolution, as well as Kenyans’ System, the Rapid Results Initiative and high expectations that devolution, among competitive selection for senior jobs. But in many constitutional provisions, will improve each of these areas there is room for making service delivery and accountability. more effective use of the tools to improve service delivery and accountability, including Second, incoming policymakers need to institutionalizing programs like the Open continue and deepen ongoing judicial Data Initiative. reforms. Kenya is at the beginning of a momentous Judicial reform program, Kenya can create shared prosperity over articulated in the Judicial Transformation the next decade if the country builds on Framework. The change in leadership and its strengths and deals decisively with its culture at the judiciary, and the reforms weaknesses. The success in areas such as initiated so far, give hope to many Kenyans macroeconomic management, finance and that significant improvements in judicial ICT shows that Kenya does not only need performance are achievable. It will be critical to look outside for good practice. Unlike for the judiciary to show tangible results in other countries in the world, especially the short-to-medium term, especially in in Europe, Kenya’s debt is sustainable reducing case delays, in professionalizing case which means that it has the fiscal space to management, and in issuing well-reasoned invest in its development. If all parts of the judgments, so that reform momentum builds, economy performed as strongly as Kenya’s rather than dissipates. Beyond the judiciary, best performing sectors, the envisaged GDP the full implementation of the Constitution in growth rates of 10 percent would become a all its aspects, including enforcing the integrity reality. and leadership provisions, will put Kenya on a trajectory to improve its performance on To achieve the Kenyan dream of shared various governance indicators where it is prosperity, the new government will need currently behind its peers. to address three deficits that are holding the country back: Third, Kenya needs to redouble its efforts to (i) a quality deficit, especially in the social improve public financial management, and sectors; to translate the constitutional provisions (ii) an infrastructure deficit, which demands on access to information into the legislative a continuous focus on scaling-up framework. Policymakers can build on recent investments; and Achieving Shared Prosperity in Kenya ix Overview (iii) a governance deficit, which the 2010 The new government has a very tall Constitution is starting to address, but the agenda and the next Medium-Term Plan challenges go beyond the constitutional will articulate a new strategy for advancing changes (the agriculture sector and the Kenya’s development. Among the many port of Mombasa illustrate how poor priorities for Kenya’s policy makers, there governance affects economic outcomes). are nine areas which stand out for their significance in addressing the challenges in realizing the potential of every Kenyan, creating a competitive economy and completing institutional transformation (Box 1). Box 1: Nine priorities for the new Kenyan Government Realizing the potential of every Kenyan (a) Achieving equity. Establish a more equitable distribution of basic health and education services, targeting historically-disadvantaged counties. (b) Improving education quality. Improve learning attainment, by reducing teacher absenteeism and increasing teaching hours in the classroom. (c) Mitigating vulnerability. Improve the management and use of water resources to expand irrigation, and establish a unified and scalable social protection program, to help respond to disaster. Creating a competitive economy (d) Maintaining stability and consistency. Macroeconomic and political stability are the necessary backbone of successful economic development in Kenya. A macro-economic framework consistent with strong exports and investment, rather than consumption and short-term financial flows, will be critical to achieving the objectives of higher and broader economic growth. (e) Expanding infrastructure. The new government will need to maintain investments in key sectors (energy and roads) which, despite recent improvements, are still lagging behind. Structural change, especially regarding the port of Mombasa and rail services, will be key determinants of the future quality of Kenya’s infrastructure services and competitiveness. (f) Reforming agriculture. The quickest win for all Kenyans would be a turn-around in agriculture, especially the maize sector, which most Kenyans still depend on. The greatest single measure the new government can take is a complete overhaul of the National Cereals and Produce Board, which in the interim, would include the publication of daily transactions and the establishment of a commodities exchange. Completing institutional transformation (g) Making devolution accountable. The functioning of the new counties will determine the quality of service delivery for the next years. One important measure which the government can adopt is to measure the performance of county governments, and to connect the allocations of intergovernmental transfers to that performance. (h) Implementing judicial reform. High hopes in continuing the turn-around of the judicial sector will only be maintained if the government continues fully to implement the Judiciary Transformation Framework, especially measures to improve access to courts and establishing an automated system for reducing backlog, delays and opportunities for corruption. (i) Managing the people’s money well. Given continuing concerns about leakages in Kenya’s budget, the full implementation of the Integrated Financial Management System will be critical to enhancing the credibility and quality of Kenya’s public finances. In addition, the institutionalization of the Open Data Initiative will create bottom-up pressure for the sound use of public funds, and generate opportunities to find new solutions to Kenya’s development challenges. x Achieving Shared Prosperity in Kenya Human Development and Resilience 1. Reducing poverty and The government’s commitment to the promoting the well-being provision of public services to Kenyans is of Kenyans encoded in the 2010 Constitution and under the aspirations of Vision 2030. Article 43(1) By Paul Gubbins and Miriam Omolo of the Constitution states that every person has a right to basic rights such as food, Introduction shelter, education, health and security. The D uring the last decade, Kenya has social pillar of Vision 2030 has at its core emerged as one of a growing number ‘investing in the people of Kenya’ with a of success stories on the African continent. focus on health, education, youth and sports, Kenya has the largest economy in East Africa gender, children and social protection, and between 2002 and 2011 its economy environment and housing among other grew by 4.6 percent per year on average. welfare improving programs. These programs Fueling this growth is a strong private sector and flagship projects are intended to ensure and an incipient middle class. Despite several that the provision of public services will internal and external shocks in the past 10 improve livelihoods of Kenyans. Vision 2030 years, Kenya managed to sustain economic targets the creation of 3.5 million jobs and a growth and its prospects remain strong within reduction in the poverty incidence from 46 in the world’s turbulent economic waters. 2005 to 28 percent in 2030, and an increase in the human development index from 0.47 Broadly, the government impacts the lives in 2005 to 0.7 in 2030. of the poor in two ways. First, it provides the foundation for economic growth and Despite notable improvements, Kenyans, job creation. Infrastructure (such as roads, particularly the poor, often face difficulties energy and ports), regulations, a functioning in getting public services and are frequently bureaucracy and security are all important compelled to pay bribes. This is the case when foundations for growth that require public Kenyans need to receive medical care, obtain investment. Secondly, public services documents, get a child into school, avoid (such as health care, education and social problems with the police, or to get household assistance) that equip citizens with skills and services like piped water and electricity. that protect in the face of shocks can help There is optimism that the decentralization Kenyans take advantage of the opportunities of many government functions to the county that economic growth creates. level will improve public services delivery by Achieving Shared Prosperity in Kenya 2 Human Development and Resilience putting citizens into close contact with the Approximately 44 percent of Kenyans go responsible authorities. However, increased without the basic required minimum food government accountability and active intake per month. Food security-a major citizenship is not a guarantee. determinant of the country’s welfare-is largely affected by the performance of the The implementation of the 2010 agricultural sector. The high incidence of food Constitution and a devolved government insecurity can be attributed to Kenya’s over brings both opportunities and risks for reliance on rain fed agricultural production. poverty reduction. If the 2010 Constitution is implemented effectively, the conditions Income inequality is high, with 10 percent for increased accountability and therefore of the richest in the population holding pressure to improve the quality of public 40 percent of total income. This is in sharp services will be in place. To the extent that contrast to only 2 percent of incomes being county governments are responsive to these held by the poorest 10 percent of the pressures, devolution has the potential of population. Disparities in living conditions improving welfare and reducing poverty. between urban and rural areas are also However, the decentralization process reflected in poverty rates: in 2005, 34 percent is complex and carries with it significant of urban households were poor compared to challenges. There is a risk of weak governance 50 percent in rural areas. and corruption within county governments and an increase in inequality, as counties Updated poverty estimates will not be with greater endowments develop faster available until after the next nationwide than the rest. household budget survey is conducted, likely in 2014. In the absence of new Key Facts and Trends poverty estimates, it is possible to track how The most recent and reliable poverty welfare has changed over time using other estimates in Kenya date to 2005. Based on non-consumption measures that partially Kenya’s national poverty line, 47 percent of capture the quality of life of Kenyans. Table the population (16 million Kenyans) was poor 1.1 summarizes trends in select indicators at in 2005 and the vast majority of the poor lived the national level for education, health and in rural areas. Figure 1.1 shows estimates of household services. poverty at the county level, based on the 2005 Kenya Integrated Household Budget School attendance rates have increased Survey (KIHBS). This poverty map shows that substantially over time, and are now over 90 patterns of poverty are highest in northern percent for both younger and older children. and northeastern counties, which are Key child health measures, such as infant and sparsely populated. Poverty rates are lowest under-5 mortality rates declined substantially in the urban hub of Nairobi and neighboring in the past decade (Table 1.2). A study of the counties. Poverty rates are at intermediate drivers of infant mortality credits the scale- levels in counties in the southeast of the up of insecticide treated bed nets as a major country (which also has low population contributor to this decline. With respect to density, apart from the coast) and the more household services, access to electricity, densely populated areas in Western and sanitation, and drinking water stagnated Nyanza regions. during the 1990s as infrastructure expansion failed to keep pace with population growth. 3 Achieving Shared Prosperity in Kenya Human Development and Resilience Figure 1.1: Map of poverty rates by county 2006 Turkana Mandera Mars abit Wajir Wes t P okot S amburu Trans Nz oia E lgeyo Marakwet Is iolo Bungoma Baringo Uas in G ishu Busia Kakamega L aikipia Nandi Meru S iaya Vihiga Kis umu T haraka Nithi Nyandarua Kericho Nakuru NyeriKirinyaga G aris s a Homa B ayNyamira E mbu Bomet Kis ii Muranga Migori Kiambu Narok Nairobi Machakos Kitui Tana R iver Makueni L amu Kajiado Kilifi Taita Taveta Poverty Mombas a 22.2 - 31.7% Kwale 31.8 - 42.7% 42.8 - 51.5% 51.6 - 69.2% 69.3 - 89.4% Source: KIHBS 2005/06 Achieving Shared Prosperity in Kenya 4 Human Development and Resilience Table 1.1: Selected economic trends 2007 - 2011 Indicator 2007 2008 2009 2010 2011 GDP growth rates (percent) 7.0 1.5 2.6 5.6 4.4 GDP percapita growth rate (percent) 4.0 -1.0 0.1 3.7 1.5 Inflation rate (percent) 4.3 16.2 10.5 4.1 14.0 Savings/GDP (percent) 13.9 14.9 12.4 11.3 13.2 HDI 0.486 0.493 0.499 0.505 0.509 Employment Modern sector (‘000) 1,977.3 2,011.3 2,067.6 2,130.2 2,127.7 Informal sector (‘000) 7,501.6 7,942.3 8,388.9 8,829.8 9,272.1 Source: Various economic surveys and UNDP human development index reports Table 1.2: National trends in key indicators of well-being in Kenya Indicator 1993 1998 2003 2008 Education School attendance (age 6-10 percent) 84 82 89 91 School attendance (age 11-15 percent) 88 88 89 95 Health Infant mortality rates (per 1.000 births percent) 62 74 77 52 Under-five mortality rates (per 1,000 births percent) 96 111 115 74 Child vaccination rate (age 12-23 percent) 71 58 49 65 Percent owning insecticide-treated bednet - - 4 56 HIV prevalence (ages 15-49 percent) - - 7 6 Household Services Percent with access to electricity 11 15 16 23 Percent with access to improved drinking water source 54 54 41 47 Percent with access to improved sanitation 16 19 19 33 Source: Kenya demographic health survey data and reports – National Bureau of Statistics Since 2003, there have been modest gains, Figure 1.2: Fractions of citizens reporting difficulty but still only a minority of Kenyans has access obtaining services, wealthiest 20 percent versus poorest 20 percent of Kenyans 2011 to these basic services. 80 86 The government influences health and 76 80 73 education outcomes largely through Percentage reporting problem 69 60 the quality of public services. Despite 57 improving health and education indicators, 40 51 large numbers of Kenyans, particularly the 32 poor, report problems with public services. 20 27 While citizen perceptions are influenced 19 by expectations, they are nevertheless 0 useful as a reflection of how Kenyans think Document/ Household Permit Service Help from Police School Placement Medical Treatment about public services. Figure 1.2 shows the Poorest quintile Wealthiest Quintile percentage of the wealthiest and poorest Source: World Bank calculation from afrobarometer Data 2011 5 Achieving Shared Prosperity in Kenya Human Development and Resilience Kenyans who reported experiencing difficulty the 30 years spanning 1980 to 2010, Kenya obtaining various services. conducted four surveys that provided a basis to measure poverty; an average of one survey A majority of the poorest fifth of Kenyans, every 8 years. The latest reliable poverty as well as a substantial percentage of the estimates are almost a decade old. Investing wealthiest fifth say they have difficulty in a system of routine household budget obtaining services, including documents or surveys to monitor poverty and inequality permits, household services like drinking will put the government in a better position water, getting help from the police, and to learn about the poverty reducing impact medical treatment. Problems with placing of their policy choices and make incremental a child in primary school are much less improvements to policies over time. frequently reported, which likely reflects the benefits of the government’s efforts Leveling the playing field in access to key to expand access through the free primary opportunities-such as quality education, education program. energy, water and sanitation-has the potential not only to boost growth but also Large numbers of Kenyans also report having to reduce poverty and inequality. Despite to pay bribes to obtain public services. Figure improvements in critical areas such as child 1.3 shows the percentage of people in Kenya, mortality and school attendance over the Tanzania and Uganda who reported having last decade, access to basic household paid bribes for various services. Kenya has infrastructure such as electricity, water and the highest rate of bribe payments to obtain sanitation remains low and large numbers of household services, documents or permits, Kenyans report facing difficulty in accessing and avoiding problems with the police. Bribe key services, and being compelled to pay payments to obtain medical treatment are bribes in order to obtain services. also common. Figure 1.3: Percentage of citizens paying bribes to obtain This section provides a framework for services, Kenya versus Tanzania and Uganda (2005) public investment based on Kenya’s spatial 40 development. The gap between the more prosperous parts of Kenya and poorer areas, 33 such as the arid lands presents a case of Percentage paying bribe 30 29 27 28 lagging and leading regions, similar to the 20 22 situation in faced in many countries. A crucial 19 question facing policymakers is what type 15 10 14 12 of public investment should be made in 11 9 10 8 the lagging areas? The insights from broad 6 0 6 historical experience with the geography Document/ Permit School Placement Household Medical Avoid problem Services Treatment with police of development are captured in the “3- Kenya Uganda Tanzania Ds” namely: density, distance, and division Source: Afrobarometer data 2005 model and matching this with the “3-Is” set of policy approaches, namely institutions, Policy Recommendations infrastructure, and incentives which offer Kenya’s inconsistent record of monitoring clear applicability to Kenya. For poor low- poverty calls for a systematic program density areas like those in northern and of rigorous household data collection. In northeastern Kenya, the long-run path for a Achieving Shared Prosperity in Kenya 6 Human Development and Resilience great deal of the population will be moving with policies that foster both institutions to leading areas like larger towns, who then (ensuring equality of opportunity), and those continue to support those who stay behind that are spatially connective. Without laying through remittances, as has been the trend the foundations through a principal focus across the world, as well as in Kenya, where on institutions and infrastructure, targeted remittances sent via mobile money systems incentives are unlikely to succeed. are a life-line for the rural poor. Overall, this section puts emphasis on The fact that many living in northern and recalibration of priorities in terms of northeastern Kenya, particularly children investments in poor and remote areas. will migrate to other areas, strongly suggests Recognizing that the future welfare for a refocusing on institutions, principally people in these communities is likely to those that help people to migrate to places be driven largely by migration to areas of with economic opportunities. This can be economic concentration and remittances done through guaranteeing access to basic sent by migrants, top priority should be services, such as education and health given to ensure that children in these areas care, regardless of one’s location. Given the receive basic education and health care, so low population density and remoteness of that they can be well equipped when seeking the population in some areas, the cost of for opportunities elsewhere. This emphasis delivering these services is relatively high. can be complemented with investments in This cost is justified by ensuring equality of infrastructure, as well as targeted programs opportunity for children from these areas, to encourage economic activities. and in promoting economic growth. One way of dealing with unemployment is A second lesson that emerges from historical through investment in infrastructure (roads, experience is that policy should seek to energy and telecommunication) which is connect lagging areas to leading areas known to have strong multiplier effects that through infrastructure. In Kenya, the mobile positively affects other sectors through job phone revolution and the rise of mobile creation. Firstly, better infrastructure will see money, have helped some to cope with the the expansion of the private sector to areas effect of drought, by providing a lifeline originally neglected, but with high business to remittances. Government investments potential. Secondly, improved infrastructure in roads can help to further link remote generally reduces business risks, which areas with more prosperous areas and to ultimately results in low risk premiums neighboring countries. associated with access to credit, which is important for business expansion and job Finally, given the divisions that stand in the creation. way of migration in the arid lands, the primary focus on institutions and investments can be Food security policy measures adopted in complemented with limited and carefully the agricultural sector will greatly influence defined incentives to encourage economic overall poverty incidence in the country. activities in these areas. The experience with Maize is Kenya’s main staple food and such policies has been mixed and in cases policies should therefore be geared towards where spatially targeted interventions have improved performance agriculture, in order been successful, they have been coupled to have implications for food security. Reforms 7 Achieving Shared Prosperity in Kenya Human Development and Resilience in the maize subsector must be geared cohesion. Unemployment and job loss are towards having low and stable maize prices, associated with lower levels of trust and through efficient production and marketing civic engagement, and thus, societies that incentives, in order to reduce the persistent can widely create productive opportunities structural maize deficit. Maize deficits tend for citizens are better able to avoid the to increase prices above the market range, social fragmentation and conflict that can and these have strong distributional effects accompany economic change. that worsen food security and any poverty reduction initiatives that are put in place. Key Facts and Trends Family farming is the predominant job in The implementation of the 2010 Kenya. In 2009, 6.5 million worked on family Constitution accompanied by strong farms out of 14.3 million employed Kenyans institutional reforms that guarantee the of working age. protection of human and property rights can reduce the corruption that is important However, the composition of jobs in Kenya for poverty reduction. The implementation is moving away from farming. The large of the 2010 Constitution is seen to provide number of Kenyans in family farming masks stronger checks and balances between the a fundamental shift in the nature of work three branches of the government, and has (Figure 2.1). In 1989, farming represented also created a stronger institution for dealing 61 percent of total employment. By 2009, with corruption through the Ethics and 45 percent of the employed were working Anticorruption Commission. These initiatives on farms. Kenyans of every age have shifted carry the potential of reducing the corruption out of family farming into non-farm self- that determines access to key services such employment and wage work. While in 1989 as education, health and security, which are majorities in all age groups worked in family important vehicles for poverty reduction. farming, in 2009, only adolescents and those above the age of 50 had majorities working on the farm. 2. Jobs as the path to a brighter future for Kenyans, higher Figure 2.1: Wage jobs & self-employment have increased, employment on family farms have remained constant productivity for the economy 15 and greater cohesion in society 5.1 By Paul Gubbins 10 People (millions) 3.5 J obs are essential to the well-being of Kenyans. Fundamentally, people work to make a living, to earn either cash income or 5 1.9 0.9 1.7 6.2 2.7 6.5 4.5 food on which to survive. Higher yields in agriculture, access to small off-farm activities 0 and transitions to wage employment 1989 1999 2009 Year are milestones on the path to individual Wage work Non−farm self−employment Family farming prosperity. From the macroeconomic Source: World Bank analysis of census data perspective, growth happens as jobs become more productive, as more productive Most work in Kenya does not pay a wage. jobs are created and as less productive Almost two thirds of all jobs do not have the jobs disappear. Finally, jobs foster social benefit of a stable, predictable wage. These Achieving Shared Prosperity in Kenya 8 Human Development and Resilience jobs include family farming but also a host to access social security benefits, such as a of other non-farm work, ranging from such pension or health insurance. low skill trades like street vending to skilled trades like dressmaking, butchery, carpentry The rate of modern wage job creation is and other jua kali trades. Individuals in theseseverely outpaced by the rate of growth jobs often run their own small businesses, of the working age population. Estimates occasionally hiring one or two other people, from the annually released Economic Survey, or recruiting family members to help. Most put modern wage job growth from both the non-farm self-employment is in commerce— public and private sector at about 50,000 such as retail food or textile sales—but also per year, while the working age population includes manufacturing, transportation and is increasing at about 800,000 per year. other services. This creates an environment of intense competition for good jobs. This situation A vast majority of work takes place outside means that many young Kenyans who aspire of contractually based employer-employee to modern wage work as a first best option, relationships. What most would consider a will have difficulty finding jobs and resort to modern or formal job, such as an engineer secondary options, such as self-employment in a large telecoms company or a doctor in a or low end wage work. public hospital, is the exception not the rule in Kenya. Only two out of five wage jobs (a Unemployment is almost entirely an urban little over 2 million) are modern or formal phenomenon, while underemployment employment (Figure 2.2). Overall, only 15 is more widespread in rural areas. Overall percent of working Kenyans hold a modern unemployment rates (for all ages) in 2009 job that provides a wage and the opportunity using the conventional definition—the Figure 2.2: Breakdown of Kenya’s working age population by employment status Working Age Population: 20.6m Employed: Other : 14.3m 6.3m Family Non farm Farming: self−employed: Wage work: Inactive: Students: Homemakers: Other : 6.5m 2.7m 5.1m 1.6m 2.7m 1.9m 0.1m Informal: Modern: 3.1m 2.0m Private: Public: 1.3m 0.7m Source: World Bank analysis of census data 9 Achieving Shared Prosperity in Kenya Human Development and Resilience percentage of the labor force that is seeking More education opens up the possibility work—stood at 7 percent of urban adults of wage employment and higher earnings, and 2.5 percent of rural adults. In rural areas, especially for secondary or post-secondary unemployment rates are low because most graduates. Data shows that the probability of those without other jobs are working on of getting a wage job increases steadily with family farms. Rather than unemployment, in education level. More than half (52 percent) rural areas, the more common phenomenon of those with secondary education or more is underemployment—people working at have wage jobs, compared to barely a below their productive potential. quarter (27 percent) of those with only some primary education. Among those with wage Unemployment rates are highest for young jobs, analyses of how much wages increase people, especially those in urban areas. In with each year of education, suggests that 2009, the overall unemployment rate for the returns to primary education are very Kenyans between the ages of 20 and 24 low, but wages do increase more rapidly was 8.1 percent. The unemployment rate for each additional year of secondary or for urban residents in this age group is 13.2 post-secondary education. This means that percent. the payoff in the wage market from more education at the high levels is very substantial, While youth unemployment is seen as a but not at the low end. major concern in Kenya, the employment outlook improves as individuals grow older. Low wage returns to primary education Data from multiple censuses enable tracking suggest that the quality of basic education of inactivity rates of groups over time. In is limited. Results from tests (conducted 1999, inactivity rates for 20-24 year olds was by Uwezo to a randomly selected group of nearly 15 percent, by 2009, the inactivity rate schools) in basic literacy and numeracy point for these same individuals, who were then to low levels of learning overall, particularly, 30-34 years of age, had fallen by more than for poor students. Overall, one third of half, to 7 percent. This suggests that youth Standard 3 students cannot pass a Standard unemployment is high as Kenyans transition 2 level test. Among 10 to 16 year old students from school to work but after some time, from poor or extremely poor households, a most of them find work. little more than half can pass literacy and numeracy test for their grade level. Among Over the long run, the average level of the non-poor the pass rates are close to 80 skills in Kenya’s workforce has increased percent, suggesting that wealth buys better dramatically. At the time of Kenya’s quality education opportunities for children. independence in 1963, approximately three out of four adults in their 30s had never Key Challenges attended school. Today, very few do not Kenya needs to expand high productivity attend school at all. In 2009, two out of jobs in the private sector. Kenya has three adults completed primary school, and had success expanding its wage-based half of primary school graduates completed agricultural sector—in cut flower farming, secondary school. Due to policies in the last tea, and coffee—and also in creating jobs in ten years that have boosted primary school information and communications technology enrollments, both primary and secondary (ICT). These sectors are competitive completion rates are likely to see substantial internationally, and have been a vehicle for gains in the near future. Kenya’s growth. While there are strong firms Achieving Shared Prosperity in Kenya 10 Human Development and Resilience in the manufacturing sector, what stands out generator, and use it for 16 percent of their in Kenya’s economic trajectory is the lack electricity needs. This is costly, requiring of a takeoff in manufacturing. At 11 percent expensive fuel purchases and substantial of GDP, the share of manufacturing in the capital investments. Additionally, obtaining economy has not changed since 1960. a power connection is still difficult in Kenya. The country ranks 162 out of 185 in the ease Firm surveys suggest that the key barriers of getting electricity, in the World Bank’s to creating good jobs in Kenya are 2012 Doing Business rankings. macroeconomic instability, constraints created by infrastructure and energy A third drag on job creation comes from bottlenecks, and corruption. More than half kickbacks on government contracts and of surveyed manufacturing firms in the 2007 pervasive demands for bribe payments. Enterprise Survey, report these factors to be Overall, 71 percent of firms say they need major or very severe constraints. to give gifts to obtain government contracts, and the average amount paid is 12 percent of In a 2011 survey of employers in Kenya, the value of the contract. Close to 80 percent almost three-fourths cited macroeconomic of firms cited having to give gifts to public conditions and instability as an obstacle officials to “get things done”. Firms report to growth, and 44 percent cited political that on average, 4 percent of the value of their instability. Kenya’s macroeconomic sales is directed towards bribe payments. On management in recent years has been both counts, corruption rates surpass the strong, but political instability, especially average for the world and for countries in after the 2007 elections, has consistently had Sub-Saharan Africa. Overall, the total costs of a negative effect on growth. corruption in 2011 was estimated at over KES 104 million, which is the equivalent of more Manufacturing firms face a combination than 253,000 well paid wage jobs. This is close of high inventory and transportation costs. to the number of urban unemployed youth in Supply chain problems due to challenges Kenya. In other words, if firms were able to with transportation have resulted in Kenya’s redirect all the funds they use for bribes to manufacturing enterprises holding an salaries, they could hire almost every young average of 47 days of critical inventory for unemployed Kenyan. production. Transport costs in Kenya are more than double the costs in South Africa, China Many young Kenyans face considerable and India, and are driven by several factors hardship as they enter the job market. including poor infrastructure, long waits at Findings from a qualitative study conducted weighbridges, delays due to inefficiencies by the World Bank revealed that nepotism, and low capacity at the port of Mombasa, tribalism, demands for bribes and sexual and demands for bribe payments. harassment are common challenges faced by youth entering the job market. Young people A large majority of firms in Kenya experience from wealthier and better connected families financial losses, due to power interruptions. are seen as having large advantages in finding Close to 80 percent of firms cited power work, regardless of skills and qualifications. disruption as a source of financial loss, For those with the least power in Kenyan amounting to about 7 percent of sales society, the possibility of obtaining a wage on average. Due to power shortages, two job—or even just the access to markets for out of three firms in Kenya own or share a a self-employed job—can seem daunting or 11 Achieving Shared Prosperity in Kenya Human Development and Resilience hopeless. Pervasive discrimination stacks on what works to improve earnings and the deck against the poor and women, productivity. Research on alleviating threatening to exacerbate inequalities over financing constraints through cash grants time. In addition, if exploitation rather than and micro-credit, has provided evidence merit, continues as a means of allocating that these instruments can increase entry jobs, frustration and a sense of injustice will into self-employment, but not on whether increase the risk of conflict. they improve productivity. One study in Kenya offers evidence that facilitating access Informal is normal—today and for the to savings accounts to women market foreseeable future. The reality in Kenya is vendors, encouraged more savings and more that even if the country accelerates wage productive investment. Despite the existence job creation, the fastest growing category of several public and private programs to of employment and source of livelihood in improve skills—primarily training in business a setting where people of working age are skills, training in technical skills through larger in number, increasingly educated apprenticeships or vocational training, and moving off the farm, will be informal and training in behavioral skills—rigorous non-farm self-employment. The challenge evaluations of these programs are scarce is that this sector is dominated by informal and when evaluated, show limited effects on household and micro enterprises, with very productivity or earnings. low levels of capital and productivity. Policy recommendations Harassment by authorities, access to Reduce barriers to private sector growth to finance and lack of skills represent three boost wage job creation. Most good jobs in main challenges that face the self-employed the future will come from the private sector. in the informal sector. One study among Encouraging the growth and expansion women street vendors in Nairobi found of the private sector requires improving harassment from city authorities relating to operating and investment conditions. The licensing, taxation and site of operation, as government can create these conditions by the most significant challenge they faced. maintaining political and macroeconomic Demands for bribes from police amounted stability; reducing the costs and improving to 3 to 8 percent of income. Other studies the reliability of transportation and energy; highlight the lack of adequate space as a and eliminating job-smothering corruption. challenge, which points to little consideration in urban planning of the needs of informal Enforce the principles in the Bill of Rights enterprises. Access to financing—particularly in the 2010 Constitution that asserts lack of credit and savings instruments—also equal opportunity regardless of tribe and emerges as a consistent challenge faced by gender. Kenya can adopt measures to fight household enterprises. Lastly, the skills that tribalism, bribery and sexual harassment— are needed to run a productive enterprise are the hardships that adversely affect job- typically not provided by formal schooling. seekers—through education, legislation and enforcement of non-discrimination policies. There are few clear guidelines on how to improve the productivity of informal Recognize informal micro enterprises as enterprises. Since both policymakers and part of the legitimate economy and provide researchers have largely neglected household the space for them to operate. The single enterprises, there is limited knowledge most important action that the government Achieving Shared Prosperity in Kenya 12 Human Development and Resilience can take to improve the welfare of the self- Continue to invest in cities, so that they work employed is to recognize them as a legitimate for everyone. Cities are centers of job creation part of the economy, and encourage urban and innovation for many industries. They authorities to provide safe operating spaces, facilitate idea exchange—the ICT innovation while protecting them against pervasive cluster in Nairobi is a good example of this— harassment. and they reduce operating costs for business, as they naturally bring firms, suppliers and Experiment with training programs to customers closer together. As cities expand, improve the productivity of informal it is important for the government to invest enterprises, but do so through rigorously in urban infrastructure, so that they continue evaluated pilot programs. One promising to flourish as drivers of job creation. Urban training approach—the Technical and planning should also take into account the Vocational Vouchers program (TVVP)—is operating needs of Kenya’s growing category currently being examined with a rigorous of informal self-employed workers. impact evaluation. Initial analysis of this program has yielded interesting insights, about how to boost enrollment in training 3. Education and training programs, and the role of choice in increasing for long term growth the chances that trainees complete the programs. Continued experimentation and By Helen Craig and Fred Wamalwa evaluation will continue to provide insights, about how to best support the self-employed. Introduction Investments that will increase output on family farms include developing rural roads K enya has a population of around 39 million, comprising of 14 million school- going children. Of the 14 million, 17 percent and irrigation systems, as well as improving are 4-5 years old and have the potential to farming techniques through agricultural extension. The broad formula for making be enrolled in early childhood education small farms more productive is well known. programs, 59 percent are of primary school- It includes improving the institutions going age of 6-13 years, and 24 percent are relevant to smallholder agriculture, as well as secondary school-going children aged 14- targeted public investment. Improvements in 17 years. The population of Kenya is also property rights would help, as would reforms increasing at 1 million people per year. of the relevant marketing boards, to increase Today the number of Kenyans with basic incentives for producers. education has outpaced those with none, and the demand for tertiary education is Improve primary education, so that it works also growing. The provision of quality and for all Kenyans. Kenya has made impressive relevant education and training remains a gains in making schooling more accessible national priority. to children. Next steps are to ensure that Kenya continues to work towards achieving The government’s commitment is to provide universal primary completion, increasing globally competitive, quality education, completion rates for secondary school, training and research for the country’s and increasing the quality and relevance of human and economic development. This education at all levels, so that people leave commitment is well recognized in various school with skills that are demanded in the policy documents including the 2010 economy. Constitution, Vision 2030 and the Millennium 13 Achieving Shared Prosperity in Kenya Human Development and Resilience Development Goals. Education and training An enabling environment for raised learning help to provide the knowledge, skills and achievement is needed, related to strong mindsets necessary to drive economic growth leadership and management at all levels, and create a knowledge-based economy. quality service delivery, relevant curriculum Education and training are also essential and high teacher quality. The government for political growth and social cohesion, as has undertaken major reforms to attain its they help citizens to be tolerant, to uphold policy goal of providing quality education democratic values, to respect the rule of law,and training to its citizens. The most notable and develop caring and healthy communities. include the ongoing Free Primary Education (FPE), Free Day Secondary Education (FDSE), In order to achieve this, the education and and bursaries and loans to needy students training sector has embraced the provisions mainly at secondary and tertiary levels. of the 2010 Constitution and endorsed Other reforms in the education sector the Vision 2030 goals. The mission of the include the Sessional Paper No.1 of 2005 on government is to create an education and a Policy Framework for Education, Training training environment that equips learners and Research; the adoption of a sector-wide with desired values, attitudes, knowledge, approach to the planning and financing of skills and competencies, particularly in education and training (the Kenya Education technology, innovation and entrepreneurship, Sector Support Program); and several new enabling all citizens to develop their full education Bills. capacity, live and work in dignity, enhance the quality of their lives, and make informed The government has also committed personal, social and political decisions. significant financial resources to the sector, and this has delivered returns. Spending Vision 2030 places great emphasis on the link on education has been growing in real between education and the labor market, terms, maintaining a 20 percent share of the on the need to create entrepreneurial skills, national budget and about 6.5 percent of attitudes and competencies, and on strong Gross Domestic Product. Kenya spends more public-private partnerships. It assumes the on education relative to its comparators. It development of Kenya as a middle-income has succeeded in getting many children into country in which many citizens embrace school and the number attending school has entrepreneurship, engage in lifelong been increasing for all levels, to the extent learning, perform more non-routine tasks, that by 2020, the number of Kenyans with a and are capable of more complex problem- university degree should exceed those with solving. This makes citizens confident to no education. Despite these gains, there take decisions, understand more about are remaining concerns regarding equitable what they are working on, and assume access for all, student learning levels, more responsibility with accountability. As curriculum relevance, fiduciary oversight, vital tools towards this end, they will have and system efficiency. better reading, quantitative reasoning and expository skills. Reforms in education Recent reforms in the sector have focused on and training seek to move from knowledge- making the education system responsive to reproduction to knowledge-creation and the aspirations of Vision 2030 and the 2010 application. Constitution. Institutional and management arrangements will also change with the Achieving Shared Prosperity in Kenya 14 Human Development and Resilience implementation of the 2010 Constitution. with no education. The number of Kenyans County governments will take over the with secondary education has risen from responsibility for providing early childhood 4 million in 2000 to 7 million in 2011, and education and running village polytechnics, this number will triple by 2035 according while the national government will retain the to projections on educational attainments responsibility for education policy, standards, in Kenya by the Wittgenstein Center for curricula, examinations and the granting of Demography and Global Human Capital. In university charters. It will also provide basic absolute numbers, secondary enrolments education, and manage public universities increased from a low base of 0.9 million in and other institutions of research and 2003 to 1.8 million in 2011. higher learning. The current two education ministries are likely to be merged, while the Tertiary education has increased and Teachers Service Commission (TSC) has been estimates show that by 2020 the number established as an independent commission. of Kenyans with a university degree is expected to exceed those without any Key Facts and Trends formal education. Enrolments in Technical, Kenya is getting returns on its investments in Industrial, Vocational and Entrepreneurship education, and now the majority of Kenyans Training (TIVET) institutions increased from have attained some basic level of education. 70,500 in 2005 to about 100,000 in 2011. Enrolments in Early Childhood Development Enrolment in public universities almost (ECD) and primary programs have increased doubled between 2005 and 2010, as shown from 1.6 million and 7.2 million in 2003 to 2.3 in Table 3.1. But there are still not enough million and 9.9 million in 2011, respectively. places, because 77 percent of secondary Primary school net enrolment rates have been school graduates with the minimum required consistently over 80 percent over the period university entry grade of C+ are not able to 2004 to 2011 (see Table 3.1). As shown in get places in public universities. Most join Figure 3.1 since 1980, the number of Kenyans either public universities as self-sponsored with primary education has exceeded those students, or private ones. with none. Over a decade later, those with secondary education also exceeded those Nationally, enrolment rates at ECD and primary levels do not indicate a significant Figure 3.1: By 2020, Kenyans with a university degree will exceed those no education attendance bias by gender. Across ECD and primary schools, boys and girls share almost 70 equal attendance opportunities, with the 60 Gender Parity Index (GPI) coming closer to 1. 50 There is however a wider gender gap in Thousands 40 favor of boys at secondary school, where 30 the GPI was 0.86 in 2011—with not much 20 improvement over the last 5 years, as shown in Table 3.1. Also, in some regions there 10 are huge disparities in access to education 0 opportunities between girls and boys, even 2045 2050 2005 2010 2015 2020 2025 2030 2035 2040 1970 1975 1980 1985 1990 1995 2000 Total population at primary level. Generally, girls are much No Education Primary Secondary Tertiary (above 15 years of age) less likely to go to school in the arid areas, Source: Vienna based Wittgenstein Center for Demography and Global Human Capital including in Mandera, West Pokot, Garissa, Notes: In the figure, total population (15 years of age) is the summation of those with no education, primary, Samburu, Turkana and Wajir. secondary and tertiary education 15 Achieving Shared Prosperity in Kenya Human Development and Resilience Table 3.1: Trends show that Kenya has made successes in getting children into school 2005 2006 2007 2008 2009 2010 2011 Enrolments (000)/1 1,643.2 1,672.3 1,691.1 1,720.2 1,914.2 2,193.1 2,370.0 GER 57.9 58.8 59.0 59.8 60.6 60.9 65.6 Pre-primary NER 32.9 33.6 42.1 43.0 49.0 50.0 52.4 GPI 0.98 0.93 0.93 0.94 0.98 0.99 1.02 Enrolments (000)/ 1 7,691.5 7,632.1 8,253.9 8,563.9 8,831.5 9,381.0 9,857.9 GER 107.6 103.8 108.9 109.8 110.0 109.8 115.0 Primary NER 82.8 83.5 91.6 92.5 92.9 91.4 95.7 GPI 0.95 0.96 0.95 0.96 0.96 0.97 0.98 Completion Rate 83.2 79.8 81.0 79.8 83.2 76.8 74.6 Enrolments (000)/1 934 1,030.1 1,180.3 1,335.9 1,472.6 1,653.4 1,767.7 GER 28.8 32.4 38.0 42.5 45.3 47.8 48.8 NER 20.5 22.5 24.2 28.9 35.8 32.0 32.7 GPI 0.89 0.89 0.85 0.85 0.87 0.87 0.86 Secondary Primary to 66.9 64.1 69.9 64.1 66.9 72.5 73.3 Secondary Transition Percent of 30.2 24.5 24.3 27.3 29.1 candidates scoring C+ and above TIVET 70.51 71.17 76.52 85.20 80.98 82.65 103.07 National Enrollments (000) 20.2 20.5 21.3 22.9 16.5 15.8 20.3 Polytechnics Other TIVET Enrollments (000) 27.4 27.7 30.2 32.6 33.2 33.8 48.9 institutions/2 Youth Polytechnics Enrollments (000) 22.9 23.0 25.0 29.7 31.3 33.1 35.0 University 92.32 112.23 118.24 122.85 177.74 177.62 198.26 Private univerities Enrollments (000) 10.6 20.9 21.1 22.2 35.2 27.8 40.3 Public universities Enrollments (000) 81.7 91.3 97.1 100.6 142.6 139.8 157.9 Source: Various Economic Surveys Notes: (i) 1/includes both private and public 2/includes technical training institutes and institutes of technology (ii) GER is Gross Enrolment Rate, NER is Net Enrolment Rate and GPI is Gender Parity Index Compared to other countries at a similar education, such as reducing the percentage level of development, Kenya has done well of learners who fail to complete primary in terms of enrolments, and relative levels education; addressing enrolment rates which of educational attainment and literacy. have now started to stagnate or fall; and Kenya’s primary Net Enrolment Rate (NER) is increasing the ratio of girls’ enrolment. at par with Uganda (92.2 percent) and higher than South Africa (84.7 percent), Ghana Budgetary resources devoted to the (75.9 percent) and the Sub-Saharan African education sector in Kenya are high compared average (75.1 percent). Kenya enjoyed a to other countries in the region. Spending more educated youth population as at 2009, on education for the last eight years has with its youth literacy rates being higher been growing in real terms, maintained at compared to its peers such as South Africa, 20 percent share of the national budget Ghana, Uganda and Tanzania. However, and about 6.5 percent of GDP. The total Kenya needs to improve in other aspects of government education budget is estimated Achieving Shared Prosperity in Kenya 16 Human Development and Resilience at slightly over KES 200 billion (about 6.6 spending at secondary and higher education percent of GDP) in 2011/12, from a low base levels (while ensuring that the poor benefit of KES 74.6 billion in 2003/04 (see Table 3.2). most), since higher education increases This is well above the Sub-Saharan African translates to higher employability and higher average of 3.8 percent, and the investment wages.1 is higher as a share of the economy than in South Africa, Uganda or Egypt (see Figure The highest spending goes to staff 3.2). Spending has shifted towards secondary compensation, which is mostly for teachers’ and higher education, although primary salaries. Spending on staff compensation education still takes the largest share. The (including wages and salaries, allowances increased spending in primary education and benefits) constituted almost 60 percent has generally been pro-poor, and it has of total spending in 2011/12, and is bound to proportionately benefited the poor. The increase further, due to recent teachers’ strike government needs to sustain the increase in which forced the government to put 18,000 contract teachers on permanent terms and Figure 3.2: Education sector in Kenya are high relative to other countries harmonize teachers’ salaries. The decision 8.0 to change the status of contract teachers is 7.0 6.8 somewhat contentious, since previous impact Public Spending on Educa tion, total 6.3 evaluation work in Kenya has pointed to the 6.0 positive impact that contract teachers had (percent of GDP) 2008 5.1 5.0 on learning outcomes (see Box 3.1). These 3.8 3.8 3.8 4.0 3.3 positive results may partly be attributed to 3.0 the recruitment of additional teachers in the 2.0 foundational year of schooling (first grade), 1.0 targeted instruction, and teacher monitoring. 0.0 The policy question going forward is how Tanzania Kenya South Sub-Sahara Uganda Egypt Mauritius Africa Africa to contain the wage bill as the government deals with the fiscal challenges associated Source: World development indicators with devolution. Table 3.2: Spending on education maintained at about 6.5 percent of GDP 2010/11 2011/12 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 Budget Budget Estimate Total Expenditure 74.6 83.4 96.2 108.6 126.2 141.6 166.1 201.1 216.6 Central Government 74.1 81.0 92.6 103.8 121.3 137.0 161.9 194.1 208.1 Devolved (CDF and LA) 0.6 2.4 3.5 4.8 4.9 4.6 4.2 7.0 8.5 Expenditure (2003/04 74.6 77.9 85.6 89.6 99.1 98.3 98.6 106.6 109.4 prices) Central Government 74.1 75.7 82.4 85.7 95.3 95.2 96.1 102.9 105.1 Devolved (CDF and LATF) 0.6 2.2 3.2 4.0 3.9 3.2 2.5 3.7 4.3 Total Expenditure 6.2 6.2 6.3 6.3 6.4 6.3 6.8 7.2 6.6 (percent of GDP) Total Expenditure (% of 19.8 22.0 22.2 21.3 19.0 20.4 20.6 20.0 22.1 Government spending) Source: Various Economic Surveys Notes: (i) 1/includes both private and public 2/includes technical training institutes and institutes of technology (ii) GER is Gross Enrolment Rate, NER is Net Enrolment Rate and GPI is Gender Parity Index 1 See work by Manda, Mwabu and Kimenyi, 2002. 17 Achieving Shared Prosperity in Kenya Human Development and Resilience Box 3.1: Studies in Kenya show positive effects of contract teachers on learning outcomes A study by Kremer et al (2011) employed a randomized evaluation method to examine the effect of contract teachers and parental school monitoring on learners’ performance, as measured by test scores. It is based on a program implemented by International Child Support, which provided funds to 140 schools (randomly selected from a pool of 210 schools in Western Kenya) to hire an extra teacher for first grade classes. Results from the study show that providing school committees with funds to hire a contract teacher had a generally positive effect on learning: higher tests scores were observed in 140 schools (treatment) relative to the 70 schools (comparison). The biggest gains come when local school committees are empowered to effectively monitor these teachers and when extra classes are structured so as to target instruction to pupils’ initial achievement level. Per capita spending has been increasing, but have reduced from 81 percent in 2005 to not at the same pace as enrolment rates. 74.6 percent in 2011), owing to unfavorable Spending per learner at both primary and learning environments and decreasing secondary levels has increased in real terms quality. During the 2010/11 academic year, by 57 and 64 percent respectively from 2004 over 400,000 learners did not complete to 2010. However, since 2004, net enrolment grade 8, and from tracking learners who rates at both primary and secondary levels began primary school in 2003 (the year when show declining rates, against steady increases FPE started) has shown that only 59 percent in per capita spending, indicating a possible completed. Schools struggle to provide space, decrease in return on public spending in the classrooms, books and notebooks, while in education sector (see Figure 3.3). some areas teachers face huge class sizes. Key Challenges Access issues at primary level are The increase in enrolment following compounded by even more challenging the elimination of user fees has been access issues at ECD and secondary levels. accompanied by a decrease in resources Lack of integration of ECD into the primary and increased concern over access and school system has stagnated access at this equity. As a direct result of FPE, primary level. The NER at ECD is relatively low, at schools saw a large increase in enrollment. 52.4 percent in 2011 (albeit increasing from However, learners have struggled to stay 32.9 percent in 2004), which means that 47.6 enrolled in school (primary completion rates percent of children of ECD school-going age Figure 3.3: Increase in sector spending has not kept pace with enrolment rates 9,000 95 36,000 40.0 Per Capita Spending, Secondary (2003/04 Prices) Per Capita Spending, Primary (2003/04 Prices) 8,500 90 31,000 35.0 8,000 85 NER and comple ti on Rate 26,000 30.0 7,500 Secondary NER 80 21,000 7,000 25.0 75 16,000 6,500 20.0 70 11,000 6,000 65 6,000 15.0 5,500 5,000 60 1,000 10.0 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 Per Capita Spending Primary NER Primary Comple tion Rate Per Capita Spending Secondary NER Source: Appropriation accounts (for spending data) and Ministry of Education Achieving Shared Prosperity in Kenya 18 Human Development and Resilience (3-5 years) do not enroll in ECD centers. This County is 93 percent, while in Turkana it is is a missed opportunity, since ECD provides 25 percent. In every aspect, arid regions for the development of the learner‘s brain, lag behind. Primary NERs fall behind the which is most rapid during the first five years Millennium Development Goals target in of life. In addition, this stage provides for counties located in arid regions, with net the emotional, cognitive, social and physical enrolments of less than 50 percent. At the development of the learner. Secondary secondary level, county NERs range from 5 school NERs in Kenya are low at 32.7 percent to 10 percent in the arid regions, to around in 2011, albeit increasing from 20.5 percent 50 percent in Kiambu and Nairobi counties. in 2005. Children in arid regions have lower skills, are absent from school more often, and benefit The key concerns with secondary school from fewer teachers and poor facilities. Data access revolve around the process of from the Afrobarometer survey also show student selection and costs. First, the Kenya that wealthier households have access to Certificate of Primary Education (KCPE) plays better education services (better facilities, a key role in controlling access, because if teachers and quality of teaching) than those students fail the examination, they either drop from poor households. out or repeat the final year of primary school. Second, when KCPE results are released, three More children attend schools but they selection rounds follow in sequence: national are not necessarily achieving the desired schools first, then provincial schools, and learning outcomes. According to the Kenya finally district schools. This only perpetuates National Examinations Council’s report of the system of hierarchy: national schools the 2011 KCPE results, some candidates begin the selection, thus eliminating many could hardly construct a sentence in either opportunities from the lower schools to English or Kiswahili. The 2011 Uwezo receive the higher test-performing students. literacy and numeracy survey2 revealed The government waived tuition fees in 2008 that nationally, 7 out of 10 children in Class with the FDSE program, but this resulted 3 cannot do Class 2 work. Also, 12 percent in a drastic increase in boarding costs—in and 14 percent of Standard 7 leaners failed fact secondary education is still actually to reach Standard 2 numeracy and English far from free. Since it takes both the public tests respectively. Educational attainment and private sector to cater for the increased is often not sufficient to enable students to numbers in primary school, private primary proceed to higher education: only 24 percent school graduates generally reach higher of Kenya Certificate of Secondary Education levels of attainment. This makes competition (KCSE) examination-takers obtain grade for secondary school places contentious, a C+, rendering them eligible for university struggle between wealthy and poor students. admission. Kenya also experiences huge regional However, the quality of education and variations in education opportunities and training in Kenya seems to be better than outcomes, which threatens to erode the for most of Sub-Saharan Africa, as Kenyan gains made. Almost two-thirds of Kenya’s learners perform well on comparable counties have primary school NERs above 80 standard competency tests. The results percent. However, there is a significant gap from the Southern and Eastern Africa in enrollment ratios between the highest Consortium for Monitoring Educational and the lowest: enrollment in Murang’a Quality (SAQMEQ) III survey in 2010 revealed 2 Uwezo, 2011 ‘Are our children learning? Annual Learning Assessment Report for Kenya 2011’, Uwezo Nairobi. 