Document of The World Bank FOR OFFICIAL USEONLY ReportNo.: 28524 - KE THE REPUBLICOF KENYA POVERTY REDUCTION STRATEGY PAPER 'INVESTMENT PROGRAMFOR THE ECONOMIC RECOVERY STRATEGY FORWEALTH AND EMPLOYMENT CREATION' AND JOINT IDA-IMF STAFFASSESSMENT April 9,2004 PovertyReductionand EconomicManagement2 Africa Region This documenthas a restricteddistribution andmaybe usedb y recipientsonly inthe performance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization. INTERNATIONAL DEVELOPMENT ASSOCIATION AND INTERNATIONAL MONETARY FUND Republic ofKenya Joint Staff Assessmentof the EconomicRecovery Strategy Preparedby the Staffs of The International Monetary Fundandthe InternationalDevelopment Association Approved by Anupam Basuand Anthony Boote (IMF) Callisto Madavo and GobindNankani (IDA) April 9,2004 I.OVERVIEW 1. The InvestmentProgram for the EconomicRecovery Strategyfor Wealth and EmploymentCreation (IP-ERS) that the Government of Kenya has recentlysubmitted to the IMFand World Bank is Kenya's povertyreductionstrategy paper. The IP-ERS provides the framework for implementing the government's Economic Recovery Strategy for Wealth and Employment Creation, issued inJune 2003. It describesthe participatory process, provides an overview of poverty inKenya, and presentsthe government's strategic vision, objectives, and priority actions for stimulating economic growth, reducing poverty, and promoting human development in line with the MillenniumDevelopment Goals (MDGs). 2. The IP-ERS reflectsan extensive processof consultation.Itrests on the three interlinked pillars o feconomic growth, equity and poverty reduction, and governance, each of which is essential to poverty reduction. Its primary strengths lie in its strong emphasison improving governance and restoring the rule of law, andthe scope of the participatory processthrough which the strategy was prepared. Also important is its focus on results through inclusion o f a comprehensivemonitoring and evaluation framework with targets that refer to the MDGsas benchmarksand a time frame for achievement. 3. While recognizing the strengths of the IP-ERS, the staffs notethat there are some shortcomings that will need to be addressedduring implementation,includinginthe preparationof the first Annual ProgressReport. First, its analysis o fpoverty needs to be strengthenedby expanding the information base through surveys and strengtheningthe analysis ofthe determinants of poverty. Second, the strategy could better prioritize policy actions to accelerategrowth and reduce poverty and provide a more precise identification of core pro-poor spending programs. Third, a sector strategy for health remainsto be formulated, and a strategy for education completedthat would map out programs for acceleratingthe pace for achieving MDGs. Fourth, the strategy could better articulate a processfor the prioritizationo f public actions that are inturn linkedto the budget and - 2 - medium-term expenditure framework. Fifth, the actions contemplatedto build capacity inkey areas need to be clearly spelled out, including the envisaged support from the donor community. Sixth, systems for monitoring poverty outcomes are weak and need to be strengthened. Finally, the outcomes o fthe future consultation processes and poverty diagnoses need to be better described, linkedto, and reflected in, the selection o f targets, policy priorities, and budget allocations. 11. PARTICIPATORY PROCESS 4. The IP-ERSis the resultof a broad-based participatoryprocessthat has includedconsultationwith parliament,civil society, nongovernmentalorganization (NGOs),private sector representatives,development partners,and other stakeholders. The previous government initiated work on the draft PRSP. A steering committee that included all the stakeholders was formed at the national levelto guide the process. In2002, consultations were undertaken in 70 districts o f the country to establish priorities at the local level. These were noteworthy for including the poor inthe consultations through participatory poverty assessments carried out inten districts. A draft PRSP was prepared in2002, which reflectedthe outcomes o f the consultations. It had not been formally submitted to the Bank and the IMFby the time o f the parliamentary and presidential elections inDecember 2002 that brought a new government to power. 5. The National Rainbow Coalitionadministrationthat assumed power in December2002 began immediatelyto articulate its own strategyto revive the economy, createemployment,and reducepoverty, drawingheavilyon its electionmanifestoand the earlier extensiveconsultations on the PRSP undertakenby the previous government.The new government presentedthe first draft o f its strategy to a large workshop inFebruary 2003 that included nearly all ministersandpermanent secretaries, andmany representatives o f development partners, the private sector, NGOs, and civil society. Inthe following months, a large number o f smaller meetings were held to seek feedback from a broad range o f civil society organizations (trade unions, professional and industry groups, financial institutions, pastoralist associations, and women's organizations), the parliament, and development partners. The consultations, many o f which were televised, also included local government representatives. Groups were invitedto provide their perspectives on the main causes of poverty and the interventions requiredto address them. The government presented its ERS inJune 2003, which reflectedthe feedback it had received duringthe participatory process. The government then prepared an Interim Investment Program for the ERSto provide a results-based framework for implementingthe strategy, which it presented inNovember 2003 to the National InvestmentConference, organizedjointly by the government and the private sector and involvingover 2,000 participants. The IP-ERS formed the basis o f discussion at the Consultative Group meeting held inNovember 2003, which also included a wide range o f participants from NGOs and the private sector. The IP-ERS reflects the outcome o fthis participatory process. 6. The IP-ERS does not describe how the concernsof stakeholdershaveinfluenced the formulation of the IP-ERS and the associatedeconomic reform agenda. It could have included a summary o f the participatory process (especially among central ministries, parliament, and subnational governments), differences o f views among the various stakeholders, major issues raised, and a description o f how the process influenced the policy priorities and budgetary allocations laid out inthe strategy. - 3 - 7. A participatory approachwill continueto guide implementation of the IP-ERS. Inthis regard it will be important to ensure that the National Economic and Social Council- comprising stakeholders from government, universities and researchinstitutes, civil society and the private sector -is soon fully functional. 111. POVERTY DIAGNOSIS 8. The poverty diagnosis in the IP-ERSdocumentis based on very limited information. Evidence on income poverty comes from the 1997 welfare-monitoring survey. Moreover, the series of household surveys undertakeninthe 1990s are not comparable. As a result, information on income poverty trends over the pastdecade i s not available. More recent and comprehensivedata would help indesigningpolicies and programs to reduce poverty, as illustrated by the ongoing poverty mapping exercise. 9. These data limitations imply that the poverty diagnosis does not establishvery clear links betweenpolicies,slow economic growth, and persistentpoverty. While the IP- ERSdocument reviews the factors that havebeenassociatedwith poverty (household size, location, education, and gender), more analysis is neededto understandthe fundamental determinants of poverty, particularly the linksbetweenpoverty and economic activity. Data from the 1997 welfare-monitoring survey do not permit such detailed analysis because of its neglectof household income. The Kenya integratedhouseholdbudget survey is being designedto rectify this. The diagnosisof poverty could also be strengthenedby analyzing the impact ofpast policies on income-earning opportunities inKenya, especially for the poor. In addition, some ofthe structural reforms mentioned inthe IP-ERS could benefit from an ex ante poverty and social impact analysis, as was stressed inthe JSA of the Preparation Status Report (2003). 10. The staffswelcome the discussion of the deterioration in the nonincome dimensions of poverty. More is knownabout these aspects of poverty than of other aspects, primarily because ofthe series of demographicand health surveys that have been conducted, the most recent ofwhich was concluded in2003. The staffs welcome the candor ofthe IP- ERSdocument inhighlightingthe seriouschallenge posedby the deterioration inmortality, morbidity, and nutritionrates. They propose, however, paying more attention to understandingthe factors behind these adverse trends. Such analysis would permitthe government to focus on the key actions required to improve health and nutrition outcomes. 11. The staffs welcome the plansof the governmentto rapidly deepen its knowledge of poverty and inequality in Kenya. The 2004/05 integratedhousehold budget survey will provide critical data for estimating the incidence, depth, distribution, and trends of poverty, and provide the basis for undertaking a comprehensive poverty assessment in2005/06. The intended use of quick-monitoring survey instruments, such as the Core Welfare Indicators Questionnaire every two to three years, will provide rapid feedback on the effectivenessof government policies and programs. Participatory poverty assessmentswill combine quantitative with qualitative data and provide insights into the determinants and dynamics of poverty. Activities ofthe Poverty Analysis and Data Initiative, which aims to establishclose linksbetweendata producers, researchers, andpolicymakers, will also help to address gaps in knowledge. 12. The understandingof the geographicalvariations in poverty has grown considerablyas a result of the production of poverty maps in 2003. These maps show not - 4 - only the provinces with highproportions o f poor people, but also the subdistricts within provinces with such concentrations. This information could be used inthe future in developing programs to target the poor. The staffs note that available poverty maps are incomplete because they do not present information for the North Easternprovince, as the welfare-monitoring survey did not include this region. Data from the plannedKenya integratedhouseholdbudget survey will be used to produce a complete poverty map inthe future. IV. POVERTYREDUCTIONSTRATEGY 13. The results-basedIP-ERS,which restson three pillars, providesa sound basis for reducingpoverty.The three pillars o fthe IP-ERS are (a) economic growth, supported in part by reforms o f financial services and an expansion o f investments in infrastructure; (b) equity and poverty reduction, which would be aided by actions to improve the access o f the poor to basic services (education, health, and HIV/AIDS) and the revival o f agricultural growth; and (c) governance, including strengthening public safety, law, and order. The staffs agree that these areas o f focus are key to addressing the root causes o f poverty, and that the policies and programs laid out inthe IP-ERSdocument are broadly consistent with the government's objective to reduce poverty. The focus on tacklingthe concerns o fthe poor in the arid lands is particularly welcome and is one o f the key outcomes o f the participatory process. In addition, the staffs encourage the government to identify a limitednumber o f additional priority actions that would have the greatest impact on growth and service delivery to the poor and begin to carefully monitor their impact on poverty trends. Furthermore, the quality o f service delivery to poor groups in society should be closely monitored. A. Targets, Indicators, and Monitoring 14. The IP-ERSdocumentdefines medium- and long-term goals for poverty reductionlinked to the MDGs,establishes indicatorsof progress,and sets targetsfor many of the goals.These are specified ina detailed matrix that summarizes priority actions inkey sectors. While appearingto be modest, giventhe poor performance ofthe economy duringthe past 20 years, the targets are appropriate. The matrix, however, provides only medium-term targets for many o f the goals and, for some goals, no targets at all. The staffs would encourage the authorities to specify annual targets, disaggregated where possible by gender, to facilitate monitoring and preparation o f annual IP-ERS progress reports. The staffs welcome the government's intention to specify soon, in consultation with stakeholders, a short list o f key indicators to be monitored that would also be incorporated inthe annual progress report o f the IP-ERS. 15. Once implemented,the monitoringand evaluationframework should providean adequate basisfor tracking progress and demonstratingthe outcomesand impactsof government policies and programs.The framework will provide critical feedback to the government on the efficiency o f spending and the effectiveness o f policies and programs in contributing to specific development outcomes. The staffs acknowledge the many actions that the government has taken to strengthen its capacity to collect and analyze data and to monitor and evaluate the impact o f its policies and programs. The preparation o f the Statistics Strategic Master Plan is welcome, becausethis will provide a framework for coordinating, in the future, donor support to the sector. The staffs believe that multidonor Statistical Capacity BuildingCredit (Statcap), planned for Bank Boardapproval in2004, should help to ensure - 5 - the establishmentofthe monitoring systems requiredto regularly produceand disseminate data requiredfor detailed assessment of poverty and evaluation of public policy. The staffs recommendthat the government actively develop and institutionalize mechanisms for participatory monitoring and evaluation, focusing especially on service delivery to the poor. The government's intention to develop a public information access policy that will specify the types of information to be releasedandthe mechanismsthrough which such information will be made available would be important inthis regard. 16. The challengewill be to ensure that the resultsof the monitoringand evaluation system are reflectedin policy formulationand budget decisions.The staffs note the intention ofthe governmentto strengthen linksbetweenthe results of monitoring and evaluation operations and policy formulation, and recommenda more detailed discussionof how this would be achievedinthe first annual progressreport. The staffs note that the monitoring and evaluation unit has beenestablishedwithin the Ministryo f Planning. Appointment ofthe membersof the National Economic and Social Council will be an important next step. The council is expectedto play a key role inoverseeingthe implementation ofthe IP-ERS and inadvising the governmenton the refinements to the policy and budget management system required to achieve the objectives ofthe IP-ERS. 17. The staffs recommendthat the government develop concrete plans and timetablesfor the reportingof key data. Development partnerswould welcome continued preparationand sharingof quarterly progressreports on budgetexecution, inaddition to annual progress reportson IP-ERS implementation. This would provide the basis for a regular dialogue, basedon a sharedunderstandingof economic developments, and would ensure that partners respond early and transparentlywith respectto prospective aid commitments and disbursements.Harmonizing the reporting system with the timetable for the budget andmedium-termexpenditure framework (MTEF), as well as for the PRGF reviews, will be important to ensure that the information is used inbudget decisions andto allow development partnersto use the government's own planning, budgeting, and monitoring systems, insteadof setting up their own. B. MacroeconomicFramework 18. The IP-ERSpresents a comprehensive, clearly articulatedmacroeconomic framework that rightly emphasizesthe need for the governmentto stimulate economic growth through higher publicand private investmentso as to significantlyreduce povertywhile maintainingmacroeconomicstability. The IMFand World Bank staffs welcome the core objectives o fthe fiscal strategy, namely, to increase pro-poor expenditure supportedby increasedconcessional assistanceand expenditure restructuring, while containing the stock of debt to within a sustainableand prudent level. However, the IP-ERS would have benefited from a more detailed explanation of the factors that are likely to support a sharp expansioninprivate and public savings and investment, as well as the sectors that are likely to benefit. 19. The staffs suggest that during IP-ERS implementation, the government work with the IMF, Bank and other partners to specify a high case that embodies a faster pace of policy and governance reform coupled with increased levels of donor financing (including a larger proportion inthe form of grants) Unlikethe highcase currently included inthe IP-ERS, this scenario would allow the government to illustrate how the combination of deeper domestic reform and more and better aid would help accelerateKenya's progresstowards its medium- - 6 - term development goals, including the MDGs. The IMFand the Bank will assist the government indrawing out the macroeconomic and public expenditure implications of this scenario. 20. The staffs recommendthat in further developing the IP-ERSin the first year of implementationthe government preparea detailedmedium-termfiscalstrategy to underpinits MTEF.The fiscal strategy should be consistent with the macroeconomic framework underlying the IP-ERS, especially its broad fiscal objectives, instruments, and assumptions. It would also clearly articulate a policy toward contingent liabilities that pose a major riskto the government's finances, including the National Social Security Fund, the proposed social health insurance scheme, parastatal debt, and unfunded government pension obligations, and explain how shortfalls inrevenues or financing would be addressed. The staffs urge the authorities to take into account the short-term revenue losses associated with trade liberalization when formulating the fiscal strategy. The fiscal strategy should include details about the government's plan to restructure public spending so that it is more pro-poor and pro-growth, specifically includingprojected spending on the main MTEF categories, disaggregated into recurrent and capital expenditures. Development partners, inthe context o f the public expenditure review (PER) process, are ready to providetechnical support to help the government further articulate its fiscal strategy. 21. The staffs suggest that the annualprogress report emphasize the importanceof improvedmanagementof Kenya's externaldebt.This is neededto achieve the country's projected highexternal financing requirementswithout increasing its external vulnerability, andjeopardizing its debt sustainability position. Furthermore, developments inexternal debt management should be covered inthe first annual progress report. 22. The IP-ERScould havebeenstrengthened by a fuller discussion of the accompanying public sector wage policiesand the civil service reform agenda, particularly inlight of the prevailingwage pressures.Buildingonthe work o fthe Committee o f Officials, the staffs urge the government to complete the principalelements o f a public sector wage policy and the associated civil service reform agenda by the time of the presentation o f the budget for financial year 2004/05. They also suggest that a more detailed reform agenda be included inthe first annual progress report that contains specific plans for rationalizing public services. Inaddition, the main parameters o f pension reform should be clearly spelled out. 23. The staffs recommendthat the annual progress report presenta clearer and morecomplete pictureof the financingrequirementsand how they are expected to be met. Inthis regard, it is suggested that the financing framework be improvedby providing more detailed coverage o f the projected annual financing for both the investment program and other government expenditures, broken down by financing source (for example, domestic revenue, expenditure restructuring, domestic borrowing, and external aid). The staffs note that for Kenyato reconcile increased investment with the goal o f declining debt ratios, substantial external support inthe form o f grants may be necessary. C. Public ExpenditureManagementReform 24. The IP-ERS includesa program to reform public expenditure management.The staffs welcome the government's commitment to open up PERs to other stakeholders and to strengthenits role inthe medium-term expenditureand budget process by institutionalizing - 7 - PERsas regular annual exercises. The staffs note however that the PER and the MTEF processeshave not, inthe past, been used effectively to shift budgetary allocations to priority areas. The challenge now will be to ensure that the results o fthe PER and the MTEF processesare used to inform budget preparation. The staffs welcome the steps the government has taken to achieve this objective, including the establishment o f a high-level steering committee to oversee and guide the PERprocess. This, inturn, should facilitate the preparation o f a budget that more clearly reflects IP-ERS priorities. The staffs suggest that the PER clarify the definition o f "core poverty programs" to ensure closer linkage between the increase in expenditures on these programs and the poverty and other social welfare targets. The staffs urge the government to complete the MTEF review so that its findings can be implemented duringnext year's budget cycle and adhere much more strictly to the related budget preparation calendar to allow more time for the preparation and discussion o f ministerial public expenditure reviews. The staffs note the progress that has been made in estimating the costs o f priority programs, most notably inprimary education, and urge the government to strengthen its capacity to cost other important IP-ERSprograms. 25. The staffs endorse the reformsoutlinedin the IP-ERS document that are intendedto strengthenbudget execution.The government, inconsultation with donors, is developing an action plan for enhanced financial management that will strengthen financial controls and provide more accurate and timely information on government spending. Relatedly, it has presented to parliament three important bills on financial management, auditing, and procurement that will together significantly improve economic governance in Kenya. The staffs urge the government to rapidly implement the enhanced financial management action plan, enact the two bills (public financial management and procurement) that have not yet been passedby parliament, and report on adherence to improved public expenditure management inthe first annual progress report. D. Policiesto StimulateGrowth and ReducePoverty 26. The staffswelcome the government's plans to undertakeneeded financialsector reformsto mobilize funds for investment,improvefiscalmanagement,and strengthen governance. Given the importance o f financial intermediation to the economy, placing financial institutions on a sound financial and commercial footing will bringmore effective competition to the sector. The annual progress report should describe planned actions to reduce lending spreads and improve accessto finance, `while maintaining market-determined interest rates. The discussion should explain how major impediments to the efficient functioning o f the financial system-outdated infrastructure, deficiencies inthe legal framework, and an inefficient judiciary-will be addressed ina coordinated manner. As for access to finance, the staffs recommend that the government develop, by the end o f 2004, an efficient and effective strategy to provide financial services to currently underserved groups, including small and mediumsize enterprises, and that the recapitalization o f development finance institutions await the formulation o f such a strategy. 27. The staffs welcome the government's commitmentto increaseprivate sector participation.However, recognizing the importance o f open and informedpublic discussions o f the privatization strategy, the annual progress report could outline the different modes o f divestiture (outright sale, concessions, and leasing arrangements) that could help to accomplish the divestiture objectives. The report could also indicate the approach selected by the government for individual public enterprises to be privatized. Equally important, the - 8 - report could provide more information to the public about the heavy costs to the Kenyan taxpayer stemming from the inefficiencies o fthe parastatal sector which preempt resources that could be spent on pro-poor programs. The annual progress report could also indicate areas where poverty and social impact analysis would be especially usefulto inform the policy dialogue concerning policy choices. The Bank and other donors are willing to support the government in conducting such poverty and social impact analyses. 28. Other measuresare plannedto promoteprivatesector development. These include reforming the legal and regulatory framework, restructuringthe trade system, including inthe context o f the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), lowering administrative barriers to trade and investment, improvingthe general security situation inthe country, and strengthening governance. The staffs endorse the reforms that have beenmade inthese areas and note the recent pickup inprivate sector investment. They recommend, however, giving more prominence inthe first annual progress report o fthe IP-ERS document to the consideration o f how a more open trade system could contribute to growth and poverty reduction, based on an early completion o f the government's trade policy strategy paper. Important cross-cutting and sectoral issues, such as standards, trade facilitation, and sectoral adjustment, could also be addressed inthe document. 29. The recognitionof agriculture as a key sector to stimulateeconomic growth and reduce povertyis welcome. The decisionto move toward a more demand-driven research and extension system should help strengthen linksbetween farmers, extension service providers, and researchers and thus helpto improve the livelihoods o f small farmers. The current agricultural policies, particularly those aimed at protecting farmers who market maize and sugar, have a devastating impact on the vast number o f poor, both rural and urban, who are net buyers o f these goods (80 percent o f maize farmers are net buyers o f maize, for example). The focus on improved governance o f cooperatives and improved transparency and accountability o f Kenya's marketing boards i s welcome. The staffs welcome the recent launch o f the strategy for revitalizing agriculture and suggest that the first annual progress report describe progress in developing the regulatory and institutional framework o fthe agriculture sector, reducingthe direct role o f state enterprises inmarketing and production, and progress in liberalization. Notably, this would include disposal o f the central KenyaMeat Commission plant near Nairobi, and support for the small scale decentralizedprivate sector abattoirs inthe arid and semiarid lands. 30. Employmentcreationwas a key post-election concern of the government. Inthis regard, while the annex to the IP-ERS document includes objectives, outcomes, and outputs, the maintext would have been strengthened by including a more detaileddiscussion o flabor market policies and o f the government's strategy for promoting the growth o f small and medium-sized enterprises. Issues that could be addressed inthe coming year include reforms o f the labor market regulatory framework, the strategy and mechanisms for job creation, policies for removing labor market rigidities and other impediments to employment growth, reforms o f minimumwages, and the regulatory framework and financing arrangements neededto facilitate the expansion o f small and medium-sized enterprises. The staffs recognize that the quantitative basis for analysis i s limited and welcome the inclusion inthe Statistical Master Plan o f the labor force survey and other specialized surveys that are expected to contribute to policy formulation inthese areas. - 9 - E. Policiesfor ImprovingServiceDelivery,SocialInclusionand Equity 3 1. The staffs endorse the broad approach of the IP-ERS to ensure that all Kenyans have access to basic services and to focus more attentionon vulnerableand disadvantaged groups. The strategy calls for providing free primary education, increasing access to basic health services continuing efforts to reduce the spread o f HIV/AIDS, and removing barriers to increased productivity o f rural farm and nonfarm enterprises. The arid and semiarid lands program aims at reducing poverty ina particularly disadvantaged region. The staffs strongly endorse the prominence the government has given to addressing the needs o f pastoralists, a previously neglectedbut particularly vulnerable and poverty-stricken group. The strategy could be deepened by discussing how to extend the approachto other poor communities inKenya, inthe context o f the strategies for health, education, and roads 32. The staffs strongly support the government's strategy for improvingaccess to free primary educationand agreewith the government's call to improvethe efficiency with which available resourcesfor education are used, as Kenya already spendsavery high proportionof its budget and GDP on education. The free primary education program that the government implemented as its first act inoffice in January 2003 resulted inan increase in enrolment o f 1.5 millionstudents. As a result, Kenya is likely to meet the MDG for education, provided suitable programs are developed to meet the needs o f pastoralists and to overcome cultural barriers that discourage parents in some communities from sending girls to school. The second challenge for the government is to expand secondary education to meet the growing demand from primary school graduates. To further strengthen the government's strategy o f financing the expansion o f education by usingresources more efficiently, the staffs recommend includinginthe annual progress report a discussion o f the financing o f tertiary education. Reforms to improve the efficiency o f spending and level o f cost recovery inthe tertiary sector will be necessary to ensurethat government spending on education is pro-poor. The staffs also suggest that the government work on targeting the buildingand rehabilitation o f primary schools for poorer communities. 33. The staffswelcome the government's decisionto prepare a comprehensive strategy on healththat recognizes the needto sharply increase healthexpenditureon the poor while tackling inefficienciesand misallocations in resourceuse. The staffs believe, however, that the government will needto considerably strengthen the analytical base for the proposedhealth strategy. The decision on the proposed national social insurance scheme should await the completion o fthe health strategy paper. Inparticular, the health strategy should include a thorough economic and social analysis to evaluate whether a compulsory national health insurance scheme is the most cost effective and best targeted approach for delivering badly neededservices to the poor. Inthe meantime, given the urgency o f ensuring that next year's budget addressesthe needs o fthe poorest and most vulnerable Kenyans, funding for clinics serving the poor inboth the urban slums and rural areas should be increased significantly. The staffs suggest that the first annual progress report discuss the main recommendations o f the health strategy paper, which is scheduled to be completed by the end o f 2004, as well as the plans for implementing the strategy. 34. The government's multisectoralapproachto reducingthe spread of HIV/AIDS is demonstratingresults.The staffs welcome the recent decline inthe HIV/AIDSprevalence rate among women attending prenatal clinics from a peak o f 10.2 percent in2002 (corrected estimate) to 9.4 percent in2003. They support the government's intentions to continue focusing on prevention, especially among the most vulnerable groups. Implementing the - 10- plans to dramatically increase the number o f patients with access to antiretroviral drugs will be challenging. This will requirethat the capacity to handle large numbers o f patients be strengthened. The strategy couldbe strengthened through a discussion o f how this would be achieved and how equal access to these drugs by the poor would be ensured. The staffs recommend that the first annual progress report discuss progress indeveloping measures to increase the capacity to effectively use resources for responding to HIV/AIDS, especially given the promise o f substantial increases indonor resources for addressing HIV/AIDS inthe future. 35. The treatment of environmentalissuesneedsto be strengthened. Improved environmental management in Kenya is critical to stimulate growth; reduce risksto health, life, and property; and, generally, to improve the quality o f life. Inthe view o f the staffs, the IP-ERSdocument could pay more attention to this important cross-cutting issue. The annual progress report should discuss plans to improve management o f water resources, forests, wildlife, soils, and pollutioncontrol, drawing on results o f studies that development partners are supporting. 36. The implicationsof the gender dimensionof poverty need more attention.While the IP-ERS document recognizes that women have unequalaccessto opportunities and assets, little is said about the implications o f such inequality for growth. Yet, considerable microeconomic evidence, and growing macroeconomic evidence, suggeststhat gender inequality directly limits growth, output, and productivity inKenya, notably in agriculture, where women provide about 70 percent o f the labor requirements. Buildingon the recommendations o f the recently completed World Bank study on gender, the next ERS progress report should identify, and report on implementation of, the measures needed to support women's efforts to more fully realize their own potential and, inturn, to contribute to Kenya's economic development. 37. The staffs commend the governmentfor its commitmentto eliminating corruption,restoringthe rule of law, and bringingabout equitabledevelopment that favors all citizens.The government should also implement the recommendationso fthe forensic auditors it has employed to review financial transactions ina number o f government programs and parastatals to prevent future abuses. More could be said inthe annual progress report o f how access by the poor to thejudicial system will be enhanced, for example, through the establishment o f alternative dispute resolution mechanisms. F. Risksto the Strategy 38. I n the staffs' view, successfulimplementationof the IP-ERS faces three major risks.First, capacity for implementation and coordination within the government needsto be significantly strengthened. Difficulties inproducing a final IP-ERS document and weaknesses inthat document largely reflect capacity constraints. The IP-ERS specifies a number o f measures that will be adoptedto strengthen capacity, including establishing an IP- ERS steeringcommittee comprising all permanent secretaries and the KenyaGovernment- Donor Coordination Group. These measures will help, but more mustbe done to strengthen institutions, including improving incentives for performance. The World Bank, Fund, and other development partners, who are already providing substantial support for capacity buildingintheir respective areas of expertise, are readyto deepen their support for the implementation o f the IP-ERS.The second major risk is that popular and political support for the IP-ERScould slip duringimplementation unless the government finds ways to manage -11- the gap betweenthe expectations that have beencreated informulating the strategy andthe needto prioritize public actions during implementation. This will require both the analysis of likely losers and gainers from various reforms, attention to the sequencing and phasingof reforms, and buildinga consensus through an effective communications strategy to enlist support for reforms among stakeholders. The third major risk is the vulnerability o f the Kenyan economy to external shocks, including terms o f trade shifts (particularly incoffee and tea), security-relatedevents, severe weather, and shortfalls indonor inflows. Further diversifying the economy will help reduce vulnerability to external shocks; the implementation o fpolicies to achieve this diversification as well as targeted measures to manage riskwill help. The World Bank, Fund, and other development partners are ready to helpthe government identify and implement measuresto mitigate and better manage risks. V. Views of Other DevelopmentPartners 39. Other development partnersactive in Kenya broadly endorse the government's economic development strategy.They echo the concerns ofthe World Bank and the Fund regarding weaknesses inthe presentationo f some important policy reforms inthe fiscal, financial, and parastatal areas and call for a deeper analysis o f the dynamics o f poverty and inequality and their linksto various economic growth paths and policy alternatives. Some development partners also recommend that the government explicitly address issues o f inequality and identify measures to reduce it.The development partners encourage the government to demonstrate its commitment to pro-poor spending in its forthcoming budget and to set specific, time-bound targets for improvements inpublic financial management. Of great importance i s to translate the priorities of the IP-ERSinto the MTEF and the budget. Development partners support the call for developing strategies for health and education that identifyprograms and policies to hasten progress towards achieving the MDGs.They agree with the government onthe importance for growth ofattracting private sector investment, and recommendthat the government develop a concrete program to achieve this objective. Onthe monitoring and evaluation framework, development partners agree that specification o f a set of core indicators (linked to the hIDGs where appropriate) and annual targets is important to facilitate the annual review o f the ERS and an eventual move to budget support by interested donors. VI. Recommendation 40. The staffs o fthe WorldBank andthe IMFconsider that this IP-ERS document provides a sound basis for World Bank and IMFconcessional assistance. The staffs recommendthat the respective Executive Directors o f the World Bank and the IMFreach the same conclusion. Republic of Kenya INVESTMENTPROGRAMME FOR THE ECONOMICRECOVERY STRAT GY FORWEALTH PLOYMENTCREATION I 07 MARCH 12,2004 ExecutiveSummary ................................................................................................................. ... 