Limping giant: How the lights were dimmed at Kenya Power

All the critical numbers at the firm are blinking red. To meet its day-to-day operations, the giant is now surviving on overdraft facilities — the modern-day Fuliza.

It owes banks more than Sh110 billion. And in the past three years, the risks of defaults have been growing bigger and bigger. 

Its finance bosses have been busy, writing one letter to one commercial bank after the other, asking to be allowed to breach the company’s loan covenants without punishment.

The power distributor has a huge stock of current liabilities, totalling Sh117 billion, and had exceeded its Sh44.6 billion current assets by a staggering Sh74 billion by June 2020.

Current liabilities are debts and loans that must be paid within a year.

This mountain of debt and Kenya Power’s waning ability to service loans and pay suppliers continue to pile pressure on its going concern basis. If a company is unable to meet these liabilities when they become due, then it can be declared insolvent. Besides the money owed to commercial banks, the company also has significant debts to contractors, suppliers and power generators.

There are some contractors who have not been paid into the fourth year now. Its losses are getting bigger and more painful, with the latest being a Sh7 billion loss.

Current financial mess

There is also one more problem on its doorstep: Kenya Power has breached the Capital Market Authority (CMA) listing regulations, reporting significant negative working capital for the fourth year in a row.

“The company has reported negative working capital position for the fourth consecutive year. As disclosed by the board and management in the past and current financial statements, strategic initiatives have been undertaken to improve the financial results of the company,” Auditor-General Nancy Gathungu writes after reviewing the company’s books.

“However, these initiatives appear not to have yielded the intended results. These conditions indicate that a material uncertainty exists, which may cast significant doubt on the company’s ability to continue as a going concern.” The company is also in breach of loan covenants, particularly in regard to the maximum debt capacity and adequate working capital.

So, just how did the company get here?

By the time it had signed up all the power suppliers, the company found itself having more power than the market demand. This should have been a good problem for the company if it did not have lopsided take-or-pay power purchase agreements with 44 expensive power producers.

Its internal document detailing the roadmap of getting out of its current financial mess shows that its problems became bigger when the total energy supply was not keeping pace with demand.

The current installed generation capacity is 2,788 MW against peak demand of 1,976 MW.

The take-or pay-model requires the utility company to pay the power producer a certain amount of money whether they supply power or not.

This guarantees the power producers’ income in perpetuity but punishes Kenya Power to take up expensive power even when there are cheaper alternatives.

Last mile project

There were also the forex based Power Purchase Agreements (PPAs) and capacity charges that have helped sink the company in debt abyss. These ones meant that any weakening of the Kenyan shilling against the US dollar would increase the costs of power. This and the huge foreign denominated debt pose a great forex risk to the company.

The firm says that every Sh1 devaluation against the US dollar translates Sh1 billion due to forex losses.

The fact that the company is invoiced by power producers in dollars and Euros when it invoices its customers in Kenya shilling is also a huge nightmare— given the fact that it has to pass the costs to the consumer but also ensure it does not make electricity too expensive and push large consumers to generate own power. In the last financial year, the company booked its cost of sales as Sh87.4 billion. Under these costs are power purchase costs of Sh47.4 billion, which relate to capacity charges slapped on the firm as per the PPAs.

“These charges, which account for 54 per cent of the total cost of sales, are significant and considering their fixed nature, may have adversely affected the company’s performance resulting in loss,” Ms Gathungu notes.

The huge staff complement of 10,500 employees is also major contribution to high administration costs of Kenya Power and have now been marked as unsustainable.

But the company’s hands are tied on how to reduce the wage bill without firing.

Multiple interviews with insiders, however, point to the ambitious last mile project and procurement scandals that came after it as the last straw that broke Kenya Power’s back.

As the company rushed to beat the one million connections per year to meet Jubilee government’s targets, it ended up burning its cash, connecting households that could not afford to maintain an electricity connection. In informal settlements, after the connections, some unscrupulous electricians colluded with the metre owners to remove the meters and sell them elsewhere.

Instead, they ended up with direct connections that bypassed the meters, making it a double loss for the company. The Last Mile connectivity project also had huge impact on the current Kenya Power debt stock given that the company had to start borrowing to keep up with the demands.

Theft of power

After three years of aggressive expansion, the company realised that only its costs were going up, but revenues had remained nearly flat.

Executives at the firm were puzzled by the fact that even after more than doubling the number of Kenyan’s connected to the national grid, its revenues were growing by single digits, outpaced by the huge transmission costs. These wiped out any gains made from extra sales in electricity.

The huge system losses that have remained relatively high at 23.46 per cent due to technical and commercial factors arising from the expanded transmission and distribution network as well as increased electricity pilferages have also not helped. 

Half of the system losses are commercial and result from theft of power and illegal connections.

Most of the theft happens from transformers around Industrial Area and other heavy consumers in steel and cement industries.

This means that for every Sh100 of power it distributes, about Sh23 is lost. This is still way higher than the allowable system losses of 19.9 per cent by the Energy and Petroleum Regulatory Authority (Epra). 

In July 2020, the regulator revised the allowable system losses from 14.9 per cent. Sources within the company have also attributed the company’s woes to various procurement scandals at the company.

“Every board that comes in arrives with its own agenda. Some want to procure poles, others want to procure transformers. They all just want a major procurement in their lifetime to ensure someone makes money,” a source said.

This and its own staff that have found ways to manipulate the billing system to corruptly reduce bills for connected and powerful industries have destroyed the company.

Procurement corruption

The procurement-driven managers have led the company to end up with huge inventories of slow moving and obsolete stock.

In the last financial year, the company had a carrying amount of inventories amounting to Sh4.8 billion.

This is after considering allowance for obsolete, slow moving and non-moving inventories of Sh3.9 billion. This has cost the company billions of shillings as it writes off such dead inventory.

It is also how the company ended up with a junkyard of obsolete and poor quality transformers that blow up days after installation.

But it is the corruption in the procurement department that hurt Kenya Power most.

In its own admission, the company acknowledges that the department must be overhauled to deal with the legacy issues around value procurement, excess quantities and high value of obsolete stocks.

It has recommended the suspension of all procurement staff.

“Suspension of all procurement staff at KPLC and undertake a vetting exercise for suitability to continue holding public office,” the company says in its internal document.

Poor debt collection

Kenya Power wants the vetting to be done by the National Intelligence Service (NIS) or the Ethics and Anti-Corruption Commission (EACC).

The company also wants National Treasury to deploy its technical procurement officers to facilitate sourcing, stock and contract management. 

To get out of the mess, the Kenya Power board wants to be approving strategic procurement items and their standards and specifications as well as develop a procurement manual incorporating a robust contract management and oversight framework.

The company also must undertake a forensic procurement audit.

The firm’s ICT systems have also been blamed for its current woes since they are not configured accordingly to monitor revenue.

At some point, there were even fears that the company’s official paybill number had been infiltrated by staff and the money from the account was being paid to two different accounts— one owned by Kenya Power and the other to an unknown account. Investigations of this front went cold.

The firm is also hurting from poor debt collection both from the private sector and the governments.

More than half of its debtor book is over 90 days old, meaning the chances of collecting the money are growing slimmer by the day.

This debt grew by Sh3.8 billion last year, exacerbated by Covid-19. Ms Vivienne Yeda, the company’s board chairperson, said the Covid safety measures together with the negative GDP growth, affected the company’s electricity sales and revenue collection in the year ended June 2020.