The Contribution of Financial Management Practices to Financial Challenges Facing Local Authorities in Service Delivery in Kenya

The paper assesses the contribution of financial management practices to the financial distress faced by local authorities in Kenya. The presence of financial challenges in local authorities leads to poor service delivery and makes a local authority not to meet its mandate as stipulated in Cap 265 of our laws. Poor service delivery has its consequences which include a growing dissatisfaction of the community, suppliers, employees and all internal and external stakeholders. Financial challenges in local authorities exist in various forms. For instance local authorities are often unable to pay current liabilities such as salaries and short term obligation to creditors. In order to meet their short term financial obligations they are forced to operate on overdrafts with high interest rates hence compounding the problem. The study draws attention to financial management practices that may contribute to financial challenges in local authorities in Kenya. The population of the study comprises of 175 local authorities. A sample of 20 Local Authorities was selected using a stratified systematic sampling technique. A questionnaire was used to collect data from both the LAs officers and customers to these local authorities. The collected data was analyzed using descriptive statistics such as frequencies, mean, standard deviation. Ordinary Least Squares (OLS) was employed to study the causal relationships among all the variables in the model. In order to identify whether significant difference exist among the three categories of financially distressed local authorities, Analysis of Variance (ANOVA) was used. Qualitative responses were analyzed using content analysis. Results indicated that the local authorities were financially distressed. In addition, financial management practices of local authorities were found to be poor and this may have led to the state of financial distress. The study recommended that best practices in the area of financial management such as proper internal controls, institution and adherence to budgets, regular and accurate financial reporting are crucial in averting or reversing the trend of fiscal distress in local authorities. The Contribution of Financial Management Practices to Financial Challenges Facing Local Authorities in Service Delivery in Kenya Prof. Gakure Professor and Principal JKUAT CBD Campus Dr. Waititu Senior Lecturer, JKUAT CBD Campus Dr. Mouni Senior Lecturer, JKUAT CBD Campus INTRODUCTION 1.1 Background of the Study The terms Local Governments and Local Authorities are used interchangeably in this thesis proposal so as to avoid being bogged down by terminological quagmires. By definition, local government means an intra-sovereign governmental unit within the sovereign state dealing mainly with local affairs, administered by local authorities and subordinate to the state government (Khan and Ara, 2006, Jahan, 1997). The formation of local government may have been motivated by the need to reduce bureaucracy and the growth of institutional power to the detriment of the citizens. This is exemplified by the quote from a letter from Thomas Jefferson to J. Cabell, 1816. “The way to have good and safe government is not to trust it all to one, but to divide it among the many, distributing to everyone exactly the function he is competent to. Let the National Government be entrusted with the defense of the nation and its foreign and federal relations; the State governments with the civil rights, laws, police, and administration of what concerns the State generally; the counties with the local concerns of the counties, and each ward direct the interests within itself. ” --Thomas Jefferson to J. Cabell, 1816, Writings 14:421--423 1.1. 0 Mandate of Local Authorities The mandate of local authorities is to bring governance closer to the people as advocated by the decentralization theorem which states that each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalize benefits and costs of such provision (Oates, 1972). They provide cultural; educational; management, research, commerce and political services. They also do offer employment, best health facilities and boost the country’s economy (UN-HABITAT, 2004). For instance, the City Council of Nairobi, the largest Local Authority in Kenya, produces more than half of the country’s Gross Domestic Product (IEA, 2009). The Cities Alliance Report (Menkveld, and Cobbett, 2007) and Local Authority services (Cap 265, chapter 3 section 5), describes Local Government as providing platforms for productivity, entrepreneurship and economic modernization, poverty reduction and practicing good governance. Local authorities also are mandated to enable administrative convenience and expediency as advocated by Stigler’s menu theorem. The presence of financial challenges in local authorities leads to poor service delivery and makes a local authority not to meet its mandate (Freire and Polese, 2003). Poor service delivery has its consequences which include a growing dissatisfaction of the community to the point that they form local associations to voice their concerns; a good example is the Karengata Resident Association (Omamo, 1995). On the extreme side, residents may withhold the rates owed to the local authorities as a measure to enforce compliance with service delivery (IEA, 2009). 1.1. 2 Local Authorities in developing countries Schoeman (2011) investigated fiscal performance in terms of own-revenue collection and sustainability of local municipalities in South Africa. This study noted that a large number of municipalities do not comply with the requirement that a “reasonable” amount of current expenditures be financed by means of own resources. Furthermore, local governments finances are featured by substantial variance as far as collection of own income is concerned. Fjelstad,Henjewele, Mwambe, Ngalewa, Nygaard (2004) attempted to analyze changes in Tanzanian local authorities’ capacity for financial management and revenue enhancement, and changes relating to governance, including accountability and responsiveness of the local government. The study concluded that there is a causal relationship between financial management of local authorities and governance. Another study by Sennoga (2004) on relationship between local government revenues and expenditures in Uganda noted that increases in revenues lead to less than proportionate increases in local government expenditures which then lead to credence of the flypaper effect. Jonga and Chirisa (2009) observed that it was lamentable that the messy reality of governance in Zimbabwe and the economic meltdown in the country has rendered most of the councils