REPUBLIC OF KENYA

PARLIAMENTARY SERVICE COMMISSION

The MPs Budget Watch by The Parliamentary Budget Office

Financial Year 2012/13

Disclaimer The Parliamentary Budget Office (PBO) is a Non-Partisan Professional Office of the Kenya National Assembly whose primary function is to provide timely and objective information and analysis concerning the national budget and economy.

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TABLE OF CONTENTS List of Tables ................................................................................................................................. iv Acknowledgments........................................................................................................................... v Abbreviations and Acronyms ........................................................................................................ vi 1. INTRODUCTION..................................................................................................................... 1 1.1. Overview .................................................................................................................................. 1 2. STATE OF THE ECONOMY AND KEY MACRO ECONOMIC VARIABLES ............. 3 3. HIGHLIGHTS OF THE FISCAL YEAR 2012/2013 BUDGET .......................................... 6 3.2. Sectoral analysis of the 2012/13 Budget .................................................................................. 7 3.3.Austerity Measures ................................................................................................................. 13 4. REVIEW OF REVENUE AND TAX MEASURES ............................................................ 15 4.1. Resource Mobilization for Financing of the Budget.............................................................. 15 4.2. Tax Measures ......................................................................................................................... 16 4.3. Challenges and Efficacy of Tax Collection ........................................................................... 18 5. PREPARATION FOR DEVOLUTION ............................................................................... 20 5.1. Legal Framework and budgeting for devolved Government ................................................. 20 6. BUDGET PROCESS STRUCTURE AND TRANSITION ................................................ 22 6.1. Budget Documents and Legal Framework ............................................................................ 22 6.2. Potential Challenges in the Budget Process ........................................................................... 23 6.3.Gender Analysis of the Budget ............................................................................................... 24 6.4. Budget Public Hearings ......................................................................................................... 25 Appendixes................................................................................................................................... 27 Appendix 1: Economic Growth by Sectors (% growth) ............................................................... 27 Appendix 2: Sectoral Contribution to GDP (Kshs. Billions)........................................................ 27 Appendix 3: Government Fiscal Table (Kshs. Billions)............................................................... 28 Appendix 4: Allocation to Ministries (Kshs. Billions) ................................................................. 28 Appendix 5: Devolved Resources by Ministry (Kshs. millions) .................................................. 31 Appendix 6: County Revenue Potential and Cost of Devolved Functions (Kshs. Millions)........ 32 Appendix 7: Tax Proposals and their Implication ........................................................................ 33 Appendix 8: Donor Funding (Kshs. Millions) .............................................................................. 34 Appendix 9: Projects considered for funding from public hearings, 2012/13 Budget ................. 35

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List of Tables Table 1: Composition of GDP growth (% change) ......................................................................... 4 Table 2: Analysis of key expenditure categories in Kshs. billion................................................... 6 Table 3: Details of Consolidated Fund Services ( Kshs. Billions) ................................................. 7 Table 4: Analysis of distribution of resources by sectors (Kshs. millions) .................................... 8 Table 5: Government Financing of the Budget for 2011/12 2012/13 ( Kshs. Billions) ............ 15 Table 6: Analysis of the government revenue for 2010/11 2012/13 ......................................... 16

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Acknowledgments This edition (5) of the Budget Watch was prepared by the staff of Parliamentary Budget Office (PBO). The core team included Phyllis Makau, Nicodemus Odongo, Martin Masinde, Fredrick Muthengi, Lucy Makara, Robert Nyaga, Gichohi Mwaniki, Gilbert Kipkirui, Benjamin Ngimor, Joash Kosiba, Millicent Ojiambo, Josephat Motonu. In addition, Junior Legislative fellows attached to the Parliamentary Budget Office, namely, Erick Kanyi and Lewis Wandaka gave insightful input.

Abbreviations and Acronyms ARV BEC BPS CFS CRA CW SK GDP ICT IEBC JKIA KARI LAPSSET MP M TEF NSIS PBOM PFM TS C VAT Antiretroviral drugs Budget and Economic Council Budget Policy Statement Consolidated Funds Services Commission on Revenue Allocation Child Welfare Society of Kenya Gross Domestic Product Information Communication and Technology Independent Electoral and Boundaries Commission Jomo Kenyatta International Airport Kenya Agricultural Research Institute Lamu Port and Lamu Southern Sudan-Ethiopia Transport Corridor Member of Parliament Medium Term Expenditure Framework National Security Intelligence Service Parliamentary Budget Office Model Public Financial Management Teachers Service Commission Value Added Tax

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1. INTRODUCTION 1.1. Overview 1. This MPs Budget Watch provides a concise review of the Budget Estimates for 2012/13 fiscal year, highlights the priority spending areas, lessons learnt in the budget making process and what Members of Parliament need to look out for during the execution of the budget. The brief also outlines how the budget is to be financed, preparation and financing the devolved governments, and also provides a review of the state of the economy underpinning the budget. 2. The budget is the key economic policy tool in Kenya as it provides the means through which the government can pronounce its policy priorities and how it intends to deliver services to its people. Members of Parliament as representatives of the people, have the humongous task of ensuring that the budget is implemented as passed hence the importance that parliamentarians should attach to budget implementation. 3. The government prepared the 2012/13 budget within the legal and constitutional timelines, but faced challenges associated with the transition from the old to the new Constitution. A major drawback observed in the budget process was the late submission of the Budget Policy Statement (BPS). It was submitted seven days to the submission of the Estimates of Revenue and Expenditure. The BPS preparation and submission to Parliament is a legal requirement under the PFM Act, and gives the Legislature an opportunity to reflect on and influence the budget at policy level. Its late submission, therefore, meant that Parliaments recommendations on economic policies and expenditure plans contained in the BPS could not be fully incorporated in the Budget Estimates. 4. The BPS holds the key to the future process of determining the vertical distribution of resources between the national and county governments. This draws from the fact that the BPS provides the macroeconomic and fiscal framework, which is the basis for the estimation of the overall resource envelope and the determination of the resources available for vertical sharing between the two levels of government. Thus, the delay in submitting the BPS may have contributed to the missed deadlines for the introduction to Parliament of the Division of Revenue Bill and the County Allocation of Revenue Bill in line with the Constitution. Once resources have already been allocated, it is really not possible to introduce a Division of revenue Bill. However, in-year re-allocations would be in order 5. However, the Estimates of Revenue and Expenditure for 2012/13 were submitted to Parliament within the legal timelines. Parliament subsequently adhered to the provisions of the constitution in reviewing the estimates including holding public hearings. The recommendations drawn from countrywide public hearings were considered with further 1

adjustments in the budget estimates. Remarkably, the Appropriations Act for 2012/13 budget was assented to before the end of the 2011/12 financial year, effectively eliminating the need for the Vote-on-Account. 6. Various challenges, however, lie ahead in the execution of the budget. In particular, is the handling by the executive of the wage adjustment pressures from various segments of the public sector coupled by the intricacies that are likely to emanate following the l transition to county governments. Full execution of the budget will highly depend on the following factors: one, efficient collection of planned tax revenue and receipt of other finances; two, smooth establishment of the devolved governments and their ability to absorb the initial allocations in the last months of the 2012/13 budget; and three, efficiency of Parliament to oversee the implementation of the budget and make necessary budgetary approvals for the Financial year 2013/14 7. The following section presents a brief review of the state of the economy during the preparation of the budget. Section 3 discusses the budget estimates for 2012/13 financial year, including sectoral issues and austerity measures. Highlights on resource mobilization for the financing of the budget are discussed in section 4. Section 5 highlights the status and preparedness for devolution. The budget process structure and transition issues are examined in section 6. The last section reviews the budget process so far, the budget timelines, and also provides a look at the evolving budget process in Kenya.

2. STATE OF THE ECONOMY AND KEY MACRO ECONOMIC VARIABLES 8. The 2012/2013 budget was prepared amidst moderate expectations on the economy. Following the 2011 economic uncertainties, 2012 began with growing negative numbers on inflation, interest rates, and the growth outlook. Nevertheless, by April 2012, Kenyas economy had shown signs of resilience with inflation showing signs of slowing down in January 2012. This was attributed to favorable food prices as a result of predictable rains in April-May 2012 and a gradual decline in global oil prices. The shilling had also recovered its value by the second quarter of 2012. Even though the interest rates remained relatively high due to tight liquidity, there are strong expectations that the rates will fall as pressure on inflation eases. 9. The economy is forecast to grow at about 5.2% in 2012/13 with stable economic fundamentals and good rains (Table 1). This rate of growth assumes that inflation will decline to single digit levels, interest rates will fall in tandem with inflation, and Kenyas shilling will remain stable due to decreased demand on imports. However, this situation may be short-lived given the wage pressures coupled by uncertainties associated with the upcoming general elections. 10. The analysis of various income components of GDP shows that economic growth will be driven by various components among them exports, consumption of goods and services, and investment. According to estimates from the Kenya Parliamentary Budget Office Macro Model (PBOM), export of goods and services is projected to rise by 9% in 2012/13. Private and government consumption are projected to grow at 4.8% and 3.8% respectively, while total investments (gross fixed capital formation) will expand by 5.2% in 2012/13. Private investment is poised to grow by 5.9% and government investments through the development budget is expected to rise by 4.5% in the 2012/13 financial year.

