The PoinTIssue No. 4 • June, 2014Published by Institute of Economic Affairs (IEA)

Brief on Public Sector Wage Bill: Policy Options

By Stephen Jairo

It comes as no shocker, that the budgetary allocation for development expenditure has been lower than the allocation for recurrent expenditure - which mostly goes towards the payment of salaries and allowances of civil servants/government officials. It is also worth noting that there are disparities in salaries to officials even for those within the same job group, some even with similar qualifications. This is because the remuneration package is not based on a systematic job description and pay analysis. It is also important to note that government is a non-profit making entity, meaning its employees are rarely motivated, even with the introduction of performance contracts. Of concern though, is the rate at which the public sector wage bill has skyrocketed, to the extent that it is threatening to stifle government’s normal operations and consequently, economic growth. It is based on this background that the Institute of Economic Affairs (IEA-Kenya) held a public forum, to discuss and get views on how this can be tackled moving forward. To this end, the IEA made a presentation that looked at the state of play, recent developments, the economic implications of the ever burgeoning wage bill, and outlined some Policy Options (Presentation available at www.ieakenya.or.ke). This brief looks at this issue in-depth and offers some policy recommendations.

1.0. Introduction

There has been consistent growth in the population structure globally, leading to an increased demand for both public and private goods and services. Of most concern however, is the need to provide adequate public services, since in most countries, the quality of services in most instances is usually low.

Today, people around the world are demanding for better goods and services from the government, in return for the taxes they pay, which should be used to procure the goods and offer services. Among

the common services that the national government is required to offer its population include;

• Educa t ion : ( g ove r nmen t sponsored/public schools). This is in terms of employing teachers in public institutions, remunerating them and providing tools and materials that will aid in this endeavour.

• Security: This is in terms of recruiting and remunerating the various persons in the disciplined forces as well as the general security apparatus.

• Health: This is in terms

Inside

Introduction

Public wage bill and GDP

Wage Bill and Revenue Collection

Dissecting the Wage Bill: Causes of the Increase

Implications of IncreasingWage Bill

Policy Recommendations

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government embarked on a strategy to maintain a leaner number of civil servants, with emphasis being placed on efficiency and productivity. Despite these efforts, the public sector wage bill still went up.

2.0. Public wage bill and GDP

The country’s GDP has been on a steady growth path for the few previous years. It is worth noting, that the GDP score was 4.4 in the year 2011, whereas the percentage of wage bill to GDP was at 11 percent. The growth of GDP signifies steady economic growth of the country, and this is expected to trickle down to the population at large, as economic activities benefit individuals and the country at large. Comparing the GDP against the wage bill is essential, since economic growth cannot be realized with huge debts, but with growth in real terms and not nominally.

Figure 1 above indicates that the public wage bill as percentage of GDP was at 11.3 per cent in 2010. The promulgation of the Constitution of Kenya 2010 and the subsequent establishment of decentralized administrative units (counties) then saw this huge wage bill increase, rising to 12.1 percent of GDP in 2012 and 12.5 percent in 2013. These rates are way above the internationally desirable levels of a 7 percent ratio of wage bill to GDP; hence it is important that measures are in place to bring this down to desirable levels.

3.0. Wage Bill and Revenue Collection

In order for the government to provide goods and services to its citizens, it has first to collect revenue that would in turn be used to pay for these goods and services. In a more service-oriented kind of structure, it would be required that more allocation set aside to attain this feat. This is the ideal scenario, but far

availing and providing health items like drugs, hospital infrastructure, health services as well as employing health practitioners

• Various social amenities: This includes roads; streetlights as well as services are offered in government offices.

It is important to note that “public” also includes those institutions involved in service provision, but in which the government has majority shares for instance - state corporations.

In order to realize better provision of the aforementioned services, it is important to appreciate the role of the human resources as a means of providing these services adequately and in a timely manner. The human resource also has to be adequately remunerated in a manner that motivates them, that matches their qualification and that upholds their values and living standards, while still bearing in mind the current harsh economic realities in the country. This is an issue that has not been addressed.

According to recent figures, Kenya has a total workforce of twelve (12)million, ten (10) million of whom are in the informal sector. The remaining 2 million make up the formal sector which is comprised of the government civil service jobs, parastatals as well as the private sector. It is estimated that Kenya currently has a civil service workforce of about 700,000. This has been said to be one of the largest numbers of public employees in comparison to other sub-Saharan countries that are relatively at par with Kenya in terms of the rate of economic growth. This has greatly contributed to the rising wage bill.

In order to get to the root cause of this reality of these huge wage bill. There is need to look at Kenya’s history and what got Kenya to this current state.

