Treasury has been dispatching unqualified persons to negotiate loans on behalf of Kenya, resulting in expensive loans with harsh terms for the country, an audit has revealed.
An audit of contracts for external loans for development projects faults the Treasury for failing to undertake proper market research on the terms of loans tapped, mainly due to limited skills by officials in its debt office.
Auditor-General Nancy Gathungu sampled six debt-funded projects including the Mwache Dam and the Kenol-Sagana-Marua Road, currently facing delays due to the failure of the government to fulfill creditors’ terms.
She noted that incapacity at Treasury’s debt department has left officers failing to review terms such as penalty fees, other charges, and currency before borrowing from different countries and multilateral institutions such as the World Bank and International Monetary Fund (IMF).
“Interviews with the staff of the Debt Policy, Strategy, and Risk Management Department revealed that inadequate staff and skills in debt management attributed to this shortfall,” Ms Gathungu said.
She added that while the office should have 19 officers, it had only six as at October last year.
The shortage of staff and skills at the office, the audit noted, had caused the Treasury to negotiate loans with harsh terms for taxpayers, including punitive penalties, procurement conditions, and financing clauses.
Treasury brushed off the audit query on failure to undertake financial analysis on loans to ensure it borrows at cheapest rates stating, in a response within the report, that “The comment is erroneous and onerous.”
The audit noted that “for effective loan negotiation, the negotiating team should comprise of well-trained professionals who can meaningfully engage the experienced negotiating teams of creditor institutions or countries”, including representatives from debt office and Attorney-General AG).
Besides the incapacity issues, the audit faulted Treasury for ignoring legal advice from the AG.
“However, review of financing agreements for the sampled projects revealed that two out of six sampled projects have co-financing clauses which have a negative impact on the contracted loans,” the audit notes.
The audit cites a clause in the Mwache Dam Project loan, issued by the International Development Association (IDA) and Agence Francaise De Development (AFD), stating that a drawdown request could not be submitted to the lender if a co-financier had suspended any payments on the project.
Under the financing agreement for the Nairobi Water and Sanitation Project, the audit also flags a clause stating that if the borrower prepays any amount due to a co-financier in full or in part before the technical completion date, they must prepay the entire or a portion of the facility within 30 calendar days.
“Therefore, in the event a new financier is introduced and prepayment occurs, this clause may have a negative impact on liquidity position of the government. Therefore, Treasury should have negotiated for removal of these clauses from the financing agreements to avoid these risks,” Ms Gathungu says.
The audit also notes that lenders are imposing harsh terms due to Kenya’s incapacity to negotiate better terms, including dictations on procurement.
Besides the incapacity issues, the audit faults Treasury for ignoring legal advice from the AG, where it notes that “legal advices to negotiate for amendment of some of the clauses and fulfilment of conditions precedent were not considered in four out of six sampled loans.”
The failure to negotiate loans in line with legal advice, the public auditor notes, poses risks of the government signing loans with unfavourable terms and stalling of projects.
The report reveals that had the government engaged residents of Kenol, Murang’a County before it started constructing the Kenol-Sagana-Marua Highway in 2020, probably the road would have been completed by December 2024, at a cheaper cost.
Instead, the Treasury and the Kenya National Highways Authority (Kenha) went ahead to borrow billions of shillings armed with an obsolete design, resulting in heavy cost implications that have delayed works and exposed the government’s recklessness to satisfy its borrowing appetite.
The audit notes that the initial road design, for instance, did not consider the need for footbridges where primary school pupils cross, exposing them to the dangers of being hit by speeding Miraa vehicles.
“Further, the project affected the existing markets, boda-boda stages, and sheds at Kenol-Makuyu Junction and Kenol Town. The affected beneficiaries need relocation of these facilities to safer places for free movements and interactions with their customers,” the audit notes, indicating that even the consultant handling the road has acknowledged that the residents’ concerns “were important and new design proposals had been submitted to KeNHA with additional cost implications.”
“Failure to involve public causing challenges such as land acquisition disputes, delays in project implementation, and increase in costs. These costs could be avoided with proper identification and planning,” Auditor-General Nancy Gathungu states.
But the Kenol-Sagana-Marua road is just the tip of the iceberg, as the public auditor, exposes loopholes in borrowing processes to fund projects, including the use of obsolete feasibility studies, the Treasury’s refusal to follow legal advice, and the inability of its officials to bargain better terms for taxpayers.
The audit notes that despite ignoring public views when identifying and planning for projects to undertake, the government has also been hurriedly entering into harsh loans that end up attracting penalties and causing delays, denying Kenyans value for their taxes.
Ms Gathungu sampled six projects including the Kenol-Sagana-Marua road, Bagamoyo-Horohoro-Lunga Lunga-Malindi road, and Mwache Dam, all of which residents said they were never involved in the projects’ identification.
“Interviews with implementing agencies revealed that financiers approach ministries directly before projects are conceptualized by the users or project implementing ministries,” the audit notes.
The feasibility studies Treasury used to borrow for the Kenol-Sagana-Marua and Bagamoyo-Horohoro-Lunga Lunga-Malindi roads, had to be updated since while they were drawn in 2009, the projects started in 2020.
The audit notes that a “top to bottom” approach by the State when implementing loan-funded projects has created “a disconnect from grassroots beneficiaries unlike demand-driven where a project is identified through a bottom to top approach which is highly decentralized and people-centric.”
It notes that during the conceptualisation of Mwache Dam in Kwale County, for instance, planners failed to consider the relocation of Fulugani primary school, leaving pupils whose parents had already been moved far away traveling long distances.
“Interview with the Deputy Principal of the school and the Chair of the School Board of Management revealed that the school population had dropped by about 22 percent, from 1,230 to 960 students. The drop was attributed to young learners being unable to walk long distances and parents' concern about heavy vehicles plying the road which may result in accidents,” Ms Gathungu indicated.