Table 1: Composition of GDP growth (% change)

Government expenditure of which wage bill of which consumption Private consumption expenditure Gross fixed capital formation of which private investments of which government investments Exports of goods and services Imports of goods and services GDP at market prices 2009/10 6 .5 2 .0 13.5 6 .2 5 .3 8 .0 2 .0 3 .5 4 .4 4 .3 2010/11 9 .9 2 .9 19.4 4 .9 10.2 -1 . 2 24.8 11.7 11.0 5 .1 2011/12 5 .4 2 .5 8 .9 4 .3 4 .7 4 .8 4 .6 12.0 7 .4 5 .5 2012/13* 4 .8 2 .5 7 .4 3 .8 5 .2 5 .9 4 .5 9 .0 5 .6 5 .2 2013/14* 4 .0 2 .5 5 .6 5 .3 6 .2 6 .3 6 .2 10.0 8 .5 5 .6 2014/15* 3 .6 2 .5 4 .7 5 .8 6 .2 6 .2 6 .3 9 .0 7 .5 6 .0

Source: *Parliamentary Budget Office Macro Model (PBOM) estimates

11. The key growth sectors in 2012/13 include the most resilient of the sectors such as hotels and restaurants, transport and communication, construction, financial services, and wholesale and retail trade. Indeed, recent data seems to confirm these as the key growth sectors in the last three years. For example, the fastest growing economic sector in the last three years (20092011) is hotels and restaurants which grew by 17.3%, followed by the financial intermediaries which grew by 8% (Figure 1). The other leading sectors include construction, wholesale and retail trade, transport and communication, which grew by 7.2%, 6.4%, and 5.6%, respectively. The usual slow and underperforming sectors are the manufacturing sector and agriculture. Agriculture grew by a paltry 1.8% despite the fact that it is the largest sector in terms of contribution to economic output (Appendix 1 and 2). These two sectors hold great potential in Kenyas development. Thus, increased investments in agriculture and manufacturing could help turn around the economy and create jobs for Kenyan workers. The major concern to Kenyans would be what the new measures are being considered in the agriculture sector through the budget estimates for 2012/2013 and in the medium term. 12. Risks to growth still remain. The most significant downside risks to the growth outlook include: persistent growth of imports relative to exports; high oil prices; crisis in the Euro zone which could affect Kenyas exports and hurt Kenyas export earnings; the war in Somalia and associated sporadic terror attacks; Others are rising budgetary pressure particularly consumption type of expenditures such as the wage adjustments may push up or widen the deficit and thus lead to increase in public debt; increased spending associated with constitutional reforms and devolution; election uncertainties and the possibility of drought in the early part of the year 2013 will just add on to the hard budget constraint. All these challenges suggest the need for strict oversight to guard over new spending pressures that may lead to increased borrowing by government. Indeed any adjustments upwards for a particular vote head should be followed by a corresponding adjustment downwards or an 4

increase in taxes and Additional borrowing whether domestic or external should only be considered an option.

Note: The horizontal axis is the percentage growth rates

3. HIGHLIGHTS OF THE FISCAL YEAR 2012/2013 BUDGET 13. The total budget is Kshs. 1.46 trillion for the fiscal year 2012/13, comprising of Kshs. 1.01 trillion in recurrent expenditure and Kshs. 453 billion in development expenditure. This is a 21% increase from the 2011/12 budget of Kshs. 1.15 trillion. The 2012/13 budget is broken down as follows: Kshs. 18.05 billion for the Parliamentary Service Commission, Kshs. 16.36 billion for the Judiciary and Kshs. 1.08 trillion for the executive.

Table 2: Analysis of key expenditure categories (Kshs. billion) Ca t eg o ry CFS Parliamentary Service Recurrent Development Judicial Service Recurrent Development Executive Ministerial Recurrent Development Total Budget Recurrent Development 2009/2010 187.53 7 .6 9 2 .5 0 0 .5 8 409.00 320.65 606.72 321.23 2010/2011 187.41 7 .5 6 3 .3 2 0 .5 9 497.19 303.20 695.48 303.79 2011/2012 209.52 6 .5 0 1 .6 0 6 .8 1 2 .5 2 531.55 394.43 754.38 398.55 2012/2013 345.99 1 3 .4 3 2 .8 9 1 2 .1 3 2 .8 6 630.22 447.48 1,001.77 453.23

Source: Approved 2012/13 Estimates of Revenue and Expenditure

14. The rise in the budget is occasioned by steep increase in allocations for the Consolidated Funds Services (CFS). The recurrent votes across all the three arms of government have also risen significantly. The rise is attributed to the ongoing constitutional reforms. For example, increased allocations to the Parliamentary Service Commission reflect the planned spending for the two chambers of Parliament. Government expenditure also includes a Kshs. 17.4 billion allocation for the upcoming general elections scheduled for March 2013. 3.1. Consolidated Funds Services (CFS) 15. Consolidated Fund Services (CFS) for the fiscal year 2012/13 is estimated at Kshs. 345.99 billion. This is a steep rise compared to last years allocation of Kshs. 209.52 billion. The largest proportion of CFS is dedicated to public debt repayment. This component has risen by 73% from 2011/12 budget (Table 3). The rise in the CFS is occasioned by sharp rise in domestic debt repayments, caused by redemptions of maturing government bonds.

Table 3: Details of Consolidated Fund Services ( Kshs. Billions) Item Public Debt Interest Redemption Pension Salaries Subscription to International Organizations Miscellaneous Services Guaranteed Debt 2011/12 175.39 8 6 .5 7 8 8 .8 2 2 9 .2 6 3 .3 0.0005 0 .6 1 .4 6 2012/13 303.63 105.85 197.78 3 7 .8 5 3 .1 0.0005 0 .6 1 .3 4

Source: PBO, Approved 2012/13 Estimates of Revenue and Expenditure

16. The sharp rise in expenditure provisions for CFS means that a significant part of the national budget is non-discretionary, which reduces room for expenditure adjustments. In fact, excluding essential spending on wages and salaries, Kenyas budget is relatively inflexible and there is not much room for deep spending cuts or austerity measures. 17. Pensions will rise from Kshs. 26.3 billion in 2011/12 to Kshs. 37.9 billion in 2012/13. This increase may be attributed to a large number of civil servants retiring in the course of the financial year with those who benefited from the sixty year as major beneficiaries. 3.2. Sectoral analysis of the 2012/13 Budget 18. The Government has, for the last ten years, pursued the medium term expenditure framework (MTEF) approach to budgeting, which strengthens the link between policy and planning in the budget process. The Government completed sector reviews in January 2012 and thereafter held public hearings which culminated in the development of the Budget Policy statement that was submitted to Parliament in April 2012. 19. Sector reviews and sector public hearings should ideally inform the content of the BPS as well as the final budget, but the link between these processes is fairly weak as shown in table 4. The table shows an analysis of the sector requests versus allocations in the Budget Policy statement and the final Budget as submitted by the Ministry of Finance. There are significant deviations between the amounts requested or approved at various stages of the budget process as indicated in the table. Notably, the amounts requested at the sector level appear unrealistic compared with available resources or resource ceilings. This indicates inadequate guidelines to costing of programs or a lack of an appropriate framework for prioritization. Such a situation often leads to proportional distribution of available resources in total disregard to planned program targets. 7

20. Improved link between sector reviews, public hearings, the BPS preparation, expenditure ceilings, and the final budget would reduce these deviations and make budget and budget implementation more predictable. Ideally, sectors and ministries should plan expenditure requests within available resource envelope provided by the Ministry of Finance (National Treasury).
Table 4: Analysis of distribution of resources by sectors (Kshs. billions) Sector General Economic Commercial and Labour Affairs Social Protection Culture and Recreation Agriculture and Rural Development Environmental Protection Water and Housing National Security Health Amount requested 8 4 .8 7 115.29 117.88 5 1 .1 4 6 2 .7 8 B PS ceilings 2 2 .9 6 3 6 .9 7 5 0 .8 3 4 8 .4 8 6 4 .2 8 Budget Estimates (Treasury) 2 1 .8 3 3 8 .2 6 5 3 .2 6 5 5 .2 1 8 3 .4 5 Approved Budget (Parliament) 2 0 .9 9 3 8 .0 0 5 2 .1 1 5 4 .7 6 8 3 .7 0 8 6 .9 7 132.71 1 4 .9 9 135.82 1 6 .3 2 235.97 267.91

