Cash-strapped parastatals demand loan cancellations as defaults reach Sh74b
Parastatals have failed to honor interest payments on state loans of 921.93 billion shillings, with the majority seeking to be written off as losses mount.
State-owned enterprises, including Kenya Power, Kenya Railways and East African Portland Cement, were in default at the end of June 2021, failing to repay 74.014 billion shillings in interest and principal on the loans.
The latest overdue payments, due to the disruptive environment of Covid-19, represent an increase of 77.4% over the previous fiscal year, when state-owned enterprises failed to pay the government 41.72 billion shillings .
The National Treasury said many of the 260 state-owned companies operating in key sectors such as energy, agriculture, transportation and finance are now bidding for write-offs in order to stay afloat.
“The majority of state-owned enterprises are facing financial constraints and have requested that their loans be canceled,” the National Treasury said.
Defaults are increasing despite the fact that the Treasury added these entities to 54.93 billion shillings in the fiscal year ended June 2021, bringing the total stock of loans to public enterprises to 921.93 billion shillings. .
Outstanding debts to state-owned enterprises are equivalent to 55% of the 1.669 billion shillings that the Kenya Revenue Authority (KRA) collected in the full fiscal year 2020/2021.
Write-offs from the Treasury seem unlikely given pressure from lenders such as the International Monetary Fund (IMF) for the government to make structural changes, including layoffs and the closing or merging of some parastatals.
State-owned enterprises also continued to benefit from the billions of shillings transferred from the treasury, plunging into public opinion on the socio-economic benefits accruing to taxpayers.
The Treasury recently estimated that taxpayers could spend around 382 billion shillings to support the operations of 18 state-owned enterprises over the next five fiscal years.
Companies such as Kenya Railways Corporation, Nzoia Sugar, Kenya Power, East African Portland Cement, South Nyanza Sugar Company, National Oil Corporation, Post Bank, Postal Corporation of Kenya, Muhoroni Sugar Company and Kenya Electricity Transmission Company are all in loss.
The national treasury usually borrows funds from external and national sources and then lends to public enterprises.
The chances of getting this money back are generally lower as the Treasury emphasizes the strategic role of SOEs and implemented projects as opposed to repayment capacity.
“State-owned enterprises should play a strategic role in the economy, have a weak balance sheet which cannot attract competitive funding both at the national level,” the Treasury said.
“The projects implemented by SOE should be a high priority in the government’s development agenda. ”
The state received 8.35 billion shillings in the fiscal year ended June 2021 from 15 state-owned enterprises with 6.26 billion shillings in principal and 2.09 billion shillings in interest payments.
The Treasury said a few entities such as the Agricultural Settlement Fund, the Central Land Board and the Cooperative Bank of Kenya have been consistent in their loan repayments and have therefore reduced their loan arrears.
However, the Treasury adds that the Co-op Bank has indicated that various cooperative societies are in a moribund state, rendering them unable to repay part of the on-lent loans.
Failure to settle the arrears saw the government take over Kenyatta Teaching Hospital. The state now manages the hospital to recover the loan amount.
Because the Agro-Chemical and Food and the Kenya Meat Commission are doomed to privatization, the state betting on it to recover its money.
But most water supply, construction and development agencies face financial difficulties and are unable to meet their on-lending obligations as the treasury is at risk of losing the money. “An inter-ministerial committee has been formed to review all water sector loans and recommend mitigation measures to be adopted,” the Treasury said.
The state’s checklist for loans to parastatals differs from that of commercial banks which primarily examine the ability of entities to repay money.
Tight scrutiny of commercial banks has led them to cut back on loans to state-owned enterprises, a move that should steer many parastatals to the government for a bailout.
Data from the Central Bank of Kenya shows that banks’ net loan portfolio to parastatals fell for three consecutive months to close in July at 76.3 billion shillings, the lowest since February 2017.
The decline in the parastatal loan portfolio indicates that the value of maturing loans is greater than that of new loans to many loss-making public enterprises.
Data from the National Treasury showed that more than half of the country’s 260 parastatals recorded either a deficit or a loss in the fiscal year ended June 2020, with the situation worsening in 2021.
This is attributed to a slowdown in economic activity, competition from cheaper imports and weak corporate governance, jeopardizing their viability.
Banks have also struggled to collect debts from ailing state-owned enterprises, using auctioneers and placing some of them in receivership to recover their money.
State entities such as East African Portland Cement, Mumias Sugar, Kenya Power, Kenya Airways and Kenya Railways have all struggled to pay their money to lenders in the recent past.
Treasury data shows that nine state-owned enterprises contracted unsecured debt – commercial loans obtained from local banks and external creditors – amounting to 128.93 billion shillings at the end of December last year.
The majority (Sh71.23 billion) will mature between one and four years while another Sh45.8 billion will mature between five and 10 years. There is only Sh 11.88 billion more than 10 years to go.
Borrowing from banks, on top of what the state has loaned them, has increased their indebtedness, forcing many to focus on paying contributions from commercial lenders to avoid foreclosures and auctions.
Kenya Power leads the way, having used 53.84 billion shillings or 42 percent of total unsecured debt.
Kenya Electricity Generating Company has taken 37.78 billion shillings while Kenya Pipeline owes banks 19 billion shillings.
This means that the exposure of banks in companies in the energy sector is 110.62 billion shillings. This is followed by Sh11.75 billion loaned to Kenya Airports Authority.
The outstanding balance of unsecured loans is in the hands of Jomo Kenyatta University (2.74 billion), East African Portland Cement (1.75 billion Sh), Kenyatta University (1.26 billion), from the University of Nairobi (783 million Sh) and the Postal Corporation. from Kenya (20 million shillings).
The seizure and auctioning of the assets of these entities in the event of default is generally considered a public risk, especially when these state-owned enterprises are providers of essential services such as water, electricity and electricity. education.
“These public enterprises borrow to finance strategic and high priority projects in the government’s development program. Unsecured loans therefore present a risk of contingent liabilities and potential budgetary commitments to the national government, ”the Treasury said.
In the past, the government has been forced to step in and rescue companies like Kenya Airways when lenders prey on assets like planes.
With pressing fiscal needs and pressure to cut borrowing, the state may be forced to slam the door on parastatals as well and turn to IMF recommendations.
Some of the proposals on the table include restructuring parastatals in a way reminiscent of the ’90s style when structural adjustment programs led to the dismissal of thousands of civil servants.
The downturn and merger of some state-owned enterprises are expected to lead to job cuts as the state plans to cut payrolls and ease the pressure on national collections.