Kenya’s new President will inherit more than Sh500 billion owed to suppliers and contractors by ministries and State agencies in bills that have exposed many small and medium-sized businesses to closures and auctions.
Latest Treasury statistics show pending bills climbed to Sh504.7 billion at the end of the last financial year in June, a 40.39 percent jump over Sh359.5 billion the previous year, making it the biggest annual jump on record.
Cash-strapped parastatals, including public universities, account for the largest share of the unpaid bills, which is hurting cash flow among suppliers and contractors with State deals.
Many Kenyan small and medium-sized businesses bid for government contracts because the State is the biggest spender in the country.
The arrears have continued to mount amid tough rules requiring payments be made within 60 days of goods or services being supplied.
Surprisingly, half of the Sh145.20 billion new arrears for the last financial year were accrued in the April-June period after Treasury Cabinet Secretary Ukur Yatani directed State entities to clear verified bills before the year closed in June.
“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,” Mr Yatani warned when he delivered the last Budget Speech of the outgoing Jubilee administration on April 7.
“In a number of cases, this has led to the closure of businesses, affecting the livelihoods of the suppliers.”
The late payments are in turn hitting the financial sector, where lenders are saddled with non-performing loans that jumped to new highs in the wake of Covid-19 economic hardships.
The mounting unpaid bills largely by cash-strapped parastatals, including public universities, have led to asset seizures by banks, triggering business closures and joblessness.
A large number of business people who have contracts with the government have ended up being blacklisted by credit reference bureaus after falling behind on loan repayments or defaulting, hurting chances of borrowing in future.
Auctioneers say repossessions among government suppliers had increased in recent years, highlighting the risks of doing business with the State.
The unpaid bills burden is one of the economic headaches in the overflowing in-tray of the incoming president.
After a fiercely fought presidential election race, Deputy President William Ruto won 50.5 percent of the vote against opposition leader Raila Odinga’s 48.8 percent, according to results declared by the electoral commission’s chairman, Wafula Chebukati.
Mr Odinga rejected the results, signalling another Supreme Court battle.
Whoever takes office will have to steer a Covid-battered economy, rising food and fuel prices spurred by the war in Ukraine, the worst drought in four decades and soaring public debt.
The Association of Public Sector General Suppliers (APSGS) is collecting signatures from members with a view to seeking legal interpretation on how the mounting pending bills will be paid by the new government.
APSGS secretary-general Simon Gichuki says the lobby — which claims 3,400 of its 4,100 members are owed cash dating back to 2014 — has received documents on arrears amounting to Sh38.4 billion ahead of September 1 when the class-action lawsuit is expected to be filed.
“The biggest worry is that most of the new [national and county] governments are afraid of paying the old bills when they come into office. This is because of obvious fears like there might have been corruption and this will create a problem for them or if they pay, they may not have enough money for their own projects,” APSGS secretary-general Simon Gichuki told the Business Daily in an interview.
“What we are seeking is a structure of protecting suppliers in this country because as a supplier you’re always at the mercy of the outgoing and incoming government. We have been christened as the most corrupt, and that is a sad thing.”
Treasury data show 88.88 percent or Sh448.6 billion of the pending bills were accumulated by State corporations which are largely governed by independent boards — a 38.80 percent jump over Sh323.2 billion the year before.
The remainder Sh56.1 billion is owed by ministries, departments and agencies, which increased 54.5 percent over Sh36.1 billion a year earlier.
The soaring pending bills have become a major economic challenge despite President Uhuru Kenyatta’s directive in June 2019 that ministries and parastatals should prioritise verified arrears in their expenditure plans.
This has been followed by repeated circulars by Mr Yatani asking State agencies to comply in a bid to support economic growth and sustain jobs.
However, the Budget and Appropriations Committee of the National Assembly warned in June 2021 that the arrears had accumulated to levels which could not be settled through annual budgetary allocations.
The committee recommended that the Treasury sets up a special fund to be financed through a long-term debt to pay off verified pending bills for goods and services rendered and court awards for contract breaches, unlawful dismissals and human rights violation.
Mr Yatani, nonetheless, shot down the recommendation, writing 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 the surging pending bills.
“Payment of existing pending bills and court awards through the issuance of long-term bonds may not be tenable at the moment given the prevailing fiscal environment in view of the 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.”