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Treasury lends Kenya Airways Sh16bn without a repayment plan

Kenya Airways planes at the Jomo Kenyatta International Airport. FILE PHOTO | NMG

The Treasury funded Kenya Airways (KQ) to the tune of Sh16.27 billion without a loan agreement or recovery mechanism last year, the Auditor-General has revealed.

In a special audit on the Treasury’s use of public funds under Article 223 of the constitution, which allows the withdrawal of funds to use for emergency purposes that had not been factored during budget formulation, Auditor-General Nancy Gathungu faulted the Treasury for releasing the funds without an agreement and without a clear plan on how it will get back the money. The government holds a 48.9 percent stake in the national carrier.

“The shareholder loan agreement had not been signed by the Government and Kenya Airways PLC as at the time of disbursing the funds,” Ms Gathungu revealed.

The Treasury released the funds to the national carrier in two tranches of Sh6.27 billion (March 2022) and Sh10 billion (September 2022).

“In addition, the National Treasury failed in its fiduciary role by releasing public funds without an effective mechanism of recovery, while the Management of Kenya Airways PLC failed to act in good faith by not complying with the agreed covenant clauses thereto,” the Auditor-General stated.

The report further observed that it was not possible to establish whether the money received by KQ was put into the intended purpose since the airline put it in the account where it runs its other operations.

This points to the possibility that the airline could have utilised the funds in other operations that were not targeted.

“However, the amount disbursed by the National Treasury was received in Kenya Airways Operations Account on March 16, 2022 (Sh6,270,000,000) and on September 20, 2022 (Sh10,000,000,000), an indication that the company did not open a GOK loan designated account and which led to the commingling of funds by Kenya Airways PLC,” Ms Gathungu stated.

“It was therefore difficult to confirm whether the amount received from The National Treasury was actually utilised for the intended purpose since the funds were commingled and were being utilised from a common operations account,” she added.

The Treasury released the money as part of emergency spending, appropriated under Article 223 of the constitution.

KQ, in its annual report for 2022, recognised that it had received the loan from the government, indicating that it used the money to fund its “turnaround initiatives” to support its “resumption of operations following the impact of the Covid-19 pandemic.”

“This was in addition to Sh25 billion advanced in 2020 and 2021, making the total loan amount to Sh41.27 billion. The loan was to enable the airline to recover from the impact of Covid-19 and support restructuring of the airline with a view to making the business profitable and sustainable in the long term. The loan is repayable after 5 years and attracts interest at a rate of 3 percent per annum,” KQ reported.

The government is already spending billions of taxpayer money to repay other KQ loans, including one from the US Exim Bank that the Treasury guaranteed the national carrier.

In the three months to September, for instance, the Treasury spent Sh2.7 billion to repay part of the loan it guaranteed KQ to the Exim Bank of the US, the Controller of Budget reported last week. In the year ending June 2023, the Treasury spent Sh12.3 billion to service the loan it guaranteed KQ.

The government is projected to spend more than Sh61 billion to service loans it guaranteed KQ over the next four years, with Sh16 billion expected to be spent this financial year alone, documents tabled in parliament in August showed.

This is even as the airline continues to operate under tough conditions and incurring billions of shillings in losses, as it battles high costs, mainly fuel, financing costs and aircraft maintenance costs.

Last year, KQ, which has been in loss-making territory for a decade, recorded the worst loss in its history of Sh38.26 billion.

In the first half of 2023, the airline more than doubled its losses to Sh21.7 billion from Sh9.9 billion a year earlier.