The true impact of pending bills on businesses, economy

Local businesses have over the recent years experienced major challenges.

In different polls, firms have cited different factors, including high taxes, poor infrastructure, and high cost of electricity as among the factors that have made it difficult to operate in Kenya.

But for those doing business with State agencies, the issue of pending bills tops the list of their concerns.

The large sums owned by the government have seen some firms shut down and others go under the hammer after failing to meet their loan obligations after borrowing to deliver on the State jobs.

Others have been forced to send some of their worker’s home to cut costs.

Many firms are also unable to pay their own suppliers and staff.  

Other than the squeeze on businesses, the delay to pay pending bills could also be putting the government at a disadvantage.

Many firms, especially those that have burnt their fingers, are now reluctant to supply the government, opening the door for suppliers of questionable integrity, who have no qualms about parting with a bribe to hasten the processing of their payments or inflating the prices of their products to cushion themselves against these demands by corrupt State officials.

There appears to be no consensus on how much the government owes different entities in pending bills, with the private sector claiming over Sh1 trillion, while Treasury recently put it at Sh650 billion.

According to the Controller of Budget (COB), the national and county governments owed different firms Sh722 billion as of September 2024, with the national government’s share standing at Sh538.26 billion and the counties owing a combined Sh194 billion.

Margaret Nyakang’o in her latest report said the national government’s pending bills stood at Sh528.26 billion as of September, which was a slight increase from Sh516.27 billion three months earlier in June.

The national government over the year reduced its pending bills from a high of Sh794.18 billion in September 2023. 

The counties owed different supplies Sh194.01 billion as of September 2024.

Economist Patrick Muinde said the failure of the government to release funds to the private sector has had a huge impact on not just businesses but also the economy. 

“Our economy is still small and Sh650 billion – assuming that is the amount the government owes in pending bills –  is a lot of cash that is not in circulation. Businesses are hurting, and this means that they are not consuming and they are not employing,” he said, adding this is also eroding the confidence among Kenyans in the economy.

“People and businesses invest and spend when they have confidence in the economy. What is happening is that even those who have cash are not willing to spend or invest because of the fear and uncertainty in the economy.

“If Treasury can release the money to businesses, they can buy back what we are lacking in the economy – the confidence – which is hurting the economy even more. The earlier [Treasury CS] Mbadi brings this to a closure the better.”

There was a degree of optimism that the government would deal with the challenge of pending bills in September 2023 when it appointed the Pending Bills Verification Committee chaired by former Auditor General Edward Ouko.

The committee is, however, taking longer than expected to complete its report. It was expected to hand over its report by the end of September last year, but the committee’s term was extended by six months to March 31 this year, dashing hopes of many that the matter will be brought to a closure any time soon.

“I think it is about time we get a conclusive closure on the pending bills one way or another. We have a precedent when President Mwai Kibaki’s administration came into office in 2003, he actually cleared all the pending bills quietly,” said Mr Muinde, suggesting that the Kenya Kwanza Administration make a decisive decision and make an out-of-budget payment.

The government itself acknowledges the impact that pending bills have on the economy. 

“The delay in clearance of arrears has led to deterioration of financial positions of businesses and in particular the MSEs, including businesses owned by women, youth and persons with disabilities. This has had a negative impact on the economy, including less than optimal levels of employment and escalation of poverty,” said Treasury in May 2024  in a strategy that laid out how it would verify and clear pending bills.

And though he extended the term of the committee tasked with verifying the pending bills as it sought more time to complete the report that is in draft form, Treasury Cabinet Secretary John Mbadi says the government will soon pay the majority of the firms whose pending bills have been verified by the Ouko chaired committee.

The CS said the committee’s draft report showed that about half of the pending bill claims could be fraudulent.

Mr Mbadi said the pending bills verification committee had as of December last year received claims amounting to Sh665 billion, of which, the committee had analysed claims of about Sh474 billion. It found only Sh206 billion worth of claims to be valid. 

“So these bills have either been fictitious or maybe there are too many other charges like interest and penalties,” he said. 

CS Mbadi explained that out of the Sh206 billion, 95 per cent of the claims are of amounts below Sh10 million, pointing to government the level of indebtedness to micro, small and medium enterprises supplying goods and services to the government.

He said Treasury would make a provision in the next supplementary budget to pay the money owed to the SMEs.

“We are taking a decision to make a provision in the supplementary budget II to clear these small bills owed to SMEs so that we are left with the bigger bills, which we have a strategy to pay and so we will pay a lot of pending bills in the roads sector in February which will help reduce pending bills and bring liquidity to our economy,” he said.

Analysts say this will be a welcome relief. Other than the collapsing businesses and an economy that could continue posting sluggish growth rates, the failure to pay money owed to the private sector could also be a deterrent for many businesses from working with the government. 

Economist, Mr Muinde, noted that this could open room for unscrupulous businesses, which have no qualms about unethical and even illegal practices of paying bribes to get their payments processed, to do business with the government. Such businesses also tend to overprice goods and services and the government ends up paying high prices for what they are supplying.

“Right now, there are few business people who want to do business with the government. Because of the uncertainty and lack of payment, you find that people who are willing to do it are the people who are able to get their way around the bureaucracy, people who are able to corrupt and get paid. Even when we are saying that people are not being paid, some people are getting paid,” said Mr Muinde.

Mr Muinde also noted that the government has the challenge of dealing with historical claims and continues to carry them indefinitely until they are serviced, which he noted is “a serious policy gap.”

“The government does not have provisions on how to write off old claims. You find that many of these claims are historical and within our PFM (Public Finance Management) laws, the government cannot write off claims and even their own debts,”

“As part of the solutions, Treasury should look at the historical nature of some of these claims and probably look at the appropriate accounting policies they can apply sometimes to write off some of them.”