IMF: Half of all public projects have stalled

Half of the 1,000 public projects being implemented in Kenya have stalled and will require a staggering Sh1 trillion to complete, the International Monetary Fund (IMF) has disclosed, raising concerns about the country’s planning and public spending decisions.

The huge number of stalled projects, which comes with delayed payments to contractors, is a major contributor to the cash crunch in the private sector that has precipitated job losses and reduced cash in people’s pockets with latest Central Bank of Kenya (CBK) data showing that the cash circulating outside banks dropped to Sh176.9 billion in September — the lowest since September 2015.

“The number of stalled projects is increasing, and is currently estimated at approximately 500 (half of all ongoing projects), because of non-payment to contractors, insufficient allocation of funds to projects, and litigation cases in court,” the IMF said in a fiscal transparency evaluation update on Kenya released on Wednesday, but which was finalised in August 2019.

“Expenditure estimated at Sh1 trillion (12 percent of GDP) is required to finalise these projects,” it further says. “The rapid increase in public investment since 2010 occurred without enough screening for project viability and readiness before they entered the budget”.

The Bretton Woods institution noted that lack of effective gatekeeping has allowed many new projects to enter the budget pipeline — creating challenges in the financing of ongoing projects.

Many of the public projects lack a cost-benefit analysis as well as standardised appraisal and selection plans, effectively failing to match expenditure to available financial resources and producing white elephant projects.

The disclosure follows meetings between the IMF and top officials from the National Treasury, the Central Bank of Kenya (CBK), the Kenya Revenue Authority (KRA), the Kenya National Audit Office (KENAO), the Controller of Budget (CoB) and other government agencies, parastatals and regulators that handle or oversee public projects in preparing the report.

Revenue performance has failed to hit target at the same time, meaning that the government has had to borrow heavily to finance these projects.

Servicing the debt and financing a large recurrent expenditure bill takes up the lion’s share of State revenue, leaving the Treasury unable to pay development expenditure bills and thus stalling projects.

The period leading up to the 2017 General Election in particular saw a significant increase in project launches — particularly roads — by the Jubilee and county governments as they tried to win over voters.

Many of these were not budgeted for, and the shift by the government after the elections in development spending focus to the Big Four aligned projects has left many of them incomplete.

The pending bills issue has now become one of the major sticking points in the economy at both national and county levels.

Suppliers and contractors were owed nearly Sh200 billion by the national government and counties as at September, prompting President Uhuru Kenyatta to order that verifiable bills be settled by end of November.

In his address to the nation on Tuesday, Mr Kenyatta said that one of his main objectives this year would be to revitalise the economy and improve money circulation. He said that about 70 percent of the verified bills had been paid by December 31, and that additional funds to pay contractors will come from a planned Sh150 billion infrastructure bond that will also aid the completion of all ongoing road and infrastructure projects across the country.

IMF’s revelations on the previously undisclosed volume of incomplete projects also explains the Treasury’s renewed vigour in clamping down on unauthorised capital spending by government agencies and departments. The Treasury in 2018 established the Public Investment Management Unit (PIMU), which is tasked with appraising all infrastructure projects before they are included in the Budget to establish their value for money, affordability and economic return.

However, the IMF has noted that the reform measures and changes to procurement arrangements have yet to be fully implemented, and are thus not yet having an impact on fund allocation and selection of projects in the country.

“The human capacity, IT systems and analytical tools used by the unit (PIMU) are still being developed, and the staffing structure, and the location of the unit within the National Treasury is under consideration by senior management,” said the IMF.

Of concern also are large projects such as the standard gauge railway that are the result of government to government deals, whose operation lies outside the standard procurement process. Given that they are financed using debt, their repayments end up having an impact on the government’s cash flows even if they are not at risk of stalling during construction.