The report seen by the Star shows many state-owned enterprises have failed to service their debts, hence the costly penalties that stand to strain public finances.
A total of Sh407.2 billion in loans to state-owned enterprises was yet to be repaid to various lenders as of June 30, 2024, despite their maturity – some past the repayment dates.
State-owned enterprises owed Sh875 billion as of the time of the audit. The principal amount due was Sh153.8 billion, of which only Sh1.6 billion, 1.04 per cent, had been repaid.
“This resulted in SOEs attracting penalties of Sh197.7 billion. The default on on-lent loans by SOEs has consequences of shifting the debt repayment burden to the national government,” the audit reads.
The bulk of the penalties, as per a new report by Auditor General Nancy Gathungu, is tied to the Kenya Electricity Transmission Company.
The report shows that Ketraco has been penalised Sh179 billion from an outstanding Sh182 billion as at the time of the review.
According to the report, the loans were for the Kamburu-Meru 132kV transmission line and the Chemosit-Kisii 132kV transmission line.
The Kenya Railways Corporation is also under scrutiny, with the audit uncovering Sh10 billion in default penalties for the Mombasa-Nairobi Standard Gauge Railways loan, along with an additional Sh939 million in arrears for the same project.
Further, the Naivasha SGR extension has accrued Sh1.7 billion in penalties, compounding the financial burden on taxpayers.
The findings raise fresh concerns over financial mismanagement in key infrastructure projects, putting agencies with the largest share of the defaults on the spot.
Gathungu says the findings highlight growing risks of expensive loan agreements tied to major infrastructure ventures.
“This not only deteriorated the financial health of these entities, but also shifted the repayment burden to the national government and, ultimately, increased fiscal pressure on public debt servicing,” the auditor said.
Kenyatta University was slapped with a Sh357 million penalty for loans towards the construction of the Kenyatta University Teaching, Research and Referral Hospital.
Athi Water Works Development Agency has been slapped with penalties totalling Sh740 million for various projects.
They include Sh527 million for loans disbursed for the Nairobi Water Distribution Network project, Sh28 million for the same and Sh142 million for sanitation projects in Nairobi and Kisumu.
Other water agencies flagged in the audit include Tana Water, Lake Victoria South and North water boards, National Water Harvesting and Storage Authority, Coast Water Development Authority, and Nyeri Water and Sanitation Company.
It emerged that the Treasury, mandated to oversee government investments, was not involved in the negotiations for the loans.
Auditors established the department played no role in determining the SOEs eligible for on-lent loans.
“The department was only involved in drafting the subsidiary loan agreements, which were done after negotiations and securing of loans.
“This resulted in financing agreements being negotiated without adequate risk assessment and consideration of the financial capacity of the borrowing entities to repay on-lent loans,” Gathungu said.
The auditor further pointed out that there was no clear legal mandate or documented policies and procedures for the department’s involvement in the committees negotiating loans.
“This resulted in loans being advanced to SOEs that had already defaulted on previous loans, leading to continued defaults,” the report said.
Athi Water, for instance, defaulted on loans to the tune of Sh35 billion, Central Rift water agency (Sh2.8 billion), Coast Water (Sh2.5 billion), Lake Victoria North (Sh4.4 billion), Tana Water (Sh3.7 billion), and Sh4.1 billion for Lake Victoria South.
“Review of loan files at the department of government investments revealed that there was no credit risk assessment conducted to assess the financial capacity of SOEs prior to the advancement of on-lent loans,” the report reads.
It is emerging that the reviews focused on project viability but did not assess the agency’s creditworthiness, leading to on-lent loans being advanced to those with weak financial standing and a history of default.
Some project loans also matured before the projects themselves were completed, hence did not fulfil their intended objectives.
As a result, the projects did not generate the revenue required for repayment of loans, the auditor general said.
The audit established that the department did not adequately monitor the repayment of on-lent loans by SOEs.
“The department could, therefore, not take timely corrective action on SOEs that had defaulted on repayment of on-lent loans. The defaults were attributed to insufficient revenue collection and non-adherence to loan remittance requirements.”
In January, Treasury CS John Mbadi declared that parastatals that have defaulted on loan repayments would no longer be allowed to borrow additional funds.
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