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Position Paper on the Public Service Wage Bill

4th March 2014

Contents
1

Introduction ................................................................................................................. 3

1.1 Objectives of the Position Paper .......................................................................... 5


1.2 Definition of the Public Sector Wage Bill ........................................................... 5
2 Analysis of Trends in and Rise in the Public Service Wage Bill and Employment .... 7
2.1

2.2
2.4

Trends in Public Service Wage Bill 2008-2014.


Analysis of Public Service Wage Bill 2008-2014 ........................................................ 8

Employment Trends in the Public Sector:............................................................ 8

2.6 Trends in Public and Private Sector Pay: A Comparison................................... 11


2.7 Comparative Analysis of Kenya Public Sector Wage Bill with other African
states. ......................................................................................................................... 12
2.9 Lesson from Kenyas comparison with other countries ..................................... 14
2.10
Implications of the Wage Bill on Kenyas Fiscal Position ............................ 15
3 Trends in Labour Productivity in Kenya Economy and Public Sector...................... 17
3.1 Linking Wages to Productivity ................................................................................. 17
3.5 Labour Productivity in the Kenya Public Sector ................................................ 18
4 The Role of Existing Legal and Institutional Frameworks in The Rising Wage Bill. ..
4.1 Setting Public Wages in a Democracy.20
4.3 Public Sector Wage Determination in Kenya: ................................................... 20
4.4 Collective Bargaining Agreements affect the government salary bill. .............. 21
5 Wage Bill Management Strategies: Policy Proposals .............................................. 22
5.1 More Growth ..................................................................................................... 22
5.2 Reforms on the budgeting process. .................................................................. 22
5.3 Retrenchment: .................................................................................................... 22
5.4 Recruitment freeze ............................................................................................. 23
5.5 Rationalizing the Payroll: ............................................................................ 25
5.6 Further measures to rationalize the payroll. ....................................................... 25
5.7 Application of Staffing norms ............................................................................ 25
5.8 Suggested Immediate Policy Measure. .............................................................. 27
2 Annexes ..................................................................................................................... 29
Annex I: Definition of Terms Relating to Pay and Wage Bill ..................................... 29
Annex 2: Actual /Projected Pension Expenditure (Millions) ....................................... 32

1 Introduction
1.1.1 Kenya faces a serious development crisis caused by very rapid growth of the
public sector wage bill that is now taking about one half the government revenue
(net of grants and loans), nearly one quarter of the annual national government
budget, and that took 13% of the GDP in FY 2012/13. This fiscal position is
unsustainable and it is out of line with the best international practices. A growing
wage bill puts pressure on the development and investment share of the budget
meaning there is less money to devote to infrastructure, hospitals, equipment
power generation, etc.

It could put pressure on the government to borrow

because, it claims a disproportionate share of revenue, which could affect interest


rates and the exchange rate in ways not favourable to macro-economic stability as
envisioned in Vision 2030.

It could hurt other recurrent expenses like the

purchase of medicines and books that are needed in our public hospitals and
schools. It could affect GDP growth poverty reduction and job-creation adversely
if wages claim an increasingly larger share of GDP at the expense of savings and
investment. None of this is good for the future of our country under Vision 2030.
1.1.2

Kenya is not alone in this Governments around the world are coming under
increasing pressure to provide improved services while simultaneously reducing
government spending. Many Kenya citizens believe that government productivity
and efficiency can be improved to deliver the twin goals of better service delivery
and more efficient use of public sector finances. Employment and pay reform
within government is increasingly seen as the way to improve public service
management, improve service delivery, and maintain macroeconomic stability.
For these reasons, many developing (and developed) countries have embarked on
reviews aimed at reduction in the size of government.

1.1.3

But the causes of a rising wage bill are not the same everywhere. In Kenya there
has been a significant increase in employment in the public sector. New public
sector jobs increased by 58,700 between 2008 and 2012 (Economic Survey 2013)
and this explains part of the increase in the wage bill. Other factors which have
contributed to the high wage bill include:
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1.1.4

(i)

Public hiring of additional teachers, police and nurses;

(ii)

An increase in the average wage of employees in the civil service, public


universities and state corporations over the past decade;

(iii)

Implementation of the Constitution of Kenya (2010) which created a bicameral legislature and resulted in the increase in the number of legislators
at the National Assembly and a new house , the Senate;

(iv)

Establishment of the 47 counties which created posts of members of the


County Assemblies, Executive Committees and many other positions at
the County Government Levels;

(v)

The establishment of ten (10) Constitutional Commissions, two (2)


independent offices and other state offices.

These developments have led to an increase in the public sector wage bill from
Kshs.239.9 billion in FY 2008/09 to Kshs.464.9 billion in FY 2012/13 that could
rise to an estimated Kshs.521.6 billion this FY 2013/14. Over the period under
review, the wage bill as a percentage of GDP increased from 11.0 % in FY
2008/09 to an estimated 13 % in the current FY(2013/14). The wage bill as a
percentage of government revenue has also increased from 49 % in 2008/09 to
55 % in 2012/13.

1.1.5 The Public Service Wage Bill is part of the overall recurrent expenditure of
Government and its growth has put pressure on non-wage expenditures, especially
spending on operations and maintenance.

