On June 30, 2020, the Ministry of Health paid Sh751.4 million to a supplier. The payment left the ministry with a balance of Sh1 billion, which continues to attract 2 percent compound interest monthly.
The payment is related to Sh57.3 million worth of goods that the supplier delivered to the ministry back in 1996.
Had the ministry honoured its contract with the supplier and paid the Sh57,356,951 some 25 years ago, taxpayers would have been saved from the current burden of having to pay Sh1.75 billion.
By the time the government completes paying, taxpayers will have paid more than 30 times the cost of goods supplied, in a case that best portrays the heavy cost of pending bills in government, caused by impunity in breaching procurement laws.
The Sh751.4 million paid last year was 13.1 times the original amount owed to the supplier, and the Sh1.75 billion is 30.5 times (or 3,053.5 percent) of the Sh57.3 million.
All this has come out of a lawsuit filed by the supplier in July 2000, suing the ministry for failing to pay for the goods supplied in 1996.
“Information availed indicated that the goods supplied amounted to Sh57,356,951 while the claim for loss amounted to Sh20,410,831 totaling to Sh77,766,832,” Auditor-General Nancy Gathungu notes in the 2019/20 audit report for national government.
“On October 9, 2015, the court awarded the supplier Sh1,862,302,792 for the pending amount, outstanding accounts and for lost profits. This comprised the principal amount of Sh77,766,832, legal fees of Sh26,602,660 and compounded interest of 2 percent per month from May 31, 2000 running to the date of judgement.”
The ministry was forced to negotiate with the supplier to revise the amount downwards to Sh1.75 billion, since it had risen to over Sh3.1 billion by 2017.
In her report faulting the Ministry of Health’s Sh41.6 billion in pending bills, the Auditor-General notes that most of the debts taxpayers will end up paying have resulted from the ministry’s negligence, and lack of interest in defending itself in courts.
“It is not clear why the ministry did not appeal the ruling considering the effect the award was to have on (its) budget and the precedent created, which is likely to result in similar action by other suppliers,” the report says.
Ms Gathungu also faults the ministry for failing to seek court orders to stay payments of huge awards to suppliers and stop the interest from accruing further, reservations that have previously been expressed by the Solicitor-General.
In another case exposing huge financial burdens transferred to taxpayers, all resulting from its failure to honour contracts, the Ministry of Health entered into a Sh1.15 billion one-year contract with a supplier - Equipment Agencies Ltd – to deliver insecticides, malaria control equipment, drugs and protective clothing between July 14, 1996 and June 30, 1997.
But the ministry failed to pay the supplier after the goods were delivered, resulting in a court case whose determination in favour of the supplier will see taxpayers cough up Sh15.25 billion to settle the debt. This means Kenyans will pay Sh14.09 billion more than (or a 1,217.1 percent jump from) the original cost.
“Available information indicates that the court awarded the supplier Sh1,862,302,792 plus compounded interest at 18 percent per annum from March 1, 1999 to January 31, 2020 amounting to Sh80.5 billion,” the auditor says.
“However, upon negotiations out of court, the award was revised to Sh15.25 billion resulting in an escalation of Sh13,387,697,208 from the initial award of Sh1.86 billion.”
In a third case, still touching the Health ministry, a business that supplied haemoglobin scale books and throat swabs, insulin, surgical dressing and sutures and disposable needles for Sh196.8 million between 1992 and 1993 will walk away with Sh17.8 billion (or 90 times and 9,061 percent of the original cost).
“The agreement provided that payment was to be made strictly within 30 days from the date of the invoice or delivery of the goods and any delay in payment would attract interest at 1.5 percent or 2 percent per month on outstanding amount,” the report says.
“As at June 30, 2020, the claim by the supplier stood at Sh17.8 billion, which translates to an increase of Sh17.6 billion from the initial amount.”
By the close of the 2019/20 financial year, the ministry had a pending-bills balance of Sh41,659,573,232, but auditors could not confirm their completeness and validity, observing that it could not be confirmed that there was value for money.
The debts were forwarded to the 2020/21 financial year, further continuing to accrue more costs to the government.
“Included in the pending bills balance of Sh41.6 billion as at June 30, 2020 is an amount of Sh80.4 million in respect of 15 companies whose copies of original documents including certificate of incorporation, tax compliance, pin certificate and confidential business questionnaire were not availed for audit verification,” the report noted.
“Further, the invoices and delivery notes for the companies provided for audit were computer generated with the same numbers and the local purchase orders raised were not signed.”
Appearing before a parliamentary committee last year, Health Principal Secretary Susan Mochache said the ministry had resorted to resolving the debts out of court with suppliers, after courts kept awarding them huge amounts for their unpaid supplies and breached contracts.
“We will be meeting the two suppliers, officials of the Attorney-General and Ministry of Finance to negotiate on this huge bill,” Ms Mochache said, acknowledging to MPs that of the Sh41 billion in pending bills in the Health ministry at the time, 90 percent arose from court awards.