Treasury: State corporations owe Sh400bn in pending bills

Treasury Cabinet Secretary Njuguna Ndung'u

Treasury Cabinet Secretary Njuguna Ndung'u speaks during a handover ceremony on December 6, 2022.

Photo credit: Diana Ngila | Nation Media Group

 Kenya’s 160 state corporations recorded Sh400.68 billion in pending bills as at December 31, 2022, the latest data from Treasury shows, even as the government works to scale down the figure.

The data presented to the National Assembly does not include figures from government ministries, state departments, constitutional commissions and independent offices, meaning that, combined, the pending bills figure could be much higher.

This figure paints a chilling picture to suppliers and government agencies who rely on statutory deductions from staff members in the public and private sectors for the National Social Security Fund (NSSF) and the National Health Insurance Fund (NHIF).

Controller of Budget (CoB) Margaret Nyakang’o said this latest figure is Sh14 billion less than what was recorded as at December 31, 2021.

“The government is trying all it can to ensure the pending bills are cleared within the required time, to safeguard the suppliers from the auctioneer's noose,” said Dr Nyakang’o.

The pending bills include Sh166.99 billion in unpaid contractor projects, Sh115.7 billion owed to suppliers, Sh21.82 billion pension arrears and Sh2.96 billion in unpaid staff loan deductions.

The amount also covers unremitted statutory deductions that include Sh9.25 billion Pay As you Earn (Paye) to the Kenya Revenue Authority (KRA), Sh991.29 million in staff sacco deductions, Sh95.55 million to NSSF and Sh72.42 million for the NHIF.

Some Sh82.8 billion is categorised as ‘others’.

Various individuals who have previously done business with government agencies have been auctioned by financial institutions that advanced them credit while others have died or been hospitalised due to the negative health effects of the demand to pay off loans.

Interestingly, the pending bills figures have not been captured in the 2023 Budget Policy Statement (BPS) currently before Parliament for consideration. It is not clear whether it is by design or default.

The BPS only captures the pending bills of county governments, which total Sh25.1 billion.

Broken down, state corporations under housing and urban development have a combined pending bills figure of Sh167.24 billion while agencies under infrastructure have bills of Sh116.5 billion. The Kenya National Highways Authority (KeNHA) has the highest figure at Sh70.2 billion while the Kenya Urban Roads Authority (Kura) has Sh46.3 billion.

Those under energy have bills of Sh86.6 billion, with Kenya Power the highest at Sh74.2 billion. The State Department for Crop Development has Sh74.6 billion and Nzoia Sugar Company Sh55.1 billion.

Fisheries, aquaculture and the blue economy has Sh72.33 billion, those under health Sh64.6 billion and transport Sh49.89 billion, with Kenya Railways Corporation (KRC) at Sh28.03 billion and the Kenya Airports Authority (KAA) at Sh21.5 billion. Vocational education and training has Sh29.88 billion and industrialization Sh9.56 billion.

Finding solutions

The adopted report of the Budget and Appropriations Committee (BAC) on supplementary budget I, for the 2022/23 financial year, recommended that the Office of the Controller of Budget, in collaboration with the auditor-general and attorney-general, develop an enforceable framework to manage further accumulation of pending bills and report this to the National Assembly by June 30, 2023.

The committee made the recommendations to support the government’s fiscal consolidation efforts.

Owing to the huge pending bills under the State Department for Transport, the National Assembly approved use of Sh12 billion from the annuity fund to approved road projects and that “the same be refunded from the exchequer in future appropriations to the annuity fund based on yearly requirements”.

“The alternative financing from the annuity fund is to avoid interest and other penalties on delayed payments for road projects,” the adopted report reads.

Pending bills occur as a result of delayed exchequer releases, supplementary budgets that cut funds already committed elsewhere and variations in costs due to delayed payments, among other reasons.

The Constitution states that pending bills shall form the first charge on the budget of the concerned government agency in the subsequent financial year.

It also warns that continued accumulation of pending bills distorts implementation of the budget of the government agency in question.

Section 94 (1) of the Public Finance Management (PFM) Act of 2012 states that failure to make any payments “as and when they fall due” by a state organ or a public entity “may be an indicator of a serious material breach or a persistent material breach of measures established under the law”.

To ensure pending bills are paid in time, Article 225 of the Constitution and section 96 of the PFM Act give the Treasury Cabinet secretary powers to stop transfer funds to the concerned state organ.

Section 25 (8) of the PFM Act prescribes that the CS shall take into account resolutions passed by Parliament in finalising the budget for a given financial year.

The National Assembly approved the 2021 BPS on March 4, 2021 and the 2022 BPS on February 24, 2022.

Section 38 (1) (iii) of the PFM Act requires the CS to prepare a memorandum explaining how resolutions adopted on the BPS have been taken into account. 

A serious fiscal risk

The resolutions of the House on the 2021 BPS was that during finalisation of budget estimates, Treasury should take into account pending bills and ensure funds are adequately provided for within the approved expenditure ceilings.

The action taken by the Treasury as captured in the BAC report is that the national government and counties will continue to prioritise payment of all pending bills as a first charge on the 2023/24 budget.

The 2023 BPS notes that state corporations can be a major source of fiscal risk to public finances “if they underperform financially”.

“While the government has a stake in the state owned enterprises and other government investments in public companies, its contractual obligations may be limited,” the BPS reads.

However, due to the strategic nature of the state-owned enterprises and public companies,  given the national interest and the overall impact of their failure on the economy, the government may be morally obligated to bail out state-owned enterprises and public companies in financial distress.

“This may pose serious fiscal risk and challenge to budget implementation,” the BPS says.

Although the government has made a strong commitment to social protection across the population, delays in remitting pension deductions by state agencies remains a concern.

The pension plan of the national government covers the workforce in both formal and informal payrolls.

Of those in formal employment, a majority serve in the public service, with their pension administered under the Public Service Pension Scheme (PSPS) in the Treasury’s pensions department.

The benefits accrued under the scheme are budgeted for and drawn directly from the Consolidated Fund Services (CFS).

In the 2021/22 financial year, the government allocated Sh120 billion to the defined pension scheme. The budget was increased to Sh146 billion in the 2022/23 financial year to reduce the fiscal risk associated with the unexpected increase in pension payment.

The government plans to increase the allocation to Sh163.53 million in the next financial year.

“To mitigate the fiscal risks involved, the government will ensure timely remittance of the required contribution to defined contribution schemes to reduce possible litigation costs and encourage appropriate investment choices.”