Fresh audit report reveals Attorney General’s legal advice on loans was ignored

A report by the Auditor General has revealed that the National Treasury may not have the capacity to process the procurement of external loans effectively.

At a time that the country is reeling under the burden of more than Ksh.5 trillion in external public debt, the auditor’s report shows that the government may have ignored advice from the Attorney General on several occasions, while also signing up for loans way before concepts of the intended projects were developed. 

The report dated October 2023 covering three financial years between 2019 and 2022 shows up to Ksh.5.3 billion of commitment fees were incurred on loans that had not been disbursed, meaning the country incurred expenditure that could have been avoided had the right procedure been followed.

The report shows that there were delays in the commencement of projects, delayed drawings and even stalled projects reported, all pointing to inadequacies of the government.

The auditor found that the process of procuring loans was flawed and that approvals were secured without proper planning and preparedness.

It shows that, out of six sampled projects, there had been no public participation conducted before identification and even approval of the projects.

It also states that financiers approached ministries directly, most way before projects were conceptualized. Financiers or would-be creditors identified target projects based on strategic plans of ministries.

Ordinarily, once a project has been identified, a feasibility study is done and the costing estimated, then the government seeks the financing after analysing various options.

The Auditor General however identified gaps in how the National Treasury compared credit terms. In most of the loans, there was only one creditor identified without considering other potential creditors for the purpose of comparing credit terms and conditions.

The auditor found that in some of the instances, comparative analysis of creditors was limited as a creditor would have been identified by the time of a project proposal submission, saying in some of the cases, the potential creditor had financed the feasibility study.

The report went ahead to establish that contracted loans may not have been the most cost-effective in the market.

The auditor identified gaps in the evaluation of credit terms including currency, penalty fees, and other charges on the loans.

That disbursement and maturity profiles and their impact on existing debt service profiles were not performed. The report shows that the National Treasury’s debt, policy, strategy and risk management office is inadequate in necessary staff and skills.

Further, in four out of six sampled loans, the legal advice of the Attorney General was not followed.

As a result, some of the projects stalled for failing to adhere to the pre-conditions for loans. They include the Kenol-Sagana-Marua Highway, and the Bagamoyo-Horohoro-Lunga Lunga-Malindi road projects.

The report comes at a time when the President has picked a task force to conduct a forensic audit of the public debt. 

The Auditor General indicates that the public debt management office at the National Treasury did not monitor project implementation, partly for lack of capacity and that it relies on implementing agencies, meaning there could be material facts that only the Treasury could pick.

According to the Central Bank of Kenya, Kenya’s public debt stood at Ksh.10.3 trillion in March 2024. Of that, Ksh.5.16 trillion is foreign debt, both bilateral and multilateral.