Documentof The World Bank FOR OFFICIAL USEONLY ReportNo. 38055-KE THE INTERNATIONAL DEVELOPMENTASSOCIATION THE INTERNATIONALFINANCE CORPORATION AND THE MULTILATERAL INVESTMENT GUARANTEEAGENCY COUNTRY ASSISTANCE STRATEGYPROGRESSREPORT FOR THE REPUBLIC OF KENYA FORTHE PERIODFY04-OS February 16,2007 EasternAfrica Country Cluster 2 Africa Region InternationalFinance Corporation Sub-SaharanAfrica Department Multilateral Investment GuaranteeAgency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the World Bank's authorization. KACC Kenya Anti-Corruption Commission KEPSA Kenya Private Sector Alliance KESSP Kenya Education Sector SupportProject KHADREP Kenya HIV/AIDS EmergencyResponseProject KPLC Kenya Power andLighting Corporation KUTIP KenyaUrban Transport InfrastructureProject M&E Monitoring and Evaluation MAM ManagementAction Plan MDGs Millennium DevelopmentGoals MIGA Multilateral InvestmentGuaranteeAgency MSMEs Micro, Small andMedium-size Enterprises MTEF Medium-Term ExpenditureFramework M W Megawatts NACC National AIDS Control Council NARC National Rainbow Coalition NCTIP Northern Corridor Transport ImprovementProject NGO NongovernmentalOrganization NSSF National Social SecurityFund NWSIRP Nairobi Water and Sewerage Institutional RestructuringProject OECD Organization for Economic Co-operationand Development OPEC Organization ofPetroleumExporting Countries PEMAAP Public ExpenditureManagementAssessment andAction Plan PER Public ExpenditureReview PIC Public Information Center PPIAF Public-Private Infiastructure Advisory Facility PREM Poverty Reduction andEconomic Management PRGF Poverty Reductionand GrowthFacility PRSC Poverty Reduction SupportCredit PRSP Poverty Reduction StrategyPaper PSIA Poverty and social impact analysis QAG Quality Assurance Group ROSC Report on the Observance of Standards and Codes SIDA SwedishInternational DevelopmentAgency SIL Specific InvestmentLoan SME Small and MediumEnterprises SOE State-ownedenterprise StatCap Statistical CapacityBuilding Program SWAp Sector-WideApproach TOWA Total War on AIDS UN UnitedNations UNDP UnitedNations DevelopmentProgramme WBI World Bank Institute WDR World DevelopmentReport WSP Water and SanitationProgram IDA IFC MIGA Vice President(Acting) Hartwig Schafer Edward A. Nassim Yukiko Omura Country Director Colin Bruce Thieny Tanoh Frank J. Lysy Task Team Leader Geoffrey Bergenand Jean Philippe Prosper Thomas A. Vis HaroldBedoya DATEOFLAST COUNTRY ASSISTANCESTRATEGY The Country Assistance Strategy was discussed and endorsedby the Board on June 17,2004. CURRENCY EQUIVALENTS Currency unit = Kenya shilling (KSh) US$l = KSh71.96 (February 2007) FISCALYEAR July 1-June 30 ABBREVIATIONSAND ACRONYMS AAA Analytic and Advisory Activities AfDB African DevelopmentBank FOR OFFICIAL USE ONLY AIDS AcquiredImmuneDeficiency Syndrome CAS CountryAssistance Strategy CBO CommunityBasedOrganization CDD CommunityDriven Development CDF Constituency DevelopmentFund CEM CountryEconomicMemorandum CET CommonExternalTariff CIFA CountryIntegratedFiduciaryAssessment CPIA CountryPolicy and InstitutionalAssessment CPPR CountryPortfolio PerformanceReview DARE DecentralizedAIDS and ReproductiveHealthProject DCG Donor CoordinationGroup DfID Departmentfor InternationalDevelopment (UK) DIR DetailedImplementationReview DPL DevelopmentPolicy Lending DPO DevelopmentPolicy Operation EAC EastAfrican Community EMU Efficiency Monitoring Unit ERS Economic Recovery Strategy ERSSC Economic Recovery Strategy Support Credit ESEP Economic and Social EmpowermentProgram ESW Economic and Sector Work FBO Faith-basedorganization FLSTA Financialand LegalTechnical Assistance Credit FOI Freedomof information FSAP FinancialSector Assessment Program GAP Governance Action Plan GBI Grassroots BusinessInitiative GDLN Global DevelopmentLearningNetwork GDP Gross Domestic Product GEF Global EnvironmentFacility GJLOS Governance, Justice, Law and Order SectorReformProgram GOWE GrowthOriented WomenEnterprises GSPK GovernanceStrategy for Building a ProsperousKenya HIV Human ImmunodeficiencyVirus ICPAK Instituteof CertifiedPublicAccountantso fKenya ICT InformationCommunications and Technology IDA InternationalDevelopmentAssociation IDF InstitutionalDevelopmentFund IFC InternationalFinance Corporation IFMIS IntegratedFinancialManagementInformationSystem IGA InitialGovernance Assessment IMF InternationalMonetary Fund INT InternalIntegrity Department IP-ERS Investment Programmefor the EconomicRecovery Strategy IRCB InstitutionalReformand Capacity Building This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. KENYA COUNTRY ASSISTANCESTRATEGY PROGRESS REPORT Contents EXECUTIVESUMMARY ................................................................................................................................. i KENYA COUNTRY ASSISTANCESTRATEGY PROGRESSREPORT .............................................................. 1 1 EXPECTATIONS, . OUTCOMES, AND CHALLENGES OF KENYA'S ECONOMIC RECOVERY STRATEGY 1 A. Macroeconomic Stability and Growth................................................................................................ 1 B. EquityandPovertyReduction ............................................................................................................. 3 C. Governance......................................................................................................................................... 4 11 PROGRESS.CHALLENGES AND LESSONS . INIMPLEMENTINGTHE BANKGROUP'SSUPPORT PROGRAM FORTHE P-ERS ........................................................................................................................ 4 111 STRATEGYFORTHEREMAININGCASPERIOD . .................................................................................. 8 A. Equity.................................................................................................................................................. 8 B. Governance......................................................................................................................................... 9 C. IDA Lendingfor Kenya.................................................................................................................... 13 D. IDA/IFC Synergies........................................................................................................................... 14 ..................15 v.RISKSANDRISKMITIGATION Iv. IMPLEMENTING THE STRATEGY WITH EQUITY AND GOVERNANCE ENHANCEMENTS ............................................................................................................. 18 VI CONCLUSION . ....................................................................................................................................... 19 Figures Figure 1. Assessmentof CAS Outcome IndicatorsandCAS MidtermIndicators(inpercent)...................6 Figure 3. IntegratingSchoolMapswith PopulationDatato IdentifyService DeliveryGaps Figure2. Constructingan IntegratedGeo-ReferencedDatabase.............................................................. ...................-80 Figure4. MappingPublicExpendituresto ProvideInformationfor SocialMonitoring........................... 81 82 Tables Table 1. Assessment of 2004 CAS Base-CaseTriggers............................................................................... Table 2. TargetedResults inGovernance .................................................................................................. 7 Table 3. IDA Lendingfor Kenya. FY06-08............................................................................................... 15 11 Annexes Annex 1. Governmentof KenyaGovernance Strategy.............................................................................. Annex 2. Bank Group Support Alignmentwith CAS Priorities ................................................................ 20 Annex 3. Progresson the KenyaResults-basedCAS ................................................................................ 53 Annex 5. StimulatingGrassroots andOutput-BasedMicrofinancefor Community-ManagedWater Annex 4. Developmentof an InnovativePublicExpenditureandGovernanceMonitoringTool .............55 80 83 Annex 6. Partnershipin Implementingthe IP-ERS.................................................................................... Programs...................................................................................................................................................... 86 88 Annex 8. KenyaCAS Annexes.................................................................................................................. Annex 7. Economicand Sector Work ........................................................................................................ 90 EXECUTIVE SUMMARY 1. This report, preparedjointly with IFC and MIGA, documentsprogressin implementingthe Country Assistance Strategy (CAS) for the period 2004-2007. It enumerates key accomplishments, including improved macroeconomic management and growth recovery. It documents challenges such as continuing inequities inincome and access to services, and mixed progress on corruption and some structural reforms. Inan environment where governance challenges are paramount, it also strives to maintainthe balance between dealing effectively with governance and corruption and continuing to provide vital assistance to the poor. 2. The report continues the Bank Group's strategicemphasis on growth and poverty reductionbut gives enhancedattentionto equity and governance. The four themes o fthe original CAS remain relevant: (a) strengtheningpublic sector management and accountability; (b) reducingthe cost o f doing business and improving the investment climate; (c) reducing vulnerability and strengthening communities; and (d) investinginpeople. Reflectinggreater attentionto equity, our support program more directly targets the poorestpeople(with continuingattentionto the drivers of overall growth). Analytic work such as the ongoingjoint poverty assessment will help the Government improve the targeting and use o fpublic resources. Lending will target some poverty hotspots, such as WesternKenya, Nyanza Province, and urban and periurban slums, where about 70 percent o f poor Kenyans live. Newprograms will provide financial and technical resources for poor communities andentrepreneurs to provide economic services and create employment. I n supportingthe Government's GovernanceStrategyfor BuildingaProsperous Kenya (GSPK) and GovernanceAction Plan (GAP),the Bank will focus on transparency initiatives (including transparency inthejudiciary, and capacity building intheprosecutorial andjudicial services); broadening stakeholder involvement, including additional private participationininfrastructure services such as the ports; accelerating public financial management reforms; and improving governance in high-priority sectors-education, HIV/AIDS, health, and roads. Analytic work in such areas as media development, parliamentary andjudicial capacity, and police oversight mechanisms will help lay the foundation for the development and governance agenda beyond this GSPWGAP and for the next CAS. 3. We proposea one-year extensionof the CAS periodto take fuller advantage of program elements that were deferred in2005-06 becauseo f corruption concerns, and to allow the Bank Group to support implementation o fthe GSPWGAP. Inaddition, the extension would allow us to continue our engagement on the basis o ftransparent guidingprinciples, while the country prepares for presidentialand parliamentary elections by December 2007, andthe Government completes its new development strategy for achieving middle-income status by 2030. Duringthis period we will also work with the Government, development partners,and other stakeholders on the Kenya Joint Assistance Strategy. 4. New lendingwill support and reflect progressingovernance. The Bankproposes to support the original and enhanced pillars o f the strategy through a selective and carefully aligned program o f analytic work, advisory services, partnershipand coordination, and ongoing and new lending. The resultinglendingprogram for the remainder o f FY07would consist o f seven projects for an additional US498 million, while the pipeline for FY08 would consist o f six projects for a total of U s 3 6 7 million. These amountsfully reflect Kenya's access to IDA resources under the performance-based allocation system, includingthe possibility of scale up allocations. Duringthe rest o f the CAS period (through June 2008), the Bank proposes a three- part approach to lending: (a) proceedingwith operations, with safeguards, where risks are manageable; (b) undertaking additional safeguards and other technical work inareas where corruption risksare highbefore proceedingwith operations; and (c) completing due diligence ESWbefore proceeding with development policy operations. 5. Bank Group activitiesover FY07-OSwill contribute further to achieving developmentresultsidentified inthe original CAS program such as greater transparency and efficiency inpublic spending, more cost effective procurement, reduced costs o f doing business, and improved humandevelopment outcomes. The new operations proposed inthis CAS Progress Report would help reduce inequities inaccessto critical social services, and improve performance o fthejudiciary and other governance-related indicators inTable 2. 6. Implementation of the CAS program will entail specific measures to address corruption risks in Bank-funded operationswhile strengtheningcountry systems. Recently approved operations contain a range o f provisions that reflect the Bank's selective engagement with ministries, agencies, and institutionsthat champion good governance, and makeclear that funds mustbe usedfor their intendedpurpose. Bank staffing, processes, andinternal organization will be adapted to better reflect operational priorities: a field-based governance adviser and additional procurement staff will be recruited; a cross-sectoral Operations Risk Mitigation Team will be established; and inFY07 we will launch an integrated and in-depth technical, procurement, and financial management review of projects with highfiduciary risk. 7. Monitoring and evaluation has been updated and strengthened. We have updated and strengthened CAS programindicators to reflect the new emphasis on governance. We are also enhancing the assessment o f the impact o f governance measures inBank-supported credits. 8. Significant attention will be paid to overall program riskmitigation. The original CAS risk assessment has beenexpanded to include new areas that experience has shownto merit particular attention, including supervisingthe expanded agenda, political uncertainty, and reputational risk. 9. The proposedmodificationsto the strategy havebeendiscussed locally with the Kenyanauthorities, development partners, parliamentarians, the judiciary, private sector, and civil society, and are supported by them. 10. ProposedIssues for Board Discussion: 0 Does the proposed CAS Progress Report, with enhancements inequity and governance, adequately support Kenya's strategy to accelerate broad-based growth and poverty reduction? 0 Are the proposed interventions appropriate and inline with our comparative advantage and that o f other development partners? 0 I s the revised results matrix appropriately defined to replace the original framework? .. 11 KENYA COUNTRY ASSISTANCESTRATEGY PROGRESS REPORT 1. Progressmade buta challengingperiodlies ahead. The Bank Group's current Country Assistance Strategy (CAS) was endorsedby Executive Directors inJune 2004. This CAS Progress Report discusses key accomplishments, particularly macroeconomic management and growth recovery, and remaining challenges, such as continuing inequities inaccessto services as well as mixedprogress on corruption (Annex 1) and some structural reforms. Approaching presidential and parliamentary elections, scheduled for December 2007,' are likely to exacerbatepolitical tensions, makingreforms more difficult although not impossible. 2. While continuingthe BankGroup's emphasis on growthand povertyreduction,the strategywill give enhanced attentionto equity and governancegoingforward. Consistent withrecent discussions between Executive Directors and Senior Management2and the feedback from public consultations on the Bank's Governance and Anticorruption Strateg~,~ the approach to sustained Bank engagement inKenya duringthe rest o fthe CAS period seeks to: (a) reinforce the Bank's focus on poverty reduction; (b) work withreformers to support reform processes, particularly ingovernance, andto strengthencountry systems; (c) harmonize the Bank's reform efforts with other donors and other stakeholders to achieve greater leverage; (d) ensure that World Bank funds are usedfor the purposes intended; and (e) find the right balance between mitigating the risks o f corruption and remaining engaged to helpthe poor. Accordingly, we propose supportingthe Government's own strategy for improved governance (derivedfrom significant input over time from Kenyans as well as from the Bank and other development partners), as well as the Government's new2030 Vision for achieving middle- income status by 2030. Applyingthis approach also means lending insectors where risks are manageable, and undertaking additional safeguards and other technical work insectors where risksare highto support the governance improvements that are neededto ensure that lendingwill achieve expected results. The approach draws on successful implementation experience insome sectors and a large body o f analysis that includedan Initial Governance Assessment (IGA) and the Department o fInstitutional Integrity's (INT's) DetailedImplementationReview (DIR). I.EXPECTATIONS, OUTCOMES, AND CHALLENGES OFKENYA'S ECONOMIC RECOVERY STRATEGY A. MacroeconomicStabilityandGrowth 3. The Governmenthas carriedout comprehensive macroeconomicreforms. To improve macroeconomic management and stimulate growth, in2003 the Government of Kenya I For example, political tensions surfacedinthe form of confrontational but relatively peacefulpublic demonstrations inearly December2006. There was also ano-confidencemotion againstthe Government. But Parliamentrecessed on December 7, 2006 without consideringthe motion, puttingall legislative activity on holduntilParliamentreconvenes possibly inMarch2007. The most recent discussiontook placeon December 14,2006, when Executive Directors considereda document entitledKenya (IDA/SecM2006-0634), December 13,2006. 3 Kenya's consultationswere held on August 1, September 28, andNovember 1,2006, andJanuary 15-26,2007. promised action on a broad front, includingfiscal policy and such areas as infrastructure services andthe financial sector. Kenya's macroeconomic environment has become muchsounder: public debt has gone down, prices are more stable, and real interest rates have fallen. GDP growth i s estimated to have exceeded 6 percent in2006 (although a conservative estimate would be 5.5 percent), compared to 5.8 percent in2005 and 4.9 percent in2004; andafter years of stagnation, per capita growth has picked up at an average rate o f 1.8 percent per year. Exports o f goods and services have been growing steadily at an average o f more than 15 percent inthe past three years. Investment increased by more than 25 percent inreal terms in2005, although investmentlevels, at 19percent o f GDP, remainbelow the 23 percent average for low-income countries. Reflecting growing private sector confidence, foreign direct investment applications finalized by the Kenya InvestmentAuthorityjumpedfrom about US$90 million in2005 to about US$l.1 billion duringthe first 11monthso f 2006, driven by information, communications, transport, andtourism. By December 2006 the business confidence index had risen to 72 points from 58 points (inMay 2006).4 Still, 59 percent o f respondents indicatedthat corruption affects their businessto some extent while anadditional 30 percent o fthem are affectedto a great extent. 