19 Achieving Shared Prosperity in Kenya Human Development and Resilience that Kenyan learners in Standard 6 (aged 11 The deteriorating quality of education years) generally perform well on both reading is partly due to fundamental systemic and mathematics tests, compared to their problems in the 8-4-4 system of education. counterparts in 15 countries in Sub-Saharan At the school level, the curriculum is quite Africa. broad: there is extensive subject selection, and it is too focused on passing examinations. While the 2006 ECD Policy is sound, the Due to the pressure to attain high grades, implementation of ECD struggles and is not teaching revolves around passing tests, yet well developed to respond to the needs and extra classes are mandated under the of children at this level, especially regarding pretext of completing the bulky syllabus. trained teachers, adequate nutrition, and Excessive emphasis on standardized national classroom environment. The ECD curriculum testing has led to test score inflation and is guided by the policy, which emphasized examination cheating scandals, thereby holistic development. In practice however, compromising the ability to instil the values public pre-primary schools do not have of integrity, honesty, respect for others and well-developed early-childhood services hard work. Often, resources are diverted to for children under the age of five. Teaching preparatory testing, and learning time is lost is focused on literacy and numeracy skills as students spend weeks preparing for the meant for early primary education centers— tests. This type of pedagogy is not conducive partly due to pressure from parents, who to enhancing the capacity for critical thinking view ECD as early schooling. Child-centered and complex reasoning, essential for the pedagogical methods, which would provide attainment of Vision 2030, which relies on a better basis for learning, exist in only a the presence of an abundance of creativity few private centers in urban areas. Learning and innovation, especially among the youth. from the global empirical evidence on the importance of early childhood learning There is a disconnect between the curriculum shows that the quality of such care in Kenyan and quality of teaching at higher education public schools inadequately takes account of levels and the emerging needs of the labor the need for early cognitive stimulation and market. The task force on the re-alignment of better nutrition (Box 3.2). the education sector to the 2010 Constitution Box 3.2: Evidence of early childhood development impact There is emerging evidence internationally of the higher returns to early childhood investments. Delays in children’s cognitive and overall development can lead to future public health and education sector costs because these children lose out on significant brain development in the first years—including prior to birth. The greatest window of opportunity for brain development is mostly in the last trimester through to 2-4 years of age, and is dependent on sufficient nutrition and early sensory and cognitive stimulation. Children who start behind tend to stay behind (Schulman and Barnett, 2005), and the ability to change brain function decreases over time (Levitt, 2009). Empirical evidence points to the strong cross-sectoral links between education, health and social protection interventions. For example, (i) for children to be prepared to learn and to stay in school, they need to be nourished, free of worms, and healthy; (ii) brain development and cognitive ability are critically affected by nutrition and early stimulation, especially during the prenatal to 2 year growth period; and, (iii) poor families often need interventions such as cash transfers to access basic education and health facilities. This will require county governments to coordinate closely with national social protection schemes such as the orphans and vulnerable children cash transfer scheme, and with the county primary health programs. Achieving Shared Prosperity in Kenya 20 Human Development and Resilience has identified a number of challenges facing that teachers in Kenya need to be trained university education. According to the further to teach core fundamental early report, there is a general mismatch between reading and mathematics skills4. Teachers what universities teach and the demands and other school administrators also need of industry. The high number of students to be trained in leadership and monitoring enrolling in universities, mainly as a result to ensure attainment of high standards and of parallel degree programs, continues to to enhance their interface with students, overstretch the capability of staff to deliver parents, and other stakeholders, as on the teaching/learning programs. The new emphasized in the report of the task force on culture of part-time teaching in universities, education, and as catered for by the Kenya due to the shortage of lecturers and tutors, Education Management Institute. compromises the quality of education. There is an increasing number of private Areas to target for efficiency improvement commercial universities that have sprung in the sector include reviewing teacher up, and maintaining the expected standards distribution and utilization. The Ministry remains a challenge to these institutions too. of Education estimates that Kenya is short of 80,000 teachers for both primary and The TIVET subsector faces similar quality and secondary schools to effectively provide relevance challenges. According to a study instruction to 11.3 million students in public by Onsomu et al (2009), the TIVET sector primary and secondary schools. The norm suffers from fragmented programs, limited for Pupil Teacher Ratio (PTR) for primary is integration into the formal education system, 40, but before addressing this gap, there is weak linkages with labor markets, insufficient need to address the current poor distribution financing, inadequate monitoring, poor wage of teachers. For instance, in north eastern employment opportunities for its graduates Kenya a teacher handles 25 children more and limited alignment with technological than does a teacher in the central region innovation in the local and global markets. of the country. Data (for public schools) on enrolment and teacher distribution from The number of pre-primary and primary Teachers Service Commission shows that in teacher training colleges has increased, 2011 there were counties with almost the estimated to have reached 105 and 89 same levels of enrolment, but with different respectively, but enforcing quality and numbers of teachers. Furthermore, there are standards for these colleges remains a counties with less than the recommended challenge. primary PTR of 40. Demographic trends also show that some regions are experiencing Teachers are struggling to teach, some are higher growth in school-age populations than not reporting to school, and others are others. At secondary level, there is no clear not maximizing their learning time within norm for PTR. It is based on the curriculum- classrooms. On average, it is estimated that based establishment system, where teachers on any given day, 13 out of 100 teachers are are trained to teach only one or two subjects not in school.3 Teachers also face pedagogical for individual subjects, and most schools challenges. A 2011 survey by Uwezo shows offer a large range of optional subjects, some that nationally, 1 in every 4 teachers do not with low demand, resulting in average low follow the timetable, and the USAID-funded class sizes. Primary Math and Reading initiative shows 3 Uwezo, 2011 ‘Are our children learning? Annual Learning Assessment Report for Kenya 2011’, Uwezo Nairobi. 4 USAID, GoK, 2012, Primary Math and Reading (PRIMR) Initiative Baseline Report. 21 Achieving Shared Prosperity in Kenya Human Development and Resilience The potential to start new schools, school performance. Data are held by multiple funded through devolved funds and the agencies in the sector and they are not community, further threatens the efficient compatible between them, thus precluding use of resources in the sector. There have proper comparisons and sharing best been efforts to improve the quality of school practice. However, an initiative is currently infrastructure and also to start new schools, underway to develop a national integrated mainly through Constituency Development education information management system, Funds and community support financing. But which will address this challenge. new unplanned school facilities continue to put a strain on available inputs, especially The sector also faces accountability issues. teachers. There is need to ensure that It is highly centrally managed, with pervasive devolved funds are not used to start schools powers at ministry headquarters and little that are too small, which causes further management oversight from the bottom, inefficiencies in the system, but for the most in particular at the community level. The over-crowded schools. Achieving national sector has had public financial management objectives with decentralized funds remains concerns, and an internal audit review in 2010 a challenge. found that significant amounts of public and donor resources did not benefit the intended Systematic quality assurance and policy beneficiaries. While more resources are impact evaluation is lacking. There are being devolved directly to the school level limited systematic school visits. Apart for direct management, there is no explicit from the annual school surveys, schools provision for the auditing of finances at are not obliged to prepare school plans, or individual primary and secondary schools. performance and accountability reports. Poor A new financial management assessment and/or inadequate quality assurance services is needed to determine areas for further are due to the shortage of quality assurance attention. and standards officers; inadequate resources such as vehicles and budgetary allocations Policy Recommendations for carrying out the work; and inadequate (i) Access training on the subject. However, several • Improve access at ECD level by integrating new initiatives show that greater attention is ECD into Free Primary Education policy. being paid to ensuring that the performance • Adopt a more targeted ‘no child left of the sector improves. One example is the behind’ strategy for children, particularly 2012/13 Public Expenditure Tracking and girls in arid areas. The strategies should Service Delivery Indicator Survey of 300 address the cultural, social and economic primary schools, that provides a base-line barriers to children entering school in against which to benchmark future primary counties that are lagging behind. school performance improvement. • At secondary level, address the current low enrolments by scaling up the current The sector does not have up-to-date, Free Day Secondary Education program, consistent or reliable data system critical including alleviating the cost burden on for planning, oversight and accountability. students from poor households through There is limited reliable information capable bursaries and other targeted forms of of providing policy-makers, parents or school financial support. This will increase the managers with the school-level information current low secondary enrolment rates. they require. Such information includes • At TIVET and university, encourage more enrolments, school inputs, financial flows and private sector participation. Achieving Shared Prosperity in Kenya 22 Human Development and Resilience (ii) Quality • Mainstream public private partnerships • Improve ECD implementation through in curriculum development and in possible public-private partnerships financing of higher education. which can focus better on physical, • With the upsurge in university cognitive, linguistic and socio-emotional enrollments, evaluate and adopt development (4-5 year olds); and school methods of delivery that foster high health and nutrition programs. quality teaching and effective learning. • At primary and secondary levels, focus on • Establish strong linkages with business, core service delivery activities to retain industry and community needs (and students and increase learning. These contributions). are the top school related areas to be focused on for raising student learning (iii) Efficiency levels: • Address the current unequal teacher (a) Review curriculum learning distribution across counties by ensuring outcomes for relevancy and that additional teacher recruitment is sequencing across grade levels and based on current distribution, which in cycles (primary and secondary). turn may require relocating teachers (b) Ensure there are sufficient books from over-supplied to under-supplied which focus on age-appropriate counties. learning tasks, including early grade • Ensure infrastructure school expansion reading. addresses over-crowding instead of (c) Maintain regular classroom creating small under-utilized schools attendance by teachers, and train to be achieved through coordination teachers on how to use books between the central government, county and how to teach (especially core government, CDF committees and fundamental early reading and communities. mathematics skills). • Ensure service delivery by integrating (d) Ensure that learners spend sufficient performance management, through time on learning tasks. performance contracting and appraisals. (e) Strengthen school leadership for overall school management as well (iv) Financial management, monitoring as instructional support to teachers, and accountability working more closely with parents • Handle the current data challenges by and community, and mobilizing integrating and harmonizing the data resources. in the sector, while ensuring that it is • Ensure life skills are incorporated in the regularly updated. curriculum and that teachers are trained • Undertake a sector financial management on how to teach these skills. assessment to better prepare for a new • Introduce interactive e-learning, moving phase of support to the sector. beyond physical books, while ensuring • Initiate a review of the effectiveness there is infrastructure to support this. of local authority and CDF projects • At University and TIVET, focus on quality and ensure that sub-national spending of teaching and relevance of curriculum, programs going forward are coordinated and this includes: by county governments. • Develop a quality assurance framework for multiple service providers to deliver relevant skills and ethical training in needed areas. 23 Achieving Shared Prosperity in Kenya Human Development and Resilience 4. Making a healthy Kenya of which the most important ones are saving the lives of mothers, and reversing By Gandham Ramana the stubbornly high levels of stunting. The poor still remain highly vulnerable to Healthier is Wealthier health shocks caused by unforeseen health G ood health makes the foundation for development, and societies benefit from healthy populations that are more productive conditions, and there is an urgent need for reliable financing mechanisms that protect them. Finally, sustaining the gains made as and save and invest more. One extra year of the health system is becoming devolved, life added raises the GDP by 4 percent.1 and getting ready to face the dual burden of communicable and non-communicable A healthy population is critical for achieving diseases, need priority attention. the Vision 2030 goal. Several actions to improve the health status of the population Figure 4.1: Trends in infant and child mortality are well grounded in the 2010 Constitution 225 that makes health a basic right, and proposes 205 a devolved system of service delivery, that is Mortality, per 1,000 live births 185 responsive to local needs. 165 Under-5 mortality 145 The goal of Kenya’s health policy (2012- 125 2030) is to achieve the highest possible Infant mortality 105 health standards, responsive to population 85 needs. The policy aims to achieve this 65 goal through supporting the provision of 45 equitable, affordable and quality health and 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 related services to all Kenyans, at the highest attainable standards. Source: WDI 2011 Kenya has shown an increasing commitment How healthy is Kenya? to the Sector Wide Approach (driven by the Kenya has made good progress in reducing 2005 Paris Declaration on Aid Effectiveness), child mortality, and the burden of and stakeholder representation is now communicable diseases. However, maternal better coordinated by the Health Sector mortality remains unacceptably high. Every Coordinating Committee. A Code of Conduct day, nearly forty Kenyan women die due to articulates the roles and responsibilities of pregnancy related complications, yet most of key players, with the government providing leadership and enabling policies; non-state these deaths are preventable. actors (both for profit and not for profit) acting as implementing partners; and In most countries in Sub-Saharan Africa, development partners providing finances maternal and child deaths mostly revolve and technical support. around childbirth. The trends in Kenya are the same, with new born deaths contributing Kenya has made notable progress during to two-thirds of infant mortality. Therefore, the past decade in reducing communicable improved care during pregnancy and diseases and child mortality (Figure 4.1). childbirth will be critical for making further However, several challenges still remain, progress in maternal and child health. 1 Investing in Health for Africa - The Case for Strengthening Systems for Better Health Outcomes, Harmonization for Health In Africa Achieving Shared Prosperity in Kenya 24 Human Development and Resilience Nutrition is an important determinant of by 2030.3 Injuries are estimated to be the the health and productivity of a population. third leading cause of deaths, and again the Childhood malnutrition is known to be a share of deaths due to injuries is higher in critical underlying cause of child mortality. Kenya compared to the global average (116 vs. Over a third of Kenyan children are stunted 78 deaths per 100,000). The most productive (DHS 2008), and more importantly, stunting young populations, especially males, suffer a has remained more or less at the same disproportionately higher number of deaths levels since the early 1990s. Even among the due to accidents. richest households 25 percent of children are stunted, suggesting the negative influence of Figure 4.2: Projected trends in mortality by cause groups child-caring and feeding practices. Kenya is 300 70 estimated to lose US$ 2.8 billion of its GDP 60 annually as a result of childhood mulnutrition 260 (World Bank 2009). 50 Total population (million) Total death (thousands) 200 40 Kenya demonstrated several gains in the 30 160 control of communicable diseases, especially 20 in reducing the burden of tuberculosis, HIV/ 100 AIDS and malaria. Kenya was also able to 10 reverse the adverse trends in basic health 50 2010 2015 2020 2025 2030 0 service coverage which steeply declined in Communicable Non-Communicable Injuries Total population 2008, and if current trends are maintained, projections Source: Comprehensive National Health Policy Framework; it may be able to achieve the Millennium Ministry of Medical Services and Development Goals (MDGs) for HIV/AIDS. Ministry of Public Health and Sanitation 2011 However, Kenya may not achieve most health MDGs, especially those related to child and maternal health (MDG 4 and 5). Is Kenya getting better health for monies being spent? The burden of non-communicable diseases is It is estimated that annually, over one rapidly increasing in Kenya. Kenya has higher million Kenyans slip into poverty due to mortality rates due to non-communicable health-related expenditure. Total health diseases compared to the global average (624 expenditure has remained at a constant vs. 573 deaths per 100,000).2 Over 50 percent 5 percent of GDP since 2001/02, with of hospital admissions in Kenya are due to private expenditure and donor support still non-communicable diseases (Figure 4.2), and contributing over two-thirds of the total include cardiovascular diseases, diabetes, healthcare expenditure (Figure 4.3). Total cancers and chronic respiratory diseases. health expenditure increased by nearly 50 The causes of chronic disease epidemics are percent in absolute terms, from KES 82.2 well established and include unhealthy diet, billion (US$ 1,046 million) in 2001 to KES 122.9 physical inactivity, obesity, and tobacco use, billion (US$ 1,620 million) by 2009. However, as well as excessive alcohol consumption. government expenditure on healthcare as Cardio-vascular diseases accounted for 12 a share of total expenditure has declined percent of deaths and cancers 5 percent in from 8 percent in 2001/02 to 4.6 percent 2005 and are projected to contribute to 17 in 2009/10. The estimated total per capita percent and 8 percent of deaths respectively expenditure of KES 3,203 (US$ 42) in 2009 is 2 World Health Statistics, 2011. 3 Health Situation Trends and Distribution: 1994-2010 and projections for 2011-2030, Ministry of Public Health and Sanitation and Ministry of Medical Services, Government of Kenya. 25 Achieving Shared Prosperity in Kenya Human Development and Resilience Figure 4.3: Trends in total health expenditure percent. In the absence of effective risk- 100 0.1 0.4 pooling, a catastrophic illness can push 90 16.4 the poor to even deeper poverty. 31.0 34.5 80 • The National Hospital Insurance Fund 70 (NHIF) currently covers about a fifth of 60 Kenyans, but coverage of the non-formal Percent 54.0 50 39.3 40 36.7 sector and among indigents remains low. 30 Ongoing efforts to increase coverage for 20 indigent populations resulted in adverse 29.6 29.3 28.8 10 selection, with enrollment by those 0 2001/02 2005/06 2009/10 who need hospital care rather than risk- Public Private Donors Other pooling. NHIF benefits are limited to Source: Kenya National Health accounts 2009/10 hospital care, and reimbursement to those treated by the private sector is limited to more than the resource needs estimated for bed charges. About half of the premiums providing a basic package of health services, go towards funding administration, partly by the Commission for Macro Economics and due to the fact that premiums have not Health. been adjusted since 1990. However, Kenya is still not able to get the Income and geographic inequalities are best value from the resources being spent still predominate in accessing and using on health, due to several factors. While health services, with low utilization of low government spending on healthcare essential services among the poor and those remains an important concern, the available residing in arid and semi-arid areas. Nearly resources are not being optimally used due 90 percent of women in Nairobi deliver at to inequitable resource allocation (favoring health facilities, in sharp contrast to only 17 hospitals and curative care); inefficiencies in percent in north eastern Kenya (Figure 4.4). the public health system that adversely affect Only 20 percent of women belonging to the the poor; huge out-of-pocket expenditure; poorest households are delivered by a skilled significant off-budget support from partners provider, compared to 81 percent belonging focusing on a small number of diseases; and to the richest ones (Figure 4.5). the inability of social safety-nets to provide risk-pooling for indigent populations. In Both the quality and efficiency of public general: health services remain low. While many • Access to affordable and quality guidelines and policies exist, there is no healthcare remains a major challenge systematic approach to assessing, monitoring for most Kenyans, with 40 percent of and improving the performance of health total health expenditure paid through services, and in any case, not according to household out of pocket payments. consistent defined standards. • The poor benefit far less from government subsidies of healthcare. Ill- Health workers are unevenly distributed health is concentrated among the poor, across the country, with greater numbers in but the poorest 20 percent lay claim to hospitals and in urban and non-arid areas.4 just 14 percent of government healthcare Further, there is a general decline in the expenditure, compared to 27 percent number of health workers in all provinces5. of the benefit received by the richest 20 The overall availability of medical staff is 4 In 2006 only 15 percent of the workforce worked in health centers while 70 percent worked in hospitals. 5 Health Situation trends and distribution 1994-2010 and Projects for 2011-2030. Achieving Shared Prosperity in Kenya 26 Human Development and Resilience Figure 4.4: Women in Nairobi and Central regions are three times likely to use skilled care during childbirth compared to those in Western and North Eastern regions Access to skilled care during birth, percent 88.9 90 80 73.8 70 60 50 45.5 45.6 43.1 40 33.7 31.6 30 25.8 20 10 0 Western North Rift Valley Eastern Nyanza Coast Central Nairobi Eastern Source: Kenya DHS, 2008 Figure 4.5: Women belonging to highest wealth quintile are four times more likely to use skilled care during birth compared to those belonging to the lowest 90 81.4 Access to skilled care during birth by 80 70 wealth quintles, percent 60 52.9 50 41.9 40 31.3 30 20.3 20 10 0 Lowest Second Middle Fourth Highest Source: Kenya DHS, 2008 still low, estimated to be just over 5 per source of supply for essential medicines, 10,000 of the population. Polices to attract while traditional herbalists are well health workers to underserved areas mostly integrated in their communities, and serve remain ineffective. It is still not clear how as an important first port-of-call for advice the status of the nearly 3,000 staff recruited and support. Faith-based organizations also under the economic stimulus package will be constitute an important component of the regularized. ‘The ongoing devolution will also healthcare system, and provide essential have implications on human resources with health services to populations in underserved some Counties inheriting a large number of areas, especially the northern arid and semi- staff, due to historical advantages of having arid regions. more facilities. Several key reforms launched by the The for-profit private sector plays a critical government focus on improving access, role, especially for specialized clinical service delivery and quality. The most services and for primary care in urban areas. important among these initiatives include Private pharmacies remain an important exempting fee payments for basic maternal 27 Achieving Shared Prosperity in Kenya Human Development and Resilience and child health care services; the 10/20 What will be the impact of policy for cost sharing, that limits user fees devolution on health? to KES 10 and 20 for accessing care at public The 2010 Constitution devolves the dispensaries and health centers respectively; responsibility of delivering essential health the Health Sector Services Fund and Hospital services to the counties, while the national Services Fund that provide direct cash Ministry of Health will provide policy transfers to facility committees; and the support and technical guidance to priority demand-driven procurement and distribution national programs. The proposed devolution, of essential medicines and medical supplies with changes in roles and responsibilities and through the introduction of the “pull system” use of equitable resource allocation criteria, of supply. has great potential to improve services for the poor and underserved populations, to Despite recent reforms in the Kenya enhance accountability. But it also faces Medical Supplies Agency (KEMSA) and potential implementation challenges that scaling-up of the pull system, stock-outs include: of essential medicines and supplies are • Providing more equitable health services: frequent. The overall government allocation devolution aims for equitably distribution for pharmaceuticals remains low and this, of resources. However, the share of the coupled with poor supply chain management future allocation that the counties will and irrational use, forces facilities to buy need to provide for the health sector out medicines and medical supplies locally, of the allocation received from national paying higher prices and with a lack of revenue—based on the County Revenue effective oversight on quality. Allocation (CRA) formula—will differ significantly, ranging from 4 percent The health sector still faces governance to over 40 percent. Thus, there will be challenges. Accountability needs to improve some “cash-rich” and some “cash-poor” at all levels of the health system, in terms counties, and urgent technical support of both service delivery and financial is required to help them optimize the management. Community ownership and devolved resources for delivering essential involvement in the planning and monitoring health services. of health services have improved, following the establishment of community and health • Building county health systems. There facility management committees, but the will be a 3-year transition period during complaint redress mechanisms that give voice which counties can apply for the transfer to citizens remain weak, lacking efficiency of functions and funding. There is still no and transparency. clear guidance on county health systems and the building of their capacity, to take Despite the increasing mix of health service over their challenging new roles. providers, there is no comprehensive and • Managing the Human Resource transition. systematic engagement of non-state actors. The ratio of health workers to population These non-state actors play a critical role in varies considerably across Counties. There the delivery of healthcare in Kenya, but their is also an uneven distribution of workers engagement, though higher than before, within a county between different levels remains low. This is occasioned by fragmented of care, with understaffing at lower level legal and regulatory frameworks, and a lack (rural) facilities, and relative overstaffing of efficient and transparent institutional at higher level (urban) hospitals at mechanisms. district, provincial and national levels. Achieving Shared Prosperity in Kenya 28 Human Development and Resilience Responsibility for a large number of staff from the recent commitment of Kenya (about 43,500) will be transferred to to the global Scale Up for Nutrition (SUN) counties, which constitutes a major human initiative. resource transition, and will require very (c) Improve life-style changes and early careful management. detection and management of non- communicable diseases, at the primary Making Kenya Healthy care level. Early detection and effective (i) Improve the delivery and quality of management of hypertension and Kenya’s essential package of health and diabetes at the primary health care level, nutrition services. coupled with relevant policies to address (a) A “one size fits all” approach to health risk factors such as tobacco taxation, will service delivery will not work for Kenya, help to reduce the burden. due to huge diversities in health needs, population densities, and cultural (ii) Get better value for money from practices. An effective community strategy expenditure on health. is necessary to improve service delivery (a) Scaling up output-based approaches in northern Kenya, while facility-based would enable disadvantaged groups services could still be an option in central to access healthcare from preferred Kenya, due to its high population density institutions, as recommended by Vision and the historical existence of several 2030. There is need to build on successful health facilities. The Ministry of Health innovations, addressing both demand-side needs to develop appropriate menus and supply-side barriers affecting access for different settings, to help counties to healthcare. Kenya has successfully to effectively plan and implement the piloted, and is currently scaling-up the delivery of the essential package of health Reproductive Health Voucher scheme services, with a strong focus on maternal under the output-based aid. The results and new born health. suggest a significant increase in facility- (b) The scourge of stunting requires well- based deliveries and skilled birth targeted evidence-based interventions, attendance. Similarly, the direct cash and a cross-sectoral approach. The health transfers to health facilities need to be sector needs to urgently take action to sustained and further strengthened by improve the abysmally low coverage for including non-state actors, and linking iron folic acid supplementation during financing to results. Both vouchers and pregnancy, and scale-up the recently results-based financing help to strengthen introduced policies such as for the use of the accountability of providers to their therapeutic Zinc supplements for diarrhea management and multiple micro-nutrient clients and enhance quality of care, supplements for children. Cross-sectoral thus helping in shifting the role of the action is equally important to reduce government from provider of health stunting, especially in partnership with services to purchaser of health results. the Ministry of Agriculture to ensure (b) Competent and well-motivated personnel household food security, increasing access are critical in reducing inequities and to safe drinking water, and promoting improving the quality of care. A strong household hygienic behaviors. The national commitment is required to Ministry of Health needs to spearhead support counties in addressing the such cross-sectoral action, benefiting unequal distribution of human resources. 29 Achieving Shared Prosperity in Kenya Human Development and Resilience Carrot-and-stick approaches such as approach to complaint redress, and to compulsory public service for all newly facilitate information sharing with citizens. trained medical staff before licensing, This will build on initiatives already being and hardship allowances or performance implemented by the health ministries to bonuses, need to be introduced to improve use mobile technology, such as weekly the availability of skilled health staff in disease surveillance reporting, and underserved areas. It is also important to tracking of essential medical supplies. ensure that an enabling work and social environment is created for health staff (iii) Develop and implement a time-bound posted in undeserved areas. action plan for county healthcare systems (c) Health services cannot be delivered strengthening. without commodities. There is need for (a) Clear and transparent criteria for sustained focus on commodity supply, by assessing the capacity of county health scaling up the “pull system”. This involves systems need to be established through building on the economic and efficiency a consultative process involving county benefits of centralized procurement, governments. A traffic-light approach while improving efficient facility-level could be considered for objectively commodity management and rational ranking counties, based on their capacity use, led by county health management (for example, green for good; amber for teams. To achieve this, the voice of adequate; and red for unsatisfactory) counties should be strengthened in the to perform critical service delivery and KEMSA Board, and which should be management functions. Comparing made accountable to counties through county’s performance using simple score- performance contracts. Partnerships with cards will help in learning and sharing non-state actors are also important for lessons from good performers, and target ensuring commodity security, especially capacity building efforts. with the Mission for Essential Drugs and (b) Using conditional grants to counties Supplies (MEDS) the procurement and to ensure focus on national and global distribution agency for the faith based priorities. By using conditional grants, sector, and private distribution networks the Ministry of Health could ensure focus with whom KEMSA is already partnering on systems, services and results to meet with. national and global priorities including (d) Further deepen ongoing reforms to MDGs. The criteria for such conditional enhance citizens’ role in health service cash transfers could be: (i) providing delivery, through active participation adequate county funds for health services; in planning, facility management, (ii) adopting national health policies; and (c) complaint redress and validation meeting basic minimum service delivery of reported results. Transparency in standards. sharing information on services offered through the payment of user fees for (iv) Improve universal health coverage different services and inputs provided by with targeted subsidies to indigent government (both in cash and kind) need populations. to improve. Kenya’s strategic leadership in (a) Introduce effective risk-pooling to ensure ICT in the region needs to be effectively financial protection for the indigent harnessed to apply a technology-driven populations. The proposed initiative to Achieving Shared Prosperity in Kenya 30 Human Development and Resilience provide an insurance scheme targeting the (a) Ensure a level playing field and indigent populations in a phased manner, harmonized regulatory frameworks, will be critical for more informed decisions building on the existing roadmap for Public to be made on universal coverage. While Private Partnerships. Performance-based additional funding is required for such an contracting with faith-based organizations initiative, it is important to improve the can enhance access to basic healthcare efficiency of the health system. Currently, services in the northern arid and semi- over 50 percent of government subsidies arid areas, while the services of for-profit are spent on outpatient care at public private providers can be purchased for hospitals. Instead of paying for inputs, the primary healthcare delivery, for the urban government can engage in a more strategic poor and for specialized services. purchasing of hospital services, especially (b) The role of the private sector is no longer from the national referral hospitals and limited to the delivery of healthcare the private sector. Similarly, counties services. There are several new areas facing challenges in delivering basic health where effective collaboration is possible services first need to explore opportunities and desirable. These include organizing for contracting existing facilities operated mobile money transfers to remote health by faith-based organizations. facilities, decentralized warehousing (b) The role of the National Hospital Insurance for KEMSA, and the use of private fund (NHIF) requires redefining. NHIF is pharmacies in disease control programs. the largest social health insurance provider The Affordable Medicine Facility for in Kenya, covering about a fifth of the malaria has contributed to more than a country’s population. Its reimbursements tenfold decline in the price of life-saving currently contributes an important share Artemisinin Combination Therapy in of public hospital revenues, and with the Kenya. Similarly, the private sector can proposed addition of out-patient services, improve the efficiency of ambulance primary care facilities can also receive services, and partnerships can be used reimbursements. The potential for NHIF for operating common effluent treatment linking reimbursements to improve equity facilities to effectively manage bio-medical and quality of care needs to be explored, waste. among other measures to improve (c) Kenya also has a thriving pharmaceutical efficiency. industry which is beginning to achieve global quality standards, and there is (v) Engage non-state actors to improve great potential for making the country a health outcomes through strategic major pharmaceutical hub in the region. purchase of services. Such a move will benefit Kenyans by improving access to affordable medicines. 31 Achieving Shared Prosperity in Kenya Human Development and Resilience 5. Protecting the vulnerable Fund (NSSF) Act is being reviewed to provide for conversion from a provident fund to a By Sarah Coll-Black, Michael Munavu and pension scheme. This will facilitate expanded William Wiseman coverage and provide for the requirements of the people in the informal and other sectors. Introduction T The fund is in the process of exploring various he policy context for social protection ways of enhancing contributions base by in Kenya is changing in response to encouraging voluntary contributions and the Kenyan Constitution and the recently setting a minimum contributory level. The approved National Social Protection Policy. fund will also continue to play a significant The 2010 Kenyan Constitution, specifically role in national development, by providing Chapter 4 on the 2010 Bill of Rights, commits affordable housing projects for workers. the state to progressively realize the right to social security, including social assistance Kenya has a long history of investing in for people unable to support themselves social protection. Kenya has established and their dependents.1 The National Social social security, social health insurance and Protection Policy (NSPP) of 2012 aims to social assistance (safety net) programs, but progressively expand coverage of social their coverage has tended to be low and their security in line with the government’s effectiveness limited. The main form of safety constitutional commitment. To this end, the net support offered to poor and vulnerable policy proposes to extend social assistance populations has been humanitarian relief to various specified target populations, with (often in form of food aid), which had been the ultimate goals of providing universal mobilized by the government and the access to social assistance to the vulnerable international community in response to throughout their lifecycle, establishing crises, such as drought and floods. In many comprehensive social security arrangements parts of the country, most notably Arid and that will extend legal coverage to all workers Semi-Arid Lands (ASALs), this type of response and their dependents, whether in the formal has become common, with emergency or informal sectors and implementing a food relief being provided year-on-year to comprehensive national health insurance chronically poor food insecure populations. scheme, which covers all Kenyans, and to Concurrently, the long-established NSSF and which those who can afford contribute. National Hospital Insurance Fund (NHIF) have been providing social security and health Under Vision 2030, a comprehensive social insurance support, albeit to formal sector protection program is regarded as one of workers only—roughly 8 percent of the labor the sufficient requirements for improved force. productivity and industrial competitiveness. Social protection is crucial for workers, as it This has occurred against a backdrop covers family benefits and health care and of rapidly rising investments in social provides income security in the event of such protection since 2005. Between 2005 and contingencies as sickness, unemployment, 2010, social protection expenditure in Kenya old age, disability, accidents, maternity rose from KES 33.4 billion to 57.1 billion, and loss of the breadwinner. To address which was equivalent to 2.28 percent of Gross the challenge of low coverage of the social Domestic Product (GDP) in 2010.2 This overall security systems, the National Social Security growth in social protection spending was due 1 Article 43(3) of the Constitution states that: “The State shall provide appropriate social security to persons who are unable to support themselves and their dependents.” 2 This analysis is from the Kenya Social Protection Review, 2012. Achieving Shared Prosperity in Kenya 32 Human Development and Resilience to increases in spending on the contributory aid and supplementary feeding). Considering programs, the civil service pension, and safety the funding sources to safety nets only, nets. Spending on contributory programs these programs are largely financed by rose by roughly 53 percent between 2005 development partners (71 percent).3 The and 2010, while spending on the civil notable exception to this broad trend is service pension increased by 70 percent and social cash transfers; in 2011, 42 percent of spending on safety nets doubled. On average, financing to social cash transfers was from between 2005 and 2010, the civil service the government.4 pension accounted for 48.4 percent of total social protection spending, as compared to Despite the investments noted above, and 30 percent on safety nets and 22 percent on a broad range of initiatives to promote contributory schemes. poverty reduction and economic growth, poverty and vulnerability remain high in The government is the largest source of Kenya. In 2005/06 the overall rate of poverty financing to social protection in Kenya (55 in Kenya was 47 percent, with the rates percent), followed by development partners being markedly higher in rural areas (50 (22 percent) and members of contributory percent) than in urban ones (34 percent). schemes (22 percent). However, these Rates of poverty also tended to be higher sources of financing, shown in Figure 5.1 are for households with Orphans and Vulnerable each concentrated on different parts of the Children (OVC, 54 percent), older people sector. Firstly, 88 percent of total government (53 percent), and people with disabilities spending on social protection is channeled to (63 percent for children with disabilities and the civil service pension, with the remaining 53 percent for adults) than for the general government financing being allocated to population. safety nets, mostly and increasingly to social cash transfers. Secondly, funding from At the same time, there is growing evidence development partners (both bilateral and that social protection does directly multilateral) was allocated entirely to safety reduce poverty and promotes inclusive nets, the majority of which went to relief and economic growth. An evaluation of Kenya’s recovery programs (that is, emergency food Cash Transfer Program for Orphans and Vulnerable Children (CT-OVC) found that Figure 5.1: Sources of financing for the social protection sector (KES billions) it had a significant positive impact on the 80 consumption, school enrolment levels 70 and health outcomes of beneficiaries. The 60 program has also resulted in an increase in 50 the productive assets owned by recipient households. Similar results were reported Billions 40 for Kenya’s Urban Food Subsidy Program 30 (UFSP) and its Food for Assets Program (FAP), 20 while there is some indication that school 10 feeding programs appear to be improving 0 2005 2006 2007 2008 2009 2010 educational outcomes. The CT-OVC also Other financing Members of contributory Multilateral partners Bilateral partners Government appears to be stimulating demand for locally produced goods and services, a finding schemes Source: Kenya Social Protection Review (2012) observed in the Hunger Safety Net Program 3 Contributory programs are financed completely by members and the civil service pension by government. 4 This increases to 65 percent if multilateral loans are included under government financing. 33 Achieving Shared Prosperity in Kenya Human Development and Resilience (HSNP) as well. These effects are leading Social assistance in Kenya is currently to lower poverty rates among beneficiary delivered through a large number of safety households. The national-level gains of net programs, although there is limited such impacts are potentially significant, as information on their relative effectiveness. evidenced internationally (see Box 5.1). Figure 5.2 shows the range and coverage of the main social assistance programs in Key Facts and Trends Kenya. In 2010, relief and recovery programs • Social protection spending has increased were the most common form of safety net, steadily from 2005 to 2010, amounting providing support to 55 percent of all safety to KES 57.1 billion in 2010. This was net beneficiaries, followed by safety nets in equivalent to 2.28 percent of GDP. the education sector (26 percent) and then • The government is the main financer social cash transfers (14 percent). While of social protection in Kenya, although evidence of the relative impact of these 88 percent of government financing is programs in Kenya is limited, international directed to the civil service pension. experience suggests that the use of such Development partner financing amounts to 71 percent of all resources to social Figure 5.2: Number of recipients in the largest social protection programs, 2010 assistance. • However, contributory and social assistance 2,500 2,180 programs covered 13 percent of the 2,000 Thousands population, on average, from 2005 to 1,500 2010. 804 • Currently, less than 7 percent of any 1,000 538 455 vulnerable group is covered by social 500 412 368 289 209 140 121 72 256 assistance, with the exception of OVC 0 among which coverage is 28 percent. GFD NAAIAP Regular school feding Home grown school meals Supplementary feeding CT-OVC NHIF HSNP Civil service FFA/CFA pension HIV/AIDS nutrition feeding Other programs • Progressively increasing financing to safety nets could achieve comprehensive coverage of poor, vulnerable groups in nine years. Source: Kenya Social Protection Review (2012) • Increasing coverage to all poor people in Notes: Social cash transfers refer to the five main cash transfer programs, that is CT-OVC, HSNP, Disability Grant, Older Persons selected vulnerable groups would cost Cash Transfer (OPCT) and UFSP. Relief and recovery refers to between 0.35 and 3.83 percent of GDP. programs such as emergency food aid and supplemental feeding. Education refers to regular school feeding programs. Health refers • Reforms are underway to improve the to feeding programs and vouchers for primary health services. Agriculture refers programs that provide inputs and small grants financial sustainability of the NHIF and to farmers groups. GFD is the General Food Distribution program NSSF and the civil service pension. Box 5.1: International examples of the national-level impacts of safety nets International evidence shows that targeted social protection interventions directly reduce poverty and inequality. Old age pensions in South Africa have reduced the poverty gap ratio between the richest and the poorest citizens by 13 percent. At the same time, the country’s comprehensive system of cash transfers has doubled the share of national income that the poorest 20 percent of the population receives. In one of the most notable examples globally, Brazil has experienced a remarkable reduction in inequality-driven largely by a reduction in extreme poverty. Studies have found that Bolsa Familia, the largest conditional cash transfer program in the world, was responsible for 21 percent of this decline in national inequality, while having no negative impact on economic growth. Most recently, the Rwanda government has attributed the fall in poverty from 57 percent in 2006 to 45 percent in 2011 to the Vision 2020 Umurenge Program of public works and cash transfers, along with two other key development programs. Achieving Shared Prosperity in Kenya 34 Human Development and Resilience emergency food aid to respond to chronic Figure 5.3: Recipients of relief and recovery poverty tends to be inefficient. This is because, and other social protection programs compared to poverty rates, 2005-2010 while it can save lives in the short run, it 45 tends to be unable to halt the population’s 40 downward spiral into destitution, as 35 livelihoods are continually eroded.5 Similarly, Individuals (Million) 30 school feeding programs do not tend to be 25 an effective means of providing basic income 20 support to poor households6, although these 15 programs can increase school enrolment. 10 5 In contrast, there is a robust and growing 0 body of evidence on the impact of social 2005 2006 2007 2008 2009 2010 cash transfers on consumption, health and Total Population Absolute Poor Hard Core Poor Relief Beneficiaries Other SP Beneficiaries education outcomes in Kenya (as discussed in the previous paragraphs and in Box 5.1). Source: Kenya Social Protection Review (2012) Notes: Poverty rates are assumed to be constant over this period Increasing investments in social protection the poverty rates in that location.7 Safety have expanded the coverage of these nets currently use a range of methods to programs, but overall coverage remains low identify those households that are eligible in comparison with the population in need. for the program, such as categorical By the end of 2010, safety nets covered targeting, community-based targeting, and almost 14 percent of the population, and in proxy means tests. To date, the relative spite of rapid growth, contributory schemes effectiveness of these different methods covered only an estimated 1 percent. Safety has not been evaluated. But there is some nets cover a fraction of the poor population suggestion that categorical targeting can be (a maximum of 27 percent—see Figure 5.3) easier for communities to understand and and of vulnerable groups (ranging from an less costly in terms of data requirements. estimated 28 percent of poor households with OVCs to 0.38 percent of poor households Social protection programs, particularly with a member who is disabled). At the same safety nets, have established fairly robust time, members of contributory schemes are accountability mechanisms to ensure still largely drawn from formal sector workers fiduciary control and upwards accountability and, as the formal sector constitutes only 8 of program staff to program managers and percent of the labor force, only a fraction of parliamentarians. These include the use of the population is currently benefiting from monitoring and evaluation systems, financial these schemes. management reviews and audits, among other mechanisms. Many safety nets have Operationally, there have been a number also established strong systems to create of important advancements in the sector. downwards accountability to beneficiaries Safety net programs tend to be well targeted and communities, most commonly by using to poor counties and locations, although community-level organizations to monitor the relative share of safety net beneficiaries implementation progress and advocate for in each location does not appear to reflect beneficiaries’ rights. 5 There are currently no rigorous impact evaluations of emergency food aid in Kenya. 6 School feeding programs do not provide direct income support to households and are often not as well targeted as cash transfer programs (see the World Bank’s Africa Social Protection Strategy: 2012/22). 7 This finding is based on an assessment of school feeding programs, the relief and recovery programs and social cash transfers. Source: Kenya Social Protection Review 2012. 35 Achieving Shared Prosperity in Kenya Human Development and Resilience Some notable advances in this area include: being upgraded and contributory schemes (i) providing information to communities and are looking to make greater use of M-Pesa beneficiaries through barazas and service to streamline the payment process. More charters; (ii) making public audit reports, generally, registration systems tend to be evaluations, and other program reviews; manual and slow. (iii) establishing committees to represent beneficiaries; (iv) involving local people in There continues to be delays in some program processes and decision-making, cash payments, largely arising from the for example, in program targeting; and, (v) lengthy process of moving funds through creating complaints and appeals procedures government systems for safety nets, and for beneficiary feedback. While this strategy settling claims for contributory schemes. appears to be effective in many ways, it has In addition, monitoring and evaluation of raised questions about the sustainability of social protection programs in Kenya is weak; programs that depend heavily on voluntary even basic data on program implementation labor at the local level. are often scarce, making it challenging to undertake a comprehensive assessment of Social protection programs are the sector’s performance. As a result, it is leveraging advances in Information and almost impossible for policymakers to get an Communications Technology (ICT) to accurate picture of the beneficiaries of these enhance their efficiency and effectiveness. programs. A number of programs have well established Management Information Systems (MIS). The Key Challenges MIS for the five cash transfer programs are Despite a slow move towards the provision currently being upgraded based on the open- of predictable safety nets to chronically poor source model employed by the HSNP. At and vulnerable populations, emergency food aid remains the most common type present, 29 percent of safety net benefits are channeled through banks, 6 percent through of support. The five main cash transfer banking agents, and 4 percent through programs9 have collectively increased their ewallet.8 Contributory schemes are similarly coverage over ten-fold since 2005, and looking to use ICT to streamline aspects of currently provide regular support to 1.5 their payment systems, with greater use of million people or 8 percent of the poor online submission of claims and payment population. But cash transfer programs are through M-Pesa. The increasing use of these still only about half the size of the emergency systems will make it significantly easier to response, particularly ad hoc emergency food exercise fiduciary oversight over the paymentaid. As a result, safety net support in Kenya process even in hard-to-reach areas, as remains dominated by relief and recovery demonstrated in the case of the HSNP. programs, with the second most common form of safety net support being provided Yet these advances are uneven among types through school feeding programs. As of programs and operational areas. The previously discussed, international evidence innovative use of technology to strengthen suggests that these types of programs are program governance is currently limited not an effective means of providing regular to a few programs, although there are income-support to poor households, but can indications that these systems are being be an important means of achieving other replicated across the sector. For example, policy objectives. In contrast, there is a well- the MIS of social cash transfer programs are established body of evidence on the positive 8 E-wallet refers to the ‘agency banking model’ in which a biometric smart-card is used, and mobile networkplatforms, such as M-Pesa. 9 OPCT, CT-OVC, HSNP, UFSP and the Disability Grant. Achieving Shared Prosperity in Kenya 36 Human Development and Resilience impact that social cash transfers can have on weaknesses, by providing sector-wide the welfare of poor households. oversight and coordination. Cash transfer programs tend to be small The Kenyan population does not yet enjoy and do not yet provide reliable support effective protection against poverty in to all beneficiary households. There are a old age, and access to health insurance number of cash transfer programs in Kenya remains limited and inequitable, despite the but, given their small size, they cover only presence of NSSF and the NHIF. Historically, a fraction of the population in need, as NSSF has had low rates of coverage as well previously discussed. Yet there is emerging as of contributions. This, together with poor geographic overlap that is set to increase as investment returns, has resulted in low programs continue to grow (see Figure 5.4). benefit levels for members. NSSF is currently At the same time, no cash transfer program structured as a provident fund, meaning is able to expand coverage in response that beneficiaries are paid only once (in a to shocks, although some programs have lump sum) upon retirement. Overheads are increased the value of the cash transfer to high, and the fund has not, until recently, existing beneficiaries during emergencies. been compliant with Retirement Benefit This limitation undermines the effectiveness Authority (RBA) regulations concerning of such support to chronically poor and fund governance and asset management. In vulnerable populations. Finally, the adequacy addition, the public’s confidence in the fund’s of the support provided to households is ability to deliver on its mandate is generally variable, as the value of cash transfers is low. irregularly adjusted for inflation and rarely reflects household size or other factors. In However, NSSF has started to implement spite of these shortcomings, cash transfer some reforms in order to address some programs are widely assessed to be a more of these issues. For example, it is trying to effective form of safety net support than increase the returns on its investments, emergency food aid. to ensure its compliance with the RBA by employing asset managers and custodians to Safety net programs—including oversee its assets, and to reduce overheads, cash transfers—are fragmented and while also changing from a provident fund uncoordinated. There are currently over 19 into a pension fund. Like NSSF, coverage of of these programs in Kenya, implemented NHIF has been low, although it has increased by over a dozen different agencies. These rapidly since 2004, and now stands at almost different implementation arrangements 17 percent of the population. lead to a high degree of fragmentation, with missed opportunities for efficiency NHIF contributions have not been changed gains. Such duplication of effort and parallel since 1990, as the current initiative to implementation structures do not optimize adjust contributions is on hold pending limited implementation capacity or support consultation with the wider stakeholder a coherent approach to capacity building group. Contributions are based on a worker’s across the sector. The planned expansion of income up to a predefined ceiling, with the programs into the same geographic areas has contributions from informal sector members the potential to exacerbate this situation. The being set at 50 percent of the rate for formal Social Protection Secretariat, as mandated sector workers. However, many informal by the NSPP, aims to address some of these sector members are inactive and thus are 37 Achieving Shared Prosperity in Kenya Human Development and Resilience Figure 5.4: Geographic coverage of social cash transfer programs in Kenya (2010) South Sudan Ethiopia Uganda Somalia Tanzania Legend Lakes Forest/Parks International Boundary County Boundary OPCT Beneficiaries Indian Ocean < 200 200 - 1000 CTOVC Beneficiaries HSNP Beneficiaries < 200 < 200 200 - 1000 200 - 1000 > 1000 > 1000 Source: Programme administrative data Achieving Shared Prosperity in Kenya 38 Human Development and Resilience not making regular contributions to the fund. should take to significantly advance this This, together with the fact that informal agenda. sector workers join on a voluntary basis, suggests that there is some adverse selection Improve the effectiveness of social into the fund, with only those informal sector assistance programs workers who are in need of health care Article 43(3) of the 2010 Constitution states participating. Indeed, in 2010, 33 percent that “The state shall provide appropriate of all benefits were paid to informal sector social security to persons who are unable to members, who paid only 5 percent of all support themselves and their dependents.” contributions. To progressively realize this right to social assistance for those in need, the government Against this backdrop, the government is must define an appropriate mix of programs considering a range of reforms. One key based on the country’s medium-term proposal is to increase contribution rates, objectives and fiscal considerations. Yet, which would make the fund more financially because social assistance programs currently sustainable and create an opportunity to have a range of different objectives, and increase benefits. However, this would need there is generally limited information on their to happen against a backdrop of improved effectiveness in delivering on the country’s governance. stated policy goals, it is difficult to determine the exact form that social assistance should The civil service pension dominates take. In recognition of these limitations, government financing to the social protection there are a number of steps the government sector (and indeed all financing to the can take to improve the effectiveness of the sector). The civil service pension is currently support. a pay-as-you-go benefit scheme, financed (i) Provide predictable income support from the government’s general revenue. for chronically poor and vulnerable However, a bill is currently before parliament populations through cash transfers that would turn it into a fully funded defined instead of food aid. Emergency food contribution scheme with the government aid continues to dominate safety net (as the employer) financing the equivalent spending, accounting for 53.2 percent of of 15.5 percent of the workers’ salaries all safety net spending. While this kind of and employees contributing 7.5 percent of support is an important way of responding their salaries to the scheme. If passed, this to emergency situations such as floods or bill would significantly increase the fiscal droughts, it is often used to provide food sustainability of the pension scheme, and aid to populations that are chronically would reduce future fiscal liabilities. poor, such as those in the ASALs, but not in any systematic way. Therefore, the Policy Recommendations government could consider reallocating The government’s overriding objective in resources from emergency food aid to a this sector is to progressively realize the transfer program that will provide these right to social security. The NSPP provides groups with more predictable support. a vision for extending the coverage of social This could be done by expanding the protection programs, while addressing the coverage of the HSNP, which targets current operational weaknesses in the sector. poor and vulnerable populations in The section which follows identifies a set ASALs. This would capitalize on existing of short term actions that the government implementation capacity and experience, 39 Achieving Shared Prosperity in Kenya Human Development and Resilience while avoiding further fragmentation and limitation undermines the effectiveness duplication among programs. of cash transfer programs to respond to (ii) Expand the coverage of cash transfer chronic and transitory poverty, and misses programs. Cash transfer programs out on important efficiency gains in the currently provide regular support to 1.5 sector. As a result, there is need to build million beneficiaries, or an estimated 8 the capacity of cash transfer programs percent of the poor population. There is to scale-up in responding to shocks in a need to scale-up coverage significantly, a coordinated manner. The National to respond to the needs of the poor and Drought Management Authority (NDMA) vulnerable population. While there are and the National Contingency Fund (NCF) competing priorities for government provide a foundation for this approach, revenue, public financing to safety nets including the established early warning accounts for only 0.6 percent of total system and local contingency plans. To government expenditure (with social cash this end, the government could establish transfers a fraction of this) compared with a window in the NCF that can be accessed the 19.8 percent spent on education and when an agreed set of early warning 5.5 percent spent on health. Economic indicators are met, so as to scale-up cash growth of 6 percent per year would transfer support to populations affected generate an estimated additional KES 100 by a shock. billion in annual government revenue. (iv) Harmonize safety net programs to If a small proportion of this increasing reduce fragmentation and duplication. fiscal space were gradually allocated to Safety net programs in Kenya tend to social cash transfers, substantial increases be small, with emerging geographic in coverage could be achieved in a short overlaps, despite some similarities in their time. More specifically, comprehensive objectives and implementation modalities. coverage of poor households with Stronger coordination in the sector could members who are vulnerable, for significantly improve the effectiveness of example OVCs, the elderly, the disabled safety net support. To initiate this reform or chronically ill, and People Living with agenda, the government should have a HIV and AIDS (PLWHA)—in nine years. An roadmap, as well as harmonize the five annual increase of this magnitude would main cash transfer programs. This would lead to comprehensive coverage of poor consist of: households with OVCs in two years, or (a) Formulating a nation-wide scale up provide support to all poor households strategy to ensure equity in coverage, and to reconcile the fact that some with elderly members in five years.10 programs currently cover specific (iii) Build the capacity for cash transfers geographic areas (such as ASALs or to respond to shocks. International urban slums), while others aim for experience shows that scaling up national coverage of specific vulnerable established safety net programs is the most groups (such as OVCs or the elderly); (b) Create a harmonizing framework through effective way of protecting households the adoption of: (i) a single monitoring from the negative effects of shocks, and evaluation framework for cash because it is faster, more effective, and transfer programs; (ii) a common cheaper than emergency assistance. At mechanism to adjust the value of the present, only those emergency response cash transfer; and, (iii) sharing of best programs have such capacity. This practices across programs (Box 5.2). 