Taxpayers’ exposure to guaranteed debts

Guaranteeing someone a loan means you shoulder the burden in case of default. Similarly, Kenya has given guarantees to private businesses worth billions of shillings aimed at encouraging investments. The cash is not necessarily a debt as it is not factored in the Sh4 trillion owed to foreign and local lenders who fund budget shortfall.

However, failure to repay such debt by private entities will see Kenya become liable, and foot the bill. In some instances, the Government has guaranteed a market to investors undertaking mega projects failure to which it would have to pay them because they cannot monetise their investments.

This exposure is more on the power sector, where Kenya Power is the single buyer. Cases have emerged whereby Kenya Power is unable to buy the generated electricity due to factors beyond its control. This has resulted in Government paying up for new supplies as per the guarantee issued to the investors.

An International Monetary Fund report indicated that Kenya has about Sh322 billion ($3.1 billion) guaranteed loans mostly taken by 12 power purchase agreement contracts signed over the last 10 years.

In fact, after the approval of the Sh77 billion guarantee to Kenya Airways (KQ) loan, Kenya’s indirect debt may stand at Sh399 billion with significant amount of the undisclosed debt being guarantees it made to the energy sector over the past 10 years through Public Private Partnership (PPP) deals.

“The KQ guarantee is a debt. We are basically saying if they can’t pay up, we will foot the bill, this is debt and there needs to be publicly discussed,” Kwame Owino, head of the Nairobi-based Institute of Economic Affairs said. However, the government put this debt at Sh60 billion by the end of June 2016.

“The total outstanding government guaranteed debt increased by Sh16 billion, attributed to disbursements of Sh8 billion and Sh6 billion by Germany and Japan for projects under KenGen and Kenya Ports Authority respectively,” the National Treasury said in 2015/16 Public Debt Management report.

The government said that increased demand for transport, water and sewerage, health and energy has forced Kenya to offer guarantees.

“This has led government to look for alternative sources of financing which does not directly impact on Kenya’s debt portfolio and associated risks,” the National Treasury said.

The 140 megawatt Africa Geothermal International project has a Sh8 billion annual obligation for fixed capacity payments.

Government had entered into a 25-year deal with the firm on the Sh78.8 billion to cover the project costs and the expenses incurred by the seller as a result of termination.

Gulf Power’s 11.2 billion deal with Kenya Power for 80.3 megawatts heavy oil power plant is also guaranteed by the State.

A similar plat with Triumph Power worth Sh16.2 billion and the Sh15.1 billion Thika Power have also been guaranteed by government. Orpower Olkaria III Geothermal power plant, Rabai Power plant, Mumias Bargasse Co-generation power plant and, Kipevu II, Kipevu III and Power Technology Solutions Ltd , Gikira Kianjora small hydro power stations among others have all been guaranteed.

Microwave telephone

This model was used to finance the Umoja II Housing project in 1985, KBC modernisation project in 1989, Telkom Kenya purchase of microwave telephone system in 1990.

It also helped set up Tana Delta Irrigation Scheme in 1990, and rehabilitation of East African Portland Cement plant in 1990. Power generation firm, KenGen, has also benefited from the scheme. It was guaranteed by the State in 1995 to set up the Mombasa Diesel Power Project, Sondu Miriu Hydropower Project in 1997 and second and third phases in 2004 and 2007.

While these projects have proved beneficial, the government has had to come in and foot the bill on several occasions when payments are defaulted. Mr Owino says that while guarantees are not bad, government is taking too much of a gamble giving the firms guarantees.

“When the government has given guarantees for about 25 years, what happens when technology changes and there is a new innovation,” Mr Owino posed. “Such agreements should be set out so that they can be reviewed every five years during the life of the project and to ensure costs go down over time,” he added.

The economist argues that the problem with such guarantees is that negotiations are done in secrecy and only become open to the public when they are a foregone conclusion. “There is simply no transparency, which leaves little room for public comment before agreements are signed.” The Parliament, he reckons, need to do more work instead of letting the State get away with such deals.

The terms are also unknown and sometimes the State cedes too much ground putting huge tax burdens on the government in the event the project flops. Mr Owino says by the time the State is being billed, it is usually too late since cancelling the contract is equally a bad sign for investors. Kenya has given guarantees to the tune of Sh15.5 billion to Kinangop Power and Sh88 billion to the 300 megawatt (MW) Lake Turkana Wind Power project (LTWP).

Kinangop Wind Park Ltd which was supposed to set up a 60MW plant stopped work last year after months of delay and frustration by locals who refused to cede land for the project.

The firm then dragged Kenya to the International Chamber of Commerce looking to cash in on the guarantee that the Ministry of Energy had promised as insurance in the event that the project failed to take off for political reasons. Another firm, US-based, WalAm Energy Inc is seeking Sh61.8 billion compensation from the government for a botched geothermal project.

Joint venture

Recently, Dubai-based businessman Ajay Sethi of Channel 2 Group Corporation has also sued KBC over breach of contract and termination of a joint venture in what was supposed to be a 24-hour entertainment and sports channel. In the Sh49 billion suit, the State broadcaster is also accused of using information from a feasibility study carried on the digital TV market by Channel 2 to launch a distribution platform together with China’s StarTimes.

Even as the suits pile up, the energy Ministry seems to be embroiled in yet another brawl that may end up in international courts where Kenya would be obliged to pay.

The dispute with the Lake Turkana Wind Power company centre on delayed building of the Loiyangalani-Suswa transmission line due to land compensation hurdles.

The delay is supposed to attract a monthly fine of about Sh700 million from January this year under the signed power purchase agreement in which Treasury had guaranteed the project.

The money is payable to LTWP, which claimed that it is ready to produce electricity and sell the same to Kenya Power but there was transmission line to enable it monetise on its investment.

The 428-km high-voltage line was approved in August 2014 and the government agreed to pay the investors a monthly compensation should there be delays in injecting power to the grid after January 2017.

Talks have been going on to resolve the situation, with the latest having taken place two weeks ago where senior Ministry of Energy officials and energy sector institutions met with LTWP officials. It’s not clear what emerged from the meeting—whether Kenya should pay or the wind firm should hold off on billing the Government.

The Ministry’s Energy Principal Secretary Eng Joseph Njoroge has however in the past stuck an adamant tone when he declared that the country will not pay for the delays.

It has insisted that the delay in completion of the power line was due to factors beyond its control, which is catered for in the contract. The Ministry also says that the wind farm was not ready to start production as claimed by LTWP.

LTWP has in the past said it was ready to start electricity generation December but could not feed the grid as the transmission line was not ready.

Power purchase agreements

The Energy Regulatory Commission (ERC) last week commissioned a study that will evaluate the possibility of denominating power sector loans and power purchase agreements (PPAs) signed between producers and Kenya Power. Financing projects in local currency is expected to reduce power bills by eliminating or substantially reducing the forex component risks.

The acting ERC Director General Pavel Oimeke said having shilling denominated debt and PPAs would help cushion power consumers from currency volatility that has an impact on electricity cost.

He gave an example of the appreciation of the dollar against the local currency which pushed the exchange rate to the dollar at Sh103 compared to Sh85 recorded five years ago.

This meant that Kenyans could be paying 15 per cent more on dollarised loans.

“The move will protect investors and ensure that they get fair return on their investments but also ensure consumers get affordable power and that monthly bills are not subject to sudden spikes due to movement in foreign currencies,” explained Oimeke.

“The brunt of depreciation of the Kenyan shilling against the US Dollars affects Kenyans consumers as this is reflected in power tariffs.”