Interest, syndicated loan payments still haunt Eurobond

GRAPHIC: BENJAMIN SITUMA

What you need to know:

  • The IEA simulated what that Sh88 billion would earn in interest at a  fixed deposit account in Kenya at an interest rate of five per cent per year and found that the sum earned would be Sh730 million, which is almost 50 times more than interest received from the off shore account.
  • But by not keeping the money in the Consolidated Fund, the Auditor-General argued that there was a risk of the proceeds being appropriated without the authority of the Controller of Budget and also being applied for unintended purposes.
  • The Auditor General report indicates that on July 3, 2014, two withdrawals were made from the offshore account, the first one being Sh35 billion (US$395 million) to fund infrastructure projects and the second being Sh53 billion ($604 million) to repay the syndicated loan.

Had proceeds from Eurobond been placed in a fixed deposit account in Kenya instead of an offshore account in New York they could have earned 50 times as much as they did in interest, a fact check by Nation Newsplex finds.

According to a statement by Cabinet Secretary Henry Rotich, the interest earned in the offshore account was Sh14.9 million, 0.01 per cent of the net proceeds of the initial Eurobond, according to calculations by the Institute of Economic Affairs (IEA) and Nation Newsplex.

This return appears to be low, given that by the Cabinet secretary’s own account, at least half the money from the Sovereign Bond proceeds, about Sh88 billion, stayed in the offshore account until September 8, which was more than two months.

Although the Treasury CS has cited sections of the Public Finance Management Act that he says allowed him to make the payments, the Public Accounts Committee maintains the Constitution was violated.

This raises the question of how interest was negotiated considering the duration the sum was placed in the account.

The IEA simulated what that Sh88 billion would earn in interest in a fixed deposit account in Kenya at the interest rate of five per cent per year and found that the sum earned would be Sh730 million, which is almost 50 times more the interest received from the offshore account.

The big assumption is that the money rested in an account within Kenya for up to two months, which is less than the time it stayed offshore before being transferred to the Sovereign Bond Account at CBK.

Other open issues the government is yet to tackle include conflicting bank transaction dates between the Auditor-General and Treasury secretary, violation of the law by the Cabinet Secretary during the Eurobond bank transactions and lack of clarity on what the proceeds allocated to infrastructure projects were spent on.

According to Mr Rotich, the withdrawal of funds for the infrastructure projects took place on June 30, 2015 and the withdrawal to repay the syndicated loan two days later, on July 2.

The Auditor-General report notes that although the two transactions happened on the same day, July 3, the first transaction was accounted for in the previous financial year, which had just ended, just three days before, on June 30, 2014. The second transaction related to repayment of the syndicated loan was accounted for in the 2014/15 financial year.

In a statement sent to the media Mr Rotich argued that it made no sense to transfer the Eurobond money to a local account, immediately converting it into shillings, only to convert it back into dollars within the same week to repay the commercial loan, given that contract documents required that the syndicated loan be repaid within seven days of receipt of proceeds from the sovereign bond.

He claimed that not converting the dollars to shillings and then back into dollars saved the government exchange rate losses of about Sh1.2 billion.

WITHDRAWAL WITHOUT AUTHORITY

But the Auditor-General argued that not keeping the money in the Consolidated Fund created a risk of the proceeds being appropriated without the authority of the Controller of Budget and also being applied for unintended purposes.

The other bone of contention is why the proceeds from the sovereign bond amounting to Sh174 billion ($2 billion) were kept in an offshore account and withdrawals made, instead of transferring all the money to the Consolidated Fund. 

The Auditor-General report indicates that on July 3, 2014, two withdrawals were made from the offshore account, the first one being Sh35 billion ($395 million) to fund infrastructure projects and the second being Sh53 billion ($604 million) to repay the syndicated loan.

This withdrawal to pay the loan was in violation of Article 206 (1) of the Constitution and Section 17(2) of the Public Finance and Management Act, 2012, which require all money to be paid into the consolidated fund.

The only two exceptions spelt out in Article 206 (1a and 1b) require an Actof Parliament, which did not happen in the case of repaying the syndicated loan.

The Controller of Budgets told the National Assembly Public Accounts Committee that the withdrawals were made without her authority.

Although the Treasury CS has cited sections of the Public Finance Management Act that he says allowed him to make the payments, the Public Accounts Committee maintains the Constitution was violated.

A total of Sh250 billion was used on infrastructure projects and repaying the syndicated loan, according to a statement sent out by the Treasury CS. The amount included proceeds from tap sales amounting to Sh68 billion.

NO DETAILS ON PROJECTS

According to Mr Rotich’s breakdown on how the money was distributed among ministries to fund various projects, the Department of Infrastructure received the largest share of Sh64 billion, equivalent to 33 per cent of the total allocation of Sh197 billion.

It was followed by the Department of Planning that got Sh44 billion (23 per cent) and the Ministry of Energy and Petroleum which got the third largest share of Sh21 billion (11 per cent). In total, Treasury released money to 14 ministries and agencies, according to the Cabinet Secretary

Even though Mr Rotich did not give details of the projects that benefited from the Eurobond money, the high amount given to the Ministry of Devolution and Planning raises speculation whether a big chunk of it went to fund the Nation Youth Service, which is implementing infrastructure projects under the Ministry.  

A review of budget data by Nation Newsplex indicates that in the current Financial Year the National Youth Service, which is under the State Department for Planning, received Sh25 billion, an increase of 117 per cent over the Sh11.5 billion it was allocated in 2014/2015.  

This amount was way more than the biggest single allocations, or vote heads, within the Interior Department that went to Sub County Administration Police Services and Divisional Police Services, at Sh13.8 billion and Sh13.3 billion respectively.