10 Source: Kenya Social Protection Review, 2012. Achieving Shared Prosperity in Kenya 40 Human Development and Resilience Box 5.2: The potential benefits of a single beneficiary registry The NSPP advocates the establishment of a universal registry of all beneficiaries enrolled in existing social assistance programs. The single registry would enable the various programs to use the same information system, which would eliminate the need for and the costs of designing such systems for individual programs. The registry would be a source of timely and consolidated information from various programs that policymakers could use to inform their decision-making. Importantly, the registry could be the foundation for the creation of other common systems (for example, a common payment system), which would further reduce the costs associated with delivering benefits. Operationally, the registry would reduce “double dipping”, where individuals benefit from more than one program, and would make it easier for beneficiaries to move between programs. Having a single registry of beneficiaries would also facilitate more effective responses to emergencies as many of the poor and vulnerable would already be registered, making it easier to rapidly scale up existing programs in response to short-term and unforeseen shocks. Finally, linking the registry to the broader national registration system would enable program staff to verify beneficiary identities, thereby ensuring that the safety net is accurately targeting the poor and vulnerable. Address the adequacy of benefit levels and affordability and sustainability, and the the financial sustainability of contributory proposal should see consultation with a programs broad range of stakeholders; Going forward, the priority actions for NSSF (b) NSSF should realize administrative include increasing contribution levels and efficiencies by, for example, adopting extending coverage, while continuing to more modern and streamlined collection bring down overheads. The priority actions and payment systems; should include: (c) Concerted outreach to the informal sector (a) The draft NSSF Conversion Bill, which will is also needed to increase coverage of reform NSSF into a pension fund, needs workers there. NSSF will need to adopt to be passed by parliament, as it will flexible voluntary savings schemes strengthen its ability to protect members similar to the Mbao Pension Plan (Box against poverty in old age. However, 5.3), which is already gaining attraction careful consideration of the parameters in Kenya, in order to effectively respond of the new fund is needed to ensure to the needs of informal sector workers. Box 5.3: The Mbao Pension plan: extending pensions to the informal sector The Mbao Pension Plan is a voluntary savings program to help its members save for retirement. It was started by the medium and small micro-enterprises sector to help members of different Jua Kali Associations (associations of informal sector enterprises) to save regularly towards a long-term and reliable income when they retire. The scheme has since been opened to the public. As of November 2011, there were 9,408 active contributors to Mbao. Members pay a KES 100 registration fee and commit to saving at least KES 100 per week. They make their contributions electronically using M-Pesa or Airtel Money. The contributions are managed and invested by service providers appointed by the Mbao Trustees and approved by RBA. Upon retirement, members receive the value of their accumulated contributions plus interest. When they die, a refund of accumulated contributions plus interest is paid to their nominated beneficiaries. Both of these payments are made in a lump sum. 41 Achieving Shared Prosperity in Kenya Human Development and Resilience Significant reforms to NHIF are needed to of a social protection system, a vision that better protect the population from health is articulated in the NSPP. However, for this shocks. These changes should include longer term vision to materialize, a system- measures to: wide approach to social protection needs (i) Increase the long-term financial to be adopted to reinforce the fact that sustainability of the fund by increasing social assistance, social security and social contributions and returns on investments, health insurance, work together to protect and continuing to reduce operating the population from a wide range of risks expenditures. throughout their lifecycle. (ii) Continue to increase membership, both in terms of overall coverage and Because of this, to advance any part of encouraging members to remain active, the social protection sector (whether particularly among those from the social assistance, social security, or health informal sector. insurance), there is need to ensure that (iii) Enhance the benefits available to progress in reforms is being made in each members by changing the way in which it of the other sectors/areas. In the long term, contracts with health providers to deliver this will improve the effectiveness of the services11. overall social protection, thereby reducing (iv) Focus on recruiting new members from the need for social assistance (graduating the informal sector as the formal sector’s from poverty) and at the same time, ensuring compliance rate is estimated to be close a well-functioning social security and social to 100 percent. health insurance schemes, that protect households from falling into poverty. However, there are a number of challenges associated with reaching out to informal sector workers which include, designing 6. Promoting a sustainable Kenya appropriate policies, effectively marketing and distributing the products, efficiently By Christian Peter, Halla Maher Qaddumi and collecting contributions, and addressing Gutavo Saltiel gaps in health services in rural areas. Even if these challenges were addressed, additional Introduction measures would be needed to reach the poorest people. This is recognized in ongoing K enya aims to be a nation that has a clean, secure and sustainable environment by 2030. Under the social pillar of Kenya discussions in the health sector, as a result of which there is a proposal to create an equityVision 2030, Kenya’s journey towards and access fund that would subsidize the costprosperity involves the building of a just of health insurance to the poorest citizens. and cohesive society that enjoys equitable social development in a clean and secure Moving forward with these proposed environment. This is the case because about reforms would significantly improve the 42 percent of Gross Domestic Product (GDP) efficiency and effectiveness of social is derived from the natural resource-based security, social health insurance and social sectors of agriculture, forestry, tourism, assistance programs. These reforms will mining, water and energy, that are closely also contribute towards the establishment related to the state of the environment. At 11 NHIF is mandated to provide both in and outpatient medical healthcare but largely provides in-patient care. The NHIF should “continue to pursue roll out o of the outpatient care” (Strategic Review of the National Hospital Insurance Fund-Kenya” October 2011: 156). Achieving Shared Prosperity in Kenya 42 Human Development and Resilience the same time, droughts and floods cost sanitation facilities. Pollution and waste Kenya 2.4 percent of GDP per year, since management are exacerbated by the dumping the key drivers of the economy are climate of waste into rivers, streams and other water sensitive. bodies, and inadequate strategies to deal with these issues, have resulted in serious Future projections of temperature and health implications. rainfall variability and change suggest that major challenges will be presented to the Conservation, sustainable exploitation and economy, human life and the environment. management of the environment and natural Thus, sound environmental conservation resources, continue to pose major challenges measures that result in the preservation to the government. Goals to address these of natural resources, as well as proactive challenges include, increasing the forest management of the environment, are cover from less than 3 percent in 2008 to important as they pre-empt serious calamities 4 percent in 2012 and 10 percent by 2030, and occurrences, such as drought, floods and and lessening by half all environment-related global warming that would otherwise take up diseases. The specific strategies involve extensive resources to deal with. promoting environmental conservation, in order to provide better support to the various The development activities planned under flagship projects and also for achieving the Vision 2030 will have different impacts Millennium Development Goals. on the environment, some of which could lead to increased pollution levels and more Improvement of pollution and waste waste. Activities in the manufacturing sector management is to be effected through are expected to give rise to an increase in the design and application of economic effluents discharged, which will also require incentives and the commissioning of Public- effective management. In line with the Private Partnerships, for improved efficiency country’s commitment to the sustainable in water and sanitation delivery. Kenya development objective, targeted Vision 2030 should also enhance disaster preparedness socio-economic development initiatives in all disaster-prone areas, and improve the must take into account environmental capacity of adapting to global climatic change. considerations. In addition, the country should harmonize environment-related laws, for better Water is an environmental resource environmental planning and governance. This necessary not only to support life but also will be in line with protecting the environment to sustain economic activities—and across as a national asset, and conserving it for the different sectors. The country’s water benefit of future generations and the wider endowment is low, and Kenya is classified as international community. a water-scarce country. Sanitation and waste management are closely related to human In order to address the current and future health, and the challenges of addressing environmental challenges, the Ministry of sanitation and waste management have Environment and Mineral Resources has been compounded by rising population, developed the climate change action plan, improvements in the standard of living, and supported by a multi-sectoral taskforce. the high rural-urban migration, which is It has also been shaped by a countrywide responsible for the development of densely series of county consultations, given that populated informal settlements in urban the impacts of climate change affects and peri-urban areas, that suffer from poor planning at community, county and national 43 Achieving Shared Prosperity in Kenya Human Development and Resilience levels. Besides, the Bill of Rights in the 2010 Both spatially and temporally, Kenya Constitution states that “every person has the experiences wide climate and rainfall right to a clean and healthy environment”, fluctuations, primarily due to El Niño-La and so it is the responsibility of every Kenyan Niña events, that usually manifest as severe to protect and care for the environment. flooding followed by drought. Rainfall is highly variable, and varies year-to-year by up This holistic plan will guide policy makers, as to 30 percent above or below the long-term well as civil society and the private sector, average. In ASALs, the variation is even more in implementing the 2010 Constitution and significant, with variations from the mean the 2010 National Climate Change Response of between +35 percent and –70 percent. Strategy. It has been designed to address The country experiences either a drought sustainable development and climate change, or a flood (with a greater than 20 percent with the objective of achieving Vision 2030, deviation from the mean) on average, every through people-centered development. third year. Major floods affecting much of the country are becoming increasingly frequent Key Facts and Trends (for example in 1961, 1997, 1998 and 2003). Kenya covers an area of about 587,000 The spatial variability of rainfall is also square kilometers, of which 11,000 are considerable, varying from 250 mm in ASALs water. Extreme poverty affects about half of to 2,000 mm in high mountain ecosystems. Kenya’s population, with around 80 percent The Lake Basin receives the greatest rainfall of the poor living in rural areas that depend over a small area, while the much larger on agriculture. Approximately 80 percent of Ewaso N’giro North basin receives the least, the overall population is directly involved and 66 percent of the country receives less in, and is dependent on agriculture (crops, than 500 mm of rainfall annually. livestock and fisheries) for their livelihoods. Warming over continental Africa is Agriculture is a key sector, directly projected to be greater than the global contributing to 24 percent to GDP, as well mean over the 21st century, and there is as contributing indirectly through its links likely to be an increase in rainfall over East to other sectors. In addition to its multiplier Africa, and most of Kenya by the end of the effects, the sector provides 62 percent of 21st century. While mean annual rainfall is formal employment, 60 percent of exports, projected to increase, climate conditions in and 45 percent of government revenue. Land general and rainfall in particular are expected is the main asset in agricultural production, to become more variable, which means that but its productivity is reliant on a number the frequency of extreme events, including of factors, including rainfall and/or access floods and droughts, will be likely to increase. to supplemental water supplies. Over 80 percent of the country is Arid and Semi-Arid Kenya is already classified as a chronically Lands (ASALs) and so unsuitable for rain-fed water-scarce country, in both absolute farming, due to low and erratic rainfall. At the and relative terms, and water availability same time, rising population pressure has led can be highly sensitive to relatively small not only to the progressive sub-division of changes in rainfall and temperature. Even if land (and consequently to smaller and less rainfall remains constant or increases, water productive farms), but also to encroachment availability may decline as a result of climate into critical and/or less productive land, such change because of higher temperatures and as water catchments and steep slopes prone if warming is of a significant magnitude. to soil erosion. Achieving Shared Prosperity in Kenya 44 Human Development and Resilience Kenya is also highly exposed to sea level escalation of pests, as well as of crop and rise and related coastal hazards, due to its livestock diseases. Other impacts include extensive low-lying coastal areas. In addition, water scarcity, which may foment natural the increase in forest cover over the years (as resources conflict, food insecurity and shown in Table 1.6a) has been and remains malnutrition. The continued annual burden low, compared to other African countries. of these extreme climatic events could cost the economy as much as US$ 500 million a Key Issues year, which is equivalent to approximately 2 Climate variability and change (and attendant percent of the country’s GDP, and is likely to climate-related risks) pose a number of stunt long-term growth. challenges to the realization of Kenya’s development goals. Close to 80 percent of Reports indicate that the 2009-2011 drought Kenya’s population is rural and dependent on may have led to an economic loss of about agriculture for basic livelihoods. This makes US$ 2.8 billion, resulting from the loss of the country highly vulnerable to climate crops and livestock, forest fires, damage change and variability, since 98 percent of to fisheries and reduced hydropower the country’s agriculture is rain-fed, hence, generation and industrial activity. As for highly sensitive to climatic fluctuations. the 1997/98 floods, they are estimated to Moreover, arable land constitutes only 17 have affected about 1 million people, and percent of the total land mass, with the may have cost the economy between US$ bulk of the land mass considered to be arid 0.8 and US$ 1.2 billion, related to damage or semi-arid. Kenya is also a water-scarce to infrastructure (roads, buildings and country, where the natural endowment of communication systems); public health freshwater is low, and water resources are effects (including fatalities); and loss of unevenly distributed. Population pressures crops. Other losses amounting to US$ 9 and rapid urbanization are also impacting million may have arisen from flooding, the country’s natural resources. In addition, property destruction, soil erosion, mudslides Kenya’s strong tourism industry is sensitive to and landslides, surface and groundwater climate risk, as important habitats, including pollution, and sedimentation of dams and coral reefs and wildlife corridors and reserves, water reservoirs. are directly affected by climate variability and rising temperatures. Climate variability and change, and the inability of Kenya to deal effectively with The combination of these factors increases their impact, jeopardize stable economic Kenya’s vulnerability to climate change. growth, and provide a volatile environment Therefore, mitigating the expected impacts of for the implementation of macroeconomic climate change and related uncertainties will reforms and development programs. require careful planning. Addressing climate Kenya’s economy is highly vulnerable to change requires taking measures aimed at hydro-climatic shocks such as droughts and tackling both the causes of climate change floods that impact the general economy, (greenhouse gas emissions) and adaptating and disproportionally affect the poor. For measures to support the country’s capacity example, it is estimated that about half the to cope with its impacts. population lacks access to adequate food, and even the little it has, is of poor nutritional Similar climate-related challenges include, quality. The incidence and prevalence of food increases in the incidence of waterborne insecurity is more extreme in ASALs, largely and water-related diseases, crop failure, and due to the regular recurrence of hydro- 45 Achieving Shared Prosperity in Kenya Human Development and Resilience climatic hazards—particularly droughts and fisheries and recreational opportunities) and, floods that have repeatedly led to massive increased height of waves. crop/livestock failure, and in the worst cases, to severe famine. Kenya is in the bottom 8 percent of countries classified as a chronically water-scarce Consequently, the poor have been forced globally) and water stress could increase to rely on food relief provided by the with climate change. The natural endowment government, bilateral and multilateral of renewable freshwater is currently 552 agencies, and Non-Governmental cubic meters per capita per year, less Organizations, at high cost to the country. than 10 percent of the regional average— For example, for the 2005/2006 financial which is 5,720 cubic meters/person/year. year, the government budgeted US$ 194 Severe degradation of the country’s key million through reallocation and additional water catchment areas (known as “water allocation, to cover the anticipated fiscal towers”), mainly caused by deforestation requirements of drought. But by February and unsuitable agricultural management 2006, it had already spent US$ 124 million. practices, has exacerbated this situation (see Box 6.1). Kenya is also highly exposed to sea level rise and related coastal hazards, due to its In addition, high population growth adds extensive low-lying coastal areas. Climate pressure to this limited resource, and by change is projected to have quite severe 2025 Kenya is projected to have a renewable impacts on the coastal areas. Kenya’s freshwater supply of only 235 cubic meters coastal plain is 4 to 6 kilometers wide per capita per year. In terms of vulnerability and it is between sea level and 45 meters to increasing water stress (measured by the above sea level, as a result of which it is proportion of people with access to improved highly vulnerable. In addition to the risk of water sources), Kenya is in the middle submergence from sea level rise, it is also range of Sub-Saharan African countries (61 possible that large areas may be rendered percent, compared to Gabon, the highest at uninhabitable or could no longer be exploited 88 percent, and Ethiopia, the lowest at 22 for agriculture, due to water logging and salt percent). stress, particularly in peri-urban areas, where most of the agriculture is practiced. Sandy Kenya’s vulnerability to climate variability beaches, together with historical and cultural and change is very high when taken in a monuments, beach hotels, industrial sites, global context. Along with about half of the the port and human settlements, could all be countries in Sub-Saharan Africa, Kenya has negatively affected by sea level rise. a score of 4 out of 5 in the overall Climate Vulnerability Index. No country in the region Other potential impacts of sea level rise scores below 3, and a number of countries include increased vulnerability to coastal score 5 (indicating maximum vulnerability). storm damage and flooding, seashore Although Kenya is in the middle range, it is erosion, salt water intrusion into estuaries, important to note that Sub-Saharan Africa freshwater aquifers and springs, changes exhibits systemic vulnerability to climate in sedimentation patterns, decreased light variability and change, which means that penetration to benthic organisms (leading to climate risks for Kenya are very high within a loss of food for various marine fauna), loss of global context. coral reefs (leading in to reduced biodiversity, Achieving Shared Prosperity in Kenya 46 Human Development and Resilience Box 6.1: Environmental degradation is not helping climate change pressures in Kenya Serious environmental/catchment degradation has increased challenges related to climatic variability and change, putting additional pressures on an already fragile natural resource base. The effects of water resource degradation are not always as apparent as those of rainfall variability. This is partly because of their incremental nature and partly due to the effects that are often felt at a distance, both in time and space, from the source of the degradation. Mogaka et al. (2006) names the following principal causes of water resource degradation in Kenya: (i) excess abstraction of surface and groundwater; (ii) soil erosion, causing turbidity and siltation; (iii) high nutrient levels, causing eutrophication of lakes and pans; and, (iv) toxic chemicals, including agricultural pesticides, and heavy metals, which are toxic to water-dependent biota. Water resource degradation also exacerbates the costs arising from rainfall variability. Poorly managed catchments shed their runoff quickly into rivers and streams, thereby increasing the size of flood peaks during moderate to large storms. Forests and agricultural catchments with good ground cover slow down the runoff and reduce the size of the flood peak. Adaptation options therefore need to address both the natural assets (protection of catchments, wetlands, lakes and aquifers), as well as built assets (dams, irrigation systems, hydropower plants and water supply systems). Additionally, in terms of extreme events, previously noted, while mean annual rainfall Kenya has a history of greater disaster risk, is projected to increase, climatic conditions particularly of droughts and floods, than the are expected to become more variable, which majority of Sub-Saharan African countries— means that the frequency of extreme events when assessed over the past 30 years. will likely increase. Vulnerability to coastal hazards, measured in terms of the percentage of the national Floods and droughts already cost Kenya population living in the low-elevation coastal an estimated 2.4 percent of GDP per year. zone, is relatively low at 0.91 percent (as Flood risk is often exacerbated by the use of measured by the Global Rural Urban Mapping drainage channels for settlement as rubbish Project dataset), and there are significant dumps, and also by unplanned development, threats associated with sea level rise, as including for agriculture. Lake levels are also previously discussed. highly sensitive to climate: for example, Lake Victoria rose by about 1.7 meters after the There are a number of ongoing initiatives 1997 floods. Positive or negative lake level in Kenya to address current and potentially fluctuations may have significant societal increasing climate vulnerability, but impacts associated with flooding, and the these efforts do not meet the scale of availability of water for agricultural and other the challenge and there is significant and uses. growing adaptation deficit. It is critical to move towards a more comprehensive and Kenya currently lacks the capacity to buffer systemic approach, whereby the risks and against climate shocks, which are already opportunities presented by climate variability so severe, that years of investments in and change are fully understood and infrastructure for economic growth can be integrated, and measures are taken across all undone. For example, the floods of 1997-98 key sectors, including health, infrastructure, caused transport infrastructure damage and energy and agriculture, to mitigate risks and destruction, whose replacement cost was realize opportunities. The Kenyan economy US$ 777 million (World Bank 2004). A recently urgently needs the buffering capacity to completed post disaster needs assessment address the hydro-climatic shocks that could established that the overall cost of the 2008 be exacerbated by a changing climate. As to 2011 drought was estimated at US$ 12.1 47 Achieving Shared Prosperity in Kenya Human Development and Resilience billion, which includes US$ 805.6 million for Projections of increased runoff and soil destruction of physical and durable assets, moisture must therefore be treated with and US$ 11.3 billion for losses in the economy caution. Any increase in rainfall may be across all sectors. offset by increased evaporative losses associated with atmospheric warming, and Climate change and energy sources. Climatic even if rainfall remains constant or increases, variability and change have potentially serious water availability may decline as a result of implications to the viability and reliability of climate change, due to high temperatures hydro-electric power generation, the supply and if warming is of a sufficient magnitude. of which may become more erratic as rainfall Increased climatic variability may result in becomes more variable and unpredictable. greater variation in water availability over The Seven Forks hydropower station situated time, with extreme water stress during in the lower Tana catchment, provides nearly times of drought, exacerbated either by 58 percent of the total national electric power greater variability in rainfall (and greater generated. However, such catchment areas rainfall deficits) and/or higher extreme have undergone intensive environmental temperatures. degradation, resulting in the siltation of rivers, reservoirs and irrigation canals, which Other risks to water resources include the in turn exacerbates flooding in the lower intrusion of saltwater into coastal aquifers, parts of the basin. Thus, along with climates and the loss of mountain snow and ice, mart investments, proper management and associated melt-water. Saltwater intrusion conservation of the catchment areas are a key is likely to result from higher sea levels, and strategic requirement for Kenya’s sustained might be exacerbated by the abstraction economic growth. of groundwater for coastal development, or by a reduction in surface runoff Climate change and water resources. As in resulting from either reduced rainfall or much of Africa, some of the most significant increased evaporative losses, due to higher impacts of climate change on development temperatures. Mount Kenya and Mount in Kenya are likely to result from its impacts Kilimanjaro are reported to have lost over on water availability. As previously noted, 60 percent of their ice cover over the past rainfall is projected to increase over East century. Africa, and a study published in 2005 projected increases in surface runoff of 5 to The factors contributing to this loss are the 50 percent across Kenya by the middle of the subject of intense debate, and they are not 21st century. Nonetheless, surface runoff can simply a result of atmospheric warming. be highly sensitive to relatively small changes Nonetheless, if current climatic conditions in rainfall and temperature. For example, persist, the ice fields on Mount Kilimanjaro a study of the potential impact of elevated are predicted to disappear between 2015 temperatures in Morocco, concluded that and 2020. While Kenya may experience an increase in average temperature of just increased rainfall, greater than projected one degree centigrade over the catchment rates and magnitudes of climate change, of the country’s largest dam, would result in changes in variability, and factors such as a 10 percent reduction in surface runoff— saltwater intrusion at the coast and the equivalent to losing one dam a year, if loss of mountain melt-water, are likely to extrapolated to the entire country. increase water stress. The development and Achieving Shared Prosperity in Kenya 48 Human Development and Resilience implementation of strategies to increase the hazards such as storms, erosion, saltwater efficiency of water usage, expand the capture intrusion, ecosystem change and permanent and storage of surface runoff and conserve inundation. Within the timescale of Vision soil moisture, are therefore all necessary. 2030, the impact of climate change on coastal settlements, infrastructure, ecosystems, Climate change and agriculture. Climate livelihoods and tourism, could be quite variability already poses considerable significant. challenges to agriculture, particularly in form of droughts, which recur every few A study of climate change risks to Mombasa years. These could be exacerbated by climate district established that around 17 percent change. Crucially, agricultural planning cannot of the city’s area could be submerged by a assume that current or historical climatic and 0.3 meter rise in sealevel, which is plausible hydrological conditions will hold in the future. within the next few decades, based on As discussed earlier, climate change will result studies of sea level rise. Such an increase in reduced water availability, hence, in a shift in sealevel would also make many areas in the geographic ranges viable for key crops. uninhabitable, due to periodic flooding, The length of growing seasons may also alter water logging and salt stress. While the due to changes in temperature and rainfall, estimated proportion of Kenya’s population with seasons becoming longer in some areas living in the low-elevation coastal zone is less and shorter in others. than 1 percent, Mombasa county houses over 2 percent of the country’s population, as Crop responses to climate change will vary well as vital infrastructure (including the port with location, topography and local climatic and the refinery) and economic activities. conditions, with potentially positive impacts on crop yields in some areas and negative Key economic sectors such as tourism are impacts in others. In medium to high- highly vulnerable to the potential impact altitude locations where water availability is of climate change. Beach erosion and the not a limiting factor, crop yields may increase degradation of beaches and coral reefs may if climate change results in higher mean make coastal areas less attractive to tourists. and minimum temperatures. However, in Coastal erosion is likely to result in the loss of low-lying semi-arid areas higher mean and beaches, loss or migration inland of coastal maximum temperatures are likely to result wetlands and ecosystems such as mangroves, in increased evaporative water losses and and the permanent inundation of some land physiological stress, thereby decreasing areas. The economic losses resulting from yields. Trends in yields are not necessarily the inundation of areas used for producing consistent over time, so there is significant mangoes, coconuts and cashews resulting uncertainty as to future crop performance from a one meter rise in sea level, have been (for example, some areas in central Kenya estimated at up to US$ 500 million. and in the Kilimanjaro region have registered unchanged or decreased maize yields that Higher ocean temperatures and ocean subsequently increased). acidification, combined with other natural and human stresses, are likely to lead to a Climate change, coastal development widespread loss of corals, with an impact on and tourism. Kenya’s coastal population, fisheries, livelihoods and tourism. Changes cities and infrastructure are at a risk from in water depth, temperature, salinity, acidity potential sea level rise, and from related and turbidity may also affect key species such 49 Achieving Shared Prosperity in Kenya Human Development and Resilience as sea grasses, which are at the foundation The priority is to increase investment of marine ecosystems. Threats from climate readiness by advancing and improving change and other stresses are already the quality of investment preparation. apparent in locations such as Kiunga Marine Investment must balance productivity and National Reserve, where bleaching and other climate resilience, by avoiding unsustainable threats have led to the establishment of a development in marginal or otherwise partnership between a number of national sensitive areas. Investments—and and international bodies, to monitor the settlement—in catchments or flood-prone health of corals and integrate climate areas need to be approached with extreme resilience principles into the management of care, in order to avoid/minimize losses marine ecosystems. from potential floods and to protect the natural functioning of catchments. Beyond Policy Recommendations water investments, there is need to build Water resources an enabling institutional foundation— one Climate variability and change present an that is fully aligned with the Constitution— opportunity to invest heavily in appropriate and a solid, scientifically-founded knowledge water infrastructure, and to better manage base and analytical tools to ensure that existing water investments. Kenya has not water investments are sustainably planned, invested adequately in the storage of water developed and maintained for long-term and further existing storage capacity has prosperity. not been properly maintained in the face of siltation, general depreciation and episodic Agriculture Agricultural policies must be informed by damage from floods. Generally, the water scientific information on emerging and investment gap—from small scale storage to potential future changes in productivity. irrigation and water supply—is substantial, They must be based on observed and estimated in various studies to be between projected changes in rainfall, temperature, US$ 5-7 billion. and the incidence of key pests and diseases, in order to target investment in areas with The government has planned a large scale the greatest potential for yield improvement. water investment program to address this In addition, investment must be made in challenge. Vision 2030’s ‘flagship projects’ in land rehabilitation and land conservation the water sector, include building large-and- measures, to arrest erosion-induced declining medium sized multipurpose water storage land productivity. facilities, upgrading the hydro-meteorological network, and rehabilitating and expanding In addition, existing subsistence strategies major irrigation schemes and urban water such as pastoralism that promote climate supply and sanitation in key satellite towns. resilience in the face of climatic uncertainty, Such investments—and more generally variability and marginality should be measures to capture and store surface water complemented by new measures such runoff, conserve soil moisture, and make as efficient irrigation; new crop varieties better use of groundwater resources—will that are drought and disease tolerant and go a long way towards building climate grow fast; erosion controls to address more resilience, so as to lift Kenya out of a history intense rainfall events; water conservation of food insecurity, low productivity and measures; and the dissemination of climate constrained growth. information such as seasonal forecasts and long-term trends. Achieving Shared Prosperity in Kenya 50 Human Development and Resilience Natural resources management grazing should be further promoted as a Efforts to build resilience must focus on policy strategy, as herders can triple stocking investment in natural resource management capacity in drylands as an explicit land more broadly, given the reliance of Kenya’s restoration strategy that recharges water economy on the health of its natural resource tables and stores massive amounts of carbon. base. Natural resource management cuts This approach has been proven in a number across strategic sectors and themes, including of settings, from Zimbabwe to western United crop and livestock production, surface and States, and deserves further exploration on groundwater resources, forestry, tourism, its suitability in Kenya. and coastal zone management. Investment in coastal development Natural resource management is central This must take climate risks into account: to issues of conflict in Kenya over forest, Kenya’s Coast Region is highly vulnerable to water, and productive land, and as such, multiple climate impacts. As such, coastal their resolution is critical. Watershed development must be carefully directed. management is one strategy that provides Kenya’s draft Integrated Coastal Zone a platform for balancing these competing Management Policy (July 2010) sets forth interests, and should be highly prioritized. For guiding principles to promote integrated example, it is widely known that Nairobi and planning in the sensitive coastal region. high-value irrigated crop land such as Mwea, Efforts to support spatial planning and a critical rice-producing area, depend on the integrated development, are likely to result health of forested water towers upstream in significant cost savings in the long-term. The water from Cherangany Hills drains into the western part of the country, e.g. Nzoia In parallel, given that the Coastal economy and Lake Victoria. Nairobi and Mwea depend is highly dependent on sensitive natural mainly on water from Mt. Kenya and the resources, including beach-based tourism, Aberdares. fisheries and agriculture, efforts to strengthen natural resource management The new generation of large-scale water will lead to increased resilience of local infrastructure that is being planned communities. In coastal areas, support for as previously discussed, requires that enhanced community co-management of watershed planning and management fisheries and other marine resources provide should accompany the investments in important development and climate co- order to prolong their useful life. The benefits. Improved management of fish government’s target to expand forest cover stocks, both in marine and inland waters, will from a current 6 percent to 10 percent is in provide an important sustainable source of line with the need to protect key catchments revenue and livelihood. No-regrets measures from degradation. Yet to accomplish this, include improved research and monitoring it is critical that local forest-dependent capacity. communities and downstream communities partner in watershed planning, to help secure a shared vision on the sustainable use Similarly, strengthening Kenya’s world-class of forest, water and land resources. In the conservation efforts, including protection absence of this approach, climate risks will and management of marine and terrestrial persist and amplify over time. parks and other sensitive habitats (e.g. mangroves and corals), represent an Other integrated approaches look important long-term strategy for adaptation, promising. For example, rotational planned as ensuring sufficient connecting habitats 51 Achieving Shared Prosperity in Kenya Human Development and Resilience for high-value tourism species and other monitoring and evaluating environmental biodiversity will provide a sustainable trends, and for harmonization of data long-term source of revenue for Kenyans. collection methodologies, storage and access These efforts should be complemented by in the entire area of environment, and natural investment to promote pro-poor tourism, resources. through supporting policies, and activities to ensure tourism benefits extend far along the Climate variability and change present not value chain. only risks, but importantly, opportunities for Kenya’s development. In order to achieve Public awareness and communication the aspirations of Vision 2030, it is important Given that climate change is a serious that investments and other activities are challenge requiring the active participation designed to manage and mitigate climate of all members of the society, creating public risks, while capturing the opportunities awareness and communicating climate presented. A number of government projects change information in a structured manner, (including those supported by development would catalyse an appropriate response partners), focus on building climate resilience to the phenomenon. In addition, climate through disaster mitigation and longer-term change issues should be integrated into adaptation to climate threats. Kenya’s education system. All efforts should be made to achieve critical levels of expertise These include initiatives to more carefully in climate change-related topics in all areas of manage the natural resource base, on which learning, and effort must be made to ensure a vast majority of the Kenyan population and that opportunities that arise as a result of its economy depend on, such as improving climate changes initiatives are harnessed. forestry and water resource management, For effectiveness, climate change courses reducing food insecurity through increased need to be common units of study, and use of irrigation, and buffering shocks and compulsory for all learners. This should be improving the productivity of water resources done through a multi-disciplinary approach, in water dependent sectors, through the whereby climate change course contents are development of multi-purpose water storage infused and integrated into other subjects facilities. of learning, and applied across the different levels of learning. Climate Change therefore must be addressed through a coordinated approach and must Mainstreaming be dealt with countrywide, and across all The actions will need to be mainstreamed sectors of the economy. In addition, climate into Vision 2030 through the 2013- change must be mainstreamed into national 17 Medium Term Plan, and into sector planning. Indeed, integrated environmental strategies and government workplans. It planning must be adopted, because the current is also crucial that these climate change planning approach is largely sector-based and actions are incorporated into the Medium neglects the essential economic and social Term Expenditure Framework, and that a values associated with the environment. This climate change budget code is developed, way, the economic and social benefits arising to enable the tracking of the flow of climate from sound environmental management will change funds. In addition, there is need for be demonstrated, and delivered to Kenyans. Achieving Shared Prosperity in Kenya 52 Growth and Competitiveness 7. Rebalancing Kenya’s recurrent items), rising credit to the private economy1 sector, and continued flows of foreign short term capital. Investment has been low as a By John Randa result of low saving, both private and public, as well as low foreign direct investment. Net Summary exports have had a negative contribution to K enya’s economic performance has been below its potential and below what has been envisaged under Vision 2030. Kenya’s GDP growth in practically all years, owing to poor export growth and rising imports. This poor performance has been a result annual GDP growth over the past decade of various constraints to production and averaged 3.8 percent, which was lower than exports, as well as an appreciating shilling (in the average for Sub-Saharan Africa (SSA) of real terms) which in turn favors imports. 5.5 percent, and far from the 10 percent target of Vision 2030. Exogenous factors, such as To achieve the objective of becoming an African success story with shared prosperity, rising food and oil prices, as well as the global economic crisis, somewhat contributed to the the authorities would need to change weak economic performance. Nevertheless, the policy mix in order to balance out the the main reasons for the low growth are to economy and unleash its potential. This be found in Kenya. would require prompt action on multiple fronts. First, macroeconomic policy would The structure of Kenya’s economy and its need to stimulate more private and public growth trajectory are incompatible with high investment. Second, the exchange rate should and sustainable growth rates. GDP growth support exports and make domestic goods has been driven mainly by consumption, more competitive vis-à-vis imports. Finally, while the contribution of investment has measures to reduce Kenya’s susceptibility been low, and that of net exports has been to exogenous shocks are necessary to build largely negative. Consumption has been a positive growth momentum and deal with fueled by increased public spending (on possible external shocks. 1 The author would like to thank Celestin Monga and Paolo Zacchia for very extensive, valuable and insightful comments on the initial drafts. Achieving Shared Prosperity in Kenya 54 Growth and Competitiveness Introduction 478 in 2011 representing a 6 percent growth T he Kenyan economy has the potential to be one of the strongest in SSA, but it has been underperforming. Hills and rate over a period of two decades. This is disappointing performance, especially when compared to its African peers and other “role” valleys with no sustainable growth pattern models countries like Ghana, whose GDP per characterize Kenya’s GDP growth trajectory. capita increased by 82 percent in the same Kenya’s GDP growth accelerated from 0.5 period, Ethiopia (79 percent), Tanzania (55.6 percent in 2002, to 7 percent in 2007. It then percent), and Uganda (111.1 percent). This plummeted to 1.6 percent in 2008, as a result poor performance is even more pronounced of external and internal shocks, before taking when Kenya is compared to some of the off again. Kenya’s average GDP growth has East Asian countries, which Kenya wants to picked up since 2000 after falling drastically emulate. For example, Malaysia’s GDP per in the 1990s (see Figure 7.1). However, when capita in constant dollar terms increased by compared with others, including countries in 106.2 percent, Thailand (94 percent) and SSA, Kenya’s GDP growth has lagged behind Vietnam (232.9 percent). as shown in Figure 7.1. From 2000-2010, Kenya grew at an average annual rate of 3.8 Because of slower growth, other SSA percent, compared with SSA growth rates countries are catching up with Kenya. Most averaging 5.5 percent. Kenya’s growth over African countries whose GDP per capita was this period was also less than that for newly below Kenya’s in 1980, including some of its industrialized Asian economies (4.6 percent) neighbor’s, are rapidly catching up with it and and for all emerging economies (6.2 percent). some (Nigeria) have overtaken it. In 1990, GDP per capita increased from US$ 397 in Ethiopia’s GDP per capita was 28 percent that 2003 to US$ 772 in 2011. of Kenya, in 2011 was 48 percent. Relative to Kenya’s GDP per capita, a number of Compared to its peers, Kenya is punching countries have had their economies expand: below its weight. Even though Kenya has seen Ethiopia (69 percent), Ghana (71 percent) improved growth performance in the decade Mozambique (104 percent), Tanzania (46 of 2000, it can perform much better given its percent), Uganda (98 percent), Malaysia (94 potential. GDP per capita has increased from percent), Thailand (82 percent) and Vietnam US$ 450 (constant 2000 US$) in 1990, to US$ (213 percent) (see Figure 7.2). Figure 7.1: Kenya’s GDP growth is picking up but still remains low compared to SSA and early post-independence period Kenya's Economic Performance has significantly 8.0 8 improved in the last decade 7.2 7.0 7 Average Growth (Percent) GDP Growth (Percent) 6.0 5.7 6 5.0 4.6 5 4.2 4.0 3.9 4 3.3 3.0 3 2.3 2.2 1.9 2.0 2 1.2 1.0 1 0.4 0.0 0 1960/69 1970/79 1980/89 1990/99 2000/11 2003/11 2010 2007 2008 2009 2005 2006 2003 2004 2002 1999 2000 2001 1993 1997 1998 1990 1991 1992 1995 1996 1994 -1.0 -1 -0.7 -2.0 -2 GDP growth (annual %) GDP per capita growth (annual %) Kenya Sub-Saharan Africa Source: World Bank, WDI 55 Achieving Shared Prosperity in Kenya Growth and Competitiveness Figure 7.2: Kenya’s GDP per capita is growing at a slower rate relative to its peers % Expansion of GDP per capita (constant 2000 US$) between 1990-2011 Relative GDP per capita growth compared to Kenya (%) 250.0 250.0 232.9 % (GDP Per Capita in 2011)/ (GDP per Capita in 1990) 213.4 Growth in Per Capita GDP (Constant 2000 US$) 200.0 200.0 relati ve to Kenya's (percent) in Constant 2000 US$ 150.0 150.0 106.2 111.1 104.9 100.0 94.1 100.0 94.1 98.7 79.6 82.2 82.7 69.1 71.5 55.6 57.8 57.9 50.0 50.0 46.4 48.5 48.6 17.4 10.5 15.4 6.2 0.0 0.0 Mozambique Tanzania Malaysia Vietnam Ethiopia Thailand Senegal Rwanda Uganda Malaysia Nigeria Thailand Vietnam Ethiopia Senegal Rwanda Uganda Ghana Tanzania Nigeria Ghana Kenya Sub-Saharan income levels) Africa (all Source: World Bank, WDI Country X GDPPC 2011 Kenya GDPPC 2011 Country X GDPPC 1980 Kenya GDPPC 1980 Aggregate demand has powered Kenya’s net exports (exports minus imports) was a recent growth. Growth in domestic demand drag on economic growth by a negative 14 drove the strong growth Kenya experienced percent. This finding supports the World in 2003-2011, which averaged 4.6 percent Bank’s position in the 2011 Kenya Economic annually, with private consumption and Update that showed Kenya’s economy private fixed investment contributing as running on one engine (consumption) positively to the headline figure. Foreign and needs other engines (investment and demand, on the other hand, has been weak. As exports) to substantially kick-in for Kenya to shown in Table 7.1, consumption expenditure achieve a stable economic growth pattern. is the major engine of Kenya’s GDP growth. Analyzing Kenya’s growth pattern reveals The macroeconomic outcomes indicate that some interesting insights. When the 4.6 the Kenyan economy is out of balance. In percent rate of GDP growth is decomposed, 2005, gross domestic savings were sufficient it shows that 78 percent of it emanated from to cover domestic investment financing private consumption expenditure, 15 percent requirements. However, savings have not from government final consumption, and 21 been increasing as fast as investment needs. percent from domestic investment, while The savings-investment gap increased from Table 7.1: Contribution to GDP growth 2003-2011 (expenditure method): constant 2001 prices 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% Govt final consumption 1.0 0.1 -0.1 0.3 0.5 0.3 0.5 1.3 1.6 expenditure [1] Private final consumption 1.8 1.9 5.0 6.2 5.8 -1.0 4.0 5.8 2.2 expenditure[2] Net fixed capital formation [3] 1.6 1.2 2.3 4.5 3.5 2.1 1.3 1.2 4.3 Gross domestic 4.3 3.2 7.2 11.0 9.8 1.4 5.8 8.3 8.1 expenditure[4=1+2+3] Net exports[5] -1.7 -1.7 -1.2 -5.3 -2.8 0.3 -3.5 -2.6 3.7 GDP Growth [6=4+5]* 2.9 5.1 5.9 6.3 7.0 1.6 2.6 5.6 4.4 Source: KNBS Economic Survey-various issues * Numbers may not add up due to statistical discrepancy in the national accounts Achieving Shared Prosperity in Kenya 56 Growth and Competitiveness Figure 7.3: Contribution to GDP growth 2003-2011 of GDP in 2005 to 21.5 percent in 2011, while (expenditure method): constant 2001 prices the current account deficit increased from GDP Growth and its drivers (expenditure approach) 8.0 1.5 percent of GDP to 10.6 percent in 2011. Kenya’s main macroeconomic outcomes are 6.0 summarized in Table 7.2. 4.0 Percent 2.0 Savings and investment levels are lower 0.0 than those underpinning the first Medium -2.0 2003 2004 2005 2006 2007 2008 2009 2010 2011* Term Plan (MTP) and Vision 2030. Kenya’s savings and investment rates are well below -4.0 those desired in the MTP and Vision 2030. -6.0 The MTP envisages Kenya’s gross savings GDP growth Consumption Investment Net exports for 2008-2011 averaging 18.7 percent and Source: KNBS Economic Survey-various issues investment equaling 24.6 percent. However, the outturn for actual gross savings was 14.4 near zero in 2005, to a deficit equivalent to 8.9 percent, while gross investment averaged percent in 2011. On the fiscal side, the story 21.3 percent (Kenya’s annual saving and is not any better. The fiscal deficit including investment rates for 2005-2011 are shown grants has deteriorated from 1.8 percent of in Table 7.2). Kenya also lags behind SSA GDP to 5.4 percent. The saving-investment countries and others in terms of savings and gap and the deterioration in the fiscal balance investment (see Figure 7.4). For a country have spilled over into Kenya’s external with Kenya’s investment opportunities, the account. The balance of trade deficit has low levels of domestic savings are acting to almost doubled increasing from 11.4 percent constrain investment. Table 7.2: Selected macroeconomic outcomes (percent of GDP) 2005 2006 2007 2008 2009 2010 2011 Savings – Investment Investment 16.9 17.9 19.1 19.5 19.4 21.5 24.7 Savings 17.2 16.8 15.5 13 13.3 15.6 15.8 Government Government Expenditure 24.3 24.7 26.2 27.6 27.9 31.2 31.4 Government Revenue 21.2 21.1 22 22.1 21.9 24.2 24.8 Fiscal Balance (grants) -1.8 -2.5 -3.1 -4.3 -5.2 -6 -5.4 Fiscal Balance (W/grants) -3.1 -3.6 -4.2 -5.4 -6 -7 -6.7 External Sector Imports 36 36.3 37.1 41.8 37.2 41.1 44.5 Exports 28.5 26.6 26 27.6 24.1 26.9 28.8 Balance of Trade -11.4 -14.5 -15.7 -18.8 -16.9 -19.7 -21.5 Current account -1.5 -2.3 -4.0 -6.6 -5.8 -6.5 -10.6 S-I 0.3 -1.1 -3.6 -6.5 -6.1 -5.9 -8.9 T-G -3.1 -3.6 -4.2 -5.5 -6 -7 -6.6 X-M -7.5 -9.7 -11.1 -14.2 -13.1 -14.2 -15.7 Current Account -1.5 -2.3 -4.0 -6.6 -5.8 -6.5 -10.6 Source: KNBS Economic Survey-various issues * Numbers may not add up due to statistical discrepancy in the national accounts 57 Achieving Shared Prosperity in Kenya Growth and Competitiveness Figure 7.4: Kenya’s savings and investment rates below its peers Gross National savings, percent of GDP Kenya's savings need to more than double to reach Kenya is not investing enough to attain levels the levels of Newly Industrialised countries of Newly Industrialised Countries Gross Investment as percent of GDP 40 40 35 35 30 30 25 25 20 20 15 15 10 5 10 0 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Kenya Sub-Saharan Africa Kenya Sub-Saharan Africa Newly industrialized Asian economies Emerging and developing economies Newly industrialized Asian economies Emerging and developing economies Source: IMF WEO database 2012 The responsive and responsible nature of newly industrialized economies (see Figure Kenya’s fiscal management is one of Kenya’s 7.5). Experience has shown that the economy signature achievements. The government is prone to external and exogenous shocks has been able to mobilize domestic revenue brought by such developments as spikes to finance its spending, and as such, Kenya is in international oil prices or downturns in one of the very few countries in SSA, whose the Euro zone, a major trading partner. The budget is not dependent on development government has resorted to the external assistance. Kenya has not sought debt market at times, to smooth the impact of relief under the Heavily Indebted Poor the various shocks that the economy has Countries (HIPC) initiative, and has managed experienced. to maintain reasonable debt levels. The Figure 7.5: Kenya’s debt levels in comparison with others government’s recurrent spending is 100 Kenya's gross debt has declined tremendously from percent financed by domestic resources about 60% to less than 50% but more needs to be done 80 while development assistance finances Gross Debt as percent of GDP 70 part of the development budget. Under the 60 recent Kibaki administration (2002 – 2013), 50 significant resources were directed to finance 40 infrastructure projects, as well as programs 30 in health and education. 