Fund launches guarantee scheme for youth groups

The Youth Fund has started a trade facilitation programme with Family Bank to help members to easily obtain bid and performance guarantees when tendering for jobs.

Despite President Kibaki’s order that at least a tenth of the tenders falling under public procurement and estimated at Sh532 billion be reserved for qualified youth groups, the affirmative action has been beset by the group’s inability to obtain essential guarantees.

Performance bonds
The President said Sh15 billion of the procurement budget should initially be awarded to the youth groups.

It is this gap that the partnership with Family Bank that will be unveiled in a month’s time hopes to seal, with Sh3.2 million already having been spent on the transaction assurance services.

According to the Youth Fund Status report launched on Wednesday, many youth entrepreneurs have failed to access government procurement due to lack of basic financial instruments such as bid and performance bonds.

“In the realisation of this difficulty, the Fund has partnered with Family Bank to avail these financial products to the youth entrepreneurs wishing to tender for government contracts or any supplies that require these instruments,” noted the report.

Henry Mwenda, the Youth Fund’s lending and investment manager, said Sh200 million has been set aside for the Credit Guarantee Scheme. The scheme will also incorporate Local Purchase Orders financing.

Already Sh25 million has been channelled towards Family Bank under a pilot project, of which 3.2 million has been borrowed. Mr Mwenda said that once the scheme is launched next month other financial institutions will be brought on board to disburse the credit facility.

A bid bond is issued during the bidding process. However, a performance bond is awarded once an investor gets the contract.

Ideally, the performance bond acts as a compensation plan in case an investor fails to deliver on the terms of the contract.

Due to the risk involved, the performance bond is more popular with insurance companies as opposed to banks.

Mr Kennedy Aosa, General Manager British America Insurance told the Business Daily that insurance firms do not require collateral from investors as it is the case with banks.

An investor is also required to have a good amount of money in the bank to access performance bonds from a bank, making insurance firms a more attractive option.

Mr Aosa said the insurance covers 10 per cent of the total contract amount to cover retendering costs that the issuer of the tender has to incur incase an investor fails to deliver. In the Youth Fund bid and performance bond, a ceiling of Sh3 million per entrepreneur has been set.

“We have to thoroughly vet contracts as well as the investor. We take the risk and negotiate the interest charged on the bonds with clients depending on their credit history and type of contract awarded. A performance bond is a key requirement once a contract has been won,” said Mr Aosa.