How your tax billions are wasted by State

As the battle rages in court over the legality of a retinue of new taxes imposed in the Finance Act 2023, the spotlight is now on how billions of shillings of taxpayers’ money are wasted annually.

The Act, which was assented to by President William Ruto last week, was poised to take effect on July 1 but Justice Mugure Thande last Friday temporarily suspended its implementation pending hearing of the suit filed by Busia Senator Okiya Omtatah.

With the additional tax measures, the Ruto administration seeks to raise an additional Sh289 billion to finance a record Sh3.68 trillion budget for this year.

These tax measures include doubling of value added tax (VAT) on fuel to 16 per cent from 8 per cent, and a mandatory 1.5 per cent housing tax to be deducted from the monthly pay of all workers.

Despite the squeeze on taxpayers, the government still wastes billions of shillings annually.

Also Read: How CAS ruling scuttles Ruto’s 2027 strategy

Here are ways taxpayers’ money is flushed down the drain or ends up lining the pockets of a few.

Commitment fees

The Kenyan government has been shouldering billions in commitment fees paid on undisbursed loans, which is significant money which can be redirected to key projects.

Commitment fees are charged on borrowers for credit that has not been advanced and is a way of guaranteeing that a lender will keep the funds.

The fee is charged because the lender has set aside funds for the loan but cannot yet charge interest pending drawdown.

In the first half of the FY 2022/23 alone, the Treasury paid Sh680 million as commitment fees, according to a recent report by Controller of Budget (CoB) Dr Margaret Nyakang’o.

The Treasury also spent Sh1.4 billion on undisbursed loans in FY 2021/22.

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“Had the implementing agencies put in place proper mechanisms to enable absorption of the committed credit within the agreed timeframe, the payment of commitment fees would have been minimized,” said Auditor-General Nancy Gathungu.

State-guaranteed non-performing loans

Taxpayers risk losing Sh218.8 billion in loans that were borrowed by State-owned companies which defaulted on payment. The loans were guaranteed by the government and are therefore payable by the State.

The National Assembly’s Public Debt and Privatization Committee has warned that the State risks legal suits that could hit taxpayers even more in legal costs.

“There are dormant/non-performing loans where recipients have defaulted on the repayment obligation. This exposes the government to risks of legal suits,” said the Committee in its latest report.

In the FY 2021/22, Kenya defaulted on servicing three loans totaling Sh11.039 billion advanced by an international commercial bank towards the construction of Arrror Dam, Itare Dam and Kimwarer Dam.

“Default on debt repayment exposes the government to risks of legal suits that may lead to punitive penalties and subsequent loss of public resources,” warned Ms Gathungu.

The stage for default of the loans was set in September 2019 when then President Uhuru Kenyatta halted construction of the two dams - initially budgeted at Sh63 billion - citing corruption.

Funds were to be raised through complex loans from privately-owned lenders facilitated by the Italian government.

By the time of cancellation of the contracts, Kenya had controversially paid Sh14 billion to Italian insurance firm, SACE Gruppo CDP, to insure against default of the loans, money that was simply lost following the stalemate.

Consequently, three Italian contractors – Cooperativa Muratori & Cementisti - CMC Di Ravenna Societa Cooperativa (Italy), Itinera S.P.A and CMC Di Ravenna- Itinera JV S.C.P.A – sued Kenya at the International Court of Arbitration seeking compensation for the contract cancellations.

In documents filed at The Hague-based court, the three Italian firms claimed they were collateral damage in President Kenyatta’s political war against his deputy, William Ruto.

“Claimants find confirmation that they fell victim of a political struggle for power between the President, Mr Uhuru Kenyatta, and his Deputy President, Mr William Ruto, the latter being a vocal supporter of the projects,” the court papers stated.

But in a Kenyan court where a corruption trial opened against sacked government officials including former Treasury Cabinet Secretary Henry Rotich, State prosecutors said “we will demonstrate how the procurement of the construction of the two dams plus procurement of commercial loans at very high interest rates and what is known as the SACE insurance policy by the Ministry of Finance was contrary to the law.”

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“We will prove to this court how the accused persons actually borrowed more money than was needed for the two projects. How they unlawfully inflated the contract amounts. How they agreed to pay a higher exchange rate and as a result lost billions just from the exchange rates applied,” special prosecutor Talib Ali Taib told the court in November 2021.

“That the evidence available leaves no doubt that the applicant CS Finance with the intention of plundering taxpayer’s funds, abused his fiduciary and legal responsibilities leading to loss of over Sh21 billion to date and counting,” Mr Taib added. The case is ongoing.

