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How taxpayers are losing out in State agencies' loans

Kenya Airways plane on the runway at the JKIA, Nairobi. [Boniface Okendo, Standard]

In January 2014, national carrier Kenya Airways approached the Export-Import (Exim) Bank of the United States for a Sh122 billion loan to purchase seven aircraft and one engine.

The investment was meant to facilitate Project Mawingu, the airline’s strategy to modernise its fleet and expand its international destinations. 

Exim approved the loan and together with financiers Citi, JP Morgan Chase formed the entity Tsavo Aircraft Financing LLC to facilitate aqcuisition of the aircraft and manage the loan repayments.

The Kenyan government defended the new debt load as part of a strategy to restore the ‘Pride of Africa’ from its loss-making streak and command a bigger share of the continent’s growing aviation industry.

Just a few months prior to the deal and in the wake of the Westgate terrorism attack, Kenya Airways had reported a record Sh7.9 billion loss, the biggest yet in the company’s history.

The country’s aviation and tourism sectors were in crisis following a string of cancellations owing to travel advisories on threats of terrorism by Western countries like the UK and the US, which formed the bulk of the airline’s ticket revenues.

Issued guarantee

Despite the risk posed by this bleak financial outlook, Exim was confident that its loan would be repaid in full.

The Government of Kenya had issued a guarantee of Sh78 billion (63 per cent) on the loan which meant that Exim’s exposure was only on Sh44 billion and the lender was guaranteed by law a refund from taxpayers in the event of a default.

Government officials further told Exim that Kenya Airways is a strategic asset and thus the State was willing to provide a non-discretionary guarantee; meaning if the debt is called it must be paid despite parliamentary objections.

“If KQ were to default on the loan, Exim could seek repayment directly from the Consolidated Fund without additional actions by the Parliament of Kenya because the soverign guarantee has already received parliamentary approval for funds distribution from the Kenya Debt Management Department.”

Last year, Kenya Airways defaulted on the Sh122 billion owed to Exim Bank and in a Cabinet decision, the debt burden was transfered to Kenyan taxpayers and Sh2.8 billion in interest payments were made to Tsavo Aviation Financing LLC.

“A Cabinet decision was made to novate Kenya Airways guaranteed debt to government which was in arrears,” said the National Treasury in the latest Public Debt Report.

“Kenya Airways defaulted on both the guaranteed portion of the loan ammount as well as the non-guaranteed portion. The National Governmnet is in the process of novating the debt to be finalised during the 2022-23 financial year.”

‘Project Mawingu’ flopped due to embezzlement of the credit line, which was spent on dubious deals that sunk the national airline further into the red.

In one such deal, Kenya Airways bought two second-hand planes at Sh2 billion from one of its major shareholders, KLM, and then sold them for Sh200 million.  

As at December 2022, its outstanding debt stood at Sh139 billion, a 30 per cent increase from Sh107 million in a similar period in 2021.

The financial woes of the airline in which Kenya taxpayers own a majority 48.9 percent illustrate how investors and government officials collude in State-guaranteed loans to the detriment of taxpayers.

This pattern emerged yet again in the controversial sale of Teklom Kenya that saw the government use Sh6 billion of taxpayer funds to buy out UK-based Helios Investment partners, only to rescind the decision a few months later in favour of another investor, the Infrastructure Corporation of Africa LLC (ICA) of the United Arab Emirates.

Despite the fact that Parliament and key regulators including the Competition Authority of Kenya and the Communications Authority are yet to see the particulars of the deal, Cabinet earlier this month gave a directive on the change of shareholding.

“In order to complete the process of onboarding ICA, GoK will work with Jamhuri/Helios to transfer their 60 per cent shareholding directly to ICA, this process will inevitably require rescinding of the transaction documents already signed between GoK and Jamhuri/Helios, among other necessary actions,” said Treasury Cabinet Secretary Njuguna Ndung’u in a statement.

Legal challenges

While the deal is still “subject to regulatory approval”, it appears that the role of key market regulators and Parliament has been relegated to that of a rubber stamp, despite the existence of significant legal challenges.

“Once Helios returns the money, they become shareholders in Telkom again and the government will have no right to ask them to sell, let alone choose for Helios who they should sell the shares to,” said constitutional lawyer Paul Mwangi in a legal brief.

“In fact, if the government gives back the money and rescinds the sale, it will be deemed to have lost its pre-emptive rights and legally, Helios will be free to sell to anyone else.”

This would mean that the transaction involving Telkom Kenya shares becomes a private treaty involving Helios Investment Partners and the ICA and one that is not subject to public or parliamentary scrutiny.

During the parliamentary inquiry into the sale of Telkom Kenya earlier this year, Helios Investment Partners Chief Financial Officer Paul Cunningham said they had injected $47 million (Sh6 billion) in the form of loans “to help protect and grow the business”.