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The government has defaulted servicing loans amounting to Sh11 billion that were procured for the construction of three dams.

Auditor-General Nancy Gathungu, in a report for the 2021/22 financial year, faulted the National Treasury for failing to honour its financial obligations despite taking loans from an International Commercial Bank towards the construction of Arror, Kimwarer and Itare dams whose total costs stand at Sh63 billion.

Gathungu says the government procured a loan of Sh2.9 billion for Arror Dam, Sh5.3 billion for Itare and Sh2.82 billion for Kimwarer.

Reads the report: “Review of records held by The National Treasury’s Commonwealth Secretariat Debt Recording and Management System as at 30 June, 2022 revealed that the Government had defaulted on servicing an amount of Sh11,039,138,761 in respect of three (3) loans advanced by an International Commercial Bank towards the construction of three (3) dams.”

In the report, Gathungu says the credit agreements for the loans were not provided for audit review to confirm the terms of the loans and if the termination of the credit was conducted in accordance with the provisions in the agreements.

Legal suits

She points out that the management only indicated that the lender had cancelled the remaining balance and the credit agreements for the three dams were in the custody of the Directorate of Criminal Investigation (DCI) as the matter was in court.

“The default on debt repayment exposes the Government to risks of legal suits that may lead to punitive penalties and subsequent loss of public resources,” the report says.

Last month, President William Ruto announced the resumption of the three projects following talks with Italian President Sergio Mattarela who was in the country for a four-day visit.

Ruto announced that the governments of Kenya and Italy had agreed to withdraw the arbitration cases on the three dams.

He explained that Kenya and Italy had agreed on a framework to settle all the outstanding court cases and matters surrounding the projects.

“I’m proud to announce that the three dams which were subjected to court cases and court matters, we should be able to go on with the construction of these three dams in a few months,” said Ruto.

A technical team that had been appointed by then President Uhuru Kenyatta in 2019 cancelled the Sh22.2 billion Kimwarer dam on grounds that it was overpriced and was not technically or financially viable but it approved the Sh28.3 billion Arror dam in Marakwet East sub-county.

The cancellation of the project saw Former Cabinet Secretary Henry Rotich and former Kerio Valley Development Authority (KVDA) managing director David Kimosop charged in court for corruption.

Rotich is accused of aiding a Sh11 billion irregular offshore payment to an Italian insurance firm to finance the two dams.

 In court filings, the Director of Public Prosecutions (DPP) accuses Rotich of facilitating direct payment of the amount to Italy’s SACE Insurance contrary to the law, which requires that all payments are processed through the consolidated account in Kenya.

Debt burden

In 2019, then Deputy President Ruto claimed “only Sh7 billion” was lost in the controversial projects, not the Sh21 billion in question.

Meanwhile Gathungu has revealed that the country’s external debt rose from Sh3.8 trillion to Sh4 trillion representing 8.37 per cent increase, while internal debt rose from Sh3.6 trillion to Sh4.2 trillion, representing 14.62 per cent.

The interest on internal debt for the financial year ended June 30, 2022 stood at 76 per cent to that of external debt, which stood at 24 per cent of the total finance costs, including loan interest, she says.

 “In the circumstances, the high domestic borrowings may have a negative impact on the country’s interest rates, inflation rates and may lead to crowding out of private investors due to reduced loanable funds in the market,” adds the report.