The Sh7 per liter added to the fuel tax in July will be used to pay off Kenya’s inaugural Sh175 billion road bond, underscoring the country’s defiance amid the public uproar that greeted the sharp 38 percent increase.
The Treasury has approved a request from the Kenya Roads Board (KRB) to use Sh7 generated from a liter of diesel and petrol as collateral for the bonds, with the cash used to compensate investors who will buy the bonds for billions of shillings.
Kenya has increased the Road Maintenance Levy Fund (RMLF) from Sh18 to Sh25 per liter of fuel, sparking public uproar and court applications.
The unveiling of the plan to back the bonds with the tax provides clues as to why the country is defying public opposition to the tax hike, which came days after President William Ruto withdrew the finance bill containing the tax hikes in response to youth-led mass protests.
The Road Board believes the increase is set to raise an additional Sh35 billion or a total of Sh135 billion annually, with the additional funds ring-fenced to pay the interest and principal of the road bonds.
A senior Ministry of Transport official has confirmed that the Eastern and Southern African Trade and Development Bank (TDB) has been selected as the lead arranger and advisor for the road bonds.
The regional commercial financier, formerly known as PTA Bank, has begun looking to major banks for cash in a fundraising campaign expected to attract high-net-worth investors such as pension plans and insurance companies.
The bond proceeds will reach KRB’s accounts before March next year to support road maintenance budgets for the country’s 239,122-kilometre network.
Treasurer John Mbadi, in a letter to Transport and Roads Minister Davis Churchill dated October 15, granted KRB approval for the road bonds, pending publication of the terms and conditions of the fund.
“KRB will coordinate the establishment of a facility of up to Sh175 billion and issue bonds and/or loans through a special purpose vehicle created to securitize cash flows accumulated from the Sh7 per liter fuel tax,” Mbadi says in a letter seen by him. the Daily chores.
“Since TDB has conducted the relevant transactions for the benefit of the Government of Kenya and Kenya is a member state of the bank, KRB may engage TDB as lead regulator and advisor to the facility.”
Mr Mbadi says the Ministry of Transport and KRB must obtain approval and approval from the Treasury on the terms and conditions of the facility for each tranche, in accordance with the law.
The Treasury is walking a funding tightrope after deadly protests forced Dr Ruto’s administration to abandon tax measures that would have raised Sh346 billion this year, leaving little money for projects such as road maintenance.
Abandoning taxes has led to reduced spending and additional borrowing to fill the budget gap.
Kenya is now working to diversify its financing sources, including public-private partnerships, to finance the construction of highways and other infrastructure projects after public debt ballooned.
The revival of road bonds comes three years after the government was forced to postpone a plan to raise Sh150 billion under a similar arrangement over fears of angering the International Monetary Fund over spiraling public debt.
The government had intended to issue the bonds in two tranches of Sh75 billion each starting from September 2021, with the hope of using the proceeds to settle outstanding bills owed to road contractors and fund the construction of new highways.
However, Kenya entered into a four-year financing program with the IMF in April 2021 to address balance of payments hurdles caused by economic shocks caused by the coronavirus.
Some of the terms of the IMF loans – which expire in April 2025 – included a requirement that the country follow a strict fiscal consolidation path in order to reduce debt accumulation.
The International Monetary Fund has warned that road bonds risk violating financing sharing conditions.
These new bonds are also being planned under the cloud of a September court order freezing the use of Sh10.5 billion of RML funds following a case brought by the Board of Governors challenging the distribution formula for county road construction.
The counties appealed the National Assembly’s September 2023 decision to remove them from the list of RML beneficiaries, followed by another decision in August this year to cancel the Sh10.5 billion conditional grant owed to the counties from the 2024/24 levy collections. Fiscal year 2025.
An earlier order issued by the Mombasa High Court on August 2, preventing the government from implementing the tax increase, was overturned two weeks later after the petitioner (a taxi driver) withdrew his petition.
This left the government free to implement the increase, which it said was necessary if it wanted to effectively fund its annual road maintenance requirement of Sh157 billion.
Before this year’s change, the most recent increase in the RML was made in 2016, when it was raised from Sh12 to Sh18 per litre.
The KRB, in a paper outlining the rationale for the 2024 increase, argued that inflation had eroded the value of the fund, meaning the Sh80 billion raised in the 2023/2024 financial year was equivalent to Sh52 billion at 2016 prices.
“In order to maintain the true value of the RML Fund at 2016 prices, annual collections in 2023/2024 must amount to at least Sh122 billion,” KRB said in a July 2024 research paper.
The fuel tax was introduced in 1993 to raise money for road maintenance, replacing road tolls that had been in place since the late 1980s but had been subject to widespread graft at toll stations.
Initially, the tax on petrol and diesel was Sh1.50 and Sh1 per liter respectively, then gradually rose to Sh5.80 each by 1999.
Further increases raised the tax to Sh9 per liter in 2006 and Sh12 in 2015, and again to Sh18 per liter in July 2016.
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