Capital Budgeting Methods and Performance of Water Services Boards in Kenya

Abstract

One management practice that has been widely adopted by corporations is capital budgeting. The current study sought to establish the relationship between capital budgeting methods and performance of water services boards in Kenya. The study was guided by the following specific objectives: to identify the capital budgeting techniques employed by the Water Services Boards in Kenya; to assess the factors that influence the choice of the capital budgeting techniques used by the Water Services Boards in Kenya; and to evaluate the relationship between capital budgeting techniques and organizational performance. A review of literature related to the study area was undertaken in order to eliminate duplication of what has been done and provide a clear understanding of existing knowledge base in the problem area. The literature review is based on authoritative, recent, and original sources such as journals, books, thesis and dissertations. A descriptive design was to identity the relationship between capital budgeting techniques and performance in water services boards in Kenya, whose number stood at 8 as at June 2008. A semi-structured questionnaire was used to collect primary data from the respondents. Since all the Water Boards have websites and reliable internet connection, the researcher sent the questionnaires to the respondents outside Nairobi by email. The Boards whose Head offices are located in Nairobi received their questionnaires by hand delivery. A letter of introduction, stating the purpose of the study was attached to each questionnaire. In addition, the researcher made telephone calls to the respective respondents to further explain the purpose of the study and set a time frame for the completion of the questionnaires. Once completed, the researcher personally collected the questionnaires from respondents in Nairobi, while those from outside Nairobi were received online. Findings of the study indicate that the capital budgeting techniques used by Water Services Boards in Kenya include Net Present Value, Internal Rate of Return, Profitability Index, Average Rate of Return and Payback Period. The findings further show that the Factors that Influence the choice of capital budgeting techniques include: - Cost of debt to the Water Service Board, either from public or private sources; Internal Rate of Return; Average cost of capital for its stakeholders; Average rate of return on equity invested by the Water Services Boards; and Risk associated with the project. The findings also point at a positive relationship between usage of capital budgeting techniques and organizational performance. Improved access to funding to undertake projects and informed decision making were cited by the respondents as being the major benefits of adoption of capital budgeting techniques.

Keywords: Capital Budgeting, Performance, Water Services Boards