Immediately after Kenya attained independence, there was a push to substitute all white collar job holders, mostly the colonial masters and their cronies, with native Kenyan. This endeavour saw both the qualified and the unqualified get plum government jobs in the civil service. This was followed by subsequent efforts to reform the country’s civil service between the 1980’s and 1990’s, commonly referred to as the Structural Adjustment programmes (SAPS). The government thereafter realized a shortfall in revenue and subsequently froze direct hiring of graduates, and reduced the retirement age limit. Further on, the

Figure1: Comparison of GDP growth and Wage Bill as % of GDP, 2010 - 2013

Source: National Treasury, Economic Survey, 2014

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from the case of Kenya, where allocation for service provision is far outweighed by allocation towards payment of salaries and allowances for civil servants. It is important to note that since the year 2008/09, there has been a steady increase in the share of revenue allocated to payment of salaries and wages of civil servants. In 2009/10, this percentage was 47.3, which is way above the internationally desirable level of 35 percent. This went up in the fiscal year 2011/12 to 48.1 percent and further on in 2012/13, to be at a whopping 55 percent. Figure 2 shows this trend. This means that only 45 percent of the revenue collected is left for development purposes, noting that it will still be used to cater for other recurrent expenditures that must be acquired for normal daily operations such as stationery, rent and other utilities. Therefore, it is important that drastic measures and policy actions be implemented if this is to be brought down.

4.0. Dissecting the wage bill: Causes of the Increase

The public sector wage bill is comprised of regular payroll expenditures such as: basic salary, house allowance, and all other allowances payable to public servants. It also includes other personnel-related expenditures which are not paid on a regular basis, such as fees, commissions and honoraria, refund of medical expenses, and other personnel benefits.

The country’s wage bill started soaring in 2008 following the coming into place of the grand coalition government formed early in April 2008, as well as increased employment of public service officials, mostly teachers and nurses. The push by trade unions for pay rise for their members has also contributed to

the increase in the wage bill. Worth noting is the fact that there has been an increase in the public sector wage bill from Kshs.239.9 billion in the financial year 2008/09 to Kshs.464.9 billion in the year 2012/13. This is almost a double increase, thereby making it critical for Kenyans to look at what could have led to this situation, and how to rein in on the burgeoning public sector wage bill.

In the year 2012/13, the public sector wage bill in Kenya constituted about 43 percent of the national budget and rose to 45 percent in 2013/14. Coupled with increases in salaries of various entities in the public sector, and an ever-sustained agitation for higher pay from various quarters, it is impractical to imagine that the high wage bill could be tamed soon enough, and as such will require concerted efforts from all key players. However, in an effort to mitigate the current situation, the following are some of the issues that need to be addressed:

i. Number of employees: The Government has undertaken to carry out an audit process with a view of establishing legitimately employed personnel, and weed out ‘ghost workers’ from the civil service payroll. A lot of money has been and is still being paid to non-existent workers, or those who have left service, or even those who do not work in the civil service but whose details are in the governments’ payroll. This audit is expected to go a long way in helping reduce the wage bill as it will curb wastage and misuse of public funds.

ii. Thepayroll:The government has also raised issue with its own payroll system, terming it outdated, and appreciating the need to upgrade it using the latest advanced technology. There is therefore need to audit the current payroll system and how it works, identify the existing loopholes and propose ways through which it can be improved. This will eliminate instances of double payment to civil servants, thereby saving public funds. . Caution however has to be taken to ensure that the system is fool proof.

iii. Supporttocountygovernment: The rise in the wage bill in counties has raised concern especially because county governments have not met their revenue targets, thus heavily relying on the central government for support. It is expected that in the initial stages however, there may be shortfalls as the county governments try to establish structures at those levels, and seamlessly set their operations

Figure 2: Ratio of Wage Bill to total Revenue (2009 - 2013)

Source: National Treasury

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in motion. Raising revenue at this level is still a challenge, although could be overcome in the futures. It is therefore important that county governments put in place measures that will aid in raising adequate revenue for their own use.

iv. Hiring of new staff: The government has recruited new staff members, especially for core services that are understaffed, for example, teachers, police officers, and nurses, thereby raising the wage bill. The increased hiring of civil servants by the county governments should be addressed, since most officers hired just duplicate roles of the existing staff considering that the county government inherited staff from the defunct local authorities in their jurisdiction.

v. Salary and wage increase: In the recent past, there has been an increase in the salaries and wages of state officials which has raised the wage bill. The Salaries and Remuneration Commission (SRC) needs to carry out a job evaluation and staff rationalization so as to harmonize salaries to the levels that the economy can sustainably support.

vi. New governance structure: The new constitutional dispensation has seen creation of a two-tier system of governance in the country. The number of Members of Parliament has increased and new positions of governor, senators, and county representatives created. Also worth noting is the coming into being of 47 county governments. All these post holders are paid by the government. Though some functions have been devolved to the county governments, some of those functions are seen to be more of national importance and have thus been left to the national government. These include national defense (security), immigration, foreign affairs and international trade among others. With the county government structures now picking shape, there has been deployment of staff from the national government to the counties, as well as recruitment drives in various counties for new staff members, to operationalize the county governments. This has also greatly contributed to increasing the already high wage bill.

