Sh1.16bn payment to Turkana Wind Power averts sovereign default crisis

A last-minute amendment to the supplementary budget averted a sovereign debt default crisis by allowing the Treasury to pay Lake Turkana Wind Power (LTWP) a Sh1.16 billion penalty, it has emerged.

Treasury Secretary Henry Rotich and Parliament’s Budget Committee chairman Kimani Ichung’wah have both confirmed to the Business Daily that MPs allowed release of the cash to avoid plunging Kenya into a “cross-default” situation with external financiers.

The MPs reversed the recommendation by the Budget and Appropriation Committee of the National Assembly which had asked them not to approve the cash under the Sh161 billion second supplementary budget.

The penalty was incurred by the Energy ministry for delays in connecting the Lake Turkana wind plant to the national grid.

Default on the penalty could have potentially damaged Kenya’s creditworthiness status in global financial markets.

Mr Ichung’wah and Mr Rotich both confirmed the Committee’s report was amended to allow for the penalty payments to LTWP before the Supplementary Appropriation Bill was forwarded to the president for assent.

President Uhuru Kenyatta signed the Bill into law last Tuesday evening.

Kenya incurred a 127 million euros (Sh14.5 billion under prevailing exchange rates) penalty for breaching the timelines set for completion of the 428-kilometre high-voltage power line from Marsabit to Suswa sub-station in Narok, the country’s main interchange for power coming from different sources.

In a deal struck in 2017, Kenya committed to pay 46 million euros (Sh5.7 billion at the time) of the total penalty in lump sum, while the balance 81 million euros (Sh9.25 billion under prevailing rates) was to be cleared over a period of six years through a minor tariff increase.

LTWP used a letter of support from the Treasury to secure 475 million euros (Sh54.24 billion) debt out of total project cost of 630 million euros (Sh71.93 billion), binding Kenya as a party in the debt obligations for the wind farm.

“It is important that we are seen to honour contractual obligations and that investors and lenders can rely on the provisions of the contract. We cannot attract foreign direct investment if these underlying contractual obligations are not respected,” LTWP director Rizwan Fazal told Business Daily late last year.

A sovereign debt default could trigger cross-default clauses on other loans extended by multi-lateral lenders.

Kenya found itself in this situation after construction of the Marsabit-Suswa line faced a series of setbacks, including securing financing for the project and land compensation.

The construction finally kicked off in November 2015, but the project’s main contractor, Spain’s Grupo Isolux Corsan, went under due to financial difficulties forcing Kenya to turn to a Chinese contractor to finish the job.

The 310-megawatt plant, whose electricity costs $8.5 cents (Sh8.66) per unit, was finally connected to the grid on September 24 last year.

“We are awaiting official communication from the respective entities in the GoK and until we receive it, cannot give a comment,” LTWP responded via email regarding the payments.