20 10 Public debt as a share of GDP is within 0 tolerable levels, but a reduction of this debt 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ratio is important if the government is going Kenya Emerging and developing economies Newly industrialized Asian economies Sub-Saharan Africa to improve confidence levels in the financial Source: IMF WEO database 2012 markets, and expand the fiscal space to ride out any future shocks. Public debt declined Kenya’s conduct of monetary policy has from over 60 percent of GDP in 2003 to just contributed to macroeconomic stability, the below 45 percent in 2011-2012. This is a major development of money and capital markets, achievement for an economy that has not and in keeping the exchange rate stable. As been a recipient of HIPC assistance. However, a result of Kenya’s prudent monetary and Kenya’s debt levels are still high, compared financial policy, it now has the third largest to debt levels in emerging economies and financial system in SSA, in terms of assets. Achieving Shared Prosperity in Kenya 58 Growth and Competitiveness Kenya’s money and capital market are among Figure 7.6: High growth in private sector credit Africa’s most vibrant. has increased inflationary pressure Growth in Private Sector Credit and Inflation Growth in Private Sector Credit, percent 25 40 Kenya has experienced relatively low Overall Inflati on, percent 30 inflation, averaging below 10 percent 20 annually since 2000, with spikes driven 15 20 mostly by swings in food and international 10 oil prices. The Central Bank’s prudent 10 0 monetary policy has kept core inflation within 5 targeted range, but sub-optimal official food -10 policies and strategies have led to spikes 0 -20 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 during drought periods. Since food accounts for 36 percent of the consumer price index, Overall Inflation Private sector Credit spikes in food prices have a strong impact on Source: CBK database inflation. In addition, sharp movements in international oil prices are passed through percent in 2005, to 28.8 percent of GDP in to domestic prices leading to inflationary 2011. At the same time imports as share pressure. The economy relies heavily on of GDP increased from 36 percent to 44.5 hydro power, whose supply fluctuates with percent. Though a significant portion of the the amount of rainfall Kenya receives. During increase of imports can be attributed to the droughts, expensive diesel fuel is imported to oil bill and increased imports of machinery, power engines for supplemental energy. transport goods and other intermediate goods, the appreciation in the real exchange Access to private sector credit has spurred (to be discussed hereafter) has contributed an increase in domestic consumption, and to the problem. The current account deficit GDP has also added to inflationary pressure. deteriorated from 1.5 percent in 2005 to over Kenya has seen tremendous growth in private 10 percent in 2012 (see Figure 7.7). When sector credit since 2003, as the government Kenya runs a current account deficit, it builds reduced its reliance on borrowing from the up liabilities to the rest of the world that are domestic market. With less crowding out by financed by flows in the financial account. the government, there was a sharp increase However, if the imports are mainly composed in financial savings, leading to lower interest of consumption goods, i.e. spending that rates and increased lending. In addition, yields no long term productive gains, then a more accommodative monetary policy Kenya’s ability to repay might come into encouraged a boom in borrowing by the question. Kenya’s large appetite for imported private sector in 2008-2010. However, high goods has not only led to deterioration in the credit growth is associated with inflationary current account, but has also contributed to a pressure as shown in Figure 7.6. reduction in the consumption of domestically produced goods. This in turn has reduced the Kenya’s current account and balance of demand for local labor, contributing to the trade deficit has deteriorated sharply, as existing imbalance between new entrants exports have stagnated while imports to the job market and job prospects. About increased. The share of Kenya’s exports in 800,000 Kenyans enter the job market GDP has remained constant since 2005, while annually, but the economy, on average, the share of Kenya’s imports has increased. generates only 50,000 modern sector wage Exports marginally increased from 28.5 jobs. 59 Achieving Shared Prosperity in Kenya Growth and Competitiveness Figure 7.7: Current account has deteriorated sharply and being financed by short term flows Current account has deteriorated significantly since 2008 Short term flows and net errors and omissions as a ra o of 2,000 70.0 64.9 65.3 63.5 60.0 59.6 1,000 50.0 0 US$ (Millions) Apr-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jul-11 Apr-07 Oct-07 Jan-08 Jul-08 Jan-05 Apr-05 Ju-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Jul-07 40.0 Percent -1,000 31.1 30.0 25.4 -2,000 20.0 -3,000 10.6 10.0 7.5 -4,000 -1.4 0.9 0.0 Exports Merchandise Exports of Capital and FDI as a ra o -5,000 of services exports goods and fi nancial of exports of -10.0 Services account goods and services Current Account CA without oil 2002 2012 Source: Balance of payments data, CBK database The financial account has been financing the imports, as do Turkey and Dubai. Commercial current account. Remittances have increased banks organize trips for businessmen and significantly in the last 5 years, surpassing women to attend trade fairs in China, the US$ 1 billion mark in 2012, from US$ Singapore, Malaysia and Turkey. These 300m in 2006. Large amounts of remittances trips often lead to orders for new imports. find their way into real estate, building and Overall, the reinforcing nature of the nexus of construction activities, which has increased strong short term flows (both legitimate and the demand and prices in the non-tradable illegitimate), and an appreciated exchange sector. The high differential between yields rate which discourages exports, acts as a in Kenya and international market (USA and drag on economic growth. As such, Kenya Euro area) both in fixed income securities needs to rethink its macroeconomic policy and equities market has attracted short term mix which is currently only being driven by inflows into the financial markets. consumption. The short term flows have heavily Kenya’s capital account, which remains the influenced Kenya’s exchange rate which has least controlled in the region, has become an appreciated by 34 percent since 2000 in real attractive destination for short term flows, terms. The appreciation of the real exchange some of which may be of questionable rate is reflected in the deterioration of the origin. Short term flows (including errors and current account (weaker export growth and omissions, have increased dramatically in the strong import growth) and strong private last decade. Compared to earnings of exports sector credit growth. The short terms flows of goods and services, short term flows, have financed the current account deficit, which were the equivalent to 7.5 percent and have managed to shore up the strength of GDP in 2002, increased to 29.4 percent of the Kenyan shilling since 2003. The strong in 2011-and now constituted 70 percent of shilling has boosted the consumption of Kenya’s Capital and financial account imports, benefiting businesses such as those in the construction industry, that import Exchange rate policy remains the key pillar to significant levels of specialized materials and macroeconomic management. Although the finished products. China and India account for real exchange rate has appreciated, nominal an increasing amount of construction-related bilateral exchange rates have been stable with Achieving Shared Prosperity in Kenya 60 Growth and Competitiveness a minimal bias towards depreciation in the rate since 2008, Kenya’s competitiveness has last decade.2 3 The shilling has depreciated by deteriorated by 30 percent since 2003. 36 percent cumulatively between 2000 and 2012, representing an annual depreciation KEY Challenges of about 3 percent. Given the higher price Kenya’s below par economic performance differences between Kenya and its trading over the past ten years can be attributed partners, the shilling should have a higher to a policy mix which has not always been nominal depreciation. The good news is optimal. The current policy mix has led to that exchange rates are market determined an overvalued exchange rate, discouraged with no interferences from the Central Bank. exports, encouraged short term flows, and The forex market in Kenya remains very has failed to attract enough FDI to power thin with few market participants, and as GDP growth. As a result of the policy mix: such, susceptible to large volatility in both (i) Growth has been unbalanced: growth intraday markets and within any month. has mainly been driven by consumption, The average daily market trading averaged while investment and exports have yet to only about US$ 300-500 million, a relatively be the major factors determining growth; small amount. Large purchases of forex, (ii) Growth has not been sustainable: growth for example, to buy fertilizer or petroleum, has not been sustainable with high subject the shilling to large swings on the growth episodes followed by low growth; days the deal is completed. Since Kenya has (iii) The external account has deteriorated an open capital account, volatility in the as the result of the unbalanced and international currency markets and geo- unsustainable nature of Kenya’s growth. political disturbances, are passed through Weak exports and high import demand into the domestic currency market. In in an environment of an appreciating addition, the trade weighted exchange rate, real effective exchange rate resulted in shown in Figure 7.8 indicates that despite Kenya’s external account deteriorating the nominal depreciation of the exchange significantly since 2003; and, Figure 7.8: Bilateral exchange rates relatively stable but the shilling has appreciated in real Bilateral Exchange Rate Real and Nominal Trade weighted Exchange rate 180.00 Jan 2003=100 Kenya Shiling vs other currencies 160.00 140.00 138.80 140.00 120.00 115.47 120.00 100.00 86.90 100.00 80.00 60.00 80.00 40.00 20.00 60.00 0.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 40.00 Jan-00 Jun-00 Nov-01 Apr-01 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Apr-06 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Dec-12 Sep-01 Feb-02 Jun-05 Nov-05 Sep-06 Feb-07 Jul-07 Sep-11 Feb-12 United States dollar Sterling pound Euro Source: CBK Database 2 Nominal exchange rate can be defined as the amount of Kenya shillings that can purchase a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the currency while an increase is termed nominal depreciation of the currency. Real exchange rates are nominal exchange rate that has been adjusted for the different rates of inflation between Kenya shillings and a foreign currency. In practice, changes of the real exchange rate rather than its absolute level are important. An increase in the real exchange rate is termed depreciation while a decrease is depreciation. The importance stems from the fact that it can be used as an indicator of competitiveness in the foreign trade of a country. 3 Long-run equilibrium real exchange rate is the real rate that, for given values of “economic fundamentals” (openness, productivity differentials, terms of trade, public expenditure, direct foreign investment, international interest rates, etc.) is compatible with simultaneous achievement of internal and external equilibrium. For methods to estimate long-run real equilibrium exchange rate, see Hinkle and others 1999. 61 Achieving Shared Prosperity in Kenya Growth and Competitiveness (iv) The open capital account has attracted are constrained, and cannot be relied upon significant inflows of short term funds, to deliver such costly investments. some of which, including those from troubled countries within the region, are Even though public debt has decreased of questionable origin. to within tolerable levels, a debt level below 40 percent of GDP would provide a Kenya is able to finance its current account comfortable cushion to improve confidence deficit because capital flows are coming in levels in the financial markets and expand and this contributes to the exchange rate’s the fiscal space to ride out any future appreciation. Most of the inflows that come shocks. Kenya’s debt levels are still high in are short term and speculative in nature, compared to debt levels in emerging and drawn because of attractive interest rates, the newly industrialized economies. Experience strength of the Kenyan financial sector and has shown that the economy is prone the relatively stable political and economic to both external and exogenous shocks, environment. Exchange rate appreciation in brought on by such developments as spikes turn weakens exports incentives. In addition, in international oil prices, negative spillovers Kenya is not saving enough as the economy from Kenya’s trading partners, and drought. consumes more than what it produces, The government should aim to keep the rate further putting pressure on the current of growth of its debt accumulation below the account. rate at which the economy grows. While fiscal programs have been adequate, Economic development is a continuous Kenya will require more resources if it is to process of industrial and technological attain its major developmental objectives— development that also changes the becoming a Middle Income and newly institutional and social settings. Kenya’s industrialized country by 2030. Kenya is government has underperformed in the already mobilizing over 20 percent of its past because it has not taken a systematic budget from taxation. It will need more and comprehensive approach to managing resources to finance its development agenda. all aspects of the economy. As it begins to Considerable scope exists to increase tax readjust Kenya’s economic strategy, the revenue, by simplifying the tax codes, closing incoming National Treasury team should try the loopholes for tax evasion, reducing tax to answer the following questions: exemptions, and bringing significantly more • How to move resources (human and people within the formal taxation system. physical) from low-to high-productivity activities?4 Foreign direct investment and development • How will the process of moving into higher assistance will be critical in helping Kenya quality goods and services happen within to finance its development agenda. agriculture, services or industry? Kenya needs to provide reliable energy to • Why are some firms able to move into its industrial sector at competitive rates. export markets and start producing new It needs roads to connect its cities with goods competitively, while others languish, both domestic and international markets, yet they all face the same business and it needs more fiber optic connections environment constraints? to facilitate commerce. These are huge • Why is there a high firm mortality in the investments which need large injections of manufacturing export market? capital into the economy. Government funds • How could the economy move up the value 4 This does not necessarily mean from low-to high-value added activities Achieving Shared Prosperity in Kenya 62 Growth and Competitiveness chain without government distortions Jumpstarting the manufacturing sector is a getting in the way and creating artificial key pillar for any medium term economic and unsustainable growth spurs, that strategy. The most important strategic eventually lead to a middle-income trap? decision which Kenya’s new administration • What are the appropriate roles for the needs to make, is to renew its commitment Kenyan government and the country’s to the manufacturing sector and exports, as vibrant private sector in setting the country part of the broader agenda to diversify the on a sustainable growth path? economy. • Diversification of the economy is Moving towards a better important for Kenya’s development. policy mix for Kenya Countries that have been able to achieve Kenya’s developmental goals envisioned a higher level of economic development in Vision 2030, will need an adjustment have done so through the diversification to its policy mix to help deliver better of their economy. An effective industrial macroeconomic outcomes (outlined policy is key for an economy to diversify earlier). To achieve its developments goals: over time. Diversification which involves (i) Kenya’s sources of growth must expand the manufacturing sector, creates new and be broad-based, powered by exports sources of income and has positive and investment; (ii) the economy needs to spillover effects for society, such as create more jobs than the current 50,000 knowledge acquisition that allow for other or so to accommodate the roughly 800,000 capacities to be developed. Furthermore, job entrants that come into the job market empirical evidence shows that as countries every year; and, (iii) policy makers need to increase their level of diversification, the re-evaluate macro fundamentals to assess level of economic output also increases. their viability to deliver the projected growth In other words, no country has been able trajectory and outcomes in the Vision 2030 to achieve positive growth over many document. years, based on a single sector or on a few activities. Kenya can grow faster. With GDP per capita • The philosophy behind the new strategy just above US$ 800 (half of SSA’s average), is to give a focused thrust to economic yet with all the ingredients for much stronger growth and employment intensive performance, Kenya should be aiming for initiatives. The manufacturing sector double-digit growth. It is projected that the in general and manufacturing exports country will only reach a very modest GDP in particular, can be viewed not only in per capita of about US$ 1,000 in 2018—that is terms of their economic contribution, less than half of Congo’s GDP per capita today. but as a means of generating gainful The current growth trajectory of 6 percent in employment. This can be done by: the medium term is not ambitious enough, encouraging domestic manufacturing to especially given the country’s incredible produce inputs for the export industry, potential and challenges. With high income reducing their dependence on imports; inequality and nearly half the population promoting technological upgrading of below the international poverty lines of exports to retain a competitive edge in US$ 1.25 per day, the new administration of global markets;5 endeavoring to reduce President Uhuru Kenyatta needs to aim for transaction costs through procedural much higher goals. simplifications, encouraging and 5 While innovation is the driver of productivity enhancement everywhere, it should mean different things for developing and developed countries. For advanced economies, innovation generally implies invention, because technologies and industries there are on the global frontier. For developing countries such as Kenya, innovation could be mostly imitation because their technology/industries are most likely to be within the global frontier. At its current low level of development, Kenya could sustain very high growth rates by just doing imitation. 63 Achieving Shared Prosperity in Kenya Growth and Competitiveness promoting a strong market diversification development—provided that the funds are strategy to hedge the risks against global used to finance productive infrastructure uncertainty; and encouraging investment (i.e., those with positive rates of return) in export-oriented business in and and to support competitive industries. The around Kenya’s coastal shipping zones, important questions are not whether savings which themselves need to be made are too low or whether the fiscal and current more efficient, if Kenya is to improve its account deficits are too high, but how the international competitiveness. country’s resources are being used, how the • Exports incentives could include deficits are being financed and whether their supporting exporters to access new financing is sustainable. markets by helping the exporters to offset high freight costs and other externalities Foreign Direct Investment is key to Kenya’s to select international markets. In development agenda. Since domestic savings addition, Kenya could encourage new are low, attracting FDI would supplement export products, which have high domestic savings in financing Kenya’s growth employment intensity outside Nairobi, so agenda. Kenya should aggressively seek as to offset infrastructure inefficiencies more productivity enhancing FDI to diversify and other associated costs involved in its economy and develop its private sector, marketing of these products. Kenya could and encourage technology transfer, to also support its exporters to reach out to sharpen its competitive edge in the external new markets by supporting buyer-seller market. Kenya needs strong institutions like meeting exhibitions abroad based on a the judiciary to resolve conflicts, enforce careful consideration of products and contract disputes, and ensure a level playing countries to be targeted. field for investors. Political stability is also an important factor in attracting FDI, and in Macro-Financing Framework. For Kenya providing longer term investment horizons. to achieve a high annual growth rate of 10 percent or higher, greater levels of investments Re-evaluating Kenya’s exchange will be needed. Kenya’s relatively low savings rate policy rate, only 13 percent in 2012, might be Kenya’s real effective exchange rate has seen as an impediment to higher growth. appreciated by over 30 percent since 2003, thereby hurting its export competitiveness. However, low savings are a typical feature Given that Kenya has a floating exchange of poor countries—few economies with GDP rate regime policy, the real appreciation has per capita of US$ 800 have much higher been driven by massive short term inflows, saving rates. Moreover, the low domestic which dominate its financial account. The saving rate can be compensated by higher short term flows which stand at 70 percent levels of foreign savings, provided that they of the financial account include, portfolio are channeled into a credible development flows flowing into the money market mostly strategy that generates economic surplus, into the bond and equities market. Kenya in the form of profits and salaries, and might be attracting the illicit flows from higher savings. Kenya urgently needs high- fragile states of Somalia, South Sudan and quality infrastructures, at least in certain others, given the stability of its financial key sectors and key geographical areas. The sector and the proximity to these countries. country currently has the fiscal space and A peculiar characteristic of Kenya’s securities credibility to attract more FDI and even to market is the thinness of the market, with a use more foreign debt to sustain its economic daily turnover of US$ 300-500m with about Achieving Shared Prosperity in Kenya 64 Growth and Competitiveness five to six main market players. As such fiscal discipline would lead a country to crisis the forex market has exhibited high short under any exchange rate regime. Typically, term exchange rate volatility and medium the longrun equilibrium real exchange term swings that are only weakly related rate is estimated based on the economic to economic fundamentals. This is largely fundamentals of the country, and a variety explained by the fact that the exchange rate of policy and institutional arrangements are is also an asset price influenced strongly by made to keep the actual rate sufficiently short term financial flows, which are subject close to it over the medium-term. If Kenya to speculation, manias, panics, herding, and could embark on active management of contagion. the exchange rate, this would provide policymakers with an additional strong The size, peculiar nature and the outcome of policy tool, to correct misalignment and to the forex market has called into question its influence the balance of payments, trade efficiency, and appropriateness of the current flows, investment, and production (Yagci exchange rate policy. Because of the thinness 2001). of the forex market, short term inflows are able to move the market. The exchange rate The current exchange rate policy has helped is therefore sustained by artificial reasons Kenya to override shocks. With its current not real fundamentals. Central Bank of exchange rate policy, the economy has been Kenya’s reaction of mopping off excess able to absorb the impact of adverse external liquidity to sterilize the inflows through open and domestic shocks (deterioration in terms market operations ends up keeping domestic of trade, contraction in world demand as interest rates high which typically results in experienced during the global financial the attraction of even greater capital inflows. crisis, etc), and avoid large costs to the real Second, given the relatively small size of the economy. These shocks usually necessitate domestic financial market compared with an adjustment in the real exchange rate. international capital flows, sterilization tends Because domestic prices move slowly, it to become less effective over time. As capital is both faster and less costly to have the inflows increase, tension will likely develop nominal exchange rate respond to a shock. between the authorities’ desire, on the one hand, to contain inflation and, on the other, to Kenya’s exchange rate policy needs to maintain a stable (and competitive) exchange be calibrated to maintain a stable and rate (see Caramazza and Aziz, 1998). competitive real rate consistent with the economic fundamentals. This might to The government needs to have an idea of involve consciously moving from a free float where the real exchange rate should be, to managed float exchange rate policy, to to ensure that the national economy is correct Kenya’s misalignment and to influence competitive. For any exchange rate regime the balance of payments, trade flows, to maintain a stable and competitive real investment and production in the medium exchange rate, it requires a supportive policy term.6 The current exchange rate policy environment which would include prudent stance has exhibited short term exchange macroeconomic policies, a strong financial rate volatility and medium term swings, sector, and credible institutions (Yagci 2001). that are only weakly related to economic Monetary policy should be consistent with fundamentals. This is largely explained by the exchange rate objectives. Failure to establish fact that exchange rate is also an asset price 6 Long-run equilibrium real exchange rate is the real rate that, for given values of “economic fundamentals” (openness, productivity differentials, terms of trade, public expenditure, direct foreign investment, international interest rates, etc.) is compatible with simultaneous achievement of internal and external equilibrium. 65 Achieving Shared Prosperity in Kenya Growth and Competitiveness influenced strongly by short term financial should not include capital outflows, longer flows, which are subject to speculation and term inflows and direct investment, that help herding behavior (Yagci 2001). Determined to ease downward pressures on the exchange in this manner, exchange rates may develop rate. their own short term and medium-term dynamics that overwhelm the goods and services market transactions. 8. Unleashing Kenya’s export potential – regionally and A managed float exchange rate policy will globally provide scope for setting an appropriate balance between exchange rate stability By Ganesh Rasagam, Yira Mascaro, John Randa and Ravi Ruparel and flexibility. When supported by sound macroeconomic policies, such a policy Overview K measure can keep the variations in the enya’s export performance has been exchange rate within reasonable bounds, characterized by: dampening the degree of uncertainty, while • an over-reliance on traditional exports permitting enough flexibility to adjust the (tea, coffee and horticulture), which still parity to economic fundamentals.7 If the account for 35 percent of goods exports, Central Bank of Kenya can manage the but are losing share in traditional markets exchange rate to be consistent with economic in Europe and failing to penetrate into fundamentals and the markets is convinced potential emerging markets; by the government of Kenya’s macroeconomic • an under-performing services export policies, Kenya can achieve and maintain sector dominated by tourism; stable and competitive exchange rates.8 • low value addition and lack of differentiation in traditional and non- Kenya could adopt some selective capital traditional exports; and, controls to discourage highly volatile short • lack of an integrated national framework term flows, but facilitate the longer term for export development across key industries and institutions. capital inflows.9 These controls would reduce Kenya’s vulnerability to external shocks, and To achieve the aspirations of Vision help to ease the real appreciation of the 2030, a fragmented approach to export shilling which has averaged about 3 percent development is no longer appropriate, and annually in the last 10 years. Any selective will not lead to enhanced competitiveness, measures chosen should complement GOK hence, sustainable improvement in Kenya’s macroeconomic policies and aim to: (i) limit export performance. Experience in countries short term speculative flows; (ii) reduce the that achieved sustained rapid growth since vulnerability of the shilling from domestic the 1960s indicates that such growth has and external shocks; and, (iii) help insulate typically been accompanied by a sharp the real economy from excessive movements increase in the share of exports in GDP, and in the exchange rate. A policy of selective in most cases, in the share of manufacturing capital controls should be limited to short in exports and GDP , although a few have 1 term speculative inflows, which pose managed to grow through revenues from particular risks to the shilling’s stability, and services. 7 See also Yagci 2001. 8 A policy of managed float exchange rate policy would still allow Kenya’s exchange rate to remain flexible and absorb an important part of the shocks. The shock absorption capacity of the regime would depend on the width of the band. 9 This can take three forms (i) unremunerated reserve requirement on bank deposits designed to discourage the short-term inflows (ii) a minimum holding period of one year for equity investment (iii) taxing short term inflows. 1 See Eichengreen, 2008. Achieving Shared Prosperity in Kenya 66 Growth and Competitiveness Kenya shares some important features with the resulting demand volatilities for Kenya’s these high export economies, including exports. labor abundance, a coastal location, and macroeconomic stability. But while it has The sophistication of Kenya’s export basket performed moderately well in services, its has increased, particularly between 2006 manufacturing sector has lagged behind and 2008. Nevertheless, Kenya’s significant significantly. The new government needs to textile and clothing exports lost in relative comprehensively address issues constraining quality between 1996-1998 and 2006- export development by: addressing the 2008, which is serious, given the growing competitiveness of Kenya’s products abroad; role of this sector. Moreover, Kenya’s removing impediments to competitiveness export growth was strongly affected by a within the export sector; allocating scarce decline or even extinction of old products resources to priority industries, and businessto existing markets. The increase of new support services—that enable current products to either new or existing markets exporters to export more, potential exporters only explains 2.8 percent of Kenya’s export to begin exporting—and aspiring exporters growth between 1998 and 2010. In order to to move from idea to execution. become a more dynamic exporting country, such as Nicaragua, Cambodia and Vietnam, While Kenya’s trade participation has Kenya’s export growth needs to focus more expanded over the last decade, its deficit on new products, while ensuring that existing has grown considerably, and despite some products show lower decline and extinction progress in product diversification, there rates. remains much scope for improvement. Goods exports are still dominated by Kenya’s share in world merchandise exports vegetables and foodstuffs, whose share has shrunk by 75 percent since the 1960s, expanded to over 60 percent in 2010. while its share in world manufacturing has Outside of the goods sector, Kenya is showing stagnated at a very low level. Given the high buoyancy in the development of the services level of unemployment, especially among the sector, particularly in communications educated youth, and given the job creation services. At the same time Kenya seems to imperative, Kenya needs to adopt concrete face important challenges with regard to the actions aimed at diversifying its production sophistication of its services exports. and export structure, and removing regulatory barriers to manufacturing exports. Looking at the product composition of Kenya’s export basket, there is little sign Kenya could develop an export strategy that of dynamism. The most important products doubles merchandise exports by 2018. Such in the basket are, by and large, the same a strategy could hinge on two pillars: ones that were there a decade ago. While (i) market and product diversification; and the EU still remains the main destination for (ii) expanding existing products with Kenya’s goods exports, higher export shares considerable growth potential. to the BRICs partially compensated for the declining share to the EU. Although export This will require the government to concentration of markets doesn’t seem to address issues of capacity development be a serious problem now, Kenya still needs and diversification, cost of doing business, to explore alternative sources of demand, export facilitation, and market access and given the current crisis in the Eurozone and promotion. This should include the harnessing 67 Achieving Shared Prosperity in Kenya Growth and Competitiveness of Kenya’s creativity and innovative spirit, high rapid and sustained economic growth including in the financial sector. However, in modern economic development have this is not going to be easy. It will require been associated with industrialization— Kenyan policymakers to make tough policy particularly growth in manufacturing.2 choices and renew their commitment to the manufacturing sector and to exports, as part Kenya has been losing its market share of a broader agenda to diversify the economy. of merchandise exports globally. Its share They will need to build resilience to shocks, in world merchandise3 exports has shrunk and develop productive capacity for high and significantly (by 70 percent since 1977, sustained economic growth. reaching 0.03 percent in 2010), while that of manufacturing exports has stagnated at Kenya has a comparative advantage in the about 0.02 percent in the last three and half export of services, but this potential has decades. The only good news on exports is not been fully exploited. Despite the weak that the share of manufactured exports in performance in manufacturing exports, merchandise exports has more than tripled Kenya’s services sector has performed from 10 percent in 1977 to 35 percent in relatively well in recent years. Service exports 2010. have been growing at nearly twice the rate of service imports, and substantially faster than Kenya’s export performance is poor merchandise exports. The country has a clear compared to high growth exporters. It comparative advantage in services within the has had limited growth in exports over COMESA region, and the sector has significant the last decade, mainly as a result of poor potential to continue this dynamic growth performance in merchandise exports. trend. However, regulatory barriers currently However, services exports have expanded restrict growth, particularly in higher value significantly. The ratio of total exports (goods added services sectors like banking, and and services) to GDP has fluctuated between professional and business services. Improving 22 percent and 29 percent (see Figure 8.1). competitiveness in these key input services In comparison, Cambodia’s4 ratio increased sectors will also be critical to underpinning a from 20 percent to 60 percent over the same more competitive manufacturing sector. Figure 8.1: Kenya’s share in world merchandise exports has shrunk KEY Challenges 0.12 The contribution of manufacturing to GDP Percentage Share of the World Exports 0.1 has stagnated at about 10 percent since 2000, and has actually been declining. The share 0.08 of manufacturing in GDP has dropped from 0.06 10.1 percent in 2000, to about 9.6 percent in 0.04 2010, implying that as the size of economy expanded, the contribution of the service 0.02 sector (including subsectors such as trade, 0 transport and communication), expanded 1960/69 1970/79 1980/89 1990/99 2000/10 faster than that of the manufacturing Kenya's Share in World Manufactured Exports Kenya's Share in World Merchandise Exports sector. This seems unlike experiences from Source: World Bank computation based on UN Comtrade data other countries, where in virtually all cases, 2 See Szirmai, 2009. 3 Manufacturing includes firms that convert raw materials into products; merchandise firms buy finished products and sell them. The latter differ from services firms in that they hold goods inventory that they sell to their customers. 4 Cambodia has a similar export structure as Kenya (i.e. emphasis on agricultural products and light manufacturing). Achieving Shared Prosperity in Kenya 68 Growth and Competitiveness period. Merchandise exports stagnated, 2000 and 2010. This increase mainly came increasing from 14 percent in 2000 to 19 at the cost of travel, whose share fell from percent in 2005, then declining to 17 percent 27.4 percent to 21.8 percent over the period. in 2011. However, service exports increased ‘Other services’ exports are dominated by to 12 percent in 2011 from 8 percent in government services, but also communication 2000,while service imports declined from 7.7 services, making up almost 10 percent of percent to 6.3 percent in the same period. Kenya’s total services exports. The export Net service exports (exports minus imports) share of transport services remains high at registered a positive balance that widened around 42 percent. Furthermore, Kenya has throughout the last decade (see Figure 8.2). portential to develop its services sector, but it faces severe regulatory barriers which As of 2011, Kenya’s services exports as a restrict services—particularly in banking, and percentage of GDP were higher than the professional and business services. ratios registered by countries at similar levels of development, implying that the There has been considerable volatility in country’s services exports are above the the rate of merchandise exports growth. sample average (conditional on the level of Kenya’s export growth pattern has been per capita income). Kenya’s services export rather volatile, with a few good years share of world services exports expanded followed by major falls. Vietnam, a successful from 0.065 percent in 2000, to around 0.09 example of export-led growth, has had a percent in 2010/11. Kenya shows the third distinct export growth trajectory with steady largest share in world services exports after growth in merchandise exports year after South Africa and Vietnam. year. In contrast, Kenya has had little positive momentum while suffering from some Services exports across broad sectors show particularly challenging years. that the country has slightly increased its dependence on ‘other services’ beyond The EU is the main destination for Kenya’s the traditional transport and travel sectors, goods exports. Nevertheless, the EU27 growing from 30.6 percent in 2000-2002 to export share declined from almost 50 35.7 percent in 2010, reflecting a compound percent in 1996-1998 to 35 percent in 2006- annual growth rate of 15.9 percent between 2008, which was mainly driven by strong Figure 8.2: Kenya’s exports as a percent of GDP have remained virtually the same for a decade, while they have grown in comparator countries. Kenya’s service exports have been growing sharply 100 14 90 12 80 70 10 Percent of GDP 60 Percent 50 8 40 6 30 20 4 10 2 0 2010 2011 2008 2009 2006 2007 2001 2002 2003 2005 2000 2004 1996 1997 1998 1999 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Kenya Thailand Ghana Cambodia Vietnam Mauritius Service exports Service imports Source: World Development Indicators (WDI), 2012 and KEU, edition 6 69 Achieving Shared Prosperity in Kenya Growth and Competitiveness drops in exports to the UK and Germany. In Kenyan export performance has been 2010, the export share to the EU27 seems hampered by its high costs of doing business to have recovered, reaching 37 percent of compared to its competitors such as India, the total export basket. The export share China and South Africa. Investment climate to Netherlands—Kenya’s major destination assessment studies (World Bank, 2008) have for cut flowers—is noteworthy, having shown that selected business costs in Kenya increased from 7.1 percent to 11.4 percent add up to three times more than in China and between 1996-98 and 2010. Higher intra- almost twice as in India. The high costs of regional exports (to the most important Sub- business reduce Kenya’s export profitability, Saharan African and Middle East and North thus, act as a disincentive to investment. African markets) only partially compensated Doing business 2012 places Kenya in the for Kenya’s reduced reliance on the EU-27 bottom quintile in terms of trading across markets, rising from 28.7 percent in 1996- borders (at position 141), with costs to exports 1998 to almost 35 percent of exports in 2006- and imports being twice as large as those in 2008. Missing data from Sudan, Rwanda, and OCED countries, and with almost three times the United Arab Emirates are likely to have longer wait times to clear customs. reduced the reported share. Kenyan firms have to bear high direct and Kenya does not export much to high growth indirect costs, because of the poor quality emerging markets like China, Turkey, Brazil of the transportation infrastructure. and India. The BRICs absorbed less than 2 High lead times and the unreliability of percent of Kenya’s exports in 1996-1998, transportation services are reflected in the 3.9 percent in 2006-2008 and 5.9 percent disproportionately high number of days of in 2010. While India was previously the inventory held by Kenyan firms, particularly dominant market among the BRICs, Russia by manufacturing firms. Inland transport has recently become an important export costs in the country are much higher than in destination. Kenya’s export share to the US China and India, and are among the highest also slightly increased, to around 8 percent in in all the comparator countries. Low returns 2006-2008 and 2010. to capital appear to have their roots in an insufficient supply of complementary factors There is untapped potential to increase of production such as infrastructure services. exports to countries that play an important role in global markets. The results from Kenya’s exports of goods have become a bilateral gravity model, evaluating the less concentrated. Over the last decade, observed bilateral trade in relation to the the index of export market penetration has projected trade, indicates that Kenya’s increased from 14 to 25, indicating that actual exports are in line with predictions for Kenya has become better at diversifying partners such as Europe, the US and Japan, its product portfolio across existing export but are below the potential to some high markets. The Herfindal Index5 for products growth countries. The results from a gravity has decreased from 0.1 to 0.05, indicating model evaluating the observed bilateral reduced concentration. trade in relation to the projected trade indicates that Kenya’s exports are in line with Looking at another measure of export predictions for partners such as Europe, the product diversification—the share of total US and Japan, but are below potential to exports accounted for by the top five some high growth countries, including the HS6 products—shows that Kenya is less BRICS. 5 The Herfindal Index is computed as the sum of squared shares of each product (market) in total exports. A country with a perfectly diversified export portfolio in terms of products (markets) will have an index close to zero, whereas a country with only one export product (market) will show a value of 1. Achieving Shared Prosperity in Kenya 70 Growth and Competitiveness concentrated in its exports than most African new product categories such as inorganic peer countries, but still more so than South chemicals, glass/glassware, beverages/ Africa and all non-African peers. Regarding spirits, metals manufacturing, and select market concentration, Kenya managed to apparel categories. further diversify its export markets during the period. Overall, the results suggest that Kenya has increased the number of export export concentration of products and markets destinations and export products. In 1996- is not a serious problem, but significant 1998, Kenya exported 2813 products to 98 scope remains for further diversification of countries, compared to 3621 products to the product range. 129 countries one decade later. Both Kenya, and particularly Vietnam, managed to catch Kenya’s top ten export goods in 2010 up with South Africa in terms of the number confirm the country’s strong reliance on of countries, with Vietnam exporting more vegetables, but also indicates the growing products to more countries than Kenya in role of textiles. The top ten products made 2006-2008. Other regional partners also up more than 50 percent of the total export caught up with Kenya, particularly, Tanzania, basket, reflecting moderate diversification at Uganda, and Ghana, while Rwanda is lagging the product level. However, this share grew behind. substantially in recent years, from only 43.5 percent in 2006-2008. Among the top ten, Kenya’s exporters export on average 7.6 vegetables had the dominant share, of which HS6 products, the third largest number after black tea and cut flowers and flower buds South Africa (16.4 products) and Cambodia for bouquets were the main export goods, (8.1 products). Kenya also ranks third in with almost equal shares in 2006-2008. terms of the average number of markets per Table 8.1 reveals that the EU27 is a major exporter (2.5 markets), after Cambodia (5.3 export destination group for many important markets) and South Africa (3.6 markets). vegetables. Besides EU27 countries, the The results suggest that compared to other Middle East and Eastern Europe are major East and West African peers the number export destinations for black tea, while the of products is not a major issue for Kenyan US plays an important role for coffee exports. exporters, while Kenya trails Cambodia and South Africa. In terms of number of markets, Kenya has also improved its relative Kenya lags behind Cambodia, which seems to competitive position (as measured by the be globally more integrated. Revealed Comparative Advantage) in some Table 8.1: Kenya’s high cost of doing business for trading across borders Sub- Kenya Sahara OECD Singapore Malaysia China India Africa Documents to export (number) 8 8 4 4 6 8 8 Time to export (days) 26 31 10 5 17 21 16 Cost to export (US$ per container 2,050 1,960 1,032 456 450 500 1,095 Documents to import (number) 7 8 5 4 7 5 9 Time to import (days) 24 37 11 4 14 24 20 Cost to import (US$ per container) 2,190 2,502 1,085 437 435 545 1,070 Source: Doing Business 2012 71 Achieving Shared Prosperity in Kenya Growth and Competitiveness Export growth has been driven primarily by this period, Kenya’s share of low-tech exports traditional products to traditional markets, grew from 6.2 percent to 14 percent, driven with little by way of new products or new particularly by the textiles sector. At the market discovery. Kenya’s main exports in same time, Kenya lowered its dependence on terms of products and markets still remain resource-based exports from 25.4 percent to what they were two to three decades ago. 19.5 percent of the export basket. Exports of Evidence also shows that the total number of primary products declined from 66.7 percent both markets and products has declined since to 46.8 percent in 2008, but climbed back to 2005, and Kenya appears to be specializing 56.2 percent in 2010. in a smaller set of merchandize exports.6 Export growth has mainly been driven by Kenyan exporters of business services are growth at the intensive margin (i.e. existingfacing a variety of challenges. At the regional products and existing markets), with minimal level, numerous barriers limit the mobility of growth at the extensive margin (i.e. existingprofessionals, and differences in regulation products into new markets, new products further segment the markets for business into existing markets, and new products into services in East Africa. Skills mismatches and new markets). skills shortages pose a significant challenge to many Kenyan exporters. Another factor An analysis of Kenya’s trade statistics for that constrains service providers from the period 2005 and 2009 reveals that exporting is a widespread lack of knowledge export growth has been primarily at the about exporting opportunities, markets, and intensive margin—with existing products processes, and a lack of awareness as to in existing markets. Further, there has been how to acquire such knowledge. Very often, little new product or new market discovery. Kenyan service providers—especially smaller Cumulatively, between 2005 and 2009, ones—lack international networks and find approximately 72 percent of export growth it very difficult to obtain market intelligence was at the intensive margin. At the same on foreign markets. Finally, difficulties in time, only 28 percent of the growth was penetrating foreign markets also comes from at the extensive margin. The bulk of this Kenya’s low international brand equity as a growth was accounted for by an increase in business service provider. exports of existing products to new markets. Discovery (new products exported to either In summary, Kenya’s overall export new or existing markets) accounted for less competitiveness in recent years has been than 1 percent of growth. very weak—it has failed to maintain its competitive position in key products and The technological content of Kenya’s exports markets, and perhaps more importantly, to improved substantially between 1990 introduce new, innovative products to the and 2010. The share of high-tech exports mix. On many indicators of competitiveness, increased from 0.6 percent to 3.4 percent, Kenya does outperform its regional (East and the share of medium-tech exports rose and West African) peers. However, in almost from 1.1 percent to 6.6 percent, driven all cases, it lags badly behind South Africa by growth in exports of pharmaceuticals, and emerging dynamic global exporters like and electronics and telecommunications Cambodia and Vietnam. equipment. Perhaps more significantly over 6 This could be driven by a combination of higher exit rates by existing export products and lower rates of discovery and innovation at the extensive margin (new products being brought to the export market). Achieving Shared Prosperity in Kenya 72 Growth and Competitiveness Policy Recommendations: 9. Fuelling growth: energy Revamping the Export Engine • Renewed momentum in the business By Kyran O’Sullivan environment reform agenda will reduce both startup and operating costs for Introduction businesses, including exporters. Kenya’s performance on business environment K enya has advanced further in the reform of its power sector than most African countries. Reforms implemented to date reforms has stagnated since 2008 (when Kenya was the top reformer in Africa in the -notably private participation in generation; World Bank Doing Business indicators). commercial and technical performance There is urgent need to embark on contracting for the public companies; a tariff regulatory reforms, especially in business policy based on cost recovery and regulation startup, licensing, tax administration by contract; unbundling of generation and and trading across borders, and this will distribution; and creation of specialized significantly enhance the competitiveness agencies for geothermal development and of Kenyan firms. rural electrification-have had positive • A comprehensive action plan for outcomes. enhancing exports, drafted and implemented jointly with the private Further unbundling is in progress, and in sector, is urgently required. This action time, the transmission company KETRACO plan, as part of the second Medium will assume the mandate of an independent Term Plan, will address institutional and system operator from KPLC. The reforms policy constraints across ministries and have attracted considerable investments agencies, to identify priority constraints from private investors and donors, the quality and systematically address these through of electricity supply has improved, and the a multi-year reform program. For such a number of electricity consumers has doubled program to be implemented effectively as in the past five years. it has been in other countries, high level government leadership and oversight are Kenya is now at a crossroads in its power key success factors. sector reform journey. The government drafted an Energy Policy in 2012 that described • Critical to the strategy of achieving the challenges in the sector, together with greater diversification of the export strategies and policies to address these, that sector is firm level support in partnership included a detailed implementation agenda with the private sector, in accessing and timetable. new markets, new products and market access initiatives. Such firm level support The draft Energy Policy sets out the must be tailored to the specific needs of overriding objectives for the power sector potential and current exporting firms, to that will guide public policy in the medium innovate and attain higher value addition, term: increase the current value of non- • Ensuring adequate and reliable traditional exports, grow services exports electricity supply. Investment in and increase penetration to existing and electricity generation and transmission emerging markets. infrastructure needs to keep pace with demand, to ensure that there is adequate reserve margin and diversified sources of 73 Achieving Shared Prosperity in Kenya Growth and Competitiveness supply. Modernization of the distribution Development Corporation has begun network needs to be accelerated, to geothermal resource development in ensure that there is reliable electricity Menengai. Wind generation projects being service to customers and reduction of developed by private sector sponsors, as technical losses. well as thermal generation at a number of • Ensuring that electricity prices are sites will add a further 400MW generation affordable and at the same time ensuring capacity by 2014. fair returns to investors. Stable and predictable electricity prices are necessary Regional interconnections between Kenya, to underpin the competitiveness of Uganda, Tanzania and Ethiopia will allow Kenyan firms. The electricity tariff-setting the countries to access lower-cost power. It mechanism will need to ensure that there will also enable countries that import power is a fair return for investors, in order to to postpone, reduce or avoid large and lumpy sustain private investment in the sector. investments in domestic generation. For • Rapidly increasing the number of Kenya example, Kenya has contracted the purchase households with electricity service. The of 400MW of supply from Ethiopia from late number of households with electricity 2017, after a transmission line interconnector access has increased rapidly in recent will be commissioned. Domestic generation years—doubling between 2008 and 2013 capacity additions and interconnections to 2 million customers. The electrification under construction will enable Kenya to achieve sufficient reserve margin (i.e. program can be sustained to achieve the surplus available generation capacity), stable target of 40 percent household access by electricity supply, avoid load shedding and 2020, from 25 percent in 2012. reduce its vulnerability to hydropower from 2014 onwards. A policy that ensures open The government can achieve these objectives access to transmission networks needs with sensible policies that protect investors to be pursued, to allow agents in Kenya and consumers, promote competition, and and neighboring countries to trade freely protect the environment. (purchase and sell) electricity. Policies to ensure Electricity is The outlook of electricity supply by adequate and reliable source based on Kenya’s least cost power development plan is summarized in Figure (i) The current policy of diversifying national 9.1. Kenya’s considerable green energy sources of electricity supply and pursuing a sources of wind and geothermal are projected regional strategy of system interconnection to provide as much as 45 per cent of electricity with neighboring countries should continue. supply by 2022, displacing thermal plants that Investments in geothermal and wind would otherwise be required. Imports based generation capacity and transmission line largely on diversified hydropower resources, interconnections with neighboring countries, are projected to provide a further 28 percent will reduce vulnerability to drought-prone of supply by 2022. Since the proportion hydropower. of national hydropower generation is also projected to fall to 20 percent by 2022, Currently, 280MW of additional geothermal Kenya’s supply of electricity will become capacity is being built in Olkaria, to be much less vulnerable to hydropower, during commissioned in 2014, and the Geothermal drought years. Achieving Shared Prosperity in Kenya 74 Growth and Competitiveness Figure 9.1: Projected percentage shares of spare generation capacity. Furthermore, sources in electricity supply 100 establishing a wholesale market, with the 90 required accompanying mechanisms (e.g. 80 metering, balancing mechanisms, settlement 70 of differences and ancillary services), is costly. Percent Share 60 50 40 Even well-performing wholesale markets 30 can fail to provide market signals to ensure 20 optimal security of supply. The approaches 10 0 successfully adopted by middle-income developing countries such as Chile, Brazil, 20 10 20 1 20 12 20 13 20 14 20 15 20 16 20 17 20 8 20 19 20 0 20 21 2 /1 /1 /2 /2 / / / / / / / / / 09 10 11 12 13 14 15 16 17 18 19 20 21 Peru, Colombia and El Salvador in the past 20 Hydro Share Gothermal and Imports Share Oil Fired Generation Wind Share Capacity Share decade, are a reversal of the tendency Source: World Bank Computation based on data from Kenya Least to create wholesale markets that was Cost Power Development Plan, 2011 predominant in the 1990s. (ii) Policies for increased competition in supply to end users should be implemented These countries have shifted their approach gradually, provided that a number of from “competition in the market” to preconditions are put in place. The draft “competition for the market”. Their priority Energy Bill 2012 proposes that a generating is to ensure security of supply through entity may supply electrical energy to any competitive processes (auctions and others), consumer, i.e. the Bill envisages a competitive and to sell electricity to financially viable wholesale and retail electricity market. The distribution companies, through long-term proposal is made in the context of the need PPAs. to ensure that there is improved reliability and reduction of losses in the distribution of To ensure the success of further market electricity to consumers. There are a number liberalization, the government should define of preconditions for a successful transition to a road map with specific milestones and a more liberalized power market. Ideally, the timelines, in order to create the appropriate following characteristics are required: technical, commercial and economic • multiplicity of market players (i.e. conditions, to be able to introduce such multiple generators and buyers); reforms successfully. • no major transmission constraints; and • mature steady-state power systems (iii) Kenya can ensure security of supply through competitive processes (auctions (i.e. which do not require significant generation capacity additions). and others) to sell electricity to financially viable distribution companies through Experience from successful examples long-term PPAs. In order to attract private indicate that where reforms were investment in generation capacity, Kenya will introduced in wholesale markets, either need to continue to provide investors with a one of the above conditions were already predictable and even enhanced environment. in place, or they were created as part of This will involve long term power purchase the reform process. In addition, wholesale agreements (valid for at least 15 years) and power markets seem to function better credible off-takers; and include either take or when there is a comfortable margin of pay clauses or payment for capacity (in order 75 Achieving Shared Prosperity in Kenya Growth and Competitiveness to secure a level of cash-flow at least covering information systems used by the utility (KPLC) debt service obligations). It is unlikely that to run its operations. A realistic approach to a private investor would be willing to build addressing this critical issue involves effective generation capacity in Kenya on the basis enforcement of a strict regime of service of a prospective portfolio of clients, who quality, and application of penalties, when would not be prepared to make long term mandatory standards are not met. commitments for energy prices or demand volume. (vi) The efforts of industry and consumer associations to improve efficiency in the (iv) Modernization of the electricity commercial and industry sectors need to network is necessary. There is urgent need be encouraged. The regulatory environment to modernize the electricity transmission and can support these efforts (the current distribution systems, through investments in requirement for solar water heating in new the “last mile” of the electricity network (i.e. housing development is a good example), in the distribution network up to the customer and it will need to be backed by a strong meter), and through the deployment of enforcement regime. advanced tools for network planning, operations and maintenance in KPLC. The Policies to ensure that electricity introduction of Smart Grid technology and prices are affordable and provide other information technology applications to fair returns to investors improve operational management processes, combined with investments in upgrading (i) The policy of maintaining full cost recovery and expanding the electricity distribution tariffs is critical for sector sustainability grid, could initially target urban and greater and for attracting private investment to peri-urban areas, that are the main zones the sector. Kenya’s good track record of of economic growth and development. maintaining tariffs at cost recovery levels— Currently businesses incur heavy production even during periods of high international losses and capital investment costs in self- energy prices—has enabled it to attract generation, due to unreliable electricity large amounts of concessional financing service. By ensuring reliable electricity for electricity generation, transmission service in economic growth zones, existing and distribution infrastructure, from donor businesses will become more productive and agencies, as well as financing from the private will be encouraged to expand, while new sector. manufacturing and service industries will be attracted to set up operations. (ii) The system of regulation by contract that governs the setting of wholesale and retail (v) Effective enforcement of regulations tariffs since 2008 has worked well and should on service quality is required. The Energy be maintained. The independence and Regulatory Commission (ERC) should ensure capacity of the ERC and the Energy Tribunal effective implementation of a regime based should be safeguarded and enhanced. The on service quality, including parameters to existence of these bodies has been a key be monitored, acceptable target values, feature of the sector that has underpinned penalties in cases of non-fulfillment and private sector investment in independent procedures for systematic monitoring. This power generating projects, and maintained should allow for timely access to, and the use interest in projects being developed. As a of information provided by the management wider array of public-private arrangements Achieving Shared Prosperity in Kenya 76 Growth and Competitiveness are introduced, and as the sector further system, acknowledgement of agricultural evolves, the competence and capacity of potential, access to markets, and the these bodies will need to be commensurately capacity of local manufacturing industry); adapted, and enhanced with sector needs. and • the design and effective implementation (iii) Diversification of the sources of electricity of an institutional framework that clearly supply from hydropower and oil based establishes the roles and responsibilities generation will moderate price increases and of the public and private agents involved. reduce price volatility. The share of oil-fired generation in electricity supply is projected to Achieving the targets for household fall to about 11 per cent by 2022, as is shown electrification in Kenya (40 percent by 2020, in Figure 9.1, thus, reducing the weight of up from 25 percent in 2012) will require more systematic planning of network oil-fired generation in the bills paid by KPLC’s reticulation using advanced GIS techniques, customers. Consequently, as new generation in order to reduce or at least contain costs. is commissioned after 2014 (when 280MW As the draft 2012 Energy Policy points out, at Olkaria I and IV are commissioned), there creating linkages with other sectors of the will be less volatility from month-to-month in economy in the framework of integrated the fuel component of the electricity bill. In energy planning is necessary. Expanding addition fuel imports that are a heavy burden industrial and commercial electricity loads to Kenya’s balance of payments, will fall can anchor the electrification program by as the country reduces its use of imported enabling the distribution utility to expand diesel and heavy fuel oil. the network with such nodes at the center of local reticulation schemes. Off-grid schemes will require that technical designs Policies to increase electrification are optimized and institutional arrangements rapidly that are adapted to local conditions. For (i) Public policy has supported electrification example, through community ownership or as a priority development objective. This involvement in billing and collections. commitment will need to be sustained over the long term. Common features of (ii) The financial sustainability of a successful rural electrification planning electricity service should be guaranteed include: by contributions from all consumers. The • a clearly established system to prioritize draft Energy Policy highlights the high cost of the areas to be electrified and the projects connection at between KES 17,000 and KES to be selected; 35,000, a level that is beyond the reach of • a long-term (multi-year) vision aimed majority of rural households. It is unrealistic at coordinating grid extension and off- to charge new users full connection costs. grid efforts, that should be supported by Investments in rural electrification plans studies on the optimization of technology should comprise of all network assets needed options and a grid/off-grid comparative to provide services to new users, which economic analysis; include the new customers’ connections. • a broad regional development approach Worldwide, experience shows that there that takes into account other conditions is often a gap between the cost of efficient for rural development (access to education service provision, and the ability to pay of and health services, an adequate transport low-income consumers. 