Two power utility firms owe a development authority billions of shillings arising from breach of a deal reached in the 1980s.
Public Investments Committee, in its audited financial statements of state corporations, notes that Kenya Power and KenGen owe Tana and Athi River Development Authority (Tarda) Sh9 billion.
The debt is the primary reason for the authority’s poor financial health, the committee said.
The two firms took over the management of Kiambere and Masinga dams in the 1980s under agreements that Tarda says have not been honoured.
“The committee recommends that the ministry of Energy, the Treasury, Kenya Power, KenGen, Inspectorate of state corporations, Attorney-General’s office and Tarda’s parent ministry work together to reach an amicable solution on the matter,” the team said.
The committee observed that non-remittance of the charges to Tarda, which was occasioned by a government directive that all revenue from hydro-electric power generation be wired to the Treasury, needs to be addressed by the relevant parties.
A Cabinet directive spelling out how revenue generated by Kenya Power was to be released to Tarda was disregarded over the years, the committee heard. Tarda would have received Sh4.26 billion from Kenya Power between 1988 and 2000 had the deal been honoured.
KenGen took over assets in 2000 without proper compensation, and only Sh293 million was given to Tarda, leaving a net amount of Sh3.97 billion unpaid.
“The committee noted that the state of Tarda’s insolvency as captured by auditors would not have occurred had Kenya Power paid this authority the claim, which has accumulated to Sh3.97 billion in line with the commercial agreements or Sh3.1 billion if the authority were to receive the funds in accordance with the 1988 agreement,” the committee said.
Failure to pay the charges had seen Tarda suffer Sh10 billion loss due to annual depreciation of Sh367,984,972 on Masinga and Kiambere hydro-electric plants. KenGen would have remitted Sh4.09 billion and Kenya Power Sh4.9 billion.
“The authority’s current liabilities of Sh395,034,899 exceeded the current assets of Sh264,825,043 as at June 2012 resulting in negative working capital of Sh130,209,856,” the House team noted.
The row over payment of the charges to Tarda has been going on for several years.
Suspended Cabinet secretary for Energy, Mr Davis Chirchir, in 2013 pleaded with the House team for more time to sort out the matter by March 2014. Tarda said it was unable to undertake projects for the communities in the areas it operates as required of it due to lack of money.
Last year, the Public Investments Committee summoned Tarda bosses to explain why the entity should not be wound up.
Kenya Power and KenGen entered into agreements with Tarda in 1978 and 1988 that bound them to pay certain rates to the authority for the takeover and use of reservoirs.
Tarda managing director, Mr Steven Githaiga, told MPs that the authority developed Masinga and Kiambere reservoirs as part of its role of establishing integrated management of water resources for the development of communities in the catchment areas.
However, the reservoirs were handed over to KenGen and Kenya Power without compensation.
As a result, Tarda lost the generating and transmission assets amounting to Sh12.8 billion and other assets worth Sh520 million.
The two utility firms also took over Tarda’s 193 rental houses, canteens, and halls, causing loss of revenue amounting to Sh780,000 a month. The amount had accumulated to Sh225 million by the end of 2012.
An audit by the World Bank in June 1995, seen by Smart Company, says the two firms ignored the advice of the Cabinet and the Treasury to honour the agreements.
“Tarda has been insolvent since KPLC stopped honouring the lease agreement (1988) and its audited accounts have been qualified,” the report says. The Kenya Power was formerly called the Kenya Power and Lighting Company (KPLC).
“Had the Cabinet directive of 1988 and subsequent advice by the Treasury been adhered to on the equivalent receipts, Tarda would have received Sh4.2 billion from Kenya Power and Sh4.8 billion from KenGen, and the Treasury between 1988 and 2000.”
Tarda’s financial position weakened, as it received an average of Sh200 million from the Exchequer every year, hence restricting its ability to raise adequate revenue to enable it to offer services.
A letter by the permanent secretary dated July 10, 1989 said Tarda was able to finance its recurrent budget and fund a number of its projects from tariff agreements and, therefore, did not rely on the government.
“Immediately Kenya Power disregarded the lease and government agreements in 1988 and eventual transfer of the power generating assets in 2000, the finance base and solvency of the authority was incapacitated,” Mr Githaiga said.
The matter went to court, but Tarda was prevailed upon by the Ministry of Energy to withdraw the case in favour of an out-of-court settlement.
An Inter-ministerial Sectoral Group recommended KenGen to pay Sh420million every year to Tarda for loss of its assets but this has not happened.
In its submissions to PIC in 2013 however, Kenya Power had argued that it was directed by the government to pay the Kiambere power station loans directly to Treasury to avoid escalation of power tariffs and the government would in turn meet the financial needs of Tarda. The World Bank report notes that KPLC was allowed to increase tariffs which was to accommodate meeting its obligations to Tarda, but this was not done.
“Further Tarda, Kerio Valley Development Authority and KenGen were fully owned by the government.
The government transferred to Kengen the interest, titles and liabilities of the two bodies including generating assets, land and building upon which Masinga, Kiambere and Turkwel hydroelectric power stations are situated.
“The dams at Masinga and Kiambeere were not transferred and remained under Tarda. The water reservoir remains the property of the ministry of water resources,” a letter presented to PIC prepared by officials in the energy sector that included the Cabinet secretary Mr Chirchir said.
They argued that the contractual loans towards building of power stations were fully serviced by Kengen.
“As KenGen took more assets than liabilities from Tarda and KVDA, the excess of Sh10 billion was converted to equity in favour of the government in KenGen.” the letter said.
Tarda has asked the PIC to enforce the payment by the two power utility firms as recommended at various times by the parliament, World Bank, office of the president and the Treasury to enable them return to financial stability.