County development funds in Kenya to shrink

County development funds to shrink as government reallocates funds to fighting Covid-19; says credit rating agency

Agusto & Co. Limited, a leading Pan-African credit rating agency, has highlighted the need for county governments in Kenya to look towards other development funding options for the next financial year.

The continuous spread of COVID-19 pandemic has placed significant pressure on the Government of Kenya’s (GOK) finances, which would ultimately limit near term funds available for infrastructure development projects across the 47 Counties.

“The outbreak of the COVID-19 pandemic has upended Kenya’s outlook for 2020 with its attendant decline in the national government’s receipts from agricultural exports, foreign remittances and tourist activities owing to the plight of the virus.  As the Kenyan government contends with worsening debt service to revenue and budget deficit to GDP ratios, Agusto & Co expects a significant reduction in the total equitable share to Kenyan Counties (which is typically a percentage of national revenue) in the near to medium term. Consequently, Counties must begin to look elsewhere for other financing options to meet ongoing and future capital projects.’’ said Ikechukwu Iheagwam, Country Manager, Agusto & Company Limited.

Following the devolution of the Government on the back of the 2010 Constitution, County Governors now have greater autonomy in shaping the future of their regions due to unbridled access to a large pool of funding opportunities. This has also been pushed by the new political and economic governance system which places financial discipline and accountability of the Counties in the hands of the County Governors.

According to the Kenya’s National Treasury, a total of KES1.5 trillion has been allocated to the 47 county governments from 2013/14 to 2018/19 as equitable share transfer under the following parameters and weights:

Population (45%)

Poverty Index (18%)

Land Area (8%)

Basic Equal Share (26%)

Fiscal Responsibility (2%)

Development Factor (1%)

Based on these statistics, the monthly equitable transfers coupled with grants and other internally generated receipts by county governments, remained largely inadequate to cover recurrent expenditure let alone infrastructure development. This is further reinforced by statistics from  the World Bank which assert that Kenya has an infrastructure financing deficit estimated at $2.1 billion annually, which obviously cannot be met from public resources given the country’s rising public debt to GDP ratio estimated at 60% coupled with debt-service to revenue ratio expected to hit 2x of the IMF threshold- A situation that brings in the need for counties to begin to mobilize finance from the private sector and in local currency to fund infrastructure needs.

Other funding options available to the 47 Counties asides the Equitable Share Transfer from the national government and low internally generated revenue includes Public Private Partnerships (PPP) strongly promoted by the World Bank, grants and aids from development finance institutions, local commercial bank financing and now access to the debt capital markets locally and internationally. Agusto & Co notes that the common prerequisites for external financing for sub-national governments which includes ability to demonstrate financial discipline, transparency, accountability, good cash generating capacity, autonomy in decision making, existence of governing laws and importantly the use of the funds, are key features that most Counties in Kenya now possess due to the devolution of the Government.

“Agusto & Co. believes that Counties must begin to access the option of raising long term finance from domestic debt capital markets in the form of Bonds or Notes to fund infrastructural development projects, which would inevitably attract more investments and lead to higher internally generate revenue if properly utilised. These sources of financing have been successfully used by many sub-national governments in Nigeria to secure long term funding (typically above 7 years) in form of bonds for specific infrastructure developments by pledging a portion of the monthly centrally distributed income (similar to the monthly Equitable Share Transfer for Counties) and/or a portion of the Internally generated revenues (similar to local receipts from levies, fines, licenses and others by Counties).

We believe this approach is sustainable in the long run and would make Counties economically viable, financially discipline and accountable to their citizens. However, it requires greater collaboration among critical stakeholders such as the Ministry of Devolution and Arid and Semi-Arid Lands (ASALs), the Commission on Revenue Allocation (CRA), the National Treasury, the Retirement Benefits Authority (RBA), the Capital Markets Authority (CMA) and the Nairobi Securities Exchange (NSE), amongst other capital market operators to design a framework for Counties to access this ready pool of investable long term funds for critical capital expenditure.” adds Ikechukwu Iheagwam, Country Manager, Agusto & Company Limited.

Agusto & Co. has provided credit ratings to over 23 sub-national governments in Nigeria and collectively these States have raised in excess of $3 billion from the debt capital markets in sub-Saharan Africa over the last 10 years in the form of Bonds and tenured Islamic-related products for specific infrastructure development projects. The major investors in these asset classes are Pension Funds with long term pool of funds, commercial banks with huge investable pool of funds, insurance companies and foreign portfolio investors seeking long term fixed returns and investment outlets across Africa.

Given Kenya’s role as the leading business hub within the East African Community as well as its well diversified economy, Agusto & Co believes that Counties can leverage improving fiscal responsibility towards transparency, accountability and financial discipline as well as strong capital market regulations and alliances to access funding from the capital markets. This will definitely support GOK’s infrastructural development initiatives and positively impact the lives of the citizens at the grassroots post Covid-19 era.