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Why Laikipia infrastructure bond will be a game-changer

By Ndiritu Muriithi | November 28th 2021

Laikipia Governor Ndiritu Muriith. November 2021, Karen, Nairobi. [Edward Kiplimo,Standard]

The Intergovernmental Budget and Economic Council (IBEC) approved Laikipia County’s proposed infrastructure bond last Monday. This attracted a lot of commentary on social and mainstream media, particularly because it is a first.

A caller from Dubai offered to arrange the financing, “if it is true” we had been allowed to borrow!

It was expected. As the first sub-sovereign bond issue under devolution, there is bound to be plenty of speculation on how it is done. So, let me explain.

First, bonds as a means of borrowing are common place around the world. They are issued by private companies, by municipalities and cities, and by countries. When issued by municipalities or cities, they are typically referred to as municipal bonds. And, you can issue them for various maturities and interest rates. Nairobi City has previously issued municipal bonds.

Johannesburg and Lagos are other African cities that have raised money using municipal bonds in recent years. Our national Treasury routinely issues bonds of maturities ranging from 3 to 25 years. The amount of Kenya’s borrowing is of course, often the subject of controversy. US cities had $4 trillion in outstanding municipal bonds as of the first quarter of this year.

Commentary on the Laikipia bond has focused on the amount, repayment and timing of the bond. What is the right amount of borrowing for any entity? Frankly, not too little and not too much. If you borrow too much, the debt service can be too heavy for your cash follow.

If you borrow too little, it will not be worth the effort. The right amount depends on your ability to pay, determined by the cash you will generate from the proposed investments.

The proposed Laikipia bond is Sh1.16 billion, borrowed for 7 years. The interest rate payable will be about the same as a seven-year treasury bond partly because the county has an excellent credit rating (BB+), but mainly because the bond will have a treasury guarantee as required by the law.

The bond will finance improvements in urban infrastructure and water for production. The choice of projects was guided by both need and ability to generate specific cash flows that will be used to repay the bond.

Both programmes will generate cash flows from various user fees, levies and taxes. Parking fees are easy to understand. As we pave more towns and provide parking, we collect more fees. Three times more in the last 3 years.

Not so visible are the increases in outdoor advertising fees, sewer connections, and in property taxes that come about, as we improve our towns and market centres.

For instance, street lights not only improve night time security, but provide advertising space from which we collect fees. One relatively new stream of taxes is land value capture. As we develop various towns, land values increase dramatically, and those increases in value are taxed when properties are sold.

Even less visible to casual observation is the growth in the business register.

More businesses have set up shop in Nyahururu, Nanyuki, Rumuruti and Wiyumiririe after we improved these towns. In the last three years, our business register has more than doubled to 25,000. That increase has brought not only additional tax revenues, but most importantly created 18,000 new jobs.

Water for production is more exciting. The programme will provide water for irrigation and livestock production to 3,000 households, create jobs and increase incomes.

The timing question has been raised in relation to the electoral cycle. But government is a constitutional, perpetual entity. Assets and liabilities remain even when administrations change at election time.

It simply took time to bring the right fiscal balance, grow revenues and obtain a credit rating, all of which were needed to make a bond issuance possible.

How does a county issue a bond? First, article 212 of the Constitution directs that a county may borrow, but only with a Treasury guarantee and approval of the county assembly.

This is further elaborated by the public finance management Act articles 140-143, which imposes conditions on the type of projects (development) to be financed, and fiscal responsibility principles that have to be met. For instance, your development budget must be a minimum of 30 per cent of your budget.

To ensure adequate public participation, the PFM Act demands that the projects and their proposed financing be part of your county fiscal strategy paper (CFSP). 

This critical paper shows how you intend to finance your annual budget, and undergoes through mandatory public participation both by the executive and by the county assembly.

Additional requirements relate to the socio-economic viability of the projects, and their ability to generate cash flows that will be used to pay the debt.

On meeting these requirements, you submit a request to the CS Treasury. Once the CS confirms that you have met the threshold, he seeks IBEC’s concurrence to proceed. It is this step that Laikipia reached last Monday. But why IBEC?

IBEC is the key institution to ensure fiscal harmony between the two levels of government. That is why the CRA’s recommendations on division of revenue are first processed here. It brings together all the county finance executives, the CS for finance, and is chaired by the Deputy President.

The Laikipia bond is now awaiting one last regulatory approval. After that, the national debt management office will go to the market on our behalf and issue the bond. On the ground, team are gearing up for execution of the projects that are being financed.

One last bit. Although not required by law, but to ensure superior project execution, we have sought to improve our project management skills. Over 140 of our officers will shortly graduate with a post graduate diploma in project management from Dedan Kimathi University of Technology.

-The writer Laikipia County Governor.  @NdirituMuriithi

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