Kenya incurred Sh7.5b fees on undisbursed loans, Auditor General reveals

Auditor-General Nancy Gathungu calls for more fundings when she appeared before the Senate's Cohesion.  [Elvis Ogina, Standard]

An analysis of loan commitment fees paid by the National Treasury over the five years running from financial year 2020/2021 to financial year 2024/2025 has revealed that the government incurred Sh7.65 billion in fees on undisbursed external loans.

Auditor General Nancy Gathungu stated that the fees declined from Sh2.063 billion in financial year 2020/2021 to Sh1.07 billion in financial year 2024/2025, representing a decline of approximately 47.6 per cent.

This, she said, shows there has been an attempt to deal with underlying causes of delays and commitment fees, but the continued payment of over Sh1 billion in the most recent financial year indicates that the underlying causes of commitment fees have not been fully addressed.

“The audits have identified various institutional and operational weaknesses contributing to the continued incurrence of commitment fees,” she said.

Gathungu has since urged National Treasury to negotiate financing agreements  on terms that minimise commitment fees by securing longer grace periods, especially for large or complex projects, before commitment fees accrue.

“The National Treasury should strengthen the assessment of proposed borrowing by undertaking comprehensive cost and risk analysis covering interest and commitment fees and other charges, foreign exchange risks, disbursement and maturity profiles, debt service implications and the impact on overall debt sustainability before entering into financing agreements,” she said.

She also recommended that National Treasury and implementing agencies streamline and time-bound the approval and payment process of certified contractor claims to ensure that eligible payments are processed promptly and do not impede project implementation.

A commitment fee is a fee or charge paid by a borrower to a lender in the period between approval of a loan and disbursement of the loan and is intended to preserve undisbursed loan funds aside for the borrower.

Gathungu made the remarks in a presentation on the consideration of commitment fees incurred on external loans to the National Assembly Committee on Public Debt and Privatisation.

The key root causes identified, she said, included inadequate assessment of the overall cost and risk of borrowing, where loan evaluations did not adequately consider factors such as currency, penalty fees and other charges, disbursement and maturity profiles, and the impact of new borrowing on existing debt-service obligations.

She also cited inadequate negotiation of co-financing provisions, where certain financing agreements contained co-financing clauses that could restrict drawdowns where a co-financier suspended payments or trigger additional repayment obligations upon prepayment to another financier.

Such provisions increased the risk of commitment fees and other financing costs.

“There were weaknesses in the monitoring and timely resolution of undrawn balances, including balances that remained outstanding for extended periods after projects had been completed. This resulted in continued exposure to commitment fees,” Gathungu said.

The auditor also identified weak mechanisms for timely cancellation of non-performing or discontinued loans.

For instance, the five-year delay in cancelling the two Underground Electric Power Distribution Network projects indicates weaknesses in decision-making and coordination mechanisms for identifying and cancelling loans where projects are no longer proceeding.

On operational challenges, Gathungu noted delays in meeting conditions precedent to first disbursement.

According to her, most of the 32 sampled projects experienced delays in drawing their first disbursements due to failure to fulfil conditions precedent, including signing subsidiary loan agreements and power purchase agreements, compensation for acquisition of wayleaves, obtaining no-objection certificates, and provision of Government counterpart funding.

Delays in project commencement and implementation were also identified, which came in the way of fulfilling pre-implementation requirements and prevented projects from commencing as planned, leaving committed loan amounts undrawn and subject to commitment fees.

On retention of undrawn balances after project completion, she said three completed Olkaria projects retained undrawn loan balances totaling Sh12.562 billion for periods ranging from three months to seven years.

“These balances attracted commitment fees of Sh70.991 million. Cancellation of the two Underground Electric Power Distribution Network projects took five years, resulting in commitment fees of Sh474.598 million and additional interest charges of Sh151.860 million, resulting in total avoidable costs of approximately Sh626.458 million,” she told the committee.

In assessing the extent to which previous audit recommendations aimed at addressing the causes of avoidable commitment fees have been implemented, Gathungu said her office has commissioned a stand-alone audit on the implementation of audit recommendations.

“The audit seeks, among other objectives, to establish the extent to which National Treasury and implementing agencies responsible for debt-funded projects have implemented previous audit recommendations aimed at reducing or mitigating the incurrence of avoidable commitment fees,” she said.

The stand-alone audit will assess the actions taken by responsible entities to address previously identified weaknesses, including delays in meeting conditions precedent to loan disbursement, delayed drawdown of approved loan funds, retention of undrawn loan balances after project completion, delayed cancellation of loans for discontinued projects, and weaknesses in coordination between National Treasury and implementing agencies.

 The audit will also assess whether the measures taken have addressed the root causes of the identified weaknesses and contributed to improved utilization of external financing and reduction of avoidable commitment fees.

According to the auditor, a performance audit report on deficit financing operations by the National Treasury, July 2023 established that 16 projects with loan agreements dated between 2014 and 2021 incurred commitment fees amounting to Sh1.12 billion on non-disbursed loan amounts.

She said the fees were mainly attributed to failure to fulfil conditions precedent specified in the respective loan agreements, resulting in additional costs to the National Treasury.

 The audit further established that delays in implementation of 12 sampled projects incurred Sh161.5 million in commitment fees due to delays in project execution, which increased the cost of borrowing and delayed the realisation of intended project benefits.

Another performance audit report on contracting of external loans for public development projects by the National Treasury in October 2023 has also shown that out of 70 loans contracted, 17 were non-disbursing, out of which 4 had accumulated Sh110.5 million in commitment fees.

Three of six sampled loans incurred Sh158.75 million mainly due to delays in land acquisition and compensation.

In yet another performance audit report on public debt servicing activities dated September 2022, it was revealed that two KPLC financing agreements had not been drawn down due to KPLC’s constrained absorption capacity.

This was occasioned by the decline in its financial performance, but had accumulated Sh474.59 million in commitment fees, while 13 loans had accrued approximately Sh997.35 million due to delayed drawdowns.

“The delayed loan drawdowns were largely caused by lengthy approval processes, legal and administrative requirements, land acquisition challenges, delays in signing agreements, and inadequate involvement of implementing agencies during loan preparation and negotiation. The KPLC projects had been conceptualized in 2012, but financing agreements were signed in 2017,” she noted.