lteport No. 7506IE

KenyaPublic Expenditure Issues

Apr| 14,1989

Country Operations DivisionEastern Africa DepartmentAfrica Region

FOR OFFICIAL USE ONLY

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Document of the Wuld Bank

This docurnent has a restricted distribution and may be used by recipientsonly he the perforiance of their official duties. Its corimts may not otbewisebe disclosed without World Bank authorization.

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CUDZUCY

One pound (KL) - Tventy Kenya ..llings (KSh)

KSh 17.75 - US$1.00 (1988 period average)

KL 1.00 - US$1.27

GOVERNIENT FISCAL YEAR

July 1 to June 30

FOR OFFICIAL USE ONLY

KENYAPUBLIC EXPENDITURE ISSUES

Table of ContentsPage No.

EXECUTIVE SUMhARY

PART ONE: OVERVIEW OF PUBLIC EXPENDITURE ISSUES

A. Macroeconomic Framework

Recent Fiscal Developments ..................................... 1Medium-Term Fiscal Prospects ................................... 2

.8. Cross-Sectoral Issues

Personnel Expenditures ......................................... 4Non-wage Operating and Maintenance Expenditure ................. 7Capital Expenditure ............................................ 8Parastatals .................... .............................. 10Process Issues ................................. 12

C. Key Sectoral Issues

Sectoral Allocation ................................. 12Sectoral Expendittire Programs ................................. 13

PART TWO: SELECTED CROSS-SECTORAL ISSUES

I. BUDGETARY PROCESSES

A. Features of the Existing System ............................... 25B. Assessment of the Existing System and Recommendations

for Improvement ................................ 27C. Documentation of Proposed Modifications to System ............. 35

II. PUBLIC RESOURCE MOBILIZATION

A. Central Government Revenues ................................... 38B. Deficit Financing ............................................. 43

This report was propered by a mission which visited Kenya in February/March 1988. Themission consisted of Messrs. Bruce Jones (chief), Mustapha Rouis, Michael Millc, Swadesh Bose,Emmanuel Ndungutse, Mohawmmd Faisal, Chukwums Obidegwu, Arun BanerJ-e, Fermin Fautsch, and Ms.Aeran Lee. Mr. Brian Parks (consultant) visited Kenya during Jun-/July 1988 for additional workon public expenditure in the agriculture sector. In addition, Messrs. Toe Allen and Ion Bannonparticipated in the drafting of the report at Headquarters. The Green Cover draft report wasdiscussed with the Government in February 1989 by Bruce Joncc, Michael Mille and David Hatendi.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

III. GOVERNMENT WMPL.YMENT AND PERSONNEL EXPENDITURES

A. Background .................................................... 48B. Government Strategy end Policies .............................. 52C. Analysis of the Forward Budget ................................ 55D. Issues and Options ............................................ 56

PART THREE: SECTORAL ISSUES

I. AGRICULTURE

A. Performance of Sector ..................................... I .... 69B. Recent Policy Initiatives and Future Policy Agenda ............. 72C. Government Expenditure Program in the Forward Budget ........... 76

II. ENERGY

A. Performance of the Sector ...................................... 78B. Objectives and Issues for Future Development ................... 81C. Government Expenditure and Public Investment ................... 83

Ill. TRANSPORT

A. Performance of the Sector ...................................... 87B. Policy Framework for Future Expenditures ............. ......... 91C. Public Expenditure Program ..................................... 94

TV. EDUCATION

A. Performance of thse Sector ...................................... 99B. Issues for Future Budgetary Expenditures ...................... 101C. Government Expenditure Program ................................ 103

V. HEALTH

A. 1erformance of the Sector ..................................... 107B. Future Strategy for the Health Sector ......................... 110C. Forward Budget ............................................... 111

Appendix 1: Economic Classification of Expenditure

Appendix 2: Selected Project Lists (Ministries of Agriculture,Education, and Health)

Appendix 3: List of State Corporations

Appendix 4: Selected Public Finance Tables for the UK, Thailand, andthe Philippines

Statistical Appcndix.

tUNYAPUBLIC EXPENDITURE rS'SV

List of Text Tables

Pate No.

1. Central Government Budgetary Operations, Actual andProjected. 18

2. Investment and Savings, Actual and Projected .193a. Economic Composition of Government Expenditure .203b. Economic Composition of Expenditure (Projected) .214. Real Non-Wage Operating and Maintenance Expenditure .225. Public Fixed Investment .. 236. Ministry Expenditure by Sector Group, with Latest Forward

Budget Ceilings (percent distribution) . 247. Externally-assisted Projects . 37S. Central Government Revenue ................................. 459. Cost Recovery .4610. External Grants and Loans. 4711. Central Government Recurrent Expenditure, by Wage and

Salaries, and Non-wage Expenditure .6112. Wage Employment in the Public Sector by Type of Public Sector

Sector Unit, and in the Private Sector .6213. Central Government Establishment and Employment by

Ministry .6314. Central Government Establishment and Employment, by Job

Classification . 6415. Nominal and Real Wages in the Public and Private Sectors. 6516. Expenditure on Wages and Salaries in the Forward Budget .6617. Personnel Expenditure in the Forward Budget, by Ministr .6718. Agricultural Minis.ries Gross Expenditure by Economic

Classification .7719. Parastatal Capital Expenditures and Total Public Investment 8620 Roads Department Expenditure .9721. Ministry of Transportation and Communication Forward

Budget, by Sub-Vote .9822. Ministry of Education Expenditures and Resource Mobilization,

Actual and Projected in the Forward Budget .10523. Ministry of Education Recurrent Expenditure and Resource

Mobilization: an Alternative Scenario .10624. Ministry of Health Expenditures by Sub-Vote, Actual and

Projected .114z5a Trends in Ministry of Health Expenditure by Economic

Classification, at Constant Prices .11525b Trends in Ministry of Health Expenditure by Economic

Classification (Percent Distribution) .116

Tables in Appendices

Appendix 1

Recurrent and Development Expenditure Item Codes and SpecificationsEconomic Classification of Expenditure

Appendix 4

United Kingdom:Public Sector ManpowerPublic Sector Cap'.tal SpendingNationalised Industries' FinancingNationalised Industries' Internal ResourcesNationalised Industries' Financial TargetsPublic Sector Transactions by Sub-sector and Economic Category

Philippines:Consolidated Public Sector Revenues and Expenditure

Thailand:Consolidated Public Sector Accounts

LIST OF STATISTICAL APPENDIX TABLES La

National accounts

2.6 Use of Resources at Current Prices2.6a GDP Projections (Government)2.6b GDP Projections (Mission)2.7 Use of Resources at Constant 1982 Prices2.9 Savings2.11 Gross Fixed Capital Formation by Public and Private

Sector, and by Industry, at Current Prices

Public Finance

5.1 Central Government Operations5.2 Central Government Operations as Percent of GDP (Historical)5.2a Central Government Operations as Percent of GDP

(Government and Mission Projections)5.3 Central Government Revenue5.( Economic Analysis of Central Government Expenditure5.4a Economic Analysis of Central Government Expenditure (Z of ODP)5.5 Zentral Government Savings5.6 Recurrent Expenditure by Sector5.7 Development Expenditure by Sector5.8 Total Expenditure by Sector5.9 Recurrent Expenditure by Sector, with latest Forward Budget

Ceilings5.10 Development Expenditure by Sector, with Latest Forward

Budget Ceilings5.11 Total Expenditure by Sector, with Latest Forward Budget

Ceilings5.12 Budgeted Employment and Compensation5.13 Non-wage Operating Expenditures in the Recurrent Estimates

Money and Banking

6.1 Consolidated Accounts of the Banking System at Year's End

La The scheme for numbering Statistical Appendix tables follows theKenya Country Economic Memorandum

EXECUTIVE SUMMARY

Macro and C=oss-sectoral Issues

1. Government Policy Framework. In its Sessional Paper on EconomicManagement for Renewed Growth (1986), the Government of Kenya madeimprovement of the management of publJc expenditure a central element ofits strategy for sustaining a high rate of growth. The Paper emphasizesthat the level of Government expenditure needs to be restrained, and thebudget deficit reduced, in jrder to control inflation, restrain publlcindebtedness, and avoid crowding out p-ivate investors. The SessionalPaper incorporates the Government's Budget Rationalization Program (BRP),launched in 1985, under which the composition of expenditure is to beadjusted in order to increase the effectiveness of expenditure in achievingits objectives. More specifically, the growth of Government employment andpersonnel expenditure would be decelerated, more resources would beprovided for complementary non-wage operating and maintenance (O&M)expenditure, and the overloaded Government project portfolio would bepruned. Treasury Circulars have also emphasized that transfers from thebudget to parastatals should be reduced.

2. Progress to Date. The ratio of Government expenditure to GDPdeclined from 30.5Z in FY87 to 29.62 in FY88, and is planned to be 29.72 inFY89. The budget deficit declined from 7.6Z of GDP in FY87 to 4.2Z of GDPin FY88, and is planned to be 4.5? of GDP in FY89. The composition of thefinancing of the deficit has shifted, with less domestic financing and moreconcessional foreign financing. Thus, there has been some progress onfiscal stablizatlon, but the budget deficit is still too high and will needto be reduced further in the years ahead.

3. Progress in improving the composition of expenditure is moredifficult to assess, because the formulation of quantitative performanceindicators, and subsequent monitoring of progress toward their achiLvemert,has been largely neglected. Government employment has continued to growvery rapidly, despite policy prono.incements in favor of slower growth ofemployment. The Treasury's objective, in the last Forward Budget cycle, ofrestraining the annual increase in personnel expenditure to no more than4?, has not yet been achieved (the increase for PY89 is 1O) , reflectingthe lack of a policy framework for the stable level of employmentnecessitated by this objective. Non-wage O&M expenditure is substantiallyunderprovided in all of the sectors reviewed by the mission, with theexception of the energy sector which is essentially in the hands ofparastatals. Because the Government lacks an explicit Public InvestmentProgram, it has not been possible to assess the progress in prioritizingpublic investment and ensuring the the pace of Government capital formationis consistent with the Government's capacity to subsequently operate andmaintain the capital stock. The Government has reported that the number ofdonor-assisted projects in the Central Government budget has been reducedby 102 over the past two years; this is a step in the right direction.While there has been important progress with the National Cereals andProduce Board, in general the ptogress in addressing the problems ofunprofitable parastatals has been slower than originally intended under theagricultural and industrial sector adjustment programs.

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4. In sum, despite the fact that it is now more than three year.since the Budget Rationalization Program was launched, the restructuring ofexpenditure is still at a very early stage. The Government shouldaecelerate and intensify its efforts.

6. Framework and Strategy for Future Progress. In order to stabilizethe economy while freeing up more resources for private sector activitythe Central Government budget deficit should be reduced from 4.52 of GDP inFY89 to 3.OZ of GDP in FY92. In addition, the Government should begin tomeasure the public sector deficit, with a view to ensuring that adjustmentin the Central Government deficit is fvlly reflected in adjustment of thepublic tector deficit. The Government is aiming at increasing its revenuefrom 23.22 of GDP in FY89 to 23.8Z of GDP in FY92, through strengthening oftax administration and increased collection of user charges, particularlyfor education and health. Taking into account the revenue and deficitprojections and the likely availability of external grants, theexpenditure/GDP ratio should be reduced to no more than 29.02 of GDP byz'Y92.

7. With regard to the composition of expenditure, Central Governmentcurrent expenditure should be reduced to no more than the level of CentralGovernment revenue, since the reduction and eventual elimination of CentralGovernment dissavings is a key element in improving the economy's 8avings

performance. In view of the unavoidable necessity of interest payments andthe need for increased levels of non-wage O&M expenditure, this impliessharp restraint on the growth of Government employment and personnelexpenditure, as compared with recent trends. The mission endorses theTreasury's objective of restraining the growsh of personnel expenditure tono more than 41 annually, for at least the next two fiscal years. Thiswould enable the share of GDP claimed by Government personnel expenditureto be reduced to 9.12 by FY91. This objective can be achieved only ifthere are no further increases in the aggregate level of Governmentemployment, necessitating a substantial reduction in recruitment, and a re-orientation of training institutions from pre-service to in-servicetraining.

8. The Government should provide adequate non-wage O&M expenditure inrelation to the Government capital stock in the various sectors, or inrelation to planned service delivery in subsectors where utilization of thecapital stock is subsLantially variable. If coefficients for non-wage O&Mexpenditure were to be restored to levels prevailing in FY81, then non-wageO&M expenditure would have to be increased to about 62 of GDP; thejustification for such increases should be assessed on a ministry-by-ministry basis.

9. The Government should formulate a Public Fixed Investment Program,embracing the capital expenditures of both the Central Government and themajor nonfinancial parastatals, amounting to about 72 of GDP. In order tostrengthen the project selection process, the preparation of a PublicSector Project List should be de-linked from the Forward Budget process andcarried out in advance. The projects should correspond to budgetary sub-heads, and should be costed out on the assumption that they will beimplemented expeditiously. New projects should be clearly distinguishedfrom ongoing projects, and projects should be ranked into groups according

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to priority, with tl:e highest-priority "core' group protected from anyshortfalls in resource availability,

10. The Government should adopt a more systematic approach toparastatal issues. In particular, drawing upon the experience of othercountries which have initiated public enterprise reform programs, theGovernment should formulate a policy framework for parastatals; begin tomonitor the aggregated flow of funds for the largest nonfinancialparastatals, and the consolidated public sector deficit; and clarify theGovernment's position as a creditor of parastatals.

11. With regard to the intersectoral allocrtion of expenditure, themission does not have a firm basis for proposinc an aLternative to theallocations fcr gruss expenditure in the most r~ tent Forward BudgetCircular, although the shares of the social sectors, particularlyeducation, are quite high. The sectors generally display a mixture of bothunderfunding (of non-wage O&M experditure) and overfunding (of employmentor capital formation); where there are such imbalances within a sector, thefirst priority should be their correction rather than the drawing ofresources away from other seztors. Increased cost-sharing is contemplatedas a means to reduce the share of Treasury resources (tax revenues andborrowings) claimed by the Ministry of Education and the Ministry ofHealth, but this might or might not have an impact on these ministries'share of gross expenditure, depending on whether the cost-sharingintroduced is budgetary or nonbudgetary.

12. Improvements in Government resource allocation processes shouldbe documented by supplementing the existing Forward Budget and AnnualEstimates documents with briefer, analytical Summary documents, containingtext as well as numbers, with the text explaining the relationship betweenthe numbers and the Government's expenditure policy objectives. Thesedocuments should also display the economic composition of expenditure; thePublic Fi-ed Investment Program; expenditures on projects in the PublicSec-or Pr-ject List; and flow and stock data on Government-parastatalfinancial relations.

13. In its revised Policy Framework Paper (April 1989), theGovernment has committed itself to address the expenditure issuesconfronting it generally along the lines recommended above. Among itsquantitative objectives, the Government is aiming at reducing its budgetdeficit to 3.2Z of GDP in FY92; decelerating the growth of CentralGovernment employment (excluding Teachers' Service Commission) to no morethan 2Z annually beginning in FY90; and decelerating the growth of TSCemployment to 5Z in FY90 (the final year of introduction of the new 8-4-4system), to be followed by a further reduction in the growth rate of TSCemployment in subsequent years.

Sectoral Expenditure Programs

14. Agriculture. Following upon the restructuring of NCPB, theGovernment should expedite the restructuring of the remaining threeparastatals specifically targetted for r.dtructuring under the adjustmentprogram. It should also review its portfolio of agricultural parastatalsto identify any additional ones which should be restrnctured or wholly orpartially divested, and formulate appropriate work plans for such actions.

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The Government should reoirient agricultural training instiutions away frompre-service toward in-service training, and consider a freeze on theimployment on non-professional staff.

15. tnergv. The Government should remove price controls on charcoaland modestly step up budgetary expenditures on voodfuel development. Itshould reassess the role of the National Oil Corporation of Kenya inpetroleum procurement, and avoid any expansion of MOCK into distributionand retaLling, the mission endorses the planned expenditures In theelectric power sector, with the qualification that the Governmeat shouldexplore the possibility for greacer cost recovery in rural *lectrification.Over the longer term, the Covernrmnt should consider possibilities foradditional electricity supplies form Uganda, and/or interconnection withTanzania.

1S. TransDortation. The mission strongly enoorses the tripling ofmaintenance expenditure by the Roads Department. Expenditure onmaintwnance, and on reconstruction of deteriorated roads, should beprotected, with any funding shortalls falling upon upgrading expenditure.The labor force of the Roads Department should be reducec through a hiringfreeze and natural attrition. The reform program for Kenya Railways, whichhas experienced some delays, shou.d be implemented expeditiously in thefuture.

17. Education. The Report of the Presidential Working Party providesa foundation for formulating an action program on expenditurerationalization and resource mobilization. At the primary level, adequateexpenditure on school equipment and textbooks should be ensured. This willprobably necessitate a modest increase in average class size and areorientation of Teacher Training Colleges more toward in-service, ratherthan pre-service, training. At the secondary level, the PWP'srecommendation for full cost recovery of food and boarding expenses atGovernment-maintained boarding schools should be implemented promptly. Atthe University level, budgetary savings should be generated by eliminationof free food and boarding, partial cost recovery for tuition. and reductionin the non-teaching staff.

18. Health. The discrepancy betueen the Forward Budget and MOH'sstated objectives point to the need for a strengthening of MOH's planningand budgeting capabilities. For planning and budgeting purposes, HOHshould set ceilings for capital and current expenditure, with the latterdisaggregated into personnel expenditure and non-wage O&M expenditure, andadkquately funded. MOM should develop norms for O&H expenditure for itsstoc'c of buildings and equipment, and/or service delivery, and ensureadherence to these norms in the budgetary process. Finally, MOH shoulddevelop a medium-term plan for capital expenditure. With regard to cost-sharing, this should be introduced at the hospital level first, andthereafter gradually extended to the lower levels of the system.

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FART ONE: OVERVIEW OF PUBLIC EXPENDITURE ISSUES

A. Macroeconomic Framework

1. The improved management of public resources is a core component ofKenya's development strategy as outlined in the Government's SessionalPaper oiL Economic Management for Renewed Growth (1986) and Policy FrameworkPaper (1988) 1/. Increased revenue mobilization and restraints on thelevel of public espenditures are seen as necessary to control inflation,constrain public indebtedness, and avoid crowding out private investors.Improvements in the composition of publ.c expenditures - focussed onappropriate infrastructures and basic social services - are seen asnecessary to increase their effectiveness in contributing to growth anddistributional objectives. Steps are also being taken to rationalize therole of parastatals in the economy and the Government's relationship withthem, and the leading role of the private sector in productive activitieshas been emphasized. However, while the donor community endorses theseobjectives, the means of implementation are yet to be fully articulated.This report - which focusses principally on revenue measures, thecomposition of expenditures, and budgetary processes - is intended tocontribute to determining these means.

Recent Fiscal Developments

2. Fiscal performance in recent years has deviated somewhat from thepath envisaged in the Sessional Paper as well as from initial adoptedbudgets (see Table 1). While the Government's revenue effort has beensustained at a relatively high level, expenditures have been consistentlygreater than planned, reflecting the underestimation of some items in thebudget preparation process and the emergence of unforseen expenditure needsdaring the course of a fiscal year. In FY87 the ratio of Governmentexpenditure to GDP reached 30.5 percent, well above the 28 percent levelindicated in the Sessional Paper and far above the expenditure ratios foundfor low-income (20 percent) and middle income (24 percent) developingcountries. The overall cash deficit reached 7.6 percent of GDP nearly allof which was financed from domestic sources - a level which threatenedeconomic stability. Although there was a significant reduction in the cashdeficit in FY88 to around 4.2 percent of GDP under a financial programagreed with the IMP 2/ - reflecting mainly a marked increase in revenueperformance (to 25.2 percent of GDP) with some constraints on expenditures(to 29.6 percent of GDP) - Governzment indebtedness has continued to growrelatively rapidly as a result of these deficits, s-ith the share ofGovernment revenue claimed by debt-service payments increasing from 27percent in FY83 to 35 percent in FY88.

11 The Sessional Paper incorporates the Government's BudgetRationalization Program, launched in 1985, under which the composition ofGovernment expenditures is to be adjusted to increase their effectiveness inachieving development objectives.

2 / This outcome was facilitated by the deferral of some cash outlaysfrom late FY88 into the early part of FY89. There was a significant increasein external financing of the deficit in FY88, both grants and loans, and areduction in domestic financing to about 3 percent of GDP.

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3. Of particular concern has been the dissavings of the CentralGovernment (i.e. its revenues have been exceeded by its currentexpenditures) and the recent deterioration in its savings performance,reflecting principally the large and rapidly increasing personnelexpenditures and the growing interest payments on Central Government debt(see Table 2). Private savings, on the other hand, have been relativelyhigh at 18-20 percent of GDP; these have been devoted to financing not onlyprivate fixed investments (currently around 12 percent of GDP), but alsopublic fixed investments (currently around 8 percent of GDP) and theCentral Government's current account deficits. This suggests there may havebeen some *crowding out' of private investors, with financial resourceswhich otherwise could have been used for investment and the generation ofproductive employment in the private sector being used, in some instances,for less productive Government expenditure. Table 2 also reveals asignificant absorption of foreign savings, particularly in 1987; Kenya'sexternal debt service ratio on public and publicly guaranteed debt has beensteadily increasing throughout the 1980s, reaching 31 percent in 1987.

Medium-Term Fiscal Prospects

4. The Government has recognized that the absorption of foreign savingsmust be reduced if its objective of lowering the debt-service ratio is tobe achieved. Thus an increase in the domestic savings effort will be neededto sustain the level of investment; since the private sector - in responseto the positive real interest rate policy which has been in effect since1983 - already has a creditable savings performance, this will have to beachieved through an improvement in the Government's saving performance.Further, if the intended acceleration in private investment is to takeplace, the improved Government savings performance will have to beaccompanied by an overall reduction in the share of available resourcesclaimed by the public sector.

5. The medium-term fiscal scenario presented in Tables 1 and 2 (seealso Statistical Appendix Table 2.6b for nominal and real GDP projections)is intended to reflect the above objectives, as well as the Government'sspecific commitments under the financial program agreed with the IMF. Thescenario 3/ envisages a real GDP growth of 5 percent per annum, and thusassumes the vigorous implementation of both stabilization and structuraladjustment measures, including increased efficiency in the use of publicresources and the facilitation of an increased level of private investment.Fixed investment of about 20 percent of GDP would be required to meet thistargeted growth, with the share of private investment increasing modestlyfrom 63 percent of the total in FY89 to 65 percent in FY92. /

3 / The scenario is consistent with and draws on the High Case of theBank's recent economic report on Kenya.

4 / These ratios of private to total fixed investment are typical forcountries with growth strategies oriented to the private sector.

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6. The revenue projections contained in the Government's paper on'Kenya's Finar.:ial Program (presented to the November 1988 ConsultativeGroup Meeting) have been adopted in the scenario, in which Governmentrevenue as a proportion of GDP would increase by a modest amount (from 23.2percent in FY89 to 23.8 percent in FY92), while the mobilization of grantsis assumed to be maintained at a level of 2.2 pert?nt of GDP over themedium-term, which is slightly above the FY88 level of 2.1 percent. Thecash deficit will have to be reduced even further from its programed levelfor this financial year (viz. from 4.5 percent of GDP in FY89 to aprojected 3.0 percent of GDP in FY92) to ensure that financialstabilization is maintained and that sufficient resources are freed up forprivate investment. The implementation of the strong adjustment programsunderlying this scenario should enable the Government to continue tomobilize considerable amounts of quick-disbursing non-project externalfinance, which would enable domestic financing of the deficit to be reducedto around 1.0 percent of GDP in FY91 and only 0.5 percent of GDP in FY92.However, to achieve the cash deficit objective with the levels of revenueand grants assumed, Government expenditures will have to be contained toabout 29.7 percent of GDP in FY89 and 29.0 percent of GDP I FY92. Whilethe aggregate expenditure adjustment required is thus relatively modest,achieving it will not be easy and will require sustained discipline,especially in view of the legitimate need for higher levels of operationsand maintenance expenditure, the necessity to meet the growing interestobligations, and the pressures for other types of expenditures.

B. Cross-Sectoral Issues

7. Public resource allocation and monitoring in Kenya is considerablyhandicapped by the lack of quantitative indicators for the economiccomposition of expenditures in the Forward Budget and Annual Estimates.Non-wage operations and maintenance expenditures for programs, minis'r!8s,and the Government as a whole are not measured and shown in the budgetdocuments; nor are other critically important variables such as totalcurrent expenditure, aggregate transfers to parastatals, and fixed capitalformation. It is therefore more difficult to assess progress in improvingthe composition of expenditures (or * budget rationalization') than indeficit reduction. Likewise, the investment and fina;.cial plans of theparastatals are not integrated with those of the Central Government, whichmeans that key economic variables such as total public investment and thepublic sector deficit are not measured. If the Government is to bring aboutthe desired improvements in the composition of expenditures, it will haveto ensure that its budgetary processes enable the necessary quantitativeindicators to be readily derived.

8. The Central Bureau of Statistics does, however, measure the economiccomposition of expenditure ex-post, although the resulting published dataare highly aggregative (see Table 3a). An analysis of this and other dataraises some important cross-sectoral issues which will have to be addressedif budget rationalization is to be successful:

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First, Central Government personnel expenditures have bean rising at arapid rate reflecting principally a high growth in employment, despite thepolicy pronouncements of the Sessional Paper to slacken the rate of jobcreation in the public sector. The need to stabilize the growth inemployment is now becoming urgent.

Second, the efficiency in the delivery of public services has been impairedby the substantial underprovision of non-wage operations and maintenanceexpenditures in all the sectors reviewed by the mission (with the exceptionof energy, which is essentially in the hands of parastatals). Restoredlevels of such expenditures for the appropriate operation and maintenanceof the Government's capital stock in these sectors will be essential ifdesired levels of services are to be achieved and the rapid deteriorationof the infrastructure is to be avoided.

Third, the Government does not have an explicit forward plan for publicinvestment which provides a solid basis for setting priorities and forensuring that the pace of Government and parastatal capital formation isconsistent with the ability to subsequently maintain and operate thecapital stock. The formulation of a manageable and well-prioritized projectportfolio and public investmeit program is thus highly desirable.

Fourth, while transfers and net lending from the Central Government budgetto parastatals and other entities have been declining as a proportion oftotal budgetary expenditures, progress in addressing the problems ofunprofitable parastatals has been slower than envisaged by the Governmentin its adjustment programs. Further, the nature of the financial transfersto parastatals is not always specified in the budget documents, and theGovernment's position as a creditor of parastatals remains somewhatobscure. A more systematic approach to deal with these issues is required,which should incorporate specific actions to accelerate the rationalizationof the relevant parastatals.

In order to illustrate the direction and possible magnitude of desirableadjustments reflecting the above, a medium-term projection of thecompoeition of expenditure, consistent with the fiscal scenario, ispresented in Table 3b. A key element in the projection is the reduction ofCentral Government dissavings to zero by FY91, and the achievement of smallpositive Government savings beginning in FY92.

Personnel Expenditures

9. Employment Growth. The recent rapid growth of personnel expendituresreflects to a considerable extent the growth in Central Governmentemployment (Civil Service plus Teachers' Service Commission). Over the1981-87 period, Central Government emrployment grew by around 5.4 percentper annum, which was much faster than the growth of private sectoremployment (2.8 percent) and of the labor force (4 percent). The growth hasreflected both the increasing demand for public services and theGovernment's attempts to alleviate concerns over unemployment by the

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creation of Government jobs, although factors such as the Government'spractices of hiring all graduates from its training institutes and of(implicit) employment guarantees to university graduates have contributedsignificantly. The employment of teachers by the Teachers' ServiceCommission - which now account for nearly 40 percent of all CentralGovernment employment - has grown particularly rapidly at 8 percent perannum, reflecting the growth of enrollments, a gradual lowering of thestudentlteacher ratio, and the introduction of the 8-4-4 system.

10. Compensation. The most recent revision of the salary structure forGovernment employees was implemented in three stages during 1985-87,following the findings of the Ramtu Commission. Salary levels wereincreased to arrest to some extent the decline in real salary levels whichtook place between 1981 and 1985 wben inflation outpaced significantly thenormal annual increases; the revisions also resulted in some compression ofthe salary structure, as the salary bracket for the lowest grade wasincreased by 45-52 percent, while the bracket for the highest grade wasincreased by only 23-26 percent. The structure allows for an averagewithin-grade salary increase of about 4.5 percent. Average earnings peremployee in the Central Government, however, have grown faster than sAlarylevels because of significant amounts of position upgrading and promotions.The average earnings of civil servants, for example, increased by anaverage of 8.8 percent per annum between 1980 and 1986, although theincreases were still not sufficient to prevent a decline in real earningsover this period, 5/ with the decline being more serious in the higherlevel jobs. 6/ When compared with earnings of workers in the privatesector and in parastatals, it is apparent that Government compensationpackages are competitive in the lowest grades (as illustrated by the almostnon-existent vacancies), but uncompetitive in the highest grades (qualifiedcomputer programmers, engineers, medical specialists, etc. with vacancyrates of 30 to 35 percent).

11. Productivity. The practices of granting annual increments largelyregardless of performance, and making promotions on a basis of seniorityrather than performance, do not encourage maximum effort. The inadequacyof complementary non-wage inputs, and the departure of many of the mosttalented people for better-paying positions in parastatals and the privatesector, contribute to low morale. The Ramtu Commission found that theCivil Service suffered from inadequate management, that schemes of servicehad not been implemented as intended, and that "many civil servants do nothave any specific work schedules or specific objectives to accomplish".While the productivity of any civil service is difficult to measure oranalyze, it is possible that increased productivity would reduce, or insome cases eliminate, any need-based justification for additional staff.

5 / The GDP price index, for example, rose by an annual average of 9.5percent over this period.

6 / In addition to wages and salaries, civil service compensation alsoincludes a non-contributory pension scheme, health insurance, and housingbenefits. The housing benefits scheme is complex, is subject to abuse, andgenerates inefficiencies in the housing market.

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12. Recent Initiatives. The Government has recognized, in theSessional Paper and the Policy Framework Paper, that the growth ofGovernment employment and personnel expenditure is threatening theeffective delivery of public services because of the resulting inadequateprovision for nor.-wage operating and maintenance expenditure. Accordingly,in the Circular (July 1987) launching the FY89-FY91 Forward Budget process,the Treasury instructed that expenditures on salaries and allowances shouldnot be increased in the Forward Budget by more than 4 percent annually,which would imply zero net employment growth under existing compensationpolicies. Most of the Ministries complied with this instruction in theirForward Budget submissions. However, in the adopted Annual Estimates forFY89, personnel expenditures have been increased by 9.8 percent as comparedwith FY88 (Statistical Appendix table 5.12), with the budgetedestablishments being increased by 14.7 percent (Ministry of Education by25.2 percent and the other ministries by 5.6 percent). The lack of successof the Treasury's effort to contain the growth of personnel expenditure to4 percent demonstrates that salary guidelines alone are relativelyineffective, and points to the need for an integrated policy frameworkembracing training, employment, and compensation. 7/

13. Future Policy. In order to make possible the restoration of anadequate level of non-wage operations and maintenance expenditure (asdiscussed in the following section), within the overall budgetaryconstraints, it would be appropriate for the Government to prevent anyfurther increase over the medium term in the aggrmgate level of Governmentemployment. Increases in some areas could be selectively permitted,provided that they are offset by declines in the volume of employment -through attrition or redeployment - elsewhere. As a matter of policy, noministry should be permitted to recruit additional staff unless it candemonstrate to the Treasury that its provision for non-wage operation &maintenance expenditure is fully adequate, and would remain so with anyadditional recruitment. In order to be consistent with a sharpdeceleration of Government recruitment, the output of pre-service trainees,presently about 16,000 persons annually, should be significantly reduced,and pre-service training allowances should be abolished. Traininginstitutions should be reoriented to in-service training.

14. In the area of compensation, the guiding principle should bethat, while it may not be necessary or appropriate for Governmentcompensation to strictly match that available in parastatals or the privatesector, it should not be grossly uncompetitive. In order to assess itscompetitiveness for professional positions, it would be appropriate for theGovernment to selectively survey parastatal and private sector compensationfor such posts. Over the medium term, there should be no across-the-board

7/ In the circular (July 1988) launching the FY90-92 Forward Budgetprocess, the Treasury has once again instructed that personnel expenditure shouldnot be increased by more than 4 percent annually. In this latest Circular, theinstruction has been incorporated in the form of specific ceilings for eachministry. The Circular also announces that the annual establishment review,chaired by the Directorate of Personnel Management and also includingrepresentatives of the Treasury and the ministry concerned, will be reintroducedand will be held in January/February of each year.

7

increase in the salary structure. However, it may be appropriate forcompensation for skilled professional staff to be selectively increased.Housing benefits should be rationalized, with the ultimate objective ofabolishing housing allowances by integrating them into a 'clean, wage forcivil servants.

15. In the area of productivity improvement, the Ramtu CorAiission'srecommendations in favor of more effective performance evaluation, merit-based awards, and monitoring of management improvements deserveimplementatioi. The Public Service Commission should consider introducingan entrance examination for applicants to the Civil Service.

Non-Wage Operations and Maintenance Expenditure

16. The Government has for many years recognized the necessity tidevote a much greater share of the budget to non-wage operations andmaintenance expenditures; the Fourth (1979-83) and Fifth (1984-88)Development Plans made explicit reference to this objective, and it is oneof the principal aims of the Budget Rationalization Program. However, inpractice the situation has been the reverse. Between FY81 and FY87, forexample, the proportion of non-wage operations and maintenance expendituresin total Government expenditures fell from around 25 percent to 15 percentin FY81, while real non-wage operations and maintenance expenditure percivil servant fell by 30 percent, and the ratio of real non-wage O&Mexpenditure to an estimate for the Government capital stock (assumed toincrease by 4.52 annually) also fell by 30 percent (Table 4).

17. The inadequacy of non-wage operations and maintenance expenditurehas had adverse effects in most sectors. In road transport, upgrading andconstruction have continually been given priority over maintenance, withaccomplishments in the latter falling well below plan targets - under theFifth Plan, for example, the target for resealing paved roads was 1100kmannually but accomplishments were only 466km. This has resulted inpremature road failure and a need for costly reconstruction in the yearsahead. In primary education, the share of recurrent expenditure devoted toteaching equipment and textbooks decreased from 5.4 percent in FY85 to onJy1.7 percent in FY87, resulting in expenditure per student of only twelveshillings, less than half the price of a textbook. In agricultureservices, project appraisal and supervision work of Bank staff has revealeda pervasive problem of inadequate non-wage operations and maintenanceexpenditure. For example, the appraisal of the National AgricultureResearch Project found that the share of the research budget devoted topersonnel expenditure (76 percent ) was far too high, with insufficientbeing allowed for supplies for the execution of programs and for themaintenance of research infrastructure. An August 1988 supervision of theAnimal Health Services Project found that budgetary provision in FY89 fordrugs, sera, and vaccines was only 27 percent of the amount estimated asnecessary during appraisal. A September 1988 supervision of the ForestryIII project found that the absorption of 85 percent of the ForestDepartment's budget by wages and salaries resulted in a lack of adequatemeans for training and education, structures and equipment, materials, andnormal operations and maintenance, and thus a decline in the department'sperformance.

8

18. Looking to the future, the Government will have to make a concertedeffort to provide adequate non-wage expenditure for the operation andmaintenance of its capital stock, except where a decision is taken toabandon facilities as uneconomic. In 1985, the Treasury Task Force onBudget Rationalization recommended that the TreaRury, the Ministry ofPlanning, and the technical departments of the line ministries collaboratein developing norms and standards' for measuring capacity utilization andin identifying items of non-wage c,erations and maintenance expenditurewhich would contribute to increased capacity utilization. This proposal wasnot pursued, and it is recoomended that it be reactivated as a matter ofpriority, with the objective of making explicit, for major spendingministries, the linkage betiieen the level of non-wage operations andmaintenance expenditures and capacity. 8/ In subsectors where laborintensity is high (e.g., primary education, rural extension services) orwhere the utilization of the capital stock is substantially variable (e.g.,double shifting in schools, variations in utilization of health facilitiesarising from variations in population density), it may be better to adoptcoefficients relating non-wage inputs to employment or measure of servicedelivered, as appropriate.

19. Illustrative projections of future levels of operations andmaintenance expenditures consistent with the macroeconomic scenariooutlired earlier are presented in Table 4. It is 'assumed that the capitalstock will continue to grow at 4.5 percent per anrum and that a policyobjective is to regain, by FY91, the ratio of reel non-wage operations andmaintenance expenditure to capital stock which prevailed in FY81. If thiswere done while the level of Government employment was kept constant, thenreal non-wage operations and maintenance expenditures per Governmentemployee would reach 8 percent of the FY81 level by FY91.

Capital Expenditure

20. Public In"estment Program. Kenya has no explicit forward plan forpublic investment of the Government and of parastatals. This has meant thatthe Government has not been able to determine clearly, on an ex-ante basis,priorities for public investment, and the extent of build up of the capitalstock implied by the annual and forward budgets and its implications onfuture operations and maintenance expenditures. 9/ No mechanism thusexists for fully assessing the impact of resource constraints on thedesirable level and composition of inrestment. It would thus be highlydesirable for the Governmen; to formulate a Public Investment Program, such

8/ Of course, future levels of non-wage operations and maintenanceexpenditure should be related to future capacity rather than present capacity.This is one of the reasons why, as discussed later, the Government shouldformulate an explicit Public Investment Program.

9/ Public investment is, however, measured ex-post, on a calendar yearbasis, by the Central Bureau of Statistics. Unfortunately, the published data(see Table 5) do not identify public investment by individual ministries andparastatals. Recently, public investment has been about 7-8 percent of GDP -about average for a country at Kenya's income level - of which about half isaccounted for by parastatals.

9

as the forward plans for public investment in the UK or the Philippines, tobe revised on an annual basis as part of the budgetary process. Theelements are already available: Central Government expenditures onconstruction and equipment are available in the Annual Estimates andForward Budget at the item and project levels, and parastatal expenditureon capital formation items by project are available from the financial andinvestment plans they are required to submit to Treasury. All that isneeded is for Treasury to pull this information together before thefinalization of the Forward Budget and Annual Estimates each year, and toensure that the total level of capital formation is consistent withmacroeconomic targets, and that the composition is consistent with theinvestment priorities implied the Public Sector Project List (see below).

21. Public Sector Proiect List. At the time of preparing the ForwardBudget, the Government requires each ministry to classify the projectsunder its jurisdiction into high, medium or other priority. The prioritiesare to reflect some key economic criteria (e.g., employment, foreignexchange earnings or savings) and enunciated sectoral development policies,with new project being evaluated for their economic and social viability.State Corporations also provide such an analysis for investment projectsreceiving financial support from the budget. However, many of the responsesare incomplete, do not correspond to budgetary heads, include programsrather than identifiable projects, or are not costed out in a way whichwould assist in making decisions on appropriate expenditure cutbacks inresponse to a shortfall in resource availnibility.

22. To overcome these problems, it would be desirable to delink theselection of projects and priority determination from the Forward BudgetProcess and carry it out in advance. A Public Sector Project List 10/should be prepared, which would have as 'sub-set' all capital formationprojects of the Central Government and parastatals (except perhaps projectsfunded by the parastatals own resources) corresponding to the PublicInvestment Program; the sub-set (hereafter called the Public Sector ProjectList for convenience) wouid contain considerably more information than thePublic Investment Program, since it would include details on project costs,costs to complete, etc., while the latter would be limited to proposedexpenditures for the coming budget and forward budget years. The List wouldbe the basis for setting investment priorities, with projects beingclassified into 'core' and 'non-core' groups, the former being protectedfrom any short-falls in resource availability. 1l/

10/ The Treasury has begun to assemble a data base on donor-assistedprojects in the Central Government budget. There are about 500 such projects,many of which involve support to current government operations and toinstitutional development rather than capital formation.

11/ The non-core group could be further divided into, say, three sub-groups ranked according to relative priority.

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Pirastatals

23. Recent Policy Actions. Financial transfers from the CentralGovernment to the parastatals and other entities has averaged around 3percent of GDP over the past few years. This level, although representing asignificant improvement over the level of 6 percent of GDP in FY81, is seenis unsustainable by Treasury. 121 The Government has thus taken a number ofiateps aimed at improving the financial performance of parastatals, but14nfortunately progress in bringing about an overall rationalization of thesector has been slow. 131 Following the recommendation In the Report ofthe Working Party on Government Expenditure (1982) that divestiture shouldbe pursued as a means of reducing the public sector's role in the economy,a Task Force on Divestiture was established in 1983 to classify parastatalsinto those to be retained, divested, or liquidated. The Task Forcesubmitted its reports in 1986, but ite findings have not been made public.A statistical system on internal debt owed by parastatals to the Governmentwas established, but the maintenance and utilization of the system appearsto have languished, which is unfortunate given that only a minority ofparastatals are servicing their domestic or on-lent external debt owed tothe Government. The instruction issued by the Government requiring thelargest 42 parastatals to submit their Forward Budgets to Treasury'sGovernment Investment Division for review was a positive action, althoughgiven the limited staffing of the division, it is unclear what impact thisreview process has had on parastatal performance. A State Corporation Actwas passed in 1986 with the objective of clarifying the legal framework forGovernment control of wholly-owned parastatals; however, neither this Actnor any other document clearly sets out a policy framework for statecorporations.

24. A similar pattern is discernible for initiatives at the sectorallevel. In the context of its agricultural sector adjustment program,initiated in 1986, the Government intended to clarify its policy onparastatals and their status, comence divestiture of non-essentialparastatals, and rehabilitate parastatals that were unable to function on afinancially independent basis. However, the recent increase in the numberof ministries in the sector has meant that a clear statement of policy andstrategy for the agricultural parastatals has not been made. Further,progress in the restructuring of the four parastatals specifically targetedunder the program has been relatively slow, with the possible exception ofthe National Cereals and Produce Board, and the divestiture of cottonginneries is now two years behind the schedule originally envisaged. Theroles and strategies of the Government-owned development finance

12/ Since some of the parastatals have special access to banking system

credit, the transfers from budget are only a partial measure of the extent towhich parastatals constitute a public finance "problem'. From end-1985 to end-1987, banking system credit outstanding to public bodies other than the CentralGovernment increased by 48 percent (see Statistical Appendix, Table 6.1).

13/ The numbe: of parastatals has remained more-or-less constant in

recent years (see An-iex 2 for a list of the 92 parastatals in 1987): recentadditions include the National Oil Corporation of Kenya (1982) and the Nyayo BusService Co. (1988), while the National Construction Corporation was dissolvedby Act of Parliament in 1988.

11

institutions are being re-examined in the context of the recently (1988)initiated industrial sector adjustment program. Industrial enterprises withequity holdings by these institutions and/or the Government will beclassified into categories for retention, divestiture, or liquidation, andthe capital market is to be developed in order to support contemplateddivestitures. Since this program is only in its early stages, it is notpossible to make any real judgments on progress. In the transport sector,an important potentially replicable effort has been launched with respectto Kenya Railways. A Corporate Plan has been prepared with the objective ofmaking the enterprise commercially-oriented and profitable; tariffs are toreflect market conditions and costs, and where the Government requiresKenya Railways to provide services at tariffs that are below costs,compensation payments would be made from the budget. Unfortunately, therehave been considerable delays in implementing the Plan which hasexacerbated the poor financial condition of Kenya Railways. The Governmentshould ensure that future adjustments in tariffs and compensatory paymentsare made in a timely manner.

25. Further Actions Required. The formulation of a clear policyframework for parastatals should be given the highest priority; the lack ofsuch a framework has undoubtedly contributed to the relatively slow paceof, and case-by-case approach to, dealing with financially troubledentities. Examples of statements on policy frameworks are available for anumber of countries implementing reform orograms, most of which containelements such as the following: (i) the ci~.umstances under which statecorporations would be the preferred vehicle to private sector entities orGovernment departments for car-ying out an activity; (ii) the objectives ofstate corporations in general, and the formulation of specific objectivesfor individual entities in their corporate plans; (iii) systems forevaluating and encouraging progress towards agreed (usually profitability)objectives; (iv) assignment of financial responsibility to the Governmentfor financially non-viable activities undertaken by state corporations atthe Government's behest; (v) tax treatment and dividend policy of statecorporations; and (vi) criteria and procedures for divestiture andliquidation.

26. The preparation of a consolidated public sector deficit - the publicsector borrowing requirement -would also be highly desirable. This measureis a broader and more appropriate measure than the Central Governmentbudget deficit of the impact of public sector financing operations on theeconomy. As a first step towards this, it is recommended that the Treasurymonitor the aggregate flow of funds for about 10 to 15 of the large.t non-financial parastatals, and consolidate this with the Central Governmentbudgdtary operations. The Government should also consolidate its data oninternal debt owed by parastatals to the Government (from KIDRES) and onpublic external debt of the parastatals (from KIDRES) to obtain a fullpicture of its position as a creditor of parastatals. Its loans should beclassified into: (i) serviced on schedule; (ii) overdue withoutjustification; (iii) overdue but potentially collectible with policy and/orinstitutional improvements affecting parastatal financial performance; and(iv) overdue and un:ollectible. By a target date, the Government shoulderase uncollectible loans from its portfolio, with other collections beingstrictly enforced.

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Procewa Issues

27. In order to bring about the desired improvement in the compositionof expenditures, it will be necessary for the Government to take actions,in ad4ition to the ones outlined above, to strengthen resource allocationprocedures. In particular:

(a) the preparation of the Annual Estimates and Forward Budget should becarried out at the same time;

(b) the economic categories of expenditure should be specificallyidentified and measured in the Annual Estimates and Forward Budget;

(c) planned levels of employment should be included in the Forward Budgetas well as in the Annual Estimates;

(d) the Annual Estimates and Forward Budget should be supplemented by thePublic Investment Program and with key data on the projects included in thePublic Sector Project List;

(e) the Annual Estimates and Forward Budget documents should display flowand stock data relating to Government-parastatal financial relations, andthe consolidated public sector flow of fundq, including the consolidatedpublic sector deficit; and

(f) brief and analytical summary documents, containing text as well asnumbers, should supplement the Annual Estimates and Forward Budgetdocuments.

C. Sectoral Issues

Sectoral Allocation

28. The sectoral allocations of Central Government expenditures in thepast and Forward Budget years are presented in Table 6. 4/ Wit thepossible exception of the social sectors, there is no hard evidence thatany of the sectors are clearly overfunded or underfunded, and thus no firmbasis on which these allocations could be questioned. 15/ It is within

14/ The projected allocations are from the most recent Treasury Forward

Budget Circular, issued in July 1988, and calling for ministry Forward Budgetsubmissions for the period FY90-92. They therefore differ from the allocationsin the printed Forward Budget for FY89-91, which were used as a basis for thediscussions of sectoral expenditure programs in Part Three of this report.

15/ The treatment of cost-sharing has an impact on the share of gross

expenditures claimed by the various sectors, particularly health and education,for which increased cost-sharing is under active consideration. With budgetarycost-sharing, the Government provides goods and services or the expenditure sideof its budget, and charges fees which accrue to the revenue side; this does notreduce the Government's gross expenditure in the sector. With non-budgetary cost

13

sectors that a mixture of simultaneous underfunding (of non..wage operationsand maintenance expenditures) and overfunding (of either capital formationor employment) is apparent; where there are such imbalances within asector, the first priority should be their correction rather than thedrawing of resources away from other sectors to meet any "shortfalls.

Sectoral ExPenditure Programs

29. Agriculture. The Government is currently implementing anagricultural adjustment program which aims to provide, throughderegulation, a more favorable environment for private sector participationin agricultural services such' as output marketing and input supply, whilestrengthening the provision of those services that can most effectively beprovided by the Government. As well as pricing and trade policy reformsaimed at improving incentives to proeicers, the program emphasizes therationalization of parastatals and of budgetary expenditures.

