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

city hall

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

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.

Last week, the council narrowly escaped an employees’ strike after it raised money at the eleventh hour to settle April salaries.

“We know that this delay had more to do with relations with banks than City Hall’s ability to pay new salary levels,” said Festus Ngari, the chairman of the Nairobi branch of the Kenya Local Government Workers Union (KLGWU).

Nairobi’s new town clerk Roba Duba last week acknowledged that City Hall is unable to bear the debt servicing burden citing punitive interest rates.

“The cash flow problem we have is driven mainly by punitive interest rates that commercial banks are charging us,” he said.

The intense pressure that City Hall faces to improve its cash flow position came to light last week with the publication of a notice of intention to forward the details of some 74 notorious rate payment defaulters – mainly government departments and parastatals – to credit reference bureaus.

Together, government institutions owe the council 60 billion. Mr Duba reckons that the amount, if recovered, could help City Hall settle more than half of its Sh106 billion mountain of debt.

The defaulters have 14 days to pay up or face blacklisting with the credit reference bureaus – a move that would make it difficult for them to access credit in future.

City Hall said it had opted to report the defaulters for blacklisting with the bureaus because global best practices indicate that 90 per cent of rate debtors listed at the credit reference bureaus pay up while 10 per cent have their property auctioned.

Acting Local Government minister Fred Gumo has given City Hall the green light to initiate a fresh bid to increase fees charged for core services and boost internal capacity for revenue collection.

Officials said adjusting fees upwards is the only sustainable way to meeting its obligations to residents and servicing short term debts including paying the huge salaries that the government recently awarded its workers.

“The salary increment was itself so abrupt and required quick response yet some of the government departments ganged up against us when we tried to raise our fees to match the increased financial obligations,” said Michael Ogada, the NCC finance committee chairman.

Until the signing of the current collective bargain agreement, City Hall paid Sh320 million in monthly salaries but this how now risen to more than Sh350 million.

City Hall has responded to the increased financial burden with plans to increase property rates, parking fees and business licence fees – that together account for more than 70 per cent of its internal revenues.

City Hall had planned to raise Sh3.5 billion from land rates for its Sh14.8 billion budget this year up from Sh2.6 billion the previous financial year.

Parking fees and business permits were to generate Sh1.6 billion each, up from Sh1.4 billion and Sh1.3 billion respectively.

The council had also sought the Treasury’s authority to use its rich asset base to settle the debts but the permission had not been granted by the time Mr Kisia left office last month.

He former town clerk had told the permanent secretary at Treasury Joseph Kinyua that flexibility to decide when to dispose of or lease City Hall’s rich asset base would readily resolve its liquidity problem but the PS did not respond to the request.

Leasing or selling the council’s assets –which are estimated at Sh200 billion - could ease current liquidity problem, Mr Kisia said.

To lease or sell a property, the local authorities must seek permission of the Treasury and the local government ministry.

Lately, the council has been locked in a tug of war with the Department of Defence over the piece of land where the Eastleigh Barracks stands saying its cash flow would improve by Sh57 billion if the army paid the full price of the property.

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