143.43 7 7 .0 0 8 5 .0 3 Governance Justice Law and Order 218.57 120.91 133.78 of which Judiciary 1 2 .7 5 9 .8 0 1 6 .3 4 Public Administration and International Relations 155.38 107.33 138.39 of which Parliament 1 8 .2 5 1 2 .1 0 1 8 .0 6 Education 398.20 226.14 232.36 Energy Infrastructure and ICT Sector 265.76 227.67 267.29 Sources: PBO, Sectoral reports, BPS, Approved 2012/13 estimates of revenue and expenditure

Infrastructural Investment 21. The energy, infrastructure and Information Communication and Technology (ICT) sector is critical to economic development in the country since it facilitates production and distribution of goods and services. The largest proportion of the 2012/13 budget is allocated to the sector which comprises of ministries responsible for roads, transportation, energy, public works, communication, local government, and Nairobi metropolitan development. In total, the sector is allocated Kshs. 267.9 billion, which is equivalent to 24% of the total budget. 22. The roads sub-sector Kshs. 124.62 billion. Specifically, the Kenya National Highways Authority, which is responsible for major roads and highways, has been allocated Kshs. 68.02 billion. The Kenya Rural Roads Authority which caters for rural roads has been allocated Kshs. 16.7 billion, while the Kenyan Urban Roads Authority receives Kshs. 8.8 billion. In order to track the expenditures and infrastructure development in this sector, 8

adequate monitoring and evaluation mechanisms need to be put in place, including reports to Parliament. 23. The transportation sub-sector receives funding for the first phase of the commuter railway upgrade project amounting to Kshs. 1.45 billion. This comprises the planned completion of the line linking the Jomo Kenyatta International Airport (JKIA) to the central railway station, upgrading to standard gauge of the existing railway line from Mombasa to Western Region and other parts of the country... The commuter railway upgrade is a major flagship project under Vision 2030, and its implementation will ease movement between the Nairobi city centre, Jomo Kenyatta International Airport and its environs. The increased investment in rail transport and other transport infrastructure should result in real measurable outcomes. Therefore, Parliament should monitor the progress in these railway upgrades as well as other improvements of infrastructure at JKIA, Kisumu International Airport and Isiolo Airport which have received funding during this financial year. 24. Initial projects under the Lamu Port and Lamu Southern Sudan-Ethiopia Transport Corridor (LAPSSET) have been allocated Kshs.2 billion. This project is expected to enhance trade integration and interconnectivity between the regions by linking South Sudan and Ethiopia to the Kenyan coast. Owing to geopolitical factors, the sheer resource requirements of the project, and its overwhelming importance to Kenyas development, adequate monitoring of the projects implementation is important. 25. The energy sector has been allocated. Kenya is highly dependent on hydroelectric power generation which is susceptible to unpredictable weather conditions such as drought. Geothermal energy is seen as a suitable and reliable alternative source of energy for the country. To this end, Kshs.80.2 billion. has been allocated to the energy sector, including Kshs.19.9 billion to the Geothermal Development Company for investment in geothermal energy 26. Further, Kshs. 2.4 billion has been allocated to the Rural Electrification Authority to enhance electricity access in the rural areas. Absorption of these resources in the distribution of electricity to target households is important in assessing the performance of these funds. Investing in Education 27. Articles 43 and 53 of the constitution entrench the right to education in the Bill of Rights. Consequently, the education sector, which currently comprises of the Ministry of Education, Ministry of Higher Education, Science and Technology, the Teachers Service Commission (TSC) and their affiliated institutions, receives the second largest share of the national budget. 9

28. The sector is allocated 21% of the total budget in 2012/13, amounting to Kshs.232.36 billion. At least 60% of total education budget for 2012/13 goes to employees compensation (wages and allowances). Grants, transfers and subsidies are the second major component accounting for about 35%. This includes cash transfers for free primary and secondary grants to schools, bursaries for secondary education, transfers for school supplies, and loans for university students. Grants account for over Kshs. 70 billion in 2012/13. 29. Some of the salient planned spending in the sector budget, excluding salaries and allowances, include the following: Kshs. 8.2 billion for Free Primary Education, Kshs. 17.8 billion for Free Secondary Education, Kshs. 1.6 billion to employ teachers for Early Childhood Development, Kshs. 4.4 billion to Higher Education Loans Board to provide loans to students, and Kshs. 300 million for sanitary towels for underprivileged school girls. 30. Despite the substantial funding to the education sector, various challenges still persist, these include: Persistent disparities in quality of education across regions, Enrolment challenges in some regions that are lagging behind, Increasing labour union wage pressure which could potentially cause disruption of teaching, Low overall transition rates, particularly from secondary to tertiary levels, and Disparities in distribution of teachers among schools.

Improvement of Security 31. The country faces increasing security challenges. Notably, pockets of attacks on innocent citizens in the coastal and northern Kenya have increased in recent times. To deal with external threats, Kshs.70.29 billion has been allocated to the Ministry of Defence in the 2012/13 budget. In addition, the National Security Intelligence Service (NSIS) receives Kshs.13.41 billion. 32. The Ministry of State for Provincial Administration and Internal Security (PAIS) receives Kshs. 65.89 billion in the 2012/13 budget to tackle internal security challenges. However, budgetary allocations alone cannot be a panacea to insecurity particularly from within. There is need to increase investment in technology for example installation of surveillance cameras in most public places and the need to introduce instant fines for various infractions as is the case in the developed world.

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Governance, Justice, Law and Order 33. The 2012/13 fiscal year budget allocates Kshs. 134.78 billion to various spending agencies under the governance, justice, law and order sector. Distribution of these resources affirms the relative importance of various agencies in addressing governance issues in the country. The Office of the Vice President and Ministry of Home Affairs has been allocated Kshs. 16.3 billion, Ministry of Justice, Kshs. 3 billion, State Law Office Kshs. 1.9 billion, the Judiciary Kshs. 16.4 billion, Ethics and Anti-Corruption Commission Kshs. 1.9 billion, Department of Immigration and Registration of Persons Kshs. 8.6 billion, and office of the Director of Public Prosecutions, Kshs. 1.1 billion. 34. Others include: Witness Protection Agency, Kshs. 230 million, Commission for the Implementation of the Constitution, Kshs. 530 million, Registrar of Political Parties Kshs. 430 million, Kenya National Human Rights and Equity Commission, Kshs. 260 million, the Independent Electoral and Boundaries Commission, Kshs. 17.6 billion, National Police Service Commission, Kshs.300 million, and the Commission on the Administration of Justice Kshs. 350 million. 35. Some of the agencies created by the Constitution with cost implications include, delinking of the office of the Director of Public Prosecutions from the State Law Office to strengthen prosecutorial powers of the public prosecutor. Other important agencies include the Commission on Administration of Justice and the independent National Police Service Commission. Witness Protection Agency will play a crucial role in safeguarding witnesses especially in high profile and sensitive cases. 36. The Ministries and agencies under this sector are expected to directly aid the implementation of the Constitution as well as support, to varying degrees, the preparation of transitional general elections planned for March 2013. To cater for the coming transitional elections which include electoral offices at the county levels, the Independent Electoral and Boundaries Commission (IEBC) receives Kshs. 17.6 billion. The Judiciary has been allocated Kshs.16.36 billion to enable it restructure and undertake reforms necessary for the implementation of its constitutional mandate. Agriculture sector 37. Drought has become a common feature in this country so is relief food in some areas. As a result on yearly basis substantial resources are allocated to mitigate drought related disasters. However, a long term solution to address this phenomenon is to guarantee food security by expanding land under irrigation and further investing in drought resistant crops. This can only be achieved through provision of adequate resources to the sector. Kenya still lags behind at less than 5% of total resources being voted for the agriculture sector despite it being signatory to the Maputo Declaration. 11

