Municipal bonds: Why counties should use this tool to end their perennial revenue shortfall woes

A view of a section of the Nairobi Expressway meandering through Museum Hill to Westlands.

Photo credit: File | Nation Media Group

Counties have various ways of raising finance including generating their own revenue, allocations from national government and debt. 

Research shows that while African cities depend on self-generated income, it is not enough to fund capital and recurrent expenditures. 

In Kenya, counties often face a shortfall in self-generated income, exposing them to uncertainty when they are forced to depend on the national government for allocation of revenue. Many a times, the budgetary allocations face a lot of challenges.

Counties therefore ought to consider alternative and innovative funding methods to overcome the uncertainties. Municipal bonds may be the best answer to county revenue woes.

A municipal bond is a debt security issued by a county to finance capital expenses. Certain functions including health services, building and maintaining streetlights, county roads, county planning and other county public works are the responsibility of the devolved governments. 

Through the use of municipal bonds, counties can raise capital for these functions from individual and institutional investors. During uncertain times when self-generated income is low, or when there are issues with national government financing, a municipal bond is an ideal financing tool to fund projects.

The challenge of city budget gaps is not unique to Kenya. Major cities in the world have from time to time faced major budget gaps to the tune of billions of dollars. 

According to one research for example, ever since 1978, US Federal Aid to cities has declined by a big percentage over the years. This means that the cities do not place too much reliance on the federal government to fund their projects. Many of them have resorted to the use of municipal bonds. US cities have raised municipal bonds to the tune of almost $4 trillion.

Major cities such as Toronto and San Fransisco have been able to issue municipal bonds successfully.

Closer home, in Africa municipal bonds have been issued by Johannesburg, Cape Town and Lagos. Some of the bonds have gone to fund climatic change projects. 

In Kenya, a Sh1.16 billion municipal bond was issued by the Laikipia County government to fund county projects. The bond received parliamentary approval nearly two years ago and has a seven-year term before maturity.

Other counties can follow the Laikipia's example to fund infrastructure projects, especially if they will generate income.

Issuance of municipal bonds is heavily regulated and the county issuing the bond has to comply with a number of regulations. Of key importance is that a county cannot borrow without approval and furthermore, the national government is the guarantor in any such arrangement. 

The Public Finance Management Act also requires counties to seek the approval of national government before issuing the bond. They will also need to comply with the strict regulations provided by the Capital Markets Authority to safeguard investors ‘interests.

Ms Mputhia is founder of C Mputhia Advocates | [email protected]

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.