Why Kenyans can’t afford the painful KQ debt experience

A Kenya Airways plane at the Jomo Kenyatta International Airport. PHOTO | FILE 

By DENNIS KABAARA

Posted  Thursday, January 21   2016 at  14:26

The name is Bond…Eurobond.  It seems we just can’t get away from this debate.  As far as I can tell, the Treasury has issued five press statements with little success in eliminating the air of confusion around the transaction.

The Sunday Nation edition of January 17 aptly captured this confusion. The newspaper reported that Treasury secretary had confidently stated that Kenya would return to the international financial market to raise more Eurobond-type funds (Sukkuk and Samurai bonds) because “we can’t have our cake and eat it”  - techno-speak for “if we want to grow, we need to spend, and since we don’t have oil, we simply have to borrow.”

In the same paper, economist David Ndii continued his coruscating analysis of what really happened to the Eurobond, focusing this time on implications for Kenya.  

And then towards the end of the paper, the Treasury carried its latest (that is, fifth) double-spread explanation of what really happened.

The trouble with the Treasury’s explanations is that each one has been different from the previous one.

First, we issued the Eurobond to fund priority infrastructure projects as well as general budget support. Now, we issued it to boost forex reserves, hold down interest rates and inflation, and to shore up the shilling (which is the Treasury’s normal work, anyway).  The problem is that first, we had a list of projects, now, we don’t, and can’t produce one.

Then we learnt that the Treasury, with all of its wonderful cash flow forecasting, transferred Sh25 billion from the sovereign bond account to the national exchequer account on September 15, 2014 before transferring a similar amount four days later. 

The question is what happened that week. We could go on and on.

If indeed the funds were properly received and disbursed, why is it that the original listed Ministries, Departments and Agencies (MDAs) funded by Eurobond cash are the self-same MDAs that account for 75 per cent of total development pending bills at the end of 2014/15?

It would have been so much easier – even politically – had the Treasury first identified projects that were (wholly, or partly) financed by the Eurobond, leaving observers, pundits and commentators to then seek different sorts of truths (like whether the projects exist and what their state of completion is).

That this was not the approach used explains the focus on accounting ( how much money came to Kenya and how it was used), and accountability (suspicions around money laundering and outright theft).

It will come as no surprise if the Treasury’s reluctant transparency leads us into deeper and more frightening questions as to who the actual bond holders are and who is benefiting from its current rising yield.

And now we’re going for more borrowing! This Jubilee administration can’t help itself. This week, CNN ran a piece titled: “Kenya’s Mega-Projects:  What can $50 billion (Sh5.1 trillion) do for an economy?” 

Many viewers must have asked where the number $50 billion come from.

Well, the Treasury’s own mega-project estimates total Sh5.7 trillion. As a comparison, Kenya’s gross domestic produce – at market prices – totalled Sh5.3 trillion in 2014. These are not the only mega-estimates. 

The 2013-2018 Medium-Term Plan that meshes the Jubilee manifesto into Vision 2030 has a total investment requirement of Sh8.6 trillion, according to the World Bank’s own calculations as reflected in their 2014 Kenya Public Expenditure Review (PER). 

So we have a Eurobond that still raises serious transparency and accountability questions around the flow of funds, economic policy objectives and transactional detail, including what the money actually bought. 

We proceed with mega-investment, despite the PER noting that the (total factor) productivity element in Kenya’s growth composition (effectively, return on investment) has turned negative and our R-coefficient (a measure of the provisions we make for future operations and maintenance for completed investment projects) is falling.

It further observes that our current infrastructure spending could be halved through efficiency gains. To painfully illustrate, we plan to build 8,000 kilometres (km) of new roads at a cost – assuming Sh30 million per km (international benchmarks suggest a road shouldn’t cost more than Sh2-5 million per km) – of Sh240 billion, yet last week the Kenya Roads Board reportedly stated that we have a road maintenance backlog of almost Sh400 billion.

If, as the PER observes, 70 per cent of Kenya’s domestic tax take (effectively, 50 per cent of Kenya’s total tax collections) is drawn from a little over 1,000 large taxpayers (corporations), then mega-investment can only be financed by mega-borrowing (back to the Treasury’s “eating cake” argument).

Which brings us back to that CNN advert.  Global capital and financial markets will have followed the Eurobond saga with much interest – this will raise the premium on Kenya’s future external borrowing.

They will have looked at that $50 billion number – and added a further premium to the premium. 

Then they will factor in Kenya’s current and projected debt service, including the standard gauge railway, and multiply the premium by a super-premium.

Effectively, we will be issuing a “junk bond”. Why does this picture look familiar? Forget Greece, and remember Kenya Airways (KQ).

When we strip out the details, Project Mawingu was all about mega-buying - many more planes to fly many more routes absent of a realistic demand assessment and predicated on generous equity and debt financing. 

Yes, Ebola and terrorism happened, but so did over-pricing, poor customer service and consistent operational inefficiency.  

The result was record losses, culminating in a negative equity balance sheet for a technically insolvent airline that is today struggling to meet its daily running costs.

In management-speak, we call this a “negative balanced scorecard” – customer apathy, process failure and human resource management malfunction, balanced by management hubris and negative financials.

In finance-speak, KQ’s failure has been about inattention to the balance sheet, and the ways in which bottom-line results contribute to its growth or decline.

I fear this continued investment and borrowing binge at national level is taking Kenya to a Project Mawingu situation.

The debt already accumulated in the past three years has altered our national financial balance sheet – driven by faltering revenues (taxes) against fast rising recurrent and capital costs.

It’s early 2016, so we still have time to take a step back for three things.  One, let’s get a true and fair account of the Eurobond. I anxiously await the findings of the Auditor-General’s forensic audit. 

Two, let’s think very hard about the potential Project Mawingu situation we face, especially since Kenya Inc’s shareholders are the citizenry– the Kenyan balance sheet is more than just financial, as the citizens of Greece, Portugal and Ireland have discovered in the past. 

And let’s operationalise this Treasury-Planning-Office of Management and Budget “rethink and restructuring”. 

Lest we forget, KQ got rid of its strategy function - long before Project Mawingu - and their shareholders are now “reaping the whirlwind”.  Kenyans at large don’t deserve this untidy fate.

Mr Kabaara is a management consultant,dkabaara@gmail.com