There has been a furore over unpaid debt by counties in recent months amid concern about the authenticity of some of the claims. Traders and suppliers have made claims amounting to billions of shillings in unpaid dues for goods and services.
Several county bosses, however, termed some of the claims fictitious and vowed not to pay up. The hubbub has caught the attention of the National Treasury, which has also doubted the legitimacy of some of the pending bills and swiftly moved to implement a raft of measures aimed at curbing fraud.
As part of the reforms, counties will soon be required to start disclosing their liabilities on a monthly basis in a new push by the Treasury to mitigate accumulating bills at the devolved units.
Treasury Cabinet Secretary Henry Rotich says the ministry has initiated the review of accounting standards for the 47 counties to include disclosures on assets and liabilities starting July 2020.
The Treasury is working with the Public Sector Accounting Standards Board (PSASB), a State agency that sets financial accounting and internal audit guidelines for the public sector, on tightening rules on managing assets and liabilities.
“These are preparatory steps for a possible future migration to accrual accounting, which PSASB has indicated to commence in FY (financial year) 2020/21,” says Mr Rotich in the draft 2019 Budget Policy Statement, which forms the basis for the budget in the year starting July.
“This will further enhance closer monitoring of county governments’ pending bills as they will have to be recognised on the face of financial statements. Adequate documentation of pending bills and assets will also facilitate their handover between county government regimes.”
The counties had by end of last financial year in June 2018 accumulated Sh108.41 billion claims from contractors and suppliers, a steep climb from Sh35.84 billion the year before, statistics by the Controller of the Budget show.
The bills piled partly because some of the new county regimes bulked at some of the unpaid bills, exposing loopholes in the current accounting method the devolved units use, which only require them to capture cash inflows and outflows. Mr Rotich says the Treasury is considering intervening in cases where some counties have defaulted on payments amounting to more than Sh1 billion for more than 90 days.
The Treasury minister in mid-December directed Auditor-General Edward Ouko to conduct a special audit of pending county bills for purposes of paying off the genuine ones.
“Such failure by county governments to make payments as and when due, or default on financial obligations may indicate material breach of legally-established measures,” says Mr Rotich, citing section 94(1) of the Public Finance Management Act.
“If any county is in breach, this will trigger the national government’s intervention as per Article 225 of the Constitution.”
That section of the Constitution empowers the minister to temporarily freeze the transfer of not more than half of funds to affected counties as part of correcting measures for violating prudential financial guidelines.
The accumulating arrears have hit hard businesses, including the dominant small- and medium-sized enterprises (SMEs), most of which had taken out loans to deliver on the contracts.
Nairobi had Sh64.80 billion in arrears owed to suppliers and contractors over two years through June 2018, the annual budget implementation review report for 2017-18 by the Office of Controller of the Budget released last September indicate, nearly half of the total pending bills for the counties.
Other counties, which had huge unpaid bills amounting to more than Sh1 billion were Mombasa (Sh3.71 billion), Wajir (Sh2.62 billion), Nakuru (Sh2.38 billion), Kisumu (Sh2.05 billion), Meru (Sh2.00 billion), Kwale (Sh1.83 billion) and Narok (Sh1.73 billion).
Others were Nyeri (Sh1.41 billion), Nandi (Sh1.35 billion), Nyamira (Sh1.35 billion), Embu (Sh1.28 billion), Kericho (Sh1.26 billion), Kilifi (Sh1.22 billion), Vihiga (Sh1.18 billion), Kitui (Sh1.17 billion) and Bomet (Sh1.16 billion).
Mr Rotich had earlier blamed governors, who took over reins in August 2017, for stalling settlement of the bills incurred during the tenure of their predecessors.
“In general, pending payments older than 90 days constitute a fiscal risk with major potential consequences to the economy, and County Accounting Officers are legally required to update the National Treasury on a monthly basis,” he says in the BPS.
Most counties have struggled to generate own revenue from sources such as property tax, business permits, liquor licences, vehicle parking fees and building permits, breaching the 35 per cent limit on wage bill expenditure as a share of total revenue.
For example, Nairobi, Machakos, Embu, Laikipia and Wajir blew more than half of their total income on wages last financial year ended June.
“Improvements in the delivery of devolved services can be sustained only if county governments adhere to existing fiscal rules,” Mr Rotich says.
“For this reason, beginning FY 2019/20, the National Treasury will renew its focus on enforcing compliance with the Fiscal Responsibility Principles — particularly legal thresholds for wage bill and development spending.”