111 Introduction .......................................................................................................................... 1 Chapter 1: The Consultationand InstitutionalProcessesfor the EconomicRecovery Strategy ..................................................................................................................................... 3 Chapter 2: SituationalAnalysis of the Economyand Povertyin Kenya ................................ 8 Poverty Diagnostics inKenya................................................................................................. The Economy ......................................................................................................................... 8 9 Chapter 3: Economic Growth ................................................................................................ 12 Macroeconomic Framework ................................................................................................. Fiscal Strategy for Economic Recovery ................................................................................ 12 13 Monetary Policy Framework................................................................................................. External Aid and DebtPolicy Framework............................................................................. 27 35 Financial Sector Reforms 36 Infrastructure ........................................................................................................................ ...................................................................................................... Privatization ......................................................................................................................... 38 39 Productive Sectors ................................................................................................................ 48 Chapter 4: Equity andPovertyReduction ................................................................. 51 Human Resources Development........................................................................................... 51 Agriculture. Livestock and Environment ............................................................................... 55 Poverty Targeted Programs ................................................................................................... 58 Chapter 5: Governance .................................................................................................... 60 Public Safety. Law and Order ............................................................................................... 60 Public Administration., ......................................................................................................... 63 Chapter 6: FinancingFramework ................................................................................ 65 Chapter 7: Monitoring& Evaluationand NationalStatistics .............................. 67 Conclusion ........................................................................................................................... 71 APPENDIX 1 ...................................................................................................................... 72 Annex 1 ............................................................................................................................... 102 ii Executive Summary This document presents a result-based programme of priority government actions designed to meet the medium-term objectives of the Economic Recovery Strategy for Wealth and Employment Creation or the Economic Recovery Strategy (ERS). To address the economic growth objective, the programme envisagesa strengtheningof the macroeconomicframework, a more responsiblefiscal stance, and the unleashingof private sector participation and investment. To improve equity and reduce poverty, the program focuses on universal primary education, improved access to basic health, expandedproductive capacity inagriculture, development of the hitherto overlooked arid and semi-arid areas, and upgrading the living conditions for urban dwellers that have suffered from poor urban infrastructure and social services mainly due to high urbanization rates. To enhance governance, the program proposes far reaching reform of the judiciary, strengthening of rule of law and security, and implementing reforms in public administration systems that are critical to improving government transparency and accountability. As part of the programme, the government commits its resources and efforts inthe achievement of the Millennium Development Goals and an additional set of outcome indicators, as well as input, output and process indicators, relatedto economic growth, poverty, education, health, and water, among others. The logframe matrix for the ERS, included inthis document, spells out the list of indicators and related targets. A summary matrix specifies key developmental targets that are considered major step stones in the developmentalprocess. The activities referred to in this proposalare all key activities to ensure the achievementofthese targets. Inrevising the ERS, the Governmenthas soughtto ensure that the investmentprogrammecan be funded in a sustainable manner. Consequently, the ERS investment activities have been reprioritised, bringing the implementation cost down from Kshs 706 billion as originally indicated in the interim investment programme to Kshs 340 billion. The financing framework has also taken account of donor pledges during the Consultative Group meeting which totalled US$4.1 billion. With the revisions, the financing gap for the ERS declines to Kshs 58.5 billion, which can be accommodatedthrough a 7.5 percent reduction innon-ERS priority activities. The revised strategy is thus fundable. iii Introduction This investment programme presents a set of priorities of government actions designed to meet the medium-term objectives of the Economic Recovery Strategy. The ERS presents a multi- faceted strategy to meet economic growth, equity and poverty reduction, and governance objectives. To spur economic growth, the ERS commits to strengthening the macroeconomic framework, assuming a responsible fiscal stance, and providing a conducive environment for private sector investment inthe productive sectors and, specifically, in infrastructure development and maintenance. To reduce poverty, ERS focuses on universal primary education, improved access to basic health, development of traditionally overlooked arid and semi-arid areas, and upgrading the living conditions for the urban poor. To enhance governance, ERS proposes a far reaching reform of the judiciary, strengthening of rule of law and security, and implementing reforms in public administration systems that are critical to improving government transparency and accountability. The investment programme operationalizes the intentions of the ERS by spelling out priority programs, identifying key activities within each program, providing budgetary estimates and financing gaps within the overall resource envelop, laying out the implementation timetable, and committing to a set of monitorable targets. The interim version of the investment programme was tabled for discussion by H.E.the President during a National Investment Conference on 20th November 2003. Thereafter, it was tabled for discussion at the Donors' Consultative Group meeting held on 25`h November 2003. Following the national conference and the CG meeting, the Government embarked on producing this final version of the investment programme by updating the interimversion. The updated investmentprogramme: (i) incorporatesthe outcomes of the Consultative Group meeting; (ii) incorporatesthe Government commitments entered into for the PRGF; (iii) brings on-board and takes cognisance of new issues and developments that have taken place since the publication of the original ERS and interim investment programme such as the reschedulingof Kenya's external debt; and (iv) Adopts a more realistic costing framework given the donor pledges inthe CG and the macroeconomicframework of the PRGF. This updating was necessary because in addition to the need to have the investment programme consistent with the outcomes of the CG meeting and the PRGF commitments, the interim investment programme of ERS was found to be inadequate on several fronts. Firstly, it failed to describe the process that will be followed to ensure that the MTEF and the budgetary allocations are aligned with the priorities of the ERS. Secondly, it failed to describe the arrangements through which coordination of the ministries of planning, finance, line ministries, and development partners will be enhanced. And finally, the monitoring and evaluation framework of the investmentprogramme was incomplete. These shortcomings were addressed as follows in this investmentprogramme: (i) The sectoral activities have beenreprioritised; (ii) The costing ofthe new priorities has beenrevised; (iii) The outcomes ofthe Consultative Group meeting have beenincorporated; (iv) The MinisterialPublic Expenditure Reviews (MPERs) were utilised as core inputsto the prioritisation process; 1 (v) Revisions dealing with poverty diagnostics as contained inthe more detailed poverty maps and the Kenya Demographic and Health Survey; the coordination mechanisms of the MTEF; and the consultationprocesshave beenincorporated; (vi) The logical framework matrix was also revised to make it a more complete instrumentfor monitoring andevaluation; and (vii) A new matrix of the investment programme that is consistent with the MTEF budgeting definitions was introducedas the new Annex 11. The document is organized as follows. The introductory chapter describes the ERS consultation process and the coordination mechanisms for implementation. Chapter 2 is the scene setter presenting current economic conditions inthe country including poverty assessment. Chapters 3- 5 present the government program, one for each major objective of the ERS: Economic growth, Equity & Poverty reduction, and Governance. Chapter 3, on economic growth, focuses on the macroeconomic framework, infrastructure and productive sectors. Chapter 4 presents human resource development, agriculture and rural development, and poverty targeted programs. Chapter 5, on governance, lays out the reforms required to strengthen the rule of law and to improve transparency and accountability of public administration. Financing framework is presented in chapter 6. The monitoring and evaluation framework is described in Chapter 7. A monitorable and output-based ERS logical framework matrix is presented in Annex I,which identifies input, output and outcome indicators, and monitoring mechanisms. The logical framework matrix starts with summary which identifies 15 major developmentaloutcomes of the ERS and selected indicators and targets, among which are the MillenniumDevelopment Goals. Annex I1is a matrix providing the objectives, outcomes, costs, and enabling activities under each of the MTEF sectors. 2 Chapter 1: The Consultation and Institutional Processes for the Economic Recovery Strategy The Process The Government of Kenya subscribedto the Poverty Reduction and Growth Facility (PRGF) in 2000 and embarked on the preparation of the Poverty Reduction Strategy Paper (PRSP) at the same time. This preparationwas undertakenthrough wide-ranging consultations and dialogue in order to build consensus on priority actions and activities necessary for economic growth and poverty reduction. The PRSP was preceded by the Interim Poverty Reduction Strategy Paper (IPRSP) released in 2001. The IPRSP only involved limited consultations at the national level. The PRSP consultations followed a three-tier approach: national, provincial and district levels. The stakeholders in the consultations included the Private Sector, Civil Society, the Development Partners and local communities. A national steering committee that included all the stakeholderswas formed to spearheadthe processandensure inclusion at all levels. The consultations also covered thematic areas to take care of important issues that are cross cutting and which tend to be left out in mainstream sector working groups. The consultations went as far down to the divisions, locations and villages in some of the districts. Participatory Poverty Assessments (PPA) were carried out in ten (10) sampled districts. The District PRSP reports and PPA reports together with inputs from the Sector Working Groups were synthesized into the PRSP (2001-2004). The PRSP formed the basisfor the 2002/03 budget. In December 2002, a new government under the National Rainbow Coalition (NARC) took office and immediately embarked on the process of preparing an economic recovery strategy, focusing on reviving the economy and creating employment. The ERS presents a road map for economic recovery during the next five years. The ERS takes into account existing Government policy documents, particularly the PRSP andNARC'SManifesto and Post-Election Action Plan. The developmentof ERSwas also a result of wide-ranging consultationswith stakeholders. The stakeholders included, parliamentarians; trade unions; professionals; financial institutions; industrialists; ASALs; Development Partners; Civil society and government. The strategy therefore embodies the views and aspirations of all Kenyans. Based on the ERS, an Interim Investment Programme was developed. The Interim Investment Programme provides a framework for implementing the ERS. The Interim Investment Programme was discussed at a National Investment Conference in November 2003, organized jointly by the government and the private sector. At this conferencethe private sector committed itself to continued partnership with the government for the success of the programme. It was also the Investment Programme that formed the basis of discussions at the Donor Consultative Group meeting held inNovember 2003. A prioritization workshop was also heldinJanuary 2004 where all the activities in the logical framework of the programme were prioritized in line with the sector objectives. Duringthe same workshop, the Rapid ResultInitiative (RRI) was launched inone ofthe sectors.Commentsbythe developmentpartners, other stakeholdersand inputsfrom the National Investment Conference, the Donor Consultative Group meeting and the prioritization workshops has be usedto generate this final version ofthe Investment Programme. 3 Mechanisms of Linking the Ministerial Public ExpenditureReviews to the MTEF Budget Process A key priority of the MTEF processis to improvethe planningand resource allocationprocessto achieve a moreeffectiveuseof resourcesandto redirectavailableresourcestowards implementationof policy priorities. The MTEF is an outcome basedplanningand budgeting processthat seeks to establish an explicit link betweenpolicy, planningand budgeting. More importantly, the MTEF objective is to strengthenthe linkage betweenthe annualbudget and nationaldevelopment policies and providemeansof aligningexpenditures to nationalpriorities, outputsand outcomes set inthe EconomicRecovery Strategy. Thisway the NationalBudget will be guided by nationalobjectivesandthe desiredoutcomes. A review of the existingpolicies, analysis of the ministerial expendituretrends and the impacts of programmes and activitiesfinanced throughthe MTEF process is what is widely referredto as Public ExpenditureReviews(PER), and generallyusedto review and analyse trends and impacts of these expenditures. The PER process inKenyais implementedthrough an established institutionalframework ledby the National Steering Committee of Permanent Secretaries, Technical Officers in all the line Ministries and representatives of DevelopmentPartners. The Steering Committee is responsible for policy on PER and is chairedby the Permanent Secretary, Ministry of PlanningandNational Developmentand co-chaired by the Country Director World Bank Kenya office. The Steering Committee is supported by a Technical Working Group (TWG) drawn from all the ministries and representatives of key Development Partners under the leadership of the Ministry of Planning and National Development and is responsible for all the analytical work on PER and the back stoppingroles form ministerialpublic expenditurereviews.The TWG is supportedby a Secretariat, which hasbeenmodeledalongthe sector wide approachused inthe MTEF process. The outputs of PER are used in preparingreports of the Sector Working Groups (SWG) which are responsible for the coordination of MTEF sector policies, priorities and activities. Future institutionalreforms for PER will entailthe introductionof Public ExpenditureTrackingSurveys (PETS) which have been piloted in the Ministries of Health and Education Science and Technology. The government, having recognizedthat public expenditurereviews are an integral part of the MTEF process issued one circular that is going to guide the MTEF process for the period 2004/05 - 2006/07 and the Ministerial Public ExpenditureReviews (MPERs). The MPERs will review the past trends of expenditures including those expenditures that are related to core poverty programmes or social spending. The MPERreportswill also include costed programmes and activities.The costed programmes and activities must be in line with those identified inthe Investment Programme. Having costed the programmes, they will draw a three year financial/financingplanfor the Ministry. While the work of the sectors and Ministries is goingon, the macro working group will draw up a fiscal strategy which will state the resources available and based on the ERS and the Investment Programme indicate which sectors are going to support faster recovery needed for povertyreduction. The sector resource envelopes will be developed after having reviewed sector needs as given in the SWG reports and after havingmatched those needswith the Fiscal Strategy Paper (FSP) and 4 other policies. Once sector envelopes are approved by cabinet, ministries will participate in the sharing of the resources through a criteria which must be seen to support the overall National goaldstrategies as will be outlined in the fiscal strategy. Thereafter the Ministries will prepare their itemized budget accordingto resources they will get from the sectors. A review of the MTEF process is inits final stages of completion. The mainthrust of the review i s to determine the main strengths and weaknesses of the current MTEF budget processand make recommendations for better public expenditure management. Together with the MTEF Review Report will be detailed implementation action plan with definite time lines that will pave the way for a revisedMTEF for Kenya. CoordinationArrangementsfor the Implementationof the EconomicRecoveryStrategy ERSImplementationCoordination The development of the ERS and the Interim Investment Programme involved inputs from ministries of Planning and National Development, Finance, line ministries, development partners, the private sector and civil society. The inputs were received through consultative meetings, workshops and conferences, correspondences and missions. This all- inclusive spirit should be advancedto the implementation of the ERS. This requiresthat an elaboratemechanism be put in place to provide an interactive and productive system that will ensure that all stakeholders actively participate inthe recovery process. To achievethe above ERS objectives, the Governmenthas takenthe following measures- 0 Identified key actions/activities whose implementation will constitute a successful implementation ofthe ERS; Identified a set of indicators that will be used to monitor progress. In this regard, a monitoring and evaluation logframe has beendeveloped; 0 The Ministry of Planning and National Development has developed a Monitoring and Evaluation System to be used the monitoring of the ERS. A Monitoring and Evaluation Unit has also been establishedwithin the Ministry to coordinate the monitoring of the ERS across all sectors; 0 The Sector Working Groups (SWGs) will constitute the operating platform for all stakeholders in the various sub-sectors. The SWGs are responsible for enhancing consultations at sector level in the identification of sector priorities and ensuring that these are given adequate funding through the Medium Term Expenditure Framework (MTEF) budget. The ongoing review of the MTEF system is meant to strengthen the system to ensure that funding goes to priority ERS activities. 0 The Government has now institutionalised the Public Expenditure Review PER) system across all ministries and departments to be able to track down the flow of expenditure to priority activities under the ERS. The Ministry of Planning and National Development has establisheda full time secretariatto coordinate the PER process. The PER Secretariat i s already reviewing the budgetary processes including the institutions that are involved inorder to identify weaknesses andmakerecommendationsfor improvement. 0 A Committee of all Permanent Secretaries under the chairmanship of the Head of Public Service and Secretary to Cabinet will get regular briefing on the progress of the implementation ofthe ERS and give technical guidance. 5 0 The Cabinet Committee of Economic Management, Chaired by the Vice-president and Minister for Home Affairs will review progress in the implementation of the ERS and give policy guidance. e The Government has been having regular consultative meetings with development partners through the Economic Governance Group (EGG). The Government will institutionalise the Forum to also discussthe implementation ofthe ERS. 0 The Government is the processof establishingthe National Economic and Social Council (NESC). Invitations have already been sent out to various stakeholders to be represented in the Council. Once the Council becomes fully operational, it will be able to assist in giving an independent view on the implementation of programmes and advise on emerging policy concerns. The Ministry of Planning and National Development and Ministryof Financewill host and facilitate discussions inthe Forum. ERSSteeringCommittee Comprising all Permanent Secretaries and with the task of overseeing and guiding the implementation of the ERS. This committee will be guided by reports prepared by the Technical committee under the leadership of the Ministry of Planning and National Development. This committee will meet in every quarter of the fiscal year mainly to ensure that implementation of the ERSpriorities is on course andwhere there could be bottlenecks, they be discussed, resolved and a way forward be defined. ERSTechnicalCoordinationCommittee Comprising representatives from Ministry of Finance and Ministry of Planning and National Development should be established.This committee will: 0 Liase with implementers within Ministries, Departments and Agencies (MDAs) on a continuous basis and receive and examine reports from Ministries and Departments on the implementation of the actions/activities outlined in the ERS implementation action plan; 0 Liase with Sector Convenors who will be spearheading a continuous assessment of the implementation of ERS sector priorities and strategies based on expenditure allocations, identified performancetargets and monitorable indicators. 0 Compile progress reportshriefing and submit the same to the ERS steering committee. The objective will be to generate information necessary for making strategic policy decisions and adjustmentsto the implementation strategy. GovernmentDonor ConsultativeForum The hitherto dormant Government Donor Consultative Forum has already been established with representatives from all key donor partners, Government ministries and departments. The Minister for Finance chairs this forum. Key representatives from the private sector and civil society could also attend. The role of the Forum is to meet on quarterly basis to review progress on key priority areas identified in the ERS and Investment Programme. This will be similar to the recently held Consultative Group Meeting but mainly involving local representatives of the donors that have already committed resources to the ERS. However, the issues to be discussed 6 under this forum will be of broad nature but relatedto projects that are financed by donors while specific issues will be dealt with at the sector level. For instance a timetable for the various donor missions would be agreed in this forum. Projects financed by donors but implementedby agencies outside government could also be reported under this forum. This forum will ensure mutual accountability by all partners inthe process of implementing the development agenda. National Economicand SocialCouncil Once the National Economic and Social Council (NESC) becomes operational, it will be able to assist in giving an independent view on the implementation of programmes and advise on emerging policy concerns. The Ministry of Planning andNational Development and Ministry of Finance will hostand facilitate discussions inthe Forum. 7 Chapter 2: SituationalAnalysis of the Economyand Povertyin Kenya After two and half decades of deteriorating economic performance, Kenyan citizens elected a new government in December 2002 that is committed to improving the living standards of all, especially the poor. Despite taking over with severe resource constraints, the government has begun implementing a wide ranging and deep set of reforms. Top on the reform agenda are measures to improve governanceandto provide universal primary education. The Economy Since the 1980s, the economy has performed below its potential, with low economic and employment growth and a decline in productivity. Consequently, per capita income in constant 1982 prices declined from US$271 in 1990 to US$239 in 2002. The number of people openly unemployed currently stands at over 2 million or 14.6per cent of the labour force, with the youth accounting for 45 percent of the total. The majority of the unemployed, though educated, do not have necessary skills. In addition, the number of the working poor is staggering comprising primarily subsistence farmers, female-headed households and slum dwellers. Disguised unemployment is also a serious problem, especially inthe public sector. Moreover, the incidence of HIV/AIDS has increased, thereby imposing an increasing social and economic burden. The factors underlying the weak economic performance and high incidence of poverty include the persistence of pervasive governance failures, the slow pace of economic reforms, low savings and investment, intermittent shortages and high costs of power, and poor physical and telecommunications infrastructure. The weak economic growth has been accompanied by deterioration in the fiscal position and a growing domestic debt. As a result of reduction in the tax rates, Government revenue fell from 29 percent of GDP in 1999/2001to 22 percent in2002/03. This reduction intax rates was in line with Government policy of creating an enabling environment for business. However, a weakening tax administration resulting largely from widespread corruption contributed to fiscal pressure as the revenue declined. As the tax revenue declined, public expenditure did not respond concomitantly and continued to come under expansionary pressure on account of increased spending on wages, salaries and interest, as well as the burden of supporting a large parastatal sector. With donor budgetary support falling concurrently, the resulting fiscal pressures was accommodated by a squeeze in spending on operations and maintenance and public investment, an increase in arrears, including pending bills and stalled projects, and growing domestic borrowing. Despite improvements ingovernance, severalexternal developments have kept economic growth subdued. Recent data indicate that overall economic performance remained weak due to recent terrorism alert, which has taken a heavy toll on the tourism industry. Partly due to this reason, real GDP growth in 2003 is projected to remain below 2 percent. Excluding food and energy, inflation has risen to 3.7 percent in June 2003 from 1.6 percent in October 2002, reflecting in part a loosening of monetary conditions during 2002 that was accompanied by a depreciation in the nominal and real effective exchange rates of the shilling. While the exchange rate does not appear to have been a major impediment to export performance in recent years, the government has been monitoring exchange rate developments closely, as a continuation of the recent appreciationtrend could have adverse effects on export and output growth. 8 Poverty Diagnosticsin Kenya Poverty rose in Kenya during the 1990s. Three national surveys conducted inthe 1990's provide valuable information about welfare levels, poverty and other household and individual characteristics. Several poverty profiles have been constructed spanning 1991/92, 1994 and 1997. The surveys are, however out of date and not fully comparable. Nevertheless, it is estimated that the proportion of the population living in poverty has risen from about 48.8 percent in 1990 to 55.4 percent in 2001. The proportion is estimated to have risen to more than 56 percent in 2003. Poverty increased sharply during the early 1990s, declined during the mid- 1990s, and rose steadily since 1997. Thus, an additional 2.7 million people were living below the poverty line in 2001 than were in 1997 (from 14.4 million in 1997 to 17.1 million in 2001). Regionally, there are pockets of very high poverty that exceed the national average, calling for deliberate intervention in such regions. Non-income dimensions of poverty worsened. In step with poor economic performance, key social indicators during the 1990s. Illiteracy rates increased as enrolment rates in primary school declined during the 1990s. Life expectancy declined from 57 years to 47 years between 1986 and 2000, while the situation in infant and childmortality and HIV/AIDSworsened. Preliminary results of the Kenya Demographic and Health Survey conducted in 2003 indicate that Infant mortality increasedfrom 62 per thousand in 1993 to 78 per thousand in 2003, while under five mortality rose slightly from 96 per thousand births to 114 per thousand in the same period. Trends in nutritional status of children under age three show that the percent of stunted children (short for their age) increased from 29 percent in 1993 to 31 per cent in 2003. Similarly, the percent of children aged 12-23 months who were fully vaccinated dropped from 79 percent in 1993 to a dismal 52 percent in 2003. These national averages conceal substantial regional variations. For example, the proportion of children fully vaccinated in Nyanza, Western and North Easternprovinces falls below 50 percent as of 2003. Estimates on unemployment also indicate an increasingtrend over the last two decades. In 1978 the urban unemployment rate was approximately 7 percent. By 1986 it had increased to 16 percent and continued to rise to 25 percent by 1999. The unemployment rate in the rural areas for the same period was less acute at 9.4 percent, while for Kenya as a whole it was estimated at 14.6 percent. However, underemployment i s significant, which has contributed to the existence of a class of Kenyans who are the working poor. Currently, Geographicalvariations in the distribution of poverty are large. The WMS indicate that three quarters of the poor live in rural areas while the majority of the urban poor live in slum and peri-urban settlements. The 1994 WMS revealedthat North EasternProvince had the highest proportion of people living in absolute poverty (58 percent), the highest in Kenya, followed by Eastern Province (57 percent) and Coast Province (55 percent). In 1997, Nyanza had the greatest proportion of its population living in poverty (63 percent) followed by Coast (62 percent). Moreover, more than 50 percent of the population in all other provinces except for Central (31 percent) were living in poverty. Inurban areas, Kisumutown recordedthe highest prevalence of poverty (63 percent), followed by Nairobi with 50 percent. Resultsof poverty mapping in Kenya indicate similar patterns in levels of poverty at the provincial levels, but depict large differentials at the sub-district level. For instance, rural poverty rates within Central province (least poor province inKenya-31 percent) ranges from 10 per cent to 56 percent across its 171 locations. In Coast, about 61 per cent of the rural people are poor, and poverty ranges from 13 per cent to 90 per cent across the 140 rural locations. As in the rural areas, the urban areas similarly exhibit 9 considerable heterogeneity with sub location measures showing high variability in the incidence poverty. InNairobi, for instance, overall poverty rate i s 50 percent, but at the sub-location level (110 sub-locations) poverty ranges between 6 and 78 percent. The poor in urban areas are concentrated in small areas (slums) where living conditions are pathetic. In all provinces except North Eastern, poverty levels show significant variations between locations in the same division and similarly for divisions within the same district. The Poverty mapping estimates also show that people in relatively less poor districts, divisions and locations depict much smaller poverty gaps (consumption shortfalls). Poverty gaps in such areas are typically around 5 percent of the poverty line, whereas in the poorest areas, poverty gaps are inthe range o f 30 to 50 percent. Households that are large, headed by females, headed by adults with low educational attainment, or deriving most income from agriculture are more likely to be poor than others. InKenya, as in other countries, poverty increases with household size.' Thus, households with a larger number o f infants and children have a lower level o f consumption, and thereby a higher probability o f being poor. Female-headed households in urban areas are poorer than otherwise similar households. Not surprisingly, the educations o f both the household head and o f the spouse appear to be important determinants of poverty. For example, an urban household whose head has at least some primary education has a level o f consumption 20 percent higher than a comparable household whose head has no education at all. In rural areas, the gap is only 13 percent. As the level o f education attained by the head and spouse increases, the effect on consumption also increase. Working in the non-farm sector in rural areas is associated with a higher level o f consumption. Wage workers, whether in the public or private sector, are better off than informal workers such as unpaid family workers. Land ownership, it i s associated with higher levels of consumption in rural areas. Land owners can expect a 7 percent increase in consumption versus otherwise similar households, and each hectare of land brings an additional gain. Determinants of Poverty: The key determinants of poverty in Kenya include location (ruralhrban); household size; level o f education o f head o f household, gender (male versus female headed households); agricultural output (cash crop farmers or subsistence farmers); access to land; and ownership o f livestock and o f selected durable farm tools. Factors highlighted in participatory poverty studies as affecting household consumption include having low agricultural productivity and poor access to markets; being unemployed or earning low wages; living in areas with poor infrastructure (especially roads), and with limited availability o f affordable basic services; living with HIV/AIDS or with a disability; being a member o f a minority or other group that is discriminated against; and living in an area with a poor and degrading environment. The poor also attribute their poverty to natural calamities, and traditions and cultural beliefs that deny women access to productive assets. The government recognizes that much is still to be done to understand the causes o f poverty and to identify interventions that can effectively and rapidly reduce poverty. Gender Dimensions of Poverty: Social factors and cultural norms emphasize the unequal power status o f men and women. Some traditions favour male dominance, resulting in low social status o f women. Special efforts are needed to empower women to make them less vulnerable. Efforts are ongoing to mainstream gender in the Economic Recovery Strategy. Constraints, however, include lack o f gender-disaggregated analysis, except for the fields of basic education and some areas o f healthcare. In addition, gender specific targets for defining 1 This analysis is basedon the 1997householdsurvey. 