However, after winning last year’s presidential elections, President Ruto in March, this year, following talks in Nairobi with Italian leader Sergio Mattarella, announced his government will renegotiate with the Italians to revive the multibillion-shilling projects.

Abandoned big-money projects

Nairobi Governor Johnson Sakaja last week caused waves when he announced that he would do away with the Green Park Terminus that cost taxpayers some Sh250 million.

Mr Sakaja said the terminus would be flattened to pave way for a conference centre.

The move underlines the wastage of millions and sometimes billions of shillings when a new government comes into office with new priorities of its own.

Another major wastage on projects comes from houses built for government officials at huge sums of money but which are rarely, if ever, occupied.

For instance, recent revelations have disclosed that the Judiciary is seeking to sell the official residence of the Chief Justice in Runda, Nairobi for Sh310 million. The residence has remained unoccupied for 10 years.

Taxpayers also lost an estimated Sh15 billion from retired President Uhuru Kenyatta’s rollout of Huduma Namba.

Dr Ruto has pledged to implement a new digital identification system within the next 90 days, which will also see taxpayers pay billions of shillings.

“In the next 90 days, we must have a Digital ID. That digital ID has been traumatic for Kenya. We are all aware that there was another phantom project called Huduma Namba that was a complete fraud. We lost almost 15 billion shillings and got very little out of it,” he said.

Ghost workers

Ghost workers have nearly become legend in Kenya especially after the promulgation of the new Constitution that gave birth to 47 counties.

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Since devolution, rogue county officials have fleeced taxpayers billions of shillings through fictitious employees.

Several audit reports reveal that corrupt county officials have stolen more than Sh35 billion paid monthly to thousands of fake workers.

Counties have been exploiting manual payroll systems to steal from county coffers despite the State recommendation to use the Integrated Personnel and Payroll Database (IPPD) system.

Unsupported expenditures

The Auditor-General has time and again raised questions about billions of shillings spent by government ministries, departments and agencies without attaching evidence of how the funds were spent.

In the FY 2021/22, unsupported expenditure stood at Sh5.8 billion. The money was spent on items such as travel, consultancy, emergency relief, purchase of items and printing among others.

Non-essential spending

Within two weeks of ascending to power, Dr Ruto announced a budget cut of Sh300 billion targeting non-essential expenditures such as travel, hospitality, accommodation, printing and airtime.

Also Read: Shame of wasted taxpayers' billions spent on houses

He said the country was digging itself into a debt hole to finance such expenditures.

While the budget cut failed to materialize, the figures mentioned by the President signal the amount of money that can be saved should the government tighten its belt.

This wasteful spending was recently acknowledged by Dr David Ndii, who serves as the economic advisor to President Ruto.

Questionable renovations

Nation recently reported on annual budgetary allocations for renovations in government buildings that do not seem to ever be concluded.

For instance, the Treasury will splash in excess of Sh1.2 billion to refurbish Bima House and Herufi House. An analysis of allocations to the Treasury over the past financial years shows annual allocations running into millions of shillings towards water reticulation works and installation of CCTV cameras at the two buildings that host the Treasury.

Lavish personal perks amid meagre development allocations

Out of a total expenditure of Sh239.67 billion by county governments in the first nine months of the FY 2022/23, the bulk — Sh209.95 billion was spent on recurrent budget — salaries and allowances — with only a meagre Sh29.73 billion dedicated to development expenditure.

The report by Controller of Budget Margaret Nyakang’o for July 2022 to March 2023 criticiaed the low expenditure on development programmes by counties and high level of pending bills which stood at Sh159.73 million as of March 31st 2023.

“Analysis of development expenditure as a proportion of approved annual development budget shows that there was no county government which attained an absorption rate above 50 per cent,” states the report released in May, this year.

The report indicts 11 counties that reported below 10 per cent absorption of development budget, namely Tana River, Machakos, Kericho, Vihiga, Meru, Trans Nzoia, Kilifi, Makueni, Migori, Embu, and Kisii.”

For the national government, the total expenditure towards salaries, allowances, and miscellaneous services in the first nine months of FY 2022/23 was Sh2.55 billion, representing 55 per cent of the annual estimates, compared to Sh2.27 billion (51.4 per cent) recorded in a similar period in the FY 2021/22.

The national government, too, has routinely violated the law by spending below the statutory development limit as exposed in the latest report of the auditor general following scrutiny of the Sh3.3 trillion budget for 2021/2022.

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