Long road for counties in bid to tap capital markets

Analysts say the bond market would be key to addressing the local debt issue, with disclosure requirements helping to impose a hard budget discipline on elected officials. [iStockphoto]

"It's like children raising debt based on parents' income," said Mr Dave.

"Let's also say J P Morgan has bought the debt from a specific county, which courts will enforce if the county fails to pay?" he posed, adding there is also little accountability of county government debt management.

Policy change

But in fresh efforts to give impetus to capital raising, CMA last week backed the push by more county governments to borrow from the capital markets.

Nairobi County, which has been laying the groundwork for the issuance of an infrastructure bond, seeking to raise at least Sh17 billion, has stepped up the plans. But Governor Johnson Sakaja is pushing for policy change to enable counties to borrow above the current limit of 20 per cent of their audited annual revenues for development projects.

County governments have the green light to borrow up to Sh60 billion for development projects in a deal reached between the Intergovernmental Budget and Economic Council and the National Treasury.

Counties can borrow up to 20 per cent of their last audited total revenue. The Sh60 billion upper limit is based on the 2018/19 financial year audited revenues.

Revenue is, for purposes of setting the borrowing ceiling, defined as the share that counties receive from the Treasury and own-generated cash that the regional governments raise from fees such as licence and parking charges. "We need about Sh17 billion to address the sewerage situation and expand the water pipes to meet Nairobi's growing population," Mr Sakaja said in a statement after a meeting with CMA representatives. "The county cannot raise these funds from conventional sources such as banks or even from its own revenue thus, the capital markets offer an affordable and long-term solution," he explained.

The Constitution allows counties to borrow from the capital markets and foreign sources once cleared by the National Treasury. The law requires Treasury to guarantee devolved units to raise cash from investors upon meeting stringent conditions.

Capital markets

Counties must, for instance, raise at least 15 per cent of project funds from internally generated resources before the national government can guarantee their borrowing, Treasury rules say.

"The Authority will support the Nairobi County Government to raise funds through the capital markets," said CMA Chief Executive Wyckliffe Shamiah while admitting that challenges abound.

"However, it will be important for the county to demonstrate good governance through the prudent application of funds raised to give confidence to investors for future county capital raising exercises." Stringent conditions for devolved units are aimed at curtailing reckless borrowing. Counties are also assessed on their loan repaying ability over the medium term, meaning counties that are in the red are blacklisted from external borrowing.

There have been concerns over the capacity of some counties to absorb money borrowed and also fears of misuse by some administrators.

But the innovative form of financing could ease funding pressure off counties and avoid straining Kenyans with additional taxes. Newly elected governors recently vowed to implement a new report showing Sh216 billion go uncollected in counties every year.

The report, published by CRA and backed by the World Bank, showed county governments collect only Sh31 billion in taxes annually against their target of Sh52 billion, underlining their inability to tap their own source revenue from residents.

The report's findings could set up Kenyans - who are already facing high inflation pressures - for steeper rents and higher costs of accessing basic services and goods. CRA Chairperson Jane Kiringai said the higher collections could ease the pressure off the National Treasury amid debt repayment obligations and a tightened public purse.