Kenyan distribution utility Kenya Power is facing serious debt issues which have seen the company now seek a lender to address its cash deficit.
In 1973, the government of Kenya signed a deal with the then East African Power and Lighting Company to connect electricity to rural areas.
Under that Rural Electrification Scheme (RES), the sole power distributor was to build new electricity lines in rural areas, construct substations, erect transformers and connect electricity to rural trading centres, factories and homes.
Four decades later, the Jubilee administration launched the Last-Mile Connectivity project, in a bid to connect all Kenyans to the national power grid.
As a result, the company’s successor, Kenya Power, has increased its high and medium voltage electricity network from 41,486 kilometres in 2013 to 84,681 kilometres in 2020. The monopoly also stepped up its transformer capacity from 6,490 megavolt amperes to 13,383 megavolt amperes over the same period.
Meanwhile, the number of customers who are now connected to the national grid has risen to 7.5 million from 1.2 million eight years ago.
But to pull off these capital-intensive projects, Kenya Power borrowed billions of shillings to finance the expansion in addition to donations. However, the projects yielded meagre returns to recoup the investment.
The former Auditor-General, Edward Ouko, summed up the scheme in an audit report in 2018: “The schemes of RES are generally referred to as sub-economic because their operational and maintenance costs exceed the revenues derived from them. This is because the activities are undertaken in the rural areas where income is low.”
Financing these ambitious projects, coupled with mismanagement and operational inefficiencies at the company saw it develop more appetite for borrowing, which has eventually seen its debt balloon by more than 26 times in the last 15 years, totalling over $1 billion in June 2020 from just $38 million in 2004.
Of this, $525 million is owed to commercial banks while $494 million is on-lent debt guaranteed by the Kenyan government.
Even as Kenya Power’s debt has ballooned over the past decade and a half, the revenue from its core business, which is selling electricity, rose by only six times from $188 million in 2004 to $1.2 billion in 2020.
At the time, the company made a profit of $4.2 million. However, the utility firm’s financial performance has quickly sunk to a $8.7 million loss for the year that ended June 2020.
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To get a clear picture of how the loans are bleeding the country’s sole electricity distributor, Kenya Power has paid $315 million in interest on its loans alone between 2012 and 2019. In 2012, the interest stood at $10.2 million, rising to $12 million in 2013 and $20 million in 2014.
In 2015, the utility firm paid $42.6 million in loan interests, $53.8 million in 2016, $41 million in 2017, $56.1 million in 2018 and $65.8 million in 2019.
Meanwhile, in the six months to December 2020, Kenya Power’s finance costs, which include the interest paid on the loans, bank overdrafts and penalties for late payment of invoices hit $74.2 million, up from $35.2 million in the six months to December 2019.
But in a late bid to dig itself out of the mounting debt hole, the firm has floated an Expression of Interest (EOI) for refinancing of its commercial debt after the government granted it a one-year renewable moratorium on the repayment of its $493.5 million on-lent debt.
The company said that the projects it financed using its loans are long term and may take many years to realise returns hence the need to negotiate for longer repayment periods for the loans and seek better terms.
“The company expects to take advantage of the prevailing macro-economic situation to achieve lower interest rates compared to those under existing facilities consequently reducing its overall financing costs,” Kenya Power states in the EOI.
The company’s debt servicing has hit $185.5 million annually, with 85 per cent of the debt unhedged on a long-term basis and denominated in US dollars and Euros yet its income is in Kenya shillings, exposing it to foreign exchange risks.
“The proceeds of some of the existing bank debt was utilized to finance specific long-term projects hence the need for a rationalisation at this time,” Kenya Power said in the EOI.
“Arising from the above, expressions of Interest are therefore being invited from eligible bidders to re-finance the existing term bank debt and convert the outstanding overdraft into a term loan, and to provide a facility to enable the reduction of trade payables,” the company said.
Interested banks and other financial institutions will score 30 marks if they readily have $545 million, which is just over a third of the threshold required to take on Kenya Power’s debt, while financiers who have at least $297 million will score 15 marks.