Introduction to Public Financial Management Legal Framework

Introduction to Public Financial Management Legal Framework Public finance is the study of the role of the government in the economy. It is the branch of economics which assess the government revenue and government expenditure of public institutions and the adjustments to achieve desirable effects and avoid undesirable effects. Public financial management is the administration of funds used to deliver or provide public services such as education, health care, infrastructure among others. It is a discipline within financial management which is focused on delivering services as effectively and efficiently as possible to maximize benefits to residents/citizens. Public financial management has concerns that are not present with spending in the private sector including; Public accountability; members of the public expect to see accounting to show how their money was collected and spent. The public may participate directly in policy making at the polls, through petitions, and in lobbying measures targeted at specific agencies or legislators. Another issue is the need to balance the public good, and what will benefit most people most of the time, in public financial management. The relevant PFM legal instruments (legal framework) that have been enacted (some will be discussed in the ensuing chapters) include; - Public Financial Management Act, 2012 - The Commission on Revenue Allocation Act, 2011 - The Independent Offices (Appointment) Act, 2011 - The Salaries and Remuneration Commission Act, 2011 - The Controller of Budget Act, 2011 - Public Procurement and Disposal (PPD) Act General overview of PFM as envisaged by the Constitution The PFM legal framework is firmly anchored in Article 201 of the Constitution and gives effect to the principles of public finance. The following are the principles which guide all aspects of public finance in the Republic of Kenya; 1. openness and accountability which include public participation in financial matters 2. the public finance system shall promote an equitable society i.e.; Fairly shared burden of taxation Equitable sharing of revenues among national and county governments Equitable development of the country through expenditure including making special provision for marginalized groups and areas 3. Equitable sharing of burdens and benefits of the use of resources and public borrowings ©Kiphill2015

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4. Fiscal discipline i.e. public money should be used in a prudent and responsible way Overview of PFM Act PFM Act is an Act of Parliament enacted for the following purposes; - to provide for the effective management of public finances by the national and county governments; - to provide for the oversight responsibility of Parliament and county assemblies; - provide the different responsibilities of government entities and other bodies, and for connected purposes

Objectives of the PFM Act PFM Act was enacted to ensure that; Public finances are managed at both the national and the county levels of government in accordance with the principles set out in the Constitution Public officers who are given responsibility for managing the finances are accountable to the public for the management of those finances through Parliament and County Assemblies. To promote good financial management at the National and County Government level; this would facilitate effective and efficient use of limited resources. The PFM Act makes provisions for the followings public finance issues to be implemented inline with the principles of finance as envisaged in the Constitution; Parliamentary oversight of national finances National government responsibilities with respect to the management and control of public finance ©Kiphill2015

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County government responsibilities with respect to the management and control of public finance The relationship between national and county governments on budget and economic matters He public sector accounting standards board Enforcement provisions dealing with various offences that can be committed and their penalties Other provisions including public participation, protection of public officers from liability, among others. Financial Regulations Financial regulations refer to the point of reference for the principles and procedures governing the establishment and implementation of the national and county budgets and the control of the public finances. Financial regulations ensure effective and efficient application of public finances to achieve the specifically defined financial and economic objectives. Financial regulations should at all time address the following concerns; - Simplification; this involves cutting red-tape, speeding up procedures and shifting focus from paperwork to performance. - Accountability; this involves ensuring enhanced sound financial management and the protection of citizen’s (public’s) interests. Treasury Circulars This is a form of communication applied by the Treasury in providing information, instructions, rules and guidelines affecting the finance functions. It is addressed to many different government institutions, departments, sections and functions within the country or county. The recipient of the Treasury circulars are always to implement the directives as indicated in the circulars e.g. the Treasury can issue a circular to all accounting officers to ensure that all cash receipted in their departments are banked within a specified time period. Where there is no regulations treasury circular forms part of the financial regulations applied. A ‘Budget Circular’ means a written instruction issued by the Cabinet Secretary providing broad guidelines on the budget process of the national government. Process of Developing County Government Finance Bill A bill is proposed legislation under consideration by a legislature (national or county assembly). A bill does not become law until it is passed by the legislature and, in most cases, approved by the executive. Once a bill has been enacted into law, it is called an Act or a statute. A Finance Bill is a proposed legislation which formulates the proposals announced in the budget of the National or County government. It is prepared every year by the National or County Treasury and submitted to the national or county assembly for passing. Once the Finance Bill has been assented to by the President or Governor for National or County government respectively it becomes the Finance Act. Finance Bill form an integral part of the budget process. Section 125 of the Public Finance Management Act, 2012 provides the procedure to be followed in the budget making process at the county level as outlined below: ©Kiphill2015

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Development of an integrated development planning process, which includes both long term and medium term planning; Planning for and establishing financial and economic priorities for the county over the medium term; Making an overall estimation of the county government’s revenues and expenditure; Adoption of the County Fiscal Strategy Paper; Preparing budget estimates for the county government and submitting estimates to the county assembly; Debate and approval of the budget estimates by the county assembly; Enactment of the appropriation law and any other laws required to implement the county government’s budget; Implementation of the county government’s budget; Accounting for, and evaluating the county government’s budgeted revenues and expenditure. The county executive member in charge of the county treasury shall submit the budget estimates and other documents together with the draft Bills (for implementation of the county government budget), except the Finance Bill, to the county executive committee for approval. Following approval by the county executive committee, the budget estimates shall be submitted to the county assembly for approval. The clerk to the county assembly shall then prepare the budget estimates for the assembly and forward them to assembly and the county executive committee member in charge of the county treasury for comments. After submission of budget estimates to the county assembly for approval, the county executive committee member in charge of the county treasury shall publish and publicize them. Upon approval, the county executive committee for finance shall prepare and submit the County Appropriation Bill with the approved budget estimates to the county assembly. The county assembly shall consider and approve the Appropriation Bill, with or without amendments, and within 90 days after its passing, the assembly shall pass the Finance Bill.

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