38. The government proposes to improve agricultural productivity and exploitation of irrigation potential in the country. This will be undertaken through the eight ministries in the agriculture sector. They include; Agriculture, Livestock Development, Fisheries Development, Cooperative Development and Marketing, Development of Northern Kenya and other Arid Lands and Regional Development Authorities. 39. The key policy goals of the Agriculture sector include: raising agricultural productivity through generation and promotion of technologies; exploiting irrigation potential; increased commercialization of agriculture; undertaking a comprehensive review of the legal and policy framework for the sector; improving governance of sector institutions; land development; and promotion of sustainable management of fisheries. 40. In total, the agricultural sector is allocated Kshs. 53.26 billion. The National Irrigation Board will receive Kshs. 8 billion for irrigation projects and Kshs. 1 billion is dedicated to the Agribusiness Fund for provision of credit facilities to farmers to improve research and adoption of technology. Kenya Agriculture Research institute (KARI) has been allocated Kshs. 1.025 billion. Capital grants amounting to Kshs. 700 million has been extended to Agriculture Finance Corporation to offer credit to farmers, while the Pyrethrum Board will receive Kshs. 200 million for reviving of the pyrethrum industry. The National Drought Management Authority is allocated Kshs. 100 million. Healthcare and Social Services 41. The government has allocated the health sector Kshs. 85.03 billion for provision of healthcare to the citizenry in the financial year 2012/2013. This is 8% of the total budget which is below the 15% target set by the African Union Abuja Declaration for government funding to healthcare services. The sector comprises of Ministries of Medical Services and Public Health. Some of the expected output from the health care services budget include: employment of 5,200 health workers; recruitment of 715 doctors who completed their internship in March this year and a further 200 doctors to be recruited from the market; construction of health centers and hospitals; purchase of essential medical supplies including ARVs, malaria and Tuberculosis medicines as well as crucial medical equipments; and eradicating preventable diseases at constituency level. This is a critical sector to watch out in this financial year given the numerous strikes, and the ever increasing rates in communicable diseases. 42. In the 2012/2013 budget, the Ministry of Gender, Children and Social Development receives 5.2 % rise in allocations compared to allocations in the 2011/12 approved budget. The budget for Ministry of State for Special programmes rose by 24.6% in 2012/13 budget compared to 2011/12; National Heritage budget rose by 4.3% while that of Youth Affairs and Sports increased by 13.6%. The budget for Ministry of Labor, however, declined by 18.14%. 12

43. To continue providing social safety nets and cushioning the poor and vulnerable members of the society, the 2012/13 budget makes specific allocations to specific sectors such as the following: Kshs. 4.4 billion for orphans and vulnerable children, additional Kshs. 550 Million to the Youth Enterprise Development Fund, and Kshs. 440 million for the Women Enterprise Development Fund. Kshs. 1 billion will be used as transfers to elderly persons, and Kshs. 2 billion is earmarked to fund famine relief programmes. Other transfers include Kshs. 342 million for cash transfers to persons with severe disability, and Kshs. 925 million for urban poor. In addition, Kshs. 239.5 million will be used to promote gender and equality through the National Gender and Equality Commission, and Kshs. 491 million will be used to under the Kenya Youth Empowerment Project to cater for youth employment in laborintensive works. 44. Additional allocations were approved in the Budget Committee Report on the Estimates of Revenue and Expenditure for 2012/2013. These include: Kshs. 20 Million towards rehabilitation of Kisii Childrens home; Kshs. 175 million towards Child Welfare Society of Kenya (CWSK); and Kshs. 81 million for food security programme towards the development of a comprehensive food security programme. 45. To make sure that the budget delivers its promise in the social services scene, the following are some of the policy reforms required: strengthening of the Youth Enterprise Development Fund through parliamentary legislation; enactment of National Competitive Bill which is crucial to improve the competitiveness of Kenyas labor force; and, completing the Kenya Diaspora policy with the aim of putting in place mechanisms for securing and protecting Kenyans working abroad. 3.3.Austerity Measures 46. The National Assembly through recommendations of the Budget Committee made specific expenditure cuts on several non-core expenditures in the budget for 2012/13 financial year. The Budget Committee key concern was the unrelenting use of public resources in non-core areas such as foreign travel, hospitality supplies, and purchase of vehicles. All these against a shortage of essential equipment for screening and treating non-communicable such as kidney disease and cancer in public hospitals. 47. Expenditure cuts were guided by the need to: reduce wastage by reducing excessive resource requests for non-core activities; curb the use of development expenditure to fund recurrent type items; ensure that the government departments continue providing essential services without any interruptions and reallocate resources to needy but neglected areas. The cuts were made on the initial expenditures allocations for maintenance and operations by 20%, printing and office supplies by 30%, purchases of vehicles and equipments by 30%, 13

construction of buildings, hospitality supplies by 30%, domestic and foreign travel by 30% and 50% respectively, among others. 48. The cuts yielded savings that were reallocated to high impact areas or chronically neglected areas of public service delivery including specific allocations for procurement of cancer screening equipments and procurement of drugs, medical supplies, and training of health professionals, among others. Further, Kshs. 3.14 billion of the savings was allocated to priority areas identified through the public hearings across the country (see Appendix 9). 49. The austerity measures in the 2012/13 budget is a call on the government ministries and public agencies to rationalize and prioritize their spending so as to cut back on non-essential and reduce wastage. The challenge however is how to institutionalize the prioritization of some of these expenditures and to stringently institute measures to ensure a tenable implementation mechanism. For example, foreign travel expenditure can only be contained when there are regulations and rules that cut across the board as is the case with the treasury board of CANADA. This should be rules that make foreign travel less attractive by ensuring that the benefits are not individualized.

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4. REVIEW OF REVENUE AND TAX MEASURES 4.1. Resource Mobilization for Financing of the Budget 50. The government projects to collect revenue amounting to Kshs. 954.98 billion, which is equivalent to 24.7% of GDP. This will comprise of Kshs. 817.46 billion from taxes and Kshs. 51.36 billion from non-tax revenue. Collection of Appropriations-in-Aid is projected to reach Kshs. 86.16 billion (see Table 5). Revenue estimates are based on a strong growth in the revenue base, or national output, and successful reforms in tax and customs administration. 51. Total committed grants from donors amount to Kshs. 56.24 billion. This includes Kshs. 17.12 billion from foreign governments and Kshs. 39.06 billion from international multilateral organizations. 52. The government plans to fund part of the budget through borrowing from domestic and external sources. An estimated Kshs. 169.32 billion will be borrowed from external sources. Of this amount, Kshs. 37.42 billion will come through the exchequer while the remaining Kshs. 131.89 billion will be channeled to projects through direct payments. 53. An estimated Kshs. 277.48 billion will be raised from domestic markets through the issuance of government securities such as Treasury bonds and Treasury bills. This amount includes Kshs. 170.5 billion in domestic debt rollovers (see Budget Statement, 2012).
Table 5: Government Financing of the Budget for 2011/12 2012/13 ( Kshs. Billions) Item Total Revenue Tax Revenue Non-tax Revenue Appropriation-In-Aid Grants Loans Repayments- domestic lending & on-lending Domestic borrowing Foreign borrowing Source: PBO, QEBR August 2012 2010/11 6 6 7 .5 557.17 52.05 58.32 1 8 .8 118.77 9 0 .3 8 2 8 .3 9 2011/12 7 4 8 .2 626.45 6 4 .2 9 5 7 .4 3 1 5 .2 9 171.74 7 3 .2 2 9 8 .5 2 2012/13 954.98 817.46 51.36 86.16 5 6 .2 4 448.49 1.69 277.48 169.32

54. Nonetheless, the revenue projection by the Ministry of Finance notwithstanding, it is noted with concern that the target has consistently failed to be achieved as evidenced in recent years. For instance, in the fiscal year 2011/12, the Ministry set a target for total revenue at Kshs. 804.5 billion but only managed Kshs.748.2 billion, which was an underperformance by

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Kshs.56.3 billion. The Parliamentary Budget Office (PBO) had projected the total revenue target at Kshs.760.2 billion which was only Kshs.12 billion from the actual. (see table 6) 55. For the ordinary revenue, the Ministry set a target at Kshs. 724.9 billion but only Kshs. 690.7 billion was collected and this exhibited a shortfall of Kshs. 34.2 billion and it can be recalled that the Parliamentary Budget Office, had also projected a target of Kshs. 686.2 billion which is very close to what was actually realized. In fact, it represented a difference of only Kshs. 4.5 billion to the actual revenue in that period.
Table 6: Analysis of the government revenue for 2010/11 2012/13 2010/11 2011/12 2012/13 Actual Target PBO Actual Target PBO Treasury projections 686.42 669.08 7 4 8 .2 804.50 760.17 Total Revenue 667.54 954.98 .Tax Revenue 557.17 555.06 557.17 626.45 643.65 610.36 817.46 Non-tax 5 2 .0 5 5 0 .8 3 5 2 .0 5 6 4 .2 9 8 1 .2 5 7 5 .8 5 51.36 Revenue Appropriation5 8 .3 2 8 0 .5 3 4 6 .2 4 5 7 .4 3 7 9 .6 1 5 7 .8 6 8 6 .1 6 In-Aid 1 8 .8 4 3 .7 3 1 8 .7 6 1 5 .2 9 4 2 .2 4 4 1 .1 1 5 6 .2 4 Grants 118.77 188.50 110.21 171.74 234.23 158.08 448.49 Loans Domestic 9 0 .3 8 125.59 82.06 7 3 .2 2 6 1 .9 5 5 6 .3 0 277.48 borrowing Foreign 2 8 .3 9 6 2 .9 1 2 8 .1 5 9 8 .5 2 172.28 101.78 169.32 borrowing Source: QEBR various, Budget Options 2012 Item

PBO projections 872.38 703.27 8 2 .0 0 5 7 .8 7 4 3 .1 7 211.60 8 2 .7 4 128.86

56. Therefore, the Ministrys total revenue target for the fiscal year 2012/13 of Kshs. 956.9 billion comprising of Kshs. 870.5 billion of ordinary revenue is, in a considered view, unlikely to be achieved based on the prevailing revenue fundamentals. Indeed, PBOM has projected a modest revenue total of Kshs. 872.4 billion which is made up of Kshs. 785.5 billion in ordinary revenue, for the same period. 4.2. Tax Measures 57. The government plans to raise Kshs. 868.82 billion in revenue comprising of Kshs. 817.46 billion from taxes and Kshs. 51.36 from non-tax revenue. This is a 27% increase from the revised revenue collection for the financial year 2011/12 (Table 5). Tax collections are projected to increase by 24% from the previous years collection. 58. To meet the target revenue collections, the government plans to introduce various tax measures and undertake reforms on the tax system to improve efficiency and effectiveness. 59. The following are some of the tax measures that the government intends to revise: 16

i .)

i i .)

i i i .)

i v .) v .)

v i .) v i i .)

v i i i .)

i x .)