77 Achieving Shared Prosperity in Kenya Growth and Competitiveness (iii) Given the magnitude of the electricity term. These have been discussed and are access challenge and the limited institutional summarized as follows: and financial resources available, it (i) Policies to Ensure Affordable Electricity. is imperative for Kenya to minimize The current policy of diversifying sources of inefficiencies in the power sector. supply, and pursuing a regional strategy of system interconnection with neighboring (iv) Private sector provision of energy countries should continue. Increased services in rural areas should be encouraged. competition in supply to end-users should A number of factors, such as accelerating be implemented gradually, provided that urbanization, will facilitate the achievement a number of preconditions are put in of electrification targets. Nevertheless, as place. Investments in transmission and the residual unconnected households will distribution infrastructure need to be be progressively more dispersed and poorer, accompanied by effective enforcement of the costs of connecting them may escalate regulations on service quality to ensure considerably. In areas of very low population reliable service is provided to consumers. density, the focus of the government should (ii) Policies to Ensure Adequate Electricity be on providing energy services and not just Supply. The commercial orientation of electricity access, since the immediate needs the sector and the government’s policy of of rural households are for lighting, cooking, maintaining full cost recovery tariffs, have entertainment and charging mobile phones. been critical for sector sustainability and These energy services using photovoltaic- attracting private investment to the sector. based devices can be provided more efficiently by the private sector, than by the This track record–even during periods public sector. The role of the government of high international energy prices– should be to help private sector service has enabled Kenya to attract significant providers to get established, by facilitating concessional financing for electricity start-up capital and expertise development, generation, transmission and distribution and introducing smart subsidy schemes. infrastructure from donor agencies, as well as conventional financing from the private (v) The electrification program that KPLC is sector. The independence and capacity of implementing on behalf of the government the ERC and of the Energy Tribunal, should requires long term financing, to allow for be safeguarded and enhanced. extended amortization of the investments (iii) Policies to Rapidly Increase Electrification. by the company and reducing the financial The financial sustainability of electricity impact on it, and limiting the potential service should be guaranteed mostly by impact on tariffs. The electrification rate the contributions from all consumers. will need to increase from about 350,000 Pursuing a balanced approach to urban and households per annum currently, to 500,000 rural electrification, can ensure financial by 2022, to be able to achieve the targeted sustainability of supply, and affordability 80 percent connectivity by 2030. by poor consumers. The electrification program that KPLC is implementing on POLICY RECOMMENDATIONS behalf of the government requires long- The paper endorses policies in three broad term financing to allow for extended areas that the new government should amortization of the investments and consider adopting in order to meet Kenya’s reducing the financial impact on KPLC and power requirements in the near to medium limiting the potential impact on tariffs. Achieving Shared Prosperity in Kenya 78 Growth and Competitiveness 10. Infrastructure for growth: road authorities and a fuel levy to fund road priorities for transport sector maintenance). By Josphat Sasia and Solomon Waithaka Kenya’s road network of 160,886 km is adequate for the needs of the densely- Introduction populated parts of the country, while T ransport infrastructure is a central insufficient for those Kenyans who live in element for Kenya to reach its Vision the less populated areas. In terms of quantity 2030. Economic growth will only accelerate of roads, Kenya compares favorably with if Kenya increases its quantity and quality of its neighbors where many regions remain infrastructure, in particular transport. The without all-weather roads. vision is to build modern, high-quality and efficient transport infrastructure facilities The port of Mombasa continues to perform that would facilitate access to markets. In substantially below international standards. addition, better infrastructure is expected to This is despite some recent improvements boost tourism, which is one of the six priority such as the deepening of the Kilindini channel, sectors for development. Areas of emphasis the construction of a second container in the Vision 2030 include rehabilitating terminal, and the upgrading of port security. the road network; upgrading the railways; Nevertheless, with some 900,000 containers transforming ports and airports to create Twenty-foot Equivalent Units (TEU) Mombasa hubs for a modern economy; and improving transacts per year what Singapore handles in urban public transport. eight days. Kenya is the dominant economy in East The aviation sub-sector, which is critical Africa and aspires to become a regional for promoting tourism and trade, has also hub for which it has the right location become a bottleneck. Kenya’s main aviation and conditions. Its geographic location is gateway, Jomo Kenyatta International Airport critical for transportation of goods from the (JKIA), is experiencing severe capacity neighboring countries to foreign markets. constraint. For instance, JKIA handled over Unfortunately, this potential is not fully 6 million passengers in 2012 compared to utilized as transport costs remain high, due its design capacity of 2.5 million. With such to inefficiencies, poor quality, and congestion congestion, Kenya would not be able to reach of the infrastructure. its objective of increase foreign tourist and other visits from the current 1.5 million to KEY FACTS AND TRENDS 3 million. The sector has received additional Following years of neglect during the 1990s resources in recent years. For example, the and early 2000s, the quality of Kenya’s government is expanding the Nairobi and transport infrastructure and services has Kisumu airports. been improving over the last eight years. This has been a result of higher spending on The railway sector has been on a downward infrastructure as well as thanks to institutional spiral for decades. Kenya Railways Corporation reforms. Recent investments have upgraded (KRC) used to be a major economic asset trade corridors, reduced urban traffic several decades ago. Thirty five years ago, congestion, and modernized governance in it carried 60 percent of long distance freight the sector (through establishing autonomous traffic along the Northern Corridor linking 79 Achieving Shared Prosperity in Kenya Growth and Competitiveness Mombasa, Nairobi and the Ugandan border. quantity and poor quality of certain aspects However, by the time the concession for of Kenya’s transport infrastructure continue railways services was signed in 2006, KRC to present a major impediment to economic had become a severe financial liability to growth. Some of these key impediments the government. Today, railway’s share of could be removed in a short-period while the throughput at the port of Mombasa is others will take several years of investment negligible–at about 4 percent―which has and institutional development to change. caused shifting of traffic onto the overloaded In both instances, the pays-offs for Kenya’s roads and thus reduced competition in the economy and its people outweigh, by a freight market. For comparison, KRC handled great margin, the time and effort needed to over three million tons in the 1990s, while in implement the reforms. 2012 it handled one six hundred million tons. The poor performance of the railways adds KEY CHALLENGES to the congestion at the port of Mombasa. Progress in improving transport infrastructure and services has been uneven With respect to urban transport, Kenya’s across the five sub-sectors: roads, ports, cities and towns have been rapidly growing aviation, rail, and urban transport. Thus, the and this trend is expected to continue challenges that each of the sub-sectors faces as the labor force out of agriculture into differ. The following sub-sections summarize industry and services. The pace of growth the key challenges in each sub-sector. of urban areas has far outstripped the ability of the authorities to provide infrastructure (i) Roads to keep parity with this growth, even if The main challenge here is the poor condition vehicle ownership had remained the same. of the road network, which is a result of a But urbanization has been accompanied in large backlog in maintenance. More than half Kenya, as in virtually all countries, with large of Kenya’s roads are in poor condition, and increases in motorization rates. The pace of only 38 percent are in fair to good condition both population growth and motorization has (see Figure 10.1). In recent years spending led to new urban challenges, in which travel on roads has increased: US$ 2.4 billion were times have become long and unpredictable, spent between 2008 and 2011, of which US$ particularly for the urban poor who live farthest from the city centers. For example, Figure 10.1: Only 11 percent of Kenyan roads are in good condition on an ordinary day, it takes more than one Status of Kenya's road network (2010) hour for commuters living less than 10 km 60 away to reach the Central Business District of Nairobi. The cost to the Kenyan economy from these challenges is large, in terms of 40 lost productivity, congestion, and increasing Percent 55 public health costs associated with poor air quality, which negates Kenya’s reputation as 20 30 an environmental leader. 8 0 3 3 1 Although increasing investments and Good Fair Poor institutional reforms over the past years Paved Non-Paved have had a positive impact, the insufficient Source: World Bank, 2010 Achieving Shared Prosperity in Kenya 80 Growth and Competitiveness 1.8 billion went to construction of new roads further contributing to the poor performance and the remainder to road maintenance of the port. and rehabilitation. Nevertheless, even this spending is inadequate to raise and maintain (iii) Airports the quality of road network. The main challenges for the aviation sector are service improvements and A second challenge facing the road sector inadequate capacity, the latter recently is the completion of ongoing institutional addressed by investments in airports. reforms. The government introduced major Among other measures, improving the institutional reforms in the road sector over quality of service will depend on how the the past few years which lead to substantial government addresses the management improvements in the efficiency of managing performance and aviation regulations. As air the road network. However, further reforms traffic grows, the mandate of the Kenya Civil are required to anchor the sector to the Aviation Authority (KCAA)―i.e. to provide constitutional changes of 2010 and to regulatory, safety and security oversight incorporate private sector in financing and consistent with international conventions management of the sector.. and protocols―becomes more demanding. KCAA has largely met the International (ii) Ports Civil Aviation Organization standards and The port of Mombasa has suffered recommended practices, though it is yet from years of underinvestment and is to attain the International Aviation Safety experiencing serious capacity constraints. Assessment Category 1 safety status. JKIA Although it has a design capacity for only has attained category 1 security status from the Transportation Security Administration 250,000 TEUs annually, it handled a much allowing for direct flights from Kenya to higher amount―about 900,000 TEUs―in the US. Overcoming the regional security 2012, out of which 27 percent was destined challenge will enable Kenya to access the for neighboring countries. This under large US market and also attract more airlines capacity leads to long delays and to high to operate from Kenyan airports. handling costs at the port. Nevertheless, by international standards, the volumes (iv) Railways handled by Mombasa port are relatively The key challenge in railways is the dismal low. This creates a paradoxical situation that performance caused by a combination despite the low levels of trade, the port still of dilapidated infrastructure and poor suffers from substantial congestion. The management. The legal framework is also total average transit time from Mombasa not conducive to promoting private sector to Nairobi is estimated at 20 days, about engagement which could in turn improve the same time it would bring a container by the management of railways. Indeed, the boat from Singapore to Mombasa. Without KRC Act works against further privatization investment in new capacity, over and above of operations. For example, since the law is current investments, that would increase the not based on an open access principle for quality of services and reduce their price, qualified operators, it benefits the incumbent Mombasa cannot become a major transport concessionaire for commuter services, hub for the East African region. In addition the Rift Valley Railways (RVR). The firm is to the high congestion and handling costs responsible for all rail freight operations and created by inadequate infrastructure, there for the maintenance of railway infrastructure, are deep-rooted interests that resist reforms, including the track. Therefore, a newcomer 81 Achieving Shared Prosperity in Kenya Growth and Competitiveness to the commuter rail market could face comprehensive parking policies and pricing, serious constraints, such as RVR giving its as well as temporal restrictions on freight freight trains timetable priority. In addition, movement in and through cities; (v) strategic even if a new service provider was granted application of traffic improvement measures, access, RVR would still have control over the including physical separation / geometric maintenance priorities and, moreover, is improvements where appropriate, use of likely to be granted the right to charge a track centralized traffic control where appropriate access fee. (e.g. central Nairobi), and development of Intelligent Transport System (ITS) (v) Urban transport infrastructure; and (vi) strategic improvements Addressing the problems of urban transport to urban road networks to support the above requires a holistic approach that recognizes measures. To address the above will require the experience that many cities around concerted efforts to improve the currently the world have learned the hard way: it is weak institutional framework for urban difficult, if not impossible, for cities to “build” transport and the formation of the Nairobi themselves out of congestion. Tackling Metropolitan Transport Authority (NMTA) complex urban transport problems such as should be expedited. congestion requires a more comprehensive approach, such as the internationally (vi) Gateways accepted strategy of Avoid – Shift – Improve Kenya’s main trading partners are its (ASI).1 In the case of Kenya, such an approach neighbors; the EAC Customs Union signing would entail the following elements: (i) (in 2005) saw a significant increase in trade, strong investment in urban public transport, rising threefold in some cases during the first including mass transportation modes such five years. Kenya must address significant as commuter rail and Bus Rapid Transit trade facilitation challenges, including non- (BRT) systems, that provide an alternative tariff barriers on the main corridors and on to private car use within the major cities, the entry and exit points. Though progress complemented by bold action to develop has been noted―with the number of road and strengthen institutions capable of blocks between Mombasa and Malaba more developing and managing these systems; (ii) than halved, and the crossing time reduced immediate action to strengthen regulatory from 15 to about 6 hours, both in the last five and planning capacities with respect to land- years―there is scope for further reduction. use and land-use control at national and The one stop border point concept adopted by county levels, in order to ensure that returns the EAC will be of help once the infrastructure on transport investments are maximized to for it is completed and a border management allow full exploitation of transport capacity system installed. In the meantime, there created; (iii) strengthening the use of non- has been little attention to the roads linking motorized transport, such as cycling and productive areas to the border, the bulk of walking, through, for example, a Complete which are in very poor condition. In addition, Streets program, with better linkages to the Kenya has to seriously consider its links to public transport network; (iv) managing the Ethiopia, Somalia and Southern Sudan even demand for road space through transport as it continues to invest in roads leading to demand management measures, including the traditional EAC markets. 1 Avoid excessive motorized travel, for example through incentivizing the use of non-motorized transport such as walking or cycling, or developing or redeveloping land-uses in a manner as to reduce the need to travel by motorized means. Shift the motorized travel that does occur toward vehicles with higher occupancy, such as well-managed, effective, and efficient public transport services, carpooling, or vanpooling. Improve the fleet of motorized vehicles which are plying the roads, by removing older, dirty vehicles, improving driving and maintenance practices, ratcheting up the environmental and safety performance requirement of new vehicles entering the market and the fuels they run on, and managing running ways to minimize stop-and-go traffic as much as possible (while maintaining the primacy of Avoid and Shift). Achieving Shared Prosperity in Kenya 82 Growth and Competitiveness KEY RECOMMENDATIONS ventures with local investors. Irrespective of The cost of expanding Kenya’s infrastructure the type of investor, a precondition for the to the level needed for achieving a success of any management or concession sustainable GDP growth rate of 10 percent arrangement would be the adequacy of is well above the resources available to its governing contract, and particularly the government and donors. Hence, the two design and supervision of it (see Box 10.1). primary recommendations for transport infrastructure and services are to: (a) involve In addition to attracting private sector private sector in order to meet the large involvement in infrastructure, other reforms infrastructure gap and improve service are needed to address the key challenges quality in the non-urban sector, and (b) related to transport infrastructure and manage demand and improve the quantity services. These are highlighted below. and quality of public transport services in the urban sector. (i) Roads • Increase spending on road infrastructure Kenya’s transport infrastructure sector has and allocate a greater share of the great potential to grow and be profitable, budget to upgrading unpaved roads and so the government should expect high maintenance. Costs of maintenance investment interest from the private sector. should be incorporated in fiscal estimates The interest would be strong, in particular, when preparing new road investments. for Kenya’s international getaways―JKIA • Adhere to implementing the Road Sector and the port of Mombasa―but is also likely Investment Plan (2010-2024). for railways, in particular, the commuter • Concession the viable road sections along rail service. The road network, on the other the Northern Corridor. hand, is unlikely to attract strong interest, so • Initiate maintenance concessions and long- the government would retain the primary term performance-based maintenance financial responsibility for this sector. contracts for the long-haul road network. • For national roads in and around the main Attracting experienced, international cities–Mombasa, Nairobi, and Kisumu– operators would be the best strategy for foster strong mechanisms for land-use attaining services at international standards control and access management by local and at competitive prices. Experiences authorities to ensure that these roads elsewhere support such a view, showing retain their national function. strong correlations between private investment and effective management. Air (ii) Ports transport is a good example of successful • Award a concession contract for Mombasa synergy between the private and public port to a private investor, ideally involving sectors. The benefits are also evident from an experienced international operator. Kenya’s own air cargo transport; the sub- The first step of this process would be to sector is managed by private firms and has commission a transaction adviser for the achieved remarkable progress, particularly in concessioning of the Mombasa container the expansion of cargo handling facilities. terminal, the dockyard and marine craft, and the bulk oil terminals. The next steps The government should seek respected would be to concession the operational international operators to manage the key activities at the port and transform the gateways, which could be in the form of joint Kenya Port Authority into a landlord port. 83 Achieving Shared Prosperity in Kenya Growth and Competitiveness Box 10.1. Role of government in management or concession contracts The success of management and concession contracts depends on how they are designed and implemented. In designing the concession, the management responsibility assigned to the international operator has to be very clearly defined, so as to avoid a repetition of the failed management contract at the Mombasa container terminal. The government should be careful in proposing a joint venture that includes the asset authority/ landlord, whether it is the Kenya Airports Authority or the Kenya Ports Authority. Such ventures do exist elsewhere, but they raise potential conflicts of interest (the authority holds, in effect, both the interest of the landlord and of the tenant). It would be preferable to have a complete separation of roles with clear lines of responsibility. As for implementation, even if the private sector is involved in investment and in providing services, the public sector will still retain some core functions for all transport modes. These would include: (a) public funding in areas where private companies cannot be attracted; (b) contract management, including long-term contracts (e.g. performance-based road maintenance contracts; concessions/toll roads, etc.); and, (c) concession monitoring where the public sector retains ownership of infrastructure assets and is responsible for several oversight functions including, ensuring terms of agreements are followed; monitoring maintenance of public assets; ensuring safety standards are kept, and monitoring service delivery performance targets. • Enact legal changes to facilitate private • Amend the legislation to create a sector investment and management, and competitive railway system that is anchored strengthen the regulatory function. in a transparent contractual relationship between the government and KRC. This (iii) Airports should be for services to be provided, • Concession the international airports. directly or via concession contracts, The first step would be to prepare the and cover multi-annual infrastructure basis for concessioning JKIA and other maintenance contracts, public service international airports. The JKIA concession contracts and compensatory mechanisms should incorporate an investment plan for the procurement of passenger rolling to increase capacity. The next steps stock. would be to place the major domestic • Strengthen the regulatory function over airports under a management contract the concession holder RVP. and transfer responsibility for the other • Prepare plans to maximize the value airports/airstrips to counties. of Kenya Railways’ non-operational • Make KCAA a fully autonomous regulator land or land that, in time, could be by separating its responsibility to made non-operational as a result of the regulate air navigation services and the concessioning and taking into account the management of the East African School of future expansion of the railways. Aviation from its responsibility to provide   such services. In addition, KCAA needs to (v) Urban transport upgrade its air navigation systems. • Scale up investment in urban public transport infrastructure and services, (iv) Railways particularly in Mass Rapid Transit systems • Inject additional resources to acquire designed around buses and commuter rail modern rolling stock, and upgrade the rail systems, as well as in the capacity to plan track. and manage urban public transport. Achieving Shared Prosperity in Kenya 84 Growth and Competitiveness • Scale up capacity of the private and 11. Modernizing and informal sector to enable professionalized boosting agriculture transport service delivery. • Scale up investments in and capacity for By Andrew Karanja improved traffic management in the newly created counties covering urbanized Introducion areas. • Establish the proposed Metropolitan Transport Authority, to Nairobi K enya is still predominantly rural although it is urbanizing very fast. Seven out of ten Kenyans live in rural areas, and they are mainly plan and coordinate transport matters in engaged in agriculture.1 The performance Nairobi. Clarify its powers in relation to of the overall Kenyan economy and that of those of the National Transport Licensing the agriculture sector are therefore closely Authority. Establish a Special Purpose linked, with economic growth declining Vehicle to immediately coordinate urban whenever there is a shock in agriculture. The transport matters in Nairobi while the availability of food has also in the recent past NMTA is being developed. affected inflation (and therefore the cost of • Establish legal and regulatory framework living) hence, the welfare of most Kenyans; for railways as well as a railways regulatory it also affects the government’s budget and body. balance of payments. (vi) Gateways The overall performance of agriculture has • Remove non-tariff barriers on the corridors been erratic, mainly due to over-reliance on and borders. rain-fed production. Farmers also face major • Embrace the One Stop Border Concept challenges in accessing both input and output and empower customs officials at the markets, and most commodities are sold border points. without much value addition. Nevertheless, • Maintain roads to key border points in an in the recent past some subsectors such as acceptable condition. tea, horticulture and dairy have performed • Work with other EAC countries to charge well, in total contrast to the food subsector, duty at the port of entries. where productivity has not been able to • Manage axle loads at the point of loading match the increasing demand. This contrast to ease congestion at weighbridges provides a clear indication that with better management, there exists major growth The benefits from investment and reform prospects in the sector, that can be exploited of transport infrastructure and services will for the benefit of all. be maximized if actions are taken across all five sub-sectors. Many of the priority sectors Recent experience from China and other for Kenya, including tourism, manufacturing, emerging economies clearly demonstrates transport services, and agriculture, the developmental and poverty reduction rely on multi-modal transport. Hence, benefits from agriculture-led growth, implementation should begin immediately in especially involving large numbers of each sub-sector as all of them together can small holders. A distinctive feature of fully unleash Kenya’s growth potential. China’s reform-driven growth has been the strong initial emphasis on the expansion of agriculture, the so called “firing from the 1 Agriculture comprises crops, livestock, fisheries and related activities. 85 Achieving Shared Prosperity in Kenya Growth and Competitiveness bottom”. For Kenya there is evidence to are commendable for both the medium the fact that enhancing agricultural growth and long term, there is also need to focus could be a very powerful and effective way on critical reforms and investments for the to induce overall economic growth and immediate future. As a matter of priority, the reduce poverty. The evidence suggests that government should focus on three critical agriculture-led growth is more than twice priorities: (i) policy, institutional and legal as effective at reducing poverty as industry- reforms in the sector; (ii) measures to enhance led growth. Agriculture as a source of overall productivity and promote food security; and, growth has been significantly underutilized, (iii) measures towards commercialization of as reflected in declining public spending agriculture. on agriculture-related public goods. These findings confirm that the Vision 2030 and the Policy, institutional and Agricultural Sector Development Strategy legal reforms (ASDS) are rightly focusing on agriculture as To unleash the potential of the sector (see a key sector to achieve the overall national challenges, Box 11.2), and to attract private objectives of growth and poverty reduction. sector investments and participation in the sector, in order to reduce the cost of There is need to focus on agriculture in doing business, as well as improve service particular and on rural development in delivery, comprehensive policy, institutional general, as a major source of growth (see and legislative reforms should be put in Box 11.1). Agriculture also contributes to place. In particular, there are likely to be improving equity, and is a viable mechanism high dividends from fast-tracking parastatal for addressing a variety of other challenges, reform in the following areas: such as food insecurity, high food prices, (i) separating the regulatory and unemployment and climate change. For this commercial functions of the National to happen, critical reforms and investments Cereals and Produce Board (NCPB); have to be undertaken, prioritizing (ii) privatizing the sugar factories interventions that benefit majority of and improving the sub-sector’s Kenyans, while delivering quick results. competitiveness; (iii) implementation of institutional changes/ Sector policy and priority parastatal reforms as provided for in interventions four legislations enacted in 20122; and (iv) agricultural finance. The sector’s priorities are articulated in the government’s 2009 Agricultural Sector There is also need to prioritize the Development Strategy (ASDS). The ASDS improvement and devolution of agricultural investment plan is also in place. The sector services, such as research and extension, and policy identifies critical issues to be addressed, to enhance public private partnerships that but there is still a need for prioritization, support sector development and investment. for an implementation schedule, and for rigorous outcome measures. The sector is Maize sub-sector reforms also developing a food and nutrition policy Maize is the most important staple food to guide food security and nutrition matters, in Kenya and also more broadly in the and the government is in the process Eastern Africa region. It is also the most of finalizing a far-reaching consolidated widely traded of agricultural commodities. agriculture reform bills. While these efforts The performance of grain markets therefore 2 The sector bills signed into law in January 2013 include; The Agriculture, Livestock, Fisheries and Food Authority Bill 2012; The Kenya Agricultural and Livestock Research Bill 2012; The Pyrethrum Bill 2012; and the Crop Bill 2012. Achieving Shared Prosperity in Kenya 86 Growth and Competitiveness Box 11.1: Agriculture as a source of growth Agriculture directly contributes 26 percent of the GDP annually, and another 25 percent indirectly. National economic growth is highly correlated to growth and development of the agriculture sector; and the sector is identified as a key pillar to deliver the 10 percent annual growth under vision 2030. The sector accounts for 65 percent of Kenya’s total exports, and provides more than 70 percent of informal employment in the rural areas. The sector is dominated by smallholder farmers, pastoralist and fish folks (estimated at 4 million households) with small land sizes averaging one hectare. The sector recorded a lower growth of 1.5 per cent in 2011, compared to 6.4 per cent in 2010. The slower growth in 2011 was primarily due to erratic weather conditions and high cost of agricultural production (rising farm inputs prices). All major crops registered declines in production in 2011 except for rice, cotton, pyrethrum and sisal (see Table 11.1). However, global supply constraint resulted in higher (better) prices for tea and coffee. Table 11.1: Key Indictors of agricultural production Commodity 2010 2011 Percent change Tea (‘000 Tonnes) 399.0 377.9 -5.3 Coffee (‘000 Tonnes) 38.9 30.0 -22.9 Fresh horticultural produce (‘000 Tonnes) 228.3 227.1 -0.5 Maize (million bags) 35.5 34.4 -3.9 Wheat (‘000 Tonnes) 199.7 105.9 -47.0 Rice (‘000 Tonnes) 72.5 80.2 10.6 Milk delivered to processors (million litres) 515.7 549.0 6.5 has a significant impact on people’s welfare, a drag on the country’s overall agricultural particularly the poor, and it is critical to performance, which in several other respects, inducing pro-poor growth. Maize is widely appears to be quite vibrant. Fueled by rapid regarded as the “sleeping giant” of Kenya’s population growth and declining farm size, agriculture. It occupies the largest share of Kenya now suffers from a structural maize cultivated land in Kenya, but the lackluster deficit, which is likely to grow in the coming performance of the maize sector has been years (Box 11.3). Box 11.2: Critical agriculture challenges for Kenya Critical challenges facing the sector include: (a) Continued shocks such as drought and food deficits, and their impact on macroeconomic performance, food security and the incomes of a major proportion of the population, re-emphasizing the need to focus on agricultural productivity and competitiveness. (b) High population growth rate, urbanization, regional integration, land reform and land use offer both opportunities and challenges to the growth of the agriculture sector. (c) Climate variability and change are increasingly affecting agricultural productivity and food security in Kenya, as evidenced by numerous droughts in recent years, such as the 2011 Horn of Africa Crisis. (d) Legal and policy reforms are required to enhance service delivery, parastatal rationalization, private sector participation and investment. Many parastatals continue to drain public funds while offering poor services and stifling private sector participation. Comprehensive legislative action is also required as the sector is currently regulated by more than 130 Acts. (e) Land and land use reforms are required to provide a sound basis for investment in agriculture and access to land for the poor. 87 Achieving Shared Prosperity in Kenya Growth and Competitiveness Most farmers are net buyers of staple food. urban households and the majority of poor Two percent of Kenya’s rural households rural households, who are all net buyers of account for over 50 percent of the marketed maize. maize production in Kenya, and their average farm income is over seven times that of the At the heart of future food policy issues in bottom 70 percent of households. Meanwhile, Kenya is the question of how to maintain 60 percent of households are net buyers of adequate maize production incentives maize, and they tend to have relatively small for specific producers—both large and farms, mainly concentrated among the poor. small scale farmers, for whom maize is a Smallholders have little to do with NCPB, viable commercial crop—without taxing and currently only 2 percent of smallholders consumers and producers of other farm sell to the cereals board. It is therefore clear products through high maize prices. Solving that policies that raise prices above market this conundrum will involve difficult political levels have income distributional effects that trade-offs. In the short-run, reducing NCPB’s run counter to the stated poverty reduction operations will hurt large-scale maize farmers goals. Because the rural poor tend to be net in the North Rift. Over the long-run however, purchasers of staples such as maize, wheat the confusion and uncertainty spread and rice, they are directly hurt by policies throughout the maize value chain by current that raise the prices of these commodities. and past NCPB interventions, have resulted Higher import prices risk the food security in such a high cost that reform is most of millions of low-income consumers, and likely to reduce marketing (and production) should and indeed may change the nature of costs enough to make maize farming more food policy debates in Kenya. competitive, even with lower prices. Given that maize is Kenya’s major food Reforms must focus on transforming staple, efficient maize marketing is critical government and NCPB functions in the to food security, poverty reduction, and sector, and on the need to promote private producer incentives. Marketing systems sector participation. The key reform areas in that reduce price risk and instability benefit NCPB and the cereal sector should include: consumers, as well as producers. But the government has intervened in maize markets (a) Mandate of the NCPB. The NCPB in ways that have kept maize prices high mandate allows it to engage in and have had little impact on price stability. commercial activity like any other private However, evidence clearly indicates that player in the industry, while at the same the current maize market interventions are time, carrying out certain social duties generally anti-poor, in the sense that they on behalf of the government, including raise prices paid to large-scale farmers at procuring and managing the Strategic the expense of consumers—especially poor Grain Reserve (SGR) and emergency relief Box 11.3: Kenya’s grain sub-sector The grains sub-sector accounts for a large share of agricultural GDP, rural employment and consumption-both in terms of calorie intake and households’ food budget. Cereals are estimated to contribute about 15 percent of agricultural GDP. Maize is the main cereal, with a 12 percent share in agricultural GDP. Maize consumption is estimated at 98 kilograms per person per year, which translates into a total of 30-34 million bags (2.7 to 3.1 million metric tons). However, national maize production has not kept pace with consumption. Over time, food imports and aid have bridged the gap, with a strong tendency towards increased dependence on imports. Kenya has been importing maize from Uganda and Tanzania, in addition to large offshore imports from as far away as South Africa, the US, Brazil and Argentina. Achieving Shared Prosperity in Kenya 88 Growth and Competitiveness aid stock. Separating the responsibility These efforts could be combined with for the SGR from NCPB will make it a warehouse receipting system to help possible to distinguish between SGR farmers and traders to gain access to stocks, commercial stocks and famine formal credit markets, and improve relief stocks. (in addition, the SGR the efficiency of the food marketing should also be expanded to include system in general. Another alternative other commodities apart from cereals.) for private storage, cereal banks, is NCPB’s role in importing and distributing receiving renewed attention in Kenya. To fertilizers deviates from its core mandate, be successful, these systems must benefit and offers unfair competition to the from: (i) an effective system of grades and private sector. If the public sector wants standards; (ii) sufficient integrity, hence, to continue to play a role in the fertilizer trustworthiness, plus quality control trade (which is sometimes justified by systems, so that there is essentially factors such as economies of scale and the no default risk in using them; and, (iii) oligopolistic fertilizer market structure), regulatory procedures and oversight to this function should be undertaken by ensure the integrity of the system. a farmers’ organizations. The Kenya (d) Establishment of a Commodity Exchange. Tea Development Agency model is a To ensure that the warehouse receipts and good example of how such a farmers’ cereal banks are well linked to the market organization can contribute. and to monetize these activities, an (b) Accountability in grain management. open price discovery mechanism should Existing procedures for procuring and be established through a commodity marketing maize are not transparent. exchange. A review should be undertaken For example, NCPB is not required to to determine the legal regime under make public how much maize it has in its which the commodity exchange could be stores, despite the fact that it is funded operationalized. To enjoy economies of by tax payers’ money. The reformed scale in line with East African integration, NCPB should be made to publish periodic it should be structured as a regional reports disclosing information on available entity. stocks, procurements and importations, as well as allocations/beneficiaries, in Reforming the sugar subsector order to enhance the accountability of its The sugar industry in Kenya, which has heavy operations. government involvement, is constantly (c) Enhancing the private sector role. The embroiled in controversy. The industry is development of private storage capacity also highly inefficient, and only survives is essential to increasing market stability due to high tariff and non-tariff protection. and facilitating trade. To encourage Nevertheless, it remains a key economic the development of private storage activity in Western Kenya, where it directly operations, some NCPB grain silos and supports an estimated 300,000 small-scale warehouses could be transformed into farmers who supply over 80 percent of the storage leasing operations. Additional cane to the factories. Employment in the storage facilities, coupled with better sugar factories is estimated to be around financing arrangements, could help 40,000, and the Kenya Sugar Board estimates the commercialized grain marketing that the industry supports up to 2 million system to weather downside price risk. people in the country. 89 Achieving Shared Prosperity in Kenya Growth and Competitiveness Kenya’s annual sugar demand is estimated import tariffs, Kenyan producers may have to at 800,000 metric tonnes (mt). However, the compete with more efficient producers such country’s domestic production has historically as Egypt, Swaziland and Malawi. hovered at around 550,000 mt, leaving a net deficit that must be filled by imports of It is clear that the Kenyan sugar industry approximately 250,000 mt (see Figure 11.1). remains under global and regional threat, Demand is estimated to be growing at an despite the protection being offered to local average annual rate of 4 percent. sugar producers. This in a way demonstrates the inadvisability of pursuing a protectionist Currently, there are seven sugar companies policy that is not complemented by in the country, and the government is the deliberate efforts to introduce competitive majority shareholder (owning over 90 pressure that will improve internal efficiency. percent of the shares) in most of them, The government plans to privatize five highly except in the largest one, Mumias, where it indebted state-owned mills, but will retain 19 owns around 28 percent. Capacity utilization percent ownership. Once the mills become in most factories is below 55 percent, except profitable, the government will then sell its Mumias which manages over 70 percent. share to private mills. But the process has Low capacity utilization and outdated milling been slow, and needs to be accelerated. technologies have been cited as major factors responsible for high sugar processing costs. Without protection, most of the sugar Further, due to protection, Kenya has been producers in western Kenya would find allowed to become a high cost sugar producer, it difficult to dispose of their sugar in the with cane prices almost equal to the CIF price local market, unless measures are taken of sugar at the port of Mombasa. Indeed, to improve production and processing Kenya’s sugar market is arguably the most efficiency. Western Kenya, which comprises attractive open market for sugar in the world, the main sugar belt, is a poverty hotspot after the EU. The cost of producing sugar is with 55 percent (1.8 million people) of its estimated at US$ 550 per mt compared to US$ rural population living below the poverty line 230-350 per mt in several COMESA countries. (CBS, 2007). Without any viable alternatives Since March 1st 2012, Kenya granted duty- to sugar production, the region would free access to COMESA members, under the definitely sink further into poverty. So as the market-opening provisions for sugar. Once days of protectionism become numbered, the government removes the current sugar it is prudent that all concerned should Figure 11.1: Sugar production, consumption and imports (MT), 2000-2012 900,000 800,000 700,000 600,000 Metric Tonnes 500,000 400,000 300,000 200,000 100,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Domestic Produc tion Consumption Imports Source: Kenya Sugar Board Achieving Shared Prosperity in Kenya 90 Growth and Competitiveness seek alternative medium and long-term credit for investments in agriculture also interventions for the subsector if increases remains low. As of June 2012, the agriculture in poverty are to be avoided. Investments sector received KES 64.5 billion as credit and geared towards diversification (both on advances from banks and other financial and off farm), improvements in sugar institutions. This amount was a paltry 5 production, and processing efficiency, are percent out of the total credit and advances of immediate alternatives that can be pursed KES 1.29 trillion. No meaningful development simultaneously. can occur in agriculture with these levels of private investments. To enhance access to Institutional and parastatal reform credit in the agricultural sector, and to ensure Kenya cannot revamp its agricultural sector that the country increases and broadens its without proper coordination and regulation, agricultural exports, the government should whose objective should be to promote set up a suitable funding mechanism/facility policies that reduce costs and stimulate to be used to finance the development of competition. It is with this realization that critical subsectors such as coffee, tea, sugar, the sector in the last two years has invested dairy, livestock, and aquaculture. Such a heavily in consolidating the legal legislation funding facility can be used as a wholesaler governing various aspects of the sector. As of funds for on-lending to farmers through previously mentioned, in January 2013 four financial institutions. The government should major Bills were signed into law and their initially target at least 10 percent of total implementation should be a high priority. credit and advances from commercial Banks The new laws propose major changes by for on-leading to agriculture. The activities establishing a new body to take over the of such a facility can be complemented by regulatory, marketing and other functions support for livestock and crop insurance, which are currently being performed by to cover some of the risks associated with 14 parastatals. Most of the 14 parastatals, farming and livestock keeping. including NCPB, will be reformed or abolished altogether. A new agricultural research Enhancing productivity and legislation also provides for the establishment food security of a new organization to coordinate all Productivity in the sector remains low, agricultural research activities in the country. and food insecurity is a major concern The implementation of these new legislations in the country. To enhance productivity, will significantly reduce the number of the government should continue with its sector parastatals, thereby leading to better investments in research, extension and coordination and significant cost savings. service delivery to farmers. The government The new government should prioritize the should work closely with the county enactment and full implementation of the governments to ensure that service delivery consolidated legislation, noting that the to the agricultural sector is improved and political-economy issues arising from these modernized though use of ICT, media and reforms will need to be well managed, to other modern communication methods. avoid derailment by vested interests. The private sector will also be encouraged and supported to offer extension, marketing Agricultural finance and other services to the sector. High cost The existing agricultural financing system of fertilizers and other inputs (seeds, animal provided by the Agricultural Finance feed, etc.) are of major concern to farmers, Corporation (AFC) is highly inefficient. The as they increase the cost of production, 91 Achieving Shared Prosperity in Kenya Growth and Competitiveness which in turn raises the cost of food to Climate variability and change are consumers. As general subsidy program may increasingly affecting agricultural not be affordable, the government should productivity and food security in Kenya, as facilitate and support farmers and pastoralist evidenced by numerous droughts in recent to be organized to procure and distribute years (Box 11.4). There is therefore need the inputs centrally, through national and to focus support towards “climate-smart county level organizations. In particular, agriculture”, that can sustainably increase the government should promote the use of production and food security, and be resilient suitable cereal dying and storage technologies to climate change and variability. at farm and community level. This will reduce the estimated losses of 30 percent of the In particular, future support may focus total harvested cereal production through on natural resources management in the contamination and post-harvest loses. main water towers, on investment in irrigation, and on drought management and To address the food insecurity in the country, livelihoods coping mechanisms, especially the government should prioritize the in arid and semi-arid lands. Kenya’s irrigation implementation of the National Food and potential is estimated at 540,000 ha, of which Nutrition Policy which was approved in 2011. only about 105,000 ha have been exploited. Priority should go towards ensuring that the The potential for irrigation can be expanded country has adequate food reserves. In this further by 1 million ha by developing the regard, the government should increase and Tana and Athi basins. Furthermore, Lake expand the strategic grain reserves (SGR). The Victoria has a 253 km shoreline in Kenya that SGR should be converted in a strategic food is basically unused, despite its huge irrigation reserve (SFS) that will include grains such potential. maize, rice, and other traditional crops, and livestock products (milk powder and conned Commercialization of agriculture beef). The SFS will thus offer a ready market There is need to build on the current for farmers and pastoralist, minimize imports success and recent investments in rural and ensure that excess food in one part of the electrification through investments in cold country is stored for distribution in the needy storage and processing facilities to handle parts of the country. Furthermore, the SFS milk, fish, and fresh fruits and vegetables. will ensure that an assortment of foodstuff is Potential for adding value to products such as available to meet the different social cultural tea, coffee, pyrethrum, hides and skins, milk dietary needs of various communities in the and beef, and fruits and vegetables remains country. A drought contingency fund will largely untapped. Through Private-Public also be put in place, to respond quickly and Partnerships (PPPs) the government should flexibly to drought, whenever it occurs. facilitate private sector involvement in the Box 11.4: Need for disaster risk reduction The country has experienced significant crop and livestock production losses, particularly in the arid and semi-arid lands, which cover 80 percent of the total land mass. The regular and increasing occurrence of drought, coupled with the high vulnerability of the ASALs, calls for greater attention to be paid to disaster risk reduction-and more specifically for a hazard-specific focus on drought risk reduction. The impact of drought has intensified over the years, and is likely to worsen with climate change. Available records indicate that in the last 100 years the country has experienced over 29 droughts, while in the past four decades droughts have become more frequent, more widespread, and more intense. Achieving Shared Prosperity in Kenya 92 Growth and Competitiveness development of marketing infrastructure, by high tariff and non-tariff barriers. For especially rural market facilities, regional example, during the recent drought, Tanzania and international quality and safety imposed an export ban on maize and other standards, and investment for value-addition cereals, which disrupted trade in the region. technologies The new government should therefore prioritize the review of present agreements, Effective marketing is critical in increasing and devise a common agricultural trade the productivity and commercialization regime within the EAC and with other of farming, so that it can be—and be regional blocks. perceived to be—a viable business. National and regional markets have great potential to Devolution expand given better marketing infrastructure In line with the new constitution agricultural, and quality assurance. Export markets mainly livestock and veterinary services are to deal with raw commodities, and they have be devolved to the country governments. introduced stringent measures regarding Although the devolution of these services traceability, safety, sanitary and phytosanitary may present another challenge in 2013 standards, and maximum residue limits. and beyond, it should be regarded as an An effective market infrastructure should opportunity to enhance service delivery therefore address the compliance process for to the farming community. The in-coming quality and safety standards. It is estimated government will be required to develop and implement a plan that will ensure that there that 91 percent of agricultural exports are is a smooth transition. in raw or semi-processed form. Thus, the country loses billions of shillings in earnings by not adding value to its produce. The 12. Reaching new heights: broadening financial sector potential remains largely untapped for deepening and stability adding value to products such as tea, coffee, pyrethrum, hides and skins, milk and beef, By Ganesh Rasagam, Paola Granata, Yira Mascaro and fruits and vegetables.3 and John Randa Support for such activity should focus on: Introduction (i) facilitating private sector involvement in developing marketing infrastructure, especially rural market facilities and S ignificant modernization and rapid expansion of the Financial Sector have heightened its role as a driver of economic regional and international quality and growth in Kenya. Kenya’s financial sector safety standards; stability has strengthened significantly since (ii) empowering farmers’ organizations to 2005, through a series of major reforms, provide market support services; and which enabled it to weather global and internal crises very well. Kenya also has a (iii) investing in value-addition technologies, much deeper financial sector, with broader through building the capacity of farmers access to financial services, but much more and other stakeholders, and by providing material and financial support through is needed. Vision 2030 expects the sector Private-Public Partnerships. to make more significant contributions to economic growth. However, for that to Trade in agricultural commodities in the happen, both access and stability will need East African Community is still characterized to deepen further, to reach new heights. 3 Value addition includes processing, branding, quality certification and accreditation, as well as farm-level quality improvements that the market values. 