Why county governments should think of issuing municipal bonds to finance infrastructural developments.

Following the promulgation of the new constitution in the year 2010 in Kenya, that gave birth to ‘semi autonomous’ 47 county governments, several challenges and opportunities have since emanated from these devolved units of governments. The commission on Revenue Allocation, the body mandated with ensuring equitable distribution of national revenues plays its role at the national level; however a lot needs to be done by the county government leadership through their governors and respective membership in financing the budget deficit in order to provide for proper and reasonable social amenities, Education, health and other infrastructural facilities i.e roads, rail and air transport.

What are county governments doing at the moment?

Lets kick  off with governor Mutua’s Machakos County which held an investor conference from the 16^th -17^th  may 2013 that catapulted into signing of a  Memorandum of understanding on investments worth kes 56 billion with various stakeholders, hot on the heels of governor Mutua was Homabay County’s governor Cyprian Awiti unveiling Sh595 billion agro cum infrastructural project, a joint venture between Good Earth Power, Urban Green Energy and the county, to be  rolled out in phases for a period of 30 years, a project if implemented would impact positively on the income per capita for the locals .Last but not least is the recent pledge by China Investment Bank, on the prospects of funding the urban re-generation of the Eastland’s area  in  Governor Kidero’s Nairobi County ,the project also involves face-lifting the dilapidated housing conditions in the city and  the transport system to the tune of kes 80 billion and for sure other county government are likely to  take cue depending on their strength ,priorities and the purchasing power of the county residents.

The challenges from the above scenario?

No investor puts his money into a project and expects dismal returns, they all expect above market returns especially the foreign investors ,in turn what that means is to raise the cost of services and taxes in order to repay the aforesaid loans thence capital flight something which the municipal bonds can easily mitigate. Capital flight in terms of royalties, licence, management fees, supernormal profits deprive the locals the much needed income for affordable livelihood sustainability hence the need to ‘open the front door and block  the back door’ and expand the scope of local government independent bond issuance," a policy  the Development Research Center said in its draft proposal submitted recently to leaders of the ruling Communist Party and published last week on the website of Beijing's Renmin University

Back at home the likely panaceas lie in the restructuring of our bond markets to cater for issuance of county municipal bonds , economists opine  that a real municipal bond market would be key to addressing the local debt issue, with disclosure requirements helping to impose a hard budget discipline on local officials i.e. the governor ,county assembly members and ministers  this will ease the fear of the  rise in local government debt which is  a concern, given the complexity and murkiness of municipal finances where there is no clear transparency in debt levels disclosures a key aspect that can be aptly addressed by the controller of Budget . The use of longer-term  municipal bonds would also relieve the worrying mismatch between infrastructure investments that may take decades to produce financial returns and the short-term loans that are often used to finance such projects for instance construction of major highways, railways or airports may take more than 15 years inorder for the principal and loan interest to be fully repaid where as given the option of borrowing from a bank their payback periods are shorter and expensive usually lesser than six years hence a drain on the locals, therefore the suggested use of a hybrid form of county municipal bond issuance would cut down on borrowing costs for many local counties , given that municipal bonds  are tax free and that the county government is basically guaranteeing that you will receive your full deposit and earned interest back and chances of default levels are extremely low given their long term nature -  repayment spread and contrary new issue stocks that are brought to market with price restrictions until the deal is sold, municipal bonds are free to trade at any time once they are purchased by the investor .In a nutshell there is need for conducting pilot projects for municipal bonds in the country in order to cut reliance on over dependence on donor loans for both national and devolved county  governments in order to avoid being declared a HIPC sooner .