Mbadi: Why Treasury froze Meru county funds over French investor debt

Treasury Cabinet Secretary John Mbadi has laid bare the chain of events that led to the Treasury seeking approval to stop the transfer of funds to Meru county.

Appearing before the Senate Standing Committee on Finance and Budget on Thursday, Mbadi cited what he termed a “serious material breach” arising from the county’s failure to settle a costly arbitral award involving a French investor.

Defending the Treasury’s decision, the CS argued that the continued delay in settling the debt had exposed the county and the country to growing financial and diplomatic risks.

“The continued non-settlement of the arbitral award is detrimental to the fiscal sustainability of the County Government and foreign relations between Kenya and France,” Mbadi told senators.

The dispute dates back to 2018 when the Meru County Government evicted French investor Michel Dechauffour, operating through Leopard Rock Mico Limited, from a long-term lease in Meru National Park.

According to Treasury submissions tabled before the Senate committee, the eviction violated an earlier lease agreement entered into between the defunct Nyambene County Council and the investor’s company.

Following the eviction, Leopard Rock Mico Limited sought compensation through arbitration for investments made on the property.

On December 19, 2019, the High Court in Meru awarded the investor Sh339 million, with interest accruing at 14 per cent annually from March 8, 2019.

“The County Government of Meru subsequently filed appeals against this award in both the High Court in Meru and the Court of Appeal in Nyeri, both of which were unsuccessful,” Mbadi said.

The CS revealed that the matter later escalated into a diplomatic issue after French President Emmanuel Macron raised it during a meeting with President William Ruto in Berlin, Germany.

“Following this meeting, His Excellency the President directed the Attorney General to convene the relevant National Government departments and advise the County Government on modalities for settling the outstanding amount,” Mbadi said.

An inter-agency meeting convened by the Solicitor General in February 2024 brought together various government agencies to deliberate on the matter.

During the meeting, Meru County reportedly acknowledged the debt but said it lacked sufficient budgetary provisions to settle the payment in full.

“The County Government acknowledged the debt but indicated it lacked sufficient budgetary provisions to settle the payment in full,” Mbadi stated.

The technical team proposed that Meru formally seek either a loan or a conditional grant from the National Government to settle the debt.

However, officials also warned that if the National Government assumed responsibility for the debt, it could set a precedent for other counties with pending legal liabilities.

In a subsequent letter dated February 16, 2024, Meru County formally requested financial support from the Treasury, citing an increasing wage bill and limited resources.

The county also acknowledged that the debt had already grown significantly due to accumulated interest.

“It further acknowledged that the debt had accrued interest approximated at Sh600 million as of the date of the letter,” Mbadi said.

However, the Treasury declined the request.

“In response to the request, the National Treasury declined the County Government of Meru’s formal request for a loan or conditional grant to settle the arbitral award,” Mbadi told senators.

The Treasury instead advised the county to renegotiate with the claimant through the Attorney General’s office and develop a long-term repayment arrangement acceptable to both parties.

Mbadi further disclosed that the Office of the Controller of Budget later warned that failure by the county to settle the arbitral award could trigger recommendations for stoppage of funds due to serious material breach under the Public Finance Management Act.

The Ministry of Foreign Affairs also became involved in the matter after concerns emerged over possible strain in Kenya-France relations.

According to Treasury documents, the State Department for Foreign Affairs requested authorisation for the gational government to take over the debt after the French Ambassador reportedly indicated willingness to negotiate a waiver on interest if the government formally committed to settlement.

But the Treasury again resisted the proposal.

“The National Treasury advised against the National Government assuming the debt, citing potential contravention of existing legal and regulatory frameworks and setting precedent to other County Governments with pending bills,” Mbadi explained.

The CS warned senators that failure to resolve the matter could expose Kenya to international legal claims under the Bilateral Investment Treaty (BIT) signed between Kenya and France.

“The Republic of Kenya and the French Republic are signatories to a Bilateral Investment Treaty, which if invoked by the claimant on grounds of denial of justice, could result in a higher award and penalties,” he said.

Mbadi said such a scenario could negatively affect Kenya’s credit rating and investor confidence.

He also raised concern over the rapidly growing interest on the award, noting that public resources continued to be lost with every delay in settlement.

“With the current pace of settlement, the total interest payments along with the principal are expected to exceed Sh650 million,” he warned.

Although Meru County later paid Sh200 million through the investor’s legal representatives, Treasury said an outstanding balance of about Sh442.8 million remained as of August 2025.

Mbadi accused the county government of failing to provide updates requested by the Treasury and omitting the pending liability from its 2025/26 pending bills action plan submitted to the Office of the Controller of Budget.

“The ongoing delays in the payment of the arbitral award and the County Government’s failure to fully settle this longstanding obligation are clear indicators of significant fiscal challenges,” he said.

He argued that under Sections 93, 94 and 96 of the Public Finance Management Act, the county had met the threshold for “serious material breach,” thereby justifying Treasury’s decision to seek stoppage of funds under Article 225(3) of the Constitution.

Mbadi told senators that the move to halt transfers was not meant to punish the county but to stop further losses arising from accumulated interest and pave the way for a structured settlement plan.

“The decision to stop funds transfer to the County Government of Meru marks our initial step in preventing further loss of public funds through accrued interest rates,” he said.

Under the proposed arrangement, the national government would intervene by settling the award and later recovering the funds from the county through an intergovernmental repayment agreement.

Mbadi assured the committee that the Treasury did not intend to suspend transfers indefinitely or disrupt devolved services in Meru.

“The National Treasury does not intend to stop the transfers beyond the timeframe established in law or as guided by this committee,” he said.

He added that the Treasury remained committed to supporting county governments in line with the Constitution and principles of prudent financial management.