Counties risk a freeze of up to half the share of funds from the national government over Sh108.41 billion bills owed to contractors and suppliers at the end of last financial year in June 2018, the National Treasury has warned.
Treasury secretary Henry Rotich said the national government may be forced to intervene in cases where counties had defaulted on payments amounting to more than Sh1 billion for more than 90 days.
The move offers some relief to cash-strapped businesses contracted by the counties.
It will, however, depend on the findings of the Office of the Auditor-General, which in mid-December invited contractors and suppliers owed by the counties to lodge claims with respective County Executive Committee (CEC) members for Finance by end of last month.
The government auditor, who is acting on instructions from Mr Rotich in carrying out the special audit, is this month expected to start verifying the claims to determine whether or not they were genuine and reasons for breach of payments.
“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,” said Mr Rotich in the draft Budget Policy Statement (BPS) published last Thursday, 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 Finance secretary to stop the transfer of not more than 50 per cent of funds to counties or any other state organ in breach of rules for up to 60 days.
The Treasury’s decision may be enforced immediately, “but will lapse retrospectively unless, within 30 days after the date of the decision, Parliament approves it by resolution passed by both Houses (National Assembly and Senate)”.
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.
Banks have equally been hit as they have been forced to provide cash for defaults by the SMEs, which had used the strength of local purchase orders to sign off loans.
That ate into their profit and prompted them to tighten lending conditions for the small businesses.