Reforms loom as State firms hoard billions amid biting cash crunch

Despite the government being cash-strapped, State corporations are holding billions of shillings in commercial bank accounts.

At times, they have even been using these funds to lend to the government by buying Treasury Bonds and Bills.

The National Treasury is now decrying the situation, noting that in the year to June 2023, it could not access over Sh430 billion belonging to State corporations, which had been deposited in different financial institutions. 

“The National Treasury undertook an inventory of bank accounts and balances held by public entities in various financial institutions and established that as of 30th June 2023, these entities held Sh431.7 billion with various financial institutions. These large cash balances were not immediately accessible at a time when the government was cash-strained,” said Treasury Cabinet Secretary Prof Njuguna Ndung’u when he presented the Budget Statement in Parliament Thursday.

Treasury is now eyeing these funds through the ongoing State corporation reforms.

To access the funds that parastatals have stashed in different bank accounts, the government is implementing the Treasury Single Account (TSA) System.

The system is expected to consolidate government cash resources into a single account held at the Central Bank and a Sub-Treasury Single Account at the commercial banks. 

Prof Ndung’u said the Treasury will establish a Treasury Function to manage the TSA and TSA-Sub Accounts’ structure so that the government’s financial position is known and ascertained at any given time. The migration to the TSA system commences on July 1, 2024

“To address this challenge and underscore the Government’s unwavering commitment to fiscal discipline, transparency, and efficiency in the management of public finances, the Cabinet approved the implementation of the TSA system in a clustered approach,” he said. 

“The PFM Act, 2012 and its attendant Regulations provides for the establishment of the Treasury Single Account (TSA) system at both the National and County Governments. Based on the experience over the last 10 years since the enactment of the PFM Act, 2012, the need to review the scope of TSA implementation has become apparent.

“To improve public cash management, it is necessary to operationalize other elements of the TSA system as envisaged in the law. The automation of Government payments through the Integrated Financial Management Information System (IFMIS) and Central Bank of Kenya’s Internet Banking (IB) system, forms a good basis to widen the scope of the TSA system.”

Access to such money could reduce the extent to which the government has to borrow.

In implementing the budget for the 2024-25 financial year, the government will, for instance, need to borrow Sh597 billion to bridge the difference between the Sh3.99 trillion total budget and the Sh3.34 trillion in revenues (both ordinary revenues and ministerial appropriations in aid). The Cabinet in January directed Treasury to start implementing TSA, which would help consolidate and improve oversight of its cash resources.

The move is expected to significantly reduce the amount of cash that Ministries, Departments and Agencies deposit in commercial banks as the agencies are supposed to process and pay suppliers and contractors within 24 hours of receiving money from Treasury.

The move could also see local bank deposits take a hit as government agencies may close some of their accounts. The move will, however, not affect State-run commercial enterprises.

There have been concerns about state corporations’ money banked in commercial bank accounts, raising questions as to whether the interest earned benefits the public.

This could help in mopping up idle money from State corporations and is in addition to a March 2024 directive that all commercial State corporations remit 80 per cent of their profits after tax to the National Treasury.

Regulatory institutions were ordered to remit 90 per cent of their surplus funds to the Treasury.

Analysts noted that this could hit State corporations that have to compete with private sector players as it might starve them of money to deal with issues that crop up in the market as well as implementation of projects that might require them to plough back profits.

As part of the reform, the government recently unveiled a privatisation programme, which is expected to see about 40 entities sold to private sector players.

“In order to address the challenges faced by State corporations including, government-owned enterprises, the government will privatise government-owned enterprises whose mandates are no longer relevant, those that require huge budgetary allocations for bailouts, and those producing goods and services that would more efficiently be produced by the private sector,” he said.

“(The government will also) restructure State corporations through mergers and transfer back to parent ministries or relevant State corporations to: move duplication of functions; enhance efficiencies and synergies in operations so as to optimise use of limited resources; ensure State Corporations are self-sustaining; generate additional revenue to the exchequer; and ensure quality service delivery to Kenyans.”

Loss-making

Last November, Treasury listed 11 State corporations that it plans to offload its shareholding. These include the Kenya Pipeline Company, New KCC and the Kenyatta International Convention Centre (KICC).

Others include Kenya Literature Bureau (KLB) and Kenya Seed Company, which alongside KPC, KICC and New KCC are profitable. Others are National Oil Company (NOCK), Kenya Vehicle Manufacturers (KVM), Rivatex and Numerical Machining Complex (NMC), Mwea Rice Mills and Western Kenya Rice Mills, which are loss-making

Prof Ndung’u also told MPs that the government is putting in place new policies, which are expected to enhance the performance of state corporations. 

“You will note that in 2023 the Cabinet approved the Ownership Policy for government-owned enterprises, a key governance reforms framework. To anchor the policy in law and give effect to its operationalisation, a draft Government-Owned Enterprises Bill, 2024 has been finalised and is undergoing public participation. Once the process is completed and approval granted by Cabinet, the bill will be submitted to this august House for consideration,” he said. 

“We have also prepared a draft Government Investment Regulations, 2024 to provide a framework for the efficient and effective management of government investments.”

The State corporation reforms are backed by the International Monetary Fund (IMF) as among the conditions for continued access to the Bretton Woods institution’s loans.

The IMF in the January review of the government entities noted that “a substantial portion of public sector assets, about 67 per cent of GDP, is managed by State corporations and semi-autonomous government agencies, but their contributions to the budget (dividends and taxes) were very small in the financial year 2022-23”, emphasising the need why they need restructuring.

Treasury in its report to the IMF said structural reforms aimed at strengthening the governance, and oversight of state-owned enterprises and state corporations continue to rank high on the authorities’ reform priorities.