This could lead to decline in

productivity of public servants because they cannot provide quality service


adequate without equipment, transport, stationery and other essential inputs. An
increasing size of the public sector wage bill also reduces the potential share of
resources available for development spending and this is likely to make it difficult
for the country to attain the goals in rapid EDP with equity and poverty reduction
if funding for infrastructure, irrigation, energy generation, agriculture, etc, does
not meet the desired targets.

1.1

Objectives of the Position Paper


This position paper has been developed to provide factual data that will be used for
public discussion and evidence based-policy making in light of the alarming trends in
the growth of Kenyas public sector wage bill.

Its overall objectives could be

summarized as follows:

1.2

(i)

To provide recent factual data on the composition of the public sector wage
bill, its relative size, in and its implications on economic growth and
development in Kenya.

(ii)

To propose policy strategies for reducing the public service wage bill and for
staff rationalization in order to release resources for additional development
spending and other key investment priorities.

(iii)

To gain stakeholder support for a sustainable public sector wage reforms


through a national debate on trends in growth of the government wage bill and
the best solutions for it.

(iv)

To make recommendations for incorporation in a proposed Kenya Public


Sector Wage Bill Policy.

Definition of the Public Sector Wage Bill


1.3.1

To arrive at such an informed resolution of the crisis posed by trends in


the growth of the government wage bill, it is necessary to define the
categories and terms used in this paper. The Public Sector Wage Bill
comprises of the 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.

1.3.2

Regarding the institutions covered, it includes personnel emoluments paid


to the Core Civil Service, Teachers Service, Health Services,
Disciplined Services, Judiciary Service, State Law Office, Parliamentary
Service, Public Universities, State Corporations, Local Authorities (which
became defunct following the Constitution of Kenya 2010), Armed Forces,
Constitutional Commissions and Independent Offices and Other State
Offices.Since the Constitution of Kenya (2010) has created

a two-tier

level government structure (a national government and 47 county


governments). staff of the former Local Authorities and Ministry staff
deployed in the 47 counties constitute staff of the counties, and their
emoluments will for this financial year and in future be included in the
computation of the public sector salary bill.

1.3.3

Gross remuneration means total remuneration before any deductions


are made by the employer in respect of taxes, contributions of employees
to social security and pension schemes, life insurance premiums, union
dues, and other obligations of employees. Its computation excludes
employers contributions in respect of their employees paid to social
security and pension schemes and also benefits received by employees
under these schemes. It also exclude severance and termination pay.

1.3.4

It is important to note, however, that the Kenya Public Service Wage Bill
figures (Table 1 below) includes taxes payable by employees.

An

important implication of this is that reduction in the size of the Public


Sector Wage Bill will also affect government revenue through lower
reductions in PAYE taxes.

Analysis of Trends in Employment and Rise in the Public Service


Wage Bill
2.1

Trends in Public Service Wage Bill: 2008 -2014


It is advisable to begin with rise in the bill distributed by public service units.
Between FY 2008/09 and FY 2013/14, and the total annual salary bill required to
pay them over that period rose from Kshs239.9 billion in 2008/09 to Kshs512.6 in
2013/14. Some units, however, grew their wage bill faster than others.

Table 1 Public Service Wage Bill by Sub-Sectors FY 2008/09 FY 2013/14


(Kshs billion)
FY 2008/09

FY 2012/13

FY 2013/14

Core Civil Service

48.5

62.1

23.6*

Disciplined Services

22.3

44.4

64.3

Security Services

29.3

41.3

42.4

Judiciary

1.14

4.60

6.50

Teachers Service

66.5

133.0

138.0

Public Universities

13.3

21.6

26.4

Defunct Local Authorities

9.3

17.3

Parliamentary Service

3.50

6.27

8.91

State Corporations

31.6

78.9

83.0

Constitutional Offices /State

0.91

9.72

14.1

4.20

71.2

226.4

423.4

478.4

13.5

40.9

43.2

239.9

464.9

521.6

Officers
Counties
Total Salary **
Other Allowances
Total Public Service Wage Bill
Source: National Treasury
*Excludes civil servants working in the Counties
** Includes Basic salary, commuter and housing allowances

2.2 Analysis of Wage bill Composition and Growth:


As Table I indicates Kenyas total public sector wage bill nearly doubled over the
past five years as it went up by 92%.The Teachers service salaries constitutes the
largest component of the total public service wage bill. However, as evident from the
Table 1, the sub-sectors which recorded the highest increases in their wage bills in the
past five years were the constitutional commissions, the judiciary, and state
corporations. Wages and remuneration there rose faster than elsewhere. The large
increase in the counties wage bill in the current financial year (Kshs71.2b) compared
to the previous financial year (Kshs4.2b) is mostly explained by incorporation of
wages of staff of the defunct local authorities and of civil servants working in the
counties. The same phenomenon explains the decrease in the wage bill of the core
civil service in financial year 2013/14; i.e. some national public service salaries were
transferred to the county governments.
These trends in the cost of government salaries is alarming. Our projection of the
Wage Bill based on past growth (2008/09 to 2013/14) indicate a wage bill to GDP
ratio of 15.4% and a wage bill to revenue ratio of 64% by FY 2016/17.

