Auditor-general says Kenya Railways insolvent

Journalists inspect the Voi-Taveta railway line, which has not been in use for almost four decades. FILE
Journalists inspect the Voi-Taveta railway line, which has not been in use for almost four decades. FILE 

Kenya Railways Corporation (KRC) is insolvent to the tune of Sh50 billion, making it yet another State-owned enterprise that has gone bust.

In an audit report tabled in Parliament last week, Auditor- General Edward Ouko says the corporation’s liabilities stood at Sh59.44 billion against Sh9.33 billion in total assets, leaving it with a negative working capital of Sh50.11 billion for the year ended June 2011.

“The corporation is therefore technically insolvent,” Mr Ouko says in a qualified opinion on the corporation’s books of accounts.

A qualified audit opinion means the auditors did not find completeness of information provided by the firm or could not determine the validity of the information provided. 

Kenya Railways management has attributed the massive negative working capital to a heavy loan and interest charges burden of Sh41.13 billion that it continued to shoulder even as its revenue sources have dwindled over the years.

“In the circumstances, the financial statements have been prepared on a going-concern basis and on the assumption of continued financial support from the government and creditors,” the auditor adds.

General (Rtd) Jeremiah Kianga, who chairs the corporation’s board, said the government had settled the Sh4.8 billion tax arrears it owed Kenya Revenue Authority and agreed to a restructuring proposal that would convert long term debts to equity.

The continued decline in Kenya Railways’ financial position makes it ever more difficult for the government to use it as the agency that would lead the planned revival of railway transport in Kenya as part of the drive towards the achievement of Vision 2030 development blueprint.

Railway has been identified as key to modernising Kenya’s dilapidated and chaotic transport system – especially in the movement of goods from the Mombasa port and in efficiently transporting the rapidly growing urban population.

Decay of the railway system that was first built by the British in 1901 has left Kenya and the larger East Africa to depend solely on road transport with far reaching ramifications on the cost of goods to consumers and the state of road transport in the region.

Economists have estimated that an efficient railway transport that moves up to half of the total annual cargo discharged at the port of Mombasa would bring down consumer goods price inflation by up to five percentage points.  

Kenya Railways returned a Sh2.13 billion loss in the year under review up from a Sh1.98 billion loss the previous year -- increasing the corporation’s accumulated losses to Sh24.07 billion at the end of June 2011.

“The corporation’s negative equity stood at Sh9.55 billion compared to Sh12.77 billion the previous year,” the auditor says in his report dated August 1, 2012.

At the centre of Kenya Railways’ financial troubles are parcels of land worth millions of shillings that have been allocated to private developers without the consent of the corporation.

“Land measuring approximately 3 acres within Limuru Railway Station, constituting industrial plots No 7882/2-10 has been allocated to private developers.

Similarly, private buildings have been put up on another piece of land measuring approximately two acres within Kikuyu Railway Station without the corporation’s consent,” Mr Ouko says in his report.

In Mombasa, parcels of land measuring approximately one and 0.75 acres adjacent to Mombasa Railway Station have been allocated to private developers, again without the corporation’s consent.

Mr Ouko has also questioned KRC’s books of accounts saying the corporation has included in its net receivables balance of Sh3.52 billion some Sh815.3 million due from the Rift Valley Railways.

“The amount which represents unpaid concession fees, rent and supply of spare parts has remained outstanding for a considerable period of time. Consequently, the full recoverability of the receivables balance of Sh3.52 billion as at 30 June, 2011 could not be confirmed,” the report says.

The audit has also questioned the failure by KRC management to incorporate in its financial statements some 38,250,000 shares worth Sh382.5 million that the Numerical Machining Complex (NMC) issued to it.

Kenya Railways has also been found to have breached important tenets of corporate governance in its payment of irregular sitting allowances to public officers who are non-board members.

“During the year under review, the management of the corporation paid sitting allowances totalling Sh1.52 million to public officers in attendance during board/committee meetings contrary to Section 10(1) of the State Corporations Act Cap 446, which requires that such allowance be paid to chairmen and board members only. The corporation therefore contravened the law,” the audit report says.

The audit also found inconsistencies in the statement of cash flows noting that the provision for bad debts of Sh34.9 million charged in the year under review had been adjusted to arrive at cash generated from operations, while the same had been included in the amount deducted from gross debtors’ account.

“A loss on sale of fixed assets of Sh85.3 million adjusted to arrive at income generated from operations is not supported. The net book value of assets disposed is Sh71.28 million against the gross disposal proceeds of Sh42.63 million, gives a loss on disposal of Sh28.64 million,” the auditor says.

Mr Ouko also found that cash and cash equivalents valued at Sh3.73 billion was not in line with the derived balance consisting of Sh1.94 billion net increase in the year and a cash and cash equivalent brought forwards of Sh667.69 million all totalling Sh2.61 billion.

“The statement of cash flows, consequently has not been prepared as per the requirements of International Accounting Standards No. 7 and the accuracy of the cash and cash equivalents balance of Sh3.73 billion disclosed as at 30, June 2011 could not be confirmed,” Mr Ouko concluded.

Nduva Muli, KRC Managing Director, said the corporation recorded a 12.4 per cent increase in gross revenues to Sh1.46 billion compared to Sh1.3 billion the previous year.