ENS Africa: Guidelines for county governments seeking to tap into the loans and debt market

ENS Africa: Guidelines for county governments seeking to tap into the loans and debt market

By Binti Shah (Partner, ENS Africa) and Nkatha Murungi-Omondi (Senior Associate, ENS Africa)

In order to alleviate the budget deficits most county governments in Kenya are facing, the National Treasury recently issued guidelines on Borrowing by County Governments (the "Guidelines"). These Guidelines are issued further to existing legislation on county government borrowing under the Constitution of Kenya, 2010 and the Public Finance Management Act, 2012 ("PFMA"). We note that under the existing legislation, any county government borrowing must be guaranteed by the National Government and that such borrowing can only be used to finance development expenditure and not recurrent expenditure.

The Guidelines prescribe the criteria for the issuance of guarantees for county government borrowing/issuance of security. The county government would be required to demonstrate, among other criteria, that:

  1. the target project could not have been financed without such borrowing;
  2. it has adopted an acceptable project cycle management approach;
  3. the conditions precedent for project implementation have been met, eg, land acquisition, resettlement and compensation of persons affected, completion and approval of project designs, regulatory approvals and resource requirement planning (ie, sources of funding and personnel for the project); and
  4. not less than 15% of project funds will be contributed from their own resources.

Under the Guidelines, no guarantee will be issued where such borrowing would cause the Government of Kenya's borrowing to exceed the statutory public debt limits or where the county government does not demonstrate that it has the ability to repay the loan, interest and any other amount in respect of the borrowing. County governments will be required to provide the National Treasury with information on disbursements and repayments on a quarterly basis.

The Guidelines set out the procedure to be followed by county governments in making an application for a guarantee for a county government borrowing or a county government security (which includes a treasury bill, treasury bond, treasury note, government stock and any other debt instrument issued by the county government). Ultimately, any such guarantee must be approved by Parliament. Finally, the Guidelines provide for the recovery of payments made by the National Treasury under a guarantee in the event that the guaranteed county government defaults.

Under the PFMA, county governments are required to prove that they are compliant with the prescribed fiscal responsibility principles, in particular, that they are not spending more than 35% of their budget on recurrent expenditure and are spending at least 30% of their budget on development expenditure. County governments must also prove that they have sufficient revenue-generating activities or resources outside the National Treasury budget allocation that can service any borrowings.

Notably, from a practical perspective, only four out of 47 counties in Kenya have successfully met the prescribed financial responsibility principles and obtained satisfactory credit ratings. We understand that the Laikipia County Government intends to issue a KES1.4-billion infrastructure bond later this year. The issuance of these borrowing Guidelines comes amid heavy criticism of increased and allegedly unsustainable borrowing by the Government of Kenya and an increased tax burden on Kenyan citizens.

For more information on this please contact ENS Africa (Kenya). This article was originally published in the ENS Africa website and can be viewed on this link.

Binti Shah is a Partner at ENSafrica. She specialises in banking, project finance and infrastructure and structured finance. She is qualified as a Kenyan Advocate and an English Solicitor. Her clients are mainly international and local banks & developmental financial institutions. She is also recognized as a leading/recommended lawyer by: IFLR1000 Financial and Corporate Guide (Energy and Infrastructure, Project Finance, Capital Markets, Structured Finance & Securitisation, Banking) 2021, 2020, 2019 – Highly Regarded; Chambers Global Guide 2021, 2020, 2019 – Banking and Finance (Kenya); and The Legal 500 EMEA 2019 – Baking and Finance (Kenya).

Nkatha Murungi-Omondi is a senior associate at ENSafrica, specialising in banking and finance. She has acted for a variety of clients, in Banking and Finance, Corporate Commercial, Energy and Infrastructure. Nkatha's experience includes preparing and reviewing loan documentation, advising on: syndicated lending, debt and equity capital markets, structured finance, project finance, trade and commodity financing, due diligence, general regulatory compliance in Kenya, business establishment in Kenya as well energy and infrastructure projects. Her client portfolio includes multilateral institutions, international and local banks, development finance institutions and export-import banks.

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