Politics and policy

Treasury bails out City Hall after default on Sh1.5b loan

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City Hall has defaulted on a loan it borrowed 28 years ago to build houses in Umoja. Taxpayers will now foot the bill running into billions of shillings. Photo/File

City Hall has defaulted on a loan it borrowed 28 years ago to build houses in Umoja. Taxpayers will now foot the bill running into billions of shillings. Photo/File 

By GEORGE OMONDI

Posted  Monday, May 21   2012 at  21:26
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The Nairobi City Council has defaulted on the Sh212 million loan it borrowed from the United States Agency for International Development (USAID), forcing taxpayers into a multi-million shilling bail-out that uncovers the depth of City Hall’s financial troubles.

City Hall’s failure to service the debt it took nearly 30 years ago to build residential houses in Umoja Estate is one of the highlights in the Controller of Budget’s report.

The report, which was presented to Parliament three weeks ago indicates that City Hall has, together with Tana and Athi River Development Authority (TARDA) and the Kenya Broadcasting Corporation (KBC), received millions of shillings from the Treasury to service bad debts.

The Treasury is making the payments as the guarantor of the loans who the lenders must hold accountable when the borrowing public institutions default.

The Controller of Budget’s report covering up to the third quarter of the financial year indicates that the Treasury had by the end of March drawn a total of Sh1.40 billion out of the Sh1.41 billion it had set aside to meet its public debt guarantee obligations and that the money was drawn to service City Hall, TARDA and KBC’s debts.

Servicing City Hall’s debt to USAID took Sh120 million while Sh678 million was paid to the Japanese agency for international development (JICA) on behalf to TARDA and the remaining Sh557 million to JICA to service KBC debt.

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Finance experts said inability of City Hall to service a much smaller loan compared to TARDA or KBC means the Kenyan capital is in deeper financial trouble that is expected to escalate in the coming months as new debts come due for payment.

City Hall borrowed the Sh212 million from USAID in 1985 to be paid at an interest of 8.5 per cent per annum with the Treasury as the guarantor.

That left the taxpayer as the ultimate owner of the debt in the event of a default. At current rates, the loan amounts to Sh1.5 billion. The 30-year loan was to be repaid by 2014 but City Hall has defaulted, leaving the Treasury to pay the residual amount plus interest.

More recently, City Hall, which is indebted to the tune of Sh106 billion, has found the burden of interest payments on loans too heavy to bear culminating to a default that has now left the taxpayer with the bill.


Use of taxpayers’ money to bail out public institutions is however proving to be an unpalatable settlement that is expected to put the Treasury and City Hall under the spotlight.

Agnes Odhiambo, the Controller of Budget, has questioned the move in her latest report to parliament where the Treasury and the institutions in default are expected to come under intensive scrutiny. 

“There is need for the Treasury to make a follow-up to determine why government agencies, which are not insolvent defaulted on loans and to recover these amounts from them,” Mrs Odhiambo says in her report for the third quarter of 2011/12 financial year.

The NCC has lately been embroiled in a tug of war with its creditors – among them Equity Bank – which two years ago roiled the corporate lending market with a record Sh5 billion loan to City Hall.

The standoff with creditors has affected payment of short term debts forcing City Hall executives to seek the Treasury’s assistance in covering pressing obligations such as payment of staff wages.

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