Broke State agencies eat into Treasury's budget plan

About half of the State corporations that owe the government nearly Sh1 trillion did not make an effort to service their debts last year.

In all, 59 corporations and other government agencies owe the government Sh920.7 billion as of June 2022.

Thirty of these agencies did not pay a cent over the financial year to service their debts advanced to them by the National Treasury, according to budget documents presented to Parliament.

Treasury does not explain the circumstances under which the State-owned enterprises (SOEs) have not been servicing their debts - although some have clearly been undergoing difficult times and have not registered a profit (or surplus) for years.

"Total outstanding loans by the national government to State corporations, government agencies and other organisations as at June 30, 2022, stood at Sh920.7 billion," said Treasury in the budget documents.

The total outstanding loans have gone down slightly when put in comparison with the Sh921.93 billion that was the outstanding loan amount as of June 2021. This could be an indication of both Treasury slowing down on loans advanced to State entities as well as higher repayment rates by the agencies that have been servicing their debt.

Kenya Railways is among the largest debtors to the government following several years of absorbing billions of shillings to construct the Standard Gauge Railway (SGR) and revamp the old metre gauge railway.

The corporation's outstanding debt to the government stood at Sh566.12 billion as at June 2022, more than half of Sh920.69 that is owed to the government by the different state corporations.

The government has, however, been paying the loans that had been advanced by the Exim Bank of China for the construction of the SGR.

The Madaraka Express passenger and freight service - Kenya Railways' most significant source of revenue - has for years been operating at a loss.

Other agencies that owe Treasury huge amounts are in dire straits financially and the government is unlikely to recover the money it has advanced to these firms. These include Mumias Sugar Company which owes the government Sh3 billion and Uchumi Supermarkets (Sh1.2 billion).

Kenya Airways, which just reported a record Sh38.26 billion loss for the year to December 2022, owes the State Sh31 billion. This is in addition to other loans guaranteed by the State.

Kenya Airways is optimistic that it will turn a profit next year and cut reliance on government bailouts. The company has not reported any profit in more than a decade.

Customer debts

Also heavily indebted to the government are the regional water and sewerage companies, a number of them not servicing their debts.

Many of these companies have been unable to collect customer debts for years while some are also unable to grow their customer base, with their infrastructure having stagnated.

Real estate projects across the country are now largely serviced by private sector players that for instance, have sunk boreholes or invested in large storage facilities and buy water from the State companies for resale to consumers.

Some of the water companies have been considering increasing their rates for customers. The Auditor General has in past reports cast doubt on whether the government would recover some of the loans advanced to a number of SOEs.

The reports note that while the debts have been outstanding for a long period, the National Treasury has not made serious attempts in recovering the money.

The Auditor General has at some point given an adverse audit opinion to the Government Investment and Public Enterprises (GIPE) Management, a department within Treasury that has oversight on State corporations, noting that it had not proactively tried to recover the debts.

Dormant loans

In the latest audit report for GIPE for the year to June 2021, Auditor General Nancy Gathungu raised concerns about dormant loans. At the time, the report noted that some 17 State corporations whose loans amounted to Sh218 billion had been dormant "over a significant period".

In addition to the failure to make efforts to collect, GIPE had also not given an analysis of the ageing debt.

The Auditor General noted that 24 per cent of the total loan portfolio had "no movement" during the year and remained unpaid over a significant period. Reforming SOES was part of the agreement the government signed with the International Monetary Fund (IMF) when the institution agreed to offer Kenya an extended credit facility for budget support in 2021.

"While the SOE reform agenda saw limited progress since the third review, President (William) Ruto has set out a bold objective to step up privatisation as part of efforts to rationalise SOEs," said Treasury in a December 2022 report to IMF.

It added that the government had reduced extraordinary financial support to SOEs, with the entities expected to save on costs.

"Our financial evaluations had earlier identified a cumulative Sh383 billion liquidity gap over a period of five years for 18 SOEs involving the largest financial and fiscal risks," said Treasury in the report. "This gap is expected to be primarily covered via SOEs' cost-saving measures, which were partially materialised and reflected in the FY2021-22 financial result."

President Ruto recently committed that the government would privatise between five and 10 State corporations in the course of this year as part of parastatal reforms.

He expects most of the privatisation to be undertaken through public offers at the Nairobi Securities Exchange, which he noted would also give citizens an avenue to buy into the companies.

"My administration will revitalise the capital markets by embarking on privatisation of State corporations where divestiture is overdue and strategic as well as introduction of such innovative products as a domestic dollar-denominated bond," he said.

"I have made a commitment that between five and 10 public enterprises that are mature should be listed in the next 12 months. I expect that the private sector will work with the capital markets so that we can have private sector companies to also list at the (securities) exchange."