4. While a numberof structuralreformshave movedforward, other important reformsare delayed, raisingconcerns about growthsustainability. The water sector is being commercialized; the regulatory framework for private sector participation inelectricity generation i s beingupdated to include transmission; the concessioning o fthe Nairobi Urban Toll Road i s at the biddingstage; the tender for the second fixed-line operator was awarded in October 2006, following liberalizationo fthe international gateway; and the management contract for the railway concession commenced inNovember 2006. Under the ongoing licensing reform program, about 9 percent of licenses have been abolished, and another 50 percent are scheduled for harmonization, simplification, or elimination by December 2007 (including about 23 licenses that the private sector has identifiedas priorities). However, financial sector reform has faced serious setbacks (particularly the Government's failure to divest from banks, and recent court rulingsthat have seriously challenged the authority o fthe Central Bank o f Kenya to carry out supervision, particularly with regard to anti-money laundering). Inaddition, most public enterprises are still not privatized, eventhough an enablingPrivatization Bill was passed in2005. Sustained highgrowthwill require accelerated implementation o fthe promised reforms, includingmuch faster scale-up o fprivate sector development through regulatory reform and overhaul o fthejudicial system. 5. Publicsector managementhasimproved,thoughnotenough. Public sector management reform has focused on introducing results-based management, rapid results initiatives, service charters, codes o f conduct, and citizen scorecards. One important milestone inthis home-grown reform programoccurred inDecember 2006, whenthe President officiated at a public event inwhich all Ministers, Assistant Ministers,and their Permanent Secretaries received their performance scores as assessed by expert stakeholders on the basis o f the results- basedmanagement performance contracts their departmentshad signed. But comprehensive civil service reform i s yet to begin. Public confidence inthe efficiency andhonesty o f Government services (as measured by opinion poll results), continues to be low. Some o f these polls also suggest that inspecific areas like free primary education and health, the public i s The study notes that this is particularly striking inan election year. Business confidence was 57 points in Uganda, 59 points inTanzania and 9 inZambia. See Steadman Research Group. 2 reporting improvements inservice delivery, while inother areas, like procurement and the judiciary, the situation continues to causepublic concern (see also Box 1). B. Equity and PovertyReduction 6. Government promisedincreasedinvestmentin and improveddelivery of basic social services. InKenya's InvestmentProgramme for the Economic Recovery Strategy (IP-ERS), the equity andpoverty reductionpillar, with the Millennium Development Goals (MDGs) as the key reference, called for free primary education, increased basic health services, continued efforts to reduce the spread o f HIV/AIDS, increased productivity o f rural farms and nonfarm enterprises, targeted interventions for slum dwellers (people settlements), and community-driven development inthe arid and semiaridareas. 7. Unevenimplementationhas producedmixedresults. Healthsector outcomes have beenmixed, reflectingsignificant increases inpublic spendingbut also continuing weaknesses in planning, budgeting, management, regulation, and monitoringandevaluation. Kenya is not likely to meetthe childmortality andmaternal healthMDGs, but it has already metthe target o f halving the prevalence o f HIV/AIDS,which has fallen by about one-half to about 6.0 percent in 2006. While the agriculture sector-so critical to reducingpoverty-grew by 6.9 percent in 2005, a ten-year high, agriculture value-added grew by only 2.5 percent, up from 1.4 percent in 2004 but well below the IP-ERS target o f 5 percent because o f the slow pace o f agricultural reforms. Incontrast, the Free Primary Educationprogram that the Government introducedin 2003 has hada positive impact: Kenya's primary school net enrollment rate (including private andnonformal schools), was 80 percent in2003 butrose to about 83 percent on average, although there are still slight disparities between boys and girls and among regions. Another notableprogram is the Government's Drought Contingency Fund. Itprovides livestock interventions, nutrition-related responses to child malnutrition, emergency water supply, and increased livelihood opportunities for Kenya's poverty-stricken aridand semiaridvulnerable areas. Recently, the Government also has introduceda Youth Enterprise Development Fundto increase employment and business opportunities for vulnerable youth. 8. Inequityremains a major concern. In2003 it was estimated that about 56 percent o f Kenyanhouseholds were below the poverty line (recently collected data are being analyzed to update poverty estimates). Income inequality is high: in 1998-2002, the Gini indexwas 43 (comparedto 35 inTanzania); andthe poorest 20 percent o f the population receivedonly 6 percent o f national income, while the richest 20 percent took 49 percent. At a deeper level, income disparitiesmirror regional differences. Poverty i s highest inthe densely populated WesternandNyanzaProvinces, which flank Lake Victoria, and inthe Coast Province. The proportion o f children who die inthe first year o ftheir lives i s more thantwice as highinNyanza Province as inthe Rift Valley. Women inKenya supply 70 percent o f labor inthe agricultural sector but hold only about 1 percent of registered landtitles intheir own names, and 5-6 percent jointly. Our simulations for Kenya suggest that eliminating gender-based inequalities in education and agricultural inputs' could result ina one-off increase o f as much as 4.3 percent o f GDP, followed by a year-on-year increase o f 2.0-3.5 percentage points o f GDP growth. 5 As the World Development Report 2006 argues, public action shouldseek to expandthe opportunities ofthose who have the least resources, voice, and capabilities. This can be done by leveling the playing field incrucial areas such as access to public information, justice, the rule of law, land, and infrastructure, while also harnessingthe potential of markets and economic growth to supportpoverty reduction. 3 C. Governance 9. The Government set ambitious goals. On governance, the Government promised in 2003 to eliminate corruption andrestore the rule o f law. As Box 1indicates, early efforts focused heavily on re-staffing thejudicial and procurement cadres, developing a legal framework, and setting up or strengthening institutions devoted to fighting corruption. New laws requiredcivil servants to file annual declarations o f income, assets, and liabilities; established the Kenya Anti-Corruption Commission (KACC); and provided for stronger public financial management and audit (see Box 1). Laws to modernize procurement (includingfor security- related contracts-transactions that inthe past were shrouded in secrecy and associated with high-levelgraft)-and set up a new privatization commission were passed. Critical reform o f the police force-which public opinion surveys identify as the most corrupt o f national institutions- has yet to take place. 10. Implementation and results were mixed. Despite some notable efforts, Kenyaremains an underperformer on anticorruption (see Box 1).6 11. PROGRESS, CHALLENGESAND LESSONS INIMPLEMENTINGTHE BANKGROUP'S SUPPORT PROGRAMFORTHE IP-ERS 11. The Bank Group CAS for 2004-2007 seeks to: (a) strengthen public sector management and accountability; (b) reducethe cost o f doing business and improve the investmentclimate; (c) reduce vulnerability and strengthencommunities; and (d) invest inpeople.' 12. Some areas show progress, others do not. Some 41 percent o f the CAS outcome indicators and 70 percent o fthe progress indicators are on track. The rest are delayed or off track (see Figure 1, Table 1, andAnnex 3). Overall, implementationhas been most successful for investmentprojects inthe education, energy, water and sanitation, and rural development sectors, where the Government showed strong ownership and effective leadership, including on governance issues. Insuch sectors as health and transport, where corruption has beena more serious problem, implementationhas beenless successful (although there has been some recent progress). Indicators that apply to parastatal and financial sector reforms show incomplete achievement, are off track, or could not be observed for other reasons. As for budget support operations, governance and corruption concerns led the Bankto defer Board presentation of the two Development Policy Operations (DPOs) plannedfor the CAS period. The Government still implementedplannedreforms inagriculture, financial management, andtelecommunications that were to be supported by one DPO, but financial sector reforms to be supported by the other DPO remain stalled. The commitments to Kenyaduringthe period (July 2004-June 2006) totaled US$449.5 million, 35 percent lower than the US$694.7 millionprojected for FY04-06. The IGA uses data from the Steadman Survey, the Governance, Justice, Law and Order Sector Survey, the KACC Survey, andTransparencyInternational's KenyaBriberyIndex. It also uses the World Economic .Forum's GlobalCompetitiveness(fm)Survey andthe World Bank's Doing BusinessReport. The Global Integrity Index assesses the existenceandeffectiveness of anti-corruptionmechanismsthat promotepublic integrity. It is preparedby a leadresearcherinthe country andthen blindly reviewed by additionalin-country and external experts. It assesses the existenceof laws, regulations, and institutionsdesignedto curb corruption ' andtheir implementation.It also assesses the access that average citizens haveto those mechanisms. We have revisedthe framework to reflectlessons learned(Annex 3), andto better align it with the Government's evolvingresults framework andthe prioritiesinthe GSPK and GAP. Around38 percent of outcome indicators are new to the CAS program. 4 Box 1. GovernanceandAnticorruption inKenya-Historical and Current Perspectives A patrimonialsystemhasbred corruption and decay of vital institutions. Historically inKenya, power has operated through a web o f informal networks based on personal ties, often with a strong ethnic and gender element, between leaders and supporters at all levels. The networks permeatedpublic institutions, subverted formal rules and severely compromised systems o f public accountability. As a result, key institutions decayed. The judiciary, for example, became largely ineffectual and corrupt, and presidential powers (and single-party democracy until 1992) supplanted other vital institutions such as Parliament. Theft o f public resources, including procurement fraud, was documented by controllers and auditors general, but corrupt individuals used court powers and other means to punish critics. Media freedoms suffered, and the police emerged inpublic opinion surveys as the most corrupt institution. Since 2003, the new Governmenthas adoptedimportantmeasures. The Government took several important legislative actions to fulfill its election promise o f zero tolerance for corruption. For example, the 2003 Public Officer Ethics Act required civil servants to file annual declarations o f income, assets, and liabilities, and the Anti-Corruption and Economic Crimes Act set up the KACC. Legislationwas also passed on audit (2004), privatization(2005), procurement (2005), and witness protection(2006). Inlate 2006, legislation was introduced to Parliament that would increase the number o fjudges, significantly reduce delays incorruption trials, fight money-laundering, and provide a framework for politicalparty funding. Parliament recessedinDecember before completing this legislative agenda, but these legislations are expected to be reintroduced when it reconvenes possibly inMarch 2007. The Government is also at an advanced stage indeveloping a Freedomo f Information Policy and Bill that will ensure public access to information. Meanwhile, implementation o f the new procurement act and regulations began inJanuary 2007. Onthe administrative front, Government action has included firing corrupt judges, forestry officers, and procurement officials; and introducing performance-basedsystems to holdpublic officials, including Ministers, to account. Government revenue (excluding grants) rose about 2 percentage points o f GDP to 21.6 percent between 2002/03 to 2005106 as tax leakages beganto be closed. The Government also resolved some longstanding pending bills totaling over U S $ l billionby rejecting for payment over 95 percent o fthem as having no credible basis. But other recentdevelopments create doubts about the Government's anticorruption efforts. InJanuary 2006 the former Permanent Secretary for Governance and Anti-Corruption alleged that some Cabinet ministers and other senior civil servants inthe new government were involved inbig graft. InMarch2006, hoodedmenraided the headquarters o f the Standard Media Group late at night, allegedly for national security reasons. InOctober 2006, the Attorney General sent the investigative files o f 12 prominent individuals (including former Cabinet members), who hadbeen recommended for prosecution, back to the KACC. Inlate November 2006, the President reappointed two Ministers who had earlier left Cabinet because o f their alleged involvement incorruption scandals (both had undergonejudicial processes that appear to have clearedthem o f criminal wrongdoing, but public confidence inthese processes inquite low). InJanuary 2007 Ministers were clearedby the KACC o f interferencewith an investigation. Other allegations against them are being looked into. Overall, Kenyans continue to cite governance as the most pressing concern, and want more action on it, but half doubt the Government's commitment to the fight. Overall,data show that the impact of Government anticorruptionefforts is mixed, with the police,judiciary, transparency, and regulatoryburden amongthe very soberingelements. Almost all surveys show improvements inabroadrange o fgovernance and anticorruption indicators in2003 and 2004. Almost all surveys also show that since then the picture has been mixed. For example, according to the 2005 data compiled by the World Bank Institute and Development Economics Group, there were initial improvements and then partial reversals inKenya's ranking on four o f six indicators o f governance, with performance invoice and accountability and rule o f law continuing to improve somewhat. Transparency International's Annual CorruptionPerceptions Index consistently placed Kenya toward the bottomo f the list (in2006 it ranked 142nd o f 163 countries; in2005 it ranked 144th o f 159 countries) (see also Annex 1, footnote 14). Incontrast, one index-the 2006 Global IntegrityIndex-placed Kenya inthe cluster o f "moderate" performers with countries like Argentina, Uganda, and Nigeria. Bank-fundedoperations face confirmed corruptionrisks. To assess sectoral corruption risks, the Bank has undertaken several exercises, including forensic audits and the INT-ledDIR. These found risks, which differed across sectors. For example, the DIR found serious indicators o f corruption inthe health sector, HIV/AIDS, and roads; but found the Bank-funded Free Primary Education Project to be at low risk for corruption. The Bank is working with the Government to establish better risk management controls at boththe systemwide and sectoraYproject level and to encourage the enforcement o f applicable laws and administrative remedies. 5 Figure 1. Assessment of CAS OutcomeIndicatorsand CAS Midterm Indicators(in percent) 70 HCAS OutcomeIndicators(%out of68 indicators) 70 CAS Mid-term Indicators (% out of 37 indicators) 60 50 40 38 30 20 10 0 I On-track Delayed Off-track Not Observed New 13. Portfolioperformanceimprovedbut some problemspersist. The 2004 CAS reported a portfolio o f 11projects (as o f May 2004) with 46 percent o fprojects at risk, representing 71 percent o f commitments. These indicators have improved: 15 percent o fprojects (2 o f 13 projects under implementation) are now considered to be at risk, representing less than 10 percent o f commitments (US$68 million out of US$709.7 million under total commitment). Realism i s currently at 100 percent. Audit compliance rose to nearly 100 percent inFY06 and FY07, from a mere 7 percent inFY03. Despitethese improvements, some problems persist- slow project start-ups, complex funds flow procedures, and delayed procurement. InJanuary 2006 the Bank and Government launched an intensiverolling portfolio review process that involves the most senior civil servant ineach ministry inimproving project performance. Furtherimprovingportfolio performance will depend on attentionto implementationcapacity constraints and a greater focus on monitoring and evaluation. Meanwhile, ongoing increases in the Bank's country office staffing will helpto address Government's concernregarding disbursement delays associated with increaseddue diligence. 14. Practicallessonswere learned. While implementing the CAS, the Bankhas learned several critical lessons that it is usingto shape its program for the rest o f the CAS period. 0 Governmentleadership. Committed and effective government leadership has driven reforms even when the Bank did not provide financing. Indeed, such leadership i s crucial giventhe relatively small contributionand leverage of official development assistance inKenya. Hencethe Bank will work with reformers to support governance reform processes (see paragraph 2b) Bank Group analytic work and outreach. There i s considerable demand for Bank knowledge products from both policymakers and the general public inKenya. We already disseminate these products widely, but we will intensify these outreach efforts, especially beyondNairobi (see paragraph 36 and Annex 7). 6 Table 1. Assessment o f 2004 CAS Base-CaseTriggers Public ExpenditureManagement comparedwith three in2003. Severalmoreare at an Assessment andActionPlan). advancedstage. For example, the new procurement law was finalizedinlate2005 andcomprehensive new regulationswere approvedinDecember2006 for implementationstartingJanuary 2007. public investmenthas risenf?om 12percentoftotal Strengthen communities and local governments health schoolnet enrolmentrates increase aUnderthe four CAS themes the World Bankworkedwitha rangeofpartners,which are showninAnnexes3 and6. Corruption risks and remedial actions. During the CAS periodforensic audits and the DIRrevealedcorrupt activities inBank-fundedurbantransport, HIV/AIDS,and healthprojects. However, prosecutingaccused individuals inKenyan courts could take years. Thus, to help ensure that Bank funds are usedfor the purposes intended (see paragraph2d), we place a premiumon measures to prevent corruption and improve the performance ofthe legal system at all levels (see Section 111.B). Historical and currentpolitical complexities. Experienceto date suggests that an approachbasedlargely on buildinginstitutions and systems, as inthe CAS, is unlikely to generate measurableand sustainedresults. However, because ofthe 7 efforts already madeto broaden the approach to governance (see Annex l), is there considerable room for suchresults. This would require strong leadership, with a single-mindedfocus on reversingbehaviors that have been sanctioned for decades. Scenariosand triggers. To address calls from the authorities, development partners, and other stakeholders for greater transparency and predictability inthe Bank's support program, the Bank's governance approach will target a specific subset o f actions enumerated inthe Government's Governance Strategy for Buildinga Prosperous Kenya (GSPK) and Governance Action Plan (GAP) and incorporate them as progradproject triggers (see Table 2). 111. STRATEGYFORTHEREMAINING CASPERIOD 15. CAS objectivesare unchanged,but attentionto equity and governanceis significantlyenhanced. The themes o fthe original CAS document remain valid, including areas such as investing inpeople and infrastructure development, and regional trade and integration. However, we will significantly enhance our attention to equity and governance. We will extendthe CAS by one year, to June 2008, to include programelements that have been deferredbecause o f corruption concerns and, following national elections inDecember 2007, to finalize the Bank's CAS on the basis o f work with development partners andthe current Government on the Kenya Joint Assistance Strategy (KJAS). The Bank Group activities described inparagraphs 16-22 (i) refer to ways inwhich operations already included inthe 2004 CAS (such as the Institutional Reform and Capacity Buildingand Statistical Capacity projects) contribute to these new emphases; and (ii) include a number o f new activities that target specified results inthe areas o f equity and governance (for example, the Economic and Social EmpowermentProgram andTransparency and Communications Infrastructure Project) (see IDA Lendingfor Kenya, FY07-08). A. Equity 16. Additional geographicaland demographictargetingwill be key. Many o f the lending and nonlending activities planned for the remaining CAS period can help achieve greater equality o f opportunities. For example, among nonlending products, the joint poverty assessment and related work aimed at understandingpoverty, vulnerability, and inequality will helpthe Government improve the targetingand use ofpublic resources. Economic and sector work (ESW) that has been completed or is under way-including a Labor Market study, an Agricultural Policy Review, and Poverty and Social Impact Assessments (PSIA) o fpotential changes inpolicy-will help the Government target reforms to assist those who are most inneed. Similarly, insuch lending operations as the ongoing World Bank/IFC Micro, Small, and Medium-Size Enterprises (MSME) Project, the plannedWestern Kenya Community-Driven Development (WKCDD) project, and a follow-on phase o f the Water Supply and Sanitation project, we will enhance components that relate to equity and focus their activity as much as possible on geographic areas that have hadless access to development resources. 