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Shame as Kenya’s bullet factory makes losses

Auditor General Edward Ouko. (Photo: Boniface Okendo/Standard)

Kenya’s bullet factory – the heavily guarded military installation on the Eldoret-Kitale Road – made a loss of Sh78 million in the 2013/2014 year.

The Auditor General’s office has warned that unless the military bosses shape up, the loss-making factory will sink deeper into debt, at a time Kenya is engaged in a bloody war in Somalia.

“If strategies are not put in place to reverse the trend, the corporation may experience financial challenges as and when debts fall due,” Auditor General Edward Ouko says in a report on the Kenya Ordnance Factories Corporation (KOFC), the legal name of the bullet factory.

A confidential report on the financial health of the bullet factory, which was submitted to the Auditor General, shows that aside from the colossal loss in that first year of President Uhuru Kenyatta’s command, the proceeds from bullet sales dropped by Sh170 million from Sh647 million to Sh477 million. While the report does not explain reasons for the losses, it notes that the military had forecast a drop of ammo sales to Sh570 million, but even with that, it appears the target was ambitious, because only Sh477 million was netted.

The factory’s vision is “to become a premier manufacturer of world class military equipment and related products” but if it keeps up the losses, that vision will fizzle. The opacity in the factory’s book-keeping has made Ouko to issue an “adverse opinion” which in audit parlance is one of the worst verdicts that denotes shady book-keeping.

If the bullet factory was not government-owned, and if it was listed at the securities exchange, the audit findings would cause sanctions by the investors, regulators and even the government. In fact, the auditor says, the way the booking is done, is illegal.

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“The financial statements do not present fairly the financial position of the corporation as at June 30, 2014 and of its financial performance and its cashflows for the year then ended in accordance with the International Financial Reporting Standards and does not comply with the Companies Act, Cap 486 of the Laws of Kenya,” reads Ouko’s report for the financial year 2013/14 released publicly 10 days ago.

The military bosses refused to give the Auditor General “detailed schedules” of assets which as per the military records, are estimated at Sh3.1 billion.

Ouko and his team had sought details about the value of the buildings, plant and equipment, motor vehicles, furniture and fittings at the bullet factory, but they were denied the documents, and as a result, they said, they couldn’t confirm the military’s value. But knowing Ouko’s grit, the military bosses quickly sent an explanation for giving the auditor an “incomplete” register for fixed assets.

“Other than two 51-seater UD buses, two Nissan micro buses, pick-up, and two tractors bought by the corporation, the other motor vehicles in question belong to the Kenya Defence Forces. The vehicles are only attached to the corporation, therefore we cannot include them in the asset register,” the directors of the bullet factory said.

Even the computers, furniture, and the machinery at the factory, plus the buildings, were still owned by the Ministry of Defence, they added.

So, where did they get the value of the assets at Sh3 billion — the value they presented to the auditors?

The value, according to the KOFC was “sourced from the initial cost at the time of taking over from the contractor in the year 1997.” They acknowledge that the value must surely have depreciated after nearly two decades, but they were sticking to it, at least until they get a valuer to assess the value of the assets.

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The auditors also noted that the corporation, with an estimated 400 employees, most of them soldiers, stands on 727.7 hectares of land, in what was formerly Eldoret North, but is now in Turbo constituency. The corporation had asked the government for an additional 908 hectares to have a kind of a buffer zone for security reasons, but a fight with squatters has stalled the process.

“The buffer zone is necessary to ensure safety of the people in the neighbourhood and security of the factory in accordance with international standards,” reads the audit report.

Even though the ammo sales were below budget, the corporation disposed scrap metal worth Sh44 million, a whole Sh25 million above budget. They also overshot the revenue targets for the engineering section and bakery by Sh3.4 million and Sh4.9 million respectively. They say this was because of “increased customers… due to a wider market”.

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