30. The Government is still faced with the task of defining clearstrategies relating to agricultural parastatals, particularly the settingout of a work plan and schedule for divestiture of non-essentialparastatals, and for the restructuring of essential parastatals which needto be placed on a sounder financial footing. Progress in the restructuringof the four parastatal which were specifically identified in theagricultural adjustment program - the National Cereals and Produce Board(NCPB), the Cotton Seed and Lint Marketing Board (CSLMB), the South NyanzaSugar Company (SONY , and the National Irrigation Board (NIB) - has, asindicated above, been relatively slow. The restructuring of NCPB is onlyjust beginning; the Government has redefined its role from being a monopolytrader in grain to performing price stabilization and food securityfunctions, and will progressively allow for the liberalization of privatesector maize trade. It was originally irtended that the divestiture ofCSLMB's trading and processing activities would commence in 1986, withCSLMB being transformed into a regulatory body by mid-1987, but these stepshave not yet taken place. Completion of these actions and the formulationof a definitive strate,gy for the cotton sub-sector remain of high priority.In the case of SONY, an action plan involving sugar estate and factoryrehabilitation and financial restructuring was drawn up in 1986. Someprogress has been made in estate rehabilitation. The Cabinet approved thefinancial restructuring in November 1988, thereby clearing an obstacle tourgently needed factory rehabilitation. Proposals for the restructuring ofNIB are now before cabinet. The restructuring proposals are fairly modestand should receive support, although consideration of the proposedexpansion of the irrigation schemes should await the res'.ructuring and bebased on proven economic viability.

31. Although there may be a requirement for some large "lumps" ofbudgetary resources for the further restructuring of parastatals over thenext few years, their reduced claims on budgetary resources over tnemedium- to long-term should free up resources for other purposes. The

sharing, responsibility for providing certain goods and services is shed fromthe Government budget and transferred to beneficiaries, thereby reducingGovernment expenditure.

14

Forward Budget for FY89-91 reflects this by projecting a significantdecline in real terms (about one-fourth) of transfers to parastatals;however, the provisions for extrr"-rdinary transfers for the financialrestructuring of parastatals are inadequate, and will have to be revisedupward if the rationalization program is to maintain any real momentum. Itwill also be necessary for the unsustainable growth in employment andpersonnel expenditure to be brought under control, and for adequate fundsto be made available for non-wage operations and maintenance costs. Majorchanges in training and recruitment policies will be necessary to achievethis; a freeze on the employment of non-technical and subordinate staffover the next three years should also be considered. The need to emphasizeresearch, extension, and animal heath services is a'iequately reflected inthe Forward Budget, although the Government should build on its recent costrecovery initiatives to recoup outlays in these areas, as appropriate. Theneed to allow greater allocation of scarce budgetary resources to non-wageoperating and maintenance expenditures and to meet other requirementsdictate that investment expenditures will have to be squeezed in the short-term; they should be concentrated on a limited number of viable and highpriority projects which can be completed in a timely fashion, and whoseimplications on continuing recurrent expenditures can be readilyaccommodated.

32. Energy. Traditional fuels (fuelwood and charcoal) account for over70 percent of energy consuiption in Kenya, with the balance comingprimarily from petroleum products (22 percent) and electric power (7percent). The increasing scarcit; of traditional fuels and the need toensure least cost and adequate supplies to meet the growing demands forpetroleum products and electricity are the major issues which need to beaddressed over the next decade.

33. The annual sustainable yield of woodfuel from Kenya's forests isestimated to be in the range of 18-23 cubic meters, well below the currentannual woodfuel consumption of about 31 million cubic meters; as a result,a marked depletion of the standing wood stock is emerging. In order toencourage the private sector to expand commercial woodlots, particularlynear the urban --eas, the Government should remove price controls oncharcoal and other regulative impediments to the efficient development ofwoodfuel resources. While the private sector should play the leading rolein woodfuel supply, the Government should be spendi.g about KL6 millionannually over the next few years for forestry extension and on otherwoodfuel development and conservation measures.

34. In the petroleum industry, it is expected that the Government wouldcontinue to pursue an active exploration policy involving around KL1.5million per annum in budgetary support for the National Oil Company ofKenya (NOCK'. however, the adoption of a more competitive pricing systemthan the ctrrent cost-plus pricing for petroleum products (which haspermitted considerable inefficiencies to emerge) would enable NOCK'sinvolvement in procurement to be reassessed, and would mean that therewould be no real justification for its proposed expansion intodistribution. The Government should also satisfy itself that any proposedupgrading of the refinery run by the Kenya Petroleum Refinery Limited(KPRL) and the extension of the Mombasa-Nairobi pipeline to Western Kenyaby the Kenya Pipeline Company (KPC), are both financially and economicallyjustified.

15

35. The investment expenditures contemplated by the electric Powerparastatals over the next three years are reasonable and consistent withthe National Power Development Plan. The plan provides the basis for theleast-cost expansion of Kenya's power generating nnd transmission systemover the next twenty years, with the development of geothermal resourcesaccounting for the bulk of the expenditures after the completion of theTurkwel Gorge hydroelectric scheme in 1991. There are uncertaintiesassociated with the development of the geothermal (e.g. risk of dry wellsor finding insufficient steam to support an economic sized power plant) andhydro resources, and the Government and Kenya Power and Lighting Company(KPLC) will thus have to monitor carefully the demand and supply situationand have contingency plans to cope with any supply shortages that mayemerge, particularly in the mid-1990s. The possibilities for additionalelectricity supplies from Uganda, or an interconnection with Tanzania,should be considered as options for meeting any expected shortages.

36. Transport. Some 80 percent of the budgetary resources devoted to thetransport sector are accounted for by expenditures on roads. However,around two-thirds of these expenditures have been of an investment nature,reflecting the priority given to the upgrading and construction of newroads relative to maintenance. As indicated in earlier (see para.17), thelack of timely expenditure on maintenance has resulted in a markeddeterioration in the condition of the road network, a deteriorationreinforced by delays in implementing an effective axle-load control system.Fortunately, the Government has decided that maintenance efforts should bestepped up, and the Forward Budget thus makes provisions for a tripling inreal terms of he Road Department's non-waLe maintenance expenditure and astabilization cf the wage bill; 16/ also, a considerable proportion of theroad network will require costly reconstruction and strengthening as aresult of the lack of maintenance in the past, and this will require agrowing share of the investment expenditure budget. Such expendituresshould be fully protected, with any funding shortfall falling uponupgrading expenditure. Given the constrained budgetary resources over thenext few years, these expenditurc claims will mean that road upgrading willtherefore have to be limited to high priority projects, and theconstructi i of new roads limited principally to the completion of ongoingcontracts and to priority rural access roads.

37. The principal parastatals in the transport sector are KenyaRailways, Kenya Ports Authority, and Kenya Airways; Kenya Railways (KA) isquantitatively the most important of these entities in terms of revenues,employment, and impact on the Central Government Budget. A Corporate Planand Short-term Action Program, approved by Cabinet and supported by IDA'sSecond Railway Project, pruoides the framework for an improvement in KR'scompetitiveness and for a turnaround in its operating and financialperformance. There have been delays, however, in implementing these plans(see para.24). The first of the planned compensatory payments to KenyaRailways for providing some services at tariffs below cost, for example,

16/ A freeze on employment of non-technical and subordinate staff and

a gradual reduction of the work force through attrition, would enable an actualdecline in the wage bill to be achieved.

16

was omitted from the original FY89 budget in June, ard it was not untilNovember 1989 that the Government acted on them (with half coming from thebudget and half from a special overdraft facility with the Central Bank ofKenya). The expected tariff increases have not yet been implemented. TheGovernment will have to ensure that the implementation of the plans isbrought back on track, since any slippage will make it increasinglydifficult for Kenya Railways to achieve financial viability.

38. Education. Kenya's education system faces the challenge ofaccommodating continuing demographic pressure for the expansion of primaryeducation, and strong social pressure for further expansion at thesecondary and tertiary levels, while maintaining or improving the qualityof education. The share of Central Government expenditure claimed by theMinistry of Education has increase from around 19 percent in the beginningof the 1980s to 24 percent in FY89; the most recent Forward Budget Circular(July 1988) suggests the aim is to hold this share to 26 percent in FY92,noting that some of the necessary outlays are expected to be financed bycharges to beneficiaries. In view of the enrollment expansion, thisobjective can only be achieved if actions are taken to enhance cost-effectiveness in providing education. The Report of the PresidentialWorking Party on Education and Manpower Training (March 1988; provides agood foundation for planning the necessary actions.

39. Cost savings are critical at the primary level, since it willcontinue to claim the bulk of the demand on the recurrent budget. The mainoption is the easing of the salary burden and the reduction in unit costsper student through raising, in a phased manner, the average student-teacher ratio above its present level of about 33. To bring this about, theGovernment should reduce the intake into Teacher Training Colleges tolevels that are consistent with the need of the primary schools and theGovernment's financial capacity to employ teachers, and to re-orient thosecolleges more towards in-service training. ,t the secondary level, thereshould be a shift of emphasis from boarding to day systems in theGoveranent-maintained schools, and immediate implementation of thePresidential Working Party's recommendation that students at boardingschools should pay the cost of food and boarding. The expansion ofuniversity education should not be financed at the expenb. of primary acldsecondary education. It can and should be done through budgetary savingsgenerated by the raticnalization of the system, including the eliminationof free food and boarding, partial cost recovery for tuition, and areduction in non-teaching staff.

40. Health. A principal objective of the Ministry of Health nas been toincrease the share of its expenditures devoted to preventative services andrural health relative to the share of curative services. However, theactual pattern of expenditures has not conformed to this objective.Curative health services have accounted for around two-thirds of healthexpenditures over the last few years, and the in-built bias of the systemis illustrated by the large shortfall of preventative service and ruralhealth expenditures from those budgeted over FY85-98 (around one-third),with expenditures on curative services exceeding those budgeted. Anotherserious problem has been the growing imbalance between personnel costs andother operating expenditures; there are frequent reports of healthfacilities which have run out of drugs and which cannot use essentialequipment because maintenance inputs are in short supply.

17

41. In the Forward Budget for FY89-91. the pattern of expenditurecontinues to be inconsistent with the Ministry of Health's statedobjectives. Real expenditures on curative services are expected to increasewhile expenditures on preventative services and rural health are expectedto decline, and inadequate provisions are made for non-wage operations andmaintenance expenditures. Also disturbing is the fact that half of thebudget for curative services is at the upper levels of the hospitalreferral system. The observations point once again to the need for astrengthening of the Ministry of Health's planning and implementationcapabilities.

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Table 1: CENTRAL GOVERNMENT BUDGETARY OPEtATIONS

(2 of CDP)

Financial Latest Fin.Actual Prelim Proarm b Estimate Pros/b Projected

FY84 FY85S/ TY86 FY87 FY6S FY85 FY89 FY90 FY91 FY92

Revenue and arants 23.0 23.7 23.6 23.8 25.5 25.2 25.6 25.7 25.9 26.0Revenue 22.3 22.0 22.6 22.5 22.8 23.1 23.2 28.5 26.7 28.eGrants 0.7 1.7 1.0 1.3 2.7 2.1 2.4 2.2 2.2 2.2

Expenditure 26.8 29.7 29.7 30.5 29.4 29.6 29.7 29.5 29.4 29.0Recurrent 20.8 2 2 4 227 22.9 22.1 TTT 22 5Development 5.9 7.3 7.0 7.6 7.3 7.2 7.2

Deficit (Treasury -3.8 -6.0 -6.1 -6.7 -7.9 -4.4 -4.1 -3.8 -3.5 -3.0Accounts)

Adjustment tocash basis /c - 0.9 0.7 -0.9 - 0.2 -0.4 -0.2

Cash Deficit /d -3.8 -5.1 -5.4 -7.6 -3.9 /f -4.2 4.5 -4.0 -3.5 -3.0

Financing 3.8 5.1 5.4 7.6 3.9 4.2 -4.5 -4.0 -3.5 -3.0Foreign (net) 0.2 1.2 -0.9 0.4 1T1 1.1 2 5 2.5 2 5 2.5Domestic (net) 3.7 3.9 6.3 7.1 2.9 3.1 2.0 1.5 1.0 0.5

Memorandum item:Cash Deficitexcludinggrants /e 4.5 6.8 6.4 8.9 6.6 6.2 7.0 6.2 5.7 5.2

/a Drought-affected year./b Refers to financial program agreed with IMF in connection with SAF and Standby arrangements./c The adjustment factor arises because financing data are derived from different sources than

revenue and exoenditure data. It includes a float element from some checks being issues butnot cashed during the same fiscal year, and statistical discrepancies.

/d Treating grants "above the line" as an item entering into the determination of the deficit..Fe Treating grants "below the line" as an item contributing to the financing of the deficit./f The ratios in this column have been calculated using the latest estimate for FY88 GDP, which

is slightly higher than the estimate in the original financial program. In the originalprogram, the cash deficit was targetted at 4.22 of GDP.

Source: Table 5.2

Note: The column for FY89 is from the financial program agreed with the IMF. The Governmenthas also committed to the IMF that the cash deficit will be reduced to 3.5X ofGDP (5.72 excluding grants) by FY91, and that bank financing of the deficit will beeliminated by FY92.

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Table 2: INVESTMENT AND SAVINGS, PUBLIC AND PRIVATE(% of GDP)

Actual Est. Projected1984 1985 1986 1987 1988 1989 1990 1991 1992

2,GrsInvyest,ment 23.4 20.1 22.5 24.6 23.6 22.6 22.5 22.5 22.4sommummono mom= an== am.= amn. Sam= nas. =.u. n.. a=..

Fixed Investment 18.4 16.4 20.1 19.8 20.6 20.0 20.0 20.0 20.0Public 7.7 7.0 8.1 7.6 7.9 7.5 7.2 7.0 7.0

(Government)/a (3.5) (3.9) (3.6) (4.3)(Public enterprises) (4.2) (3.1) (4.6) (3.3)

Private 10.7 10.4 12.0 12.2 12.5 12.5 12.8 13.0 13.0

Change in Stocks 5.0 2.8 2.4 4.8 3.0 2.5 2.5 2.5 2.4

Less: DomesticSavijngs 19.3 16.3 12.2 16.5 16.6 17.1 17.7 18.2 18.6... M. .. M =.. .. Wm m== =a= =M=. a.=. aaaa =A.

Central Government /b -1.3 -1.0 -1.0 -2.1 -2.1 -0.9 -0.3 0.1 0.3Private sector /c 20.6 17.3 20.9 18.6 18.5 18.0 18.0 18.1 18.3

Esuais: Keny,a's Investsm,ent- 4.1 3.8 2.6 8.1 7.0 5.5 4.9 4;4 3.8

,av,i,ngs Ga

4,,ebn3v8.1 2,, 8.1 7;0 ,;, 4-2 4.4 3,,

Grants from abroad 2.1 2.2 2.0 1.9 3.2 2.2 2.4 2.4 2.3Net borrowing from abroad /d 2 0 1.6 0.6 6.2 3.8 2.7 2.4 2.0 1.5

/a Chiefly Central Government, but also includes local authorities. The published data onGovernment ca)ital formation do not dissagregate Central Government and local authorities.Capital expenditures of local authorities are about 0.52 of GDP.

/b Revenue minus current expenditure./c Implicitly includes parastatal savings, for which data are not available. The savings

of local authc,rities are approximately zero./d Current accourt deficit in the balance of payments.

Sources: Statistical Appendix Tables 2.11 (public and private investment), 2.9 (savings),5.5 (Central Governr at savings) and 2.6 (GDP).

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Table 3a: ECONOMIC COKPOSITION OF GOVERNMENT EXPENDITURE(I of GDP)

Actual ProvisionalFY81 FY65 FY66 FY67 FY86

Current Expenditure 23.4 23.5 23.3 23.7 26.0Personnel expenditure la Lb 6 9 10.3 10.3 10.5 10.7Non-wage operating andmaintenance expenditure la 5.6 4.7 4.5 4.4. 3.1

Defense 2.9 2.2 2.1 1.6 3.3Subsidies Ic 0.3 0.5 0.4 0.5Interest 2.4 4.2 5.0 4.7 5.2Current transfers Id 3.3 1.6 1.0 1.9 1.3

Fixed CaDital Formation 5.9 4.2 2.8 4.4 4.5

Capital Transfers. Equity 3.3 1.3 1.4 1.3 1.9Purchases, and Net Lending

Total Expenditure 23.6 28.9 27.5 29.5 32.4

Memorandum Itemst

Revenue 25.3 22.1 22.8 22.5 23.1Savings (revenue minus 1.9 -1.4 -0.7 -1.2 -2.8current expenditure)

Total transfers Le 6.6 3.1 2.4 3.2 3.2

Non-wage operating and maintenance 244 217 219 226 281maintenance expenditure at constantFY85 prices (XL million)

la Excluding defense.Lb May possibly include pensions as well as current labor costs. This

point should be checked.Ic Chiefly export compensation.Id Transfers to parastatals, local authorities, and non-governmental

organization excludes Teachers Service Commission which is includedunder personnel expenditure.

le Current transfers plus capital transfers, equity purchases, and netlending

Source: Statistical Appendix Tables S.4a.

Note: Comparison with Table 1 suggests that in Table 5 totalexpenditure has been understated in FY86 and FY87, and that non-wage operating and maintenance expenditure may be overstated inFY88.

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Table 3b: ECONOMIC COMPOSITION OF EXPENDITURE (PROJECTED)(X cf GDP)

Provisional ProiectedFY87 FY88 FY89 FY90 FY91 FY92

Current Expenditure 23.7 26.0 24.4 24.1 23.7 23.5Personnel expenditure 10.5 10.7 10.4 9 .6 91 9. 0Non-wage operating andmaintenance expenditure 4.4 5.1 4.8 5.6 6.1 6.1

Defense 1.8 3.3 1.9 1.9 1.9 1.9Subsidies /a 0.4 0.5 0.5 0.5 0.5 0.5Interest 4.7 5.2 5.5 5.3 5.3 5.2Current transfers 1.9 1.3 1.3 1.2 0.8 0.8

Capital Formation, Capital 5.7 6.4 5.3 5.4 5.7 5.5Transfers, and Net Lending

Total Expenditure 29.5 32.4 29.7 29.5 29.4 29.0

Memorandum itemsRevenue 22.5 23.1 23.2 23.5 23.7 23.8Savings (revenue minus -1.2 -2.8 -1.2 -0.6 0.0 0.2current expenditure)

la Chiefly export compensation.

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Table 4: REAL NON-WAGE OPERATING AND MAINTENANCE EXPENDITURE

Actual Provisional ProiectedFY81 FY87 FY89 FY90 FY91 FY92

Non-wage 0& expenditure 165 271 383 498 606 666(KL million,current prices)

Real non-wage O&M 194 176 214 261 301 315expenditure (KL million,constant 1982 prices)

Number of civil servants 320 423 563 563 563 563(thousands)

Real non-wage O&M per civil 607 416 379 464 535 559servant (KL)

Government capital stock 100.0 130.2 142.2 148.6 155.3 162.3(index number, FY81100)

Real non-wage O&l per unit 1.94 1.35 1.50 1.76 1.94 1.94of Government capitalstock

Memorandum items:

Non-wage 0&M expenditure/GDP 5.8 4.4 4.8 5.6 6.1 6.1

GDP deflator (1982-100) 84.9 154.4 179.3 190.9 201.1 211.5

Sources: Non-wage O&M expenditure for FY81 and FY87 is from non-defensemother goods and services', under current expenditure, inStatistical Appendix Table 5.4. Non-wage 0&M expenditure forFY89 is a 'guesstimate,' since total non-wage O&K is notmeasured in the budget. Employment for FY81 and FY87 is from ----. Employment for FY89 is from the budget.

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Table 5: PUBLIC FIXED INVESTMENT(% of GDP)

_ _ _ __ 1984 1985 1986 1987

Government Services 3.5 3.9 3.6 4.3Public Administration 0.7 0.7 1.2 1.6Education 0.4 0.5 0.5 0.5Health 0.2 0.2 0.2 0.3Agricultural Services 0.1 0.2 0.2 0.3Other Government Services 2.1 2.3 1.6 1.7

Public Sector Enterprises 4.2 3.1 4.6 3.3Agriculture 0.2 0.1 0.1 0.1Electricity and Water 0.8 0.9 1.0 0.9Transport and Communication 1.5. 1.3 2.8 1.0Housing 0.6 0.4 0.5 0.6Other 1.1 0.4 0.3 0.7

Public Fixed Investment 7.7 7.0 8.1 7.6

Source: Statistical Appendix Table 2.11.

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Table 6: MINISTRY EVENDITURE BY SEC10R GROUP,WITH LATEST FORUARD BIDGET CEiLINGS

(percent distrlbution)

Latest Foroard BudgetAudited Prelim. Rvised Printed Culilns (JluIy 1988)

FY85 FY88 FY87 FY88 FY89 FY90 FY91 FY92

Oefen6e f d Pu±llc Administration 29.9 30.2 29.3 36.1 28.6 28.2 27.8 27.5

Offloe of the President 8.8 9.2 8.9 9.8 8.9 8.7 8.6 8.6Department of Defenc 10.0 10.9 10.8 13.9 9.1 9.0 8.8 8.6Other a/ 11.0 10.1 9.6 12.4 10.6 10.5 10.4 10.2

Economic Sector Ministrlis 38.6 33.0 36.6 29.9 37.1 36.2 36.2 36.3

Agricultural Mlnistrles b/ 11.2 11.3 14.2 9.4 9.7 10.3 10.3 10.3Water Development 3.3 3.5 4.0 3.1 3.9 3.9 3.9 3.9Energy 7.3 2.6 5.7 3.8 4.2 3.7 3.7 3.7PublIc Works c/ 3.2 2.9 2.3 6.2 9.0 8.9 8.9 9.0(Of dhich: Roads DePt.)

Transport and CouLnicatlon c/ 9.1 7.9 6.3 1.8 3.5 3.2 3.2 3.2(Of Fihch: Roads Dept.)

Other d/ 4.5 4.7 4.2 5.7 6.7 6.2 6.2 6.2

Socilal Sector Ministries 31.5 36.8 34.1 34.0 34.3 35.7 35.9 36.2

ECicatlon 21.5 28.2 23.7 23.3 24.1 25.6 25.9 26.3Health 7.5 8.1 7.2 7.5 7.7 7.6 7.6 7.6Other s/ 2.5 2.6 3.1 3.2 2.5 2.4 2.4 2.4

Total Expandriture 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Excludes Consolidated Fud ServIoe.

a/ lncludos all ministrles awd offices not listed belom urder Econo Ic Sector wnd Social Sector.b/ MInistries of Aricultwure; LIvastoCk Development; Ccoperatives, and SW ly nd Marketirg.C/ In April 1988, Hosino was reoved from the former Ministry of PbilIc Works and Hxusing

and attadced to the former Mlnistry of Lands and Settlement. At the same tle, theRoads Department ans transferred from the Ministry of Transport ard Com.rnIcation to theMInistry of Public kbrks.

d/ Includes the following mlnistrles: Tourlsm ard Wildlilfe; Enviroament and Natural Resources;Comerce; Ind.stry; Regional Development; Research, Sclence and Tecdology; and Landsand Housing.

e/ Includes the following mlnistries: Teaonical Training; Labor; ianpower and EpVloyment;Cilture and Social ServlCes.

Source: Based on Statisticai Appendix Table 5.11.

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PART TWO: SELECTED CROSS-SECTORAL ISSUES

I. BUDGETARY PROCESSES

A. Features of the Existing System

1. The budgetary processes involve the preparation of two principal setsof documents: the Annual Estimates and the three-year Forward Budget. Theprocesses have been continually improved since 198S under the Government'sBudget Pationalization Program, which was introduced with the principalobjective of increasing the productivity of Government expenditure byconcentrating capital expenditure on a smaller number of high priorityprojects and by providing adequate resources for the operation andmaintenance of existing capital stock. However, in spite of theimprovements, the processes still do not generate a number of criticallyimportant variables necessary to achieve the objective of the BudgetRationalization Program, including non-wage operations and maintenance(O&M) expenditure, Government capital iormation, total public investment,and transfers to parastatals.

Longstanding Features

2. Annual Estimates. In June of each year 1/, three Annual Estimatedocuments are submitted to parliament: the Estimates of Revenue, theRecurrent Estimates, and the Development Estimates. The key numbers in thedocuments are linked in a short paper called the Financial Statement, whichalso provides details on the financing of the budget deficit and on theGovernment's indebtedness. The Estimates of Revenue display projectedrevenue from taxes and some user charges for the coming fiscal year,together with the actual and latest estimates for the two preceding years.The Estimates of Revenue do not need parliamentary ratification, since thelegal authority for collecting taxes arises from existing laws modified byany changes that the Minister for Finance may propose in his budget speechand thus include in the Finance Act. The Recurrent Estimates andDevelopment Estimates, when approved by Parliament through theAppropriations Act, confer the legal authority for Government expenditure.The documents display both gross (total authorized) and net (from Treasuryresources) expenditures; the difference between the two is 'Appropriations-in-Aid", which embraces user charges not included in the Estimates ofRevenue and project-specific external financing. In most years it becomesnecessary for Parliament to provide additional expenditure authority, in

1/ The fiscal year runs from July 1 to June 30.

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the form of Supplementary Estimates, which are approved around the middleof the fiscal year. 2/

3. The process of preparing the Annual Estimates begins with theissuance of the Draft Annual Estimates Circular by the Treasury in Januaryor February of each year. The circular contains a ceiling for total CentralGovernment expenditure (determined on the basis of revenue and foreign aidforecasts and the deficit target) and ceilings for the recurrent anddevelopment expenditures of each Ministry (determined on the basis ofDevelopment Plan priorities, past expenditure trends, past implementationrates, and developments such as the expansion of university education). TheMinistry submissions, due in March, are reviewed by an Estimates WorkingGroup for each Ministry 3/. Responsibility for finalizing the PrintedEstimates to be submitted to Parliament lies with the Budgetary ProceduresGroup, a high level committee in Treasury.

4. Forward BudRet. The three-year Forward Budget is intended to be thebasis for the Draft Annual Estimates submissions of the ministries; it isthe designated means for ministries to get new projects .nto the AnnualEstimates. Recurrent and Development Expenditures are distinguib..ed. TheForward Budget cycle begins in July of each year with the issue of aTreasury Circular calling for submissions, by October, for the followingthree fiscal years. The Estimates Working Groups review the submissions,following which an "approved' Forward Budget is finalized by the Treasuryand transmitted to the Ministries in January or February.

BudRet Rationalization Program

5. In their "Guide to the Government of Kenya Budgetary Processes" (June1985), the Ministry of Finance and Planning explicitly recognized a numberof limitations in the budgetary processes, viz: (i) most ministriessubmitted to Treasury estimates well in excess of the ceilings set; (ii)priorities of ministries and parastatals were not clear, and the detailsprovided often fell well short of the requirements specified in the DraftAnnual Estimates Circular; (iii) obligations underprovided for in theRecurrent Estimates were frequently appearing in the Development Estimates;and (iv) the Forward Budget exercise was not being taken as seriously as itshould by some ministries. These observations are consistent with those ofthe Bank staff over the years.

2/ The approved Estimates, while providing Parliamentary ceil.ngs onexpenditures, do not by themselves give ministries the authority to spendthe full amounts allocated. The Treasury, though the issuance of anAuthority to Incur Expenditure, controls the actual amounts.

3/ Each Estimates Working Group is chaired by the Budget Officerresponsible for that ministry in the Budgetary Supplies Department of theTreasury, together with representatives of the External Aid Department ofthe Treasury, the Ministry of Planning, and the Ministry concerned.

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6. The Budget Rationalization Program has attempted to address theseissues. Sir.ce its introduction in 1985, the following improvements inbudgetary processes have been made:

(a) As part of their budget submissions, ministries are required tosubmit two policy statements on expenditure priorities, one for recurrentexpenditure and one for development expenditure. This is to be accompaniedby a project list which divides their projects into categories of high,medium, and other priority.

(b) The former practice of token allocations - where a project might begiven 10 pounds in the budget - which would be the entering wedge leadingto substantial expenditures in subsequent years, has been eliminated.

(c) Ministries have been given the flexibility to shift up to 10 percentof their development expenditure ceiling to recurrent expenditures, andvice versa.

(d) The Forward Budget, which was formerly a set of files, has become aprinted document which is made available to donors.

(e) In the July 1988 Forward Budget 'ircular calling for submissions forthe PY30-FY92 Forward Budget, ceilin.gs on wages and salaries have beenintroduced.

In addition, but separately from the Budget Rationalization Program, thelargest 42 parastatals are now required to submit their Forward Budgats andAnnual Estimates to the Government Investments Division of the Treasury forreview. However, the staffing of this division is limited, and it isunclear what impact this review has on parastatal operations and finances.

B. Assessment of the Existing System and Recommendationsfor Improvement

7. The Forward Budget provides an excellent foundation for resourceallocation planning and for preparing &nnual budgets; in this respect,Kenya is well ahead of most other developing countries in budgetarypractices. However, despite the approximately 220,000 numbers in theForward Budget and the approximately 75,000 numbers in the AnnualEstimates, there are some numbers (and subsequent analyses) which urecritically important for effective resource allocation planning and fordetermining progress towards achieving the Government's expenditure policyobjectives, but are not to be readily found in these or ocher documents. Inparticular, non-wage operating and maintenance expenditures for programs,ministries, and for the Government as a whole are not measured, making itdifficult to plan for, and monitor performance in achieving, an appropriatelevel of these expenditures relative to personnel costs. Nor are data onplanned Central Government and parastatal capital formation systematically

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measured, prioritized, and monitored. 4/ A framework is also lacking forintegrating the investment and financial plans of the parastatals withthose of the Central Government, to yield such critically importanteconomic variables as total public investment and public sector deficit. Afinal issue is the timing of the Forward Budget exercise. With the presenttiming, much of the calendar year is devoted to preparation of either theForward Budget or the Annual Estimates, thus constraining the availabilityof staff time for anasvtical work.

Non-Wage Operating and Maintenance Expenditures

8. Non-wage operating and maintenance expenditures appear in both therecurrent and development categories of the budgets; they are allocated tothe development category if they are externally financed (see para.13) 5/.These need to be lumped together so that a total picture of theexpenditures on a program, sectoral and overall basis can be obtained. Themost important factor for assessing the adequacy of the flow of non-wageoperating and maintenance expenditure, however, is its relationship to theGovernment capital stock, since this is what gives rise to the need for theexpenditure (except to the extent that redundant facilities may beabandoned). 6/ The Treasury has implicitly recognized this in its BudgetCirculars and policy statements, which have stated that in many areas non-wage operations and maintenance expenditures need to be raised to increasecapacity utilization. In 1985 the Treasury Task Force on BudgetRationalization recommended that the Treasury, the Ministry of Planning,and the technical departments in the line ministries should collaborate indeveloping "norms and standards" for measuring capacity utilization, and inidentifying items of operations and maintenance expenditures which wouldcontribute to increased capacity utilization. This proposal was notpursued, and it is recommended that it be reactivated.

4/ In comparison with those countries which have formulated PublicInvestment Programs, in Kenya the information available in either coreministries (Finance and Planning) or line ministries on projects is sketchyand not readily accessible.

5/ For FY89, the ratio of non-wage O&M expenditure in the DevelopmentAccount to total non-wage O&M expenditure was 372 in the Ministry ofHealth, 642 in the Ministry of Water Development, and 59? for theagricultural ministries. About 802 of road maintenance expenditure isfound in the Development Account.

6/ The flow of operations and maintenance expenditures relative to theflow of personnel expenditures is frequently used as a proxy, especiallywhen capital stock figures are hard to come by; this measure is alsoappropriate in "labor-intensive" activities, such as primary education.

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9. Most of the non-wage operations and maintenance expenditures can bereadily identified (e g., water, electricity, fuel, gravel, text-books) andquantified. Although there will be special considerations associated withthe various sectors (see Part III), it would be appropriate for theministries to take steps ilong the following lines:

(a) Undertake an inventory of their capital stock (e.g., kilometers ofroads of various types, water supply systems, school facilities, vehicles).

(b) List the non-wage operations and maintenance items and determine,where possible, physical co-efficientj relating the need for these items tounits of the capital stock. In cases where the 'labor-intensity' of an areais high (e.g., primary education, rural extension services) or where theutilization of the capital stock is substantially variable (e.g., doubleshifting in schools, variations in utilization of health facilities arisingfrom variations in population density), it may be preferable to adoptcoefficients relating to non-wage inputs to employment/wage bill or measureof services delivered, as appropriate.

(c) Translate these measures into financial requirements.

Future levels of non-wage operations and maintenance expenditures should,of course, be related to future capacity rather than present capacity. Thisis one of the reasons why, as discussed in the next section, the Gover"mentshould formulate an explicit public investment program, which it does notnow have.

Public Investment and Proiects

10. Public Investment Program. Despite the importance of Government andparastatal capital formation in the development process, Kenya, in commonwith many developing countries, has no explicit forward plan for publicinvestment of the Government and parastatals. 7/ This has meant that theGovernment has not been able to determine clearly, on an ex-ante basis, theextent of build-up of the capital stock implied by the annual and forwardbudgets and its implications on future maintenance and operationsexpenditures. No mechanisms thus exists for fully assessing the impact ofresource constraints on the desirable leve. and composition of public

7/ It is appropriate to consider both Government and parastatal capitalformat2,n when looking at total public investment. However, in Kenya,public investment by this definition is only measured ex-post on a calendaryear basis by the Central Bureau of Statistics; even then, the publisheddata do not identify public investment by individual ministries and publicenterprises. The Development Estimates of the Annual and Forward Budgets donot correspond to public investment by this definition, since they includeexternally-financed non-wage operations and maintenance expenditures (whichis not capital formation), and exclude parastatal capital expendituresfinanced extra-budgetarily (i.e. not financed by Government resources, norby external funds on-lent to the parastatal through the Government).

30

investment. Two examples of countries which do have forward plans forpublic investmenc incorporating capital spending by the central Government,public corporations, and local authorities are the UK and the Philippines(see Appendix 2, Tables 1 and 2), noting that a number of Africandeveloping countries are now moving in this direction (eg. Nigeria andGhana).

11. The elements already exist for putting together a Public InvestmentProgram. Central Government expenditures on capital formation (constructionand equipment) are available in the Annual Estimates and Forward Budget atthe item level, and can be aggregated for projects, sub-vr.tes, andministries. Similarly, state corporation expenditures on capitalformation, by project, are available from the financial and investmentplans that the parastatals submit to Treasury on an annual basis (seepara.6 above). All that is needed is for Treasury to pull this informationtogether before the finalization of the Forward Budget and Annual Estimateseach year, and to ensure that the total level of capital formation isconsistent with the macroeconomic targets, and that the composition isconsistent with the investment priorities implied by the Public SectorProject List (see below).

12. Public Sector Project List. The term "public investment program' hasfrequently been based on the 'project' concept. however, in Kenya,'project' has been used to refer to all foreign-assisted acslvities (seeTable 7), regardless of whether the nature of the activity is capitalformation, support to current Government operations, or institutionaldevelopment. At present, the Treasury's computerized data base on projectsis limited to foreign assisted activities in the Central Government budget.It would be highly desirable to expand the data base to include as well alllocally-funded capital formation projects of the Central Government, andall extra-budgetarily financed capital formation projects of statecorporations. The capital formation expenditures included under the PublicSector Projects List could be separated to correspond to the PublicInvestment Program, noting that the former would contain considerably moreinformation (project costs, expenditures to date, expenditurea to complete,etc.) than the latter (which would be limited to proposed expenditures forthe coming budget year and Forward Budget years). The Public SectorProjects List would be the basis for setting investment priorities.

13. Current practice goes part of the way towards setting investmentpriorities. The Forward Budget Treasury Circular requires each ministry toprovide a Project List classifying its projects into three categories -high priority, medium priority, and other - wso as to facilitateadjustments of the ministry proposals by the Treasury when needed, insteadof having to resort to across-the-board cuts." The criteria which theministries are instructed to take into account in setting the prioritiesinclude productivity, employment generation, earning or saving of foreignexchange, and prospective contributions to recurrent costs bybeneficiaries; the priorities should also reflect the enunciated sectcraldevelopment policies. For new projects, the ministries are instructed toprovide an analysis of the project's technical, financial, economic, andsocial viability. State corporations are also required by the Forward

31

Budget Circular to provide such an analysis for investment projectsreceiving financial support from the budget, following the guidelineu andformat set out in the Circular and in the Ministry of Planning documententitled 'Guidelines for the Preparation, Appraisal, and Approval of NewPublic Sector Investment Projects'. 8/

14. The criteria and guidelines are appropriate as far as they go.However, experience with their implementation - as illustrated by thenature of the responses from the Ministries of Agriculture, Health, andEducation presented in Appendix 2 - has revealed two serious weaknesses:

(a) The Forward Budget Treasury Circular does not specify to theministries what is meant by 'project', and different ministries have thusresponded in different ways. Programs rather than identifiable projectsmostly appear in the submissions. In order to be of the greatest usefulnessin the preparation of the Forward Budget and the Annual EstimateF, theprioritized Project Lists submitted by the min!.stries should coryrespond tothe budgetary heads or sub-heads, which is how projects are identified andaccounted for in the budget. In most of the ministry responses, this is notthe case. Many of the responses also appear to be incomplete. Theprioritized Project List of the Ministry of Agriculture, for example, doescorrespond to budgetary sub-heads, but evidently is incomplete since itlists 23 projects, whereas the data base (see Table X) of the ExternalResources Department of the Treasury indicates that the Ministry isimplementing 70 externally-assisted projects.

(b) The prioritized Project Lists as submitted by the ministries are notcosted out, and therefore do not provide as basis for indicating how theproject portfolio should be retrenched in response to a shortfall (e.g., 10percent) in resource availability. The (unranked) sub-heads in the Forwardand Annual Estimates submissions are, of course, costed out, but someministries evidently squeeze project allocations and stretch out projectimplementation schedules in order to accommodate a larger number ofprojeccs within the ceiling. The under funding of projects is subsequentlyused by the ministries as a basis for arguing with Treasury for an increasein their ceilings.

15. In order to strengthen the project selection process, it would bedesirable to delink or disconnect the preparation of the Public SectorProject List from the Forward Budget process and carry it out in advance.The projects should correspond to budgetary sub-heads, and should be costedout on the assumption that they will be implemented expeditiously. Newprojects should be clearly distinguished from ongoing projects. With thewidening of the List as proposed in para.13 above so that it encompassesall public sector capital formation projects, a much more solid basis for

8/ The Guidelines, which were designed flexibly to apply to the entirerange of 'Government investment/development projects and programs", requirenet present value and internal rate of return to be calculated for revenue-earning projects; less quantitative analysis is required for non-revenueearning projects and programs.

32

relating expenditure decisions to priorities would exist. The capitalformation 'sub-set' should be classified into 'corel and 'non-core'groups, the former being protected from any short-falls in resourceavailability. The non-core group could be further divided into, say, threesub-groups ranked according to relative priority. A similar classificationcould also be adopted for non-capital formation projects, although it ismost likely that these projects would, in general, receive priority infunding over the capital formation projects while there is still theconsiderable shortfall in non-wage operating and maintenance expendituresand a significant need for institutional development.

Parastatal Issues

16. The State Corporations Act of 1986 9/ requires each parastatal tosubmit estimates of revenue and expenditure for the following year to its'parent" Minister and to the Treasury; no estimates are to be implementeduntil they have been approved by the Minister "with the concurrence of theTreasury'. And, as indicated in para.6, the largest 42 parastatals arerequired to submit to ';reasury their Forward Budgets and Annual Estimates.A statistical system - the Kenya Internal Debt Reporting System '.IDRES) -on the purely internal debt owed by parastatals to Government was alsoestablished to complement the longstanding KEDRES statistical system onpublic external debt (including parastatal debt channelled from externalsources through the budget in the form of onlending, Government-guaranteedparastatal debt not channelled through the budget, and non-guaranteedparastatal external debt). 10/ However, none of these information sourcesare being used to contribute to the preparation of a consolidated pictureof the public sector's fiscal performance which, among other things, wouldenable an effective assessment to be made of the impact of parastataloperations on the economy.

9/ The Act sets out the legal framework for Government control of wholly-owned parastatals. However, it does not provide a policy framework forstate corporations, nor any objectives for them. A Task Force onDivestiture was established ia 1983 with the principal task of classifyingparastatals into those to be retained by the Government, dc'vested to theprivate sector, or liquidated. The Task Force submitted its findings andrecommendations in 1986, but these have not yet been made public.

10/ The maintenance and utilization of the KIDRES appears to havelanguished, possibly because of transfers of responsibility for it withinTreasury. Surprisingly, it is not used for formulating debt servicepayments from paras'atals to Government (which are part of the Government'snon-tax revenues) in the annual budget. Only a minority of the parastatalsare servicing either their domestic or on-lent external debt owed to theGovernment, reflecting poor financial performance and inadequate Governmentcollection effort.

33

17. Consolidated Public Sector Deficit. The best measure of the publicdeficit is the public sector borrowing requirement, also known as theconsolidated public sector deficit. It is a broader and more appropriatemeasure of the impact of public sector finarcing operations on the economythan the Central Government budget deficit, to which reference iscustomarily made in Kenya, and provides a more meaningful basis forformulating macroeconomic and stabilization policies. 11/ To move towardsthis, it is recommended that the Treasury should monitor the aggregatedflow of funds for about 10 to 15 of the largest non-financial parastatals,and consolidate this with Central Government budgetary operations, yieldinga consolidated public sector deficit. Once this has been achieved and thesystem is functioning satisfactorily, oth'c parastatals can be added(initially to include all the 42 state corporations subgitting theirForward Budgets to Treasury). 12/ Examples from the UK, the Philippines,and Thailand are shown in Appendix 4, noting that these countries alsoinclude local governments; in view of the small size of local authorityfinancing operations in Kenya, it is suggested that the local authoritiesbe brought in only after the consolidated public sector flow of fundsincorporating all the significant parastatals is working well.

18. Parastatal Debt to Government. It was noted above that themaintenance and utilization of KIDRES appears to have languished, and thusonly unconsolidated and somewhat out-of-date information on parastatal debtowed to the Government is available. The Central Government, which is thelargest debtor in the Kenya economy, pays systematic attention to itsdebtor position, and publishes bosh stock and flow data on its debt in theeconomic survey. The Central Government is also a major creditor in theKenya economy, but it does not pay commensurate attention to the systematicmanagement of its creditor position. It is recommended that the Governmentconsolidate data from KIDRES and KEDRES on its creditor position, and beginto publish timely stock and flow data on loans outstanding, loandisbursements, and loan collection payments in the Economic Survey (forhistorical) and in the annual budget documents and the Forward Budget (forbudgeted/projected). Undoubtedly, a significant share of the loan portfoliois uncollectible. Debt-to-equity conversions have been sufficientlyfrequent in the paEt that the credibility of Government collection may havebeen undermined. In order to clarify the Government's expectations and re-establish the credibility of debt service collection, it is recommended

11/ See World Development Report (p.56).

12/ The UK Treasury document "The Government's Expenditure Plans 1988-89to 1990-91', explains (p.114) that the public sector borrowing requirement(PSBR) 'indicates the extent to which the public sector borrows from othersectors of the economy and overseas to finance the balance of expenditureand receipts arising from its various activities... The borrowingrequirements of the three sub-sectors of the public sector - centralgovernment (CGBR), local authorities (LABR), and public corporations (PCBR)- are similarly defined but include lending from one sub-sector to another.The PSBR is therefore equal to the sum of CGBR, LABR, and PCBR, less alllending transactions between the sub-sectors."

34

that the Government review its loan portfolio and classify its loans intothe following groups: (i) serviced on schedule; (ii) overdue withoutjustification; (iii) overdue but potentially collectible with policy and/orinstitutional improvements affecting parastatal financial performance; and(iv) overdue and uncollectible. By a target date - hopefully by the FY90budget - the Government should erase uncollectible loans from itsportfolio, with the corresponding liabilities removed from the parastatalbalance sheets. After this date, collection should be strictly enforced.

Timing of the Forward Budget

19. As indicated earlier, a Treasury Circular in July, shortly after theink is dry on the Annual Estimates, calls for the ministries to submitdraft Forward Budget proposals in October. There may be a tendency in someministries to devote more careful attention to the Annual Estimates processthan to the Forward Budget, in the belief that the former is more "real, interms of what the approved budget will actually be. There could well be aconsiderable enhancement of the credibility of the Forward Budget andsavirgs in manpower if the two budget processes were to be consolidated.This could be done by issuing a combined Annual and Forward Budget Circularin January, calling for submissions for the next budget year and the twosucceeding fiscal years. The staff time freed up during July-December couldbe devoted to analytical work related to budget rationalization.

Other Issues

20. Dual Budget Structure. If the Government were to systematicallyadopt, as recommended, the economic composition of expenditure, thecontinued usefulness of the distinction between the Recurrent Estimates andDevelopment Estimates is brought into question. As employed in theGovernment's current budgeting system, the distinction is ambiguous. Roadmaintenance activities, for example, appear in both the Recurrent Estimatesand .evelopment Estimates, depending on whether or not they are externally-assisted,

21. A significant disadvantage of the dual budget structure is that themanager or analyst must ordinarily look in two different documents in orderto find the expenditure on any particular "recurrent-type activity", suchas road maintenance, rural health services, or agricultural extension. Onthe other hand, no significant advantages of the structure are apparent.The Government should therefore consider shifting to a unitary budgetstructure, which would allow a considerable simplification andrationalization of budgeting and accounting tasks. Under this structure,instead of having two sub-votes for each of road maintenance, rural healthservices, and agriculture extension, there would only be one vote for eachunder their respective ministries, Personnel expenditure, non-wageoperations and maintenance expenditure, capital formation expenditure,lending to parastatals, and transfers could be shown as memorandum items atthe end of each vote, sub-vote, program, project, etc..

35

22. Comouterization. While data in the Annual Estimates and ForwardBudget are computeriztd, relatively llttle use has been made of theresulting data base for analytical work. A number of units of the Treasury(e.g., External Aid, Government Investments) have acquired microcomputersand have developed data bases, although it is not clear that adequatearrangements have been made for communications and consistency among thevarious bases. Accounting is not computerized, and if it is accepted thatimplementation is at least equally important as planning and that timelyaccounting data can improve budgeting, then this should be corrected. Theremay thus be a case for a review of the computing needs of the Treasury as awhole.

C. Documentation of Proposed Modifications to the System

23. The proposed modifications to the budgetary process outlined in theprevious paragraphs and summarized in Part I should serveto improve considerably resource allocation planning. The modificationscould be documented through the preparation of a Forward Budget Suzuary andan Annual Estimates Summary, which would supplement the present documents,The Summary documents would be brief and analytical, using both text andnumbers to explain the relationship between the budget estimates and theGovernment's expenditure policy objectives. 13/ More specifically, theywould contain information such as the following:

(a) The economic composition of expenditure (personnel expenditure, non-wage operating and maintenance expenditure. Central Government capitalformation, and transfers to parastatals and local authorities) forministries and for Central Government as a whole.

(b) The objectives of Government expenditure in the various sectors, onthe basis of policy statements presently submitted to the Treasury by theministries as part of the Forward Budget process. Where appropriate,measures of output of services could be introduced.

(c) Planned levels of employment for ministries and Central Government asa whole.

(d) The forward Public Investment Program, with an indication as to howit reflects the priorities in the Public Sector Project List.

13/ An example is provided by Volume I of the annual two-volume U.K.Treasury document, 'The Government Expenditure Plans'. Note that if thedecision was made to combine the preparation and presentation of the Annualand Forward Budgets, then only one Budget Summary document would be; calledfor.

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(e) Flow and stock data relating to Governi nt-parastatal financialrelations, and the consolidated public sector flow of funds, including thepublic sector deficit.

Also, the accounting data on actual expenditures in the three most recentyears should be placed alongside the projected data, thereby makingcontinuity or change ir the pattern of expenditure evident.

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Table 7: EXTERNALLY-ASSISTED PROJECTS IN THE CENTRALGOVERNMENT BUDGET

Number efDoner Numbr ofContributions Numcer of Projects/to Prolects Proeicts e/ Progrms

D01 OffIco of the PreoIdent 19 19 isDO Directorate of Personnel Mansgem nt 9 7 7ON4 Ministry of Foreign Affairs 2 2 2DOS Vice President and Home Affairs 16 1S 14DO Ministry of Planning 44 4D7 Ministry of Finance iS 1i 19019 Mlnistry of Agriculture 72 79 GO01l Mlnistry of Health 49 47 43012 Ministry of Loeol Government as as 25D1J Ministry of Works and Housing 12 11 9D14 Ministry of Transport and Coe. 59 U5D1C Ministry of Labor a a aD16 Ministry of Tourism and Wildlife I I qD17 Ministry of Livoetock Developmnt 42 so ISD1S Ministry of Culture and Social Services 1S 19 17D19 Ministry of Information and Broadcast 2 2 2021 Ministry of Environ, and Not. Resources 20 19 16022 Ministry of Cooperative Developent 14 14 14023 Ministry of Co_serce 9 S I024 Ministry of Suppll-s and Marketing S 7 503U Ministry of Energy and Regional Dovt. 49 44 40032 Ministry of Industries 17 14 12038 Ministry of Rosearch, Science and Tech. 1 1 9038 Ministry of Lands and Settlement 65 C

Total 640 499 4U

Source: Mdlnstry of Finance, External Resource Department.