17. Innovation and piloting are part of the enhancedequity focus. We propose expanding a successful pilot program addressing the cultural barriersto women's effective use o f their propertyrights. The IDA-fundedEconomic and SocialEmpowermentProgram(ESEP) -a new addition to the CAS program-will be developed for FY07 with the principal objective o f scaling up support to address vulnerability and inequity-including ongoing pilot programs that 8 are encouraging the involvement o fpoor communities and entrepreneurs inservice provision and employment creation. These proposals are consistent with the evolution o f the Government's equity strategy, which is increasinglytargeting specific demographic groups (women, youth, orphans, and slum dwellers) while emphasizing growth.* B. Governance 18. The BankGroupwill directlysupport a subset of shorter-termpriority actions in GSPWGAPwhile maintaininga longer-termfocus. Inidentifying priorities for Bank support, we take account o f the importance (drawing inpart on empirical evidence inthe IGA andthe findings o fthe DIR) and potential impact o fthe actions; the Government's leadership and readiness for implementation; the comparative advantage o f the Bank Group; and what other partners are doing. We are also aware that even as we focus on rapid actions inthe short-term (which also reflects the short time period covered by this Progress Report), the challenges o f governance and corruption are large inscale and will require sustained efforts over an extended period o ftime. Thus our analytic work (including ongoing audits at the level o fprojects and government systems) will focus on longer-term objectives andhow policy and investments can reinforce them. The governance monitoring framework set out inTable 2 will assist this process by allowing for feedback on the success or failure o fanticorruption efforts across a variety of sectors. Operations-for example, the ongoing InstitutionalReform and Capacity Building (IRCB) project, but also sectoral projects-will also continue to focus on the longer term by supporting the Government inbuildingthe capacity o f its systems to control corruption. 19. Transparencyinitiativesare the first governance priority area for Banksupport. A major pillar o f the updated GSPWGAP i s the Government's significant "transparency deficit." A Transparency and Communications Infrastructure Project (TC1P)- another new additionto the original CAS program which is parto fa regional ICTprogram-will support the implementationo f "e-government," which will both vastly increase public access to Government information and advance the eventual implementation o fpendingfreedom-of-information legislation. The Bank i s also providing additional support for transparency in specific areas o f potential impact. For example, the Bank has provided technical support for the recently passed Statistics Act (2006) and i s collaborating instrengthening national capacity to collect, compile, analyze, and publish statistical information. Its assistance inthis area will be channeled through a Statistical Capacity BuildingProject (Statcap), which will also include support for in-depth governance surveys. Another example i s a pilot program to record and disclose court proceedings, incollaborationwith the National Council o f Law Reporting (NCLR). The ongoing Financial and Legal Sector Technical Assistance Project i s supporting this pilot. 20. Broadeningstakeholder involvementis the second governance priorityarea for Banksupport. GivenKenya's history ofpatrimonialpolitics, a central challenge is to identify and support interventions that can "crowd in" more stakeholders to ensure that public resources are efficiently and effectively used for the purposes intended. A greater focus on stakeholder involvement will include the following kinds o f initiatives: Kenyais apilot for the 2006 World DevelopmentReport(WDR) anda focus country for implementingthe PovertyReductionandEconomicManagementNetwork's (PREM's) gender actionplan. It is a target country for the recentlyestablishedNordicTrust Fundfor Justice andHumanRights. 9 Those that involve informed communities and service users inthe delivery and oversight of service provision at the front line, including oversight o fprocurement- for example, parents inschool committees inthe Education Sector Support project (ESSP), or community-driven development inthe Arid Lands I1Additional Financing project. Those that foster competitive arrangements for service provision-for example, by supporting private sector participation inthe provision o fwater, energy, roads (includinga toll-road concession for a stretch of 77 kminand aroundNairobi), and port services while limiting the potential risks from contingent liabilities that may arise in such public-private partnerships.Inaddition, IFC has extended a pilot program originally developed inGhana to support private educational institutions in Kenya and has invested US$32 million investment inthe Kenya-Ugandarailways. MIGA is providing support for a 45 MW private geothermal powerplant. Those that promote synergiesbetweengovernance and equity-for example, by improving poor people's access to justice, and increasing opportunities for participation incommunity-level development planning, monitoring, and evaluation. Those that further develop, deploy, and integrate practical tools for systematic citizedstakeholder participation and monitoring (Annex 4). 0 Those that create pilots aimed at testing newparticipatory approaches for service deliverywith built-insocial accountability (Annex 5). 21. Selectedpublicfinancialmanagementand licensingreformsare the third governance priorityarea for Banksupport. HereBank support will focus on: (a) procurement reform, including related transparency initiatives; (b) accelerated implementationo f an integrated financial management and information system(IFMIS); (c) support for risk-based auditing throughout the government; and (d) licensing reforms under which about 9 percent o f licenses have beeneliminated, and another 50 percent are scheduled for harmonization, simplification, or elimination by December 2007 (including about 23 licenses that the private sector has identified as priorities). The financial management activities will be supported mainly through ongoing programs, principally the IRCB project. Inaddition, the Bank Group will scale up its advisory services on licensingreform. 22. Governancereformsin high-prioritysectors-education, HIV/AIDS, health,roads, and the judiciary-are the fourth area for Banksupport. For education, the governance agendai s being extended to the secondary and postsecondary levels and to the Teachers Service Commission under the Bank-supported education SWAp. InHIV/'IDS, the key issues involve remedial action for past misuse o f funds administeredby the National AIDS Control Council (NACC), and creating a newtransparency regime and social accountability measures, including an independent complaint mechanism. Because o fthe measurable progress being made, the World Bank plans to join with the UK's Departmentfor International Development (DffD)to provide a credit duringthe first half o f 2007 based on the full rollout andcareful monitoring o f the new operational arrangements. Inthe health sector, the Bank is proceeding onthree tracks: (a) through the existing IRCB project, it i s providing assistance for the rollout o f IFMIS inthe Ministry;(b) as chair ofthe donor subgrouponhealth, it isheavily involvedwithothers in 10 F Table 2. TargetedResultsinGovernance Strategic, Indicators of Kenya's success that the CAS aims to Status longer-term support (drawn from the GovernmentofKenya's objectives GovernanceAction Plan, November2006-December2007) Facilitate Implementation offreedom-of-information(FOI) legislation, PrivatemembersFOIlegislation,including the whistleblower transparency with whistleblower protection. protection, for possibleconsiderationwhen Parliament (paragraph2b: reconvenes. GOK FOIpolicy, which will form the basis for its bill, is now postedfor public comment and face to face stakeholderconsultation inFebruary. (The WitnessProtection Act was enactedin December2006). Accelerate implementationof acoordinatedandprioritized The Ministry of Information and Communication has e-governmentinitiative, with public access to procurement. establishedanationalstrategy for communicationsand transparency, togetherwith an e-Government Strategy launchedMarch2004. Recordingand disclosure of court proceedings, beginning Agreementreached on pilot programto be launchedby March with 20 courts. 2007, usingthe Hansardmethod, incollaborationwith the NationalCouncil ofLaw Reporting. Reductionin backlog in court cases, currentlyat about 1 New courts being built. Bids invited for the engagement of million. Will also include suchsupporting actionsas private counsel and special prosecutors. Informationbeing building upof prosecutorialandjudicial capacity, added gathered on internationalbest practice. court facilities, andtraining. Public access to declarations of assets by public officers. IncludedinStatuteLaw (MiscellaneousAmendments) Bill that Parliament may reconsiderwhen it reconvenes. Enhancedprivate sector participationin port operations, Governmenttechnical team hasbeenestablished. Exploratory stakeholder includingcontainer port operations inMombasa. talks havebeenheldwith IFCto provide advisoryservices. involvement (paragraph 2c) Independenceof the statisticssystem, including governance Statistical Law was enacted inAugust 2006. Bureauis being surveys, through establishmentof NationalBureauof establishedwith support from StatCap. Statistics. Creation and employment of community-leveloversight Many alreadyestablishedvia Arid Lands and FreePrimary mechanisms andtheir involvementin monitoring of EducationProjects. Bank will support scale-up via Western governmentprocurement. KenyaCDD andthe Economic and Social Empowerment Program. support Autonomous PublicProcurementOversight Authority Legislationpassedin October 2005. InJanuary2007, the new improved created and functional. Directorwas appointed andthe new regulations were also public finance effected. The Authority is to be fully operationalby March management 2007. (paragraph 2d: Governmentwebsites publish informationon all contracts, Underdevelopment.To be operational by June 2007. includingnamesof contractors, decisions ofProcurement Appeals Board, bidders andtender outcomes, and contractors'performance. Establishmentof transparentsystemvetting to prequalify Under development.To be operational by March2007. companies doing businesswith the Governmentto address conflict of interestand fraudulent companies. Blacklist companies found to havebeeninvolved in Website fully operational by March 2007 corruption. Roll out and effectiveuse of IFMIS across ministries Rollout hasbeguninministries. Bank will supportscale-up via IRCB project(with Educationand Healthas priorities). Adoption of arisk-basedinternalaudit approach, including All Ministerial Audit Units are already inplace.Efforts will establishmentof ministerial audit committeesto provide focus ontheir effectiveness. oversight. Establishmentand executionof atime-bound plan for Parliamentapprovedthe abolition of 118 licenses during June implementingthe key recommendationsof the Business 2005 and June 2006. Licensing~eport. Sector-level Education:Further strengthenedfree primary education Inprocess, with the following already achieved:(a) adoption governance programthrough securingand scalingup governance inthe of arisk-based audit system; (b) establishmentof the improvements Ministryof Education. Ministerial Audit Committee; (c) carryingout ofpublic 11 Strategic, Indicators of Kenya's success that the CAS aims to Status longer-term support (drawn from the Governmentof Kenya's objectives GovernanceAction Plan, November2006-December2007) (paragraph 2e) expenditure tracking, with highly positiveresults; (d) public disseminationof examinationresults and secondaryschool entrants; (e) anticorruptiontraining for key officials; (f) training of local communities for the schoolrehabilitation program(inline with the textbook program); (9) reformof teacherrecruitmenton a decentralizedbasis; (h) annual auditingof schoolaccounts;and (i)full compliancewith Ethics Act on officials' disclosureof assets. HIV/AIDS: "Staff-monitoredprogram" for reformof NACC reforms well under way, with monthlymonitoring NACC successfullycarriedout, including dismissals, reports submittedto the Bank TOWA projectto support restitution,fiduciary systemsbuilding, further anticorruptionmeasures. transparencyicommunication strategy,etc. Health: Significantimprovementsto procurementand A governancestrategy for the HealthMinistry is under financial management in the HealthMinistry, including preparation.Effective roll-out will serve as atrigger for the system-buildingfor procurementand financialmanagement, HealthSWAP as well as management strengtheningof the KenyaMedical SuppliesAgency (see also paragraph24, secondbullet). Roads/Transport:Establishthree autonomous road Legislationdrafted for possibleconsiderationby Parliament authorities to streamline^ ownership, management, when it reconvenes. accountability, and financing of all roadnetworks. Water: Fully transfer mandatefor serviceprovision WSBs have taken over many operational areas but MWIare responsibilityand accountabilityto Water Services Boards yet to handover all operations, budget andpermanent staffing, (WSBs). implyinglack of full autonomy. Judiciary:Improveperformance. Various stakeholdershave developedproposalsfor improving the administration ofjustice, including throughchanges in rules, automation, etc. The Bank will supportimplementation through a Judicial PerformanceImprovementProjectin collaborationwith other interesteddonors. will partner with others to scale up successfbl preventive effort^.^ For roads, the key governance actions proposed include establishing three autonomous road authorities to streamline ownership, management, accountability, and financing o f all roadnetwork activities inthe country. These activities (and physical investments) are beingsupported under the ongoing Northern Corridor Transport Improvement Project (NCTIP), and additional financing would be considered inline with progress inthese reforms. Working with development partnersinGovernance Justice Law, Order and Security (GJLOS")-where the Bankheadsthe sub-committee onthejudiciary-the Bank will provide support for improving the performance o f Kenya's judiciary (including clearing the 1.1million case backlog). InTable 2, specific reference i s made to the guiding principles o fthis CAS Progress Report, outlined inparagraph 2 above. 23. Vigorous effortswill be requiredduringand well beyondthe CAS period. Giventhe history and scale o f Kenya's governance problems (Box l), it will take vigorous actions on a broad front over the mediumterm to achieve sustained gains. The dynamics o f the electionyear are also likely to make significant reforms difficult, althoughnot impossible. The Government has enumerated priority actions--from a larger work program-that it believes it can achieve in the short run. Inareas inwhich preparation for implementation i s already well advanced-for example, procurement and other financial management reforms-such progress i s very likely to 9 One example is the private sector/civil society's Global Water Challenge, which involves multinationals, internationalNGOs, and UNICEFto deliver clean water, sanitation, and hygiene education and support. lo GJLOS seeks to improve transparencyand accountability, empower the poor, marginalizedand the vulnerable inter alia by promotingequal access tojustice, andpolice andpenalreforms. 12 occur. We are also working to help consolidate governance improvements inwater and sanitation, which the Bank has been supporting since 2004 through a technical assistance project. Other areas that require Parliamentary approval, such as the increase inthe number o fjudges, could be delayed. Meanwhile, analytic work insuch areas as media development, Parliamentary capacity, andpolice oversightmechanisms will helppreparethe governance agenda beyondthe timetable set out inthe GSPWGAP (see Annex 7). C. IDA Lendingfor Kenya 24. Overall, reformswould unblocksignificant new credits, but some could be backloaded. The Bankproposes supporting the original and enhanced pillars ofthe strategy through a selective and carefully aligned program o f analytic work, advisory services, partnershipand coordination, and ongoing andnew lending(see Annex 2). The lendingprogram for the remainder o f FY07 would consist o f seven projects for an additional US$498 million, and the pipelinefor FY08 would consist ofsix projects (including two partially financed bythe Global Environment Fund(GEF) for a total o f US$367 million. These amounts fully reflect Kenya's access to IDA resources underthe performance-based allocation system, including the possibility of scale up allocations. IDA allocations are made on an annual basis and the final FY06-FY08 envelope will be determined when FY08 allocations have been decided. Thus far in FY07, US$140 million has beenapproved for Arid Lands I1(US$60 million, August 2006) and the EducationSector Support Program(US$80 million, November 2006) (see Table 3)." During the rest o fthe CAS period the Bank proposes a three-part approach to lending: Proceeding with operations, with safeguards, where risks are manageable. The Bank wouldproceed with lendinginareaswhere there is effective leadership and manageable risk of corruption-such as statistical capacity building, transparency and communications infrastructure (including e-government), community-driven development and natural resources management inWestern Kenya, and HIV/AIDS. Lending would move forwardwith appropriate safeguards derived from the recommendations o fthe various forensic audits carried out over recent years as well as more recently from INT's work. Undertaking additional safeguards and other technical work in areas where corruption risks are high before proceeding with operations. Inhealth, where corruption risks are highbut some reforms are progressing, the Bank will continue to provide targeted support for reforms (e.g., infinancial management) through the ongoing IRCB project. Following the recent DIR, the Bank and the Government o f Kenya have also agreed to undertakethe following steps to strengthen the health sector: (a) improving procurement practices, including publishingon websites information on all contracts; (b) establishing a transparent vetting system to pre- qualify companies doing business with the MOHto address conflict o f interest and fraudulent companies; (c) blacklisting companies found to have beeninvolved in corruption; (d) rolling out and using IFMIS inthe MOH; (e) establishing a functional risk-basedinternal audit system, withthe MOHministerial audit committees 11 For public-private infrastructure advisory work, the Bank has committed US$3.8 millionto 13 activities, including the Kenya Power and Lighting Corporation (KPLC) management contract, Kenya Electricity GeneratingCompany's (KenGen's) initialpublic offering, Kenya-Ugandarail concession, northern corridor toll road concession, plans for the airport privatization, and microfinancing of community water supply. 