The 2014 Eurobond (or any proposed issuance) runs the risk of being converted into or being declared an Odious Debt on the basis of three widely acknowledged tests for Odious Debt :
a. Absence Of Consent: That the Eurobond debts were incurred without the consent of the People of Kenya (in respect of any portion of the proceeds not deposited into the Consolidated Fund)b. Absence Of Benefit: That the expenditure of the Eurobond Proceeds were not applied towards the public benefit or for the intended purposes to fund Infrastructure Projects (in respect of the expenditure from the Eurobond proceeds that the National Treasury cannot account for or provide a list of projects funded by the Eurobond .
I. BACKGROUND TO PUBLIC STATEMENT
1. The Government of the Republic of Kenya issued its first International Sovereign Bond (Eurobond) on 24 June 2014 that raised a Gross Amount of USD 2 billion. Kenya raised a further USD 815million from a “Tap Sales” re-opening of the Eurobond in December 2014. The proceeds of the Eurobond were intended to be applied “for general budgetary purposes, including the funding of infrastructure projects and repayment of a US$600 million Syndicated loan that was maturing in August 2014”. At the time the Government stated that the Eurobond would provide additional economic and financial benefits to the country including reduction in domestic borrowing by Government and lower interest rates.
II. FAILURE TO ACCOUNT FOR THE PROCEEDS OF KENYA’S FIRST EUROBOND
2. The Government and the National Treasury have persistent failed to accurately and completely account for the Net Proceeds of the Eurobond. The failures in respect of the first Eurobond constitute material and significant breaches of the Constitution of Kenya 2010 and the Public Finance Management Act 2012.
3. The Government of Kenya, and more specifically the National Treasury, failed to deposit Net Proceeds of the Eurobond amounting to US$1,999,052,872.97 (KSh.173,917,599,948.39) into the Consolidated Fund as required by law. The Constitution of Kenya, 2010 atArticle 206(1) and the Public Finance and Management Act, 2012 at sections17(2)(a) and 50(7)(a) require all National Government Revenues, including all loan proceeds, to be deposited immediately and in full into the Consolidated Fund.
4. Of greater concern and more troubling is that the Government of Kenya has to date failed to deposit or remit Net Eurobond proceeds amounting to USD 999,018,457.60 into the Consolidated Fund (“National Exchequer Account”) maintained at the Central Bank of Kenya.
5. The official audit report of the Office of the Auditor General (OAG) on the Financial Statements Of The National Government for FY2014/15 does not support the Government’s claims that it transferred the “missing” USD 999,018,457.60 into the Consolidated Fund on 8 September 2014 from the offshore “special account” at JP Morgan Chase Bank in New York through “an account” at the Federal Reserve Bank of New York.
6. The Auditor General, a Constitutional Office Holder and the National Audit Office, has beenunable to ascertain, verify or confirm to his satisfaction the receipt of Eurobond Proceeds amounting to US$2,419,016,127.10 (KSh.215,469,626,035.75). He accordingly issued aDisclaimer of Opinion on Eurobond Proceeds amounting to US$2.4bn (KSh.215.5bn) on the basis that he has not ascertained the accuracy or veracity of those proceeds.
7. The Auditor General’s Disclaimer of Opinion on the receipt, accounting and use of Eurobond Proceeds over 28 months after the proceeds were first received in the offshore “special account” at JP Morgan Chase Bank in New York completely disprove the public statements issued by the National Treasury and the Central Bank of Kenya.
8. Its disturbing that the official reports of the Auditor General and the Controller of Budget over theFiscal Years ended 30 June 2014 and 30 June 2015 confirm that only USD 395.4mn from the Eurobond Issue of 24 June 2014 and USD 815mn from the Tap Sales proceeds on 17 December 2014 have to date been deposited into the Consolidated Fund.
9. It’s clear that the National Treasury and the Central Bank of Kenya have utterly failed to prove to the satisfaction of the two Constitutional offices that all proceeds of the Sovereign Bond and the Tap Sales were paid into the Consolidated Fund.