93 Achieving Shared Prosperity in Kenya Growth and Competitiveness Preserving the sector’s stability is crucial for backbone of Kenya’s economy in recent broader access, but also because the costs years. In 2010, the sector recorded its highest of failure are larger to poorer segments ever growth (8.8 percent), and was among of the population. Efforts to improve the the strongest performers in the economy. banking sector from the early 2000s have paid off, and ongoing reforms at supervisory The finance sector in Kenya, the third largest and regulatory agencies in the sector have in Sub-Sahara Africa after South Africa substantially improved the framework for and Nigeria, has deepened and widened enhancing stability. The government is considerably. This is due to: (i) a large starting to address lingering problems in banking sector that has shown resilience the pensions and insurance sectors, and and strong growth in the last few years, with cooperatives. It is also dealing with complemented by regulated microfinance governance issues affecting the capital institutions (MFIs) and revived SACCOs; markets. However, additional measures to (ii) a relatively well-developed securities further strengthen the banking sector need market; and, (iii) a relatively large pensions to be implemented. Despite these advances, and growing insurance sector. Banks grew the government must keep a watchful eye by over 33 percent per year over the period over the financial sector, as vulnerabilities, 2006–2011. This growth has encompassed compounded by exogenous and endogenous sizable increases of banks’ gross deposits, risks, still remain. loans and networks.1 Kenya’s capital markets have also experienced robust growth in Greater access to finance has emerged recent years.2 The insurance sector, while from technological innovations, and still small, has grown with total assets of the expansion of financial institutions, insurance companies almost doubling from particularly those that target traditionally 2006 to 2010.3 Furthermore, total assets of under-served segments of the market. pension funds are significantly larger, albeit Challenges to broader access remain, growing at a slower pace, representing about particularly in rural areas, but Kenya is on a 18 percent of GDP in 2010. path towards reaching new heights, building on successes, particularly during the last The financial sector’s growth has been decade, and working on a set of reforms that accompanied by remarkable increases will further develop both financial sector in access to finance and improvements deepening and stability. in financial services delivery. According to FinAccess surveys, the share of the Recent developments and population with access to formal financial major achievements services increased from 26.4 percent in 2006 In the last couple of years, the significant to 40.6 percent in 2009. This improvement modernization and expansion of the sector was mostly driven by the introduction of has heightened its role as a driver of the M-Pesa mobile phone-based payment economic growth. The booming financial systems in 2007, but also by branch sector has become a significant driver expansion and product development at banks of growth within the service sector, the and MFIs. (see Figure 12.1) Additionally, 1 Bank accounts have more than quadrupled since 2006, reaching more than 14 million. Bank branches increased from 534 at the end of 2005 to 1,114 at the end of September 2011, with much larger increases in the rural sector. Private credit to GDP, another indicator of financial development, rose from 28 percent in 2002 to 32 percent in 2010 (compared to a median of 12.3 percent for SSA) and private sector credit accelerated to 36 percent in September 2011. 2 Market capitalization of the Nairobi Stock Exchange (NSE) increased from KES 462 billion in 2005 to KES 1,167 billion in 2010. Corporate bond market has expanded noticeably (from 0.7 percent of GDP in 2008 to 2.8 percent of GDP in 2011). 3 Total assets of insurance companies reached KES 223 billion in 2010 (about 8 percent of GDP). Insurance premiums increased by an average of over 10 percent a year for the last ten years. Achieving Shared Prosperity in Kenya 94 Growth and Competitiveness financial exclusion (i.e. lack of use of financial Total mobile money deposits were KES 192 products-either formal or informal) declined billion. M-Pesa was later joined by three from 38.4 percent to 32.7 percent in the other mobile phone providers, but remains same period. the clear leader in the market, accounting for more than 90 percent of mobile money Figure 12.1: Financial sector has experienced substantial growth subscriptions, and over 28,000 agents nation- 2,500 16 wide (November 2011). 14 Number of Accounts (Millions) 2,000 M-Pesa now processes more transactions 12 within Kenya than Western Union does KES (Billion) 1,500 10 globally, providing banking facilities to 8 1,000 more than 70 percent of the country’s 6 adult population (including half of those 500 4 in the poorest quintile). The value of its 2 transactions since 2007 through March 0 0 2011 topped KES 828 billion (i.e. half of 2006 2007 2008 2009 2010 2011 Net Loans Net Assets No of Deposit Account Holders Kenya’s GDP). This expansion has been due to high customer satisfaction, and increased Source: CBK database outreach to households and individuals, that were previously excluded from the financial Further improvements in access to finance sector. since 2009 are evident, based on proxy indicators, and these will be reported on The sector strengthened substantially from in the ongoing 2012 FinAccess survey. the early 2000s and has remained stable, Financial services delivery has improved notwithstanding, the shocks suffered in the with the expansion of branch networks, as last couple of years. The financial sector has well as through the rapid adoption of agency been resilient to domestic shocks, namely banking and mobile money. Banks and MFIs the post-election violence in 2008 and have nearly doubled the number of their subsequent lower economic growth, and branches, and electronic money transfers international shocks (the global financial (particularly M-Pesa transfers) have become crisis and the rising prices of food and fuel widely used. Agency banking, introduced in particular). The quality of lending has in 2010, has been rapidly implemented by improved significantly, with a noticeable eight banks, with a total of 9,748 agents as of decline in non-performing loans (from 30 December 2011.4 These developments have percent in 2003 to less than 5 percent in improved access to finance for underserved 2011). sectors (rural areas, lower income individuals and micro-enterprises). Capital adequacy in the banking sector is well above the required minimum, and Mobile money has rapidly become a the banking sector remains profitable with fixture in the lives of Kenyans, as well as a a return on equity above 30 percent over successful example to the world.5 Mobile the period 2006-2010. Financial institutions, money subscribers in July 2012 stood at 19.5 particularly those targeting the lower income million, with the number of agents at 49,000. segments of the population (such as SACCOs 4 Most of these agents belong to Equity Bank, which is delivering about 20 percent of its transactions through agents, but Kenya Commercial Bank (KCB) and Co-operative Bank are also growing through agent banking. 5 For more information on mobile money see World Bank (December 2010, Edition No. 3), “Kenya Economic Update: Kenya at the Tipping Point? with a Special Focus on the ICT Revolution and Mobile Money”. 95 Achieving Shared Prosperity in Kenya Growth and Competitiveness and deposit-taking MFIs), are increasingly highlights the central role to be played by the formalized. The decline in performance financial sector. Vision 2030 also expects the and other stability issues at SACCOs are sector (along with the other five economic being addressed through several reforms, in sectors), to make relevant contributions to particular: economic growth. The strategy identifies • Improved regulation and supervision in as its main objectives for financial sector the last few years have strengthened the development: improving stability; enhancing sector. All financial regulators have adopted efficiency in the delivery of credit and other risk-based supervision as a goal, but are at financial services; and, improving access to different stages of implementation, with financial services products for a much larger younger institutions such as the SACCO number of Kenyans. Societies Regulatory Authority (SASRA) and Insurance Regulatory Authority (IRA) However, structural constraints are limiting starting to move towards that goal. Kenya’s financial sector potential as an • The infrastructure and legal framework engine for economic growth. The following for large value and retail payments two sections will detail the main challenges has strongly improved in terms of currently faced by the sector and offer efficiency and robustness, resulting in policy recommendations to tackle them high transaction growth rates in recent and help to unleash its potential. Policy years. The Kenya Electronic Payments recommendations will highlight priorities and Settlement System (KEPSS) which is to enhance the sector’s catalytic role in owned and operated by the Central Bank stimulating growth, improving the efficient of Kenya, has grown considerably, since it use of resources, and reducing poverty. These was launched in 2005. two sections are based on the authors’ own • The securities markets infrastructure assessment/analysis, as well as on relevant has been strengthened through research and government plans.6 improvements in different areas to Main structural constraints in support the capital markets agenda. the Kenyan financial sector Legislation and regulatory changes to While the sector has coped successfully allow the Over the Counter (OTC) market with a turbulent global macroeconomic for trading bonds, essential for the environment and domestic shocks to the development of an efficient wholesale economy, it also suffers from vulnerabilities, government and non-government compounded by the existence of endogenous fixed income market, was enacted by and exogenous risks. Political uncertainty; parliament. the risk of inflation; volatile exchange rates (with resulting higher interest rates); and, Financial sector at the centre droughts; and an unfavorable international of strategies to propel Kenya’s environment with low growth and a looming Economic growth debt crisis—these are some of the risks and Vision 2030 puts financial services at the vulnerabilities faced by the sector. center of planned economic growth. The economic pillar of this strategy aspires to The rapid growth in credit over the last achieve high economic growth based on few years, together with higher interest high national savings rates, which already rates, may increase the risk of asset quality 6 This includes the 2013-2017 MTP, Kenya FSAP Update, ICR ROSC, 2009 Kenya ICA and ICA survey, FinAccess surveys, latest Global Competitiveness and Doing Business Reports, IMF papers/reports and FSD reports. Achieving Shared Prosperity in Kenya 96 Growth and Competitiveness deterioration. Increased levels of non- Further reforms in regulation, supervision, performing loans could affect the financial governance, and the bank resolution soundness of banks with weaker balance framework are needed to strengthen sheets. Credit and liquidity risks have risen the financial sector. The growth and with higher credit growth, as half of bank development of the sector have brought new loans are concentrated in sectors more challenges, including an underdeveloped sensitive to a possible deterioration of the mobile payments regulatory framework; quality of the loan portfolio, and smaller underdeveloped general financial regulations; banks have more limited access to interbank and, the need to consolidate cross-border markets and wholesale funds.7 supervision (in light of regional deepening). Interest rate spreads remain high. The Conglomerate supervision and consolidated main challenges in the banking sector are supervision techniques are at their very related to the persistently high interest early stages, and at the cross-border level rate spreads as well as to connectivity, which consolidated supervision is even infrastructure and supervision issues. High less developed, although there are ongoing spreads emerge from banks’ cost of doing incipient efforts. Kenya’s crisis-readiness business; the risk premium of borrowers; and framework also has shortcomings, such as profit margins. Even while bank costs have lack of a comprehensive crisis management declined noticeably in the last ten years, and system; constraints to bank resolution; and, efficiency has improved, their costs remain an incomplete financial sector resolution high, relative to best international standards framework.8 Finally, some of the weaknesses (approximately double), and there is a found by the 2009 FSAP update on banking relatively low level of bank competition. supervision are still valid, including: the need to strengthen licensing; to keep implementing Spreads had stabilized until 2010, declining the AML/CFT regime; to continue capacity to 8 percent, but they have since increased enhancement for risk management; and, (with higher overheads and profit margins), to broaden the coverage of credit bureau and further widened to 13 percent in 2011, regulations—with voluntary sharing of as deposit rates did not respond rapidly to positive information with other financial higher lending rates. Key drivers of higher institutions—included in the 2012 Finance spreads are: Bill. • the high opportunity cost for private sector credit (government infrastructure Limited connectivity between financial bonds constitute a high benchmark); institutions and mobile network operators, • international and domestic shocks (global as well as high dependence on cash and financial crisis, macroeconomic volatility, limited automation of government and other inflation and election risks); payment systems, are relevant weaknesses • higher capitalization and provisions, of the infrastructure of the sector. MTP greater outreach and deposit mobilization; 2013-2017 finds that the most relevant and weaknesses of the sector’s infrastructure • increased lending to higher risk sectors relate to: (i) the missing elements in the (such as consumers and SMEs). National Payment System; (ii) the need to 7 Annual credit growth has been rapid in the last three years, especially in personal loans, posing challenges for sectors with above-average NPLs and higher sensitivity to economic slowdown. As liquidity tightens and becomes more costly, some banks are starting to hold more excess reserves but small and midsized banks depend more on short-term interbank and CBK funding. For more details on credit and liquidity risks please see IMF Country Report No 12/14, “Kenya 2011 Article IV Consultation” (January 2012). 8 While banking sector arrangements can be improved, and expanded to include resolution methods such as “good bank-bad bank”, mechanisms for the other sectors have not been developed, and crisis management planning and, in general, cross-industry or cross- border issues have only just begun to be addressed. 97 Achieving Shared Prosperity in Kenya Growth and Competitiveness improve the inter-operability between the as well as loss of investor confidence three main Electronic Funds Transfer Point emerging from fraudulent practices in the of Sale (EFTPOS)/ATM networks; and, (iii) brokerage industry, have had a negative the need to level the playing field for mobile impact on the development of Kenya’s payments. capital markets. Additionally, the clearing and settlement framework does not support Kenya’s pension system remains a major efficient and cost effective secondary market risk to the stability of the financial system, trading in government and non-government due to significant contingent liabilities and fixed income instruments, and operates inadequate corporate governance. The under risk levels that will deter the further scale of these contingent liabilities remains growth of trading. unknown,9 and the management and oversight of NSSF remain weak. As a result The Kenyan insurance sector is of weak governance and management, as underdeveloped, and has a relatively large well as high administrative expenses, NSSF number of companies (given the small size has underperformed against all market of the sector) with efficiency issues and benchmarks. Occupational Pension Schemes potential under-reserves. Despite recent are exposed to risks from the asset and liability growth, the Kenyan insurance sector is sides of their balance sheets. The Retirement small, with a rate of insurance penetration Benefits Authority, which regulates and of 2.63 percent in 2008, although growing supervises all pension schemes in Kenya, still at a fast pace in 2010. The small size of the has to operationalize a risk-based supervisory market emerges from issues like: low per framework. It is unable to enforce NSSF’s capita income; income distribution (smaller compliance with key prudential provisions, middle class); lack of public confidence in and should strengthen its off-site monitoring the sector; and, fraud and weaknesses in capacity. regulation and supervision. The Insurance Regulatory Authority suffers from capacity The non-government bond market is constraints (such as specific knowledge and underdeveloped (but growing at a fast pace), experience of its staff), and there is need and capital market development had been to implement risk based supervision, and hindered by ethical problems in the licensed early intervention mechanisms, to underpin community and by weak supervision, now prudential supervision. In motor insurance being addressed. Equities and government (the primary business line for insurance bonds dominate the Kenyan capital markets, companies) the rates are low and do not cover with the corporate bond market being in a future liabilities, resulting from high levels nascent stage. Additionally, the government of competition and inadequate prudential bond market is still fragmented, even though supervision premiums. it is fairly developed in the Sub-Sahara African context. It is also accepted that it has One of the most important weaknesses in improved in recent years, based on efforts to Kenya’s lending infrastructure remains the better develop a yield curve that can serve as process of taking and realizing collateral, a reliable pricing mechanism. a process evaluated as lengthy, costly and unpredictable.10 A very large proportion Lack of competition and low standards of of loans are collateralized in Kenya professionalism in the licensed community, (approximately 90 percent) and the value 9 According to MTP 2013-2017, unfunded liabilities were estimated to be 18 percent of GDP in 2008 and have increased rapidly since then, given the salary increases of civil servants and the growth in the number of employees. 10 For more details on the collateral process please see Financial Sector Deepening (FSD) Kenya (September, 2009). “Costs of Collateral in Kenya: Opportunities for Reform”. Achieving Shared Prosperity in Kenya 98 Growth and Competitiveness of collateral is high (118 percent of the loan Not withstanding recent improvements, value, on average), with extensive use of the registry systems tend to be weak and “all asset debenture”.11 Securing immovable dispersed, using manual procedures and property comprises six stages, with various experiencing problems such as incomplete steps in each stage, and the cost of creating and unreliable search methods, missing and perfecting this collateral amounting to records and files and incomplete/incorrect 6.7 percent of the loan amount (most of the information (FSD Kenya, September 2009). costs come from legal fees, stamp duty and The registration of collateral is expensive and bank commissions). Enforcing this collateral burdensome, as well as involving numerous is expensive, and could take more than five steps and a relatively expensive stamp years. Pledged assets stay in the hands of duty. The resolution of bankruptcies is also the borrower during these lengthy judicial costly and time consuming, taking 4.5 years processes, and assets often depreciate or are (compared with an average of 3.4 in Sub- destroyed/lost, meaning that even if the court Sahara Africa) and 22 percent of the estate rules in favor of the lender (and, reportedly, (compared with 23 percent of the estate the perception by lenders is that this is often in Sub-Sahara Africa) according to Doing not the case), it might only be able to recover Business 2012 data. A weak and dispersed a small fraction of the value of the collateral. legal framework, with twenty laws regulating In this context, lenders tend to request an “all the collateral process, is a key constraint to asset debenture” (i.e. the borrower pledges the smooth functioning of the collateral all the assets that the company may hold, in process in Kenya, creating inconsistencies, the present or in the future) to grant credit. complexities and extra expenses in the In fact, 64 percent of firms surveyed in an FSD collateral process (FSD, Kenya, September study had to provide an “all asset debenture” 2009). to obtain credit. Kenya’s insolvency and creditor/debtor High collateral requirements emerge from regimes are incomplete and outdated.13 the judiciary’s and (land and companies) The enterprise credit market is fragmented, registries’ inefficiency; lack of credit history; and appears not to have served small and problems with bankruptcy proceedings; medium enterprises well. But innovations (in and multiple laws regulating the collateral microfinance, mobile and agency banking) process, among others.12 The courts in hold considerable promise. Many of the credit Kenya with jurisdiction over enforcement laws are outdated, and are often inadequate and insolvency procedures have attracted to meet the needs of a modern economy, considerable criticism for insufficient capacity, although legislative efforts are underway to skills, resources and integrity. Contract improve the situation. enforcement is one of the main weaknesses of the business environment in Kenya (the The poor legal framework is coupled country ranks 127 in the “Enforcing Contracts with weak implementation. Commercial Index” according to Doing Business 2012 courts have been relatively unskilled, data), with costs representing more than 47 understaffed, and beset with an ad hoc percent of the claim (above the average in attitude. Commercial courts are known for Sub-Sahara Africa). using excessive judicial discretion and lacking 11 Data source: Enterprise Survey of 2009 Kenya ICA. 12 Initiatives to tackle these issues include: efforts to automate land registries; a Land Policy which prioritizes the reform of the land laws; initiatives to improve judiciary efficiency (such as the establishment of a Bench Research Hotline for judges to obtain updated legal information, improvements to civil and administrative procedures, recruitment of more judges, and computerizing the judiciary system); Insolvency and Companies Bills; improvements at the land and company registries (such as digitization). 13 For more details see (World Bank,2012) Draft Kenya Report on the Observance of Standards & Codes – Insolvency and Creditor/Debtor Regimes (ICR ROSC). 99 Achieving Shared Prosperity in Kenya Growth and Competitiveness material support, and are frequently tainted In terms of operational infrastructure, key by the perception of undue influence and issues are the need to: improper practices. Similar weaknesses have • accelerate reforms in the registry of been found at the Official Receiver’s Office. collateral and land registry (through The Company Charges and Land Registries automating the processing in Nairobi, have been regarded as inadequate, inefficient Mombasa and Nakuru); and beset with dishonest practices, but • enable the interoperability of the recent reforms are expected to generate payments systems; and improvements. • enhance payments and capital markets infrastructure. While the regulatory framework governing credit reference bureaus is improving The health of the financial sector should the credit environment, it still shows also be strengthened by addressing issues weaknesses.14 Issues in the legal framework at NSSF; passing key draft laws (such as the for the creation and enforcement of credit Insurance Act); and implementing the AML are key contributors to the high interest rate Act. spreads observed in Kenya.15 Additionally, the insolvency framework is internally Crisis response, preparedness and inconsistent, incomplete and outdated, and management would benefit from prompt the processes for liquidating companies and corrective action in the banking industry for rendering natural persons bankrupt, are and the introduction of a crisis-management moribund in practice, given the deficiencies system. Intervention systems should be in their implementation. strengthened in all sectors. A prompt corrective action framework in banking should Financial sector reform agenda be introduced, and a crisis-management The top priority in the short term should be system should be developed, assisted by to complete the legislative program at the incorporating learning from a study of best Attorney General’s office, and accelerate practice international arrangements. The the strengthening of the legal, regulatory financial structure would benefit from a and supervisory framework across the stronger system of intervention by IRA and different regional and domestic financial CMA in their respective industries, insurance regulators. Legislative preparation is slow and capital markets. These regulators should in Kenya, and strengthening institutional develop formalized methods of supervisory capacity at the Attorney General’s office intervention, and closure or resolution. should be a top priority. The strengthening of the regulatory/supervisory process should The regional financial integration agenda include crisis preparedness; regulations for presents a major opportunity for Kenya, mobile banking; regional integration; the being the most developed financial market implementation of prudential regulation and in the East African Community (EAC) supervision (e.g. SACCOs, MFIs, IRA); and, region, and among the leaders in Africa. expanding the credit bureau mandate. The transformation of the EAC into a single 14 These include the absence of a data protection law; the lack of effective dispute resolution mechanisms regarding disputed information stored by credit reference bureaus; the absence of time limits for the retention of information; the exclusion from the system of institutions not regulated by the CBK nor other commercial debt (???); and the absence of any obligation by credit reference bureaus to report positive information. (The last two will be solved by the Finance Bill 2012.) 15 Enforcement of secured claims through individual or collective processes in Kenya takes an estimated average time of 4.5 years, costs 22 percent of the value of the debtor’s estate, and yields the secured claimant only 30 percent of what is owed. By comparison, the averages for jurisdictions in Sub-Sahara Africa are 2.7 years, 19 percent, and 19.1 cents in the dollar, and in OECD countries theyare 1.7 years for the duration of proceedings, with costs of 9 percent, and recovery rates of 68.2 percent. Achieving Shared Prosperity in Kenya 100 Growth and Competitiveness market, with free movement of goods, eliminating the relevant structural barriers services, capital and labor, accelerated with (Saya and Gaertner 2012). It is crucial the ratification of the Protocol of the EAC to strengthen property rights (including Common Market in July 2010. Kenya is already property registration and enforcement) by: a major financial market in Sub-Sahara Africa, • modernizing the legal infrastructure (laws and its banks have been expanding regionally. governing collateral, bankruptcy and The deepening of EAC integration enhances foreclosure); the opportunity to transform Nairobi into • providing accessible infrastructure (keep a regional financial hub. Ongoing efforts in improving credit bureaus and payment this area include: an integrated Real Time systems); Gross Settlement (RTGS) system, providing • leveling the playing field across banks; and the potential for Kenya to become a clearing • continuing EAC integration, so that banks settlements hub for smaller economies; can reach economies of scale. regional cross-listing of shares across stock exchanges largely centered at the Nairobi Information asymmetries and risks should Securities Exchange; and, the overall opening be ameliorated by: up of regional financial markets, with marked • expanding information available at credit participation of Kenyan banks in the region. bureaus (to include positive information, as well as information from non-bank Regulation and supervision of the banking financial institutions and commercial sector need further strengthening, with entities, such as shops and utilities); emphasis on consolidated supervision. • passing legislation to enhance the legal Increased credit risk calls for the redoubling and judicial framework of the lending of supervision efforts, to ensure that banks environment (including movable collateral, comply with provisioning practices. Growing land reform and dispute resolution—some cross border linkages highlight the need to of which are covered in the Insolvency and strengthen supervision, focusing on inter- Companies Bills); and group transactions, and the possibility of • improving the land and companies regulatory arbitrage (IMF 2012). As was registries and titling. highlighted in the 2009 Kenya FSAP Update and in MTP 2013-2017, reform efforts in the These are major contributors to banks’ banking sector should focus on: implementing operating costs. Another key factor that consolidated supervision and on country and needs to be addressed is the inefficiency in transfer risk programs; fully operationalizing the system (such as ATM platforms and back the AML Act; boosting supervision capacity office). with more staff and specialists at the Banking Supervision Department; fully investigating To improve interoperability, a number of legal the ownership of banks; and, implementing and institutional reforms are needed. These the Basel I capital requirements for market are: (i) the harmonization of laws of payment risk. systems and enactment of the NPS Act as well as other regulations, with special emphasis High interest rate spreads should be on foreign currency liquidity regulation to tackled by promoting competition in the facilitate real time gross settlement of foreign banking sector and addressing information exchange payments and the adoption of EMV asymmetries and risks (perceived and standards, and, (ii) improving several NPS actual). Competition should be motivated by infrastructure elements, such as upgrading 101 Achieving Shared Prosperity in Kenya Growth and Competitiveness or replacing the current Central Bank CSD to well as improving infrastructure. The a system supporting the existing script-less improvement of the capital markets registration of Government Securities, and framework should focus on: completing the promoting mobile payments, by enabling the demutualization of the NSE; reforming the delivery of G-Pay payments over the mobile Capital Markets Act through the Securities channel. and Investment Bill and the Capital Markets Authority Bill; developing legislation for a The priority in the insurance sector is to commodities futures exchange; completing strengthen its regulation and supervision, provisions for a second market to serve SMEs; and ensure that MTPL can cover liabilities. and, establishing Real Estate Investment This should encompass the sanctioning Trusts. and implementation of the Insurance Act; upgrading the technical capacity of IRA To facilitate long-term financing for (particularly regarding prudential supervision, infrastructure and housing, the development risk-based supervision and financial analysis); of the non-government bond market and restructuring MTPL to ensure its and Public-Private Partnerships (PPPs) sustainability and the appropriate coverage needs to be accelerated. Lack of adequate of liabilities. The MTP also recommends infrastructure has repeatedly been identified promoting industry consolidation, improving by Kenyan enterprises as a major constraint consumer education, and creating incentives for doing business, and was singled out for channel development and product by relevant research as a key obstacle for innovation. growth. Given the large infrastructure financing gap, and the amount of public Reform in the pensions sector should tackle resources already committed to this effort, the issue of contingent liabilities; keep private financing is necessary to tackle this strengthening governance and management constraint. Nevertheless, long term finance at NSSF; and improve funding for DB (for infrastructure and housing) is limited in schemes. The short-term goal for the pensions Kenya, constituting a major constraint for sector should be to tackle the weaknesses in economic growth. The development of non- the existing schemes, so that these can grow government bond structures can serve as and serve current customers better. First, suitable vehicles for mobilizing savings for the level of (funded and unfunded) liabilities infrastructure investments. should be systemically estimated and disclosed in the budget. Second, NSSF should Reforms to promote access should focus on comply with regulations for the outsourcing promoting further access to formal financial of management and custodianship, and its services (beyond payments), tackling the governance and role should be reformed main obstacles to access credit (including through the implementation of a pension high collateral requirements and weak reform strategy. Third, the funding ratios of creditor rights), and strengthening SACCOs DB OPS should be increased. Finally, RBA and other non-bank financial services should strengthen its offsite monitoring providers: capacity. • So far, SASRA has licensed 83 deposit taking SACCOs, which still need to make changes Further, capital markets development to comply with regulatory requirements, requires strengthening of the regulatory the most relevant ones being related to framework and enforcement efforts, as governance issues. Achieving Shared Prosperity in Kenya 102 Growth and Competitiveness • The credit information sharing initiative the chattels registry (such as being moved should be expanded to incorporate on line and having mechanisms for the (mandatory) positive information and correction of errors); improving the integrate regulated financial institutions Companies Register; and streamlining (MFIs and SACCOs) and retailers, as the process for debt collection and reflected in the Finance Bill 2012. enforcement of security interests (e.g. by Improvement of the regulation should discouraging the use of stay orders). also include incorporating a time limit • The legal framework for insolvency needs for the retention of negative information to be strengthened by: providing creditors of borrowers, and consideration should with adequate notice of key steps in the be given to requiring banks to notify insolvency process; ensuring that appeals borrowers before notifying the CRB, when generally do not suspend proceedings; adverse credit information has resulted abolishing the ‘acts of bankruptcy’ in a denial of credit and creating a ‘credit doctrine, strengthening the insolvency information Ombudsman’ to settle moratorium; and, empowering creditors disputes about information accuracy and in relation to critical decisions in the confidentiality. insolvency process, among others. • As mobile money operators provide • The implementation of the creditor rights financial products such as savings and and insolvency legal frameworks should insurance, the following changes to the be strengthened by: appointing lawyers mobile money regulation could enhance with suitable commercial legal expertise to financial inclusion: (i) consumer protection the bench at the Commercial Divisions of regulations and financial literacy tailored the High Court; significantly increasing the to mobile money use; (ii) tiered Know- number of judges/magistrates (in general Your-Customer regulations to allow the and commercial); limiting the rotation opening of an account with minimum of commercial judges; modernizing case requirements for poor people, with management processes; and, creating progressive tightening of regulations; and, a regulatory framework for insolvency (iii) creating regulatory space for a class of professionals, among others.16 non-bank e-money issuers, authorized to • SME financing should be promoted raise deposits and process payments, but through: the elimination of obstacles for not to intermediate funds. the development of leasing, factoring • The legal framework for creditor rights and bank SME financing; encouraging should be strengthened by: reviewing the the development of leasing, factoring Land Act 2012; unifying and strengthening firms/products to eliminate current legal, the real property register (including regulatory, taxation and informational electronic recording of title and interests, issues; and, having policies which facilitate and access to the register available bank SME financing, since banks are the through district registry offices and or main providers of SME credit and have the online); speeding up modernization potential to develop profitable business and strengthening of the registration of models to serve SMEs. interests in movable property; strengthen 16 For more details on reforms to improve insolvency and creditor rights please see ICR ROSC 2012. 103 Achieving Shared Prosperity in Kenya Governance 13. Spending people’s money The 2010 Constitution provides a platform well: reforming public financial to further address the weaknesses in PFM. management Under the Constitution, the Treasury has been reorganized, and new agencies have By Winston Cole, George Larbi and Caroline Wangusi been mandated to focus on various aspects of PFM. These include the Commission on Summary Revenue Allocation (CRA), the Controller A review of Public Financial Management of Budget, and the Transitional Authority. (PFM) in Kenya shows that reforms have The role and function of institutions such as led to substantial improvements in a number the Auditor General’s office and the Kenya of areas including: (i) revenue mobilization; National Audit Office (KENAO) have also been (ii) transparency and citizen participation; redefined and strengthened. (iii) external audit and oversight; and (iv) an Integrated Financial Management and However, key risks associated with the Information System (IFMIS). This progress current PFM system arise under the has been accompanied by a strengthening in Constitution. It greatly increases the power the oversight role of the legislature, which in of the legislature in the budget process, turn has strengthened the accountability of and while creating three separate estimates the executive arm of the government. whose input forms the budget, the Treasury has no control over two of them (the Nevertheless, the quality of PFM systems, parliament and judiciary). Whereas this is especially for accounting and reporting, and good for financial autonomy, it increases the of the comprehensiveness and transparency risk of the total annual budget exceeding of the budget, are often cited as the major revenue, and over time, creates deficits, reasons for non-use of country systems since the Treasury will not have much say by donors and for off-budget spending. over a significant proportion of the budget. According to the Public Expenditure Financial Assessments (PEFA), these are the two areas A significant milestone has been reached where Kenya performs poorly compared to with the enactment of the 2012 PFM Act and its East African neighboring countries, scoring other relevant legislation, creating additional an average of 1.5 and 2.2 respectively. opportunities for entrenching key reforms. Achieving Shared Prosperity in Kenya 106 Governance The Act also has reporting provisions, which and oversight; public procurement; and tax will improve the information made available administration, all of which are embedded to the public, thus improving transparency. in a solid legal and regulatory framework. It also requires the Ministry of Finance to Countries which have made good progress in report on progress made in implementing governance and development effectiveness audit recommendations, as part of the draft enjoy PFM systems that are robust enough budget submissions to parliament, and to prevent or minimize abuse and leakages in improves accountability in the use of public public finance. resources. It must be pointed out that there is also need to accelerate and sustain the pace PFM reforms have been underway in of PFM reforms in the context of devolution. Kenya since the 1990s, but progress has been slow, and the results mixed. Since the The following areas are recommended for 2002 elections, the government has taken action by the incoming government: significant steps towards strengthening the • complete the inter-governmental country’s PFM systems. The importance financing architecture and finalize the of having such effective systems has ratios to be used in transferring debts and been emphasized in key national policy assets (financial and non-financial) from documents, such as the Economic Recovery the local government authorities to the Strategy for Wealth and Employment new counties, and clarify the procedure Creation (2003-2007), and Vision 2030. The for fiscal transfers; latter in particular defines public expenditure • conduct a PFM capacity assessment in the and financial management as a priority in counties, and assist with their capacity structural reforms, whose goal is to improve development; and efficiency, transparency and accountability, under a coordinated strategy that revitalizes • manage and sustain the implementation PFM. of the re-engineered IFMIS to full completion and usage across national and In 2006, the government adopted the county governments. Reliance must not be Public Financial Management Reform placed on IFMIS alone, but also on other Strategy 2006-2011 to guide the continuous key areas such as accounting and financial development and improvement of PFM reporting, and comprehensiveness and reforms. The ultimate goal was to ensure transparency of the budget. Sustained efficient, effective and accountable use of reforms efforts are also required. public resources, as a basis for economic development and poverty eradication, Review of Progress – Facts and through improved service delivery. The Trends strategy also covered the transition period An efficient and effective PFM system to June 2012. A new strategy for the period is critical to the proper allocation and 2012-2017 has been prepared in the context management of financial resources to of the newly enacted 2012 PFM Act. achieve development results. A sound PFM system is one of the key components of good The Medium Term Expenditure Framework governance, ensuring adequate infrastructure (MTEF) is fully developed and integrated and improved access to services for citizens. into the budget process, but a meaningful It encompasses information technology; medium term perspective is lacking. In budgeting; accounting and financial pursuit of a more disciplined fiscal policy, reporting and control structures; auditing the MTEF and a new chart of accounts were 107 Achieving Shared Prosperity in Kenya Governance introduced in 2005. In addition, the annual average, as shown in Figure 13.1. The budget process is now more inclusive, better credibility of the budget has been the best defined, more medium-term oriented and performing aspect of the PFM system since has more internal and external safeguards put 2006. The most profound progress over in place to ensure that the implementation the years has been in the area of external of the budget process continues to improve scrutiny and audit, but the accounting and over time. reporting aspects perform below average and are deteriorating. Overall, the performance However, the following challenges remain: indicators suggest moderate to significant (i) the second year of the MTEF is often fiduciary risks1 in the PFM system, with the ignored, with preparation of the subsequent PEFA ratings declining from C+ in 2008 to C year’s budget effectively starting from zero; in 2012. (ii) the linkage to and alignment with the Vision 2030 Medium-Term Plans of MTEF, Off-budget expenditure and in-year for sector working groups and by specific budget reallocations still hamper effective development partner projects is unclear; and efficient use of resources. Although and (iii) performance targets of the budget, the detailed budget estimates are policy and performance contract processes comprehensive, they lack transparency and are complex and not aligned. Supplementary are not easily comprehensible to citizens, budgets also still form a significant percentage due to the huge amounts of tabular details of the overall budget: for instance in the provided, without accompanying narrative. 2011/12 budget, they were 25 percent of the In addition, the budgets of the Semi- total. Autonomous Government Agencies (SAGAs) do not disclose the government’s potential According to the PEFA assessment reports contingent liabilities, except for debt it for 2006, 2008 and 2012, the performance guarantees.2 Although these institutions of Kenya’s PFM system is slightly above submit their reports to the Auditor General, Figure 13.1: Comparison of 2006, 2008 and 2012 PEFA results for Kenya 3.5 3.0 2.5 Average Scores 2.0 1.5 1.0 0.5 0.0 Credibility of Comprehensiveness Policy-Based Predictability and Accounting, External Scrutiny Donor Prac tices the Budget and Transparency Budge ting Control in Recording and Audit Budget Execution and Repor ting 2006 2.8 2.4 2.5 2.4 2.3 1.5 1.0 2008 3.3 2.3 2.5 2.7 1.9 1.8 1.2 2012 2.2 2.2 2.8 2.7 1.5 2.2 1.0 Source: Kenya 2006, 2008 and 2012 PEFA Assessment Reports 1 A general principle in relating the PEFA ratings with the various aspects of the PFM system is that a high PEFA score (e.g. ‘A=4’) indicates low fiduciary risk, and conversely a low PEFA score (e.g. ‘D=1’) indicates high fiduciary risk. 2 In the 2011 financial year, State Corporations represented 13 percent of total budgeted central government expenditure, including net lending(2012-17 PFMR Strategy). Achieving Shared Prosperity in Kenya 108 Governance in terms of reflecting actual revenues and in the payment processes within the spending, they have not been satisfactory. ministries, which impacts the budget Fiscal risk assessment and oversight of public execution and service delivery. Payment enterprises have not formed part of the arrears can arise from financial resource PFM reforms to date, and current practices inflow unpredictability, combined with are not clear. Kenya’s performance is below problems which result from weak budgeting that of its East African neighbors, in terms and budget execution systems. The Public of PEFA scores on comprehensiveness and Expenditure Review 2010 states that delays in transparency of the budget, as shown in cash transfers can take between one week to Figure 13.2. several months. A critical factor in this regard is the seasonality of revenue collection, which Figure 13.2: Trend of deviations within the recurrent invariably affects cash releases. An effective and development budgets, 2002/03-2011/12 cash management framework, with tools 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 20.0 (and the skills to use them) for proper revenue 0.0 forecasting and cash planning, supported by -20.0 procurement plans and disbursement and/or payment schedules, will help to address this KES Billions -40.0 problem. -60.0 -80.0 There is improvement in capacity and the regulatory framework for debt management, -100.0 and this progress needs to be sustained. -120.0 Since the introduction of a Medium Term Recurrent Development Debt Management Strategy (MDTS) in 2008, Source:2003-2009 (KENAO); 2010-2012 (BPS 2013) public debt transactions have declined from 21.4 percent in 2007/08 to 15.7 percent in Predictability of budget resources, 2010/11. The 2009 MTDS recommended particularly for the development budget, a shift in the composition of debt—long- has been weak and requires attention. term domestic debt from medium-term, in Figure 13.2 indicates that the budget has order to minimize both cost and risk in the deviated between the appropriated and debt portfolio. The Internal Loans Act was the executed development budget, with introduced in 2009 to provide for borrowing the worst deviations occurring during the by the government, and the Guarantees Act financial year 2010/11. This may be due to has been replaced by the National Loans the slow process of transferring funds, and/ and Guarantee Act 2011. The annual Debt or the lengthy procurement processes that Sustainability Assessments show that Kenya’s hinder the ability of ministries to use funds debt levels are indeed sustainable.3 Lastly, for development within set timelines. new CS-DRMS 2000+ software was recently installed, which has significantly improved Predictability of available cash for the reliability of external debt data. expenditure commitment is critical for efficient budget execution. Cash transfers Some progress has been achieved in from the exchequer to ministries have procurement reforms through new improved due to electronic funds transfer. procurement legislation, but more needs However, there are still significant delays to be put into place for a more robust and 3 The Assessments are carried by the International Monetary Fund with full collaboration of MoF. 109 Achieving Shared Prosperity in Kenya Governance less cumbersome system. The need to Auditor General’s report. However, there are create an oversight body, whose roles were long delays by parliament in reviewing audit embedded into law, led to the passage of reports, posing queries, and getting responses the Public Procurement and Disposal Act from government ministries, department (PPDA) in 2005, followed by the publication and agencies (MDAs). Some significant of the Public Procurement and Disposal components of the Financial Management Regulations in 2006. The PPDA created the Act (FMA) of 2009 have been altered by the Public Procurement Oversight Authority 2010 Constitution: public finance under the (PPOA), which administers the provisions of FMA was centered on the Treasury—under PPDA. PPOA also has additional roles such as the direction of the executive—as the key monitoring, regulatory, advisory, sensitization player in controlling public funds. In addition, and training. the Controller’s function has been removed from the Office of the Auditor General, and Other bodies formed by the PPDA include given to a new office of Controller of Budget. the Public Procurement Advisory Board and the continuation of the Public Procurement Since 2009, the Internal Audit Department Complaints, Review and Appeals Board, has undergone further strengthening and known as the Public Procurement empowering, and its mandate has been Administrative Review Board. These reforms expanded. The department has adopted the have brought some improvements, such as Risk Based Audit Approach; spearheaded the introduction of a procurement manual the development of the Institutional Risk and guidelines for framework contracts. Management Policy Framework in the public However, little change has occurred. The roles sector; adopted internal audit standards and of the three bodies that came into existence best practices as promulgated by the Institute prior to the bill have not been clearly defined, of Internal Auditors; enhanced governance and need to be streamlined. Other aspects through the establishment of ministerial that remain weak and need strengthening audit and risk management committees; include the institutional framework; introduced IT-supported audits and the procurement capacity; the functioning of roll out of Audit Management Systems the procurement market in terms of private (Teammate); and, adopted Value for Money sector participation; enforcement and follow- Audits/Performance Audits. All ministries up on external audit recommendations; and and state corporations have adopted the public access to procurement information. Institutional Risk Management Policy Framework, whose adoption is envisioned to Major improvements have been witnessed enhance risk identification and management in external scrutiny and audit, but following by government MDAs, and provide a policy up on recommendations and sanctions framework for risk-based auditing for remains weak. The Fiscal Management Act internal audit. However, these systems have of 2004, which lays down the scope of the not been uniformly introduced or supported legislature’s enhanced oversight functions, by various public entities, and only exist on was revised in 2009 to introduce fiscal paper, rather than in practice. responsibility principles. The Parliamentary Budget Committee is now fully and legally Progress towards International Public Sector entrenched in the budget process, and the Accounting Standards (IPSAS) adoption in Public Accounts Committee of parliament Kenya has been slow. In 2009, the Office has also been active in the review of the of the Accountant General issued a circular Achieving Shared Prosperity in Kenya 110 Governance directing donor funded projects to have their enable better analysis and oversight by the financial reports prepared in compliance Auditor General, and provide more reliable with IPSAS (cash basis). However, there information for overseeing the budget by the have been delays in the adoption of IPSAS, Controller of Budget. The most significant throughout the public sector. A full set of ongoing reform to date is the roll-out of the consolidated annual financial statements re-engineered IFMIS to strengthen the control is not prepared, and only Appropriation environment. Through its in-built budget Accounts are submitted for audit. The control functionality, it has contributed adoption and implementation of IPSAS to addressing the perennial challenge of requires additional efforts by the various payment arrears and accounting vis-à-vis stakeholders who support the improvement financial commitments. The government of financial management and reporting in will need to provide sustained support to the public sector. The Accounting Standards introduce and operate IFMIS throughout the Board, when set up as envisaged in the PFM public sector, as an important component of Law, is expected to drive this process. ongoing PFM reforms. The implementation of the re-engineered The Kenya Revenue Authority (KRA) has been IFMIS is vital to the success of ongoing implementing its Revenue Administration reforms. The implementation of IFIMIS has Reform and Modernization Programme rolled-out a full suite of modules comprising since 2004, resulting in a significant increase accounts payable, purchase orders, in revenue collection. Revenue collection general ledger, accounts receivable, cash has tremendously improved over the last five management and fixed assets. years, with the revenue to GDP ratio having improved from 21.3 percent in 2004/05 to In addition, the new Hyperion Budgeting 22.8 percent in 2009/10. Transformation Module has been rolled-out to all MDAs and in KRA has brought about improvements tested with the production of the 2011/12 in the transparency of taxpayers’ liabilities supplementary budget. Furthermore, an which, inter alia, have resulted from making electronic funds transfer system, linked to the legislative framework clearer, including IFIMIS, was recently implemented by the the removal of tax exemptions and other Central Bank. However, reporting standards discretionary powers. KRA is currently are still fragmented, and institutionalization executing its Fourth Corporate Plan, of reporting through IFMIS has not been 2009/10—2011/12. However, results from implemented. the 2012 PEFA indicate that domestic revenue has been persistently over-estimated, unlike Overall, the role of IFIMIS is yet to show during the period covered by the last PEFA any significant improvement of actual PFM assessment (FYs 2005-07) when revenue out- performance. According to the 2012 PEFA, turns exceeded budget estimates in two of budget performance reports are prepared the three years. on a monthly, quarterly and annual basis, and the information comes from multiple The operational efficiency of the pension sources. A fully comprehensive IFMIS would system has improved since the introduction help to provide accuracy, uniformity and of the new Pension Management timeliness. Improvements in the production Information System (PMIS) in 2009. The and reconciliation of accounts by line automation of the Integrated Personnel and ministries and the Ministry of Finance would Payroll Database (IPPD) and the PMIS have 111 Achieving Shared Prosperity in Kenya Governance helped to address the challenges of manual Figure 13.3: A comparison of PEFA results for Kenya (2012), Uganda (2009), Tanzania (2010) and Rwanda (2010) payroll administration by making personnel Credibility of the Budget information more accurate, timely and 4.5 reliable. 4.0 3.5 Comprehensiveness Donor practices 3.0 and transparency The 2012 PEFA indicates that the Ministry of 2.5 2.0 Public Service and the Pensions Department 1.5 1.0 have no arrears in wage, salary and pension External scrutiny Policy-based payments. However, the IPPD is a distributed and audit budgeting system with each ministry or agency having its own database, and it is not integrated Predictability and control with IFMIS, which has a centralized database Accounting, recording and reporting in budget execution structure. Furthermore, the systems are built Kenya PEFA 2012 Tanzania PEFA 2010 Uganda PEFA 2009 Rwanda PEFA 2010 on different technical platforms, hence, the Source:2003-2009 (KENAO); 2010-2012 (BPS 2013) payroll data is entered manually into IFMIS, generated from IPPD printouts, posing the performance is at par with Rwanda in risk of errors, with loopholes for fraudulent predictability and control in budget execution, payments. The fiscal sustainability of the where both countries are performing above pension scheme is also an issue, and the the others. Kenya has made much progress in government is considering to change the civil the credibility of the budget, an area where it service pension scheme to a contributory is ahead of its peers. system, from the current non-contributory one. The 2010 constitution and implications for Public Finance The use of country systems by donors has Management Reforms declined, with most aid programs and The 2010 Constitution has introduced a grants remaining off budget. Kenya’s budget set of principles and dimensions to PFM regulations do not require donor funding to reforms. In particular, Article 201 of the be included within the budget framework, Constitution emphasizes the principles of though this is under review as part of the draft transparency, accountability and equity as Kenya External Resources Policy. Generally, the key foundations for PFM and prudent Kenya performs worse than all Eastern Africa and fair use of resources for the benefit of countries in donor aid management, as society. The enactment of the Constitution shown in Figure 13.3. An initiative on Open puts fiscal decentralization and PFM, at the Aid Partnership, together with the proposed center of policy reforms in Kenya, and it External Aid Policy, is likely to reduce off- addresses the composition of the legislature, budget aid and improve transparency. the appointment of the executive and Although the country has made considerable judiciary, independent positions, and the progress in PFM reforms, Kenya performs public service. It introduces major reforms below average, and lags behind in almost in PFM that will require parliament to enact all PEFA indicators, when compared to legislation over the next several years, to have other countries in Eastern Africa. Figure 13.3 them fully institutionalized. The Constitution, shows that the country’s 2012 PEFA scores inter alia, strengthens the oversight role of for accounting, recording and reporting parliament in budget and other PFM areas and donor practices are significantly lower such as auditing and accounting, as well as than those of its peers. But the country’s budget monitoring. Achieving Shared Prosperity in Kenya 112 Governance The operational independence of the sub-national government. The adoption Auditor General has been enhanced with of the TSA will result in the phasing out of the splitting of the role of the Controller and the Guaranteed Payment Solution, and its Auditor General, into those of Controller of replacement by the G-Pay/Electronic Fund Budget and Auditor General. The capacity Transfer system, which would increase the of the Office of the Auditor General needs reliability and completeness of payment to be strengthened to be able to manage its information in IFMIS.5 According to the 2012 increased scope and audit demands arising PEFA, some donor agencies have indicated from devolved government, decentralized that they may start to open accounts at the operations and development partner Central Bank of Kenya, thereby reducing the projects. The audit committees also needs to amount of donor aid that is off budget. be effectively deployed. It is anticipated that the revised financial management regulations The Constitution also established the will define and entrench the role of these Commission for Revenue Allocation (CRA). committees, more solidly in the PFM systems. This is mandated to oversee the allocation From a resource dependence perspective, of revenues between national and county the Audit Bill that is being developed should governments, and to advise the legislature seek to protect the financial and operational on issues related to revenue sharing. independence of the Office of the Auditor General.4 The Constitution provides the basis for a more coherent PFM legal framework, but The Controller of Budget is now mandated oversight remains contentious. For the first to oversee the implementation of budgets, time in Kenya, there will be a single PFM of the national and county governments, legal framework for all levels of government. by authorizing withdrawals from public Even so, the Constitution leaves room funds under Articles 204, 206 and 207 for interpretation regarding the extent to of the Constitution. With requirement to which the national government has a role in submit a report on the implementation “overseeing” county government’s finances. of the budgets of the national and county governments every four months, to each The Constitution empowers parliament house of parliament, this new office will to subject the budget to discussion and need a strategy, an organizational structure scrutiny. The 2012 PFM Act makes provisions and appropriate multi-disciplined staff with for reporting that will improve the amount experience in Monitoring and Evaluation. The of information that is made public. The Act introduction of Program Based Budgeting, also outlines a new budget calendar, with when fully embedded across the government, clear deadlines, and clarifies the roles and will provide a framework to perform the role responsibilities of the actors, including of overseeing the implementation of the parliamentary oversight functions and the budget. establishment of a new accounting standards body. Moreover, the new requirement for the The PFM Act introduces a Treasury Single Ministry of Finance to report progress on the Account (TSA) at central and county implementation of audit recommendations, governments and sees the adoption of a as part of the draft budget submissions to single unified PFM system for national and parliament is a step towards ensuring greater 4 Following the Lima Declaration of Guidelines on Auditing Precepts (October 1977), Section 7, specifying thefinancial independence of supreme audit institutions. 