Treasury changes contract rules to curb losses from rising court fines

The Treasury has changed contract rules for ministries, departments, and agencies (MDAs) in a move aimed at safeguarding taxpayer money even as court awards against the State for bungled tenders exceeded the Sh150 billion mark.

Treasury Cabinet Secretary Njuguna Ndung’u wants MDAs to revise contract papers to inject clarity and strike out clauses that may fan acrimony resulting in costly legal battles for the State that is starved of cash to finance its budget.

“Poor management of contracts exposes the government to huge financial risks due to the nature of the colossal claims and non-payment of legal fees and costs by client MDAs,”  he said in a memo to accounting officers.

In a major shift, contract documents will be tweaked to provide bigger latitude for friendlier dispute resolution and accommodate contractors who either delayed in delivering on their obligations or faltered in meeting the desired quality of work.

For example, under the new rules, contracting MDAs are now required to minimise cancellation of contracts due to delays by service providers.

“If at any time during the contract period, the service provider is unable to perform in a timely manner, the service provider must notify the MDA in writing of the cause of the duration of the delay,” Prof Ndung’u said.

“Upon receipt of the notification, the MDA should evaluate the circumstances and if deemed necessary, the MDA may extend the service provider’s time for performance which will constitute an amendment to the contract in line with Section 139 of the Public Procurement and Asset Disposal Act, 2015. The MDA may decide to impose a delay penalty,” he added.

In the case of unsatisfactory performance, the Treasury now requires MDAs to stop apportioning blame on service providers and instead focus on negotiating corrective measures with them, including granting extensions on delivery time.

“When an MDA is not satisfied or there are problems with service provider’s performance, the MDA must review the conditions causing the problems and determine whether or not the MDA itself has significantly contributed to the problem,” the Treasury said.

Terms, conditions

It said the MDAs will be required to review the contract and other relevant documentation in the event of unsatisfactory performance to identify the rights and responsibilities of each party and notify the service provider in writing that their delivery does not comply with the terms and conditions of the contract.

The written notification to the service provider should identify the problem, corrective actions taken, timeframe for correcting the problem, and the consequences in case the problem is not corrected on time,  the CS said.

The changes to the contract documents also extend to the actual dispute resolution with the Treasury now ordering a review to provide clarity in delivery specifications and timelines to limit conflict due to misinterpretation.

“Accounting officers should apply different measures during the preparation and administrative phases of the contract to avoid any problem that may lead to a dispute. These measures include the following; stating the contractual requirements such as specifications and delivery dates as clearly as possible and; using plain and clear language in the contract itself as well as all other contract documentation,” the Treasury CS said, urging accounting officers to address issues without delay to prevent escalation.

Prof Ndung’u further directed accounting officers of MDAs to limit severe methods of dispute resolution in contracts.

“Maintaining a good working relationship with the service provider and the policies and procedures dispute should be detailed in the contract agreed to by both parties. The resolution options should be listed in order of preference starting with the least severe method and moving towards more severe methods.”

The rules come a few months after Attorney-General Justin Muturi warned that Principal Secretaries and chief executives of government entities would be punished for breach of legal agreements as the State sought to reverse mounting court awards against it.

Risk mitigation

Unlawful decisions by officers have become a major burden to the exchequer, with the awards now a key driver of pending bills for the national and county governments.

“To mitigate these risks, MDAs are required to follow due process in the management of contracts with contractors and service providers as well as in the issuance and cancellation of licenses and contracts,” Prof Ndung’u said.

For example, the Budget and Appropriations Committee of the National Assembly in 2021 estimated potential compensation for ongoing litigation in local and international courts at about Sh1.2 trillion from Sh809 billion in 2019.

The analysis showed the Health ministry accounts for over half of the cumulative court awards largely due to historical determinations which have not been honoured.

Many contractors have blamed “rogue” State officials for fanning the fines through reckless decisions. The biggest problem has been a lack of accountability on the part of officials whose actions lead to this unnecessary liability of taxpayers.

Some analysts have argued that it would help if the government went beyond taking responsibility for the breaches as a body corporate, and extended the penalties to individuals, who can then be charged in court themselves for their role in the messes they oversee.

“Some State officers are very reckless and would in some cases blatantly breach contract rules to accommodate their cronies through favours. I think such officers deserve some form of individual reprimand,” Donald Kenge, a governance analyst, said.

The government is under immense pressure to cut back on expenditure amid tough economic times that threaten the implementation of the 2023/24 budget.

President William Ruto’s maiden budget of Sh3.68 trillion is 8.6 percent higher than that of 2022/23 of Sh3.39 trillion.  This leaves an expected Sh720.1 billion deficit, which would comprise about Sh198.6 billion borrowed externally while Sh521.5 billion will be sourced domestically

The 2023/24 revenue is projected at Sh2.89 trillion. Sh2.57 trillion of this is ordinary revenue — revenue from income tax, VAT, duties, and investment.

As part of a strategy to cope with the budget pressures, the Treasury has set monthly limits on cash disbursement to MDAs and restricted recruitment of new staff, promotions and pay rise deals as part of wide-ranging rules aimed at curbing the wastage of funds amid tight budget conditions.

Prof Ndung’u said the fixed monthly cash disbursements to MDAs will be tied to available funds with priority on four categories of expenditure.

“Cash planning and setting of cash limits are intended to ensure more predictable execution of the budget and delivery of services and public investments,” he said in a circular to the accounting officers of MDAs.

Statutory obligations

In the new disbursement plan by the Treasury, Category One expenditures will cover statutory obligations, including debt outflows, salaries, cash transfers to elderly and other vulnerable groups, pensions, and county equitable share.

The second one comprises major social, economic, accountability, governance, and security programmes, including core services and investments while the third expenditure group covers all other government financed expenditures not in categories one or two.

The fourth expenditure category comprises externally funded projects categorised as revenue in the budget and for which funds are transferred to the exchequer.

“To enable a structured disbursement of cash to MDAs, the Treasury will provide monthly cash limits for each quarter based on projected available cash for category 1,2 and 3 expenditures and consequently meet requests related to category 1 and 2 expenditures promptly and category 3 when cash is available in line with withdrawal requests,” Prof Ndung’u said.

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