Why Counties Should Strengthen Structures for Management of Assets and Liabilities
Management of assets and liabilities is one of the key pillars of a Public Finance Management (PFM) system. Effectiveness in management of public assets ensures that public investments provide value for money, assets are recorded and managed efficiently, risks are identified, and debts and guarantees are prudently planned, approved and monitored. Good practice in management of assets and liabilities includes fiscal risk reporting, public investment management, public asset management and debt management.
Promotion of social and economic development is one of the objectives of devolution. As a result, Section 15(2a) of the Public Finance Management (PFM) Act 2012 requires that at least 30 per cent of the budget be allocated for development expenditure. Management of public investment is, therefore, critical for actualization of development objectives in the devolved units. However, most county governments are yet to develop effective tools for economic analysis and technical analytical methods for assessing the main investment projects at county level. Instead, most counties employ needs-based analysis and public participation.
Many county governments have not developed standard procedures to guide investment project selection. Instead, investment project costing is mainly based on ceilings set by the respective County Treasury and Budget and Appropriation Committee. In addition, projections of the total costs of major projects in the county for the current year and the total capital costs for the forthcoming budget year are included in the budget documents. However, recurrent costs of projects hardly appear in the budget documents for periods covered by the assessment. It is also observable that counties are gradually putting systems for monitoring and evaluation.
An assessment by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) in 2017 showed that most of the county governments do not clearly identify fiscal risks that are associated with unfavourable macroeconomic situations, financial positions of county public corporations and contingent liabilities. Most county governments either own or are in the process of acquiring public corporations. However, the financial positions of these entities are hardly assessed, neither are they audited. In addition, investment initiatives and projects undertaken in most counties are not based on any analytical appraisal methods. Rather, the practice is that county assemblies have the final say on the projects to be implemented after public participation and prioritization.
In most of the counties, mortgages and car loan schemes have been rolled out for Members of County Assemblies (MCAs). However, there are no clear mechanisms or framework for repayment compliance. This increases the risks for losses, especially in cases where beneficiaries failed to be re-elected. Besides, the county governments rarely provide guarantees for loans such student loans, mortgage loans, agriculture loans and small business loans. Nonetheless, counties pay statutory social security schemes including National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF). Besides, entities such as the Early Childhood Development Education (ECDEs) and Technical Training Institutes (TTIs) receive development funding from the counties but do not present the expenditures from users’ fees for scrutiny by the executive in many counties.
Financial assets held by the counties are mostly cash and cash equivalents as evidenced in bank reconciliation statements and annual financial statements. County revenues are deposited in County Revenue Fund accounts in commercial banks and Central Bank accounts. In addition, most counties have automated or are in the process of automating revenue collections to increase efficiency in collections, increase coverage and reduce pilferage. However, investments in other forms of financial assets such as securities, bonds, loans and receivables is yet to take root in the counties.
A number of counties keep an asset register for non-financial assets such as assets acquired since counties became operational in 2013. However, the non-financial registers are incomplete as they do not include all properties that were inherited from the defunct local authorities. The registers rarely undertake age and value analysis of the assets. Some counties were still relying on the 2015 Transition Authority Report for Assets and Liabilities at the time of the assessment. Thus, the devolved units should engage the IGRTC to finalize transfers of assets, liabilities and pending bills.
So far, most county governments rely on the Public Procurement and Assets Disposal (PPAD) Act 2015 for transfers and disposal of their assets. Besides, many of the devolved units have not developed supplementary procedures for disposal. In few instances in which the counties disposed of their assets, they relied on a disposal committee and the national law (PPAD Act) and employed public auction model. Nevertheless, Makueni County has adopted the disposal procedure that has been incorporated in the county Financial Regulation and Procedures Manual (section 10.13 on disposal procedure).
Article 212 of the Constitution, Section 123 of the PFM Act 2012 and County PFM Regulation 2015 (176-196) permit devolved units to borrow domestically and externally. However, there has been an administrative moratorium on county borrowing. When the counties start borrowing, the loan will have to be guaranteed by the National Government and approved by the respective County Assembly.
Besides, development of Debt Management Strategy (DMS) is at various stages across the county governments. An effective DMS should have an assumption of underlying debt management, total debt stock, sources of loans, principal risks associated with loans, analysis of the sustainability of debt and debt servicing framework. Whereas it is possible that counties might not have incurred debts, most of them inherited debts from the defunct local authorities hence the need to develop debt management framework. Several counties have no updates of the inherited debts, since the defunct Transition Authority did not finalize the issue of assets, liabilities, debts and pending bills of the former local authorities. The counties are also accumulating pending bills, hence the need for such a strategy. A system to monitor and report regularly on debt portfolio to ensure data integrity and effective management is important for a reliable and effective DMS. The various debt management strategies developed by the counties seem to lack mechanisms of handling financial liabilities arising from domestic, foreign and guaranteed loans.
For the management of assets and liabilities to be more effective, reliable and transparent, the devolved units need to develop clear mechanisms of fiscal risks reporting by ensuring that factors that might contribute to fiscal risks for county corporations are well captured and responses to address them are put in place. There is need to develop capacity in handling contingent liabilities by developing laws and policies to clearly stipulate the procedures, repayment plans and consequences for defaulting by the beneficiaries of mortgages and car loans schemes. Moreover, county governments should develop standard procedures and guidelines for public investment management, capacity building of their officers in charge of public investments for effective economic analysis of investment projects, project selection, project costing, and monitoring and evaluation.
Authors: Paul Odhiambo, Christopher Onyango and Manaseh Otieno
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