Treasury under fire over billions spent in service of phony debts

The Treasury has continued to spend billions of taxpayer funds to service questionable debts that the government incurred more than 30 years ago with nothing to show for it. 

The latest report by the Controller of Budget says billions of shillings were in the past 12 months used to service debts despite there being no evidence that the money borrowed was used to finance any project.

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Top in the list of questionable loans on which the Treasury has spent billions of shillings is a fertilizer factory debt that was incurred in 1978 but for which the country has nothing to show.

“The (Controller) notes with concern that government resources are being used to repay a loan for a non-existent asset,” the Controller of Budget, Agnes Odhiambo, says in a report covering the three months to July 31, 2012. “It is, therefore, imperative that this matter is fully investigated and the findings made public,” the report says.

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The debt, which has been questioned by various arms of government, including Parliament, consumes billions of shillings in principal and interest payments even as farmers continue to suffer inflated fertiliser prices arising from heavy reliance on imports.

Mrs Odhiambo said Sh731.7 million of taxpayer funds was spent on the debt in the financial year ended July 31, 2012. The Treasury paid Sh676 million in principal and Sh53.7 million as interest chargeable on the debt that was incurred to finance the construction of the fertilizer plant.

Public Debt Department records show that the taxpayer will continue to bear the burden until the loan is fully paid in 2015. The report also questions the continued use of taxpayer funds to service debts that ministries and public agencies incurred through the use of overdraft facilities at the Central Bank of Kenya before 1997.

The report says no information is available as to which ministry borrowed, how much they borrowed and the purpose for which the debt that has since accumulated to Sh36.9 billion was incurred. Sh1.1 billion was paid out of the Consolidated Fund Services (CFS) to service this debt in the past financial year.

The CFS is the account that the government uses to make payments that are provided for in the Constitution or common law.

The debt is said to have been incurred as the CBK’s bail-out of a number of ministries that were facing cash constraints in the wake of poor tax collections and bad relations with development partners.

The Controller of Budget’s report also questions the government’s decision in 2004 to sign a bilateral agreement with Italy to consolidate the debt into a Sh12 billion ($142 million) facility for a swap without making clear what the money was used for.

“There is need to undertake monitoring and evaluation of the projects to ascertain whether the funds were utilised to meet the objectives of the loan swap,” says Mrs Odhiambo.

The government has also guaranteed billions of shillings in loans to parastatals and other state agencies that it is now servicing without declaring the borrowers bankrupt or insolvent, despite their failure to pay debts.

The Treasury spent Sh1.9 billion to service guaranteed loans in the last financial year.

By the close of the year on June 30, the Exchequer had released Sh82 million, Sh500 million and Sh1.4 billion to service the Nairobi City Council’s, Tana and Athi River Development Authority’s (Tarda) and Kenya Broadcasting Corporation’s (KBC) debts respectively.

“The government continues to spend public resources to repay these loans yet the funds were borrowed for commercial ventures.

It is therefore imperative that these institutions are appraised to establish causes of their default so that corrective action can be taken,” the report says.

Analysts said the imprudent debt accumulation is rooted in the weak monitoring and evaluation structures in most state organs as well as lack of oversight by Parliament.

“We have failed to set clear targets on what to do with some of these loans, we have no prudence and we don’t do risk analysis or even define who bears responsibility for loan repayment,” said Kiama Kaara, the programmes co-ordinator at the Kenya Debt Relief Network (KenDren) – an NGO that has been monitoring debt accumulation in Kenya for 13 years.

Mr Kaara said the problem of guaranteed loans comes from a failure to determine at the time of signing, the implications of debts that a state agency is about to incur. He gave the example of the City Council of Nairobi debt for which no targets or objectives were set.

“Unfortunately, we have ended up saddled with debt while the council has removed itself from the onus of performance or any controls,” said Mr Kaara.

In a show of the poor state of financial controls at the Treasury, Mrs Odhiambo documents the huge discrepancies that have emerged in the use of money that was allocated to payment of government pensions and gratuities in the last financial year.

The report notes that while a total of Sh29.3 billion was allocated for payment of pensions and gratuities, some Sh24.1 billion had been released to the beneficiaries through Exchequer issues at the end of the financial year.

Official records, however, show that the Treasury’s expenditure for the period stood at Sh24.4 billion – raising queries about the discrepancy.

“The expenditure for the period stood at Sh24.4 billion which represents 83.3 per cent of the revised gross estimates compared to exchequer issues amounting to Sh24.1 billion or 82.2 per cent of the revised gross estimates.

As reported in the third quarter report, this discrepancy requires urgent reconciliation,” says the report. Mrs Odhiambo says there was a difference of Sh470 million between the amount released and the expenditure.

girungu@ke.nationmedia.com