KenGen has turned to the Treasury to take over loans associated with the construction of the Olkaria IV and I AU substation, a move that could unlock Sh5.3 billion for the power producer in the form of the value of the assets.
KenGen built the assets which have been used by Kenya Electricity Transmission Company (Ketraco) for the evacuation of power from Olkaria to the national grid since 2015.
Ketraco was to take over assets and obligations thereon in a contract called a novation agreement but this has not materialised.
The Auditor-General says the government has now been approached to formalise the assets transfer, a move that will end the uncertainty for KenGen in terms of realising the value of the power infrastructure.
“There have been ongoing discussions for the National Treasury as per letter referenced DGIPE/loans84 dated August 21, 2023 to take over the loan in respect to this asset and facilitate full transfer of the asset to KETRACO,” the Auditor-General Nancy Gathungu wrote in a review of KenGen’s financial statements for the year ended June.
“As at the time of the audit, the agreement with the National Treasury was yet to be concluded.”
KenGen says that in 2010, the government received financing for the Kenya Electricity Expansion Project (KEEP) from various financiers. The KEEP projects included the construction of Olkaria IV & I AU power plants, high voltage substations and transmission lines.
The project was financed by the European Investment Bank (EIB) and the German fund KFW.
On September 8, 2010, KenGen and Ketraco entered into an implementation agreement framework for cooperation in certain services in connection with the transmission of electricity under KEEP.
Upon completion of the project in 2015 and in accordance with the Implementation Agreement, KenGen was to sign a novation agreement that would govern the transfer of assets and fulfilment of obligations thereof.
This has, however, remained pending, with the value of the contract asset currently standing at Sh5.3 billion.
The Auditor-General had earlier expressed doubt on KenGen’s ability to realise the value of the assets as the novation agreement remained in abeyance. A novation is an agreement between two parties to allow for the substitution of a party.
The original contracting party who is replaced by another is excused by the novation, and therefore the original party who is replaced gives up any rights they have against the other original party to the contract.
