Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Kenya to issue Sh135bn roads bond for pending bills
Settlement of pending bills is part of government plans to inject liquidity into the economy and offer demand for goods and services in the private sector.
Kenya Roads Board (KRB) has received the green light to issue a Sh135 billion bond whose proceeds will be used to settle mounting pending bills that have triggered the closure and auction of some small contractors.
The Business Daily has established that the regional development finance institution, Trade and Development Bank (TDB), is arranging the planned bond whose sale is awaiting the handover of a report by the Pending Bills Verification Committee.
The committee is expected to present its report next month, paving the way for the sale of the bond.
Investors who buy the multi-billion shilling bond will be compensated with collections from the Road Maintenance Levy Fund (RMLF).
Business owners have accused national and county governments of delaying suppliers’ payments worth more than Sh665 billion, pushing small traders into bankruptcy.
Kenya increased the fuel levy from Sh18 to Sh25 per litre of fuel in July last year, with the extra Sh7 generated from a litre of diesel and petrol being used to compensate the roads bond investors.
The pricing of the bond is yet to be settled. Some Treasury officials are pushing for a yield or return of 150.0 basis points (1.5 percentage points) above the prevailing 91-day Treasury bill, pricing the bond at 10.47 percent at present rates.
Others reckon the rate of return on a bond should be equivalent to an infrastructure bond of a similar tenor.
Kenya’s six infrastructure bonds issued last year came with a coupon of 18.4 percent redeemable over eight and half years.
The tenor of the KRB bond is yet to be made public.
The KRB bond marks the revival of its long-standing campaign pledge by the governing Kenya Kwanza coalition of securitisation as a way of clearing the country’s troubling pending bills headache.
“To remove the pressure of settling pending bills from the annual budget allocations, a transactions advisor will be engaged to advise on the securitisation of outstanding bills subject to verification,” the Kenya Kwanza manifesto states.
Securitisation involves the government or a State-affiliated institution issuing a bond in the capital market and using the cash raised to pay pending bills to contractors.
According to data from KRB, the 39.0 percent increase in fuel levy to Sh25.0 per litre is expected to grow annual collections to Sh122 billion from the previous average of Sh80.0 billion.
Settlement of pending bills is part of government plans to inject liquidity into the economy and offer demand for goods and services in the private sector. Pending bills for small businesses whose claims are less than Sh10 million have been earmarked for the first settlement.
The Treasury is walking a financing tightrope after deadly protests forced the Ruto administration to abandon tax measures that would have collected Sh346 billion this year, leaving little cash for projects like road maintenance.
The abandonment of the taxes has triggered spending cuts and additional borrowing to plug the budget hole.
Kenya is now diversifying its financing sources, including public-private partnerships (PPPs), to finance the construction of highways and other infrastructure after public debt ballooned.
The revival of the roads bond comes three years after the government was forced to shelve a plan to raise Sh150 billion under a similar arrangement out of fears of upsetting the International Monetary Fund (IMF) over the mounting public debt.
The government had intended to float the bond in two tranches of Sh75 billion each starting September 2021, hoping to use the proceeds to settle pending bills owed to road contractors and finance the construction of new highways.
Kenya had, however, entered into a four-year funding programme with the IMF in April 2021 to address the balance of payment hitches triggered by the Covid-19-induced economic shocks.
Some of the conditions of the IMF programme—which ends in April 2025— included a requirement that the country follow a strict path of fiscal consolidation to reduce debt accumulation.
The IMF warned that a road bond risked breaching the terms of the funding engagement.
The fuel levy was introduced in 1993 to raise funds for road maintenance, replacing road tolls which had been in place since the late 1980s but were hit by widespread graft at toll stations.
Initially, the levy on petrol and diesel stood at Sh1.50 and Sh1 per litre respectively, going up progressively to Sh5.80 each by 1999.
Further increments took the levy to Sh9 per litre in 2006 and Sh12 in 2015, and again to Sh18 per litre in July 2016.