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II. PUBLIC RESOURCE MOBILIZATION

A. Central Government Revenues

1. Kenya's domestic revenue effort of 23 percent of GDP in FY88 comparesfavourably with that being achieved in other sub-Saharan African countries(19 percent) and lower-middle income countries (21 percent). 14/ Becausemany taxes and charges are fixed in such a way that they do not respondautomatically to general inflation, revenue tends to increase more slowlythan nominal GDP, in the absence of discretionary measures, with anestimated elasticity of 0.8. It is only through the continual introductionof discretionary measures in the annual budgets that the Government hasbeen able to keep the revenue/GDP ratio on a level or slightly risingtrend.

2. Looking to the future, the Government intends to maintain therevenue effort as a percent of GDP at around its current level, whileimproving effi:iency aspects. This is expected to be achieved by: (i)simplifying the tax structure; (ii) lowering high tax rates which mayencourage evasion, discourage investment, or distort incentives; (iii)strengthening tsx administration; and (iv) increasinig the collection ofuser chargen, particularly for education and health. The Government shouldalso review its loan portfolio to identify possibilities for collectingmore of the income due to it from this source.

Tax Revenue

3. Tax revenue currently accounts for about 88 percent of CentralGovernment revenue in Kenya (see Table 8). The tax structure is more"mature* than in most sub-Saharan African countries in that it is welldiversified and exhibits a less heavy dependence on international trade andproduction taxes. The gradual shift in recent years towards a greaterreliance on taxes on income and commodities is a welcome development sincetaxes on international trade, although relatively easier to administer andpolitically expedient, tend to be volatile and impose unnecessary costs onthe development of agriculture and industry.

14/ Local Government finances are not covered in this report.Strengthening 'he finances of local authorities is an important element ofthe Government's Sessional Paper strategy, and the Government and the Bankwill be jointly acdressing this issue in the context of the proposed UrbanIV project.

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4. Income Taxes. Around 28 percent of tax revenue comes from incometaxes. Personal income tax, which accounts for one-third of income taxes,suffers from inadequate coverage and high rates. The bulk of the revenuecomes from withholding taxes (PAYE) on formal sector employees, while mostother Kenyans do not pay income tax. There appears to be a significantupward movement of the taxpayers in the tax scale, reflecting the lack ofan inflation indexation system, as well as increased real incomes. Theeffective rate of corporate income tax in Kenya (52 percent) is high, andis a disincentive to investment and exports. In the 1988 Finance Act, theGovernment took steps to address this problem by increasing investmentallowances, and by allowing exchange losses on foreign currency loans usedfor purchasing fixed assets as deductions against taxable income. Theeffect of the personal income tax and corporate income tax structures onthe Government's efforts to encourage the development of capital markets inKenya and to widen the distribution of ownership of industry, is also underreview.

S. International Trade Taxes. International trade taxes have been animportant source of Government revenues since independence, and currentlyaccount for just over 16 percent of tax revenue. In the last few years,however, there has been a move towards tariff rationalization to giveincreasing emphasis to the efficiency, relative to the revenue, aspects ofthe international trade tax structure. The implicit effective rate oftaxation on imports (i.e. revenue from imports divided by the cif value ofimports) and the average nominal rates have remained unchanged during FY83-86 at arou.ad 27 percent and 44 percent respectively; in FY87, consistentwith the Government's stated policy in the Sessional Paper of 1986, theaverage effective and nominal rates dropped to 24 percent and 39 percentrespectively. In the FY89 budget the number of tariff tates was reducedfrom 25 to 17 by eliminating eight rates in the 55 to 170 percent range,with the affected items being assigned new rates in such a way that similargoods bear similar tariffs. The Government intends to continue with thereforms, with the aim of moving further towards a simpler, lower, and moreuniform tariff structure.

6. Taxation of exports is essentially limited to coffee and tea, andaccounts for a very small proportion of tax revenues in normal years andless than 4 percent of all export receipts. The export tax ranges up to 25percent, depending on the level of international prices. A policy of lowtaxation of export commodities is a good one, but even low taxes on mostexports - particularly manufactures - should be avoided because of theirdisincentive effects.

7. Taxes on Goods and Services. The sales tax, which accounted foraround one-third of tax revenues in FY88, is a single-stage tax levied onall manufactured goods (excupt for "essentials' such as sugar and tea bags)whether locally produced or imported, and on electricity andtelecommunication services. The structure of the tax is complex, with anumber of very high rates; there are three schedules with eight ad valoremrates and 30 specific rates, with a wide variation of rates up to 370percent. The effective sales tax rate (i.e. tax collected divided by taxbase) is estimated to be 17 percent, well below the average statutory rate

40

of 31 percent. The high statutory rates tend to encourage tax evasion.There is thus a case for the rationalization of the structure of the salestax, on simplification as well as economic efficiency grounds, by adoptingone or two rates and making most rates ad valorem. Over the medium-term,the sales tax could evolve into a value-added tax since many of thefeatures of the latter are already in place. 15/

8. Excise duties represented nearly 9 percent of tax revenuie in FY88,with taxes on cigarettes, alcohol and beverages, and sugar accounting forthe entire collections. In recent years, the share of excise duties in taxrevenues has delined steadily, indicating the increased reliance on salestax; this is a desirable trend, since in a sales tax system, there islittle rationale for excise duties except possibly on a few isolatedproducts.

9. Tax Administration. There is considerable scope for improving theyield of the existing tax structure through improvements in all aspects oftax administration, including data processing, coordination among differentdepartments, staff training, and enforcement. The Government is preparing aproposal to deal with tax administration matters and is currently seekingdonor financing for this work.

Non-Tax Revenues: Property Income

10. Profits and Dividends. The transfer of profits (chieflyseignorage profits) from the Central Bank of Kenya accounts for the greatbulk of irnvestLient income (see Table 1). Dividends from the Government'sshareholdings in enterprises other than the Central Bank were only KL5.5million in FY86, a small amount in view of the substantial equitycontributions made by the G rernment in wholly and partially-owned publicenterprises over the years.

11. Interest on Loans. The da-a from KEDRES and KIDRES suggest thatthe Central Government portfolio of loans to parastatals and localauthorities was about KL1035 million at the end of FY86. The average termsof the portfolio are not known, but if it is assumed that the averagematurity is ten years and the average interest rate 6 percent, then theannual debt service due to the Government would be about KL165 million ofwhich interest income would be about KL 60 million. However, the Treasury'sdebt service collections were only KL14 million in FY87, of which KL12.4million represented interest payments by parastatals (almost half from oneparastatal), indicating that only a small fraction of the debt service dueis being collected. The Government frequently converts parastatal arrears

15/ The extension of the sales tax to the retail level would have to beimplemented (i) gradually, in order to avoid over-burdening of theadministration and to maintain incentives for small scale production acrosssectors, and (ii) only once a credit system, which allows taxes paid oninputs to be offset against tax liabilities, is in place.

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into Government equity, or services external debt of parastatals whichdefault on guaranteed loans. 16/

12. Parastatal Reforms. As discussed earlier in para.19 of theprevious Section I, it is essential for the Goverrnent to take steps toclean up its loan portfolio and to improve its collection performance.However, improved financial performance by parastatals is necessary forthem to contribute to the overall resource mobilization efforts of theGovernment. There are marked differences in the financial performance amongthe parastatals, as well as in the measures required to increase theirope~.ational efficiency. A number of factors such as government pricecontrols, government requirements to provide uneconomic services, highleverage, overstaffing, and management inefficiencies contribute indifferent measures to the poor performance of the sector. Efforts toimprove the efficiency of parastatals will therefore require enterprise-specific action plans, which in some cases would involve divestiture orliquidation. As a minimum, the Government should distinguish parastatalsthat can and should be expected to operate along commercial lines. Forthese, the objective should be to ensure that enterprises at least breakeven, with any subsidies necessitated by government policy explicitlyprovided in the Central Government budget. The same principal should applyto government lending to parastatals by ensuring that loans are made atcommercial rates, preferably encouraging enterprises to rely on financialmarkets which would require parastatal investment proposals to meetstandard conmercial requiremeats.

Non-Tax Revenues: User Charges

13. The amount of cost re:overy in Kenya is small, representing onlyaround 4 to 5 percent of Central Government revenues at the presenttime. 17/ Transportation is by far the major contributor to cost recovery,accounting for over two thirds of the user charges collected in FY87, withwater (around one-eighth) being a distant second (see Table 9). The scopefor futher revenues from user charges is considerable, not only as a resultof expanding the scope of the charges and ensuring that the levels areappropriate, but also through improved collections; actual aggregatecollections of user charges have been well below those budgeted, suggestingthe potential for additional cost recovery without even increasing

16/ The latter include Ken-Ren Chemicals and Fertelizers, Kenya FibreCorporation, South Nyanza Sugar Complany, Kenya Furfural, and Nzoia SugarCompany.

17/ The Government's budget documents do not provide any comprehensivestatement of user charges. Some user charges appear in the Revenueaccounts, while others appear in the Recurrent Expenditure accountsministry offsets against Treasury expenditure ("Appropriations-in-Aidw).In the tables used in this report, the Recurrent A-in-A user charges havebeen combined with the Revenue Account user charges as part of CentralGovernment nontax revenue.

42

existing, or introducing new, charges. In this respect, the principle ofcost recovery does not appear to be a major issue, since this has now beenaccepted in most of the relevant areas. Already Treasury allows operatingministries to increase their expenditure ceilings for a particular year by

i the same amount as increases in their user collections above the levelsindicated by Treasury.

14. Infrastructure Pricinx Policies. In the transport sector, feescollected relate mainly to road tolls. In FY87, just three years after theintroduction of road tolls, collections from the eight toll stationsamounted to KL4.8 million. With the establishment of additional stationsand appropriate charges reflecting economic costs, there is considerablescope for increasing revenues from this source. The Ministry of Transportexpects to raise fees collected to KL9 million by FY91 following theconstruction of three additional stations, which would cover about one-third of the total resealing expenditures expected for that year. In thewater sector, the most critical issues at the present time are waterwastage and poor billing procedures and collections. Considerableimprovements in cost recovery should be possible by establishing a reliablemetering, billing, and accounting system, combined with appropriateincentives for its effective implementation.

15. Support Services to Agriculture. Subsidies in the agriculturesector are large, and have been given indirectly in the form of very lowuser charges for government supplied goods and services (essentially forlivestock and mechanization) and transfers to agricultural parastatals. TheGovernment recently commenced implementation of a program to reach fullcost recovery for animal health services (dipping, artificial insemination,chemical services, and drugs). There has not been any recent increase incharges for tractor hire services; an encouraginig sign, however, has beenthe significant decrease in the budgetary allocations to tractcr hireservices, which has led to a rapid increase in supply by the privatesector.

16. Education and Health. The greatest scope for a substantialimprovement in cost recovery lies in the education and health sector. Ineducation, it is estimated that budgetary user charges account for lessthan 2 percent of the actual cost of services. While budgetary costrecovery is small for all categores of education, there is considerablecost sharing by beneficiaries, with parents and local communitiessupplementing the Government's role in the development and operation ofeducational institutions. The cost-sharing effort varies widely acrosseducation levels. For instance, it is generally less in higher educationthan in primary education, while maximum cost sharing is at the secondarylevel. For higher education there is also a large subsidy element by wayof student allowances, which are legally loans but defaults are widespread;disbursements under the Student's Loan Scheme amounted to KL 45 millionduring the period FY75-87, of which less than 3 percent have beencollected. The report of the Government appointed "Presidential WorkingParty on Education and Training for the next Decade and Beyond," which wastabled in Parliament in July 1988, recommended that increased cost sharingbe implemented at the secondary and tertiary levels of the educationsystem, and that university loans be managed by commercial banks ratherthan the Ministry.

43

17. Although user charges and fees for health services have beenaccepted in principle by the Government, they have not been implemented toany significant degree. A recent World Bank report on health financingrecommends expanding cost sharing initially at the hospital level andgradually moving to the lower levels of the health care system. Healthfees suggested in the report include drug charges, hospital charges payabledirectly by insurance companies for insured patients, bypass fees, and aset of other inpatient and outpatient fees. The fees and charges should begraduated to avoid adverse effects on lower-income groups. There arealready countries in Sub-Saharan Africa which are currently performingbetter than Kenya in the area of cost recovery in the health sector,including Rwanda, (7 percent) and Togo (6 percent). In Colombia, costrecovery of 28 percent has been achieved.

B. Deficit Financing

18. Domestic Financing. In addition to mobilizing resources throughtax and non-tax reveues, the public sector also borrows from domestic andexternal markets to finance its deficit. As noted earlier, the publicsector deficit and its financing are not measured, and it is recommendedthat the Government begin to do so. Domesitic financing of the CentralGovernment budget deficit more than tripled over the five year period FY83-87 (from 2.2 percent to 7.1 percent of GDP), with borrowings from the non-bank sectors accounting for the bulk of the financing over the first fouryears of this period (mainly through sales of Treasury Bills ar.d stockissues to the National Social Security Fund and non-bank financialinstitutions 18/), and borrowings from the banking system accounting forthe bulk (two-thirds) in FY87.

19. Domestic financing of high budget deficits has at least threebroad economic implications. First, excessive reliance on financing fromthe banking system contributes to the build up of inflationary pressures.This was clearly the case during 1986 and 1987, when credit to the CentralGovernment accounted for 50 percent and 66 percent respectively of theincrease in total monetary liabilities. Second, higher credit needs on thepart of Central Government must be accommodated at the expense of growth inbank credit to the private sector. Shifting financing needs to the nonbanksector, as the Government did during FY88, exerts pressure on marketinterest rates crowding out private investment. Third, the rising level andcost of domestic budgetary financing increases government spending toservice debt. Interest payments have risen rapidly in recent years, andpresently account for 18 percent of Government expenditure.

18/ Treasury Bonds replaced Treasury Bills as the main source of fundingfrom the nonbank sectors in FY87. The maturity of the Bonds are from 1 to 5years, with tax free yields of 15-15.5 percent, depending on maturity. TheTreasury Bonds were introduced to improve the maturity structure of publicdebt, encourage capital markets, and limit inflationary pressures.

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20. External Financing. External grants and loans channeled throughthe budget have fluctuated widely in recent years. nis-bu--ement performancefrom these grants and loans, in terms of actual relative to budgeteddisbursements, has also been uneven. The main constraint on disbursementshas not been so much the level of commitment but rather the limitedabsorptive capacity of the Government, as measured by the inadequatebudgetary allocation of local funds to donor-assisted projects, the slowprocess in claiming from the donors reimbursement for expenditures incurredby the Government and, until quite recently, the limited number of deskofficers in the External Resources Department responsible for donorprograms. Inadequate countepart funds has been the most serious problem; ithas arisen principally because of the over-design of projects by donors andthe inability of the Government to restrict the number or projects so as tofully fund the high priority ones. To address these problems, theGovernment has recently taken steps to: (i) increase the staffing in theExternal Resources Department (ERD) and the frequency of interaction withdonors; (ii) establish a monitoring system for all donor-assisted projectsin ERD; (iii) encourage donors to channel assistance through programsupport rather than projects, and prepare adjustment programs inagriculture and industry with more clearly articulated priorities; and (iv)establish ceilings on purely locally-funded projects in order to increasethe allocation of counterpart funds for donor-assisted projects. Ifsustained and strengthened, these measures can substantially improveexternal disbursements.

21. There are already indications that the ibove steps are paying off(see Table 10). The ability of the Government to mobilize quick disbursingprogram support (cash and commodity grants) and better absorption ofproject grants has meant that the ratio of external grants to GDP, whichfluctuated widely in the eighties, more than doubled between FY87 and FY88to 2.3 percent, the highest ratio ever achieved. However, disbursementsfrom external loans continue to be an important means of financingdevelopment expenditures - in PY89 gross loan disbursements are expected toincrease by 74 percent to 4.9 percent of GDP while grants would rise by 31percent to 2.4 percent of GDP - although the Government has committeditself to limiting comercial borrowings to a maximum of US$75 millionduring this fiscal year. Given the high stock of public and publiclyguaranteed debt outstanding and disbursed (about US$3.5 billion in 1986),the high debt service ratio (34 percent), and the structure of debt(reflecting recent increases in commercial borrowing), the Government hasto be prudent in its borrowing strategy and concentrate its efforts inmobilizing additional concessional finance. A key factor in theGovernment's ability to obtain such support to the extent required to meetits ambitious targets, will be the development of strong and crediblesector adjustment programs.

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Table 8: CENTRAL GOVERNMENT REVENUE

(Z of GDP)

Actual Set. Program

FY85 FY86 FY87 FY88 FY89

Tax Revenue 19.0 19.8 19.5 20.6 20.4

Taxes on Income and Profits 6.5 6.6 6.2 6.6 6.5Taxes on Goods and Services 8.3 8.2 9.0 10.0 9.7Sales Tax 5.9 6.7 6.4 7.5 7.1

(On local manufactures) (3.4) (3.6) (3.9) (4.3) (4.3)(On imported manufactures) (2.5) (2.1) (2.5) (3.1) (2.7)

Excise duties 1.7 1.7 1.7 1.8 1.7Other taxes on goods and

services, and licenses 0.7 0.9 0.8 0.7 0.9

Taxes on International Trade 4.1 4.7 4.1 3.8 4.0Import duties 3.6 3.9 3.6 3.5 3.7Export duties 0.6 0.7 0.5 0.2 0.3

Other Taxes 0.1 0.3 0.2 0.3 0.3

Kontax Revenue 3.1 2.8 2.7 2.6 2.8

ProDerty Income 1.4 1.4 13 1.1Investment Income 1.0 0.9 0.8 0.8 0.7(CBK) (0.9) (0.8) (0.7) (0.7) (0.6)(Other) (0.1) (0.1) (0.1) (0.1) (0.1)

Loan interest and amortizationreceipts 0.3 0.3 0.2 0.2 0.2

Other property income 0.2 0.2 0.3 0.1 0.2

Administrative Fees and Charges 1.1 0.9 0.9 1.0 1.0

Other Nontax Revenue 0.5 0.5 0.4 0.6 0.3

Additional Revenue to be Mobilized 0.4

Total Revenue 22.1 22.6 22.2 23.2 23.2

Sr St i-p-a-

Source: Stat stical Appendix Table 5.3

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Table 9: COST RECOVERY. FY83-87(millions of Kenya pounds)

FY83 FY84 FY8S FY86 FY87

Transport and communications 27.8 22.4 27.5 30.6 33.7Water 3.8 5.1 5.3 5.2 6.1Agriculture /a 2.5 1.6 2.0 5.6 2.2Education 1.7 1.5 4.0 3.6 3.5Health 1.7 1.5 1.4 2.1 1.8Industry and energy /b 0.1 0.4 0.6 0.0 0.6

Total 37.6 32.5 40.8 47.1 47.9

Memo items:

Cost recovery as Z of:Recurrent expenditures 4.7 3.8 3.9 3.9 3.4Recurrent revenues 4.5 3.5 4.0 3.9 3.4

/a Includes livestock and cooperatives./b Includes commerce.

Table 10: EXTERNAL GRANTS AND LOANS BY PROJECTS AND PROGRAMS

Yearly Average (KLm) Act.JBud. Distribution (1) An 2 Of GDP

FY83-87 FY88 FY89-91 FY83-87 FY83-87 FY88 FY89-91 FYS3-87 FY88 FY89-81

LoAns-Subtotal 124 191 285 87 68 44 55 2.6 2.7 3.4

Program 19 36 71 64 10 8 14 0.4 0.5 0.8

Project 105 155 214 93 58 36 42 2.2 2.2 2.6

Grants-Subtotal 59 241 230 62 32 56 45 1.2 3.5 2.7

Program 23 32 45 58 13 7 9 0.5 0.5 0.5

Project 35 209 185 64 19 48 36 0.7 3.0 2.2

Total Aid 183 432 514 77 100 100 100 3.8 6.2 6.1

Program 42 68 llS 61 23 16 22 0.9 10. 1.4

Project 141 364 399 83 77 84 78 2.9 5.2 4.8

Source: Ministry of Finance

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III. GOVERNMENT EMPLOYMENT AND PERSONNEL EXPENDITVRE

A. Backaround

1. The Government of Kenya has expressed its concern on severaloccasions about the high and growing proportion of its budget being devotedto personnel expenditures and, by derivation, the low and decreasingproportion of the budget being available to non-wage operating andmaintenance expenditures. Since the beginning of the 1980s, CentralGovernment (Civil Service plus Teacher's service Commission, TSC) personnelexpenditures increased 2.8 times while non-wage operating and maintenanceexpenditures increased 2.1 times, with the former now accounting for aroundone-third of budgetary expenditures and the latter one-sixth (see Table11). The rapid growth in personnel expenses reflects principally thegrorth of Government employment, as the compensation policies havegenerally been restrained. However, some of the compensation policies -principally aspects of the benefits structure and of salary adjustment andpromotion practices -do give rise to inefficiencies and lead to a reductionin the productivity of civil servants.

Public Sector Employment

2. Growth in Employment. Since the beginning of the 1980s, CentralGovernment employment has grown by around 5.4 percent annually and by theend of 1987 stood at just under 450,000, which is about one-third of totalwage employment (see Table 12) 19/. The growth has been in response to theincreasing demand for Government-provided services and Government concernsto alleviate unemployment through the creation of public sector jobs. Theemployment of teachers by the TSC - which accounts for nearly 40 percent ofCentral Government employment - has grown particularly rapidly at 8 percentannually, reflecting the increase in enrollments, a gradual lowering of thestudent/teacher ratio, and the introduction of the 8-4-4 system. Othercontributing factors to the growth of Central Government employment includethe creation - through the splitting of existing ministries - of eightadditional ministries since 1986, the practice of hiring all traineesgraduating from Government training institutions, the (implicit) employment

19/ If local government and parastatal employment is included, this figure(i.e. public sector employment) would be just over 625,000, or around halfof total wage employment.

49

guarantee to university graduates, and the effects of a number ofexternally-financed projects 20/.

3. Composition of Employment. Seven ministries, each with 15,000or more employees, accoint for over two-thirds percent of Civil Serviceemployment (see Table 13); these same ministries account for the mostvacancies which, in aggreg&te terms, are now about 11 percent of approvedposts 21/. The unskilled, lower technical, and clerical staff account foraround two-thirds of approved posts and employment, although the vacancyrate in these groups is very low compared with the higher-level groups (seeTable 14). In the clerical and analogous staff groups, for example, thereis in fact an excess of employment over posts, while in the administrativesuper-scale bracket 37 percent of the posts are not filled, in theprofessional super-scale bracket 27 percent, and in the professional staffbracket 34 percent. Even for the higher technical staff bracket, 31 percentof posts were vacant in 1987. These numbers highlight the problems of theGovernment in recruiting highly skilled managerial and professionalpersonnel.

4. In the case of teachers employed by the TSC, there has been amarked trend for employment at the higher grades 22/. Partly this has beendue to an increase in training at the graduate level and in sciencesubjects, but it has also been due to promotions and a policy changewhereby newly trained primary school teachers are now automaticallyrecruited at the higher levels. The overall result is that the proportionof teachers in the highest three grades (there are seven grades in all,including untrained and apprentice graduates) has increased from 29 percentin 1982 to 43 percent in 1988.

20/ The forestry sector is a good example of the latter; whereas donorshave been initially prepared to finance the recruitment of extra staff forthe implementation of a project, it has been the Government which has beenleft to sustain the additional employment. Special factors, such as the1984 drought, have also caused the Government to employ additionalpersonnel (even if hired on a temporary basis, it is very difficult todismiss them).

21/ In proportionate terms, though, it is some of the smaller ministriesand departments that have a larger problem of vacancies. e.g. the PublicServices Commission has 26 percent of its posts vacant, the Exchequer andAudit Department 48 percent, and the Ministry of Local Government 31percent.

22/ For the last few years, the employment of teachers has been excludedfrom the statistics on Central Government employment, but data is availablefrom the TSC.

50

Public Sector Compensation

5. Salaries. Since Independence, there has been a review ofgovernment salary levels roughly every four years. The latest of thesereviews were in 1980 (the Waruhiu Commission) and 1985 (the RamtuCommission). The salary reviews have considered increases in the cost ofliving, but the principle of government affordability has also been a majorcriterion vith the result that the real salary levels of civil servants -especially for the higher paid job groups - have been allowed to fall. TheRamtu revisions resulted in increases of 45-52 percent in the salarybracket for the lowest grade, but only 23-26 percent in the salary bracketfor the highest grade. However, between 1981 vhen the Waruhiu revisionswent into effect and 1987, when the Ramtu increases were fully in place,the personal consumption deflator rose by 86 percent. 23/ The compressionin salary levels between the lower and middle levels of the Civil Servicehas been particularly significant, as it has among all levels but the verytop 24/.

6. Average earnings per employee in the public sector, however, grewmuch faster than salary levels, implying 'wage drift, through significantamounts of position upgrading and promotions. The average earnings of civilservants, for example, increased by an average of 8.8 percent per annumbetween 1980 and 1986. Earnings per employee in the parastatals (includingfirms with majority government control) grew even faster. These increaseswere not sufficient to prevent a decline in real earnings, as illustratedby the data in Table 15, noting that average real wages in the privatesector followed a similar trend.

7. Data enabling comparison of Central Government, parastatal, andprivate sector wages for particular types of jobs are not available.However, inferences maybe drawn from the data on vacancies and fromanecdotal evidence concerning the local labor market. For the lower jobgroups, there is no doubt that there is an excess supply situation -although salary levels for unskilled workers in the Government may notappear unduly high in absolute terms, they are clearly relativelyattractive to many people seeking such work and for whom any other jobopenings are extremely limited. At the other extreme, it is well known thatprofessionals such as engineers, medical specialists, and researchers canobtain salaries several times greater in the private sector than in thepublic service, and that there is a lack of supply of appropriatelyqualified personnel to fill the available governmental positions. In themiddle are groups such as nurses (who have been trained in quite largenumbers and who face limited work opportunities in the private sector) and

23/ This deflator, which is a weighted average of the consumer priceindices for three income groups, is used by the Central Bureau ofStatist'cs to deflate nominal wages to real wages.

24/ The creation of some new job groups at the top of the civil servicehas meant that differentials between the lowest job group and the veryhighest job group have been maintained.

51

mid-level administrative/technical workers (only the best of whom can stillfind attractive openings in the private sector). The situation is thusmixed, as public service salary levels have limited relationship with thevider labor market conditions.

8. Fringe Benefits. Wage levels and earnings are only part of thecompensation package of Central Government employees. The most importantfringe benefits are the non-contributory pension scheme (except for thosein the lowest job groups, A and B), health insurance, and housing benefits.In terms of cost to the Government and economic efficiency, the housingbenefits are of particular concern. Essentially, there are six differentsituations: (i) civil servants who live in a government-owned house and whopay a highly subsidized rent (depending on floor area of the house) to theGovernment; (ii) certain civil servants who live rent free in governmentalinstitutional housing; (iii) civil servants who live in a government-rentedhouse and who pay a highly subsidized rent to the Government (while theGovernment itself pays the much higher market rent); (iv) civil servantswho have purchased their own house and who receive an owner-occupierhousing allowance (which is based on the value of the house, subject tocertain limits); (v) civil servants who live in rented accommodation ai,dwho receive the lower level of housing allowance (which is based on theirrent actually paid, again subject to certain limits); and (vi) civilservants who receive no housing benefit at all (for example, if their houseis not considered to be permanent, or if they are married women). Withoutgoing into details, two broad conclusions are widely accepted: first, thepresent system is considerably abused and inequitable; and second, it isalso very costly for the Government. Concerning abuses, there are manytypes of problems: (a) only a very small proportion of civil servants areprovided with a governmental (owned or rented) house, and the allocationprocess is subject to inevitable pressures; (b) some civil servants whoposses their own house, move out into rented accommodation but still claimthe owner-occupied allowance; and (c) some civil servants collude withtheir landlords to defraud the Government of unduly high rental allowances.In addition to such abuses, disparities and economic inefficiencies arealso caused in the housing market. For example, occupiers of governmentalhousing find that basic maintenance and repair work fails to be done, somecivic servants live in standards of accommodation at variance with theireffective purchasing power, and the market structure of rents is seriouslyaffected by governmental decisions on what will be paid.

9. The cost aspect is also extremely significant to the Government.The cost of owner-occupied housing allowances are in the range of 40-60percent of corresponding salaries, while the (more common) renters'allowances are in the range of 18-33 percent. Clearly these imply largeexpenditures by the Government; even taking into account that many civilservants do not receive housing benefits in the form of cash and most ofthose that do only receive a proportion of the maximum entitlement, thefinancial cost to the central Government in total is equivalent to about 15percent of salary expenditures (excluding teachers). An estimate for FY88is that housing allowances in total cost the Government about LS49 million.In addition to these expenses, the Government also faces the costs ofmaintaining its housing property and constructing new houses. Since FY85

52

it has seemed that the Govemnment was prepared to allow spending on newhousing to decline, but recently Government has started again to constructa considerable amount of housing, especially for the police and securityforces.

Productivity of Civil Servants

10. The practices of granting annual increments largely regardless ofperformance, and making promotions on the basis of seniority rather thanperformance, do not encourage mazimuma effort. The inadequacy ofcomplementary non-wage inputs, and the departure of many of the mosttalented people for better paying positions in parastatals and the privatesector, contribute to low morale. The Ramtu Commission found that the civilservice suffered from inadequate management, that schemes of service hadnot been implemented as intended, and that 'many civil servants do not haveany specific work schedules or specific objectives to accomplish'. Whilethe productivity of any civil servant is difficult to measure or analyze,it is highly probable that increased productivity would reducesignificantly, in some cases eliminate, any need-based justification foradditional staff.

B. Government Strategy and Policies

Overall Strategy

11. The size of governmental employment and the problem ofexpenditures on the salaries and allowances of civil servants are not newissues in Kenya. In 1982 the Ndegwa Report emphasized concern about the'financial strain imposed by a rapidly growing Government labor force.Apart from the direct personnel costs, there are the related costs ofproviding offices, transport facil_ties and other necessary complementaryfacilities. Beside the actual financial cost, we are also concerned aboutthe costs resulting from idleness and the under-employment of Governmentpersonnel". Such concern was well justified in the light of the highgrowth in central Government employment over the last decade. The 1986Sessional Paper on Economic Management for Renewed Growth again highlightedthe problem: 'unless a better balance between personnel costs andcomplementary outlays is achieved, the productivity of many branches ofGovernment will fall below acceptable levels. Eventually many services maycease to be offered at all, while officers continue to draw salaries'.

12. The specifics of the Government's objective in this area areindicated by the forward budget guidelines issued in July 1987 to the lineministries by the Ministry of Finance.

It is noticed that in many Ministries there have beensubstantial increases in the share of salaries and allowancesfor staff ia the recurrent vote, not only due to the increasesarising from Ramtu Committee recommendations, but also due to

53

upgrading, the establishment of new positions and the intake oftrainees from Government institutions. As a result, fundsavailable for operating expenses for the existing staff to beutilized effectively have been reduced considerably. In view ofthe fact that the resources available are limited and are to beused efficiently, it is essential that ministries keep a verystrict control on the recruitment of new staff, especiallysubordinate and clerical staff, and on upgrading so that theexpenditures on salaries and allowances in the recurrent vote isnot increased by more than 4 percent over the previous year'sactual expenditure. The Cabinet in considering the expenditureprogramme for 1987/88 has directed under minute 10/87 dated 12thApril, 1987 that 'the Directorate of Personnel Management submitproposals on the levels of sustainable complements in eachministry, in consultation with both the Treasury and theMinistry of Planning and National Development, and also identifyother reform measures which will in effect reduce the share ofsalaries and allowances in the recurrent vote.'

The message of the forward budget circular was reiterated in the Treasurycircular of February 1988 dealing with the draft estimates of revenue andexpenditure for the forthcoming fiscal year 1988/89. The challenge,however, is for these guidelines to be fully implemented in practice, andfor the Government as a whole to be able to resist the pressures andtendencies for it to employ increasing numbers of people.

Policies

13. For convenience, the Government's policies may be split intopolicies on compensation and policies on employment, though there is alsothe added dimension of productivity to be considered. If ways could befound to raise the productivity of the civil service, then at least therewould be less 'demand induced' increase in employment.

14. Compensation Policies. The third phase of the Ramtu Commissionsalary recommendations only took place in July 1987, 25/ and so it islikely that the Gov-..ment will be able to postpone another major review ofsalaries and allowances for perhaps another three or even four years. Evenwithout any overall salary revision, though, and even without any netincreases in employment, the total personnel cost would still be expectedto increase in nominal, terms through normal increments in salaries andpromotions. Offsetting this effect slightly would be the replacement ofretiring staff by younger, more junior officials, but due to the relativelyyouthful age structure of the civil service, this effect would only be

25/ The Ramtu Commission made recommendations for a three phase increasein salaries commencing in 1985.

54

marginal. Even without any net increase in employment, salary incrementsand a comparatively small number of promotions etc. are expected to add atleast 4 percent annually to the total wage bill (see Table 16).

15. Brief mention should also be made of the introduction by theGovernment in recent years of a relatively small number of salaries'personal to individuals'. This innovation arose from the Government'sneed to attract particularly well-qualified personnel into key publicsector positions, especially for positions that have to compete directlywith the private sector. Clearly this practice raises questions ofcomparability and equity, but it reflects the Government's realization oflabor market conditions and the importance of having highly qualified andproductive staff in strategic positions.

16. Employment Policies. As a result of its concern about the trendsin its employment, the Government has already started its review (as agreedunder the Policy Framework Paper) of the detailed manpower requirements ofselected ministries. However, there are also some generic policy issuesthat effect most ministries (though some more than others). Perhaps themost important of these relates to pre-service training. Altogether thereare 76 formal training institutions in Kenya, of which 69 are within thecivil service and operated by individual ministries. The type of trainingis largely determined by the respective ministries, though fourinstitutions under the Directorate of Personnel Management itself covergeneral managerial and technical training. The total output is about29,000 trainees annually, of which about 16,000 are pre-service trainees.Excluding teachers, there are still nearly 10,000 new entrants to thepublic service each year from these institutions. For the Government to beable to reduce the growth of the civil service, reductions especially inth. numbers of the pre-service trainees will be required. In some cases,such as nurses, this would be relatively easy in so far as there arealready about 900 trained nurses looking for work in Kenya (and whom theMinistry of Health has not been able to employ due to its financialconstraints); but in other cases it may be considerably more difficultespecially where vacancies still exist within the Government'sestablishment.

17. A second problematic area in the Government's employment policyconcerns the recruitment of university graduates. In 1986/87 the threepublic universities (Nairobi, Kenyatta and Moi) plus Egerton Collegeenrolled a total of 1,641 diploma students, 8,625 undergraduate studentsand 1,750 post-graduate students - over 12,000 students in total. With the"double intake" in 1987, the present annual numbers are considerablylarger. In addition, over 10,000 Kenyans are attending universitiesoutside the country; a large number are also attending private universitieswithin Kenya. While several policy statements have been made to clarifythat the Government is not committed to recruit automatically anyuniversity graduate who cannot find employment elsewhere, the practicecontinues to be for the Government to do this even though the waiting timefor employment-seeking graduates may have lengthened.

55

18. Productivity. The productivity of any civil service is difficultto measure, analyze or monitor. Quite apart from inefficiency induced bythe growing proportion of the budget being taken up by salaries andallowances, though, the Governament's policies for the management of thecivil service do not seem to encourage maximum effort or output. Forexample, promotions are normally made on the basis of seniority, annualincrements are made largely regardless of effort or performance, anddiscipline (as emphasized by the President himself) has been weak in somequarters and needs to be improved. The Government has already focused onsome of these issues and considerable training work has been undertaken,but the incentive structure for the civil service is still problematic.Although a more detailed review would be needed in order to identifyspecific areas where management improvement would be possible, it isimportant at this stage to emphasize the significant linkages betweenemployment, compensation and the productivity of civil servants.

C. Analysis of the Forward Budget

Projections of Personnel Expenditure in the Forward Budget

19. Wages and salaries in the Forward Budget are projected to be heldmore-or.less constant in real terms over the FY89/91 period (see Table 16).A marginal decrease in the proportion of resources acccunted for byteachers' salaries and allowances is anticipated; whereas, the proportionwas 41.9 percent in 1987/88, it would fall to 39.4 percent by 1990/91.However, the realism of these figures needs to be questioned, as theprojections of expenditures on salaries were based essentially on thesimple assumption of a 4 percent per annum increase rather than estimatesof salary trends and additional employment. In view of the projections ofthe Ministry of Education for the output of teachers from the trainingcolleges, and even without taking into account the new colleges about to bebuilt, it is clear that the forward budget projections for spending onteachers' salaries are unduly low unless existing policies are changed. Byimplication, therefore, the projected downward trend in the proportion oftotal salary expenditures accounted for by teacher's salaries andallowances, as shown in the forward budget, is misleading without certainchanges in the policy framework.

20. The detailed picture of the projected ministry by ministry salaryexpenditures, excluding the TSC, is given in Table 17. There do not appearto be any very major changes between the allocations of the ministries.More fundamentally, however, the projections are still based on theassumption of about 4 percent per annum increase in expenditures onsalaries is inconsistent with the past trend of annual increase ingovernmental employment; in fact, this assumption is inconsistent with anynet increase in governmental employment. It appears that the line

56

ministries were given these salary expenditure ceilings as a strategy toput pressure on them to restrict personnel expenditures; without an actionprogramme to translate these ceilings into employment practice, however,the danger remains that it will prove impossible for the ceilings to besustained. In any event, it seems that the critical vehicle forimplementing the Government's fiscal objectives will not be the forwardbudget so much as the individual annual estimates. Again this is a majorconclusion - if the forward budget is unrealistic on the basis of presentpolicies and trends, then either specific policy changes will need to beworked out and implemented in order for the forward budget to be followed,or ad hoc decisions will be made to adjust the forward budget framework.The danger is that the reality of spending *requirements, and pressureswill render the forward budget obsolete and that the annual budgets willdepart significantly from it.

D. Issues and Options

21. The central question to be asked, as implied above, is whetherthe Government can manage to hold salary and allowance expenditures to thelevel of increase shown in the forward budget projections - and if so how?The 4 percent per annum increase projected is well below the rate ofincrease in recent past years, and would only be just enough to covernormal increments and (minimal) promotions. If the Government can keepsalary and allowance levels constat.t in real or even nominal terms; if theGovernment can resist the strong pressures on it to continue to increasethe numbers of civil servants; and if the Government can ensure that thecivil service is managed as efficiently and productively as possible sothat there is correspondingly less need for extra personnel, then it wouldbe possible for the financial allocations for non-wage operating andmaintenance expenditures eventually to rise back to their historic and moreappropriate levels.

22. Compensation Policies. On compensation levels, it must first beacknowledged that the Government in the early 1980's did allow the realwages of civil servants to fall. Without this, the present problem facingthe Government would be even more serious than it is, though salary levelshave now increased again due to the implementation of the Ramtu Commissionrecommendations. For the future it is obvious that further salarycommissions and reviews will need to take place, but the important issue ishow often these will happen and how much extra for civil servants will berecommended. Given the state of the economy and the fact that the thirdstage of the Ramtu increases only took place in July 1987, it may beexpected that there will be no further across-the-board salary adjustmentwithin the period of the forward budget. At the same time, however, areview is currently underway of the salaries of the police and prisonofficers, and it is important (both for the budget in the period up to1990-91 and also for any subsequent "knock-on" or "ripple" effect) that anyincreases proposed be severely constrained.

57

23. Future salary reviews should focus explicitly on the state of thelabor market, as there is clear evidence of imbalances in remunerationbetween the public and private sectors. For the low job groups, there iswidespread 'over-supply' for entry to the civil service; in contrast, atthe higher and especially technical levels, it is very difficult for thepublic sector to recruit and retain qualified personnel. In some cases theGovernment has already introduced 'salaries personal to individuals", butthis approach is difficult to use on a widespread basis. Furthermore,except in situations where the Government is having particular recruitmentproblems for key strategic posts, the Government should pay wages in linewith the job position rather than the qualifications of the individualconcerned. In addition, although quantitatively far less important thansalary levels, training allowances should be eliminated. Trainee teachers,for example, presently receive a personal allowance of KShs. 200 permonth, and these allowances are paid by the Government in addition to theinstitutional running costs. Not only are there large disparities in theallowances of different groups of trainees, but such expenditures canhardly be justified in the light of the fiscal situation.

24. Housing is another area where present policy needs to bereviewed, Even as far back as in 1966, the Government said that it wouldlike to move towards giving civil servants a 'clean wage' by selling offmost of its housing, abolishing all types of housing allowance, andaugmenting wages to allow civil servants to spend as much (or as little) onhousing as they like and could afford. Although decirable as an objective,the financial and economic implications of such a major policy change wouldneed to be studied carefully. In the meantime, though, an intermediatemove could be for the Government: (i) to stop leasing any more housing forcivil servants; (ii) to raise rentals on governmental owned or leasedhousing to market levels; (iii) to stop construction of any additionalhousing (except perhaps for certain institutions and in the more remoteareas to which officers might be posted); and (iv) to redistribute thepresent sum spent on housing allowances among all civil servants, dependingonly on their job grades and without consideration to where they actuallylive. While the fourth of the intermediate policy changes would notalleviate the financial burden to the Government, it would considerablyreduce inequity and abuse of the present system, and would also facilitatemovement in due course to a "clean wage" arrangement, if such a furtherpolicy change were deemed desirable. A summary of the proposals is shownbelow.

58

Suggested Policy Change

Short Term Long Term

i* I I IGovernment leased No more to be leased. I Reduce/eliminatehousing. Raise rents to market I Government leased l

levels. I housing. l

Government owned I No more to be con- Divest except in remotelhousing. | structed. Raise rents areas and for some

to market levels. I institutions. l

| Housing Allowances | Integrate owner occupiedl Abolish housing allow-I I a;d renters' allowances I ances and integrate l

| into uniform rate. Makel into clean wagesw. available for all civil Iservants on basis of joblgroup. l

25. Employment Policies. Turning to the employment issue, it must beemphasized that the Government now only accounts for about 5 percent oftotal employment in the country. Admittedly, if one only considers theformal sector, then the central Government and the TSC together account foralmost a third of the total. At the same time, however, there is a commonacknowledgement that the Government cannot and should not act as anemployer of last resort. In order for the Government to be able to resistthe existing pressures upon it to expand public sector employment, it issuggested that consideration be given to action in the following particularareas. First, there is the question of guaranteed employment by theGovernment of university graduates. Although statements have already beenmade in the sessional paper, and by politicians and key officials thatstudents cannot automatically expect a governmental job, graduateunemployment is now beginning to emerge as a problem and there is still theassumption in many quarters that employment of graduates is guaranteed -even if there may be something of a delay while the recruitment process ismanaged. Particularly with the expansion of student numbers, it iscritical for the Government to clarify and confirm that employment ofgraduates is not automatic. It might also be useful for the PSC tointroduce an entry examination for graduates seeking public sectoremployment.

59

26. Second, there is the question of pre-service training. Theoutput from the Government's 76 training institutions is now about 29,000per annum, of which the majority (about 16,000) are pre-service trainees.The largest field of pre-service training is education (with currentlyabout 6,400 graduates annually, though this number will soon increase toover 8.000 with the construction of 9 new teacher training colleges).Other important fields include agriculture, health, water development,livestock development, mass communication, forestry, and secretarialtraining. Even if additional cost-sharing is increased in some sectors toaugment non-wage operating and maintenance budgets, the prospects for anysignificant improvement in the quality of service provision by theGovernment depend on a drastic reduction in the net growth of public sectoremployment. Both the numbers of pre-service trainees, and also theirallowances and other expenditures, should therefore be critically reviewedby the Government.

27. At present there are about 32,000 vacancies in the civil service.The reasons for these vacancies vary; in some cases they are the result ofdelays (sometines up to one year) in recruitment, but mostly they arecaused by uncomnetitive civil service salaries (for example, for medicalspecialists, engineers, researchers, etc.). In many cases these vacancieshave been existing for several years, but the annual budgets have continuedto be provided w,.th funds in case the recruiting ministry/PSC is successfulin identifying ar appropriate candid3te. In view of the severe fiscalconstraint now facing the Government and the importance of keeping theestablishment as i:ight as possible, the Government could considerinitiating a freeze of all vacant posts. Furthermore, posts which havebeen vacant for a period of two years could be abolished entirely. In thecase of a frozen post, the approval of DPH would be needed for recruitmentof a suitable candidate; in the case of an abolished post, however, theapproval of both DPM and the Treasury would be needed for the post to berecreated and for recruitment to be undertaken. Not only would such ameasure help the Government to constrain any increase in public sectoremployment, but it would also facilitate manpower planning andprioritization of incremental staff to the most important sectors of thecivil service. Coupled with this measure, the Government could considerinitiating a freeze of all vacant posts. Furthermore, posts which havebeen vacant for a period of two years could be abolished entirely. In thecase of a frozen post, the approval of DPM would be needed for recruitmentof a suitable candidate; in the case of an abolished post, however, theapproval of both DPM and the Treasury would be needed for the post to berecreated and for recruitment to be undertaken. Not only would such ameasure help the Government to constrain any increase in public sectoremployment, but it would also facilitate manpower planning andprioritization of incremental staff to the most important sectors of thecivil service. Coupled with this measure, the Go-ernment could considerensuring that any new recruits to the civil service would be paid accordingto the job category level, rather than the qualifications of the personrecruited. In some cases (e.g. graduate teachers in primary schooJs), theexisting recruitment arrangements hate caused additional expenditure by theGovernment which could have been avoided.

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28. Some specific suggestions may also be made concerning theemployment of teachers. The Forward Budget *ramework makes allowance foronly marginal increases of an average of 3.6 percent per annum in thepersonal emolument payments for this critical group of officers. It isclear that these increases are inadequate to cover the incremental costs ofthe additional teachers projected to come from the training colleges -indeed, the increases would hardly cover the cost of increments andpromotions for the existing teachers, let alone provide for the extra KL12mor so annually to cover the costs of the new ones. It is likely that theForward Budget framework is intended to encourage maximum efficiency in thedeployment of teaching staff; but for this framework to be realistic, waysneed to be worked out to keep these costs down in practice. In thisrespect, the Government could consider utilizing the new teacher trainingcolleges (and indeed some of the existing ones) primarily for in-servicetraining activities rather than pre-service training, re-introducingdifferential scales for the appointment of new teachirs rather thanappointing them primarily on the P1 scale, and allowing the pupil-teacherratio to rise on average, and reducing regional disparities in this ratio.

29. Productivity of the Civil Service and Institutional Issues. Thethird dimension of the overall issue of governmental expendlture onsalaries and allowances concerns the productivity of civil servants. Thisdimension is intimately linked to compensation policies. For example,civil servants may be expected to be more productive if they feel that theywill be rewarded in line with their performance; conversely, if civilservants are rewarded adequately there will be less pressure on them tolook for other ways of earning income through their official duties.Similarly civil servants cannot be expected to be fully productive if theydo not have the necessary complementary inputs with which to do their work;indeed, the present inadequacy of non-wage operating and maintenanceexpenditures tends to create a vicious circle of lack of complementaryinputs, reduced productivity and low morale. Tackling this involves majorissues concerning the management of the civil service, including discipline(which has recently been emphasized considerably), financial incentives forabove-average performance (which, however, would be very difficult tointroduce without a system of clear and objective performance criteria),and promotion on the basis of merit rather than seniority. The Governmenthas already recognized the importance of such issues, but implementation ofany changes will require a great deal of careful planning.

29. Underlying all of these suggestions for ways to constrain thelevel of public sector wage expenditure is the need for stronginstitutional arrangements within the Government to review such issues.The DPM has started to analyze the manpower needs of the various ministries(starting with the Ministry of Health), and this should be seen as a highpriority activity for which adequate resources should be allocated. It isexpected that this work will be assisted and facilitated by the newly-created Ministry of Manpower Development and Employment. It might also beuseful to reactivate the DPM/Treasury committee which used to overseerecruitment, etc., and also to emphasize the role of principal finance andestablishment officers in helping to restrain governmental expenditures.Only when the Treasury, DPM and the line ministries and departments aretogether addressing these issues as aggressively as possible, will it befeasible for the present problem to be brought under control.

