Counties too can tap into capital markets

A leading daily ran a well-read article this week, on the long road for counties in a bid to tap capital markets.

Perhaps because of my association with the often-quoted Laikipia infrastructure bond, friends were soon sending me the online link.

Can counties mobilise resources from capital markets? But of course! Utilizing capital markets is, however, not just about borrowing.

County entities such as water companies can also issue other securities such as shares. But it is bonds that have generated the most interest.

The 2010 Constitution, in article 212, directs that a county may borrow, but only with a Treasury guarantee and approval of the county assembly. The Public Finance Management Act (140-143), elaborates further on the type of projects to be financed, and fiscal responsibility principles that have to be met. For instance, your development budget must be at least 30 per cent of your budget.

Bonds issued by private firms, municipalities and cities, and by countries are commonplace around the world. They can have various maturities depending on need. When issued by municipalities or cities, we refer to them as municipal bonds.

Nairobi City has previously issued municipal bonds. Johannesburg and Lagos have also raised municipal bonds in recent years. US cities had $4 trillion in outstanding municipal bonds in 2021.

The law lays out five steps. Budget, review by Treasury, approval by IBEC, approval by Parliament, actual issue.

The executive must prepare an annual development plan, and detail how they intend to finance that plan.

That financing is by a combination of borrowing and taxes. Those taxes are raised in the county (own source revenue) and nationally (equitable share). To ensure the public is involved, the annual development plan, debt management and fiscal strategy are subjected to public participation and approval by the county assembly.

Socio-economic benefits 

The review by the Treasury CS confirms that the projects have been analysed and found to have positive socio-economic benefits. Importantly, they should generate cash flows; user fees, levies and taxes to repay the bond.

Urban infrastructure is a good example. As a county improves towns, it collects more fees from parking, outdoor advertising, sewer connections and property taxes. Streetlights not only improve night-time security but provide advertising space that generates fees.

Chaired by the Deputy President, the Inter-governmental Budget and Economic Council (IBEC) is the institution that ensures fiscal harmony between the two levels of government.

It brings together all the county finance executives and the Finance CS. So far, only the Laikipia bond has been brought before it, and approval was granted within two weeks of the application. The final regulatory step is the approval of the guarantee by Parliament. 

Being new, county bonds no doubt are causing analysts some confusion. To be clear, an issuing county is responsible for bond repayments. The Treasury guarantee provides the bondholders with additional comfort, making the bond more attractive to investors.

In issuing a bond, a county could employ the services of an investment bank to issue the bond. However, it is more prudent to seek the assistance of the Public Debt Management directorate, which has unparalleled expertise in this area. After all, they issue bonds every week!

Using the capital markets to mobilise resources for counties sounds new only because devolution is new.

@NdirituMuriithi is an economist