CMA pushes for counties to raise funds through bonds

BY JAMES ANYANZWA AND LILLIAN KIARIE

The Capital Markets Authority (CMA) is in the process of arranging county bonds in a bid to reduce reliance by the devolved units on levies to finance their budgetary shortfalls.This comes amid growing budgetary deficits among county governments.

The capital markets regulator has also hinted at plans to develop a capital markets devolution strategy that will guide the industry on orderly devolution of capital markets products and services.

CMA Chairman Kung’u Gatabaki said the authority would interrogate the current provision of the constitution, which provides that national governments assent and provide guarantee for all capital raising programmes by the county governments.

“We are in the process of structuring viable country bonds that would target improving infrastructure across all 47 counties,” Gatabaki told county government representatives during a forum held in Nairobi last week.

The counties began the 2013/2014 financial year with an accumulated deficit of Sh32.7 billion, with individual county deficits ranging from 36 per cent to 91 per cent of their total budgets.

Gatabaki appealed to the leaders of county governments to look beyond the Commission for Revenue Allocation (CRA) and tax levies for funding of their development programmes.

Counties in deficit have to rely on the national government for both their recurrent and development expenditure.

For instance, as of early this year, Nairobi County had a deficit in excess of Sh7 billion, Nyeri Sh3.4 billion and Nakuru Sh1.8 billion.

Gatabaki said that the current allowable levies on agriculture, road use, water use and entertainment may not be sufficient to augment what is being disbursed from the national government.

Innovative products

He said it is here that capital markets come in as there would be unique opportunities to raise funds through Initial Public Offerings (IPOs), project financing, asset backed securities, and other innovative products such as Public Private Partnerships (PPPs).

“The authority is offering opportunities in investment banking, stockbroking, asset management, investment advisory and credit rating services at devolved levels,” he said. The market regulator, however, noted that each county government would need to look critically at internal capacity to help identify cash generating projects and to internalise issues around fiscal discipline and closing all leakages.

Counties will also have to introduce laws allowing them to fund projects through the capital markets and formalise pooled investments such as chamas to increase savings and investment levels.

Acting CMA Chief Executive Paul Muthaura said the authority provided an enabling environment, with over 20 tax and policy incentives granted by the government.

He said counties should factor, in among other things, credit rating and guarantees, market timing  and promising future revenue projections in raising capital.