Why Kenya's US$1.35 billion roads arrears securitisation is facing public backlash

In my younger years, I remember reading and being enchanted by the famous Indian folktale, One Grain of Rice by Demi. It’s the story of how an Indian Raja/ruler decreed that everyone in the province must give them their annual produce of rice, with a promise to store it in the royal granary in readi

In my younger years, I remember reading and being enchanted by the famous Indian folktale, One Grain of Rice by Demi.

It’s the story of how an Indian Raja/ruler decreed that everyone in the province must give them their annual produce of rice, with a promise to store it in the royal granary in readiness for the unfortunate occurrence of famine. When the famine materialized, however, the Raja reneged on their promise, pervasive hunger ensued across the province and the people became famished and woefully disenfranchised.

This week, the Indian folktale has come to mind recurrently as the Kenyan government’s efforts to resolve the backlog of legacy arrears to road contractors via securitisation has been met with public uproar and unrelenting pushback.

The debate has raged around the securitisation of Roads Maintenance Levy funds in floating a dual currency (both Kes and US$) denominated bond whose aim is to help extinguish arrears (which we popularly like to call ‘pending bills’) to contractors in the roads sector.

It was one of the promises on which the Kenya Kwanza administration assumed governance in 2022 and was billed as one of the quick wins that would be designed to cure the liquidity crunch on whose choke hold the economy was reeling at the time.

Hon. Kipchumba Murkomen speaking during his Oct 2022 vetting for the position of Transport Cabinet Secretary

As a scribe, I have been on this securitisation beat since its inception and truth be told, it can get convoluted and complex. But in case you missed the brief, here’s a whip through of what’s at play.

The government assumed office facing multiple stalled road construction and rehabilitation projects owing to a backlog on arrears owed to contractors, the official statement at the time they assumed office pegged it at just about Kes 140.0 billion affecting 583 projects.

So, what did the government decide to do? 

In line with its campaign promise, it opted to follow the securitisation path to address this issue. Essentially, it seeks to use a portion of the collections of the Roads Maintenance Levy (Kes 7.0 out of each Kes 25.0 collected) as collateral for the pooled arrears owed to contractors and go to market with a debt instrument.

Remember the bond issuance will be both in local currency (the Kes) and in foreign currency (the US$) with the split being 20:80, respectively, meaning the lion’s share of the issuance will be US$ denominated.

The reason for the skew towards US$ in the bond issuance is because a lot of the roads projects were assigned to foreign contractors, especially the Chinese, and their obligations are denominated in foreign currency.

But because there is a long lead time to structuring a bond instrument and taking it to market, the government tapped a bridge facility (essentially a short-term facility until you secure more permanent financing), Kes 60.0 billion worth to kickstart the process of paying the contractors.

I see a few challenges with the planned securitisation and this is where Demi’s folktale One Grain of Rice comes in.

Haunted by the ghosts of the Road Annuity Programme

This is not the first time the government of the day has ventured to ring-fence a portion of Roads Maintenance Levy collections for road projects.

Just like the Indian Raja who made a promise to store his citizens rice in the royal granary and ‘ring-fence’ the same for a bout of famine but ended up reneging on the promise, Kenyans have been scarred in the past with such a promise tied to road projects.  

Legal Notice No.123 of July 13th, 2016 is where this begins because by dint of this gazette notice, the then Cabinet Secretary for Transport, James Macharia, effected a 50.0% increase in the Roads Maintenance Levy to Kes 18.0 per litre.

Legal Notice No.123 of July 13th, 2016

It was then embedded in law, the Road Maintenance Levy Fund Act, that a portion of this increase, Kes 3.0 to be precise, would be set aside for financing projects under the Road Annuity Programme.

The Road Annuity Programme is another long, and unfortunate conversation that needs a whole blog post by itself.

Suffice it to say, however, that in 2015, the idea was mooted that the heavy capex of roads infrastructure financing could be best met through an arrangement between contractors, commercial banks and the government.

Contractors will tap commercial bank financing for a roads project and the government will then repay the contractor in equal instalments (annuity) over an agreed period.

Just like the folktale One Grain of Rice by Demi, Kenya borrowed the Road Annuity Programme from India where its execution is widely touted as having been a success.

Road Maintenance Levy Fund Act provision for ring-fencing funds for the Annuity Programme

But the Road Annuity Fund would be marred with inflated costs that left contractors and commercial banks as the winners while the tax payer, whose funds were ring-fenced for this purpose, was left standing when the music stopped.

Hon. Kipchumba Murkomen speaking during his Oct 2022 vetting for the position of Transport Cabinet Secretary

What’s worse, it would emerge, as revealed by the Office of the Controller of Budget, that the Executive would tap into the Road Annuity Fund for spending that was not affiliated to earmarked roads projects, clearly contravening the provisions of the Roads Maintenance Levy Fund Act.

Controller of Budget, Margaret Nyakango, before a National Assembly Committee in November 2022

So like the clever village girl, Rani, in Demi’s One Grain of Rice, who forced Raja/ruler into more prudent thinking around the collection and storage of rice in the royal granary, the public backlash on the securitisation is Kenyans’ way of telling the government that they are far much wiser now than they were when the Roads Annuity Fund was conceived in 2015.

Obscurity around state arrears & who’s finally being paid

The second reason why there’s popular backlash on the securitisation is the obscurity that has surrounded the settlement of arrears that is being done.

Via Gazette No.13355 of September 30th, 2023, the government set up a taskforce to audit pending bills dating as far back as 2005.

Statement from the National Treasury on the appointment of the Pending Bills Verification Taskforce

While the taskforce’s final report was expected at the end of Q1/2025, the last major update from the National Treasury came on Jan 31st, 2025 revealing that of the Kes 474.0 billion worth of state arrears assessed, only Kes 206.0 billion have been deemed eligible and therefore to be settled.

As things stand, and given that the settlement of arrears owed to roads contractors has already kicked off despite the final report from the taskforce not being made public, it remains unclear who is being paid.

If indeed state arrears are to be regularised into the country’s stock of public debt and a portion of tax payer funds are being ring-fenced to securitise arrears, the public does have the right to know who is being paid.

National Treasury CS, Hon. John Mbadi, speaking on Jan 31st, 2025 about the audit of state arrears

Finally, all this boils down to transparency and utmost good faith.

There’s no question that securitisation is not a Kenyan peculiarity in navigating financing constraints , especially where a debt-neutral outcome is being pursued.

The biggest issue at hand is a government grappling with a gaping trust deficit and lack of clarity on the framework being used to actualise the process.