The second Own Source Revenue (OSR) Conference is planned for next week in Nairobi. Led by the State Department for Devolution, the conference has attracted leading corporates as sponsoring partners.
By focusing on resource mobilisation by sub-national governments and entities owned by them, it has rekindled discussion on options for counties to raise development monies beyond the Equitable Share of national raised revenues.
Reacting to this topical issue, several people have asked me about the Laikipia Infrastructure Bond. Was it issued? How long did it take to prepare? Can other counties or county entities such as water companies, issue similar securities? Here are some answers.
The bond got to the finish line but was not issued. It took three years to get our books right, finish the planning of the smart towns and design water projects, conduct economic analysis of the proposed projects, and undertake detailed public participation.
The results were then debated in the County Assembly before the projects and proposed bond were finally approved as part of the 2021/22 budget in early 2021. This included approval within the County Fiscal Strategy Paper and Debt Management Strategy for the same financial year.
We received invaluable support and hand-holding from the Public Debt Management team at the National Treasury. We got a credit rating from GCR, an Africa based rating agency that was later bought by Moody’s.
In law, county borrowing must be supported by a National Treasury guarantee, approved by the National Assembly.
Once the Laikipia bond was approved by Inter-Governmental Budget and Economic Council (IBEC) and Cabinet in 2021 and 2022 respectively, the National Treasury requested for Parliament’s nod of the guarantee.
However, by the time of the 2022 General Elections, the request was only half-way processed. It had gone through committees, but had not been submitted to plenary.
Elections brought a change of government and, the new Laikipia County government did not pursue the matter. As is their prerogative, it was a conscious policy choice. They were not keen on the smart towns and water projects that the infrastructure bond was financing, and wanted to redirect the resources.
Unfortunately for the new team, the bond proceeds were project specific as contained in the prospectus, and the County appropriation Act 2022 and could not be redirected to finance other projects.
Frustrated, the new administration chose to stop the works on the projects and abandon the bond. The cancellations led to a number of commercial disputes that are now under determination in arbitration and in courts.
All incoming administrations want resources to fund the programmes in their manifestoes on which they were elected. Should that desire extend to canceling existing commercial contracts? This question and attendant issues are at the heart of understanding political risk.
And the answers are key to structuring investment transactions.
County, municipal, water and green bonds, as well as leasing will no doubt feature prominently in next week’s OSR conference. But so will political risk.
Today, leasing companies are not accepting county leases for periods beyond current electoral terms, which have less than three years left.
To conclude the leases in two and half years requires very high monthly payments. The best term for leasing vehicles and equipment is between five and seven years.
Tenant purchase contracts require longer still, since you are financing buildings, and the transactions are similar to mortgages.
You may blame financiers, but they are reacting to political risk, as demonstrated by the behaviour of current county governments who cancelled commercial contracts they found in place.
Political risk is not just a problem for financiers and investors, but Citizens as well. When cancelled or delayed, commercial contracts attract penalties.
When Kenya Power delayed in connecting Turkana Wind Power to the grid, electricity consumers paid Sh0.96 per kilowatt hour. In construction, you have to pay for idle time of both staff and equipment.
The costs are borne by the taxpayers, not by the political leader or official whose decisions gave rise to them! Parliament and county assemblies should legislate to provide for personal liability of political leaders or technocrats who incur public costs by acting unlawfully.
In the Laikipia case, taxpayers will pay the costs of cancellation or frustration of contracts. If the projects are ever implemented, they will pay again. All these costs could be avoided if decision makers respect the law.
Politicians and public officials have found a clever way to deflect criticism arising from these awkward decisions. All they have to do is allege corruption and hide behind the EACC.
The writer is the Chairman of Kenya Revenue Authority (KRA). Email: [email protected]
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