Income generating Units have been in operation in the public Universities since their inception in 1990s. Their establishment was meant to cushion the Universities from the effects of the reduction of Government capitation to finance their recurrent and capital expenditure. The Government of Kenya was the sole financier of higher education until 1991 when it became unable to fully finance this education. To find a way out of this fiscal distress, Public Universities were called upon to implement new ways of generating extra income to supplement the ever decreasing capitation from the Government. As a wakeup call, Public Universities initiated various income generating activities which include Module II Programme, Research & Consultancy services, Commercial ventures like hotels, hospitals, fuel stations and general production units, among others. However, most Public Universities are still suffering from financial distress despite the creation of these IGUs. The study sought to evaluate the contribution of the IGUs in financing Public Universities. The study was conducted in Egerton University and its former constituent colleges by December, 2012 and the results were inferred to represent all Public Universities as they are managed by same legal and financing structures. The study population consisted of 22 deans, 2 directors of institute 14 IGU managers and 4 Finance Officers in Egerton University and its Constituent Colleges. A census was conducted on all the 42 members of staff as the group was small and manageable hence there was no need of further sampling. Data was collected using self administered questionnaires and documentary records. Data analysis was done using descriptive statistical analysis where frequency, means and percentages were used. Financial ratio analysis were employed to analyze the financial performance of the IGUs over a period of ten years from 2003-2012. Data presentation was in form of tables and pie-charts. A correlation statistical analysis was performed to establish the relationship of IGUs and University expenditure. The findings indicated that the IGUs are contributing very little to financing public Universities expenditure. To improve the financial performance of the IGUs in Public Universities, there is need to have a radical change in planning and execution of IGUs and also establishment of investment companies to manage the IGUs. Public Universities should also set clear guidelines on utilization of the internally generated funds. For further research it was suggested that a similar study can be conducted in other Public Universities and also a study on factors affecting financial performance of IGUs in Public Universities.

Background of the Study 
Universities all over the world are regarded as engines of economic and suitable national development. They are veritable tools for the realization of national development; the development of cultured citizens and promotion of basic research. University education is therefore the most powerful and critical success factor for individuals and the society (Aina, 2007). For Universities to effectively perform their roles there must be adequate funding. The Kenyan government’s priority to Universities in terms of funding has declined and this has limited the ability of the Public Universities to effectively and efficiently perform their duties, particularly the traditional roles of teaching and research. 

The problem of underfunding of Kenyan Public Universities is a consequence of the expansion of the higher education in response to the growing demand for the University education and the intensifying needs of modern economy driven by knowledge, without an increase in the corresponding available resources (Kiamba, 2005). This have had effect on Universities’ core business of teaching and research where the quality has fallen considerably because of lack of adequate teaching and research materials, among others. Furthermore, effects of inadequate funding are evident in the fact that the physical facilities in the Universities are in a state of despair and several capital projects have been abandoned (Kiamba, 2005). 

At the time of Kenya’s independence, shortage of skilled labour was a major constraint to the achievement of the government’s development goals. To address this challenge, the Kenyan government has consistently devoted a large share of its budget to expansion of education. For instance, the education sector took up to 29 per cent of the total government budget in 1998 and remained high of 27 per cent in the fiscal year 2004/2005 (Republic of Kenya, 2006). In 2011/2012, the government allocated Ksh. 149.4 billion to education sector which was 13% of the total National budget (Republic of Kenya, 2011). During the 2012/2013 fiscal year, the government raised the allocation to 233.1 billion shillings translating to 16% of the total National budget (Republic of Kenya, 2012). Whereas the cost of education is borne both by the public and private sectors of the economy, the share of public expenditure on education is becoming a major issue, now than ever before; given that it is weighing very heavily on the exchequer. In an attempt to address this problem, the government, through Sessional Paper No.1 on Economic Management for Renewed Growth, reduced the budget on Education from 38 per cent to 30 per cent (Republic of Kenya, 1986). The objective was reiterated in the Sessional Paper No. 6 of 1988 on Education and Man Power Training for the Next Decade and Beyond, where the government asserted among other things that in order to halt the increasing claim of the educational sector on national resources, it would introduce a cost sharing system through which both public and private sector expenditures of education would be rationalized (Republic of Kenya, 1988). 

The government in the cost-sharing policy shifted the responsibility of acquiring resources to the local communities and schools. In addition, the government emphasized that the resources needed to be acquired and put to the best use in judicious management process. As regards this need, the government, in part, expected that various resources available to education institutions including land, finances, staff, time, facilities and equipment are managed properly and utilized in the most cost-effective manner to bring about efficient provision of quality and relevance in education (Republic of Kenya, 1988). 

Over the years, Public Universities in Kenya had to innovate in order to cope with increased competition and diminishing capitation, particularly, from the treasury. Apart from this, the perception of Universities as merely institutions of higher learning is gradually giving way to the view that, Universities are important engines of economic growth and development (Kiamba, 2005). Since 1990, Public Universities have continued to receive less financial allocations from the government than their estimated expenditure. This has resulted to the accumulation of debts, delayed payments to suppliers and delayed payments to SSP service providers, among others. According to a report of Ministerial Public Expenditure Review in 2005, there was a strong indication that the government was no longer able to fully finance Public Universities. Session Paper No. 1 of 2005 on Policy Framework for Education, Training and Research, clearly stated that University education is particularly expensive to Government and is not sustainable within current resources (Republic of Kenya, 2005). 

The need for Public Universities to diversify their activities to include income generation formed the thrust of the speech by the Chancellor and the then President of the Republic of Kenya during the University of Nairobi 1994 Graduation Ceremony. The evolving Government policy in this regard was further emphasized by the then Minister of Education by asserting that, this was a turning point in the development of Public Universities, where they were being called upon to adopt business-like financial management styles. This meant that, Public Universities had to plan well ahead about resources expected to be forthcoming from sources other than the Exchequer. 

The problem of under-funding in Public Universities is not surprising considering the fact that, in the recent time, government revenues have not grown in proportion with its expenditure. The government which statutorily bears the cost of higher education in the country now faces tight budgets constraints due to the collapse of various industries and harsh climatic conditions affecting Agriculture, which is the major economic activity in the country. Government priority to education has continued to be very low, while funding of Universities by the government is declining very fast (Kiamba, 2005). As a wakeup call to the problem of under-funding on higher education, Public Universities resorted to various income generating projects to supplement their income. The purpose of these Income Generating Units (IGUs) was to supplement the ever declining government capitation and deliver the Public Universities from the financial hardship. Academically, Public Universities have been affected by the problem of underfunding, which includes reduction in research grants, curtailment in purchase of library books, chemicals and basic laboratory equipment, reduction in attendance of academic conferences and limited number of academic field trips, among others. 

Despite these efforts, Ngolovai (2006) observe that regardless of the various innovative methods introduced to generate additional income, Universities economic situation is still precarious, that the income generation measures that have been introduced only offsets a fraction of the huge financial burden facing the Universities. This raises key questions: how can Universities fill these financial gaps? Do these schools have the capacity or the ability to significantly generate additional income for Universities?

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Item Type: Kenyan Topic  |  Size: 99 pages  |  Chapters: 1-5
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