Table 11: CENTRAL GOVERNMENT RECURRENT EXPENDITURE ON WAGES & SALARIES, AND ON NON-WAGEOPERATING AND MAINTENANCE EXPENDITURE, 1980/81 - 1987/88

1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88

Ministry rec. expenditure (KLm) 589 601 618 b21 740 861 1064 1111

Defense expenditure 81 84 81 82 83 94 114 123Ministry rec. expenditure

(excl. Defense) 508 517 537 539 657 767 950 988

of which: Wages and salaries 242 293 320 359 434 499 589 677

Non-wage rec. exp. 266 224 217 180 223 268 361 311

Percent Distribution

Wages and salaries 47.6% 56.7% 59.6% 66 6X. 66.1% 65.1% 62.0% 68.5%

Non-wage rec. exp. 52.4% 43.3% 40.4% 33.4% 33.9% 34.9% 38.0% 31.5%

Wages and Salaries

-in constant FY85 prices 358.7 389.7 381.9 392.6 434.0 454.0 486.2 533.1

-in constant FY85 prices/capita 21.1 22.0 20.8 20.5 21.9 22.0 23.2 24.0-in constant FY85 prices/

civil servant 1120.9 1177.4 1113.3 1099.7 1133.2 1096.7 1173.1 1234.0

Memo items

CDP deflator 67.5 75.2 83.8 91.4 100.0 109.9 118.7 127.0

Population (millions) 17.005 17.689 18.392 19.115 19.862 20.631 21.424 22.24

Civil Serv. 320,000 331,000 342,000 357,000 383,000 414,000 423,000 432,000

(Cen. Gov. & TSC)

SOURCE: Ministry of Finance

Table 12: WAGE EMPLOYMENT IN THE PUBLIC SECTOR BY TYPE OF PUBLIC SECTOR UNIT, AND IN

THE PRIVATE SECTOR 1981-1986. (in thousands)

AnnualGrowth Rate

1981 1982 i983 1984 1985 1986 1987 1981-8

Public Sector 484 506 528 542 575 600 625

Central government 215 217 226 231 252 260 274 3.9%

Parastatal bodies 87 96 98 95 90 94 95 1.6%

Teachers Service Commission 111 119 124 132 151 164 173 8.1%

Majority control by the

Public sector 32 33 35 35 36 39 39 4.0%

Local government 40 41 45 48 46 43 43 1.5% a,

Private Sector 540 540 566 578 .600 621 638 4.4%

Source of most recent data: Economic Surve-y 1988

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Table 13: CENTRAL GOVERNMENT ESTABLISHMENT AND EMPLOYMENT,BY MINISTRY, 1971 AND 1987

Annuel GrestJi Rate1971 197 1971- 1947

Approved gpproved AppMoredPosto In Post Posts In Post Poet In post

Off leo of the Preside t 18797 13213 39990 36334 4.1X 4.31

Ministry of Financ 93 4U4 7418) 6069) 15.8X 19.1w) 9296 ) 7913

Ministry of Mat. Planning 186) 1349)

Ministry of Agriculture 1475U 13867 22973) 16236) 5.71 5.4S) 36965 ) 32056

Minlstry of Livestock Dev. 138m9) 1579")

Ministry of Foreign Affairs 267 240 773 701 7.2X 6.92Ministry of Education * 56459 7371 5004 4516Ministry of Labor 1943 1060 2751 2416 6.2X 6.3SAttorney Generel0s Office 329 271 1143 925 0.3X 3.6SMinistry of Touri m A Wildlife U65 1614 7679 7155 14.60 9.8sPolice Department 16361 14934 32648 294"6 4.43 4.3SV.P. Office and Hone Affairs 7639 7442 11659 11027 2.71 2.65Ministry of Coop. Development 690 584 2209 1956 7.5X 7.8sMinistry of Culture A Soc. Serv. 639 475 6979 6O66 16.1X 17.35Ministry of Works, Housing A

Physical Planning 323U 3091 10941 9612 7.6X 7.3SPublic Service Comiselon 52 53 216 1" 9.3X 7.15Ministry of Info. AOr adcasting 151C 19 U 8634 30 5.61 6.65.Ministry of Lands A Settlement 4113 3879 10229 9302 1.9X 6.41Ministry of Not. Resources 2236 2229 22394 13501 15.5X 14.22Exchange and Audit Dept. 23J 229 1002 555 1O.6X 6.7'Ministry of Trens. A Cams. 736 73U 29496 240 9 25.91 24.4-Ministry of HeIth 11636 12925 38496) 36169) 0.41 5.32

) 42336 ) 40129Kenyatta National Hospital 10) 3N8)

NLtional Assembly Admin. 2" 3264 30C 42C 131X 17sJudicial Dept. 1453 1431 221C 2237 2.7X 2.8Ministry of Local Covern_mt 1i 145 <96 274 3.5X 4.1'

Ministry of Coemerce 869 395 1363) 1662) 19.81 9.71) 1775 ) 1341

Minletry of Industry 412) 279)

Minlitry of Water Developm"t 13146 11926Ministry of Supplies & Market. 312 122Ministry of Rsea rch, Science Technology 219 9n

s The employment of techers Is now handled by the TSC whlch Is *xcludedfrom this table.

Sources DPM

64

Table 14: CENTRAL GOVERNMENT ESTABLISHMENT AND EMPLOYMENT,BY MAJOR JOB CLASSIFICATION, 1971-1987.

A^nual Growth Note1971 1S? 1971-1917

Approved Approved AprovedCialeflc tlo Posts In Post Poet. In Poet Pta In Ptet

Psilticians 1in 247 9 2" -4.2X *0.5Admi. supr scls 371 3U2 2,669 1,271 11.1X 6 .4Pref.elml super scale 327 33,66 2,641 16.2X 14.51 11Adml. and analogous staff 611 655 2,039 1, 5" 7.9X 4.63Professional staff 1,626 91o 4,481 3,454 9.71 3.63

Teaching staff (9ov) 52,213 4,649 3,238 3,653 U *Exc./Gyp.rvis.ry staff 4,961 4,118 16,344 12,263 7. 3 7.1%Higher tech~ staff 4,696 3,294 22,897 1C,327 11.4s 19. 1Clerical a analogeou staff 11,679 11,793 44,2U4 44,641 *.7X 2.93

Lower tech, staff 15,613 14,349 U5,375 55,444 6.6* 6 2.

Police a prisons (gzeotted) 11 253 1,U2 go1 0.6 4.43Polie A prisons (non gazetted) 1,5t4 1,134 2,813 2,653 .61 CaPolice A priseons (rank A file) 25,6 23,635 44,332 43,231 3. 71 3.61Minor grade A unskilled staff 25,679 27,099 67,696 72,912 2.11 6.43

Trainees , 7 472 1,39 1,671 3.21 5.331

'Total 143.864 93.221 29pS665 262,5U2 *_ -

I iN 1967 the employmnt of teach-r we. ne longer Included In the estral oevern.st data.Sources WV

65

Table 15: NOMINAL AND REAL WAGES IN THE PUBLIC ANDPRIVATE SECTORS.(KL/Year)

19i 1961 1912 196 164 I 196 lo"

Averase gminal Wass:

Public Setor - 71. - pi0.Z 1.!n7 IJAI.L1.UL.3Ccrtou goims o"t 7TMT 901.2 9C3.5 1064.9 1924.1 16. 1253.5Teachers" ServicsCo_lolo (714.4) 719.0 792.4 334.6 312.9 911.5 I9O7.6Perstotal bodies ( ) 121.? 113.6 197.3 123.3 147.6 1619.4Majority control bypubllc sector 7U.9 632.3 1.6 19U.67 122. 12913.3 136.0Local Government 794.4 710.3 609.2 944.7 913.6 1326.5 1116.9

Privat. Sector 611.6 63S.2 732.5 706.3 377.4 906.7 1029.6

Averag. Real Wan:

Public Sector 464.9 4U3.0 3U7.1 360.1 346.3 346.3 364.4

Contral Governfmnt 464.1 453.1 394.6 361.3 338.4 326.4 zi!.0Teachers' ServiceComission (494.3) 302.6 $26.4 166.4 3*1.7 202.3 309.5Parastatal bodle C1 ) 513.9 417.3 394.9 499.2 409.5 454.1Majority control bypublic ectoer 424.3 413.5 366.7 342.1 397.4 365.1 30.9.ocal Governent 303.9 357.1 357.6 330.9 M2.6 366.7 314.7

Prlvato Sector 346.1 4.0 M1A 2n2.9 2 . 29 .5 20 .4

Memorandum I tme:

Price deflator (1975.166) 176.0 190.9 242.0 277.0 362.5 335.1 354.6

Not. of Increase of pricede lator (X) 12.9 12.0 22.3 14.5 9.1 19.7 5.6

*ato of Increso of C.O.nominal Waes (X) 2.9 26.9 6.3 4.7 2.9 7.6 12.6

C.O.Waee/parestatal Da. 68.2 04.6 01.5 62.7 76.8 76.6agoew (X)

C. 0. wage/Private 116.0 131.0 136.0 127.7 i1t.7 114.3 110.6sector Woo" (3)

66

Table 16: Government Recurrent ExDenditure on Wages and Salaries.Teachers and Others, 1987/88 - 1990/91

(KL million)

Forward Budget

1987/88 1988/89 1989190 1990/91

Salaries & allowance 676.5 724.5 779.9 798.8

1. Teachers 283.3 285.4 318.2 314.52. Others 393.2 439.1 461.7 484.3

Total Recurrent Expenditurez 1,110.9 1,169.2 1,263.8 1,354.1

Note: Excludes salaries and allowances financed from the development budget.

Source: Ministry of Finance.

67

*im1aa t__aTE IN -MiumL

ob.fb P..'w,d hadee

* U efre. odf r.c of r...

V*t b. and "into" 1007/1 "w ,0e IO1t/0 r v. " Te 19W/1O fo W 1"I/ts

RI Offies of Preldet 011.8 U.0 e.g u.s M.. 1.1 W.

a state Now" 0.8 17.a 0.8 17.0 0.8 17.0 0.8

a W" 8.8 0.111 8.7 46.8 8.0 68.5 4.04 F1.; af r.8 4.12 10.7 U. 114 .? 11.

MS VP and NewsA ire 12.4 51. . 14.5 84.0 18.2 41.1 18.7

r P'maam & S. ov uuat 8.8 7.1 8.s u.s a.? 71.1 4.8pl 00.044 1.4 74.5 18.8 65.0 IS. 0 64.1 14.0

RtIO A riewItw.. i17 LTvoatoA S1. 6 60.S 14.6 75. I 6.6 76.6 1.1

NIt a MeI h 76.8 64.9 .S U.4 66.0 90.1 73.0N12 Local Government 0.5 11.1I 1.3 14.8 1.8 14.0 1.8RiS Works. Houseing a 14.8 54.s is.s 88.6 16. 0 57.1 17.5R14 Transport S C.maicsti.mn U2S 70.6a 38.61 680 a6. 681.7 87.4MIS Labor 4.4 68.06 8.0 68.1 5.2 64.7 8.8RIll T..arbea.WiIdIife 9.2 61.4 10.8a U9. 10.69 64.0 11.1RI? Liv.at.chi 11.0 77.7 19.9 70.1 11.4 6o. 9 25.1RiO CulIture and t... so"v. 0.8 64.7 10.0 79. 6 10.6 77.9 11.4R19 Info, and Sroe*cw*%;ns 5.8 65.8 6.8 81. 9 6.1 51.7 6.4MO Voter Donslosment 14.8 70.9 16,4 5.5 17.1 62.9 18,0

21Nmvi pan. No. oo N.ces 8.7 70. 0 8.0 70.7 8.1 70.7 8.8r2 C.os.l-twve 00.weI0e.ngt 4.0 62.4 4,2 U.S 4.4 f1.6 4.6PM Commoc. and Indwetey 5.1 n.es 8.8 71.0 8.4 651.7 8..H2S Su.plyr *d Shek.ting -- -08 80 0.6 8.8 0.6

~5Attarn.vOnea 2.0 72. 1.8 72.0 2.6 78.7 2.7M JuiciaSi 8.1 64.4 6.7 as.1I 8.6 $.4. 8.0

o7 PKC 0.4 77.4 0.4 71.9 0.8 78.6 0.8

PM Not. Aaa.b 1w 1.6 88.5 2.1 60.12 2.2 60.5 1.1RIO Lmev.a 8 Regenat Dat. 8.0l 73.5 3.5 61.4 8.6 72.6 8.6PSI hi.tat.n 87.0 62.6 46 .6 10.8 50.7 10.0 58.6-NI2 Induatr -p 1.0 88. 0 1.1 18.8 1.1NM N.a"areh -- -- 15.1 76.9 1.S, 76.6 16.5US Loads and $*Wtmaat, 18.1 64.2 14.0 W 6. IS.8 67.1 16.0

Total PE. A AllowancesS .1 61.0 4. .1 70.6 4841.7 70.8 484.

68

PART THREE: SECTORAL ISSUES

I. AGRICULTURE

A. Performance of the Sector

1. Despite progress in industrialization, Kenya is fundamentally anagricultural economy. The population is predominantly rural, andagricultutre accounts directly for about one-third of GDP and around two-thirds of exports. The sector produces nearly all of Kenya's food and rawmaterials for the mainly resource-based industrial sector. Thus the unevenagricultural growth averaging a low Z.9 percent per annum since the earlyseventies has been of ̂ oncern, especially when compared with the impressiveaverage of 4.7 percent per annum during the first decade followingindependence. While production of traditional export crops (coffee andtea) has shown strong growth, the growth of domestically consumedcommodities (eg. wheat, maize and sugar) has lagged well behind populationgrowth. Droughts and erratic rains contributed to this weakenedperformance, as have unstable and deteriorating terms of trade and theshortage of good quality arable land, the latter exacerbated by alreadyhigh population density and continued rapid increases in population.However, growth has also been affected by: (i) inadequate oroductionincentives, due principally to deficiencies in the price control system andinefficiencies in the marketing channels for some crops; (ii) insufficientuse of key inputs, notably fertilizers, pesticides, improved seeds, andanimal health services; (iii) imbalance and problems in the delivery ofessential services, such as research, extension, and animal health; and(iv) falling and sometimes ill-directed Government expenditure in theagricultural sector. The misallocation of constrained budgetary resourcesand weak public institutions in the sector underlie many of these problems.

2. Budgetary resources made available to agriculture fellconsiderably in real terms between the middle of the 1970s and the middleof the 1980s. This reflected general fiscal retrenchment as part of theGovernment's stabilization program, and weaknesses in absorptive capacityin the agricultural sector. The decline was only arrested in 1985. Theshare of agriculture in total budgetary expenditures has averaged around 11percent over the last five years, although this has fluctuated considerablybecause of the large and generally unpredictable transfers to parastatals

I which have accounted for around one-half of the expenditures (Table 16).The commitment of such a significant part of the budgetary resources foragriculture to these generally inefficient parastatals has left little roomfor discretionary expenditures and, most imporcantly, for supportingessential services, especially given the large and growing personnel costs.

69

Parastatals

3. There are more than 100 statutory boards and cameercial concernswith Government investment in the agricultural sector involved in a gamutof operations including regional development, production, marketing, inputsupply, crop regulation, advisory services, credit, and research. Fiscalcontrol and management has been very weak in most instances which hasreduced the effectiveness of the parastatals in the delivery of services;many are afflicted with chronic debt. They have also often been required toundertake financially non-viable activities without appropriatecompensation. These factors have led to considerable strains on theGovernment budget, with total transfers to parastatals amounting to nearlyRL300 million over the last four years. The bulk of these transfers havebeen in the form of grants, and where loans have been given, the repaymentrecord has been generally poor. It should be understood that not allagricultural parastatals are troubled. The Kenya Tea DevelopmentAuthority, for example, has been consistently profitable and has servicedits debt on schedule.

Personnel and Non-Wage Operating Expenditures

4. The high and continually rising personnel costs coupled with theclaims of parastatals have left inadequate funds for supporting non-wageoperating expenses, including some essential services and maintenance.Since the mid-19709, the number of employees in the agricultural ministrieshas increased by about 2000 per year - of which two-thirds are newgraduates from agricultural training institutions - serving to push uppersonnel costs at a much faster rate than recurrent and developmentexpenditures over most of the period. 1/ Non-wage operating expenditurescontinued to decrease in real terms and as a ratio of personnel expensesthrough to the middle of the 1980s, and it is only over the last couple ofyears that this situation has been arrested. In FY88, personnel expensesaccounted for around 30 percent of the budgetary expenditures inagriculture while non-wage operating expenditures accounted for 2C percent,noting that some two-thirds of the latter was financed through thedevelopment budget reflecting an increasing trend to obtain donor supportfor providing essential services (Table 17). However, the increasedallocations recently made to non-wage operating expenses have not beenanywhere near sufficient to reverse the significant decline over many yearsin the productivity of the staff of the ministries, nor in theeffectiveness of the research, extension, and other essential services theyprovide to the farmers.

1/ A feature in Agriculture and Livestock Development was that thecombined on-strength staffing exceeded the deisgnated establishmentceilings in FY87 by over 500 workers. also of concern is thedisproportionate increase in lower level staff that is becoming apparent inmany parts of the service, such as the Provincial Administrative Service.

70

Priority Agricultural Services

5. Agricultural grovth has been affected by the reduced and uneveneffectiveness of essential services provided by the ministries andparastatals, particularly those directed towards smallholders andfooderops. The research system has declined markedly since the begLining ofthe 1970s, and although there have been some successes with coffee and tea,there have been no new significant breakthroughs on food crops. Theextension system has also weakened, while the high cost and large subsidies(90 to 100 percent until recently) for the provision of animal healthservices, such as drugs and associated veterinary services, are majorissues to address. Apart from shortages of equipment, tools, drugs etc.that lower performance, extension and livestock services staff arehandicapped by logistical difficulties caused by inadequate transport.

Investment Expenditures

6. The FY88 planned development expenditures in agriculture ofKL1O5 million represented about 17 percent of the total development budget,which was a marked turnaround from the trough of about 9 percent reached inFY85. However, only around 35 percent of this amount is for capitalformation by the ministries concerned, the rest being non-wage 0 & Hexpenditures financed through aid projects (around 21 percent) andtransfers to parastatals (44 percent). 21 Until recently the developmentbudget was characterized by the proliferation of projects, manyunderfunded, with a heavy emphasis on parastatal investments/subsidies andon costly large scale schemes with limited beneficiaries. The Governmenthas attempted to address this situation in recent years by cutting back onprojects and prioritizing them, although much still needs to be done torationalize the expenditures to clearly reflect the priorities and thebudgetary constraints. 3/

2/ Part of the lattee amount would, of course, be used for investmentpurposes by the parastatals.

31 In the Ministry of Agriculture Livestock Development's (MALD) ownassessment, the FY86 budget deviated from the sectoral priorities set outin the Development Plan. 'While the plan lays stress upon the developmentof smallholder agriculture . . . 602 of the development allocation isdevoted to large-scale irrigation, large-scale grain storage, sugar, andcredit to large farmers' (Development Planning Division, "Agriculture andLivestock Budget Strategy for 1986/87-1988/89 Forward Budget). TheMinistry further noted that 'the Ministry is extremely constrained in itsability to change the situation', due to Government decisions that werebeyond the Ministry's control, such as employment policy or policies onparastatals.

71

B. Recent Policy Initiatives and Future Policy Agenda

7. In order to promote an acceleration of agricultural growth, theGovernment in 1986 began to implement an agricultural sector adjustmentprogram. The general thrust of the program is to provide - throughderegulation - a more favorable environment for private sectorparticipation in the provision of agricultural services, such as outputmarketing and input supply, and to strengthen the provision of thoseagricultural services that can be most effectively provided by Government.More specifically, the Government intends to: (a) ensure adequateincentives to producers through maintaining attractive and appropriateproducer prices, further expediting payments to farmers by marketingboards, and by the continued deregulation of marketing; (b) furtherliberalize the import system and promote the development of inputdistribution channels, including the relaxation of constraints on privatefertilizer trade; (c) continue the divestiture or restructuring of selectedparastatals and to strengthen parastatal management and supervision; and(d) further rationalize budgetary expenditures - with increasedallocations of resources to research, extension and animal health services- and further cost recovery.

Parastatal Reform

8. Under the program, the Government initially intended theParastatals Division of MALD to define clear policies relating toparastatal reform, and to set out a work plan and schedule for divestitureof non-essential parastatals and for the rehabilitation of parastatals thatare unable to function on a financially independent basis. In addition,four parastatals - the National Cereals and Produce Board (NCPB), theCotton Seed and Lint Marketing Board (CSLMB), the South Nyanza SugarCompany (SONY), and the National Irrigation Board (NIB) - were specificallyidentified for restructurirg, and the Upland Bacon Company (UBC) and theKenya Meat Corporation (K1C) were isolated for divestiture. However, theintention for the Parastatal Division of MAMD to play the leading role informulating a strategy for agricultural parastatals has been superseded bythe ministerial reorganization which has, for example, attached each of thefour agricultural parastatals to a different ministry. This has meant thatthe parastatal issues are now being addressed on a case-by-case basis.

9. The deregulation of marketing and input supply will serve toreduce the fiscal burden of the public sector participation in theseactivities. The reforms of the agricultural parastatals are closely tiedto dereggulation, and the restructuring of NCPB - which is just beginning -represents a major step in this process. The Government has redefined

NCPB role from being a monopoly trader in grain to performing pricestabilization (through floor and ceiling prices) and food securityfunctions, and will progressively allow for the liberalization of privatesector maize trade. Uneconomic buying centers have been closed. NCPB's

72

balance sheet has been restored to viability by the write-off of all itsoutstanding debts to the Government, and by the Government taking overother debts. Further action vill be taken in the context of a 5-yearCereals Sector Reform Program agreed in May 1988 with the EEC. In theForvard Budget, NCPB is projected to continue to receive about KL30 millionannually, reflecting the uncommercial nature of its food security function,as compared with average annuil transfers of about KL50 million annuallybefore the restructuring. 41 Progress has been slower, however, in therationalization of SONY, CLSMB and NIB ard in the divestiture of KDC 5/

10. In the case of SONY, an action plan - involving the rehabilitation ofthe sugar estate and tsctory and the financial restructuring of theenterprise - was drawn up in 1986. While some progress has been made inestate rehabilitation, Cabinet approved the financial restructuringproposals only in November 1988. This has been urgently required since thefinancial restructuring is a prerequisite for factory rehabilitation, andrecent increases in cane output have not been met by any factoryrehabilitation to enhance capacity.

11. The CLSMB had been in deficit every year since the mid-1970s and itssurvival has depended upon annual subventions from the Government. Underthe five-year reform program, it was intended that the divestiture ofCSLMB's cotton trading and processing activity would proceed in 1986, withCSLMB transformed into a regulatory body by mid-1987. To date, these stepshave not taken place although a new Cotton Act (1988) replaces the CLSMBwith the Cotton Board of Kenya. Under the Act the Board retains the powerto purchase all cotton lint produced and ginned in Kenya on terms fixed byitself, and will license all cotton ginners and other persons dealing withcotton. While the Act seems to be a step in the right direction with itsemphasis on financial viability of the Board and its reduced directinvolvement in marketing. it is clearly open to interpretation on a numberof issues; it is silent, for example, on the Bo.rd's involvement in ginning(which was a loss-making activity for CLSMB) and gives considerablelatitude to the Board in the way it applies the licencing provisions. TheAct thus needs to be followed up with a definitive strategy for cotton sub-

4/ The Government aims to maintain strategic reserves at about 25 peicentof national food production. This seems rather high when compared withmany other developing countries, a,nd consideration should be given toreducing this to, say, 10 pe__ent which would result in significantbudgetary savings. A decisicn on this could be made after the completionof the review of food security needs now being undertaken with IDAassistance.

5/ The Government plans for a minority share in a restructured KMC, but adecision on the course of action for divestiture (which could includeparticipation of producers, foreigners and the Agricultural DevelopmentCorporation) will have to await the outcome of a further study which it ishoped will be concluded shortly.

73

sector and on the role envisaged for the Board before further work isundertaken on the detailed reorganization of the Board. The Governmentshould give this priority, for vithout this strategy and reorganizationplan, it is difficult to determine the financial implications for theGovernment's budget.

12. Proposals for the restructuring of NIB - which manages andoperates six irrigation schemes - are now before Cabinet calling changes inthe terms of rice sales to NCPB to be cash on delivery, and for theforgiveness of NIB debt owed to Government (only KL2 million). 6/ Theproposals also request the go-ahead to investigate and seek external fundsfor the expansion of the schemes. Like CLSMB, the NIB has come to rely onGovernment subrentions for its survival. The restructuring proposals arefairly modest and should receive support, although consideration of theexpansion of the schemes should await the restructuring and be based onproven economic viability.

Rationalized Budgetary Expenditures

13. Although there miay be a requirement for some large "lumps' ofbudgetary resources for the financial restructuring of the aboveparastatals over the next few years, their reduced claims on budgetaryresources for financing their operations should free up significantresources for other uses over time. However, the growth in personnelexpenditures also needs to be brought under control, with enough fundsbeing allocated to non-wage operating costs to ensure the efficientdelivery of essential services. This can only be achieved with majorchanges in the recruitment policies of the agriculture sector Ministries,particularly the discontinuation of the practice of maintaining stafflevels in excess of establishment ceilings in some Ministries and of theunwritten policy of guaranteeing employment to all newly qualifiedagriculture graduates. 7/ Also, the intake of students into Governmenttraining programs should be adjusted to be commensurate with the numbersneeded by the Government and the private sector, and the curricula oftraining institutions should be structured to ensure an appropriate qualityof training and to prepare students for job opportunities in the privatesectcr. A freeze on the employment of non-technical and subordinate staffover the next three years should be considered. The Government is urged toexpedite the completion of its action plan to dpal with the personnelissues in the agriculture sector so that the policy revisions can have atleast some positive impact on the budget within the next few years.

6/ Higher rice prices were granted, belatedly, in August 1988.

7/ Recent projections of the Ministry of Agriculture and Ministry ofLivesto.k Development indicate that only about 55 percent of the newgraduates exp.cted from agricultural training institutions over the nextfew years could be effectively absorbed it, the concerned ministries.

74

14. The Government recognizes that it will have to place increasingemphasis on airicultural and livestock research and extension services, andon animal health services. While the private sector should be activelyencouraged to participate in these areas, particularly in the provision ofveterinary and mechanical services, the need for extensive Governmentinvolvement in them will be apparent for many years to come. TheGovernment has recently rationalized all research under Kenya AgriculturalResearch Institute and allocated additional funds in real terms to thesepriority areas (increasing their share of total expenditures from 23percent in FY85 to 31 percent in FY88), but a large part of these increasesgo towards increased staffing and in any case have not been of a magnitudesufficient to have any great impact. The Government has also taken stepsto improve cost recovery. Fees for certain drugs and services wereincreased (eg. dipping fees increased by two-thirds and artificialinsemination service fees quintupled) and fees introduced for clinicalveterinary services. 8/ The Government will, however, have to build onthese efforts particularly for livestock and clinical veterinary services,to enable the full cost of some of these services to be recovered whereappropriate. Higher fees for all regulatory, licensing and inspectionactivities, seed certification, training institutes and possibly extensionservices should be seriously considered. Strengthening the management andadministrative capacity for user charge collections will be necessary (itis estimated that only around two-thirds of the expected fees werecollected over the last four years), particularly for the sale of clinicalcertificates.

15. As indicated in para. 6, an increasing proportion of thedevelopment expenditures is being accounted for by current operating andmaintenance expenditures, including outlays on the above services,reflecting their financing through foreign aid programs. While budgetaryconstraints may dictate that investmient expenditures have to be squeezed inthe short-term to allow greater allocation to non-wage operating andmaintenance costs in the face of a rising wage bill that will take sometime to bring under control, it would not be appropriate over the medium-and long-terms. The investment expenditures over the next few years will,however, have to be concentrated on a limited number of viable and highpriority projects which can be completed in a timely fashion and whoseimplications on continuing recurrent expenditures can be readilyaccommodated. The projects should emphasize support to smallholderagriculture and be of a manageable scale. The Government has recentlyreviewed its present project pipeline with these objectives in mind, andhas indicated that it has adjusted the forward program accordingly.Unfortunately, the Public Expenditure Mission was not equipped to commentin detail on the project pipeline, and it is proposed that this be a taskof a future mission.

8/ Plans to increase tractor hire fees was superseded by the decision tophase out this service.

75

C. Government Expenditure Program in the Forward Budiet

16. The Forward Budget of the Government provides for an expenditurein agriculture of around KL178 million in FY91 (around 10 percent of thetotal), which represents a decline in real terms by about 20 percent fromthe average over the last three years and a slight reduction inagriculture's share of total budgetary expenditures. However, for FY89 anextraordinary provision of some KL267 million has been made to write offthe debts of NCPB, with the result that budgetary expenditures in thesector is expected to amount to KL432 million. The allocation of 10 percentof the total budgetary resources to agriculture - excluding theextraordinary provisions to deal with paraststal restructuring requirements- seems reasonable, provided this means that transfers to parastatals tomeet operating deficits are being contained (and ultimately eliminated) andpersonnel expenditures are being brought under control. Unfortunately, theForward Budget provisions do not reflect this adequately; nor do theyadequately allow for the parastatal restructuring requirements. Theattached table presents the Forward Budget as prepared by the Government,along with suggested modifications reflecting the points outlined below.

17. Personnel and Non-wage Operating Expenditures. Although no realgrowth in personnel expenses is anticipated by the Government in theForward Budget over the FY88 level, they continue to absorb a growingproportion of the total budgetary resources devoted to the agriculturalsector (36 percent in FY91 compared with an average of 30 percent over thelast three years). Expenditures on other goods and services, on theotherhand, are projected to peak in FY89 and thereafter decline in nominalas well as real terms; the ratio of non-wage operating costs to personnelexpenditure is thus expected to worsen steadily from 0.79:1 in FY89 to0.73:1 in FY90 and to 0.65:1 in FY91, the latter roughly the levelprevailing over the last few years. While it is realized that it will takesome time to bring personnel expenditures under control, these projectionsreflect a lack of urgency on the Government's part in dealing with thisissue. It could be reasonably expected that the nominal expenditures ongoods and services remain at least constant over the FY89 to FY91 period,to be financed mainly through savings in personnel expenses. After FY91, acontinued improvement in the non-wage operating cost/personnel expendituresratio should be observable.

18. Agricultural Services. The Forward Budget does provide forsignificantly increased expenditures in the priority areas of research,extension, and animal health services. AllciL-tions to these services inFY91 reach 34 percent of budgetary expenditures in agriculture comparedwith an average of around 25 percent over the last three years, with eacharea of service accounting for roughly one-third of the total. Researchexpenditures over FY89 to FY91 are projected to be at a level around 50percent greater in real in terms, although they do show a decline in bothnominal and real terms over the period after peaking in FY89. Without amuch closer examination of their detailed breakdown, it is difficult tomake a judgement as to whether this decline will automatically imply adiminution in the Government's research effozt; it is possible that thereduction reflecta to an extent that a good portion of the FY88 and FY89expenditures will be oti capital items which serve to increase productivityin later years. Expenditures on agriculture and livestock extension and onveterinary and animal health services are projected to follow similartrends.

76

19. Transfers to Parastatal. The parastatal reform program is expected tohave a significant impact on transfers to parastatals in the future, butthis will not become fully apparent until well into the 1990s. The ForwardBudget does reflect some improvement in the situation in th&t grants to,and investments in, parastatals are expected to decline in real terms byaround one-quarter between FY89 and FY91, discounting the extra-ordinarysubventions to deal with the rationalization of the principal enterprises.Declines of the orders of magnitude involved are reasonable - thoughrelatively modest given the extent of the reform program envisaged -although delays in making key decisions on some of the parastatals involvedwill mean that the savings envisaged in these years will not materialize.However, the provisions for extraordinary subventions for the financialrestructuring of the affected enterprises in the Forward Budget areinadequate. The assumption by the Government of KL46 million of foreigndebt and the writing off of KL9 million in monies owed to the Governmentunder the financial restructuring package for SONY is not accounted for. 9/The new Cotton Board may also require support in excess of that providedfor, since the sale of the Makueni ginnery is now unlikely to yield theprice envisaged at the time of determining the reorganization costs ofCLSMB. Provided the Board does divest itself of loss making ginneries andwithdraws from other loss making activities, these sums should not beanything like the amounts granted in earlier years and be in the nature of'one-off' re-establishment grant'. The allowances for NIB may also beunderestimated, although the ai.,unts involved are small. 10L Provisionsshould be made for all these outlays in the Forward Budget, and it isassumed that these would have to be met through additional budgetaryallocations to the agricultural sector. A decision to reduce the strategicfood reserves of NCPB to 10 percent of national food production would freeup around KL12 million in FY89 and equivalent amounts in FY90 and FY91 andwould thus reduce considerably the need to divert funds from other sectors.

20. Investment Expenditures. Investment expenditures (gross capitalformation) show a declining trend in both nominal and real terms over theForward Budget period, reflecting the squeeze placed on them as a result ofthe claims of other budgetary components. They are projected to decline toKL26 million (15 percent of budgetary expenditures in agriculture) in FY91from a peak of KL38 million in FY88 (21 percent). While the squeeze oninvestment expenditure in agriculture may be the most acceptable solutionto budgetary constraints for the time being, there will be strong pressuresto increase the investment effort in the early 1990s to ensure that thegrowth momentum is maintained. In the meantime, the emphasis has to be onthe fuller utilization and maintenance of existing viable assets and onensuring that the projects that are proceeded with are of the highectpriority.

9/ Provisions are made for loans to the sugar industry of KL10 millionover the FY89 to FY91 period, which presurably include some debt servicerequirements for SONY.

10/ The subventions provided for in grant form (around KL4 million incurrent terms over FY89 to FY91) were based on a NIB request which assumedrice price increases as contained in an earlier submission to Cabinet(which were rejected), and no provision was made for the write-off of KL2million of debt on the West Kano icheme.

Table 18: AGRICULTURE MINISTRIES: Gross Budgetary Expenditure by EconomicClassification - Current Prices(KL Millions)

Actual Printed Reviseti Forward BudgetFY 86 FY 87 FY 88 FY 89 FY 90 FY 91

000-099 Personnel Expenses 40.5 47.1 53.8 57.9 60.9 64.5

100-199/Other Goods and230-299 Services 25.8 34.5 36.3 45.7 44.5 41.5

200-229/ Gross Fixed400-499 Capital Formtion 10.6 28.3 37.6 38.2 32.0 26.2

500-599 Financial Investment 33.2 15.1 17.7 13.2 15.9 13.3

300-399 Grunts to StateOrganizations &

Others 22.8 40.5 36.5 296.8 35.6 32.4

TOTAL 132.2 165.5 181.9 451.8 188.9 177.9

Notes:

a/ Breakdown by economic classification for FY 1987 on basis of Actuals unavailable from

Treasury. Figures shown here are based on the original Printed Estimtes for the year.

b/ Figures for FY 1988 differ slightly from those in other Tables in that they are derived

from the Revised as opposed to Approved Estimates. This explains the smlldiscrepancy in totals.

c/ Expenditure for Min of Regional development is restricted to that relating to

Irrigation.

dl Expenditure for Min of Research Science & Technology is restricted to that relating

to Kenya Agriculture Research Institute.Sources Ministry of Finance.

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II. ENERGY

A. Performance of the Sector

1. The per capita energy consumption in Kenya of about 380 kilogramaof oil equivalent (kgoe) is low by world standards. but is about twice theaverage for sub-Saharan countries. Traditional fuels (fuelvood and charcoalused mainly for cooking) currently account for approximately 70 percent ofenergy consumption, with the balance coming principally from petroleumproducts (22 percent) and electric power (7 percent). The growth ofconsumption of traditional fue,ls during the last five years has been fairlyconstant at around 4 percent per annum, while the accelerated economicgrowth and decline in real domestic oil prices over this period fueled afairly rapid growth in petroleum consumption of about 6 percent per annumand increased connections led to an increase in electricity consumption ofnearly 7 percent per annum. These figures imply an elasticity of commercialenergy consumption (ie. petroleum and electricity) with respect to GDP of1.5 in recent years, which is considerably above the average for sub-Saharan countries. The increasing scarcity of traditional fuels, the heavydependence on imported fuel for commercial energy needs, and the necessityto ensure least cost and adequate supplies to meet the growing demand forelectricity and petroleum, are the major issues which have to be addressedin this sector over the next decade.

Eneriv Supply

2. The annual sustainable woodfuel supply of Kenya's forests isestimated to be approximately 18 to 23 million cubic meters, well below thecurrent annual woodfuel consumption of around 31 million cubic meters (one-third of wnich is used to produce charcoal). As a consequence, a markeddepletion of the standing stock of wood is emerging. The imbalance is alsoreflected in the rising trend of woodfuel prices (about 50 percent in realterms since the beginning of the 1980s) and the increased time ruralfamilies are spending in wood gathering. Woodfuel is increasingly beingconverted to charcoal because of the latter's lower transport cost per unitof energy, although the price controls on charcoal have been a deterrent tolarge scale and more efficient investment in woodfuel supplies bycommercial operators.

3. Kenya relies on imports of mainly crude oil to meet petroleumproducts demand; oil exploration is underway but has not yielded anycommercially exploitable discoveries to date. Fuel imports are currentlyrunning at just over 2 million tons per annum, of which only around 60,000tons are refined products. The crude oil is processed at the Mombasarefinery which is now operating at about 50 perceni of its 4 million _onsper annum capacity. Refinery operations are geared largely to process crudein quantities sufficient to meet domestic demand for middle distillates andgasoline. Fuel oil now accounts for about 800,000 tons of the annual output

79

of the refinery of which one-half is consumed domestically; the surplusesof low-value fuel are being re-exported, although these are only about one-quarter of the levels prevailing at the beginning of the 1980s, largelybecause of the loss of regional markets to the more efficient refineries inthe Gulf states, and the falling demand for petroleum products in regionalmarkets. The refining processing fees are quite high by internationalstandards, and there is little doubt that the refinery agreementsguaranteeing shareholders a 12.8 percent return on revalued fixed assets donot give much incentive for cost saving measures.

4. Light petroleum products (gasoline, kerosene and gas oil) for thedomestic market are transported from the refinery to Nairobi by thepipeline of the Government-owned Kenya Pipeline Company, while liquifiedpetroleum gas and all heavy fuels are transported by rail and road toNairobi for distribution up-country. The pipeline operates at about 40percent of design capacity, but since pipeline tariffs are set on a cost-plus basis to yield a return of 15 percent per annum on fixed assets, thecash generation enables Kenya Pipeline Company to pay considerabledividends to the Treasury.

5. In late 1987 retail prices of petroleum products in Nairobiaveraged 225 percent above border prices. While this partly reflectstaxation of petroleum products, it also reflects inefficiencies in theprocurement, refining, and distribution chain; the cost-plus pricing systemhas allowed these inefficiencies to perpetuate.

6. The installed electricity generating capacity is now 702 MW, ofwhich 493 HW is hydro (including the recently commissioned 144 HW scheme atKiambere), 45 HW is geo-thermai, and 164 MW is-oil-based thermal. Under along-term contract, the Uganda Electricity Board (UEB) also provides 30 MW.Peak demand is currently around 430 MW per annum so the installed capacityis adequate, although the potential for the expansion of the distributionsystem and the need for substitute low cost energy sources for woodfuelsand imported oil will mean that further investment in generating capacitybased on indigenous energy sources will be required over the longer term.However, since the better hydro sites have already been exploited, the costof power development in Kenya has been increasing. If the Government wishesto ensure tariffs are kept to a minimum - noting that although averageelectricity tariffs have more than kept pace with inflation since thebeginning of the 1980s, they are still some 27 percent below the long-runmarginal cost of supplies - then it will be critical for the electricityindustry to ensure least-cost development.

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Government Orianization in the Sector

7. The responsibility for promoting woodfuel supply lies primarilywith the Forest Department of the Ministry of En-ironment and NaturalResources. Apart from managing forestry resources and providing researchand extension services, it sets the conditions for the exploitation of

* forestry resources by private interests.1

8. The Ministry of Energy oversees the petroleum and electricityparastatals. There are a number of companies operating in the Petroleumindustry, including two parastatals (Kenya Pipeline Company and theNational Oil Corporation - NOCK), subsidiaries of six multinational oilcompanies and two private Kenyan companies. The Kenya Pipeline Companyoperates the light products pipeline from Mombasa to Nairobi and isplanning to extend the pipeline into Western Kenya. NOCK was established atthe beginning of the 19809 to oversee exploration activities, but itsmandate was recently broadened to include procurement of up to 30 percentof Kenya's crude oil imports. Four multinational oil companies co-own withthe Government (50 percent) the Kenya Petroleum Refinery Company Limited(KPRL) which operates the oil refinery at Mombasa. Because it is notmajority-owned by the Government, KPRL is not considered a parastatal underthe State Corporation Act, and therefore does not participate in theForward Budget process.

8. The electricity industry is composed of six entities: the KenyaPower and Lighting Company (KPLC), the Kenya Power Company Limited (KPC),the Tema River Development Company Limited (TRDC), the Tana and Athi RiversDevelopment Authority (TARDA), the Kerio Valley Development Authority(KVDA), and the Lake Basin Development Authority (LBDA). With the exceptionof KPLC which is 40 percent privately owned, the entities are fully state-owned. KPLC coordinates the power grid and is the sole distributor ofelectricity. It purchases in bulk from KPC, TRDC and TARDA (KVDA and LBDAdo not yet have generating facilities in operation) and operates allgenerating facilities under management agreements with the other entities.TARDA, KVDA and LBDA have mandates to develop the river basins and are thuspursuing interests in irrigation, reforestation, and industry. As part ofthe reorganization following the splitting in early 1988 of the formerMinistry of Energy and Regional Development, the generating assets of TARDAand KVDA in operation and under construction will be transferred to KPC.This is a first step towards consolidating asset ownership and eliminatinginstitutional fragmentation. As a second step in the medium term, theGovernment is considering merging KPC and TRDC which would complete theconsolidation of power generating facilities within the jurisdiction of oneentity.

l/ In the light of these responsibilities, the justificationfor thie six agro-forestry centers recently established by theMinistry of Energy is unclear.

8.

B. Obiectives and Issues For Future Development

9. Energy consumption is expected to maintain its present growth of about 5percent per annum over the next few years, with both petroleum products andelectricity increasing slightly faster at nearly 6 percent per annum.However, to ensure stable and affordable supplies, actions aimed atencouraging expanded woodfuel supplies by commercial operators and curbingwoodfuel demand, improving efficiencies in the handling of petroleumproducts, and at ensuring least-cost development of electricity supplies,will be of utmost priority in the development of the energy sector in thenext decade.

Woodfuel Industry

10. In order to avoid ecological damage in the late 1990s due to theimbalance between demand and sustainable supplies, around KL150 millionwill have to be spent on woodfuel development over the next decade. It isestimated, for example, that the establishment of about 100,000 hectares ofwoodlots in forest reserves and around 200,000 hectares of on-farm woodlotscould meet the demand for charcoal in the ten largest urban areas of Kenya.To encourage the private sector to meet the bulk of the investment needs(projected at two-thirds), the Government should remove the price controlson charcoal and make other changes in regulations and administrativepractices where these are seen to unnecessarily impede the efficientdevelopment of woodfuel resources (see the Wor;d Bank's recent report onKenya's forestry sector for further details) .L In parallel, improvedforestry management would be emphasized. Measures to encourage woodfuelconservation, especially the use of more efficient cooking stoves andcharcoal kilns, should also be vigorously pursued.

Petroleum Industry

11. The system of cost-plus pricing for petroleum products which ha3permitted considerable inefficiencies in procurement, refining anddistribution to emerged should be reviewed with the aim of adopting a morecompetitive pricing system. At the same time, the operations of theparastatals (NOCK and Kenya Pipeline Company) and KPRL in these areasshould be subject to continued assessment, with the objective of achievingcost savings. In the case of KPRL, various refinery upgrading options (withcapital costs running into the equivalent of several hundred milliondollars) are under discussion among the shareholders with the aim ofimproving profitability by reducing the output of fuel oil, loweringprocessing costs and increasing the volume of high value lighter products.Past assessments, however, have found that shutting down the refinery andimporting all petroleum products would be more economic than eitherupgraling it, or continuing with the present configuration. Although

2/ Based on IBRD report No. 6651-KE, Forestry Subsector Review (February1988).

82

capital expenditures of OPRL do not figure directly in the budgetaryprocess (although further equity contributions and any loan guaranteeswould have to be reflected in the public accounts), the Government shouldsatisfy itself as to the economic as well as the financial justification ofany proposed upgrading of the refinery. The Kenya Pipeline Company is alsoplanning a major capital expenditure by extending the Mombasa-Nairobipipeline to Western Kenya; the feasibility study of this project, which IDAhas offered to help finance, is presently being reviewed by Bank/IDA staff.

12. A more competitive pricing system would mean that the Governmentwould not have ,.o have direct involvement in the procurement anddistribution of petroleum products to ensure least cost supplies. Thiswould be in keeping with the Government's expressed wishes to emphasizegrowth in the private sector. In this respect, NOCKs involvement inprocurement should be reassessed, and there would be no real justificationfor its proposed expansion into distribution (including retailing); in anyevent, it is not clear that the mere presence of parastatal in these areaswould improve things even under the current pricing system. The riskinvolved for the Government in investing in either procurement ordistribution is that scarce public resources would be allocated to theseactivities without producing any benefits to the economy in the form ofimproved efficiency or lower costs.

Electricity Industry

13. The National Power Development Plan (NPDP), completed in 1987,provides the basis for a reasonable least-cost plan for further expansionof Kenya's power generating and transmission system over the next twentyyears to comfortably meet the likely growth in demand for electricity. Thecompletion of the ongoing Turkwel Gorge hydroelectric project (planned tobe commissioned in 1991) will add 106 MW of generating capacity to thesystem. Thereafter, geothermal units are planned for commissioning in 1994and every two years thereafter (totalling around 280 MW over the planperiod), with four additional 30 MW gas turbines to be installed during1992-95 as back-up thermal capacity in dry years. The NPDP also proposesadditional generating capacity in the later years of the plan to come fromthe commissioning of conventional oil (150 MW) and coal (240 MW) firedplants, and of the Sondu-Miriu hydro plant (60 MW) assuming it is found tobe economic.

14. 'while there is the possibility that the growth in demand forelect:ricity on which the expansion in, generating capacity is based may beunderestimated, the timing and mix of capacity planned is more likely to beaffected by the uncertainties relating to the development of indigenousgeothermal and hydro resources. In the case of geothermal power, the riskis essentially one of drilling dry wells or finding insufficient steam tosupport an economic sized power plant, although it is unlikely that thenext 60 MW geothermal power plant planned to be commissioned in 1994/95would have to be cancelled for one of these reasons. In the case of hydro,a fuller assessment of the power and non-power (flood control andirrigation) benefits of possible sites, particularly the Sondu-Miriu site,

83

will be carried out; the emergence of suitable hydro options is likely toalter the present program, accepting that these would be only likely tohave a significant impact in the later years of the NRDP because of thelong lead times in developing hydroelectric power. There is also the riskof delay in commissioning the Turkwell Gorge plant. The Government and [PLCshould thus monitor carefully the demand and supply situation and shouldhave contingency plans drawn up to cope with any supply shortages thatemerge, particularly through to the mid-1990s. In reviewing the options,account should be taken of the possibility of further supplies from Ugandaand the possibility of an interconnector to Tanzania, given the latter'sexpected surplus of low cost hydroelectric generating capacity in the1990..

15. The Rural Electrification Program (REP) managed by the Ministry ofEnergy is given high priority by the Government because of its role inrural development and in curbing urban-rural migration. However, underpresent arrangements, both the capital and operating costs of the REP areheavily subsidized (with rural consumers paying the same tariffs as urbanconsumers despite the higher unit costs of supply), while the extensionand location of new individual schemes is decided largely at the Districtlevel on a discretionary basis without. specific economic criteria. Toimprove the allocation of rural electrification facilities, while reducingthe burden on the tax payer, a system should be devised where prospectiveusers are expected to bear a significant part of the capital costs as wellas the operating costs of the scheme. Under the IDA Geothermal Developmentand Preinvestment Project, a Rural Electrification Study will be carriedout which will focus on cost minimization, and capacity, and routingmethodology.