In other

words, if current trends continue salaries and remunerations in the public sector will
consume 64% of the tax revenue by 2016/17 exerting pressure on development
expenditure ( as stated earlier), debt servicing and other recurrent expenditure.
In addition to the rise in the number of state employees, the other cause of the
rising wage bill is the demand for higher pay to compensate for inflation,
especially from the unionized public sector workers. As one can observe from
Table 4, public sector wages actually fell in real term as between 2008 and 2012,
despite their rapid rise in nominal terms over that period. The largest drop in real
earnings followed the high increase in the consumer price index in 2008(16.2%) and
2011(14%). Taming inflation, must therefore be considered among the best strategies
to lower wage bill growth.
2.3 Employment Trends in the Public Sector: According to data presented in Table 2
below, a large proportion of wage employment in the public sector comprises of the
teaching staff (40%) followed by the Core Civil Service (18%) and State
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Corporations (17%). However, going forward, the proportion of wage employment


in the counties is expected to increase significantly as the counties employ more
workers, take on staff of the defunct local authorities and civil servants working in the
counties. Altogether as Table 2 show, public sector employment in Kenya grew by
14% between 2008 and 2013. This is a lot lower than the nominal rise in wage bill
(92%) cited above.

Table 2 : Distribution of Employment in the Public Sector 2008-2013


2008

2012

2013

112,000

123,498

123,897

81,693

93,366

98,894

2,532

4,294

4,439

236,800

260,800

274,729

Core Civil Service

Disciplined Services

Judiciary

Teachers Service Commission

Public Universities

17,012

20,648

Local Authorities

40,900

37,700

Parliamentary Service*

300

390

State Corporations

105,088

113,652

Constitutional Commissions*

275

952

10

Counties

42,184

596,600

655,300

682,605

Total

21,527*
490
115,493*
952

*Provisional
Source: KNBS
2.4 Despite these recent trends in public sector employment, Kenya is less dependent
on government for job creation than most African countries. Total employment in Kenya

comprises of formal sector (public and private), informal sector, self employment and
unpaid family labour. Agriculture remains the main source of employment in the
country in 2012. Public sector employment was only 5.1 % of the total labour force
and only 30% of total employment in the formal sector. Most of Kenyas employees
are therefore to be found in the private sector. Table 3 below puts the size of public
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sector employment in perspective with regard to the countrys total labour force,
broken down by public and private sectors, formal and informal sectors.

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Table 3: Size of Public Sector Employment in Total Employment (000)


2008

2009

2010

2011

2012

Labour Force (Million)

15.9

16.4

16.9

17.4

17.6

Private Sector

1,309

1,347

1,396

1,441

1494

Public Sector

597

612

620

643

655

Total Formal Sector

1,906

1,959

2,016

2,084

2,149

Self employed and

67.4

67.5

69.8

73.8

76.9

Informal Sector

8,039

8,676

9,332

9,919

10,511

Total Employment

10,012

10,703

11,418

12,077

12,737

31.3

31.2

30.7

30.8

30.4

6.0

5.7

5.4

5.3

5.1

unpaid family workers

% of Public Sector in
Total Formal Sector
% of Public Sector in
Total Employment

Source: Economic Survey 2013 (KNBS)

2.5

Trends in Kenya Public and Private Sector Pay: A Comparison

2.6.1

Given the prominent role played by the private sector in employment, it may
be worthwhile to compare private sector wages with those of the government.
A Study done for Kenya Salaries and Remuneration Commission last
year by KIPPRA on the wage differences between the privates and public
sector in Kenya, found that on average public sector wages are now
higher than in the private sector. However, this is only true when the
total compensation package in the public sector is computed to include
allowances, honoraria, gratuities, etc. If we consider the basic salary alone
the private sector has a clear edge. Furthermore, there are gross inequalities in
salary remuneration, even across the same grades in public service. The best
wages are paid in state corporations, constitutional offices and the defunct
local authorities. Notably real wages ( i.e. adjusted for inflation) have fallen
overall since 2008.

2.6.2

Table 4 shows the average wage earnings in the private and public sectors in
both nominal and real terms (after adjusting for inflation). Between 2008 and

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2012 the average nominal wage in the public sector increased by 27.7 percent
from Kshs360,545 per annum to Kshs460,664 per annum which is higher than
in the private sector. As may be noted from the same table, beginning the
year 2010 onwards, the public sector wage in both nominal and real terms
increased at a higher rate than that of the private sector.
Table 4: Public and Private Sector Average Wage earning per employee
(Kshs Per annum)
2008

2009

2010

2011

2012

Total Private Sector

369,439

384,429

391,784

404,546

420,578

Total Public Sector

360,414

380,454

402,328

432,521

460,664

Total Private Sector

397,716

376,706

370,973

334,584

316,081

Total Public Sector

388,000

372,812

380,957

357,722

346,208

Nominal Wage

Real Wage

Source: Economic Survey 2013 (KNBS)

