The Treasury is carrying a heavy load of undisclosed debt in the form of power sector guarantees made in the past 10 years, the International Monetary Fund (IMF) has warned in its latest assessment of the shape of Kenya’s public finance.
The guarantees totalling Sh313 billion, which the IMF has flagged in its latest report on Kenya, were in support of power purchase agreements between Kenya Power and independent power producers.
“Information on active Public Private Partnership (PPP) contracts worth up to $3.4 billion (Sh343 billion) or 5.7 per cent of the GDP has not been made public or accounted for in official public finance documents, meaning that their fiscal implications are yet to be fully assessed,” the IMF report says.
Twelve power purchase agreement contracts worth $3.1 billion (Sh313 billion) signed before the PPP Act of 2013 became law carry the most significant fiscal risk for the taxpayer, the IMF says.
The extent of risks to the taxpayer from the guarantees came to the fore last month after a Virgin Islands-registered consortium Kinangop Wind Park Limited (KWP) sued the Kenyan government at the International Chamber of Commerce (ICC) for compensation after its Sh15 billion wind power project in Nyandarua collapsed.
The wind power firm blames protests by Kinangop residents for the project’s collapse and is now hoping to recover the losses from a guarantee the government promised to offer in the event the plan flopped for political reasons.
Attorney-General Githu Muigai has responded to Kinangop Wind Power’s demand with the filing of a suit in the Milimani High Court in Nairobi to stop the firm from selling 38 wind turbines it acquired for the power project pending determination of the ICC suit.
The IMF says in a report released on Tuesday that the power purchasing contracts carry a real financial risk as they “involve an obligation for a minimum demand or revenue guarantee (“take” or “pay”) supported by government letters of support”.
The guarantees cover political risks and are underwritten by partial risk guarantee instruments provided by the World Bank.
“Partial risk guarantees backstop any obligation of Kenya Power, over few months only, under letters of credit for any amount drawn by the IPPs as a result of breach of a payment obligation by KPLC (capacity payments plus contingencies), effectively adding to the government’s debt once called. Political risks include war and civil disturbance, expropriation, changes in the law, regulation, taxes and licensing arrangements.”
Government guarantees made on such contracts would ordinarily add to the country’s debt load in the event that they are called by the PPP partners.
The IMF says that although Kenya’s current debt stock of about Sh2.5 trillion is deemed sustainable the size of the PPP contracts is significant enough to warrant more and better disclosure.
Neither Treasury secretary Henry Rotich nor his budget, fiscal and economic affairs director, Geoffrey Mwau, commented on the report.
Despite its clear warning, the IMF has offered no indication that the government has had to pay up for any of the guarantees on behalf of Kenya Power between 1996 and 2013 when most of the guarantee were given.
Credit: Business Daily