C. Government Expenditure and Public Investment

16. The Ministry of Energy's budget for FY89 is equivalent to about1.OZ of GDP. The bulk of the MOE budget is devoted to electric powergeneration and transmission facilities for the electricity parastatals; theternms on which these assets are being transferred to the parastatals arenot always clear from the budget documents. Central Government is a lessmeaningful concept than total public investment or public expenditure inthe energy sector, because there is a significant amount of parastatalinvestment financed by extra-budgetary sources, i.e., external lendingdirectly to the parastatal, or internal cash generation. Since theGovernment does not prepare a forward plan for public investment, nostatement of public investment in the energy sector is available from theGovernment. The mission has therefore, put together a table on publicinvestment by the Ministry of Energy and its associated parastatals. Inaddition, there are Government expenditures, mainly outside the Minis :y ofEnergy, on woodfuel development.

17. In the Forestry Subsector Review, Bank staff have recommended thatthe Government spend around KL 6 million annually on woodfuel developmentduring the period 1989-93. This expenditure includes programs in theForest Department (a unit of the Ministry of Environment and Natural

84

Resources), the Ministry of Energy, the Ministry of Agriculture, and theKenya Forestry Institute (a unit for the Ministry of Research, Science, andTechnology). Most of this expenditure would be for forestry extension,consumption surveys, and biomass inventory; a small amount would be for apilot program of woodlot development on Forest Department land.3L However,the level of expenditure recommended assumes that the Government takes thenecessary steps to encourage private investment in woodfuel development ofaround KL 10 million per annum over the next decade; if this is not done,the avoidance of ecological damage in later years would require acorrespondingly higher public investment.

18. In the petroleum industry, it is expected that the Governmentwould continue to pursue an active exploration policy involving aroundKL1.5 million per annum by NOCK (the bulk of which would be budgetarysupport). If the pricing reforms recommended in para. 11 are implemented,then the expenditur2s required by NOCK to build up stocks of crude oil areno longer necessary and no allowance need be made for acquiring interest indownstream operations; however, it is assumed that, as a 'safety net", NOCKcontinues with the procurement of crude oil resources for the next fewyears, but at a level below that previously anticipated thus involving asmaller net annual addition to public investment in stocks averaging KLmillion per annum. The only other significant essential public investmentis the maintenance of the Mombasa-Nairobi pipeline, which the Governmentestimates to involving around KLS million in FY89 but falling to KL1.7million by FY91; the extension of the pipeline has not been incorporatedinto the proposed program.

19. The public investments proposed by the parastatals in electricpower generation and distribution over the next three years seemreasonable. The bulk of the expenditures (around KL52 million in both FY89and FY90 and KL26 millior in FY91) will be directed at the timelycompletion of the Turkwell Gorge hydroelectric project and on thedevelopment of the Olkaria geothermal fields (around KL28 million in FY90and KL46 million in FY91). These expenditures are consistent with NPDP.Rural electrification is expected to continue to require budgetary supportaveraging KL10 million per annum; although improved cost recovery (seepara.16) in later years could allow either a reduction in this amount, oran increase in the annual number of new connections with the same level ofbudgetary support. The projected financing plan for electricity investment(as based on IDA's appraisal of the Geothermal Development and

31 The program for woodlots on Forest Department land would have to begreatly expanded during the period 1993-2000, when wood from lands now beingcleared for agriculture ceases to be available; the Review sets an objectiveof establishing 100,000 ha of woodlots on Forest Department lands, and200,000 ha of woodlots on private lands by the year 2000.

85

Preinvestment Project) is also appropriate.4I KPLC plans to implementannual tariff increases of KSh 0.09/kwh, (about 7 percent) during the nextseveral years; this will enable the power industry to continue to earn arate of return of around 5 percent per annum, and the contribution frominternal cash generation to the financing of the investment program to beabout 30 percent, which is satisfactory by international standards.

4/ Because KPLC is the only parastatal in the sector with a revenueflow directly from consumers, with the other entities providing electricityto KPLC, it is more meaningful to analyze the consolidated financial resultsof the six parastatals than to review them separately. KPLC's tariffs weresufficient to enable the Kenya el.ectric power industry to earn a rate ofreturn on revalued assets in operation of 5 percent in FY87, but were about27 percent below the long-run marginal cost of supply.

86

Table 19: PARASTATAL CAPITAL EXPENDITURES AND TOTAL PUBLIC INVESTMENT:

ENERGY SECTOR (iL Millions)

Actual sttiated Projected

FYI$ FY Z FYI? FY99 FY99 FY90 FYOI

PO SLIENCTORt

1. Kenya Power andLighting Co (KPLC) 6.6 6.3 20.5 29.1 24.2 30.9 26.6

- Trans;ssion/Distribution S.3 1.2 2.9 2.4 12.7 19.6 2.7- Rehabilitation (Kipevu) 6.3 1.4- Gas Turbine 39 MW 12.9 1.7- Oao Turb;n- U9 MW 0.9 9.9- GCa Turbine " MW 19- Other 2.8 S.1 4.7 9.2 10.1 11.1 12.1

2. Kenya Power Co N/A N/A 12.9 18.4 17.2 42.4 b2.6

- Notional Control Contro 1.6 6 3.2 6.9 6.9- Ceothorml Drill ing 11.1 11.9 9.2 3.6- Geothera I Plants *.5 #.6 27.3 46.4

of which:39 MW Olkaria Eoat (FY94) 9.S 0.6 16.2 16.630 mw Oikaria East (FY96) 17.O65 MW Olkar.o West (FY93) 11.6 10.9

- Other 1.1 0.2 9.2 0.2

S. Tons RiverDevolopment Co (TROC) N/A N/A 2.0 2.9 0.9 9.e 0.6

4. Keria ValleyDevelopoent Auth.(KVDA) N/A 0.2 61.3 48.4 52.0 62.0 26.0(Turkwell Project)

6. Tons and Arthi RiverDevlpt Auth.(TAPOA) 34.7 16.6 29.7 8.0 3.4 - -(Kiambere Project)

6.Lake BasinDovlpt Auth.(LBOA) _ 0. 1.3 1.2 9.1 0.1(Sondu-i lru i)

7. POWER - TOTAL 41.3 22.1 116.4 99.2 99.9 125.4 164.2

PETROLEUU SU8SECTOw

1. National Oil Coof Konya (NOCX) 22.1 10.5 6.4 11.4 29.J 32.8 36.2

- Petroleum Exploration S 3.1 6.2 1.3 1.4 1.6 1.7- Supply and Management 17.1 7.4 2.2 19.1 28.4 31.3 34.6

2. Konya Pipeline Co N/A N/A N/A 3.4 3.1 2.6 1.7

3. PETROLEUM - TOTAL 22.1 1C.t 3.4 ;9.3 37.9 36.3 37.9

TOTAL ENERGY SECTORINVESTMENTS BY PARASTATALS 63.4 32.6 124.3 113.0 136.9 169.7 142.1

IJEMORANOUM ITEMS

1. Total Public SectorInvestment in Energy 8/ 67.6 36.6 131.7 127.9 151.1 173.2 167.7

2. Total Public FixedInvestment 326.6 435.2 472.9 496.1 649.5 697.3 636.3

3. Investment in Energy as %of total public fixed Invest. 20.C 3.9 27.8 26.6 27.5 29.6 26.0

o/ Sum of total energy *ector capital expenditure by paraetataot and followingcapital expenditure item in Contral Govornment budget: (i) Genoral Administrationand Planning, (ii) Ronewoblo Energy Dovelopment, and (iii) Rural Electrification

Sources: Ministry of Enorgy, Ministry of Finance. and individual parastotela

87

III. TRA.QPORT

A. Perf rmance of the Sector

1. Kenya has a weil developed transport system based on around54,000 km of roads (12 percent paved), 2100 km of railways, and anextensive network of air routes. The backbone of the system is a 1000 kirail and trunk road corridor linking the port of Mombasa with Nairobi andthe western hinterlands, serving not only Kenya but also southern Sudan,eastern Zaire and the landlocked countries of Burundi, Rwanda, and Uganda.More than 50 percent of the total freight traffic is carried by road, about35 percent by rail and 5 percent by air. 1/ The road transport industry islargely in private hands and has performed well in meeting transport needs,although the Government's failure to adequately maintain the road networkand to control vehicle over!-.ading has led to serious cost implications.However, it has still been able to take business away from the railwaysbecause of its inherent advantage of flexibility, and because of theconsiderable inefficiencies of the Government-owned Kenya Railways (KR).Air transport, on the other hand, has continued to expand among theimportant economic and tourist centres of the country, and the Government-owned Kenya Airlines' (KA) operating performance has improved to the extentthat it has managed to generate profits in two of the last three years.Kenya Ports Authority (KPA) has also been profitable, although its overallperformance has deteriorated considerably in recent years.

Road Transport

2. The Road Department over the past few years has accounted foraround 80 percent of the budgetary resources devoted to the transportsector. Investments have accountel for around two-thirds of theseexpenditures, ref'ecting the emphasis that the Government has consistentlyplaced on road upgrading and construction relative to maintenance. Underboth the Fourth (1979-83) and Fifth (1984-88) Highway Sector Plans, routineand periodic maintenance accomplishments (ie. regravelling of gravel roadsand resealing of paved roads) feli well below requirements. For thosemaintenance works carried out by departmental forces, the rapidly risinglabor costs led to such a drastic reduction in the funds available forequipment maintenance and operation and for materials that measurablephysical maintenance suffered. 2/ The extent of the squeeze isdramatically illustrated by the fact that the split between personnelemoluments and operational expenses for road maintenance has beencompletely reversed since the beginning of the 1980s (from roughly 30/70 co70/30 at the presEat time). The result has been a considerable

1/ The petroleum products pipeline from Mombasa to Nairobi is also animportant element of the transport system and carries the remaining 10percent of the traffic.

2/ Under the Fifth Highway Sector Plan, the target for resealing was 1100km anually and regravelling 1900 km annually. Resealing accomplishmentswere only 466 km annually, while regraveling are not known.

88

deterioration in the condition of the road network and thus a markedincrease in road user costs. 3/

3. The recent rapid growth in labor costs stems mainly from theMinistry of Transport and Coauunication's (MOTC) absorption of a largenumber oi 'works paid, workers into its payroll and from the across-the-board wage increase implemented over a three-year period beginning in 1985.Immediately before the transfer of the Roads Department to the Ministry ofPublic Works (MOPW) in Mirch this year, the MOTC had a total of about26,000 employees. Of the 14,000 ezmployees in the Road Department, onlyaround 2000 were working directly on maintenance related activities, 2000were professional and clerical and 2000 worked on rural roads programs; theremaining 8000 seemed to be inactive a large part of the time.

4. The Government has had some success in achieving its objectiveof building up the road network in rural areas through both its ruralaccess road program and the District Focus for Rural Development Program(DFRD) introduced in 1983. A net of some 10,000 kilometres of earth andgravel roads have been added to the road network since the beginning of the19809. However, the decentralization of funding and duties to the districtlevel under the DFRD has not been without its problems. There is someconcern that funds are not being used efficiently, while coordination hasbecome more complicated with three parties now being involved (MOTC, MOPWand the district administration). Uneven distribution of labour and fundshas resulted in some districts not being properly equipped to carry outroutine and periodic maintenance. One of the outcomes of the districtfocus has been the reduced involvement of MOW headquarters in maintenanceand thus the neglect of routine maintenance of trunk roads. Anotheroutcome was giving permanent employment to the casual laborers, which nodoubt explains the bulk of the 'inactive' employees alluded to above.

Railways

5. KR has suffered from considerable operating inefficiencies andlosses, the lack of locomotive capacity, and the diminution of transittraffic, particularly from Uganda. Since its formation in 1978, KR's netincome has been negative every year except one. 4/ This has adverselyaffected the enterprises financial condition, squeezed liquidity and erodedits' capital base. Althouglh the Government has not generally made annualsubventions to support these losses, it has in recent years converted toequity some of KR's long-term debt (KL25 million in FY83) and assumed someof its liabilities (US72 million to Uganda ir, FY85 resulting from the

3/ The delays in implementing the axle-load control system havecontributed to this Leterioration. The actual conditon of the roads andtheir maintenance requirements are presently being investigated under aHighway Maintenance Management Study.

4! Kenya Railways was formed after the break-up of the East AfricanRailways Corporation (EARC). KR's reported profit in FY84 resulted from asteep tariff increase, but the improvement was short-lived.

89

settlement of the dissolution of EARC). Investment ex,enditures (excludingworking rapital build-up) of KR have averaged just under KL8 million perannum Loer the FY85-87 period, financed by KR's internal cash generationand external lorg-term credits; it is only in the last year thatdisbursements under the external long-term credits borrowed via theGovernment have appEared in the Development Budget.

6. The poor performance of KR has been principally due to declinesin traffic and in real tariffs cou' ed with high unit costs. Freighttraffic (ton-kms) has declined by an average of around 4 percent per annumsince the beginning of the 1980s, and has not even responded positively tothe recent improvements in the economy and to a pick-up in transit traffic.Despite the fact that railway tariffs have been generally lower than thetariffs charged by truckers, the quicker and more reliable service of thelatter (reinforced by the railways inadequate locomotive power andlocomotive maintenance) has led to a number of shippers shifting to trucksfor their transportation needs. And isnfortunately, it is only over thislast year or so that KR has started to adjust its work force (although onlymarginally) to the declining traffic levels which had led to a considerabledecline in productivity and higher units costs; the employment level ofjust over 23,000 at the end of FY86 was some 10 percent higher than thelevel prevailing at the beginning of the 1980s with the result, forexample, that the traffic units per employee of 106,000 in FY 86 comparedvery unfavourably with the 139,000 in FY80. Government interventions havenot helped matters. They have often been on an ad-hoc basis, disruptingnormal railway operations and hampering KR's marketing initiative. KR hasalso had to keep in service uneconomic branch lines. All tariff increasesmust be officially approved, and KR has been required to carry somecommodities at tariffs that do not cover long-run variable costs. However,the Government has recently embarked on a major reform program of KR, withthe support of the IDA Second Railway Project, which addresses theseissues, although the progress in its implementation has been verydisappointing (see paras 17 and 18).

Air Transport

7. The only budgetary resources going directly to KA over the lastfew years have b-en annual injection of KL5 million equity capital. BeforeFY85, KA was unprofitable, but a turnaround was achieved after tnisreflecting considerably improved operating performance and administrativeefficiency. 5/ KA's investment program has fluctuated substantially,reaching a high of KL120 million (purchase of two Airbus A310 airplanes) inFY86 falling to KL7 million in FY87. The bulk the investment is inairplanes, but these expenditures are not reflected in the Governmentbudget since KA has borrowed directly from commercial banks for them(although with Government guarantees); the acquistion of the two AirbusA310s, for example, was financed by a consortium of European banks with a

5/ A loss of around KL5 million is, however, expected to be reported forFY88, in part because of the effects of high interest charges and exchangerate adjustments.

9o

guarantee attached from the Government of Kenya. Other heavy expendituresare in airline leasings, which also only appears in KA's financialstatements. The Government does, however, make budgetary provision for bothrecurrent and development expenditures for civil aviation (total of aroundKL5 million in FY87 of which around one-third was for investmentexpenditures) and aerodromes (total of around KL10 million in FY87 of whiicharound half was for investment expenditures).

Ports

8. Although KPA has managed to turn in a positive net income overthe last few years and has thus not called on the Government for budgetarysupport for operational purposes, it is now in danger of losing money.Overall performance has deteriorated in recent years, and shippers nowconsider Mombasa port's operating efficiency to be low and at a criticalpoint; one of the results is a loss of transit traffic to Dar-es-Salaamwhere ship turn-around times are much faster. Handling and loading at theport is poor, and the cost of movement is increased by some KL4 to KL6 pertonne by the practice of trarsfering goods to outside warehouses where theyare reloaded for onward movement instead of being loaded directly. A majorfactor affecting the costs and operating efficiency of KPA is the limitedextent of commercial freedom within which it operate3. Tariff adjustmentsrequire Government approval, with the last adjustment being made in FY82.The Authority has had little autonomy in staffing policies, and it isestimated that the 12,000 strong labour force could be cut by 10 to 20percent without any reduction in operations. Shippers and agents also havestrong complaints about the slow rate of clearance from the port. They areparticularly critical of the practices of Customs of demanding fullverification of transit traffic, which involves unpackiag and repacking ofall rontainers instead of sample verification used at most other ports, andof not working weekends, which contibutes to the excessive time in sortingand processing container traffic.

9. The Government has accorded high priority to the rehabilitationand modernization of the Mombasa port facilities with an emphasis oncontainerization. 6/ Capacity of the port is now far greater than traffic,but there is a major flaw in the layout of the container terminal (i.e. therail spur is located on the opposite side of the quay from the berths,giving rise to considerable transfer difficulties) and there have beenwasteful investments (e.g. excessive expensive crane capacity, with most ofthe rubber-tyred cranes lying idle due to lack of spare parts andmaintenance). The inland container depot near Nairobi is also operatingwell below full capacity.

6/ Kenya Cargo Handling Services (KCHS), a subsidiary of KPA, isresponsible for handling the operations of the port.

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B. Policy Framework for Future Exienditures

10. Government policy over the Fifth Plan period '1984-88) in thetransport sector has been to accord the highest priority to the maintenanceand rehabilitation of the existing capital stock and to the improvedperformance of the transport parastatals. It has also been to alio* marketmechanisms to determine the modal. cplit of traffic, based on tVcomparative advantages of each mode and on the demands of the productivesectors. These objectives are likely tC be carried over into the SixthPlan period (1989-93), although much more vigour in pursuing them will berequired than was apparent in past years.

Directions for Public Investment

11. Future expenditures should continue to concentrate on roads,with the emphasis on maintenance and rehabilitption. According to MOTC, theyearly resealing of roads should be around one-fifth of the paved networkwhich would imply a target of around 1400 km per annum over the next fewyears without taking into account the "backlog' which could still possiblybe rectified by a simple resealing rather than some form ofrehabilitation. 7/ However, a considerable proportion of the road networkwill require costly reconstru:tion or strengthening as a result of the lackof routine and periodic maintenance in the past, and this will require agrowing share of investment expenditure budget (Table 19). The constrainedbudgetary resources over the next few years will thus mean that roadupgrading will have be limited to high priority projects, and theconstruction of new roads would have to be limited principally to thecompletion of ongoing contracts and to priority rural access roads.

12. To achieve the maintenance targets for roads specified above,the Government will have to address the issue of the Rrowing imbalance ofpersonnel and materials. It will be necessary to constrain the growth inpersonnel emoluments by, for example, a freeze on the employment of non-technical and subordinate staff over the next few years and its gradualreduction through attrition, and to ensure that sufficient funds are madeavailable for materials and equipment maintenance to enable the work forceto carry out its task. A review of effectiveness of the District Focus forRural Development Program should be undertaken, with the principal aims ofrationalizing the employment policies and of ensuring that the distribution

7/ The Bank is of the impression that the MOTC estimates of resealingrequirements may be on the high side. The on-going Highway MaintenanceManagement System (HMMS) should provide the basis for a more accurateassessment of the resealing cycle, and of the volume of outstandingresealing and rehabilitation requirements. Until these figures becomeavailable, 8 years for the resealing cycle would perhaps be moreappropriate than the 5 years used by the MOTC, and this should be based onthe net reasealable bitumen network estimated at 6000 km (i.e. gross of7000 km less allowanance of, say, 1000 km of roads which would requirerehabilitation due to lack of maintenance). A real backlog of 3000 km isestimated.

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of resporsibilities at the central and district levels is clearly defined(particularly with regard to the maintenance of trunk routes), and that theallocatior of funds and personnel reflect these responsibilities.

13. There is scope for rail to regain some of the traffic lost toroad haulers, but only if the efficiency of KR's operations aresignificantly improved (see para 17 below) and efforts are focussed on theactivities for which rail enjoys a comparative advantage. In this respect,it would be futile for there to be significant capital expenditures on, forexample, line extensions, terminal facilities, and new rolling stock untilKR's operating performance is at a satisfactory level. 8/ However, inorder to meet even the demands now placed upon it, KR will need to ensurethat adequate provision is made for locomotive power througn theavailability of sufficient upare parts, the rehabilitation of locomotiveswhere feasible, and further improvements to the main workshops and dieseldepots to achieve a reasonable level of locomotive availability.Operational improvements will also have to be carried out, which wouldinclude dealing with several critical operational bottlenecks that could becorrected with relatively little capital investment 9/, and ensuring theproper maintenance of wagons 'with some additions to stock), tracks, andother essentia. facilities and equipment. There may need to be someupgrading and renewal of tracks as well as improvements made to signallingand telecommunication equipment and to other key facilities, but no majorworks should be undertaken without economic justification based on thoroughfeasibility studies. 10/ It is within the context of these guidelines thatthe investment program being supported by the IDA-Second Railway Projecthas been drawn up.

14. In air transport, adequate budgetary provisions would have to bemade to ensure the maintenance of airstrips and airport facilities atappropriate standards; there would appear to be no strong justification atthis time for significant new investments, such as the opening of newairstrips and major extensions of passenger or freight facilities. KA, onthe otherhand, will have to ensure that its fleet is structured to meeteconomically its passenger and freight market requirements, which mayinvolve leasing further aircraft and replacing some of its existing fleetwith aircraft of more appropriate configurations.

8/ KR has recently purchased ten locomotives to help address the problemof insufficient locomotive capacity.

9/ For example, the provision of fueling facilities at Mombasa, Kipevu andVoi, new ground fuel storage tanks at Nakuru and Eldoret, and sand dryingfacilities at Kajiado, Sagana and Eldoret to improve locomotive turnaround.

10/ The IDA Second Railway Project is funding two studies of this nature:(a) a study of the extent and means of strengthening the viaducts on theNakura-Kisumu line for higher axle-loads: and (b) a study of thealternative means of accomplishing improvements to the signalling in theNairobi-Embakasi Complex and to the telecommunications links betweenNairobi-Malaba/Nakuru-Kisumu.

15. There is considerable excess port capacity, so no significantinvestme.it for its exp*tnsion is warranted. There is some scope forexpanding inland container depots, but this should be deffered until KPA isable to more effectively run the ones already in operation (which wouldinclude seeking improvements in customs practices). However, furtherrationalization and rehabilitation of existing facilities is required (e.g.berths, oil terminals, and crane and fork-lift fleets) and computerizationwould help considerably in alleviating some of KPA's operatinginefficiencies, but it will be important to ensure that any donor supportin these areas is effectively coordinated so as to avoid a repeat of thepast problems of overinvestment and inappropriate equipment.

Parastatal Reform

16. The Short Term Action Program (STAP) of Kenya Railways (KR) nowunderway with support of the IDA - Second Railway Project 11/ aims toimprove KR's operating and financial performance and, as a result, thecompetitiveness of the railways. In order to achieve this, changes in theorganizational and management structure are being undertaken and costescalation is to be brought under control, mainly through a reduction instaff by some 7 percent over a five-year period. It is intended thatregular adjustments will be made in tariffs to reflect market conditionsand costs, and a set of tariff increases were recently submitted to Cabinetfor approval in line with this principle. KR will be allowed to chargelower tariffs to customers willing to enter into contracts for regularlarge consignments and where backhaul capacity is available; thisflexibility is expected to allow KR to regain traffic in those marketsegments where rail has a comparative advantage (e.g. grains, fertil!zers,cement and containers). Where KR is required by the Government to set sometariffs below costs (e.g. second and third class passenger service, sodaand flourspar for export) and to continue to operate uneconomic lines, theGovernment intends to provide a compensatory payment to KR from its budget.

17. Unfortunately, there have been considerable delays inimplementing the STAP which has exacerbated the poor financial condition ofKR, and the objective of the IDA Second Railway Project to achievefinancial viability is as a consequence receding. The Government did notact on the tariff increases nor on the compensatory payments until Novemberof FY89 (the first such payment was to have been allowed for in the

11/ A Short-Term Action Program (STAP) for the reform of KR was initiallyapproved by its Board in 1986, and a Corporate Plan encompassing the corereforms incorporated in this pprogram was approved by the Cabinet in 1987.The IDA Second Railway Project is in support the STAP, with somemodifications which have been agreed with the Government.

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preparation of the FY89 budget) 12/. This posture will not truly addressthe public sector deficit problem, but will merely push more of the deficitoff-budget* onto KR. Requiring KR to cross-subsidize unviable servicesfrom profitable ones also blurs KR's objectives, and makes a reasonedassessment of it's performance difficult. The Government should ensurethat future adjustments in tariffs and compensatory payments are made in atimely manner.

18. The decline in the performance of Kenya Ports Authority (KPA)should also be arrested. While the rationalization of facilties outlined inpara 15 above will help, this would need to be placed within the context ofan overall medium-term action plan for KPA which also addresses the issuesof tariff structure 13/, employment policies, and operating procedures andcosts. Measures to overcome the negative effect of current Customs'practices on sorting, processing and transit time of container trafficwould be included. The Bank would be willing to assist KPA to prepare suchan action plan if invited to do so.

C. Public Expenditure Pro.ram

19. The Forward Budget (FY89-91) of the MOTC provides for averageannual expenditures of about KL100 million, which represents about 8percent of total expenditureR 14/ (Table 20). Roads account for an averageof around 66 percent of the MOTC expenditures over the Forward Budgetperiod, with the provisions being made for development expenditures onrailways, air transport, and ports being considerably less than totalrequirements since the funding of the operations and investments of thetransport parastatals through their own resources or through directborrowings without Government guarantees is principally noff budget". InApril 1988, suL;sequent to the preparation of the Forward Budget, the RoadsDepartment was transferred from MOTC to the Ministry of Public Works.While the level and proportion of budgetary resources to be devoted to thetransport sector seems reasonable given the financial constraints facingthe Government, the issues centre around the compostion of the roadexpenditures, and the size, nature, and funding of the investment programsof the parastatals.

12/ A sum of KL 100 million was provided for as a direct payment by theGovernment, supplemented with an overdraft facility of KL 100 million withthe Central Bank of Kenya. In the future, the full amount of the subsidyshould be provided for in the Forward Budget.

13/ Consultints under assignment from the ODA recently completed a TariffReview Study (March 1988), which is now under review by KPA and theGovernment.

14/ This does not include the allowance which was recently made for thecompensatory payments to KR.

20. Road Expenditures. The Forward Budget makes provisions overFY89-91 for a tripling in real terms of non-wage maintenance expendituresby the Roads Department (viz.expenditures on contracts with private firmsand on non-labour inputs for work carried out by departmental labor). Non-wage maintenance expenditures thus jump from a current average of around 10percent of all road expenditures to just under 25 percent by FY91 (Table19). Reasealing is expected to account for the bulk of this expenditure,with the intention of achitving a target of 1400 km per annum (seepara.12). However, the figure of 1L22.3 million for FY89 should easilyallow the resealing of some l503 km of road 15/, which would include theannual resealing requirements of 750 km (based on an eight year cycle) and1/4 of the estimated backlog (with the aim of removing the 3000 km backlogin four years). The provisions made for FY90 (KL21.9 millicn) and FY91(KL21.8 million) would also come close to meeting these targets, although aslight upward adjustments may have to be made to allow for cost escalation.Given that the cost of rehabiliating roads is about seven times those ofresealing, the gains from meeting these targets for resealing are readilyapparent.

21. If there should be any shortfall in funds and/or additionalexpenditures are required to meet the maintenance targets, then cutbackswould have to be made in the plans to upgrade roads from gravel to bitumenstandards. Since little new construction is planned and priority has to begiven to the rehabilitation of key roads, there is no scope for reductionsin these areas. The extent of cut-backs in upgrading could be reduced byfurther constraining the wage bill; the personnel expenditures of the RoadsDepartment planned for in the Forward Budget exhibits some restraint in thegrowth of personnel, but if a serious effort of reduction through attritionwas made then an actual decline in the wage bill could be expected.

22. Railways. KR's investmenit pru:,^m for the five years FY88-92totals more than KL125 million, of which around KL15 riillion was spent inFY88 for the purchase of 10 locomotives and a further KL15 millionrepresents already committed expenditures to be financed from KR's ownresources. Of the remaining KL95 million, only KL45 million can be regardedas being expenditures on 'core' projects which thus constitute the STAPinvestments being supported under the IDA-Second Railway Project. 16/ Allother projects should be postponed until after FY91, with the possibleexception the strengthening of some of the viaducts on the Nakura-Kisumuline to carry nigher axle loads if proved feasible. The Central GovernmentForward Budget's provision for development expenditure advances to z.Rtotalling KR17 million over the FY89-91 period - representing expected

15/ The costs used bv MOTC of around KL15,000 per km is assumed for thesecalculatione. This rather high figure is perhaps due to the poor state ofthe roads, which imply additional works besides pure resealing in manycases.

16/ Some of the projects under the STAP are not investments but are reallytechnical assistance support for improving operations; these total aroundKL6 million.

)6

disbursements under the ODA-Railroad Realignment Project (KL5 million inFY89) and the IDA-Second Railway Project (KL4 million per annum) - is inkeeping with this.

23. Ports. The investmen. requirements of [PA prepared by it'smanagement were estimated at around KL108 million for the six years FY88-93. Internally generated funds were expected to cover arotnd half of theexpenditures with the rest to be financed by external funds. However,these expenditures need to be carefully reviewed to determine theirappropriateness. The investment schedule, for example, includes underOffices, Sheds and Installations (KL30 million) items such as constructionof inland container depots, improvements to the Kipevu causeway, and theconstruction of a hotel complex. Housing in Nairobi and the development ofMakupa (Gorofani) are included under the heading Housing, Schools andWelfare facilities. These are highly questionable expenditures and, givenKPA's current financial situation, should not be proceeded with at thistime. The investments under Plant and Equipment also appear to be somewhatinflated; the consultants assigned to the Kenya Port Management Study-Phase III have estimated that some KL39 would be required to rehabilitateand provide adequate plant and equipment to be spent over the five yearperiod FY89-92, a figure considerably less than the KL53 million proposedby KPA management. The only provision made in the Forward Budget for [PAis for the dredging of Mkunguni and Lamu Harbour (KL10 million in FY89 andKLS.5 million in FY90 out of the Government's own resources). If the Bankwas invited to assist in the preparation of an action plan for KPA, tieformulation of an appropriate investment program could form part of thebrief. The Bank would also be willing to assist in coordinating donorsupport for the program.

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Table 20: ROADS DEPARTMENT EXPENDITURE

(KL Million)

Actusl Printed Forwar ud etFP 65 FY66 P167 FY6 FF6 rFY96 FY91

int nonento EaDenditurm LI 6.2 7.6 6.6 d.9 29. 9 81. 9 2.6Rout Ino 1 I- :g n 7 n g: - n. -r -W

4. S.2 2: 2 IS 22 1 21.9 2-18It Vol,aIIno 2.8 2.1 2.0 1.2 1.2 2. 21.6

=? 9.6 4.4 0.0~~~~~~~~~~~~2.

lnvoote nt Exp rwiitre /a 47.1 4U.1 4!.9 ELI 59.2 68.1 a. 7Upgreding IC74 117T 117! 117 1771 117 W71Str.nothoning/Roconstruction 4.7 8.6 7.1 12.3 26.7New Construction 0.2 9.2 d.3 0.7Bridges 1.5 1.3 2.1 4.9 4.9PARP IC 6.1 C.8 6.6 16.1 6.5 6.8 0.1Other S.6 6.9 6.9 6.6 6.1 6.5 7.4

Other Exp ndituro 9.5 14.5 14.1 15.6 17.5 1.S 19.9or*sonnonl expenditure 4b 17 3i77 ii7- 1Ul 1171 T77 1917

Mon-wag, current expenditure *.6 9.7 *.7 *.7 *.6 9.9 *.9

Total Expendituro 64 65 69 76 1e9 111 187

Memorandum items:Maintennco oxpendituro/total expenditure (X) 18 12 is 9 27 26 24

Investment *xpondituro/total expenditure (1) 76 66 79 79 C4 U 62

Wage expenditure/total*xpoeditur e() 12 21 29 20 16 16 18

Maintenanc- expenditure(constant FY16 prico) 6.2 7.1 5.6 s.6 21.3 22.1 21.7

Investment expenditure(constant FY$6 prices) 47.1 81.2 $0.8 41.9 43.6 48.0 56.7

Note: Rosoollng now construction, and upgroding of roada to bitumen are carriedout by constracta eith private firms. Departmental labor In used for routinemaintenance and for some lebor-intensive rural roado probloe under Investment*xpenditure.

La Inlude expenditu-e on contracts with private firma, and expenditure fornon-labor inputs for works carried out by departmental labor.

L Some of tho labor paid for by this expenditure Is devoted to routine*ainterance or labor Intensive rural roado construction.

Ic Rural Access Roads Program.

Source: Ministry of Transport and Communication.

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Table 21: MINISTRY OF TRANSPORT AND COMMUNICATION FORWARD BUDGET

(KL Million)

Sub-Vote Printed Forward BuLd.et"Y$6 FY69 FY90 FY91

Recurrent 46 54 5S 61General administration 11 12 13 13Roads 21 24 27 29Other services 7 10 10 11Aerodromes 6 6 7 7Road transport regulation 1 1 1 1

Development 85 114 107 74General administration 3 7 a 2Roads 67 SO 82 61KPTC 3 - - -Other services 2 2 2 2KR 3 9 4 4A erodromes 3 2 3 2KA _ _KPA 3 10 6 -

,Road transport regulation - - -

Total 131 168 165 135General administration 14 19 21 15Roads 88 104 109 90KPTC 3Other services 9. 12 12 13KR 3 9 4 4Aerodromes 3 2 3KA _ _ _IPA 3 10 6 -

Road transport regulatien 1 1 1 1

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IV. EDUCATION

A. Performance of the Sector

1. Pupil enrollment in the education system in Kenya is now nearly6 million, with tne gross enrollment ratios of 95 percent in primary, 20percent in secondary, and 1.5 percent in tertiary education reflecting aremarkably rapid progress since independence. Kenya's enrollment ratios,female participation rate, and achievement in adult litiracy compare wellwith most other countries of Sub-Saharan Africa. The development andsupport of the education system has been heavily dependent on public funds.Virtually all of the primary schools are maintained by the Government, andabout half of enrollment in secondary education is in Government maintainedschools with the remainder being in Government assisted harambee(community) and some private schools. All the four major universities arein the public qector as are most of the teacher training colleges,polytechnics and technical institutes (except that Harambee technicalinstitutes are community supported). The private sector at the tertiarylevel includes two teacher training colleges and several, mainly church-based, private universities. Constraints on public resources means thatKenya's education system now faces a difficult challenge of accommodatingcontinuing demographic pressure for expansion of primary education andstrong social pressure for further expansion at secondary and tertiarylevels, while maintaining or improving the quality of education.Improvements in internal efficiency and more cost effective wavs ofdelivering education are essential for meeting this challenge.

Trends in Education Expenditures

2. Central Government education expenditures have increased in realterms by nearly 10 percent per annum since the major overhaul of thestructure and curricula of the education system in 1985, and now accountfor 25 percent of all Central Government expenditures and nearly 6 percentof GDP. Development expenditures represent cnly a small proportion ofthese outlays (around 6 percent), although they have nearly doubled inreal terms since 1985 reflecting construction of facilities for expandedaniversity enrollment; parents and communities reportedly provide the bulkof the investment needs in primary and secondary schools. The overhaul ofthe education system - involving the introduction of the 8-4-4 system(viz. 8 years primary, 4 years secondary and 4 years of higher education)and adding some pre-vocational subjects (eg. agriculture, business) to thecurricula in primary and secondary schools - reinforced the underlyingrapid growth in school age population in necessitating the considerablyincreased expenditures. A larger primary enrollmeiit (now growing at around2.8 percent per annum) has led to a rapid increase in secondary schoolenrollment (now growing at around 5 percent per annum), and the eliminationof the former 'A' level examination has led to a boost in the demand foruniversity places. University student enrollment increased by over 7000 in1988/89 to reach over 26,000, and at this rate (with double entry in 1990)would exceed 50,000 by the early 1990s. The expected continuation of these

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trends would mean that by FY91, the Government would need to spend about 30percent of total budgetary outlays on education if no significant actionswere taken to contain costs and to find ;urther means of financial supportfor the sector. 1/ Such a situation would clearly be untenable givenother priority demands also being placed on the constrained budgetaryresources.

ComPosition of Recurrent Expenditures

3. The Governmpnt is committed to free universal primary education,and has intended to provide secondary and higher education selectively tostudents who perform well academically. Community and private parties havebeen permitted to establish secondary schools to cater for other students.Thus just under 60 percent of the recurrent expenditures in the sector ison primary education, with the bulk of the post-primary expenditures beingspent on Government maintained secondary schools and universities which areintended to attract the best students. However, financial assistance, inthe form of salary payments of some approved teachers, has been provided toan increasing number of harambee secondary schools. Starting in 1989,harambee schools will opt to become private or public. The Government alsoviews secondary education as a force for national integration, and, as amatter of policy, has supported a number of Government maintained nationalschools with students drawn from all over the country.

4. Within the context of the above policy, the major problemsrelating to the composition of recurrent expenditures are the high salarycomponent and the relatively high costs per student. Salaries andallowances account for an increasing share of the expenditures (now about75 percent), squeezing outlays on teaching materials and books; as aresult, education quality has been seriously threatened. The budgetarycosts per student rise steeply as one moves up the education ladder -around KL44 in primary, KL158 in maintained secondary schools, and KL3,155in universities - without any mentionable proportion of these amounts beingrecovered in the Central Government budget. At the primary level, there areno fees, but parents meet the costs of uniforms and physical facilities.At the secondary level, parents do pay some fees and charges to supplementthe costs of educating their children at primary and secondary schools, butthese funds are retained and spent by the school administrations. Surveysundertaken in the early 1980s suggest that parents, on average, contributeto school operating costs roughly KL7 (plus KL10 capital costs) per primaryschool student and KL85 per secondary school (government maintained)student. The Government bears the full cost of teacher training anduniversity education, including student living expenses. However theGovernment has recently accepted the principle of cost recovery at theuniversity level.

1/ In the most recent printed Forward Budget (February 1988), the shareof the Ministry of Education in total expenditure, excluding theConsolidated Fund, would be 292 (Statistical Appendix Table 5.8a). Withthe latest Forward Budget ceilings (August 1988), the Treasury is proposingto hold the Ministry of Education's share to 26 2 (Statistical AppendixTable 5.11a).

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5. In primary education, some 85 percent of recurrent expendituresis now on teachers' salaries and a further 13 percent on milk distributionto students. The rapid increase in the number of teachers and substantivesalary revisions have meant that the salary bill has grown by around 4.5percent per annum in real terms since t' e beginning of the 19809. Theteacher stock has been growing at a much faster rate than that of pupilenrollment, with the average student-teacher ratio having fallen from 38 in1980 to its current level of 33; this has resulted mainly from the largeintake of teachers in 1985 for 8-4-4 implementation and the guaranteedemployment every year of the output of teacher training colleges. Inabsolute terms, government expenditure on textbooks and teaching aids perpupil declined from Ksh.32 in FY85 to about Ksh.12 in FY88, the latteramount not even being sufficient to cover the price of one half a textbook.The severe squeeze on these items seriously threatens the quality ofeducation received, especially by children of poorer and less educatedparents who are unlikely to appreciate the importance of textbooks and areunable or unwilling to purchase them.

6. The Government maintained schools account for some 80 percent ofbudgetary expenditures in secondary education, the remainder being spent onsalaries of some teachers in the harambee schools through the TeachersService Commission (TSC). The majority of the maintained schools areboarding schools, entailing much higher budgetary costs per student thanday schools. About 70 percent of the expenditures goes to meet teachers'salaries through the TSC and nearly 30 percent is given as grants-in-aid,with nearly two-thirds of the latter being used to meet boarding costs.

7. Student boarding and allowances (legally loans but mostlyunrecovered) now account for around 30 percent of tertiary educationrecurrent expenditures, and the absence of any effective cost recovery orsharing of these expenses is a major issue. Also of concern is the seriousimbalance in employment in universities: non-teaching staff is about fourtimes teaching staff and the non-teaching salary bill is ab__ut three timesthe teaching salary bill, reflecting both overmanning in support staff andteacher shortages.

B. Issues for Future Bud&etary Expenditures

8. The continued general expansion of primary education and theselective expansion of secondary and tertiary education will, in the lightof future budgetary resource constraints, necessitate the Governmentimplementing less costly ways of delivering education while at the sametime safeguarding expenditures on critical items to ensure appropriatequality. The recent Reporc of the Presidential Working Party (PWP) onEducation and Manpower Training for the Next Decade and Beyond (March 1988)provides a good basis for formulating policies to meet these objectives.

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Primary Education

9. Since primary education, especially its salary componant, willcontinue to generate the bulk of the demand on the recurrent budget, costsavings here are critically important for the overall management ofeducation financing. Unfortunately, there is little scope in meeting theexpanded demand over the next few years through any significant shifts ofrecurrent expenditures towards primary education away from secondary andtertiary education. Cost recovery and increased cost sharing are also notpromising options since they go against the Government commitment to freeprimary education; in any event, parental expenditures seem to be alreadyquite significant relative to household incomes in rural areas, especiallygiven that most households have more than one child in school.

10. The main option is the easing of the salary burden and reductionof unit costs per student through raising, in a phased manner, the averagestudent-teacher ratio above its present level of about 33. Empiricalresearch in a number of countries indicates that, within this range, anincrease in class size will not lead to a significant decrease in the levelof academic achievement by pupils; the factors which most consistentlyinfluence this level are linked to the instructional process, viz, books,writing materials and teacher quality. To bring about this recommendedincrease, the Government should undertake measures to reduce gradually thepresent rapid growth of primary teacher stock by: (i) reducing intake; (ii)discontinuing guaranteed employment of pre-service trainees from PrimaryTeacher Training Colleges: and (iii) giving greater importance to in-service training, so that increases in teacher stock are determined by therequirements of primary schools and not independently by the supply fromthe colleges. However, assurance of a greater availability of textbooksand teaching materials will be necessary to ensure that the quality ofeducation does not suffer; the PWP has recommended that parents beresponsible for these items, but for the reasons outlined in para.5, theGovernment should carry the main burden.

Secondary Education

11. There should be a shift in emphasis from boarding to day systemsin maintained schools in order to achieve some reduction in budgetary costper student. In this respect, there should be immediate implementation ofthe PWP's recommendations that all future secondary schools be establishedas day schools, and that students in boarding schools pay the full cost offood and boarding with meritous but needy students being assisted byscholarships and/or loans. Above and beyond the Government-maintainedschools for meritous students, expansion of secondary education in responseto social demand should be accommodated through an enlarged role for theprivate sector.

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Tertiary Education

12. If University expansion is to be financed, it should not be atthe expense of primary or secondary education. It can and should be donethrough budgetary savings generated by; (i) phased elimination of freeboarding and food and of cash allowances to students; (ii) partial costrecovery for tuition; and (iii) gradual reduction in the non-teaching staffin the universities. However, over the next couple of years there willneed to be some additional strengthening of teaching staff.

C. Government Expenditure Program

13. The adoption of the above cost-saving measures would helpKenya's education system to begin to adjust to the reality of resourceconstraints, with a view to expanding and maintaining an appropriatequality of education. In order to illustrate the potential impact of cost-saving measures, the mission has prepared an alternative scenario (Table23) to the printed FY89-91 Forward Budget (Table 22). It should be notedthat both of these tables have been overtaken by the most recent TreasuryForward Budget Circular, issued July 1988. The latest Circular providesthe following recurrent ceilings for the Ministry of Education: FY90, KL547million (162 higher than in the printed Forward Budget); FY91, KL602million (21X higher than in the printed Forward Budget). The latestceilings may possibly reflect recent developments which have not been takeninto account in the formulation of the mission's scenario, which should beregarded as illustrating issues in the composition of expenditure.

14. The mission scenario provides total recurrent budgetaryexpenditures of KL498 million by FY91 of which some KL10 million should berecouped through user charges. The net recurrent expenditure would thus beonly around KL4 million lower than projected by the Government in theForward Budget. But the composition of expenditure would be more conduciveto improving quality of education, and also more equitable. The investmentexpenditures of KL27 million in FY91 (1.3 percent of the tctal) proposed inthe Forward Budget appear reasonable.

Recurrent Expenditures

15. The share of primary education of about 61 percent in theprojected expenditures represents a slight shift in its favour comparedwith the Government's Forward Budget estimates in both absolute andrelative terms. The expenditures assume an enrollment ratio of 95percent. Although the proposed increase in the student-teacher ratioalluded to in para. 10 will take a number of years to achieve, theprojected expenditures in primary education reflect a feasible moderationin the growth of the teacher stock and a stabalization of the student-teacher ratio at 33. Expenditures on teaching aids and textbook grants are

104

proposed to be substantially increased from present levels and theGovernment's Forward Budget estimates (i.e. to around KL20 million by FY91,compared with just over KL2 million in the FY89 Budget and KL4 million inthe Forward Budget for FY91). Only small reductions are made inexpenditures on the milk scheme.

16. In secondary education, the implementation of the PWPsrecoummendations would mean that grants-in-aid would be reducedsignificantly from their FY89 budgeted level of just over KL13 million toKL10 million in FY90, rising only to just under RL13 million in FY91(compared with the Government's Forward Budget estimate of KL17 million).Expenditures in this category would be limited to teaching aids andscholarships for poor and meritous students.

17. The growth assumed in teacher training and university tertiaryeducation expenditures from a budgeted KL78 million in FY89 to KL85 millionin FY91 compared with the Government Forward Budget figure of around KL93million is moderated through: (i a slower intake in traiL1ee teachers thanassumed by the Government in their Forward Budget estimates, reflecting themove towards a gradual increase in the student-teacher ratio in primaryeducation: (ii) a freeze on the growth of non-teaching staff, although thisis offset by the addition of necessary teaching staff to help alleviatepresent shortages; and (iii) the reduction in students loans and theelimination of accommodation board expenditures as recommended by the PWP,with scholarships being provided for poor and meritorious students. Alsobudgetary cost recovery of KL1O million in FY91 is nearly double both thatcurrently being achieved and that estimated by the Government in itsForward Budget for the same year; this increase comes from assumed moderatecharges on students for part of tuition costs in teacher training collegesand universities, and through improved collection of university studentloans.

Investment Expenditures

18. Although the information available about the developmentprojects, their priority ranking and sources of finance was very limited,there do not seem to be any serious issues in the area of Governmentdevelopment expenditures in education. However, university developmentexpenditure has been expanding rapidly and accounts for well over one-thirdof the average of KL30 million per annum of development expenditures in theGovernment's Forward Budget; no real justification is provided for this interms of assessed needs for university graduates in the economy.

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Table 22: KENYA: MINISTRY OF EDUCATION EXPENDITURES ANDRESOURCE MOBILIZATION, ACTAUAL AND PROJECTEDIN THE FORWARD BUDGET(KL Million)

nCJA BUOUWT FOWt[I PA ETD l"M ' -"r- It- - IFYf6 Ff66 "VA

Total Rocurront ExgInditur 229.9 29 .4 248.9 825.8 449.6 4"2. 49 6.

Pr ar 13@ Il.2 218.1 284.6 265.2 202.6 2W6 aTOA!Frs' sarlris & Illowsnces Tr1" WI ! u I: 17 IRTMIilk scho_ 19.2 18.5 14.6 9.? 26.7 5.6 80.1School equip. (ncl. textbooks) 7.5 9.9 2 .7 4.1 2. 2 4.2 4.2Soarding costs 1.6 2.1 2.2 2.5 2.7 S.1 .2

Secondary 82.5 44. 2 14.59 5U.2 77.8 61.6 "64Tsacheri s salarle s 41 4 1 WICrrnts-in-aid 6.2 12.7 13.9 11.2 1383 13.9 17.9

Teachors Education 9.6 11.4 12.8 12.3 13.7 16.3 17.8

Unit 26.2 29.2 87.9 456. 64.7 06.7 75.5alaris & aloanceso tri au 171 - n t in

Student loan echem C.6 06 7.7 16.2 14.4 14.7 17.7Studonts accommodation board 1.6 9.8 2.9 4.2 4.9 6.8 2.2

other** 28.6 26.2 81.6 87.5 89.6 89.4 4.6.

Total Dovalopeent Exponditure 14.9 11.1 23.6 82.4 U6.7 81.6 27.2

Pri mary .9 1.6 1.2 1.2 .9 .7 .4

Secondary 1.7 1.7 1.7 2.6 2.6 1.4 1.4

Teachers' Education 2.6 2.4 1.3 9.8 9.7 11.8 19.9

Univarsity 4.8 8.7 12.6 12.7 14.5 122. 11.9

Other.o 1.4 1.6 6.6 7.4 *.1 5.9 8.5

Oroso Total Expenditure 249.2 86.6 U67.4 417.7 466.6 56. 52 52

Lose: Budgoetry User Charges 4.0 .8 5.6 5.4 6.6 6.7 5.7

Equals: Not Expenditure 26.3 866.8 "1.6 412.8 461.1 494.6 S 190.

