Kenya Kwanza's Plan to Ring-Fence Donor Funds for County Financing

The Kenya Kwanza administration is moving to separate donor funds from the national government’s own allocations in a bid to address chronic delays in the disbursement of county allocations. In the Draft Budget Policy Statement 2026, the National Treasury outlines plans to amend the Public Finance Management (PFM) Act to allow for the submission of two separate pieces of legislation governing additional allocations to the counties. One Bill would cover funds sourced from the national government’s share of revenue, while the second would deal exclusively with allocations financed through loans and grants from development partners. The move, the BPS notes, seeks to address a perennial problem that has disrupted service delivery and raised the cost of foreign borrowing. The delays have also often resulted in funds reaching counties well into the financial year, undermining project implementation and weakening budget absorption. “It has also led to fiscal inefficiencies resulting in additional costs for the country in the form of commitment fees and interest charged on foreign borrowing,” BPS says. The proposal follows repeated delays in the enactment of the County Governments Additional Allocations Bill. The proposed law authorises the transfer of conditional grants from the national government and development partners to counties. According to the BPS, the issue was escalated to the Intergovernmental Budget and Economic Council, a forum for the consultation and cooperation between the national and the county governments under the chairship of the Deputy President. Resultantly, IBEC directed Treasury to initiate a multi-stakeholder engagement within one month to explore alternative legislative and administrative frameworks to ensure efficiency and timely flow of conditional grants. “The persistent delays in the approval of the County Governments Additional Allocations Bill have led to late disbursement of funds, disruption in service delivery and low absorption of allocated funds at the county level,” the Treasury notes in the policy document. Under the current framework, all additional allocations are bundled into a single Bill that must be approved by Parliament before any funds can be released. This is regardless of such allocations being financed through national revenues or donor funding. In this regard, Treasury argues the arrangment has exposed development partner financing to domestic political and legislative bottlenecks unrelated to the donor-funded programmes themselves. To resolve this, Treasury has put forward the Public Finance Management (Amendment) Bill, 2025, which proposes amendments to Sections 42 and 191 of the PFM Act. The amendments would allow the submission of two separate Bills to Parliament, effectively ring-fencing donor-financed allocations. Treasury argues that separating the Bills would facilitate faster approval and timely disbursement of additional allocations, particularly those financed by development partners, whose programmes often operate under strict disbursement timelines and contractual obligations. Beyond service delivery concerns, the government acknowledges that delays in approving the CGAAB have had direct fiscal consequences for the country. The BPS states that late disbursement of donor-financed funds has resulted in fiscal inefficiencies, including additional costs arising from commitment fees and interest charged on undisbursed foreign loans. Commitment fees are typically levied by lenders on approved but unutilised loan amounts, meaning delays in releasing funds to counties can translate into costs for the Exchequer without corresponding development outcomes on the ground. Low absorption of conditional grants at the county level has also been a recurring concern flagged by oversight bodies, with projects stalled or rolled over into subsequent financial years due to delayed cash releases. By isolating donor funds from the national government’s own allocations, Treasury hopes to ensure development partner financing flows more predictably, improving project implementation timelines and reducing the risk of penalties associated with foreign borrowing. The proposed amendments have already been reviewed and cleared by the Office of the Attorney General and approved by Cabinet. The Bill is now awaiting transmittal to Parliament for consideration. If approved, the changes would mark a significant shift in how the administration manages intergovernmental transfers tied to external financing, potentially easing long-standing tensions between the two levels of government over delayed funds.