Eurobond billions: The anatomy of a grand heist

Someone is blatantly cooking up figures. Some project expenditures have been wildly inflated.

Friday January 15 2016

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Let us start with what we know. The government raised $2 billion (Sh176 billion) from the first issue of the Eurobond in the last week of June 2014.

It reopened the bond issue and raised another $815 million (Sh74 billion) in “tap sales”, bringing the total to $2.8 billion (Sh250 billion).

On July 3, 2014, the government paid off a loan of $604 billion (Sh53 billion) from the offshore account at which the $2 billion was credited.

On the same day, it transferred $394 million (Sh35 billion). The two transactions add up to exactly $1 billion, which left $998 million in that account.

Of the Sh35 billion transferred to the Exchequer, Sh25 billion is reflected as having been spent in the 2013/2014 financial year.

In effect, of the Sh251 billion raised, the government spent Sh53 billion and Sh25 billion that paid pending bills, a total of Sh78 billion.

This leaves Sh176 billion that was available to be spent on development projects in the 2014/2015 financial year.

The National Treasury has maintained that all this money was disbursed to state departments and spent on development during the financial year.

But the government has failed to corroborate this contention with credible evidence. Instead, it has lied and contradicted itself at every turn.

The bone of contention here is how much the government borrowed domestically.

Some accounts of government show that it borrowed Sh251 billion and others show Sh110 billion.

The difference between the two figures is Sh140 billion Eurobond proceeds reflected as having been carried over from the previous financial year, which is, in turn, the balance of Sh176 billion proceeds raised less the Sh35 billion transferred to the Exchequer, which the Treasury posts in the accounts of the previous financial year.

As noted already, the Treasury shows that it spent Sh25 billion on pending bills, so they should have carried over Sh150 billion.


The Sh10 billion difference between what they transferred and what they claim to have spent disappears from the books and there has been no further mention of it from the Treasury.

In a statement to the media, the Treasury sought to demonstrate that this Sh140 billion is reflected in government bank deposits that, when offset against its gross domestic borrowing, results in a net domestic borrowing of Sh110 billion.

This account lacks financial corroboration.

What I mean by this is that if you give me an income and expenditure account and your bank statements for last month, I should be able to see some correspondence. There is none here.

The government’s bank statements could not have reflected Sh140 billion of Eurobond proceeds at the end of June 2014 as it claims in its statement, since, at the time, all the Sh176 billion equivalent was sitting in the offshore account.

In fact, the Central Bank’s account of government domestic financing operations shows that the government had only Sh9.9 billion deposits with the Central Bank, meaning that the Central Bank did not reflect the offshore account as government domestic deposits, even though it is reflected in the country’s foreign reserves.

In a previous column, I pointed out that the Sh110 billion domestic borrowing figure is contradicted by an increase of domestic interest costs from Sh119 billion to Sh139 billion.

It does not make sense for the interest expenses to increase when its borrowing has declined from Sh200 billion to Sh110 billion.

Earlier in the week, the Treasury, for whatever reason, tweeted a statement, confirming that, indeed, its domestic interest cost increased to Sh139 billion, which is, in effect, an admission that its domestic borrowing was higher — and it stands to reason that Sh251 billion is the correct figure.

The import of this admission is that the budget for the 2014/2015 financial year was fully financed without the Sh140 billion proceeds the Treasury reflects as carried over from the previous year, and there is, of course, the Sh10 billion missing, making Sh150 billion the government cannot account for.

The government has also tried to suggest that Sh120 billion was used to pay pending bills owed to road contractors.

This figure was first mentioned by Treasury Cabinet Secretary Henry Rotich in a media interview.

Deputy President William Ruto repeated it in an interview on Citizen TV.

The Deputy President went on to elaborate that the money was spent on budget support, including sanitary towels, the National Hospital Insurance Fund and I don’t know what else.

The mention of budget support has given comfort to some that the crime we are dealing with here is that of financing recurrent expenditure with foreign loans. The comfort is false.

The recurrent budget for the 2014/2015 financial year was more or less fully financed from domestic revenue.

Specifically, the government raised Sh1.106 trillion in revenue, of which county governments received Sh229 billion and the national government Sh877 billion.

The national government’s recurrent expenditure was Sh897 billion, only Sh20 billion more than the revenue.

