Home Auditing How Kenyans lost Sh2b in avoidable interest payments

How Kenyans lost Sh2b in avoidable interest payments

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Auditor General Nancy Gathungu
Auditor General Nancy Gathungu

Taxpayers may have lost more than Sh2 billion to pay for extra debts which state agencies could have avoided if they paid contractors and suppliers on time.

An audit has revealed how the inaction of accounting officers at state agencies handling big money projects staged the losses through interest accrued on delayed payments.

Among the payments flagged by Auditor General Nancy Gathungu in her review of ministries’ books was Sh1.3 billion paid by the Crops department for delayed payment of commodities.

Gathungu says the contracts supporting the payment of the avoidable bill did not provide for payment of interest on delayed payments, pointing to irregular use of public cash.

“Although the management explained that the interest rate was awarded by the court, failure by management to honour the bills as and when they fell due is contrary to Section 68(1) of the Public Finance Management Act, 2012,” Gathungu said.

Similar cases, the auditor points out, have been noted in a number of roads and public works projects where payment certificates are acted on inordinately late.

KeNHA, Kura, and the Labour Department have been singled out in the new audit for the year to June 30, 2021, as notorious for delaying payments for completed construction works.

For Kura, the auditor flagged Sh34 million as interest on delayed payments charged by the contractor of Outering Road, a charge she says arose due to failure by Kura to settle the contractor’s dues within the timelines stipulated in the contract agreement.

“The charge has no commensurate benefit to the citizens. Interest on delayed payments is a nugatory cost which is avoidable and is not a proper charge to public resources,” Gathungu warned.

Kura also paid Sh77 million to a contractor of the Nairobi Missing Links Road, “implying that the risk of a claim for interest on delayed payments has already crystallized.”

“Failure to settle project obligations as and when they fall due may lead to additional costs in form of interest and penalties which are avoidable,” the auditor said.

KeNHA, for its part, expended Sh414.5 million in extra costs for failing to settle bills on time, the highest being Sh215 million in respect of the Kibwezi-Kitui road project.

The auditor says the payment could have been avoided since the project had enough funding at the time the contractor raised the payment claim which has birthed the extra expenses.

“The interest payments were, therefore, an irregular charge to public funds. The project is also staring at losing funds through the award of damages and interest in legal disputes with the project affected persons.”

Gathungu indicated that Sh1.6 billion was yet to be paid for land acquired for use in the construction of the highway.

KeNHA has also been called out for paying Sh19 million after delaying payments to a contractor building roads in the Mombasa Port area.

“The payment of interest on defrayment of delayed payments leads to loss of government funds which could have been avoidable,” Gathungu explained.

The highways authority also incurred a nugatory expenditure of Sh171 million on some donor-funded projects (NUTRIP) and another Sh4.6 million on the Western Bypass project.

The Western Bypass bill accrued from delayed payment of pending bills.

“Failure to settle bills during the year in which they relate distorts the financial statements,” Gathungu said.

Also cited is the Sh4.9 million that KeNHA spent on extra costs for delayed payment in the Kainuk bridge project.

For the Public Works department, significant avoidable payments were noted in the construction of the county headquarters.

The department paid Sh76 million relating to interest and penalties on delayed payments charged by contractors and suppliers.

“This represents an additional charge to public funds as a result of budget constraints and failure to make payments once they fall due,” Gathungu said.

She also flagged an extra Sh20 million incurred at Voi Pool Housing project irregularly as a result of interest on delayed payments. The project also had added costs from extended completion time and fluctuations in builders’ work and materials.

Public Works department also spent an extra Sh37 million on the Mathare Nyayo Hospital, costs which the auditor said are avoidable and could be attributed to the delay in project completion.

“In the circumstance, value for money paid to the contractor may not be achieved due to delay in project execution and related associated costs,” she said.

Another extra Sh8.8 million was expended at the Migori District headquarters which the audit revealed was significantly behind schedule as the percentage of completion as of June 2021.

“The office block had outstanding works, the administration block was 35 per cent complete and the refurbishment works had not been carried out with more than 315 per cent of time having elapsed.”

In the Tharaka Nithi county headquarters project, the department paid Sh28.7 million owing to extended preliminaries, fluctuations and interest on delayed payments.

Some Sh22 million was spent on Nyandarua county headquarters occasioned by delays in project implementation. The claim was certified for payment.

The department further expended Sh3 million in the construction of Isiolo county headquarters “which forms an extra charge to public funds.”

Gathungu has also flagged Sh100 million paid in the Thwake Multipurpose Dam in respect of interest charged on delayed payments to contractors on certified works.

“A review of the contractor interim payment certificates Nos.4,5,6 and 7 revealed interest claim on the project as a result of delayed/late payments totalling Sh294,237,085,” the auditor said.

“According to the available records, the interim certificates had been issued but the Program management did not settle the claims on the due date, and interest was charged.”