*sIncludes administratlon, schools for handicapped, and polytechnic and post-secondary vocational education.

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Table 23: KENYA: MINISTRY OF EDUCATION RECURRENT EXPENDITURE ANDRESOURCE MOBILIZATION: BUDGET FOR 1987/88 AND 1988/89AND AN ALTERNATIVZ SCENARIO FOR THE FORWARD BUDGET YEARS

(IL Million)

AlternativebudEst Forward Budget Scenario

1987/88 1988/89 1989/90 1990/91

1. Primary 233.9 255.2 285.9 303.8Teachers salaries & allowances 196.5 221.5 234.0 248.6Milk Scheme 30.7 28.7 31.5 33.9School Equipment incl. textbooks 4.1 2.2 17.3 19.2Boarding Costs 2.6 2.7 2.1 2.2

2. Secondary 53.2 77.3 62.6 68.4Teachers salaries & allowances 41.4 63.5 52.1 54.6Grants-in-aid 11.2 13.3 8.4 9.7Scholarship for poor &

meritorious students -- -- 1.5 3.0

3. Teacher Education 12.3 13.7 14.3 15.2

4. University 48.6 64.7 67.0 70.0Salaries & allowances 23.5 34.3 37.0 39.5Students' loan scheme 10.2 14.4 6.0 6.0Scholarships for poor L

meriotirous students -- -- 2.0 3.0Students' accommodation board 4.2 4.9 -- --

5. Other (incl. administrat.,special educ.& tech.educ.) 37.3 39.0 39.0 40.5

6. Total gross recurrent exp. 385.3 449.8 468.8 498.0

Less: Budgetary usercharges 5.4 5.5 8.0 10.5

Equal: Total netrecurrent expenditure 380.0 444.4 460.8 487.5

Memo items:Number of primary students 5,031.4 5,168.0 5,318.0 5,467.0Number of primary teachers 150.5 157.0 161.0 165.0Student/Teacher ratio 33.4 32.9 33.0 33.1

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V. HEALTH

A. Performance of the Sector

1. Over the past two decades, Kenya has achieved impressiveprogress in the provision of health care for its population. Healthindicators have improved steadily and are considerably better than mostcountries at similar levels of development, although wide variations eristamong districts (especially in terms of child and infant mortality),largely reflecting variations in the incidence of poverty and one of thehighest fertility rates in the world. Much of the prevalent causes of illhealth in Kenya can be effectively addressed through preventive actionssuch as better sanitation, clean water, and relatively simple curativehealth interventions, noting that a substantial proportion of the work-loadof the health services is fertility-related. 1/

2. Health improvements in Kenya have been the result of a rapidexpansion in the coverage of government-financed programs during the 1960sand 1970s. However, since the beginning of the 1980s high population growthand fiscal retrenchment have imposed severe constraints on the Government'sability to finance expansion into under-served areas. The quality of healthservices has also suffered; efforts to restrain expenditure growth havefallen more heavily on items such as drugs, medical supplies, equipe-it,and maintenance, while personnel costs have continued to rise. At the sametime, a large and growing share of Government resources is being devoted tothe national and provincial hospitals reflecting their high costs andminimal cost recovery, thus limiting the scope for expansion of healthservices in rural areas and for more cost-effective preventive healthprograms.

Health Care System

3. The Kenyan health system may be divided conveniently into three majorsub-sectors: public, voluntary, and private. The public sub-sectorcomprises the government and municipal health services. The primaryresponsibility for the provision of health ser ices rests with the Ministryof Health, which employs just under half of the total of around 1800medical practitioners in the country 2/ , the vast majority of the 1500 orso clinical workers, and two-thirds of the 3200 registered nurses. Outside

1/ This is not surprising in that women in the reproductive age group andchildren under fifteen years of age together account for nearly 70 percentof the total population.

2/ This represents just over 10,000 people per doctor, which compares veryfavourably with the level 17,200 for low income countries in general(excluding China and India) and about 42,000 for Sub-Saharan Africa.

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the Ministry of Health, the Ministry of Local Government bears the greatestofficial health responsibilities, although the Ministries of WaterDevelopment, Agriculture, Education, Social Services, and Labour also carryout health-related functions. The voluntary sub-sector consists of themission health services, and of the health activities of what might betermed as *other non-governmental organizations". The private sub-sectorincludes the medical services provided directly by private companies totheir employees, but consists mainly of medical care provided by privatehealth institutions (hospital and nursing zr maternity homes) and fee-for-service medical practitioners. The private sector is expected to play anincreasingly important role in the provision of heath services,particularly those of a curative nature.

Public Expenditure Trends

4. No comprehensive view of total Government expenditures in the heathsector is readily available because of the fragmentation ofresponsibilities for the provision of health services over a number ofministries, the obscurity of accounting classifications used in thebudgetary system, and the lack of a means for consolidating the data thatis available. However, the expenditures of the Ministry of Health (MOH) dooffer a fair indication as to the direction of expenditures in the sectorand are thus used for the analysis in this report.

5. Expenditure Trends. The expenditures of the MOH averaged about 9percent of total public expenditures over the FY85-88 period. There hasbeen little variation in this figure, which suggests that the financialconstraints apparent in the health sector do not appear to be theconsequence of a significant shift in government priorities to othersectors, but rather to the general squeeze on public spending resultingfrom constrained budgetary resources. However, the expenditures within thesector do not appear to reflect the Ministry's priorities, and even if moreresources were available, the current lack of a contolled allocative systemmay simple accentuate the poor distribution.

6. Preventative vs. Curative Care. Public expenditures in the healthsector since the mid-1980s have not conformed to the MOH stated objectiveof emphasizing preventive/promotive and rural health services relative tocurative services. Over the FY85-88 period, spending onpreventive/promotive services and on rural health accounted for only around11 percent and 4 percent respectively of total health expenditures (Table24), which are low figures compared with those in countries at a similarstage of development. Spending on curative health services, on the other

109

hand, accounted for a high 66 percent. 3/ The in-built bias of the healthsystem towards curative heath services is also illustrated by the largeshortfall (around one-third) of expenditures for preventative/promotionservices and rural health from those budgeted over the FY85-88 period,while expenditures on curative services were much higher.

7. Personnel and Other Operating Expenditures. MOH expenditures duringFY85-88 have reflected a growing imbalance between personnel costs 4/ andother operating expenditures 5/ (Table 25b). The ratio of non-wageoperating expenditures (including maintenance) to personnel expenses hasbeen declining throughout the 1980's; it had fallen to 0.71 by FY85 andfurther to 0.56 by FY88. Looked at from another perspective, personnelexpenditures increased at an average of 6.4 percent in real terms over theFY85-88 period while non-wage operating expenditures decreased by anaverage of 4.4 percent. The steady decline in expenditures allocated tonon-wage cost items has led to a serious deterioration in the efficiency ofhealth personnel and the quality of health care in Kenya, with inadequatecoverage in rural areas. There are large shortfalls in drug availabilityin health facilities, especially in rural areas. There are frequentrepcrts of health facilities which have run out of drugs, and which lackfunds to purchase petrol and spare parts for vehicles. Whereas in the1970s the proportion of MOH expenditures devoted to medical stores, sera,and vaccines was about 28 percent of non-wage operating expenditures, by

3/ It should be :ted, however, that the sub-vote for Curative Servicesincludes all expenditures on hospital services, even though some of theseservices (for example, some of the services offered by outpatientdepartments) may be preventive/promotive in nature. Thus, the Curativeheading in the Ministry of Health budget structure may somewhat overstatewhat is being spent on truly curative services, and thePreventive/Promotive heading may correspondingly understate what is reallybeing spent on preventive/promotive services. This points to the need forthe MOH budget structure to be designed in such a way as to allow formonitoring of the achievement of the Government's expenditure policyobjectives in the health sector.

4/ The composition of employment is of some concern, in that the MOH findsit difficult to attract higher level staff since the salary levels are notattractive enough to compete with the non-government sector. The majorityof the 5.3 percent of approved posts that are currently unfilled are forhigher level positions. Middle and lower level vacancies appear to beminimal; the MOH has had to absorb the increasing number of nurses andadministrative and technical workers being trained by government and non-government institutions.

5/ MOH also provides grants and transfers to non-governmental organizationswhich operate primary health care programs mainly in rural areas. In realterms, these transfers increased from KL 3.9 million in FY85 to RL 12.5 nFY88. Their share of total MOH expenditures increased from 4.6 percent to11.3 percent over the period.

110

FY88 this proportion had declined to less than 20 percent. Maintenanceinputs are also in short supply, leading to deterioration of equipment,buildings falling into disrepair, and ministry vehicles which have becomenon-operational for the want of, sometimes only minor, repairs.

8. Capital Formation. Over the FY85-88 period, capital expenditure hasincreased from 10 percent of total MOH spending to 18 percent. It hasfocussed on the construction/rehabilitation of district hospitals, Nyayowards, and health centers, and or. the purchase of transport and otherequipment. This expansion of the capital stock has served to exacerbatethe poor maintenance situation.

B. Future Strategy for the Health Sector

9. The Government's strategy in the health sector, as articulated in theFifth Five-Year Plan, the 1986 Sessional Paper, and its Policy Statementsaccompanying Forward Budget submissions, is to emphasizepreventive/promotive - rather than curative - services, expand access forunder-served groups, and identify more cost-effective and efficient methodsfor protecting the health of the population. In order to implement thisstrategy, the Government plans to: (i) use alternative financingmechanisms to extend the coverage of health services; (ii) strengthen theMinistry's management capabilities, especially at the district level, andstrengthen its Health Information System; (iii) further consolidate urbanand rural curative and preventive/promotive services, with an appropriatebalance being achieved between curative and preventative health services,and between capital investment and recurrent expenditures on operations andmaintenance; and (iv) increase coverage and accessibility of rural healthservices.

10. User Charges. Although the Government has accepted the principle ofcost recovery in the health sector, implementation to date has beenlimited. Despite considerable potential, financing of health care inpublic facilities has not been Lelated to ability and willirgness to payand to service use. The Health Financing Study recommends expanding cost-sharing initially at the hospital level, and thereafter gradually moving tothe lower levels of the health care system. Health fees that wereconsidered feasible include drug charges, hospital charges payable directlyby insurance companies, bypass fees, and a variety of other in-patient andout-patient fees. Using conservative assumptions regarding fee levels, itis estimated that as much as one-fourth of health recurrent expenditurescould be met through user fees.

11. Health Insurance. Kenya's health insurance system also offersconsiderable scope for both increased resource mobilization and spreadingthe risks associated with higher fee structures. A review of the NationalHospital Insurance Fund (NHIF) shows that contributions to the Fund are notrelated to the level of health risk. the number of beneficiaries treated,or to the cost of the treatment received. Also, similar government

ill

institutions do not obtain reimbursements from NHIF for services rendered.Improvements in the health insurance system are necessary but will requireconsiderable study before they can be implemented; it is thereforerecommended that a policy and technical committee be appointed to reviewalternative options and to recommend policy measures for the development ofthe system. Over the short run, improved bases for estimating realisticpremium contributions, co-payments, and deductibles should be considered tonarrow the gap between the level of contributions and expenditures incurredby NHIF.

12. Institutional Development. The lack of consistency between theGovernment's health priorities and actual expenditure patterns reflectsweaknesses in MOH plant,ing and implementation capabilities. Developing amore effective resource planning process in MOH will require strengtheningand improving coordination among staff responsible for planning healthservices, budgeting, accounting, and administration. Recent efforts toimprove coordination has been made difficult by the dispersion of thesefunctions among different wings of MOH.

13. The district focus policy for rural development implies thatmore planning responsibility will be assigned to the districts. Aneffective system of inter-active resource planning will have to bedeveloped between the district and other health service levels, especiallyMOH. Development of the district focus will require strengtheningadministrative and financial management capabilities at both the districtand centr: i levels. It will also be necessary to develop mechanisms forthe establishment of district resource targets following consultationsbetween central and local levels, and of effective systems to monitorachievement of targets. At the same time, overshooting of budgetedexpenditure should be curbed, especially by hospitals. Providingincentives for achieving both cost recovery and efficiency savings shouldbe considered.

C. Forward Budget

14. The approved Forward Budget (February 1988) provides for anincrease in the share of health expenditure and a rising share of recurrentrelative to development spending. The total MOH expenditure as aproportion of Ministry expenditures is projected to increase from about 7.7percent in FY89 to 8.1 percent by FY91. Recurrent expenditures would risefrom 71 percent of total MOH expenditure to 86 percent by FY91. Althoughthe proposed increase in the share of the health sector and the greateremphasis on recurrent expenditures appears consistent with the Government'sobjective of continuing to improve health care and consolidating pastinvestments in the sector in order tc provide adequate resources foroperations and maintenance, the pattern of expenditures is at odds with theGovernment's objective of emphasizing rural health and preventive/promotiveservices, and the need to increase allocations to non-wage operations andmaintenance expenditures. Unless the expenditure priorities implied in theForward Budget estimates can be changed to better reflect the Government'sstated strategy and objectives, there would appear to be littlejustification for the increased share proposed for the health sector.

112

15. Preventative vs. Curative Expenditures. Expenditure patterns forthe Forward Budget period (FY89-91) indicate a continuation of past trends.Total expenditure on curative services, which averaged 66 percent of tctalMOH expenditures during FY85-88, is projected to rise to 73 percent.During FY89-91 both rural health and preventive/promotive services areprojected to experience negative real growth of about 11 percent, whilecurative services would grow at nearly 1 percent in real terms. Alsodisturbing is the fact that more than half of the budget for curativeservices is incurred at the upper levels of the hospital referral system,namely Kenyatta National Hospital and the Provincial Hospitals. This is aresult of the high share of hospital beds at the tertiary level which haveconsiderably higher unit costs than other levels of the health system.

16. Although Recurrent expenditures are planned to in,crease onaverage by 1.6 percent a year in real terms over FY88-91, the imbalancebetween curative and other expenditures will continue to worsen. Over theperiod, curative services will experience real annual growth of 4.7 percentand absorb almost 80 percent of the total Recurrent budget, up from 73percent in FY88. Expenditures for preventivelpromotive programs are notprojected to increase in real terms. Expenditures on rural health serviceswill decline substantially in FY89 and 90, before returning to the FY88level in FY91. Health training is also expected to decline in real terms.

17. Within the allocation for curative services, the relative shares ofKenyatta National Hospital and the Provincial Hospitals are projected toremain stable. This pattern of expenditure, however, appears inconsistentwith MOH's stated policies of decentralization and cost-effectiveness.Clearly, curative care will continue to play a major role in Kenya's healthsystem, but there needs to be a more careful evaluation of the form thiscurative care should take and where it can be most effectively provided.

18. A reallocation of some budgetary resources away from theKenyatta National Hospital and Provincial Hospitals to the DistrictHospitals and to primary health care units is likely to be more costeffective. This measure would brirg curative hospital services closer tothe users, and would represent considerable savings in time and transportfor patients and their families. In addition, larger allocations toDistrict Hospitals would enable them to provide more effective technicalsupport and a more efficient supervisory role to the primary health careunits. This reallocation of priorities, if accompanied by cost recoverymeasures in Kenyatta and Provincial Hospitals, would permit maintaininghealth services at the tertiary level while improving the costeffectiveness of government expenditures on curative as well as primaryhealth services.

19. Operations and Maintenance Expenditures. Non-wage operatingexpenditures, which accounted for 24 percent of total MOH expenditures inFY88, are projected to decline to 22 percent in FY89 before rising again toabout 23 percent for the remainder of the period. Maintenanceexpenditures, which accounted for only 1.8 percent of total expenditures inFY88, are projected to fall to 0.9 percent by FY91. The proposedallocations for operations and maintenance appear to be inadequate in terms

113

of meeting HOH's objectives of improving the quality of health services anda better utilization of its capital stock. In addition to improving theallocations for non-wage operations and maintenance expenditures, there isa need to develop more precise estimates of the requirements of thehospital and health center subsectors. Improved estimates of theoperations and maintenance requirements should be followed by detailedaction plans to ensure their effective implementation.

20. Development Expenditures. Development expenditures are projectedto decline by about 25 percent over the Forward Budget period. Curativeservices would account for about 40 percent of development spending andrural health activities for about 37 percent. The proposed allocation forrural health is consistent with MOH's objective of strengthening ruralhealth services. As discussed above, however, actual expenditures on ruralservices have not conformed to budgetary priorities and allocations.Unless MOH's planning, administrative, and monitoring capabilities can bestrengthened considerably, it is likely actual expenditures for ruralhealth will continue to experience shortfalls.

21. Grants and Transfers. Grants and transfers over the ForwardBudget period are projected to increase by 12 percent annually in realterms. Their share of total expenditures would rise from 11 percent inFY88 to 15 percent in FY91. To the extent that grants and transferssupplement health services provided by MOH, the proposed increase would beappropriate. In implementing this increased allocation, however, MOHshould ensure that resources are spent according to government priorities.First call on public money should be given to facilities located in under-served areas providing a comprehensive range of preventive, promotive, andcurative services. In determining individual allocations, MOH should alsotake into account resources available from other sources, particularly theNHIF. Transfers from NHIF have been rising in recent years as more peopleare drawn into the scheme.

TABLE 24 Ministry of Health Expenditures by Sub-vote, FY8S - 91(KL million in FY85 pricen and percentages)

Actual Forward Budget Annual Average Annucl Growth RateFY85 FY86 FY87 FY88 FY89 FY90 FY91 FYOS-91 FYSS-91 FYS9-91 FY99-91

Total Expenditures (amount) 84.1 86.0 92.3 109.3 103.2 96.0 97.1 96.6 2.4 -3.9 -3.1rotiv- health -servic-e 63.3 67.4 63.0 70.8 71 0 69.6 72.2 64.8 .16

Preventive/promotive services 3.0 3.6 3.6 4.4 6.4 4.6 4.3 4.3 5.9 -0.C -10.9Rural health 8.6 11.6 10.0 17.8 16.2 12.1 11.9 13.1 6.7 -12.5 -11.5Others 19.3 13.4 16.8 16.3 11.6 8.8 8.7 13.4 -12.4 -10.1 -13.4

T'osl Expenditures (percent) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0-turati Te t hi

2 ervices 63.3 68.8 68.2 64.4 68.s 73.2 74.3 68.2Pr-ventive/promotive services 3.6 4.1 3.8 4.0 6.3 4.8 4.4 4.6Rural health 10.1 13.4 10.9 16.7 14.7 12.7 12.3 13.8Othere *> 23.0 16.6 17.1 14.9 11.3 9.3 9.0 13.6

Memo item:C df~iator 100.0 109.9 118.F. 127.0 136.8 144.0 161.3

a> Includes administration, training, supplies coordination, research, and tho National Hospital Insurance Fund.

Sourc- : Ministry of Financi, Budget Documnts, and Forward Budget.

TABLE 25a: Trends in Ministry of Health Expenditure by Economic Cloesification, FY8S-91 a'

(KL million, in FY86 price-)

Actual Forward Budget FY8-891 FY8S-91 FY89-91

FY85 FY86 FY68 FY89 FY90 FY91 Annual Average Growth Rate Growth Rate

R;eurr nt Exp nditurs 79.2 77.0 79.9 83.4 79.8 1.7 4.1

Personnel 49. W.: I 77 W": iW-4l" ~Non-wage operating 16.6 14.9 16.6 20.0 17.C 6.4 16.9

Capital Formation b) 0.4 0.4 0.4 0.6 0.4 6.2 14.1

Maintonence 0.6 0.6 0.6 0.6 0.6 3.a 6.6

Grants A transfers 12.1 10.9 12.4 14.7 12.6 6.7 16.4

Dev-lopMnt Expenditures 31.4 26.3 16.2 13.4 21.6 -24.6 -26.5

PersonnTl o.6 -_6i 0.1 0T0 --1 .a -Tan

Non-wage operating 9.4 8-0 4.4 2.2 6.0 -36.3 -47.4

Capital : equipmnt 3.2 2.6 1.3 1.6 2.2 -21.3 -21.9

construction 16.3 13.8 8.1 9.4 11.9 -16.7 -17.2

Maintenance 1.4 1.6 1.0 0.2 1.1 -46.6 -43.1

Grants A transfers 0.4 0.2 0.2 0 0.2 -100.0 -100.0

Total Ex2nditur-u 64.1 66.7 110.6 103.3 96.0 96.8 101.4 -4.3 -3.2

P-T'reonnel 42.1 45.1 tO.2 60.6 48.0 47.6 .49.1 1 :i

Non-wage operating 29.8 25.0 26.0 22.9 23.0 22.2 23.6 -5.1 -1.C

Capital:-quipment 6.3 11.4 3.6 2.9 1.7 2.1 2.6 -i6.- -16.3

consaruction c) N.A N.A 16.3 13.8 8.1 9.4 V.9 -16.7 -17.2

Mainteneanc N.A N.A 2.0 2.1 1.6 0.8 1.6 -26.2 -37.6

Grants A transfers 3.9 4.3 12.6 11.1 12.6 14.7 12.7 6.5 1S.3

memo IteCDFP 7l1tor 100.0 109.9 127.0 136.8 144.0 161.3

a) Data FY87 not available. Disaggregated and development expenditures not available for FYo 86 end 86.

b) Includes capital formation on equipment only.

c) Data on capital formation in FYs 85 and 86 not available for separate categories of equipment and construction.

d) Expenditure on maintonance for FYs 86 and 86 included *inder non-wage operating.

Source: Ministry of Financo, Budget Documents, Forward Budget, and Central Bureau of Statistics

TABLE 26b: Trends in Ministry of Health Expenditure by Economic Classification, FY8S-91 *>(percentages, in FY86 prices)

Actual Forward Budget FY8S-91FY86 FY86 FY68 FY89 FY90 FY91 Annual Averngo

Rocurr-nt Expendituroo 100.0 100.0 100.0 100.0 100.0Porsonne l 177 ! 4 _W.0 -r71I -§1Mon-wage operating 20.9 19.8 28.8 24.0 21.9Capital formtion b> 0.6 0.5 0.5 0.6 0.5Maintenance 0.7 0.7 0.7 0.7 0.7Grants & transfers 165. 14.1 1656 17.6 16.7

Develoom nt Expenditures 100.0 100.0 100.0 100.0 100.0Personnel 1. _0. 0.7 0 ur 1.0Non-wage operating 80.0 80.6 29.2 16.5 27.9Capital equipment 10.1 9.7 8.6 11.6 10.0

construction 62.0 62.4 63.6 70.8 66.2Maintenance 4.6 6.1 6.8 1.6 4.9

Grants A transfer- 1.8 0.8 1.4 0 1.0

Total Expenditures 100.0 100.0 100.0 100.0 100.0 100.0 100.0P-rsonnol 601 62.6 46.4 46. 50. 0 49.2 48.4Non-wage operating 36.6 29.2 23.6 22.1 24.2 22.9 23.2Capital equipment 9.9 13.3 3.2 2.8 1.8 2.1 2.6

co3atruction c) N.A N.A 14.8 13.3 8.6 9.8 11.7Maintenance a N.A N.A 1.9 2.1 1.6 0.9 1.6Grants A transfers 4.6 5.0 11.3 10.7 13.3 16.2 12.6

a) Data for FY87 not available. Disaggregated recurrent and development expenditures not available for FY86 and 9.

b) Includes capital formtion on equipment only.

c> Data on capital formation in FYo 85 and 88 not available for separate categories of equipment and construction.

d) Expenditure on m*intenance for FYs 86 and 86 included under non-wage operating.

Source Table 26a

117 Appendix 1Page 1 of 3

COMPULSORY RECURRENT AND DEVELOPMENT EXPENDITUREITEM CODES AND SPECIFICATIONS

ITEM SPECIFICATION

000 Personal Emoluments040 Gratuity and Pensions Contributions050 House Allowance060 Other Personal Allowances080 Passage and Leave Expenses100 Transport Operating Expenses110 Travelling and Accomodation Expenses112 External Travel amd Accomodation120 Postal and Telegrams Expenses -

121 Telephone Expenses130 Official Entertainment140 Electricity, Water and Conservancy150 Purchase of Supplies for Production153 Fungicides, Insecticides and Sprays160 Purchase of Food and Rations171 Publishing and Printing Expenses172 Purchase of Uniforms and Clothing173 Library Expenses174 Purchase of Stationery175 Advertising and Publicity Pi.', ;

181 Payment of-Rents and Rates - Residential182 Payment of Rents and Rates - Non-residential183 Contribution in Lieu of Rates184 Contracted Professional Services185 Computer Charges186 Hire of Transport, Plant and Machinery190 Miscellaneous and Other Charges193 Fees, Commissions and Honororia200 Replacement of Motor Vehicles202 Replacement of Bicycles and Motor Cycles204 Replacement of Aircraft207 Replacement of Boats210 Purchase of Additional Vehicles212 Purchase of Bicycles and Motor Cycles214 Purchase of Additional Aircraft217 Purchase of Additional Boats220 Purchase of Plant and Equipment250 Maintenance of Plant, Machinery and Equipment260 Maintenance of Buildings and Stations270 Maintenance of Water Supplies and Sewerage280 Maintenance of Roads, Ferries nad Jetties290 Maintenance of Aerodromes and Airstrips295 Minor Alterations and Maintenance Works300 Grants to Statutory Organizations

(Purpose anid Recepient must be specified)

118 Appendix 1

320 Grants to Local Government Authorities Page 2 of 3(Purpose and Recepient must be specified)

340 Grants to Private Organizations(Purpose and Recepient must be specified)

360 Transfers Abroad to International Organizations(Pt:pose and Recepient must be specified)

380 Interest Payment390 Internal Government Transfers400 Construction of Buildings -. Non-residential410 Construction of Buildings - Residential420 Construction of Water Supplies and Sewerage430 Construction of Roads, Bridges, Ferries and Jetties440 Construction of Aerodromes and Airstrips500 Capital Fund e.g. Central Stores Fund520 Financial Investment - Including lending530 Financial Investment - Redemption Expenditure

119SCONOMIC CLASSIFICATION OF EXPENDITURE 1 Aendix 1

CUR.R:LT EXPENDITURE _ _ _

LABOUR' COSftS

Personal le xens. ................................. *..... ; ....N .uSe AlloF anc e ........................ ...... a ........... Pas Banges ni s.... ......... .......... 99...*... .-. p.......TN.S.S.F PF and Supovanuation ud.................. --i-M4edleal Benefits .......... . ....I.I.......a.......... & ....... 40 00o0o a0004-00

Othex Benefit3 ..................e.... .....

O,HER GOODS AND SERVICES

Trarn&{nrrt and travelling expenses... ...................................-- - - - .--Postal. and Teieto,o cation expeago ....................................... .-Off`.cial entertainent................ . . .................

Electricity, water and conservancy ............*.. .............. ........ ......Purchase of storeso-....... o . o .-.. I. I. -..-, : _..10 *...'I... .. 1.. *-** .- **. *Unitorms anA clothing............................... ................ *.*.0.* . . .Cther hirings, rents and rates.................. ..................Advertising and publicity*..**.........9...0.. ... 0 ... | .....Training expenses............ .. ...... OI.IOa...... 0..60 ... S... .....Expenses of Boards, Committees, Conferences etc .................. .0 ....Commisson to agents ...... ..... ..... oooe. . 9....... e9.9 9.... o...'.9. . 94 ... 00 ..... .MaiLtenance and Repairs .. ..... .... 9... ...................... .....Insurance.... 0.0.0-0.-.90 ... 00.0.0-- -- **--- ..-- ...- *.O....1 * -0- 0 ...Otner miscellaneous charges ..... ...............................

............ . .......... ...... ................................... .. ....... .

'RANSIERS-TO'baseholds and unincorporated enterprises . ..........0 ..... ........ .rirvate non-profit institutions serving households ....... .......... ......Central gove*nrnmnt...... .. . , , ......... ....... .. ......... .......... 90* .... ...... ,_ ..... .. ..TRANSFER~ TC FUNDS (currekt)Renewals fund ...................... 99*9... ......

INTEREST - Internalo- ...I..I.....I. , o_ I,__ I9Io . I a II oI.A. 0III.......... ... I.I.I.I .......- Extlernal .... 0........ _z.. ........ &.0.0 .0 .... ..... 00....... OG09Tctai b;urrent ... .... ......... 0.......O.. , _ .....

CAPIEAL EXPENDITUREGRO'S FIXED CAPITAL FORMATION

Re3idential Buildings. .. ...... ... .0.. ...... ........... 9999Non-residential Buildings ......................... ..... * ....Construction and Works...... ................... ..... 999*b.Plant, Machinery and Equipment..I . ....... ........I.I.*I I .I.IIII..I.. I.. I I..... .. ...Transport Equipment- vehicles ...... 0-0 .... ... .. .. ... . .... 9..9...

Land. ..... ... O ... oo .. 9........ *..99..9..9999999 99. 999 .0 .. 00..0 . ........ .............

LOkN REPAYMENTSInternai ......... 9 - .. ........ ... ........ ...... 0External ...... ....... 9 99....9999.... III9.....9 9 ...

TRANSFER TO FUNDS (capital) .....9999.......... -9..... ... .... . ....Total Capital ...... 9...99.......9.9....... .. . .. ...... 9...9.9..9. ...

Total current and capital.............

120 Appendix 2

rage I or 3

MINISTRY OF EDUCATIONProject List

The following are the Ministry's project priority list:-

1. University Education

2. 8-4-4 Education Programme

3. Teachers Education

4. Kenya National Examination Council Project

5. Kenya Literature Bureau Project

6. Commissio,n for Higher Education Development

7. Kenya Special Education Institute Project

3. 41 Decece Centers - Pre-primary Education Project

_ J

121

Appendix 2MINISTRY OF HEALTH Page 2 of 3

Project Lint

ULU PRECRITX

1. Provincial Hospitals-. District Hospitals3. Chemical Officers School - Mombasa4. Maintenance Schools at - Eldoret, Kilifi, Meru5. Rural Health Training Ctrntres

MEDIUM PRIORITY

1. Psychiatric HospitalsHospitals

3. Health Centres

122

MINISTRY OF AGRICULTURE Appendix 2Project List Page o 3

HIGH PRIUI-X

1. Oleguruone Tea Schemes2. Agriculture Access Roads3. Small holder irrigation projects4. Ndeiya Karai ASAL projects5. National Agriculture Extension Projects6. Kitui Integrated Development Project - ASAL7. Machakos Integrated Development Project - \SAL8. Baringo ASAL project9. Group Farms Supervised Credit10. Kisii Valley Integrated Dc'elopment Project11. Crop protection services

MEDIUM ?RIORIT

1. Robusta Coffee Development Project2. Cotton Development Project (CP & MB)3. Small Holder Coffee Improvement Project - SCIP II4. Kwale/Kilifi Rural Development Project.5. Horticultural Export System Development6. Farmers Group & Community Support Programme - Siaya.

1. Sugar Rehabilitation Project - KSA2. Coast Horticultural Development Project3. Small Holder Mechanization Project4. Micro- Project5. On Farm Grain Storage6. Rural Structures Unit.

123123 ~~~~~~~~Appendix 3

Page 1 of 4

M4INISTRY OF FINANCE

GvVERNMk'T IN'JV:TMENTS DIVISIG*/TRE',SURY

BRIEFING SEMINARZ ON ,ANNUjL BUDGET (1987/8? ) AND FXRWARD BUDGET(31988/89 - l1¶29/90) FOR STATE CORPORATIONS, FROM 28/1 /7 TO4/2/87

LIST OF PARTICIPANTS

(The Ministry would be represented by the PF & EO whilc theState Corporation would be represented by the Financial Manager/Chief Account.nt).

28/l/e7 Miristry of EDi-rgy and Regional Developyent

'i'ana -r.r t,th; Rivers Development :.uthority

Likc B-sin D-veloprent Authority

Keric V.U11.Y Development Authority

Kenya 1ower -nH Liehting Co. Ltd.,

Keony Power Co. Ltd.,

T-';. iiver Dcvelopmont Co. Ltd.,

Kcnya Pipcline Co. Ltd..,

Kenyn Nntional Oil Corporation.

29/1/87 Ministry cf Comnacrce and Industry (a) (

Industrirl -'ni Commercial Development Corporation

Kenya InOustri,l Estetes

Industrial DL;velopmznt Bark

Kvnyn Nr. ional Trarling Corpor-tion

E.A. Portilinc Cc-rrent Co. Lt.,

Ben;huri Portlton Ce-zent Co. LtP.,

Salt hanufacturer= (Kenya) Ltd.,

Kenya Wincs ;.encics Ltd.,

Kicorri (19e,3) Lt'.,

Cer.aic Industries (E.f.) Ltd.,

E.A. Fine Spinners Ltd.,

./... 2

124

Appendix 3Page- 2f 34

General Motors (Kenya) Ltd.,

Kenys. CRshewriuts Lti'.,

KenyR Engineering Industries Lte,

Minet I.C.D.C. Ltd.,

301/1/87 Ministry of Commerce anc' Ineustry (b)

Mt. Keny- Botilers Lt-,

MuSxtex M-1nuf'cturers Co. LtO,.,

Rift Vn'lley Bottlers Ltd,

Rift Villey Textiles Mills Ltd,

Uchumi Supermarkets Ltd,

, ssocintee Vehicles ,ssemblers LtO.,

Milline Corpor"Liorn of Kenyn Ltd,

Kenyn Inr'ustriPl Resenrch nnd Deuelopment Institute

African Diatormite Industries Ltd,

Xensa Drilling Co. Ltd,

Kenyn Nationel Properties Ltd,

Synthetic Fibres (Kenyi) Ltd,

Yuken Textiles Industry Ltd,

Kenyn Bureau of St.nndards

2/2/87 Ministry o; Finnnce/lTeasury (C)

Cerenls and Sugnr Finance Corporation

Kenya Nstionnl Assurance Corporation

Kenya Reinsurrnnce Corporation

ilousing Finence Co. of Kenya Ltd,

National Bn'nk of Kenya Ltd,

Investments Advisory Centre

Savings nne Lonn (Kenyr) Ltd,

Kenyn Nntionnl Cnpital Corporation Ltd,

Town Properties Lte,

-"^"ci'^l Finance Co. Ltd,

125Aeppndix 3

2/2/R? Ministry of Worlks, Housing And Mhysical PlazninX (i-)

National Yousing Corporition

National Construction Corporation

2/?/87 Office of the Preaident tZ

tgriculturnl Development Corporation

2/2/87 MinistrY oi Inform.,tion and Broadcasting

Kenya Film CorporaLion Lt,

2/2/87 Ministry of He-.lth

IKeny., Tryprnosoini.'sis Resen.rch Institute

3/2/87 1e1inist.-y of Lduc:.Lion L 3)

Keny. Nr'ional Libr-ry Services Bonrd

Ni'ttionn.l Council for Scicnce and Technology

U:.;vcrsity Stuit'lLs ..commoOrtion Bo'nrd

3/2/87 Mini;ry of Toturism ar.d Wilelifelxe

Cr.tcring Levy Truwtees

Kcny-t Tourist Development Corporntion

African Tours and Hotels Ltd,

Kenya Mnrine and Fisheries Research Institute

Bomas of Kcnya Ltd,

Kenya Utalii Collegc

Hotels and Rcataurants :uthority

3/2/87 Ministry of Transport ane Communications (-7

Kenyt Railwnys Corporation

Kanya Ports Authority

K.P. & T. Corporetion

126 Appendix 3

Page 4 of 4

Kony-i 'irwns Corporntion

Transport Licensing Board

Civil Avintion Board

Kenyr. Shipping .egency Lte,

Ministry of tgriculture L2A

National Irrigation Board

:.griculture Finance Corporation

Kenya Tea Development Authority

Cotton Lint ane SeeW Marketing Board

Nationpl Cereals ane Produce BocnrO

I;enya Meo.t Cornmission

Pyrcth.um. Donrd of Kenya

Col'ec Boarcl of Kenyn

'lort icultural Dcvelopment Authority

4;nyn Sugex #uthority

Kcnya Dairy bonre

Chemi,lil Su&nr Co. Lte,

L.,. Sut:-r InWu8tries Ltd,

Hurrian Sugnr zo. Ltd

Nzoia Su:r. Co. Lte',

South tNyenzv. Sugar Co. Ltd,

Kenyr. Tea Research Foundation

. Tea Board of Kenya

wL.nds Ltd and Agriculture Settlement Fuad

Sisa.l Board of Kenyn

Ycr,ya Seed Co. Lte,

.Agro Chemical and Food Co. Ltd,

Mwen Rice Mills Ltd.

127

Appendix 4Pale 1 of 8

Additional analyses

Table 2.14 Public sector manpowerthousands.

whole time equivalents1912 7- I')81-112 1982 2-43 IY'A3-M4 1'4-N5 1tNMS-W6 l9i4-147 1.4.118 19'M4-W 199-(A) l'JVA-91

acialu actual actual actual actual actual actual target plam plans plan%

Central government,departments(')

)etctictc 22 1 24431 193') 1945 N 177 6 17148 167 4 146t0 (i) 145 5 144 5 144r4For9sg% antd

Consnsss.swc.uI,Is o(i;cc 914 93 9)2 B." 8d3 811 84tt 82 812 812 82Ovenrss I tvclopincati

Adnmintiration' 23 2 0 1 9 118 1-7 I S 15 1 I6 16 16 1 6Mimestry (if Agricu12 rec

FashIrkse and Foodl 1441 127 123 118 114 112 1/)7 10)7 107 1()7 10(7lntcrvctiaoIi Bloard t'r

Agrsicultural l'rodticc 4S 0t6 016 ()6 0'7 0U7 4)8 0-9 4)9 ()9 (09Tradc and lidustry 164) 144 1318 125 116 IIS 11S 116 118 11 7 117Export Credits GC.aranste

l)epartnictit 24) 1)8 118 1 8 18 1 14 17 1 7 1 7 1 7 1 7Energy 1 3 12 1.1 1.1 11 1.1 1 ( 1.4) 1.0 1 10 (Employmenot 53 6 56 2 58 2 57 1 556 552 58 0 61 4 60f8 60f6 606Transport 109 100 97 104 112 114 111 10(9 10(9 109 109Department of the

Environmnesst 12 5 95 8 3 72 66 65 65 6-6 66 66 66Homc OliTce 33 3 350 34 8 358 36 5 37 0 37 6 38.7 38 9 39 2 39 3Lord Chancellor's

l)epartmcnt 106 10-0 102 102 10-1 10-2 102 106 107 108 109Education atid Science 3 7 36 3 5 2 9 2 4 2-4 2-4 2-5 2-6 2 6 2-6Ara and Librares 01 01 0 0-I 01I 01 0.1Department of Health and

Socul Security 97 6 96-7 9ff0 92-4 9146 92-8 94-7 102-9 98-6 96-0 95f9Scotlnd 12-8 12-6 12-4 12-0 11-9 12-0 12-0 12-2 12-4 122 122Wakls 2-5 2-3 2-2 2-2 2-2 2-3 2-3 2-2 22 22 22Nonhern Ircland Office 02 0-2 02 0 2 0C2 0-2 0-2 02 02 02 02Customs and Excisc 28-8 26-5 25-8 25-3 25-3 25-3 253 26-6 271 27 4 27-9Inland Revenue 84-9 7418 73 5 71-5 69.8 69-5 68-8 68-0 68-1 68 1 68-1Chancellor's other

departments 151 143 140 13-2 12-6 12-3 12-1 11-8 118 117 117Property Services Agency 36 8 29 2 21-3 26-0 24-8 23 9 231 22 4 22 2 22-0 21 9Other departments(') 13-5 12-1 10-6 10-1 10-0 10-3 12-3(') 14-9 15-3 15-9 16-4

Total Civil Servicemanpower in runningcostb W1 63-2 6205 6004 5849 5734 S792 5731 5700 567-0 S67-2

Trading funds(') 34-8 29-5 26-9 25-3 25-2(') 6 3(2) 6-3 6-3 6 2 6-2 6-1

Other Civil Servicemanpower(') 10-1 10-3 10-2 10-6 11-1 11-4 12-0 13-2 14-4 14-5 14-6

Clvii Servic manpowertotxtis 73440 67830 6574 64 621-2 5967 S97-S 593 2 597 58717 5874

128

Table 2.10 Public sector capital slwnding(') by spcnditig authority and deparsnscnt soe . o 8L nsillion

N'M2 M3 19KI h4 1984 8. 189h .W 198 87 1'M7 I ) 18 F'J 19)89 'Il 19'A1 I1

01IMttIr, titt skiut lrt utcutr,i tsit turn osul turtui c:mt ctld phf)sl. piii r InOutturn)

Central governmentl)efeliee 4,195 4,715 5,s 5,42 5,43. 5,659 5VONt 5.9ccO .(got)For'igci atid Commollov,twextll,

Offite(2) 9 12 13 13 18 2h 32 .S1 3tiMmistry of Agriculmtre Fi%lt,rics

aiti Fi xx(-) 127 149 13N6 ' 0 77 97 1M1 'st 9t

Tralt and lndustry(2) 16 Li 359) 375 299 365 230 292 234) 14)1Eiimrgy' 35 44 CA 31 13 11 1 6Eiiiploynitcnc 44 47 57 5)4 62 74 62 (6) Rt

Transport (- 66 637 707 72) 759 884) 893 910 954DOE-Housing 502 873 791 748 680 70t, (75 67;(0 6)DOE-Other ecovironmentrl

services 41 44 52 63 66 8t 89 90 90Honic Office(2) 95 126 140 176 196 238 325 370 3641Education and Science 243 237 250 287 3() 319i 326 350 340Arts and Libraries 15 14 16 21 22 36 59 70 70DHSS-Hcalth and personal

social services 707 731 834 912 992 1,019 1,0)30 1,(06 1,0w)DHiSS-Social security 9 23 21 48 77 87 143 200 210Scotland 666 542 559 5'3 581 51 5 508 530 520Wales 325 313 279 271 314 298 313 34K) 2(9Northern Ireland 303 289 311 341 368 367 378 360 381Chancellor's departments 21 19 37 78 117 145 138 ,30 140Othcr dcpartmcnts(2) 97 86 138 145 120 111 90 90 80

Total central goverunsent 8,466 9,261 10,128 10,503 10,561 10,908 11.068 11,430 11,510

Local authoritiesTransport 700 764 814 669 585 566 665 670 680DOE-Housing 2,193 2,877 2.890 2,492 2,347 2.575 2,730 2,634) 2.540DOE-Other environmental

services 793 801 993 933 1,016 1,084 823 820 820-ome Office(2) 133 157 163 181 184 236 218 210 210Education and Science 443 457 481 519 523 528 485 490 j00DHSS-Health and penonal

social services 76 86 95 102 107 119 111 110 110Terntones 1,079 1,333 1,219 1,226 1,332 1,525 1,448 1,520 1,530Other 155 120 111 105 74 84 60 60 60

Total local authorities 5,571 6,595 6,766 6.226 6,168 6,7151 6,540 6,510 6,470

Public corporationsElectncity 1,632 1,847 1,737 1,648 1,597 1,575 1,765 1,930 2.510Bntish Steel Corporation 130 190 230 218 254 237 256 270 290British Rail 239 224 341 400 427 391 498 560 550Water 736 804 764 847 1,014 1,042 1,104 1,200 1.300Other nationalised industrtIes(3) 1.042 920 592 985 922 1,015 1,139 1,100 1.100Other public corporations 888 947 1,000 987 982 1,045 1,089 1,130 1.200

Total public corporations 4,667 4,932 4,663 5,084 5,196 5,306 5,852 6,190 6,940

T9tal public sector capitalspending 18,704 20,788 21,557 21,813 21,925 22,929 23,460 24,130 24,920

Real terms(') (base year 1986-87) 22,312 23,708 23,548 22,470 21,925 21,994 21.535 21,400 21,450

The figures for 1987-88, 1988-89, and 1989-90 make no allowance for allocations to capital spending fronm the Reserve

()OSee T n 1, 2 11 de p'f,.ph 21 J.-, th, okfirm-g PvAr pejies c; %cne..i ,,f I;tcis - , .e pljr,- byod he , ( 9)) x- r-ci k.,; I

))Ezsl..dr,5 hi, ,^ ...j i Sh h,e., h e,.oh, ve Ms.y e, p.. retsC -d

129

Appendix 4Page 3 of 8

Table 4.t Nationalisd industries' finncing IC million

1'M2-#3 1"#3-#4 I1'4-4#5 19MS-W46 19'-87 I987-8 I l14-8') A1919-91A 199' IIIoutturn outtum outturn outturn totturn i c<unated plaits plans plai%s

outturil

Total capital requiremcnts 6.W5 6.#43 4.522 5,7tW4 4 21) 1 4,6H1 5,191 5,31. 6.035Total internal resources 4,755 4,569 695 3.'1J# 3.1321 4,227 4.5414 5,417 6.421

Total external finance 2,140 2,274 3,827 1,709 387i 455 17 -32 - 386

Of wliiel:loirrowilsig (netc)(), 26A 375 1,11)3 -642 - 135W6 - 1.5S84 -671) - 1.277 - :.585('granits 1.#72 108'0 2,724 2.351 1,972 2.0139 1,357 1.24S 1.1)99

Table 4.4 Nationalised industries' capital requirenments £ million

1982-#3 1983-84 1984-9i 19M.S-8 1984-87 1987-88 1988-M9 189-',M, 199I 9I1oitttr n) outnturn out turin outttLrit outrttnrt c%tn ad plan% plan plans

otutturni

Expenditure on fixed assetsin the UK(')Britisih Coal 8:57 72(i 38'- () 651 648 0419 649 649Britisih lailwavi Board 273 27(; 343 402 428 54(0 641 655 678britisic Slipbtiuldcrs(-) 43 48 12 17 9 1 1 8 8 8British Stedc Corporatiuo 138 193 233 221 257 237 236 274 288British Waterways Board 4 4 4 5 6 8 8 9 6Civil Aviation Authority 26 21) 19 19 3N1 3O 36 34 4;Electricity (England and Walcs) 1,271 1,389 1.310 1,236 1,1/5 1,320 1.334 1.727 2.311$Girobank 4 11 13 8 12 13 14 14 15London Regioniai Transport() * 230 248 297 36j 348 319North of Scotland Hydro-

Elcctnc Board 47 46 41 46 55 57 66 82 78Post Otffcc 125 123 148 146 1(W4 135 163 165 1911South of Scotland Elcctricity

Board 319 419 388 376 377 201 171 129 115Scottish Transport Group 14 17 2l I8 17 17 18 17 15Water (England and Wales) 741 823 796 888 1.044 1,093 1.158 1.255 1.363

Subtotal(') 3,861 4,082 3,721 4,278 4,411 4,610 5,087 5.365 6,087Industrics privatised bcfore

1988-89(') 2.880 3.226 2.387 1.159 671 48

Total expenditure on fixedasses 6,741 7,309 6,107 5,437 5,082 4,658 5,087 5,365 6,087

Changes in working capital 122 -397 - 1.440) 269 -811 142 286 216 1(1Othcr capital requircrnents(6) 31 -69 - 145 2 - 52 - 118 - 181 - 197 - 213

Totel capital requirements 6,895 6,843 4,522 5,708 4,219 4,681 5,191 5,385 6,035

(s,I1w".fi srail vaJh. O h . w.ad as 'IN,, 7 Al, 4 I 14,(' I.' M 1.4.4. 4 4, ,xf I." OIN,, I 4.1. 4 , I.,( T). W 7jh4 i. -. w, I 1, (V -' ir-1q..s,s.w,0! ,,-d.. PRq.

