The Prompt Payment Bill, 2021 (Senate Bills No. 16 of 2021) is a Bill that is sponsored by Senator Farhiya Haji, MP and Senator Johnson Sakaja, MP. The Bill is Gazette Notice No. 36 of 2021.
At the time of writing this review in early April 2022, the Bill had passed through the 3rd Reading at the Senate, been approved with amendments and referred to the National Assembly for debate. The Bill went through the 1st Reading at the National Assembly on 2nd February 2022. This is as per the information in the Senate Bill Tracker and National Assembly Bill Tracker on Parliament of Kenya’s Website.
The short title of the Bill provides that it is “A Bill for AN ACT of Parliament to provide for prompt payment for the supply of goods, works or services; and for connected purposes”.
The best way to start this review is by answering the question whether this Bill is indeed necessary. The answer is not a simple yes or no. This is because the Bill is necessitated by the failure to respect and enforce existing laws, thus the need to create specific laws to address issues which are already covered in existing legislation, but still poorly enforced.
To this extent, the question on the importance of the Bill cannot be answered in the affirmative, reason being that if current provisions on prompt payment of bills have not been enforced, what guarantee is there that the provisions of this law will be enforced?
It is a fact that delayed payment of bills in Kenya by both the national and county government is a common problem that has not only frustrated businesses but also led to the near or actual collapse of many businesses.
Delayed payment of bills is not an evil that bedevils the Government of Kenya only but is also quite rife in the private sector. One common excuse that private entities use to justify their delay in settling bills is that they too have not been paid by Government or their private sector clients.
The practice of delayed payments is quite common in the Kenyan retail chains, with some of them like the collapsed Nakumatt chain and recently Tuskys going down with billions of shillings of suppliers funds.
Prompt payment of bills is one the issues that entities such as the Kenya Private Sector Alliance (KEPSA) and Kenya Association of Manufacturers (KAM) often raises with the government as some of the initiatives that would improve the business environment in Kenya and ease of doing business.
Further to this, the fact that the Government has admitted that pending bills are a problem and even issued Circulars such as Treasury Circular No 10/2020 dated 16th June 2020 titled, “Prioritization of Pending Bills by State Corporations and Semi-Autonomous Agencies (SAGAS), is an indication that the problem is huge.
Existing Legal Provisions on Prompt Payments
The issue of prompt payments is not novel to the Prompt Payment Bill, 2021 as it is already covered in pre-existing legislation to a great extent.
Delayed payments which are attributed to lack of funding could be an indication that the provisions of Section 44, 53 and other provisions of the Public Procurement and Asset Disposal Act, 2015 (PPADA) on role of the accounting officer and procurement planning have not been adhered to. Ideally, a procuring entity should not start any procurement without first confirming that the item was in the procurement plan and that it was in the budget.
Section 44 of the PPADA provides for the responsibilities of the accounting officer in procurement including ensuring the procuring entity complies with the Act, that procurement plans prepared are within budget, are in accordance with fiscal objectives and that the procurement plans are submitted to the National Treasury.
Section 53 of the PPADA provides for procurement and asset disposal planning, with Section 53 (2) requiring that the accounting officer shall prepare an annual procurement plan that is realistic and which is within the approved budget, prior to the commencement of each year.
Treasury Circular No. 10/2020 dated 16th June 2020 on prioritization of pending bills lists various provisions of the law that apply to accounting officers in financial management and which are breached whenever payment of bills is delayed. These include provisions of the Constitution, the Public Finance Management Act, 2012 (PFMA) and the PPADA.
Of note is Section 74 of the PFMA which provides for disciplinary measures against public and accounting officers. Section 74 (4) of the PFMA states that:
“For the purposes of this section, a public officer or accounting officer engages in improper conduct in relation to a national government entity if the officer— (…)
(d) fails, without reasonable excuse, to pay eligible and approved bills promptly in circumstances where funds are provided for.”