In the manufacturing sector, the government intends to increase import duty on galvanized wire from 0% to 10% in order to cushion local iron and steel manufacturers from unfair competition from cheap imports from the Far East. In the telecommunication and ICT sub-sectors, the government plans to remove duty on set-top boxes critical for migration of television signals from analogue to digital. The government also proposes to remove duty on all imported software so as to make it affordable to Kenyans and to attract foreign investors in the industry. The government also intends to exempt duty on inputs used in the manufacture of medical diagnostics kits and grant duty remission to producers of food supplements for use by infants and people living with HIV/AIDs. Furthermore, the government proposes to reduce the rate of duty on imported food supplements from 10% to 0% so as to make them affordable and help improve the health of the citizens. In the agriculture sector, the government intends to exempt duty on all imported inputs for bee-keeping so as to encourage farmers to take up the activity. The government is keen to create equity and fairness to tax payers by ensuring that all landlords rental incomes are taxed. To ensure that all landlords are effectively brought into the tax net and all outstanding rental income taxes are paid by enforcing the existing tax measure, the government will map out all residential and commercial areas and implement a comprehensive tax collection strategy. In line with the Constitution, the government intends to ensure that no state officer is exempted from taxes. The government proposes to review the valuation method on minimum tax payable on imported second hand clothes from Kshs. 1.9 million to Kshs. 1.1 million so as to protect the source of livelihood of second-hand cloth dealers. Further, the Kenya Revenue Authority will institute an effective excise tax management system which help the tax collector account for and collect taxes from licensed manufacturers of excisable goods. The government also proposes to amend and modernize various tax laws. For example, the Income Tax Act will be amended to make it easier to determine institutions that qualify for exemptions while engaging in charitable activities.

60. The Government has also introduced to Parliament a new Value Added Tax (VAT) Bill that seeks to repeal the current VAT Act, CAP 476. The Bill particularly seeks to address challenges facing administration of VAT as noted by the Minister of Finance in the 2010/11 Budget Statement. The bill therefore proposes to simplify administration and expand the tax base by removing the category of goods and services subject to tax remission, and drastically reducing the number of exempt and zero rated goods and services. The Bill also seeks to 17

redress the problem of VAT refund backlog and VAT refund fraud and also to curb tax evasion by major suppliers and manufacturers. 4.3. Challenges and Efficacy of Tax Collection 61. Various risks to revenue collections have been identified if some of the proposed tax measures are approved or otherwise not approved. Disapproval of some of the measures by Parliament may cause revenue shortfall. The tax measures will also be weighed against the effects that they may have on existing industry, jobs, incomes, among other factors. 62. The proposed measure in the 2012 Budget Statement to reduce the minimum tax payable on second hand cloths from Kshs. 1.9 million to Kshs. 1.1 million per 20 foot could bring mixed fortunes on the affected sectors. While this proposal might be popular among the secondhand cloth dealers, it is likely to face resistance from domestic cotton, textile, and apparel industry stakeholders who may argue that the measure reverses the gains made in revamping the cotton and textile industry in Kenya. 63. Further, the widening of the tax net to catch non-compliant landlords could lead to rent hikes in the low income section of the Kenyan rental market. A rise in rental incomes may also drive demand for higher wages and inflationary pressures. It can be expected that enormous pressure will be applied by interest groups to shelve this tax measure, but at great revenue loss to the exchequer and government programmes. 64. The new VAT Bill places 16% tax on several previously zero-rated goods some of which are basic consumables. The goods which may face a 16% standard rate include milk and milk products, maize seeds and maize flour, milled rice, vegetable seeds, infant foods, illuminating kerosene, cooking gas, insulin products, mosquito nets, sanitary towels and tampons, supply of electrical energy to domestic households, books, mosquito nets, agricultural machinery, textile machinery, animal feeds, fertilizers, insecticides, fungicides, computer systems, computer storage and software, napkins for babies, among others. 65. Since tax exemptions and zero-rating generally help keep prices of basic goods low, the rise in the tax rate will drive up prices and hence a likelihood of rejection of the Bill in total. In the event that the Bill is rejected or if there are material amendments to reintroduce significant zero-rating and exemptions, these may have revenue implications on the Government and as such challenges in financing the 2012/13 budget. Additional consequences would include increased budget deficit, a rise in domestic borrowing and probably a rise in interest rates.

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66. In addition, a rejection of the Bill will also mean that, the government may also miss the opportunity to address the challenges associated with zero-rating, exemptions, and tax remissions. A common challenge being the intended recipients of these exceptions rarely access them. This means that these measures could ironically be a form of subsidy to supplies and retailers. A measure by measure analysis of these tax proposals is also given in Appendix 7.

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5. PREPARATION FOR DEVOLUTION 5.1. Legal Framework and budgeting for devolved Government 67. The Constitution of Kenya 2010 ushered in a new republic with expanded political and economic structures. In addition to the national government, the Constitution establishes 47 county governments, each of which shall have an elected Assembly, a Governor and an Executive Committee. Each level of government is distinct and interdependent with specific duties. County governments will be established after the coming general elections. In readiness for devolution, a number of institutions such as the Commission for Revenue Allocation (CRA) and the Transitional Authority have been established. These institutions, together with Parliament and the Executive, are playing a primary role in spearheading the implementation of various aspects of devolution. 68. To set the ground for county governments, Parliament has enacted a number of crucial laws needed for devolution. These include the enactment of the Public Finance Management Act, the County Governments Act, among others. These Acts are meant to guide the devolution process by establishing responsibilities of key players as well as identifying procedures of key processes at county and national levels of government. In the 2012/13 budget, Parliament has approved resources required for the county governments, including the equitable amounts provided for in Article 203 of the Constitution pending determination of the criteria and formula for allocation. 69. The Constitution of Kenya in Article 203(1) provides the criteria for determining the equitable sharing of revenue between and among the national and county governments. Among other considerations, the Constitution lists the following criteria: (i) The needs of national and county governments in respect to development, debts and other national obligations; (ii) The need to promote fiscal capacity and efficiency of county governments and minimize economic disparities; (iii)The objective of providing incentives for economic optimization and to optimize its capacity to raise revenue to each county; (iv) The need to ensure that county governments are able to perform functions allocated to them; (v) The developmental needs and other needs of counties; and (vi) The desire to establish a stable and predictable allocation of revenue. 70. In addition to the criteria listed in Article 203(1), Article 203 (2 and 3) of the Constitution provides additional considerations in revenue sharing. Article 203(2), for example, states that 20

the equitable share of revenue raised nationally that is allocated to county governments shall be not less than fifteen percent of all revenue collected by the national government. Clause 3 of Article 203 clarifies that the amount to be allocated to the county governments should be based on the most recently audited accounts of revenue as approved by the National Assembly. A review of the current cost of providing the devolved services indicates that the government is spending over 25% of the government revenue. Sharing of revenues between the two levels of government therefore should be guided by the estimated cost of providing the assigned responsibilities. 71. As a start, the government has allocated Kshs. 149.4 billion in the 2012/13 budget for sharing among the counties in observance of the provisions in Article 202 and Article 203 of the constitution. This is drawn from devolved functions in various ministries as depicted in Appendix 5. The sharing of resources due to county governments will be determined by Parliament (with recommendations from the Commission for Revenue Allocation). The CRA has developed a proposal for sharing revenue among the 47 counties. It is important that this criterion is finalized as a matter of priority in addition to determination of marginalized areas for purposes of allocating the equalization fund established in Article 204 of the Constitution.

