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Did Treasury loan tactics outfox PTA Bank board?

BUSINESS
By Otiato Guguyu | July 23rd 2017
Software technician Rhoda Chumba installs software at the Digital Assembly Plant at Jomo Kenyatta University of Agriculture and Technology.The plant produces laptops and tablets for the primary schools Digital Literacy Programme on 24th JANUARY 2017 PHOTO BY DAVID GICHURU

Regional financier PTA Bank was surprised when the Kenyan government approached it for a $250 million (Sh25 billion) loan last year.

The government asked for a two-year facility to do various infrastructure projects around the country.

The lender, also known as Trade and Development Bank, wondered why the government would want the money for such a short period of time yet such projects take time to complete.

“Why is Government of Kenya borrowing short-term maturity funds to finance infrastructure projects that are long term by nature and that usually require more than two years to even reach technical and commercial completion before they can generate revenue streams?” reads a confidential circular by the bank’s management to the board.

The reality was that the government may have pawned Kenya’s future to a debt cycle without regard to the projects’ viability.

Treasury has made up its mind to issue another Eurobond next year so it assured the PTA Bank that its money would be settled with proceeds from the bond, just like the Government did with other creditors in 2014.

“Government of Kenya approached the bank for a short-term facility on the premise that by the end of two years, it will have secured long-term financing through the issuance of the Eurobond whose proceeds shall be partly deployed towards the settlement of maturing obligations under the PTA facility,” said the circular, a copy of which Weekend Business saw.

The board of the bank, whose financial model is to fund viable projects that should ideally pay for themselves, was unsettled that the money was being used as bridging finance and was dependent on whether Kenya issued a sovereign bond.

Treasury, however, assured the lender that the money would be repaid - even if it meant taking another international loan, raising money through domestic loans and taxes or any other money in the country’s Consolidate Fund.

PTA Bank even feared that the money would be seen as budget support financing rather than for infrastructure.

“Is there a provision in the PTA Bank charter, rules and guidelines that prevent it from giving budget support loans to its sovereign borrowers? If the answer is no, why not go for a straight budget support loans?” the board asked.

EXCLUSION LIST

The board was advised that if the lender granted such a request, the risk was that the facility might be used for non-essential activities on the bank’s exclusion list such as purchase of military hardware, ammunition and meeting salaries and pensions obligations of civil servants.

“We propose that the facility is considered a bilateral loan to finance clearly identified projects and trade activities that are acceptable by the bank,” the board members were told.

The loan was offered at a rate of 5.2 per cent above the Libor.

The Libor, an average interest rate at which a selection of banks on the London money market are prepared to lend to one another, is currently at 1.7 per cent for 12 months, which put Kenya’s borrowing at 6.9 per cent excluding fees and other costs.

To lure the lender, Treasury produced a list of 50 projects to be funded by the loan including the Early Oil Pilot Scheme, which has been suspended.

Lake Turkana Wind Power (LTWP) project, a private venture guaranteed by the Government, was allocated Sh300 million while the Loyanglani-Suswa transmission line was allocated Sh3.2 billion.

The Government is supposed to pay the LTWP investors a monthly fine of Sh700 million from January this year for the delayed building of the line to evacuate power from the project site to the national grid at Suswa under the power purchase agreement.

However, Energy Cabinet Secretary Charles Keter has in the past said the government will not pay for the delay.
Other projects that the Government listed included the laptop project that would cost Sh13.4 billion and Sh1.6 billion for improving Thika highway.

Kenya could find it difficult to justify debt from development partners who are getting concerned that the money might not end up in servicing project and instead go into recurrent budgets.

A World Bank economic update noted with concern that Kenya is borrowing more than what it is spending on development projects, meaning that some of the money is going to recurrent expenses.

“Overall borrowing in 2015/16 outstripped development spending by 0.1 percentage points, suggesting a small part of the borrowing financed part of the recurrent spending,” said the report.

Last year, Kenya’s borrowing calendar indicated that the National Treasury would borrow Sh700 billion, while the development budget was estimated to cost Sh682 billion.

President Uhuru Kenyatta has been on the defensive on the huge debt, saying the funds were not going to consumption.

He said the government has been borrowing to invest in rail, roads, water and health, areas he said, would have a positive impact on the country by enabling economic growth.

“I do not think we should be concerned as a country. Yes, we are not going to run away from the fact that we are borrowing. But the question is, are we borrowing for investment or for consumption?” said Uhuru.

“The money is not going towards payment of salaries or consumption but to projects that will spur economic growth and create employment,” he added. As borrowing in the commercial markets becomes even more difficult, Kenya will increasingly find itself having to enumerate the projects which it intends to fund.

Interestingly, the government claimed it would spend Sh2 billion to distribute LPG gas, a similar claim and amount it made a few months later when asking for additional funds from PTA and a consortium of lenders.

 

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