A committee of experts appointed by the Treasury has recommended the creation of a new fund to settle pending bills by issuing government securities backed by expected payments of the arrears.
The final committee of experts report on leveraging local financial markets for investments in public-private partnerships calls for a new fund to raise funds to settle verified pending bills from expected proceeds of the securities sale.
Association of Pension Trustees and Administrators of Kenya President Hosea Kili, the task force chairman, said the new fund would restore eroded confidence in government among investors, suppliers and contractors.
“The persistent accumulation of verified but unpaid pending bills by public sector entities has created a perceived and growing trust deficit between the Government of Kenya and its suppliers, contractors, investors and financial partners,” the report says.
“To systematically address this challenge and strengthen investor confidence, it is proposed that a public pending bills liquidation trust fund be established. Securitisation provides a proven mechanism for unlocking liquidity tied to verified government payables, converting future payment commitments into tradable securities that provide immediate cash to creditors.”
The fund is expected to serve as a structured, legally anchored vehicle for managing the settlement of verified public sector arrears through innovative market-based financing.
The report does not offer a breakdown of the pricing criteria for the bond or its tenure.
Additionally, the report does not disclose what happens to investors in the case the government further delays expected pending bill payments.
The proposals borrow a leaf from other jurisdictions that have successfully securitised arrears, including Brazil, Colombia, Mexico, Spain, and India.
Mexico, for instance, has a factoring bonds programme, which addresses arrears to small and medium-sized enterprises. The Mexican government and private sector have established a reverse factoring programme, where pending bills from government contracts are factored through financial institutions.
The financial institutions then issue factoring bonds backed by government receivables, providing liquidity to SMEs and allowing the government to manage its cash flow issues.
Kenya has mulled securitising verified pending bills and issuing bonds to clear the arrears but is still setting up a clear framework for settlement.
The Kenya Roads Board is set to issue a Sh135 billion bond whose proceeds will be used to settle mounting pending bills in the roads sector.
Investors in the bond are to be compensated with collections from the Road Maintenance Levy Fund, which acts as a security for the paper.
The pricing of the bond is yet to be determined but was estimated previously by some Treasury officials at around 1.5 percentage points above the prevailing 91-day Treasury bill return.
The Kenya Kwanza administration had indicated a plan to securitise outstanding pending bills after their verification, according to its 2022 manifesto.
The total stock of outstanding pending bills by the national government fell by Sh118.3 billion in the first three months of the year to March to Sh421.6 billion from Sh539.9 billion at the end of December as the State began paying approved arrears.
According to the Treasury, the Pending Bills Verification Committee indicated that it had verified Sh578 billion in arrears out of Sh663 billion.
Of the verified pending bills, only Sh229 billion has been certified for payment, including Sh80 billion in arrears relating to the roads sector.
“About Sh80 billion of the approved bills relate to the road sector and we have started the process of settling those bills using the securitization of the Sh7 per litre road maintenance levy,” National Treasury Cabinet Secretary John Mbadi told the Business Daily in an interview last month.
“Pending bills are coming down partly because of the road sector settlements. For the balance of Sh148 billion, we are working to make a proposal to the Cabinet to settle the bills. By the time we get the approval, the committee will be done with the verification, and we can add approved pending bills to the balance to be settled.”