5.0. Implications of Increasing Wage Bill

In 2013/14, the ratio of development to recurrent expenditure was 27 percent to 73 percent respectively. This means that there is little funds in the budget left for development which can be used for various initiatives for poverty reduction and restoration of equity in the socio-economic fabric of the Kenyan society. It is a fact that more funds are required for infrastructure development, energy generation and supply, irrigation and agriculture among others so as to meet the desired targets as envisioned in the Kenya Vision 2030 Economic Blueprint. A huge wage bill that is the current situation means that there is little allocation towards these endeavors and this curtails achievements of targets.

At the moment, most county governments are spending a large proportion of their allocations from the National government in payment of salaries to staff members. This in turn means that there is not enough revenue left for allocation towards development initiatives in the 47 counties spread all over the Republic.

The ballooning wage bill has raised attention and the government has admitted that this increased is unsustainable and that it needs to put more effort to tame it. The onus is now with the various government ministries to come up with ways to implement various directives in their respective dockets.

In order to deliver quality public services, the government has to spend money on goods and services, while also paying wages and salaries to its workforce; the civil servants. As a rule of thumb, the ratio of money spent towards payments of salaries and wages against that used to acquire and offer the necessary goods and services should not exceed 25 percent. In cases where this has happened, as in the case of Kenya, the implication is that there has been a reduction in terms of the quality of services being offered.

6.0. Policy Recommendations

Earlier in the year,Kenya’s President Uhuru Kenyatta gave a directive, that all civil servants take a 10 percent pay cut from their salaries - this was specific to all parastatal heads. He further announced that together with his Deputy President, they would take a 20 percent pay cut, to lead by example, this indicating that the issue of the wage bill has to be dealt with, as a matter of national concern. The effects of these directives are yet to be felt – if ever implemented - and will take

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some time before the fruits can be realized.

It is the prerogative of the Salaries and Remuneration Commission (SRC) to set desired levels of salaries and wages for the civil servants in the country, and the SRC should take initiative and lead in this task by reviewing the existing salary structures, bearing in mind the country’s level of economic growth as well as expectations of the workforce.

Listed below are some policy suggestions that can be implemented in the short to medium term, in order to tame the rising wage bill:

1. Streamline payroll handling and control

Currently, Kenya has weak payroll control systems, which are prone to interference by officers in charge, in conspiracy with corrupt employees, thereby encouraging fraud. Strengthening payroll control systems would identify and weed out fictitious workers, thus help reduce the wage bill and increase productivity. In the same breath, use of advanced ICT systems should be deployed to further aid this endeavor.

2. Review recruitment practices

Hiring should be done on merit, and not based on corrupt practices or political patronage as has been the case for the civil service. In the same vein, there needs to be a well stipulated recruitment policy for the various posts whenever they fall vacant.

3. Institute performance contracts

There have been efforts to have the civil servants’ remuneration package pegged on performance and job evaluation. Performance-based pay could enhance incentives for government employees, and though inherently difficult in the public sector, performance assessment should be encouraged.

4. Freeze on salary increments

Current salary reviews for public service are not based on a systemic review method. There is need to conduct salary adjustments based on a periodical and systematic evaluation of wage competitiveness against the private sector wages and salaries, taking cognizance of the prevailing economic dynamics. This would ensure there is fairness in employees’ salaries, and would go a long way in helping to tame the huge wage bill

5. Revise wages and labor policies

The existing labor policies are not strong enough. Dealing with trade unions who push and lobby for salary increases for their membership continues to be a problem that the government faces. There is need to review the existing labor and wages policies to align them with the changing economic times and conditions. It is therefore necessary to encourage sobriety from the workers’ trade unions, and to also implore upon them to review salaries based on periodic reviews.

6. Streamline job descriptions – avoid duplication of duties

It is evident that there are incidences of duplication of duties in the civil service. A functional review of government departments and organizations can expose areas of duplication, and identify non-core functions which can be outsourced. Rationalization of various government departments should be undertaken to weed out duplication of work which means double pay for the same job.

7. Increase revenue collection

It is important to note that there are still gaps that exist in revenue collection, which can and should be fixed to enhance revenue collection and aid in service provision. There have also been efforts to widen the tax bracket to rope in other untaxed areas. The noose however needs to be tightened for those who evade and avoid paying tax. Automation and ICT systems can be deployed to help with this purpose.

In all, there is an urgent need to take drastic measures and step to tame the already high wage bill. It is upon the stakeholders in collaboration with the SRC to look into ways of implementing the above recommendations in totality, and expeditiously, if the country is to benefit in the short term.

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References

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1. PSC, 2013:The Public Sector Wage Bill and its Implications on Economic Performance in Kenya. Parliamentary Budget Office. Nairobi.

2. Institute of Economic Affairs, 2006:Public Sector Wages. Institute of Economic Affairs. Nairobi

3. KIPPRA, 2013:A Comparative Study on Public-Private Sector Wage Differentials in Kenya. KIPPRA, Nairobi.

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Evidence-based policy pace-setting

The Point

The Institute of Economic Affairs (IEA - Kenya is a Public Policy Think Tank and a civic forum that seeks to promote pluralism of ideas through open, active and informed public debates on key policy issues.

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Evidence-based policy pace-setting