In its first public statement on the matter, the Treasury promised to provide data on the projects the money funded and went ahead to give state departments three weeks to submit information on how they had spent the Eurobond proceeds.

Five weeks later, in an interview with the Business Daily, the CS threw in the towel, stating that “The ministries cannot differentiate whether the money they have received from the Exchequer came from VAT, income taxes, Customs duties, excise taxes, domestic borrowing or the Eurobond.” This is a true irrelevant lie.

Development projects are funded primarily from three sources — money raised and retained by state agencies, referred to as local appropriations-in-aid, external project loans or grants and “budget” funding.

Budget funding may come from revenue, domestic borrowing or external programme loans and grants, that is, money the government has borrowed or been given that is not earmarked for a specific project. This latter category is the money referred to as “budget support”.

To illustrate the point, a new courthouse can be funded partly by aid money given or borrowed specifically for courthouses, partly by the Judiciary itself from fines, and partly by disbursements from the Budget.

If Sh10 million has been spent (and paid) on the courthouse in a particular year, the donor released Sh5 million, and the Treasury disbursed Sh3 million, it follows that the balance of Sh2 million is A-in-A.

It is true that the Judiciary will not know how the Sh3 million disbursed by the Treasury was raised, but this is not the issue.

A breakdown of project funding at this level is sufficient to demonstrate where the Eurobond money went.

In an interview with the People Daily newspaper published on December 8, Treasury Principal Secretary Kamau Thugge stated that the government released Sh270.3 billion for development expenditure in the year, of which sovereign bond accounted for Sh171 billion, Sh36 billion was financed by aid donors and the balance of Sh63 billion was financed with the government’s own resources.

The same PS has signed off statutory reports submitted to Parliament, showing that aid donors disbursed Sh98 billion in loans and Sh27 billion in grants (excluding the Standard Gauge Railway).

The accommodation of the Eurobond has now shifted from domestic borrowing to external financing.

True or false, the breakdown given by the PS has to come from somewhere. The Treasury does have detailed project information.

This data shows that the government’s budget for 47 priority national development projects in 2014/2015 was in the order of the figure cited by the PS, Sh270.9 billion to be precise.

But of this, Sh157 billion was for the SGR, meaning that the budget for all other national projects was Sh114 billion.

Of this, projects fully financed by the government total Sh14 billion, the other Sh100 billion is in donor-financed projects, in which the government contributes a small fraction, typically less than 20 per cent.

This means the total government outlay for these projects would have been no more than Sh35 billion.

The data I have seen included entries for the expenditure on these projects up to December 2014.

These entries are very interesting. Leaving out the SGR, the entries show that the government had spent a total of Sh224.6 billion on projects whose budget was Sh114 billion, an overspend of Sh110 billion.

Quite apart from the fact that it would be criminal to overspend to this extent without parliamentary approval, it is implausible that the government could spend close to double the budget on these projects halfway through the financial year. What is going on here?

It is quite simple — someone is blatantly cooking up figures.

Some project expenditures have been wildly inflated.

The standout figures are in the energy sector where nine projects with a budget of Sh50 billion are shown to have spent Sh117 billion, an “overspend” of Sh67 billion.

The rural electrification of primary schools, for instance, which had a budget of Sh9.9 billion, is shown as having spent Sh34 billion, more than three times its budget.

The single largest item, however, is a Sh62.8 billion shown as having been spent on “military modernisation”, which did not have any budget allocated for the year.

What is the cookery in aid of? We can guess with a fair amount of confidence that it has to do with accounting for the Eurobond.

But these are not the only inflated expenditures. In the energy portfolio, the projects that are not inflated over budget are shown as having exhausted the budget.

There could be others where the padding is kept within budget, making for an uncanny resemblance with the Sh140 billion the Treasury has been trying to cook into the Budget one way or another.

We are left to contemplate the following question: How high up does this fraud go?

Is it possible for the mandarins to do this all on their own?

The inflated figures are in six state departments, two of them, Agriculture and Energy.

The URP departments account for Sh68 billion, and the TNA ones for Sh70 billion. Not 50-50 but close. Coincidence?

The answer is blowing in the wind.

David Ndii is Managing Director of Africa Economics. [email protected]