2.6.3 However, (to underscore the KIPPRA

report for SRC) it is important to

note(Table 4) that despite nominal wage increases, the average public sector wage
(and the average private sector wage) has declined in real terms over the five year
period to 2012. This implies that Kenya may be experiencing a wage/price spiral
where increases in the cost of living leads to demands for higher wages and
subsequent upward wage adjustments. The policy implication of this is that
medium to long term policy measures to cope with the high public sector wage
bill should also tackle prices and the need for higher productivity in the public
sector over the same wages.
2.6

Comparative Analysis of Kenya Public Sector Wage Bill with other African
states

2.7.1 Before coming to how Kenya compares to its neighbours it is fair to compare it to
the best international practices. It is clear that Kenya is moving away from the
best global practices. Table 5 below compares Kenyas public sector wage bill as
a percentage of GDP, wage bill as a percentage of government Revenue with

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internationally desirable levels. Wage bill as a percentage of GDP has risen 11%
(2008/09) to 13% ( 2012/13) as compared to the desirable level of 7%: wages
took 55% of total tax revenue in FY 2012/13 as compared to 35% of globally
recommended level.
This trend is clearly unsustainable if Kenya is to achieve the goals it has set itself.
It is worth noting that Kenyas wage bill is taking a greater share of revenue than
in such countries as Liberia that are emerging form conflict.

Table 5: Selected Sustainability Ratios


2008/09
2009/10
2010/11

Wage
11.0
11.4
Bill/GDP
Wage Bill
49.3
47.3
/Revenue
Source: National Treasury
2.7

2011/12

2012/13

11.3

11.0

13.0

47.1

48.1

55.0

Internationally
desirable
levels
7
35

In FY 2012/13 Kenya was doing worse according to these standards than her
East African neighbours- Rwanda, Uganda, and Tanzania. This can be seen
from Table 6 below. Kenya was getting closer to the levels of Botswana and South
Africa which are experiencing a fiscal stress. Kenya must ensure this trend stops.
At present Swaziland with the highest wage bill to GDP ratio in Africa is
experiencing low growth, increasing poverty, and a stalemate over an austerity
programme agreement with the IMF.

Table 6: Central Government Wage Bill as a % of GDP


Country
2008/09 2009/10
2010/11
2011/12
South Africa
10.1
11.2
11.2
11.6
Botswana
9.7
10.6
11.2
9.7
Rwanda
3.3
3.4
3.4
3.5
Tanzania
6.1
5.7
6.2
6.3
Uganda
3.7
4.3
3.7
Kenya
6.9
7.0
7.1
6.9
Source IMF

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2012/13
11.2
8.5
3.9
6.3
3.9
7.8

2.8

Lessons from of Kenyas comparison with other countries

2.9.1 Public sector wage bill as % of GDP: This ratio can vary between 5% and 25%,
with many countries around the 10% mark. The ratio depends on the relative
involvement of the state in the economy. Developing countries tend to have
smaller governments relative to GDP and consequently a lower ratio. Historically
has a lower percentage of the wage bill to GDP but that is now changing. Kenya
is now among those with a higher percentage.

2.9.2 Public sector wage bill as % of total public sector spending: In order to deliver
quality public services, governments need to spend money on goods and services
as well as wages and salaries. As a rule of thumb, when this ratio rises over 25%,
governments risk reducing their effectiveness by squeezing non-wage expenditure
such as goods and services, maintenance, and capital expenditure. In practice, this
means that hospitals will lack medicines; schools will go without textbooks, etc.

2.9.3 Average government wages compared to per capita GDP: Another way of
comparing how well countries use wages for public service as compared to public
welfare generally is to calculate average central government wages as a multiple
of GDP per capita. According to World Bank figures, Africa has one the highest
figures of public sector wages in multiples of GDP per capita. It was estimated at
5.9 in 2004 which is higher than Asia or Latin America using Kenyas 2011,
public sector average wage and GDP per capita figures, the country has a figure
of 11. In other words public sector average salaries are eleven times higher than
average income for a Kenya, which is apparently much higher than most of
Africa.

Public Sector Recruitment Growth Rate: When government recruitment grows


faster than GDP, revenue or population growth it is clear that either financial
stability will be in jeopardy due to growing deficits through reduced wages, or
reduced non-wage expenditure.

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2.9.5 These percentages or ratios should be compared to the average for the countys
region, as well as with countries at similar levels of development farther afield. It
is important to note that policy recommendations cannot be "read off" the
employment and wage statistics alone. A complete picture needs to be built up
and discussed with all relevant stakeholders before designing an appropriate
employment and wage reform agenda.

2.9
Implications of the Wage Bill on Kenyas Fiscal Position
2.10.1 Recent Data (Table 7 below) shows that the government fiscal position has been
deteriorating with increase in deficit financing. Since the Government can only
finance from taxes or borrowing (domestic and external), the large demands of
financing government spending on public service wages appears to have
contributed to the

increase in

deficit financing and to additional domestic

borrowing.

