An assessment of the influence of Capital Budgeting practices on the operation of projects initiated by local authorities: a survey study of projects in Kisii Municipal Council, Kenya

Abstract

apital budgeting practices involves decisions on investments; it entails the techniques that seek to build on the concepts of the future value of the capital investments. Poor and unrealistic capital budgeting practices can cause misery on socio-economic development. It was not clear to what extent local authorities had embraced these practices. The purpose of this study was to assess the influence of Capital Budgeting Practices on the operation of projects initiated by Local Authorities in Kenya. The specific objectives included: assessing the extent of use of the Capital Budgeting Practices and its influence on the operation of projects initiated by the Local Authorities. The study was guided by the Capital Budgeting theory that addresses the independent variables: NPV, IRR, PI, ARR and PBP. The research adopted a survey study design. The target population was 106 consisting of: 59 council representatives, 16 religious organization representatives and Zlorganized groups (or unions) representatives. The study sample was 52 respondents consisting of: 29 council representatives, 8 religious organization and 15 organized groups respondents. Stratified random sampling technique was applied to select a sample for this study. A structured questionnaire was used for primary data collection. Quantitative data collected was analyzed using descriptive and inferential statistics. Simple regression analysis and Pearson’s correlation coefficient were used to assess the dependence of the variables at a 95% confidence level. The research findings include: participatory capital budgeting process enhanced accountability and financial transparency for projects, the consultative action and right choice of projects leads to good service delivery, profitability index was the major practice used to appraise projects, profitability index practice was the most frequently in project appraisal; capital budgeting practices do influence the operation of projects; PI approved the highest number of projects and had the greatest number of projects in operation. The regression equation parameters a and b were calculated and the regression equation established was yi = 2162326203 + - 2.9l4438503xi . The degree of association between the projects initiated and the revenue collected by the local authorities is negatively strong; the correlation coefficient is r = - 0.8273194l4, this indicated that not all projects initiated can generate revenue, some projects were initiated to provide service to the general public.