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Who should settle the outstanding pending bills – Nairobi City County or Nairobi Metropolitan Services?

In our article published in the Business Daily ”Transfer of functions from Nairobi City County fiscal implications”,we captured 3 of the most significant insights into the unchecked fiscal gap following the startling transfer of key functions from Nairobi City County (NCC), to the National Government – Ministry of Devolution and ASAL.

EGCL held that the Ministry of Devolution and ASAL should let the county government independently settle the outstanding verified and eligible pending bills until the end of the current financial year 2019/2020 to necessitate the transfer of clean books of accounts to the national government. The Constitutional provision on the law of subsidiarity would equally dictate that the County is allowed to retain that function of offsetting the pending bills considering they have direct contacts with the respective suppliers.

However, just what has been the trend of pending bills in the county for the last 6 years?

Our analysis shows that in 2013/2014, debt repayment and pending bills from the former Local Authorities were NCC’s highest expenditure item. In 2016/2017, NCC did not submit the status of pending bills at the time of finalizing the county implementation report (Diagram 1). In 2017/2018, NCC presented its pending bills to the Auditor General for a special audit. Subsequently, the bills were reduced by Ksh 42 billion from an overall of Ksh 65 billion (Diagram 1) to Ksh 23 billion. As of 18th December 2019, NCC had made some partial payments amounting to approximately Ksh 4 billion, reducing the bills further to Ksh 19 billion (Diagram 3). ABout 60% of bills are currently ineligible for payment until further investigation.

Diagram 1: NCC outstanding annual pending bills over the last 6 years.

Source: Office of the Controller of Budget County Implementation report & National Treasury press Release

Diagram 2: After special Audit (Ksh. billions).  Diagram 3: After partial payment (Ksh. billions).

        Source: Press Release -National Treasury

Within the context of limited resources, disrupted operations, the complications from COVID -19 and the few months to the end of 2019/20, the balances will be difficult for the county to clear by the end of the fiscal year. What is required is the development of a framework with a detailed payment plan on how the bills should be cleared. Considering the already tight county budget for the current financial year of Kshs. 36.98 billion – pending bills would take over 52.5% of this budget.

Following the creation of Nairobi Metropolitan Services (NMS) that is now running the transferred functions, more projects are expected to be launched within the 100 days timeline. Since the transfer deed stated that the NCC is required to fully fund the said functions from the county revenue kitty, it is expected that new pending bills may arise in addition to the existing ones based on the historical trend of late exchequer releases characterized by the projected decline in national revenues.

To address this constraint, the National Treasury has been releasing billions of shillings to the counties to help clear pending bills. To mitigate against the risk of a recurrence of pending bills, the National Treasury has introduced penalties for county governments that do not, in turn, pay contractors within the specified timelines. As a result, there has been a discernible downward trend on the overall bills – NCC has reported the highest of these.

Therefore, as we approach a new financial year, we recommend that the following:

  1. NMS immediately establishes a pending bills committee to manage bills and produce status reports from the transferred functions. A circular from the Office of the Controller of Budget required that counties constitute county pending bills committees. The NMS committee would be along this vein. 
  2. A detailed plan for the handling of pending bills be drafted and implemented through the NMS pending bills committee. 
  3. The PFM regulations 2015, Section 41 (2) clearly states that debt service payments shall be a first charge on the County Revenue Fund (CRF). Based on the transfer deed, the national government will determine the level of funding for each transferred function in consultation with the county government thereafter appropriating funds into the county revenue fund. For this reason, the NMS will receive these budgetary transfers from the CRF, thereafter prioritizing pending bills as per the law.
  4. The two levels of government should prepare joint supplementary budgets that cover revenue performance and address pending bills. According to PFM Act section 135, overall coordination will remain the purview of the county as it holds the key funding.

In conclusion, we maintain our position that NCC should be obligated to clear existing pending bills that arose from all functions (including transferred) for the remaining financial year. However, to conform to the PFM Act provisions of paying debt service as a first charge on the CRF, each level of government will be required in the next fiscal year 2020/2021 to account for their bills.  This will be done by setting a clear demarcation as to which level of government is responsible for which payments, and from which kitty.

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