10 improvements in the economic, social and legal situation are still lacking. The macroeconomic framework that forms the core of the Economic Recovery Strategy is still analyzed in gender- neutralterms. Actions to deepen the understanding of the incidence, depth, trends, distribution, and determinants of poverty: An improved process for poverty diagnostics has been undertaken recently by the government incollaboration with the World Bank, through the establishment of a Poverty Analysis and Research Unit in CBS which is spearheading poverty analysis including poverty mapping exercise aimed at revising the poverty profiles for all the districts. The first volume of the poverty mapping exercise was released in October 2003 and further analysis to produce a volume two on socio economic dimensions is underway. To further improve on prior weaknesses of the WMS type of surveys, the CBS is planning to undertake an Integrated Household Budget Survey in 2004/05, which will provide critical data for estimating poverty headcount, distribution, causes, and trends. These data will provide the basis for a comprehensive poverty assessment to be undertakenduring 2005/06. While the comprehensive survey data are very important for assessing poverty trends, the government recognizes a need for frequent information on poverty trends. It therefore plans to implement a program to generate such data through the use of quick monitoring survey instruments such as the Core Welfare Indicators Questionnaire (CWIQ) preferably every 2-3 years. Such information will be usednot only for designing targeted poverty interventions but also for monitoring and evaluating the ERS and MDGs. The information will also be used to develop a scorecardto indicate the numberof households/individuals lifted out of poverty every year. 11 Chapter 3: Economic Growth After two decades of weakening economic growth, low productivity and high unemployment, the ERS's first priority is to restorethe economy on a path of high growth as a condition for the achievement of all other developmental objectives. The strategy calls for redefining the role of the state as a facilitator for private sector growth and investment. This will entail strengthening policy and regulatory functions of the state and transferring productive and service delivery activities to the private sector. Within this framework, the government commits to maintaining a stable macroeconomic framework, reforming the financial sector and strengthening its regulations to increase savings and investment, implementing mechanisms for private sector participation in provision of infrastructural services, and establishing a competitive environment able to attract increasedprivate investment in productive sectors such as tourism, industry and trade. MacroeconomicFramework The overall objective of macroeconomic policy is to restore economic growth within a sustainable framework of low inflation, declining fiscal imbalances, declining net domestic borrowing and healthy balance of payments. Specific objectives include increasing domestic savings and investment, improving accountability in the use of public resources, and restructuring and refocusing public spendingtoward priority activities. Economic Forecasts Table 3.1 below gives the economic forecasts for the period 2003 to 2007 for key economic variables. This forecast is consistent with the expected external environment especially trading partner growth and price levels, prices of key commodity exports and imports and expected growth in external support which will be used to boost Government investment and reduce domestic financing needs. The main elements of the forecastare as follows: Economic growth is expected to rise from 1.lpercent in 2002 to 1.3 percent in 2003 and continueto reach 4.9 percent in2007; Investment growth is expected to be the primary driver for economic growth. Investment levels are expectedto rise from 13.6 percent of GDP to 24.3 percent. Domestic savings are expected to rise from 13.8 percent to 18.5 percent over the period, implying that there will be need for substantialexternal inflows for the investmentlevels to be achieved. Exports and imports are expected to be a major factor in the growth outcome. Exports to begin with are seen to be constrained by the low prices of Kenya's major commodities. However, a quick response by the exporters to the policy regime currently being put in place to make them more competitive is expected to provide almost immediate gains by 2005. As for the imports, the volume growth will be driven mainly by the movements of the other components of the GDP, primarily investments and exports. Private consumption is expectedto remain low as the Government focuses on investments and as lower proportion of incremental profits is disbursed from the private sector to households. Inflation: continuation of the conservative monetary policy will allow Kenya's underlying inflation to remain below 3.5 percent, comparable with the forecasts for trading partner inflation. This will allow for the maintenance of a stable nominal exchange rate policy without risking real appreciation of the Kenyan shilling. Low inflation as well as 12 externalization o f the deficit is expected to allow the rate of interest on Government debt to remain below 6 percent inthe medium term. Fiscal Strategy for Economic Recovery The Government in June 2003 published an Economic Recovery Strategy that will guide major reforms to be undertaken over the period 2003 - 2007. The Budget mechanism presents one o f the most fundamental instruments o f implementing the economic reforms and other policy options outlined in the ERS in order for the objectives and the outcomes o f the strategy to be realised. Core to the Budget is the ability to have a stable and sustainable Macroeconomic Framework. The overall objective o f macroeconomic policy in the ERS is to restore economic growth within a sustainable framework o f low inflation, declining fiscal imbalances, declining net domestic borrowing and healthy balance of payments. Specific objectives include increasing domestic savings and investment, improving accountability in the use of public resources, and restructuring and refocusing public spending toward priority activities. Fiscal policy together with other instruments such as monetary policy provides the Government with useful handles that can be used to ensure the realisation o f the goals of the ERS. In the following section, the fiscal strategy that will guide the Government's fiscal framework in the next three fiscal years i s outlined. Objectives of the FiscalStrategy Kenya's Fiscal Strategy that will cover the period 2003/04-2006/07 has three core objectives. These include Fiscal Sustainability, expenditurerestructuring for growth and poverty reduction, and improvingpublic sector service delivery. Fiscal sustainability: Under this objective, the fiscal policy's aim is to maintain a level o f expenditures that can be funded without either an increase inthe present value (NPV) o f overall debt to GDP or an increase o f external debt growth. This is consistent with the desire of the country not to become a Highly Indebted Poor Country (HIPC). Expenditure restructuring for growth and poverty reduction: This objective will be anchored in increasing the shares o f development expenditures especially those targeting Government investments, core social expenditures (education and health) and core poverty expenditures, The increase will be bothas a share o f total expenditure and as a percent of GDP. 13 Improving public sector service delivery: This will entail enhancing both the efficiency and effectiveness of public expenditure through a process of internalizing the Public Expenditure Review (PER) and carrying out Public Expenditure Management(P.E.M.) reform. The fiscal strategy will serve as the basis for defining a realistic medium term Government finance framework covering revenues, expenditures and financing, which allows for an aggregate expenditureceiling to be derived that is consistentwith the objectives indicated above. The strategy will also allow for the setting of expenditure ceilings both by category and by MTEF sectors. Factorsunderlyingthe FiscalStrategy Several critical factors underlie Kenya's fiscal strategy. The strategy is hinged on the projected performance of the economy. The key factors determining the projected economic performance Recoveryand sustained good performance in Kenya's trading partners' growth: Recent economic data shows that the EuropeanUnion, East African Community, rest of Africa, and East Asia are Kenya's major trading partners accounting for 31 percent, 11.4 percent, 15.7 percent and 14.4 percent respectively of Kenya's major exports. It is forecast that Kenya's trading partners will have an annual average growth rate of 4.2 percent over 2003 to 2007. Forecasts for trading partner inflation: It is also projected that Kenya's trading partners will have a weighted average inflation of between 3.2 to 3.6 percent. Hence, a low inflation regime will be imperative for Kenya's international competitiveness: Growth in export and import prices is expected to be subdued: Kenya's merchandize export basket is heavily oriented towards agricultural products and commodities (coffee and tea account for over 31 percent while manufactured products account for less than 40 percent) while its import basket is heavily biased in favour of petroleum fuels (16.3 percent) chemicals (13.9 percent) machinery and . transport equipment (32.4 percent) and manufactured goods (16.3 percent). Given the low price forecasts for both export and import commodities, overall externaltrade prices are expectedto be low. Interest rates:Kenya has recently moved to a low domestic interest rate regime as a result of low underlying inflation and stable exchange rate regime. With restoration of donor support, the Government is expected to rely less on domestic borrowing allowing for interest ratesto remain low and stable. The expectedtrends of these key economic variables between 2003-2007 are shown intable 3.2 below. 14 (ii) Donorrelationsandimplications Like most other low income countries, Kenya relies on its development partners to assist it in acceleratingeconomic development. Table 3.3 shows the trends of inflows during 1999/2000to 2002/03 fiscal years. Over 1999/2000 to 2002/2003 the Government received disbursements amounting to Kshs 52,436 million of grants (including Kshs 12,444 million of drought related grants in 2000/01 fiscal year) and Kshs 48,480 million of loans (including Kshs4,382 of drought related loans and Kshs 4,045 of programme loans). Hence, donor inflows into the budget totaled Kshs 100,916 million. However, over the same period the country repaid external principal to the tune of Kshs 90,059, implying that net inflows over the period totaled Kshs 10,857 million, and excluding drought related inflows were negative2. The low level of donor support were primarily driven by Kenya being "off track" with key development partners and especially the Bretton Woods institutions. Drought related loans 0 4,382 0 0 Total Grants 8,494 24,080 6,823 15,039 Total loans 8,850 18,087 10,031 11,512 This situation has however changed following Kenya's accessing the IMF's Poverty Reduction and Growth Facility (PRGF) and the holding of a successful Consultative Group (CG) meeting in November 2003 where US$4.1 billion in support was pledged over 2004-2006. The restoration of working relations with development partners therefore enables the Kenya Governmentto accept a more ambitious stance with respectto donor assistance to the budget. Domestic factors The following are the key domestic factors that will underlie the economic recovery efforts and thusthe fiscal strategy: 0 Response of private investors to the incentives and measures put in place by the Government, 0 The capacity of the Government to absorb the external inflows and the restructuring capacity given the needto shift resourcesfrom one expenditure category to another, 0 The Monetary policy stance adopted by the Central Bank of Kenya, Private Investment Private investments in Kenya have continued to perform below expectation and to a large extent the poor performance explains partly the slow economic growth that the economy has transited The levelof net extemalresources accessedby Kenyaon aper capitabasiswas as low as US$l over the period. 15 to. An in-depth analysis of private investment behaviour in Kenya indicates that private investment is driven by: growth in national income; profitability; interest costs; crowding-in factor of public investments; and availability of credit to the private sector. The link with the interest costs is weak implying that fiscal policy lends itself as a more effective instrumentthat the Governmentcan use as partof its economic recoverystrategy to stimulateinvestments. The measures currently in-built in the ERS in line with the key determinants of private investmentsinthe country is the restructuringo f public expenditures towards public investments outlined in this strategy. Immediate dividends through the crowding-in factor of such public investmentsare expected will create a positive response for the private investments. Inaddition, the public investmentswill are expected will reduce the costs, particularly infrastructuralfacing private firms, and this will lead to increased profitability. Private investors in the country on average have been shown to re-invest one-third of their profits net of interest costs in a given year. The increased profits through lower costs occasioned by public investments are also likely to be positively augmented by a continuation during the ERS implementationperiod of strong fiscal policy that addresses the profitability of private businesses through the use of current tax policy that allows faster depreciation of machinery and equipment. This has a direct effect of raisingretainedearnings inbusinessesand subsequently privateinvestments. The principalobjective of fiscal policy under the ERS is fiscal consolidationto reduce domestic debt, and fiscal restructuring to reallocate resources to high priority programs. The budget envisages substantialreductionin domestic borrowingrequirements which will maintainthe on- going efforts to remove competition between the public and private sector for domestic credit. With the realisationof increasedcredit availabilityfor the private sector, it is anticipatedthat the impetusfor privateinvestmentswill be supported. GovernmentCapacity The public sector has been undergoingcontinual reform since the early 1990's with a view to reducing the share of Government recurrent expenditure (especially wages) and increasingthe development budget. The countryhas however failedto registerany major successes inthis areas as indicatedby the continuallyrisingwage bill, under provisionfor operations and maintenance and declining development vote. Giventhe ambitioustargets of the recovery strategy, achieving success in restructuringthe public sector and enhancing its capacity will be paramount. Success inthis areawill dependonthe following: Internalisingthe MTEFprocess to ensure all budgets are MTEF budgets; The Public Expenditure Review (PER) process which seeks to institutionalisean annual Ministerial PER (MPER) process and use this annual process as the basis for guiding resource allocation; and The Public ExpenditureManagement (PEM) reformprocess which seeks to improve the efficiency and effectiveness of Kenya's public expenditureand ensure the tax payer gets value for money. FiscalStrategy targets The fiscal strategy is built around the following key areas: 16 0 A revenue policy framework that seeks to maintain revenues to GDP at above 21 percent to enable the bulk of government expenditures to be met from domestic resources excluding borrowing, 0 An expenditure strategythat gradually reduces the level of recurrent expenditure to GDP to allow for a rapid increase in development expenditures within a sustainable macro economic framework. Public Expenditure management reforms and the MPERS will be usedto redirect expenditures to national priorities and away from low priority areas, 0 Reducing the budget deficit from 4 percent of GDP in 2003/04 to below 3 percent o f GDP by 2005/06 and focusing deficit financing on concessional external borrowing to allow for a reduction in the level o f domestic debt to GDP and for maintenance or lowering of the present value (NPV) o f overall debt to GDP. Revenues Table 3.4 below shows the recent revenue performance as well as projections for 2003/04- 2006/07 consistent with the fiscal strategy. Kenya's recent revenue experience has seen the revenue to GDP ratio decline from 23.3 percent in 1999/2000 to 20.8 percent in 2002/03. In 2003/04 the ratio i s expected to remain below 21 percent o f GDP. Decline in revenue performance has been occasioned by a reduction in tax rates partly as a result o f liberalization measures and partly as a means o f lowering consumption costs, to non adjustment o f specific tax rates for inflation and to administrative and capacity constraints. Government policy will focus on arresting the decline in the revenue to GDP ratio to ensure the ratio is maintained above 21 percent. The overall tax and administrative reform agenda will focus on achieving the above revenue target as well as ensuring that revenue enhancement measures are not based on additional taxation. Table 3.4: Revenueand Grants, 1999100-2006107 11999/200@/ 2000/011 2001/02\ 2002/03 2003/0 2004/0 2005/01 200610 Tax reform The objectives of tax reform are to improve transparency and efficiency of taxation, strengthen tax collection to maintain a revenue/GDP ratio at or above 21 percent, and harmonize tax systems within the East African Community (EAC). To improve the structure o f taxation, the government will undertake an assessment o f tax policy and its impact on the economy and make the tax systemmore pro-growth and sensitive to the poor. This will be achieved by undertaking a comprehensive review of past policy regime, evaluate its effects on growth and poverty and use the lessons learnt to draw a pro-growth tax policy regime. In particular, the Government will 17 establish an optimal tax rate framework for those tax heads considered high currently, institute tax regime that encourages new investments, economic growth and employment creation and use tax instrumentsto make social interventions for alleviating poverty. In view of the prevailing low tax efforts for a number of tax heads, the Government will make expansion of the tax base a priority. This is in recognition of the relationship betweentax policy and tax administration capacity. Towards this end, the Government is well aware that without effective tax administration infrastructure, little economic growth can be achieved through tax policy instruments. Making tax administrative effective will achieved by instituting effective enforcement in revenue administration. To strengthen tax collection, the reform will implementa modernization o f tax administration, including computerization o f the tax administration infrastructure through the development of integrated information architecture. In addition, as already initiated, Kenya Revenue Authority will implement a functional based tax administration to enhance efficiency and effectiveness o f the tax administration system in Kenya. Further system support enhancements to Income Tax, Value Added Tax and Customs functions and strategic capacity buildingand development will be will a priority. Harmonization and rationalization o f tax regimes and integration of trade arrangement within the EAC and COMESA includes, among others, the lowering o f tariffs and other barriers to imports o f goods from the rest o f the world. The loss in revenue arising from trade arrangements and subsequent tariff reductions will be compensated for by enhanced customs administration capacity, especially through implementation of regional transit cargo control strategy, deployment o f scanners at the ports o f entry to assist with valuation and verification, computerization of customs operations and effective management of warehouse. Duringthe 2003/04 - 20051'06, Kenya Revenue Authority's operational reform agenda will be guided by the 2003-2006 Corporate plan. Among the key goals envisaged are the reorganization o f the tax administration, restructuring the port handling facilities and procedures of revenue administration, implementing effective strategy for the management o f excisable products, enforcing the withholding requirement by public sector and collection-agents to enhance compliance with tax laws and revamped and streamline the bond and transit cargo management. Other reform measures include strict enforcement o f the traffic Act and development o f new number plates and second generationdrivinglicenses to improve compliance. Expenditure Despite the declining performance on the revenue side, the bulk of Kenya's fiscal strategy will need to focus on expenditure reduction, expenditure restructuring and expenditure reform. Whereas Kenya's revenue performance at over 2lpercent o f GDP has been above par for low income countries, Kenya's expenditure levels at over 26percent o f GDP have been significantly above that for low income countries, yet the public investments level at below 2Spercent of GDP is below the recent sub Saharan African performance. The country also has a poor public expenditure management record with only 3 out o f 16 indicators of public expenditure management beingconsidered acceptable3. The focus of the Public Expenditure Management Reform is in the 3 core areas of expenditure performance, namely, budget formulation, budget execution and budget reporting. 15 initial indicators were identified for measuringperformance. A review canied out in 2003 found that Kenya found that only 3 of the 15 indicators were rated as acceptable.A 16" indicatorhas since beenadded. 18 Table 3.5 below shows the major categories of expenditure over 1999/2000-2002/03andthe forecast ofthe fiscal strategy over 2003/04-2006/07. Of which: Princi As shown in the table above, total expenditure excluding interest grew from Kshs. 176,876 million in 1999/2000 to Kshs. 266,008 million in 2002/03, an annual average growth of 14.6percent.. There was a consistent trend of rising expenditure to GDP, from 23.lpercent in 1999/2000to 26.2 in 2002/034.The fastest growing component of expenditures was the pensions expenditures which grew at an annual average of 4lpercent over this period. Given that the rise in expenditure coincided with declining revenue performance, it will clearly be imperative to reininexpendituregrowth as a keyplank ofthe fiscal strategy. Inachieving the expenditure objective of restructuring to focus on poverty alleviation, promotion of economic growth and increasingaccess of the poor to social services, the following will be the mainareas to be coveredby the expenditure strategy: 0 Reducing overall expenditure to GDP ratio as the primary means by which the budget deficit will be brought down to sustainablelevels; 0 Raising the level of development expenditure from 4.3 percent of GDP in 2002/03 to [6.7 percent] by 2006/07, 0 Ensuringthat core poverty expenditures are maintained at or above 4percent of GDP; 0 Ensuring that the wage bill to GDP ratio declines to 8.5 percent by 2005/06 and to 7.2percent by 2007/08; 0 Reducing the overall level oftransfers to subventedbodies (universities and parastatals); 0 Increasing expenditures on health in a manner consistent with achieving 12percent of total expenditures by 2010while maintaining the level o f primary educationexpenditures; 0 Improved public expenditure managementby tackling PEM shortcomings and internalizing the annual MPERprocess, The rapid increase in expenditure in 2000/01 was due to drought relatedexpenditures. 19 e Reduction inGovernment contingent liabilities through termination or completion of stalled projects and elimination of pendingbills. Table 3.6 below shows the forecast expenditure outcomes by economic categories. The major forecasts are: 0 Overall expenditure is expected to rise from Kshs 266,008 million to Kshs 370,623 million over 2002/03-2006/07 representing a rise from 26.2 percent of GDP to 26.5 percent of GDP; and e Expenditure composition is expected to change in favour of development (from 16.3 percent in 2002/03 to 25percent in 2006/07) and core poverty (from 7.3percent to 8.3 percent over the same period) while wages (from 32 percent to 31 percent) and interest payments (from 13.2 percent to 7.6 percent) and transfers to paratstatals and universities (from 5.4 percentto 5.0 percent) decline. WageslRevenue (percent) 36.91 34.93 35.95 40.37 37.93 38.55 36.34 35.63 Transfers to parastatals & universities/GDP (percent) 1.68 1.82 1.42 1.48 1.41 1.38 1.34 Development expenditures/GDP (percent) 2.1 4.0 2.5 4.27 4.2 5.42 6.01 6.69 The above forecasts are basedonthe followingunderlyingassumptionsandmeasures: Wages and salaries: Wages are expectedto decline from 8.7 percent of GDP in2003/04 to 8.5 percent by 2005/06. The Government, in 2003/04, awarded substantial increases to the disciplined forces (police and prisons) as well as begun implementation of the teachers salary award. No awards have as yet been given to civil servants. Achieving the 8.5percent target by 2005/06 will require that any awards to be provided to the civil servants or any additional awards (other than the remaining phases ofthe teachers' awards) will be matched by a proportionate downsizing of the civil service. To this end, 21,500 civil servants are 20 forecast to leave the service through a Voluntary Early Retirement(VER) scheme to enable civil service wages to be raisedas part of an overall pay and benefits strategy. Interest payments:the fiscal strategy is based on the premise that the Government will be able to raise substantial additional external resources and thus allow for a reduction in both domestic borrowing levels and interest rates. The Central Bank will also continue with its policy of lengtheningthe term structure of domestic debt, Ministerial recurrent expenditures: non-wage ministerial expenditures (excluding transfers to subvented bodies) depend on exchequer releases and Appropriations in Aid (AiA) expenditures. The strategy assumes that these expenditures will be maintained constant inreal terms, other than education, health and core poverty expenditures. Transfers to parastatalsand universities:are expected to be maintained at their 2003/04 levels in real terms, with any increases in personnel emoluments being catered for through downsizing, Pensions: Kenya currently operates a non-contributory pension scheme. Pensionpayments have however been rising at an unsustainablerate and there will be a need to reduce these expenditures. The Government is scheduled to introduce a contributory pension scheme in the 2004/05 fiscal year. The fiscal strategy assumesthat pension paymentswill continue to rise at 1Spercent per year, but an early introduction of the contributory scheme could lower this growth. Core poverty expenditures:The main objective of re-prioritizing and selecting the core poverty programmes was to allocate and ring-fence resources to those programmes that have a direct impact in reducing poverty levels in the medium term. The objective of the core poverty expenditures is to ring fence and deliver a set of programmes that improve access of the poor to infrastructural and social services especially rural infrastructural services, education and health, enhance the capacity of the poor to participate inproductive service activities, and improve the governance and security environment. The Government has recently reexamined its list of ring fenced core poverty expenditures and updated the list. In 2002/03 core poverty expenditures were expected to account for Kshs.34,043 million or 3.35 percent of GDP. In2003/04 the Government expects to spend Kshs. 43,137 million or 3.93percent of GDP over 2004/05-2006/07 the policy objective is to maintain core poverty expenditures at 4percent of GDP. Consequently, Kshs. 153,729 million is expectedto be spent on core poverty expenditures over this period. Guaranteed loans and capital transfers: the major components of this category have tended to be Government repayments of parastatal debt. However, the Government has adopted an ambitious strategy to restructure the National Bank of Kenya (NBK). It is proposedthat over 2003/04 and 2005'06 Kshs. 12,000 million be used inthis endeavour. Health expenditures: the Government is committed to raising the level of health expenditures to at least 12percent of total expenditures as part of its strategy for providing adequate health services. Since overall recurrent health expenditures were 6.7percent of total recurrent expenditures, achieving the 12percent target by 2010 will require that recurrent health expenditures grow by at least 7.5percent faster than overall expenditures. The fiscal strategy assumes that these healthexpenditures will be focused on non wage non transfer expenditures and will thus enablethe rapid increase inbasic health services. Developmentexpenditures:Over the recent past development expenditures inKenya have declined as a percentage of total expenditures and as a percentage of GDP. Implementing the ERS will require a massive increase in development expenditures. Over 2002/03- 2006/07 development expenditures are expectedto rise from Kshs.43,330 million to Kshs. 21 92,715 million, an annual average of 23.6percent. Over 2003/04-2006/07 a total of KShs. 280,006 million will be available for implementing development projects inthe ERS. 0 Stalled projects: Over the 1990s Kenyabuilt up a substantial inventory of stalled projects as lax fiscal control led to the initiation of more projects than could be sustained by the development budget. As a result, by 1997 the completion rate for projects was as low as 3percent. Stalled projects, those projects that were initiated, not completed and which are currently not receiving funding, mushroomed. By 1999, the Governmenthad a total of 164 stalled projects with an estimated original contract cost of Kshs. 31,357 million, accrued expenditures of Kshs. 13,319 million and an estimated completion cost of Kshs. 13,227 million for those than could be completed and Kshs. 2,448 million for those that required termination. By 2003 the stalled projects were estimated to have increased to 207. The Government will review all stalled projects with a view to terminating as many as possible and only completing those that fall in the ERS core priority areas or which have potential for meeting ERS core objectives. It is estimatedthat reviewing the stalled projects will cost Kshs.90 million. PublicExpenditurereform The 1997 Public Expenditure Review concluded that expenditure management trends were not consistent with the objectives of achieving sustained growth and poverty reduction. Following this review, the Government introduced a number of reforms to strengthen expenditure management. These include: The adoption of Medium Term Expenditure Framework (MTEF) approach to budget formulation in 2000/01; establishment of the Budget Monitoring Department in2000; introduction of the IntegratedFinancial ManagementInformation System (IFMIS); and ministerial rationalization. The 2003 PER noted that expenditure management weaknesses identified inthe 1997 PER still persist. The Government recognizes that economic recovery efforts will require efficient use of public resources and sound management of public expenditure geared towards enhanced service delivery and value for taxpayer's money. In this regard, the government has institutionalized PER as part of the wider efforts to improve budget planning, execution and monitoring. InJune 2003, a comprehensive public expenditure management reform program was initiated. This program includes legislative changes to improve the legal framework for public expenditure management as well as institutional and system changes. It incorporates the recommendations emanating from the Country Financial Accountability Assessment (CFAA) and a Public Expenditure Management Assessment and Action Plan (PEMAAP) exercises, both carried out by the Government incollaboration with key development partners. As part of the PER institutionalization process, the Government issuedthe Treasury Circular No 26/2003 dated 3rdDecember to initiate the 2004 PER process at the ministry level. Unlike the 2003 PER which involved only eight key ministries, the process has been rolled out to cover all the other ministries and integrated with the MTEF budget process. The PER will support the budget process by analysing expenditure allocations and budget institutions to identify weaknesses and recommend measures to enhance the impact of public expenditure. The MTEF budget process is being reviewed and the exercise will also involve development of an action plan to strengthenthe budget process. 22 The IFMIS has been procured and IFMIS team and supervisors trained. Pilotingof the system in the Ministries o f Finance and Planning and National Development started in January 2004 and roll out to all other ministriesis expected by mid 2004. The government is improving the legislative framework for Public Expenditure Management (PEM). This includes: the enactment of the Anti-Corruption and Economic Crimes Bill (facilitated the establishment of an anti-corruption commission) and the Public Officer Ethics Bill (requiring the declaration of wealth by public officers) in 2003. Additional three pieces of legislation have been published and are awaiting enactment. These are: The Government Financial Management Bill (2003), which aims at enhancing accountability in public financial management practices; the Public Audit Bill (2003)- which aims at strengthening the independence and operational capacity o f the Controller and Auditor General; and the Public Procurement and Disposal o f Assets Bill (2003) which aims at enhancing the oversight role o f the Directorate of Public Procurement. The government is creating the institutional framework inwhich these reforms can be effectively designed and implemented; establishing a robust program of analysis and evaluation that can be the basis for buildingthe expenditure management reform program; and defining a timetable for reforms. Priorities include: i)the creation of strong coordination and management arrangements between the departments in the Ministry o f Finance and the Ministry o f Planning and National Development that have lead responsibility for designing and implementing the expenditure management reform program; ii)phased reform o f the MTEF; iii)implementation of short term reforms set out in the government's Action Plan for Enhanced Financial Management in the Public Sector; vi) adherence to the timetable for the budget process for 2004/05; vii) early conclusion o f the PER work program to provide information on the costing o f ERS priority programs, and savings from low priority programs, and track expenditures o f core poverty programs; and viii) design o f MTEF budget for 2004/05 based on early decisions on the macro- economic framework and sector ceilings, onthe objectives o f the ERS, and on the analysis of the PER. Development partners are supporting the public expenditure management reform through a technical coordination group that includes each o f the main donors' active in this area. In addition to supporting the PER process, the development partners are members o f the PER steering committee and technical working group. These arrangements already provide a means for coordinated dialogue. Further, the government is exploring the use of a formal common memorandum o f understanding to capture donor assistance to the PER. Development partners will consider the provision o f basket funding within this framework for the PER and other aspects of the public expenditure management reform program. PublicExpenditureManagementReform Public expenditure management has been a major weakness in Kenya inrecent years. In particular, Kenya has had declining performance with respect to forecasting expenditures and/or disbursing the same. As table 3.7 below shows, the poor performance has been especially visible with respect to the development budget. Over 2000/01-2002/03 less than 40percent of projected ministerial development expenditure were actually realized. Given the rapid increase in development expenditures required to ensure the recovery targets are met, the Government will be focusing its efforts o n improving public expenditure management. 23 Table 3.7: Projctedand ActualMinisterialExpenditure(values inKshs. mn) I 99100-02103 15729551 63874 6368271 6046071 1206631 72527q 94.761 52.93) 87.811 Following recommendations from a Country Financial Accountability Assessment (CFAA) study done in 2001 and the Public Expenditure Management Assessment and Action Plan (PEMAAP) exercise done in 2003, an Enhanced Financial Management Action Plan was prepared. Since the recommendations covered a broad scope, it was decided that concentration be focused first on the public sector before movingto the private sector actions. The mainobjectives of the EnhancedFinancial ManagementAction Plan include:- Enabling the Government to focus resources within realistic fiscal constraints, on core priorities including economic recovery and poverty eradication. These will be achieved through improving and strengthening the tools used in the budget preparation and in particular, the MTEF process; Dealing comprehensively with the issue o f pending bills and preventing future recurrence by improving the quality o f budget preparation, broadening commitment control, and strengtheningfinancial discipline through timely reconciliation and reporting; Improving the quality and timeliness of information available for financial management decision making, through the establishment o f improved and relevant reporting systems. Facilitation in the medium term will be by the implementation of the govemment-wide integrated financial management information system. . To achieve the above objectives, the Enhanced Financial Management Action Plan addresses the following key areas: Budget Formulation - focus is on government policies, resource allocation, comprehensiveness, classification and projections Budget Execution - this covers issues on financial management procedures which .. include commitment control, payment management, project management, procurement and debt management Monitoring and Evaluation - the effort i s to improve internal audit systems; monitoring o f expenditures especially on those projects/programmes aimed at reducing poverty; achieving timely and accurate information; and, better information sharing. Institutional and Human Resources - actions will include undertaking a review o f available and required financial management skills and other associated resources; and, . articulating roles and responsibilities o f central and line ministriesinthe management o f financial resources. State Corporations - the main actions will include, reviewing of the overall government policy on investments, rationalization and restructuring o f the parastatals, review o f the parastatal financing policy, and review o f procedures for accounting and monitoring o f the remaining state corporations. 