Firms to wait longer for payment as pending bills verification drags on

Last week, National Cabinet Secretary John Mbadi said the government had started paying businesses pending bills, starting with the players in the roads sector.

He, however, dampened the news that would have been welcomed with cheers by the business community when he said companies, many of them SMEs, would have to wait longer as the government verifies their pending bills.

The exercise that started in September 2023 was expected to end last year. However, it has received several extensions, the latest being the end of June this year. Mbadi, however, said the Pending Bills Verification Committee chaired by former Auditor General Edward Ouko has not handed in the final report and when it does, this will be subjected to Cabinet approval before it can start paying.

And even with cabinet approval, analysts note that while it is impossible to clear all the pending bills this financial year, Treasury has not allocated funds to clear any significant fraction of the funds owed to businesses.

This points to further delays in the payment despite the impact on businesses and the economy.

Different people have tried to demonstrate this impact. In May this year, Irungu Nyakera, a former Principal Secretary and recent chair of the Kenya Medical Supplies Authority (Kemsa) termed doing business with the 47 county governments and the national government as 48 ways to die in Kenya financially.

This is on account of pending bills, with the money that the State and counties owe running in the hundreds of billions.

The government’s repeated promises to pay, including Mbadi’s word earlier this year that Treasury would allocate some funds in the third supplementary budget for the 2024/25 financial year, have amounted to nought.

Nyakera told Kenyans, especially youth in business, to stay away from doing business with the government.

“Youth of Kenya, hear me out: Avoid government tenders unless you have a death wish, or unless you have a rich uncle in State House,” he said in a post on social media. “You will deliver, they won’t pay. You’ll drown in debt. You’ll be auctioned. You’ll get depressed and even contemplate suicide! Avoid.”

Doing business with the government, users reacting to his posted notes, has two sides to it. On the one hand, the richest people and families in Kenya acquired their wealth as a result of working with the government. On the other hand, it is characterised by weeping and gnashing of teeth as young people and other smaller business owners suffer from doing business with the government.

One story that perhaps captures the impact of pending bills on people’s lives and livelihoods is that of Hannah Ndugire, the granny roads contractor from Nyandarua County, who died in February 2023. 

Fighting off auctioneers 

Her death was attributed to the toll that her long fight with the county government over pending bills had on her health, resulting in bouts of depression and eventually claiming her life.

It was only after her death that the county said it would pay the money owed to the granny. Two and a half years after her death, many businesses – a majority of them small and mid-sized small business owners – are still waiting for the government to make meaningful efforts in payment of their pending bills.

Behind the firms, many of them little-known brands, are people who have to go without salaries while the owners of the entities keep digging themselves deeper in debt and fighting off auctioneers. 

Patrick Muinde, an economist, noted that SMEs rarely have working capital and have to borrow to execute the contracts. When the government delays their payments, they suffer double tragedy when lenders come after them.

“Businesses end up defaulting and are then auctioned. These are people’s lives. The situation is that when you get a government contract, it could very well end up becoming a death warrant,” he told The Standard in a past interview.

Mbadi said last week that the government had started paying pending bills owed to contractors in the road sector. This followed the government’s borrowing of loans using the Road Maintenance Levy as collateral, a move that has kicked up a storm, with a section of Kenya protesting the move.

In Securitising a portion of the road levy, the government plans to borrow Sh175 billion that would go towards the road sector, including payment bills. Questions, however, abound about the payment of pending bills to players in other sectors.

“We have started the process of settling pending bills that have been validated, particularly those related to road construction, which has resulted in the resumption of road construction projects across the country, which had been completed for about two years,” said Mbadi. 

He added that “the pending bills are currently being verified”. “The committee is yet to give me the final report. Once completed, recommendations shall be tabled in cabinet for approval, after which, we shall embark on the process of clearing the legible bills, starting with those related to individuals and the Micro, Small and Medium Enterprises, the majority of whom have borne the brunt of non-payment,” said Mbadi.

Mbadi, when he delivered this year’s budget statement in Parliament on June 12, said the Committee’s time had been extended to June 30, explaining to Parliament that he now expected the final report by the end of June. 

“The government remains committed to resolving the longstanding issues of pending bills dating back to 2005 as part of broader efforts to strengthen public financial management and restore confidence in the government process,” said Mbadi. 

“The pending bills verification committee appointed in September 2023 is finalising its report for submission by the end of this month (June). Since the inauguration, the committee received a total of 65,627 pending bill claims valued at over Sh571.6 billion,” said Mbadi.

“The Committee has analysed 57 per cent of the bills received, valued at Sh522.9 billion. Out of this, a total of Sh229 billion has been recommended for settlement. Once the Committee submits its report, we shall submit the recommendations to Cabinet for approval to settle the pending bills.”

The committee’s recommendation for the government to settle Sh229 billion, which is less than half of the Sh522.9 billion pending bills analysed, could be an indication of the level of fraudulent claims or the firms owed money by the government, including other charges like interest and penalties.

According to the Controller of Budget, the State and counties owe businesses a combined Sh684.26 billion as of March this year. The bulk of this is owed by the national government at Sh511.75 billion, while counties’ pending bills stood at Sh172.51, with Nairobi County accounting for the largest Share of Sh115.69 billion or 67 per cent of the counties’ pending bills.

Liquidity constraint

CS Mbadi has in the past said more than 95 per cent of the pending bills that the Committee had reviewed are claims of amounts below Sh10 million, which are mostly owed to small and medium-sized enterprises.

“Accumulation of pending bills restrains cash flows to businesses, resulting in liquidity constraints, especially for Small and Medium-sized Enterprises, as they have to endure the long wait for settlement of overdue payments,” said the office of COB in its latest report. 

“This forces such businesses to either scale back operations, lay off workers, or even shut down operations. It also leads to high government costs of doing business due to the accumulation of interest charges and penalties on unpaid invoices, and it erodes trust between the government and the private sector.”

It urged the National Treasury should fast-track the verification of all pending bills and implement the pending bills verification report, including hastened settlement of all bills assessed and cleared for payment.

Over the 2025/26 financial year, Treasury allocated Sh2.75 billion for pending bills for the 2024/25 financial year, a reduction from Sh10 billion it had allocated in the budget for the current financial year.

“The government has allocated Sh2.747 billion to clear arrears, including pending bills. This is a reduction from the FY2024/25 budget allocation of Sh10 billion (73 per cent reduction),” said analysts from PwC in a recent report analysing the budget.

“The paltry allocation to clear pending bills raises uncertainty regarding the Government’s commitment and timelines to clear pending bills.” Muinde said the government cannot be “verifying pending billions in perpetuity”. He 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, there are people who are getting paid,” said Muinde.

“What happens is that if somebody in such deals factors in the cost of kickbacks, the government ends up paying for an item even up to 100 times more than the market price. You find that the only people who will increasingly do business with the government are the crooked ones, and the result is that the government cannot buy anything at market price.”