Treasury has sent unqualified people to negotiate loans on Kenya’s behalf, resulting in expensive loans with tough terms for the country, an audit has revealed.
An audit of contracts for external loans for development projects blamed the Treasury for failing to carry out proper market research on the terms of the loans it received, mainly due to limited skills by officials in the debt office.
Auditor-General Nancy Gathungu sampled six debt-financed projects including Mwache Dam and Kenol-Sagana-Marua Road, now facing delays due to the government’s failure to meet the lender’s requirements.
He noted that defects in the Treasury’s debt department caused officials to fail to check requirements such as penalty fees, other fees, and currency before borrowing from various countries and multilateral institutions such as the World Bank and the International Monetary Fund (IMF).
“Interviews with the staff of the Department of Debt Policy, Strategy and Risk Management revealed that inadequate staff and debt management skills are the cause of this deficiency,” said Ms Gathungu.
He added that the office should have 19 officers, but there were only six in October last year.
Lack of staff and skills in the office, the audit said, led the Treasury to negotiate loans with harsh terms for taxpayers, including penalty penalties, procurement conditions, and funding clauses.
The Treasury dismissed the audit question about the failure to conduct a financial analysis of the loan to ensure the loan at the lowest rate saying, in response to the report, “The comments are wrong and severe.”
The audit noted that “for effective debt negotiations, the negotiation team must include well-trained professionals who can participate in the experienced negotiation team of the debtor institution or country”, including representatives of the debt office and the Attorney General AG).
In addition to the defect issue, the audit faulted the Treasury for ignoring legal advice from the AG.
“However, a review of the financing agreements for the sampled projects showed that two of the six sampled projects had co-financing clauses that had a negative impact on the contracted debt,” the audit notes.
The audit noted a clause in the Mwache Dam Project loan, issued by the International Development Association (IDA) and Agence Francaise De Development (AFD), stating that withdrawal requests cannot be submitted to the lender if the co-financier has delayed anything. payment in the project.
In the financing agreement for the Nairobi Water and Sanitation Project, the audit also identified a clause that states that if the borrower pays any prepayment due to the co-financier in full or in part before the technical completion date, he must pay all or a part of the facility within 30 calendar days .
“Therefore, if there is a new financier and prepayment happens, this clause can have a negative impact on the government’s liquidity position. Therefore, the Treasury must negotiate to remove this clause from the financing agreement to avoid this risk,” said Ms Gathungu.
The audit also noted that lenders imposed tough terms because Kenya could not negotiate better terms, including dictating procurement.
In addition to the issue of incompetence, the audit blames the Treasury for ignoring the legal advice of the AG, where he noted that “legal advice to negotiate for the amendment of some clauses and the fulfillment of precedent conditions was not considered in four of the six sample loans.”
Failure to negotiate loans in line with legal advice, the public auditor notes, puts the government at risk of entering into loans with inappropriate terms and stalling projects.
The report revealed that if the government engages the people of Kenol, Murang’a District before starting the construction of the Kenol-Sagana-Marua Highway in 2020, the road will probably be completed by December 2024, at a lower cost.
However, the Treasury and the Kenya National Highways Authority (Kenha) went ahead with borrowing billions of shillings armed with an unworkable design, leading to heavy cost implications that have delayed work and exposed the government’s recklessness in meeting its appetite for debt.
The audit noted that the initial design of the road, for example, did not consider the need for a bridge crossing elementary school students, presenting the danger of being hit by a speeding Miraa vehicle.
“Furthermore, the project affects the existing markets, boda-boda stages, and warehouses at the Kenol-Makuyu Junction and Kenol Town. The affected beneficiaries require the relocation of these facilities to safer places for free movement and interaction with customers ,” the audit notes, indicating that the consultant handling the road acknowledged that residents’ concerns were “significant and a new design proposal had been submitted to KeNHA with additional cost implications.
“Failure involves common challenges such as land acquisition disputes, project implementation delays, and cost increases. These costs can be avoided with proper identification and planning,” said Auditor General Nancy Gathungu.
But the Kenol-Sagana-Marua road is only the tip of the iceberg, as the public auditor, open loopholes in the borrowing process to finance the project, including the use of useless feasibility studies, the refusal of the Treasury to follow legal advice, and the inability to carry out officials to bargain better terms for taxpayers.
The audit noted that despite ignoring public opinion when identifying and planning projects to be implemented, the government also rushed to sign harsh loans that ended up attracting fines and causing delays, denying Kenyan value for taxes.
Ms Gathungu sampled six projects including the Kenol-Sagana-Marua road, Bagamoyo-Horohoro-Lunga Lunga-Malindi road, and Mwache Dam, which all residents said they never participated in project identification.
“Interviews with implementing agencies revealed that financiers approach the ministry directly before the project is conceptualized by the user or the ministry implementing the project,” the audit notes.
The feasibility study of the Treasury used to borrow for the Kenol-Sagana-Marua and Bagamoyo-Horohoro-Lunga Lunga-Malindi roads, should be updated since when it was drawn up in 2009, the project will start in 2020.
The audit noted that the “top-down” approach by the State when implementing loan-financed projects has created “a disconnection from the grassroots beneficiaries, unlike what was expected where projects were identified through a highly decentralized and people-centric bottom-up approach.”
It noted that during the conceptualization of the Mwache Dam in Kwale County, for example, the planners failed to consider the relocation of Fulugani primary school, leaving pupils whose parents had been relocated too far away.
“An interview with the Vice Principal and the Chairman of the School Board revealed that the number of the school decreased by 22 percent, from 1,230 to 960 students. The decrease is caused by young students who cannot walk far and parents’ concern about heavy vehicles that can cause accidents,” said Ms. Gathungu.