The PPADA contains certain provisions to ensure prompt payment of bills. These include Section 151 of the Act which provides for the roles of the complex and specialized contract implementation team. Section 151 (2) contains the following responsibilities of the team on payments:
(c) ensure that the procuring entity meets all its payment and other obligations on time and in accordance with the contract. (…)
(h) ensure that the contract is complete, prior to closing the contract file including all handover procedures, transfers of title if need be and that the final retention payment has been made; (…)
Section 176 of the PPADA which provides for prohibitions and offences provides as follows at Section 176 (1) (c);
A person shall not: (…)
(c) delay without justifiable cause the opening or evaluation of tenders, the awarding of contract beyond the prescribed period or payment of contractors beyond contractual period and contractual performance obligations;
The PPADA also provides for the penalties and sanctions that apply when a person commits any of the offences under the Act.
To enable implementation of the above provisions, Regulation 150 of the Public Procurement and Asset Disposal Regulations, 2020 (PPADR) contains more detailed provisions on prompt payment for performed contracts. Regulation 150 (1) of the PPADR provides as follows:
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Subject to the availability of funds and after proper certification of the goods, services or works have been done, a procuring entity shall make prompt payments for all performed contracts including enterprises owned by youth, women or persons with disabilities and shall make payment within sixty days from the date of receipt of the invoice. (Emphasis Added)
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For delayed payments in the private sector, Section 24A of the Competition Act, No. 12 of 2010, contains provisions on abuse of buyer power which address delayed payments to suppliers. These provisions were introduced by the Competition (Amendment Bill), 2019. Section 24A (5) (a) defines conduct amounting to abuse of buyer power to include delays in payment of suppliers without justifiable reason in breach of agreed terms of payment.
Section 24 A (9) of the Competition Act provides for penalties for abuse of buyer power and states that, “Any person who contravenes the provisions of subsection (1) commits an offence and shall be liable on conviction to imprisonment for a term not exceeding five years or to a fine not exceeding ten million shillings or to both.”
Kenyan laws are clearly not bereft of legal provisions to enable prompt payments of bills. These laws also provide for consequences for failure to adhere to the provisions on prompt payment.
So, where exactly does the problem lie? Is it a failure in procurement planning, poor budgeting, or budget failure in terms of the Government failing to remit funds or misallocation of funds by diverting funds meant for certain procurements to other projects?
The enactment of a Bill on an issue that is already well legislated is an indication that the existing provisions have not served their purpose and have been largely ignored, thus the need for a separate piece of legislation on the subject with the hope that it will improve compliance.
Will a stand-alone piece of legislation to curb delayed payments solve the problem? A review of the provisions of the Bill may give us an indication of this.
Provisions of the Prompt Payment Bill, 2021
Interpretation Section
The interpretation section of the Bill defines certain key terms which are relevant to the Bill. The definitions also refer to other relevant Acts of Parliament. For instance, the term accounting officer is defined in line with the definition provided in the PFMA and specifically Section 67 of the PFMA which refers to an accounting officer of a national government entity and section 148 which refers to the accounting officer of a county government entity.
The term “micro and small enterprise” has the same definition as that given in Section 4 of the Micro and Small Enterprises Act, 2012.
Section 2 of the Bill also defines the “prescribed payment date” as being the date when payment is due under a contract or in the absence of a contract, ninety (90) days after receipt of an invoice following completion of works or completed delivery of goods or provision of services or such lesser days as the Cabinet Secretary may prescribe.
This timeline is 30 days more than what is provided under Regulation 150 (1) of the PPADR, which creates a concern on whether the Bill is introducing further complacency on an issue where there is already too much complacency.
Section 3 of the Bill provides for Application of the Act [the Bill after being passed] and indicates that, “This Act shall apply to payment due for all goods, works and services procured by the national government, county governments and private entities.”
The wording of this section implies that the Act once passed will also cover situations of delayed payments by private procuring entities since it does not state items procured by national and county governments from private entities, but lists private entities as also coming within the application of the Act.
If the intention was to cover private procuring entities, it would have been useful for the Bill to add the definition of “private procuring entities” since procuring entity is defined in Section 2 of the Bill as entities making procurement to which the PPADA applies, which definition does not include private entities.
The Report of the Standing Committee on Finance and Budget which discussed the Bill indicates that the main object of the Bill is to put in place a framework to facilitate prompt payment of goods, works and services procured by government entities at both national and county level.
This means that the intention of Parliament is that the application of the Bill be limited to Government entities at both levels of Government. Also, the structure of the Bill and the enforcement mechanisms are not relevant to the private sector context. Since the bill is intended to apply to Government only, the inclusion of the term “private entities” in Section 3 should be deleted as it is misleading.