13 providing oversight effectively; and (f) developing a community-based systemfor managing and financing local-levelhealth facilities, usingthe Ministryo f Education's successful textbook program as a model. Work inall these areas is taking place at the moment with help from the Bank and other development partners, and i s similar to reforms beingrolled out across the rest o f the public sector to strengthen country systems. The Bank's contribution to the health SWAPwill proceed when these steps have been completed inthe MOH. Inthe meantime,the Bank will support and scale- up successful healthinitiatives inentities other than the M O Hthat deliver healthcare to the poorest o fKenyans (e.g., microfranchising schemes).l2Separately, we propose reallocating IDA funds previously earmarked for governance improvements inthe Nairobi City Council because o f slow progress inproject preparation. Completing due diligence ESW before proceeding with development policy operations. The Bank will complete analytic work (e.g., the Country Economic Memorandum (CEM), Public ExpenditureReview (PER), PSIA, and the governance survey) and continue with the policy dialogue concerningongoing structural reforms and implementation o f the GSPWGAC inpreparation for possible future DPOs. Givenongoing governance work and the relatively short period o fthe proposed CAS extension, DPOs are not likely to be presented to the Boardbefore the next CAS. Overall, about 45 percent o f the lending envelope for the rest of the CAS period (January 2007- June 2008) would be delivered during January-June 2008 ifprogress inrelevant areas o fthe GSPWGAP i s delayed untilthen. D. IDMFCSynergies 25. IDA andIFC will enhance their partnershipon equityand governance. Withinthe World Bank Group, the Grassroots Business Initiative (GBI), a trust fund managed from IFC, i s working with several social enterprises that target disadvantaged youth and rural and urbanpoor; IDAand IFC are exploring opportunities for scaling up successfulprograms underGBI. In addition, the IFC i s offering support through several technical assistance programs including the following: the Small and Medium-Size Enterprise (SME) Solutions Center; SME Development Initiatives; a program to facilitate women entrepreneurs' access to finance through local banks; a program to develop credit bureaus; and a program to facilitate better access to finance for private schools inKenya. IFC i s also supporting curriculum development inbusiness schools, including on issues o f governance and ethics, through its Global Business School Network program. IFC will partner with IDA to prepare the Corporate Governance ROSC (Report on the Observance o f Standards and Codes), a review o f the corporate governance o f state-owned enterprises, and additional work on governance inthe financial sector. As part o fjoint World Bank/IFC outreach anddialogue with the private sector, IFCwill explore additional opportunities for company-level programs, especially among MSMEs, to provide training and buildawareness, address problems inparticularcompanies, andhelp create governancereformchampions.l3 I2 IFC is investing US$8 million ina private firmto produce artemisinin for malaria treatment. l3 IFChas taken a risk-based approach to managing corporate governance issues inits portfolio companies and prospective clients. Inthe past two years, IFC has invested inbuildinginternalresources to support staff further. The creation o f the Business RiskDepartment has allowed for frequent and formal interaction and consultation with INT on difficult projects; and inthe past year, all IFC staff have beenrequired to complete an anti-money laundering course. 14 Table 3. IDA Lending for Kenya, FY06-08 InstitutionalReform and Capacity Building Project Jan. 2006 25.0 East Africa Trade and Transport Facility Proj. (1/3 US$120.6 million) I Jan. 2006 40.0 Delivered FY07 Arid Lands I1Additional Financing AUP.2006 60.0 StatCap Q3 20.5 WesternKenva CDD 0 3 88.5 Natural ResourcesManagement 4 3 69.2 Total War on AIDS (with new Malaria and Tuberculosis Component) Q4 80.0 a/ The scaled-upoperations are tentative as they dependonthe possibilityo fscaled-upallocations. Inthe event scaled-upoperationsdo not materialize, the FY08 commitmentswill be adjustedto be consistentwith the overall IDA14FY06-FY08 country envelope ofUS$790 million. bi The FY06-FY08envelopeof US$790 millionis indicative. IDA allocations are made on an annualbasis and the final FY06-FY08envelope will be determinedwhen FY08 allocations havebeendecided. Iv. IMPLEMENTING THE STRATEGY WITH EQUITY AND GOVERNANCE ENHANCEMENTS 26. Experience highlights the importance of attention not only to broad strategic aspirations, but also to practical issues of implementation, such as the risk o f corruption duringproject execution, operational staffing and budgets, and partnerships. 27. Additional measureswill address systemic corruption risksinlending. All Bank- fundedprojects benefit from a range of measures (e.g., results-based auditing) beingrolled out across Government. Inaddition, recently approved operations contain a range o fprovisions that reflect the Bank's selective engagement with ministries,agencies, and institutions that champion good governance, and make clear that funds must be used for their intendedpurpose. For example, the Education Sector Support Program and Arid Lands Additional FinancingProject 15 contain enhanced public disclosure provisions, mechanisms for community monitoring, and independentcomplaints mechanisms. We will use similar measures to ensure that bothexisting and new Bank-supportedlendingoperations address issues o f governance. Inaddition, beyond the regularproject supervisionthat addressespolicy andinstitutional issues, each year beginning inFY07the Bankwill undertake anintegratedand in-depthtechnical, procurement, and financial management review o fprojects with highfiduciary risk. This reviewmay include sampling contracts, visually inspectingthe actual delivery o f work, following up on audit findings and recommendations, andreviewing interim financial management reviews. The Bank will also agree with the Government on the release o f certain documents that will help enhance the transparencyand accountability o f Bank-financed projects-for example, aides-mdmoire o f implementation review missions, audit reports and the Government's formal responsesto them, procurementplans and schedules, shortlists o f consultants, and summaries o fbidevaluations that do not reveal confidential commercial informationprovided by bidders. 28. Anticorruption vigilancewill generate significantbenefits. The Kenyan authorities, development partners and other stakeholders have notedthat the introduction o f anticorruption measureswithin projects could involve incrementalupfront cost, for example, interms o f delays. However, there i s broad agreement that successful anticorruption measures can reduce overall de facto project costs considerably. That said, the Bank is takingpractical steps to reduce delays. For instance, we are dealing upstreamwith sectoral or agency-level governance issues, rather than leaving them to be addressedonly inindividual projects. We are increasing the number o f fiduciary staff inthe country office to help improve Bank response time. To maximize development impact, we are also exploiting synergies between protectingthe funds of Bank- supportedprojects and buildingcountry systems (see paragraph 29). Inaddition, the Bank will work with the Government and other stakeholders to better quantify and publicize benefits of greater fiduciary oversight such as more competitive procurement. 29. Work to build country systemswill continueto be an integralpart of managing program and project corruption risks (and amplifying development impact). With overall donor support accounting for only about 5 percent o f Kenya's development spending, measures aimedat protecting externally funded projects (including activities supported by the World Bank Group) are being carefully tailored to maximize impact by benefiting all Government spending. For example, forensic audits o fBank operations in2005 showed problems related to faulty accounting practices, lack o f fraud risk management, weak oversight by senior Government officials, inconsistent application o fthe Bank's Procurement Guidelines, and failure to share lessons learned and best practices. Inresponse, the Bank initiated a dialogue with the Government over systemic anticorruption measures (such as risk-based audit procedures) that the Government has since applied to Bank operations, and more broadly, to strengthen Kenya's systems. Inthe same spirit o f Kenyansystembuilding, side letters are also being used inproject agreements with the World Bank to reinforce compliance by implementing agency staff with Kenyananticorruption laws such as asset declaration, and to promote other transparency measures such as disclosure o f financial statements and audit reports. The Bank i s providing technical assistanceacross all these areas through on-demand technical support via our country- based legal, financial management and procurement experts, and through projects-notably the IRCB. 30. Bank staffing, processes,and internal organization will better reflect operational priorities. A field-based governance adviser will be recruitedfor the Nairobioffice to guidethe 16 Bank's work on governance, and recruitment o f additional field-based procurement and financial management specialists is inprocess. A cross-sectoral Operations RiskMitigationTeam will be established, to be chaired by the governance adviser, with a mandate to oversee risk-mitigation actions, advise task teams inthe designand preparation o fprojects, share and disseminate information on risks, advise the country management team on strategy for mitigating governance risks, and interface with INTas necessary. Inaddition, the rolling intensive Country Program Review(CPR) process will sharpenits focus on corruption issues. 3 1. Development partnerships will be deepened. As we intensify the equity and governance agenda inthe Bank assistance program, it will be important to partner meaningfully and transparently with other stakeholders inthe spirit o f mutual accountability. The Bank's comparative advantage i s ESW, grounded inqualitative and quantitative research and comparative analysis. But even here the Bank will seek partnerships with other development and research agencies, including infuture governance assessments. Duringthe rest o f the CAS period, we will also mobilize a small team o f external reviewerscomprising a representative from each o f the following: (a) the donor subgroup on harmonization, alignment, and coordination; (b) the relevant donor sector working group; (c) the relevant professional association; and (d) the civil society/governance network. This team will review all projects proposed for Bank financing. The Bank has also committed to preparing the next Kenya CAS in the context of a Joint Country Assistance Strategy, andto identifyingopportunities for greater selectivity and division o f labor based on comparative advantage (see Annex 6 for more on multilateral andbilateral partnerships). A particularly important partnershiphas been that with the IMF: for example, inrecent months there hasbeenclose collaborationand information sharing betweenstaff o f the two organizations on issues o f governance, structural reforms, and the growth outlook duringthe preparationfor and discussions on the secondreview under the IMF's PRGF arrangement andthe Article IV consultation. IMF staffalso participatedina Bank- ledgovernance mis,sion inJuly 2006. This close partnership is expected to continue. 32. Government is encouragingstronger partnershipsbetweenthe Bank and non- ExecutiveBodies (including civil society). Within Kenyan society, and as agreed with the Government, we propose deepening our partnershipswith the private sector, professional bodies, faith-based organizations, youth groups, foundations, and trade unions, and our engagement with parliamentarians and nongovernmentalorganizations (NGOs). The Bank's existing relationship withthese groups has taken many forms such as: (a) regular dialogue ontopical development issues such as youth and gender empowerment, and governance; (b)joint workshops to share development experience and identify opportunities for collaboration such as with the Ford and other Foundations inMarch2006; (c) financial support for capacity building (such as for the ' Federation o f Women Lawyers through an InstitutionalDevelopment FundGrant); (d) channeling Bankcredits for service delivery for example, to faith based organizations andNGOs providing education and health services to the very poor; (e) training indevelopment communication(for media personnel); and (f) collaborating indeveloping practical solutions to monitoring and evaluation o f development programs. Through the ParliamentaryNetwork on the World Bank, parliamentarians have asked for analytic work on the functioning o f Parliament, further collaborationinmonitoring and evaluation at the community level, andtechnical support for key oversight committees. The Instituteo f Certified Public Accountants o f Kenya has approached the Bank for institutional strengtheningsupport to help ensure the quality o f the professional accounting practice and adoption o f best practice, including enforcing compliance with international standards. The Bank is seeking trust-fundedresources to finance a multiyear 17 grants program to support such partnerships,including promoting greater transparency and mutual accountability within these partner groups. All these activities fit within the mandate o f the Bank and are undertaken withthe prior knowledge ofthe Government, which is settinga good example by systematically engaging the private sector inpolicy dialogue, especially through umbrella private sector organizations such as the Kenya Association o f Manufacturers and KenyaPrivate Sector Alliance. 33. The program/project monitoring and evaluation framework is beingupdatedand strengthened. For purposes o f ex post evaluation, the indicators listed inTable 2 will be added to those inthe original CAS trigger matrix (Table 1). We are also enhancing mechanisms to assess the impact o f social accountability and other governance measures inBank-supported operations (e.g., by over-sampling areas receiving support under the arid lands and education SWAps inthe forthcoming governance surveys). Inaddition, the Bank i s mainstreaming mechanisms to support impact assessments that would measure what changes inpoverty can be attributed specifically to a givenproject; the Western Kenya CDD project will pilot this approach. Baseline and follow-up household survey samples are beingdesignedto include communities that are randomly selected to receive support for microprojects, which will be compared with those that are eligible but not randomly selected and those that are deemed ineligible. This will enable specific attribution o f improvements inoutcome indicators to the project as well as examining whether and why some households are able to benefit relatively more than others. This approach will provide valuable insights for improving implementation during midtermreviews and for possibly scaling upproject components inother areas. v. R I S K S AND RISK MITIGATION 34. The original CAS identifiedsuch areas ofrisk as: (a) political economy, or the inability to move forward with politically difficult reforms; and (b) external factors, such as terms o f trade shifts, weather, andproblems associated with regional marketintegration. These risksstill apply; butgivenour experience with CAS implementation, we mustalso addressthe following risks. 35. Political uncertainty will rise inthe run-up to national elections. Kenyanpolitics are highly competitive, with no single party commandingthe support o f a majority o f voters. To win elections, many politicians have been willing to use extraordinary means-for example, large extrabudgetary spending, offers o f landand other benefits for favored groups, and election- related violence that has damaged the confidence o f tourists and investors and ledto a decline in Government revenues. The ongoing domestic debate about contentious constitutional reform issues, including presidential powers and devolution, i s likely to intensify. For the upcoming election, the Bank Group will mitigate this risk by continuing an active dialogue with the Government, highlightingthe risks to Kenya's external reputation o f an electoralprocess that i s judged to be less thanfree and fair, and emphasizing the likely dividends o f popular support for a Government that i s seento be making serious progress against corruption. Through its public lectures and other dissemination efforts, the Bank will continue to inform public debate on key economic development issues, thereby encouraging a more issues-oriented election campaign. 36. The BankGroup will face significant reputationalrisks. Inthe past, the Bank has beencriticized by those who perceive its stance on governance and corruption inKenya to be unclear, nontransparent, tough, punitivetoward poor people, and not consistent with its treatment o f other countries. At the same time, others have accusedthe Bank o f supporting corrupt leaders whenever it lends to Kenya. This Progress Report, which has been written concurrently with the 18 development and debate over the Bank's corporate strategy on governance, aims to adapt the Bank's broader governance approach to Kenya's specific circumstances. Boththe Government and civil society groups consulted duringthe preparation o fthis report have generally encouraged and welcomed this clarity. Inaddition, because o f the intensity o f focus on the Bank's Kenya program inboth the local and international media, we intendto increase our communications and outreach to include more systematic interactions with all these groups and develop a "rapid response" capability to ensure that correct information i s made available to the press ina timely manner. We will also continue our efforts to highlightthe Bank's ESW, including exploring ways to establish Public Information Center satellites insecondary population centers outside o fNairobi. VI. CONCLUSION 37. The KenyaCAS,FY2004-07 providedappropriatestrategicdirectionat a time of re-engagementafteryears of economic mismanagementandinstitutionaldecay. To date, we have learned a great deal from experience andthe track recordo freforms undertaken starting in2003. Whilemacroeconomic management has improved andeconomic growthhasreturned, structural reforms that significantly improved infiastructural services, reduce the cost o f doing businessand createjobs will needto be deepened and expanded to achieve the ambitious goals set forth inKenya's Vision 2030. Major steps will have to be taken to reduce inequality in access to resources and government services, and to spread the benefits o f renewed growth. And while many new laws and institutions are beingcreated to fight corruption, muchremains to be done, especially inareas o ftransparency, procurement, judiciary andpolice, and inreal sectors likehealthandroads. Indeed, the Government needsto do more to assure the public of its commitment to fighting graft by vigorously implementingthe GSPWGAP. There i s also considerable room for other stakeholders, including the private sector, professionalbodies and civil society, to do more to improve governance and anticorruption within the public and within their ownranks. This would require strong leadership at all levels, with analmost single-minded focus on reversingbehaviors that have beenentrenched, politically, socially and culturally for decades. 38. This CAS ProgressReport,whichwe proposeextendingthroughJune 2008, contains nonlendingandlendinginterventionsthatwould supporteconomic growth, povertyreduction,equityandgovernance reforms. Indeveloping these proposals, we have benefited from a broad range o f inputs, including from the Government, other Kenyan stakeholders, and development partners. We have been quite candid about the risks and uncertainties o f achieving solid results inthe run-upto national elections, and inthe face o fthe entrenched interests that make fighting corruption so difficult. However, we also believe that the proposed program through the end o f FY08provides a way to ensure that genuinereform efforts are supported and rewarded, while ensuringagainst malfeasance inBank supported operations. Duringthis periodwe will also work withthe Government, development partners, andother stakeholders on the Kenya Joint Assistance Strategy. 19 Annex 1. Government of Kenya Governance Strategy for Buildinga ProsperousKenyaand Updated GovernanceActionPlanThrough December 2007 1. The attached Strategy andAction Plan were preparedby the Government o f Kenya after months o f internal deliberations, and were discussed with development partners at a local consultative meeting on December 1,2006. The documents draw on earlier events dating back to the first half o f 2006, including the National Stakeholder Conference heldby the Government inlate May 2006, with broad-based participation by stakeholders from across the country. At that conference, the new Minister o f Justice and Constitutional Affairs noted that public expectations about the fight against corruption were not being met and that efforts so far ``...have only scratched the surface." 