5 G-PAY is an authorized Payment Service Provider registered as a System Operator with the Payment Association of South Africa. 113 Achieving Shared Prosperity in Kenya Governance accountability by the executive branch of timetable mandated by the Constitution. government. Implementing Kenya’s devolution is very challenging, because it entails transferring a The Constitution guarantees the citizens’ significant amount of resources to counties. rights to access information held by However, no comprehensive assessment of government, but this needs to be made the PFM capacity of the new counties has operational through an act of parliament. been carried out. Nevertheless, a number of reports are still not required to be shared, such as the Policy Recommendations Mid-Year Review of budget performance, There is need to conduct a PFM capacity and a simplified Citizens Budget. The law’s assessment in the new counties as provisions for some budget documents well as to provide assistance for their already contain a timeframe for publication, capacity development. The devolution but a number of critical documents are not of responsibilities to county assemblies required to be released within a specific results in a four-fold increase in the share time. For example, the law mandates the of resources to be managed outside of production of Budget Estimates, new reports the central administration. So given past on state corporations, and a supplementary experiences, where there has been poor budget, but does not specify when these management of devolved funds and poor should be made public. resulting outcomes (as noted in several audit reports), there is need for an in- The Constitution reinforces aggregate depth assessment of the PFM capacity of fiscal discipline. The Constitution has new counties to handle such funds. The established the Public Debt Management government urgently needs to develop and Office, with a view to instilling efficiency and roll out a long-term programmatic approach to reliability in debt management, including systematically support capacity development in the counties. This may require phasing the establishment of reliable databases that in the transfer of PFM and other functions enable the development of medium and long to counties over time, following predefined term perspectives on current transactions. capacity benchmarks. These obligations stretch to the county governments, as they will also incur—and Improving budget performance will require need to manage—their debts. Nevertheless, further reforms. While there is need to align the design of the inter-governmental performance targets between the budget, financing architecture is incomplete, and the policy and performance contract processes, share of debts to be transferred from local monitoring and evaluation of outcomes government authorities to the new counties, and outputs of the budget will need to be as well as the procedure for fiscal transfers, strengthened, especially at the sectoral level. remains unclear. This means focusing on a few key indicators, and better alignment of national and sectoral The implementation of devolution under plans. In addition, further work will be the Constitution means putting into required to embed program-based budgeting place new institutions. Kenya’s devolution in the budget culture, which implies the need brings with it several governance risks and to sensitize and train budget officers and staff challenges with regard to service delivery, in MDAs. in part due to the ambitious scale and Achieving Shared Prosperity in Kenya 114 Governance Managing and sustaining the 14. Improving transparency and implementation of the re-engineered IFMIS accountability for service to full completion and usage across national delivery and county governments is a priority PFM requirement. The full implementation By Christopher Finch, Philip Jespersen and George Larbi of IFIMIS will enable the integration of planning, budgeting, accounting, financial reporting and the procurement functions of Executive Summary the government. IFMIS is being launched in ministries and counties, thus, it is important K enya’s record on governance1 is mixed and it has been identified as a key constraint to the private sector’s investment that its institutionalization takes center stage in the PFM reform strategy under preparation. and development. Compared to other countries in the region and beyond, Kenya The establishment of the IFMIS Academy is does relatively well on voice, regulatory an excellent step, considering the enormous quality, revenue mobilization, quality of need for training across the government. public administration, and macroeconomic The implementation of IFMIS should receive and budgetary management. However, it the necessary political, technical and financial does poorly on rule of law, accountability, and support, but it is also important to manage control of corruption. Figures 14.1 and 14.2 the costs of implementation and of dealing summarize Kenya’s mixed performance on key with multiple vendors and consultants. To governance indicators, since 1996. There are a get the maximum benefit from IFIMIS, it is number of positive and encouraging factors in important that complementary PFM reforms, the country’s governance arena and fledgling such as the adoption of IPSAS, are carried out democracy. These include, a strong and open by both central and county governments. media, a vibrant civil society, resourceful use of ICT to improve access to information and Given the introduction of sub-national transparency (e.g. the Open Data Initiative), administration who have the potential to and revamped institutions of governance, borrowing, and the history of arrears in such as parliament and the judiciary. existing sub-national units, the monitoring and management of fiscal risks is a key Improving governance would address one new area of responsibility for the national of the greatest constraints preventing Kenya treasury. Given the large number of extra from reaching its economic and social budgetary entities that already exist, and the potential. Whereas the country matches development of public private partnerships or exceeds its peers in many development for new capital investment projects, the fiscal indicators, it recurrently underperforms risk framework should be comprehensive, when it comes to the quality of governance, and include all risks. The extent of extra- and registers high levels of corruption when budgetary entities needs to be rationalized, compared to other Sub-Sahara African and financial reports and/or information countries and global averages. The country’s made available to the public. performance has remained stagnant (see CPI in Figure 14.1). This not only constrains Kenya from reaching its economic and social potential, but it significantly increases the cost of doing business, and limits opportunities for job creation and improved service delivery to citizens. 1 World Bank, 2010. Doing Business in Kenya 2010. The World Bank Group. 115 Achieving Shared Prosperity in Kenya Governance Figure 14.1: Selected governance indicators for Kenya, 1996-2011 45 40 35 Percenti le Ranking 30 25 20 15 10 5 0 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Control of corruption Voice and Accountability Government Effec tiveness Rule of Law CPI (Transparency Int.) Note: Indicators range from 0 (lowest) to 100 (highest) Rank Source: World Bank, World Governance Indicators 2012 Figure 14.2: Government effectiveness ranking for selected countries, 1996-2011 100 90 80 70 Percenti le Ranking 60 50 40 30 20 10 0 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ghana Kenya Korea, Rep. Nigeria Philippines Rwanda Senegal South Africa Tanzania Uganda Source: World Bank, World Governance Indicators 2012 Note: Indicators range from 0 (lowest) to 100 (highest) Rank The 2010 Constitution and its The incoming government can build on the implementation provides a platform to foundation of the 2010 Constitution, and address long-standing governance problems. on the opportunities it provides to Kenyans It offers hope for the consolidation of in keeping up the momentum for reforms democracy, but also poses some challenges, that advance governance. Three key areas of especially in devolution and the sustainability focus are: of other institutional reforms. The success of • carefully plan and coordinate the Kenya’s devolution will largely depend on the implementation of devolution, by devoting quality of governance arrangements in the adequate human and financial resources new counties. The EACC lacks the mandate to manage the transition process to to prosecute corruption cases, and this a devolved government, with priority weakens its ability to confront corruption. But being given to establishing sub-national the enforcement of the Ethics and Integrity systems and capacity building. This should provision in Chapter Six of the Constitution safeguard accountability of both national should go a long way to complement the and county governments to citizens, and efforts to fight corruption and unethical lead to improved service delivery; behavior in the public service. Achieving Shared Prosperity in Kenya 116 Governance • reforms that enhance the capacity to in service delivery and community-driven address corruption, through inter alia— development projects, (including donor and (i) amending the EACC law to enable the World-Bank financed projects), have been body to prosecute cases of corruption, highlighted over the past two years, and have and designating selected courts to indict led to the suspension of three World Bank corruption cases; and (ii) making emphasis projects. on corruption-prevention methods, through engaging in public education on The latest Kenya Investment Climate corruption, in the medium to long term; Assessment from 2009 states that despite and, some improvements, Kenyan firms still • strengthen the use of ICT to provide public face an adverse business environment in access to services and information, intra- governance: 79 percent of the firms surveyed government use of M&E information reported having paid bribes to get things in policy-making, and planning and done, and 38 percent identified corruption budgeting, in order to enhance as a major constraint. Similarly, the latest transparency and accountability. Global Competitiveness Report for 2009/10 identifies corruption, infrastructure, tax rates, Review of Progress and Trends crime and theft, and inefficient government Compared to other countries, Kenya scores bureaucracy, as the most problematic factors lowest in the World Governance Indicator for doing business in Kenya, hence, the cost on government effectiveness, followed by increases. Nigeria. (see Figure 14.2) Governance is often identified as a constraint to development Several factors explain Kenya’s mixed track and rapid growth in a country, which in record in governance and corruption. First, turn translates into improvement in service poor performance tackling corruption is delivery and livelihoods. Corruption is a attributed to the fact that the institutions symptom of weak governance systems, and which have been charged to investigate is among the top constraints to investment and prosecute corruption-related crimes in by the private sector. Continuing fiduciary Kenya have historically been weak, and open problems of ineligibility, fraud and corruption to political interference. There is weak law Table 14.1: Selected governance indicators for Kenya and other countries GDP per capita Voice and Control of Rule of Law (current US$) Accountability Corruption Ghana 1,570 62 63 54 Kenya 808 40 19 16 Korea, Rep. 22,424 69 70 81 Nigeria 1,502 27 9 10 Philippines 2,370 49 23 35 Rwanda 583 12 70 47 Senegal 1,119 39 31 40 South Africa 8,070 66 59 59 Tanzania 532 46 36 34 Uganda 487 30 20 44 Note: Indicators range from 0 (lowest) to 100 (highest) rank 117 Achieving Shared Prosperity in Kenya Governance enforcement and compliance, largely due local level funds and service delivery is not to laxity from the enforcement agencies, made available to citizens on a timely basis particularly the police, the Department of or in suitable formats, or through channels Public Prosecutions and other regulatory that the public can easily access. Where and oversight agencies. For example, little information is made available, it is rarely progress has been made in prosecuting provided in formats that enable citizens offenders and recovering assets acquired to compare a selected facility’s financing through corruption: in 2010/11 the EACC and performance with other comparators. submitted 113 files to the Attorney General Another contributing factor is that the public (AG), recommending prosecution. Although financial management system lacks the the AG accepted the EACC’s recommendation, ability to disaggregate expenditures down out of 95 cases, only 23 appear before the to local facility levels. This coupled with lack courts. of formal recourse mechanisms for citizens to voice their dissatisfaction with service Second, although Kenya scores well in some delivery, creates major accountability gaps. national-level benchmarks of transparency, access to information at the local level is Kenya is becoming a global innovator in generally poor. Citizen’s access to financial applying ICT to improve transparency. and other information, related to devolved However, access to information by citizens funds and services is limited. The Public through the Kenya Open Data Initiative and Expenditure Review, the Public Expenditure other initiatives, is yet to impact on the and Financial Assessment, government accountability of the government and its audits, and multiple civil society monitoring officials. Since 2000, the ICT sector has out- reports document how difficult it is for citizens performed all other segments of the economy, to access reliable, timely and accessible growing at an average 20 percent annually. information on funds and performance of Kenya’s ICT sector continues to expand local service delivery units. Kenya’s Public phenomenally, attracting global attention, Expenditure and Financial Accountability especially after the introduction of mobile (PEFA) score on the availability of information money. Since then, Kenya has developed the on resources received by service delivery largest mobile money platform in the world. units is low (D). This is despite the strong and It has positioned itself as a global ICT hub, open media, and a vibrant civil society. attracting investors who wish to extend the domestic ICT revolution, as well as look into Third, a core challenge is lack of visible, ways of replicating the knowledge in other comparable performance indicators across developing countries. The rapid diffusion of administrative units, service delivery mobile phones (9 out of 10 Kenyan owns a facilities or sectors. For most facilities such mobile phone), together with other socio- as local authorities, although the government technical and grass-root innovations such monitors performance on a number of metrics, as geo-mapping, provide the opportunity to the information is generally not made public, further enhance transparency, accountability therefore compromising accountability and and public participation in governance. transparency. Even where rules for disclosure exist, they are not strictly enforced or applied. The 2010 Constitution lays out a framework Several research and monitoring efforts, which enables Kenya to address long- conducted by the government, civil society, standing governance challenges. These and donors, indicate that information at the include strengthening transparency and Achieving Shared Prosperity in Kenya 118 Governance accountability, and tackling corruption. The personal integrity, honesty in the execution Constitution provides a clear delineation of public duties, accountability to the public of roles, and strong checks and balances for decisions and actions taken, and financial between the three arms of the government. probity of state officers (including restrictions It strengthens the independence of on the maintenance of bank accounts the judiciary, improves public access to outside the country). The key challenge for information, introduces new Bills of right, as going forward will be to see the enforcement well as an ambitious devolution program. It of these constitutional and related legal also outlines an open vetting process for key provisions, in order to ensure that public positions, and establishes the Office of the office-holders are held accountable. Ombudsman, and the Commission on the Administration of Justice. The Kenya Anti- Despite the opportunities presented by the Corruption Commission has been replaced 2010 Constitution to strengthen governance, with the EACC; and the Auditor General’s many institutional challenges and vested capacity is improving, having recently interests remain. These challenges include achieved full coverage of audits for all central Kenya’s very ambitious devolution (see government ministries and departments. separate chapter); the need to strengthen bodies and systems for reporting and The Constitution also specifies that ministers detecting corruption; ensuring successful charged with fraud and corruption need to prosecution of corruption offenders; and step aside—and several have done so in the further strengthening systems to enable past. However, high profile corrupt officials information disclosure and citizen recourse. have rarely been jailed. A major constraint is that the Anti-Corruption Act 2011 does not The success of Kenya’s devolution will empower the new commission to prosecute depend on the quality of governance offenders. Just like its predecessor, the EACC arrangements in the counties. Implementing does not have prosecutorial powers, and Kenya’s devolution is challenging, because it has to depend on the public prosecutor for entails transferring a substantial amount of the prosecution of corruption cases. The power and resources to an entirely new— inherent risk of this arrangement is that and hence untested—level of government. it creates room for delays in prosecuting Drawing on Kenya’s own extensive experience corruption cases, which often lead to loss of in managing decentralized funds (such as evidence, resulting in impunity of offenders. CDF and LATF) over the past fifteen years, It is also worth noting that most high profile the performance of devolved funds has often cases of corruption in Kenya have not been failed to meet expectations—with audits and successfully prosecuted. In Hong Kong, some citizens’ monitoring revealing considerable of the most successful anti-corruption bodies waste and leakages. have the power to prosecute offenders (see Boxes 14.1 and 14.2). Contributing factors include: • lack of an overarching legal and regulatory Chapter Six of the 2010 Constitution on framework for decentralized funds; Leadership and Integrity clearly lays out the • weak institutional capacity; high ethical standards and guiding principles • poor monitoring and evaluation systems; by which public office-holders must abide and, to. These include, inter alia, avoidance of • wide gap between transparency and conflict of interest, selection on the basis of citizen engagement. 119 Achieving Shared Prosperity in Kenya Governance Kenya is using ICT to boost government the public, through a single online portal. In transparency and openness. The Open Data 2012, the government formally announced Initiative was launched in July 2011, and Kenya its intention to join the Open Government became one of the first developing countries Partnership (OGP), and tabled an Action Plan to make government data freely available to at the OGP conference in Brazil. However, Box 14.1: Hong Kong: lessons on anti-corruption reforms The use of a three-pronged strategy Corruption is a multifaceted phenomenon and it is systemic. To address this problem the Independent Commission Against Corruption (ICAC) developed a three-pronged strategy, reflected in its internal structure. The Operations Department carries out enforcement to discover and investigate corruption and prosecute the corrupt. The Community Relations Department implements education to inform the public of the role of the ICAC, spreads knowledge of anti-corruption laws, mobilizes the public to report corruption, and raises the moral costs of corrupt actions. The Corruption Prevention Department works on institutional design to reduce opportunities for corruption. Enforcement ICAC investigators had the power to make arrests without warrant for all offences described in available laws. They also had full powers of arrest without warrant for any other offence that may be detected during investigations. Therefore, the ICAC used its powers to consolidate its reputation with early well-publicized enforcement successes-catching and prosecuting “big tigers” and targeting syndicated corruption in the police force. Corrupt officials quickly revised expectations about corrupt pay-offs and changed their behaviors accordingly. In turn, ordinary citizens revised expectations about the volume and severity of corruption. In time, they no longer viewed corruption as routine. Public Education Enforcement was followed by a broad anti-corruption public education effort that reached out to the community in innovative ways: teaching the mass public the legal connotation of corruption, publicizing enforcement successes and thereby strengthening ICAC credibility, and advertising the ease with which corrupt acts can be reported. Education also included an effort, targeted at youth, to transform public morality. Institutional Design The ICAC studied the organization of work procedures in government and recommended specific measures to reduce incentives for corruption inherent in institutional design. It also vetted arrangements proposed in new legislation to consider their implications for corruption. Corruption prevention work was unique in concept at the time the ICAC was established: (a) A standard practice was developed for “conventional studies” of design flaws in the organization of work in government departments. (b) Corruption prevention analysts returned to the client department after a short time to monitor implementation and assess effectiveness. At the same time, they checked that the changes had not produced new opportunities for corruption. (c) Corruption prevention analysts offered external training in corruption prevention, organizing sessions in government departments. (d) Consultation at the stage of policy formulation or legislative drafting. Under this arrangement, the government department that originates legislation seeks the advice of the Corruption Prevention Department so that analysts there can advise, especially on whether there has been an adequate assessment of enforcement capability in terms of resources in the agencies responsible for implementing the proposed legislation. This work aims to pre-empt the creation of corruption opportunities. Source: The Chilla Review, Vol. 4, No.2 (Fall 2004), 81-97 Achieving Shared Prosperity in Kenya 120 Governance Box 14.2: A participatory approach to anti-corruption reforms, lessons from South Africa Broad Based Partnerships It was realized early that the public service could not succeed in the battle against corruption on its own, and a broad based partnerships needed to be developed in order to provide the necessary assistance and capacity to fight corruption. Strong components of such partnership were the business sector and civil society. Popularizing the Act This was done by simplifying it through a guide both in terms of language and through the use of illustrations. The National Anti-Corruption Forum (NACF) believed that by publishing a reader-friendly guide, it has contributed in a small way towards bringing legislation closer to the people. Feasibility of establishing a common database of corrupt persons and businesses for use by all sectors The challenges in establishing such a database were deliberated on during a roundtable on the Prohibition of Corrupt Persons and Businesses. It was agreed that a committee of specialists should, emanating from the roundtable, meet to discuss and recommend an appropriate course of action for the NACF. The meeting was attended by all sectors, as well as academics and other interestedplayers. The much smaller Implementation Committee has facilitated quicker communication The existence of the much smaller Implementation Committee, which consists of only one representative per sector, has facilitated quicker communication and provides necessary oversight over the projects. Furthermore, individuals have been nominated to serve on cross-sectoral task teams to implement specific projects. The lack of accountability structures had a definite impact on the inactivity of the forum Internal accountability in the non-governmental sectors has improved significantly during the evolution of the forum, but it seems that this accountability stems more from a committed group of peers, rather than from constituencies. The National Anti-Corruption Programme (NAP): A programme of action The partnership of civil society, the public and business sector was further consolidated through the development of NAP. The NAP was adopted as a two-year programme and it serves as an important barometer against which the public can hold stakeholders accountable. Government showed its commitment towards the implementation of the projects of NAP by making funds available. Since the development of NAP the pace of the NACF’s activities has noticeably accelerated. Source: Case study on the South African National Anti-Corruption Forum both initiatives are potentially fragile, and Law, and an institutional context for Open will require further support to sustain them. Data. Similarly, access to survey data is limited due to lack of up to date information that is An increasing focus on results, in monitoring available for downloading, and a convoluted and evaluation systems, and performance and cumbersome data dissemination policy at information, provides opportunities for the Kenya National Bureau of Statistics(KNBS). better-informed decision-making and These factors have increasingly reduced user accountability. Since 2003, a culture of access to the required data. Strengthening Managing for Development Results (MfDR) and solidifying these governance gains will emerged in Kenya following the introduction require policy and institutional reforms to be of the National Integrated Monitoring and put into place, such as Access to Information Evaluation System (NIMES). Among notable 121 Achieving Shared Prosperity in Kenya Governance achievements are the development of a processes have been asked to leave the national indicator handbook that covers key service; sectors in the economy, the production of (iii) charging the budget of the judiciary on the Annual Progress Report (APR), and the the consolidated fund, to provide some comprehensive 2009 Census report. level of financial independence from the executive; and A draft M&E Policy submitted in 2012 for (iv) the establishment of a Supreme Court as Cabinet’s approval will provide a much the highest court. improved basis for strengthening M&E across the government if implemented; The new leadership of the judiciary has and a national project database, e-ProMIS been demonstrating its commitment to is designed to offer citizens, managers reforms. Notably, by the actions already and decision-makers with an integrated taken, including the launch of the Judiciary platform to monitor government project Transformation Framework and increased implementation—nationally, across sectors, public confidence in the judiciary. and at decentralized levels. However, entering project data into e-ProMIS has been The oversight role of the executive by remarkably slow. These M&E tools and the parliament is enhanced and expanded under data generated from them, can enhance the 2010 Constitution, potentially reducing transparency and enable citizens to hold opportunities for abuse by the executive, their governments and service providers as had been characterized by previous accountable for results. However, the will administrations. Parliament no longer and the capacity to use such information, to merely rubber-stamps budgets submitted by hold officials accountable, is still weak and the executive, instead, it subjects them to yet to evolve to its full potential. discussion and scrutiny. The Parliamentary Budget Committee and the Public Accounts Ongoing Reforms: the 2010 Committee are fully and legally entrenched Constitution and its implications in the budget process, and are supported by for Governance and a professionally staffed Parliamentary Budget anti-corruption Office. The 2010 Constitution strengthens the independence of the judiciary, which in the The 2010 Constitution guarantees the past was ranked as one of the most corrupt citizens’ right to accessing information, but institutions in Kenya. Initial judicial reforms this needs to be translated into legislation. include: The government is in the process of drafting (i) the appointment of the Chief Justice a Freedom of Information Law. Although and new judges, through an open there is no constitutional deadline for such and transparent process, and the legislation, stakeholders agree that it should establishment of a Judicial Service be enacted before the 2013 national and Commission for the appointment, county elections. The draft bill meets most promotion and disciplining of judges; of the criteria for an effective law of this (ii) vetting of existing judges and magistrates, kind, scoring 114 out of a maximum 150 on who were in office before the new the Right to Information legislation rating Constitution came into effect. Already methodology, which—if passed in its current judges found wanting by the vetting form—will see Kenya taking the 10th position Achieving Shared Prosperity in Kenya 122 Governance as the country with most progressive law these legal provisions in the PFM Act will need in the world. The draft bill makes provision to be carefully monitored and supported. This for continuous proactive disclosure of is both from the perspective of whether it is information held by all government achieving its objectives (i.e. increased control ministries, departments and agencies, and of resources at the local level; more efficient greatly reduces the scope of secrecy laws. At service delivery; and increased equity), and the same time, the government is drafting a to monitor the quality and consequence of Data Protection Law to ensure that privacy spending by counties. The Treasury will need laws do not contradict or infringe on Access to set up a unit to manage disbursements, and to Information Laws. oversee conditional grants (if they are used), and monitor counties’ PFM compliance and Significant progress is being made in PFM performance in terms of results. reforms, which will enhance transparency, accountability and participation. First, The implementation of devolution under the the PFM Act 2012 makes provisions to 2010 Constitution requires several new legal enhance transparency, accountability and reforms and regulations, in order to create participation in the management of public an enabling environment for anti-corruption finances. Second, and as noted above, under efforts. As previously noted, the EACC has the 2010 Constitution and in the PFM Act, the been established with the mandate to oversight role of parliament over the national investigate corruption cases. The Commission finances is enhanced through the Budget has been involved in investigation and asset Committee, which has the powers to review tracing, and as a result, approximately KES 3.8 budget policy statements, budget estimates, billion of losses have been averted during the and compliance with the fiscal responsibility 2010/11 fiscal year. The recovery of illegally provisions in the Act. The PFM Act and the acquired public and otherwise unexplained Constitution require that public finances are assets has been witnessed, thus leading to managed transparently and accountably, corruption prevention. at both national and county levels; and public officers are accountable to the public Despite many advantages of devolution, for the management of public finances with it are inherent risks of increased through parliament and County Assemblies. corruption, especially at the sub-national Therefore, the PFM Act in particular and thelevel. County Governors will have significant Constitution in general, provide an overall authority, which could be abused. However, legal framework for accountability and devolution presents opportunities for transparency, in the management of public reducing corruption in service delivery, resources (see separate chapter on PFM). provided that there is sustained focus on introducing and managing accountability The PFM Act also provides for the mechanisms. A strong legal framework is establishment of an Intergovernmental important, but building effective participation Budget and Economic Council, which and accountability mechanisms, require provides a forum for consultation and substantial capacity at both national and sub- cooperation between national government, national levels. counties and other stakeholders, on issues such as the budget policy statement and the Capacity building will be required at the recommendations of the Commission for national level to develop systems (e.g. for Revenue Allocation. The implementation of soliciting citizens’ feedback and registering 123 Achieving Shared Prosperity in Kenya Governance complaints), and at the local level to systems that will ensure accountability implement them (e.g. transforming complex between national and county governments, financial information into formats that are service providers and citizens. Priority accessible by citizens). This is an important actions on devolution include: component of long-term capacity building • effective co-ordination structures for to support effective devolved government. It devolution by key players (e.g. the is important that these long-term goals are Transitional Authority, the Commission not overlooked in the preoccupation, with for Revenue Allocation, ministries of Local the immediate and urgent concerns that will Government and Finance). This is critical inevitably accompany the early transition to avoid overlaps, turf wars and building period. of synergies; • develop national standards and processes Building a strong culture of Managing for to support the framework for sub- Development Results at county level is national accountability (e.g. transition important, both for the continuity of service arrangements, intra-governmental co- delivery during the transition as well as for ordination, civil service restructuring, and ensuring value for money. Monitoring and rules for transparency and accountability), Evaluation (M&E) capacity at decentralized including a system to benchmark and levels has improved in recent years, including monitor county development outcomes the quality of the District M&E reports, which and performance; are received by the Ministry of Planning on • enhance voice and inclusion in Kenya’s a yearly basis. But there must be further counties, through mechanisms that build progress in moving from output to outcome transparency and accountability between measures. citizens, service providers and the government at the national, county, and Clear guidelines need to be laid out for both sub-county levels, for example, inclusion statistics and M&E at county level, including of measures and indicators of citizens’ linking county results to planning and satisfaction with devolved service delivery budgeting. This needs to be complemented in the county performance measuring by the development of capacity for system; evidence-based decision-making, based on • build service delivery capacity of a comprehensive assessment of present stakeholders (government, providers and capability, county-by-county. Improving CSOs), to manage decentralized funds, access to information at the decentralized transparently and accountably; level, involving civil organizations in • encourage leaders at both local and providing feedback on the quality of service national levels to be committed and to provision, will be essential to ensuring set examples through the promotion value-for-money—both in the planning and of high-standard service delivery and implementation stages. ethical behavior that are conducive to the development of the economy and the Policy Recommendations eradication of poverty; and, Devote additional human and financial • develop short, medium and long term resources to manage Kenya’s transition to county capacity building programs with a devolved government, with priority being the Kenya School of Government. given to the establishment of sub-national Achieving Shared Prosperity in Kenya 124 Governance Enhance the capacity to address corruption 15. Judicial reforms: A journey of through: turmoil and opportunities • amending EACC laws to enable the body to prosecute cases of corruption, and By Nightingale Rukuba-Ngaiza and Stephen Mukaindo designating selected courts to try cases of corruption. The inability of EACC to “We found an institution so frail in its prosecute corruption cases is a major structures; so thin on resources; so low on its constraint, which partly explains the confidence; so deficient in integrity; so weak delays in prosecuting corruption cases; in its public support that to have expected it • in the medium to long term, the to deliver justice was to be wildly optimistic. government is advised to put emphasis We found a judiciary that was designed to on strengthening corruption-prevention fail ...” (Chief Justice Mutunga, “The First systems and public education on the Hundred and Twenty Days” speech, October subject. In reviewing the strategy, emphasis 19, 2011). should be placed on strengthening systems to prevent, or perhaps more realistically, A TURMOUS HISTORY AND A WINDOW to minimize opportunities for corruption OF GREAT OPPORTUNITY in the public sector; and • EACC’s ongoing corruption perception K enya’s long term political, social and economic development cannot be attained or sustained unless the rule of law is surveys for public institutions and sectors, and publishing the information for citizenspursued as a central theme, and is grounded on a regular basis. on an independent and robust judiciary. The rule of law supports transparent and Strengthen public access to information and accountable government, and protects the intra-government use of M&E information in freedom, liberty and security of citizens. It policy-making, planning and budgeting, and ensures fair and timely resolution of disputes, enhance transparency and accountability. and the effective enforcement of contractual This includes: and property rights; vital for social stability • accelerating reforms to institutionalize and for attracting foreign and domestic access to information, e.g. through Open investment. An efficient and independent Data; judiciary is essential to the rule of law1; • passing the Access to Information Bill; it helps to ensure respect and adherence • putting into place the rules and intra- to the law. It also plays an invaluable role government linkages required to sustain in promoting a country’s governance and and expand available data; development efforts. The 2010 Constitution, • engaging the ICT community, academia, for example, reaffirmed the judiciary’s media and think-tanks to unpack and significant role for Kenya, i.e. to interpret disseminate analysis behind the data; and and to enforce governance, public finance • encouraging the uptake of these skills and (including equitable sharing of national tools in public service delivery. resources), devolution, and the bill of rights. However, a favourable private sector and development environment requires much more than the presence of an effective judiciary. Other legal and justice institutions― 1 The political pillar of the country’s Vision 2030 strategy aims at realizing a democratic political system based on the respect of the rule of law. 125 Achieving Shared Prosperity in Kenya Governance such as, the Attorney General’s office, the The challenges facing Kenya’s judiciary National Police Service, the Director of Public are traceable to the country’s post- Prosecutions, the Kenya Prison Service, and independence political history. The years associated public bodies―must also possess following independence saw the dismantling the will and the institutional capacity to of checks and balances, in favor of an all play their own roles effectively. Inescapably, powerful executive. The executive held the the efficacy of these institutions affects the power to appoint judicial officers and to judiciary’s own performance and the overall determine the judicial budget. The judiciary, state of rule of law in the in effect, became an country. “… the Constitution has created instrument of the opportunities for transforming executive. Ironically, The justice sector judicial services in Kenya. It has given the judiciary’s own was neglected and the judiciary the institutional and management style― financial freedom to pursue this goal, underfunded for many and to extend its reach throughout under highly centralized years, undermining the the country” and powerful control― capabilities of legal and looked extremely justice institutions, the similar to the rule of law and the country’s development, executive’s. Executive actions, therefore, including its peace prospects. Consequently, went largely unchecked and the end result Kenya’s ranking in adherence to the rule of was a disempowered judiciary, lacking the law, good governance, ease of doing business, independence, integrity and institutional and as an investment destination is low capacity to deliver on its mandate. Public compared to neighboring countries (Figure trust and confidence in the judiciary waned, 15.1). Moreover, the 2008 post-election and impunity took hold in the country. violence which set back the country’s GDP growth rate―from 7 percent in 2007 to 1.6 At least twenty judiciary reviews were percent in 2008―was largely attributed to the conducted over the last two decades to fragility of the legal and justice institutions in assess the problems and offer solutions. the country. Some of their recommendations were implemented in varying degrees, but the Figure 15.1: Kenya ranks lowest in rule of law fundamental ones related to the judiciary’s compared to its neighbors independence and its institutional structure 1996 50 were finally taken up by the 2010 Constitution. 2011 1998 45 40 This marked the start of significant 35 2010 30 2000 institutional and managerial changes in the 25 20 15 judiciary―listed in Box 15.1―that support 2009 10 5 2002 the possibilities of even more reforms. 0 Basically, the Constitution has created 2008 2003 opportunities for transforming judicial Kenya 2007 2004 services in Kenya. It has given the judiciary Rwanda Tanzania the institutional and financial freedom to 2006 2005 Uganda pursue this goal, and to extend its reach Source: Worldwide Governance Indicators (WGI), 2011 throughout the country. In addition, it has Note: Ranges from 0 (lowest) to 100 (highest) made it possible for the institution to help Achieving Shared Prosperity in Kenya 126 Governance Box 15.1: Major changes heralded by the Constitution for the Judiciary (a) appointments of the Chief Justice, Deputy Chief Justice and Chief Registrar; (b) establishment of a Supreme Court to address fundamental legal and policy issues (e.g. constitution interpretation, elections, etc.) and develop indigenous jurisprudence; (c) establishment of an expanded Judicial Service Commission with more representation from the public; (d) establishment of specialized courts―the Land and Environment Court and the Industrial Court―to expedite administration of justice; (e) establishment of the Judiciary Fund to give the judiciary financial autonomy from the executive government; (f) establishment of a National Council on the Administration of Justice to coordinate reforms across all institutions in the Justice sector; and (g) enactment of the vetting of judges and magistrates. improve the country’s development and courts, 77 percent prefer using courts to governance efforts―including its vision for a resolve their disputes, and 70 percent have Middle-Income status―through an expanded confidence in the Chief Justice and other and enhanced judicial service. newly appointed judges for many reasons (see Figure 15.2). Nonetheless, if this turn- REFORM OBSTACLES: THE PURSUIT around is to be maintained and deepened, TO OVERCOME THEM it still has to tackle many of the difficult Kenya is at the beginning of a momentous and deep-rooted obstacles that continue to judicial reform program, articulated in the bedevil meaningful reform. Some of these Judiciary Transformation Framework (JTF), are discussed below. 2012-2016. The process is beginning to show some promise following several early (i) Management system issues accomplishments, such as the open and Despite separation from the civil service transparent recruitments for judicial officers; in 1995, the judiciary never established a vetting process to remove judicial officers effective management systems. The Judicial found unsuitable; large scale recruitment to Service Commission remained dysfunctional, meet the needs of a greatly court stations outside expanded judiciary; and a Nairobi lacked autonomy, “...if this turn-around is to be program that is actively maintained and deepened, it still has and administration was strengthening public to tackle many of the difficult and centralized featuring 16 participation. These deep-rooted obstacles that continue cumbersome committees unfolding events are to bedevil meaningful reform” made up largely of judicial improving public support officers (and taking them for an institution that away from their core suffered from low public trust and confidence, judicial duties). In addition, a 2007 forensic and perceived as corrupt and weak. audit revealed serious leakages in financial management leading to a loss of hundreds of Public opinion polls show that satisfaction millions of shillings. with the judiciary has risen; from a low 31 percent in 2008 to double, 67 percent, in Improvements have since been made in April 20122. The more recent September management systems and controls, but more 2012 Infotrak Harris opinion poll indicates still remains to be done. Notably, in 2012 that 84 percent of Kenyans trust Kenyan the judiciary established five registrars and 2 The Kenya National Dialogue and Reconciliation Monitoring Project: Reforms and Preparedness for Elections, Review Report (May 2012), page 30. 127 Achieving Shared Prosperity in Kenya Governance Figure 15.2: Why Kenyans have confidence in the new CJ promotions. Since 2011, the judiciary has and other senior judicial staff embarked on a vigorous recruitment program Reasons for Confidence that has seen the entry of 251 new senior Judges have been ve tted 43 staff comprising judges, magistrates, kadhis, Impar tiality & fairness in recruiting 24 registrars, legal researchers, and directors, including a better gender balance. Moreover, Good track record 21 terms and conditions of service are being 17 They are persons of high integrity improved. They are best qualified & experienced 16 The judiciary is independent 8 A 2003 internal report implicated several It's a change from the old regime 7 judges, magistrates and paralegals in They are newly contracted in office 5 n=1008 corruption, and the majority were dismissed 0 20 40 60 80 100 or opted to retire. Since then the judiciary has Percent established a Code of Conduct and an Office of Source: Infotrak Research and Consulting, Judiciary Perception Survey, September 2013 the Ombudsperson to receive and to respond to complaints from staff and the public. It has seven directorates3 to lead and to strengthen also set up a Judicial Service Commission the institution’s management structures, Standing Committee to handle disciplinary including monitoring and evaluating judicial cases. A Governance and Anti-Corruption services and the JTF’s results indicators. In Strategy is also under development. Perhaps addition, an independent, private sector the most significant mechanism to address fiduciary agency is expected to shortly join judicial corruption and integrity has been the the judiciary for a limited period to help vetting of judges and magistrates. However, implement the World Bank-financed Judiciary stakeholders’ involvement in promoting Performance Improvement Project (JPIP). The oversight, transparency and accountability, firm will help to manage and to strengthen as envisaged in the JTF, will also be very financial and procurement systems, including powerful. Some progress has been made building the capacities of judiciary staff. (see the Participation Issues section below), but more needs to be done to help build and (ii) Staff issues sustain such public engagement. Severe under staffing made it impossible for the judiciary to deliver on its mandate. Weak staff capacities, along with a poor By 2011, the organization was running on performance and accountability culture, has only 47 percent of its staff requirement. The frustrated reform efforts for decades. In a bid justice to population ratio was one judge for to reverse this, the judiciary has established every 500,000 people and one magistrate human resources and performance for every 90,000 people.4 This translates to management directorates led by high level, only one judicial officer for every 245,000 experienced professional. The Judicial Kenyans, in comparison to 2.39 for every Training Institute is also being revamped 100,000 Tanzanians, 3.83 in South Africa to help it respond better to the severe and 3.5 in United Kingdom. Poor terms and capacity building requirements, including the conditions of service worsened the situation, expanding workforce. Change management characterized by a demoralized staff, frequent efforts―to help transition personnel to the staff departures, and scarce pay rises and judiciary’s new vision, performance culture, 3 Directorates of human resources; performance management; information and communications technology; financial management; public affairs and communication; and supply chain management and others. 4 Chief of Justice speech, State of Judiciary, October 19, 2012. Achieving Shared Prosperity in Kenya 128 Governance structure, and processes―are also underway. the use of manual operations; deliberate Furthermore, there are plans to conduct case delays by litigants; inflexible rules of an organizational review, to implement an procedure; under staffing; over-stretched Integrated Performance Management and judges and magistrates6; and weak staff Accountability System5, to conduct regular accountability and performance management court users’ satisfaction surveys, and to issues such as corruption, poor work ethics institutionalize Court and sudden, disruptive and Users Committees, punitive transfers. “Change management efforts― to among other measures help transition personnel to the that are intended to judiciary’s new vision, performance The judiciary is fighting improve performance culture, structure and processes―are this out on all fronts. It and accountability. In also underway” has revised the procedural the meantime, court rules to allow judicial stations have seen the officers more control of introduction of Customer Care desks to the trial process; culled inactive cases; hired help improve service, and Leadership and more staff; is gradually freeing judicial staff Management Committees to help oversee from administrative duties; and is managing the transformation process and the day-to- transfers better (including a transfer policy day running of courts. under development). In addition, cases of great public interest―such as the Electoral (iii) Funding issues and Administrative Boundaries cases and The judiciary has for many years been grossly the election date―were fast tracked which underfunded. In 2007/08 the institution “had the effect of stabilizing the political received 0.3 percent of the national budget environment ...”, The State of Judiciary 2011 percent (at the same time parliament received –2012 Report, October 2012. Between July 1.3 percent) compared to an international 2011 and June 2012 there were 428,827 benchmark of 2.5 percent for judiciaries. The new court cases lodged, 421,134 concluded, allocation, however, rose sharply following 802,570 pending, and a rate of disposal of the establishment of the Judiciary Fund from about 1,685 cases concluded each day7. KES 3.9 billion in 2011/12 to KES 15.9 billion in 2012/13. This is equivalent now to 1.3 In addition, the judiciary has instigated percent of the budget, but is still below the a number of interesting ICT innovations international benchmark. To help finance the capable of several outcomes. For example, JTF’s performance improvement goals, the they could save costs, increase efficiencies, judiciary received US$ 120 million for the JPIP and enhance transparency, as well as reduce from the World Bank (October 2012) and, case delays, and the opportunities for more recently, from the Netherlands (June corruption. The emerging innovations include 2013, US$22,965,000) as part of a United the telephone short code number, 5834, for Nations Development Programme managed lodging complaints with the Office of the basket fund. Ombudsman, and the mobile phone transfer payment system, Faini Chap Chap, for traffic (iv) Access to justice issues fines which is to be rolled out throughout the One of biggest problems for the judiciary is country. In addition, the judiciary is assessing case delays and backlog, brought about by the possibility of using credit/debit cards a multitude of circumstances. These include for other money collections, and is piloting 5 This system will modernize and operationalize performance management and accountability. It will establish performance factors, criteria and scoring guidance; performance agreements at unit and individual levels; and links between performance and reward mechanisms. 6 Since they also have administrative responsibilities, e.g. procurement, supervising construction, etc. 7 State of Judiciary 2011 – 2012 Report, October 2012. 129 Achieving Shared Prosperity in Kenya Governance case management systems, an audio-visual The judiciary is also seeking to establish a recording system and a Court Fees Calculator. small claims court as a means of increasing The latter “will be available online and is and diversifying access to justice. This is expected to eliminate opportunities for awaiting parliamentary review and approval. corruption, obviate the need for advocates The customer care desks and plans to have and litigants to visit the courts, and reduce court counsels in every court (to assist congestion in the registries”8. court users understand court processes) should help to improve lack of information Plans are also underway to link all the high and ignorance of the law. At the same time, courts, the magistrates’ courts in Nairobi and various court procedures are being simplified the Judiciary Training Institute to a single by the judiciary through the Rules Committee network. JPIP will also be automating 68 and a sentencing and bail handbook for courts under a case management information judicial officers, led by the Judicial Training system that aids systemization and allows case Institute, is under development. In addition, processing and court procedure information the judiciary is promoting use of Alternative to be more transparent to users, improving Dispute Resolution mechanisms―such as accountability. The system will offer audio/ a court-annexed mediation program and visual recording of court proceedings, traditional dispute resolution mechanisms― electronic case tracking and management, but these are still in early development and an Integrated justice information portal, consultation stages. electronic display of case listings, SMS notifications of court case events, video Access to legal information has conferencing facilities for courts, versatile tremendously improved, led by the National reporting tools/business intelligence, a Council for Law Reporting. Laws of Kenya sentencing information system and other are now available online free-of-charge, legal knowledge processing databases for the and decisions made by superior courts are use of magistrates and judges. reported regularly and are available online. Electronic newsletters are published monthly Many other issues such as the cost of to draw attention to recent laws and judicial litigation, lack of legal information, decisions of significance. A data base of ignorance of the law, complex court Gazette Notices since 1896 and up-to-date procedures, and the absence of Alternative access to the Parliamentary Hansard have Dispute Resolution mechanisms limit access also been established. Although access to to justice. Access is particularly unreachable information has visibly improved, it is not yet for the vulnerable and marginalized. In this adequate. It still needs to be expanded, and regard, a pauper brief system for indigent its quality, accuracy and targeting enhanced. capital offence offenders and a national legal aid scheme piloted under the Ministry The nonexistence of nearby courts, as of Justice and the National Cohesion and well as the dilapidated―sometimes Constitutional Affairs are in place to help condemned―state of many of those that provide legal aid. However, they remain do exist relentlessly cuts back access to challenged by inadequate funding (e.g. to justice. There are no courts in 43 percent of attract experienced, high paid lawyers) and the existing districts, and only 83 out of the are yet to be mainstreamed into the country’s 146 districts have at least one court. The legal practice. travel costs alone prohibit many Kenyans from pursuing justice. In addition, the large 8 Chief of Justice speech, State of Judiciary, October 19, 2012. Achieving Shared Prosperity in Kenya 130 Governance number of the cases handled by urban courts Cost effective and uniform-space planning present inefficient, unsafe and unsanitary and design standards have been lacking conditions due to constricted spaces, too few for Kenyan court buildings. Court building magistrates and numerous litigants and their typically aspire to meet some level of lawyers. functionality, accessibility, safety, health, comfort, efficacy, and environmental friendliness, among other considerations. In February 2012, the judiciary launched a nationwide campaign to collect public ideas on a prototype court design. Entries were evaluated on creativity, functionality, form and strength of design concept, quality of sustainable ideas, durability, internal comfort, green ideas, and the impact the proposal will have on accessibility and transparency of the judiciary. The results of this initiative led to the development of construction guidelines, including meeting public concerns (see Box Snakes, termites and hedgehogs infested the Machakos Law 15.2) such as on having separate washrooms Court's archives and records before a recent rehabilitation and cells for men and women. The judiciary aims to have a high court in The quality of past judicial decisions has every county (47) and a magistrate court in been concerning. Some judicial officers each district (285). As at June 2011 there were have issued decisions that were not in line 16 high court stations and 111 magistrate with local realities, public expectations or courts in the country. By October 2012, the established precedent. They have been judiciary had built an additional four high criticized for unreasoned judgments which courts with 13 in the pipeline for construction makes development of jurisprudence difficult (leaving a shortfall of 14 courts). Two new and the appeal process more tenuous. In magistrate courts have also been opened and a number of cases, litigants have felt that two others are scheduled for construction judicial outcomes did not reflect standards of and 30 for rehabilitation9 fairness. Going forward, (leaving a shortfall of 142 judicial officers will find “Meaningful reforms need to occur courts). In the meantime, likewise in the other justice sector it increasingly difficult 11 prefabricated courts bodies to help maximize judicial to issue sub-standard (30 more planned) are reform outcomes” decisions. The increasing being built to provide legal information, the operational capacities stronger Judicial Training and reduce construction and rehabilitation Institute, a growing vigilant media and the delays. Furthermore, mobile courts have newly defined avenues for lodging complaints been launched to enhance access in is tightening the reins. underserved areas in the Rift Valley, Nyanza, North Eastern, Western, Coast, and Eastern regions. 9 Of the 13 high courts due for construction, ten are JPIP funded and three are GOK. The two constructions and 30 rehabilitations for magistrate courts in the pipeline are JPIP funded. 131 Achieving Shared Prosperity in Kenya Governance Box 15.2: Court facility problems identified by court users in interviews, 2009 (a) Inadequate security, including the absence of separated internal circulation routes for judges, the public, and defendants in remand. (b) Lack of basic public amenities, such as wash rooms, waiting rooms or space for reviewing documents and for consultations. (c) Inadequate space for remanded defendants, including lack of separate facilities for females, males, and juveniles. (d) Great distances and travel times to courts. (e) Courtrooms of inadequate numbers and size. (f) General building deterioration and structural problems affecting functionality, health, and safety. (g) Lack of space for important court functions, e.g. storage of evidence and records, libraries, help desks, court-annexed mediation, small claims courts, etc. (h) The absence of non-threatening rooms from which children can “appear” in courtrooms. (i) Lack of barrier-free accessibility for the handicapped, including features that support sight, mobility, and hearing impairments. (j) Buildings that are unable to support the installation of modern sound recording and automated equipment. (v) Participation issues – government, sector performance. Because the judiciary, stakeholders, the public and partners for example, has more magistrates then the Adequate Inter-agency coordination, office of the Director of Public Prosecution’s including public participation remains prosecutors, two or three magistrates are challenging. The JTF aims to strengthen the now forced to constitute courts in turns so as capacities, collaboration and participation to be served by one prosecutor. of stakeholders and the public through the Judicial Service Commission, the National The Governance, Justice, Law and Order Council on the Administration of Justice, theSector (GJLOS) reform program, 2003– National Council of Law Reporting of Kenya, 2009, helped the sector to address many and the Court Users Committees10. This challenges. For instance, more than 36 program is still in early stages. In the meanpolicies, laws, regulations and strategies time, other public participation initiatives―were developed. Sector players, such as the such as the public education and information police, prisons, office of the Director of Public programs, court service surveys, media Prosecution, the Judiciary, the Anti-Corruption outreach, citizens’ open days, etc.