Parastatals, including public universities, racked up Sh122.7 billion in additional arrears to contractors, suppliers, and regulators in 12 months through March, signalling worsening cash positions for State-run entities.
Data released by the Treasury shows that pending bills for State corporations surged to Sh385.6 billion from Sh262.9 billion in March 2021.
The accumulation of unpaid bills jumped despite the Treasury repeatedly issuing circulars to State entities from 2019 to prioritise payment of debts, especially to contractors and suppliers to support economic growth and sustain jobs.
Rising supplier debt at national and county levels has deepened cash flow challenges for firms, especially the micro and small-sized, forcing some of them to close down.
“The national government policy on clearance of pending bills continues to be in force,” the Treasury wrote in the expenditure and budget review report for the third quarter of the current year ending June. “All MDAs [ministries, departments, and agencies] are, therefore, expected to continue with prioritisation of payment of the pending bills by settling them as a first charge in the FY 2021/22 budget in line with the Treasury Circular No. 7/2019.”
The circular followed President Uhuru Kenyatta’s directive in June 2019 that ministries and parastatals should prioritise verified arrears in their expenditure plans.
Treasury statistics show that supplier debts accumulated by State corporations made up 88.7 percent of the Sh434.5 billion pending bills at the national level by end of March, up from Sh307.8 billion a year earlier.
The remainder of Sh48.9 billion was owed by ministries, departments and agencies (MDAs), an 8.9 percent growth over Sh44.9 billion the prior year.
The unsettled obligations include payments to contractors of State projects, suppliers of goods and services as well as unremitted statutory deductions like payroll taxes, pension and medical cover contributions.
The Treasury data shows about Sh227.89 billion of the parastatals’ arrears are owed to contractors of public projects and suppliers of goods and services, a 38.91 percent jump over Sh164.05 billion the year before.
The remainder Sh157.71 billion debts are in form of unremitted statutory and other deductions, which jumped 59.54 percent from Sh98.85 billion a year earlier.
These include Pay As You Earn taxes to the Kenya Revenue Authority, pension contributions to the National Social Security Fund and other private retirement schemes as well as medical cover arrears to the National Hospital Insurance Fund and other insurers, among other obligations.
“Continued delays in payment of pending bills to entities that provide goods and services to both national and county governments have affected liquidity and operations of these entities. In a number of cases, this has led to the closure of businesses, affecting livelihoods of the suppliers,” Treasury Cabinet Secretary Ukur Yatani said on April 7.
Mr Yatani in February shot down a resolution by lawmakers directing the Treasury to borrow money to clear accumulated debts to suppliers and contractors as well as court fines on grounds that this would burst the country’s Sh9 trillion debt ceiling.
Human rights violations
The Treasury wrote in the Supplementary Budget Report tabled in the House on February 1 that Kenya had no room to borrow more than Sh500 billion to clear pending bills for goods and services rendered as well as court awards for contract breaches, unlawful dismissals and human rights violations.
The Budget and Appropriations Committee of the National Assembly had last June resolved that the Treasury set up a special fund to be financed through a long-term debt to pay off verified pending bills and court awards.
“Payment of existing pending bills and court awards through issuance of long-term bonds may not be tenable at the moment given the prevailing fiscal environment in view of magnitude of these bills,” Mr Yatani said.
“Creation of a fund for such a purpose will require clear justification as provided for in section 2017(b) of PFM (Public Finance Management) Regulations 2015 which oblige that the functions and other public services to be delivered through a fund should be those that cannot be delivered through the structure of budget appropriations.”
However, some State entities have in the latest sector budget proposal reports accused Treasury of not allocating sufficient funds for clearing pending bills despite asking them to treat them as a first charge in the budget.
Association of Public Sector General Suppliers said earlier in the year that 3,400 of its 4,100 members were owed cash dating as back as 2014.
“The lack of clear penalties and personal liabilities on the part of the government staff handling procurement and payment is to blame,” the lobby’s secretary-general, Simon Gichuki, said.
Mr Yatani has said the Treasury was considering drafting a legal framework that would penalise accounting officers for failure to honour verified bills for goods supplied or services rendered to State entities as a first charge.
“Government is exploring legal mechanisms to resolve the issue of pending bills,” Treasury officials wrote in the Budget Policy Statement (BPS) for 2022. “The accounting officers will be compelled to clear pending bills and failure to do so, penalties will be charged against the accounting officers.”