130

Appendix 4:-age 4 or a

Table 4.S Nationalised industries' internal resources C million

19*#2-83 19143-84 1984-8i 1916--W6 I'JWr-H7 1I917-14 4-Joutturil outturn outturi outtumn outturn estimated plans

outturn

Current cost operating profit(l)13ritish Coal -275 -718 - 1.91)I -147 -546 -170 -115lIritish I;aIWays Board -'942 -N873 - 1.214 -14)3 -926 -7(07 -7341Iritish Shipbuilde(2) - 1#11 - 385 - 163 - 196 - 245 - 135 - 110llritish StLel Corporation - 275 - 105 -42 130 202 (4) (4)British Waterways Board - 34 -35 - 41 - 39 - 39 - 39 - 41Civil Aviation Authority 39 13 11 -8 29 18 7Electricity (England and Wales) 868 9)1 - 1.292 944 1.154) (4) (4)Girobank 18 17 19 20 23 23 27Londoni Regional Transport(3) -183 - 191 -132 - 74North of Scotland Hyiro-Electric Board 53 44 22 74 77 (') (')Post Office 130 119 127 123 103 118 125South of Scotland Elcctricitv Board 72 104 46 249 284 (4) (4)Scottish Transport Group -3 -5 -8 -10 -9 -12 -4Watcr (England and Walcs) 308 268 291 430 557 (4) (')

Subtotal(4) -222 -657 -4,216 523 458 1,232 1,679Industrics privatised beforc 1988-89(-) 2.624 2.525 2.154 914 344 39

Total current cost operating profit 2,402 1,868 -2,062 1,437 802 1,271 1,679Interest, dividends and tax -2.870 --2,688 -2.491 -2.217 - 1.849 -1,784 -2.397Depreciation ectc() 4.577 4.812 4.370 3.970 4.038 3.535 4,457Other receipts and paymcnts(7) 645 577 878 808 841 1.204 765

Total internal resources 4,755 4,S69 695 3,998 3,832 4,227 4,S04

(')Soe mods.te mse hoseluuw tests, dsthe h.is, eth.eir .Moee's Betdu, . this dis tw txehusa.., o.4 Gogfoe,ms Iatrs.tw Fevem.e pmnpwes tef ieipste mis th,is tik may A .trow.fw lommook' s0 .6 ut ithem u"Ms .ustsi(3)See rahk 4 J. owe (2j.(')See Tabk 4. 1, met e().()See TeAke 4J, e (4). Eu ,uwtedproitfiguerrJet t r Benih, Steel Ceeperdt ;'. Ekfamsty (EL-W4. the Sc, .si Eklatwery alt m.d hater ( Iwe mehuefird too itals hut Mr poet

these' separately de to smpews' pewrsatwm..()S.e Tailo 4.J, * et, (5I.(6)Isslses est closee sak ,-uu sut, m.'etay we*rt'g teaul adtwtsse' &W eew items tole4ro "sse vemnus s.f,lunIj(7),losludke peeeed Jfrm mkds of fixed asses tefher mm red,ted to p*oesstte prefil dad ether recIpt sSee Tabk 4.Jfor sruJs meolsdoed Anthem Ite,.,. rise,tes

131

Appendji' 4Page 5 of 8

I'tublic eorporati ns

T'able 4.6 Natiostalised inulustrscs' finiancial targets

Industry ( urrcit ta.rgct I . Its 1 .it,lcv cc 11 Itl ')

Britisih Coal 1lv I'M88 #9: brm.ikcvvii after SRii.d grjnts(() 198(6 87: /.288 tilillioli 154-)british Railways Boardl 11) I9S') '0: Vublic Smctor Obligmtio 1I98(O 87 1'S() gr.unw 71 4 iiillion

(l'S() granit down to (555 1inligotl. (')I3ritisl5 Sh;ipbiildcrs N(oIIi 19)81, 87: I r.iding 1,,s * t J: 1-48

liritisih Stcel Corporation (I)98(, %87: 7.;(5)Britisih Waterwavs. Board 19 7 88: irc,ikcvcLn 18(, 87 lirc.ikcvoiCivil Aviation Authority I 943 Ms ttI 1987 88: 7%('-)(') 19'W8(, T 1 3 '(")(')Electricity (England & Wales) 1985s 80 to 1987 88: 2 75;,, avcr.ig(') 19V' 81,: 2 (5,,()(n)

1988-89): 3 75%.(')I989-'90: 4 75 5/(")

Girobank 1985-86 to 1987-88: .vcragc 22%.(2)(') 19S(P-87: 24,0%, rctirn(2)Lurndon Regional Transport 1984 85 to) 1987 88. rducce 1986, 87: revenue sLupport L' 3

rcvcnu.c %upport to i,95 millioi insllionNorth of Scotland 1987-88 2 7 1z.(h) 198S h3 to 198(6 87: 2,8"i,Hvdro-Electric Board and 19'88-89: 2 8 (^) avcragc(`')South of Scotland ElectricityBoard

Post Officc 1986--87 to 1988-89X 3 25%/o return on 198(S-87: 31 '.

turnover bcforc interest and taxation(10 )Scottish Transport Group(' ')(I2)(i) Rooad l'assenger 1986 to 199(): averagc 4%(6) 1986o: O (i5 (6)(ii) Shipping Brcakcven aftcr urant(2) 1986: SC. 3 million prot( 2j(iii) Other activities 1986 to 19(J: 8:, trading 1986: 18% 4(I 123 million

surpltis Onl turlovcr( 13) surplus

Water Authorities 1987-88: 1 875'%(`) 1980-87: 1 96` u(6)1988-89: 2 24%

('IO mnc bass-. ternr,, Sates . ix-rs v.etr spenlsrdti',,.t.s,, ,s.1 a.,.s,utinn iHC.4 ha.,

( S) 9 p,. p.s.. s wpes aart Ie ht HR 2sl-s'd i,. *se . teuins Ark, metes, o- p es s sic: by I r 90('Ovvo. ".,t., . ,.,

.4 jl -,si,t- , S%. -et,, on eara) epi,yed im Ludwi swi sr e,., 6.srvssstn( C..t ,-. ,,....a..s.i.he CC.4, rt."i sis 'Aevae, nrl a.it

( Ai ms a. s m, , CA. . 4 1 csa,c, . ae deteirmui,d A) mnseraiwawi aw ww, een,ris J tha 1he its ghlands a,,nd i .4As,pots( jAlrIssvs ,J . ...... itst. i,

R.i,, .e.. ... ii asp, Oetite o., snf ,mwes: i, P se , ats(50> sepasId lae- .art i 5, s,, irt soh .. s.. ti. l * ew- essn, J rs- 'I p fs 198 -f8. Lesis,, 2 8%, I'atr Is. a,id ( (etisw 1 t '.

('1. 't' we ,e %l ir h- >{-f-jg 8r-1 6tr

(a 4,rinaat rs., 4,r n ' epi lal 8etiit5 Atfsdtsi

6 The public sector's finances 132

Appendix 4Page 6 of 8

Table 6.7 Public sector transactions by sub-sector and economic categoryi billion1987-88 Latest estimateGcneral govcrnment Public Public

corpora- sectortions

Central Local Totalgovern- authon-

Line' ment ttes

Current and capital receiptsTaxes on incomc. and oil royalties 1 59 3 - 59.3 -0 2 59 1

Taxes on expenditure 2 52 3 169 693 - 693Taxes on capital 3 3.7 - 37 _ 37National insurance and othc; contnbutions 4 28 7 - 28 7 - 28 7

Gross trading surplus 5 -0-6 0 4 -0 2 7 0 6 8Rent and miscellaneous current transfers 6 03 31 3 4 035 3.9Interest and dividends from private sector and abroad 7 3 3 0 9 4-2 0 6 4 8

Interest and dividends within public sector 8 58 -3.7 2-1 -21 -

Impute? charge for non-trading capital consumption 9 1 2 1 6 2 8 - 2 8

Capital transfers from private sector 10 - - .01 01

Total receipts I1 154-0 19-3 173 3 6-1 179-3

Current and capital expen44tiureCurrent expenditure on goods and services 12 52 9 34 3 87-2 -- 87-2

Subsidies 13 5 2 10 6 2 - 62Current grants to personal sector 14 48 2 4 7 52 9 - 529Current grants paid abroad 15 3.5 - 3.5 _ 3.5Current grants within public sector 16 23 6 - 23 6 - - -

Debt interest 17 170 05 175 06 18*0Gross domestc fixed Capital formation 18 3 6 36 7 3 4 5 11.8

Increase in stocks 19 -0 2 - -0-2 - -01Capital grants to pnvate sector 20 1 8 06 2 5 01 2-5

Capital grants within public sector 21 1 7 -1.0 0 7 -07 -

Total expenditure 22 157-4 20.2 177-6 4-5 182-2

Unallocated Reserve 23 - - - - -

Financial deficit2 24 3-4 0-9 4-4 -1-5 2-8

Financial transa4tionsNet lendmg to private sector and abroad 25 0 3 -0*6 -0-3 0.1 -0*2Cash expenditure on company secunties(including pnvacisation proceeds) 26 - 54 - -5.4 - -5.4

Transactions conceming certain public sectorpension schemes 27 - 0 6 - -0*6 - -0'6Accruals adjustments 28 - 0.5 0 2 -0 3 - -0 3Miscellaneous financial transactions 29 -0.5 1.1 0 5 0 1 0-7Borrowing requirement2 30 - 3 2 1-5 - 17 -1-4 - 3-1

1 Financial deficit (line 24) = expenditwre (line 221 + ReserVe (llnt 23) - receipts Financial deficit end bo"ov yg requiremen. positve;(line II) finawcial surplus and net debt rq;ayment. negativieBorowing rtquirrment (liee 30 - financial deficit (line 24) + finacial transations(lInes 25to 29)

133 Appendix 4Page 7 of 8

CONSOLIDATED PUBLIC SECTOR REVFNUES AND EXPENDITURES, 1986-92fin billion poeas

19e 198? 19S8 1989 1990 1991 1992

A. Ae,ee,um 131.2 168.3 185.6 211.5 241.4 279.5 321.7 2f

1. Notiseplwrnernt 61.0 100.8 121.1 139.6 162.1 189.0 220.72. Major nbnfiancial corperatoeu 42.8 47.7 52.3 67.1 61.0 67.3 72.23 Ot1w to POelsoiew - - - - -

4. LoCal geoivamn 7.4 9.8 12.2 14.8 16.3 22.6 28.8

U. Onwt OpielFExpendituw 114.9 134.6 158.3 180.7 207.9 238.1 270.9

1. Natloi "rnment 65.5 62.4 98.6 113.5 132.2 154.4 177.42. mjer noninci corporstaon 41:7 42.2 46.9 51.7 57.5 63.2 68.53. Orw corporetko.ta - - - - - -4. Local gornmnts . 7.7 10.0 12.6 15.5 18.2 20.5 25.0

C. aOIW r SwpAns (DlekirJ 16.3 23.7 27.3 30.6 33.5 41.4 50.8

1. Naonal government 15.5 18.4 22.3 26.1 29.9 35.2 43.32. Maor nonfinancial corporationm 1.1 5.5 5.4 5.4 3.5 4.1 3.73. Otter corp arationsa - - - - - - -

4. LoCal gornmentb (0.3) 40.2) /0.4) 10.7) 0.1 2.1 3.8

D. CWatad Oudvys and Aet Lending 79.6 65.9 69.7 73.9 82.7 89.5 91.4

1. National governnt 43.4 38.2 37.6 38 5 412 44.8 49.92. Major nonfinancial corporations' 13.6 15.1 16.0 19.8 25.3 27.4 22.33. Othercorporationrs 21.6 10.7 13.3 11.6 10.7 9.0 8.24. Loclgovernmentf' 1.0 1.9 2.8 4.0 5.5 8.3 11.0

E. PQbicScwto Suplus (Deficit) (63.3) (42.2) (42.4) (43.1) 149.2) (48.1) 140.6)

1. National govrnrnemlt (27.9) (19.8) 115.3) 112.4) (11.3) (9.6) M6r.)2. Major nonfinanial corporat.onib 12.5) (9.6) (10.6) 114.4) (21.8) (23.3) (18.6)3. Olhercorporsrions (21.6) (10.7) (13.3) (11.6) (10.7) (90) (8.2)4 Local gova rnmentvb (03) (2 1i) (3.21 (4.7) (5 4) (6 2) (7.2)

F. Add: Invasactor C,.il Tram" 33.0 21.5 24.6 23,4 24.0 24.1 23.4

1. Equity and Net Lending to all PublicCorporations 29.9 18.0 20.5 18.7 t8B 17.9 162

2. Aids and Allotments to Local Govemments 3.1 3.5 4.1 4.7 5.4 6.2 7.2 a

G. Coradidttrd Pub/i Sector Defieit Ae: ofInvrctor Cap,//Trirrr 303 20.7 17.8 19.7 252 24.0 17.2 z

Memo Item:

Consolidated public sector deficit aspercentofcurr entGNP 4.9 3.0 2.2 2.1 2.3 1.9 1.2

a. No targets for ravenuej and current operating expnitur. of all other corporstionrs. Equity nd not lending from the national government tothese corporations are reflected a both a deficit and a capital expenditure by the corporations.

b. Before capital trnsfers from national government.c. Inclusive of capital outlays funded from transfers from national governmentData as of 5 NovemLbr 1986.Sourca of boic data: M8M, MOF, NEDA, 14 Major Nonfinencial Corporations.

134 Appendix 4

Page 8 of 8

CONSOLIDATED PUBLIC SECTOR ACCOUNT(billions of boht)

"Y81/82 7Y62/63 6Y83/64 7Y64/85 FV65/86 U Y66/87 7T67/66

Ravnue and GrantsCentral governmentTotal revenue and grants 116.6 139.4 152.3 164.4 172.0 198.7 219.6

Revenue 116.2 136.4 146.3 160.6 166.6 193.3 214.2External grants 2.6 3.0 3.9 3.e 5.4 5.4 5.4

Local governmentTotal revenue and grants 14.4 15.2 16.2 17.2 17.9 19.2 20.6

Lass: Central government grants 6.9 6.9 6.7 7.1 7.0 7.0 7.0(-) bevenue of local governmewnts 7.5 6.3 9.5 10.1 10.9 12.2 13.6

Nonfinancial state enterprisesEtavinAd income 12.8 16.1 27.1 21.4 31.7 29.7 29.2Lass: Capital transfer froa central

government 2.5 1.1 1.8 0.7 0.4 0.5 0.5( O) Own resources of SEs 10.4 15.0 25.3 20.7 31.4 29.2 28.7

Consolidated publiC sectorTotal revenue and grants 136.7 16a.6 187.0 195.2 214.2 240.1 261.9

Expendituresrentral governmentC ent expenditures 126.6 140.6 155.8 171.4 178.L 184.1 196.7

Lose: Transfer to local government 3.9 3.9 4.4 4.5 4.5 4.5 4.5(-) Net current expenditures 122.7 13..7 151.5 166.9 174.0 179.6 194.2

Capital expenditures 38.3 36.0 34.4 41.6 40.1 38.0 40.8Less: Transfer to local government 2.9 3.0 2.4 2.6 2.5 2.5 2.5Loss: Transfer to SEs 2.5 1.1 1.8 0.7 0.4 0.5 0.6(-) Net capital experditures 33.0 31.9 30.2 38.3 37.2 35.0 37.7

Landing minus repaymnnts, including netacqusition of equity 2.9 0.8 -1.0 5.3 4.7 6.1 2.6Less: Net lending to local governments 0.0 0.0 0.0 0.0 0.0 0.0 0.0Loss: Net lending to SEc 0.8 1.1 -1. 4.1 5.7 5.6 2.6Loss: Net acquisition of SE equity 1.3 0.0 0.2 0.0 0.0 0.0 0.0(-) Net lending to private sector 0.8 -0.2 -0.1 1.2 1.0 0.5 0.0

Local governm_ntCurrent expenditures 8.5 9.0 9.5 10.4 11.3 12.1 13.0Capital expenditures 5.0 5.6 6.1 5.9 6.3 6.8 7.3

Nonfinancial state enterprisesCapital expenditures 30.2 30.6 33.0 35.7 34.6 36.8 39.6

Consolidated public sectorCurrent expenditures 131.2 145.6 -161.0 177.3 185.3 191.7 207.2Capital expenditures 68.2 68.2 69.3 79.9 78.1 78.5 64.6Landing minus repayments 0.8 -0.2 -0.1 1.2 1.0 0.5 0.0Total expenditures and net lending 200.2 213.6 230.2 258.4 264.4 270.7 291.7

a lancesCentral government -49.0 -38.0 -36.9 -53.9 -51.3 -29.5 -22.5Local governmat 0.9 0.6 0.6 0.9 0.3 0.3 0.3Nonfinancial state enterprises -17.4 -14.5 -5.9 -14.3 -2.9 -7.1 -10.4Consolidated public sector -63.5 -51.0 -43.2 -63.2 -50.2 -30.6 -29.8

Source: bank of Thailand.

135

Table 2.6: USE Of RESOLRCES AT CURENT PRICES(Nllions of Kenya pounds)

1979 1980 1981 1982 1983 1984 1985 1986 1987

GDP at Factor Cost 1977.15 2232.41 2583.45 2998.24 3316.63 3797.47 4290.79 5073.02 5702.54

+ Indirect taxes 297.58 397.78 442.57 467.73 510.99 593.37 624.48 759.31 912.74- SubsidIes 0.80 0.70 1.22 1.58 1.67 1.81 0.99 0.58 0.58

GOP at Market Prices 2274.13 2629.49 3024.80 3464.39 3825.95 4389.03 4914.28 5831.75 6614.70

Import Surplus 136.50 299.40 272.00 131.79 40.11 61.45 53.56 -5.86 333.68

Imports of goocd and N S 736.60 1052.70 1045.70 1009.39 1019.67 1231.96 1328.40 1510.83 1734.12Exports of goods and WFS 600.10 753.30 M7.70 377.60 979.56 1170.51 1274.84 1516.69 1400.44

Total Rasources AvalIable

for Domestic ExpendIture 2410.63 2928.89 3296.80 3596.18 3886.06 4450.48 4967.84 5825.89 6948.38

Gross investment 516.25 789.19 858.81 763.63 810.35 1027.54 989.26 1315.09 1827.74

Gross fixed capital formation 540.45 622.53 725.41 668.20 720.89 807.15 852.88 1175.12 1310.82Changes In stocks -24.20 166.66 133.'0 95.43 89.46 220.39 136.38 139.97 316.92

Consntlon 1894.38 2139.70 2437.99 2832.55 3055.71 3422.94 3978.58 4510.80 5320.64

Public consumptlon 447.31 533.77 576.42 647.44 739.43 775.60 880.10 1061.02 1282.77Private consuLption 1447.07 1605.93 1861.57 2185.11 2316.28 2647.34 3098.48 3449.78 4037.87

Souroe of most recent data: Economic Survey 1988, p. 21.

136

Table 2Gm: GOP PROJECTIONS (GOVERNMENT)

1966 1987 1988 1969 19" 1991 1"2

Nominal COP (Kg million) 5331.6 6614.7 7586.2 8461.6 9433.5 10449.9 11676.0

Real GOP (Kg oillion at 3931.4 4126.6 4337.a 4662.6 48&4.6 658.9 6347.7constant 1962 prices)

GDP Deflator (1962-188) 148.3 16".3 173.1 186.2 196.3 26.2 216.6

Growth Rates ( X )

Nominal GOP 13.4 13.1 12.6 11.6 16.6 10.8

Roal GDP 6.8 5.1 6.2 6.3 6.6 6.6

GDP Deflator 9.1 8.8 7.8 6.8 6.8 6.0

Fiscal Year Data: FY87 FY88 FY89 FY90 FY91 FY92

Nominal GDP 6222.3 70861. 7979.9 8942.6 9941.7 11013.0Real GDP 4029.1 4232.1 4460.1 4683.7 4936.8 6208.3GDP Deflator 164.4 168.9 179.3 190.9 201.4 211.6Nomiinal CDP g.r 13.6 13.0 12.1 11.2 10.8Real GDP g.r. 6.0 6.2 6.3 6.4 6.6GDP Deflator g.r. 8.1 7.6 6.6 6.6 6.0

137

Tablo 2.6b: COP PROJECTIONS (MISSION)

1966 1i67 1918 1969 1990 1"1 1m

Nominal GOP (Kg million) 5631.6 "14.7 7497.9 8426.2 9377.6 19343.4 11493.1

Real GDP (Ki million *t 3931.4 4126.8 4333.1 4549.8 4777.3 6916.2 5267.6constant 1982 prices)

GDP Deflator (1962a10) 148.3 16O.3 173.1 1C5.2 196.3 296.2 216.5

Crowth Rates ( % )

Nominal GDP 13.4 13.3 12.4 11.3 1.8 10.2

Real CDP 5.0 6.0 6.9 6.0 6.0 6.0

GDP Deflator 8.1 8.0 7.0 6.0 6.0 5.6

Fiscal Year Data: FY67 FY66 FY89 FY90 FY91 FY92

Nominal GDP 6222.3 7055.9 7961.6 8902.0 9660.6 10873.3Real GDP 4029.1 4236.6 '441.5 4663.6 4696.6 5141.6GDP Deflator 164.4 166.9 179.3 190.9 201.4 211.6iNominal GDP g.r. 13.3 12.8 11.6 16.8 10.3Real GDP g.r. 5.0 5.0 S.0 5.0 6.0GOP Deflator g.r. 6.1 7.6 0.6 5.5 6.0

138

Table 2.7: USE OF RESUCS AT COATANT 1982 PRICES(amIIlam of ya Pouds)

1979 190 1981 1982 1963 194 1985 196 1987

GOP at Factor Cot 2518.0a 2111.45 200.16 211.24 30.U4 3091.78 3240.13 3416.82 3560.3D

* Irdirct tun 49.71 569.81 530.5 467.73 427.15 479.17 475.67 514.95 548.36- StIdies 0.69 0.77 1.27 1.5 1.10 1.09 0.80 0.42 0.Jt

MP at Mirket Prilos 3095.05 3287.49 3389.84 3M.38 342.19 3569.2B 3715.00 3131.35 4132.78

I port SurPluB 543.87 836.38 352.92 131.79 -36.40 94.15 -28.82 -7.37 127.82

lports of goods art NFS 1385.89 1524.08 1203.47 1009.39 823.70 970.87 951.73 1056.88 1193.61Exvorts of goods and NWS 842.02 887.72 850.55 877.60 860.10 876.72 978.55 1064.23 1085.79

Total Resoucres AvaelabIe

for Domstic Expenditure 3638.72 3903.85 3742.75 3596.18 3455.79 3683.41 368 .18 3923.98 4254.60

Gross lnstfestnX 786.22 1031.00 995.09 763.63 867.80 743.86 682.86 804.29 938.27

Gross fixed capita! fornation 787.51 807.28 843.97 688.20 575.97 593.56 597.16 676.69 738.67Cianges in stocks -21.29 223.7k 151.12 95.43 91.83 150.30 85.70 127.60 199.60

Coasiuptlon 2871.70 2872.67 2763.96 2832.55 2785.44 2949.55 3005.32 3119.89 3316.33

P;biIc owoAptlon 679.32 694.74 657.26 647.44 669.22 662.37 643.88 686.35 741.43Private oonsum tlon 2192 V8 2177.93 2106.70 2185.11 2116.22 2287.18 2361.44 2433.34 2574.90

Souroe of est reoent data: Ksnya Central reeiu of StatistIcs.

139

Table 2.9: SAVINGS AT CURNT PRICES(mIlIon of Kwnya pounds)

1979 1990 1981 1962 1993 1984 1985 1986 1987

Foreign Savings 196.30 350.62 273.95 185.20 111.19 178.85 188.09 153.62 535.60

Grants from abroad 15.40 21.90 20.70 25.50 85.74 92.55 108 69 117.72 126.99Net borrowing from abroad 180.90 328.72 253.25 159.70 25.45 86.30 79.40 35.90 408.61

Domestic Savings 314.55 438.59 511.21 478.45 696.62 848.69 801.17 1161.47 1092.14

Total Savings 510.85 789.21 785.16 663.65 807.81 1027.54 989.26 1315.09 1627.74

Noto: 'Net borrowing from abroad' Is equal to the current accout deficit In thebala nce of payments. 'Dooestic savings" as defined by the Central Sureauof Statisties In this tabie Is equivalent to gross natinal savings(rather than gross domestic savings) as defined In the World BaiCkseconomic data bass.

Source of most recent data: EomnomIc Survey 1988, p. 22.

140

Table 2.11 GROSS FIXED CAPITAL FORiATION BY INUSTRY AT CURRNT PRICES(Illions of Kenya poLdS)

1979 1980 1981 1982 1983 1984 1985 1986 1987

PlliIc Sector Capital Forutlon 248.62 281.17 322.48 300.8B 274.16 336.67 343.54 504.18 502.88

Goverrnent Servioes 93.71 128.64 148.31 128.86 102.03 153.10 192.37 233.53 285.49

EduatIon 11.75 20.16 21.60 20.91 14.75 16.47 24.81 30.69 30.41Health 10.91 14.08 12.57 8.77 8.23 9.12 10.65 13.03 18.63Agrlcultural servioes 8.95 13.08 12.31 12.50 10.55 6.43 10.40 14.21 18.47PFlIC adelnistratlan and 62.10 81.34 101.83 84.48 68.45 121.08 146.51 175.55 217.98

other goverrmnt servioes

P'JbI Ic Sector Enterpr Ises 154.91 152.53 174.17 174.20 172.13 183.57 151.17 270.63 217.39

ADrlculture and forestry 5.35 9.12 9.67 8.06 8.42 9.03 6.75 5.43 4.14Zining and quarrying - - 0.02 0.00 0.00 0.00 0.00 0.00 0.00Marufacturing 24.04 3.00 2.63 2.72 3.08 3.10 2.92 5.28 8.76Electricity and water 32.00 41.40 65.46 75.22 57.18 36.99 29.07 35.88 61.23Constructlon 2.76 2.00 2.52 3.44 26.54 25.63 16.23 22.98 3.97Trade, restaurants & hotels 1 78 2.C0 1.67 4.08 5.69 2.56 3.10 2.79 15.48Trarnsport and coImunIcation 65 50 56.25 5O.92 47 29 41.90 65.04 63.22 160.59 68.84Finance & busiress services 4.75 9.00 11.09 7.16 8.99 14.10 10.58 4.95 16.67CNership of dwelings 16.73 27.26 26.26 23.59 18.58 25.08 18.20 31.95 37.50Other services 2.00 2.50 3.95 2.64 1.75 2.04 1.10 0.80 0.30

Private Sector Capltal Formation 291.83 340.44 406.29 367.35 443.30 470.47 536.87 686.38 831.79

A_riculturo and forestry 37.39 39.07 45.92 43.82 45.62 49.93 89.56 85.19 105.28Mining and quarrying 4.10 4.10 4.83 4.05 5.09 7.12 4.88 7.03 12.39Manufacturing 64.48 73.91 87.68 64.31 108.62 92.23 98.84 161.93 165.22Electricity and water -0.01 -0.14 0.01 0.00 0.00 0.01 14.23 22.24 0.32Construct ion 22.92 31.41 30.38 25.42 32.81 42.62 15.24 27.28 64.74Trade, restaurants & hotels 15.52 26.29 18.02 17.70 20.75 22.19 31.41 70.35 71.92Trarsort and coumnication 36.15 46.55 62.56 54.21 68.24 84.90 100.97 80.27 149.72Finance & business services 3.50 1.19 12.59 2.26 7.69 4.32 8.57 8.87 26.51Ownership of dwilirngs/1 78.02 79.31 94.69 102.93 95.51 109.68 114.25 141 92 156.30Other services 29.76 38.75 49.61 52.65 58.97 57.47 78.92 81.i0 79.39

Total Capital Formation 540.45 621.81 728.79 668.21 717.46 807.14 880.il 1190.54 1334.67

A rlculture and forestry 42.74 48.19 55.59 51.88 54.04 58.96 76.31 90.62 109.42ilning and quarrying 4.10 4.10 4.85 4.05 5.09 7.12 4.88 7.03 12.39

Manufacturlng 88.52 76.91 90.31 67.03 111.70 95.33 101.76 167.19 173.98Electricity and water 31.99 41.26 65.47 75.22 57.18 37.00 43.30 58.12 61.55Construction 25.68 33.41 32.90 28.86 59.35 68.25 31.47 50.26 68.71Trade, restaurants & hotels 17.30 28.29 19.69 21.78 26.44 24.75 34.51 73.14 87.40Transport and comxunication 101.65 102.80 113.48 101.50 110.14 149.94 164.19 240.86 218.56Finance & business servIces 8.25 10.19 23.M8 9.42 16.68 18.42 19.15 13.82 43.18Ownership of dwellIngs/1 94.75 106.57 120.95 126.52 114.09 134.76 132.45 173.87 193.80Goverrnent servIces 93.71 128.64 148.31 126.66 102.03 153.10 192.37 233.53 285.49Other services 31.76 41.25 53.56 55.29 60.72 59.51 80.02 82.10 80.19

/1 rcludiing traditional dwellings.

Souroe of rost recent data: Kenya Central Bureau of StatIstIcs.

141

Table 5.1: CENTRAL G0VERIENT OPERATIONS(aIllions of Kenya poundg

Actut I PreolI. FInrela Latest FInanialatuaI Progra mt. ProW.r

FY83 FY84 FY85 FY85 FY87 FY86 FY88 FY89

Reverte and grants 893.1 953.2 1103.9 1289.4 1481.0 1798.5 1780.4 2D44.8Rsvew 835.8 924.9 1026.7 1214.6 1400.3 1607.4 1634.0 1853.0Grants 57.3 28.3 77.2 54.8 80.8 191.1 148.4 191.8

Ependitlure ard net lending 1021.0 1110.6 1380.7 1597.1 1895.8 2075.7 2090.8 2372.7Reaerrent ePwnditure 798.0 864.9 1041.8 ,2m.2 1424.3 1557.1 1582.3 1797.9Development ewmndIture 223.1 245.7 339.0 374.9 471.5 518.7 508.5 574.9

and net lidling

Overall deficit (treasury -127.9 -157.4 -276.9 -327.7 -414.8 -277.3 -310.4 -327.9accounts)

Adjusthent to cash basis/1 -1.5 -0.8 39.8 36.7 -56.5 0.0 16.8 -35.0

OveraIl cash defIcIt -129.4 -158.2 -237.1 -291.0 -471.3 -277.3 -293.6 -362.9

Financing 129.4 158.2 237.1 291.0 471.3 277.3 293.6 363.0Foreigan financing 50.6 6.5 55.9 -48.2 27.1 75.4 76.1 200.1

Drawings 124.7 95.1 176.6 97.9 198.4 236.8 225.6 392.4Repayments 74.1 88.6 120.8 146.0 171.3 161.4 149.5 192.3

Domestic financIng 78.9 151.8 181.3 339.2 444.2 201.9 217.5 162.9Bank and CSFC 3.8 48.3 41.1 96.8 296.2 66.3 -3.9 110.0Nonbank 75.1 103.5 140.2 242.6 148.0 135.6 221.4 52.9

Overall cash deficit excluding -186.7 -186.5 -314.3 -345.8 -552.0 -468.3 -440.0 -554.7grants

Memorancim Item:GOP at umrket prices 3845.2 4107.5 4651.1 5373.0 6223.2 7061.5 7061.5 7979.9

1/ The adjustment factor arlses because financing data are derived froe different sources thanrevenue and evenditure data. It Includes a float element resulting from some checks beingIssued but not cashed, and statist icaI discrepancIes.

Source of most recent data: The Appropriation Accounts, various years; Economic Survey, varlous years;data provlded by the Kenyan authoritles; and IMF staff estimates.

142

Table 5.2: CENTRAL. GVERNINT OERATIONS(peront of GOP)

Actu l Pral l. Financlal Lato t FinhwlalactuaI Progra et. PrOWa

FYI) FY84 FY85 FY86 FY87 FY88 FY88 FM88

Reverum and grants 24.5 23.2 23.7 23.6 23.8 25.5 25.2 25.6RevuuJs 22.9 22.5 22.1 22.6 22.5 22.8 23.1 23.2!rants 1.6 0.7 1.7 1.0 1.3 2.7 2.1 2.4

ExmndltLre and net lond g 28.0 27.0 29.7 29.7 30.5 29.4 29.6 29.7Recurrmnt exmWnditure 21.9 21.1 22.4 22.7 22.9 22.1 22.4 22.5DeveloPumnt epervditure 6.1 6.0 7.3 7.0 7.8 7.3 7.2 7.2ard net Isnding

Overall cash defIcit -3.5 -3.9 -5.1 -5.4 -7.6 -3.9 -4.2 -4.5

Overall cash ceficit excludirg -5.1 -4.5 -6.8 -8.4 -8.9 -6.6 -6.2 -7.0grants

Forelgn fInancing 1.4 0.2 1.2 -0.9 0.4 1.1 1.1 2.5Domestic flnancmng 2.2 3.7 3.9 6.3 7.1 2.9 3.1 2.0

Bark and CSFC 0.1 1.2 0.9 1.8 4.8 0.9 -0.1 1.4NonWb* 2.1 2.5 3.0 4.5 2.4 1.9 3.1 0.7

Source: Table 5.1.

143

Table 5.2a: CENTRAL GOVERNMENT OPERATIONS AS PERCENT OF GDP(PROJECTED)

Est. Program ProiectedFY88 FY89 FY90 FY91 FY92

Government Proiections

Revenue and Grants 25.2 27.5 27.2 26.5 26.3Revenue 23.1 22.9 23.5 23.7 23.8Grants 2.1 4.6 3.7 2.8 2.5

Expenditure 29.6 32.0 31.1 30.1 29.4

Deficit (Treasury Accounts) -4.4 -4.5 -4.0 -3.6 -3.3Adjustment tocash basis 0.2 - - - -

Cash Deficit -4.2 -4.5 -4.0 -3.6 -3.3

Financing -4.2 4.5 4.0 3.6 3.3Foreign (net) 1.1 2.5 2.5 2.6 2.3Domestic (net) 3.1 2.0 1.5 1.0 1.0

Mission Projections

Revenue and Grants 25.2 25.6 25,7 25.9 26.0Revenue 23.1 23.2 23.5 23.7 23.8Grants 2.1 2.4 2.2 2.2 2.2

Expenditure 29.6 29.7 29.5 29.4 29.0

Deficit (Treasury Accounts) -4.4 -4.1 -3.8 -3.5 -3.0Adjustment tocash basis 0.2 -0.4 -0.2

Cash Deficit -4.2 -4.5 -4.0 -3.5 -3.0

Financing -4.2 -4.5 -4.0 -3.5 -3.0Foreign (net) 1.1 2.5 2.5 2.5 2.5Domestic (net) 3.1 2.0 1.5 1.0 0.5

144

Table 5.3: CENTA GNIKNT EMJCES(a1111m of Kea pay*)

Actul Pro,vlsicml mzd.t

rY83 FYU4 Fm5 r FYST FYN

TAx ReVeM 718.0 812.4 6.0 1083.6 1253.4 1410.2

Tam an Irwcm erd profits 231.8 251.8 301.0 355.1 385.7 447.0

Tams an goods ad services 301.8 387.0 392.9 457.0 574.4 872.5Sales tax 195.9 253.7 273.6 303.8 397.5 477.9

Local manufactures 123.3 148.5 158.0 191.0 241.8 277.1ilvorteJ vfactures 72.6 107.2 115.6 112.6 155.8 200.8

I Excis dutles 74.0 79.4 78.8 89.0 106.3 118.6Other ta s 31.8 33.9 40.5 64.4 70.8 78.0

Taxs an Intwrtiomi trade 182.8 193.6 192.1 251.5 293.3 290.8lwort d.tIes 175.8 183.5 165.1 211.8 259.4 289.4E,Dort dutles 8.8 10.1 27.0 39.6 33.9 21.2

Mon-tax Reers 116.2 111.3 133.6 145.7 156.4 199.4

IcI from property 53.7 54.2 57.5 84.8 67.3 82.1Sales of Goods ard Services 30.7 27.5 36.9 38.9 43.2 60.4UwM charges

Other nt-tax revrus 31.8 29.7 39.3 42.1 44.8 58.9

Total Reveu 832.2 923.6 1019.6 1209.3 1408.8 1609.5

145

Table 5.4: ECONCOIC ANALYSIS Of CENTRAL GOVERNMENT EXPENDITURE(mIllions of Ksnya pounds)

Actual Provislonal

FY84 FY85 FY86 FY87 FY38

Current EsxwnditLre 984.6 1091.3 1250.8 1474.9 1835.1

Labor oosts/1 264.7 288.7 335.8 392.6 489.6

Other goods servloes/2 329.6 318.2 354.5 384.0 590.9(DeOf )/3 129.5 101.3 113.7 113.0 233.6(Non-defense) 200.1 216.9 240.8 271.0 357.4

S "sIdles 14.0 14.8 27.4 26.9 32.1(Export copensatlon) - 12.9 27.3 25.8 32.0(Other) - 1.9 0.1 1.1 0.1

Interest 173.7 195.9 266.1 293.6 368.1(Domestic) 108.9 121.9 175.0 197.3 252.6(Foreign) 64.8 74.0 91.0 96.3 115.5

Transfers 202.7 273.8 267.2 377.7 372.5(Teachers' Servioe Con.) - 190.0 215.3 259.4 283.3(Other) - 83.8 51.9 118.3 89.2

Others 0.0 - 0.0 0.0 1.9

Capital Exenditure 133.3 217.8 177.0 315.2 423.3

Gross fixed capital formation 119.0 194.7 150.5 274.2 317.2Capital transfers 14.4 23.1 26.5 41.1 106.1

Net LendIng 25.6 36.9 50.5 47.7 29.3

Purchase of equlty 0.5 5.4 10.5 7.9 6.9Net lendis 25.1 31.6 40.0 39.8 22.4

(Gross lending) 30.7 35.5 47.5 46.1 30.9(Repayments) 5.6 4.0 7.4 6.4 8.5

Tutal Expenditure 1143.5 1346.0 1478.3 1837.7 2287.7

MUmoranru Iteon:

Total expenditures (Table 5.1) 1110.6 1380.7 1597.1 1895.8 2075.7

Una llocated expendit ure/4 -32.9 34.7 118.7 58.1 -212.0

Labor costs plus Teachers' - 478.7 551.1 652.0 752.9Service Comlssion

1/ Civil service only. Excludes Armed Forces and Teachers' Service Comuission.2/ This Is non-wage operating and maintenance expenditure, except for defense

as explained In footnote /3.3, Defense Recurrent Account expenditure from Economic Survey 1988, Table 6.8.

The Armed Forces has a lump s u appropriation Which appears as a line Item Inthe Recurrent Account. In preparing the "Economic Analysis of Expenditure",CBS places the line Item under 'Other Goods and Services."

4/ Difference of total expenditure between Table 5.1 and Table 5.4.

Source of most recent data: Economic Survey 1988, p.64.

146

Tab'e 5.4, ECONOMI C NAL1SiiS SOF CENTPAL SKVERNMENT EXuPENE!TURE AS OERCENT OF SD

ActLal Provisional

F!Y84 FYP55 FVS't FY87 V8O9

Cuarrent Expenditure 21.0 2.5 24 2.. 26.0

a t:. r ;c.sts! a '.4 S.: 5.6

6Ct.rS rz;cd s s :e ;:: 59t S S 6 . 6b .E2 6 t- '¼ 75~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 - 5 ''^rterse;/- ., , 2.& .6.

NA0-ie;@:,4,7 4.s 4.4 5.:

Subs: d EC4 '

t, p^.-,- i, ; 4f. F ? ~~~~~~~~~~~~~~'' t ) 0

IrTe E 4 4 , 4 .7

O . IF ? S . . r , ; A ~~ I I Feras, e. .

''NsEd- ;, -" or ' 4 4.ICAe fl'S -l I |! I . .04.I.~~~~~~~~~~~~~~~~

Er Z: I 5

~~ a--~~~a- C ¶

Ne e'*; s-

Net 1Q76E -;^ P , '5! tCrf-_5 e 01 i_L 21 tbr tS 1 3c y

pp 4< ,s, .r-,' e

a t. eL' - latJ8 !' C ;

a: tj, ' ;, 7 7G'4 D, 4 -c C.i7 t r

-- -- - -- - - - -- - - - - --:- - -- - - - - -- - - - -- - -- - -- ---__- --:

147

Table 5.5: CENTRAL GOVERNMENT SAVINGS(K£ mllion)

FY84 FY85 FY86 FY87 FY88

Central Government Revenue La 925 1027 1215 1400 1634

Central Government CurrentExpenditure lb 985 1091 1251 1475 1835

Central Government Savings -50 -64 -36 -75 -201

1984 1985 1986 1987Central Government Savings

(calendar year) -57 -50 -56 -138

Central Government Savingsas I of GDP (CY) -1.3 -1.0 -1.0 -2.1

/a From Table 5.1la From Table 5.4

148

Table 5.6: REWRRENT EXENDITLRE BY SECTOR AND MINISTRY(alilIons of Kenya poirds)

PrIntedPrlnted Forward Bldget

Audited Prelim. Revised (Jim 1988) (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and Puliic Alnlstration 279.0 286.9 354.5 489.4 408.4 397.7 407.4

Office of the President 77.9 86.4 105.5 122.9 134.9 119.6 128.1Departent of Defence 101.3 113.7 144.0 233.6 148.2 154.5 149.2Other a/ 99.8 86.9 105.1 133.0 125.3 123.6 132.1

Ecanolc Sector Ministries 198.4 181.8 265.1 218.3 252.5 260.8 275.7

Agricultural Ministrles b/ 94.6 64.7 129.7 76.0 87.4 81.7 88.0Water Development 16.0 18.3 21.3 19.6 19.7 20.7 21.8Erergy 2.6 2.8 3.1 1.6 1.6 5.0 5.0PLillc Works c/ 20.3 21.7 24.7 50.7 61.5 29.7 32.1

(Of hiIch: Roads Dept.) (-) (-) (-) (21.4) (24.1) (-) (-)Transport and Conwicatioi c/ 37.4 42.1 46.6 17.1 19.9 58.0 61.4

(Of which: Roads Dept.) (n.a.) (n.a.) (n.a.) (-) (-) (26.9) (29.3)Other d/ 27.5 32.2 39.7 53.3 62.4 65.7 69.4

Social Sector Mlnistries 317.3 392.5 459.3 550.7 575.1 605.3 647.3

Edatlon 229.9 295.4 344.5 407.8 437.9 468.8 498.0Health 73.0 79.7 96.5 102.8 104.8 114.9 126.4Other e/ 14.4 17.4 18.2 40.1 32.4 21.6 22.9

Recurrent Ewenditure - Total 794.7 861.1 1078.9 1258.4 1236.0 1263.8 1330.4

Note: Excludes Consolidated Funid Service.Note: Agricultural expenditure and total recurrent expenditure In FY89 excludes KL 258.5 mlilion

allocatlon for write-off of debt owed to Goverrnent by National Cereals and Produce Board.

a/ Includes all ministries and offices not listed below under Economic Sector and Social Sector.b/ Ministrles of Agriculture; Livestock Development; Cooperatives, and Spimly and Marketing.c/ In April 1988, Housing was removed from the former Ministry of Pbiic Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Co.u.rication to theMinistry of Pubiic Works.

d/ Includes the following ministrles: Tourism and WIlIdlIfe; Envirarwent and Natural Resources;Commerce; InrKkstry; Regional Development; Research, Science and Technology; and Landsand Housing.

e/ Includes the following ministries: TechnIcal Training; Labor; Marpower and Employment;Culture and Social Services.

Source: Ministry of Finance.

149

Table 5.6a: RECUREKT EXPENDITUIE BY SECTOR AND MINISTRY(percent distribution)

PrintedForward kUxet

uditead Prelli. Revlsed Printed (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense ad Pubilc Ad inistratlon 35.1 33.3 32.9 38.9 33.0 31.5 30.6

Office of the President S.8 10.0 9.8 9.8 10.9 9.5 9.5Departaent of Defence 12.7 13.2 13.3 18.6 12.0 12.2 11.2Other a/ 12.6 10.1 9.7 10.6 10.1 9.8 9.9

Econom lc Sector Ministries 25.0 21.1 24.6 17.3 20.4 20.6 20.7

Agricultural Ministries b/ 11.9 7.5 12.0 6.0 ,.1 6.5 6.5Water Development 2.0 2.1 2.0 1.6 1.3 1.6 1.6Energy 0.3 0.3 0.3 0.1 0.1 0.4 0.4Pi.lic Works c/ 2.6 2.5 2.3 4.0 5.0 2.4 2.4

(Of I ch: Roads Dept )Traneport and CoUmmicat Ion c/ 4.7 4.9 4.3 1.4 1.6 4.6 4.6

(Of iIich: Roads Dept.)Other d/ 3.5 3.7 3.7 4.2 5.0 5.2 5.2

Social Sector Winistries 39.9 45.6 42.6 43.8 46.5 47.9 48.7

Education 28.9 34.3 31.9 32.4 35.4 37.1 37.4Health 9.2 9.2 8.9 8.2 8.5 9.1 9.5Other e/ 1.8 2.0 1.7 3.2 2.6 1.7 1.7

Recurrent Expenditure - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: ExcI Lles ConoI -dated Fri.d Serv Ic.

a/ InclIues all mlnistries and offices not listed below under Economic Sector and Social Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and Suvply and Marketing.c/ In April 1988, Housing was removed from the foraer Ministry of Pubilc Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Conunication to theMinistry of Pubiic Works.

d/ Includes the following mlnistries: Tourism and Wildilfe; Envirornent and Natural Resources;Comerce; Industry; Reglonal Development; Research, Science and Technology; and Landsand HousIng.

e/ Includes the following ministrles: Technical Training; Labor; Manpower and Ewployment;Culture and Social ServIces.

Source: Ministry of FInance.

150

Table 5.8b: RECURRENT EXPENDITLIRE BY SECTOR AND MINISTRY(as percentap of GOP)

PrintedFcrward Budget

Audited Prelli. Revised Printed (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and Publlc Adelnistration 6.0 5.3 5.7 6.9 5.1 4.5 4.1

Office of the President 1.7 1.6 1.7 1.7 1.7 1.3 1.3Department of Defence 2.2 2.1 2.3 3.3 1.9 1.7 1.5Other a/ 2.1 1.6 1.7 1.9 1.6 1.4 1.3

Economic Sector Mlnistries 4.3 3.4 4.3 3.1 3.2 2.9 2.8

Agricultural Ministries b/ 2.0 1.2 2.1 1.1 1.1 0.9 0.9Water Development 0.3 0.3 0.3 0.3 0.2 0.2 0.2Energy 0.1 0.1 0.0 0.0 0.0 0.1 0.1Pubilc Works c/ 0.4 0.4 0.4 0.7 0.8 0.3 0.3

(Of which: Roads Dept.)Transport and Cain.ication c/ 0.8 0.8 0.7 0.2 0.3 0.7 0.6

(Of vIch: Roads DePt.)Other d/ 0.6 0.6 0.6 0.8 0 8 0.7 0.7

Soclal Sector Ministrles 6.8 7.3 7.4 7.8 7.2 6.8 6.6

E*ication 4.9 5.5 5.5 5.8 5.5 5.3 5.1Health 1.6 1.5 1.6 1.5 1.3 1.3 1.3Other e/ 0.3 0.3 0.3 0.6 0.4 0.2 0.2

Recurrent Exendlture - Total 17.1 16.0 17.3 17.8 15.5 14.2 13.5

Note: Excludes Consolidated Fund Service.

a! Includes all ministrles and offices not listed below under Economic Sector and Social Sector.b/ Ministries of Agrlculture; Llvestock Development; Cooperatives, and SLvp!y and Marketing.c/ In April 1988, Housing was removed from the former Ministry of PLblic Wo ks and HousIng

and attached to the former MInistry of Lands and Settlement. At the sare time, theRoads Department was transferred from the Ministry of Transport and ConvunicatIon to theMinistry of Pbi lc Works.

d/ Includes the following mInistrles: Tourlsm and WilIdlife; Environent rnd Natural Resources;Comerce; Industry; Regional Development; Research, Sclence and Technology; and Landsand Housing.

e/ Includes the following ministries: Technical Tralning; Labor: Maromoir and Employment;Culture and Social Services.

Source: Ministry of Finance.

151

Table 5.7: DEVELPWMT EPENDITURE BY SECTOR AND MINISTRY(millions of Komya pounds)

PrintedPrlnted Forward Budet

Audited Prelim. Revised (June 1988) (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and Pubilc Adolnistration 54.8 68.2 96.5 189.7 146.4 129.8 125.5

Office of the President 20.8 21.0 31.6 62.4 38.1 33.2 33.5Department of Defence 10.9 13.7 22.8 27.4 27.3 31.5 33.7Other a/ 23.1 31.5 42.1 100.0 81.0 65.1 58.3

Economlc Sector Ministries 233.0 204.4 299.6 344.7 466.1 394.8 305.7

Agricultural Ministries b/ 30.7 68.1 88.5 100.9 101.1 85.0 70.3Water Development 21.3 23.2 40.7 38.1 55.9 55.5 45.1Energy 78.7 28.1 84.1 69.9 79.5 86.8 59.0PiLllc Works c/ 15.6 11.8 10.9 65.4 113.0 11.8 12.5

(Of M ich: Roads Dept.) (-) (-) (-) (54.7) (97.5) (-) (-)Transport a,-d Cowm.uication c/ 64.2 50.5 49.9 16.4 48.3 107.0 74.4

(Of Which: Roads Dept.) (n.a.) (n.a.) (n.a.) (-) (-) (81.9) (61.4)Other d/ 22.6 22.7 25.5 54.0 68.3 48.7 44.4

Social Sector Ministries 35.4 38.5 66.1 89.5 90.0 62.5 58.7

Education 10.9 11.1 21.1 31.7 30.1 31.6 27.2Health 11.1 14.8 14.7 38.1 44.5 21.8 20.4Other e/ 13.4 12.6 30.2 19.7 15.4 9.1 11.1

Development Evenditure - Total 323.3 309.1 462.1 623.9 702.5 587.1 489.9

a/ Includes all ministries and offices not listed below under Economic Sector and Social Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and Supply and Marketing.c/ In Aoril 1988, Hotising was removed from the former Ministry of Pubilc Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Communication to theMinistry of Public Works.

d/ Includes the following ministries: Tourism and Wildllfe; Envirornent and Natural Resources;Comerce; Industry; Regional Development; Research, Science and Technoiogy; and Landsand Housing.

e/ Includes the following ministries: Technical Training; Labor; Marpover and .mployment;Culture and Social ServIces.

