The National Treasury building in Nairobi. PHOTO | FILE
What you need to know:
The Treasury had suspended payment to contractors in the wake of a cash crunch resulting from increased agitation for salary increments and the need to address security issues.
The heap of bad loans in Kenya’s banking system is expected to start shrinking following the Treasury’s payout of Sh25 billion it owed to contractors for various public projects.
Treasury secretary Henry Rotich said the money paid out was part of the Sh174 billion proceeds of the Eurobond that Kenya successfully sold in July.
“We have paid the contractors’ outstanding cash and they have all resumed work,” said Mr Rotich in a phone interview with Business Daily.
Treasury had stopped paying contractors in the wake of a cash crunch resulting from increased agitation for public sector salary increments and the need to address security issues.
The bad loans leaped to Sh101 billion at the end of June and commercial banks said more than half of the debt was attributable to contractors who had fallen off the repayment schedule because of late payments by the government.
Banks are required to classify all loans that go for three months without being serviced as bad loans and to forward the names of such borrowers to the credit reference bureaus for blacklisting if the delay goes for six months.
Banks had said that attempts to restructure the contractors’ loans were not successful as the delay had been too long. Standard Chartered Bank, one of the lenders the contractors owed billions, yesterday confirmed that some of the debts had been settled.
“The government settled long-outstanding payments due to some of our clients in July and August. These receipts were used to reduce the clients’ exposures with us and led to a slight reduction to our non-performing loans (NPL),” said Lamin Manjang, the bank’s chief executive.
The bad loans have the impact of pushing up the lenders’ expenses as they are required to make provisions for the non-performing debts. The provisions are pegged on how long a loan has gone unpaid with the longevity of the delay to contractors and their huge size having an impact on the lenders’ expenses.
To address the challenges of financing the construction works the government recently entered into a partnership programme with commercial banks.
Under the model, contractors access loans guaranteed by the Treasury from banks, enabling them to design, construct and maintain roads. The Treasury then repays the loans in equal instalments (annuity) over eight years, starting from the time the road section is completed.
Banks participating in the programme are expected to earn Sh9.1 billion every year from interest on loans. Projections indicate that interest payment will push up the cost of developing a 10,000-kilometre road network to Sh351.2 billion by the time the last annuity payment is made in 2024.
National Bank, KCB and Co-op Bank were the first financial institutions to sign up for the new infrastructure financing model. Mr Rotich said the Treasury was in the process of evaluating some of the infrastructure projects to be financed by the Eurobond cash.
He said that his office would turn to pushing domestic borrowing downwards after it releases the projects cash. Borrowers are hoping that a drop in government borrowing from the local market would pull down interest rates which have been static at an average of 15 per cent in the past three years.
Some Sh3 billion have been set aside for the contractors’ annuity payment this fiscal year. Another Sh34.1 billion has been earmarked for a 3,000km road network in the 2015/16 financial year while Sh44.3 billion will go to the remaining 5,000km in the 2016/17 fiscal year.
This leaves a balance of Sh178.6 billion — expected to come from banks — to meet the project deadline of 2017. The State will reimburse the banks plus accrued interests through phased payments stretched up to 2024.
The first phase of the project which covers 2,000km will be rolled out this fiscal year while the second phase of 3,000 km will be completed in the 2015/16 financial year. The third phase that covers 5,000 km is planned for 2016/17.