III. FAILURE TO ACCOUNT FOR EXPENDITURE FROM THE EUROBOND PROCEEDS
10. The National Treasury has failed to account for expenditure from the Net Proceeds of the Eurobond to the satisfaction of the Office of the Auditor General. Specifically the National Treasury has failed to produce or provide a List of Projects funded by the Eurobond.
11. The National Treasury utilized USD 604,560,737.50 (KSh.53,201,344,900.00) from the Eurobond Proceeds at source to repay an outstanding Syndicated Loan without the prior approval of the Controller of Budget, a Constitutional office holder, in contravention of the Constitutional provisions at Articles 206(2)(c), 206(4) and 214(1).
IV. UNRESOLVED MATTERS ON CURRENT EUROBOND COULD CONVERT THE EUROBOND INTO ILLEGITIMATE OR ODIOUS DEBT AND JEOPARDIZE FUTURE EUROBOND ISSUES
12. Illegitimate Debt: A significant portion of the proceeds from Kenya’s 2014 Eurobond amounting to US$ 999,018,457.60 were not deposited into the Consolidated Fund.Continued failure by the Government to satisfactorily account for these “missing” Eurobond proceeds exposes investors to the risk of the 2014 Eurobond being converted into or declared an illegitimate debt (or Partially Illegitimate Debt) to the extent of the USD999mn of the Eurobond proceeds that were not received and thus did not benefit the people of Kenya.
13. Odious Debt: the 2014 Eurobond (or any proposed issuance) runs the risk of being converted into or being declared an Odious Debt on the basis of three widely acknowledged tests for Odious Debt :
a. Absence Of Consent: That the Eurobond debts were incurred without the consent of the People of Kenya (in respect of any portion of the proceeds not deposited into the Consolidated Fund)
b. Absence Of Benefit: That the expenditure of the Eurobond Proceeds were not applied towards the public benefit or for the intended purposes to fund Infrastructure Projects (in respect of the expenditure from the Eurobond proceeds that the National Treasury cannot account for or provide a list of projects funded by the Eurobond .
c. Creditor Awareness: that lenders, investors and the international banks that acted as transactions advisors in Kenya’s Eurobond (and any proposed Eurobond issue) were aware, or should have been aware, of the above two conditions. Specifically Investors need to demand resolution of the unaccounted for proceeds and all unresolved matters on Kenya’s 2014 Eurobond prior to participating in any proposed future sovereign bond issue.
V. HEIGHTENED DEBT DEFAULT RISKS DUE TO THE ABSENCE OF TANGIBLE EUROBOND REPAYMENT ARRANGEMENTS
14. The Republic of Kenya has an excellent record since independence of honouring all its obligations including sovereign debt owed to external creditors and international capital-markets institutions. The Government of Kenya bears the responsibility of addressing and resolving to the satisfaction of the National Audit Office the significant and material issues raised in respect of Kenya’s 2014 Eurobond.
15. The inability of the National Treasury to account for expenditure from the Proceeds of the 2014 Eurobond and to provide a list of projects funded by the Eurobond is evidence that the source of repayment of the Eurobond is uncertain and unknown. Further the National Treasury has not made or is unable to announce tangible financial arrangements for repayment of the principal outstanding amounts of the Eurobond on maturity, for example by establishing Sinking Funds from annual Budget revenues.
16. This places Kenya at risk of sovereign default.At the minimum it places Kenya in A Pre-Default Stateand heightens the risk of external debt distress that could lead to sovereign default - and the attendant painful Sovereign Debt Restructuring (SDR). Both outcomes place the Country at risk of Collective Action Clauses by institutions and investors who subscribed to the Kenya’s inaugural Eurobond of June 2014. They could enforce their rights under the laws of the State of New York in the United States (following the example of the actions of Vukture funds in Argentina’s Sovereign Debt Restructuring).
17. In the event of harsh and painful Sovereign Debt Restructuring Kenyan taxpayers face the risk of paying for the tough fiscal conditions that are likely to be imposed by private creditors and investors who subscribed to the 2014 Eurobond. The IMF by virtue of the USD 1.5bn Standby Arrangement (SBA) and Standby Credit (SBC) Facility that it extended to Kenya in March 2016 could also impose further conditions.
