Markets & Finance

IMF warns Kenya of Sh313bn undisclosed debt risk


The Treasury building in Nairobi. Neither Treasury secretary Henry Rotich nor his budget, fiscal and economic affairs director, Geoffrey Mwau, commented on the report. PHOTO | FILE

The Treasury is carrying a heavy load of undisclosed debt in the form of power sector guarantees made in the past 10 years, the International Monetary Fund (IMF) has warned in its latest assessment of the shape of Kenya’s public finance.

The guarantees totalling Sh313 billion, which the IMF has flagged in its latest report on Kenya, were in support of power purchase agreements between Kenya Power and independent power producers.

“Information on active Public Private Partnership (PPP) contracts worth up to $3.4 billion (Sh343 billion) or 5.7 per cent of the GDP has not been made public or accounted for in official public finance documents, meaning that their fiscal implications are yet to be fully assessed,” the IMF report says.

Twelve power purchase agreement contracts worth $3.1 billion (Sh313 billion) signed before the PPP Act of 2013 became law carry the most significant fiscal risk for the taxpayer, the IMF says.

The extent of risks to the taxpayer from the guarantees came to the fore last month after a Virgin Islands-registered consortium Kinangop Wind Park Limited (KWP) sued the Kenyan government at the International Chamber of Commerce (ICC) for compensation after its Sh15 billion wind power project in Nyandarua collapsed.

READ: Wind power firm sues State over collapse of Sh15bn project

The wind power firm blames protests by Kinangop residents for the project’s collapse and is now hoping to recover the losses from a guarantee the government promised to offer in the event the plan flopped for political reasons.

Attorney-General Githu Muigai has responded to Kinangop Wind Power’s demand with the filing of a suit in the Milimani High Court in Nairobi to stop the firm from selling 38 wind turbines it acquired for the power project pending determination of the ICC suit.

The IMF says in a report released on Tuesday that the power purchasing contracts carry a real financial risk as they “involve an obligation for a minimum demand or revenue guarantee (“take” or “pay”) supported by government letters of support”.

The guarantees cover political risks and are underwritten by partial risk guarantee instruments provided by the World Bank.

“Partial risk guarantees backstop any obligation of Kenya Power, over few months only, under letters of credit for any amount drawn by the IPPs as a result of breach of a payment obligation by KPLC (capacity payments plus contingencies), effectively adding to the government’s debt once called. Political risks include war and civil disturbance, expropriation, changes in the law, regulation, taxes and licensing arrangements.”

Government guarantees made on such contracts would ordinarily add to the country’s debt load in the event that they are called by the PPP partners.

The IMF says that although Kenya’s current debt stock of about Sh2.5 trillion is deemed sustainable the size of the PPP contracts is significant enough to warrant more and better disclosure.

Neither Treasury secretary Henry Rotich nor his budget, fiscal and economic affairs director, Geoffrey Mwau, commented on the report.

Despite its clear warning, the IMF has offered no indication that the government has had to pay up for any of the guarantees on behalf of Kenya Power between 1996 and 2013 when most of the guarantee were given.

Kenya produces regular fiscal reports, which are available to the public, including the Treasury’s quarterly economic and budgetary reviews (QEBR) and the monthly exchequer account flow statement and the Controller of Budget’s quarterly budget implementation review reports.

Meanwhile, the IMF report also identified the 25-year Kenya-Uganda Railways concession as carrying a high fiscal risk arising from the exclusivity provisions in the Rift Valley Railways’ (RVR) contract that may be called to bear once the standard gauge railway becomes operational.

Earlier this year, officials of Qalaa Holdings, the RVR parent company, said a provision for compensation was included in line with 25-year exclusive contract covering for loss of business during the standard gauge railway (SGR) operation and construction.

Clauses in the concession agreement stipulate that the governments of Kenya and Uganda cannot introduce changes that jeopardise the firm’s profitability during the tenure of the contract, effectively shielding RVR from competition such as the one being brought by the SGR.

The government has, however, sought to downplay the SGR’s risk to the old railway, insisting that it will maintain and continue to invest in the existing metre-gauge railway to offer the business community an alternative and keep prices competitive.

The IMF is also calling for further disclosure on contract terms for new partnerships between the government and private sector players in the transport, tourism and housing sectors.

This includes agreements for construction of the Lamu Port, South Sudan, Ethiopia transport corridor (Lapsset), and the Nairobi housing plan.

“New PPPs planned over the period 2014–17 will pose additional risks if their fiscal implications are not properly managed and disclosed. A list of 47 national priority PPP projects has been identified in several sectors, notably transportation, tourism, housing, and energy. This will add to contingent liabilities going forward, and urgently requires a PPP assessment framework to be put in place for which technical support has already been agreed with the World Bank,” says the IMF.

The report has faulted the government’s expenditure record keeping, stating that three quarters of contingent (potential) liabilities amounting to Sh869.4 billion or 17.2 per cent of GDP in 2013 are unreported.

The government is, however, deemed to have low exposure to financial sector risks. It also regularly discloses all support to the financial sector in various reports such as the Central Bank of Kenya’s bi-annual Financial Stability Report and an annual Bank Supervision Report.

Financial reporting in the country governments is flagged as a concern, with the IMF giving an example of the 2013/2014 financial year when counties collected only Sh25 billion in revenue against the Sh60 billion they had projected to get.