24 Public ExpenditureTracking (PETS) The Kenya Government recognizes the importance of Public Expenditure Tracking (PETS) as a tool for diagnosing problems of service delivery and as a cost effective way for overcoming systemic problems in service delivery. To this end, it has already initiated a pilot PETS, which was carried out by the Kenya Institutefor Public Policy Reasearchand Analysis (KIPPRA). KIPPRA conducted a Public Expenditure Tracking Survey (PETS) in 2003. The PETS covered education, health, and the agriculture sectors. The KIPPRA survey had the following shortcomings: It does not track expenditures through the release system in terms of identifying the amounts allocatedto particular votes, and tracking them down to the end user. It does not clearly define the kind of leakages that exist. Recognizing the weaknesses of the KIPPRA study, the Government has initiated the process of undertaking another PETS. Programmes aimed at directly having a positive impact in poverty reduction have been identified and the second PETS will focus on tracking expenditures for specific core poverty programmes. Two programmes, (i)School Equipment Scheme and (ii) Bursary Programme for primary schools have been identified as pilot programmes for the exercise. Preliminary preparations started inearly March2004. Deficit and FinancingStrategy The objectives to be pursued by the deficit and financing strategy are to first reduce the overall deficit including grants to a sustainable level and secondly to externalize deficit financing to reduce pressure on domestic financial markets and increase private sector access to credit. Over the medium term the deficit is expected to decline to below 3 percent of GDP, while net domestic borrowing is forecast for rapid reduction and ultimate elimination. The provisional overall deficit for 2002/03 was Kshs. 40,210 million or 3.96 percent of GDP. Current forecasts for revenue and expenditure for 2003/04 indicate a widening of this deficit to Kshs. 49,700 or 4.52 percent of GDP, mainly driven by increased expenditures on the free education programme and health. Initial actions on restructuring the NBK as well as wage awards to the teachers and disciplined forces. As this fiscal strategy is implemented, this deficit is expected to decline to 3,67 percent in 2004/05, 2.38 percent in 2005/06 and 2.64 percent in 2007/08. There will therefore be need for deficit financing over the fiscal strategy period. The Public Sector Borrowing Requirement (PSBR) is expected to total Kshs. 460,640 million over 2003/04 and Kshs. 330,906 million over 2004/05-06/07. Of the Kshs. 460,640 million, Kshs. 159,917 million will be required for financing the cumulative deficits, Kshs. 76,559 million will be required for external redemption, Kshs. 220,964 for domestic redemptions and Kshs. 3,000 million projectedfor paying of pending bills. Financing the deficit will focus on maximizing external concessional borrowing consistent with maintaining the external debt to GDP ratio of below 36 percent. Given the nominal GDP forecasts and projected exchange rate movements, external borrowing over 2003/04-2006/07 is expectedto total Kshs. 198,306 million, of which Kshs.26,647 million will be rescheduling, and over 2004/05-2006/07 Kshs. 143,385 million of which Kshs. 20,718 million will be 25 rescheduling. Net external borrowing over 2003/04-2006/07 will then total Kshs. 121,747 million, comparedto a net repayment of Kshs 25,225 million over 1999/2000-02/03. With external debt accounting for Kshs. 198,306 million, there will be need for domestic financing totalling Kshs.262,334 million over 2003/04 and Kshs. 187321million over 2004/05- 06/07. Of the 262,334 million, Kshs. 220,964 million will be accessed by rolling over domestic debt, while the remainder, Kshs. 41,370 million will be accessed through additional domestic borrowing. Of the Kshs. 187,521 million over 2004/05-06/07, Kshs. 165,723 will be accessed by rolling over domestic debt while Kshs. 21,798 will be accessed from additional domestic borrowing. The outcome of the deficit and financing strategy is expectedto be an external debt to GDP ratio that remains below the 36 percent level achieved in 2002/03 and a domestic debt to GDP level that declines from 24.3 percent in2002/03 to 20.8 percent in2006/07. Such declines will leadto a significant reduction inthe PresentValue (NPV) of debt to GDP ratio. Privatization proceeds: The Government has published a privatisation bill which will lay the legal framework for its privatisation programme. Once the bill is enacted into law, the privatization process is expected to begin in earnest. This fiscal strategy has not factored in privatisation proceeds. However, should they arise, they will be used to reduce the net domestic borrowing requirement. 26 Current surplus/GDPpercent 2.641 -0.571 -1.021 -1.731 -0.34 2.58 GDP at market prices 764624 83953 92603 1014441 1098497 118144 1275992 1385831 ExternalAid and Debt Policy Framework Kenya's external debt and Foreign Aid policy framework is built around the following Principles: 0 Maintaining Kenya's external debt sustainability to ensure Kenya does not become a Highly IndebtedPoor Country (HIPC) or Severely IndebtedLow incomeCountry (SILIC); 27 0 Ensuring only concessional borrowing is contracted to minimize servicing costs and maximize the grant element of borrowing; 0 Implementing a Foreign Aid policy that harmonizes donor practices along the lines proposed in the Rome Declaration of February 2003 and minimizing the transaction costs relatedto external aid; and 0 Ensuring that foreign aid is aligned to the national budget, the national development priorities and implementation should be basedon best practice principles. Externaldebt During January 2004, the Paris Club of Creditors agreed to reschedule US$ 350 million of arrears and maturities for interest and principle falling due between January 2004 and 31" December 2006. The rescheduling was done on Houston terms It is anticipated that on completion of this rescheduling, the county will graduate from future ParisClub rescheduling. Kenya's external debt policy is guided by the acceptedprinciple that the country shall obtain and service her debt on a timely basis as per the signed loan agreements. It is also premisedon the recognition that there is an optimal debt level above which the economy may not be able to sustain. Any variations to this premise have to be authorizedby Parliament for which an adequate explanation basedon macro-economicparametershas to be considered. To ensurethat the country is able to finance its deficits ina sustainablemanner, the country's debt strategy will be built aroundthe following 0 Focusingon external concessional debt as a means of reducing the NPV of debt, lengtheningthe term structureof debt and reducing servicing costs, 0 Mitigating exchangerate riskthrough currency diversification and improving forecasting of repaymentsto ensure repaymentsdo not underminethe foreign exchange reservesposition, 0 Refinancing to replace expensive debt with less expensive debt, and 0 Where necessary, rescheduling on Houstonterms to mitigate cash flow problems. ForeignAid policy The government has initiated measures for the development and eventual publishing of an External Aid Policy to guide in the optimal utilisation of external resources received from development partners. The policy will aim to harmonize and simplify donor practices in the country, as required under the Rome Declaration of February 2003 to which Kenya is a signatory. The policy will provide a framework for effective multilateral and bilateral negotiationsand assess capacity buildingneeds to manageexternal resources. The objective is to increase external inflows, and improve disbursement rates. It is envisaged that an External Aid Policy will be inplace before December 2004. 28 External Resource Requirements Inconsideringthe overall externalresourcerequirements for the ERS, the following were taken into account: i.Totaldemandforforeignexchangeforallpurposes,includingforimports,debtserviceand buildup ofofficial reserves, taking into accountthe macro projectionsandrequirements; ii.Projectionsofresourceavailabilitytakingintoaccountmacrolevelprojectionsofexports, private and public transfers, foreign direct investment, other projected private inflows and the public inflowsfor whichthere are existingcommitments; iii.Estimationofthefinancinggaptakingintoaccountexisting;and iv. Taking account of resources pledged duringthe Consultative Group (CG) meetingheld in November 2003 and implications for disbursement levels if the ERS is to be adequately funded. Overall FinancingNeeds The overall external financing framework including the financing gap is shown in table 3.10 below. Total financingneedsare estimatedat US$23,513 million over 2003-06 andUS$ 25,398 million over 2004-2007. These requirements includethe following: a) Overall import demand of US$ 20,191 million over 2003-2006 and US$ 22,097 millionfor 2004-07 ofwhichUS$4,909 millionwill be requiredfor 2004 alone; b) Total debt service of US$ 1,377 million over 2003-2006 and US$ 1,249 million over 2004-07 of whichUS$380 million will be requiredin2004; c) IMF repayments estimated at US$ 56 million over 2003-06 and US$ 49 million over 2004-07 of which US$14'million are requiredin2004; d) US$ 1,418 million needed for buildup of official reserves over 2003-06 and US$ 1,567 million over 2004-2007; and e) Estimatedprivateinterest payments of US$ 365 million andUS$ 387 million over the two periodsrespectively. DomesticallyavailableResources Domestically available resources are estimated to total US$ 20,083 million over 2003-06 and US$21,728 million over 2004-07 and includethe following: f ) Merchandiseexports estimated to total US$ 11,221 million over 2003-2006, and US$ 12,348 millionover 2004-07 of which 2004 merchandise exports are expectedto total US$ 2,788 million; g) Service exports estimatedto total US$ 4,878 million over 2003-2007 and US$ 5,042 over 2004-07 with a 2004 estimate ofUS$ 1,077 million; h) Net foreign direct investment (FDI) of US$ 234 million over 2003-2006 and 257 millionover 2004-07 with a 2004 estimate of US$ 55.4 million; i) Private transfers of US$ 1,466 million over 2003-06 and US$ 1,378 million over 2004-07 with US$376 million estimatedfor 2004, j) Other capital movements (private) estimated at US$ 1,975 million over 2003-2006 andUS$ 2,301 million over 2004-07 with 2004 estimatedto totalUS$ 535 million'. Other capital movementsare also assumedto includeunderestimatesfor tourismreceipts 29 Given the required external resources, this leaves a financing gap of US$ 3,430 million over 2003-2006 and 3,670 million over 2004-2007. ExistingExternalCommitmentsto the PublicSector In closing the financing shortfall the Government, based on existing commitments, expects to have access to US$ 2,439 million over 2003-04 and US$ 2,645 over 2004-07. These commitments comprise the following6: a. Project grant support of US$ 984 million over 2003-2006 and US$ 1,156 million over 2004-2007; b. Project loans of US$ 778 million over 2003-2006 and US$ 1,016 million over 2004- 2007; C. Other public loans of US$251million over 2003-06 and US$209 million over 2004-07; d. ProjectedIMFdisbursements of US$261million over 2003-06 and US$265 million over 2004-07; e. Paris Club reschedulingof pre-cutoff debt7:following agreement with the Paris Club the country can expect to benefit from US$ 341 million of rescheduling over 2003-06 and US$295 million over 2004-07;and f. Programme supportalready receivedin2003 and2004 totaling US$ 165million. These resource estimates leave a residual financing gap of US$ 649 million over 2003-06 and US$ 730 million over 2004-07. This implies total external support of US$ 3,430 million over 2003-06 and US$ 3,670 million over 2004-07. This compares to US$ 4,100 million pledged during the 2003 Consultative Group meeting. The implication is that virtually all the pledges made during the consultative meeting will need to be turned into commitments if the external financing gap is to be closed. Virtually all the additional resources will need to be programme support to the budgetto reduce the domestic borrowing requirementsto sustainablelevels. Privatetransfers 1 576.81 421.111 3761 3351 334 3331 14661 1378 ForeignDirect investment(net) 501 50.41 55.41 611 67.11 73.81 234 257 Debt service: principal 253 277 291 235 210 210 1013 945 Debtservice :interest 86 106 89 84 84 47 364 304 IMF repayments 19 19 14 9 14 12 56 49 Peduction in arrears 107 64 0 0 0 0 64 0 The commitmentsrefer to agreements already signedwith the IMF as part ofthe PRGF process as well as firm commitments in the forms ofproject loans andgrants. Prograsmmesupportreferredto here is that whichhas already beendisbursed. Pre December 1991debt 30 Higher case scenario The high case scenario is predicated on a faster response of the economy to the bold economic reforms envisaged in the ERS resulting on a growth increase from 1.4 percent in 2002/2003 to 2.4 percent in 2003/2004 and 5.5 percent growth in 2006/07 to deliver an average yearly growth of 3.9 percentduring 2003-2007. Inthis scenario recovery is driven by a better performing export sector and investment. Exports would grow at 6 percent in 2003/04 from 5.8 percent growth in 2002/2003, and peak at 7.6 percent growth in 2006/2007. Gross investment would increase from 11.4 percent of GDP in 2002/2003 to 16.7 percent in 2006/07. Higher consumer confidence would support the pace of economic recovery with a private consumption growth rising from -6.7 percent in2002/03 to 1.0 percent in2003/04 and 3.3 percent in2006/07. The faster growth inhousehold consumption is in line with the desired policy of its growth being at least higher than the population growth rate. Gross domestic savings would improve gradually from 9.0 percent of GDP in 2002/03 to 9.6 percent in2003/2004 and 14.6 percent in2006/2007. Imports would be expected to rise in response to the recovery in investments and private consumption. Export growth is expected to continue as the potential existing under COMESA and EAC continue to be exploited with the improved competitiveness of the Kenyan exports. AGOA related exports are also expected to continue expanding and these will sustain the expected higher export growth. The current account is therefore expected to be around 2 percent of GDP and the import cover to improve from 3.3 months of imports in2002/03 to 7.7 months in 2005/06. 31 The objective o f fiscal policy is to maintain revenuesat above 21 percent of GDP and achieving a sustainableoverall deficit (including grants) of below 3.2 percent of GDP over the 2003/2004- 2006/07 period. The restructuring of public expenditure would entail public consumption to rise slightly from 14.8 to 15.5 percent of GDP during 2002/03-2003/04 due to increased social spending commitments, and thereafter fall to 14.3 percent of GDP in 2005/06. Salaries and wages of the civil service, teachers' service and the disciplinedforces which are part of public ' consumption would remain at below 8.5 percent of GDP over the period 2003/04-2006/07. Transfers to parastatals and universities will be maintained at current levels i.e. below 1.8 percent of GDP which is equivalentto 6.9 percent of total expenditures over the period 2003/04- 2006/07. Total capital expenditure would rise from 4.1 percent of GDP in2002/03 to 4.7 percent of GDP in 2003/04 and 5.9 percent of GDP in 2005/06 and eventually rise to 6.3 percent in 2006/07. This reflects an increasing proportion of capital expenditure in the budget from 16.2 percent oftotal expenditures in2002/03 to 23.4 percent in2006/07. Low case scenario Te basic purpose of the low case scenario is to investigatewhat would be the impact on the base case scenario were the economy to be affected by various shocks which would undermine some of the key assumptionsunderpinning the base case scenario. To construct the low case scenario, the following assumptionswere made: 0 The country's return to good relations with the donors does not lead to high inflows and anyway, absorptive capacity constraints undermine the potential to absorb all available funding. Hence actual disbursements remain inline with 1999/2000-2002/03 levels, 0 The reschedulingagreed with the Paris Club of creditors is not reversed, 0 The Central Bank of Kenya continues with its monetary policy targeting 3.5 percent underlying inflationrate, 0 Terms of trade do not deteriorate further due to the low prices for commodities already existing and the lack for a basisto assume higher oil prices, 0 Private sector response to the changed policy and institutional environment is muted, meaning that investmentdoes not recover as fast as expected. Table 3.10 below provides the outcomes for the major economic variables underthis scenario. Table 3.10: Economic Outturn for Low Case Scenario (Annual percentage changes, unless otherwise specified) I2002 I2003 12004 I2005 [ 2006 I2007 1 (percent) 10.49 10.00 9.09 7.10 6.17 5.68 Govt. Foreign Interest Payments Ratio 2.88 2.60 1.99 1.75 1.66 1.60 As a result of the expected shocks, the economy experiences lower growth, lower levels of external debt, slower growth in import volumes and higher domestic interest rates due to the needfor increaseddomestic borrowing to meetbudgetary requirements. 32 This poor performance would be in line with the low growth phase that the economy transited between 1997and 2002. To appreciatethe major areas of change, table 3.11below indicatesthe magnitudesof change of major variables from the base case scenario. Table 3.11: Magnitudesof Changes in Key EconomicAggregates From the table above the following are the major impacts; 1. GDP growth declines by an average of 2percent points over 2003-2007. Given that economic growth is the major driver for poverty reduction, poverty rates are .. estimatedto increaseby 3 percentagepoints comparedto the base case; 11. With the assumption of employment growth being tied to economic activity a net ... total of 80,000 jobs are lost over 2003-2006 and 134,000 over 2004-2007, 111. The tight monetary framework leads to inflation remaining as per the base case. However, the needfor domestic borrowing increasesthe domestic (t-bill and bond) interest rates by 3 percentage points over the period, iv. Investment rates are substantially lower as a result of Government not being able to access investible resources and the lower than expected response by the private sector. Since the base case assumed a much higher dependence on foreign savings for investment, there is a lower savings gap andthus improved balanceof payments, V. Imports decline drastically improving the trade balance. The main drivers are reduced importation of investment goods and those commodities (oil products, chemicals and manufacturing inputs) that tend to grow inline with GDP, vi. The greatest impact is however felt on the budget. Over the 2004/05-2006/07 fiscal period, revenues decline by a cumulative total of Kshs. 69,312 million, while net external borrowing declines by Kshs. 132,144 million and external grants by Kshs. 54,461 million, for a cumulative resource shortfall (compared to the base case) of Kshs.255,907 million. Itis this resource shortfall that the Government expenditures will have to adjust to. Government adjustment to a resource constrainedscenariowill be based on 2 core principles: 33 0 To the largest extent possible fiscal sustainability must be maintained. This will be interpreted to mean that whereas it may be impossible to maintain a declining domestic debt position, the overall debt to GDP ratio should be maintained inpresent value terms. Thus, given that the NPV of external debt is below its face value, the net increase in domestic borrowing shall only compensate for the shortfall in NPV of external borrowing,8 0 To the largest extent possible expenditures in education and health and core poverty expenditures will be shielded from expenditure cuts. Table 3.12 below shows the expectedadjustmentsthat would occur under this scenario. Table 3.12: Adjustmentsto ReducedRevenuesand External ResourceInflows in Low Case Scenario *Excluding education and health The following are the major adjustmentsresulting from the adjustmentscenarioadopted: 0 Domestic borrowing is increased by Kshs. 141,879 million over 2003/04 to 2006/07 to counter the net external outflows and maintain the NPV/GDP ratio of overall debt. The domestic debt/GDP ratio rises from 24.6.percent in 2002/03 to 32.9percent in 2006/07 comparedto a decline to 2lpercent inthe base case, 0 Interest payments increase as a result of both increaseddomestic borrowing and increased interest rates, 0 Expenditures on wages and salaries are assumed to increase given that the programme grants required for downsizing are no longer forthcoming while the legally binding teacher's salary awards will still need to be honoured. The scenario assumes no salary awards for civil servants, 0 Ministerial expenditures (excluding education, health, defence and subventions) decline as they are maintained inreal terms only, *The Debt Sustainability analysis done in 2002 found that the NPV of extemal debt was approximately 70percent of its face value. Thus, in the context of maintaininga constant NPViGDP ratio, only 70percent of the extemal borrowing shortfall will be convertedto domesticborrowing, 34 Transfers to subvented bodies (parastatals, universities and the KRA) are assumed maintained constant in real terms with the decline being attributed to a lower estimate for the GDP deflator, Changes incore poverty expenditure resultfrom a lower GDP growth with the Government maintaining a policy of keepingcore poverty expendituresat 4percentof GDP, The minimal decline in health and education expenditures is attributable to a reduction in health expenditures. With the rapid decline in resources, it proves impossible to maintain a sustainable fiscal situation as well as rapidly increase healthexpenditures. However, given the substantial increase inthe non wage nontransfer healthexpenditures, (from Kshs.3,481 million to 9311 million), there is a substantial real increase in health expenditures. Free educationexpendituresremainat previous levels, The major casualty is development expenditures which were scheduled to rise fastest under the base case scenario. Inthis scenario, development expenditures decline by a cumulative total of Kshs. 152,478 million to maintain overall fiscal balance. It is this decline in development expenditures and the knock on effect on private investment that is the major cause of the reducedgrowth rate. In an ideal situation, a downward reduction in external inflows and revenues should not be allowed to affect either the level of the core poverty expenditures or the development expenditures. However, given the previous commitments and the difficulty of expenditure adjustments in the absence of external support. This low case scenario represents a realistic adjustment to the potential shocks. Monetary Policy Framework The Kenya Government will continue to focus monetary policy on maintaining stability in the general price level and fostering the functioning of a stable market based financial system. In line with this objective and cognizant of projected inflation in the country's major trading partners, the Central Bank of Kenya (CBK) will continue with its policy of keeping overall inflationbelow 5 percentannually while targeting underlying inflationof 3.5 percent. In the short to medium term, the Government will rely on monetary targeting as the principal monetary policy tool. In the framework, broad money supply (M3X) will be the intermediate target and reserve money will serve as the operating target. Broad money, M3X, comprises currency outside banking institutions, term and non-term deposits held by the private and the public sectors but excluding central and local government in banking institutions and residents' foreign currency deposits with local banks. Reservemoney comprises currency incirculation and deposits of commercial banks and non-bank financial institutions at the Central Bank. To facilitate effective implementation of the monetary policy, the Central Bank will continue to rely on Open Market Operations (OMO), cash ratio requirements, and rediscount facilities to influence monetary aggregates. During the Economic Recovery Strategy period, money supply is projected to increase at 8.1 percent per year by December 2007 as shown in table 3.13 below. This will adequately support the projected real economic growth. Both net foreign assets and domestic credit to the economy will support the money supply growth projected. Net foreign assets of the Banking system are projected to rise by 13.6 percent while domestic credit is expected to rise by 4.9 percent by December 2007. Over the ERS period, it is programmed, that credit will be redistributed to both 35 Government and private sector. Government will gradually reduce its borrowing from the domestic sources paving way for increased lending to the private sector. Private sector credit is programmed to accelerate by 14.9 percent while credit to Government will decline by 37.6 percent inthe year to December 2007. Exchange rate policy Since the mid 1990's Kenya has beencommitted to a flexible, market determinedexchange rate policy. Exchange controls were abolishedfollowing the repealofthe Exchange Control Act in 1994. This flexible exchange policy has been fundamentalto ensuringthat the country's balance of paymentsremains sustainable and the country has an adequate level of foreign exchange reserves.The Governmentwill continue the policy of a flexible market determined exchangerate regime. Exchangerate interventions will be limited to smoothing short-term volatility andthe variability of donor flows, affecting external debt paymentsandmaintaining a sound level of the net international reserves.The Government is committed to making full use of exchangerate flexibility to respondto both medium and long-term exogenous shocks. Financial Sector Reforms The main objective of financial sector reforms is to enhance the environment for private savings and investment, and lower interest rate levels and spreads. The reforms will address poor governance and market structure by establishing a new regulatory framework and enhancing competitiveness. New regulations will strengthen the supervisory and enforcement capacity of Central Bank of Kenya (CBK) by transferring Banking system licensing, regulatory and disciplinary authority from the Ministry of Finance to the Central Bank of Kenya, tighten provisioning regulations to conform to international best practice and implement anti-money laundering legislation. To strengthen competition, the government will uphold a financial system with market- determined deposit and lending rates, as well as bank charges and commissions. At the same time, the government will implement measures to ease cost pressures on the sector, including 36 supporting secured transactions, lowering credit risk, improving borrower accountability, encouraging establishment o f credit bureaus and endeavouring to reduce the stock of non- performing loans (NPLs). Reforms will be geared towards strengthening Deposit Protection Fund to enhance depositors protection including: i)Preparation of a new Deposit Protection Fund act, ii)Implementation of capacity building in workouts and workout management techniques, and iii)Liquidation of distressed small banks. The Government will divest from commercial banking operations starting with the restructuring and privatisation o f National Bank of Kenya to be completed by December 2005. Other banks like Kenya Commercial Bank require limited state intervention since the bank's management is resolving the problems facing the bank. The government will support the bank's right issue so as to improve its capitalisation. Following the outcome of a recent study on reforms in the banking sector, the government i s reviewing several options regarding state bank's restructuring and privatisation. These options are: 0 Partial restructuring of the Banks 0 Full restructuringofthe Bank 0 Immediate sale o f the bank to a strategic investor 0 Allowing the institution to resolve problems on its own. The government also intends to reform Development Finance Institutions especially the ones owned by Government and in poor financial condition. These institutions, which provide financial services to specific groups and certain sectors o f the economy, have large share o f non- performing loans in their loans portfolio, which have been accumulated as a result o f poor institutional capacity in assessing client creditworthiness. They have also been susceptible to political interference. The Government has commissioned a study with World Bank support, which will clearly define the role and propose reforms necessary for development finance institutions. The Government's reform agenda places much emphasis on provision of targeted credit to strategically important sectors, such as agriculture and SMEs. As a short-term measure, the government has already taken the first step to revive Kenya's Development Finance Institutions by providingnew capital to the Agricultural Finance Corporation (AFC). The government appreciates that DFIs require a more comprehensive reform program, particularly for institutions such as IDB, KIE and KTDC. These institutions are deeply troubled financially and would need substantial injection of funds for them to operate effectively. Key reforms needed inthese institutions include: 0 Development o f a national policy on access to financial services, development finance and micro finance. 0 Provide a framework for proper supervision o f the institutions 0 Designing a strategy for development financing that minimisesthe adverse effects on private financial intermediaries. As part of the reforms inthe financial sector, the government is inthe process of developing the legal framework to regulate micro finance institutions and SACCOs. This will improve access to credit by SME and form the basis for any future reforms. Once the legal framework i s in place, 37 large SACCOs effectively collecting deposits from the public and with Front Office Service Areas (FOSA) will be subjectedto rigorous licensing standards and prudential regulations by the Central Bank. This will help to avoid possible misperception about the status of non-supervised SACCOs compared to that of banks and reduce risk of regulatory arbitrage. There is need to undertake more extensive work on access to financial services, particularly with respect to measures that would facilitate improving access to credit by the rural population, farming households, and on the presentand future role of existing DFIs. The reforms will also involve undertaking a comprehensive mapping exercise to estimate the demand and supply by different categories of borrowers in different geographical locations so as to identify gaps in service delivery to different segments of population. This exercise will eventually help inthe formulation of a national policy on access to financial services and will be used by the government to develop and secure consensus on a coherent national policy and strategy for micro and small business finance which clearly defines the respective roles of the Government, micro and SME finance stakeholders in providing and broadening access to basic financial services. Institutions like Kenya Post Office Saving Bank, which have wide outlet network, have a potential to be used to expand linkages betweenthe micro finance sector and the banking sector. This will enable micro finance providers to take advantage of the physical presence of KPOSB outlets for the transfer of funds to their accountswith their clearing banks. Financial requirements for the reforms are expectedto come from the financial sector adjustment credit that will be financed by the World Bank. Inother areas, the Governmentis preparing pensionreforms, designingacomprehensive strategy for insurance services market development and reforming capital markets including the establishment of a central depository system, the strengthening of disclosure rules, and the introduction of second tier market to enhance medium sizedfirms' access to capital markets. The pension reforms specifically target introducing a contributory pension scheme for civil servants inthe year 2004/2005.0ther reforms in the pension department are aimed at improving claims settlement procedures.Legislation has already been passed in parliament that will ensure that claims are settled within 30 days after retirement. Infrastructure The ERS identifies infrastructure as one of the main pillars of Kenya's economic recovery program. Modern infrastructure is viewed as critical to lower the costs of doing business and increase the competitiveness of Kenyan products on the international markets. Developmental objectives include an expanded and well-maintained road network, improved safety of urban transport, increasedaccess to water resources, increasedavailability, reliability and affordability of energy, efficient telecommunications services and a vibrant information technology sector. To increase efficiency of investment in infrastructure, the government plans to significantly increase private sector participation and investment. Pillars of this strategy include the development of a satisfactory regulatory and legal framework, and the transfer of key operations to the private sector within the government's overall privatization and competition frameworks. 38 Regulatory and competitive frameworks The main objective of developing new regulatory and competitive frameworks for infrastructure is the provision o f an environment conducive to private sector participation while at the same time ensuring competitive practices that will deliver greater access and affordability to final users, Toward this end, the government has initiated action to review regulatory arrangements in infrastructure sectors, and assess the viability o f establishing a multi-sector independent regulatory agency and/or strengthen the regulatory capacity o f existing agencies (e.g., telecommunication and energy sectors). The government i s also committed to enact the Water Act 2002 and the new Investment Code, and amend the Electric Power Act, the Petroleum Act, Kenya Roads Board Act, and the Monopolies and Price Control Act. Privatization The Kenya Government considers privatization as an integral part o f the public sector reforms requiredto spur the recovery of the economy. Inthis respect, a number o fprivatization measures are scheduled to be implemented as part of the country's economic recovery strategy. These measures are outlined in a draft privatization strategy which i s currently being finalized for submission to the cabinet. The legal and institutional framework for implementingthe strategy is in the Privatization Bill approved by the Cabinet in June last year, published in the Kenya Gazette on 7th November 2003 and read in Parliament (First Reading) in December. Once the bill is enacted it will entrench the privatization process in the law and provide for establishment o f the Privatization Commission. The privatization program will include several modalities for private sector participation in water, energy, roads, transport, and communications. It is targeting key utilities and infrastructure service providers that are either the main providers in their sector or represent large portions of the market. Major candidates for privatizatiodprivate sector participation in infrastructure include Telkom Kenya Ltd (TKL), Kenya Railways Corporation (KRC), Kenya Power and Lighting Company (KPLC), KenGen, Kenya Ports Authority, and road financing, management and maintenance works (e.g. Mombasa-Nairobi North Corridor Road). The Cabinet approved and sent to Parliament the Privatization Bill, which will establish a strong privatization commission and pave the way for a transparent and accountable process o f privatization. The Privatization Bill i s being complemented by the reform o f sector-specific legislative frameworks to facilitate private sector participation. Water and sanitation The government is implementing structural reforms to make water and sanitation services autonomous, mobilize investment for construction and rehabilitation, and enter into partnerships with community based organizations to expand services to urban poor and rural communities. Implementation of the Water Act 2002 entails the establishment o f Water Service Boards, the Water Services Regulatory Board and the Water Services Trust Fund, as well as the transfer o f water assets from the Ministry of Water to the Water Boards (Kenya Gazette notice, 18th March 39 2003). These institutions effectively separate the functions of policy formulation, service delivery and regulation of the water and sanitationsector. The reform will increase availability of national fresh water resources from the current level of 247 cubic meters per capita to 900 cubic meters per capita by 2007. Specific targets include: i) 200 hydrological and quality water monitoring stations will be rehabilitated country-wide; ii) 1,200 water samples analyzed per year; iii)unaccountedwater wastage reducedfrom 60 percent in 2003 to 25 percent in 2005 through rehabilitatiodaugmentationof urban water supply and sewerage schemes in Nairobi and Mombasa; iv) 30 rural water supply schemes in 2003, 90 in 2004, 180 in2005, and 300 in2006 rehabilitated and handed over to local level management; v) 100 small dams and water pans rehabilitated and handed over to communities per year; and vi) 500 boreholes drilled and equippedhehabilitatedand handedover to local communities peryear. The financing requirement for the water and sanitation programmes was estimated at Kshs 24.5 billion between 2003 and 2005. Out of this the cost of priority programmes will total Kshs 14.3 billion. Roads The road sector is a priority in the ERS as it greatly affects the cost of doing business and marketing potential for Kenyanproducts. The sector objectives are to expand the road network, reduce the rehabilitation and maintenance backlog, strengthen road safety and control overloading, and expand private sector management and financing. The government is formulating a long-term road sector strategy, and will consider a multi-agency model for managing responsibilities and financing for trunk roads, highways, park roads and rural roads. On the latter, the government is rationalizing the number of agents responsible for rehabilitation, construction and development of urban roads under the Kenya Roads Board (KRB) Act. The government is completing a road inventory and condition survey study, reducing the audit backlog for the road levy fund and improving public information on the use of the fund, considering the establishment of a new road safety authority, enforcing axle load control limits, and launching a national road safety campaign. The centrepiece of the strategy is an accelerated timetable for concessioning major roads' construction and maintenanceto the private sector. The study on Road Concession(phase 2) was completed in June 2003. Based on the assessments done conventional tolling is proposed for the These are (i)Mombasa - Machakos, (ii)Machakos-Rironi, and (iii)Rironi to Malaba via Eldoret 1,208 kilometres of the Northern Corridor. Three viable road concessions have been identified. and to Busia via Kisumu. The government has taken a firm decision to move ahead with the preparatory work on Roads Concessioning Framework by preparing the regulatory and legal instruments to allow for concessioning. Concessioningwill start with the Machakos Turn Off- Nairobi SouthernBypass section of the Northern Corridor under BOT arrangements.This phased approach will test the willingness of the road users to pay. At the moment, significant financing is available from donors (US$ 309.4 million for rehabilitation of about 500 Km of the Northern Corridor). Further financing is expected to come from interested investors (US$ 326.7 million for 641 km of road). To address rural road maintenance and improvement, the government is implementing the Roads 2000 programme in 26 districts so far, with the participation of local communities and labour- intensive local contractors. Several donors (European Union, SIDA, DANIDA, ADB, AFD and 40 KfW) are supporting this program and expected to finance significant portions of it. The challenge is to adopt this programme countrywide. Selected targets over the planned period include: Roads 2000 programme expected to rehabilitate 2,815 km and create 18,800 jobs; reconstruction o f 150 km o f trunk roads per annum; and concessioning up to 1,208 km of trunk road during2004-07. Transport Transport services greatly affect the competitiveness of Kenya goods. Reforms are geared toward improving the management and security of transport infrastructure. Railway transport The government will complete the ongoing process o f concessioning Kenya Railways Corporation by means o f a long-term concession covering passengers and cargo operations. The concessioning process has been extended to include joint concessioning with the Uganda Railways. The concessionaire is expected to be in place in 2005. This will assist to raise investment funds necessary to improve rail services. Air transport Kenya is the major airline hub in East Africa. Its air transport services have facilitated and will continue to sustain development in sectors such as trade and tourism. Efficient and secure air transport i s therefore one o f the ERS priorities for economic growth. While air transport services were liberalized in 1996 with the privatization of Kenya Airways, airports management has remained in the hands of the state under the Kenya Airport Authority (KAA) and performed below potential. A Civil Aviation Authority was established in 2002 to regulate aviation activities and improve air traffic control. Airport management, safety and security under KAA remain weak. Reform objectives include raising airport security and safety service levels to international standards, improving airport facilities, management and operations, and lowering operating costs. The first priority is to address security concerns, and enhance the security and safety service levels to attain the Federal Aviation Authorityhnternational Civil Aviation Organization Category 1 standards from the current Category 2. Attaining Category 1 status will allow direct flight to the US from JKIA, strengthen Kenya's competitive position as the regional airport hub, and Kenya Airways to compete with other airlines. This will require significant refurbishingo f airport facilities, investment in security equipment and safety facilities, and training. Already, the government decided to reorganize the passenger terminal at JKIA to separate arrivals from departures and relocate the domestic terminal (terminal 3) to the Old Airport at Embakasi in an effort to provide additional space for the international flights. Second, a study funded by PPIAF will be undertaken to determine PSP options in the management and financing airport activities in Kenya. Accordingly, the Kenya Airport Authority Act and the Kenya Civil Aviation Authority Act, which currently allow for private sector management of only commercial activities (aircraft landing services, and cargo handling), will be amended to allow for private sector management or concession o f the airports. 