LETTERS: Tap capital markets to fund infrastructure

Occasionally the Capital Markets Authority (CMA) has advised county governments to raise money from the public through sale of bonds to finance major infrastructure projects.

A track of Kenya’s standard gauge railway. FILE PHOTO | NMG 



Occasionally the Capital Markets Authority (CMA) has advised county governments to raise money from the public through sale of bonds to finance major infrastructure projects.

Improving infrastructure is not only critical to economic growth of the country or counties but essential for wellbeing.

Instead of looking to international financial institutions like the World Bank, AfDB and the recent BRICS Development Bank, Kenya as a growing economy is in need of new forms of financial intermediation to finance investments that are either too long-term or too risky for commercial banks. These will drive capital markets growth.

It is also now well understood that fostering the development of capital markets can itself be a strong spur to innovation and economic growth.

At the end of the taxation post, we left the government in a sticky situation–how should it raise money when the economy is depressed, such that any money it seizes through taxation will further depress consumption or investment?

One great way to deal with this problem is borrowing. If the government gives consumers or investors bonds in exchange for their money, the money they hand the government becomes an investment with returns.

The truth is that relying heavily on multilateral and regional development finance institutions to fund infrastructure is unworkable.

It is also incapable of closing the huge financing gap. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If Kenya continues to rely on these institutions the pace for closing the infrastructure gap will be slow. The government must turn to the markets to raise capital.

Sourcing funds for huge infrastructure development in Kenya has always been fraught with difficulties. One major challenge is that the multilateral development finance institutions, which are dominated by the rich West, often impose stringent policy conditions to loans.

It also appears that the funding required to close the infrastructure gaps is simply not available on the balance sheets of the partners.

Again, major lenders have historically been more active in financing social infrastructure such as health and education. Their approach to development in Kenya has by and large been related to poverty alleviation.


The critical role of economic infrastructure in spurring economic growth has not been accorded serious attention. While social infrastructure is important for economic development, economic infrastructure is more urgent.

Wealth creation and capital accumulation are facilitated more by investments in economic infrastructure.

The emergence of the new multilateral development institutions is a welcome development. But they are in no way a panacea to current infrastructure financing challenges.

The game-changing infrastructure projects that can make a dent in the infrastructure deficit and move economies to a higher growth path need to come from elsewhere. The place to start would be the time-tested sources of long-term finance such as the debt market.

Traditionally, Kenya and other African countries have not seen the capital markets as a critical source of finance. One of the reasons Kenya didn’t float international bonds earlier was not having sovereign credit rating. But there are now 12 sub-Saharan Africa countries with ratings. Most have gone onto international capital markets to source funding.

Yet raising debt financing in the capital market is probably one of the most potent sources for rapid infrastructure development.

This is because countries are able to raise funds for earmarked projects without policy conditionalities. Kenya has to keep going to international capital markets to raise funds for projects.

And these funds should not be used to finance consumption but used to finance much-needed economic infrastructure.

The railways and canals in USA were largely financed with capital raised through bonds in the first half of the 19th Century. The American railways securities, as they were called, were financed from both domestic and foreign sources.

Since time immemorial, huge infrastructure projects have been financed with funds from the capital markets.

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