2. Inearly July 2006, at the Government's request, a World Bank-led missionvisited Kenya to assess the ongoing governance and anticorruption efforts using empirical evidence and international experience. Among the mission's findings were, first, that conuption, which was rife under the previous regime, had declined somewhat during2003-2004 (after the new Government came to power), but that results had subsequently stagnated. Infact, the evidence indicated deterioration inthejudiciary and inprocurement (though not to the very low pre-2003 levels), while high levels o f corruption were still apparent for obtaining undue influence and permits and for tax eva~ion.'~Second, major immediate challenges remained inalmost all areas o f governance: inthe civil service, public financial management, procurement, transparency, media environment, privatization and deregulation inthe enterprise sector, sectoral governance, and the financial sector. And third, the plans the Government had recently formulated (inconsultation with stakeholders) and publicly launched did appear to correctly identify many o f the key actions needed, with some already under way. The main challenges at present concern the urgent need for prioritizing, and for takingdecisive and swift implementation actions. 3. Inadditionto prioritizing, the authorities have accepted two fundamental lessons o f experience infighting corruption. First, Kenya cannot fight corruptionmerelyby "fighting corruption,"-that is, through more and more legal drafting refinements, measures by fiat, anticorruption campaigns, creation o f numerous new commissions and committees, and the like. These activities do not address the more fundamental determinants o f corruption. For that, a broader governance framework is required, with broad participation by and support from the Kenyan public. Second, inthis broader framework, the cross-cutting theme o f transparency could enable significant reformprogress across many dimensions o f governance and anticorruption, and may be more consistent with the prevailingpolitical realities (which preclude constitutional change inthe short term). Such a focus would be additional to implementingreforms inparticular areas such as procurement, the judiciary, the police, health, and transport, which the empirical data suggest require urgent attention. l4 Such atrend is also evident ina number of international sources, basedon expert assessmentsand surveys ofenterprises. For instance,bothMerchant InternationalGroup's Grey Areas Dynamicsand Global Insight's Risk Servicereportedimprovementsupto 2004 yet some deteriorationimmediately thereafter. The InternationalCountryRisk Guide'sPoliticalRisk Servicesreportedalarge improvementbetween2002 and 2003 andthereafter a largesubsequentreversal. The World Economic Forum survey of enterprisesindicatesthat briberyin areas o ftaxationandprocurement in Kenyaimprovedinthe early years, yet deterioratedbetween 2004 and 2006 (eventhough not to the very low levels ofthe previous regime). For instance, the share of surveyedenterprisesinKenya that reporteda high frequency of briberyfor procurementwent from 86 percentin2003 to 58 percent in 2004, thento 63 percent in 2005 and 69 percent in2006. The strengths and weaknesses of various governance indicatorsarethe subject ofcontinuingglobaland country dialogue. 20 Republic ofKenya `ERNANCESTMT GY FORBUILDING ANCE BUILDING A PROFEROUSKENYA Prel;rared Prepared by the Gavernment of Kgmya Kenya January 2007 21 I. INTRODUCTIONANDBACKGROUND A: Background 1. The performance o f the Kenyan economy deteriorated markedly in the 1980s and 199Os, with growth falling below its potential. A number o f factors contributed to this poor performance, including external shocks and broad-based decline in productivity o f investments, near collapse o f physical infrastructure and inefficient use o f public resources. These problems were compounded by serious weaknesses in institutions o f governance, which undermined competitiveness as well as investor confidence in Kenyan economy. The failure to generate adequate economic growth led to increased unemployment, poverty and worsening in almost all social indicators. 2. To address these economic challenges, NARC government (NARC) set out an ambitious and comprehensive programs o f economic renewal under the Economic Recovery Strategy (ERS) with emphasis on policy and institutional reforms. The strategy is aimed at: (i) accelerating sustained economic growth underpinned by stable macro-economic environment; (ii)enhancing equity and poverty reduction to improve the welfare of Kenyans; and (iii) improving governance to ensure efficiency and effectiveness o f public service delivery and to create an enabling environment for sustainable business growth and development. 3. As part o f its commitment to ensuring efficiency in the public sector and to facilitate private sector participation in the economy, various structural reforms have been implemented in the public sector, including restructuring of public enterprises and public financial management reforms. In addition, efforts have been made to create fiscal space to shift resources to priority development areas of; core poverty programs, agriculture, human capital development by improving access to education and health services; and revamping the nation's physical infrastructure. While on the fight against corruption, the government has among others, (i)enacted several governance and anti-corruption related legislations (ii)implemented the on-going sector-wide reforms under the GJLOS reform initiative; and (iii) developed a one- year Governance Action Plan (GAP). B: The Impactof RecentGovernance Reforms 4. The implementation o f these measures has improved governance, transparency, accountability and efficiency in the management o f public affairs, and as a result, made the public sector more effective in its delivery o f services. In addition to the measures already undertaken, the government fully recognizes that accelerating and deepening the reform agenda in the areas of governance and anti-corruption is critical for accelerating economic growth, a necessary condition for sustained reduction in poverty. To this end, and in addition to the administrative, policy and legislative interventions so far implemented, the government has since developed concrete and systematic actions under the Kenya Anti-Corruption Commission' Strategic Plan and the Governance Action Plan for buildinga prosperous Kenya. 5. Reflecting government's commitment to the implementation o f its governance reforms, investor confidence has been restored and the economy now enjoys a broad-based expansion, the highest in two decades. Real GDP expanded by 5.8 percent in 2005, up from 0.6 percent in 2002, while inflation rate, exchange rate and interest rates have remained relatively stable since 2003. The lower interest rates and relatively contained core inflation rates over the past one and half years have increasingly made credit affordable and accessible for enhanced private sector participation, thereby encouraging investment and economic growth and supporting the government's effort towards poverty reduction. In addition, the continued implementation o f appropriate and prudent monetary and fiscal policies and various financial reforms have restored confidence in the money and capital markets thus deepening capital development. Further, the implementation o f these governance related reforms have, in addition, resulted in: (i)anincreaseinrevenuecollectionfromKShs.190.6 billionin2002/03toKShs.345.6 billion ' The Kenya Anti-Corruption Commissionwas establishedby the Anti-Corruption andEconomic Crimes Act, 2003 as a body corporate. 22 projected for 2006/07 (representing 81 percent growth over the period) due to improved tax administration; and (ii)marked improvement in the performance' o f public enterprise as reflected by substantial dividends paidto the Treasury. C: Organization of the Report 6. The rest o f this report is organized as follows: section I1highlights recent achievements under corruption prevention, investigation and prosecutiodrestitution, while section 111 discusses challenges that continue to constrain the fight against corruption in Kenya. And Section IV highlights the government's strategy for the way forward through December 2007 in deepening the fight against corruption inKenya, while section V provides the conclusion. 11. RECENT DEVELOPMENTS ON THE GOVERNANCE FRONT 7. Many bold reform measures have been implemented over the last four years to institutionalize good governance and the rule o f law in Kenya's development process to eliminate rent-seeking opportunities and corruption. These measures are being implemented within the framework o f the generally accepted key pillars o f any well designed anti-corruption strategy, namely: (i)corruption prevention and public education; (ii)investigation; and (iii) restitution. The aim o f the government's anti-corruption strategy is to make the public sector operate inways that make corruption difficult to commit, likely to be detected, and certain to be punished. A: Preventionand Detectionof Corruption 8. The government is fully aware that the war against corruption can not be permanently won through investigations and prosecutions alone. To sustain good governance and a corruption-free environment, other reforms in the economic and social areas are necessary to seal the many loopholes that provide opportunities for corruption. As part o f corruption prevention program, the government has strengthened governance and anti-corruption institutions by providing a solid legislative foundation and educating Kenyans to appreciate the virtues o f good governance and the harm caused by corruption to the political and socio- economic systems. With a view to strengthening prevention o f corrupt practices, since 2003 the following reform measures have been implemented: 1: LegislativeActions Since 2003 The Public Officer Ethics Act 2003(POEA), introducing Codes o f Conduct and Ethics and requiringPublic Officers to file annual declarations o f income, assets and liabilities; The Anti-Corruption and Economic Crimes Act 2003, which set up the Kenya Anti-Corruption Commission (KACC) as Kenya's premier anti-corruption institution. The Government Financial Management Act (2004); The Public Audit Office Act (2004); The Public Procurement and Disposal Act 2005 was enacted. It established an autonomous Public Procurement Oversight Authority responsible for the regulation o f procurement in the public sector, including procurement o f security related contracts. Similarly, in 2005; The Privatization Act, which provides for a Commission to ensure transparency in the privatization o f state owned enterprises, thereby strengthening accountability. The new Privatization Act sets the stage for the scaling down o f the public sector, which should enhance governance and reduce rent-seeking behavior, as well as improve the efficiency o f resource use and increase competitiveness. And in November 2006, the government enacted the Statistics Act 2006, which provides for the establishment o f a National Bureau o f Statistics. Some of the factors explaining the improvedperformanceby some public enterprises include: enforcementof performance contracts; implementation of structural reforms, including appointment o f independentand competent boards; and improved economic environment. 23 Administrative Actions Various administrative measures have also been implemented over the last four years to enhance prevention o f corruption in Kenya, including through improvement o f transparency and accountability inpublic service. These include: 1 Curbing abuse o fthe harambee systems by barring public officials from being guests o f honour and/or soliciting for harambes intheir places o f work; 1 Introduction o f ministerial Code o f Conduct to complement the provisions o f The Public Officer Ethics Act 2003 and improve ministerial accountability inpublic affairs management. Among other provisions, the Code requires Ministers to take personal responsibility for their stewardship o f ministries that they head. Already, three ministers stepped aside to facilitate investigations; 1 Dismissal o f the entire cadre o f both procurement officers and forest officers to facilitate new recruitment based on integrity; and 1 Suspension by the K R A o f several senior officers that work at the port pending investigations into why they were not achieving performance target for customs revenues. 1 Enforcement o f The Public Officer Ethics Act (POW, which requires every public officer to make annual declarations o f their assets and liabilities and those o f their spouses and children below the age o f eighteen years. Plans are also at an advanced stage to make asset declarations by ministers and senior officials open to public scrutiny and verification. In addition, all ministers declared their assets, the verification o f these declarations is on-going by K A C C and report will be submitted to the appointing authority. 1 Improvement o f the cauacitv o f the Police Force through organizational reforms, including improved leadership and incentives to enhance enforcement o f law and order. Among the interventions implemented include: (i)reorganization and appointment o f officers with strong reform credentials; (ii) improving terms o f service o f the force; (iii) provision o f decent housing to the staff; and (iv) efforts to strengthen oversight o f the police; 1 Examinations by K A C C o f systems, policies, procedures and practices conducted on the Nairobi City Council, the Ministries of Transport and Health, the Kenya Revenue Authority, the Kenya Police, and the Kenya Medical Supplies Agency; 1 On enhancing the administrative capacity o f KACC to investigate and provide strong leadership in corruption prevention, the KACC launched in mid 2006 its Strategic Plan which was developed through wide consultation with stakeholders. The strategy focuses Commission's operational and measures to be implemented to achieve the set objectives and foster zero-tolerance to corruption inKenya; and 1 Other reforms implemented, which include: (i) completion o f surveys on perceptions o f corruption and experience with corruption; (ii)interdiction o f the head o f the National AIDS Control Council pending conclusion o f investigations on alleged fraud; and (iii) actions taken against civil society organizations involved infraud. 24 iv: PublicSector and FinancialManagement Reforms A central pillar o f the government's governance and anti-corruption strategy is the reform o f the internal management o f public resources and administration aimed at reducing the opportunity and incentives for corruption. This has entailed instilling a meritocracy with adequate pay and depoliticizing public administration, clarifying governance structures, enhancing transparency and accountability in fiscal management, and focusing policy reforms on improving the delivery o f government services. Among the legal and institutional reforms implemented since 2003 include: . Introduction o f a Results-Based Management (RE3M) system as a tool for helping public sector institutions to focus their work and plan strategically to ensure efficient and accountable use of public resources. The Government has also introduced performance contracts to improve public service performance and accountability for all its senior officials including those in parastatals. The government also adopted, in 2004, the policy o f competitively hiring chief executives o f parastatals from the labor market. These policies have already begun to bear fruits. For the first time in decades, the public enterprises have been making large profits and issuingdividends to the Treasury, as well as paying taxes on time. This has facilitated reductions in transfers to public enterprises and created fiscal space for increased expenditures on social and economic programs; Under public financial management, the government has rolled out an Integrated Financial Information Management System (IFMIS) in a number o f ministries- notwithstanding the slow progress in operationalizing the system, strengthened the expenditure commitment control systems, improved budget transparency by eliminating unclassified budget votes, and set out clear guidelines for Exchequer issues to line ministries, including requirement for up-to-date bank reconciliation, which underpins the Public Expenditure Management (PEM) reforms; The establishment o f an autonomous Kenva National Audit Office (KENAO) under The Public Financial Management Act (2004. The strengthening o f its operational efficiency resulted in clearance o f the entire accumulated audit backlog-it i s expected to remain current in its future audit programs. With the improved oversight capacity o f the public sector financial accounts, it is now possible to detect early enough any financial irregularities and take immediate corrective actions; Following the enactment o f The Public Procurement and Disposal Act 2005, the government has developed regulations for public procurement which are now with the Attorney General's office for gazetting and plans to establish and make operational the Public Procurement Oversight Authority, and to roll out the procurement regulations and guidelines during 2006/07 FY; The introduction o f tax administration reforms has been aimed at reducing corruption and the cost o f doing businessinorder to facilitate business and trade in Kenya. The measures implemented include: (i)full integration o f Income Tax and VAT Departments; (ii)introduction o f computerized audits; and (iii) implementation o f customs modernization reforms to reduce corruption and facilitate trade. Reflecting largely the effects o f these reform.measures, revenue as a proportion o f GDP has expanded significantly during 2002/03 to 2005/06 period. This growth is expectedto continue in2006/07; and The overhaul o f the business licensing regime i s aimed at reducing opportunities for corruption and the cost o f doing business in Kenya. Specifically, the government has reviewed over 1,400 licenses with a view to: streamline the licensing regime to ensure that only those licenses that serve a useful purpose are retained; improve the business environment; and reduce opportunities for rent- 25 . seeking. To this end, one hundred and eighteen licenses (118) were repealed in FY 2005106 and FY 2006107. The government has also made significant progress towards improving accountability through audit and increased involvement o f stakeholders' participation for CDF and LATF expenditure and other devolved funds, including funding o f free primary education. In addition, the government has finalized the resolution o f pending bills, resulting inrejection for payment o f over 95 percent o f the claims. V: IncreasingAccountabilityand EfficiencythroughPrivate Sector participation Privatization and restructuring o f parastatals remains an integral part o f the government economic reform agenda intended to improve efficiency inthe use o f public resources. The reforms implemented since 2003 include: The sale o f 30 percent o f Kenya Electricity Generating; ComDanv (KENGEN) to the public through an Initial Public Offer to strengthen transparency and . accountability and enhance corporate governance; and concessioning o f the Kenya- Uganda railways, which has now been finalized; The commercialization o f water services with handing over o f responsibility for . water provision to private, independent subsidiaries and water services providers regulated by water services boards; The restructuring and/or urivatization o f state-influenced banks: Cabinet has approved the restructuring o f the National Bank o f Kenya. Other institutions under- . going restructuring/privatization include: TelkodSafaricom, Mumias Sugar, Kenya Re and the sale o f more government shares inKenGen. In the telecommunications area, the government has sold licenses for the second . fixed-line provider as well additional license for a third mobile phone provider and for international telecom gateways; and Reforms implemented under agriculture aim to improve efficiency and productivity in order to reduce poverty in rural areas and include, among others: (i)amending