Loans red tape costs Treasury Sh55bn in penalties

The National Treasury building in Nairobi.  

Photo credit: File | Nation Media Group

The government would have avoided loan penalties of Sh55.8 billion it paid over three years to June 2022, had it addressed choking red tape within it and followed the law when borrowing to fund projects.

A special audit on external debt servicing between 2018/19 and 2021/22 fiscal years shows that out of Sh100 billion the Treasury spent settling some 90 loans, Sh55.8 billion was commitment fees charged by lenders for delays in drawing down loans and settlement of the debts, sometimes even after projects were completed.

By the end of June 2022, while the State had completed some 17 projects --most of them in the energy sector-- Sh69 billion was still held in loan accounts that funded their construction, attracting avoidable fees.

The audit notes that during the three years, Treasury breached payment dates in 61 of the 90 Payment Advices (PAs), including 11 payments valued at Sh904.4 million where it delayed between 15 and 330 days, and 50 payments valued at Sh45 billion where it paid earlier than required timelines, by three to 14 days.

“Adherence to loan due dates was observed to be approximately below average as more than half of the payment advice were processed after or before loan due date. This was attributed to inadequate clarity in each function requirement on processing of debt service payments across Treasury, Controller of Budget (CoB) and Central Bank of Kenya (CBK) as loans fall due,” Auditor-General Nancy Gathungu notes.

Treasury blames delays by the attorney-general in issuing legal opinion, delays in tracing the transaction files and long period taken during negotiations Debt Service Suspension Initiatives (DSSI) for the delays.

The audit notes that the “non-adherence to loan servicing due dates, for instance, late payment, may result in accrual of late payment interest” and “at times the lender may impose a penalty for the early clearance of the debt amount.”

The audit, however, did not determine actual penalties incurred due to non-adherence of due dates.

Ms Gathungu faults government red tape, where Treasury, CBK and CoB clash at operational level, causing taxpayers to incur avoidable charges and creating a fraud loophole.

“Inadequate transparency and clarity on apportionment of each Department's timeline in processing PA before loan due date and exchange rates applied during actual payments amongst Treasury, CoB and CBK may expose debt repayment transactions to operational and fraud risks, leading to loss of funds and high borrowing costs,” the audit notes.

Ms Gathungu notes that the three institutions should establish service level requirements for each department to guide in timely processing of loan payments and that exchange rates applied should be agreed across functions, formalized and communicated across functions.

“Inadequacies in project preparations, loan contracting and project implementation continues to negatively impact on debt service through payment of avoidable fees such as commitment fees of Sh55,862,814,697 among other costs thereby compromising service delivery and value for money for taxpayers,” Ms Gathungu notes.

The audit reveals that the government has been breaching crucial public finance management requirements when borrowing, including borrowing to fund unapproved projects and projects lacking feasibility studies.

This was based on examination of some 32 project loans taken within the three years.

“The audit revealed that out of the 32 sampled project loans, only 18 project loans feasibility studies were provided for review, which clearly indicated the need for the projects. Feasibility studies for the remaining 14 project loans were not provided for review hence the audit could not determine the necessity for the projects,” the audit states.

It adds that out of the 32 projects, there was no proof that public participation was done on 22 of them, and that 21 had not been approved.

“Therefore, there is a risk of double financing, implementing similar projects and incurring costs outside the budget due to inadequate project approvals,” the audit notes.

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