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6. BUDGET PROCESS STRUCTURE AND TRANSITION 6.1. Budget Documents and Legal Framework 72. Despite several challenges, the 2012/13 budget met most process timelines set out by the Constitution. Ideally, the budget process at the national level starts by July of every fiscal year. The National Treasury will start-off the process by issuing budget guidelines by end of July. This will closely be followed by strategic planning and expenditure reviews by the line ministries. This step will be completed by August every Financial Year. 73. Next, the macro-fiscal framework will be formulated by mid-October through the collaborative effort of the National Treasury, CRA, Macro-Working Group, Budget and Economic Council (BEC), among others. The development of budget proposals by line ministries and sector working groups will start in earnest in mid-August and come to an end in mid-December. This step will involve public participation in the sector hearings and preparation of sector reports. 74. The next important step is the development and approval of the BPS and the Division of Revenue Bill, which will begin in January. The key players in the preparation of these documents will be the National Treasury, Macro Working Group, BEC and CRA. The BPS will be submitted to Parliament by end of January and its approval completed by midFebruary every financial year. 75. After submission and approval of the BPS, the next vital step is the preparation and approval of budget estimates. This step starts in mid-February through the issuance of guidelines for budget preparation by the National Treasury. In line with the Constitution requirement that the estimates of revenue and expenditure for all the arms of government be tabled in the House two months before the end of the financial year (Article 221(1)), it is envisaged that the said estimates will be submitted by the Cabinet Secretary by April 24th every financial year. As provided for in Article 221(3) of the constitution, the estimates of Parliament and Judiciary are to be separately submitted in Parliament. 76. Subsequently, views will be received from the National Treasury on the budgets submitted by Judiciary and Parliament by mid-May. By the same period, the relevant Committee of the National Assembly will conduct public hearings on the budget estimates in accordance with Article 221(5) which mandates it to seek public views on the budget estimates before making its recommendations to Parliament. 22

77. The review and recommendations by the relevant committee envisaged in Articles 221(4) will be completed by end of May. Subsequently, Parliament will discuss the report of the committee on the estimates through the Committee of Supply. This process, including the passing of both the Appropriations Bill and the Finance Bill, or alternatively the Vote-onAccount (Article 222), will be finalized by end of June every financial year. 78. With respect to the Vote-on-Account, the Constitution in Article 222 provides for withdrawal of half the amount of money required to fund the government spending for the year, in the event that the Appropriations Act has not been assented to or is not likely to be assented to. 79. Through the budget process, various books, papers, and reports are to be submitted to Parliament at various stages. The papers prior to the submission of the estimates of revenue and expenditure are provided for in the PFM Act and the National Assembly Standing Orders. The most important policy paper from the executive is the Budget Policy Statement. The Budget Policy Statement strengthens the link between policy planning and the budget itself. This ensures that government policies are linked to actual government expenditure and allocations. 80. The estimates envisaged in the Constitution Article 221 (1) and Article 221(3) will come in as printed books containing the planned expenditures of the three arms of government, and revenue, grants and loan estimates required to fund the budget. 6.2. Potential Challenges in the Budget Process 81. Adherence to the timelines set out in the law is critical for the smooth preparation of the budget. Delays in meeting various deadlines has had adverse impact on the amount of time available for Parliament to effectively scrutinize the estimates, make decisions, or enact necessary laws related to the national budget. 82. Various delays were observed during the 2012/13 budget preparation. For example, the Budget Policy Statement was submitted on 17th April 2012, only a few days before the Budget Estimates were formally tabled in the House. 83. The delay in laying the Budget Policy Statement before the House affected the time period within which r the House is required to make recommendations for inclusion in the Estimates of Revenue and Expenditure provided for under Article 221(1) of the Constitution.

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84. The delay in submitting the BPS reduced the effectiveness of the envisaged input b y Members of Parliament to government policy and the budget estimates. Consequently, the Printed Estimates were laid in the house on 26th April 2012, with obvious deviations from those in the BPS. 85. The link between the BPS estimates and the estimates of revenue and expenditure for 2012/13 was weak, with large deviations noted between the budget estimates. For example total expenditure estimates in the BPS was Kshs. 1.265 trillion, but the total budget according to the estimates presented by the three arms of government in April 2012 was Kshs.1.462 trillion. It is observed that some of the setbacks experienced during the budget process were associated with inability to adapt to the constitutional provisions, as provided by the Constitution 2010, a departure from the 1963 Constitution. The foregoing challenges are therefore highly unlikely to recur with strict adherence to the Constitution and the PFM law. 6.3.Gender Analysis of the Budget1 86. Kenya is a signatory to several international and regional commitments and has committed to taking action to ensure that resource allocation takes into consideration gender dynamics. The Constitution of Kenya has also set an important precedence in addressing gender inequality by availing principles that will guide division of resources and avail equal opportunities for men and women. This implies that it is imperative that the process of budget formulation, approval and implementation addresses the differential needs and interests (inequities) of people based on the basis of ethnicity, age, class, level of poverty, geographical location and sexual identity. 87. The government has (since the promulgation of the Constitution), embarked on a set of initiatives to promote gender equity. This includes government operations responsive to the needs of all Kenyans regardless of their respective gender. These measures include the creation of gender units in a few ministries and the commissioning of several studies on gender issues in areas like agriculture, education, environment and health. 88. In spite of these developments, challenges in ensuring gender is mainstreamed in all policies especially at the budget making, formulation and approval and execution stages persist. Gender mainstreaming is critical since it influences how resources are allocated in addition to policies on revenue mobilization.

This section has been developed from Gender guidelines work by KEWOPA that is about to be published.

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89. In order to achieve this and ensure a both a cohesive and equitably developing country from a socio-economic perspective, there is need to ensure that the decisions made in the budget process are guided by; (i) Ensuring an even and equal focuss on revenue collection and resource allocation. This is because the expenditure side of the budget constitutes allocations that are made to support affirmative action such as allocations to maternity care as well as cervical cancer screening equipment. The revenue side of the budget, however, would ordinarily be examined with the aim of promoting private sector growth and interventions for the poor without regard to gender specific initiatives. This is especially important when analysing the Finance Bill 2012/13 (ii) Tracking gender-specific allocations to ensure that they fulfill the desired goals. This is important in the monitoring and evaluation stage in the budget process and will ensure successful implementation of intitatives that are aimed at affirmative action (iii)Ensuring that there are insitutionalized mechanisms in line Ministries, Departments and Agencies (MDAs) to undertake gender analysis and ascertain whether there is in fact need for action and design programmes to address gender inequity within the various MDAs (iv) Providing gender accountability measures in the auditing framework and this measure blends in with performance auditing of spending agencies which Parliament has been calling for in the recent past. 6.4. Budget Public Hearings 90. Public hearings, anchored in Article 221(5), are a unique feature of the budget process as mandated by the Constitution. Specifically, the Constitution mandates a committee of the National Assembly, in discussing and reviewing the budget estimates, to seek representations from the public and the recommendations shall be taken into account when the committee makes its recommendations to the National Assembly. 91. Public hearings were held during the preparation of both the 2011/12 2012/13 budgets. During the 2011/12 public hearings, it was possible to identify segments of society whose concerns had not been factored. Among them were the plight of people with Albinism, the publics concern on shortage of teachers in schools and wastage of government resources. These important concerns were incorporated in all the committee reports on the budget estimates tabled in the House and further in the budget for the financial year 2011/12.

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92. In 2012/13, the Budget Committee held public hearings in Nairobi, Nyeri, Machakos, Kisii, Malindi, Kisumu, Meru, Nakuru, Nyandarua, Wajir, Kakamega, Bungoma, Kitale, Isiolo, Voi, Lodwar and Kericho. The recommendations thereof formed part of the concrete recommendations of the Budget Committee Report on the Budget Estimates. 93. The outcomes of the recommendations were that 3.14 billion be allocated towards funding priority projects identified across the country. Some of the projects approved in the budget as an outcome of the public hearings include: the construction of a dam along Mzima Springs for provision of water in Taita-Taveta County, allocation to Kisii Hospital for improvement of emergency facilities, revival of Pan-Paper Mills, establishment of a technical training college in Muranga, funding to the Child Welfare Society of Kenya, allocation to re-carpet roads within Lodwar municipality, among others (see all the projects in Appendix 9)

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Appendixes Appendix 1: Economic Growth by Sectors (% growth)

Sector 2009 2010 2011 Av era g e (2009-2011) Hotels & Restaurants Construction Manufacturing Transport & Communication Financial intermediaries Fishing Agriculture & Forestry Mining & Quarrying Electricity and water supply Wholesale and retail trade Retail estate, renting and business services Source: Economic Survey, 2012 4 2 .8 1 2 .7 1 .3 6 .4 7 .2 3 .8 -2.6 -4.5 -3.0 3 .9 3 .0 4 .2 4 .5 4 .5 5 .9 9 .0 2 .7 6 .4 9 .7 9 .7 8 .0 3 .2 5 .0 4 .3 3 .3 4 .5 7 .8 3 .1 1 .5 7 .1 -2.6 7 .3 3 .6 1 7 .3 7 .2 3 .0 5 .6 8 .0 3 .2 1 .8 4 .1 1 .4 6 .4 3 .3

Appendix 2: Sectoral Contribution to GDP (Kshs. Billions)

