Parastatals are diverting bank loans tapped for projects to fund operating expenses such as payment of salaries and utilities, reflecting the cash crunch in the State-owned companies.
The Central Bank of Kenya (CBK) says the increase in the firms’ assets is not matching that of long-term debt.
This is a sign that a significant share of long-term loans were not used for asset purchase and were instead channelled to recurrent spending including salaries, electricity bills payment and travel.
Most State corporations are highly indebted, compounded by persistent losses and cash flow challenges.
“The ratio of long-term debt to assets for SOEs declined marginally, from 69.9 percent in 2020 to 68.5 percent in 2021, while long-term debt accumulation relative to equity increased from 134.2 percent in 2020 to 135.3 percent in 2021,” CBK said in the Kenya Financial Sector Stability Report.
“The SOEs [State-owned enterprises] therefore used long-term debt to finance operational expenses rather than for investments to generate revenues to service future debt. This limits productivity, capacity, and profitability of SOEs, and in turn their viability.”
Long-term loans whose repayment ranges between one and 30 years are typically used to fund projects to earn returns and repay the debt.
Parastatals have fallen on lean times in the wake of a Covid-19 economic fallout that has cut profitability against rigid cost structures.
A World Bank study on State corporations put total liabilities, including debt, tax and social security arrears, owed by the State firms at Sh2.4 trillion in 2020, warning that this poses a great risk to the government, which is ultimately liable for this debt.
The debts are mainly held by Kenya Railways, Kenya Power and Kenya Electricity Transmission Company (loans), Kenya Ports Authority and Kenya Airways (guaranteed debts) as well as East African Portland Cement and Tana and Athi River Development Authority, which have been in default.
The CBK said while some of the parastatals were recovering from the Covid-19 economic hardships, legacy problems, and competition from cheaper imports as well as weak governance seemed to weigh down their recovery.
This has forced the government to pump billions of shillings in bailouts to some of the troubled State entities.
KQ, which is expected to undergo restructuring costing over Sh119 billion ($1 billion), has been hit by severe cash flow problems, making it unable to pay lessors and creditors’ due invoices.
In a budget document tabled in Parliament in April, the Treasury indicated that it will offer Kenya Airways a further Sh36.6 billion bailout in the year 2022/2023 to prop up the national carrier as it recovers from the Covid-19 slump.
The allocation came just weeks after MPs approved a Sh20 billion bailout for the airline.
Kenya Power, whose revenues declined by Sh26.3 billion following the 15 percent electricity tariff reduction announced in January by the government, received a Sh9.05 billion bailout.
Kenya Wildlife Service received a Sh2 billion bailout while Kenya Airports Authority got Sh1 billion as temporary support on the back of Covid-19-induced loss of revenues.
CBK said this trend was not viable, with the government finances squeezed between debt and public spending.
It said parastatals need reforms to return to profitability and attract commercial bank financing.
"Reliance on fiscal support by SOEs is no longer viable due to declining fiscal space. Hence the need to increase efficiency and profitability to attract bank lending," the CBK said.
The International Monetary Fund (IMF) underscored the importance of maintaining the momentum of reforms to tackle difficulties at financially troubled State-owned enterprises.
The World Bank has urged Kenya to shut down and merge heavily subsidised universities and loss-making parastatals in what would see thousands of public servants lose their jobs.
The Bretton Woods Institution said measures to address overlapping mandates and consolidating State corporations in the education sector could improve the efficiency of public spending on higher education and reduce spending pressures.
Declining profitability and increasing financial risks of State corporations, exacerbated by Covid-19, the increasing government lending and debt guarantees and accelerating the state corporation rationalisation agenda could help plug losses to the Exchequer while increasing overall economic efficiency.