The Coffee Act to enhance the regulatory capacity o fthe Coffee Board and to allow for private sector participation in the industry by eliminating the monopoly o f the Coffee Board over marketing; (ii)restructuring o f the dairy industry; (iii) separating the regulatory and commercial functions o f the Pyrethrum Board and improving governance inthe co-operative sector. B: Public Educationand Anti-Corruption Campaigns 9. Aware that investigation o f offences and prosecutions alone cannot bringsignificant and sustained improvement on governance and the war against corruption, the government has since 2003 focused on targeted education and awareness campaigns to empower Kenyans to participate inthe fight against corruption. As part o fthe effort to change the mindset and behavior o f Kenyans as a prerequisite for a successful fight against corruption, the government has undertaken the following:- . Appointed in 2004 a National Anti-CorruDtion Camuaign Steering Committee, whose members come from a cross-section o f the Kenyan society, to spearhead a comprehensive . anti-corruption public awareness. The campaign was officially launched by H.E. the President inMarch 2006; Initiated anti-corruption awareness seminars inthe public service under the auspices o f the Public Service Integrity Programme (PSIP) o f the Directorate o f Personnel Management, Office o f the President inconjunction with the KACC; 26 Conducted various sensitization seminars on corruption and economic crimes to mid-level public officers in many Government Departments, e.g. the Kenya Police at Kiganjo and the Anti-Stock theft Unit at Gilgil; Developed a formal curriculum - targeting the incorporation o f anti-corruption content in the curricula o f primary schools, secondary schools, teacher training colleges, tertiary institutions and universities; Development and dissemination to the public through the print and electronic media, o f useful and simplified anti-corruption material such as The Anti-Corruption and Economic Crimes Act 2003, The Public Officer Ethics Act 2003, and Frequently Asked Questions about the war on corruption in Kenya. These materials are intended to help the public to understand the meaning o f corruption, the evils o f corruption, why it is necessary to avoid engaging in corruption and where to report cases o f corruption and suspected corruption; Launched the K A C C website in March 2006 to ease public communication with the Commission and to provide easy and accurate information to the public; and also launched a 100 percent anonymous web-based Whistle-blower system hosted by the KACC, which will compliment planned legislative moves to protect whistle blowers along with witnesses; and Launched a medium term National Anti-Corruption Plan incorporating all organized sectors o f Kenya's society as pillars upon which the Plan i s based, including the Media, the Judiciary, the KACC, the religious sector, Members o f Parliament, the Private sector, civil society and development partners. C: Investigation and Prosecution 10. Recognizing the need to address both past and present corruption the government has continued to enhance the investigative capacity o f the Kenya Anti-Corruption Commission (KACC) and the Office o fthe Attorney General. Among the initiatives implementedto enhance capacity inthis area include: . Enactment in late 2003 o f The Anti-Corruution and Economic Crimes Act and the subsequent establishment in 2004 of the Kenya Anti-Corruption Commission (KACC) . through the appointment o f a Director and Assistant-Directors, and subsequently with a full staff establishment; Restructuring o f the Department o f Public Prosecutions into 3 sections, namely: the anti- corruption, economic crimes, serious fraud and asset forfeiture section; the counter- terrorism, money laundering, narcotics and organized crime prosecution section; and the general prosecutions and appeals section. In 2006 a Special Anti-Corruption Prosecution Section-in the State Law Office was established to deal with prosecutions arising from investigations into the Goldenberg Commission, the Presidential Commission on Illegal and Irregular Allocation o f Public Lands and the investigation o f the security projects. 216 . cases have been investigated leading to prosecution since 2003 and out o f these, there have been 19 convictions; Launching in 2003 o ftwo important commissions, namely: (i) the Goldenberg Commission o f Inquiry; (ii)and the Presidential Commission on Illegal and Irregular Allocation o f Public Land (Ndung'u Commission). Reports o f the two commissions were released in early 2006 and implementation o f the recommendations3 in these reports is in progress. Key recommendations of the Goldenberg Commission include: (i)Prosecution of those implicated in the scandal; (ii)Enactment of a Proceeds of Crime Act; (iii) Enactment of a Witness Protection Bill; (iv) KRA to file regular reports on the income tax cases and appeals, explaining what transpired; and (iv) CBK like other Government institutions should be subject to audit by the Controller and Auditor General as matter of course., while on the Ndung'u report, the recommendations include: (i)establishment of a Land Titles Tribunal; (ii) establishment of an Advisory Task Force on land matters; (iii)redress of past wrongs over illegal/irregular allocation o f public land; and recovery of public land illegally or irregularly acquired, e.g. excised forest lands, etc. 27 Already 10 suspects implicated in the Goldenberg affairs are being prosecuted in court, charged with various offences; I The government moved quickly to institute a special audit o f the eighteen Anglo leasing- type of security projects. The audit by the KENAOwas completed inthe latter half o f 2005 and implementation o f most o f its recommendations has been carried out while implementation o f others is still in progress. Investigations o f some o f the aspects o f these security contracts by the K A C C is almost complete, while the international aspects o f the investigations are ongoing; I Launching and implementing sector wide reforms under the Governance, Justice, Law and Order Sectors (GJLOS), aimed at scaling up the fight against corruption, improving transparency and accountability in public sector, improving access to justice and empowering the poor and marginalized; I Establishing specialized courts and increasing the number o f magistrates. These two actions have led to more expeditious dispensation o f justice than was the case previously and reduced the opportunities for corruption by shortening the turn-around period o f cases by Judges. In addition, special magistrate's courts dedicated to the trial o f corruption cases have been established inall provinces, including Nairobi; I Establishing HighCourt stations inKitale, Malindi and Embu, HighCourt Sub-registries in Garissa, Kericho and Busia and establishing a Court o f Appeal Circuit in Eldoret to increase access to justice; and I Prosecution o f senior government officials implicated in Goldenberg and Anglo Leasing scandals and other scandals. Those that have been charged include: 8 Permanent Secretaries; 18 Chief Executive Officers o f parastatals; a Member o f Parliament; 2 former Governors o f Central Bank, former Director o f Intelligence; a former Cabinet Minister and several senior government officials. D: Restitution/ Civil Recovery 11. With a view to enhancing public integrity; ensuring that corrupt individuals are punished; and protecting state funds while seeking return to the state those funds and related payments corruptly acquired, the government has undertaken the following: 1 Cleaning UP o f the iudiciarv following a report by the Integrity and Anti-Corruption Committee o f the Judiciary. The report unearthed numerous acts o f corruption perpetrated by judicial officials. Eighty two (82) Magistrates, seventeen (17) Judges o f the High Court and six (6) Judges o f the Court o f Appeal -the highest court inKenya- were implicated in alleged corruption, unethical conduct and judicial misbehavior. Seventy six (76) magistrates were retired in the public interest, while twelve (12) Judges o f the High Court and four (4) Judges o f Appeal opted to retire. The remaining thirteen (13) magistrates and Judges were suspended pending hearing o f their cases by disciplinary tribunals. This action by the government is by far the most far-reaching purge o f the Judiciary in the history o f the Commonwealth. The hearings o f the cases o f the judges who have challenged their suspensions are expected to be concluded by mid 2007; To fill up some o f the positions left after the purge, the Judiciary has continued to recruit since 2003. Currently, there are 8 judges in the Court o f Appeal, 43 judges in the High Court and 282 magistrates o f which 32 have been recruited since 2003 to replace the 76 who were retired in public interest. Following the opening up o f more courts in rural areas to enhance access to justice, the Judiciary is currently recruiting more magistrates. The judiciary has also instituted a self-rejuvenating mechanism through a peer review on integrity and handling o f complaints, which i s expected to improve its systems and performance; 28 Tracing, recovery. and restitution o f assets sumected to be illegally acquired: The KACC is pursuing asset recovery on three main fronts; implementation o f the recommendations o f the Goldenberg and the Ndung'u Commissions and asset recovery as provided for under TheAnti-Corruption and Economic CrimesAct, 2003. Inthe financial Year 2005-2006, the KACC filed and prosecuted 78 applications before court seeking to preserve money and property suspected to be the proceeds o f corruption or economic crime; investigated cases with a value estimated at Ksh8.5 Billion; issued more than 450 DemandNotices inrespect o f illegally or irregularly alienated public land; and prosecuted 43 civil cases for recovery o f illegally alienated, lost or damaged property; and Resignation o f cabinet ministers: The former ministers for the Ministry o f Finance, Ministry o f Energy and Ministry o f Education resigned to pave way for investigations into the Goldenberg and Anglo Leasing cases. Afier following due processes in the courts o f Law in Kenya, the former o f Minister o f Education was exonerated and subsequently reappointed into his position inNovember 2006 and also the K A C C investigation4found no basis for the prosecution o f former Minister o f Energy. He was subsequently reappointed into his position inNovember 2006. 111: CHALLENGES EXPERIENCED INTHE FIGHT AGAINST CORRUPTION AND INSTRENGTHENING GOVERNANCE 12. While significant progress has been registeredtowards improvement o f governance and the fight against corruption in the recent past, many challenges remain. These challenges, both legislative and institutional, form the basis for the implementation o f further reform measures under the one-year Governance Action Plan (GAP) and the medium term National Anti- corruption Plan. Among the specific challenges experienced while implementing various programs include: A: CorruptionPrevention 13. Preventive initiatives remain the most effective instruments for a sustained and effective fight against corruption and the realization o f a zero-tolerance to corruption. Preventive interventions have therefore been emphasized over the last three years. These efforts have faced many challenges. Among the challenges experienced include: . Weak coordination in approach to the fight against corruption, including educational campaign and awareness;5 1 Weaknesses inprocesses, systems and procedures within public entities that expose them to rent-seeking opportunities and corruption-facilitative activities; ' Details of the KACC investigations will be included inthe December, 2006 quarterly report to Parliament. It has been difficult to coordinateefforts among the other bodies involved inthe fight against corruption. These bodies include; the Cabinet Committee on Corruption (2003) to advise the Presidenton anti-comption initiatives; the Efficiency Monitoring Unit (1991) which overseesthe general performance ofpublic bodies and has investigated into the accounts of various public bodies; the GovernmentProperties InvestigationCommittee (2003) to look into the acquisition and disposalof Governmentproperties such as land, office buildings and residential houseswith a view to reposition; the PendingBills Validation and Verification Committee (2003) that is looking into huge claims by road contractorsto the Treasury; the Ethicsand Integrity Sub-committee (2005) to investigate cases of allegedcorruptioninthe Judiciary and to advise on measures to enhance integrity and disciplinejudicial staff; the Public Service Integrity Program (2002,2003) which promotes corruption prevention plans, corruption prevention committees, corruptionrisk assessment and codes of conduct across the public services; the State Corporations Advisory Committee (2004) to oversee proper management o f public corporations andto take disciplinary action; the Public Complaints Unit (2003) to review, on a confidential basis, complaints from the public about corruptionor abuse of office; and the National Anti-Comption Campaign SteeringCommittee (2004), comprising representatives from the Government, statutory commissions,public institutions, the private sector, civil society, national media associations, women's interest groups, and religious organizations, with responsibility inter alia for developing national kameworks and awarenesscampaigns. 29 1 Capacity constraints, including limited manpower, financial and physical resources and technological capabilities o f the institutions inthe front-line o fthe war against corruption; 1 Inadequate appreciation and empowerment o fthe citizenry to actively participate inthe war against corruption; and 1 High and unrealistic public expectation without due regard to the complexity o f investigations into corruption and economic crime and the due process o f law. These unmet high expectations have created apathy among citizens thereby discouraging broad-based citizen participation and support for corruption prevention measures. B: Investigations 14. Over the last three years, despite progress made in the corruption investigation front, challenges, especially capacity-related and institutional coordination, remain a major obstacle to effective investigation and reduction o f corruption. Specific challenges experienced in the recent past, include: 1 Inadequacy in the legal framework especially for cross-border investigations and restitutions o f corruptly acquired assets; 1 Lack o f effective coordination among agencies responsible for investigation and prosecution; and 1 Capacity constraints in the form o f limited skilled manpower, under-developed technological capability to tackle modern and sophisticated corruption and economic crime cases. C: ProsecutionRestitution 15. Government's effort towards the fight against corruption has particularly experienced challenges in the area o f prosecution and restitution. These challenges, though few, have adversely affected the realization o f zero-tolerance to corruption. Among the reasons for these challenges include: 1 New untested legislation that has exhibited some weaknesses in the areas of: (i) Constitutional challenges to the powers o f the Commission to compel suspects to provide it with information required for investigation; (ii) challenges to the appointment o f a Receiver by the Commission over property suspected to be the proceeds o f corruption; and (iii) challenges to the Commission against powers to investigate and deal with Penal Code offences. These weaknesses are being addressed when they arise through amendments; 1 Lack o f adequate capacity and effective coordination among institutions inthe front-line o f the war against corruption, including the office o f the Attorney General, the Judiciary and the KACC; 1 Delays by suspects and their lawyers who have doggedly fought the work o f the KACC through the court procesq6 1 Politicisation o f the war against corruption with political leaders supporting suspects from their ethnic communities against the anti-corruption agencies and dismissing the anti- corruption efforts as a witch hunt against their supporters; and In the past, until very recently, recourse to constitutional reference was used to delay indefinitely prosecution o f corruption cases. InFebruary 2006, the Chief Justice published new Constitution o f Kenya (Supervisory Jurisdiction and Protection o f the Fundamental Rights and Freedom o f the individual) High Court Practice and Procedure rules, which did away with automatic stay of proceedings in criminal cases upon a Constitutional reference. These new For example, a recent review of the Laws, Institutions andJudicial Processes for dealing with Corruption in Kenya by the National Council for Law Reporting(October 2006) found that corruption cases typically have more adjournments than other type of cases (mostly by the defensebut almost as often by the prosecution and by the courts). 30 rules have accorded the Attorney General the opportunity to restart prosecution o f cases, which had stalled by Constitutional reference. IV: STRATEGY FOR THE WAY FORWARD 16. Going forward, the government remains fully committed to zero-tolerance to corruption. Although much has been achieved in the last three and half years, more remains to be done. Accomplishing the task ahead, however, requires that the outstanding legislative and institutional challenges constraining the anti-corruption efforts be addressed expeditiously. It is inthis regard that the government, in consultation with key stakeholders developed a National Anti-Corruption Plan to provide a medium-term focus to the war against corruption. The Plan brings together, in a systematic way, all national initiatives for implementation by all the agencies that form the pillars o f the Plan. 17. Reflecting its full commitment to the implementation o f the Plan, the government has developed a Governance Action Plan' for the period from July 2006 through end-2007), which sets out time-bound specific prioritized anti-corruption interventions/initiatives in the broad areas of: (i) prevention; (ii)investigation and recovery o f corruptly acquired assets; and (iii) strengthening the prosecutorial capacity. While implementing these proposed anti-corruption measures, top priority will be given to administrative and preventive initiatives whose implementations are expected to result in measurable improvement in the fight against corruption inthe short-term. The areas o f focus duringthis period include: A: PreventiveInitiatives 18. The government will implement a number o f anti-corruption preventive interventions in the areas of further legislative reforms, public sector reforms, transparency, freedom of information and educational campaign and stakeholder participation as follows: i. Further LegislativeAdvances Several laws will be amended under The Statute law (MiscellaneousAmendments) Bill 2006 and The Witness Protection Bill 2006, which is before Parliament. Among other amendments proposed include: .. The Constitutional Officers (Remuneration) Act, (Cap 423) to implement a new salary structure for constitutional office holders; TheAnti-Corruption and Economic CrimesAct, 2003, to disallow applications for Stay o f proceedings in cases involving economic crimes and corruption, and to enable the K A C C to seize assets o f the suspects; .. Harmonize the penalties for offences that can be prosecuted under both The Anti- Corruptionand Economic CrimesAct, 2003 and ThePenal Code; Amend the Public Oficer Ethics Act, 2003, to regulate and enhance public access to the officers' declaration o f Assets and Liabilities; and Other intended bills to be tabled to parliament include (i)the Proceeds o f Economic and Anti-Money laundering Bill to Parliament; and (ii)the Political Parties FundingBill. ii. Transparency, Public Access to Information and Public Education Proposed measures to be implemented by December 2007 to improve transparency, public access to information and enhance public education include: ' For detailed discussion of specific initiatives proposed to further deepen the war against corruption inKenya, see the final Draft Governance Action Plan-July 2006 June 2007 which has now been extended to December - 2007. 