VI. NEED FOR AN INDEPENDENT EUROBOND AND NATIONAL EXTERNAL DEBT AUDIT
18. The Government needs to facilitate an independent, international audit of Kenya’s 2014 Eurobond and the nation’s external debt prior to accessing the international capital markets for the second Eurobond issue proposed.
19. We make the call for an Independent, international audit of Kenya’s 2014 Eurobond, this would be a Specific Eurobond Debt Audit covering the receipt, accounting and use of the Net Proceeds of the international sovereign bond. We recommend that this specific Eurobond Debt Audit be undertaken by an international audit firm working jointly with the Independent Evaluation Office (IEO) of the IMF, the African Development Bank (ADB) and UNCTAD.
20. We also recommend an Independent, international audit of Kenya’s National External Debt that goes beyond the current Debt Sustainability Assessment (DSA) framework. This debt audit needs to cover all national external debt owed bilaterally and multilaterally. Critically it must cover all national external debt contracted from the international capital markets and ensure that there are no hidden or previously undisclosed borrowings. This recommendation is consistent with the IMF’s call for an independent international audit of an International Bond was not disclosed to the executive agencies of an emerging country nor approved by its legislature as required.
21. The National Debt Audits above should also comply with the UN Principles on Promoting Responsible Sovereign Lending and Borrowing especially the key principles on Agency, Due Authorization, Responsible Credit Decisions. In the context of Kenya these include:
a. Agency Principle: that Kenya Government Officials involved in the 2014 Eurobond transaction (and any proposed Eurobond issuance) are responsible to the country and the people of Kenya for protecting the public interest for which they are acting as agents.
b. Due Authorization Principle:that lenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of determining, to the best of their ability, that the Eurobond is appropriately authorized under Kenyan laws; and that the resulting Sovereign Bond Agreements are valid and enforceable under relevant jurisdictions.
c. Responsible Credit Decisions: that lenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of making realistic assessment of
Kenya’s borrowing capacity and ability to service its Eurobond debts based on the best available information.
22. Recent international experience of the concept of odious debt include discussions on Iraq’s debt in the Odious Debt Terms by Nobel laureate and economist Joseph Stiglitz. In 2008 Ecuador declared its debt to be illegitimate on the basis that it was Odious Debt
23. We also call on the International financial markets and investors active in the sovereign Bond market to require, through the Transaction Advisors,
a. post disbursement (post-ante) verification and monitoring of projects financed by the 2014 Eurobond and
b. prior (ex-ante) investigations and verification of the projects to be financed by any proposed future Eurobond to be issued by the republic of Kenya
VII. CAUTIONARY NOTICE AND NOTIFICATION OF MATERIAL FACTS TO INVESTORS
24. We wish to formally issue a Cautionary Notice and Notification of Material Facts (stated below) to Legal Counsel, Lead Managers and Transaction Advisors engaged or proposed to be engaged and potential International investors (hereinafter collectively “Named Persons/Entities”) by the Republic of Kenya on the planned issue of its second Eurobond.
25. We wish to place On Notice the Named Persons/Entities (as defined above) that the Government of the Republic of Kenya has not accounted for the receipts and expenditures of the Net Proceeds of the International Sovereign Bond issued on 24 June 2014 as required under the Constitution of Kenya, 2010 and the Public Finance Management Act 2012, and to the satisfaction of the Constitutional National Audit Office. Further we caution the International markets that the Government of the Republic of Kenya needs to account completely for the Net Proceeds of the Eurobond prior to the Issuance of any new International Sovereign Bond.
26. We further caution and serve notice that should the above Named Persons/Entities proceed with the issuance of any new International Sovereign Bond (Eurobond) by the Government of the Republic of Kenya without satisfactory resolution of the unresolved matters raised in respect of the 2014 Eurobond, then the Named Persons/Entities risk declaration of such debt as Odious Debt by the Government of Kenya, acting on behalf of the People of Kenya.
27. This Cautionary Notice and Notification of Material Facts is based on the Concerns and Significant and materials Unexplained and Unresolved Issues that arose from the International Sovereign Bond Issued by the Republic of Kenya on 24 June 2014 which are presented above.