Tough new rules to restore fiscal discipline in inefficient parastatals

Tough times: Treasury will no longer guarantee debts for agencies that cannot sustainably manage their financial affairs, signalling that the going will be tough for State corporations

By John Oyuke

The Treasury has unveiled a raft of new reforms to tighten control and financial management within State corporations.

Contained in a circular providing guidelines for preparing and submitting the budget for 2013/2014 financial year, are ways and practices intended to make State corporations sustain themselves to remain viable and survive.

Under the new measures, failure to repay a Government-guaranteed loan or meet statutory obligations would be heavily penalised and could result in Treasury withholding guarantee for borrowing. Finance Permanent Secretary, Joseph Kinyua warns that Treasury will not give concurrence for borrowing or where applicable recommend to Parliament for Government guarantee for state corporations in default of past loan obligations.

“All state corporations must (therefore) take debt service and statutory obligations as a first charge on their revenues,” he added in a circular to all permanent secretaries and Chief Executive Officers of state corporations.

He said the budget proposals and feasibility study data must be submitted by state corporations to their parent ministries with a copy to Department of Government Investments and Public Enterprises (DGIPE), the Treasury by January 31, 2013.

Remedial measures

Kinyua also asked those with outstanding liabilities arising from default and non-payment of on-lent and guaranteed loans, or non-remittance of dividends, taxes, pension, National Social Security Fund and National Health Insurance Fund dues to initiate remedial measures to settle these obligations.

The same, he added, applies to other statutory obligations as well as employees’ contribution to co-operative societies. “State corporations should give a status report on remedial measures undertaken to settle all outstanding liabilities including dividend arrears to the National Treasury,” Kinyua said in the circular also copied to Attorney General and Head of Public Service.

The Constitution has established elaborate mechanisms for equitable distribution of resources between the national and county governments by providing for the establishment of the National Treasury. The National Treasury according to the Constitution has, in addition to these functions promote transparency, effective management and accountability with regard to public finances in the national government.

Though the Government formed the corporations to meet both commercial and social goals these institutions have been experiencing a myriad of problems, including corruption, nepotism and mismanagement.

However, since 2005, the State required all boards of State corporations to sign performance contracts to ensure improved management and utilisation of resources entrusted to them by the Treasury. According to the Ministry of Finance Quarterly Economic and Budgetary Review for 2012/2013 fiscal year, the scheduled cumulative principal payments of guaranteed loans to parastatals with liquidity problems amounted to Sh219.78 million of which Sh231.15 million was paid by the end of the period in review. The amount paid was higher than projected due to the exchange rate of local currency to the Japanese Yen.

Pension Schemes

During the budget, the exchange rate of the Shilling to Japanese Yen was 1.02941 while during repayment, the exchange rate for the Shilling to Japanese Yen was 1.09510.

On the expenditure management, Kinyua asked State corporations to improve efficiency in the management and utilisation of resources entrusted to them to continue getting help from the Treasury.

The Corporations are also not expected to enter into commitments or initiate new programmes, projects or activities in excess of funds allocated to them under the national budgetary provisions or funds available to them from other sources including internally generated revenues in any financial year.

All commercial State corporations are also expected to generate reasonable returns and declare and pay dividends to the National Treasury and other shareholders.

Those that do not already have dividend policies should formulate appropriate dividend policies and submit the same to the Treasury. He also directed state corporations to put in place to convert Defined Contribution (DC) Pension Schemes in compliance with an earlier treasury directive.

He wants the Corporations to provide status of implementation of conversion from Defined Benefit (DB) Pension Schemes and also to outline the current level of funding or deficit if any of the staff retirement benefits.

Also to be provided to the national Treasury are remedial measures which have been put in place to clear the deficit, if any, and ensure full compliance with the Retirement Benefits Authority requirements.

Under Treasury’s Circular No 18/2000 of November 24, 2010 all public entities operating Defined Benefit (DB) Pension Schemes were required to convert to Defined Contribution Pension Schemes. According to the circular, preparation of the 2013/2014 financial year capital budget for state corporation should be informed by Vision 2030 and aligned to the Medium-Term Plan (MTP) priorities.

strategic objectives

“It is advisable to liaise with Vision 2030 Secretariat to establish the updated MTP priorities,” added circular No 12/2012.

Further, capital budgets should be consistent with sector or ministry’s strategic objectives, realistic and based on resources that are available from internally generated revenues, borrowings and or allocated funds under sector ceilings.

Parastatals should ensure that all capital projects generate a reasonable rate of return which should be benchmarked with, and be comparable to the industry they operate in.

However, Kinyua said in cases of non-commercial corporations where this may not be quantifiable in financial terms, an adequate justification should be provided in terms of other criteria such as socio-economic impact.