Table 7 Deficits, Debt Stock, and Interest Payments on Domestic Debt (Kshs
billion)
Kshs billion)

2009

2010

2011

2012

Domestic Debt

518,507

660,268

764,222

858,830 1,050,556

45,949

57,381

70,497

82,339

110,184

504,455

528,792

676,914

716,588

800,025

86

125

125

92

106

Domestic Debt/GDP

22.7

26.9

27.4

26.2

28.7

External Debt/GDP

22.0

21.0

24.0

21.8

21.8

Interest Payments
External Debt
Deficit Financing

2013

Source: National Treasury

2.10.2 Since resources are fungible, the increases in public service wage bill mean that
such increases have over the past five years contributed to widening the fiscal
deficit and increased domestic borrowing. It may be noted from Table 7 above
that domestic debt has doubled over the past five years from Kshs 518.5 billion to
Kshs 1.05 trillion. The large increase in the stock of

public debt have also

resulted in concomitant increases in interest payments on domestic debt which


15

increased from Kshs 45.9 billion in 2008 to Kshs 110.1 billion in 2013. Large
increases in interest payments on public debt reduce government discretionary
spending in subsequent years as increased resources go into servicing debt.

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3.1

Trends in Labour Productivity on the Kenya Economy and Public


Sector.
Linking Wages to Productivity: Wages are a cost to employers in this case the
government. They are also a tool for motivating workers to higher productivity. To
employees on the other hand wages represent their standard of living, self-fulfillment
and an incentive to acquire skills for the market. Reconciling the contradiction
between the interests of employers and workers is the first step to formulating a
balanced and equitable wage policy. Ignoring the contrasting interests of employers
and employees is to depoliticize changes in wage distribution by attributing
fundamental wage movements to changes in productivity trends and not to changes in
the balance of power within the labour market. Yet both are important factors.

3.2

Still productivity of employees ought to be prime concern of the government in


deciding whether it is getting value for money from its labour force. Higher
productivity growth in the economy implies sustainable change in wage levels.
This means the economy or sector can only increase wages with corresponding higher
labour productivity growth rate, if we use the productivity criteria. Therefore, the
country must strive to increase and manage its productivity levels to match
commensurate changes in wages. Trends of labour productivity indices in the
economy are reflected using five key indicators;
i)

Output index-i.e. the amount that has been produced in the economic
activity;

ii)

Wages Value added Productivity- i.e. Value added per shilling spent on

iii)

Labour, labour input index- i.e. efforts by labourers,

iv)

Labour productivity index i.e. the amount of wealth created by each


employee

v)

Labour share- value added is distributed to corporate profits and wages.

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3.3

Table 8 below shows the Labour Productivity Indices of Kenya economy as a


whole using these five indicators.

Table 8: Trends of Real National Level Labour Productivity Indicators in Kenya


2001-2012
Economy

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Output index
Wage Value
Added
Productivity
Labour input
index
Labour
productivity
index

1.000

1.007

1.038

1.080

1.136

1.200

1.275

1.288

1.321

1.397

1.450

1.514

1.000

0.940

0.889

0.827

0.798

0.732

0.677

0.649

0.577

0.535

0.490

0.455

1.000

1.013

1.030

1.052

1.078

1.108

1.139

1.159

1.192

1.229

1.269

1.281

1.000

0.994

1.008

1.027

1.054

1.083

1.119

1.112

1.108

1.137

1.143

1.181

Labour share

0.397

0.423

0.447

0.480

0.498

0.543

0.586

0.613

0.688

0.743

0.811

0.874

Source: PCK Computations


3.4

As the table shows, output indices indicate an approximate 51 percent increase


In national output over an eleven year period. The wage value added productivity,
however, has declined over the period under review, from an index 1:00 in 2001 to
an index of 0:455. This indicates wage rate increases higher than the wealth
created in the economy. Although, labour input index increased by 28 percent
during the period, the labour productivity index recorded only 18 percent growth
rate. There seems a disconnect between the labour input index and the increase in
labour force.

3.5

Labour Productivity Indices in the Kenya Public Sector


Table 9 provides the breakdown of productivity indicators in the Public sector
between 2001 and 2012

Agriculture

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Output index
Wage Value
Added
Productivity
Labour input
index
Labour
productivity
index

1.000

1.016

1.059

1.076

1.075

1.071

1.093

1.113

1.159

1.200

1.252

1.297

1.000

0.879

0.838

0.746

0.700

0.629

0.687

0.630

0.607

0.614

0.574

0.548

1.000

1.001

1.001

1.000

0.994

0.987

0.954

0.969

0.993

0.941

0.977

0.995

1.000

1.015

1.058

1.076

1.082

1.085

1.146

1.148

1.167

1.275

1.281

1.303

Labour share

0.973

1.026

1.024

1.039

1.011

0.965

0.785

0.842

0.827

0.739

0.748

0.709

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Table 9 above shows a marginal increase in the public sector output index of 30
percent over an eleven year period. Similarly, the labour productivity index
indicates marginal increase over the period. The wage value added productivity index
declined from index 1:00 in 2001 to index 0.548 in 2012. This illustrates the less returns
from every shilling the government spent on own employees by 0.4. The labour share in
the public sector exhibit increasing trend well above the 0.4 mark.

This is a worrying trend since the government wage increases is far ahead of the wealth
created in the sector.