Prompt Payment of Accounts
Section 4 of the Bill which provides for prompt payment of accounts is the heart of the Bill. It provides for payment of suppliers by the prescribed payment date, failure to which the procuring entity shall be liable to pay interest to the supplier unless otherwise agreed or subject to the provisions of Section 5 and 6 of the Act.
Section 5 of the Act provides that notwithstanding the provisions of Section 4 (on prompt payment of accounts), a procuring entity shall ensure that priority is given to the payment of outstanding debts for the supply of goods and services to the procuring entity.
The purpose of this section is to emphasize the importance of settling debts on a priority basis, regardless of the date provided in the contract or the ninety day maximum prescribed payment date in the Bill.
This means that if the goods and services in question have already been delivered and the contract has been fulfilled, the procuring entity should not wait until the last date indicated in the contract or the lapse of the ninety-day period to make payment, but should make payment at the earliest opportunity.
Pay on a “First Come First Serve Basis”
Section 5 (2) is an important provision as it seeks to promote fairness, equity and justice in settlement of payments by procuring entities. It provides that in determining which debts shall be given priority, the procuring entities shall have regard to the dates when the debt fell due and shall pay debts on the basis of “first-in, first-out”.
It is common place to hear of situations where payments for contracts which are of special interest to employees of procuring entities are fast tracked while other suppliers who do not know anybody to “push” for payment of their bills end up waiting for months or years.
This provision is also of special significance to the disadvantaged groups within the meaning of the PPADA, like youth, women and persons living with disabilities since it often happens that they have limited networks/connections and risk suffering the most when pending bills are paid on the basis of “do you know anybody” within the procuring entity.
The provisions of Section 5 (2) of the Bill therefore seek to promote a culture of fairness such that your bill should be paid based on the date it is due and not whether you know an influential person in the finance department or other relevant department within the procuring entity.
The Bill could also include a requirement to employ technology like IFMIS or any other e-procurement platform in place to aid in prioritization of bills that are due for payment on a “first come first serve” basis.
Return of Invoice
Section 6 of the Bill provides for Return of Invoice, thus catering for the practical situations that may delay payment of debts. This involves situations where there is a dispute over the invoice, such as whether the contract has been fulfilled as per the terms of the contract with regard to issues of quality or quantity of goods and services or other reasons such as defects in the invoice.
To avoid situations where a supplier is kept in limbo due to a dispute over an invoice, this section requires that the procuring entity should return such an invoice within fourteen (14) days and the supplier should return the corrected invoice within fourteen (14) days.
This section still requires that even in the event of a return of invoice, the procuring entity should still pay the supplier atleast 50% of the amount due or as the procuring entity and supplier may agree.
As a precautionary measure, this section should indicate that the 50% of the amount due should be paid subject to the terms of the contract or only where feasible, since depending on the nature of the dispute, it may not be possible to pay the amount or parties may not agree to the percentage to be paid e.g. in cases where the dispute relates to whether the supply actually happened “air supply” or where works are so poorly executed such as in the case of collapsed infrastructure, payment of even 50% or any percentage may not be feasible.
Payment of Interest
Section 7 of the Bill provides that where a supplier has fulfilled all contractual and legal obligations relating to supply of the goods, services or works and the procuring entity fails to pay, then the procuring entity shall pay the supplier interest on the amount due under the contract based on the base rate set by the Central Bank of Kenya.
The clause on interest is a fair clause since payment delays are in many ways comparable to offering the procuring entity a credit facility at zero interest. Noting that many suppliers usually take loans to supply the goods, services or works, payment of interest on delayed payments compensates them for the inconvenience and extra costs incurred in accessing credit.
This provision on payment of interest on delayed bills may be difficult to implement for various reasons. The Government already has many unpaid debts, including from judgements and commercial contracts. The fear that payment of interest could result to accusations of negligence against certain government officers and maybe even the risk of surcharge may create a further hurdle. Also, procuring entities may not have an available budget for interest and it may be hard to budget for an item that cannot be foreseen or accurately quantified.
Fair Dealing
Section 8 of the Bill provides that a supplier and procuring entity shall at all times deal with each other fairly and lawfully.
Besides stating what should be a basic minimum requirement in dealings between a procuring entity and suppliers (fairness and lawfulness), the intention and value of this section remains unclear as it sounds more like a well-intentioned provision which may not be enforceable.
