Cash-strapped parastatals seek loan write-offs as defaults hit Sh74b

 

Kenya Power workers fix a 3 phase distribution transformer of 250KVA at Ndimaini Village in Karatina, Nyeri on December 28, 2020. [Kibata Kihu, Standard]

Parastatals have failed to service interest payments on Sh921.93 billion State loans, with the majority of them seeking write-offs as losses mount.

State-owned enterprises (SOEs) including Kenya Power, Kenya Railways and East African Portland Cement, were in default at end of June 2021, failing to repay Sh74.014 billion interest and principal on loans.

The latest defaulted payments, coming on the back of disruptive Covid-19 environment, are a 77.4 per cent rise from the previous financial year, when the SOEs had failed to pay the government Sh41.72 billion.

The National Treasury says many of the 260 State corporations operating in key sectors such as energy, agriculture, transport and finance are now bidding for write-offs to stay afloat.

“Majority of the SOEs are facing financial constraints and have applied for consideration of their loans to be written off,” says the National Treasury.

The rising defaults are despite the Treasury having added these entities Sh54.93 billion in the financial year ended June 2021, to take the total stock of loans to SOEs to Sh921.93 billion.

The outstanding debts to the SOEs are equivalent to 55 per cent of the Sh1.669 trillion that the Kenya Revenue Authority (KRA) collected in the entire financial year 2020/2021.

Treasury write-offs look unlikely given the pressure from lenders such as the International Monetary Fund (IMF) for government to effect structural changes, including layoffs and closure or merger of some parastatals.

SOEs have also continued to benefit from the billions of shillings transferred from the exchequer, diving into the public opinion over the socio-economic benefits accruing to taxpayers.

Treasury recently estimated that taxpayers may spend about Sh382 billion in sustaining operations of 18 of the SOEs in the next five financial years.

Firms such as Kenya Railways Corporation, Nzoia Sugar, Kenya Power, East African Portland Cement, South Nyanza Sugar Company, National Oil Corporation, Post Bank, Postal Corporation of Kenya, Muhoroni Sugar Company and Kenya Electricity Transmission Company are all in losses.

National Treasury usually borrows funds from both external and domestic sources and then lends to SOEs.

Chances of recovering such money are usually lower given that the Treasury emphasises on the strategic role of SOEs and the projects being implemented as opposed to the ability to repay.

“The SOEs should be playing a strategic role in the economy, have a weak balance sheet that cannot attract competitive funding both domestically,” says Treasury.

“Projects being implemented by the SOE should hold a top-level priority on the development agenda of the government.”

The State received Sh8.35 billion in the financial year ended June 2021 from 15 SOEs made up of Sh6.26 billion as principal and Sh2.09 billion as interest payment.

Treasury says a few entities such as Agricultural Settlement Fund, Central Land Board and the Cooperative Bank of Kenya have been consistent in their loan repayments and therefore reducing their on-lent loan arrears.

However, Treasury adds that Co-op Bank has indicated that various co-operative societies are in a moribund state, rendering the inability to repay some of the on-lent loans.

Non-settlement of arrears has seen the government take over the Kenyatta University Hospital. The State is now managing the hospital to recover the loan amount.

For, Agro-Chemical and Food and Kenya Meat Commission, they have been earmarked for privatisation with the State betting on this to recover its money.

But most water, works and development agencies face financial difficulties and are unable to meet their on-lent loans obligations, with Treasury likely to lose the money. “An inter-ministerial committee has been constituted to review all water sector loans and recommend the mitigation measures to be adopted,” says Treasury.

The State’s checklist for lending to parastatals differs from that of commercial banks who mostly looking at the ability of entities to repay the money.

The strict check by commercial banks has seen them cut their lending to SOEs, a move that looks set to direct many parastatals to the government for a bailout.

Central Bank of Kenya data shows that banks’ net loan book to parastatals fell for three consecutive months to close July at Sh76.3 billion — the lowest since February 2017.

The drop in the loan book to the parastatals is an indication that the value of maturing loans is higher than the fresh lending to many of the loss-making SOEs.

National Treasury data showed more than half of the country’s 260 parastatals registered either a deficit or a loss in the financial year ended in June 2020, with the situation worsening in 2021.

This is attributed to a slowdown in economic activity, competition from cheaper imports and weak corporate governance, posing a risk to their viability.

Banks have also struggled to collect their debts from struggling State corporations, resorting to auctioneers and placing some of them under receivership to recoup their money.

State entities such as East African Portland Cement, Mumias Sugar, Kenya Power, Kenya Airways and Kenya Railways have all struggled to pay lenders their money in the recent past.

Treasury data shows nine SOEs have contracted non-guaranteed debts — commercial loans obtained from local banks and external creditors — amounting to Sh128.93 billion as at end of December last year.

The majority (Sh71.23 billion) matures between one and four years while another Sh45.8 billion will fall due between five and 10 years. Just Sh11.88 billion has more than 10 years left before maturity.

The borrowings from banks, which are in addition to what the State has lent them, have worsened their debt position forcing many to prioritise settling dues from commercial lenders to escape property seizures and auction.

Kenya Power tops in such borrowings, having tapped Sh53.84 billion or 42 per cent of the total non-guaranteed debt.

Kenya Electricity Generating Company has tapped Sh37.78 billion while Kenya Pipeline owes banks Sh19 billion.

This means that banks’ exposure in the energy sector firms is Sh110.62 billion. This is followed by Sh11.75 billion lent to Kenya Airports Authority.

The remaining outstanding balance of non-guaranteed loans is in the hands of Jomo Kenyatta University (2.74 billion), East African Portland Cement (Sh1.75 billion), Kenyatta University (1.26 billion), University of Nairobi (Sh783 million) and Postal Corporation of Kenya (Sh20 million).

Seizure and auction of assets of such entities over debt default are usually seen as a public risk especially where such SOEs are providers of crucial services such as water, electricity and education.

“Such SOEs borrow to finance strategic and high priority projects in the government development agenda. The non-guaranteed loans, therefore, pose a contingent liability risk and potential fiscal commitments to the national government,” said Treasury.

Government has in the past been forced to step in and rescue firms such as Kenya Airways when lenders come after assets such as airplanes.

With pressing budgetary needs and the pressure to cut on borrowing, the State may be forced to also slam the door on parastatals and turn to the IMF recommendations.

Some of the proposals on the table include restructuring of the parastatals in a way that is reminiscent of the 1990s-style where structural adjustment programmes led to the retrenchment of thousands of civil servants.

The folding and merger of some SOEs look set to cut jobs as the State eyes reduced wage bills and take pressure off domestic collections.