The Auditor General has made far-reaching recommendations on how to ensure proper utilisation of the billions of loans the country takes out to finance various projects.
In a report, the Auditor General Nancy Gathungu says the country is suffering from unnecessary loan penalties in areas that can be avoided to save taxpayers from burden.
The special audit report, dated June 2024 and presented to the National Assembly's Debt and Privatisation Committee, looks at the servicing of Kenya's loans. The audit report covers external debt servicing activities and transactions from July 1, 2020 to June 2023.
Ms Gathungu wants the National Treasury to ensure that before the country puts pen to paper on any loan, a proper audit is done and the National Treasury knows the financial commitment the country is entering into.
"To ensure that loans are contracted in a manner that minimises the cost and risk of borrowing, National Treasury should ensure proper scrutiny and negotiation of loan terms, adequate involvement of the project executing agency during loan negotiations and preparation during the drawdown of project loans," the report reads.
To save the taxpayer from paying unnecessary commitment fees and penalties arising from non-utilisation of the loan, Ms Gathungu has urged the government to ensure that adequate project appraisal is carried out prior to funding in line with the Public Investment Management Guidelines.
Some of the reasons for paying the commitment fee include delays in drawing the first disbursement, undrawn balances after project completion, wastage of up to Sh626 million due to delay in cancellation of the Nairobi Underground Electricity Distribution Network project.
Commitment fee is charged by a creditor to a borrower to compensate the creditor for its commitment to provide the loan funds.
For example, the report notes that of the 32 projects sampled, only two — the provision of drilling materials for 80 geothermal wells in the Olkaria field project and the Sondu Miriu hydropower project — drew down the first disbursement on time.
The report shows that the other projects did not draw down funds due to inability to meet conditions, including signing of the subsidiary loan agreement, delays in signing the power purchase agreement, delays in compensation for right of way acquisition, delays in obtaining no-objection certificates to start work on site, and provision of government counterpart funding.
To deal with projects that stall and end up as white elephants, Ms Gathungu wants the National Treasury to ensure that implementing agencies regularly review their targets and performance.
"In addition, collaborative, informed and effective decisions on whether to revive, stop or restructure these stalled projects should be based on a detailed assessment of these projects," the report says.
Ms Gathungu expressed fears that taxpayers were not getting value for money and that the government risked paying more in penalties for various stalled projects as donors stayed away from completing the projects due to unfulfilled commitments by the government.
She warned that the stalled projects may have fallen into disrepair and will need to be repaired when work resumes, a cost that will be borne by the taxpayer in addition to the penalties charged by contractors.
In areas where the government is supposed to provide additional funding for donor-related projects but delays or fails to do so, resulting in the country being penalised for not using its first drawdown, Ms Gathungu says only projects that have received funding from the fiscus should be prioritised for borrowing.
"Accounting officers in each national entity should prioritise projects that have already been approved when requesting funding. In addition, the National Treasury should consider counterpart funding requirements to inform the national budget review and outlook paper," the report said.
Ms Gathungu prescribed the measures after an audit revealed costly mistakes by officials that expose Kenyans to legal and operational liabilities, including up to Sh55 billion in commitment fees for loans not taken or fully absorbed, and the ignominy of stalled projects that hurt hard-pressed taxpayers.