The section would have been more useful if the term “fair dealing” was defined, specific instances of unfair dealing provided and penalties provided for procuring entities that do not deal fairly with suppliers. Fair dealing incorporates the values of equality and equity. A few examples of unfair dealings in the Kenyan context include:
- Failure to inform suppliers the reasons for delay in settlement of their pending bills;
- Returning the invoices when there is no valid reason to do so or offering false reasons for the return of an invoice;
- Favouritism of certain suppliers by fast tracking their payments in a manner that gives them an undue advantage over their competitors in the same industry etc.
Protection of Micro and Small Enterprises
Section 9 of the Bill which requires declaration of pending payments seeks to promote small and micro enterprises as defined in Section 2 of the Micro and Small Enterprises Act, 2012. This Act defines micro enterprises as firms with an annual turnover not beyond KES. 500, 000/=, employs less than 10 people and has total assets and investments as defined by the Cabinet Secretary from time to time.
The Micro and Small Enterprises Act defines small enterprises in Section 2 of the Act as firms with an annual turnover between KES. 500, 000/= and 5 million, employs 10 to 50 people and has total assets and investments as defined by the Cabinet Secretary from time to time.
Section 9 of the Bill requires that any person wishing to enter into a contract for supply of goods, works or services with a national or county government shall make a declaration to the accounting officer of the entity of any pending payments owed to a small or micro enterprise.
This is a very progressive clause and it is recommended that the application of the same be extended beyond small or micro enterprises to apply to other businesses, which though not within the category of the micro or small businesses within the meaning of the Micro and Small Enterprises Act, but can be classified as Small and Medium Enterprises (SMEs) in the broader sense of the term.
One of the loopholes with this provision is the risk of failure by suppliers to declare pending payments owed to the applicable entities through either intentional or accidental misclassification of the entities as not being in the micro or small categories.
This could be through suppliers claiming that they did not know that the entity they owe is a small or micro enterprise since their operations, staff or turnover seem bigger than those of a small or micro enterprise. Extending the declaration requirement beyond this small group reduces the risk of failure to declare due to misclassification of the entities they owe money.
It is common to find suppliers of goods, works or services to the government and who receive colossal amounts of taxpayers’ money for supplying to the government but yet refuse to honour their obligations to their smaller suppliers simply because these small entities do not have the muscle to compel them to pay.
The process of enforcing payment of pending bills through debt collectors’ or the courts is often expensive, lengthy and frustrating and many suppliers either end up classifying those debts as bad debts or only pursue them as a last resort.
Of rising concern in the Kenyan context on refusal to settle bills is the issue of foreign contractors and suppliers who make colossal amounts of money through participation in public procurement in Kenya but who exploit local service providers or refuse to pay them since they know the weak rule of law and legal enforcement mechanisms in the country will allow them to get away with such improprieties with impunity.
With regard to foreign contractors seeking to participate in public procurement, we should take this provision a step further and require a declaration on any pending payments owed not just to small or micro enterprises but to any citizen or local businesses beyond the prescribed payment period and the reasons for such delay.
Offences under the Bill
The Bill can do better on the aspect of offences provided, or else it will end up being an extra piece of legislation with no teeth. In as much as the Regulations may provide for more details, it is important that the Bill provide sufficient details on which the Regulations may be anchored on.
The offences and penalties provided under Section 10 of the Bill relate to failure by an accounting officer of a procuring entity to return an invoice delivered by a supplier as provided in Section 5 or to pay the amount due by the prescribed date.
The Bill can be lauded for providing a stiff penalty for the above offences, this being a fine not exceeding five million shillings or to imprisonment for a term not exceeding five years, or both, upon conviction. It is hoped that the courts will issue penalties on the higher and not lower limits.
Other offences that could be considered for inclusion in the Bill include:
- Failure of an accounting officer to give priority to outstanding debts in breach of Section 5 of the Bill e.g. prioritizing other non-essential payments such as expensive travel or training for employees over payment of budgeted pending bills;
- Failing, without reasonable cause, to make payment of pending bills on a first-in, first out basis in breach of Section 5 of the Bill;
- Favouritism of certain suppliers in settlement of bills;
- Making a false declaration (failing to disclose or making an incorrect declaration) under Section 9 of the Bill in terms of failure to declare pending payments owed to micro or small enterprises and other entities;
- Failure to deal fairly with suppliers in breach of the provisions of Section 8 of the Bill;
- Failure to pay interest for delayed payments when demanded to a contractor who has met all contractual and legal obligations contrary to the provisions of Section 7 of the Bill.
