•Taking into account current lending rates, government and private firms owe traders in excess of Sh350 billion
•Public Procurement and Asset Disposal Act (2015) says entities which delay payments to suppliers shall incur additional charges for each day defaulted
Suppliers say they are frustrated by the government’s failure to pay overdue bills with interest as required by law.
Under the Public Procurement and Asset Disposal Act (2015), entities which delay payments to suppliers shall incur additional charges for each day defaulted.
“The procuring entity shall pay interest on the overdue amounts… the interest and liquidated damages to be paid shall be in accordance with prevailing mean commercial lending rate as determined by Central Bank of Kenya,” reads Section 140 of the law.
Supplies and Contractors Welfare Association chairman Peter Towett said national and county governments have not been honouring payment to suppliers since the 2013/14 financial year when the government functions were officially devolved.
“The issue of pending bills became worse when county governments were introduced into the picture because they incorporated structures that were not up to date," Towett said.
A Treasury report to the National Assembly’s Committee on Implementation shows government pending bills to local traders stood at Sh32.5 billion as at November last year but suppliers say the amount owed is in excess of Sh250 billion.
The biggest defaulters, according to the report, are the Ministry of Defence that owes Sh8.93 billion, Ministry of Health Sh7.1 billion, State Department of Interior Sh5.4 billion and State Department for Broadcasting and Telecommunications at Sh3.2 billion.
Large corporate players owe SMEs about Sh60 billion bringing the total amount owed to an excess of Sh310 billion.
With commercial banks currently lending at 13 per cent as the Monetary Policy Committee retained the base lending rate at nine per cent in March, government owes suppliers interest of Sh32.5 billion.
The private sector owes about Sh67.8 billion including interest bringing total overdue bills to more than Sh350 billion.
Towett said most county governments and state entities do not allocate budgets to offset overdue bills to traders making them accrue mountains of pending bills.
“This is bad especially for small businesses which have ended up bankrupt, with some even closing shop,” he said.
According to Towett, most auction adverts in local dailies are from banks targeting suppliers who have not received payment from government and have overdue loans.
“We have seen stress from non-payment drive some of our members into depression with some cases resulting into untimely deaths and broken families,” he said.
The World Bank Economic Update released on April 9 shows profitability among firms dealing with government is on the decline and this has weakened economic growth.
According to World Bank, the affected firms especially small businesses end up in bankruptcy or alternatively stop servicing their debts resulting in increased non-performing loans. This, in turn, has a negative impact on the banking sector.
Towett said besides having to deal with the law capping interest rates, which has muzzled lending to risky borrowers, banks are now unwilling to take LPOs as collateral for loans.
“They (banks) know payment will be delayed, if paid at all, and don’t want to give loans on a false promise of payment,” he said.
Gatundu South MP Moses Kuria is now proposing amendments to the Public Procurement and Asset Disposal Act to make it mandatory for procuring entities to pay successful suppliers within 90 days from the date of receipt of invoices and certificates for works, goods or services executed or delivered.
Where the procuring entity is unable to pay within the prescribed period, they will be required to issue a promissory note which shall be valid for a period not exceeding 48 months (two years) from the date of issue.
The Kenya National Chamber of Commerce and Industry are also lobbying for measures to cushion suppliers from the negative effects of late payments.
"There is a need for transitional arrangement in counties where obligations by previous regimes are carried forward unconditionally," KNCCI chairman Kiprono Kittony said last week.
The trade body is proposing a mechanism where victims of delayed payment are spared from poor credit rating. It also wants the government to wave penalties on unpaid taxes by victims of overdue payment.