based on 2013 values

with guidance and cooperation by the National Treasury and other national government entities. The disputed statutory deductions are burning issues; they represented 15 percent of total inherited liabilities in 2013 and nearly 62 percent in 2018. For instance, among statutory deductions, NCC inherited K Sh 3.6 billion deductions unpaid to the Local Authorities Pension Trust of the National Social Security Fund (LAPTRUST), which keeps accounting a 1.25 percent penalty compounded monthly that is a 16 percent penalty annually. The numbers suggest that this single claim grew from K Sh 3.6 billion in 2013 to K Sh 7.6 billion by 2018. NCCG settled emoluments and continued servicing one loan, thus reducing inherited emoluments liabilities by over K Sh 3 billion, down to K Sh 135 million.

Inherited loan portfolio. Inherited loans are largely problematic and the portfolio has not been served since 2013 or even before (table 6.9). These loans include a government-guaranteed housing loan (1985), an on-lent foreign water loan (2004), and a loan from the defunct Local Government Authority. The CALC team concluded that these loans were not being served and the team failed to substantiate them because, as the report reads, “Loan agreements were not available and NCCG requested the National Treasury to provide copies of respective loan agreements.” (NCC CALC 2017, 43) The disputed loans amount to K Sh 22.1 billion, or 78.5 percent of total bank debts. Loan agreements of such sizable loans should have been found. The National Treasury or the Ministry of Finance do have copies of these loan agreements, especially those guaranteed and being served by the national government as guarantor. Further, the National Treasury accounts the paid debt service as a debt of CCN, so the current value of these debts is likely much greater than the historical 2013 values. A pragmatic resolution of these issues is urgent and extremely important, especially because the NCC financial capacity does not allow NCCG to resume this debt service while repaying the guarantee payments to the National Treasury.

Unpaid emoluments. Representing about 8 percent of total liabilities, unpaid emoluments largely have been worked out and paid to former staff and retirees of the defunct CCN. This is a substantial amount and part of the reason that NCC reported skyrocketed operation and maintenance costs in 2015; but also, this is an apparent misclassification of expenses because repayment of overdue emoluments was debt service, not cost of operation.

Unpaid statutory deductions. These include the Kenya Revenue Authority, National Social Security fund, LAPTRUST, and Local Authorities Providence Fund (LAPFUND) and represent the second-largest liability at K Sh 6.5 billion

TABLE 6.9 Nairobi City County net bank debts, November 2017, based on 2013 values

Loan being served uninterrupted Loan agreements not obtained, loan not served

Of which foreign loans Loans fully repaid Loans the water company borrowed Total outstanding bank debts

K Sh (MILLIONS) SHARE OF TOTAL (%)

3,666 13.0

22,144 78.5

15,328 54.3

2,181 7.7

223 0.8

28,214 100.0

Net bank debts, November 2017, based on 2013 values 26,032 92.3

(or 15 percent of total). They are a highly problematic group of liabilities because many of these are not only historical debts but also have triggered huge penalties. The CALC team stated, “Statutory creditors charge high interest and penalties in accordance with the Section 53 of the RBA Act Cap 197 with LAPTRUST charging interest at 1.25 percent per month (16 percent per annum compounded). Since the debt is historical in nature the debt has continued to grow even when the county remits statutory payments as at when the salary is paid. The county initiated discussions with some of the statutory creditors but little progress has been made because statutory creditors charge high interest rates and penalties” (NCC CALC 2017).

Other creditors. NCC inherited claims from suppliers of goods and services in the magnitude of K Sh 3.8 billion (or 8.8 percent of total) as of 2013. The NCC CALC (2017) report concludes that about a tenth of these claims have been paid subsequently. Nearly half the claims are verified and submitted to the Finance Department for further processing, and the rest need further verification. The report is silent about whether the creditors have demanded accrued interest, and thus if the actual amount of these debts is much larger than the verified 2013 amounts. But amounts paid out have inflated the current expenditure budget of NCC since 2015.

Progress in fiscal year 2018/19. In 2018, NCCG launched a campaign to review and settle liabilities of other creditors, asking them to submit their claims with supporting documentation, and continued workout discussions with statutory creditors. This campaign managed to reduce statutory deduction liabilities by K Sh 12 billion and commercial liabilities by K Sh 6 billion by June 2019 (NCCG 2019). The NCC continues debt service on a term loan from Equity Bank (now KCB Bank) with K Sh 3.7 billion in outstanding principal. NCCG has repaid the short-term liquidity (working capital) loans of K Sh 2.2 billion. Thus, the net debt from TA inventory is about K Sh 26 billion, but this amount excludes the principal and interest repaid by the National Treasury in the last 4 to 10 years.

Inherited current assets The CALC team first verified the current assets listed in the TA inventory with the total value of K Sh 89 billion as of 2013. However, the team found that the TA report excluded the current assets of the NCWSC accounts with a value of K Sh 10.5 billion. In addition, the team found that the NCC inherited from the defunct CCN the shares of NCWSC with the estimated current value of the company of K Sh 22 billion as investments. This estimate may need further scrutiny (as will be discussed), and it is not a current asset. Table 6.10 summarizes the CALC list of current assets with the grand total value of K Sh 121.6 billion (of which K Sh 99.6 billion can consistently be considered as current assets). The total volume of current assets is about three times the value of total current liabilities (figure 6.4). However, most of these current assets were accounted with inflated value and thus will be hard to mobilize. Nonetheless, it is an achievement of the CALC team to account and list financial assets in a solid report that supports follow-up actions.

Property rates. These account for nearly half of the total current assets, and the team found an additional K Sh 3.2 billion in tax arrears in the accounting system (Local Authorities Integrated Financial Operations Management System) with no explanation or supporting documents. Staff members assume that these represent late payment penalties. One critical question the NCCG should address is the real present value of the property rate arrears. A vital piece of information would be the age distribution of these arrears; segregation of the historical