―are also Commission, Public Complaints Office in progress. (Ombudsman), the Kenya Anti-Corruption Campaign Steering Committee, and others The slower reform pace of other justice received valuable office equipment, institutions is holding back the country’s infrastructure, and capacity building support. rule of law and the judiciary’s performance. GJLOS also helped to promote inter-agency Meaningful reforms need to occur likewise dialogue and collaboration, and raised in the other justice sector bodies to help the sector’s visibility at the national level. maximize judicial reform outcomes and Nevertheless, much more still needs to be the judiciary’s performance. The unequal done at the national coordination level to reform pace blocks the promise of better help accelerate and deepen sector reforms. 10 These forums are represented by partners and stakeholders of court services such as the police, NGOs, lawyers and the general public. Achieving Shared Prosperity in Kenya 132 Governance AREAS THAT NEED CLOSE ATTENTION (b) The importance of an effective staff AND SUPPORT capacity building program cannot be Incoming policymakers need to continue underestimated. The reorganization of and deepen ongoing judicial reforms. The the judiciary has seen an unprecedented change in leadership and culture at the clear demarcation between the judicial judiciary and the reforms initiated so far, and the administrative functions. Focus give hope to many Kenyans that significant must shift now to strengthening the improvements in judicial performance are capacities of staff so that they can deliver achievable. It will be critical for the judiciary to effectively on their mandates, including show tangible results in the short-to-medium on the ambitious program envisaged by term, especially in reducing case delays, in JTF. The capacity program must be strong professionalizing case management, and and responsive enough to meet the wide in issuing well-reasoned judgments so that range of training needed by different reform momentum builds, rather than types (e.g. judicial, managerial, technical dissipates. or administrative skills) and the various levels of staff, including the demands It will also be important to keep a close watch brought on by new recruits and the on those areas that could deteriorate and decentralization agenda. potentially sabotage or even erode success if not properly managed. Some of these (c) Past reform initiatives have tended vulnerable areas are discussed below with a to focus on the upper echelons of list that serves two purposes: (i) as a useful the judiciary in Nairobi, with little monitoring watch list for the judiciary and its participation of court stations outside partners on critical, but fragile reform points, Nairobi. Similarly they have tended to and (ii) to help the government, parliament, over-emphasize the needs of judges stakeholders and partners identity areas and superior courts to the detriment where they could be of help to the judiciary, of magistrates and paralegals. The especially by giving much more support, e.g. ongoing initiative to collect the views of in accelerating alternative access to justice magistrates and judiciary staff on the JTF solutions, in providing stronger participation is in the right direction. and involvement, etc. (ii) Better access to justice (i) Staff (d) High hopes in continuing the turn- (a) A still uncertain organization and around of the judicial sector will only performance orientated culture. The be maintained if measures to improve current leadership of the judiciary has access to courts―especially the the vision and the drive to champion automated case management system for the required reforms, but this vision reducing case delays and opportunities and passion needs to be translated for corruption―are fully implemented. and embraced much more widely by It’s important that this process begins to everyone in the judiciary, down to the show early results. A faster disposal of lowest level. The change management commercial cases, for example, will give efforts are already a major priority for confidence to investors and encourage the JTF, but are still at an early vulnerable further development. It’s also vital that stage. the staff of the judiciary take centre stage in the new case management technology. 133 Achieving Shared Prosperity in Kenya Governance Experience from other countries shows (e.g. court stations, libraries, registries, that staff involvement and commitment mobility, equipment, etc.), as well are critical to its success. knowledge, operating systems, (e) Alternative Dispute Resolutions offer a communication, training, management useful and practical solution. The JFF and other resources. This process will supports Alternative Dispute Resolution be highly complex, dependent on good mechanisms that help to reduce case planning, insight and oversight, as well backlogs and enhance access to justice, as on an implementation program that’s carefully matched to priorities and to such as a court-annexed mediation available resources. program. It also promotes innovations like the small claims court that will (iii) Budget priorities increase and diversify access to justice. (h) Despite the frontloading needed to The support and cooperation of catch up after years of underfunding parliament, government, other legal and and to accelerate reforms, much of justice bodies and stakeholders is needed the judiciary’s spending is strikingly to help accelerate and to expand these recurrent. For example, in FY14 the initiatives. judiciary proposes to spend only KES 7 (f) World Bank studies identify several billion on development and KES 17.1 conditions that could improve the billion on recurrent expenses. In 2012/13 efficiency of courts. These are functional only 18 percent of the budget was judicial information systems; the dedicated to development (Figure 15.2), transfer of non-contentious matters largely for construction and ICT (Figure (such as administrative 15.3). There could a risk disputes) from courts that the foundations “The JTF supports Alternative for a strong, lean and to administrative bodies Dispute Resolution mechanisms that to reduce judicial will help to reduce case backlogs and sustainable body are caseloads; simplified increase access to justice” not being properly judicial procedures built due to a possibly and processes; and skewered spending establishing small claims courts and or investment approach. In this regard, specialized commercial courts. Some of it would be useful if some analysis was these are already under implementation done to ascertain what would be the in Kenya while others have still some way ideal budget ratio for the judiciary’s to go. development and recurrent agendas, and when this ratio should be put in place. (g) Decentralization provides both great opportunity and challenge. The (iv) Participation – government, Constitution’s ambitious devolution stakeholders, the public and partners program creates new opportunities for (i) Efforts to build and to sustain public transforming judicial services, bringing participation need be strengthened services closer to Kenyans. However, it and scaled up by both the judiciary also brings enormous challenges. There and by its stakeholders. Public will be a massive increase in the number participation is invaluable; it promotes of judges, magistrates, legal researchers, oversight, accountability, team work administrative and other staff all across and service results. The Judicial Service the country. All requiring infrastructure Commission, the National Council on the Achieving Shared Prosperity in Kenya 134 Governance Figure 15.2: Only 18 percent of the current judiciary’s budget of KES 15.9 billion is available for development 16. Delivering on the promise Total Judiciary Budget Allocation, 2012/13 of devolution: Seven challenges ahead Development By Geoff Handley, Aurelien Kruse, Fred Owegi Budget 18% and Kathy Whimp T he adoption of Kenya’s 2010 Constitution marks a critical juncture in the nation’s history. Its introduction is widely perceived by Kenyans from all walks of life as a new Reccurrent beginning. Its vision encompasses a dramatic Budget 82% transformation of the Kenyan state through new, accountable and transparent institutions, Source: GoK, Judiciary Budget, 2012/2013 inclusive approaches to governance, and Figure 15.3: A breakdown of the judiciary’s 2012/13 a firm focus on equitable service delivery development budget Judiciary Development Budget, 2012/13 through the newly established county Refurbishments GOK Counterpart governments. 3% Funds-IDA 2% CJ’s Residence 7% Prior to the landmark 2013 elections, much Prefabs ICT 22% progress had been made in building the legal 8% and institutional framework for devolved New Magistrates government. The Taskforce on Devolved Courts Construc tions Government, working with other ministries, 21% departments and agencies, developed key policy and legal provisions in a collaborative New High Court Construc tions 11% On-going Construc tions manner, leading to the promulgation of 26% six laws dealing with different aspects of Source: GoK, Judiciary Budget, 2012/2013 county governments. A further two laws Administration of Justice, the National were passed in January 2013, to facilitate Council of Law Reporting of Kenya, transitional financing arrangements. The sum and the Court Users Committees are in of these laws is that county governments will particular crucial players. have significantly more autonomy than any sub-national units in Kenya’s history to date. (j) As long as other justice institutions remain unreformed, the country’s While the national parliament can make enormous potential for improved rule laws on a variety of areas affecting county of law―along with its corresponding governments, the powers of the President development and governance and cabinet to hold county governments prospects―remains unrealized. For this accountable are relatively limited. reason, the ongoing reform initiatives of the National Police Service, the Kenya Kenya’s devolution is very ambitious and Prison Service, the Attorney-General’s complex, and therefore commensurately office and the Director of Public risky. Many countries—both rich and Prosecution’s office need to be given the poor—have transferred responsibilities and urgency they deserve, including equal resources to lower levels of government. Few recognition and financial support. have done so to entirely new sub-national 135 Achieving Shared Prosperity in Kenya Governance Box 16.1: What is the meaning of devolution? Devolution is the transfer of powers and functions from national government to sub-national governments. In many countries, the devolution of responsibilities and resources is effected by the national parliament, which can modify or withdraw the powers it has devolved. In Kenya’s case, devolution is a requirement of the Constitution. The national parliament cannot withdraw powers from county governments. The “objects, principles and structure” of devolved government can only be altered through a referendum (Article 255). Source: Case Study on the South African National Anti-Corruption Forum units, which they have established from devolution architecture will be laid. This scratch. Kenya will undergo a dual transition: section focuses on helping Kenya to manage a transfer of responsibilities and resources the balancing act of transition to devolved from the center to the sub-national level, government. It covers the critical issues facing and a simultaneous reorganization of local Kenya’s policy-makers today, and presents government, with the consolidation of suggestions and recommendations on how previously existing local structures into forty- best to navigate the tough choices ahead, seven newly-created county governments with respect to seven major and immediate (see Figure 16.1). challenges: (i) Financing county needs and ensuring a Figure 16.1: Kenya’s devolution presents massive fair and equitable vertical and horizontal challenges for political and administrative restructuring distribution of resources will require 8 Provincial Administrations balancing political demands for speed with time to prepare properly, and the 47 Counties right mix of instruments to ensure service delivery is adequately resourced. 175 Local Authorities (ii) In pursuit of greater equity, existing Solid waste management, public health imbalances are better tackled over time, with a focus on people rather than try to parking and street lighting, markets, slaughterhouses, water sewerage, storm water drainage, billboards, noise control, fire fighting, libraries, game parks. equalize geographic locations. 280 + De-concentrated Administrations 280 + District Administrations (iii) Budgeting for devolved government Health, agriculture, livestock, fisheries, planning, housing, lands, transport, rural electricity, sports and without compromising Liquor licensing, disaster management, control of fiscal sustainability will require timely and culture, plant and animal quarantine, environment drugs and pornography. and conservation. Source: World Bank KEU, 5 edition constructive dialogue between the newly th empowered parliament, the executive Moreover, there are diverging views on how and the Commission for Revenue far and how fast it should go, and extremely Allocation (CRA). high public expectations exist. Clear (iv) Kenya’s cities are crucial for its economic leadership will be essential if Kenya is to chart development, and counties should a successful path to devolved government. be encouraged to ensure that urban In particular, the goal of achieving greater services continue to improve, through equity and redistribution will need to be empowered management arrangements traded off against the risk of service delivery and financing that creates the right disruption, including urban service provision incentives. in particular. (v) Effective civil service management at county level will require an effective The next three years are critical: this is framework of uniform norms and the period when the foundations of the standards, to ensure that mobility Achieving Shared Prosperity in Kenya 136 Governance between county services is maintained; guidance on the respective functions of the and capacity building for human resource national and the county governments, much management at county level. more granular work is needed to provide a (vi) Meaningful devolution will take place at basis for sharing resources. the sector level as functions are handed over, but sector implementation must be If functions are to be transferred all at supported by clear policy decisions on once, the law needs to be changed. The functions, staffing, financing and asset Constitution provides for the phasing in of ownership that are taken at the center. functions over time during the transition Outstanding decisions on transition period, but political pressure has been should be taken soon. growing for counties to receive the full set (vii) The constitutional vision of engaged of devolved functions quickly, together with citizens supporting transparency, the entire amount required to finance the accountability and inclusiveness in functions. The concern that underpins this devolved government should be move is that phased transfer may once again operationalized. leave behind the very counties that have been marginalized for many years. But the phased Challenge 1 - Financing transfer approach is spelled out clearly in county needs the Transition to Devolved Government Act. Devolving power requires transferring Governing by the rule of law is at the core resources from the center to the local level: of Kenya’s new dispensation. If it is now but how much, how fast and to whom is not considered that this approach is politically obvious. Resourcing Kenya’s future counties undesirable, the law should be changed involves a two-step process to divide national before it is abandoned. Parliament decided resources fairly. First, it requires determining upon the phased approach and it should the optimal aggregate split between the now be the body that decides whether to national and county governments in such a overturn it. way that each is adequately resourced to carry out its mandated functions (vertical sharing). Mobilizing the right mix of transfer Second, total county resources must be split instruments across the forty-seven counties, in a way that In one “moderate” scenario, the World Bank recognizes their different inherited costs has costed aggregate county needs at KES and also addresses historical inequalities 170 billion, just to maintain services at their between them (horizontal sharing). existing levels. But the devil of matching funding to functions is in the detail. First, Determining the overall vertical split not all the devolved services are suitable The vertical split of resources between for financing through the equitable share. national and county governments will be The minimum 15 percent equitable share is critically important in the 2013-14 budget, as a subset of the total resources available to the new administrations fully take on their fund devolved services. Examples of services new responsibilities. However, if funding that would be better financed through grants is to follow functions—the golden rule of that target funds to specific services, in fiscal decentralization—the first question to specific locations are cross-county services answer is “which functions?”, since this will that impose disproportionate cost burdens determine how much they will need. While on only some counties while serving many; Kenya’s Constitution provides high-level funding which Kenya has contracted to 137 Achieving Shared Prosperity in Kenya Governance provide under counterpart agreements with on existing national taxes. Figure 16.2 shows donors; and services that respond to Kenya’s various ways in which county governments international obligations. will be resourced, including the equitable share, county own revenues, the Equalization Counties will inherit substantial—and Fund and additional transfers from the unequally distributed—staff costs as national government (conditional or not). functions are transferred to them. It is not Figure 16.2: Flows of revenues from different sources clear how payroll will be managed in the for county governments short term, but payroll costs will be a first call on the equitable share. Clarity is urgently needed around how much these costs will be to each county, so that county governments can prepare their budgets with a clear understanding of the discretionary resources available to them. If the payroll is managed centrally for the time being, national government will need to negotiate with each county to hold back a proportion of the equitable share to meet these costs. Counties will want to see clear and verifiable data, to substantiate these agreed deductions. Source: World Bank KEU, 5 edition th Enhancing revenue capacity In the short term, the priority is to ensure that Own-revenues will be critical for resourcing county governments do not experience legal county governments and also for fostering challenges in collecting revenues, after they accountability at the local level. Yet the have come into existence. This is because Constitution only grants limited revenue- the constitutional provisions for county tax raising powers to counties (broadly those collection have not been converted into the previously enjoyed by Local Authorities), necessary legal instruments, to authorize which will remain highly transfer-dependent, counties to take over the revenues currently unless new revenue-raising powers are be being collected by Local Authorities. Having granted to them. To maximize the own- forty-seven different tax administration revenue potential of Kenya’s counties, systems is not economically efficient, but existing sources should be reformed and new the window of opportunity to have a single ones found. national system may have passed. The collection of property taxes should be Now that counties are in existence, a strengthened (as Kenya under-collects by constitutionally conservative interpretation a wide margin by international standards) is that they must pass their own taxing laws. by updating revenue base information, National government could help to ensure updating rates and minimizing applicable some uniformity, by providing a consistent exclusions. There is also scope to revisit the template for tax administration legal Single Business Permit. However, increasing instruments, although the determination of county fiscal autonomy would almost the base and rate should remain a decision of certainly require creating additional revenue individual counties. The PFM Act permits the sources such as piggybacking county taxes county governments to appoint a collection Achieving Shared Prosperity in Kenya 138 Governance agent as a collector of county government In the County Allocation of Revenue Bill revenues, including the option of using the negotiated in May 2013 between the Kenya Revenue Authority as a collection National Assembly and the Treasury, the agent. If this option is to remain viable, it proposed equitable share for 2013/14 is KES is particularly important that consistent 190 billion, or approximately 28 percent of administrative arrangements be applied shareable revenues. To provide this level of across the counties. funding for the equitable share and maintain the three existing funds at their current levels Policy debate on inter-governmental will be fiscally challenging. It also drastically transfers has so far focused almost exclusively reduces the scope for other targeted grants on the equitable share, yet it would be that address cost disproportionate burdens. misguided to seek to meet all county needs Moreover, further increases to county through this instrument alone. Targeted funding can only be achieved through cuts to grant decisions should be made at the time nationally funded programs—in June 2013, the vertical share is decided. The larger the the Senate proposed that the equitable share equitable share, the less will be available for be increased by an additional KES 48 billion. targeted grants. These targeted grants do not need to be highly prescriptive, or undermine A system of capital grants may be required to the autonomy of counties. They are mainly protect county-level development spending. about compensating disproportionate cost World wide, sub-national governments tend burdens that the formula for the equitable to spend a high proportion of their budgets share does not address. Urban service on wages and salaries and relatively little delivery and service delivery to slum areas are on investment. While the regulations to one example of a cost burden not addressed accompany the PFM Act will seek to limit by the equitable share formula. county wage bills, additional incentives may be required. The immediate policy priority for targeted grants involves deciding on the fate of the In order to ensure minimum standards three major devolved funds and agencies of service delivery throughout Kenya and managing the funds. Altogether, these three promote catching up in capital-poor areas, funds—the Road Maintenance Levy Fund the national government may consider (RMLF),1 the Constituencies Development implementing a (conditional) capital Fund (CDF) and the Local Authorities Transfer grants scheme based on a transparent Fund (LATF)—accounted for KES 52 billion in formula, which could also provide the 2012/13,2 or 8 percent of 2010/11 shareable backbone of a county performance national revenues (2010/11 forms the base monitoring system. As part of a sub-national year for sharing in 2012/13). Maintaining performance monitoring system, grants these funds at their existing levels would can help spur healthy competition among greatly reduce the fiscal space available for counties, providing the incentive for county unconditional funding through the equitable governments to regularly monitor and report share, and for other targeted grants for cross- on their performance and identify and county services, international obligations, address key service delivery bottlenecks. and donor counterpart funds. 1 RMLF is currently administered by the Kenya Roads Board (KRB), which disburses money to five other agencies currently being restructured to align them with the Constitution. 2 KES 21.8 billion was allocated to CDF; KES 8.5 billion to the devolved component of RMLF and KES 21.5 billion to LATF. 139 Achieving Shared Prosperity in Kenya Governance Challenge 2 – Promoting greater However, the picture is almost entirely equity while safeguarding reversed when looking at allocations per service delivery person, with Isiolo, Lamu, Marsabit and Tana Promoting greater equity in the allocation River coming out the big winners. In other of spending and services is at the heart of words, once population is taken into account, Kenya’s 2010 Constitution, but seeking to the poorer, more sparsely populated and equalize too quickly would be risky. The goal smaller counties receive disproportionately of equalization will need to be pursued in a big (per capita) allocations (see Figure 16.3). tight fiscal environment, with limited scope to increase spending without undermining Because it promotes substantial re- existing levels of service delivery. This has two distribution of resources across counties, major implications. First, existing imbalances the formula creates risks for counties at may only be tackled over time. Second, both ends of the spectrum. Areas that equalization should target the people who were historically privileged (in most cases will benefit from services, rather than try with larger populations and more densely to achieve equalization across geographic populated) will inherit service delivery locations. obligations that will require substantial funding. A significant proportion of their Parliament has adopted a formula for equitable share transfer will be eaten up allocating the equitable share. While it by these inherited costs, with the result places heavy emphasis on county populations that these counties will be “cash-poor”— (weighting them at 45 percent), this is logical meaning that they will have less revenue left since population is the main driver of service over for discretionary spending, including on needs. Taken together, all of the other development projects. In these counties, the components in the formula (amounting to challenge will be to rapidly streamline service 55 percent) tend to favor counties that have delivery without interrupting key services or been historically underserved (see Table 16.1). making inefficient reallocations. This formula will result in highly redistributive At the other end of the spectrum are more transfers. This is not obvious at first glance sparsely populated counties, that have because in absolute terms, the better-off been underserved in the past. They will counties (such as Nairobi and Kakamega) will receive substantial extra cash through the be receiving the lion’s share of the funds. CRA formula relative to their current service Table 16.1: Components’ source, weights and objectives in the CRA consultation formula Fiscal Components Population Poverty Equal Share Land Area Responsibility Weight (percent) 45 20 25 8 2 Objective Resource Promote Provide each Factor in the Provide counties to redistribution county with higher cost incentives for deliver services in favour of resources of delivering prudent fiscal equally on a per historically to cover the services in management capita basis lagging areas fixed costs of remote, sparsely running county populated areas administrations Source: World Bank based on CRA documentation Achieving Shared Prosperity in Kenya 140 Governance Figure 16.3: Per capita equitable share allocations to counties (2013/143) Per capita equitable share allocations to counties 16,000 12,000 KES per capita, annual 8,000 4,000 0 Nyeri Mandera Bomet Kisii Kericho Kirinyaga Migori Siaya Murang'a Kilifi Makueni Turkana Nairobi Marsabit Baringo Meru West Pokot Lamu Nandi Wajir Kisumu Laikipia Kajiado E/Marakwet Busia Kitui Trans Nzoia Narok Machakos Garissa Vihiga Nyandarua Bungoma Isiolo Homa Bay Kakamega Samburu Kiambu Nyamira Embu Mombasa Kwale Taita Taveta Tana River Uasin Gishu Tharaka Nithi Nakuru Source: World Bank calculations based on presentation by CRA to Governors’ Forum on 4th April 2013 delivery obligations: they will be “cash-rich”. to counties that have been historically under- Here the challenge will be to manage these resourced. Presently, it is not clear to know additional resources well, and to scale-up if the cash-poor counties will receive enough service delivery with limited capacity. Cash- through the equitable share to maintain rich counties will need to focus their spending existing service delivery levels. on infrastructure projects in order to expand their service networks. Third, a strategy is needed to build capacity rapidly and systematically among the These likely imbalances call for three short- cash-rich counties to develop adequate term actions to phase in equalization over PFM, HR and service delivery systems, time. First, it is urgent to understand the fiscal and in particular to improve their capacity impact of inherited costs of service delivery at to plan, budget, implement and manage the county level. This would require compiling infrastructure projects. Gradually phasing detailed county-disaggregated spending data the transfer of functions over the 3-year on devolved services, in particular, costs transition period will also help to buy time for which cannot readily be reduced, like civil capacity building. service wages. Challenge 3 – Budgeting for Second, on the basis of this information, devolved government the government may need to consider Budgeting for the transition will be difficult, complementing the formula-based especially under an asymmetric transfer equitable transfers, with provisions to of functions. If functions will be gradually ensure that no county loses out in nominal transferred to counties during the transition terms. Such provisions should be limited period, this raises challenges for both in time and specifically targeted to allow revenue sharing and for the annual budget cash-strapped counties to maintain existing process. Functions that will be asymmetrically services, at least at their current level. In transferred to counties within the same fiscal essence, this would mean maintaining a year are not suitable to be financed through constant level of funding for previously the equitable share, because the equitable better-resourced counties in nominal terms, share formula assumes that all counties while at the same time increasing resources have the same functions. Some certainty is 3 The allocations shown above are based on an equitable revenue share for county governments of KES 190 bn, as per the Division of Revenue Act (2013). 141 Achieving Shared Prosperity in Kenya Governance also needed, well in advance, around what of spending (Division of Revenue Act, County functions a county will be responsible for in Allocations of Revenue Act and national the coming year, so that they can budget for budget estimates). The PFM Act provides these functions. for this to some extent, by providing for the simultaneous submission to parliament of The national government will continue to the Budget Policy Statement (BPS), DoRB and perform some devolved functions during County Allocation of Revenue Bill (CARB), the transition period, and these allocations requiring parliament to pass a resolution on to counties could be clearly shown through the BPS by 1st March, and to consider the two transitional budget laws. This is what the bills by 15th March. Transition County Allocation of Revenue Act (2013) does: it provides for: (i) a KES 9.8 To avert possible gridlock, dialogue between billion allocation to counties for functions the national treasury, parliament and the transferred immediately after elections, and, revenue allocation commission should start (ii) KES 175.8 billion for county functions to much earlier in the budget cycle. Currently, be performed by the national government.4 there is no explicit requirement for the DoRB However, it does not show how the KES 175.8 to conform to the BPS, which means that there billion is allocated between the counties, and is a real risk that parliament could alter the Governors will want to know this information. DoRB after it has voted on the BPS, thereby Future revenue sharing laws could be more undermining the budget process at national detailed, by including 47 county schedules and showing county allocations by devolved and county level. An earlier dialogue between function. Alternatively, there could be 47 the national treasury and parliament would “county votes” that clearly set out in the build consensus on the fiscal framework, national budget estimates, showing explicitly and maintain that consensus to ensure that the total funding allocated to each county and the Division of Revenue Act matches the specifying how much is to be spent on each previously approved BPS. Further, inclusion county’s behalf through national government of the Commission for Revenue Allocation systems. (Hence this should be included in in this dialogue could help to achieve an the national government Appropriation Act). earlier consensus on the shareable revenue This may require a short amendment to the denominator, failure to which could also transitional provisions of the PFM Act. unnecessarily delay approval of the DoRB.5 The 2010 Constitution greatly increases Building-up the capacity to budget at the power of the legislature in the budget county level will be a tall order. Counties will process, creating the risk of gridlock. In comprise of staff from districts—who have particular, there is a risk that delays in approval very limited experience of preparing and of the Division of Revenue Bill (DoRB) could managing budgets—and from former local derail the budget process at both national and authorities-whose limited experience in county levels. One approach used in other budget management needs to be developed countries to address this risk is to introduce further. Therefore, in anticipation of the a two-tier budget process in parliament, difficulty of establishing budgeting functions through which the national legislature binds from scratch at county level, integrated itself to a fiscal framework (total spending) planning and budgeting guidelines and prior to the consideration of the allocation associated templates should be developed 4 Passed just before the 10th parliament rose, The Transition County Allocation of Revenue Act (2013) covers the period March to June 2013. It is expected that the 11th parliament will prioritize a new revenue allocation law for 2013/14. 5 Two months before the end of 2012/13 FY (and well into the budget preparation cycle for 2013/14), the Treasury and the CRA still had vastly different recommendations on what the shareable revenue should be. Achieving Shared Prosperity in Kenya 142 Governance to guide the county in the planning and other urban centers, a rather uncertain budgeting process. This would provide an arrangement for “town committees” will opportunity to integrate the annual planning apply. A number of substantial urban centers and budgeting functions into a single process, with viable existing local governments, and this should be overseen by a single including twenty-one urban centers each county institution. Lastly, it will be essential with more than 80,000 residents, will thus to ensure that county budgets are prepared, be effectively recentralized into their county executed and reported using a single country- administration. wide chart of accounts. There are three ways in which the Challenge 4 – Protecting the management autonomy of urban areas urban growth engine could be expanded. One is by lowering the Unless corrective action is taken, Kenya’s threshold for the definition of municipalities. cities may well be the big losers in the Alternatively, the act could deem all county devolution process. Kenya’s devolution capitals to be municipalities (which would is unique in that it involves simultaneous still leave out important towns like Ruiru, decentralization of key services and resources Naivasha and Ngong). A third option would from the national to county governments, but involve enhancing the managerial autonomy also recentralization of urban management. of town committees, to make them function Existing arrangements will be profoundly in the same way as municipal boards. transformed in the new dispensation, as the current system of local authorities, With all urban functions and resources vested with elected management and significant by the Constitution in county governments, discretion over resources and functions, will specific functions and resources will need to be replaced by a new system that gives much be delegated to city and municipal boards. more power to county executives. Kenya’s Yet there is no clear process or framework biggest cities will be managed by appointed for such delegation, and no transparency boards, with far less power and autonomy requirement concerning the delegation by than the local authorities they replace: most county governments to city and municipal of their functions will be delegated at the boards. A useful measure would be to require discretion of county governments, and they county governments to publish the functions will have no guaranteed funding. and revenue streams assigned to urban boards, so that urban residents understand Moreover, only three urban centers will what services they are entitled to receive, have municipal or city boards. The Urban and from which level of authority. Areas and Cities Act (UACAct) sets the threshold for city status at 500,000 and for Kenya’s Constitution makes county a municipality at 250,000, and only cities governments responsible for financing urban and municipalities are entitled to boards. service delivery, and there is a risk that Yet currently, there are only five urban areas urban services may be under-funded as a in Kenya with a population of over 250,000 result. Because rural residents will dominate (Nairobi, Mombasa, Kisumu, Nakuru and most counties, county governments may Eldoret), two of which will effectively be choose to prefer offering rural services, and county-cities and will be governed as county so to redistribute revenues raised from urban governments (without city boards). In all residents to their rural constituencies. This 143 Achieving Shared Prosperity in Kenya Governance may jeopardize the economic development of staff to counties will be the number one potential of Kenya’s urban areas, and violate transition challenge. Most of the public the fiscal federalism axiom that revenue servants needed to run county functions are and expenditure responsibilities should be already in place, but the conditions under aligned to the greatest extent possible at the which they will remain are unclear, and local level. fiscal implications have not been properly assessed. Initially, national public servants Urban services will therefore depend on will be seconded to county governments the priority which county assemblies give but the “zero-basing” approach, whereby them, unless the national government counties are not required to employ them develops urban grants to provide stronger permanently, is unusual and risky. Most incentives. The UACAct envisages that commonly, countries that establish a new county governments will provide transfers level of government simply transfer existing to city and municipal boards but not to town staff performing devolved functions to the committees, and it offers no guidance as to how these amounts ought to be calculated. new governments. In Kenya, in order to The national government could help to maximize county flexibility, a secondment ensure that urban services are adequately approach has been chosen. provided through earmarked urban services grants (such as a modified LATF), which could The secondment of national staff will come be paid either to county governments or to to an end when the seconded officer is either the urban boards directly. To ensure that appointed to the county public service or counties maintain their own levels of funding handed back to the national government. for urban services, the transfer could include Moreover, if public servants feel they have the an additionality clause binding the county to right of return to the national government, maintain a certain level of funding from its they may also choose not to apply for a own resources. position in the county public service. If a large number of secondees are returned to However, even additional transfers may the national government, it may not have the be insufficient to finance the type of jobs or the funding to absorb them. A rapid infrastructure that Kenya’s cities and towns fiscal assessment should be undertaken to need. While counties may be able to borrow, assess the costs of different scenarios and this will be subject to national government identify strategies to manage them. review and guarantee. This is helpful to prevent the risk of uncontrolled borrowing at Plugging the gaps in the legal and policy the sub-national level. However, the flipside framework for county public services may well be insufficient access to capital Kenya’s existing public service structure is for infrastructure, particularly in Kenya’s larger cities, as the national governmentcurrently highly centralized, so devolution will bring about major changes. Forty-seven may discourage sub-national borrowing that would endup on its balance sheet. new county civil services will be created, with two immediate and extremely important sets Challenge 5 – Decentralizing the of challenges: defining the overall governance Public Service in a sustainable way framework for county civil service; and The risks of the secondment approach In managing the HR transition implied by their the coming months, managing the transfer creation. Achieving Shared Prosperity in Kenya 144 Governance The County Governments Act (CGAct) members are political appointees. The provides the regulatory framework for integrity of Kenya’s county public service counties to engage their own public servants, boards will depend on the quality of the but it leaves a number of important gaps in process used to recruit their members. They the policy framework. In particular, while the are required to have university degrees; not Constitution provides clear authority for the to have breached a professional code of national government to set out a framework conduct; and to have satisfied the leadership of national standards, this could still leave and integrity provisions of the Constitution. room for counties to regulate some aspects However they are appointed by the governor, of civil service management. There should be with the approval of the County Assembly. a clear decision as to which issues national There is no requirement for members to laws and policies should cover and which have any expertise in public sector human should be left to counties. resource management. Also, some interim provisions will be The independence and competence of needed before counties develop their county public service board members will own laws. The new framework should set depend on how committed individual national standards and guide counties in governors are in selecting people: (i) with their day-to-day management of public appropriate skills and experience; and (ii) servants, by setting the general framework who are committed to checking the political for management. This should specify who is interests of the governor in the way they responsible for regulating the detail of how exercise their powers. Capacity building for county public servants should be managed; county public service board members should and provide statutory instruments to specify be a first order priority. the detail of the management arrangements. Current staff performing district-and Devolving public service management provincial-level functions are inequitably involves balancing the risks of too much central control against excessive local distributed across Kenya. County autonomy. With too much control, county governments cannot be expected to autonomy and accountability may be regularize this redistribution on their own. A undermined. With too little oversight, local strategy is needed to help identify the excess controls could be ineffective, undermining staff who are present in some counties, and service delivery. Failing local controls could match them with unfilled positions in others. result, for instance, in elite capture and There is no ideal level of staffing for any politicization of appointments. Establishing function, and resource availability will be a independent county public service boards key driver. Analysis of the inherited staffing has the potential to mitigate these risks, cost of each county is a first requirement to but they have been given too much allow this assessment to be made. power. In particular, the concentration of HR management in these boards creates Uncontrolled spending on personnel is a the potential for fiscally unsustainable common feature of decentralization and a recruitment, excluding direct supervisors big risk for Kenya. Spending on personnel from playing a role in recruitment. alone does not contribute to better services, especially if the recruitment is driven by Politicization is also a potential risk at patronage or leaves insufficient access to county public service boards, because their funding for operating costs and facilities, or 145 Achieving Shared Prosperity in Kenya Governance pays insufficient attention to performance regulations, there are no clear sanctions management. The public service provisions of if they are not followed. The best way the the CGA emphasize control over recruitment TA can ensure that the rest of government of public servants, but leave employment follows its lead is by: (a) ensuring that it gets of non-public-service staff relatively cabinet’s sign-off on its strategic direction; unregulated—potentially a very expensive (b) seeking meaningful involvement of the loophole. The PFM Act specifies a minimum implementing ministries; and, (c) using of 30 percent of the budget over the medium transparent reporting of expectations and term should be spent on development. progress in meeting them (for example Some counties may find this very difficult to through a “performance dashboard” to track achieve, if they inherit a high wage bill for progress), to create an environment in which staff currently located in the county. line ministries feel public pressure to meet their planned obligations. Paradoxically, devolution could widen capacity gaps across Kenya. There is already A detailed planning process for the gross inequity in the distribution of skilled transition is ongoing, but is lagging behind public servants across the country. Yet the implementation timeline expectations. counties that currently have the lowest The details of devolution will be designed levels of public service skills are also likely in part by the new Ministry of Devolution to be those which will have the hardest time and Planning, jointly with line ministries. attracting skilled personnel, given their overall Particularly if a number of functions are remoteness, the lack of mobility prospects transferred across the board on 1st July they offer and weak incentive systems. In 2013, line ministries need to speed up the turn, this could put undue upward pressure detailed planning for transfer of staff, assets, on remuneration, crowding out other functional responsibilities and assets. There important types of expenditure. These risks is so far little sign of line ministries moving to call for incentives-especially non-financial- formalise their new role in devolved sectors, within the framework of a single nationwide or of developing meaningful and achievable public service, where staff can be offered standards that can be used to measure county greater access to training and promotion, governments’ performance in carrying out if they serve in remote counties and where their new roles. Some uncertainty remains inter-county mobility can be guaranteed. on how key services like provincial hospitals and regional water boards will be handled in Challenge 6 – Managing the the devolution process. transition to hit the ground running County governments are now a reality For the transition to be as smooth as possible, and work is only just beginning on the Kenya needs institutional arrangements institutional architecture to include them for managing the transition itself. There in decision-making and for improved is a broad legal framework, but much work coordination. The Constitution and remains to be done. As a result, the Transition devolution laws provide only limited scope Authority (TA) has a great deal to accomplish for the national executive (as distinct from in a very short time. The TA needs to command parliament) to hold county governments respect across the government. Although accountable. The Constitution prescribes that the Transition to Devolved Government county and national levels of government Act (TTDG Act) gives the TA power to make should be distinct and interdependent, and Achieving Shared Prosperity in Kenya 146 Governance conduct their mutual relations on the basis Figure 16.4: Elements of social accountability systems of consultation and cooperation, with early tensions showing the struggles for control Government between the centre and the devolved units. To implement the vision of interpendence, an intergovernmental architecture is needed, Transparency: Participation and that can give the 47 county governments a information for citizens Accountability feedback: Information from citizens meaningful but workable role in sector policy, and in the decisions that remain to be made about function assignment. Citizens There will be big differences in capacity between weaker and stronger counties. Source: World Bank One of the main risks of devolution is that it actually exacerbates these gaps. The TA Kenya can draw on its extensive experience should develop a strategy for ensuring that with devolved funds to reinforce both weaker counties receive special assistance. upward and downward accountability. This might involve targeting donors to give Learning from CDF and LATF highlights priority to supporting specific counties, or several key challenges. Local government developing special assistance programs for had weak systems and incentives to support them. social accountability in devolved funds. Systems to distinguish between well and Challenge 7 – Building social poorly performing service delivery units, to accountability into devolved reward good performers and sanction poor government performers were not uniformly applied or Transparency, participation and enforced. Local authorities also had limited accountability are clear requirements in the capacity to involve citizens in the planning, Constitution, but laws alone are insufficient. monitoring, and evaluation processes as per The experience of devolution in other project guidelines. countries indicate the importance of building mechanisms that ensure sub-national Although Kenya scores well on some national- governments are not only accountable level access to information benchmarks, upward, but also downward to citizens. access to information at the local level is Establishing formal government systems is a generally poor: it is often difficult for citizens necessary but not sufficient condition for good to access basic information on local service governance at the devolved level. Similarly, delivery rules, budgets, expenditures, and demand-side social accountability initiatives results. More attention is required in the face major challenges of sustainability and design of accountability systems to address scale, and are typically heavily reliant on gender, education levels, ethnicity, poverty donor financing. Integrating demand-and levels and disability which also affect citizens’ supply-side systems is therefore needed. awareness and ability to participate in An effective social accountability system, decentralized funds. Finally, while there are embedded in county governments, requires many civil society initiatives to encourage three core elements: (i) fiscal transparency; citizen participation and monitoring in (ii) participation mechanisms; and, (iii) decentralized funds, civil society initiatives accountability mechanisms (see Figure 16.4). are typically small, fragmented, and CSO 147 Achieving Shared Prosperity in Kenya Governance monitoring experiences show that even where monitoring can enable citizens to track participatory processes are applied, there is how their county is performing versus significant variation in the implementation of baselines and also other counties, besides such engagement. focussing leaders’ attention on results and fostering competition and learning between Work is underway to translate Constitutional counties. Regular, repeatable surveys provisions for citizen participation into of citizen satisfaction, as part of overall practice. Recently passed legislation is performance monitoring, can also reinforce being converted into regulations, guidelines, downward accountability and government system-building and training that will responsiveness. Effective incentives and allow counties to be more responsive and sanctions will need to be put in place to accountable to citizens. Several steps are ensure genuine participation of citizens and needed for transparent and responsive the accountability of county governments. county government to take hold. Firstly citizens, as well as government officials, need Greater transparency would be supported to understand county government roles and by county officials understanding their functions, as compared with those of national obligations to proactively publish budget government. Secondly, simple mechanisms documents within certain timescales. Budget for transparency and participation need to be and performance data and information integrated into county planning, budgeting, need to be shared in formats citizens will and performance management systems. understand, using a range of tools and fora. The passing of the Freedom of Information Regulations, guidelines and capacity building Bill would support transparency in county will be needed that convert Constitutional governments and citizens’ ability to demand principles into practice. For example, it is information. important to specify where, when and how budget and performance information are Finally, citizens and county governments made available; how citizens can participate need the capacity, resources and tools to in planning and budgeting processes; and understand their roles and the tools and how citizens can seek recourse if rules are options that are available to them. County not followed. Also, county planning units governments need to make sure that citizen will need to be supported with regulations engagement is budgeted for in the planning and guidelines that specify procedures for and reporting processes. And capacity citizen engagement in county planning. building programs for county governors and PFM regulations and guidelines need to officials and civic education programmes incorporate principles and mechanisms for citizens need to include awareness and for citizen participation in budgeting and understanding of social accountability. financial reporting. Key Recommendations County governments will also need the A fiscally realistic threshold for tools to support responsiveness to citizens. unconditional resourcing of counties needs Recourse mechanisms such as ones for to be determined—over and above the complaints should be made available to constitutional requirement of 15 percent— citizens, and county officials should provide leaving sufficient scope for conditional feedback to petitions and challenges from funding. Ideally, this should be carried out citizens. Comparative county performance by the Treasury in consultation with sectoral Achieving Shared Prosperity in Kenya 148 Governance departments (formerly ministries) and with (ii) a standard pay policy that does not cause leadership from the Transition Authority. Two fiscal stress on counties; and preliminary steps must be taken to achieve a (iii) national government support for county sustainable basis for unconditional transfers. public service boards, specifically to The first involves undertaking a granular build capacity, develop systems and assessment of functions to be transferred establish staff management practices vis-à-vis competencies. This step should lead and procedures. into a clear and simple function transfer roadmap—noting that a phased approach Meanwhile, final decisions should be made is recommended. The second step involves relating to seconded staff, i.e. who will pay a comprehensive costing of all devolved their salaries, whether the salaries will be functions, beginning with historical costs, deducted from counties’ equitable share but eventually, also taking into account transfers, and if at all redundant staff will be equalization objectives. This would require re-absorbed at the national level. additional budget. Building effective citizen engagement will Central support will be required to build require civic education; building county strong county PFM systems, which will systems and capacity to interface with contribute to efficient and effective county citizens; building incentives for counties spending. Such support should be directed to respond; and encouraging collaborative at three critical areas: (i) capacity building, ventures with civil society. Key elements particularly in the areas of planning and include accurate and timely financial and budgeting, as well as for financial reporting; performance information―which in turn (ii) systematic tracking of county performance would require both capacity building and using data and clear benchmarks; and (iii) enforcement mechanisms (such as penalties nationally-developed standardized guidelines for failure to produce accurate information). and templates for planning and budgeting. Central support for county PFM systems The first priority is to strengthen the should also include initiatives to expand relationship between the planning and the citizens’ access to financial information, budget processes, since public participation allowing them to assess the efficiency and in planning will only be meaningful if effectiveness of county (as well as national) the choices made are translated into government spending. spending. A second priority is to incorporate transparency and participation mechanisms A national policy on county public into county government systems―systems services should be developed, providing to share information (“disclose, simplify and uniform procedures and a comprehensive disseminate”) on budget and spending, and regulatory framework. This policy should be to enable effective citizen participation in developed by a legally mandated national setting social service delivery priorities and agency in liaison with stakeholders, county monitoring performance. governments included. The policy should provide for: In addition to creating an enabling (i) regulation of critical aspects of county environment for citizen participation public service management e.g. and oversight, county governors and recruitment, promotion and mobility administrators can make use of civil society within the public service; capacity to help them build participatory 149 Achieving Shared Prosperity in Kenya Governance planning, budgeting and performance collaborative work with counties to ensure systems that citizens and civil society will that county systems have useful interfaces actually use. Finally, civil society can place with citizens; and building shared platforms greater emphasis on building coalitions for monitoring information. around service delivery monitoring; Achieving Shared Prosperity in Kenya 150 REFERENCES ▪ Adger W. N. Brooks N. Kelly M. Bentham S. and Eriksen S. (2004) “New Indicators of Vulnerability and Adaptive Capacity”, Tyndall Centre Technical Report 7. ▪ Brooks N. Adger W. N. and Kelly M. (2005). “The Determinants of Vulnerability and Adaptive Capacity at the National Level and the Implications for Adaptation”. In Adger W. N. Arnell N. and Tompkins E. L. (Eds.) Global Environmental Change Part A 15, 151-162. ▪ Caramazza F. and J. Aziz, “Fixed or Flexible: Getting the Exchange Rate Right in the 1990s”, IMF Economic Issues 13, 1998. ▪ Cooper, R. N., “Exchange Rate Choices”, 1999. ▪ Edwards, S., “Capital Mobility and Economic Performance: Are Emerging Economies Different?”, NBER, January 2001. ▪ Esikuri E. E. 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Palgrave Macmillan, New York. ▪ World Bank (2004). “The Republic of Kenya: Towards a Water-Secure Kenya. Water Resources Sector Memorandum”. Report Number 28398-KE. ▪ Yagci, Fahrettin (2001). “Choice of exchange rate regimes for developing countries” World Bank Africa Region Working Paper Series no. 16, Washington DC. 151 Achieving Shared Prosperity in Kenya ACHIEVING SHARED PROSPERITY IN KENYA Kenya has almost everything going for it. Its people are well-educated and energetic, its location is superb, and its neighbors are growing strongly and using Kenya as a gateway. So why is Kenya underperforming compared to its peers? Why does the average Kenyan earn only half of what the average African south of the Sahara does? The country has just experienced one of the most successful and peaceful national elections in its history. A dynamic new administration has assumed the levers of power and begun to fundamentally shape the country’s future. Guiding the new leadership is the 2010 Constitution, which ushered in a sweeping new system of devolved government that will have a profound impact on Kenya’s future. Against this momentous backdrop, Kenya’s leaders will need to grapple with an extensive range of issues, as they strive to launch Kenya’s economy on the path of high economic growth. The purpose of this book, Achieving Shared Prosperity in Kenya, is to offer a comprehensive yet digestible assessment of the challenges and possible responses for Kenya’s leadership to consider, as it plans its strategy for sustained economic growth. Produced by the Poverty Reduction and Economic Management Unit, Africa Region Photo credits: World Bank, the Kenya Judiciary Design by Robert Waiharo