41 Finally, airport charges, currently above those charged by competing regional airports, will be reviewed and harmonized accordingly. Alternative mechanisms to finance airport infrastructure are under review, including expanding commercial activities on airport grounds and reviewing currentcommercial concessions. Maritime and inland waterways Managed by KenyaPorts Authority (KPA), the port of Mombasa is one of the main ports on the east coast of Africa, serving the whole of Kenya and land-locked countries such as Uganda, Burundi and Rwanda. To maintain its competitive edge, the government is putting Mombasa Port on an accelerated reform schedule to convert it to a landlord port. The landlord port is the most widely-used model for introducing private provision of services into port operations. Under this model, key infrastructure facilities will remainunder KPA ownership. A new Maritime Sector Policy Paper is being prepared. The policy proposes the creation of a Maritime Authority responsible for the regulation of all marine and maritime affairs. The office of the Coast Guard will be placed under the KPA to manage maritimeand port facility security. Other measures will include a reform of all clearances affecting passage of goods through the port and streamlining of customs procedures to improve transparency and reducing time and costs. The Kenya Ferry Services is operated as Public Service Obligation (PSO) by the Governmentto enable pedestrians who work in town to cross the channel on a daily basis. The Ferries have outlived their economic life and are a hazard to users. Since FY 2002/03 Kenya Ferry Services (KFS) has been implementing two government funded projects. These are the construction of maintenance facilities for above water maintenance and for overnight stay (Ksh58 million in 2002/03 and KshlOO million in 2003/04), and the expansion of walkway terminus (Kshs 14 million in 2001/02). The KFS proposes to purchase two ferries at a cost of Kshs 600 million to replace MV Pwani (1975) and MV Mvita (1969), which have outlived their life span. Communicationsand information Telecommunications The government recognizes the urgent need to open the doors for a major expansion of the telecommunications sector as one of the necessary conditions for accelerating growth in other productive sector of the economy. The poor performance o f the fixed-line telecom sector has beendue to inefficiency and monopolistic structure inthe sector. For example, only 2 percent of householdhave fixed lines, 60 percent of them located in the Nairobi area; and waiting time for new lines is eight years. While Telkom Kenya's current monopoly license runs to 2004, the government has taken steps to respond to service failures on the part of the monopoly. Communications Commission of Kenya (CCK) will move quickly to introduce competition in the international segment, which will induce Telkom Kenyato lower rates for international calls; it will go ahead and license other operatorsof fixed (local) telephone services outside Nairobi, as soon as the rural access study currently being undertaken in collaboration with the International Development Research Centre and CCK is completed; and it has allowed other operators to provide public payphone services and inter-corporate data exchange. Towards this end the bidding process for the second national operator has already commenced. In the meantime, the government is preparing a privatization strategy for Telkom Kenya that will maximize the growth prospectsfor the sector. 42 Inthe mobile phone sector, competition between Safaricom and Kencell, introduced since 1999, has significantly expanded access to telecommunications services to about 2.2 million subscribers. Yet cross-subsidization schemes by Telkom with its subsidiary Safaricom have kept cellular phone rates high. To increase subscriber base, widen geographical coverage, lower consumer rates and expand job opportunities CCK by end 2003 completed the bidding process for the licensing o f the third cellular phone operator. However, the issuing o f the license has been delayed by a case filed incourt by one of the bidders challenging the award. Internet service provision is fully liberalized and the CCK has so far licensed over 60 Internet Service Providers and about 31 o f these are in operation. More potential exists in this area for exploitation by the private sector especially outside Nairobi and Mombasa, and in lowering costs. Other initiatives include reviewingthe Telecommunications and Postal Sector Policy in view o f the expiration of Telkom Kenya's license in June 2004; withdrawing idle broadcast frequencies and reallocatingthem under a transparent, equitable regime; and supporting the development o f a submarine cable on the east coast o f Kenya linkingto cables to the south and the north o f the region to reduce data transport costs in the long term. Informationand communicationstechnology The Government recognizes the importance of Information and Communications Technology(1CT) for improvingperformance inthe productive sectors and Government, and as a potentially fast growing and employment generating industry. The sector has been hampered by low access to telecommunication, limited penetration o f ICT usage in Kenya especially in the rural areas and inadequate legislative framework. Inorder to achieve rapid growth inthe sector, the Government has consulted widely with major stakeholders and these consultations have culminated in the finalization o f an ICT policy. The Stakeholders included, Private Sector, Civil Society, Internet Service Providers(ISPs), manufacturers o f ICT equipment, International agencies and Development Partners. The ICT policy has received Cabinet approval i s scheduled for full implementation. It provides guidance for the operationalisation and management o f internet technology, Communications and Radio/TV. To facilitate the smooth implementation o f the ICT policy, the Government has liberalized the telecommunications sector by removing the monopoly hitherto enjoyed by Kenya Telecommunications Corporation. In this regard, the Government has licensed a second telecommunications provider to ensure vigorous competition inthe provision o f telephony. Other critical measureswill include the following: - (i) Invest in adequate ICT education and training. In this context, the Government will streamline the education curriculum to incorporate IT studies to develop appropriate skillrequirements. (ii) Implement a well targeted tax reduction and/or tax incectives on both computer software and hardware to make them affordable to micro enterprises and low income earners. (iii) Removal the impediments that have discouraged adoption and use o f e-commerce. 43 The Government will also complete the implementation of e-government by June 2004. This will include the use o f information technologies such as Wide Area Networks, internets, and mobile computing by Government agencies in order to improve effectiveness, efficiency, service delivery and promote democracy. E-government will enable citizens to access Government and other channels of communication. Specifically the Government will: - services and information as efficiently and as effectively as possible through the use o f internet (i) Improve collaboration between Government agencies through reduction of duplication o f efforts, enhanced efficiency and effectiveness o f resource utilization. (ii) Reducetransactioncostsincurredbythegovernment, citizensandtheprivatesector through provision o f products and services electronically; and (iii) Provideaforumforcitizens'participationinGovernmentactivitiesthroughopinion polls, surveys on Government policy and administrative direction. To ensure proper coordination and timely implementation o f the above, the Government has constituted a technical steering committee to work closely with the National Economic and Social Council (NESC), to mainstream ICT into government operations. This streamlining will entail building the government information infrastructure, implementing the Government Information Technology Investment Management (GITIM). Phase I o f this Government information infrastructure component i s in the process o f installing structured cabling in all central government buildings. Phase I1 will extend connectivity o f district offices. GITIM implementationwill develop and enforce ICT standards, guidelines and principles that will guide the management of information technology resources within the public service. The focus of e- government efforts will be to improve government back-office functions, develop public services to be delivered through the internet, develop modalities for acceptance o f electronic documents for instance by KRA, foster interactions with large businesses, and post key information to improve transparency. The technical steering committee in charge o f the formulation o f a national ICT policy will also oversee the development the e-government. Goals of e-government in Kenya The achievement o f an e-Government i s one o f the main priorities o f the Government towards the realisation o f national development goals and objectives for Wealth and Employment Creation. An effective and operational e-Government will facilitate better and efficient delivery o f information and services to the citizens, promote productivity among public servants, encourage participation o f citizens in Government and empower all Kenyans. To this end, the Government is committed to establishing e-Government by June 2004. The e-Government Strategy objectives aim at: enhancement of transparency, accountability and governance; making the Government more result oriented, efficient and citizen centred; and enabling citizens and business to access Government Services and Information as efficiently and as effectively as possible through the use o f internet and other channels o f communication. The effective and efficient realisation o f e-Government objectives depends on the availability of skills and the right attitudes across Government. The Government personnel at all levels will be adequately equipped through relevant training to effectively carry out this initiative. This calls for a change in the way Government carries out its operations and requires training in change 44 management. Inorder to ensure a continued pool o f IT knowledge base within Government, all training programmeswill have an IT component. The objectives o f e-government include to a. Improve collaboration betweenGovernment agencies through reduction o f duplication o f efforts and enhanced efficiency and effectiveness o f resource utilization; b. Improve Kenya's competitiveness by providing timely information and efficient delivery of Government services; c. Reduce transaction costs incurred by the Government, citizens and the private sector through provision o f products and services electronically; and d. Provide a forum for citizens' participation in Government activities through opinion polls, surveys on Government policy direction, etc. The targets for June 2004 are: a. Develop and implement e-Government Strategy for Kenya. b. Establishan appropriate institutional set-up for e-Government. c. Undertake an inventory o f ICT capacity and assets within Government. d. Sensitize all Government Officials on the e-Government Strategy to develop consensus and a common understanding of its implementation. e. Establisha Directorate o f e-Government to coordinate the implementation o f the Strategy and ensure security o f Government systems and information. f. Continue with cabling o f Government Buildings. g. Increase internal operational efficiency and effectiveness by fully implementingsystems as the Integrated Financial Management System (IFMIS) and the Integrated Personnel and PayrollDatabase (IPPD) systems which are already underway. h. Harmonise all Ministry websites in a single Government Portal and create email addresses for all civil servants to ease access to Government information and improve communication. i. Undertake capacity buildingby training the core implementation team on computer literacy and web-based applications and internet use. The mediumterm targets are a. Train all civil servants on computer literacy and web-based applications and internet use. b. Operationalise email addressesfor all civil servants. 45 c. Implement an integrated system for registration o f persons including births and deaths; immigration; property and assets registration systems including land and motor-vehicles; and implement integrated taxation databases and information systems e.tc. d. Complete the implementation of messaging and collaboration services to facilitate the exchange of mail among discussion groups and calendaring of events across a common platform. e. Roll-out the information infrastructure to district offices. f. Accelerate automation and integrationof Government information and records. g. Operationalise web-enabled databases and expedite data sharing and document workflow within government. Other targets include a. Introduce e-talking to citizens by providing citizens with Government publications such the Kenya gazette, laws and regulations, immigration forms, passport application form e.t.c through websites; b. Enhance listening to citizens by increasing the input of citizens into public sector decisions and actions; c. Enhance e-policing so that a traffic policeman could for example access electronically details o f a car or driver at the event o f an accident; d. Enhance the provision o f election services online such as e-voting to ensure that there is no congestion at pollinghalls and that vote counting is done quickly; and e. Introduce an electronic payment system to enable payments of utility bills electronically. Implementation o f e-government is, however, faced with several challenges including a. Accomplishing the targets for June 2004 requires Kshs.lOO million which is yet to be provided by Treasury. b. Financial Resources - It i s estimated that kshs.500 million for equipment, connectivity, training e.t.c will be required annually for the next five years for the successful realisation of e-Government. C. Human resources - All civil servants will need to be trained to ensure adequate capacity inthe use of internet, email and e-Government applications. d. Right attitudes - An e-Government requires a change in attitudes, cultures and norms. Civil Service Reform i s key to the continued implementation o f e-Government. e. Enabling Legal and Regulatory environment - the legal framework must be reviewed to enable handling o f Government records and information electronically and to ensure the security and integrity o f information. 46 f. Sustained Championing of e-Government i s necessaryat the highest level o f Government to ensure focus and commitment to the realisation of e-Government objectives. Energy Electricity The electric sector is in urgent need to deepen reforms to enhance reliability o f service supply, increase access to electricity, and lower energy costs. Expanded private sector participation in generation and distribution o f electricity i s at the heart o f the agenda. To achieve this, the government will further legislative reforms and strengthen regulatory functions o f the Electricity Regulatory Board (Em) including a review of the existing tariff regime and the methodology for setting tariffs; reduce its direct equity in the Kenya Power and Lighting Company (KPLC) from 51 percent to below 39 percent in order to remove it from the purview o f the State Corporation's Act; and restructure Kenya Electricity Generating Company (KenGen) to enable a public private partnership necessary to mobilize the investment needed for expanding generation capacity. A cabinet paper on the recovery programme of KPLC was prepared and presented to Parliament and has undergone through the second reading. To accelerate the pace o f rural electrification, the government will streamline the current institutional arrangements for the implementation o f the rural electrification programme by creating a special body, the Rural Electrification Authority (REA), under the Electric Power Act, 1997.The aim o f the government i s to reach a penetration rate of at least 40 per cent o f the rural population by 2020 from the current 4 per cent. The government i s aware o f the high costs o f new connections under rural electrification (currently KSh 180,000 per rural consumer or 8 times per capita income in 2000), and will be investigating more efficient new connection arrangements alternatives. Petroleum The petroleum sector lacks an effective regulatory framework. It suffers from poor competition, enforcement o f safety standards and high barriers to entry. The government has prepared a new Energy Act that combines the Petroleum Act and Electricity Act for ease of administration. This i s expected to significantly improve service delivery and expand the existing facilities including financing and management modalities on the extension o f the oil pipeline from Eldoret to Kampala. New and renewableenergy While the country has significant energy resources, including hydropower, geothermal, solar, wind and biomass, biomass (mainly wood fuels) accounts for over 70 percent o f total energy consumption, 80 percent o f the population depending on it their domestic energy needs. The use o f woodfuel has been responsible for significant deforestation and the government i s committed to reverse this trend in favour o f a policy promoting sustainable wood resource management and efficient harvesting, and end-use technologies. The government is also committed to harnessing traditionally underutilized solar energy in various applications including alternative grid extension for electricity provision, telecommunications repeater facilities, water heating, crops drying, refrigeration, and water 47 pumping. Solar energy usage is very small relative to its potential. Only about 150,000 photovoltaic home systems are currently in use in the country with an expected yearly increase of about 20,000 units. The government in partnership with the private sector and NGOs will develop a framework to provide incentives for solar energy users. Increasingthe rate of adoption to 50,000 units would deliver energy savings of about 150,000 tonnes of oil equivalent or US$ 30 million annually at current oil prices. The government is supporting initiatives to popularize wind power (now contributing only about 0.2 million K W H to the national grid). Technological development has made wind powering increasingly more attractive especially to remote areas with no access to electric energy and oil supply outlets. Applications include battery charging, water lifting, small hydropower systems and power supply to community centres and health clinics. Major constraints are: lack of appropriatetechnology, absence of data regimes and poor promotion strategies. Productive Sectors The main drivers of the Kenyaneconomy are tourism, manufacturing and trade. They contribute 25 percent of Gross Domestic Product and employ 4 million people, of which more than 90 percent are in the informal sector. The government is committed to improving the environment for private sector growth and investment in these sectors, mainly by removing barriers to investment and lowering the cost of business. Tourism Tourism plays a central role in the Kenyan economy and is a major source of potential growth and employment generation. As such, the government is committed to working with the private sector in removing the hindrances to its growth, and strengtheningthe linkages betweentourism and the rest of the economy. To do so, government organizations (Kenya Tourism Board, Wildlife Service, the Tourism Development Corporation and the Hotel & RestaurantAuthority) will work hand-in-hand with a wide range of representatives from the private sector (Kenya Tourism Foundation, its member groups, and other stakeholders) to develop and implement a coordinated strategy for revamping the sector (tourism development policy and plan). The strategy will address the need to attract tourists from a wider range of countries, diversifying tourist attractions, expanding the benefits to the local population, protecting the environment, and improving quality and standards. The main concernthe government is addressingis security. The medium-termstrategy includesa full reform of security forces (see governance), and the strengthening of airport security (see infrastructure). As an interim measure, the government is instituting tourist and anti-terrorist police units, to improve security inthe surroundings of hotels and resorts. To improve competitiveness of the Kenya relative to other tourist destinations, the government will be reviewing the structure of taxation in the sector (which currently results in a 22 percent average tax on tourist spending), and providing tax incentives for tourism infrastructure refurbishment. To improve marketing of Kenyan destinations, the government has strengthened the Kenya Tourist Board, which together with the Ministry of Information and Tourism and the Kenya Wildlife Service will embark in a major promotion campaign and improve information systems. 48 The promotion exercise is intended to market the diversity of attractions available in Kenya, to include eco-, conference, sports, retirement, film industry and domestic tourism. The budget for this activity is however severelylimitedrelative to that availableto Kenyancompetitors, andwill need to be expanded either by earmarking selected tourism revenuesor expanding private sector contributions. To strengthen the linkages with the rest of the economy and make tourism pro-poor, efforts will be made to: foster community-based and eco-tourism particularly to northern and western areas of the country and targeted to backpackersand nationals; strengthen community-based wildlife conservation, adopt an appropriate compensation policy and take measured to reduce human- wildlife conflicts; provide guidance, access to credit, and incentives to small and medium enterprises; and review the structure park tariffs to expand tourism on less-visited parks. The Kenya Tourist Development Corporation (KTDC) will be restructured to play a key role in facilitating local investmentand proving credit to small and medium enterprises. For environmental protection, the government, in partnership with the private sector and communities, will focus on land management. Elements of land management include an integrated costal zone management structure to oversee development in Mombasa and Malindi; government-private-community partnershipsto extend reserve areas aroundnational parks; local community involvement in designing and implementing plans for sustainable land use management as part of the National Environment ManagementAct, modelled after the Selenkay ConservationArea experience; and certification schemes for eco-friendly resorts. Finally, to address quality and standards, the governmentplansto: expandthe facilities of Kenya Utalii College, including reviewing the proposal for establishing an additional branch in the coastal region by July 2005; and enhance the role of the Catering Levy and Development Trustees (CTLDT) to provide affordable credit to local tourism operators and a regulatory framework for the standardization oftraining inthe sector. Trade and investment As a result of early 1990s trade liberalization reforms, price and exchange rate restrictions have been eliminated, tariffs lowered, and suspended duties scrapped, giving Kenya a high rank for openness. The government has also recently embarked on a comprehensive reform of its trade system within the context of the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). By 2004, Kenya will reduce the number of nonzero tariff bands to four, the top tariff rate to 25 percent, and the duty on raw materials and capital goods. It will also build capacity to address trade disputes and dumping claims, and harmonize investment incentives. To increasetrade and investmentperformance, the governmentwill review licensing agreements, provide market information to Kenyan manufacturers, and support the private sector in identifying new markets, improving quality of Kenyan goods, reducing non-commercial risks, organizing export trade fairs, and exploiting AGOA. A sessional paper on trade policy will be completed by the Ministry of Trade by September 2004. The World Bank and other partners are assisting the government carry out a trade diagnostic study, expected to be completed by June 2004. To increase foreign investment, the government will work to improve the business climate and speeding up privatization. Measures include developing a new regulatory framework for finance 49 and infrastructure, strengtheningthe rule of law, improving security, and reducing the number of regulations and steps required for investing in the country. The government drafted a new Investment Code, which, among others, entails the establishment of an Investment Authority in charge of investment policy and the developmentof an investmentroadmap by 2005. Industry Kenya's manufacturing sector is performing better than its neighbours but still well below its potential. To expand its growth and employmentgenerating capacity, the governmentwill focus on removing the barriers to investment and lowering the cost of business inthe sector. This will include measures to further liberalize trade, deepen the financial market, enhance infrastructure, improve security, facilitate use of technology licenses, review mechanisms for wage determination, and improve access to quality training. Many of these activities will require close coordination with other sectors (trade, finance, infrastructure, justice, and labour) to ensure that reforms in those sectors are consistent and supportive of labour-intensive growth inmanufacturing. Even more importantly, the government will ensure the existence of adequate mechanisms for private sector consultation to ensure that policies address the heart of private sector concerns. To this end, the government will be preparing, in consultation with its private sector partners, an industrial master plan to operationalize the sessional paper on industrial transformation. In addition, the government will undertake benchmarking exercises for key industries, including sugar and textiles, to measure Kenyan industries' competitiveness in the international market and identify constraints to improved productivity. 50 Chapter4: Equityand Poverty Reduction HumanResourcesDevelopment Human resource development is at the core of the ERS strategy to level the playing field and provide opportunities for all Kenyans to productively and self-reliantly participate in employment and wealth creation. Developing human resources requires complementary efforts ineducationand training, healthandHIV/AIDS,labour andnutrition. Education: attainment of universalprimary education Education, and particularly primary education, is the top priority on the NARC Government agenda. The government's first policy action in January 2003 was to institute free primary education. As a result, enrolment has increased by 1.5 million children in 2003. To strengthen the education system and ensure proper linkages at various levels the government is negotiating with the donors a comprehensive education sector program and a national forum on education was held in November 2003. Program priorities include ensuring equitable enrolment by targeting disadvantaged areas, particularly ASAL areas and urban areas, and vulnerable groups, such as girl child, street children, etc; improving quality and internal efficiency through teacher training and redeployment, reforming the curriculum to focus on core skills, providing teaching and learning materials and improving the learning environment, redefining the roles o f local authorities, and decentralizing decision-making to district and school-level administrators, and parents' representatives. To sustain and motivate participation and completion in primary schools as well as to improve transition levels efforts will also be made to enhance secondary schools capacity in order to accommodate more primary school graduates. The free primary education program implementationhas necessitated increases in both recurrent and development expenditures. However, making public resource utilization more efficient i s now a priority without which the attainment o f universal primary education could remain elusive. Health: provisionof basic health services The primary objective of the health sector reform process is to enhance accessibility and affordability of quality basic health services for all Kenyans with special emphasis on the poor and vulnerable. Formidable challenges in the sector make the achievement o f this objective an uphilltask. These include the emergence and re-emergence of some diseases such as HIV/AIDS, tuberculosis and drug-resistant malaria, which have increased the disease burden, and the increasingpoverty levels. This has led to an overburdened health sector, ever-increasing costs of essential inputs for medical supplies as well as human resources, and a decreased capacity to financially contribute to the cost o f health care by the majority o f Kenyans. As in education, the labour and skill-intensive nature o f health services leads to most of the resources going to wages and leaving very little for non-wage recurrent expenditures and capital inputs. In order to face these challenges the Ministry of Health aims to achieve the following reforms and targets: 51 Revisit the financing of the healthsector. The objective is to reducethe unaffordable level of out-of-pocket expenditures by the poor and vulnerable and to protect them from financially catastrophic expenditures for health care services. The government is committed to the introduction of a social health insurance scheme, to achieve the objective of making health affordable. The strategy envisages a phased approachto ultimately achieve national coverage in the medium term. Focus its investments on interventions that will in particular benefit the poor and vulnerable. The Ministry of Health will step up the efforts to increase the immunization coverage to 85 percent, reduce the children under five years mortality rate to around 100/1,000 by 2008, reduce the maternal mortality rate from 590/100,000 to 560/100,000 by 2005, reduce the HIV prevalence rate by 10 percent, increase the accessibility and availability of essential drugs, reduce the mortality rate for malaria by 10 percent annually, increase the cure rate for tuberculosis, and improve health service delivery for the underprivileged ruraland urban slums. Inorder to achieve thisthe ministry will re-allocateresourcestowards promotive, preventive and basic health services and enlist additional capacity through partnerships with civil society, faith based, and private sector organizations. Improve cross-sectoral cooperation for health promotion and public health, especially to achieve public health standards that are currently not realized for the poor. In view of the importance and critical roles that other sectors play in achieving better health outcomes, the ministry will strengthen its ties and collaboration across sectors in the areas of water and sanitation, reproductive health, gender, HIV/AIDS, nutrition, school health, road safety and tobacco control. Increase the efficiency and effectiveness of the combined investments of GoK and its partners. In order to achieve synergy and reduce inefficiencies related to independent and fragmented efforts, the Ministry of Health will further pursue the modalities that allow a programmatic approach by all partners involved. These include a jointly agreed National Health Sector Strategic Plan, a jointly agreed and supported monitoring and evaluation framework, mechanisms for annual health sector program reviews, ajointly agreed and supported medium term expenditure framework, and an annual sectoral public expenditure review to evaluate the effectiveness of actual expenditures against the objectives of the health sector program. Increasetotal governmentspending on healthfrom the current 5.6 percentas a share of total publicexpenditureto 12 percentover the time periodof this investmentprogram. Such an increase inthe investments inhumancapital may seem ambitious, but past public spending per capita on health inKenya has significantly laggedbehind as comparedto global and regional experiences. Inaddition, the challengesdescribedand the commitment of the governmentto make significant progress towards the MillenniumDevelopment Goalsjustify suchan increase. HIVIAIDS The government is implementing a comprehensive multi-sectoral national strategy in the fight against HIV/AIDS (National Strategic Plan on HIV/AIDS, 2002-2005). The strategy includes institutional, legal and programmatic reforms. To strengthen policy formulation and oversight, the governmenthas establisheda cabinet sub-committee on HIV/AIDS, chairedby the President, and is in the process of restructuring the National AIDS Control Council (NACC). To provide for an explicit legal framework for the national response to the HIV pandemic, the government recently promulgated a bill on HIV/AIDS. At the programmatic level, the government 52 implemented a new policy on decentralizationto focus attention on the need to strengthen action at the community level, with the constituencies serving as the focal points. At the same time the government is committed to continue its focus on the prevention o f new HIV infections among the 90 percent of Kenyans who are not infected. In order to achieve this, the government plans to pay particular attention to the empowerment and protection o f the most vulnerable. The government recognizes that vulnerability factors for HIV infection, including those related to poverty, gender, discrimination, educational attainment and socio-cultural factors, are diverse and complex and can only be coherently addressed when the multi-sectoral dimensions o f the response to HIV/AIDS are significantly strengthened. The government also plans to intensify advocacy campaigns and education to mitigate stigma and discrimination; coordinate the strategies for prevention, treatment and mitigation; develop a roll-out plan for the increasing amount o f resources devoted to treatment; intensify prevention activities; develop capacity building plans for private and public agencies involved in HIV/AIDS programs; and develop a creative and strategic approach for caring for and supporting the rapidly increasing number o f orphans. For the infected, the government i s committed to availing Anti-retroviral drugs(ARVs) to an increasing number in line with WHO goals. It is expected that nearly 110,000 will have beenput under ARVs by the end o f 2005. The government acknowledges the large contribution that development partners and other stakeholders have made inthe fight against HIV/AIDSand i s committed to maintain an open and productive dialogue with all stakeholders. To this end, the government will reformulate its overall partnership plan that will include modalities for stakeholder participation in the planning and operationalization of new policies, partnership environment for policy dialogue, a jointly agreed strategic plans, jointly supported institutional arrangements, a jointly agreed Monitoring and Evaluation framework, and a Joint HIV/AIDS ProgrammeReview mechanism. Labour The objective of labour reform is to quicken the pace of labour productivity growth. The newly established Productivity Centre o f Kenya i s expected to implementit's strategic plan with a view to developing a productivity policy as well as productivity measurement mechanisms. Inaddition the government plans to undertake a study o f the labour market to identify a set o f consistent recommendations for improving labour productivity, and i s seeking donor support for this activity. The study would review the legislative framework; identify the inefficiencies that have led to high unemployment and high labour costs; develop an inventory o f available skills and propose reforms to improve labour market flexibility and strengthen the links betweeneducation, training and industry demands. In the area o f industrial and labour conflict management, the government plans reforms to enhance the dispute settlement machinery, strengthen the tripartite committee secretariat, fortify the labour inspection services, and reduce the backlog o f workmen dispute cases. Labour market policies The Government recognizes that the labour management policies must involve a multi-faceted approach consisting o f general wages and incomes policy, improvement o f working conditions and environment, improving occupational safety and health, clear guidelines on export o f labour and employment of foreigners, education and training, and mainstreaming the disadvantaged groups in employment. It's in this respect that the Government has appointed a tripartite Taskforce to review the six core labour Acts and make recommendations for review o f all other 53 pieces of labour related legislations. The Core Acts are the Employment Act, Regulation of Wages and Conditions of Employment Act, Trade Disputes Act, Trade Unions Act, Factories andother places of work Act, andthe Workmen's compensationAct. The review of these laws is expected to create a better environment for investors and protect the interest of the labour force. The review will also ensure that Kenya domesticates international Standards and Conventions that it is party to, while at the same time meet some of the African Growth and opportunity Act (AGOA) conditionalities relating to freedom of Association, child labour and good governance. Other measures envisaged in the medium term and which are specifically targeted at removing the labour market rigidities and impediments to employment . are: . Developing and orientating Kenya's policies on industrial relations and occupational health and safety programmes. Use of productivity indices produced by the newly established Productivity Center, in addition to the traditional in used price indices, in setting the wage guidelines, and in collective bargaining agreements. m Reorganization and strengthening of the wage setting mechanisms in Kenya including reorganization of labour Advisory Board and wage Councils, quick processing and registration of collective agreements, and allowing market mechanisms to influence wage negotiations. 