ENHANCING CAPACITY

Time to make counties creditworthy for private capital

In Summary

• A county will be considered “creditworthy” when its borrowing meets the risk standards of a lender, be it local or international

County governments have made fundamental progress in entrenching devolution into the country's social, economic and political fabric.

As devolution continues to mature, counties are now facing competing financial demands from development and expenditure needs, thus hindering their capability to effectively provide crucial services.

Under Article 216, the Commission on Revenue Allocation is mandated to make recommendation on financing of county governments. Article 212 of the Constitution gives the conditions that counties must meet to access loans. They can only get one if the national government guarantees the loan. The county assembly must approve any loans that the county government intends to borrow.

The commission purposes to leverage on the present regulatory framework that govern county governments borrowing, including the Public Finance Management Act, 2012.

Good legislation is important because it underpins sound debt management. It is vital that we build the technical capacity of county governments to enable them effectively manage and administer public finances.

Another key objective involves a reformed fiscal decentralisation typology that supports responsible borrowing regulated by market discipline. In this, we aim to insulate against potential abuse by the devolved systems by providing clear authorisation on how, why and when counties can borrow.

For counties to be considered creditworthy by private lenders, they need to manage finances, enhance their own sources of revenues, plan development and engage citizens using methods that emphasise financial & environmental sustainability and transparency.

In the capital markets master plan, a Vision 2030 project, a key objective is to support growth of the capital market to be ready for county government borrowing and develop products which they can use to access capital market finance.

Expanding and strengthening the capacity of the local capital market is crucial in mobilisation of funds to provide a pool upon which county governments can borrow to fund development projects that are capital intensive.

This initiative however demands the commission develop strategic partnership with other key stakeholders. One key partnership is with the Capital Markets Authority, which will develop products and regulate county governments borrowing in the market.

 

Another key partner, the World Bank group provides resources and technical support to counties towards creditworthiness. The National Treasury is expected to be the provider of guarantees to county governments. The Intergovernmental Budget & Economic Council’s Loans and Grants Sub-committee will provide an essential platform for dialogue on requisite institutional reforms.

The County Creditworthiness Academy was recently undertaken in Nairobi and brought together representatives from nine pilot counties who were trained in understanding the capital market, the market products as well as how to effectively prepare for county borrowing. The counties included Laikipia, Meru, Kisumu, Nandi, Lamu, Makueni, Mombasa, Bungoma and Samburu. The academy now seeks to work with these counties to improve their creditworthiness.

From where I seat, counties are facing heightened pressure to provide services, particularly with a growing population. Diminishing public funds make it difficult for counties to finance capital-intensive projects. This grave reality implores the need for the devolved governments to identify and possibly explore private capital to finance their developmental needs.

For counties to be considered creditworthy by private lenders, they need to manage finances, enhance their own sources of revenues, plan development and engage citizens using methods that emphasise financial & environmental sustainability and transparency.

A county will be considered “creditworthy” when its borrowing meets the risk standards of a lender, be it local or international. It goes without saying that without a positive risk assessment, county governments will not be able to attract private capital.

To remedy this, counties have to be financially sound through implementation of proper development plans; enhance and increase productivity of human resource; limit recurrent expenditure and wastage; streamline procurement processes and critically attend to growing indebtedness through the pending bills.

A logical and necessary place for counties to begin benchmarking from is in Uganda. The capital city Kampala, through Kampala Capital City Authority, was awarded by Global Credit Rating an initial credit rating of A in the long term and A1- in the short term.

Kampala has attracted funding other than loans and capital markets product and has become less reliant on transfers from central government. This has improved its appeal to local and international investors. This is what the academy aims to achieve through improving the creditworthiness of the selected nine counties to become financially sound.

Communications manager, Commission on Revenue Allocation