Five banks to earn Sh16bn interest on Sh35bn Kenya Pipeline loan

Five commercial banks are set to earn an estimated Sh16 billion interest on a Sh35 billion loan advanced to the Kenya Pipeline Company (KPC) to build the new Mombasa-Nairobi pipeline.

A report by KPC submitted to the National Assembly’s Energy Committee shows the State corporation has provided Sh2.3 billion this year for interest payment on the eight-year loan.

“We are paying the annual interest to the banks on quarterly basis and this will run over the next six years. We have already paid interest for two years, we expect to remit an average of Sh2 billion yearly,” said the KPC acting managing director in charge of Strategy, Disterius Nyakinda, in a presentation to MPs last week.

The syndicated loan was advanced to Kenya Pipeline Company (KPC) for construction of the Sh48.4 billion Mombasa-Nairobi oil pipeline.

Co-operative Bank, Stanbic, Citibank (Kenya), Commercial Bank of Africa, Standard Chartered Bank and Rand Merchant Bank jointly lent the State-owned corporation Sh5.8 billion each. KPC signed the loan in mid-July 2014 to construct the 450-kilometre pipeline from Mombasa to Nairobi.

The interest rate for the syndicated loan on the new pipeline commonly known as Line 5 is 5.38 per cent plus LIBOR which currently stands at 2.1 per cent, bringing the total interest charge to about 7.5 per cent.

The London Interbank Offered Rate (LIBOR) is the average interest rate at which leading banks borrow funds from other banks in the London market.

“Commercially, the rates are at 13 per cent currently. But we secured the loan at the rate of about 7.5 per cent,” said Mr Nyakinda.

Committee chairman Robert Purkose, MPs Elisha Odhiambo, Vincent Musyoka and Elsie Muhanda had wanted to know the interest that KPC was paying for the loan. “Have you considered renegotiating with the banks to reduce this interest charge? This interest is significant and is eating into your earnings. Will Kenyans get value for money on this expensive pipeline?” Mr Purkose posed.

Mr Nyakinda told MPs that KPC has an option of paying back the loan on the agreed interest rate or negotiate with financiers for a restructuring.

“If we were to renegotiate and restructure the loan, we can pay it at a lesser period to save the company more money that is going into interest,” Mr Nyakinda said.

He said KPC projects that in about 12 months, LIBOR may come down to 1.3 per cent and the interest rate will reduce from 7.5 per cent to 6.3 per cent.

KPC said that it has made an average profit of Sh11.3 billion per annum for the past six years.

Hudson Andambi, the KPC acting managing director, said a drop in the indicative pre-tax profit for the financial year 2018/19 to Sh5.2 billion is mainly attributed to on-boarding of new infrastructure which increased depreciation to Sh6.7 billion compared to Sh3.7 billion in the previous financial year.

He said provision for the Kenol-Kobil debt of Sh4.3 billion and interest on loan for Line five of Sh2.3 billion also ate into KPC’s profits.