1 Encouraging Tripartism, Social dialogue, andtraining and research. Mainstreamingspecialgroups in employment Special groups, which refer to women, children, the youth, persons with special needs, retirees and the aged persons face .many barriers for entry and progression into a number of socio- economic activities, and have led to their low participation rates in decent sustainable employment andtheir optimum utilization. Women Gender disparities in employment opportunities have remained wide in many sectors of the economy. Though women constitute the majority in the labour force their participation remains low relative to those of men. For example, in 1998/99 Labour Force Survey, women participation rate was 72.6 percent compared to 74.7, percent for men. Factors contributing to these disparities in employment opportunities include negative social attitudes towards women; inadequatecapacity on the part of many women interms of their knowledge and skills; in access to productive resources; and lack of gender responsivepolicies and programmes. This has ledto increased unemployment, underemployment, poverty and powerlessness among many Kenyan women. To reduce the marginalization of women, the Government policy is to remove barriers and promote the education and training in order improve their effective participation in the labour market. Measures will be put in place to assist women to gain access to more productive resources. These will be through intense sensitization campaigns among key decision-makers in policy and programme implementation positions invarious sectors. The Government will further strengthenunitsof gender issues invarious line ministries. 54 Government will also institute measures that will prepare and encourage women to compete for all jobs through other appropriate policies and instruments such as promotion of equal employment opportunities and removing limitingclauses o f employment related laws that inhibit their effective participation in labour market. Children The Government recognizes the existence o f child labour together with employment o f young persons in hazardous situations despite o f legislations against the same alongside unemployment. Currently it is estimated that Child Labour in Kenya stands at 1.3 million, mainly working in commercial agriculture, fishing and domestic services. This has negative impact not only on the health o f the child but also on the country's future labour force. Child labour has been attributed to poverty, HIV/AIDs pandemic and inadequacy in polices to address child labour, The Government however remains committed to protection of children and eradication of child labour. The main challenge in addressing this problem has been school enrolment, retention, and re- integration o f working children back to school. The implementation universal free primary education i s a critical initial step in addressing the challenge. The next in line will be secondary education. Complete free education will therefore be one o f the effective instruments in attacking poverty and elimination of child labour. While the Government continues to fight poverty and HIV/AIDs at all fronts, its policy i s to develop programmes and schemes that will identify child headed households and children from poor households on a continuous basis and provide for their health needs and social welfare, education and training. The Government has taken encouraging steps through legislations to reduce and eventually eliminate child labour and improve their capacity for implementation and promotion o f targeted, pro-poor employment generatingprojects both inurban and ruralareas. Youth The majority of the unemployed are the youth aged 16-39 yrs. The Government appreciates that the problems of increased youth unemployment have been accentuated amidst depressed economy. Lack o f skills, assets and access to credit facilities has rendered self-employment difficult for the youth hence leading to high crimes, street begging and drugs. In response the Government i s in collaboration with stakeholder developing programmes such as creation and sustention of a revolving youth fund for promotion o f self-employment. Other measures will include providing mechanisms to manage transition from school to work, career guidance, industrial attachment, mentoring and couching; and rendering business counseling advisory services. Agriculture, Livestockand Environment With 67 per cent o f people living in rural areas, over 50 percent o f whom are living in poverty, the agriculture sector is the growth sector, which is most likely to play a central role inreducing poverty and increasing food security. To reverse recent trends of low growth in agriculture, comprehensive and far-reaching reforms must be implemented to promote productivity growth and lower the costs o f agricultural inputs, particularly among smallholders and subsistence 55 farmers. While smallholder farmers account for 70 percent of marketed agricultural production, their yields are below potential. Tea and coffee yields, for example, are only two-thirds and one- half that of large farms, respectively. By raising the productivity of these farmers much can be achieved for reducing poverty. It is targetedthat average yield of major crops rises by 5 percent over the investmentperiod. Agricultural research and extension. The objective of reforms in the agricultural researchand extension area is to strengthenthe link between farmers' demands, extension provision and the direction of research, and increase the productivity of public investment, The government is in the process of restructuring and rationalizing the network of agricultural research institutes by consolidating operations into the Kenya Agricultural Research Institute. Already three out of thirteen institutes have been merged with KARL The government also plans to open the policy dialogue on the issue of genetically modified seed to investigatethe pros and cons of adopting a clear G M policy. In extension, the government will be reviewing alternative modalities for service delivery and exploring modalities for introducing private sector provision. The Government requires support from its development partners for analysing options for greater private sector participation inextension. Agricultural financial services. One of the main constraints to increased investment in agricultural production is poor farmer access to credit and insurance. The government is interested in investigating and selecting options to deepen the financial credit market for small agricultural borrowers. The rural SACCOs will be expected to enhance their role in mobilizing savings for on-lending to their member farmers. Agricultural inputs. Price movements in the local agricultural input market do not reflect international market conditions. Between 1997 and 2001, seed and fertilizer prices rose 80 percent, fuel prices 50 percent, and animal feed prices 40 percent. At the same time international prices for inputs declined. Erratic price movements point to serious governance issues in the market for inputs, which have affected investment in agricultural production and farmers' profitability. The government is identifying reforms to improve competition in inputs distribution and marketing and to enforce the law against fraudulent practices of input suppliers and marketing agents. In addition, through the on-going reform in the cooperative movement, the agricultural production and marketing cooperatives will be expected to contribute to improvement inthe supply of agricultural inputs at least to their members. Commercialization. Commercialization of farm and non-farm products is the key for increasing rural incomes. The government activities will focus on reducing transport costs by improving rural roads and reducing fuel taxes; reducing irrigation and factory operating costs by bringing down electricity costs (see section on energy); and improving access to market information by strengthening communications. Marketing and value addition. Lack of market for products has led to losses of income by farmers and investors in the sector. By adopting appropriate marketing strategies, the government, the private sector and the farmers' organisations can improve incomes and promote economic growth. Some of these strategies include processing, packaging, storage, transportation and research. In this regard the government is committed to supporting cooperative, private investors and other institutions to undertake necessary investments in these activities including market information and dissemination. 56 Land administration. The government will formulate a national land policy to address land use and administration, land tenure, and land delivery systems. Modernization of land information management systems is ongoing. Gender. Due to traditional roles and male rural urban migration, smallholder farmers are predominantly women who provide 75 percent ofthe labour for small-scale agriculture. They are however constrained in their access to land, credit, information and markets. As part of its constitutional review, the government is reviewing the laws of succession, which greatly affect gender land imbalances. It will also work to identify mechanismsto increase women's access to credit, information and input and output markets. Food security. The government is reassessing food security policies with the intention of introducing pro-poor reforms. Issues under consideration include the liberalization of the maize and sugar markets that impose a significant tax on the poor who are net buyers of maize and sugar. Curtailing the Kenya Sugar Board to regulatory function and privatizing sugar factories are also under study. Rehabilitation and expansion of irrigation schemes will be part of the strategy. Pyrethrum. The government i s planning to liberalize the pyrethrum sector, and restrict the pyrethrumboardto regulatory functions. Coffee sector. Following reforms in the tea and dairy sectors, the government is considering similar reforms in the coffee sector with the objective of increasing the share of final sales that farmers receive. Reforms would include legislative amendments to the Coffee Act to allow growers to sell coffee outside the auction, and the establishment of an agency to operate processing, marketing and inputs distribution. Improvement in cooperative governance among the coffee marketing societies is expectedto raisethe proportion ofendmarket value receivedby members and thus boost the members' moraleto increasecoffee output. Cotton and rice sectors. The government plans to support plans for rehabilitation and developmentof irrigation systems to supportthe revitalization of cotton and rice sectors. Livestock sector. This sector has a high growth potential and i s of priority importance for subsistencefarmers andpastoralists.The government plansto implement a concerted strategy for disease outbreak prevention and control, and improving quality and certification of veterinarians and other service providers. It is also considering the introduction of a single permit system for cattle movement, reviewing options for a decentralized and private sector provided network of slaughterhouses,expanding access to water sources, and improving security. Fisheries Sector. Fresh water and marine fisheries have significant growth potential in improving the livelihood of communities of Western and Coastal regions of Kenya, and they are a source of foreign exchange earnings. The government i s committed to developing an enabling environment to ensure sustainability in fisheries development and management. A fisheries policy and master plan is currently under development. Public resource allocation. The government is committed to restructuring public spending in the Ministry of Agriculture to allocate a greater share of resourcesto priority programs. This will require significant rationalization of agricultural parastatals. 57 Environment. Adequate management of environmental resources is key for long-term sustainable economic growth in rural areas. The government is in the process of implementing the National Environment Action Plan (NEAP) andEnvironment Managementand Coordination Act (1999). As a result, the government established the National Environmental Management Authority, responsible for setting and enforcing environmental standards and which is expected to be fully operational by 2005. The Ministry is carrying out a natural resource inventory and valuation. Other activities include the implementation of WSSD, MDG, and Lake Victoria Environmental ManagementProject. Forestry. Activities in forestry include implementation of the Forestry Development Policy, enforcement of the Forestry Act, and promotion of private sector participation in afforestation and managementof forest plantations. Wildlife management. The government is working with local communities in conservation of wildlife and benefit sharing, implementing measures to manage human-wildlife conflicts, and strengtheningthe capacity of Kenya Wildlife Services. Areas for further private sector involvement. Reforms are opening the doors for greater private sector participation in the areas of rural infrastructure, fisheries, mineral exploration and exploitation, slaughterhouses and livestock exports, particularly from arid and semi-arid lands (ASALs), agricultural processingand marketing, financial services, and input supply. Overall, the government is requesting additional support from its development partners to operationalize agricultural policy in the areas outlined above, and promote environmental protection under the strong belief that careful and timely reforms can help release the major untapped potential of the sector. PovertyTargetedPrograms To address poverty reduction targets, the ERS identified some priority programs that target poor communities, the poor in arid and semi-arid areas, the urban poor, and marginalized groups. These programs include the establishment of a social action fund, the development of arid and semi-arid areas, the implementation of slum upgrading programs, and the development of a programto reduce the vulnerability of marginalized groups. The social actionfund The government plans to establish the Kenya Social Action Fund to support and finance the implementation of productive community-driven development projects. The fund will operate within a framework for community project development, improved planning, and transparent selection and financing. The fund is meant to foster community-driven development in an accountableand transparent manner. Arid and semi-arid lands (ASAL) program The ASAL program is a multi-sector program designed to cater to geographical areas with high poverty incidence that have traditionally been a low priority in public resource allocation and programs. This government has committed to reverse past inequities and promote development and poverty reduction inthese areas. 58 The strategy in ASAL aims at combining activities in infrastructure and productive sectors, with humanresource development, security enhancement, and land tenure reforms. Onthe productive sectors side, the program aims at supporting infrastructuredevelopmentto rehabilitate roads and mobilize community participation in feeder road maintenance; implement a broad-based livestock development policy; facilitate private sector development of fishing infrastructure; and strengthencommunity-based- and eco-tourism. Inhuman resourcedevelopment, the objective is to start closing the gap with the rest of the country by developing a creative schooling program for pastoralist children, strengthening community-based health care systems and preventive medicine, and improving food security through the implementation of community-based early warning systems. Additional activities include strengthening security and increasing border surveillance; and improving land tenure by undertaking data based inventories of tenure arrangements, reviewing adjudication processes, and establishingaccountable land boards. Currently the most comprehensive integrated intervention in ASAL is undertaken by the Arid Lands Resource Management Programme (ALRMP), which is a community-driven initiative to finance community projects on livestock marketing, small infrastructure, development and rehabilitation.of bore holes, dams and water pans, animal disease control, development of roads and stock routes, and promotion of bee-keeping. The government plans to expand this program to all ASAL districts. Slum upgradingand low-cost housing The objective of the slum upgrading program is to improve the living conditions of millions of urban poor that live in urban slums mainly in Nairobi and Mombasa and lack access to basic water and sanitation, road, energy and housing infrastructure. The program will develop slum upgrading and relocation plans that will include land adjudication and registration, expansion of water network and sanitation facilities, provision of electricity distribution points, upgrading of slum roads, and enactment of housing legislation to facilitate private sector expansion of low cost housing and housing financing. In housing, the government is targeting construction of 150,000 housing units annually through its slum upgrading program, completion of stalled housing projects, adoption of innovative cost effective building materials and technologies, provision of new tenant purchase housing schemes, and promotion of full scale development of secondary mortgage market. The government seeks private sector participation for construction of low cost housing in selected urban centresunder concessionaryterms. Vulnerability The vulnerability program will be designed to target marginalized and vulnerable groups and begin closing the gap in their access to public services. Particular attention will be focused on orphans, the youth, women and the disabled. The government seeks the support of development partners inthe developmentofthese programs. 59 Chapter 5: Governance Poor economic governance, including high levels o f corruption and poor management of public resources, is one of the key impediments to economic and social development. It undermines development by distorting the rule o f law and weakening the institutional foundation on which economic growth depends. The harmful effects o f weak governance are especially severe on the poor, who are most reliant on the provision of public services, and are least capable of payingthe extra costs associated with bribery, fraud, and the misappropriation of economic resources. Corruption, a major manifestation of poor governance, and poverty are linked through many indirect channels. At a macro level, corruption hampers a country's ability to attract investment, the effectiveness o f its institutions and revenue generating capacity. Corruption affects the way public money i s allocated, diverting expenditures away from sectors such as health and education to sectors such as public works where contracts can be manipulated and bribes more easily secured. The government is committed to eliminating corruption, restoring the rule of law and bringing about equitable development that favours all citizens. Securing lasting improvements in governance represents a major challenge that will require focused and sustained effort to build stronger institutions that are able to effectively apply the law and to manage public resources with integrity.The government has already taken important steps. It created a new department o f governance and ethics in the Office of the President, and the Ministry of Justice and Constitutional Affairs with strong leadership to co-ordinate reforms across the various institutions in this highly interconnected sector. A process o f review and harmonisation's o f Kenyan laws has also started under the reconstituted Law Reform Commission, in charge o f updating several important acts, includingthe company and investment laws intendedto improve the investmentclimate. This chapter presents key government programs and initiatives inthese areas. Public Safety, Law and Order Contributing to weak public safety, law and order are the poor terms and conditions o f service for police and other security personnel, weak legal andjustice regimes, increasing sophistication o f criminals, proliferation o f firearms and light weapons, strengthening networks o f international terrorist organisations, insecurity in neighbouring countries, weakening of traditional conflict resolution mechanisms, and rising drug trafficking and substances abuse. A lack o f prison capacity and lack o f ineffective co-ordination betweenthe police, judiciary, and other institutions o f public security make the problem worse. The broad sector objectives are to restore rule o f law, to maintain an efficient and motivated police force, to promote good governance by developing a strong co-ordinated administration and governance system; to eliminate corruption; to strengthen capacity for crime management, investigation and prosecution; and to strengthen capacity and co-ordination o f institutions within the sector. Other objectives are to increase the efficiency and lower the costs o f the judiciary, especially for the poor; to strengthen the legal andjustice institutions; to create an enabling legal and regulatory framework; and to reduce overcrowding o f prisons. Outcome targets are (a) to increase the ratio o f convictions from 21 percent o f reported criminal cases in 1999 to 60 percent in 2006, and (b) to reduce the number o f reported crimes from 63,000 in 2001 to 35,000 in2006. 60 Priorities include improving training of police officers, recruiting new police officers, equipping the police with modern equipment and technology; improving living conditions of police officers; rehabilitating 20 courts; and strengthening the specialised police units. Other activities include establishinga taskforce outside the Civil Service Reform Commission; operationalizing the Human Rights Commission; completing investigations into the Goldenberg scandal; establishing the office o f the Ombudsman; developing and operationalizing a 5-year strategic master plan to fight corruption; and implementing a framework for cross-border policing and collaboration. Police reforms The police force plays a major role in promoting public safety, law, and order. However, unsatisfactory enforcement of the rule of law and low standards of professionalism and competence within the police force has worsened the security situation inthe country. The government i s addressing the problem by preparing a full diagnosis o f the police and budgetary allocations within the sector ensuing recommendations will be incorporated in the design o f a comprehensive strategy to professionalize the police force, reform the structure o f incentives police forces face, increase their linkages and accountability to the community. Professionalism in the police will require the implementation o f a training and re-equipment program to enhance efficiency and effectiveness in handling crimes. Due to wage bill constraints, the restructuring of incentives in the short term will focus on improving the living conditions of police officers including through provision o f decent accommodation. By January 2004, the police force salaries were increased which is expected to improve their morale and boost their productivity. To strengthen the linkage with the'community, the program will promote redeployment of police, initiation o f the community policing aimed at friendly working relations with the public, establishment o f monitorable outcome indicators, and strengthening o f partnerships between the police force and the private sector security agencies. The police Department is implementing a Rapid Result Initiative of one hundred days with an objective o f enhancing security inthe Central Business District. The launching was done on 23rd January 2004 and has been very successful. The members of the private sector organisation have expressed the willingness to support the initiative as a collaborative effort with the Government. The outcome will be replicated to the other major urban centres and throughout the country. The recruitment of the police to effectively undertake these initiative will be carried out in the mediumterm. The recruitment will enable the effectiveness and efficiency inthe security forces and further establishment and strengthening o f anti-banditry units, a tourism police unit, anti- terrorism police units, port patrol units, and community policing initiatives and anti-corruption units. The reform will be complemented by the development of a framework to undertake comprehensive intelligence research incrime and security; and a revision and enactment o f laws to deal with modern crime challenges such as terrorism, fraud, money laundering, e-commerce crimes, and tax evasion. Anti-corruption measures Pervasive corruption has slowed growth and deepened the poverty levels in the country. Eliminating corruption will free significant resources for investment in infrastructure and in programs that deliver services to the poor. 61 To eliminate corruption the government enacted and i s implementingthe Economic Crimes Act (2003). This provides for the establishment of an Anti-Corruption Commission, which the government intends to make fully operational by early 2004. The commission mandate is to achieve a zero tolerance on corruption, enhance accountability and transparency in the conduct of the national affairs focusing on internationally accepted standards. It also held a national conference on corruption and announced the preparationo f a five-year anti-corruption strategy. The action plan to support the strategy i s currently under preparation and will include regular surveys and monitorable indicators to measure progress made in curbing corruption. To reduce corruption in the public service, parliament approved the Public Officers Ethics Act in 2003, which requires all public officials (including the President), employees and their families to declare their assets. This provision was implemented in October 2003. Finally, the government i s strengthening the capacity of the Kenya Anti Corruption Commission. These policies are reflected by concrete actions, such as: i)investigation o f the Goldenberg scandal, ii)replacement o f corruptjudges, iii)repossessing o f grabbed land and public housing, and iv) banning o f corrupt contractors from participating inpublic procurement. Other measures are intended to reduce opportunities for corruption and eliminating conflicts o f interest. These include the transfer of the responsibility for the regulation o f the financial sector from the Ministry o f Finance to the Central Bank o f Kenya; the cancellation o f all stalled projects; the elimination o f pending bills; the timely presentation o f final accounts on government operations by the Controller and Auditor General; and the reform of the public sector procurement system. The programme outcome is to reduce corruption incidents and lower Kenya's international rating by 50 percent annually, ensure that the Publics Ethics Act is fully implemented and set up an office o f ombudsmanwhere members o f public can lodge complaints and petitions. Judicialreforms and dispensation ofjustice The reliable and accessible dispensation of justice is critical for a well functioning society. Hence a sound system that is speedy, accessible, and affordable to the poor, fair, and not corrupt promotes and sustains economic development. The government has taken several actions to improve the dispensation o f justice. Of key importance is the establishment o f the Ministry o f Justice and Constitutional Affairs, which i s responsible for policy on administration of justice, law reform, anti-corruption strategies, integrityand ethics, legal sector reform, legal aid and advisory services, and the Kenya National Human Rights Commission. The ministry's five-year strategy is to improve legal education, increase access to justice through support to legal aid, create mechanisms for community justice, zoning o f courts in various parts o f the country into 12 circuit courts to offer Judicial Service to areas without Courts and develop and implement a five year anti-corruption campaign. The campaign o f fighting corruption has started by forming a tribunal to try judges on allegation o f corruption and related cases that were identified. The ministry has also spearhead an ambitious program o f law reform to take into account the provisions o f the constitution that is expected to be adopted in 2003. The Ministry is expected to benefit from a proposed Justice and Integrity Project being supported by development partners. Activitiesprogrammes to be undertaken involves recruitment o f MagistratedKadhis to cope with the increasedcases, training of staff to enhanceefficiency, automation ofcourt registries to 62 enhance information flows, acquisition of more vehicles to facilitate accessibility to remote areas for delivery of Judicial services and court hearings inup country stations and installation o f security equipment inCourts. In addition, the government will take steps to reduce overcrowding ofjails and prisons. These steps will address prison capacity, institutional coordination between the judiciary and the office o f the Attorney General, prisons, the police, and the children and probation department, inspection and enforcement of rules and regulations. It will also sentence more non-violent offenders convicted of petty crimes to community service, implementing the community service order act. Improving immigrationservices Immigration services control the entry and exit of persons seeking to live temporarily or permanently in the country. Despite the critical role o f immigration services, various obstacles hinder delivery of services, such as lack of collaboration among stakeholders, inadequate computerization, and lack of appropriate equipment. The government has recruited 116 immigration officers to assist incurbing entry of illegal aliens. It is also preparing to provide visa stickers that contain a security mark that cannot be forged, rather than issuing manually stamped visas. In the future it will enhance collaboration with relevant stakeholders, computerize the institutional system and provide specialized equipment, and ensure that all immigrants are inpossession of requisite passes and permits. Public Administration An efficient public administration ensures that public services are delivered efficiently, effectively, and for their intended purposes. The government aims to create a leaner, more efficient, motivated and productive public service. It also intends to accelerate the parastatal privatisation process. The Government will continue with reforms in the civil service, Local Authorities and public enterprises to attract private sector investment and improve delivery o f public services. Other critical components o f the government's strategy include separating powers between various branches o f government; strengthening the rule o f law; decentralising delivery o f public services; and making the conduct of public operations at all levels o f government more accountable and transparent. These measures are expected to improve revenue collection; reduce rent-seeking; and increase the productivity o f public investments. Targets are to eliminate pending bills in all sectors, resolve stalled projects, and increase the project completion rate, during 2003-06. Other targets are to increase the proportion o f budgetary resources controlled by local governments, and to increase the proportion o f communities reporting having greater control over local development resources. Civil service reforms The government will accelerate the public service reform programme to focus public financial and human resources on the delivery o f core government functions, and to reduce the share o f 63 the wage bill inthe GDP to 8.5 percent of GDP by 2005/06. Reforms have previously included rationalization of ministerialfunctions, structures, and staffing. The civil service reform will in the medium term focus on improving performance by: (a) rightsizing the civil service, (b) reforming pay structures, (c) reforming pensions, and (d) building capacity of the public administration. Most of the resourceswill be spent on rightsizing the civil service. As part of the measures aimed at reducing the relative size of the wage bill in total expenditure, a study is being undertaken to recommend modalities for reducing the wage bill. Public expendituresystems The government places considerable importance on the effective control and close monitoring of public expenditure as a means of reducing corruption, minimizing deviations of budget outcomes from intentions, promoting budget discipline, and preventing the accumulation of new arrears. For detailed actions inthis area, see public expenditurereform inchapter 2. Parastatalreform The government set up a high level committee, chaired by the head of the public service, to review the performance and viability of state corporations. One hundred thirty six (136) state corporations and statutory boards are covered in the analysis. The recommendations of the committee, including possible restructuring, mergers and legislative reforms, have been discussedby the cabinetEconomic sub-committee and are waiting finalization and submissionto cabinetfor approval. Localgovernment reforms As part of the Constitutional review process, local government reforms will be implemented to improve delivery of services and accelerate the devolution of decision-making authority to the local levels. Currently, local finances are being improved through the local authority transfer fund (LATF). Local business licensing has also been rationalized and other measures have been introduced to improve local level financial management, revenue mobilization and service delivery linked to the LATF system. The government with the support from development partners is also supporting capacity building in local authorities and a comprehensive training programme and master plan for training of local authority personnel is beingdeveloped. During the recovery period, local government reforms will be strengthened. Actions include strengthening of monitoring and evaluation systems to cover programs implemented by local governments. Reforms also include further Operationalizing the Kenya Local Government Reform Programme (KLGRP) by implementing the local authority service delivery action plan and establishing an integrated financial management information system; developing and implementing a comprehensive decentralization strategy; and reviewing the LocalAuthority Act. These reforms are aimed empowering local authorities, and reducing conflicts between the central government and local authorities. 