Treasury, regulators in tug of war over their revenues

The dreaded market regulators that are known to jealously protect their turf and keep businesses in the straight and the narrow with hefty fines and penalties now face their own reckoning.

They are feeling the heat as the National Treasury scrutinises them for compliance.

The regulators are finding it hard to part with the billions of shillings that they make in fines levied on rogue market players or licences that businesses pay to them.

Going by their annual reports for the year to June 2017, the regulators could be holding cash in excess of Sh25 billion.

This is as the National Treasury puts its foot down and demands that they remit 90 per cent of the net surplus in line with regulations published mid this year. According to that the Budget Review and Outlook Paper, dividends from State corporations came short of Sh8.9 billion.

“During the FY (financial year) 2017/18, the Government received investment income in form of dividends, surplus funds and directors’ fees of Sh24.1 billion against a revised target of Sh31.6 billion, resulting in a negative variance of Sh7.4 billion. This was a decline of 16.5 per cent compared to FY 2016/17,” said Treasury Principal Secretary Kamau Thugge.

Police industries

The regulators, which have in the past had a free hand in handling this money, say Treasury’s demands will cripple their abilities to police the industries that they respectively oversee.

A number of them have blatantly refused to surrender the 90 per cent surplus to the Treasury. They have instead remitted the token amounts that they have handed Treasury in the past, which has not gone well with Treasury.

In Cabinet Secretary Henry Rotich’s Budget speech mid this year, he said regulators were not willing to surrender their penalties back to the State. He even enlisted the services of the Kenya Revenue Authority (KRA) to collect the monies from the entities, But the regulators are not taking it lying down.

While there are those that are turning over billions of shillings from licensing different businesses, there are a few that cannot sustain operations solely on revenues from licences and penalties to industry players and have to rely on Treasury to make ends meet.

The amount remitted to the State used to differ with each year and its economic performance. “The golden years were between 2004 and 2013,” a source at Treasury told Financial Standard.

Initially, there was no requirement to remit the money and State corporations other than the Central Bank of Kenya (CBK) which was required by law to give the exchequer its dues. Commercial firms owned by Government sent dividends, which they still do, while regulators gave their surpluses at their discretion.

But as Safaricom grew and deposited Sh15.42 billion in dividends for the 14.02 billion shares (a 35 per cent stake) in the firm and is expected to contribute 80 per cent of total dividends by next year, Treasury’s appetite in the profits of its entities – both State-owned firms and regulatory bodies - has also grown as it seeks to bridge its growing financing deficit.

State regulators, including CBK, Kenya Bureau of Standards, Communications Authority of Kenya, National Environmental Management Authority, Capital Markets Authority (CMA) and Insurance Regulatory Authority (IRA), have in the past been treated like other State corporations, paying taxes and part of their profits as dividends back to the exchequer.

Not until CS Rotich exempted the authorities from paying corporate taxes in 2015 and ordered them to remit 90 per cent of their surpluses to the Consolidated Fund instead.

However, according to Treasury, the authorities have not been consistent in remitting their surpluses - taking advantage on bureaucratic gaps and lack of an enforcement arm.

“In this regard, I propose to amend the KRA Act and the Public Finance Management Regulations to allow taxman to collect the surplus from the regulatory authorities and remit to the Consolidated Fund,” Mr Rotich said. His observation was not an off-the-cuff anecdote in his long budget speech. The National Treasury, running broke, had gone back to assess where the national purse was leaking.

Treasury needs all the money it can lay its hand on and the billions made by the regulators in surpluses are in its crosshairs. The directive in CS Rotich’s budget statement directing KRA to collect surpluses from the regulators was backed up by an amendment to the Public Finance Management (PFM) Act.

The PFM (National Government) (Amendment) Regulations requires all regulators to remit 90 per cent of the surpluses 30 days after “they have been reported” in its audited financial reports.

The non-remittance of the surpluses has in the recent past been an issue of concern to Treasury and was in August a key agenda in a meeting held between Treasury and parastatal bosses.

Then Treasury was demanding to know why compliance was low and later, according to sources, directed CEOs and chairmen of different boards to ensure remittance of the 90 per cent surpluses to Treasury.

But as regulators reluctantly comply, there is a salient fight opposing Treasury’s move. The CMA has perhaps been the most vocal, arguing that especially at a time when the market is most vulnerable, Treasury wants to slip off all its resources.

“With reduced activity in the market, this may impact the revenue for the authority which is highly dependent on trading activity at the NSE,” CMA said.

The market regulator said the move is likely to deny it monies that could have been utilised for market development which will slow down market transformation.

Surplus funds

Remitting the money would also affect industry-wide innovation initiatives requiring regulatory support that may have to be postponed due to unavailability of surplus funds for re-allocation.

“Long-term organisational planning may be frustrated in the absence of surplus funds being available to cushion against revenue volatility,” CMA said in its annual report.

It also complained it would be stripped of the institutional capacity to attract and retain talent may be undermined in the event of the constraints on incentive and benefit schemes backed by surplus funds.

The banking sector regulator - the Central Bank - took another tactic, citing that Treasury while it is sweeping money back to the Consolidated Fund, it would subsequently be required to make bigger budget allocations just a few months down the road.

CBK reported a surplus of Sh17.5 billion in the year to June 2017. It is, however, fighting to retain much of this cash, saying it needed over Sh30 billion for several programmes and that the reserves could supplement its financing needs.

CBK said it needs Sh15 billion to print the new currency notes, a further Sh15 billion to boost its shareholder funds and more cash to modernise the institution. Instead, the State has taken away Sh800 million from its reserves as CS Rotich moves to mop up cash from the regulators.

“In the context of its discussion of the financial statements 2017/2018 and having weighed the various factors as stipulated by law, the CBK board recommended the transfer of Sh800 million to the Government Consolidated Fund from the CBK’s General Reserve Fund,” the regulator said.

The Insurance Regulatory Authority (IRA) said it has been complying with Treasury’s orders and remitted 90 per cent of its surplus funds and that this was unlikely to affect its operations for the current financial year.

“The surplus funds (for the year to June 2018) stood at Sh733 million. As per the National Treasury directive, 10 per cent of these amounts were retained and the remaining 90 per cent remitted to the Treasury,” said IRA in a statement.

It added that it had stuck to Treasury’s directive that all agencies invest the retained earnings in Governments bonds and bills.

Other than the moneyed regulators, Treasury also has to contend with a number of entities that are barely surviving and making just enough to support their operations while there are those that are loss-making and have to depend on it to stay afloat.

They include the Kenya Civil Aviation Authority that reported a deficit of Sh220 million in the year to June 2016. The regulator licences local and international carriers flying within and into Kenya and its loss-making is despite the reported growth in the aviation sector.

Another loss-making regulator is the Water Resources Authority, which reported a deficit of Sh265 million in the year to June 2016.