Treasury seeking to write off billions in water sector loans, in sweeping debt reforms

Treasury is planning to introduce a new debt monitoring and tracking system in fresh crackdown on state corporations that have defaulted on billions of shillings in government-backed loans.

This is after it emerged that state corporations have been receiving loans on lent by the government for development and either poorly implementing the projects or failing to honour back repayments.

This, according to the Treasury Annual Monetary Report, has seen the on-lent loans hit over Sh1 trillion, comprising Sh874.91 donor donor-funded financing and Sh322billion issued by the National government.

Treasury Cabinet Secretary John Mbadi said through the new Government Investment Management System (GIMS), the state will be able to see real-time tracking of all loans advanced to corporations, including disbursements, repayments and project implementation.

“The system will enhance accessibility to real-time information on loan disbursements and repayments, ensuring transparency and accountability in the management of public funds,” Mbadi told the Parliamentary committee on Public Debt and Privatisation.

The plan comes amid growing concern over rising loan defaults among state corporations, especially in the water, transport and energy sectors.

An audit by the Office of the Auditor-General recently revealed that dozens of parastatals have either stalled in project implementation or failed to remit repayments for on-lent loans from the National Treasury.

According to Mbadi, the new monitoring system will also feed into a broader fiscal risk framework under the Fiscal Risk Committee, which has been tasked with vetting all future loans to ensure that only financially viable projects are approved.

This is aimed at curbing reckless borrowing and preventing the recurrence of stalled or incomplete projects financed through external loans.

Government data shows that some of the worst-hit agencies include water sector parastatals such as the National Water Harvesting and Storage Authority (NWHSA) and regional Water Works Development Agencies, which have struggled to generate revenue after devolution stripped them of direct billing powers.

In a bid to clean up the debt portfolio, Mbadi disclosed that the Treasury has submitted a Cabinet memo seeking approval to write off billions owed by water sector agencies that have no independent revenue streams.

“To resolve the issue, the outstanding loans are being considered for write-off through a Cabinet Memorandum that has been submitted to Cabinet for approval. Lack of last-mile connectivity under the Victoria South Water Works Development Agency.”

The Auditor-General’s report had flagged several stalled or disputed projects tied to billions in concessional loans, including the Mandera Water Supply Project and the Changamwe Seawater Project, both bogged down in protracted arbitration cases.

The Treasury confirmed that some of these projects, financed through international loans, remain frozen as agencies battle contractors in court, delaying service delivery and loan repayment schedules.

"A contractual dispute has stalled the Changamwe seawater project. After delays, the agency moved to terminate the contract, but a court order and ongoing arbitration have frozen progress, locking the site and funds until a resolution is reached," added the CS.

Other than the water sector utility companies, the treasury also came under sharp scrutiny from Members of parliament over the lack of clear regulations governing on-lending to state-owned enterprises.

Lamu West member of parliament Stanley Muthama, sought to know why the treasury approved a loan that has seen Kenya Electricity Transmission Company (Ketraco), struggle pay and are now facing penalties of about Sh180 billion.

“A utility transmission company in Ketraco, has an accumulation of penalties amounting to about Sh180 billion. My question is, what are the contractual terms of repayment of this loan that was extended to Ketraco? And in addition to paying the loan, how are they going to pay about Sh180 billion in penalties?” asked Muthama.

Mbadi admitted that there had been “an oversight” in monitoring Kentraco’s loan obligations, adding that the ministry would issue a comprehensive statement on the matter.

“They are not servicing their on-lent loan. It is quite significant and we will address it comprehensively,” Mbadi told MPs.

The committee questioned why the Treasury has continued issuing on-lent loans where the government borrows externally and relends to parastatals, despite widespread defaults and missing accountability records.

Lawmakers cited major discrepancies between Treasury’s and Auditor General’s figures on outstanding loans, with Treasury reporting Sh1.19 trillion while the Auditor’s report shows Sh875 billion, a difference of Sh322 billion.

Mbadi explained that the higher figure includes direct government obligations (GOP), not just on-lent loans, but acknowledged that poor data coordination between departments had worsened oversight challenges.

Nyaribari Masaba MP Daniel Manduku, pressed the CS over the lack of regulations governing the on-lending framework under Section 57 of the Public Finance Management Act, 2012, a legal gap that has persisted for 13 years.

“We still don’t have regulations for on-lent loans, but I agree that the delay is inordinate. We’ll ensure this does not drag to 15 or 20 years,” Mbadi conceded.