64 Chapter 6: FinancingFramework 1, Introduction The InterimInvestment Programmeof the Economic Recovery Strategy hada total estimated cost of Kshs.706.92 billion comparedto committed funding (inthe Printed Estimates of the 2003/04 budget) of Kshs. 154billion, including Kshs.47 billion of donor funds. This therefore left a substantial financing deficit to be met from increasedexternal borrowing, public expenditurerestructuring and private sector investment. The investmentprogramme estimated that Kshs.96.9 billion would be raisedfrom private sector participation, Kshs. 171from additional external borrowing (bringing the total external resourcesto Kshs.219 billion or US$ 2.9 billion at prevailing exchange rates) while Kshs. 119.4 billionwas to be raisedfrom expenditurerestructuring. To ensure that the funding was adequate to implementthe existing projects, a prioritization schedulewas provided inthe strategy, with activities not provided for going into a pipeline to be reviewed should funding allow. Since the launch of the investmentprogramme, several important changes have taken place including: 0 The successfulholding of a Consultative Group (CG) meeting, where a total ofUS$4.1 billion was pledged: this sets an upper limit on the level of external resources available for funding the programme; 0 The country entering into a Poverty Reduction and GrowthFacility (PRGF) arrangement with the IMFwith implications for the macro economic framework; 0 The completion of an exercise on prioritization which has enabledthe sectors to be more focused intheir expenditurerequirements. The changedenvironment has enabled a completereview of the ERS investment programme and thus its financing framework. 2. COSTSOF IMPLEMENTINGTHE REVISEDINVESTMENTPROGRAMME Table 6.1 below provides an estimate of the cost of implementing the projects and programmes enumerated inthe sectoral chapters. Sector ImplementationCost (Kshs.Mn) percentof Total costs Macro Economic Sector 8,599.4 2.51 Public Administration 7,914.5 2.3 1 Public Safety Law and Order 43,890 12.83 Agriculture and Rural Development 38,488.5 11.25 Tourism Trade and Industry 16,254.8 4.75 HumanResourceDevelopment 143,400 41.92 Physical Infrastructure 81,018 23.68 Information Technology 2,500 0.73 Total 342,062.2 100.0 65 Fromthe table above, the humanresourceand infrastructure sectors are expectedto account for the bulk of expenditure, 66percent while the public administration sectoraccountsfor only 2.3 lpercent. Table 6.2 below providesa breakdownof currently forecast expendituresunder the base case scenario. The table shows that total Governmentexpendituresare expectedto total Kshs. 1,326 billion over 2003/04-2006/07. Ofthis, Kshs.422.4 billion are expectedto be personnel emoluments, Kshs. 116.3 billion for interest payments, and Kshs.69.7 billion for pensions. An expectedKshs.369.3 billion is available for ERS expenditures, ofwhich Kshs.280 billion will be developmentexpenditures, Kshs.36 billion for the free educationprogramme and Kshs. 26.2 billion for non-wage health services. Table 6.2: ProjectedExpenditures ! TOTAL 2002103 2003/04 2004/05 2005/06 2006/07 2003104- Actual 1EstimatesIProposed 1Proposed1ProposedI 2006/07 11 66 Chapter 7: Monitoring & Evaluation and National Statistics A key area o fthe government policy to improve governance is the development o f an integrated system for monitoring and evaluating the Economic Recovery Strategy for Wealth and Employment creation. The objective o f the integrated monitoring and evaluation system is to provide the government with reliable mechanisms to measure the efficiency of government programs and the effectiveness of public policy in achieving its objectives. With appropriate links to the budget and the medium-termexpenditure framework, the system will provide the government with the needed policy implementation feedback to efficiently reallocate its resources overtime. It will also set the basis for a transparent process by which the government and the international donor community can undertake a shared appraisal of results and ensure smooth release of external support including budgetary support. IntegratedM&ESystem The integrated M&Esystem for the ERSwill assemble and use available data and information to inform public policy. Specifically, it will track progress o f the key indicators identified in the ERS logframe matrix, and provide feedback to policy-makers for improving public policy and use o f public resources. The system will monitor indicators that measure government efficiency inutilisingthe available resources and achievements made inthe reduction of poverty. These indicators will include: 0 Input and process indicators, such as budget execution and adoption of reforms, across programs and governmental institutions to ascertain progress in the implementation of policies and programs; 0 Output indicators, such as goods and services provided by the public sector, to measure the efficiency inthe utilization of government resources, and indicators that ascertain the effectiveness of public policy inachieving its developmental objectives; and. 0 Outcome and impact indicators, that inform on the actual achievements made on the Country's economic recovery and reduction o f poverty will form the basis for the evaluation of the ERS policies and programs. In the latter case, it is recognized that changes in developmental outcomes and impacts may be affected by external factors that may not be under the control o f the government, such as weather conditions, world economy, conflict, etc. For this reason, attributing change to particular policies is often difficult. To address this issue, the government plans to (i) develop a national research agenda inconsultation and collaboration with the academic and donor communities. This agenda will include impact evaluation studies that will analyze the effectiveness o f key government policies and programs in reaching desired objectives in greater depth; and (ii)the strengthening the Poverty Analysis and Research Unit (PARU) of the CBS with a view to increasing its capacity inundertaking outcome and impact oriented evaluation and other related studies. Finally, but most importantly, the Monitoring and Evaluation System will provide feedback mechanisms to policy-making, budget and medium-term expenditure framework to ensure that the lessons learnt by monitoring and evaluating government programs and policies are used to improve the effectiveness o f such programs and policies. While the inputs and outputs will be 67 monitored and reported on quarterly basis, the outcome and impact indicators will be reportedat intervals ranging from one year to five years. LogframeMatrix andPriority Indicators The government has developed a monitorable result-based logical framework matrix, which is consistent with the strategies and priorities of the ERS and PRSP. The matrix spells out a consistent framework for ERS implementation, identifies key indicators and targets, and identifies major constraints and risks (see Annex I). provides a solid foundation for the It development of a well-focused monitoring and evaluation system. However, not all the input, output, outcome and impact indicators as listed in the matrix can be effectively monitored and evaluated. In the short term, only manageable number of priority indicators that focus on the MDG indictors will be made mandatory for monitoring and evaluation at all levels of the M&E framework. The indicators that will be identified through a process of stakeholder consultations will form the basis for an M&Ebaseline data that will regularly be collected through household surveys, establishment based surveys and/or administrative records. Statistics strategic plan The government, through Parliament endorseda Strategic Plan for Statistics and gathered donor support for its implementation. The Plan, which is being reviewed to transform it into a STATCAP Master Plan, will ensure that the data required for poverty assessments and public policy evaluation are produced and disseminatedregularly and in a timely manner. The Plan will introduce a paradigm shift towards integrated surveys with diverse objectives geared towards addressingERS and PRSPobjectives, as well as the MDGs. The Central Bureau of Statistics will be responsible for improving the quality of data collection and analysis of data, building capacity, and dissemination. Institutional framework The Government in consultation with stakeholders has developed a system-wide institutional framework for monitoring and evaluating the ERS. The framework is an all-inclusive systemthat allows maximum participation of the community, civil society, and all development partners at all levels. Within the evolved framework, three institutions namely, the NESC, Monitoring and Evaluation Unit and National Stakeholders Forum will play a pivotal role in spearheading the implementation of the M&E system for tracking the ERS. The National Economic and Social Council will provide oversight in the implementation of the ERS and policy advice to Cabinet and Ministries of Finance and Planning on national economic and social issues. The council will also be responsible for liasing with the private sector and civil society organisations, and agreeing on modalities for public information access and dissemination, and feedback mechanisms. To ensure that M&Eactivities are well coordinated, the government has transformed the Poverty Eradication Unit (PEU) into a Monitoring and Evaluation Unit (MEU) with the specific role of coordinating M&E for ERS activities, store and disseminate M&E information and data. The MEUwill haveawide rangeof responsibilities. These include: i. Leadthedesignandimplementationofthegovernment-wideM&Eactionplan.TheUnit will take a very active role in spurring the adoption of M&E across the government, ensure M&E standards, and support M&E needs assessments and capacity building activities. ii.HeadtheannualERSreview,coordinatingthepreparationofsectorreviews,anddrafting the overall annual progressreport. 68 iii.Coordinatethenationalresearchagenda, policyanalysisanddisseminationofresearch results to policymakers. iv. Develop protocols for horizontal (sector to sector) sharing of knowledge and transfer of data within the government, and v. Liaise with other organizations (academic, international and nongovernmental) to strengthenthe ability ofthe governmentto leverage outside resources. The responsibilities of MEU will highly be complemented by those of CBS. In addition to its current responsibilities, the Central Bureau of Statistics will be responsible for managing the integrated data management system, and for making available the information in a timely manner to the MEUwho will inturn make it available to National Economic and Social Council, and other users. The Forum that brings together the sector working and the thematic groups, civil society and private sector organisations will ensure ownership and legitimisation of the M&E for ERS processes. A twelve member M&E Steering Committee will serve as a technical arm to the Forum and its main responsibilities will be to provide a link between policy decision makers with the technical working groups on M&E. At the devolved level, similar structures will be put inplace. A DistrictStakeholdersForum that incorporates existing government structures with communities and civil society organisations in the monitoring andevaluation of poverty reductionprogramsat the district andcommunity level. The District Stakeholders Forum will provide strategic direction on M&E at the district level. The District Planning Units will be strengthenedto coordinate M&E activities at local level. It will collect, collate, analyse, store and disseminate M&E data and information. At the community level, efforts will be made to develop structures for facilitating participatory monitoring and evaluation of poverty programs. This is aimed at ensuring that even the targeted poor themselves track and give feedback on the ERS policy and programs implementation. Institutionalizing monitoring and evaluation as a management tool across different levels and sectors of government will require not only an operating institutional framework, but also capacity building of the implementers. Training and technology for national and local governments is critical and the government plans sensitise and train staff of key Ministries and public institutions on the value of M&E for program management, institutional efficiency, and policy effectiveness, and install neededequipment. Integrated data management system The government plans to establishan integrated data managementsystemto facilitate timely and opportune delivery of information to MEU, the unit responsible for tracking progress in the implementation of the ERS. The system will afford the government with vertical and horizontal monitoring capacity, strengthen its ability to identify problem areas and low performers, and improve its capability to affect success. The system will include administrative information from all key sectors (finance, education, health, agriculture, infrastructure, etc), and information derived from the analysis of survey and census data. Administrative data will be assembled from the Ministries' own management information systems. CBS will establishprotocols for the sectorsto transfer information to the integrateddata management system. In each case, sector management information systems will need to be 69 evaluated for quality and content. Sector-specific needs assessments and capacity-building plans will be implementedas requiredto ensurethat relevantand good quality information is collected. Although produced less frequently, survey and census data are more reliable than administrative data and will provide a good check on the quality of administrative data and suggest ways to improve them over time. Specifically, survey data may help the government identify patterns of inaccuracies in the administrative data and repair malfunctioning administrative reporting. Mainly, survey data will be used for household level data analysis and for impact evaluation analysis of government programs and policies. The CBS is planning to undertake an integrated household budget survey (KIHBS), which is a modular survey able to provide good socio- economic benchmarks, and has a CWIQ incorporated for subsequent M&E activities. The KIHBS will provide critical data for estimating poverty head counts, distribution, causes, and trends. It also intends to complete a census of establishments, an international comparison of prices survey, a tourism expenditure survey, and a foreign investment survey. Finally, it plansto compile a governance statistics database. Data from the integratedhouseholdbudget survey, the living standardsmeasurementsurvey, and the census of establishments will be used for household level data analysis and for impact evaluation analysis of government programs and policies. Other sources of data, such as participatory poverty assessments and client satisfaction surveys, will be invaluable for obtaining feedback on the quality and availability of public services. The foreign investment survey, the tourism expenditure survey, and the international comparison of prices survey will be used to assess trends in environment for investmentand trade. Compilation of the governance database will provide baselinedata for monitoring changes inperceptions of corruption. National research agenda The government will develop a medium-termresearch agenda in consultation with interested partners and with the support of the Kenyan academic community. The researchagenda will put forth the priorities of the government for policy analysis and evaluation. It will also spell out programmatic areas that are criticalto the achievementof the government targets specified inthe logical framework matrix of the ERS. While the Ministry of Planning and National Development has long collaborated with local researchinstitutes and gained from their knowledge and technical capacity, the government also recognizes that evaluating the policies of the ERS may take a significant amount of resources and excellent technical skills. For this reason, the government will establish a medium-term schedule for the implementation of its research agenda following the medium-term ordering of ERS priorities. Some of the resources will come from the government participation in the regional Poverty Analysis and Data Initiative (PADI), which supports research activities in key policy areas of regional interest. Performance-based decision making For monitoring and evaluation to be effective as a learning tool, the incentives structuresfor civil servants (salary and advancement) and for public institutions (budgetary allocations) must be designed to reward performance. For this reason, M&E activities will be closely linked to the ongoing civil service and program- and result-based budget reforms. The government will work to develop a consistent framework linking budget, MTEF and M&E. 70 Participatory monitoring,disseminationand feedback One of the key elements of participatory monitoring is the availability of information. To enhance transparency and accountability, therefore, the government plans during 2003/04 to develop and implement a public information accesspolicy. The policy will classify information gathered by the government as public or confidential, and establish the mechanisms through which public information is made available. The open access policy will be coupled with an aggressive dissemination strategy to enable communities and other developmentalactors to hold service deliverers accountable for quality and quantity of their services. The government will partner with the private sector and non-governmental organizations and agree on modalities for a shared strategy for dissemination of information and community monitoring. To this end the government will agree with civil society: i)an acceptable NGO disclosure policy, ii)a common strategy for the private sector and NGO active involvement in dissemination of information to business and special interest communities, and policy feedback activities, iii)mechanisms for public information release to private sector and NGOs, and iv) standardsfor NGO data collection and evaluation methodologies. Conclusion This investment programme is a bold attempt by the Government to fulfil its obligations to Kenyans and Kenyan investors as promised in the Economic Recovery Strategy for wealth and Employment Creation. Through this programmethe Government plans to mobilise all accessible and absorbable resources to trigger faster economic growth and development, to provide better social services, to improve equity in access to the national resources, and to provide more opportunities and better environment for private sector prosperity. The Programme provides an excellent foundation for nurturing a mutually fruitful and sustainable partnership between the Government and the private sector and between the Government and development partners. The Government hopes that our dialogue with both the private sector and the development partners will be anchored on this programme in the short to medium term. 71 5 8Y a B Y) 0 i # 8asl r Z' w > 3 c I 0 0 0 0 0 0 2 2 s *0m0i 00 ? ? 3 0 0 0 N" 8 0 I z ~s o ! c f 7 > s 0 '1 10 t Q\ N m 00 W 00 c 3 V 2 0 0 c m CI c I 8 8 50W 0 NVI 0. 0" 4 0 0 0 0 9 Z0 &0 !!E S E tI 0 m m 8z 3 2 0 m d d s I I I : x M 0 00 0 2 0 4 I In PI .5 N 2m .-E .^ Annex 1 102 Annex I: Logical Framework Matrix for Kenya's Economic Recovery Strategy for Wealth and Employment Generation (ERSWEC) February 12,2004 I 1 Structure of the Economic RecoveryStrategy for Wealth and EmploymentCreation education, healthand Human Development: labor Agriculture 81 Environment Poverty targeted Table of Contents Page Summary and Selected Indicators I. 3 PART A.l: ECONOMIC GROWTH Macroeconomic Framework and Financial Sector Reforms I. 4 PART A.2: ECONOMIC GROWTH Infrastructure I. 11 PART A.3: ECONOMIC GROWTH Productive Sectors I. 16 PART 8.1: EQUITY AND POVERTY REDUCTION Human Resource Development: Education, Health and HIV/AIDS I. 10 PART 8.2: EQUITY AND POVERTY REDUCTION Human Resource Development: Labor I. 21 PART B.3: EQUITY AND POVERTY REDUCTIONAgriculture, Rural Development and Environment I. 22 PART 8.4: EQUITY AND POVERTY REDUCTION Poverty Targeted Programs I.26 PART C.1: GOVERNANCE Safety, Law and Order I. 29 PART (2.2: GOVERNANCE Public Administration I. 31 PART C.3: GOVERNANCE Monitoring and Evaluation I. 33 I2 Logical Framework Matrix for Kenya's Economic Recovery Strategy for Wealth and Employment Generation(ERS) SUMMARY AND SELECTED INDICATORS enrollmentto close to 100%by 2015 (MDG3); to 100per 1.000 by 2008 (MDG5) (MoH), Census reports, Registrarof Reducemalariamorbidity(currentlyat 30%) by H I S of MoH 10%annuallyin2003-2008(MDG8) DO7 Haltedand reducedHIViAIDS spread ReduceHIViAIDS prevalenceby 10%annual in Sentinel Surveillance (NASCOP-MoH); 1-18 B. 12003-2005amongthe youthage-15-25(h4DG7) IKDHS(CBS) DO8 IStrengthenedemploymentcreationand IHalfamillionjobs createdannually in2003-2006 ]Labor force Survey(CBS), JuaKali I 1-211 B.2 evaluation mechanisms timely feedback intobudgetprocessandyearly I3 Logical Framework Matrix for Kenya's EconomicRecovery Strategyfor Wealth and Employment Generation (ERS) PART A.l: ECONOMIC GROWTH Macroeconomic Framework and Financial Sector Reforms I IEconomicGrowth GDP growthrate increasesfrom 1.2% in Annual EconomicSurvey(CBS) 2002103 to 1.9% in2003104 to 3.1% in I I 2004105 andto 4.5% by 2006107 Developmentoutcomea I GrossInvestmentrisesfrom 14.5% of ZBS andCBK, Annual report Privateinvestment responseto GDP in2002103 to 24.9% ofGDP in improvedbusinessclimate, lowe 2005106 corruptionand"smarter regulation" ,judicial /business dispute arbitration, better infrastructure,lower cost and better availability ofcreditand sharecapital, Privatisationof commercial activities Stock of non-performingloans reducedby Monthly CentralBankReports Stablelegislativeenvironment one third duimg 2003-2006 I I 1 Macroeconomicstability andfinancialsector reforms 1.1MacroeconomicFramework Fiscal Policy Achievementofmore sustainablefiscal Overallfiscal deficit (includinggrants) MoF, QuarterlyBudgetReview, No shocksnegativelyimpact thi position decreasesfrom 3.6% ofGDP in2002103 CentralBank economic growthforecast to 3.3% in2006107 Monetary policy I4 Narrative . I * I Indicators, fmm &.J&&& M&E IAcanmptionslRLtiu &&a ao& wdn~@slbl/lfy * - w (Mone) supply growth consistentwith real Money supply increasein line with CBK MonthlyBankingSurvey ISustainabledomestic Govt, GDP and nominal inflation target NominalGDP goal e RealGrowth+ I financingwithout recourseto Harmonizedtaxation in EA countnes Public expenditure reform Structure ofexpendituresmore pro- Corepovertyspendingincreasedfrom growthandpro-poor 3 3% ofGDP in2002103 to 4% ofGDP in 2003104 Wage bill declines from 9 5% to below Treasury,DPM 8 5% ofGDP by 2006 Enhancedlinkage betweenpolicy, Within year deviationsof actual BudgetMonitoringDept - annual No unpredictableshocks (e g planningandbudgeting expenditure from pnntedestimates report, AppropnationAccount drought) impact government reducedby 30% by 2006107 Report(C&AG) expenditure requirements DeviationofMTEF projectedestimates PRSP Secretariath4TEF from pnntedestimatesreducedby 30% by 2006107 Improvedtransparencyofthe budget Budget publishedandpublicly available Website, newspapers,public notices. Distnct Information DocumentationCenters IBudgetrecordsall donor funded I I supportcommensuratewith GDP in2003104 andto -0 4% in2004105 relationto Bank's liquidity to 70% inFY03/04 I5 2003-06 Entreprisemanagersreportgreater QuarterlyBusinessExpectation confidence Enquiry(CBS), Businesssurveys ( W - K R E P , others) Undertake actions to allow first tranche 1. Adoption by the Government of a releaseof proposedFinancialSector financial sectorreformstrategy. Adiiictment credit by May 2004: 2. Adoption and publication by the Government of a restructuring and privatization policy for the state- influenced banking sector acceptable to the Bank and providingthe MoF with the authority required to secure the full cooperationofall parastatalbodies. 3, Adoption and publication by the Government of a policy on the resolution o f "A's carved out of state-influenced banks (as a component of the policy on the restructuringandprivatizationofstate- influencedbanks describedabove) which calls for the utilization of the private sector to work out these assets either under contract to the state or by means of transparent auctions of NPA's to the private sector. 4. Bank Restructuring& Privatization Unit to be adequately funded and staffed, including consultants, and operating in a mannersatisfactoryto the Bank. 5, KCB to comply with all regulatory capital requirements. All state-nominated board members to be replaced with independent professional directors. Tender for private sector investor(s) to purchasethe state's sharesto be launched. 6. NBK All state-nominated board membersto be replaced with independent professional directors. Adoption and implementation by NBK of a short term restructuring plan and credit policies and procedures satisfactory to the Bank, Recapitalization of NBK to not less than 2% CAR and compliancewith regulatory minimumsfor liquidity. 7. Consolidated: Sale of all state- influenced shares to private sector investor(s). Either: (a) withdrawal of IDB's banking license; or, (b) sale of all state-influenced shares in IDB to either multiibi-lateral investors or private investors. I6 Governance and control arrangements acceptable to the Bank to be adopted for NPA management and partial sale arrangements. Assets carved out of NBK to be either: (a) placed under management of the private sector; or, (b) sold to the private sector via a transparent auction process. Bank Restructuring & Privatization Unit to demonstrate adequate supervisionofNPA management contractsandpartialsale arrangements. Constraingovernment spendingwithin sustainablefiscal framework Monetary Policy CBK Monetary policy signal, change on repos rate andtreasurybill repurchasesto lower interestrates Strengthen MonetaryPolicy Committee FundCommitteeandsupporting BudgetandCBK financial BroaderOversightimproves secretariat. Selectmembers reports.MPC recommendations accountability, Legislativeaction in semi-annualMonetary feasible Statement Strengthenmonitoringof CBK balance Effectiveforecastingby CBK staff CBK daily reportingto Governor Effective monetary instruments sheet andMoF for managingliquidity Macroeconomicreal andmonetary Staffingof CBK, Availability of forecasts alternative independentforecasters(e.g. , KIPPRA) Taxreform MOF, KRA Modernizetax administration, including Informationsystems, equipment, training, capacity building Computerizationofthe KenyaRevenue Authority (KRA),systems enhancementsupport to incomeand value addedtax functions,, and development ofnew numberplatesand secondgenerationdriving licenses ConsolidaterevenuecollectioninKRA, Policy review(task force) MoF Amendment to publicFinance improve incentivesfor revenuecollection act, innextyear's budget (KRA's share basedon auditedresults) (FY03/04) andforecasting [Improvestructure oftaxation, undertake I I an assessmentoftax policy andits impact onthe economy, study optimaltax rates, andexpandthe tax base amative Indicators 'lM&E * ' 1.4mmptioadRiaks IIMonitor Idafa&rca mdrespawblhy .- ' t revenuetargets Appropriate staffingin reponingunits IKRAandTreasul). ,monthl), (TaxRevenueadministration available within one month . performance, andTax Policy consistent with revenuetargets. Monitor commitments anddisbursements Appropriate stafinginreportingunits Treasury ,monthly, available Upgradingof reportingand withinone month controlsystems,IMFS Continueregionaltax harmonization Public expenditure reform MoF, MOP Creationof strongcoordinationand managementarrangementsbetweenthe departmentsinMoFandMOPthat have leadresponsibility for designing and implementingthe expenditure managementreform program Enactmentofthe new legislationon GovernmentFinancialManagement, PublicProcurementandDisposal, and PublicAudit Shift to programmebudgeting (I) review budgetclassifications,ii)prepare guidelines, iii) develop and implement trainingprogram Increasecomprehensivenessofbudget include all governmentspendingand extrabudgetaryfunds withinthe budget Phasedreformofthe MTEFincluding Build capacity for ministries and MOP TrainingmanualonMTEFpreparation, Trainingrecords (MOP) departmentson MTEF process training Introductiono fthe IFMIS, includingfull rollout to Line Ministriesby mid2004 Implementationof short term reformsset out inthe government's Action Planfor EnhancedFinancialManagementinthe PublicSector Adherenceto the timetablefor the budget processfor 2004/05, includingthe PER Conclusionofanew PERwork program, by the end of2003, to provideinformation onthe costingofERSWECpnority programs, savingsfrom low priority programs,expenditure trackingofcore programsfor to povertyreduction,and extemalevaluationofprogressin expenditure managementreforms basedon early decisionsonthe macro- economic frameworkand sectorceilings, onthe objectives ofthe ERSWEC, andon the analysis of thePER Debt policy and external aid Lengthenmatunty ofdomestic debt Appropriate staffinginCBK borrowing CBK ,weekly Yield curve is reasonablein dept units relationto Bank's liquidity preferences, pensionfunds and insurancecompanies Profile an( predictabilityof Govt net domestic borrowine -3ubstitute concessionalextemalfinancing I I I I for domestic debt Developextemal aid policy Customs I8 nprove Mombasa Port revenue I I I I Levampbondand warehouse facilities for II I I I 'inancial sector 'inancral sector reforms Ievelopment o f financial sector strategy CBK Advisoly and consulting services )evelop State-InfluencedBank Lestructuring& Privatization Policyto rovide MoF with clear mandate to :structure state-influenced bankingsector :stablishhighly professional unit to dvise and provide operational support to le authorities throughout the :structuring and privatization process for le state-influenced banks Leformo f strategic banking institutions CBK Specializedbank privatization and No political interference inthe icluding: i.privatization ofNational restructuring advisor services management of banks, expandec lank ofXenya; ii.privatization of Kenya capacity and greater transparenc :ommercial Bank; iii.privatization of of commercial courts :onsolidatedBank o f Kenya; iv. :structuring o f Industrial Development lank; v. recapitalizationof Cooperative lank o f Kenya NBKto be quickly privatizedby saleof state-influenced sharesto, and an associated capital increase by, new multilateral or developmental investors capableo f providinggood governance and strategicdirection to the bank. Gov to implement short term restructuring efforts and strong pre-privatization governanceto improve prospectsfor fullrecapitalization. KCB to complete a rights offering raising aboutKSh2 billioninnew capital without state participation inthe 4th quarter o f 2003. The state's shareholdingwould be diluted from 35 percentto about 25 percent.Processo f seekinga strategic investor to purchase the state's shares to start once the rights offering is completed. Consolidated Bank o f Kenya: to be privatized Case cost pressuresonthe sector, ncludingsupporting securedtransactions, owering credit risk, improvingborrower ccountability, and develop policy on nanagement& dispositiono f ionperformingAssets to reducethe stock ion-performingloans (NF'Ls) 'he CBK to undertake,with strong echnical support, a comprehensive liagnostic o fthe condition o fthe small .nd medium sized banks(excluding NBK, 2onsolidatedand IDB)to ascertaintheir rue condition and implement enforcement ctions to resolve any bankswhich are indercapitalized before the end of 2004. I9 Narrative - IM&E . IIEstablishcredit Indicators 'ti + :-a 1' hnmptionslRiskc el ~ m d r ~ a b i t i r y I reference bureauand lothermeasuresto improvecredit ICBK I I I I evaluation IStrengthenDPFto enhancedepositors I ILegaladvice to draftnew DPFAct, I I protectionincluding:i.new DPFAct; ii. staffingand training, operational support Capacitybuildingin workouts and workout managementtechniques; iii. Liauidationof distressedsmall banks Strengthenjudicial infrastructurefor Developcomprehensivestrategyfor insuranceservicesdevelopment Financial sector regulation Enforce CentralBankAct CBK Reports on statusofcommercial banks(CBK) Transferbankingsystem licensing, regulatoryand disciplinaryauthority from the MinistryofFinanceto the CBK Strengthensupervisory and enforcement CBK Training, cap building -Tighten provisioning regulations to conform to internationalbest practice Remove regulation on banks charges and Implement anti-money laundering legislation. Developamodemnationalpayments system Build CBK ResearchDepartmentcapacity Surveylevel ofaccess to financialservices Surveyingservices by householdand businesses Mapoutletsofformal andsemi-formal Surveyingservices finance institutionsto determine geographical distributionofservices I10 /LogicalFramework Matrix for Kenya'sEconomicRecoveryStrategy for Wealth and EmploymentGeneration(ERS) PART A.~~ECONOMICGROWTH Infrastructure ,Narrative ]Indicators - ` M&D AsaumDtiom/Riskr I II ~ el d a I a " d ~ . v b l l f f y Objective EconomicGrowth GDP growthrateincreasesfrom 1.2% to Annual Economic Survey(CBS) 6.5% by 2006 Developmentoutcomes I Increased private sector participationin infrastructure Access, affordabilityand reliability of Proportionof the poor householdbudget KLSS (CBS) infrastructureservicesincreased allocatedto infrastructure services reduced Competitivenessandqualityof Proportionof infrastructure related Industrialsurvey (CBS), CBK infrastructureservicesimproved productioncosts reduced and KAM. Expandedsupply of clean water Incidenceof water bornediseases reduced KDHS(CBS), WSRB, WSBs PSP framework inWater Act Iauthorities clarified consensus with local /Roadsnetworkand safety are improved I IRoadtransport costreduced (HDM4) /Surveysby MoPW&H, KTA. /Strictenforcementof existing traffic rules. Efficiencyand safetyof urbantransport Surveys and inquiriesbyMoTC, increased Roadaccidentsinurbanareas decline NCBDA & councils. Usage of alternative energy increased Usageof alternative energy increased Surveys by MoEn 73% to 83% and 64 I I I /Keyroadlinks rehabilitatedand upgraded. I I /Numberof roadlinks rehabilitatedand upgraded Access to marketsand social services for Roads2000 programmetorehabilitate Surveys by MoRF'W&H and ruralcommunities improved 2,8 15 kmofrural roads and create MOLG 18,800 jobs during 2003-06 Roadsafety awarenessby road users Number of fatalities from roadaccidents Surveysby KenyaPolice & Expandedinstitutions offering ` increased reduced KenyaRoadsafety council RoadSafetycourses Transport Kenyatransport industty's positionas a Containercleanngtime throughMombasa SurveysbyMoT&C with Freight regionalhub is strengthenedand transit Portreducedto less than5 days by 2005 ForwardersAssoc lservicesare improved. I I IWaitingtime at borderscrossingkept ISurveysby MoRPW&H and I ]within3 hours maximum IKRAwithKTA traffic increased Airlines Airline traffic increased Traffic congestion reduced Average time to crossNairobiat peak Surveys by NCBDA hourreduced Convenienceand safetyof pedestriansand Accident involvingpedestnansor non- SurveysbyKenyaPolice & nonmotorusersimproved motorusers reduced KenyaRoadsafetycouncil Communications and Information I11 .Narrative lhdicators - 3 - IM&E ~ IhnmptiowRisim to .