31 . The proposed Freedom of Information Bill 2006, withprovisionsfor whistleblower protection, when enacted will empower ,members o f the public to have free access to information held by Government. The right o f the media to access and disseminate information will further enhance transparency and accountability. The . draft Media Bill will be finalized and submitted to Parliament to enhance self regulation; The government will collaborate with non-state partners (including industry representatives and civil society) in a World Bank-coordinated study on Kenya's . media industry aimed at assessing how best to improve the enabling environment for efficient, high quality media product and service development and provision; To strengthen the independence of the statistical system, the government will also establish in the course o f the 2006/07 a National Bureau o f Statistics to replace the Central Bureau o f Statistics, through The Statistics Act, 2006. The Bureau will . collect, compile, analyze, and publishstatistical information, and will be guided by explicit provisions for public access and dissemination; A related aspect ofthese transparency initiatives is the on-going heavy investments . in e-government and continued investment in public education and awareness- raising; . Launch a comprehensive wireless-based public information hubs in the districts and constituencies; Complete the K A C C verification o f declarations o f assets by Ministers and Assistant Ministers under the Ministerial Code o f Conduct made in 2006 and take .. appropriate action on the verification recommendations to enhance accountability. K A C C to submit its report to the appointing authority; Make declarations o f assets made by public officials accessible to the public upon application and upon payment o f a fee; and Establish and make operational the Public Complaints Unit for referral o f acts o f malpractices. iii. Results Measurement and Performance Management Government is deepening the focus on results as an integral part o f good governance, and is making progress in rolling out the RBM System in the public sector. Further steps related to the RBM's implementation include developing systems for performance management and integrated performance appraisal, performance audits and monitoring and evaluation. Other actions include introducing service charters and scorecards for Government ministries, departments and public bodies (including for parastatals) to be published on the web. iv. Deepening`PublicFinancial Management Reforms Inline with its public financial management reforms stipulated inthe PFM Strategy to be implemented starting 2006/07, the government will seek to deepen and enhance the capacity for public financial oversight and to improve efficiency and accountability in the use o f public funds. Among the initiatives to be implemented include: . Preparing and publishing external audit reports o f the Controller and Auditor General in a timely fashion inaccordance with ThePublic Audit Act 2003; Adopting a risk based internal audit approach, including establishment o f the ministerial audit committees expected to provide oversight. Empowering the Ministerial Audit Office and providing them a mandate for ensuring implementation o f audit recommendations. And, develop audit's post- 32 implementation reviews by the National Audit Office, communicate the results to the Public Accounts Committee, andpublishthem; 1 Enhance transparency and broader stakeholder participation, including members o f parliament and public inthe preparation o f 2007/08 budget cycle; 1 Conducting expenditure-tracking surveys in at least one ministry to inform budget implementation and improve its effectiveness inachieving development goals; 1 Strengthen management and audit capacity for efficient and effective use o f devolved funds under the Local Authority Transfer Fund and the Constituency Development Fund, Constituency Roads FundandBursary Fund, among others; 1 Accelerate the implementation o f integrated financial management and information system (IFMIS) and make it operational in four spending ministries (including education, health) for the management o fthe 2007/08 budget; 1 Develop and enforce objective criteria for granting tax exemptions and waivers to regulate the exercise o f discretionary powers and improve transparency and accountability in the tax exemption regime. This will be complemented by publication o ftax expenditure budgets from FY2007/08 onward; 1 Re-establish and institutionalize fiscal reporting within the ministry o f Finance, including posting on the web o f Quarterly Budget Reviews. Establish sole responsibility for collecting expenditure returns inthe Budget Supplies Department within the Ministryo f Finance; 1 Strengthen and broaden oversight o f cash, including addressing current challenges inthe Treasury FundingAccount arrangements; 1 Complete review o f the financial position o f key parastatals and initiate a process to start addressing contingent liabilities, including through: (i) automation o f the data collection o f the operations o f the public enterprises and (ii)presenting a summary o f the operations o f public enterprises in the annex to the 2007/08 budget; and 1 Submit to the Cabinet a strengthened legal framework for public financial management. vi. DeepeningProcurement Reforms The main objective o f the proposed procurement reforms i s to strengthen the institutional capacity o f the public procurement in order to enhance accountability and effectiveness by reducing rent-seeking opportunities and corruption. Among the initiatives proposed for implementation over the next one year, include: 1 Establishing and making fully operational the Public Procurement Oversight Authority ensuring its independence and objectivity, and fully rolling out o f the new procurement regulations and guidelines; 1 Posting on the ministries' websites all information on contracts, including names o f contractors, decisions o f Procurement Appeals Board, bidders and tender outcomes, and contractors' performance; 1 Introduce a transparent Vetting System to pre-qualify companies interested in bidding for contracts to address conflict of interest and to enable exposure o f fraudulent companies; and 1 Blacklist companies found to have been involved in cases o f corruption in accordance with the new procurement law, and make this information publicly available. 33 vii. Further Scaling down the Role of Government In line with the government's private-led development policy, further participation of the private sector in the economy will be enhanced over the next one year through privatization, restructuring o f the public sector and removal o f administrative barriers to trade. Among the initiatives to be implemented over the next one year to enhance efficiency inthe economy and encourage private sector participation include: A privatization commission is expected to be established and made operational by the end o f March 2007. The privatization commission will pave way for a transparent and accountable process o f privatization, thereby making it difficult to disguise corruption inthe privatization transactions; Restructuring/privatization o f Telkom Kenya, while the National Bank o f Kenya will be restructured intandem with privatization; Sale o f part o f government shares in Mumias Sugar Company and the Kenya Reinsurance Company, and KenGen; Enhancement o f the private sector participation in port operations, including container port operations inMombasa; Liberalization o f the telecommunication sector, including sale o f a second fixed- line license for domestic telecom operations and additional licenses for international telecom gateways; Include in the finance bill for 2007/08 the elimination o f business licenses found tot to serve a useful, and establish a Business Regulatory Reform Unit in the Ministryof Finance and an electronic consolidated regulatory registry for all valid licenses; Progressing the public private partnership including initiating a process to put in place a legal and institutional framework to operationalise public private partnership, allowing the private sector to participate in the provision o f water, energy, roads and transport services and limit the potential risks from contingent liabilities that may arise in such operations. To this end, concessioning and commercialization o f major utilities and infrastructure providers is earmarked, including the Kenya Railways Corporation (KRC), the Kenya Ports Authority (KPA) and others; Submission to Cabinet o f a market-oriented financial sector reform strategy by March 2007; and A diagnostic audit o f National Social Security Fund(NSSF) will be undertaken to form the basis for restructuring and reforms o f its governance. viii. Broad-based Stakeholders Participation The government recognizes that the war against corruption requires the mobilization o f a broad range o f stakeholders, including civil society, the media, the private sector, faith-based organizations and professional bodies. Going forward, this broad-based participation and consultations with stakeholders will focus on workable initiatives oriented toward demonstrable results. B: Investigations and Strengthening Investigative Capacity 19. The government plans to implement, over the next one year, a number o f initiatives aimed at enhancing the investigative capacity for corruption. These include, among others: Further strengthening o f the investigative capacity o f K A C C through specialized training and securing temporary services o f specialized agencies on a need-basis; 34 I Strengthening the Implementation Coordinating Committee (ICC)8 as a consultative forum geared towards creating synergy and effective coordination o f the efforts o f key agencies involved in the implementation o f anti-corruption measures. The ICC has gone a long way towards bringing down `Chinese Walls' in law enforcement related to corruption and economic crime, and has laid a solid foundation for deeper cooperation inthe future between agencies inthe frontline o fthe war on corruption; I Enhance the implementation by KACC o f the provisions related to compensation and recovery o f improperlconupt benefits under part VI o f The Anti-Corruption and Economic Crimes Act; I Review and publish amendments to The Anti-Corruption and Economic Crimes Act and develop modalities to address legislative and administrative constraints to investigation and restitution o f assets outside Kenya's jurisdiction; I Finalize consultations on an implementation plan to address the issues raised in the Ndung'u Commission Report; I Continue with the investigation o f the Anglo Leasing and security related contracts; and D Implement the Goldenberg Commissiono f InquiryReport. C: ProsecutionAtestitution 20. Over the next one year, the government will implement a number o f initiatives aimed at enhancing the capacity for prosecution and disposal o fcorruption and economic crime cases in order to measurably improve the fight against corruption. Some o f the proposed interventions to be implemented include: 1. EnhancingCapacity to Prosecute Despite improvements in the investigation o f corruption cases, the current capacity to prosecute is still inadequate. This has affected efforts to effectively prosecute past and on-going cases on corruption. A number o f training programs have been launched to strengthen the capacity o f the State Law Office (SLO) and the Director o f Public Prosecutions (DPP) in the Attorney General's Office. The government is inthe process o f recruiting additional lawyers, (130), including specialized and competent prosecutors with proven integrity. Of these, 65 will serve the State Law Office, 42 to the Department o f Public Prosecutions to make a total o f 104 and 23 to the Civil Litigation Department. Other initiatives include addressing legal challenges arising from corruption prosecutions (see paragraph 15) by, among others: publishing judgment and court statements; and establishing open hearings. ii. Faster Disposalof Cases In 2005, there were 503,948 new cases filed together with those pending at the beginning o f that year, bringing the total number to 1,074,602 cases. Of these, the courts were only able to deal with 541,167 cases, rolling over 535,840 to 2006. As part o f the effort to address this challenge, the following initiatives will be implemented: . The number o fjudges o f the High Court will be increased to 70 from 50 and those o f the Court of Appeal from 11 to 158 (The Statute Law (Miscellaneous Amendments) Bill 2006); 1 To enable the use o f open court rooms when hearing cases and discourage conducting the trial o f cases in chambers, in this financial year (2006-07), courts will be constructed in the following towns:- Busia, Naivasha, Kehancha, Nyeri, * The ICC reports to the Cabinet StandingCommittee on Anti-Conuption. Its membership is drawn from: the Ministry of Justice and Constitutional Affairs; the Attorney general; the Director of KACC andthe Director of Criminal InvestigationDepartment. 35 Kwale, Kerugoya, Kisumu, Mariakani, Sotik, Siaya, Butere and Mutomo (Kitui District). InNairobi the former Income Tax House i s being converted into a court . house and construction completion is expected inthe next 2 years. On completion, this utility will have 57 new court rooms andattendant facilities; To further improve access to justice, the Judiciary is also establishing mobilehisiting courts in sparsely populated areas so as to reduce the cost o f transport for the litigants and encourage resolution o f disputes in a formal way. To address possibilities o f "judge - shopping" and address the mischief o f having a multiplicity o f suits on the same issue being filed in different court registries in Kenya (as occurred recently in the Charterhouse Bank case), the Chief Justice is preparing an administrative circular directing all Deputy Registrars to ensure that the provisions o f Sections 15 and 16 o f the Civil Procedure Act concerning the place o f filing suits is complied with, and to inform any Judge seized o f a matter where this does not happen; To further facilitate faster disposal o f cases, judges will be trained, and the court . system modernized and automated for better case management and improved court administration; As part o f a broader transparency initiative, introduce recording o f court proceedings, beginning with 20 courts using the Hansard system which has been deployed worldwide (and in Kenya) to record information in parliamentary . debates. The National Council o f Law Reporting (NCLR) will assist with the archiving and storage o f proceedings, and make it publicly available on its website; The proposed amendments to the Civil Procedure Rules will simplify the court processes and include alternative methods o f dispute resolution to shorten the time . taken to dispose o f cases and reduce the backlog and provision o f legal aid schemes; and Sensitize and hold workshops for judges and magistrates on anti-corruption legislation. iii. GovernanceImprovementinPrioritySectors Over the next one year, the government will implement measures aimed at addressing critical gaps in governance, specifically inhealth, education and infrastructure; . Health: Service delivery will be addressed through the adoption o f a risk-based management approach to internal audit; monitoring full implementation o f the recommendations by K A C C into the operations o f the Kenya Medical Supplies Agency (KEMSA); and improved management o f the Global Fund Program. Weaknesses in the area o f procurement, financial management and governance identified by the World Bank's Detailed Implementation Review will be addressed as follows: i. Procurement: finalization of the sector specific procurement manuals, independent procurement actions, scaling up the capacity and involvement o f KEMSA inprocurement and public notification o f contract awards; ii. DARE: undertake a comprehensive update of progress on action plan from forensic audit; recruit auditors; and investigate and where necessary prosecute those found guilty; iii.Financialmanagement: remittance of funds directly to health facilities using commercial banks, instituting effective internal and external audit functions using a risk-based framework, disclosure o f information on financing and support to community monitoring over expenditure; and 36 iv. NACC: implementing a fraud risk management policy, prosecuting those found to have engaged in fraudulent activities, including NGOs and NACC staff, monitoring performance contracts, instituting functional internal audit unit reporting to the Audit Committee of the Board, strengthening the . monitoring and evaluation system and ensuring a greater clarity on applicable procurement rules and disclosure o f information, including on grants awarded. Education: The Government's free primary education programme will continue to be strengthened, specifically through securing and scaling up gains in governance in the Ministry o f Education. Areas of focus include community involvement . through decentralized financing and procurement; resource allocation; consultation and social accountability and teacher management; and Infrastructure: Government will establish three autonomous road authorities to streamline ownership, management, accountability and financing o f all road network activities inthe country. Parliament will first enact enabling legislation. In the meantime, analysis o f costs and preparation o f road construction and maintenance standards i s underway. V: CONCLUSION 21. The government fully recognizes that accelerating and deepening the reform agenda in the areas o f governance and anti-corruption is critical for consolidating the on-going broad- based economic recovery and reducing poverty. The implementation o f these measures is therefore expected to improve governance, transparency, accountability and efficiency in the management o f public affairs, and make the public sector more effective in the delivery of services. Their implementation will also deepen the facilitation o f private sector participationin the economy by encouraging investments, job creation and development o f business initiatives to reduce poverty. Further, these reforms are being implemented to lay a firm foundation for the attainment o f government's vision 2030 recently launched and to make Kenya a prosperous Nation for the current and future generation. 37 5 e, U" C t- 0 .--5ax B 0 I) e4 d 53WuE W I \o 0 0 e, N I5.c w W 510zz" !3 d4 b 0 b 3 b 0 b 0 b B B 3 z 3x 3x 9 0 F u 4 w 5 2510 13 .-> h 12 R b 3 0 Iz 2x 5 c +04 - C UE Eo . . 3 ? 3 2 E- I13 h ' - a .-m C * 0 s c0 Q 2a b 0 C c, a d 24 I IT 3 I Y . . 3 \o 0 V 0 2 5 B C 2 I 4 II" 3 I 0 I m d b 9 F c 0 5 C a Y cl b 0 4 > m Z 3 3 3 3 3 4 3za 2 Z 3 3 3 3 ;I 2 4 3 3 e 5 2 0 gg no a 0 xru 3 ,- I- I- I- 0 5 ; 4 8 3 O 4 5 7' u u < M E .-M C I 5 c 5 ' b o . 3 b 5 VI e n rc 0 .-> h U -.- 8 3 a 3 B I- O # 0 8 3 3 3 z k N Y 0 13 e, Y 0 a 0 .--0a 2 IA Y (d 0 0 & % sti N O b . 0 E 2 3 T a 3 e, o h > T- rcr 0 . . 2 kJ> ; s 0 b C a 3 0 5 -.I b :6 c, 4 I I 3 t- 3. 5 3 r F-. . . 2 3 3 E ? 