Regulations
The final Section of the Bill (section 11), like for most other laws, provides for the making of Regulations. Regulations provide further details that enable the operationalization of any law.
In as much as the Regulations will provide for further details, it is important for any parent Act to contain sufficient detail to avoid a situation where the Regulations end up “working too hard” to fill gaps in the parent Act with the risk of them containing clauses that may be construed as being inconsistent with the parent Act.
Section 24 (2) of Statutory Instruments Act, 2013 states:
“A statutory instrument shall not be inconsistent with the provisions of the enabling legislation, or of any Act, and the statutory instrument shall be void to the extent of the inconsistency.”
Courts have also echoed this provision and added that there is no reason why the provisions of a subsidiary legislation should override the express provisions of an Act of Parliament (See Victor Juma v Kenya School of Law; Council of Legal Education (Interested Party) [2020] eKLR).
For this reason, any additional clauses that need to be added to this Bill, some of which are proposed above, should be added so as to give the Regulations legs to stand on.
Areas of Improvement
As indicated in the introductory section, the Bill is an important piece of legislation in a country where the problem of delayed payments, starting with the government and trickling down to the private sector, has brought many businesses to their knees if not to their graves.
As pointed out throughout the review, there are certain aspects of the Bill that could be improved to ensure the Bill once passed into law will have the impact it was intended to have. Some of the areas of improvement include the following:
Application of the Bill
Clarity on whether the Bill is meant to apply to delayed payments between private entities – the confusion on which entities the Bill applies to, and specifically whether it was intended to apply to payments between purely private entities, is occasioned by Section 3 of the Bill which provides for Application of the Act.
This section states, “This Act shall apply to payment due for all goods, works and services procured by national government, county governments and private entities.” (Emphasis added)
However, beyond that, the rest of the Bill is purely focused on delayed payments by County and National Government, with the definition of the term procuring entity being limited to entities to which the PPADA applies, which are mainly government entities and parastatals. The deletion of the term “private entities” will clear the confusion.
Also, since payment delays in the private sector are already covered under the Competition Act as highlighted above, it may be redundant to extend the application of the Bill to cover delayed payment by private sector procuring entities. A better approach may be to beef up the Competition Act if need be and improve the enforcement mechanism under that Act.
Offences and Penalties
Section 10 of the Bill on offences and penalties can be strengthened to include additional offences. Also, noting that there are other pieces of legislation that deal with the issue of delayed payments, the Bill should look into how it can harmonise/tap into some of the offences under those Acts.
This will ensure that the Bill contains a more comprehensive list of offences and penalties that will give the Bill teeth that can bite, which is the finishing touch that pre-existing laws touching in the issue of pending bills seem to be lacking.
Conclusion
As noted in the introductory section of this review, the issues covered in the Prompt Payment Bill, 2021 are already covered, to a large extent, by other pieces of legislation. There is no doubt though that the issues tackled bill are important and the Bill addresses a major problem ailing the Kenyan economy and a solution to the issue will contribute to the growth of the economy.
The other benefit which prompt payment of bills is likely to yield, is the general improvement to the mental well-being of the citizens of this great country by reducing the stress and other negative ripple effects caused to businesses through delayed payments. While this benefit is not much talked about or even easily quantifiable in economic terms, it is reason enough to pass this Bill.
These mental well-being benefits the Bill is likely to bring by curbing delayed payments include averting the stress caused by the collapse of businesses due to payment delays, reducing cost of doing business occasioned by need to borrow at exploitative interest rates to stem the gap from delayed payments, reduction in spending which affects employment rates etc.
It is recommended that the drafters of the Bill investigate the proposed areas of improvement above and incorporate them to ensure that this much needed Bill delivers the intended benefits.
Finally, it is obvious that this Bill is necessitated by failure to enforce existing laws on the issue of pending bills. However, if the issue of enforcement of laws is not addressed even with the pre-existing laws, this Bill risks being another piece of legislation that may not add value to the public.
