Deal with the parastatal elephant in the room

(Part 2)

Kenya is an interesting place. A couple of months ago, the National Assembly’s Budget and Appropriations Committee proposed the creation of a special fund to sort out our pending bills monster, which is public debt.

Then this week, the Assembly’s Committee on Delegated Legislation shot down the Public Finance Management (Sinking Fund) Guidelines of 2021; a proposal by the National Treasury to ring-fence funds to manage our debt mountain.

The rejection wasn’t about high-sounding fiscal or financial rationale, just that there was no public participation.

This is the same week it was also reported that we might need International Monetary Fund (IMF) resources to manage our debt to China, or as one blog caustically put it “Borrowing from IMF to pay Kung Fu”.

The real story is that China’s reported reluctance to further extend its debt service suspension to Kenya will leave Treasury with a budget hole that it wants to plug using IMF resources.

Then there were last week’s fuel price rises, which despite public uproar, will have deleterious trickle-down effects exactly when we are busy debating bottom-up economics.

Wait! On October 1, inflation-adjusted excise duty rates will kick in. Kenya Revenue Authority (KRA) wants a 4.97 per cent top-up. Super petrol at Sh140? You couldn’t make this up if you tried!

Let’s go back to pending bills. The numbers keep morphing, but a rough, worst-case estimate is Sh460 billion at the end of last June. That’s Sh360 billion at national government level and Sh100 billion in counties.

For the avoidance of doubt, that’s cash that isn’t circulating back to private sector for goods delivered and services rendered. Think profitability, liquidity and non-performing loans right there. But it’s also cash for individual pension savings and statutory NSSF and NHIF remittances.

Based on past data trends, I reckon at least 80 per cent (Sh290 billion) of those national government bills are sitting in our cash-strapped state corporations that have turned to long-term borrowing to fund payrolls and running costs, even as Treasury continues to mop up those with surplus cash and treat it as revenue.

Remember that 127 out of our 247 corporations were loss-making in the 2019/20 fiscal year.

Debt. Pending bills. Fuel price hikes. This is as much about the spending side of our fiscus as it is about economic dystopia. We have budget abracadabra on the one hand, and casino economics on the other. Big government, you say. It’s the unaffordable constitution, Treasury adds.

Let’s quickly test the idea using, yes, IMF’s fiscal transparency evaluation for Kenya published in 2016 and updated in 2020.

One answer that the IMF sought was how many government entities exist in Kenya, in its effort to construct a public sector balance sheet. So we have broadly comparative pre and post-constitutional data. We learn that we had 547 government entities in 2012/13.

Ceteris paribus (all else remaining constant) with 47 counties replacing 175 local authorities, this number should have dropped to 419.

Well, guess what? Their 2017/18 estimate is 519 government entities, or 100 more. Where is this institutional inflation coming from? Mostly what they classify as “budgetary central government” and “autonomous and semi-autonomous extra-budgetary units”.

One imagines that anything in government that is “extra” would raise eyebrows. Then again, we probably haven’t done the counting ourselves.

BIG GOVERNMENT OR BAD GOVERNANCE?

Let’s leave that analysis for another day, as I revisit my second favourite elephant in our fiscal room, the state corporations we also call parastatals. As if the red flags from the IMF and World Bank aren’t enough, we get more from the latest Financial Sector Stability Report.

In what was admittedly a difficult Covid-19 year, the report highlights cheap imports and poor corporate governance as added reasons for poor parastatal performance in 2020. But it’s more.

Poorly performing state corporations affect households as well as the business ecosystem. Let’s throw in World Bank data for perspective. Its 2018 Enterprise Survey for Kenya found that at least one fifth of private sector had contracts with government at the time.

While that sounds conservative, the real kicker is that SMEs account for 75 per cent of this proportion.

Simply, our state corporations are strangling our SME agenda even as they reach out with begging bowl to Treasury for emergency support that it can’t afford because of a sub-optimal tax take that is probably on account of low profitability among SMEs (or at least the tax paying ones). Mind boggling!

The report raises real fiscal risk and financial sector stability concerns. How many red flags do we need?

Then there are those 18 strategic (as in high systemic fiscal risk) parastatals on the IMF’s radar. The last we heard from Treasury, four large service providers were profitable (Kenya Ports Authority, Kenya Pipeline, Kenya Airports Authority, KenGen) and two were unprofitable (Kenya Power, Kenya Railways).

Four more were perennial loss-makers (KBC, East African Portland Cement, Postal Corporation, Post Office Savings Bank) and the other eight –classified as social service providers – are operating below cost recovery. Liquidity gap over the next five years? Sh382 billion. Next steps? More analysis.

Can we get proper parastatal reform going ourselves? It’s 2021, not 2013!