The government pays beyond the lagging growth in labour

productivity. The agitation for increased wages therefore calls for introduction of a
flexible, performance-based and competitive wage structures where salaries reflect the
job value and performance, i.e. productivity.

19

The Role of Existing Legal and Institutional Frameworks in The


Rising Wage Bill.

4.1

Setting Public Wages in a Democracy: In most democratic countries wage


levels are set in part by legal and institutional regulations. Kenya is no
exception. In relation to wage fixation, the Kenya Constitution of Kenya 2010
Article 41(1) under the Bill of Rights, states that every person has the right to fair
labour practices, fair remuneration and collective bargaining. The Labour Relations
Act of 2007 and Labour Institutions Act of 2007 in particular have provisions for
methods of wage fixation including the process of collective bargaining. Section 43
of the Labour Institutions Act empowers the minister responsible for Labour to
establish general, agricultural and sectoral wages councils. The Councils are
expected to advice the Minister on appropriate levels of minimum wages and other
statutory terms and conditions of employment. This has affected Public Sector
Wage growth.

4.2

Other national laws that bear on the Wage Bill include The Public Service
Commission Act 2012, The Teachers Service Commission Act 2012, The Public
Finance Management Act (2012) and the Kenya Defense Forces Act. Being a
member of the International Labour Organization (ILO) Kenya has ratified one of
the fundamental instruments namely the ILO Convention number 98 on collective
bargaining. The other special Convention on Collective bargaining with specific
reference to negotiation in the public sector is number 151 whose principles can
guide in wage determination.

4.3

Public Sector Wage Determination in Kenya:


In Kenya this has always been done through established mechanisms and
approaches for wage fixation. These include approved ministerial schemes of
service and periodic salary reviews encompassing the entire public service, as in
the case of the Ndegwa Commission (1971), and the Waruhiu Commission of 1980,
among others. At times wages are fixed on ad hoc basis. In the unionized Public
sector, this has been fixed through minimum wage regulations, collective
bargaining and at times arbitration by the Courts. Experience has shown that
Judicial Awards of the Industrial Court and other Courts have had considerable
impact on the wage Bill and particular those that are issued based on mere legal
20

arguments without considering other variables in the economy that impinge on


Industrial Relations.
4.4

Collective Bargaining Agreements also affect the government salary bill.


Examples here include terms and conditions of employment agreed upon through
collective bargaining process between the management of Kenyatta National
Hospital and Kenya Union of Domestic, Hotels, Educational Institutions, Hotels
and allied workers (KUDHEIHA), Union of Kenya Civil Servants (UKCS) and The
Public Service Commission, The University Academic Staff Union (UASU) and the
Public university forum for wage negotiation, The Kenya Union of Nurses (KUN),
The Doctors, Pharmacists and Dentist Union (KMPFDU) and the Ministry of
Health to mention just but a few.

4.5

Finally, taking into account the fact that social dialogue is central and forms
one of the four strategic objectives of the ILO, the debates on the wage Bill will
require to be subjected to deep social dialogue between Government, the
representative of employers, and workers organizations and citizens.

21

Wage Bill Management Strategies: Policy Proposals

5.1

More Growth: One of the best ways to reduce the government wage bill as a
percentage of GDP (which is what Kenya desires) is to ensure GDP growth
rises much faster than growth in wages paid to public servants. If GDP is
growing rapidly, revenues will also generally rise. If they rise faster than wages,
the wages to revenue bill ratio will also fall. To solve the problems dealt with in
this paper, Kenya must look critically on new ways to accelerate GDP growth to
the double digit level suggested in the Jubilee coalition manifesto.

5.2

Reforms on the budgeting process. These should include:


making the budget process more responsive to priorities;

making management practices more flexible, such that defined priorities are
easier to achieve;

Strengthening competitive pressures among providers of public services and,


where not incompatible with equity considerations, containing the demand for
public services (Curristine et.al 2007).

Since effective reform cannot be confined to central government, fiscal relations


across levels of government must be such as to ensure that sub-national
governments have the right incentives to deliver cost-effective public services.
5.3

Retrenchment:
Kenya has had a particularly bad experience of this under the structural adjustment
policies of the 1990s. But there are better ways of reducing the labour force in state
institutions without causing the social and personal tragedies of the 1990s. Nunberg
and Nellis (1995) list the following cost and employment containment measures in
increasing order of perceived political risk:

i.

Removal of ghost or non-existent names and workers from the government


payroll.

ii.

Elimination of officially sanctioned posts that are not currently filled.


22

5.4

iii.

Retrenchment of temporary or seasonal workers.

iv.

Enforcement of retirement age.

v.

Freezing of recruitment.

vi.

Elimination of guaranteed entry to the civil service from the educational or


training system.

vii.

Suspension of automatic advancement.

viii.

Voluntary incentives - induced retirement of surplus workers.

ix.

Containment of wages (restraints or freezes).

x.

Dismissal of serving civil servants.

Recruitment freeze
In this decade, the select countries have resorted to the policy of recruitment freeze
to control growth of personnel numbers. Before the introduction of this policy
measure, there was guaranteed entry into the government payroll for large numbers
of pre-service trainees in all kinds of public training institutions. This policy has
been adopted to varying degrees of effectiveness in the select countries (see Table
10).

