New law to curb unnecessary debts by public entities

State corporations have become parasitic to the national government in their undying appetite for funds.

With a low resource base, they have always turned to their parent ministries to approve their loan requests and the government to act as a security in contracting the said loans.

Over the years, the government has had to incur heavy losses from publicly guaranteed loans as many of these public enterprises have not been able to reimburse the government the amount due to them.

It is worth to note that some of the debt was lent out when politically-correct chief executives and directors used state corporations to enrich themselves and bribe politicians.

In the year ending June 2011, the Government spent Sh1.4 billion to service guaranteed debts owed by public enterprises in financial distress.

For the last 10 years, the government has serviced guaranteed debts on behalf of public enterprises to the tune of Sh27.6 billion.

Some of the top net debtors to the government include Kenya Broadcasting Corporation (Sh7.4 billion), Nzoia Sugar Company (Sh6.1 billion), City Council of Nairobi (Sh4 billion) and Tana and Athi River Development Authority (Sh2.7 billion). 

Outstanding liabilities

The outstanding liabilities are now considered part of the national debt which now stands at over Sh1.5 trillion.

It’s this sad state of affairs that has seen the Finance minister react with fury over future funding of state enterprises.

In the Budget estimates presented to Parliament last month, public enterprises intend to borrow up to Sh88 billion.

The procedure is set to change with the recent enactment of the National Government Loans Guarantee Act, 2011 that has prescribed stringent measures for one to qualify for a government guaranteed loan.

Under the law, one of the issues that the Cabinet Secretary in charge of Finance will look at is the capacity of the borrower to repay the loan and accrued interest. 

This calls for the Finance Secretary to carry out a due diligence study to establish the financial and management ability of the entity before approving the loan. The loan to be guaranteed should be for a capital project that is revenue generating.

Parliament’s oversight role has been enhanced as the law requires it to approve a loan only when it is in the public interest and where the borrower’s financial position is strong enough to enable repayment.