Struggling State companies pose Sh1.3tr exposure to taxpayers

Treasury estimates that 18 of the total SOEs in the country may require Sh382 billion in the next five years to cover their liquidity shortfalls. [File, Standard]

National Treasury faces a Sh1.3 trillion fiscal risk from struggling State firms, which may require support for critical activities such as repaying loans, paying suppliers and defending court cases.

The exposure, which nears the Sh1.669 trillion tax collections in the last financial year, is listed as one that could force the State to divert resources to rescue such firms should such risks crystallise.

National Treasury says in the Draft Budget Estimates for the financial year starting June 2022 that government is the natural underwriter of risks faced by State-owned enterprises (SOEs), and will have to step in to rescue those considered too strategic to be allowed to collapse.

“A summary of their financial statistics - estimates a maximum fiscal exposure of Sh1.3 trillion, which equates to 13.6 per cent of GDP. This creates a high degree of fiscal risk for the government through potentially stepping in for the repayment,” says Treasury.

The exposure includes Sh664 billion on-lent loans that State could be forced to repay and potential bailouts for guaranteed and non-guaranteed commercial loans (Sh343 billion).

Other exposures are contingent liabilities such as pending court cases (Sh109 billion) and potential liquidity injections for the clearance of arrears (Sh211 billion).

Treasury estimates that 18 of the total SOEs in the country (about 260) may require Sh382 billion in the next five years to cover their liquidity shortfalls amid the debate on whether transfers to these entities matches the socio-economic benefits.

Firms such as Kenya Power and Kenya Airways are considered as strategic and of national interest due to the overall impact their failure would have on the economy.

Treasury says this obligates the State to bail them out from financial distress, despite the competing budgetary needs.

“This may pose serious fiscal risk and challenge to budget implementation as the National Treasury has to provide budgetary resources to bail out these State-owned enterprises and public companies in the budget year,” it says.

The findings come after Treasury conducted a fiscal risk analysis on a sample of 18 State entities which identified liquidity challenges resulting from unfavourable revenue and economic performance as a common thread.

“These State corporations were chosen, given their size and strategic importance to the economy and society, thus holding a high implicit risk to government in that many of them are too strategic to fail,” said Treasury.

SOEs such as East African Portland Cement, Mumias Sugar, Kenya Power, Kenya Airways, Kenya Railways Chemilil Sugar, Muhoroni Sugar, Nzoia Sugar and Sony Sugar are either in losses or negative working capital implying their inability to service short term loans when they fall due.

Treasury says the government is now in the process of establishing a high-level fiscal risk committee (FRC) with a view of “identifying, evaluating, and reporting and to a deeper extent propose strategies of mitigating and tackling the same.”

The International Monetary Fund (IMF) has been pushing Kenya to start rolling out reforms in State-owned entities, including trimming the headcount to make their business models sustainable.

SOEs’ performance has been worsening with the Central Bank of Kenya (CBK) report released in September this year, saying the decline in profitability and cash flow problems has seen some State-owned firms tap loans to meet expenses such as salaries.

CBK said in the Financial Sector Stability Report for 2020 that SOEs’ long–term debt to assets and long–term debt to equity ratios have declined.

“This (drop-in ratios) may indicate that SOEs used long–term debt to meet operational expenses rather than investing in assets, thus limiting productivity, expansion capacity and profitability,” said the CBK.

“The decline in profitability and cashflow problems exacerbates indebtedness, increases reliance on fiscal support, and financial sector vulnerabilities.”     

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