REPUBLIC OF KENYA

THE NATIONAL TREASURY

BRIEF ON THE PAY DISPUTE BETWEEN THE GOVERNMENT AND THE TEACHERS UNIONS

A Briefing Note to HE The President

BRIEF TO HE THE PRESIDENT, HON UHURU MUIGAI KENYATTA ON THE PAY DISPUTE BETWEEN THE GOVERNMENT AND THE TEACHERS UNIONS 1.0 Preamble1. Your Excellency, the purpose of this brief is to apprise you on the developments on the Teachers Salary Award by the Court and the implications that the award portends to the economy. 2. Your Excellency, the Industrial Relations Court delivered Judgement on the Nairobi Industrial Court Petition No. 3 of 2015 as follows: Award of basic salary to teachers of between 50 60% for 4 years, which translates to an annual award of between 12.5 15%; The award is with effect from 1st July 2013 and will therefore expire in 30th June 2017; The allowances increases already awarded to the Teachers by TSC with effect from 1st July 2015, include:i). House Allowanceii). Leave Allowanceiii). Hardship Allowanceiv). Advance for Motor Vehicle Purchase andv). Mortgage Facility are confirmed by the Court as awarded and the items to be reflected in the Collective Bargaining Agreement (CBA) for the period 1st July 2013 to 30th June 2017 All other allowances and benefits in the Memoranda of the Parties including;i). Responsibility Allowanceii). Hazard Allowanceiii). Disturbance Allowanceiv). Accommodation and Night Out Allowancev). Mileage Claimsvi). Study Leavevii). Sabbatical Leave andviii). Any Other Allowances and Benefits that the Parties may wish to be reflected in the CBA as negotiable items are to be reflected in the CBA for the period 1st July 2013 to 30th June 2017 in their current status The termS of the CBA to be reflected in the ultimate clause of the CBA document to be from 1st July 2013 to 30th June 2017; The CBA duly signed by the Parties to be registered with the Court in terms of Section 60(1) of the Labour Relations Act, 2007 within thirty(30) days from the date of the Judgement; For avoidance of doubt, the judgement took effect from 30th June 2015, notwithstanding any delay in preparation of the CBA Document and its registration with the Court.3. Your Excellency, The Government has always acted in good faith in matters relating to teachers remuneration and welfare. However, statements presented by two teachers unions regarding the pay disputes have consistently been misleading. Their claim that teachers are grossly underpaid compared to other public officers in the mainstream civil service is not true.4. The unions have once again called on all teachers to boycott classes in order to force the government to meet their pay demands.

2.0 ILLEGALITY OF THE STRIKE 5. Your Excellency, the Teachers Service Commission has not been served with any strike notice from the Union as required under Section 76 of the Labour Relations Act 2007. To claim that a notice to strike issued in January 2015 is still in force is both misleading and dishonest. That strike was called off on 14th January 2015 by the Industrial Court and teachers resumed duty on 19th January 2015. This current strike is therefore illegal, unjustified and uncalled for.6. The pay dispute is still pending in court and therefore, teachers should hence await for the finalization of the matter instead of resorting to strikes and demonstrations. A court order cannot be enforced through a strike or demonstration in the streets. The proper place for the resolution of this dispute is the courts.7. The illegality of the strike notwithstanding, the right to strike should not override the right to education of more than 12 million school going children as enshrined in the Constitution. 8. Your Excellency, the law provides for the consequences of participation in an illegal strike which includes disciplinary measures in accordance with the TSC Code of Regulations. Teachers should be aware that they are answerable to their employer as provided for by Article 237 of the Constitution. Hence no other entity can give them direction or instructions on matters relating to attendance and performance of duty. 3.0 WAGE SETTING Wage setting mechanism under the old Constitution9. Your Excellency, before the new Constitution came to being, wage setting mechanisms, including determination of wage awards in the public sector suffered several weaknesses. These include: i. Lack of clear instruments and accurate information to guide wage awards under collective bargaining agreements; ii. Use of ad hoc commissions/committees to review and award public service wages; and iii. Lack of effective remuneration review framework to guide pay review and determination of awards at the national level. 10. As a result, Your Excellency, wage awards were granted to sub-sectors of the public service without regard to their implications on other sectors of the service, macroeconomic stability, external competitiveness, effectiveness of service delivery and affordability of such awards.11. Your Excellency, to address these challenges and ensure fair and transparent harmonization of public service salaries, and value for money, the People of the Republic of Kenya consciously established the Salaries and Remuneration Commission (SRC) under Article 230(1) of the Kenya constitution to address these inherent weaknesses that created distortions, inequity and disruption of budget implementation.Wage setting mechanism under the new Constitution12. In order to ensure fairness and transparent harmonization of public service salaries, the Salaries and Remuneration Commission was established under Article 230(1) with a clear mandate as outlined in Article 230 (4) to: i. Set and regularly review the remuneration and benefits of all state officers (as defined under article 260 on Interpretation); and ii. Advise the National Government and County Governments on the remuneration and benefits of all other public officers.

