State firms’ Treasury-backed loans defaults hit Sh266bn
Public institutions have defaulted on Sh266.5 billion loans.
Public institutions have defaulted on Sh266.5 billion loans, meaning the National Treasury will step in to settle their obligations. Taxpayers are at risk of ultimately repaying a total of Sh946 billion in loans issued to 28 public institutions.
The agencies’ inability to repay the loans passes the burden to the Treasury, which services them as part of public debt.
The Kenya Railways (Sh737.5 billion), Kenya Airways (Sh99.9 billion), Coast Water Works Development Agency (Sh20.6 billion) and the Rural Electrification Authority (Sh13.6 billion), lead in the defaulters pack.
The latest Treasury disclosures show that by the end of June 2024, outstanding on-lent loans by 54 public entities amounted to Sh1.19 trillion. The loans were issued by different lenders, through the Treasury.
Out of the entities loaned the money, however, 28 with a cumulative outstanding debt ofSh946 billion (79.5 percent of all the outstanding on-lent loans) have not serviced their debt, with poor financial performance in most of them posing the risk that the burden will eventually pass on to taxpayers.
Treasury classified Sh266.5 billion out of the Sh1.19 trillion outstanding on-lent loans as being in arrears by June.
With some of the institutions’ debts having been written-off in recent years following political interventions, the non-payment of the loans by the 28 entities pose a risk of Treasury servicing their full debt should they continue defaulting.
Public debt
Treasury in the annual public debt management report notes that out of the Sh1.26 trillion on-lent loans issued to the 54 institutions, only Sh64.6 billion has been repaid by some of them.
“The cumulative stock of on-lent loans amounted to Sh1.1971 billion. This included loans to Kenya Railways Corporation amounting to Sh737.5 billion which accounted for 61 percent of the total on-lent loans," Treasury said.
"The cumulative amounts of on-lent loans repaid during the period under review was Sh64.6 billion which represented 7 percent of total on-lent loans. Additionally, on-lent loans amounting to Sh2.3 billion for the sugar sector were written off.”
The amount of loans repaid by some 23 public entities accounts for a mere 5.1 percent of all the loans issued through the Treasury, with several loans having already been written off.
The low rate of repayment of on-lent loans poses huge risks for the Treasury which has been struggling with heavy debt service costs annually, seeing that on-lent loans account for 11 percent of Kenya’s Sh10.6 trillion public debt.
Kenya’s debt service costs amounted to Sh1.56 trillion in the year to June 2024, an increase of more than Sh300 billion from the previous year.
But the Treasury notes that by the end of June this year, Sh266.5 billion on-lent loans were in arrears, including unpaid principal and interest instalments.
“Arrears in the water sector amounted to Sh34.1 billion. The water sector is facing financial challenges due to ongoing legal reforms given that water is a devolved function and some of the Water Companies owned by County Governments are not remitting the funds to Water Agencies,” Treasury notes.
The Treasury documents show that among water companies with huge unpaid loans are Coast Water Works Development Agency (Sh20.6 billion), Lake Victoria South Water Works Development Agency (Sh13.2 billion), Tana Water Works Development Agency (Sh8.36 billion), Tanathi Water Works Development Agency (Sh6.6 billion) and Northern Water Works Development Agency (Sh3.7 billion).
Other unpaid on-lent loans include the loans procured from the China Exim Bank for the construction of Standard Gauge Railway (SGR), which account for 62 percent of the Sh266.5 billion arrears.
National Carrier, Kenya Airways (KQ) also has an outstanding on-lent loan of Sh99.9 billion and has not made any payments on the loan, according to the Treasury.
In its annual report last year, the airline disclosed that it had two loans from the government totalling Sh105.24 billion by end of December 2023, with maturities running between 2020 and 2037.
Loan agreements
“As of 31 December 2023, the Group and Company had not made payments of interest on the Government of Kenya loan as set out in the loan agreements. The Group sought and was granted waiver and deferral on the unpaid interest on the shareholder loan from the Government of Kenya,” KQ stated.
The loans by the government to KQ attract 3 percent interest annually, payable by June 20 every year, but KQ noted that the government granted it a deferral of payment of interest on the loans until December 2023.
“During the year, the entire Government guaranteed Tsavo debt was transferred to the Government of Kenya after it undertook to make repayments on behalf of the airline for the remaining tenor. This has been treated as an additional Sh58 billion shareholder loan to the airline with similar terms as the existing shareholder loans,” KQ stated.
The loan was part of financing the airline procured previously to purchase aircraft but struggling business and poor financial performance over the past decade saw it operate on losses, until the first half of this year when it booked the first net profit in 11 years.
The Rural Electrification Authority has also not made a single payment on the Sh13.59 billion loan issued to it through the Treasury, most of which was to finance last-mile electricity connections to households across the country.
Most of the projects financed through the on-lent loans either failed or are struggling, with entities implementing them struggling financially.
