The introduction of devolution in 2013 came with high expectations in the business sector. Counties were seen as the next big deal. Analysts predicted an economic boom especially for small and medium enterprises doing business with counties.
In true Kenyan enterprising spirit, many SMEs angled for county contracts worth billions of shillings to build roads, supply goods and equipment, construct schools, hospitals and offices, and provide a wide range of professional services.
SMEs expanded their human and financial capacity to service county contracts. They hired more employees and borrowed from banks to boost working capital. Soon, however, many of them ran into headwinds when counties and other government institutions began delaying payments to suppliers.
Experiencing a serious cash crunch, many small businesses stared at foreclosure by banks. They resorted to litigation to enforce contracts against defaulting government entities. This increased the cost and risk of doing business with public bodies. With capital locked up in unpaid invoices, the fortunes of many small Kenyan enterprises took a dip. Doing business especially with counties became a nightmare. This negatively impacted the economy and dented investor confidence.
This sad state of affairs negated the government’s efforts at promoting local enterprise under the banner Buy Kenya, Build Kenya. Fortunately, President Kenyatta issued a directive in June 2019 to government ministries and agencies to clear all eligible pending bills amounting to Ksh 450 billion. This was a welcome lifeline for thousands of small businesses.
Counties alone owed contractors and suppliers Ksh100 billion, almost equivalent to 10 percent of the annual national budget.
The response to the directive was initially slow owing to the need to verify the authenticity of pending bills. It was only prudent that counties and other government agencies address any audit queries. However, many ministries and state agencies are said to have cleared their bills. The President in his address to the nation on January 14, said 70 percent of pending bills had been paid. The problem seems to be at the counties since most are yet to settle supplier invoices in full.
Only about fifteen of them had by December cleared most if not all eligible pending invoices. Treasury recently announced it would release Ksh 24 billion to counties that have either fully settled their bills or are about to do so. That some counties have cleared all eligible invoices owed to suppliers is not only good for business but also the economy.
First, the move has saved thousands of jobs. With the SME industry arguably the biggest employer in the country, the livelihood of millions of Kenyans was at risk. The directive injected a new lease of life into many SMEs facing collapse.
Second, the directive served to reassert fiscal discipline and accountability as a constitutional principle of public financial management in Kenya. Article 201 of the Constitution provides that public money shall be used in a prudent manner with clear fiscal reporting.
The huge stock of pending bills was partly linked to malpractices such as corruption and failure by some counties to strictly adhere to budget. Opaque county financial arrangements also created avenues for officials to demand bribes from suppliers seeking payments.
With counties now required to file regular updates on pending bill payments with Treasury, it is easy to track the status of such payments.
Third, the directive was good for investor confidence. Certainty is a valuable element in business planning and sustainability. No prudent business will commit money in risky ventures without a clear exit horizon.
In addition, timely payments improve the credit profile of SMEs doing business with counties thus enhancing their competitiveness. It also ensures their long-term sustainability.
Fourth, this is an opportunity for the Treasury to rein in ballooning public debt. A sizeable fraction of short-term government debt incurred by the Treasury in recent years is said to have been used to pay contractors upfront and this became a conduit for kickbacks. Thus, even as the government’s commercial debt stock continued to climb sharply, pending bills kept piling up.
All said, clearing the pending bills backlog will unlock funds for business expansion and job creation. It will also stimulate public spending, key to economic recovery. Treasury should not bow to political pressure but insist that it will only disburse funds to counties that are serious about paying suppliers.
Mr Choto is a lawyer and public affairs specialist.
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