Inside Sh400b austerity plan for ailing parastatals

Treasury Cabinet Secretary Njuguna Ndung'u when he appeared before the Senate, Nairobi, February 24, 2023. [Elvis Ogina, Standard]

State-owned enterprises (SOEs) and regulatory authorities are staring at job cuts, fewer calendar activities and capital projects over the next financial year.

This is as the government implements a strict austerity plan to unlock Sh400 billion in liquidity.

It comes on the back of sustained pressure from the International Monetary Fund (IMF) and the World Bank, which is part of the Sh294 billion three-year financing package approved in April 2021 and is set to expire in the coming weeks.

According to IMF's latest review of the programme released in December last year, the Kenyan government met some of the economic targets, including tax collection performance, priority social expenditure and monetary policy stabilisation.

However, IMF indicated that last August's General Election caused some delays in the reform agenda, particularly reducing taxpayers' support of ailing parastatals. "Kenya's structural reform agenda is advancing, albeit with some delays," said IMF in its latest review of Kenya.

"However, progress in addressing financial weaknesses in State-owned enterprises and a planned review of the fuel pricing mechanism were delayed during the political transition period."

In response, the National Treasury said the government has broadened reporting of 26 State-owned entities' non-guaranteed debts and automated data collection through the Government Investment Management Information System (GIMIS).

In the 2021/2022 supplementary budget, for example, Treasury halved support for State-owned firms from Sh32.3 billion to Sh17.5 billion, which it attributed to improvements in the turnaround strategies in some parastatals.

"Lower-than-anticipated support to Kenya Airways (KQ) was the primary driver of the shortfall relative to the budgeted amount, while no support was provided to Kenya Wildlife Services (budgeted Sh2 billion) and Kenya Airports Authorities (budgeted Sh1 billion), both on improved revenues from a turnaround in activities," said Treasury.

However, this reduction is a drop in the ocean as a financial evaluation by IMF and Treasury identified a cumulative Sh383 billion liquidity gap over a period of five years for 18 State-owned entities carrying the largest financial risk.

"Our spending priorities continue to be challenged by supporting SOEs, Kenya Airways in particular, and we are determined to decisively meet those challenges," said Treasury. National Treasury Cabinet Secretary Prof Njuguna Ndung'u has notified parastatal heads and accounting officers in ministries and State departments of the government's commitment to the austerity plan and the urgency of implementing new financial reporting guidelines.

"It is noted that some State corporations do not make full disclosure of internally generated revenues or under-estimate such revenues at the time of budget preparation," said Prof Ndung'u in a circular to public entities as they prepare their 2023/2024 budgets.

"State corporations are required to disclose all revenues that accrue to the respective entity, including grants. Please note that any revenues over and above the approved 2023/2024 Budget will require a fresh approval before spending," he said.

In addition, Prof Ndung'u is pushing for a more accurate reporting of the surplus that parastatals and regulators submit to the Kenya Revenue Authority (KRA), which the State says has been under-reported in previous years.

Data from KRA indicates that surplus funds surrendered to the government from State corporations fell from Sh32 billion in 2020 to Sh15.3 billion in 2021, with 24 entities remitting nothing for the year.

response, Treasury is cracking the whip and pushing for more accuracy in reporting of financial performance as a condition for receiving budgetary allocations.

Public Sector Accounting Standards Board Chief Executive Fredrick Riaga says the success of the structural reforms hinges on the effective implementation of reporting standards and templates that will come into force in the next financial year. "There has been a progressive shift in the strategy and a good portion of the public sector is already on the accrual reporting system, including most of the large and commercial State-owned enterprises that are on IFRS9," he explained.

This includes the migration from cash to the accrual accounting system, which gives a more dynamic picture of the assets and liabilities of State-owned entities.

However, a big portion of ministries, State departments and agencies are still on cash reporting despite being in control of billions of assets and liabilities guaranteed by taxpayers and which continue to depreciate or accumulate.

"The transition then involves moving the MDAs (Ministries, Departments, and Agencies) out of cash accounting to accrual accounting, and effective June 2023 we are moving the rest of government to accrual accounting," he explained.

"We are working with the National Treasury to develop national assets and liabilities policy, which involves identifying and valuing public assets to establish what assets the government owns, where they are and at what stage of depreciation."

PSASB has further issued three new accounting standards in the past year, which will affect how the government reports on leased assets, non-current assets and social benefits.

"Traditionally public assets and liabilities are captured as addendums in the financial report, which does not give a true picture of how they impact the financial performance of the entity and how provisions are made for the same," said Mr Riaga.

The reporting templates will further be cascaded to the counties where the government is keen to document and digitise all public assets that are at risk of being misappropriated.

In other changes to the reporting guidelines, State corporations will now be required to provide monthly reports to the National Treasury on the status of pending bills and payment plans, failure to which their annual budgets will not be approved.

New conditions have further been imposed on CEOs and accounting officers before they green-light any capital projects or approve new remuneration policies.

"State corporations are reminded to first get written approval from the National Treasury confirming availability of funds before putting requests to the Salaries and Remuneration Commission," stated Prof Ndung'u in his circular.

"Further, State corporations should submit a full breakdown of the capital expenditure for the 2023/2024 financial year, including all ongoing projects indicating the status of implementation, amounts required to complete the project and other capital items," he said.

"It has been noted that some regulatory authorities are adjusting operating surplus by netting capital expenditure from the operating surplus purposely to determine the 90 per cent of the operating surplus to remit to the National Exchequer," noted Prof Ndung'u in his circular.

"Regulatory authorities have been advised that in the event the authority intends to use the operating surplus to implement strategic development/capital project(s), it has to obtain prior approval from the Cabinet Secretary, the National Treasury and Economic Planning before the beginning of budget preparation and approval process for the succeeding financial year," he said.