Motorists to pay Sh300bn roads bonds for pending bills

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 pay investors for the Sh175 billion bond, which will cater for the pending bills.

Another Sh5 a litre from the levy will cover a second bond of Sh125 billion that will cater for current and future contractors' bills.

Business owners have accused national and county governments of delaying supplier payments worth more than Sh571.6 billion, pushing small traders into bankruptcy.

"The Cabinet approved the Kenya Roads Board's (KRB) plan to securitise an additional Sh12 per litre from the Roads Maintenance Levy Fund (RMLF)--Sh7 per litre raising Sh175 billion and Sh5 per litre raising Sh125 billion--to ensure uninterrupted funding for ongoing road projects," the Public Debt and Privatisation Committee of the National Assembly said in a report that was adopted on Thursday at the National Assembly.

Pricing of the bond is yet to be settled, with one section 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 9.67 percent at present rates.

Some Treasury officials said 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 a half years.

The tenor of the KRB bond is yet to be made public.

A special purpose vehicle-- Oak Assetco SPV Limited—has already been established to hold the Sh5 per litre from the fuel levy for the Sh125 billion bond.

The Eastern and Southern Africa Trade and Development Bank is expected to serve as the lead arranger and transaction advisor for the bond issue. The Sh175 billion bond will be handled by the Trade and Development Bank (TDB) as the lead arranger.

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KRB has started paying verified pending bills in the road sector using a short-term loan dubbed a bridge facility. The board has wired Sh60.6 billion to its respective road agencies, including Sh29 billion to the Kenya National Highways (KeNHA), Sh27 billion to the Kenya Rural Roads Authority (KERRA) and Sh4.67 billion to the Kenya Urban Roads Authority (Kura).

Contractors have accepted government terms to reduce the interest charged on the delayed payments by 35 percent, translating to savings of Sh7 billion.

Foreign-owned firms are expected to receive payments after discussions on the discount with their parent companies.

KRB is expected to issue first Sh175 billion bond by the end of this year and the proceeds from the issue will be used to clear the bridge facility and clear additional verified 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.

The 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.

The KRB bond marks the Kenya Kwanza's government revival of its long-standing campaign pledge of securitisation as a way of clearing the troubling pending bills headache.

Securitisation of public funds involves transferring government assets or receivables to an SPV, which then issues asset-backed securities to investors, enabling the State to raise capital while sharing risks with investors.

"In securitisation arrangements, public funds are pooled into an SPV, which issues securities backed by these assets. Investors receive payments from the cash flows of these assets and assume the associated risks, while the government is relieved of asset management responsibilities," said the House committee.

The pending bills verification committee has received a total of 65,627 pending bills claims valued at Sh571.6 billion. The committee has reviewed 57 percent of the bills received, with a value of Sh522.9 billion.

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Out of this, a total of Sh229 billion has been recommended for settlement. Once the committee submits its report, the Treasury is expected to submit recommendations to the Cabinet for approval to settle the pending bills.

"The government remains committed to resolving the long-standing issue of pending bills, as part of broader efforts to strengthen public financial management and restore confidence in government processes."

The payment of pending bills in the roads sector is expected to revitalise growth in the construction sector, helping anchor the forecast recovery of output this year by 5.2 percent from 4.7 percent, according to the Central Bank of Kenya.

The construction sector is projected to grow by four percent after contracting by 0.4 percent last year.

"For 2025, we expect a turnaround in the construction sector to be anchored on the reduction of pending bills to the road sector. Some of the contractors have already been paid and have gone back to work. We expect that to generate additional value for the construction sector," CBK Governor Kamau Thugge said on Thursday.

The Sh175 billion pending bills relate to 504 stalled road projects.

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 over the mounting public debt.

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 corruption at toll stations.

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Editor's note: The story is updated to indicate that the Cabinet and not the National Assembly cleared the Sh300 billion roads bond.