Use of technology and financial structuring dominated the second Own Source Revenue (OSR) Growth Conference in Nairobi last week.
When delegates from 36 counties gathered to discuss what is working in their efforts to grow own source revenue, it emerged that those who are relying heavily on technology are doing better than their colleagues.
And it is not just a revenue collection system, but rather, better use of technology across health, human resource and enterprise management. Leading technology provider Craft Silicon received praise for revenue growth in Meru and Homabay counties.
The two-day conference had break-out sessions on commercial bank finance, leasing and health finance, infrastructure bonds and tenant purchase, affording delegates the opportunity to deep dive into these options for resource mobilisation. I recount some of the conversations here.
The KCB Group was applauded for deep support to counties, with the risk sharing work they have done with Laikipia and Kiambu Counties highlighted as an innovative way to get much needed financing to small business.
With interest rates coming down, it was presented as one way for counties to achieve economic stimulus.
With expenditure needs outstripping the sum of own source revenue and equitable share, leasing is critical for health finance.
Imaging and diagnostic equipment are particularly well-suited for leasing, making it practical for counties to push more diagnostic capability to level 3 and 2 facilities.
All this makes universal health plausible as more and higher-level services are available to the citizen closer to where they live. Health is a devolved function, and counties should be in charge of such leasing, but financiers seem to prefer working with National Government because of political risk.
The leading leasing company explained why they are not accepting County leases for periods beyond current electoral terms, which have less than three years left. Leases for vehicles and equipment should be a bit longer.
However, the financial structurers are responding to political risk, as demonstrated by the behavior of current county governments who cancelled commercial contracts they found in place.
The presentation of the Tanga Water Bond by FSD Africa was particularly illuminating. The break-out session on water and other infrastructure bonds was full house. Delegates were keen on lessons learned in Tanga and Laikipia.
The Laikipia bond took three years to get off the ground, as the county worked to attain the minimum qualifications, including getting the fiscal responsibility ratios in line, and achieving an unqualified opinion in the annual audited accounts.
The fiscal responsibility principles are about the soundness of the financial position of the county or water company. Salaries should not be taking up more than one third of the budget for example. Getting an external review such as a credit rating is good step if you intend to raise a bond.
In addition, selected projects must have the ability to generate cash flows, with a clear line of sight. This may seem straight forward, by the way public sector projects are conceptualized, it is anything but. Take the example of the Lapsset Corridor. That an oil pipeline will generate cashflows directly to service a bond should be easy to see. But the line of sight is more blurred for a resort city.
For one, a city is not one project, but dozens of hotels and resorts to create it. Although the investor could be one entity, it is unlikely and it is easier to finance the individual hotels.
Structuring is quite important. The Laikipia Infrastructure Bond was financing part of the infrastructure development of smart towns.
The latter is a comprehensive approach to creating economic activity involving urban planning, infrastructure delivery, improving social services such as health and education, and above all, an intensive investment promotion and support effort to attract businesses to the smart town. Cashflow lines – Single Business Permits, parking, building plan approvals.
All three break-out sessions discussed political risk. All incoming administrations need resources to fund their programs. But cancellations, frustration of commercial contracts, and delayed payments are costly for the tax payers, and are ruining many businesses.
This has prompted the Public Procurement Regulatory Authority to issue a circular to County Governments and their entities, reminding them that under section 176 of the procurement act, it is an offense to delay contractor payments.
While the ten-year prison sentence or four million shillings fine should be deterrence enough, the proof of a pudding is in the eating. The PPRA will do well to go beyond the stern warning and prosecute.
The writer is the Chairman of Kenya Revenue Authority (KRA). Email: [email protected]
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