Background
Kenya has continued to accrue pending bills despite the growing revenue in both levels of government amidst tight fiscal space. The national government has a long history of pending bills while counties started accruing pending bills from the onset of devolution, some of it were inherited from the defunct local authorities. As a result of this challenge, service provision remains strained considering pending bills are supposed to be the first charge.
The nature of pending bills may make it difficult to settle considering unclarities on the eligibility. Pending bills are either eligible or ineligible. Eligible pending bills are those that are fully supported with the requisite documentation whereas ineligible pending bills are bills that are not fully supported. Recently, the national government made positive moves, particularly establishing the pending bills verification committee for all arrears dating back to 2005. In addition, the National Treasury has developed a plan to curb future accrual of pending bills. Similarly, there has been pressure on counties to prioritize settlement eligible pending bills. Several counties have also taken bold steps to set up verification committees.
Pending bills typically arise when the government gets services or goods on loan. It also includes unpaid obligations such as pensions, other payroll deductions and outstanding verified overpaid tax owed to taxpayers. According to the Office of the Controller of Budget, the current stock of pending bills at the National and County governments as of 30th September 2024 amounted to Kshs.528.36 billion and Kshs.194.01 billion respectively. This represents 4.5% percent of GDP which signifies its magnitude to our economy.
Despite pending bills conversations being often heavily linked to development expenditure, the recurrent expenditure is equally a major driver of these arrears. For instance, as of September 2024, State Corporations reported unpaid obligations worth Kshs. 64 billion on Pay as you Earn (PAYE), National Social Security Fund (NSSF) National Health Insurance Fund (NHIF), unremitted Sacco and staff loan deductions and pensions arrears.
What has been done so far
Several initiatives have been put forth to manage Kenya’s pending bills challenge. The national government budget implementation review report revealed that in FY 2023/24, Kshs. 106 billion was used to settle pending bills. This is close to but short of the Parliamentary Budget Office’s (PBO) recommendation of allocating Kshs. 150 billion each fiscal year to settle the pending arrears.
Recently, the National Treasury instructed Ministries, Departments, and Agencies (MDAs), to prioritize the payment of pending bills carried over from the previous financial years before entering new commitments. A verification committee was set up at the national level to oversee the analysis of the stock of pending bills and to determine their genuineness. According to the CS National Treasury and Economic Planning, historical pending bills amount to Kshs. 663 billion accrued before June 2022 were submitted to the verification committee. Out of the Kshs. 663 billion bills submitted; the committee has analyzed Kshs. 474 billion worth of bills and out of this, only Kshs. 206 billion have been approved as authentic pending bills.
This raises concerns whether some of the pending bills are genuine or fictious. The CS also noted that 95 percent of these bills of the number of pending bills reported are bills between Kshs. 1 and Kshs. 10 million, revealing that only 5% is above 10 million shillings meaning that the chunk of these pending bills is owed to Micro, Small and medium Enterprises (MSMEs). Although this is a progressive step, it is worth to further highlight steps that government should take to address the discrepancies and ensure transparency in the verification process and provide ways to mitigate this in future.
Similarly, some sub-national governments have also established committees to verify pending bills, which is a positive step. However, a study on budget transparency at the county level reveals that there is limited information available. For instance, on average, counties provided only 36 out of 100 points of information related to pending bills. The first step toward addressing the issue of pending bills is to disclose this information fully which would allow for scrutiny of the stock, type, and timing of when these pending bills were accrued. In addition, it is particularly important as the national government is often expected to ensure timely disbursements of equitable share to sub-national governments to facilitate the clearance of these pending bills, which is a requirement as a first charge.
What government can do
The following are key things that the government can utilize to address the issues of pending bills that the government already accrued and curb the arrears of pending bills in future:
1. Prioritization of settlement of verified pending bills
The Budget Policy Statement 2025 indicates that one of the key criteria for resource allocation will be the payment of verified pending bills. While this is not a new directive, it is important to note that, in the past, there was a lack of clarity regarding which pending bills were eligible for payment. Now, however, the government has established a clearer framework and can rely on reports from pending bills committee to outline plans and demonstrate progress in clearing eligible and verified pending bills. Similarly, the Budget Policy Statement 2025 -through Kenya Devolution Support Programme II (KDSP II), County Governments have been supported to develop and implement repayment plans and ensure adherence to Regulation 55 (2) b of the Public Finance Management (County Governments) Regulations, 2015. In addition, the Senate also requires the County Governments to prepare and submit to the Controller of Budget a payment plan prioritizing payment of pending bills as a first charge on the County Revenue Fund (CRF). Will these initiatives address the issue of pending bills? and how long will it take to fully settle the current stock of pending bills?
2. Cash to Accrual Accounting
The National Treasury has initiated transition from cash to accrual basis of accounting which is expected to gradually reduce the stock of pending bills. According to the International Public Sector Accounting Standards (IPSAS)[i] cash basis accounting is where payment receipts are recorded during the period in which they are received, and expenses are recorded in the period in which they are actually paid. Essentially, this means that transactions are recorded only when payment is made, not when orders are placed, or goods are delivered.
In contrast, accrual accounting recognizes transactions as and when they occur, regardless of cash movement. This allows for better management of expected cash flows and commitments. More so, the transition to accrual accounting will enhance accountability and transparency in fiscal reporting by providing clearer disclosures of assets, liabilities, revenues, and expenditures.
Consequently, the full implementation of accrual accounting will mark a big step towards managing public assets and liabilities including pending bills, public debt and pension liabilities.
3. E-Procurement
The adoption of an e-government procurement in both the national and county government is yet another effort set to curb ineligible pending bills. An e-government procurement (e-GP) involves the utilization of information technology by the government in conducting their procurement activities with suppliers.
According to the budget statement for FY 2024/25, the government of Kenya is currently piloting an end-to-end e-government procurement in 12 selected MDAs and counties. Also, the County Governments are only allowed to pay pending bills contained in their respective procurement plans, which is a good step to ensure pending bills are not accumulated. The system will comprise of electronic distribution (downloading) of bidding documents, an e-notification which will facilitate preparation and publication of notices to official electronic notice boards, mechanisms for conducting electronic auctions, publication of contract award results, among other functions.
The e-GP cycle presents an e-marketplace where prices for various outlets are visible. It’s configuration with the Integrated Financial Management Information System (IFMIS) to process payments of contracted suppliers will improve efficiency in settling pending bills by minimizing the procurement time and fostering accountability through in-built process workflows and audit trails.
4. Treasury Single Account (TSA)
Finally, the cabinet on January 15th, 2024, approved the implementation of the Treasury Single Account (TSA) for both National and County governments. Treasury single account is where the government’s funds are unified to provide a framework for monitoring and reporting fiscal commitments and contingent liabilities.
If utilized properly, this will provide better reconciliation as well as an audit trail of settled and unsettled pending bills. The United Kingdom is an example where all central government cash balances are aggregated into a TSA maintained at the Central Bank.
Bottom line
Over and above, pending bills are not only a challenge of budget execution but it is also a key sign of poor financial planning and distress in government entities. Financial distress is when an entity is unable to pay its financial obligations. Ignoring the signs of financial distress can be devastating because there may come a time when unsettled obligations are too high and cannot be paid. There are many steps being taken by the government to relieve this distress, some of which are quite promising. But when it comes to budgets, initiatives are often as good as their implementation.
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