23

Table 10: Timing, Policy Specifics and Impact of Recruitment Freeze in


Selected Countries
COUNTRY
Kenya

YEAR
1992

POLICY SPECIFICS
Total freeze except for
teachers and replacement of
health workers.

IMPACT
High

Tanzania

1992

Recruitment restricted to
replacements, and professional
and technical personnel in
essential services (teachers,
health workers, police and
prisons), and to be approved
by Head of the Civil Service.

Low

1995

As above, but replacements


also subject to approval by the
Head of Civil Service.
Only scarce professionals
(engineers, doctors, etc) to be
recruited with specific
approval of the Head of the
Civil Service.

High

Old establishment abolished


and a new one to be created.
Recruitment restricted to new
establishment.
One post to be filled for every
three that fall vacant.

High

Total recruitment freeze

High

Uganda

1990

1994

Zambia

1995

1997

24

Low

Low

REMARKS
Numbers in civil
service have,
reduced from
272,000 in 1993 to
216,000 in 1997.
Enforcement
mechanisms not
clarified.

Enforcement
mechanisms
clarified.
Compliance not
enforced.

Compliance
achieved with new
establishment
controls
Mechanisms to
ensure compliance
not effective.
More stringency in
monitoring
compliance with
the policy.

5.5

Rationalizing the Payroll: This has already begun in the current census of public
sector employees to establish who is actually on the government labour force.
Good practices in managing and controlling personnel costs revolve around:

Controlling the numbers on the government payroll(s);

Imposing a resources envelope for compensation of personnel;

Enforcing controls to restrict expenditures within the resources envelope;

Eliminating expenditure leaks that allow extra-budgetary expenditures on


personnel; and

5.6

Installing improved systems.

Further measures to rationalize the payroll measures include the following.


Flushing out ghost employees;
Special payroll audits;
Recruitment freeze;
Slicing away redundant unskilled workers;
Abolishing vacant posts
Rationalisation of roles, and functions;
Application of staffing Norms;
Zero-base reconstitution of the establishment;
Firm wage bill freeze;
Eliminating compensation allowances outside the salary payroll;
Strengthening payroll, checks and controls;
Developing more complete and reliable personnel data bases;
Integrating personnel and payroll systems; and
A comprehensive approach to ensure sustainability

5.7

Application of Staffing norms


Staffing norms provide criteria for determining optimal staffing levels. Their
application also guides MDAs in planning, deployment and utilisation of personnel.
The use of staffing norms has been widely in use especially to control recruitment
and deployment of field personnel in the delivery of basic social services
(education, health and agricultural extension). Staffing norms have also been
applied to target across-the-board reductions in personnel, especially teachers. For
25

example, there is a 1998 proposal in Kenya to cut the teaching force by a quarter
(63,000 out of a total 244,495) by applying a pupil: teacher ratios of 40:1 for
primary schools teachers and 30:1 for secondary schools teachers. Furthermore,
through the use of the ratios, areas and institutions that are overstaffed or
understaffed are identified and personnel redeployed on that basis.

1. Country case studies


Box 1
Botswana Wage Bill
The International Monetary Fund(IMF) revealed that the overriding fiscal policy challenge for
Botswana is to reduce the size of the government (as a share of GDP) at a time when unions are
viewing further job cuts with a lot of suspicion since the government remains the main employer
in the economy. In 2011/12 and FY2012/13 the Central Government compensation of employees
as a % of GDP was 12.2% and 12.8% respectively (Botswana Article IV consultation, IMF 13/
296).The Botswanas wage bill is high by international standards, which combined with
subsidies and transfers, account for about 50 percent of total expenditures, thereby limiting the
room for fiscal policy flexibility. Thus the targeted reduction in the expenditure-to-GDP ratio by
2.5 percentage points, reflecting mainly reduced wages and subsidies, is appropriate. The
budgets emphasis on the need to rebuild fiscal buffers, improve the quality of spending, and
buttress medium-term fiscal consolidation, is also well placed

Box 2
Swaziland
Swaziland has one of the highest public wage bills in Africa (about 17.7% of GDP in 2010/11).
As SACU revenue declined by almost 60% between 2008/09 and 2010/11, the budget deficit
reached 14% of GDP. In 2011/12, the governments access to domestic borrowing dried up due
to a loss of investor confidence.

26

5.8 Suggested Immediate Policy Measure.


i)

Review recruitment practices that are inconsistent with the needs of the public
service and absorptive capacity of the national economy. Currently, some
recruitment is done to satisfy social and political expectations that the government
should alleviate the unemployment caused by low economic growth. The public
sector should not be viewed as creator of employment but rather a partner to the
private sector in facilitating improvement of investment capacity and creation of
jobs in the private sector.

ii)

There is need to review regulations and practices governing the creation and
filling of established posts.

iii)

Improve performance management systems to ensure employees productivity.


