Kenya Railways rolls out a Sh43bn debt clearing plan

Kenya Railways has petitioned Treasury for a waiver of Sh13.1 billion in tax liabilities bringing to nearly Sh70 billion the bail out it needs from tax payers in order to attract financiers for Vision 2030 projects it is overseeing.

The liabilities relate to interest and penalties after the government granted paid Sh4.8 billion in principal amounts owed to the Kenya Revenue Authority after the Kenya Uganda railway was concessioned to Rift Valley Railways in 2008.

“The corporation petitioned the minister of finance through the Commissioner General to remit the accrued interest and penalties. This petition is currently waiting for the minister’s approval,” a Kenya Railways position paper for the financial year ended June 2011 stated. Two weeks ago the parastatal won Cabinet approval for conversion of government debt into equity, helping improve its balance sheet by Sh42.8 billion. The swap has improved the parastatal’s net asset position from a deficit of Sh7.7 billion to Sh33 billion.

“The debt to equity conversion restructures the firm’s balance sheet from a negative asset value to positive valuation. We now have a stronger capital base to allow us to focus on new railway infrastructure development,” said Kenya Railways Corporation MD Nduva Muli.

The conversion of the debts is expected to make the corporation financially attractive and enhance its capacity to raise credit from the private sector. Mr Muli said the firm would now seek to raise about Sh16.6 billion ($200 million) from a strategic investor later in the year to fund the on-going commuter metro railway network and to put up a standard gauge railway line between Mombasa and Malaba.

Financial restructuring

Following decades of loss making, restructuring plans for the State corporation were initiated in October 2006. The railway freight services were conceded to the Rift Valley Railways for 25 years and passenger services for five years. In 2008, Kenya Railways engaged Baker Tilly Meralis, an accountancy and management consultant firm, to undertake a restructuring study to ascertain the financial health of the corporation.

The audit revealed that the State corporation was technically insolvent with a negative asset value of Sh7.74 billion caused by poor management.

The parastatal was found to be Sh72.8 billion deep in debt owed to its staff pension scheme, tax liabilities, and loans guaranteed by the government.

Kenya Railways transferred assets worth Sh12.1 billion to its Staff Retirement Benefits Scheme which cleared the debts owed to the workers’ pension fund. The assets were majorly buildings and parcels of land. Some of the scheme’s property is located in Muthurwa, Matumbato, Makongeni, Landi Mawe, and Ngara.

Non-strategic assets such as staff houses were also sold generating Sh700 million that was used to pay debts owed to creditors such as the National Health Insurance Fund (NHIF), Reli Sacco, and local authorities.

Last year, Kenya Railways made an operating profit of Sh804 million but the gains were wiped out by the cost of servicing it loans. The firm earned Sh600 million last year in annual concession fees.