&tei I&m sovmd rqmsfbiltp I Telkom pn\atized ational public bidding undenakenby] I\lodalities of restructuringand /-June 2005- ~I lprivatisation agreed upon, I Telecom andICT servicesexpanded Tele-density increasedfrom 3 per 100to 4 Surveys by MoTC and CCK, and per 100 by 2006. reports of serviceproviders Intemet user increasedfrom current 1.2 ~ per 1000 Concensuson IT Policy Numberof intemet connection in governmentinstitutions rise from to by I I I Reliable energy servicesavailable at lowei IPower tariff reducedfrom 5% to 3% by IPublished tariff by KPLC 2006. Electricity rates reduced Accessto electncity by rural communities Increaseaccess by 1% per annum for the Surveys by MoEn & KPLC. Ability to subsidise rural rural population from 3.8% to 8% by communities 2006 Installedcapacity o f solar energy Surveys byMoEn with relevant increasedby 10% per year industry LPGconsumption increasedfrom 32,000 Surveys by MoEn Idtons to 50,000 mitons by 2006, I I I I I PrivatizationBill approvedby 2003 Kenya Gazette Competitive framework in placeby 2005 Regulatory framework inplace for all Surveys by CBK and all Privatization bill passed and infrastructure sectors by 2006 Infrastructure Ministries private sector is interested Key infrastructure restructuring and reforms are completed ( i.e. water, energy, roads, telecom) Strategies for Integrated WRM and WSS Surveys by MOW and CBK Private sector interest; legal and water resourcesmanagementauthority gazettedunder Water Act 2002 regulatory framework and (WRMA)and water servicesregulatory arrangements for PSPinWater board (WSRB) as stipulated inthe Water Act clarified; consensusand linkages with other water using agenciesand with local authorities; clarity on decentralization o f functions WSRB issuine licensesto Water Services Annual ret)ortso fthe WRMA - I Boards (WSB) 2004 landW S G IWRMAoperational including, locallevel I institutions(basidcatchmentand community level) inpriority areas - 2005 Number of regulatoly agency staff trained Surveys byERBand CCK with Relevant training institutions are regulatory agencies suchas ERB and CCX by 2006 MOTand MoE identified /Implementationof Maritime laws ]Number of offenders arrested lFinalisation o f regional laws. II Activities/Policies I Private sector participation in infrastru ire Water and Sanitation low Government carries out structural reforms WSB lincenses, contract with service Privatization bill approved by to put WSS serviceson anautonomous providers Parliament; consensusbuiltwith basis and introduce PSP inNairobi and local authorities; clarification o f Mombasa & Coastalregion, Nakuru and Water Act's framework for PSP Kisumu Government mobilizes investment to Numberof rehabilitedfacilities by private Strong private sector interested ii support rehabilitation and services sector. involvement inoperational extension managementand investment in water services. I12 inrrative IGovemment inpartnershipwith CBOs and pnvate providerscarriesout programs supportKenyaWater sector at to extendWSS servicesto urbanpoor and the appropriatescale Numberresettled Landtenure issuesin informal urbansettlementsare addressed OperationalBoards Politicalwill andcoordination amongrelevant ministnes Boards,the Water ServicesRegulatory Boardandthe Water ServicesTrust Fund Reformof roadmanagementand financingsustained. SupportfromKenya DevelopmentPartnersmobilized. Concessioning1,208 km of trunk road Concessiondocuments NewRoadBill passed,Private during 2004-07 sector interested. I I I IGazettement /Relevantstakeholdersmobilized Numberof cases Implementationreports Kmsconstructed Implementationreports Improvements(Lanet-Timboroa, Machakos'rum Off- SultanHamud, Mau Govemment pursuesimprovementand Kms completed Implementationreports Sustainabilityof the roads 2000 rehabilitation of rural roads and bndges programand trainingof small underRoad2000 program scale contractorscontinues. Transport 4RPW PrepareNationalTransport Policy Publication of document Implementinstitutionalstrengtheningplar for the transport sector Gov sectoroperatorsand stakeholdersto Operationalisationof program Political will and commitment tc speedup full implementationoftransport regionalcollaborationwithin the facilitation programsagreedwithin EAC EAC and COMESA. and COMESA Gov to finalize the concessioningand Privatizationbill approvedby rehabilitationof KenyaRailways(KR) in Parliament coordinationwithEAC railwaysand developmentpartners, and divest from Gulf Marine service on Coordinationwith Ugandaand Lake Victoria possiblyTanzania Convert MombasaPortto alandlordport Numberof private sector operatos Capacity to addresssocial byJune 2005 KPA to maintainregulator) engaged retrenchmentplan functions and portownership Private sectorto operate the port infrastructure (channels, locks, berths) plusthe port superstructure(surfacing, sheds, and fences) Pnvate operatorswill provide userservicesin acompetitive environment (pilotage, towage, berthing, supplies,cargohandling, storage, repair, secunty), and managethe container terminal by meansofalong-term concession I13 FederalAviation Authority secunty gradingclass 1 Activities refurbishingof airportfacilities, investmentinsecurity equipment (e g security procedures, fencing, terminalreorganization,security equipment, andtrainingofsecurity inspectors) andreduceairportcharges ImplementKCAA reformto meetICAO Training, cinsultingservicesand standards equipment Improvehandlingcapacityincluding upgradecapacityof regionalairports, pnvatize commercialnon-regulatory servicesat airport, explore potential for PrivateSectorparticipationin building new terminalsand handlingnonsecurity services Gov andmunicipalitiesto develop and Revivaloftraffic lights in major implementtraffic managementandurban urbancenters mobility plansie bus-stops,non- motorizedtraffic Gov andNCC to planandimplement K m s constructed urbanbvoassto divert transit traffic from ICommunications and Information IMOTC, I I TelKom, CCK Gov to complete liberalizationofTelecom Publication of ICT policy & licencing of ICT policy. Privatesector interestedin andICT services 2nd telecommunications provid investment PrivatizeTelKom License 3rd mobileprovider and 3-4 gatewayservice providers Gov to accelerateprogramsto modernize Regionalcollaboration regionalandglobal systems linkages framework sustained Developpolicy, legislativeandfinancial ICT policy operational Implementationreport framework for ICT growth PromoteICT adoption and skill Introduction of Curriculum inschools Implementationreport developmenf includingacountry-wide ICT awarenesscampaign, and implement an ICT skill enhancement campaign integratingICT inschool curricula as training, teaching aid and learningmaterials Promotee-Government Adoption of e-Govemment strategy Implementationreport Installinfrastructure ImplementGov informationtechnology InstallationofStructuredcabling Implementationreport investment managementframework - (G") Implemente-governmentservices Completionofconnectivity Implementationreport Energv MoEn Gov to developEnergySector Energy SectorDevelopmentStrategy Strongpolitical will to reform DevelopmentStrategy, includingpower, approvedbyFeb2004 petroleumand rural energy subsectors,to turnaroundthe sector'soperationaland financialperformance Electricity RegulatoryBoard(Em) and reviewexistingtariff regime and lmethodologyfor settingtariffs I I14 Implementpolicy onprivatizationof KPLCto enhanceKPLCperformanceon commercialoperations, transmission, distribution, andcollectionofreceivables, with special emphasison reinforcement and rehabilitationofdistributionsystems inNairobi andMombasa Implementpolicy on privatizationof KenGento improvemanagement performance Implement ruralenergy programincluding Publicandprivatefundingof electrification,wind energy,minihydros, operationcosts ensured. investments,maintenanceand solar PV Govto complete andimplementthe LPG study includingstandardizingvalves Gov to exploreopportunitiesand expedite negotiationsfor increasedpower imports andother links to regionalpowerpools (e.g. SouthAfrica, Uganda,Tanzania) Gov to implementLeast Cost DevelopmentPlanfor power development including: ImplementOlkariaI1Geothermal KenGen Poker Plant Implementother power projects IPPs, MoEn, KenGen arrangementsonthe exploitationof geothermal resources,anddevelopmentof investment office) DevelopInvestmentRoadMap Carryout comprehensivereviewof MTI, licensingarrangements FC, MoF, AG Regulatory framework for infrastructure I Establishan inter-ministerialcommitteeto The Cabinet formsthe committee and review, with the aimto increasePSP in makesKsh availableto facilitate its public utilities, the regulatory tasks arrangementsofkey sectors(telecom/IT, water, energy, roadsand transport) I15 Narrative I IIndkatora ( I - I]Assessthe I f i u . * .IM&E 3 n l&.sumptioodRisb I ' I ' Id~asanEeMdrw!mwlbiliirip, feasibiliw and outions for I I I . settingupan independent multi-sector regulatoryagency for all infrastructure sectorsas away ofboostingpnvate sector participationand reducingregulatorycosts Implementthe newly passedWater Act 2002 as away ofspearheadingPSP inthe water sector Strengthenthe capacities ofthe existing regulatoryagencies(ERB andCCK) to partnersto complementthe training boostprivate sector confidenceinthe budgetofERBandCCK I telecommunicationsandenergy sectors andbetter monitoringof performance Itargets inthese sectors Energy:Amend ElectricPower and New power act PetroleumActs to allow for appropriate I16 ILogical Framework Matrix for Kenya's EconomicRecovery Strategy for Wealth and EmploymentGeneration(ERS) PART A.3: ECONOMIC GROWTH Productive Sectors Narrative 1 ' lindiwton ' ' M&Ei d WumptionslRirbi. Objective Economic Growth GDP growthrate increasesfrom 1.2% to AnnualEconomicSurvey(CBS) 6.5% by 2006 Developmentoutcomes I agriculturalexports exporteamingsdecline productivity Increasecottonrelatedexports Exportofcottonproductsincreases NationalAccounts Continuedliberatlisationin I World Trade outputs I I I I goods and servicesreduced infrastructureimproved LocalAuthonty Trade Licensingrevoked LocalAuthontyTrade Licensingrevoked Gazette hv71-1174 !Investment relatedofficeson line ]Proportionof investment relatedoffices IImplementationreports with intemet connection TouristLevy increasedandbasewidened Tounst levy increasedfrom 2% to 4% LevyCollectionretumsby Levy consistent with Macro Trustees targets ITitle deeds issuesto JuaKaliAssociations1 ]No. of title deeds issuedto Juakali IAbsenceo flanddisputes Associations Increasedaccessto MSEsservices 25% ofMSEsaccessloans by 2006 Availability of loanablefunds 25%ofMSEswith marketoutletsby 2006 125%ofMSEstrainedby 2006 Activities/Policies Tourism Developand implementaggressive MT 2 milliontouristsper annum Arrival data Intemationalsecurity, marketingofKenyaas major tourist intemationalcooperationon destination terrorism Exploit film industryandsportstourism New films beingshot inKenya Filminglicences sought. niches Encouragedomestic tourism Increasein%tage ofdomestic tourists Increaseshare ofDomesticfor Increase localdisposable 19%to 50% incomes. I17 lsrrative I Indicetola IM&E Ikatamptions/Riska + U t e ) I ~ ' J 0 U r r r W d ~ W ~ 1 - \Publishclassificationof Hotels and Web services IGazerte MTI staff, web ]Completion of classification Restaurantson the gazetteand onthe web publicationby KTB exercise by MOT1 Upgradeand reorganizeTourist Police Training, personnelemoluments, PatrolCoverage Force(see Governance) equipment,and logistics Reviewstructure oftaxationinthe sector Numberoftaxes reviewed Reductioninthe overall price structure inestablishments Fostercommunity-basedeco-tourism and Support80 new SME's No. ofJobs created RobustgrowthinTourism , community-based wildlife conservation; provideguidance,accessto credit and incentives to SMEs; andreview structure o f park tariffs infavor of less-visited parks. RestructureKTDC. ITrade & Investment I I CompletesessionalpaperonTrade Policy MTI Stakeholderconsultation Documentpublished I-, hv 2004 --- I I I IReviewlicensingagreements, provide I /Improvedmarket access 1% increaseintrade and market informationto Kenyan investmentvolume manufacturers, supportthe pnvate sector inidentifyingnewmarkets,improve qualityofKenyangoods, reducenon- commercialnsks, organize export trade fairs, and exploitAGOA Developand export development strategy, MTI, Comprehensiveexport strategyestblished Incresedexports includingreviewof export promotion EPC, schemes PC, EPZA, MoF I I I I I IReviewtrade relatedlegislation IMTI IInter-MinistendCommittees IRevokelocalauthoritytrade licencing IMTI IReduction intransaction costs lofficialGazetteNotice IPoliticalwill, Equivalent compensationthrough transfers (LATF) Establishexport processingvillagesfor MLG, increased EPZ&MUB investments Increasedvolume of processed Suitabilityof the designated smallholderproducers, andexpandEPZs MTI, exports sites, andManufactunng UnderBonds(MuBs) MoF, lfor export promotion ]MOL I lImolement investmentcodeand reduce IReductionIntransactioncosts IReductionmnoof regulations I the numbero f regulationsand step reouiredfor investinginthe countrv II Industry Implementcomprehensivestrategyto MTI Improvementofthe business environment New investmentsregstered remove barriers to investmentand lower the cost ofdoingbusiness, including further liberalizingtrade, deepeningthe financial market, enhancinginfrastructure, improvingsecurity, facilitatinguseof technology licenses,reviewing mechanismsfor wage determination, and improvingaccess to qualitytraining IBenchmarkkey I I I industnes(sugar, textile) MIT, Improvement incompetiveness IBenchmarkingschedule to internationalcompetitors IEi I EPC, PromotebackwardlinkageinTextile Cottonproductionextensionservices, Increasedproductionof cotton Industryto exploit AGOA credit to ginnenes, industnal promotion campaigns Operationalize SessionalPaperon Consultancyservices, Inter-ministenal and Implementationschedule IndustrialTransformationthrough the private sectorconsultations Industnal Masterplan Micro, Small and Medium Enterprises Finalize sessional paper onMSEswith focuson employment creation I18 Strengthen financial institutions providingsmall businesscredit, suchas the Kenya Industrial Estates(KIE), Develop market for training small business entrepreneurs, possibly through demandincentive schemes, Strengthen vertical linkages within the Identificationof institutions, industrial sector and subcontracting dissemination & sensitization arrangements built in privatization Enhanceprovisionof infrastructureand Rehabilitationof 653 sheds& finance for the h aKali sector constructionof 14more shedswhile puttinginplacea micro-financingpolicy bv endo f2004. I19 Logical Framework Matrix for Ker a's EconomicRecovervStrategv for Wealth and Emolovment Generation (ERSl - . , _I . I PART B.l: EQUITY AND POVER Y REDUCTION Human Resource Develooment: Education. Health and HIV/AIDS I Narrative Objective Poverty Reduction by 10%by 2006 from 57% in 1997 DevelopmentOutcomes I Increaseprimary school grossenrollment Schoolcensus(MoE), KDHS Guidingandcounselingin ratefrom 90% to 100%by 2005 and net (CBS), W M S (CBS) schools, teachersable to enforce primary school enrollment from 80%to disciplinewithout corporal 85%by 2007 punishment, parent involvement inchildhomework, nutrition + programseffective, children healthstatusimproved Reducegender gap in accessto primary Schoolcensus (MoE), KDHS The girl child will given and secondayeducation(MDG 4) (CBS), WMS (CBS) opportunitiesfor educationand that culturalbarrier will not hinder them. Transitionrate from primary to secondary Schoolcensus (MoE), KDHS Physicalfacilities will be from 47% to 70% by 2005 (CBS), WMS (CBS) renovatedandexpanded Improveaccessto basic healthservices Reduceunder 5 child mortalityfrom 114 KDHS(CBS), healthfacilities HIV prevalencedeclines per 1,000 to 100per 1,000 by 2008 data(MoH), Censusreports, (MDG5) RegistrarofBirthsandDeaths Reducematemalmortality ratefrom 590 Healthfacilitiesdata(MoH), Distances to nearestfacility per 100,000 to 560 per 100,000 by 2008 Censusreports,Registrarof reduced, stafftrainedand (MDG6) BirthsandDeaths equiped Reducemalariamorbidity (currently at H I S ofMoH Distances to nearestfacility 30%) by 10% annually in2003-2008 reduced, stafftrainedand (MDG8) equiped Reducethe householdsout of pocket HouseholdExpenditureSurvey NSHIestablished,GoK financingof health from the current 53% (CBS), NationalHealthAccounts allocationto healthincreased of the totalhealthbudgetto 45% by 2008. (MOH) ReduceHIViADS prevalenceto 10% by Sentinel Surveillance(NASCOP- Youthchangetheir sexual 2006 MoH); KDHS (CBS) behavior(abstinenceand safer sex); religiousorganizationswi not actively opposecondom programming;mitigation ofsoc economic causesprograms effective; keepinggirls in schoc ..-- I I I InF I I Primaryschool fees eliminated by 2003, MoE, EducationNGOs parentsfrom poorfamilies will families 70,000 poorchildrenprovidedwith allow their childrento go school bursaries, and 150,000 more childrenfed in school Increasedenrollmentofgirls, pastoralist, Primary school enrollment ofpastoralist Schoolcensus (MoE), KDHS parentsfrom poor families as streetchildren, slum children increasedfrom 20 to 40 % by 2006.No. of (CBS), WMS (CBS) well those from pastoral street childrenin school increased.No. of communitieswill allow their slum childrenin school childrento go school Availability of leamingandteaching Pupilitextbookratio increasedto 3:l instd SchoolrecordsandMoE records 1 materialsinpnmary school 1-5 andto 2:l in std6-8 by 2004. W O E ) Additional classrooms 10,000 primaryschool classroomsbuilt. Schoolmappingreports(MoE) Fundsare available Strengthenededucationmanagement Educationmanagementinformation informationsystem systeminplace inMoEanddistricts Health I20 Narrative I I lhdicatora '; 3 . . . lM&EJ'- 4 > I IAasumplioaclRisici * ~ & f u s ~ w d w p o n s i b l / l L ~ 1 r ' - ' \Increasedequity and affordabilir) for low-I for rural health IBudget estimates, PER ]Distancesto nearest facilit) incomepatients centers anddispensariesfrom 11%to 15% reduced,staff trainedand o f MoHbudgetby 2005; and budget equiped allocations for drugsfrom 12% to 16%of MoHbudgetby 2006. StrategicPlanfor NationalSocial Health SessionalPaper onNationalSocialHealth Insurance Insurance(NSHI) planpreparedby 2004 Strengthenpromotiveand preventive Increaseproportiono fchildrenfully KDHS (CBS) health immunized from 74%in2002to 85% in 2008 Contraceptiveprevalencerate increases KDHS(CBS) Advocacy and counselingwill from 38%to 45% in 2008 continueto be camedout Increased proportiono f mothers KDHS(CBS), HIS (MoH) Distancesto nearestfacility delivering inhealthfacilitiesfrom 56% to - reduced. stafftrained and 70% in2008 equiped All HIV pregantmother receiving H I S (MoH), NASCOP Supplyanddistnbutionof drugs Navirapinetreatment by 2008 will be efficient ProportionofpopulationinWestemand KDHS(CBS), HIS (MoH Supplyand distributionofdrugs Coastalareas and of pregnantmothers will be efficient usingITNsfrom 5% to 50% by 2008 Guidelines for appointmentof DHMBs Gazzette notice, MoH reviewed bv 2003. all DHMBsand DHMTstrinedon managementby 2004 /Increasedbudgetallocationsto health I IShareof health expeditures increase from I I 15 6to 12%of pubiic budget /HIVIAIDS ~NACC 1 New institutionaland legalframework for Gazette, decrees HIv/AIDs StrengthenedHIV prevention Condomusageincreasedas a%ofthe BSS (NASCOPICBS), KDHS sexually active population (CBS) SeveralVCT centersestablishedin NASCOPdata unattendedareas by 2004 ExpandedHIV treatment Proportionof patientscoveredby ARV MoH ARVs will be available in increasedby 2005 adequatenumbers Activities/Policies lmplemenlin Inputs Agency Education, Healthand HIVIAIDS Education MoE Ensureequitableenrolment by targeting disadvantagedareas and groups, including I II I Eliminationofschool levies ISchool grants IBudgetdisbursement ]Overcrowding,demoralized Introductiono faltemativeeducation II ITeachertraining; hardshipallowances; -. ITrainingrecords, budget I delivery methods(multi-shift,multi trainingmaterials; alternative disbursements;MoErecords I I made. nonformal) school meals Provisionof bursariesto students from poor families, particularlyin ASALs Expandschool feedingprogramby 150,000 students Improvequality and intemalefficiency through teacher trainingandredeployment Reformthe curriculum to focus oncore skills Provide leamingmaterials and improving Textbooks, exercise books,pencils, School accountsand inventory teachers, repetitionand drop out, the learningenvironment equipment records(SchoolsiMoE), budget cooperationfrom school disbursements committees, cooperationwith other providers of primary Redefinethe rolesof localauthorities Decentralizedecision-making to district and school-level administrators, and parents' representatives EnforceChildren'sAct ChildrenDepartment facilitation(budget) Budget disbursements,workplans (MHA) Narrative , . Iedicatora ' 8 I -, IM~E. `i ` 1 x* * lhumptioadRlsks. h m `-el s. ,. . ~ld"~~nnd?up"upoarMNlr)r '. < I . - . Constructionof additional classrooms Provisionof buildingmaterial \Budgetdisbursements ]education,external financing, communityresources schoolsaccountingsystems, and managementinformationsystems for districtsandMoE vloH Revisit financingof healthsector to reduceout-of-pocketexpendituresbythe packageand increasedcoverageof qualityhealthcare to the poor, includingestablishment ofNational Social HealthInsuranceFund(NSHIF) Vaccines MoHaccounts including Advocacycampaignsfor family IEC (printedmaterials), radio, chief planning meetings, school curricula Strengthencapacity of health Delivery kits, ambulances,training facilities for delivenes Reductioninthe rateof HIV Navirapinetreatment for pregnant transmission mothersand STIs treatment Implement malariacontrolaction Insecticidetreatedbednets (ITNs), MoHaccounts AMREF continues its programon communicationcampaign bednetsdistribution Enhancemanagerial skills of DHMBs, and DHMTs Designessentialcurativecare package drugs MoHaccounts financialmanagementtraining Trainingrecords(MoH) Increaseprogrammingfor rural health budgetallocations MoHbudget care service deliverv Overhauldrugs procurement and distributionsystem I Improve cross-sectoral cooperation fo health promotionand public health, in th areas of water and sanitation, reproductiv health, gender, HIV/AIDS, nutritior school health, road safety and tobacc control Increase the efficiency and effectivenes of the combined investments o f GoK an its partners through joint programmati approach Increasetotal government spendingon healthfrom the current 5 6% as a shareof totalpublic expenditureto 12% NACC I IStrengthenmulti-sectoralresponseto I22 Narrative I . . I lJ.ndicatorat 1 IM&E - I " IAatumptio&h I f i e l ' Id- s o ~ n n d r u p o n r l b i l ~ I llntensih HIV AIDS awarenessand I ]Condomprogramming, provisionof . - -. I 1Availabilin of funds for ARV behavioralchange communication informationandeducation drugs, interagencycoordination, campaign I /Coordinatestrategiesfor prevention, I I I I I treatment andmitigation Developaroll-out plan for the increasing amountof resourcesdevotedto treatment I IIIntensifypreventionactivitiesincluding Voluntaly counselingandtesting EstablishingVCT centers, providetraining andeouioment Develop capacity building plans for private andpublicagenciesinvolvedin HIViALDS programs Develop acreative andstrategic approach for caringfor andsupportingthe rapidly increasingnumberof orphans I23 ILogicalFrameworkMatrix for Kenya'sEconomic Recovery Strategy for Wealth and EmploymentGeneration(ERS) PART B.2: EQUITY AND POVERTY REDUCTION Human ResourceDevelopment:Labor Namtive I i s IM&E - I /Indicators I-. AsumptbnstRh ' f&fomrci wdrrsponsbilf~ Kali associationsrecords investmentby bothlocaland outputs Employment and Productivity Newemploymentpolicy Employment policy approvedby 2004 Macroeconomic stability Decreasedlabor costs Average industrialgross wage for low- Macroeconomic stability skill labor declines Reducedindustrialunrest COTU Frequencyof labourinspectionsincreased Industrialreports The new employmentpolicy is implemented FKE, Ratio ofworkmencompensationcases CPU, processedto total increased MOL More efficientresolutionof industrial Industrial No of disputessettledper monthincreases Industrialreports The new employment policyis disuutes court imulemented IProductivity policyinplace IAdult literacy improved Literacyrate increased ActivitiesPolieies highunemploymentand highlabourcosts, and implement reforms to improvelabour networkingbetweeneducation,training& ComDenSationcases Productivity ImplementStrategicPlanofthe Strategicplanwill be completed Productivity Center I24 dissemination Measure productivityoffactors of Mol, Measunngfactors ofproductionusing production MTI, differentmeasurementcntenafor the MoF entireeconomy Strengthenliteracyprograms I25 ILoaicsl Framework Matrix for Kenva'sEconomic RecovervStrateev for Wealth and EmnlovmentGeneration(ERS) -- ....-. I _I L " \ I /PART B.3: EOUITY AND POVERTY REDUCTIONAgriculture.RuralDevelonmentand Environment Objective PovertyReduction Reduceproportionofthe peoplebelowthe KenyaLivingStandardSurvey- absolutepoverty lines(Kenya and$lPPP) KLSS (CBS) (in designstage) by 10%by 2006 from 57% in 1997 (MDGl) Reduceproportionofpeopleliving in MOA,WFF', FAO, KLSS hungerby 10%by 2006 (MDG2) DevelopmentOutcomes Agricultureandlivestock Agricultural sector becomesmore Value ofagricultural exportsrises by 3 NationalAccountsiEconomic Infrastructure(roads, energy, competitive globally. percentperyear during2003-06 survey dataprovidedannuallyby communications) improved. the CentralBureauofStatistics. Supportive legislationis passed by parliament. I I I I ITradeameementscreatealevel I I playingfield. Marketingsystemfor smallholders The ratiobetweensmall farmer price Datafrom the ministryof Supportive legislationis passed becomesmore efficient. receivedand world market price for coffee agriculture,cooperatives,and by parliament.Reformof risefrom 30%to 70% by 2006. commodity boards, KLSS (CBS), cooperativesandcommodity Marketingmarginbetweenconsumerand RuralMarketPricesSurvey boardsimplemented. producer prices for grains falls ( C W , Incomesofcrop andlivestockproducers Incomerises in communitiesthat benefit ParticipatoryPoverty increase. from rehabilitationofirrigation works, Assessments,KLSS (CBS) comparedwith abaseline. Foodsecurity increases. Headcountoffood insecurepopulations KLSS (CBS), malnutritiondata Rainfall pattemsare normal. falls, proportionofmalnourishedchildren from the ministly ofhealth, WFP, falls FA0 Animalsare healthy and more productive. Incidencesof animal diseaseoutbreaks Ministryofagriculture, Animal movementsare declines by 2006 departmentofveterinary controlled. services, HusbandrySurveys (LRI) Rural Water Increaseaccess to drinking water in rural Increaseaccessto 60% coveragein rural Ministryofwater resources, Catchmentareasare protectedfo; areas areas by 2006. KLSS andcensus(CBS) water supply; multi-donorsector investmentprogram Healthimproves in beneficiary Incidenceofwaterbome diseasesdeclines KDHS(CBS), MoHsurveillance Community memberspractice communities. in2003-6. data, andreported dataon goodhygienic standards. outbreaksofwaterbome diseases. Sustainableuse ofwater resources Reducedconflictsover water resources. MoRMD, WRMA, District Consensusandclear institutional CommisionerandOfficer linkagesandsupport; cooperation CommandingPolice amongcommunities DivisiodOffice ofthe President andNGOsdata. ~ LandResources Increasedinvestmentandreduced Ruralfixed investmentinthe land Agcultural ProductionSurvey Peopledemandtitles to the land conflictsover land. increased (CBV to whichthey haveuserrights. Improvedlanduse planningand Increaseduse ofagriculturalinputs MinistryofLandsand Input prices not above administration. Settlements intemationalmarketlevels Environment Conservationofthe environment Hectageofconservedhabitat MOA,KWS, M L S Hectageofforestry remainingand MOA,KWS, M L S reclaimed Numberofwild animalsby species KWS, ILRI outputs I Amicultural researchinstitutes ISomeofresearchinstitutes mergedand I I consolidated lstaff rationalizedby 2006 I26 Narrative I . I I Ilindieators IAsnrmDtions/Risle ' fkl- . IM&E ~ d a ~ a c & " d ~ b f l i ~ -I + I ILinkagesbetweenfarmers, the researchI 175% of farmers able to chose extension IFarmerscore cards(MOA) lGovemment adoptsa stratem system, and extension strengthened servicesBY 2006 that increasesthe participationof farmers insettingprioritiesfor availablein distncts communities, andpostedonthe web constantandifthey change declinesby 80% by 2006 donorshelpKenyacomply Land Resources Titles issued Number of titles issuedeachyear Ministry of Landsand Adjudicationmechanismsare 2003-06 Settlements efficient Landinformationsystemmodemized Proportionoflandrecordsthat are MinistryofLandsand Supportiveinfrastructure is in I27 I ]Communityworkplans I INo.of workplans completedand Iimplemented I I I I28 CtivitieslPolicies ]Agricultureand livestock IRestructureand rationalizeagricultural IIImolement research NationalAgricultural Extension policyemphasizingdemand- undertakenas abasis for reform driven servicesand private sector of agnculturalmarketingboards participationEstablishdatabase for and other regulatory issues extensionplanningand performance monitoring Caving out PRA throughout the country, facilitated by extensionists Developstrategyto improve public sector efficiency inagricultureand livestock, --Developstrategy includingrationalizationof parastatals for deepeningmarketsof agncultural financial services Liberalizeand regulate inputs market Promote commercializationof farm productsincludingreducingtransport cost by improvingruralroadsand reducing fue taxes, reducingimgation and factory operatingcosts by bringingdown electncitycosts, and improvingaccessto market informationby strengthening communications Providecrop and livestock information servicesthrough radio, bulletins, intemet, and the like Developacoherent landpolicyto address landuseandadministration,landtenure, and landdeliverysystems Liberalizemaize and sugar markets Implement plansto liberalize the pyrethrumsector, and restrictthe pyrethrumboardto regulatory functions Coffee implement reforms inthe coffee sectorwith the Objectiveof increasingthe share of final sales that farmersreceive Cotton ReestablishCottonBoard, clear AoALD outstandingdebts, expandirrigation schemes, reviewCottonAct, encourage small scale ginning Rice:rehabilitateirrigationschemesto LoALD enhance rice production Livestock.Implementstrategyfor disease outbreak preventionand control.Introduce single permit system for cattlemovement. Review options for adecentralizedand privatesector providednetworkof slaughterhouses.Expandaccessto water sources.Improvesecurity. Provide breedingservices(cattle, goats, sheep). Cooperatives reviewCooperative AoCD SocietiesAct (1997), address indebtedness, sensitizecoop memberson their riehts I29 Ministry o fAgnculrureto allocare a greater share of resourcesto priorit) Implementthe Water Act 2000 Landreclamation implementationof community projects Land Resources MoLS Developacoherentlandpolicyto address landuse and administration, landtenure, and landdeliverysystems Landvaluation, registrationoftitles, and landadministration Conveningtnbunals to hearandresolve mappingequipment, and computenzation ) andEnvironmentManagement CoordinationAct (1999),implement WSSD andMDG, implementLake Victona EnvironmentalManagement Project,andconsolidateNational EnvironmentManagementAuthonty ies inconservaion o t sharing, managehuman- conflicts,andstrengthenKWS I30 /PovertyReduction Reduceproportionofthe peoplebelowthe KenyaLivingStandardSurvey- absolutepovertylines(KenyaandSlPPP) KLSS (CBS) (in designstage) by 10%by 2006 from 57% in 1997 (MDG11 Proportionof orphansreceivingadequate care Poverty Targeted Programs Social Action Fund Promote community-dnvendevelopment more communitiesbenefit nmiectq Arid and Semi-Arid Lands (ASALs) IncreasedASALs incomesandassetsfrom Increasedvalue and diversityof Baseline survey basedon livestockandtourism activities livestocldproductiveandhouseholdassets enhancedEWS sublocations samplesfor MarchandSept ImproveASALs nutritionalstatus Stuntingratereducedduring2003-2008 Improvedcapacity to deal with disastersin Proportionoffood insecureto totalASAL lthe ASALs andmitigate their effects I 1populationreduced ReducedASALs conflictsover land Numberof reportedlandconflicts Gap inservice delivery betweenASAL ASALs enrollment ratesincreaseby 50% areas andthe restofKenyanarrowed by 2007 ImorovedhealthstatusinASALs Gau in morbiditv rate inASALs to overall morbidity narrowed Reducedinsecurity inASALs ASALs cross-border incidences reduced Kisumu slumplancompletedin2004 clean water andsanitation I31 1Availabilityof housingexpandedfor slum I 1150,000 new dwellings built in2003-2007 INumberconstructed dwellers Squattercommunitiesinthe coastal all squattercommunitiesregulanzed MLA, MLG, MRPW, housing provinces regulanzed department Vulnerability Rehabilitatedstreet children all streetchildrenprovidedwith shelter, Numberrehabiltated are off-drugsand backinschool by2007 Establishmentof the Commission, Act ofParliament Gazette Approval of SessionalPaperonGender andDevelopment Policy papercompleted, enactmentof Act ofParliament Gazette Disability Bill Communitiesreceive grants for their 1,500 groupsreceivegrants in2003 Department of SocialServices /priorityproject I(MGCSS) records increasedvariety ofcourses Rehabilitatedandmaintainedroads, all major roadsto marginalized increasedhardshioallowances for social communitiesrehabilitated service providers I I I I ictivities/Policies Implementin Inputs 1gAge.w II I I Poverty Targeted Programs Social Action Fund Establish Social Action Fund Arid and Semi-and programs Livestockdevelopment implement a broadbasedlivestock development policy to be implemented, focusingonmarketing oflivestock, providingadequatewater, conductingresearchonlivestockbreeds andstrengtheninganimal healthdelivery system, developingsupporting infrastructureand legislativeand institutionalmeasures, andfacilitatethe establishmentoflivestock basedindustriei by removinginhibiting policiesand offeringappropriate investmentincentives Disasterandemergencyresponse strengthenfood distributionand targeting mechanism,develop and implementa disaster managementpolicy and establish communitybaseddrought early warning systems LandTenure undertakedatabased inventonesoftenure arrangements,reviev adjudication processintrust landareas, andestablishaccountablelandboards I32 programme for pastoralistchildren, developlinkagesandequivalences betweennonformal andformal education system, improve schoolingfacilities, and strengthencapacities of communitiesto ensurebetterplanningandmanagementof membersofpastoralistcommunity,provide public healtheducationto communities implement foodfor work programinfood insecureareas, andmobilizecommunity maintenanceoffeeder roads affordable housing, surveyingcurrent housingfacilities,facilitating construction (design andbuilding)andfinancing I33 LogicalFrameworkMatrix for Kenya's EconomicRecovery Strategyfor Wealth and EmploymentGeneration(ERS) PART C.1: GOVERNANCE Safetv. Law and Order Objective ImprovedGovernance Controlofcorruptionandrule oflaw: Criminal Investigation proportionofcorruptioncases leadingto Department convictionincreased DevelopmentOutcomes Public safety, law andorder Strengthenedjusticeandrule oflaw/ Increasedratioofconcludedcasesto Criminal Investigation achievingpredictableand impartialjustice reportedcriminal cases from21%in 1999 Department, StatisticalAbstract system to 60% in 2006 (CBS) Improvedsecurity Reducednumberofcriminaloffences from Criminal Investigation 63,000 in2001to 35,000 in2006 Department, StatisticalAbstract outputs Publicsafety, law and order Newconstitutionapproved Newconstitutioninplace byJune 2004 Gazettenotice Securityforce strengthened Numberof trainedand deployed inthe PoliceDept/Ofice ofthe policeforce President Corruptioncases prosecuted CompletedGoldenberginvestigation MoJ, Anti-Corruption lcommission Public safety, law and order Constitutionalreview GoK Parliamentreviewsandapproves constitutionaldraft Completeconstitutional review MoJ A new constitutiondeveloped Reviewand harmonize laws AG Policereforms OOP, MH.4, Hire additional security staffto start Newwages implementedinJanuary 2004 closingthe gap with intemationalAJN Hinngongoingto meetthe ratio standards. Retrain,reequipandredeploypoliceforce OOP Train, procure equipment and redeploy andother security services security parsonnel Strengthenpartnershipsbetweenthe police force andthe private sector security Completestalledhousingprojectsfor Numberof housescompletedand occupied PublicWorks securitystaff. by security personnel Strengthenspecialized anti-banditry units, Numberofunitsestablishedandpolice a tourism police unit, anti-terrorismpolice recruitedanddeployed inthe specialised units, portpatrol units, and community policinginitiativesandanti-corruption units. I34 Develop framework to undertake Establishedframeworkfor comprehensive comprehensive intelligenceresearchin intellligence service crimeandsecurity Revise andenact laws to deal with modem Newlegislationsenacted crimechallengessuchas terrorism, fraud, moneylaundering, e-commercecrimes, andtax evasion. Anti-corruption measures MoJ, AG, KACC, OP Implementthe provisionsofthe anti- Public EthicsAct inplace and corruptionEconomic CrimesAct (2003) implemented are a five-year anti-corruption interferenceto departmentsandinstitutions practicingadvocates processing,eficiency storage& retnevalof I I I I I I 35 ILogicalFramework Matrix for Kenya's EconomicRecoveryStrategyfor Wealth and EmploymentGeneration(ERS) PART C.2: GOVERNANCE PublicAdministration Narrative 1 /Indicators - * 1 + M&E Assumr.ttioodRlsks /liwn- .to.. by (&re) & f a m e d r e ~ ~ + ~ ~ ~ b t l i v Objective ImprovedGovernance Improvetransparencyandaccountabilityof publicadministration DevelopmentOutcomes I I 2 Public Sector Transparency and Devolution of Power Fiscalresourcesreleasedforallocationto Wage Bill/GDP reducedto 8.5% of GDP BudgetOuttum, Treasury civil service reformssuccessful priorityprograms by 2005/06 Fiscaltransfers to parastatalsreducedby Budget - MoF Parastatalreformssuccessful 40% by 2006/07 Empowermentof communities Proportionofbudgetaryresources Budget - MoF fiscal discentralizationundertaken controlled by local governments increased Communitiesreporthavinggreater control Participatoryassessmentse.g. fiscaldiscentralizationundertaken on local developmentresources scorecards govemment spendingincreased I I I I I ActivitieslPolicies Implementi Inputs Parastatal reform Finalizeplanto restructurethe 136existing MoF Privitization bill passedandthe Privatizationbill andthe Strongandsustainedpolitical state corporationsand statutory boards, Privitization commissionformed by endof Privitizationcommission(AG commitment. includingrationalization, restructuring, 2003 chambersandMoF). mergersand legislative reforms, and submit to the Cabinet for approvaland implementation. I36 constitutionalreform and review Local MoLG andthe AG Chambers establish single disbursementsystemto t localities and systemof performance-base rewardsand punishments I37 inpnonty areas ofthe NationalResearch Integrateddatamanagement system Systemdesignedand installedby June Consultantreports, procurement Establishmentof inter-ministenal ! 2004 records, functional IDMS MISoperational inkeyministries(MoE, Implementationreports (MoE, MoH, MRF'W, MLD) by 2004 MoH, MRPS, MLS) 14 INationalresearchagenda I INationalResearchAgendaapprovedby /Publication IContinuedcollaborationwith I Jan2004 localresearchinstitutions 5 Intennstitutionalprotocol for MoPiMoFprotocolapprovedby Dec 2003 Decree MoF implements result-based budget/MTEFiM&E linkage budgetreforms, OP civil service reforms 6 Govemmentinstitutionsthat received Numberof governmentstaffthat received Trainingrecords trainingonM&E trainingon M&E 7 Public informationaccesspolicy Policyapprovedby June 2004 Gazetteidecree 8 Memorandumof Understandingwith NGO NGOMoUnegotiatedandapprovedby Publication continuedfavourable climatefor community June 2004 continuedpnvate sector participation consultationwith academic and donor I38