Appropriate performance measurement tools will ensure salary awards are aligned
to individual performance.

iv)

There is need to develop a National Wages and Remuneration Policy to curb the
rising wage bill.

v)

There is urgent need to carry out a job evaluation exercise in entire public
sector to establish the relative worth of positions in all public organizations
and assign appropriate remunerations and adjust current inequalities.

vi) There is need for induction or training of actors in Industrial Relations on the
question of wage determination, and negotiation to ensure that CBAs balance
the interests of labour, capital and the state.
vii) There is need to ensure vetting of all CBAs by the Ministry of Labour prior
to registration and their implementation.
viii) There is need to sensitize the Judiciary on the economic and budgetary
position of the country. Very often Judges give wage awards which are way
out of line with the state of the economy and affordability in terms of the
available budgetary resources.
ix)

Productivity and sustained growth: Priority should be given to boosting

productivity: Productivity gains and wage restraint are necessary to recoup


international competitiveness, sustain growth and reduce the sizeable external
27

deficit. Ambitious structural reforms are needed to boost productivity and


employment.
x)

Efficiency measures (cost effective staffing norms/ratios).


Optimal utilization of existing human resources norms and standards to guide
the efficient, equitable, effective and sustainable service delivery can be
considered as one of the approaches for managing the Countrys public wage
bill.

xi)

Further analysis is recommended on staffing levels in the County


Governments, especially with a view to rationalizing
with staff absorbed
from the defunct Local Authorities and Civil Servants deployed in the
counties.

xii)

The judicial awards on substantive and procedural issues must be guided by


existing income and wages policies and Ministry of Finance guidelines issued
from time to time.

xiii)

All terms and conditions of employment must be subjected to Industrial


Relations policies and wages guidelines issued by the Ministry of finance
prior to registration by the Industrial Court and implementation.

xiv)

The Salaries and Remuneration Commission should strive to always intervene


at the right time and guide parties prior to their engagement and conclusion of
collective bargaining agreements.

28

2 Annexes
Annex I: Definition of Terms Relating to Pay and Wage Bill
Award
Wages Guidelines

Means an award on wages made by the Industrial Court


means wages guidelines issued from time to time by the
Ministry of Finance to guide Industrial Court Judges in
making wage awards
Industrial Relation Charter Means a tripartite agreement between the government, the
most representative employers organization and the most
representative employees organization for the regulation of
labour and industrial relations in Kenya.
Employer
Means any person, public body, firm, corporation or
company, who or which has entered into a contract of
service to employ any individual and includes the agent,
foreman, manager or factor of such person public body,
firm, corporation or company.
Trade Union
This refers to a registered workers organization whose
major function is championing the interest of their member
and wage negotiations form their core function.
Recognition Agreement
Means an agreement in writing made between a trade union
and an employer, group of employers or employers
organization regulating the recognition of the trade union as
the sole representative of the interests of unionisable
employees employed by the employer or by members of an
employers organization.
Collective Bargaining
This refers to a process by which employers and workers
organizations meet to discuss and agree on terms and
conditions of employment. Substantive issues on and wages
are usually central in these negotiations
Collective Agreement
Means a written agreement concerning any terms and
conditions of employment made between a trade union and
an employer, group of employers or organization of
employers
Social Dialogue
This means all forms of bipartite or tripartite dialogue,
negotiations and consultations on social issues taking place
at any level of societynation, industry or enterprise and
involving government, employers and workers
organizations.
29

Remuneration for labour input in production of goods and services is referred to as


wages, allowances, monetary and non-monetary benefits. Salaries and wages is
compensation to employees for services rendered and paid for monthly in Kenya.

30

Basic- and gross-pay


Basic pay refers to the component of remuneration that is the starting point of pay which
is subsequently adjusted in a pre-defined progression structure. Allowances are
components of pay which may be fixed and paid monthly as part of salary or non-fixed
paid to employees when they perform specified duties in or out of their regular work
stations. Some of the fixed allowances which are paid as part of salary include, housing
allowance and commuter allowance. The sum total of basic pay and allowances paid as
part of monthly salaries is referred to as gross pay.
Allowances
Other allowances e.g. per diem, medical allowance, ex-gratia assistance, meals and
entertainment allowances, are paid not as part of monthly salary but as entitlements to
employees in specified work-related descriptions. Senior public officers are entitled to
non-monetary benefits which are costs to the employer such as pay for domestic servant
and security. Other costs to the employer include training cost on serving officers,
uniform and clothing, pension pay to retired officers.

31

Annex 2: Actual /Projected Pension Expenditure (Millions)


SERVICE
Civil Service,
Parliament,
Judiciary, Police,
Teachers
Kenya Defence
Forces
TOTAL CFS
PENSIONS
Teachers Award
PSSS
Contributions
GRAND TOTAL

2008/9

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

22,598.49

23,762.46

24,517.00

20,363.66

24,833.28

32,935.83

36,258.77

36,258.77

36,258.77

2,567.17

3,538.96

3,392.93

3,869.25

1,806.43

5,231.06

9,595.60

9,595.60

9,595.60

25,165.66

27,301.42

27,909.93

24,232.91

26,639.70

38,166.89

45,854.37

45,854.37

45,854.37

10,020.00

3,340.00

25,165.66

27,301.42

27,909.93

24,232.91

32

26,639.70

48,186.89

13,825.91

14,517.21

15,243.07

63,020.28

60,371.57

61,097.44