Sector Hotels & Restaurants Construction Manufacturing Transport & Communication Financial intermediaries Fishing Agriculture & Forestry Mining & Quarrying Electricity and water supply Wholesale and retail trade Retail estate, renting and business services Source: Economic Survey, 2012 2009 1 9 .0 4 9 .3 1 3 7 .1 1 7 2 .0 5 5 .4 5 .6 2 9 9 .4 6 .2 3 0 .4 1 4 3 .5 7 5 .7 2010 1 9 .8 5 1 .5 1 4 3 .3 1 8 2 .2 6 0 .4 5 .7 3 1 8 .6 6 .8 3 3 .3 1 5 4 .9 7 8 .1 2011 2 0 .8 5 3 .7 1 4 8 .0 1 9 0 .4 6 5 .1 5 .9 3 2 3 .5 7 .2 3 2 .5 1 6 6 .2 8 0 .9

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Appendix 3: Government Fiscal Table (Kshs. Billions)

Category Total revenue Revenue Tax revenue Non- tax revenue Appropriation-in-aid Expenditure and net lending Recurrent Development Deficit excl. Grants Grants Deficit incl. Grants Financing Net external financing Net domestic financing Financing gap Nominal GDP 2011/12 806.30 722.74 658.80 6 3 .9 4 8 3 .5 6 1,082.70 697.50 385.20 (276.40) 4 8 .2 0 (228.20) 228.20 166.20 6 2 .0 0 3,295.20 2012/13 954.98 868.82 817.46 5 1 .3 6 8 6 .1 6 1,459.71 1,001.77 457.94 (504.73) 5 6 .2 4 (448.49) 448.49 169.32 279.17 3,866.50

Source: PBO, Budget Statement, 2012/13 Estimates of Revenue, Grants and Loans

Appendix 4: Allocation to Ministries (Kshs. Billions)

Sector Ministry/Department/Agency Approved 2011/12 Agriculture Rural Development & Ministry of Agriculture Ministry of Livestock Development Ministry of Co-op. Development & Marketing Ministry of Lands Ministry of Forestry and Wildlife Ministry of Fisheries Development Sub-Total Energy Infrastructure & ICT Sector Office of Deputy PM & Min of Local Govt Ministry of Roads Ministry of Transport Ministry of Energy 2 0 .8 8 7 .4 9 1 .3 3 6 .0 3 6 .3 5 3 .4 7 4 5 .5 6 4 .9 2 4 3 .1 1 8 .0 9 2 5 .3 7 Proposed 2012/13 2 2 .1 0 8 .6 1 1 .6 6 5 .0 6 1 1 .7 9 4 .0 4 5 3 .2 6 2 7 .8 2 123.62 1 8 .8 1 7 9 .9 5 Approved 2012/13 2 2 .0 0 8 .5 7 1 .4 5 4 .8 4 1 1 .2 9 3 .7 5 5 1 .9 0 2 7 .9 5 124.63 1 8 .7 7 8 0 .2 3

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Sector

Ministry/Department/Agency

Approved 2011/12

Proposed 2012/13 7 .3 0 2 .3 7 7 .4 4 267.29 6 .3 8 2 .4 2 3 .1 6 1 .3 3 2 .7 8 5 .7 6 2 1 .8 3 4 4 .1 5 4 0 .8 8 8 5 .0 3 5 2 .0 4 6 0 .4 8 119.84 232.36 6 5 .8 9 1 6 .2 9 3 .0 4 1 .9 0 1 6 .3 4 1 .8 8 8 .6 4 1 .0 9 0 .2 4 0 .5 3 0 .4 3 0 .2 6 1 7 .5 8 0 .3 0 0 .3 5

Approved 2012/13 6 .9 2 2 .1 5 7 .2 7 267.91 6 .3 5 2 .3 8 3 .1 3 1 .2 4 2 .4 0 5 .4 8 2 0 .9 9 4 6 .1 4 4 0 .8 2 8 6 .9 7 5 5 .0 1 6 1 .1 6 119.80 235.97 6 6 .3 1 1 6 .1 4 2 .7 2 1 .8 3 1 4 .9 9 1 .8 1 8 .3 8 0 .9 7 0 .2 2 0 .5 1 0 .4 1 0 .2 5 1 7 .5 8 0 .2 9 0 .3 0

Ministry of Information & Communications Ministry of Nairobi Metropolitan Development Ministry of Public Works Sub-Total General Economic Commercial & Labor Affairs Ministry of Regional Development Authorities Ministry of Labour Ministry of Trade Ministry of East African Community Ministry of Tourism Ministry of Industrialization Sub-Total Health Ministry of Medical Services Ministry of Public Health and Sanitation Sub-Total Education Ministry of Education Ministry of Higher Educ., Science and Tech. Teachers Service Commission Sub-Total Governance Justice Law & Order Provincial Admin. & Internal Security OVP and Ministry of Home Affairs, Justice, Nat. Cohesion & Const. Affairs The State Law Office The Judiciary Ethics and Anti-Corruption Commission Immigration & Registration of Person Directorate of Public Prosecutions Witness Protection Agency Comm. for Implementation of Constitution Registrar of Political Parties Kenya Nat. Human Rights and Equality Comm. Independent Electoral and Boundaries Comm. National Police Service Commission The Commission on Administrative Justice

6 .7 6 2 .3 1 6 .5 2 9 7 .0 8 4 .1 0 2 .1 8 2 .0 3 1 .0 5 2 .5 9 4 .1 4 1 6 .1 0 3 0 .2 5 2 2 .6 8 5 2 .9 3 3 8 .8 0 3 2 .0 7 111.97 182.84 6 1 .7 4 1 5 .2 6 2 .2 5 1 .3 4 7 .5 5 1 .4 2 6 .5 4 0 .4 9 0 .4 1 0 .3 1 7 .4 3 0 .1 0 -

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Sector

Ministry/Department/Agency

Approved 2011/12

Proposed 2012/13 134.76 1 .6 9 9 .9 8 1 0 .5 9 2 8 .8 5 6 0 .9 7 2 .9 0 2 .4 9 1 8 .0 6 0 .4 9 1 .6 7 0 .7 4 0 .5 1 0 .6 8 139.62 9 .4 3 1 1 .5 1 0 .2 4 2 .6 0 1 1 .1 0 3 .3 8 3 8 .2 6 4 1 .5 6 7 .6 3 6 .0 2 5 5 .2 1 7 0 .0 4 1 3 .4 1 8 3 .4 5 1,111.07

Approved 2012/13 132.71 1 .6 9 9 .5 9 1 0 .4 3 2 8 .9 0 5 9 .5 7 2 .9 8 2 .3 8 1 6 .3 2 0 .4 1 1 .8 6 0 .6 7 0 .4 4 0 .5 8 135.82 9 .8 6 1 1 .4 1 0 .2 1 2 .3 7 1 0 .7 5 3 .4 0 3 8 .0 0 4 1 .6 2 7 .4 4 5 .6 9 5 4 .7 6 7 0 .2 9 1 3 .4 1 8 3 .7 0 1108.72

Sub-Total Public Administration &International Relations State House Ministry of State for Public Service Ministry of Foreign Affairs Min. Planning & National Dev. & Vision 2030 Ministry of Finance Cabinet Office Office of the Prime Minister Parliamentary Service Commission Commission on Revenue Allocation Auditor-General Public Service Commission Salaries and Remuneration Commission Controller of Budget Sub-Total Social Protection Culture Recreation & Ministry of Gender, Children and Social Dev. Min of State for Special Programmes National Gender and Equality Commission Ministry of State for Nat. Heritage and Culture Ministry of Youth Affairs and Sports Development of N. Kenya & Other Arid Lands Sub-Total Environmental Protection Wa t e r Housing National Security & Ministry of Water and Irrigation Environment and Mineral Resources Ministry of Housing Sub-Total Ministry of State for Defence National Security Intelligence Service Sub-Total Total

104.83 1 .7 7 4 .1 2 9 .7 9 2 7 .2 7 4 2 .0 4 1 .7 0 2 .3 8 1 0 .1 6 0 .3 4 1 .4 2 0 .6 7 0 .0 6 101.72 7 .8 8 1 2 .3 5 2 .3 7 9 .4 9 2 .6 2 3 4 .7 1 2 3 .5 2 5 .9 2 3 .3 9 3 2 .8 3 6 4 .5 4 1 4 .0 2 7 8 .5 6 747.16

Source: BPS, Sector Reports, Approved 2012/13 Estimates of Revenue and Expenditure

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Appendix 5: Devolved Resources by Ministry (Kshs. millions)