13. The institutionalization of SRC under the Constitution is, therefore, an important step toward Kenyas public sector reforms, including linking remuneration to cost of living, performance and productivity as well as ensuring the wage awards are fiscally sustainable.14. Already SRC has ensured complete harmony of salaries across the entire civil service. On allowances and benefits, this has now been harmonized beginning this financial year (2015/16) with review of allowances on house, leave and hardship.

15. Your Excellency, to enable the Commission effectively discharge its advisory mandate under Article 230 (4) (b) of the Constitution, SRC is conducting a job evaluation exercise for the public service in order to have a remuneration system that is equitable, harmonized, and fairly determined.

16. It is therefore important for Kenyans to note that any pay setting mechanism outside the constitutional provisions will be retrogressive to the ongoing public sector reforms.4.0. ALLEGATIONS OF OUTSTANDING CLAIMS 17. Your Excellency, there are no outstanding claims owed to teachers. In 1997, teachers were awarded salary increases of between 150 to 200% (minimum) vide legal notice No.534 of 1997. The award was implemented over a period of 10 years in five (5) phases and finalized in 2007 (Table 1).

Table 1: Comparative Minimum Basic Pay for Teachers Between 1997-2012Equivalent GradeBasic Salary 1997 (Kshs) - MinimumBasic Salary 2007 (Kshs) MinimumBasic Salary, 2012 (Kshs) Minimum% Change (1997-2012)

Chief Principal 36,790109,089

Senior Principal23,92534,01089,748275.1

Principal GAT 118,72530,91777,527314.0

Principal GAT II16,51026,51048,190191.9

Senior GAT14,53024,65041,590186.2

GAT I12,13020,39535,910196.0

GAT II10,28018,16531,020201.8

GAT III8,85516,53524,662178.5

ATS IV6,28512,47019,323207.4

P15,17511,18016,692222.6

Source: Teacher Service Commission18. It is therefore clear that the Government has finalized the implementation of the teacher salary awards and allowances as was agreed. 19. Your Excellency, in 2009 the Government agreed to harmonize teachers basic pay with those of other public officers. This harmonization process was completed in 2012. Currently, teachers basic pay is the same as that of civil servants of the same grade (Table 2).Table 2: Current Salary Structure for Staff Serving in the Civil Service & Teaching ServiceCivil Service Job GroupTeachers DesignationBasic SalaryCommon AllowancesGross Salary*

Min.Max.HouseCommuterMin.Max.

GP116,69221,3043,0004,00023,69228,304

HATS IV19,32324,6623,0004,00026,32331,662

JGAT III24,66229,9183,5004,00032,16237,418

KGAT II31,02041,5906,0005,00042,02052,590

LGAT I35,91045,88012,0006,00053,91063,880

MSenior GAT41,59055,84012,0008,00061,59075,840

NPrincipal GAT II48,19065,29013,0008,00069,19086,290

PPrincipal GAT I77,527103,89415,00012,000104,527130,894

QSenior Principal89,748120,27015,00014,000118,748149,270

RChief Principal109,089144,92815,00016,000140,089175,928

NOTE: Gross Salary is derived using the House Allowance Rates for Other Municipalities.20. The salary increment demanded by teachers will distort the equity in remuneration compared to other civil servants of comparable qualifications and Job Group and goes against what is envisaged in the Constitution (Table 3). For example a P1 teacher( lowest grade) which is equivalent to a civil servant in Job group G will earn a gross salary of Kshs.41,086( at maximum) compared to Kshs.28,304 for a civil servant, while a chief Principal(the highest grade) will earn a gross salary of KShs. 302,392 (at maximum) compared to KShs. 175,928 for a civil servant on job group R who is equivalent. Table 3: Salary Structure Proposed by Teachers (50% - 60%)Teachers DesignationBasic SalaryCommon AllowancesGross Salary*

Min.Max.HouseCommuterMin.Max.

P126,70734,0863,0004,00033,70741,086

ATS IV30,53038,9663,0004,00037,53045,966

GAT III38,47346,6723,5004,00045,97354,172

GAT II48,39164,8806,0005,00059,39175,880

GAT I56,02071,57312,0006,00074,02089,573

Senior GAT64,04985,99412,0008,00084,049105,994

Principal GAT II74,213100,54713,0008,00095,213121,547

Principal GAT I116,291155,84115,00012,000143,291182,841

Senior Principal134,622180,40515,00014,000163,622209,405

Chief Principal163,634271,39215,00016,000194,634302,392

NOTE: Gross Salary is derived using the House Allowance Rates for Other Municipalities

21. Further, Your Excellency, the Government has harmonized house, commuter and leave allowances for teachers and civil servants. Currently, teachers are better off because they earn more hardship allowance than civil servants; this will however be fully harmonized over the next three years and will be paid as shown in Table 4.