5 E -9 2 t- I Annex 2. BankGroup Support Alignmentwith CAS Priorities (including enhanced equity and governance focus) Growth with macroeconomic Transparency Stakeholder Fiduciary, regulation, Priority sectors (and Support type stability and equity initiatives involvement and licensing reforms institutions) -Analyticwork Analytic inputs into Media Study Working Programmaticpublic Judicial sector preparation, GOK's Vision 2030 with cultural expenditurereviews assessment dissemination, CEWGrowth institutions (including continued Access tojustice for the and policy (economic and social to protect internationalPFM poor dialogue pillars) women's benchmarking) Parliamentarycapacity 0 Growth diagnostic right to own Programmatic assessment study and inherit country procurement Study on police Poverty property assessment review oversightmechanisms assessment (systematicand Corporategovernance Investmentclimate sectoral aspects and report on the observance survey international of standards and codes The economic, benchmarking (ROSC) inthe financial humanand exercise) sector governance Making finance work dimensionsof for Kenya(andAfrica) Kenya's five dialogue, includingrural largesturban access to financial centers services Initial governance assessmentreview CAS impact evaluation. icludingenhanced mor iring and evaluationusingbaselineand follow-up householdsurveys that use randomizedsample Advisory Technical advice on Technical support Private Risk-basedauditing, Further liberalizingthe servicesand GovernanceSurvey, by Bank GIS and sector procurementreform. telecommunication technical including design and povertyexperts participation Licensingreform sector assistance implementation issues on building in port including on International experience interactive e- operations improving "Doing in backloggedcourts transparencyand Business" indicators Technical adviceon communications Governance usingICT to provide platform and low cost banking Implementation of participation services to rural Freedomof in service communities Information provision legislation Coordination, Continued Particioationin Continued Continued active Inadditionto the partnership, participationin GOWIkEPSA-led partnership partnershipCanada, collaboration with the and convening development partnershipwith with France Denmark, European developmentpartnersinthe role partnerships, communitiesand and Commission. Finland, GJLOS group, includingwith the EC other users on last Germany Germany, continuedBank on trade issues, UK on mile solutions & who are International participationin various investment climate linkagesfor digital jointly MonetaryFund, priority sector groups work and in leadrole villages leading Netherlands,Norway, (including also the in primaryeducation, coordination Sweden, United healthsub-groupwhich US inleadrole on in water, and Kingdom andthe it chairs), and environmental issues, with France UnitedNations other collaborative UNinleadon land as led Strengthened relationshipswith and gender issues, and coordinator partnership,with AfDB, France andUK Germany in lead role in energy, grant-funded capacity inthe financialsector, on agriculture; the EC including in buildingsupport for andwith US and Canada will soon take up the private- selectedactivitiesby incapacitybuilding chair of the urban, public the Parliamentary work with Parliament localgovernment, partnerships Network ofthe World decentralizationgroup coordination bank, KEPSA, inenergy professionalbodies (e.g., ICPAK), faith- basedandother nongovernmental organizations Continued activeoartii iationwith the Inor subgroupon governan , with Finlandand Sweden K leadingon public financial management 53 Growthwith I I I I macroeconomic Transparency Stakeholder Fiduciary, regulation, Priority sectors (and Support type stability and equity initiatives involvement and licensing reforms institutions) World Bank internal approaches, processes, organizational changes, and pilot activities Ongoing EducationSWAP Financialand Legal MSME IRCB Project (FY06, IRCB Project (FY06, operations (FY07, USSOm) and Sector Technical project US$25m) for PFM US$25m) for key FreePrimary Assistance(FY04, (FY04, work andthe sectoralministries. Education(FY04, US$8million) which US40 m) is establishmentof the See write-up on Energy US$50m); Arid supportsinter alia developing new Independent Recovery,NCTIP, Lands Additional pilot programfor quality Procurement Nairobi Water and Financing(FY07, significantly changes, Authority. Sewerage below US$60m) targeting improved innovation, See write-up Energy livelihoodsin 28 transparencyand case and Recovery,NCTIP, districts); managementin increased Nairobi Water and Agricultural Kenya's courts voice of Sewerage below Productivity(FY04, MSMEs US$40m) New lending See row See row immediately Total War onAIDS below Communications immediately below (TOWA, US$80 Infrastructure below million)) with (US$60) for significant component connectingdigital for community-based villages, e- organizationswith government, etc. establishedtrack-records (including FBOs)with strong service delivery I and social accountability track frameworks Judiciary Performance Improvement Project (US$40 million) HealthSWAP(USSO StatCap (US$20.5million), includingsupport million) regular governancesurveys. More geographicallytargetedand participatoryapproaches that straddlegovernance and equity pillars, including ~~ Western KenyaCDD (US$ 88.5 m), Natural ResourcesManagement (US$69.2 million), and the Economic and Social EmpowermentProgram (US$140 million), targeting urban/peri-urbanslums through CDD approachesto infrastructure development; social service delivery (possibly scaling up successful some micro-leasingand other service delivery models) and livelihood development,and seekingto encourage further private sector participationand crowd in social private equity. Also in this categoryis the Nairobi Toll Roads project (US$50million). Water Supply and SanitationSWAP(US$120m), aimedat consolidatingof institutionaland governancereforms, and rehabilitationof existingwater supply and sanitationfacilities,andpossibly scale of community-basedmanagement of water systems. Support for piloting community-basedmanagementof sewerage systems. Notes and Memo ms 54 P;.. n P & (A u a il b a 3 n 0 u a a . 0 . . * . .-*a e 0 - 3 a 5 .- 0 M .-0e * 2 e i e a . . Annex 4. Development of an Innovative PublicExpenditure and Governance Monitoring Tool 1. Inpartnership with Government reformers-in the Ministry o f Information and Communications and the Ministry o f Planning-and other stakeholders inKenya, the Bank i s developingpractical tools for better governance and anticonuption. Buildingon the popular and widely used constituency and subdistrict poverty maps, we have embarked on a pilot initiative to buildnew knowledge-sharing tools for all Kenyans4itizens and policymakers, rich and poor. By providing support to generate information and keep it up to date and publicly available, we aim to support Kenyans inmaking informed policy decisions and to foster a culture and practice o f social monitoring and accountability. 2. Imagine having access to "live" electronic maps o f your neighborhood, with details on roads, schools, health clinics; poverty levels and other socioeconomic indicators; and government programs and public expenditures, including details on CDF allocations and expenditures within constituencies. Imaginebeing able to use this information to advocate and plan better development programs, and to assess the performance o f your Member o f Parliament, children's head teacher or neighborhood civil society organization that i s channeling donor funds for HIV/AIDS education. Imagine accessing the maps via the Internet, local government offices, school, or public information center (see Figure 2). Besides all this, the pilot program will allow Bank staff to catalogue physical progress inproject implementation that could form the basis for physical audits. Figure 2. Constructing an Integrated Geo-Referenced Database I Geo-Referenced Databases .c-locateschools,healthcenters,boreholes Pointsof Service Delivery ~etworksof Infrastructure Administrative Areas & Communities 3. The geo-referenced database will integrate informationon the locationand quality of, andpublic expenditures in, infrastructure networks and service delivery points. These maps are then linked to M&E data providing information on inputs,outputs, and outcomes and the prevailing socioeconomic conditions at the local level observed from survey and census data. This database has multiple applications for 80 density of (poor) school-aged children and enrollment rates enables the identification o fwhere access is low and where new schools or classrooms are needed (see Figure3). 4. This databasecan also help allKenyan citizens-rich and poor, voters and the policymakers they elect-monitor public expenditures and governance. Our experience with the popular constituency and subdistrict poverty maps has demonstratedthat people like relatingto maps; even people with low levels of literacy and schooling find it relatively easy to grasp informationconveyed through user-friendly maps. Providingthe public with maps showing information on Government and development programs can promote social monitoring of development outcomes and governance. For example, maps of reported allotments o f Constituency DevelopmentFunds can give citizens the informationto voice concerns on how allocations are targeted and to verify whether these funds actually reachedthe intended beneficiaries (see Figure 4). 81 Figure 4. MappingPublicExpendituresto ProvideInformation for SocialMonitoring /I N 82 Annex 5. StimulatingGrassrootsandOutput-BasedMicrofinancefor Community- ManagedWater Programs 1. World Bank Group support for Kenya already includes a number o f innovative pilot programs aimed at improving access to financing for demographic groups that are otherwise not well served. This annex profiles two such programs-the Grassroots BusinessInitiative, and an output-based microfinance program for community-managed water projects. Duringthe CAS period the Bank Group will evaluate the impact o fthese programs with a view to identifyinglessons learned, andthe scope and modalities for scalin up. The evaluation will also identify opportunities for "crowding in" "social private equity" (SPE) through partnerships with the growing number of firms inKenyathat are promoting corporate F social responsibility, as well as with the expanding class o f professional, entrepreneurial, and philanthropic Kenyans who are interested in addressing social inequities in a sustainable way. A. IFC GrassrootsBusinessInitiative 2. IFC's Grassroots Business Initiative (GBI) supports grassroots business organizations (GBOs), socially driven for-profit and not-for-profit ventures that create sustainable economic opportunities for very poor and marginalized people indeveloping countries. This section describes some o f GBI's current activities inKenya. K-Rep DevelopmentAgency (IDA). KDA, the research and development arm o fthe K-Rep Group, develops innovative and appropriate microfinanceproducts and services targeted at MSEs.GBI is supporting KDA's development of a new microleasingproductthat enables entrepreneurs to acquire productive assets, such as beehives, water irrigation pumps, fishing gear, and mini agroprocessing machinery. While KDA's microleasing product now targets the agricultural sector, it i s expected that the product will eventually be versatile enough to serve other sectors as well. Kenya YouthBusiness Trust (KYBZJ. KYBT is a youth enterprise support organization that works with start-up enterprises runby youth entrepreneurs inNairobi, offering basic business management skills, mentoring, and financing. Before prospective youth entrepreneurs actually start uptheir business operations, KYBT provides them with a training program designed to give them the basic skills they will needto manage and runtheir income- generating activities. Once they successfully complete the training program, KYBT then provides them credit to enable them to begintheir business activities. KYBT engages with their youth entrepreneurs for three-years, after which it expects them to be able to graduate into the microfinance sector. GBI is providing grant fundingto help KYBT strengthen its operational systems, and to contribute to the loan capital for the credit program. UZZMAFoundationAfrica (UZZMA). UZIMA, another youth enterprise support organization, works with youth entrepreneurs, both those engaged in start-up activities and those that have already started up their income-generating activities but require continued support in business management skills, financing, and mentoring. UZIMA's program runs in both western Kenya and Nairobi. GBI is providing grant support to UZIMA to improve institutionalcapacity and expand its youth enterprise program. 1 Social private equity (SPE) deploys the progressive aspects of private equity (PE) to promotebroad-based development by (a) imposing a "social value-added" (SVA) filter aheadofthe conventional PE analysis; (b) making the cost of capital atactical variable so as to bolster the enterprise's core SVA; and (c) applying capacity-enhancing assistance to improve integrity and reducetime-to-surplus. The approach can be used to foster more meaningful economic participation, deliver quality social goods and services more affordably and reliably, and encourage entrepreneurialand community-based activity as avenues for wealth creation and poverty reduction. 83 0 SustainableHealthcare Foundation (SHEF). SHEF is anNGOworking inthe healthsector that usesa microfranchisingmodelto providesopportunities for trainedand certified registeredcommunity nursesto runcommunity-levelclinics as businesses.By runninga clinic the franchisees-the nurses- are able to earn a wage that wouldultimatelybe comparableto a salary they woulddraw inregular employment.SHEF providesbusiness trainingandfinancing, isthe sole source ofthe drugs that the nursesdispensehell intheir clinics (SHEF vets the qualityofthe drugs they buy, and is currentlyworking closely with MEDS), ensuresthat the clinic registrationhasbeencarriedout with the relevantauthorities, andprovides ongoingsupport to the nurse entrepreneursto ensurethat they meetthe expected standards of performance.GBI is providinga patientcapitalloanandsome grant fundingto help SHEFrefinethe franchise methodologyandmove its operationsto profitability. 0 Honey CareAfrica (HCA). HCA is inthe beekeepingsector, manufacturingLangstroth hives for sale primarilyto small-scale beekeepers, andprocessingand sellinghoneythrough retail supermarkets.More recently HCA has startedexportinghoneyto UK and US markets. The unique aspect ofHCA's businessmodelis that the company hasdeliberately chosento engagewith small-scale farmers, providinglow-incomehouseholdswith a way to supplement their income. GBIhas given HCA a patient capitalloan to expandits operationsandwork towards movingthe companyto profitability, and it is supportingHCA in settingupa foundationthat will deliverextension services to beekeepers. Kenya WomenFinance Trust (KWFT). GBI is supportingKWFT's establishmentofa loan facility of upto US$45,000 for onlendingto young entrepreneursthat are supportedbyyouth organizations, suchas KYBT andUZIMA, whose missionis to provide business/financiaVmentoringsupport andtechnicalassistanceto young entrepreneurs. 0 Kenya Gatsby TrusUCenterfor InternationalMarketAccess (KGT/CIMA). GBI is helping KGT develop a businessplanfor CIMA (craft sector), drawingbest practices from GBI's experience with CraftnetworkPrograminCambodia andIndonesiainthe areas ofaccessto market, product designanddevelopment, and sustainabilityofthe intermediary. The outcome ofthe exercisewill informGBI/KGTonthe potentialfor collaborationbetween KGT/CIMA andCraftnetworkGlobal. B. Microfinancefor Community-ManagedWater Projects-An Output-Based Aid PilotProject 3. The objectiveofthe pilot programis to increase access to water supply serviceby poor people in Kenya's ruralandperiurban areas, andto increasethe efficiencyofwater supply services. The purposeof the pilot is to demonstratethat microfinancehas an innovativerole to play infinancingsmallwater infrastructure inKenya, andto increasethe sustainabilityof smallcommunity-managedwater supply projects.While the pilot is for the Nairobiregion, lessonsfromthis experience will help inscalingupthis approach inKenyaas well as providelessonsfor other countries. 4. Design Principles.The key principlesunderlyingthe proposedoutput-basedaid(OBA) program are as follows: 0 Use of a domestic microfinanceinstitutioninprefinancingcommunity-managedwater projects (CWPs), bothto leveragelocal resourcesandto enhance sustainabilityby injecting marketrigor. 0 Introductionofthe conceptof performance-linkedsubsidypaymentsto enhance sustainability. 84 Use o f implementationarrangements that will promote scaling up inKenya (for example, by introducing an OBA window at the newly set up Water Services Trust Fund), and development o f assessment tools and manuals that can be used globally. 6. Basic OBA Pilot Program Approach. The program will provide subsidies to about 20 CWPs selected through a transparent and demand-responsive approach. Each CWP subproject will be prefinanced through a combination o f its own resources (20 percent) and a loan from K-Rep Bank (a domestic microfinance bank inKenya) (80 percent), which will follow its normal due diligence process for this loan offer. Upon successful completion o f the project and related certification o f the outputs by an independent program audit consultant (PAC) retained by the K-Rep Bank, the CWP will receive a subsidy amounting to 40 percent o f total capital expenditure, allowing it to prepay part o f the bank loan. 7. Definition andMeasurement of Outputs. Projects financed under this pilot are expected to achieve two types o f outputs: increased coverage and increased operational efficiency. Outputs will be agreed upon with the community and will be detailed inthe OBA agreement with the K-Rep Bank. The OBA subsidy payment will be linkedto the level o f achievement o f agreed outputs. For this purpose, the two output parameters will be as follows: 0 Increase in coverage: The proposed investments will ensure coverage within the CWP jurisdiction as defined inthe Service Provision Agreement, achieved through an agreed number o f new individual household connections and, ifrequired, new shared kiosk facilities, at agreed working conditions and service standards. 0 Increase in operational efficiency: Increase inoperational efficiency will be captured by an increase in revenue, measured as the average monthly revenue collected from water sales over the three initial months after project commissioning. 8. The PAC will conduct a post-project audit to assess the level o f outputs attained against baseline information ascertained duringproject selection. The audit will take place in two stages. At the end o f three months (after project commissioning), the PAC will audit outputs achieved. This initial audit and subsequent no-objection byNWSB and GPOBA will trigger subsidy release to the community account based on the proportion o f outputs achieved. Ifthe outputs are less than 100 percent o f those agreed to, the PAC will update the audit reportthrough an additional field visit three months later. The additional proportion o f outputs attained will then be the trigger for additional OBA subsidy. The maximum level o f OBA subsidy inthe two visits will be 100 percent o f the amount agreed to inthe OBA agreement (about 40 percent o f project capital expenditure). 85 Annex 6. PartnershipinImplementingthe IP-ERS Economic management and World Bank, IMF U.K.,EC, Germany, Netherlands, Dolicv Sweden Energy World Bank, UN EC, Finland, France,* Japan, Spain Financial sector reforms World Bank, IMF U.K.,France, AfDB Private sector development World Bank,* AfDB, Arab Denmark, U.K.,EC, Japan, Bank for Economic Netherlands, US. Development inAfrica, UN Public financial management World Bank Canada, Denmark, U.K.,* EC, Finland, Germany, Norway, Sweden, US. Roads and transportation World Bank,* AfDB, Arab China, EC, France, Germany, Bank for Economic Japan, Korea, Saudi Fund, Sweden Development in Africa, Organizationo f Petroleum Exporting Countries Trade policy reform World Bank, IMF DfID,EC Water supply and sanitation World Bank, AfDB, UN Austria, Denmark, EC, France,* Germany,* Italy, Japan, INetherlands, Sweden, Saudi Fund for Development, U.S. Equi Agriculture and rural development Finland, Germany,* Italy, Japan, Netherlands, Sweden, US. Education World Bank, AfDB, Austria, Canada, U.K.,*EC, Organizationo f Petroleum Finland, Germany, Italy, Japan, Exporting Countries, UN Saudi Fundfor Development, Sweden, U.S. Environment World Bank, UN Belgium, Denmark, EC, Finland, France, Japan, Sweden, U.S.* Gender World Bank, UN* Canada, EC, Italy, Netherlands, Sweden Healthand HIV/AIDS World Bank,* UN Belgium, Denmark, U.K.,EC, Germany, Italy, Japan, Sweden, U.S. - Land World Bank, UN* U.K.,Japan, Sweden, U.S. Poverty targeted programs World Bank, UN us. (arid and semiarid areas, slum- upgrading) I Go Civic education and civil society Finland, Germany, Netherlands, Norway, Sweden, US. Electoral processes World Bank, UN Canada, Denmark, U.K.,*EC, Finland. Germanv. Netherlands. 86 IP-IP-ERS Area Multilaterals Bilaterals Norway, Sweden, US. Governance, justice, law, and World Bank, AfDB, UN Canada, Denmark, U.K.,EC, order Finland, Germany, Netherlands, Norway, Sweden,* U.S. Public service reform World Bank,* IMF,UN Canada, U.K.,EC, Netherlands, Sweden Statistics and monitoring and World Bank,* UN U.K.,France, Germany, Italy, evaluation Sweden, US. Urban, local government, and World Bank, UN DfID,EC,* Italy, Sweden decentralization * Chair the donor group of 87 Annex 7. Economic and Sector W o r k Planned FYOl (delivery status) Public Expenditure Review Public ExpenditureReview Eduzation Sector Re\,iw Education Sector Review 03/04 M'atershcJhlanagemsnt Watershed Management 03/04 FSAP FSAP 12/03 Grcnvthand C'ompeti[iwness New Power Privatization 06/04 tncrgy Sector Rcvien New PSI' in WSS in Kisumu 09/03 New PSDE'PI Engagement 06/04 New AMLICFT Assessment 10/03 06/04 Plaiined FkO5 l'uhlic Eupcnditurc Financial :\cc Public ExpenditureFinancial Acc j'outh Ds\~lopmsnr,\gcnda Youth DevelopmentAgenda 05/05 I'liarmaccu ti;a1 l