Kenya: Treasury to stop financing indebted state corporations

State corporations and agencies that fail to meet their financial obligations will not be bailed out but will be left to collapse, Finance minister Njeru Githae said on Tuesday.

The minister said servicing debts incurred by profligate state agencies has become a big burden to taxpayers, forcing the Treasury to make tough decisions that may lead to the folding up of some institutions.

“We have reached a point where we can no longer support institutions that are financially unsustainable. We will close down or abolish those that are not financially viable,” he said.

The minister also said the Treasury will no longer guarantee debts for agencies that cannot sustainably manage their financial affairs, signalling that the going will be tough for state corporations that plan to ride on government backing for new loans in the coming financial year.

Budget Estimates for the next financial year show that state-owned enterprises and agencies intend to borrow Sh88 billion, up from Sh10 billion that they borrowed in the current financial year ending next month. The planned borrowings are 27 per cent of the total development expenditure for the year.

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Mr Githae said the Treasury and the Office of the Prime Minister, will soon meet parastatal chiefs and heads of government agencies to discuss the rising debt crisis.

The minister named the City Council of Nairobi (CCN) as one of the institutions that have become so financially incapacitated to the extent that it cannot meet routine obligations such as paying salaries.

He was responding to questions over the Treasury’s decision to spend Sh1.4 billion of taxpayers’ money to bail out three state agencies City Hall, Tana and Athi River Development Authority and the Kenya Broadcasting Corporation.

“City Hall has fallen into arrears even on salaries. We are paying for their debt with a gloomy face; we are very unhappy with that assignment. They want to sell assets, but what will happen after they are done with that?” asked Mr Githae.

The latest report by the Office of the Controller of Budget has named City Hall among agencies and parastatals that owe billions of shillings in loans guaranteed by the Treasury.

Agnes Odhiambo, the Controller of Budget, has questioned the logic of paying loans for institutions that are still solvent.

“There is need for the Treasury to make a follow-up to determine why government agencies, which are not insolvent defaulted on loans and to recover these amounts from them,” Mrs Odhiambo says in her report for the third quarter of 2011/12 financial year.

City Hall has defaulted on the Sh212 million loan that has now grown to Sh1.5 billion, having been procured from the United States Agency for International Development (USAid) in 1985 at an 8.5 per cent interest rate per year.

The council, indebted to the tune of Sh106 billion, was supposed to repay the 30-year loan by 2014 but it has defaulted on the back of the heavy loans burden it is carrying.

City Hall officials maintain that only an increase in fees charged for its services and automation of payments will take it to a healthy and sustainable financial position but Nairobi residents and civil society groups have opposed such a move.

“We are already acting on the financial situation and have reported those who owe us millions in unpaid land rates to the Credit Reference Bureaus,” said Jimmy Kiamba, the treasurer at City Hall.

Mr Kiamba said that the council recently met the minister for Local Government and got his permission to increase land rates but that is unlikely to rescue City Hall soon because the process could take as long as one and half years to complete.

City Hall’s decision to report rate defaulters to credit reference bureaus is informed by the finding that 90 per cent of defaulters blacklisted with the bureaus pay up while 10 per cent have their property auctioned.

Mr Kiamba declined to comment on a recent recommendation by audit firm, PricewaterhouseCoopers, that City Hall should cut its workforce by nearly 30 per cent.

City Hall is not alone in the sea of debt but stands deep in the waters with tens of parastatals that can hardly meet their annual revenue needs.

In the coming financial year, parastatals and other agencies will generate Sh441 billion in revenues against a budget total of Sh857 billion.

The rest of the cash will come from the central government, donor grants and loans.

City Hall was recently caught flatfooted after the government increased salaries for the lowest paid workers on Labour Day.

“The salary increment was itself so abrupt and required quick response yet some of the government departments ganged up against us when we tried to raise our fees to match the increased financial obligations,” said the NCC finance committee chairman Michael Ogada.

City Hall has been keen to increase property rates, parking fees and business licence fees – that together account for more than 70 per cent of its revenues.

The council had planned to raise Sh3.5 billion from land rates for its Sh14.8 billion budget this year up from Sh2.6 billion the previous financial year. Parking fees and business permits were to generate Sh1.6 billion each, up from Sh1.4 billion and Sh1.3 billion respectively.







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