Table 4: Hardship Allowance for Teachers and Civil Servants (1997- 2015)

5.0 REVIEW OF PUBLIC SECTOR WAGE BILL, 1997 - 201522. Your Excellency, a review of wage to teachers and other Public Sector shows that in 1996/97, total wage bill for public sector amounted to Ksh 58.7 billion or 8.1 percent of GDP (Table 5). Of this Teachers earned Ksh 18.3 billion or 2.5 percent of GDP that was lower than Ksh 21.5 billion (2.9 percent) paid to other Public Servants. However, beginning 2009/10, Teachers wage bill amounted to Ksh 87.4 billion (2.9 percent of GDP) and higher than other public sector workers (Ksh 82.9 billion or 2.7 percent of GDP). Teachers wage bill has therefore, remained higher than that of other public sector workers since 2009/10. By 2014/15, Teachers wage bill amounted to Ksh 164.5 billion (2.9 percent) while other public sector wage amounted to Ksh 143.0 billion (2.5 percent of GDP) and total public sector wage was 9.9 percent of GDP.

Table 5: Growth, Inflation and Wages

23. Your Excellency, real GDP improved from a growth of 3.9 percent in 2009 to 8.4 percent in 2010 and 5.3 percent in 2014. We have seen average inflation decline from 11.2 percent in 1997 and 14.0 percent in 2011 to 6.9 percent in 2014 and 6.6 percent by July 2015. This implies that cost of living as measured by the change in Consumer price index has declined overtime.24. Assuming the starting base wage to Teachers of Ksh 18.3 billion (2.5 percent of GDP) in 1996/97 and adjusting this annually for (i) drift of 2.0 percent (basic salary is normally adjusted by 4 percent, but allowances like house and commuter are normally not adjusted), (ii) average annual inflation shows that wage bill to Teachers would have increased to Ksh 103.8 billion (1.6 percent of GDP) by 2014/15. Your Excellency, this is lower than the actual wage that Teachers were paid in 2014/15 of Ksh 164.5 billion (2.9 percent). This implies that that the increases of wages to Teachers made over time has been higher than what they would have earned had the Government kept adjusting the wage by the cost of living (Cart1 and Chart 2). Chart 1: Teachers and Other Public Servants Wages, Ksh billion

Chart 2: Teachers and Other Public Servants Wages as a percentage of GDP

6.0 ARE TEACHERS UNDERPAID?25. Your Excellency, the teachers salaries and allowances are now fully harmonized with those of other civil servants and therefore the misconception that they are underpaid compared to other civil servants does not arise Teachers with a P1 certificate enter the teaching service at Job Group G with a maximum gross pay of Kshs.28,304. P1 teachers in private institutions earn an average gross salary of approximately Kshs.20,000 as compared to those employed by the Teachers Service Commission that earn Kshs.28,304. A Chief Principal teacher in Job Group R currently earns a maximum gross monthly pay of Kshs.144,928 which is comparable to a senior lecturer in public universities who earn Kshs.150,926. The academic requirement for one to be a senior lecturer is higher than that of a Chief Principal. If the 50-60% award is implemented, the Chief Principal will earn a maximum pay of Kshs.302,000 higher than a full professor at Kshs. 296,632.26. It is therefore evident, Your Excellency, that teachers salaries are now comparable to other public servants and their peers, but with the award the harmonization will be distorted.7.0 PUBLIC WAGE BILL SUSTAINABILITY27. Your Excellency, the public sector wage bill as a percentage of GDP is currently about 10 percent. This is high and unsustainable for an economy at the stage of development as Kenya. Our medium-term target is between 5-6.5 percent which is the benchmark prevailing in most developing middle-income countries; the sub-Saharan Africa average is about 6.5 percent indicating that Kenya has a long way to go in managing her wage bill to achieve Vision 2030 objectives of being a middle-income country. 28. Implementing the salary increment, Your Excellency, will raise the public wage bill by Kshs 154.6 billion from the current Kshs 627.8 billion in FY 2015/16 to an estimated Kshs 782.4 billion or 10.5 percent of GDP by 2016/17. This is an underestimate because we have not even taken into account the impact of the award on pension which will further raise the cost. Nevertheless, the wage bill is still way above the sub-saharan an average of 6.5 percent and will push Kenyas wage into deeper levels of un-sustainability. 29. The increase in the wage bill will similarly increase the proportion of recurrent expenditures to total budget from the current 69 percent to 75 percent, leaving development budget at 25 percent. This is inconsistent with the Public Finance Management Act, 2012, which requires that the provision of the development budget should be at least 30 percent.30. Your Excellency, the proportion of wages and salaries to ordinary revenue will increase from the current 50 percent to about 54 percent. The sustainable benchmark trend is to keep salaries at below 35 percent. It is clear that the wage pressure will reduce the provision for development and other operations. It will strain government budget and deny the economy the much needed resources for infrastructure and social services like health and education. Further salary adjustment without creating saving in the recurrent budget is not sustainable.8.0.FINANCIAL IMPLICATIONS OF A SALARY INCREMENT31. In line with the principle of equity and fairness, Your Excellency, the pay hike for teachers will inevitably have a spiral effect to other civil servants, police and prisons officers. It is estimated that this will cost the tax payer Kshs. 154.6 billion (Table 6). Teachers alone will require about KSh.99.8 billion in the period 2013 to 2017, in the current financial year 2015/16, it is estimated that the Government requires Kshs.103.0 billion to implement the award. 32. Your Excellency, the Ksh 154.6 billion does not include the additional pensions costs associated with the revised salary award.33. In the current financial year 2015/16, Your Excellency, the Government requires about Kshs.67.6 billion to implement the award for teachers. This comprises arrears of Kshs.40.6 billion that must be paid immediately.S/NO 2013/14 2014/152015/162016/17TotalCATEGORIESARREARSARREARS Additional Requirement Additional Requirement Additional Requirement 1.0 Basic Salary23,667,958,228 36,946,535,970 42,395,822,862 51,568,063,742 154,578,380,801 1.0 Teachers/115,559,558,110 25,040,087,523 26,987,183,984 32,212,791,919 99,799,621,536 2.0 Civil Servant3,541,910,042 5,200,972,904 6,124,145,595 7,211,181,438 22,078,209,978 3.0 Police and Prisons4,566,490,077 6,705,475,542 9,284,493,283 12,144,090,385 32,700,549,287 Grand Total Financial Implication23,667,958,228 36,946,535,970 42,395,822,862 51,568,063,742 154,578,380,801 1/ - Includes 3.4 billion arrears on hardship allowance which was based on 30% basic salary before FY 2015/16TABLE 6: SUMMARY OF THE PROPOSED ADJUSTMENT ON BASIC SALARY FOR TEACHERS AND ITS SPIRAL EFFECT