Source: Ministry of FInance.

152

Table 5.7a: DEVELOPiENT EXPENDITURE BY SECTOR AND MINISTRY(percent distribution)

PrintedFz'rward B&xkt

Audited Prelim. Revised Printed (FeLvuary 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defence and Ptbilc Adoinistratlon 17.0 21.4 20.9 30.4 20.8 22.1 25.6

Office of the President 6.4 6.8 6.8 10.0 5.4 5.7 6.8Department of Defence 3.4 4.4 4.9 4.4 3.9 5.4 6.9Other a/ 7.1 10.2 9.1 16.0 11.5 11.1 11.9

Economic Sector Ministries 72.1 66.1 64.8 55.2 66.3 67.2 62.4

Agricultural Ministries b/ 9.5 22.0 19.2 16.2 14.4 14.5 14.3Water Development 6.6 7.5 8.8 6.1 8.0 9.5 9.2Energy 24.3 9.1 18.2 11.2 11.3 14.8 ,2.0PLbilc Works c/ 4.8 3.8 2.3 10.5 16.1 2.0 2.6

(Of vhich: Roads Dept.)Transport and Coimunication c/ 19.9 16.3 10.8 2.6 6.9 18.2 15.2

(Of which: Roads Dept.)Other dY 7.0 7.3 5.5 8.7 9.7 8.3 9.1

Social Sectcr MInistries 11.0 12.5 14.3 14.3 12.8 10.6 12.0

Educatlon 3.4 3.6 4.6 5.1 4.3 5.4 5.6Health 3.4 4.8 3.2 6.1 6.3 3.7 4.2Other e/ 4.1 4.1 6.5 3.2 2.2 1.5 2.3

Development Expenditure - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

a!/ Incldes a l n IstrIes and offIce not I sted below u,der EconoI c Sector and Social Sector.b/ Ministrles of Agriculture; Livestock Development; Cooperatives, and 9upply and Marketing.c/ In April 1988, Housing was removed from the former Ministry of Pui.lc Works and Hoewing

and attached to the former Ministry of Lands and Settilment. At the same tlme, theRoads Department was transferred from the Ministry of Transport and Communication to theMinistry of Pubilc Works.

d/ Includes the following ministrles: Tourism and Wiidlife; Envirorumnt and Natural Resources;Comerce; Industry; Regional Development; Research, ScIence and Techiology; and Landsand Housing.

e/ Includes the following ministrles: Technical Tralning; Labor; Manpower and Eeployuent;Culture and Social Servioes.

Source: Ministry of Finance.

153

Table 5.7b: OEVELOPIENT EXPENDITURE BY SECTOP AND MINISTRY(as percentage of GDP)

PrintedForward Budget

Audited Prella. Revied Prlnted (Fsbruary 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and Ptbilc Adelnistration 1.2 1.2 1.6 2.7 1.8 1.5 1.3

Office of the President 0.4 0.4 0.5 0.9 0.5 0.4 0.3Department of Defence 0.2 0.3 0.4 0.4 0.3 0.4 0.3Other a! 0.5 0.6 0.7 1.4 1.0 0.7 0.6

Economic Sector Ministries 5.0 3.8 4.8 4.9 5.9 4.4 3.1

Agricultural Ministries b/ 0.7 1.3 1.4 1.4 1.3 1.0 0.7Water Development 0.5 0.4 0.7 0.5 0.7 0.6 0.5Energy 1.7 0.5 1.4 1.0 1.0 1.0 0.6Public Works cX 0.3 0.2 0.2 0.9 1.4 0.1 0.1

(Of hilch: Roads Dept.)Transport and Cowni lcation c/ 1.4 0.9 0.8 0.2 0.6 1.2 0.8

(Of vhich: Roads Dept.)Other d/ 0.5 0.4 0 4 0.8 0.9 0.5 0.5

Soclal Sector Ministrles 0.8 0.7 1.1 1.3 1.1 0.7 0.6

Eucation 0.2 0.2 0.3 0.4 0.4 0.4 0.3Health 0.2 0.3 0.2 0.5 0.6 0.2 0.2Other e/ 0.3 0.2 0.5 0.3 0.2 0.1 0.1

Development Expenditure - Total 6.9 5.8 7.4 8.8 8.8 6.6 5.0

a/ Includes all ministrles and offices not listed below under Economlc Sector and Soclal Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and Suvply and Marketing.c/ In Aoril 1988, Housing was removed from the former Ministry of Publlc Works and Housing

and attached to the former Ministry of Lands and Settlement. At the sane time, theRoads Department was transferred from the Ministry of Transport and Coru uication to theMinistry of PLbllc Works.

d/ Includes the following ministrles: Tourism and Wlldllfe; Environment and Natural Resources;Comeerce; Industry; Regional Development; Research, Science and Techrology; and Landsand Housing.

e/ Inc,udes the following ministrles: Technical Training; Labor; Ma&Vower and Eaployment;Culture and Social Servioes.

Soures: Ministry of Finance.

154

Table 5.8: TOTAL EXPEINITURE BY SECTOR AND MINISTRY(illilore of Kenya poauds)

PrintedPrinted Forvrd Budet

Asdited Prelim. Revised (J,ue 1988) (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and Pubi Ic AInIstratIon 333.8 353.1 451.0 679.2 554.8 527.5 532.9

Office of the President 98.7 107.3 137.1 185.3 173.0 152.8 159.6Department of befence 112.2 127.3 166.8 260.9 175.5 186.0 182.9Other a/ 122.8 118.4 147.2 233.0 206.3 188.7 190.4

Econom lc Sector Ministries 431.5 386.2 564.7 563.0 718.6 655.6 581.4

Agricultural Ministries b/ 125.3 132.8 218.2 176.9 188.5 166.7 156.3Water DeveIop ment 37.3 41.5 62.1 57.7 75.6 76.2 66.9Energy 81.3 30.9 87.2 71.5 81.1 91.8 64.0Public Works c/ 35.9 33.5 35.6 116.1 174.5 41.5 44.6

(Of shich: Roads Dept.) (-) (-) (-) (76.1) (121.6) (-) (-)Transport and Coinmlcatlon c/ 101.6 92.6 96.4 33.4 68.2 165.0 135.8

(Of hIch: Roads Dept.) (63.8) (65.1) (68.8) (-) (-) (108.8) (90.7)Other d/ 50.1 54.9 65.2 107.3 130.7 114.4 113.8

Social Sector Ministries 352.7 431.0 525.3 640.1 665.1 667.8 706.0

Educatlon 240.8 306.6 365.7 439.5 467.9 500.4 525.2Health 84.1 94.5 111.3 140.8 149.3 136.7 146.8Other e/ 27.8 30.0 48.4 59.8 47.8 30.7 34.0

Total E)Qendlture 1117.9 1170.3 1541.0 1882.3 1938.5 1850.9 1820.3

Note: Excludes Comsoldated Furd Service.Note: Agricultural ependlture and total recurrent expenditure In FY89 excludes KL 258.5 miiiion

allocatlon for write-off of debt owed to Goverruent by Natlonal Cereals and Produce Board.

a/ Includes all ministrIes and offices not listed below under EconomIc Sector and Soclal Sector.b/ Ministrles of Agriculture; Livestock Development; Cooperatives, and SuVply and brketing.c/ in Apr i 1988, Housing was removed from the former Ministry of Public Works and Housing

and attached to the former Milnistry of Lands and Settlement. At the same time, theRoads Department was transferred from the Milnistry of Transport and Cowa icatlon to theMinistry of Public Works.

d/ Includes the following ministries: Tourlsm and Wildllfe; Envirwuent and Natural Resources;Comerce; Industry; Regional Development; Research, Sclence and Technoiogy; and Landsand Housing.

e/ Includes the following mlnistries: Tacftical Training; Labor; Marvower and Ewployment;Culture and Soclal Services.

Source: Ministry of Flnance.

155

Table 5.8a: TOTAL EXPENOITURE BY SECTOR AN) MINISTRY(percent distribution)

PrintedForward ludpst

Audited Prellm. Revised Prlnted (Febnrary 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defee wrd Pub±lc Administration 29.9 30.2 29.3 36.1 28.6 28.5 29.3

Office of the President 8.8 9.2 8.9 9.8 8.9 8.3 8.8Departunt of Defence 10.0 10.9 10.8 13.9 9.1 10.0 10.0Other a/ 11.0 10.1 9.6 12.4 10.6 10.2 10.5

Economic Sector Ministrles 38.6 33.0 36.6 29.9 37.1 35.4 31.9

Agricultural Ministries b/ 11.2 11.3 14.2 9.4 9.7 9.0 8.6Water Developmnt 3.3 3.5 4.0 3.1 3.9 4.1 3.7Energy 7.3 2.6 5.7 3.8 4.2 5.0 3.5Ptblic Works c/ 3.2 2.9 2.3 6.2 9.0 2.2 2.5

(Of WiCh: Roads Dept.)Transport and Cou,icatlon c/ 9.1 7.9 6.3 1.8 3.5 8.9 7.5

(Of 1ICh: Roads Dept.)Other d/ 4.5 4.7 4.2 5.7 6.7 6.2 6.3

Social Sector Ministries 31.5 36.8 34.1 34.0 34.3 36.1 38.8

Educatlon 21.5 26.2 23.7 23.3 24.1 27.0 28.9Health 7.5 8.1 7.2 7.5 7.7 7.4 8.1Other e/ 2.5 2.6 3.1 3.2 2.5 1.7 1.9

Total E,penditure 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: ExiLues Consolidated Fund Service.

a/ Includes all ministries and offices not listed below under Economic Sector and Soclal Sector.b/ Ministries of Agriculture; Livestock Developmnt; Cooperatives, and SLVply and Marketing.c/ In April 1988, Housing ws reoved from the former Ministry of Public Works and Housing

and attached to the former Mlnistry of Lands and Settlemnt. At the same time, theRoads Department was transferred from the Ministry of Transport and Couaication to theMlnistry of Pubilc Works.

d/ Inliudes the following ministries: Tourism and Wildlife; Enviroruent and Natural Resources;Comrce; Inrkstry; Regional Developmnt; Research, Sclence and Tectmlogy; and Landsand Housing.

e/ IncILdes the following ministrles: Technical Tralning; Labor; Manpower and Employment;Culture and Soclal Services.

Source: Ministry of Finance.

156

Table 5.8b: TOTAL EXPENDITLRE BY SECTOR AND MINISTRY(as percmntag of GDP)

PrintedForward kudt

Audited Prelim. Revised Printed (February 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Defense and PLilic AInistratIon 7.2 6.6 7.2 9.6 7.0 5.9 5.4

Office of the President 2.1 2.0 2.2 2.6 2.2 1.7 1.6Department of Defence 2.4 2.4 2.7 3.7 2.2 2.1 1.9Other a/ 2.6 2.2 2.4 3.3 2.6 2.1 1.9

Economic Sector Ministries 9.3 7.2 9.1 8.0 9.0 7.4 5.9

Agricultural Mlnistries b/ 2.7 2.5 3.5 2.5 2.4 1.9 1.6Water Development 0.8 0.8 1.0 0.8 0.9 0.9 0.7Energy 1.7 0.6 1.4 1.0 1.0 1.0 0.6Public Works c/ 0.8 0.6 0.6 1.6 2.2 0.5 0.5

(Of which: Roads Dept.)Transport and Counicatlon c/ 2.2 1.7 1.5 0.5 0.9 1.9 1.4

(Of which: Roads Dept.)Other d/ 1.1 1.0 1.0 1.5 1.6 1.3 1.2

Social Sector Ministries 7.6 8.0 8.4 9.1 8.4 7.5 7.2

Education 5.2 5.7 5.9 6.2 5.9 5.6 5.3Health 1.8 1.8 1.8 2.0 1.9 1.5 1.5Other e/ 0.6 0.6 0.8 0.8 0.6 0.3 0.3

Total Expenditure 24.0 21.8 24.8 26.7 24.3 20.8 18.5

Note: Excludtes Consolidated Furd Service.

a/ Includes all ministries and offices not listed below under Economic Sector and Social Sector.b/ Ministries of Agriculture; Llvestock Development; Cooperatives, and Supply and Marketing.c/ In April 1988, Housing was removed from the former Ministry of Pubilc Works and Housing

and attached to the former Mlnistry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Couanication to theMinistry of Pubilc Works.

d/ Includes the following ministrles: Tourism and Wildllfe; Environment and Natural Resources;Commerce; Industry; Reglonal Development; Research, Sclence and Technology; and Landsand Housing.

e/ Includes the following ministries: Tetrlecal Training; Labor; Marvower and Employrent;Culture and Soclal Services.

Source: Ministry of FInance.

157

Table 5.9: RECLMENT EXPENDITLRE BY SECTOR AND WINISTRY,WITH LATEST FORWAO BWGET CEILINGS

(m illons of Kenya pouds)

Printed Latest Forward BidgetAuixted Prelim. Revised (Ame 1988) CeilngB (July 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92

Defene and Public Ainistratlon 279.0 286.9 354.5 489.4 408.4 435.7 465.1 495.7

Offiee of the President 77.9 86.4 105.5 122.9 134.9 145.7 157.4 189.9Departent of Defence 101.3 113.7 144.0 233.6 148.2 157.1 166.5 176.5Other a/ 99.8 86.9 105.1 133.0 125.3 132.9 141.2 149.3

Ecoriec Sector Ministries 198.4 181.8 265.1 218.3 252.5 275.6 300.9 328.1

Agricultural Mlnistries b/ 94.6 64.7 129.7 76.0 87.4 95.3 104.2 113.1Water Development 16.0 18.3 21.3 19.6 19.7 21.7 23.8 26.2Enmrly 2.6 2.8 3.1 1.6 1.6 1.8 2.0 2.1Public Works ce 20.3 21.7 24.7 50.7 61.5 67.6 74.3 81.8

(Of thIch: Roads Dept.) (-) (-) (-) (21.4) (24.1) (-) (-)TrNsport and Coinnication c/ 37.4 42.1 46.6 17.1 19.9 21.9 24.1 26.5

(Of vilch: Roads Dept.) (n.a.) (n.a.) (n.a.) (-) (-) (26.9) (29.3)Other d' 27.5 32.2 39.7 53.3 62.4 67.3 72.5 78.4

Soclal Sector Ministries 317.3 392.5 459.3 550.7 575.1 645.2 706.7 773.8

Eduatlon 229.9 295.4 344.5 407.8 437.9 497.4 547.1 601.8Health 73.0 79.7 96.5 102.8 104.8 113.2 122.3 132.1Other e/ 14.4 17.4 18.2 40.1 32.4 34.6 37.3 39.9

Recurrent E)xenditure - Total 794.7 861.1 1078.9 1258.4 1236.0 1356.5 1472.7 1597.6

Note: Excludes Consolidated Fund Service.Note: Agricultural expenditure and total recurrent expenditure In FY89 excludes KL 258.5 million

allocation for write-off of debt owed to Goverrment by Natlonal Cereals and Produee Board.

a/ Includes all mlnistrles and offIces not listed below under Economlc Sector and Soclal Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and Suipply and Marketing.c/ In April 1988, Housing was removed from the former Ministry of PubiIc Works and Housing

Nnd attached to the former Ministry of Lands and Settlement. At the same tlme, theRoads Department was transferred from the Mlnistry of Transport and Comanication to theMlnistry of PLbilc Works.

d/ Includes the following ministrles: Tourism and Wildllfe; Envirornent and Natural Resources;Coerc8; Industry; Regional Development; Research, Science and Technology; and Landsand Housing.

e/ IncIlues the following ministries: Technical Tralning; Labor; MarVower and Employment;Cuilture and Soclal Services.

Source: Ministry of FInance

158

Table 5.9A: RECURRENT EXPEU)IfRE BY SECTOR MAO MINISTRY,WITH LATEST F0RWD 8IIGET CEILINGS

(percent distribution)

Latest ForMrd bwigtAudited Prelim. Revised Printed Ceillng (July 1988)

FY85 FY88 FY87 FY88 FY89 FY90 FY91 FY92

Defense and Pblic dinistratlon 35.1 33.3 32.9 38.9 33.0 32.1 31.8 31.0

Office of the President 9.8 10.0 9.8 9.8 10.9 10.7 10.7 10.6Department of Defence 12.7 13.2 13.3 18.6 12.0 11.6 11.3 11.0Other a/ 12.6 10.1 9.7 10.6 10.1 9.8 9.6 9.3

Econolc Sector Ministries 25.0 21.1 24.6 17.3 20.4 20.3 20.4 20.5

Agrlcultural Ministries b/ 11.9 7.5 12.0 6.0 7.1 7.0 7.1 7.1Water Development 2.0 2.1 2.0 1.6 1.6 1.6 1.6 1.6Energy 0.3 0.3 0.3 0.1 0.1 0.1 0.1 0.1Pui±lc Works c/ 2.6 2.5 2.3 4.0 5.0 5.0 5.0 5.1

(Of which: Roads Dept.)Transport and Coc_nIcatlon c/ 4.7 4.9 4.3 1.4 1.6 1.6 1.6 1.7

(Of Wlich: Roads Dept.)Other d/ 3.5 3.7 3.7 4.2 5.0 5.0 4.9 4.9

Soclal Sector Ministries 39.9 45.6 42.6 43.8 46.5 47.6 48.0 48.4

Edcatlon 28.9 34.3 31.9 32.4 35.4 36.7 37.1 37.7Health 9.2 9.2 8.9 8.2 8.5 8.3 8.3 8.3Other e/ 1.8 2.0 1.7 3.2 2.6 2.6 2.5 2.5

Recurrent E)Wenditure - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Note: Excildes Consolidated Furd Service.

a/ Inclides all ministries and offices not listed below urder Economic Sector and Social Sector.b/ Ministries of Agriculture; Llvestock Development; Cooperatives, and SLVpIy and Marketing.c/ In April 1988, HousIng was removed from the former M Inistry of PbilIc Works and Housing

and attached to the forwer Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Milnistry o' Transport and Cojdlatlon to theMinistry of Puliic Works.

d/ Includes the following mlnistrles: Tourlsm and Wildlife; Enviroisent and Natural Resources;Comeroe; Indkstry; Regional Development; Research, Sclence and Techomlogy; and Landsand Housing.

e/ Includes the following ministries: Technical Training; Labor; Mwrpowr and Eaploylent;Culture and Social Services.

Souroe: Min4stry of Finance

159

Table 5.Sb: RECUREKT EXPENDITURE BY SECTOR AND MINISTRY,WITH LATEST FORMURO BIGET CEILII NS

(as percentage of GDP)

Latest Forward BuigetAudited Prelim. Revised Prlnted Ceilings (JuIly 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92

Defense and Public AdInistratlon 6.0 5.3 5.7 6.9 5.1 4.9 4.7 4.6

Office of the President 1.7 1.6 1.7 1.7 1.7 1.6 1.6 1.6Department of Defence 2.2 2.1 2.3 3.3 1.9 1.8 1.7 1.6Other a/ 2.1 1.6 1.7 1.9 1.6 1.5 1.4 1.4

Economic Sector Ministries 4.3 3.4 4.3 3.1 3.2 3.1 3.1 3.0

Agricultural Ministries b/ 2.0 1.2 2.1 1.1 1.1 1.1 1.1 1.0Water Development 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2Energy 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0PRuilc Works c/ 0.4 0.4 0.4 0.7 0.8 0.8 0.8 0.8

(Of which: Roads DePt.)Transport and ComunIcation ct 0.8 0.8 0.7 0.2 0.3 0.2 0.2 0.2

(Of which: Roads Dept.)Other d/ 1.6 0.6 0.6 0.8 0.8 0.8 0.7 0.7

Social Sector Winistries 6.8 7.3 7.4 7.8 7.2 7.2 7.2 7.1

Education 4.9 5.5 5.5 5.8 5.5 5.6 5.5 5.5Health 1.6 1.5 1.6 1.5 1.3 1.3 1.2 1.2Other e/ 0.3 0.3 0.3 0.6 0.4 0.4 0.4 0.4

Recurrent Expenditure - Total 17.1 16.0 17.3 17.8 15.5 15.2 14.9 14.7

Note: Excludes Consolidated Fund Service.

a/ Includes all mlnistries and offices not listed below under Economic Sector and Social Sector.b/ Ministries of Agriculture; Llvestock Development; Cooperatives, and Supply and Marketlng.c/ In April 1988, Housing was removed from the former Ministry of Public Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Comaunication to theMinistry of Pubilc Works.

d/ Includes the following ministrles: Tourism and Wlldllfe; Envirawent and Natural Resources;Cocerce; Industry; Regional Development; Research, Science and Technology; and Landsand Housing.

e/ Includes the following ministrles: Technical Tralning; Labor; Mhapower and Eroployment;Culture and Soclal Services.

Source: Ministry of Finance

160

Table 5.10: DEVELONT E)PENDITLK BY SECTOR APO MINISTRY,WITH LATEST FWAW BKWT CEILINGS

(mlllon of Kenya Poud)

PrInted Latest Forard B9dgetAUdited Prelim. Revised (Jju 1988) Cellings (Jily 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY9. FY92

Defense and Pt.ilc Adinistration 54.8 66.2 96.5 189.7 146.4 156.1 168.9 183.5

Office of the President 20.8 21.0 31.8 62.4 38.1 3B.6 39.7 43.0Department of Defence 10.9 13.7 22.8 27.4 27.3 31.5 34.1 37.0Other a/ 23.1 31.5 42.1 100.0 81.0 88.0 95.1 103.5

Ecoanmic Sector Ministries 233.0 204.4 299.6 344.7 486.1 483.8 524.8 569.3

Agricultural Ministries b/ 30.7 68.1 88.5 100.9 101.1 120.6 130.8 141.9Water Development 21.3 23.2 40.7 38.1 55.9 60.1 65.3 70.8Energy 78.7 28.1 84.1 69.9 79.5 76.0 82.5 89.5Public Works c/ 15.6 11.8 10 65.4 113.0 118.6 128.7 139.6

(Of vIch: Roads DePt.) (-) (-) (-) (54.7) (97.5) (-) (-)Transport and CoJnicatIon c/ 64.2 50.5 49.9 16.4 48.3 44.7 48.5 52.6

(Of Yiich: Roads Dept.) (n.a.) (n.a.) (n.a.) (-) (-) (81.9) (61.4)Other d/ 22.6 22.7 25.5 54.0 68.3 63.8 69.0 74.9

Social Sector Ministrles 35.4 38.5 66.1 89.5 90.0 103.5 112.5 121.9

Educatlon 10.9 11.1 21.1 31.7 30.1 40.5 44.0 47.7Health 11.1 14.8 14.7 38.1 44.5 46.7 50.7 55.0Other e/ 13.4 12.6 30.2 19.7 15.4 16.3 17.8 19.2

Developmt EqVenditure - Total 323.3 309.1 462.1 623.9 702.5 743.4 806.2 874.7

a/ Includes all ministries and offices not ilsted below under Economic Sector and Soclal Sector.b/ Ministries of Agriculture; Llvestock Development; Cooperatives, and Supply and Marketlng.c/ In April 1988, HoLsing was removed from the former Ministry of P'bilc Works and Housing

and attached to the former Milnistry of Lands and Settlment. At the same tlim, theRoads Department was transferred from the Ministry of Transport and Comx IcatIon to theMinistry of Pubilc Works.

d/ Ircludes the following ministrIes: Tourism and Wlidlife; Envirorment and Natural Resources;Caerce; Industry; Regional Developomnt; Research, Scieree and Tectrnlogy; and Landsand Housing.

e/ Includes the following ministries: Technical Training; Labor; Marvo,mr and EplPoyment;Culture and Soclal Services.

Source: Ministry of Flnance.

161

Table 5.10a: DEVEL0lNT DPENDITURE BY SECTOR AND MINISTRY,WIITH LATEST F0RWD NMGET CEIL INGS

(percent distrlbutlon)

Latest Forurd uEspthAited Prelim. Revised Prlnted Celilngs (July 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92

Defense and Pulic Adinistration 17.0 21.4 20.9 30.4 20.8 21.0 21.0 21.0

Office of the President 6.4 6.8 6.8 10.0 5.4 4.9 4.9 4.9Department of Defence 3.4 4.4 4.9 4.4 3.9 4.2 4.2 4.2Other a/ 7.1 10.2 9.1 16.0 11.5 11.8 11.8 11.8

Economic Sector Mlnistries 72.1 66.1 64.8 55.2 66.3 65.1 65.1 65.1

Agricultural Ministries b/ 9.5 '2.0 19.2 16.2 14.4 16.2 16.2 16.2Water Develop ent 6.6 7.5 8.8 6.1 8.0 8.1 8.1 8.1Energy 24.3 9.1 18.2 11.2 11.3 10.2 10.2 10.2Puiblc Works c/ 4.8 3.8 2.3 10.5 16.1 16.0 16.0 16.0

(Of hich: Roads Dept.)Transport and Comunlcatlon c/ 19.9 16.3 10.8 2.6 6.9 6.0 6.0 6.0

(Of ohlch: Roads Dept.)Other d/ 7.0 7.3 5.5 8.7 9.7 8.6 8.6 8.6

Social Sector MInistries 11.0 12.5 14.3 14.3 12.8 13.9 14.0 13.9

Edccatlon 3.4 3.6 4.6 5.1 4.3 5.4 5.5 5.5Health 3.4 4.8 3.2 6.1 6.3 6.3 6.3 6.3Other e/ 4.1 4.1 6.5 3.2 2.2 2.2 2.2 2.2

Development Evendilture - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

a/ Includes all ministries an offic not listed below uwder Economic Sector and Social Sector.b/ Ministries of Agriculture; Llvestock Development; Cooperatives, and Suxply and Market Q.c/ In April 1988, Housing was removed from the former Ministry of Public Works and Housing

and attached to the former Mlnistry of Lands and Settlement. At the same time, theRoads Department was transferred from the Mlnistry of Transport and Comnmication to theMinistry of Pubilc Works.

d/ Includes the following ministrles: Tourlsm and Wildlfe; Environment and Natural Resourcbs;Comerce; Industry; Reglonal Development; Research, Science and Technology; and Landsand Housing.

e/ Includes the following m,nistrles: Technical Tralning; Labor; Marpower and Employwent;Culture and Social Services.

Source: MlnIstry of Finance.

162

Table 5.11b: EVELIWIENT EWENDITUltE BY SECTOR AN) MINISTRY.WITH LATEST FORWR BDGET CEILINGS

(as percentage of GOP)

Latest Forard &xWtAUlted Prelim. Revised Prlnted Csillng (Jily 1988)

FY85 FY88 FY87 FY88 FY89 FY90 FY91 FY92

Defense and PbIlc Adinistratlon ,.2 1.2 1.6 2.7 1.8 1.8 1.7 1.7

Office of the President 0.4 0.4 0.5 0.9 0.5 0.4 0.4 0.4Department of eferc 0.2 0.3 0.4 0.4 0.3 0.4 0.3 0.3Other a/ 0.5 0.6 0.7 1.4 1.0 1.0 1.0 1.0

Econoamc Sector MlnIstries 5.0 3.8 4.8 4.9 5.9 5.4 5.3 5.2

Agricultural MInistries b/ 0.7 1.3 1.4 1.4 1.3 1.4 1.3 1.3Water Development 0.5 0.4 0.7 0.5 0.7 0.7 0.7 0.7Energy 1.7 0.5 1.4 1.0 1.0 0.9 0.8 0.8PLbllc Works c/ 0.3 0.2 0.2 0.9 1.4 1.3 1.3 1.3

(Of vhIch: Roads Dept.)Transport and Comzicatlon C/ 1.4 0.9 0.8 0.2 0.6 0.5 0.5 0.5

(Of Wiich: Roads Dept.)Other d/ 0.5 0.4 0.4 0.8 0.9 0.7 0.7 0.7

Social Sector Ministries 0.8 0.7 1.1 1.3 1.1 1.2 1.1 1.1

Eduatlon 0.2 0.2 0.3 0.4 0.4 0.5 0.4 0.4Health 0.2 0.3 0.2 0.5 0.6 0.5 0.5 0.5Other e/ 0.3 0.2 0.5 0.3 0.2 0.2 0.2 0.2

Development Exendlture - Total 6.9 5.8 7.4 8.8 8.8 8.4 8.2 8.0

a! Includes all ministrles and offices not listed below under Econom ic Sector and Social Sector.b/ Milnistrles of Agriculture; Llvestock Development; Cooperatives, and Supply and Marketing.c/ In April 1988, Housing was removed from the former Ministry of Publlc Works and Housing

and attached to the former Milnistry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Coaunication to theMinistry of Pubic Works.

d/ Includes the following mlnistrles: Tourism and WIldllfe; Environment and Natural Resources;Coerce; Industry; Regional Development; Research, Science and Technology; and Landsand HousIng.

e/ Includes the following lnistrIes: Technlcal Training; Labor; Mvoer and Eeploymnt;Culture and Social Services.

Source: Ministry of Flnance.

163

Table 5.11: TOTAL EXPENDITLRE BY SECTOR AND MINISTRY,WITH LATEST FORIUO MMT CEILINGS

(mIlilona of Kenya pDuo )

Printed Latest Forward BudgetAudited Prelim. Revised (Aui 1988) CelIngs ,'Juiy 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92

Defense and P1bllc Abdlnistratlon 333.8 353.1 451.0 679.2 554.8 591.8 634.0 679.2

Office of the President 98.7 107.3 137.1 185.3 173.0 182.3 197.1 212.9Department of Defence 112.2 127.3 166.8 280.9 175.5 188.6 200.6 213.5Oht er a/ 122.8 118.4 147.2 233.0 206.3 220.9 236.3 252.8

Eonou lc Sector Ministries 431.5 386.2 564.7 563.0 718.6 759.4 825.7 897.4

Agricultural Ministrles b/ 125.3 132.8 218.2 176.9 188.5 215.9 235.0 255.0Water DeveloP ent 37.3 41.5 62.1 57.7 75.6 81.8 89.1 97.0Energy 81.3 30.9 87.2 71.5 81.1 77.8 84.5 91.6PuilIc Works c/ 35.9 33.5 35.6 116.1 174.5 186.2 203.0 221.4

(Of Miich: Roads Dept.) (-) (-) (-) (76.1) (121.6) (-) (-)Transport and Cm"nication c/ 101.6 92.6 96.4 33.4 68. 66.6 72.6 79.1

(Of whIch: Roads DePt.) (63.8) (65.1) (68.8) (-) (-) (108.8) (90.7)Other d/ 50.1 54.9 65.2 107.3 130.7 131.1 141.5 153.3

Soclal Sector Ministries 352.7 431.0 525.3 640.1 665.1 748.7 819.2 895.7

Edatlon 240.8 306.6 385.7 439.5 467.9 53i.9 591.1 649.5Health 84.1 94.5 111.3 140.8 149.3 159.9 173.0 187.1Other e/ 27.8 30.0 48.4 59.8 47.8 50.9 55.1 59.1

Total Expenditure 1117.9 1170.3 1541.0 1882.3 1938.5 2099.9 2278.9 2472.3

Note: Excludes Consolidated Fund Service.Note: Agricultural expenditure and total recurrent expenditure In FY89 excludes KL 258.5 mlillon

allocation for write-off of debt owed to Goverrnent by National Cereals and Produce Board.

a/ Irniludes all ministries and offices not listed below under Econo le Sector and Social Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and SLVpply and Marketing.c/ In April 1988, Housing was removed from the former Mlnistry of Public Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Co uicatlon to theMinistry of P1blIc Works.

d/ IncluIKes the following InistrIes: TourIsm and WIlIdlIfe; Envirorment and Natural Resources;Coeree; Industry; Reglonal Development; Research, Sence and Ted=ology; and Landsand Housing.

e/ Incl udes the followingo InistrIes: Teethiical Training; Labor; Marvower and Eoployment;Culture and Social Services.

Souree: Ministry of Flnance.

164

Table 5.11a: TOTAL EXPENDITURE BY SECTOR ANC MINISTRY,WITH LATEST FORW BIGET CEILI,N;

(percent distributlon)

Latest Forward BuigetAudited Prellm. Revised Printed Ceilings (%lIly 1988)

FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92

Defense and Public Adlnlstratlon 29.9 30.2 29.3 36.1 28.6 28.2 27.8 27.5

Office of the President 8.8 9.2 8.9 9.8 8.9 8.7 8.6 8.6Department of Defence 10.0 10.9 10.8 13.9 9.1 9.0 8.8 8.6Other a/ 11.0 10.1 9.f 12.4 10.6 10.5 10.4 10.2

Economic Sector Ministries 38.6 33.0 36.6 29.9 37.1 36.2 36.2 36.3

Agricultural Mlnistries b/ 11.2 11.3 1'.2 9.4 9.7 10.3 10.3 10.3Water Development 3.3 3.5 4.0 3.1 3.9 3.9 3.9 3.9Energy 7.3 2.6 5.7 3.8 4.2 3.7 3.7 3.7Pubiic Works c/ 3.2 2.9 2.3 6.2 9.0 8.9 8.9 9.0

(Of which: Roads Dept.)Transport and Comuuication c/ 9.1 7.9 6.3 1.8 3.5 3.2 3.2 3.2

(Of hich: Roads Dept.)Other d/ 4.5 4.7 4.2 5.7 6.7 6.2 6.2 6.2

Social Sector Ministries 31.5 36.8 34.1 34.0 34.3 35.7 35.9 36.2

Education 21.5 28.2 23.7 23.3 24.1 25.6 25.9 26.3Health 7.5 8.1 7.2 7.5 7.7 7.6 7.6 7.6Other e/ 2.5 2.6 3.1 3.2 2.5 2.4 2.4 2.4

Total Expenditure 100.0 100.') 100.0 100.0 100.0 100.0 100.0 1"^.0

Note: Excludes Consolidated Fund ServIce.

a/ Includes all ministries and offices not Ilstec, below under Economic Sector and Social Sector.b/ Ministries of Agriculture; '.ivestock Developoant; Cooperatives, and Supply and Marketing.c/ In April 1988, Housing was remved from the former Ministry of PubiIc Works and Housing

and attached to the former Ministry of Lands and Settlement. At the same time, theRoads Department was transferred from the Ministry of Transport and Commu,ication to theMinistry of Public Works.

d/ Includes the follow ing ministrIes: Tourism and WlidIlfe; Envirornment and Natural Resources;Commerce; Industry; Regional Development; Research, Sclance and Technology; and Lands

and Housing.e/ Includes the following ministries: Technical Training; Labor; Marnower and Employment;

Culture and Social Services.

Source: Ministry of Finance.

165

Table 5.11b: TOTAL EPENDITLRE BY SECTOR AND MINISTRY,WITH LATEST FORWAN MM3GET CEILINGS

(as percentage of GOP)

Latest Forwvrd MgetAudited Prelle. Revised Printed CeiIirn (GIly 1988)

FY85 FY88 FY87 FY88 FY89 FY90 FY91 FY92

Defense and Ptbilc AdInistration 7.2 6.6 7.2 9.6 7.0 6.6 6.4 6.2

Office of the President 2.1 2.0 2.2 2.6 2.2 2.0 2.0 2.0Depart3ent of Defence 2.4 2.4 2.7 3.7 2.2 2.1 2.0 2.0Other a/ 2.8 2.2 2.4 3.3 2.6 2.5 2.4 2.3

Enomic Sector Ministrles 9.3 7.2 9.1 8.0 9.0 8.5 8.4 8.3

Agricultural Mlnistries b/ 2.7 2.5 3.5 2.5 2.4 2.4 2.4 2.3Water DevelopMent 0.8 0.8 1.0 0.8 0.9 0.9 0.9 0.9Energy 1.7 0.6 1.4 1.0 1.0 0.9 0.9 0.8Pubilc Works c/ 0.8 0.6 0.6 1.6 2.2 2.1 2.1 2.0

(Of 4lich: Roads Dept.)Transport and Coin.aication c/ 2.2 1.7 1.5 0.5 0.9 0.7 0.7 0.7

(Of lzich: Roads Dept.)Other d/ 1.1 1.0 1.0 1.5 1.6 1.5 1.4 1.4

Social Sector Ministries 7.6 8.0 8.4 9.1 8.4 8.4 8.3 8.2

Education 5.2 5.7 5.9 6.2 5.9 6.0 6.0 6.0Health 1.8 1.8 1.8 2.0 1.9 1.8 1.8 1.7Other e/ 0.6 0.6 0.8 0.8 0.6 0.6 0.6 0.5

Total Expenditure 24.0 21.8 24.8 26.7 24.3 23.6 23.1 22.7

Note: Excludes CorsoIidated Fund Service.

a/ Includes all ministries and offices not listed below under Ecnomlc Sector and Social Sector.b/ Ministries of Agriculture; Livestock Development; Cooperatives, and Supply and Marketing.c/ In April 1988, Housing was removed from the former Ministry of Publ Ic Works and Housing

and attached to the former Mlnistry of Lands and Settlement. At the saw tle, theRoads Departmnt was transferred from the Ministry of Transport and Comunication to theMinIstry of PLbIIc Works.

d/ Includes the following ministries: Tourism and Wlidllfe; Envirorient and Natural Resources;Comerce; Industry; Reglonal Development; Research, Sclence and Tecdtvlogy; and Landsand Housing.

e/ Includes the following ministrles: Technical Training; Labor; Mavbower and Employmnt;Culture and Social Services.

Source: Ministry of Finance.

166

Table 5.12 : Eeoloyment & Compen!atlonJun 29.!:M3

----- molyset-------------------- E-…rerinal Eso'usents (in KL-growth grcwtth

rate riteMinistry 1985i86 19S66'17 1987/88 19e8989 1989199 198.'86 l9ic/e7 1987/9S 1998/99 198IMP9

Olticro' Fresident 56498 56853 62129 68028 9.5 43250 55142 65892 73249 11.2Stata House 292 303 302 322 6.6 205 246 281 357 27.0Per.onnel] Nanaoesent 9095 7295 6997 70o0 0.0 2747 3022 3095 3324 7.4

Fcre4on A04airs 1095 1095 669 1314 96.7 24JT 2,Eb 28ta 3625 rVIce Vrssioent 11526 11617 11617 11863 2.3 84;31 9652 12699 1341b 5.bPainnino 2205 2055 2044 2043 n.0 2110 2325 2960 2946 3.1

F~r.ancaS b332 6634 7152 7545 5.5 749. 10781 11155 1226i 10.0

5eiense 185 199 201 214 6.5 210 19i 250 301 20.4mor:uliture 7 25105 22525 23024 2.2 28511 21027 24007 26275 z.4Hieaitl 3244 4 S211 40705 42997 5.4 40059 49201 51797 53i36 4.

.ccal Gover oent 293 31 6,7 754 14.8 402 496 900 1319 46.t

wcr;vNs 96 28 9q,56 28368 27895 -1.7 °121 112 I 8132 31029 1I.2

,ransisrt.lCcmaunicitions 2r5176 27166 7436 8013 7.8 211to 23255 9045 10848 19.

W i r 21, I 26 215 967 1Lb3 20.3 rq92 28e: 1352 1 7 C3 26.1:

.r.!;fiUS2LlY!^ie .265 '250 516 59.2 11.t 629 59T8 5b56 6368 12..:

Lis. :s,e 5, .. I;ent !442 14942 13013 12.9 1 011 14121 1.175 7.4cu'~:Suoe:0cai ier jices :'37 236 71:'l 0 s -2.7 492 5357 7119 7755

-rnmi'; n/2roa3ac i,iTc' 27So Me 3270 383 la.2 ; :7 2367 '.7.1 4"2. 2:.:

.A ; r-. .9 t ':4 11 1::: r ,X2 0 I. 1)6: 6 13: 26 1,47.16r6 1M2! 1. W 1 2644 :2:2 22:4 4.r

225 r29;-;;C; ir; ATi,l9 ES 9 2'! 3O: :7.:

;iii n efr r.ret A. 116 2176 725 .. 5 22S r;: 7; 31; 14;i

Fuoijc er,rice Co'aission 151 152 193 2: 2.5 co 246 2 j 55 845Cor.tr:Uar.;r ci:or-6eneral 2CS 9?27 494 1004 13.2 1CE2 1259 1172 173i 47.'hait:sn;. M`ssT !tv 4412 A44 £A2 5307N 10.0 Q 33 614 037 612 9.?

*0ePcv !'.''53 15031 b56 I 4 -c I516 1960 ?42 962 4.2Et;cd'..,:n .11(': 2050'!1 2272 45 284419 25.; 2001:.: 4(0 972 6 7654 30215 9.

277 4A2 56.0 677 772 14.:TEC cl zralirc 2497 '21? 27.2 5714 o046 !4.;~i7:c. OW?! e--31Er.t 57 4; 12.i 2.'c ';? 10k

rec-i~~~~~~~~~~'-~: .'.r- 42n 1;; 7.') 6f064 73 j 22 .

'.,-ona. ;utn:~e 41. 59b 45. C 266 2 :4e01:-nEi :ew:;:Dment '1:. .-. 4 .:?.1 2465 339i -

.. . 4. 49.:4 '4 14.7 414 52 47;'27 5'54:9 o316:: Q

0'AL .e,e :1. Ecu;catn ; 4O ; '') 26&!: 27)4j 5.. 9:57e565 298872 32947. IC.:

lin, mi:11ons of KP)b

.inistrv excenciture 16,.6 199s7 . -.. -4i 5,;iAace c;! 6224Y 98759 11519S2 :26;::7 g.2

Xon-wace expenditure 9027 9992 105:2 10559 0..Mon-waoe as % of tot3l 44q.22 5'..v 47.73 45."

Laible 5.13: NUIN-WAGE OFLRATING EXPENDIITURES, ITE9S 100 - 200,,...._..1.u_ '.......... MM .... wleee_ot............

.*dI1i I 1987/88 t 1 9 08/99 1 ifference 2 Z Incre4sh :

-I~~~ ; -

I I _ If t bC. L.f V' t 2r.idteit 2 47,631IB441 48,195,530: 553,6662f- IhL 'i atAt Houso. 1 2,180,7512 1.547,1911 -613,5702 2ex :

- Dircctorete o.f Pt sor.nrl I I IMst3 ar@gu-nen t 1,h92,59e: 1,864,253: 171,6t552 1 )X

pl4 F orIegri A2f f. f-. 1 10,003,4899 I0,689,5i11 68b,0921 7X Ir- Olfic* of the Vice Prasld.4rtt 2 8,199,7321 0,667,5641 467,0321 6Nb - Plinf P litj .tied National Doy. I 893,8421 1,295,180: 411,3308 472 2R7 - Finan:r 2 6,293,9071 7,720,6491 1,434,731: 23% I

hI - a) p 2e t rC. Lwftu,ce 1 269, 8561 115,20"l -154,' -577 IHI"0 - f.jrlI tIttre v M,096,1u6 9,519,7011 1,433,5au5 1t :Nil - HNalth* 1 .27,241,821: 27,247,5031 5,6921RI! - Local iovmrn.a.w.t I 5,319,3571 7,051,4201 1,733,063: *X 22.13 - fublic Wk.rks : 14,828j5411 23,190,0721 8,361,531: t'h R I- - transpLw t 2 5,809,9041 7,046,483:1 2,238,577 ;.I% R 1::. - Labour 1,047,1612 665,2221 -381,9391 -562 I

R16 - Tour is. 3 3,929,270: 4,339,1911 509,901: 13 t

217 - 1 Ivr(stc2. Do 1.-opmtnt I 5.236,496: 9,261,8411 4,025,345t 77X I

RID - DAI turu 2 9,514,5811 10,563,'9491 1104917. 2aViV- lrffrmataoD. 1 4,739,334 5.265.j34 526,2W0 11X t

H."' - -tter* 1 2,3.30,221 3,259ASC01 920,4791 39' IR')- I Fvir rw.mit A 85S,794. 814,0941- -39,6961 -SX %R22 - Cc,oprativo Dev. I 687,42.:' 95l,6&61 264,2461 358 ISIZ- Cc-..?# 1,157,'32' ,1356,081-: lv,6071 17X 2.214 b.ppaall.a a.%d "ar-ku'ing I 280,56(21 257,1I. : -23,4001 -6 e 8k2S. (oitf.a- o , tuti AI&tarnLy Goneral I '8f,14Y1 79&,ubQI 206,7111 35X tW!6 - OllCi.' L'.partnant* I 539,2801 5t8,0ial -31,1991 -62h?? -- Ful-li S.rvi-, Co&amision I 134,5332 146.4351 11,9021 92 IRi -- Cootrollrt 1 Auditor General 1 224,9531 227,800t 2,847t 1X I

9- r,`L&til&al Assembly 1 1,309,2261 1,626,593: 317,3671 242 22.S.) - Energy - 322,025! 321,4901 -1,3351 t431- lucation'o I 56,596,9201 56,934,7511 237,9311R31! - Iiduhtry 1 391,3671 1,052.9511 661,4941 1692 IR3- n Technical Training L - A. T. 1 2,036,7351 2,109,1831 72,4482 4X ti4P - h.pr.po4r Dev. & Etployment 1 220,819 238,3512 17,7331 86N.At- tw&,earch, Science 4. T-chno. I 1,767,86u: 2,045,0331 257,1651 14X R 6 - tnds and Housing 2,264,3671 2,283,545t -922: 1ti *V t- Ltiono6l -uldanco I P. A. I 1,126,953: 676,244: -490,709: --44X :P446 -- -gion.l IDi,velopoint I 1,072,831I 1,124,982: 52,251! 5X 1

…~~~~~-- - - - -- - - -- - - - - - - - - -- - --I -…----…----------I- - …TOI . 2 236,721,717: 2C,fll6,1551 24,095,43,1 IOX I

.~ ~~~~~~~~~~--…------- - ---------- ---…-…----------.-----.

* l2. FoLlnwing c.prndxtrew hIAve not been lncludtd In the eNpenditures 0f a num,ber.nALstrie5 because, they are eithe- non-r-currunt or have been reduced

sall-tta.ttiolly frco 19f07/f8 lovols.

RI Furekgn Affetares KfC -,014,500 for pending bill.R11 - Health. KC 100,000 Subsidies and contribution-.[r2v - Wat.ra KtC 1,072,773 for pending billsk7f- O241ce of the Attorney Generalo KC J9,432,740 for *1sction witpfnsCa.R26 - Judicial Dupartamwts Payment of compunnation and ax-qratta.k31 - )jucatrtit Rodoctions from previous yuar s Ir.vP1s of IC 1 ,5i.b,000 fI r t-0o,.l .< 1 utsPi.Srt.

and Kt 3.9fA,0A0 from *rhool dm4X

168

Tabi 6.1: MMIWOE I S OF T1K USWI SYS AT YEAR'SS WI(cIl I ium Of ls d 1)

179 190 131 19#2 1I3 1964 195 196 197

mmy 518.7 S0.0 W7.2 3.3 746.7 816.4 M.1 1100.1 119.6

0i-em 23.0 315.4 392.9 396.6 421.7 47.0 59.4 740.7 m.9

Othr Itm (rwt) 64.5 47.7 23.7 63.6 74.6 95.7 42.3 1W.0 JZ;.2

Total LlFliltli a Total bs V71.2 M3.2 938.9 1151.4 1242.0 1409.0 1800.8 2m5. 264.9

Mt foresign mst 179.4 113.2 15.0 -101.0 -11.3 20.2 -6.2 8.7 -1.3

Duitlo Crudlt 31.8 779.9 987.9 1252.4 1253.4 1338.9 1593.0 2318.0 2430.2

Ointral gwwrmnt (rwt) 156.1 13B.0 292.9 484.1 391.5 438.0 473.5 744.4 m.9Ottwr pSllc bodin 4.9 26.0 23.7 50.4 92.9 105.7 119.9 139.5 176.9Private motor 488.7 567.9 051.3 717.8 789.0 847.2 970.7 1134.2 1234.4

Sro" of mt r t da: E ioc Sry 1968, p.49.