How a pensions mistake left Nairobi Water Company in a Sh2.3 billion debt hole

How a pensions mistake left Nairobi Water Company in a Sh2.3 billion debt hole

After the incorporation of the Nairobi Water and Sewerage Company in December 2003, many employees of the city hall’s water and sanitation department were absorbed into the new company.

This was a lateral transfer which would allow staff members to benefit from similar conditions, including pensions. Like the defunct City Hall department, the Nairobi Water pension scheme was managed by the Local Authorities Pension Trust (Laptrust).

An employee would contribute 12 percent of their gross monthly salary to the pension. Nairobi Water would contribute 15 percent of the staff’s salary to its pension.

In September 2005, Nairobi Water chose to get rid of Laptrust in favor of Madison Insurance. What remains unclear is how the company, wholly owned by Nairobi County, decided to lower the pension contribution rate to 10 percent for both employees and the employer. Naturally, the lower rate meant that employees would receive fewer retirement benefits in their later years.

“It was at that time and (we) may not know why the management decided to accept this rate,” said Nahashon Muguna, managing director of Nairobi Water. The weekly review by text message.

Asked about meeting minutes and resolutions that could reveal the reasoning behind the pension rate cut, Mr Muguna did not respond.

But the move has turned into a costly mistake, with Nairobi Water now seeking to borrow Sh2.3 billion from a commercial bank to clean up a twenty-year-old mess. In September 2010, Nairobi Water re-hired Laptrust as pension scheme administrator, ending a five-year relationship.

Back at Laptrust, the pension contribution rate has returned to 12 percent for employees, and 15 percent for Nairobi Water.

Meanwhile, concern over the Madison Insurance deal slowly simmered until 2012, when it reached boiling point and Nairobi Water resigned itself to plugging the hole dug over the five years of Madison Insurance era.

Nairobi Water commissioned an actuarial assessment to determine how much money was not paid into employees’ pension accounts between 2005 and 2010.

The total was Sh937.9 million, a huge figure at the time.

“The purpose of this actuarial assessment was to ensure that members receive uninterrupted pensionable service,” the water company told the Charles Kerich CEC of Nairobi County Finance and Planning 2022 during the loan approval request.

Nairobi Water agreed to make payment of Sh937.9 million to Laptrust, and the amount would earn interest at the same rate it would have attracted on the pensioners’ accounts – three percent every month. The water company, however, was late in repaying and the debt now stands at over Sh2.3 billion, more than double the principal amount owed.

This move by Nairobi Water did not go down well with Kileleshwa MCA Robert Alai, who filed a complaint and requested an investigation by the Directorate of Criminal Investigations (DCI).

Alai says there is a plan to obtain the loan without approval from the County Assembly. He insists that such borrowing must be approved by the County Assembly, in accordance with Section 8 of the County Government Act and Section 142 of the Public Finance Management Act.

“According to my reliable sources, the Nairobi Water and Sewerage Company has accumulated a substantial debt of Sh2.3 billion. This raises serious concerns regarding financial mismanagement and lack of compliance with statutory obligations…” Mr. Alai states in his complaint to the DCI.

“Given the seriousness of this matter, I urge your office to fully investigate and take appropriate legal action against anyone found responsible for financial mismanagement. This will not only protect the interests of employees but also maintain the integrity of public financial management,” adds the Kileleshwa MCA.

He wants the investigation to reveal whether past or present water company officials contributed illegally to the debt, whether there were any financial irregularities and how the interest rate on the debt was calculated.

Unlike bank loans, debt has not been controlled by the duplum rule, which prevents interest on debts from exceeding the principal amount owed. This means that the debt will continue to grow until it is completely paid off.

Believing that Laptrust’s interest rate was high, Nairobi Water chose to borrow from a commercial bank, using revenues received from the provision of regular services as collateral. This means that if Nairobi Water defaults on the loan, the lending entity will be free to seize payments made by county residents to offset the debt.

The Nairobi County Executive Committee gave the green light for the loan to be granted in April 2023 after Nairobi Water argued it may not be able to pay the debt due to Laptrust’s interest rates .

On January 23, 2024, Attorney General Justin Muturi also gave the green light to the application following an advisory request from Nairobi Water, on the condition that the loan be obtained from a local bank and only after obtaining approval from the county government. Nairobi Governor Johnson Sakaja and his cabinet have already approved the planned loan and forwarded the water company’s application to the County Assembly for consideration.

The Sakaja administration issued a letter of no objection to Nairobi Water through the county secretary, Patrick Analo, on April 16, 2024, after the company said it would comply with public procurement laws to select a borrower, then would dedicate the entire loan to paying Laptrust’s debt.

On June 11, County Assembly Majority Party Leader Peter Imwatok tabled documents containing Nairobi Water’s application in the House. The request was transmitted to the assembly by Analo.

“Whereas the County Government means both the County Executive and the County Assembly and further considering that the County Executive has given the green light for the borrowing, this letter hereby conveys the request for the NWSC for consideration by the Nairobi City County Assembly,” Analo said. in a letter dated April 16.

After debate, the assembly will decide to approve or reject the request. The DCI received Mr Alai’s letter on June 5, 2024 – a week before Mr Imwatok tabled the documents containing Nairobi’s water request before the County Assembly.

Nairobi Water managing director Muguna, however, defended the move, arguing that the company currently pays Sh73.5 million to Laptrust daily – Sh44 million for current pension deductions and Sh30 million for historical debt.

“This will allow us to stop the growth of debt caused by accrued interest, liquidate the facility within 10 years without imposing additional pressure on the company, secure the financial position of the company in the long term …,” added Muguna.

Muguna, however, would not confirm whether Nairobi Water had documents showing how the move to Madison and the lower pension contribution rate was achieved.

Whether the loan application is approved or not, the Sh2.3 billion bill is among the ignored historic debts that continue to threaten the financial well-being of taxpayers and government institutions, after years of neglect.