Economy

State eyes record Sh150bn bond sale to clear debt, fund roads

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National Treasury building. FILE PHOTO | NMG

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Summary

  • The government is set to float a record Sh150 billion infrastructure bond next month, whose proceeds will be used to offset debt to contractors and finance the completion of ongoing road projects.
  • Infrastructure Principal Secretary Paul Mainga said the Treasury, the Central Bank of Kenya (CBK), and the Attorney-General had approved the sale of the bond.

The government is set to float a record Sh150 billion infrastructure bond next month, whose proceeds will be used to offset debt to contractors and finance the completion of ongoing road projects.

Infrastructure Principal Secretary Paul Mainga said the Treasury, the Central Bank of Kenya (CBK), and the Attorney-General had approved the sale of the bond.

“The National Treasury and other government agencies have agreed as a matter of urgency that we float a Sh150 billion roads bonds to pay contactors and complete ongoing works,” he told the National Assembly’s Public Accounts Committee (PAC) Tuesday.

“We will be going to seek funds at market rates. We are yet to settle on the loan period.”

Proceeds from the long-delayed bond will be used to clear Sh100 billion pending bills and ease pressure on businesses weighed down by debt and the negative economic effects of the Covid-19 pandemic.

Analysts said the current improved liquidity in the market would boost the performance of the infrastructure bond whose tax-free status traditionally tends to attract heavy bidding.

Only last month, the Treasury raced ahead of its domestic borrowing target for the fiscal year following the huge uptake of its September infrastructure bond issuance, taking advantage of a highly liquid market and dearth of alternative investment options.

The September infrastructure bond that was targeting Sh75 billion raised a record Sh151.3 billion worth of bids, with investors attracted by the interest-free nature of the paper that will pay interest at 12.73 percent.

Prof Mainga earlier this year told Parliament that the roads sub-sector requires about Sh650 billion to clear all outstanding commitments on ongoing projects.

Parliament in 2019 enacted the Kenya Roads Board Act which gave the Kenya Roads Board (KRB) the power to raise funds for road maintenance.

Bond issuance to source funds for maintaining roads is a long break from the traditional road toll and fuel levy approach where KRB would make disbursements to road agencies and county governments every year.

The move was made possible after a legal framework was completed by MPs to enable the floating of such debt instruments.

Prof Mainga told PAC that the Treasury treated the infrastructure bond with urgency owing to the huge pending bills owed to contractors.

He said the Infrastructure Ministry paid Sh5 billion in interest when it cleared the Sh70 billion pending bill that was owed to road contractors.

“As a government, we don’t know when we will clear the Sh100 billion unless we float the roads bond. Going by the Sh5 billion we paid in interest penalty when we cleared a Sh70 billion pending bill, I think we will pay interest to the tune of Sh10 billion when we clear the current pending bill of Sh100 billion,” he said.

The PS said the pending bill is accumulating huge interest given the demand for development annually.

“We must develop roads and the alternative is to float a bond. We have an annual budgetary requirement of Sh290 billion for the development of roads. We must borrow to develop roads,” he told the Opiyo Wandayi-led committee.

Mr Wandayi observed that the Sh5 billion paid in interest penalties could have been used to construct 50 kilometres of good tarmac road.

“The Sh5 billion interest penalty is nearly a quarter of our CDF (Constituency Development Fund). This is a lot of money which the government is losing,” Prof Mainga said.

The PS said the Sh100 billion pending bill relates to the year to June 2020 and that the ministry had no budget to cater for accrued interest and penalties.

“We met with local banks three weeks ago to prevail upon them not to deduct any amount we pay contractors. They should not penalise contractors because this is the fault of the government. It is as a result of delay in exchequer releases and budget cuts,” Prof Mainga said.