Fuel dealers in Deal to Convert Sh45bn subsidy Arrears into Bond

To stabilize their deteriorating cash flow, oil marketers have proposed to the Treasury turning billions of shillings in fuel subsidy arrears into an interest-earning debt instrument like bonds.

According to sources familiar with the situation, the companies want their estimated Sh45 billion in arrears to be converted into a three-year debt instrument that will give them the chance to pay interest on a regular basis during that time.

The proposal is viewed as mutually beneficial because it will protect a government under financial stress from having to raise the billions up front while giving petroleum dealers regular interest payments over the course of three years.

Marketers could earn interest of about Sh6.25 billion in the first year if their arrears will be pegged at the market rate, as a three-year bond currently yields average returns of 14.5 percent.

“We raised the concern that our money was sitting with the government without earning any interest while we continue to suffer cash-flow challenges. We are worried that if this situation drags on, we will be the ones at a loss,” said an executive at a top dealer, who spoke on condition of anonymity.

Fuel retailers are struggling with cash flow issues as a result of delays in the government’s payment of subsidies to the businesses, with small dealers being particularly hard hit due to worries about bank defaults.

For instance, Total Energies disclosed that it borrowed Sh14.5 billion in short-term loans during the year ended in December as the well-oiled multinational corporations were hit by the delays in compensation.

“The proposal has been agreed to in principle with the National Treasury but we are waiting for finer details on how it will be executed should it be accepted,” said another top executive in the petroleum business.

Since 2021, the Treasury has struggled to pay oil dealers for maintaining low pump prices, which has caused concern in the sector as dealers struggle with cash flow issues.

The government was finally forced to end the subsidy last month as a result of the compensation delays and pressure from the International Monetary Fund (IMF), which led to an increase in pump prices.

Kerosene prices increased by Sh15.19 per litre, and diesel prices rose by Sh6.40 per litre.

Since April 2021, the government has spent Sh124.1 billion subsidizing fuel, which has helped to stabilize gas prices and lower inflationary pressure.

Nearly a quarter of the local fuel market is controlled by Vivo Energy, which is owed Sh13.45 billion. Total Energies is next with Sh8.16 billion, and Rubis is the third-largest oil marketer with Sh4.03 billion.

There are still Sh3.48 billion owed to Oryx Energy, Sh2.31 billion to Ola, Sh1.24 billion to Galana Oil, and Sh1.01 billion to Gapco.

According to the Energy and Petroleum Regulatory Authority (Epra), the arrears have been verified and given to the Treasury for consideration.

The Treasury has relied on the three-year bond to mobilize domestic debt as investors shun long-term securities, so the plan to convert the Sh45 billion in arrears into an interest-earning debt is timely.

The government reopened two bonds in April, including one with a three-year maturity for which bids totalling a pitiful Sh7.3 billion were received as opposed to the desired Sh30.0 billion.

However, things turned around in May when the government sold a three-year bond for Sh58.5 billion. The primary issuance raised Sh20.7 billion, and the proceeds were then supplemented by two tap sales that raised Sh10.6 billion and Sh27.2 billion.

The Kenya Kwanza manifesto, which was released prior to the elections in August 2022, stated intentions to investigate securitization as one of the ways to address the backlog of pending bills—which has pushed suppliers into financial distress.

“To remove the pressure of settling pending bills from the annual budget allocations, a transactions advisor will be engaged to advise on the securitisation of the outstanding bills subject to verification,” the Kenya Kwanza Manifesto stated.

One of the biggest gainers from Kenya Kwanza’s first supplementary budget was the Ministry of Petroleum, which saw an increase in funding from Sh24.7 billion to Sh66.4 billion for the fiscal year that ends in June.

The additional Sh21.7 billion was set aside to help pay back fuel subsidy debt.