MPs have asked the National Treasury to disclose details of development projects financed using the proceeds of Infrastructure bonds (IFBs), amid fears that the tax-free funds are being used for recurrent expenditures such as salaries for public servants.
The National Assembly’s Liaison Committee, in its report on the 2025 Medium Term Debt Management Strategy, said that the National Treasury should set up a committee that includes reps from the Central Bank of Kenya (CBK) and Controller of Budget to review procurement and use of public debt.
“There is a need for greater transparency and accountability in the utilisation of domestic borrowing, especially when funds are allocated for general budgetary support—an approach that has been common with the proceeds of infrastructure bonds,” said the committee in the report, which was tabled on March 5.
“To improve transparency and accountability in the anticipated increase in domestic borrowing, the Cabinet Secretary National Treasury and Economic Planning should, within 60 days...record in the debt register the details on the utilisation of the borrowed funds, including the set of projects funded from the proceeds of infrastructure bonds.”
IFBs carry a tax-free status, in contrast to other bonds which are levied a withholding tax at 10 percent for those of a tenor of five years and above, and 15 percent for those below five years.
The tax incentive is meant to raise investor appetite for the bonds, with the expectation that the government will recover the foregone revenue through other taxes generated as a result of the economic impact of the projects once they are complete.
When the project bonds were introduced in February 2009, their proceeds were tied to specific development projects within the budget, in order to allow monitoring of the projects to completion. Recent issuances have, however, been designated for general budgetary support.
The first ever IFB, which targeted Sh18.5 billion with a 12-year tenor, earmarked Sh4.15 billion for water, sewerage, and irrigation projects, Sh6.44 billion for road projects, and Sh7.91 billion for energy projects.
A second IFB which was sold in December 2009—also targeting Sh18.5 billion with a 12-year tenor—carried finer project details showing that 186 districts would share Sh1.49 billion for the construction of water supplies, water conservation and construction of dams (57 districts/Sh2.9 billion) and construction of sewerage in 29 districts at Sh78 million.
A further Sh5 billion was lined up for construction of new roads in 23 districts, and Sh4 billion towards refurbishment and overhaul of civil works in 44 districts. In the energy sector, geothermal exploration was allocated Sh3.5 billion, while Sh1.53 billion went into rural electrification in 130 districts.
More recent sales, including the reopened 14 and 17-year papers that were issued last month, do not have such granular disclosures on their prospectuses, but say proceeds will be used for “funding of infrastructure projects” in the budget.
This lack of transparency about proceeds has also come at a time when the government has been raising record amounts from the project bonds.
The last six issuances, dating back to March 2023, have raised a combined Sh889.6 billion for the government, underlining their growing status as key tools for financing the budget deficit for the exchequer.
They include the two largest single issuances of any bond in Kenya—an 8.5-year IFB sold in February 2024 which raised Sh241 billion at a rate of 18.46 percent, and a seven-year IFB sold in June 2023 which raised Sh213.4 billion at 15.83 percent.
The IFBs have also outperformed ordinary bonds of similar tenor in terms of interest rates (coupon), which when allied with their tax-free status makes them highly sought after by investors.
