Treasury alarmed by State agencies' borrowing as loans hit Sh41 billion

Finance Cabinet Secretary Henry Rotich (right) and Africa Development Bank regional director Gabriel Negatu after signing a memorandum of understanding for the Last Mile Connectivity Project (LMCP) which aims to support the Government's initiatives of ensuring increased electricity access to Kenyans, particularly among the low-income groups [PHOTO/BEVERLYNE MUSILI/STANDARD]

Nairobi, Kenya - Borrowing by State-owned entities with or without Government guarantees is increasing liability risks to the government. This is because in the event of default, the State bears the debt.

The Treasury cautions that with devolution, liabilities are expected to rise as those of county governments are taken into account, calling for closer monitoring.

“To mitigate this potential risk, the Government will continue monitoring explicit and implicit liabilities to ensure they are maintained within sustainable levels,” said Treasury Cabinet Secretary Henry Rotich (pictured). Available figures from the Treasury indicate that as at January 2015, the stock of Government guaranteed loans to State agencies reached Sh41.3 billion.

Top on the list is KenGen, which has the most guarantees of Sh3.47 billion for Mombasa diesel generating power project, Sh3.42 billion for Sondu Miriu Hydro power project and loan balance of Sh7.9 billion for Sondu Miriu II hydro power project.

Others are Sh3.3 billion for Sang’oro power plant and Sh43.2 million for Ol Karia Unit 4 and five Geothermal power project- all loans secured from the Government of Japan between 1995 and 2010. Kenya Ports Authority is second with a loan balance of Sh13.1 billion, funds obtained from the Government of Japan in 2007 for modernisation of Mombasa Port facilities.

KBC has a loan balance of Sh2.6 billion procured from Japan in 1989 for the modernisation of its facilities while the Nairobi County Government loan balance hits Sh38.9 million, obtained in 1985 from the USA for Umoja II Housing Project.

Debt Management

Telkom Kenya has a balance of Sh348 million, obtained in 1990 from Canada for purchase of microwave telephone system. These remarks are contained in a Medium Term Debt Management Strategy Paper, dated February 2015 and published by Treasury’s Debt management department. While the National Government has not issued any standard loan guarantees since the new Constitution came into effect in 2010, the energy sector has been key in increasing government guarantees.

To maintain public debt within sustainable levels, the Government, with development partners, is promoting Public Private Partnership arrangements in the energy sector. It is also encouraging use of non-State guarantees from multilateral agencies to minimise the level of guarantees.

Risk Guarantees

Under the agreed framework, the World Bank and African Development Bank have been issuing Partial Risk Guarantees to provide payment security to investors and lenders, backed by government’s letter of support.

More than five Independent Power Producers have been provided with security under this framework. Under the Public Finance Management (PFM) Act, county governments must be issued with a national government guarantee. However, it is expected that devolved units will exercise fiscal restraint in borrowing.

Most counties have inherited debts, which may prove difficult to pay. The PFM Act requires elaborate procedures before a guarantee is issued to prevent contracting of debts that prove difficult to pay later. “Towards mitigating risks associated with contingent liabilities, the Government, in liaison with devolved units have developed county domestic and external borrowing framework,” said the Debt Management report.