The real debt crisis gripping country

The public debt has in recent months generated a lot of interest.

There are fundamental questions: What is causing the rapid growth in debt? Who are the major creditors (international development agencies, bilateral and commercial lenders) and how will it be serviced?

The government’s ability to service external debts very much depends on dollar inflows from exports of goods and services, while domestic debt service relies on the taxes collected by Kenya Revenue Authority.

These types of debts, fortunately, are well- documented, predicable and scheduled, so the government is certain about the burden it must deal with.

The bigger headache is how to handle debts that cannot be predicted with certainty and it’s, therefore, difficult to schedule payments.

PENDING CLAIMS

The first category are the billions of pending claims for procurement of goods and services by the national and county governments.

In May last year, the Kenya Private Sector Alliance (Kepsa) presented a memorandum to President Uhuru Kenyatta, complaining that the government owed its members some Sh112 billion for goods and services contracted or delivered in 2015.

More recently, county governments reported that they were unable to pay suppliers Sh50 billion, which they inherited from the defunct local authorities.

Nairobi City County inherited Sh19.1 billion from the defunct city council, according to its Medium Term Debt Management Strategy dated February last year.

These old liabilities do not include debts that the 47 county governments have accumulated and are unable to pay since they came into office in 2013.

BREACH OF CONTRACT

The second category of debts involves litigation against the government for alleged breach of contract. Such debts arise from procurement and payment disputes.

Some of the hefty ones include the 18 Anglo Leasing contracts, the claims by World Duty Free against Kenya Airports Authority and claims against the Ministry of Health by Equip Agencies and Vulcan for medical supplies. Litigation for such contracts imposes unpredictable costs on the government’s budget.

The problem with the two categories of debts is that they are substantially short-term and have to be paid on demand where there is an enforcement order.

It is also difficult to estimate how much the claimants will ask for, which is mostly a factor of contractual obligations, accumulated interest on outstanding payments and penalties for default.

The outcome of an arbitration, either out or in court, cannot be predicted and budgeted for.

COUNTER CLAIMS

Delays, mostly caused by claims and counter claims, heighten the risk of continued accumulation of debts. Moreover, government offices have become a hub of deal makers, who claim powers to broker payments to the suppliers for a hefty fee, depending on the amount being claimed and how long it has been outstanding.

The government risks making payments against fraudulent claims neatly packaged with all the necessary documentation.
Another fundamental issue is that the contracts giving rise to these claims may not have been executed, hence there was no value for money and no impact on the intended beneficiaries.

In 2005, then President Mwai Kibaki appointed a Pending Bills Closing Committee to conduct a forensic audit of all the claims and recommend how the debts would be resolved.

GROSSLY INFLATED

Suppliers submitted claims of nearly Sh200 billion, but when the evaluation was completed, the committee found that most of the bills were grossly inflated, and some contracts were faulty.

The committee ruled that only 20 per cent of the value of the claims was payable. Of course, the claimants retained the right to challenge the findings and went to court. Some accepted the much scaled down offer for payments.

The committee was supposed to bring an end the problem of accumulated debt, some of which had been outstanding for 15 years. But the crisis continues.

Such large debts, either paid for irregularly or not paid when they were genuinely due, have had a marked impact on development. Some government agencies and contracts have been paralysed by debt.

Stalled projects, including roads, buildings and irrigation schemes, are scattered all over the landscape.

The debt crisis contributes to public sector corruption and favours large suppliers at the expense of small players. It undermines the government’s ability to achieve its critical development objectives, including economic growth and more equitable distribution of economic opportunities.

Mr Warutere is the principal associate at MA Consulting Group. [email protected]