Borrowing Guidelines Between County Governments: Legal Insights
Article 212 of the Kenyan constitution states that a county government may borrow, but stipulates that county assemblies must authorize the borrowing and that a county must be a non-sovereign entity, necessitating additional approvals from the National Government.
The Public Finance Management Act (PFMA) imposes two additional conditions on county government borrowing:
- Borrowing must be to finance capital projects and
- A County must show the ability to repay.
In addition, the act imposes obligations and restrictions on county borrowing. County borrowing is governed by the relevant regulations, which outline the procedures and processes involved.
The ‘Treasury Circular No.1/2021’ was issued by the National Treasury to outline the county borrowing framework/guidelines.
After Laikipia County, under the leadership of Ndiritu Muriith, i sought to borrow through the issuance of the Infrastructure Bond, the Intergovernmental Budget and Economic Forum (IBEC) instructed the National Treasury (NT) to prepare the framework for the transaction and other related county borrowing in the future.
The guideline borrows extensively from the PFM Regulations (counties) and summarizes the borrowing procedure.
Before borrowing, a county must adhere to certain conditions and procedures;
It includes all budget-related ratios, such as the Wage bill revenue ratio (35%), the Development revenue ratio (30%), the amount to be borrowed set at 20% of revenues from the most recently approved county audit report, and the county’s contribution to the proposed projects set at 15%.
This will be the basis for demonstrating the ability to pay for the devolved government’s capacity to improve the collection and management of its revenue sources.
ALSO READ: AU Body Criticizes Moody’s Remarks on Kenya Eurobond Plan
The Audit report demonstrates the fiscal responsibility of a county and the financial statements of a county intending to borrow, which should have minimal or no audit queries.
In addition, the county must demonstrate the existence of a budget deficit, including the fact that the available resources are insufficient to finance the planned expenditures and that the county executive may elect to pursue borrowing.
The county executive identifies the capital projects to be financed through financing through public participation.
The county executive should also create a cash plan indicating the county’s borrowing needs and a repayment plan to demonstrate how the facility will be paid for over its lifetime.
The Cabinet Secretary for the Treasury provides the necessary guarantee for the county to proceed and borrow.
The County’s request for short-term ‘borrowing’ to finance cash flow issues is not, in fact, borrowing; therefore, the aforementioned procedures do not apply.
In this instance, the county will only need the consent of the County Executive Committee and the County Assembly to ‘borrow’ up to 5% to finance the cash flow problem, and not the budget deficit.
Borrowing would assist in releasing the enormous potential within a county, such as initiating water initiatives for production.
The water project may include reticulation and metering, and based on my personal experience, citizens would be willing to pay for increased resource production. The same holds for energy and other infrastructure financing.
Borrowing Guidelines Between County Governments: Legal Insights
