The National Treasury has said that parastatals that have defaulted on loan repayments and amassed pending bills to contractors will be blocked from accessing fresh debt, in a strategy aimed at lowering the burden on taxpayers.
Treasury Cabinet Secretary John Mbadi has told chief executives of State corporations the measure will be enforced from the financial year starting in July.
This comes after it emerged that State-owned enterprises (SOEs) held nearly Sh1.38 trillion in outstanding debts last financial year, exposing taxpayers to bailouts in the future for entities that will struggle to honour repayments.
The outstanding amount comprises Sh1.197 trillion in on-lent loans, Sh100.2 billion in guaranteed debt and Sh78.21 billion in non-guaranteed debt.
The debt stock held by parastatals is captured as contingent liabilities, meaning the Treasury will only step in if the SOEs, which play strategic roles, fail to service the loans.
As of September 2024, in addition to loans, State corporations had Sh410.7 billion in arrears to contractors and suppliers of various goods and services.
The Public Finance Management Act requires that SOEs acquire loans from financial institutions, including banks, after getting approval from the Cabinet Secretary for the line ministry with the concurrence of the CS for the National Treasury.
“The National Treasury and Economic Planning will not give concurrence for borrowings or, where applicable, grant guarantees for State corporations which are in default of loan repayments and pending bills,” Mr Mbadi wrote in a fresh circular to the chiefs of SOEs ahead of the preparation of the annual budget for the financial year starting July 2025.
Parastatals with high outstanding loans from the State include Kenya Airways (Sh99.92 billion), Kenya Electricity Generating Company (Sh78.62 billion), Kenya Power (Sh71.32 billion), Athi Water Works Development Agency (Sh55.1 billion) and Coast Water Works Development Agency (Sh20.61 billion).
Most of the SOEs had applied for their loans to be written off in the previous year because of financial constraints and inability to service their debts.
More than half (31) of the 54 State corporations did not make any repayments in the financial year ended June 2024, highlighting the continued struggles these entities are having in keeping up with loan repayments.
For instance, during the year ended June 2024, the Treasury serviced a guaranteed debt of Sh17.4 billion on behalf of Kenya Airways, an indication that the State’s exposure is beyond the risk of losing the on-lent loans.
The payment of the KQ loan helped cut the stock of government-guaranteed debt as of the end of June this year to Sh100.2 billion from Sh170.2 billion in the prior year.
The surge in outstanding loans from Sh974.2 billion to Sh1.197 trillion came in during the period when outstanding on-lent loan arrears, which include principal and accrued interest not paid, amounted to Sh266.5 billion.
Out of the arrears, Sh167.5 billion relates to Kenya Railways’ standard gauge railway loans, the servicing of which is yet to start.
SOEs in the water sector were also singled out, having arrears of Sh34.1 billion.
Additionally, the Treasury said Sh2.3 billion in loans in the sugar sector were written off.
“State corporations are required to entrench prudent financial management practices in their planning and enhance cost control measures with the aim of delivering services in the most cost-effective manner,” Mr Mbadi wrote in the guidelines for the budget for the next financial year.
“Chief executives officers/accounting officers of State corporations are reminded that incurring expenditures without approval by line ministry and the National Treasury and Economic Planning is irregular, and they will be held personally liable for such expenditures in accordance with provisions of the Public Finance Management Act, 2012,” he said.
Kenya has 248 State corporations, out of which 46 are commercial enterprises, and 201 are non-commercial entities.
The Treasury says this obligates the State to bail them out from financial distress, despite the competing budgetary needs.
A high number of commercial State corporations are concentrated in the transport and energy sectors, performing strategic functions.
A bid by the Ruto administration to implement SOEs reforms was suspended by the High Court in June last year pending a determination of a case filed by the Law Society of Kenya and others alleging that some aspects of the changes usurp the powers of Public Service Commission (PSC), an independent constitutional agency.
PSC chairperson Anthony Muchiri had also rejected President William Ruto’s Executive Order No. 3 of 2024 on Guidelines for the management of State Corporations, terming it “illegal and unconstitutional” for excluding the commission from their formulation.
The executive order gazetted on May 24 provides for among others, terms and conditions of service for boards and human resource management of State corporations.
“The guidelines are in conflict with the provisions of the Constitution and are, therefore, invalid pursuant to the provisions of Article 2(4) of the Constitution,” Mr Muchiri wrote in a protest letter to State House’s Chief of Staff and Head of the Public Service Felix Koskei on May 28, 2024.
“The guidelines violate several court decisions that found that it is only the Commission (PSC) that has power to establish offices and approve human resource instruments in the public service.”