Vo t e 101 105 106 109 110 111 112 113 114 115 116 118 119 120 122 130 131 132 135 136 141 142 144 146 149 155 156 158 159 160 Ministry Provincial Administration and Internal Security Office of the Vice-President and Ministry of Home Affairs Planning, National Development and Vision 2030 Ministry of Regional Development Authorities Ministry of Agriculture Ministry of Medical Services Office of the Deputy Prime Minister/Ministry of Local Government Ministry of Roads Ministry of Transport Ministry of Labour Ministry of Trade Ministry of Gender, Children and Social Development Ministry of Livestock Development Ministry of Water and Irrigation Ministry of Cooperative Development and Marketing Ministry of Energy Ministry of Education Ministry of Information and Communications Ministry of State for Special Programmes Ministry of Lands Ministry of State for National Heritage and Culture Ministry of Youth Affairs and Sports Ministry of Housing Ministry of Tourism Ministry of Public Health and Sanitation Ministry of Forestry and Wildlife Ministry of Fisheries Development Development of Northern Kenya and Other Arid Lands Ministry of Public Works Ministry of Industrialization TOTAL Source: Ministry of Finance Recurrent 330 163 453 543 3 ,5 9 9 24,903 22,011 8 ,5 0 7 280 658 2 ,5 9 5 2 ,0 0 8 194 1 ,6 2 0 273 2 ,0 8 4 1 ,1 1 7 25 1 ,0 9 3 424 60 12,721 139 135 955 86,892 Development 13 22,095 3 ,6 7 0 2 ,4 9 1 2 ,4 1 9 1 ,0 7 5 342 107 63 176 540 2 ,0 0 8 41 8 ,9 1 6 85 1 ,6 9 0 199 95 782 488 7 13,484 3 50 57 1 ,3 4 8 250 62,493

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Appendix 6: County Revenue Potential and Cost of Devolved Functions (Kshs. Millions)
County 1 2 3 4 5 6 7 8 9 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Mombasa Kwale Kilifi Tana-River Lamu Taita-Taveta Garissa Wajir Mandera Marsabit Isiolo M er u Tharaka-Nithi Embu Kitui Machakos Makueni Nyandarua Nyeri Kirinyaga Murang'a Kiambu Turkana West Pokot Samburu Trans-Nzoia Uasin-Gishu Elgeyo-Marakwet Nandi Baringo Laikipia Nakuru Nar o k Revenue Collected 1,349.44 99.20 275.64 25.50 28.11 123.21 42.16 27.96 38.95 46.42 136.34 212.08 47.26 164.22 141.92 427.68 86.11 214.54 291.45 184.43 220.86 655.74 33.67 37.00 136.65 143.67 402.12 60.90 70.83 76.25 168.96 631.86 983.08 Cost of Devolved Functions 4,735 2,040 3,171 1,753 1,159 1,895 3,440 3,218 2,270 2,187 1,728 4,169 1,303 3,159 3,381 3,783 3,136 2,539 6,885 3,066 4,279 5,741 2,019 2,540 1,332 1,948 2,634 2,111 2,097 2,656 2,003 5,723 1,964

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34 35 36 37 38 39 40 41 42 43 44 45 46 47

Kajiado Kericho Bomet Kakamega Vihiga Bungoma Busia Siaya Kisumu Homa-Bay Migori Kisii Nyamira Nairobi City Total

185.47 180.05 58.88 238.72 69.92 224.94 148.74 131.08 869.17 106.12 123.70 180.06 31.61 6,860.46 16,993.13

2,150 2,772 1,971 4,953 1,781 3,687 2,784 2,776 4,296 4,646 3,238 3,678 1,780 12,812 149,385

Source: Ministry of Finance, CRA

Appendix 7: Tax Proposals and their Implication

Tax Measure Increase import duty on galvanized wire from 0% to 10% Remove duty on set-top boxes. Remove duty on all imported software Exempt duty to inputs used for manufacture of medical diagnostics kits Duty remission to producers of food Duty remission, though good for the producers of food supplements and the affected persons, it is also cumbersome for KRA. This is not consistent with the broader objective of making tax administration simpler. Reduction of the rate of duty on imported food supplements from 10% to 0% so as to make them affordable and help improve the health of the citizens. Exempt duty on all imported inputs for beeTo encourage many farmers to take up bee-keeping as a To make health food supplements affordable. Expected impact and comments Protects local manufacturers from unfair competition from cheap imports. Enable migration from analogue to digital broadcast television. To promote development of ICT in Kenya. To encourage local manufacture of the kits.

supplements for use by infants and people living with HIV/AIDs

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Tax Measure keeping Ensuring that all landlords rental incomes are taxed and any outstanding rental income is paid through mapping out of residential and commercial buildings. Ensure no state officer is exempted from taxes

Expected impact and comments commercial activity. This is designed to improve rental tax compliance by landlords. It is not a new tax, only enforcement is needed. Questions arise about who bears the burden of this tax. It could increase rental prices if part of the tax burden is passed on to tenants. Reinforces the Constitutional provisions on taxation. The Constitution provides that that no one should be exempted from paying tax on the basis of the office they hold.

KRA to rescind the recent upward review of the minimum tax payable on imported second hand cloths from 1.1 million to 1.9 million per 20 foot. Amend Income Tax Act to make rules to administer tax exemptions while institutions engage in charitable activities. Fast processing of applications for renewal of excise licenses Source: Budget Statement, 2012, Finance Bill

This measure is a setback to the textile industry. Opposition is expected from stakeholders in cotton and textile industry. The flipside is that the measure will make used cloths affordable.

This will expand the tax net, reduce tax avoidance and also enhance equity and fairness

Good news to businesses since it will improve the pace of registration and encourage more investors.

Appendix 8: Donor Funding (Kshs. Millions)

Vo t e 101 103 104 106 107 109 110 111 112 113 114 116 117 118 Ministry/Department/Agency Provincial Admin. & Internal Security Ministry of State for Public Service Ministry of Foreign Affairs Min. Planning & National Development & Vision 2030 Ministry of Finance Ministry of Regional Development Authorities Ministry of Agriculture Ministry of Medical Services Office of Deputy PM & Min of Local Government Ministry of Roads Ministry of Transport Ministry of Trade Ministry of Justice, Nat. Cohesion & Constitution Affairs Ministry of Gender, Children and Social Development Loans 1 ,3 1 0 2 ,4 7 6 1 ,4 9 5 4 ,2 4 1 910 1 ,3 1 5 50,573 9 ,9 1 9 1 ,6 8 9 Grants 269 22 10 2 ,3 0 0 10,145 438 3 ,0 8 9 1 ,1 0 0 737 6 ,5 6 8 50 54 706 1 ,8 7 8

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Vo t e 119 120 121 123 124 126 130 131 132 134 135 136 140 141 142 143 144 148 149 155 156 157 158 160

Ministry/Department/Agency Ministry of Livestock Development Ministry of Water and Irrigation Ministry of Environment and Mineral Resources Cabinet Office Ministry of East African Community The Judiciary Ministry of Energy Ministry of Education Ministry of Information & Communications Ethics and Anti-Corruption Commission Min of State for Special Programmes Ministry of Lands Immigration & Registration of Person Ministry of State for National Heritage and Culture Ministry of Youth Affairs and Sports Ministry of Higher Education, Science and Technology Ministry of Housing Office of the Prime Minister Ministry of Public Health and Sanitation Ministry of Forestry and Wildlife Ministry of Fisheries Development Ministry of Nairobi Metropolitan Development Ministry of Dev of Northern Kenya & Other Arid Lands Ministry of Industrialization Total

Loans 384 18,436 771 905 60 49,468 1 ,7 3 0 2 ,8 4 9 4 ,1 7 8 52 505 7 ,2 5 7 1 ,6 0 0 6 ,1 4 0 793 165 100 169,318

Grants 112 4 ,7 6 6 363 4 65 2 ,1 7 2 3 ,2 2 4 34 22 252 225 113 10 265 150 479 13,424 1 ,2 6 2 182 1 ,6 0 2 82 56,175

Source: Approved 2012/13 Estimates of Revenue and Expenditure

Appendix 9: Projects considered for funding from public hearings, 2012/13 Budget
1. 2. 3. 4. 5. Coconut Development Authority Repair and construction of road B7 (Embu Kiritiri Kangonde road) Re-carpeting of roads within Lodwar municipality Construction and repair of road C83 Construction and repair of road C68 / C66

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6. 7. 8. 9.

Improvement of Kisumu port infrastructure Construction of Nakuru Airport Improvement of Mbita Causeway (bridge) Construction of a dam along Mzima Springs for provision of water in Taita-Taveta County

10. Kisii Hospital for improvement of emergency facilities 11. Upgrade of Wesu District Hospital and purchase of equipment 12. Child Welfare Society of Kenya 13. Revamping of the GRIFTU pastoral technical training college in Wajir 14. Establishment of a technical training college in Muranga 15. Improvement of Kipkabus technical training college in Uasin Gishu 16. Revival of pan-paper mills 17. Revamping of the Pyrethrum Board of Kenya 18. Rehabilitation of Kisii Childrens Home Source: Budget Committee Report on the Estimates of Revenue and Expenditure for 2012/13

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