State 'inflated' loans insurance cost by Sh10 billion

The Government paid Sh10 billion to insure the loans taken for construction of the controversial dams, but industry experts argue the cost should not have exceeded Sh1 billion.

Italian insurer Service Assicurativi Del Comercio Estero (SACE) was paid Sh11.1 billion as premium for the loan, but a reputable firm that offers products on sovereign loans argues the much it would have charged was Sh750 million.

In essence, going by arguments by local industry experts, Kenya paid 15 times over the fair rate to the Italian government-owned credit insurer for insuring the loans procured from a consortium of banks led by Intesa San Paolo.

It would be a subject of interest for investigators to determine why SACE charged 17.5 per cent of the loan amount as premium, against industry rates averaging 1.5 per cent.

Kenya sought the credit to finance the construction of two dams in Elgeyo Marakwet, granted on condition that they would be insured against default – as is ordinary practice.

However, it is through what insurance professionals have termed the cover as “overly exorbitant” where Kenyans may have lost billions.

Accommodate kickbacks

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Typically, countries deemed economically stable as Kenya are profiled as low risk of default on loans and are charged between one and 1.5 per cent of the loan value – meaning the cover should have been capped at Sh750 million.

But Treasury Cabinet Secretary Henry Rotich said he paid Sh11.1 billion to an Italian government-owned credit insurer as premium for the loan.

It could be one of the issues he is being asked by investigators to explain.

It adds a fresh twist to the ongoing investigations on likely fraud on the construction of Arror and Kimwarer dams, collectively worth Sh63.5 billion, with concerns that the price may have been padded to accommodate kickbacks.

Africa Trade Insurance (ATI) Agency, which prides itself as the continent’s main provider of credit insurance since 2006, said Kenya’s risk profile is “very low” considering her political and economic fundamentals are strong.

In insurance, a higher risk profile would attract a bigger insurance premium because the insured liability – in this case failure to repay the loan, is more likely to occur.

ATI Chief Executive George Otieno told The Standard that his agency was charging Kenya a maximum of 1.2 per cent in insurance premium for loans borrowed by the State and termed the Italian deal as raw.

“We have products on sovereign loans and for Kenya the price is just about one per cent,” Mr Otieno said in an interview.

“I would cover that loan at 1.2 per cent,” he added.

Unstable countries such as the Democratic Republic of Congo and South Sudan – both crippled by prolonged civil strife, bear a higher risk profile and insurers like the ATI would charge anywhere about three per cent of the loan amount as premium.

Had the Italian loan been extended to either country, the applicable insurance premium would be about Sh2 billion – still less than a fifth of the price paid by Mr Rotich.

ATI is presently the insurer for several loans borrowed by the Kenyan Government from international lenders. 

Otieno’s concerns are echoed from the wider insurance industry where covering loan products is standard practice guaranteeing that the credit facility would be repaid in case the borrower is unable to fully service the loan.

Individual borrowers and companies bear a relatively higher risk of defaulting because they are predisposed to factors such as retrenchment or death, and bankruptcy, respectively.

For individuals, the cover is essentially against job loss or a life insurance, meaning that the insurer will settle the outstanding portion of loan when the liability arises.

Even then, premium for personal loans is just about 1.5 per cent. A Sh2 million bank loan would have a insurance cost of about Sh30,000 – depending on the term.

Longer terms attract a higher insurance premium because the exposure period to default is longer.

Association of Kenya Insurers Chief Executive Tom Gichuhi said the sovereign risk of default cannot be compared to the cost of insuring individual loans.

“It looks to me as a very expensive insurance cover, which is way out of the ordinary range,” Mr Gichuhi said.

He added that it was highly likely that the cover was irregular but could not exactly suggest criminal culpability on the part of officials involved in arranging the credit facility.

Italian insurer SACE has not disclosed how much it was actually paid by the Kenyan government for the credit risk cover but indicated that the pricing was fair.

“The premium has been calculated in line with the OECD standards and it refers to an overall tenor of 10 years,” the firm said in an emailed response to queries by The Standard.

Regulatory framework

SACE added that it was increasingly getting concerned over the unfolding events in Kenya, citing that it could not comment on the specifics of the transaction as it was currently the subject of a probe by the Directorate of Criminal Investigations.

“At the moment, every detail on the story has been learned from local news sources and the statements released by the Kenyan authorities, with our increasing concern,” the corporate communications department wrote.

“Good governance and legality being core principles in our organisation, the underlying insurance transactions were subject to rigorous due diligence and were implemented in compliance with the relevant regulatory framework.”

In a statement last week, Treasury explained the payments to SACE Insurance Premium as a fee paid to SACE (Italian Government agency) as an insurance policy covering 100 per cent of the principal and interest against any potential financial risks to cushion the lenders.

“This was needed to make the facility concessional with below market interest rate and longer tenure (subsidy),” read the statement which added that “Payment of SACE Insurance Premium were made as follows: Arror Multipurpose Dam Project €52.1 million (Sh6.1 billion) and Kimwarer Multipurpose Dam Project €42.1 million (Sh5.0 billion).

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SACEarror and kimwarer damsLoan insuranceTreasury CS Rotich