9.0 BUDGETARY IMPLICATIONS 2015/201634. Your Excellency, the Teachers Service Commission as an independent Commission has its own budget and is allocated funds by the Government. In the 2015/2016 budget approved by Parliament, TSC was allocated Ksh.174 billion and the 50-60% salary award was not factored. The TSC therefore has no additional funds to implement the salary increment.35. In addition, the Government currently does not have additional funds to implement any salary increment and the National Treasury has communicated the same to TSC. Therefore any attempt to implement the salary increment will require consideration of the following options with resultant consequences: Raising Taxes: The tax burden on Kenyans is already heavy. Any increase in taxes will sharply raise the price of basic commodities pushing up the cost of living. For instance, to raise the required amount, Value Added Tax (VAT) needs to be increased from the current 16% to 21% in the financial year 2015/16. This would not only affect Kenyans directly but also undermine Kenyas competitiveness and slow down economic growth.

Additional Borrowing: Additional borrowing to finance payment of salaries which is a recurrent expenditure will be a violation of the fiscal responsibility principle as stipulated in the Public Finance Management Act, 2012. Further borrowing would push interest rates upwards, negatively impacting on private sector investment, undermining growth prospects and further lowering standard of living. Ideally, borrowing should be reserved for building infrastructure which increases the productivity of the economy, generate jobs and thus enhances the wealth of the economy.

Expenditure Cuts: It is important to note that there is very limited scope for expenditure cuts as most of the recurrent expenditures are already committed to salaries, debt service, and transfers to Counties and State agencies. The residual financial resources are committed to operations and maintenance. Your Excellency, cutting development expenditure will hamper growth and poverty reduction, in addition to affecting the completion of the ongoing projects (which may result into stalled projects). More fundamentally it will reduce the share of development expenditures to total budget to 25 per cent which is below the 30 percent required under the Public Finance Management Act 2012.

10.0 RECOMMENDATIONS36. As you may have noted in this brief Your Excellency, the Teachers have been more than compensated through the increases made so far and currently earn higher wages than other Public sector workers. 37. Your Excellency the options to (i) raising taxes, (ii) borrow from either the domestic or international markets, or (iii) expenditure cuts among the Ministries, Departments and Agencies, all have severe consequences for the economy and would therefore not be appropriate at this time.38. Your Excellency, taking these considerations into account, it is recommended that Government awaits the conclusion of the appeal process and ensure a more vigorous defense of the Government position.39. In the meantime, Your Excellency, there should be no salary payment to the teachers on strike.

THE NATIONAL TREASURYSeptember 11, 201516