4.2 County creditworthiness

financing system has been prudently cautious with respect to debt financing. That county governments are not borrowing or taking on excessive debt loads should be seen as a positive effect of the current strategy. Unchecked and unsustainable subnational borrowing has the potential to undermine county and national fiscal sustainability, which is already at risk of high debt distress.

However, some counties in Kenya—especially those with relatively large urban infrastructure needs—lack access to adequate infrastructure financing. Whereas previously disadvantaged counties have benefited from a large increase in equitable share funding—and therefore have been able to fund considerable infrastructure projects from general-purpose resources—more-populous and densely populated counties have typically received much smaller equitable share allocations per resident. As a result, they have been unable to use general-purpose resources for meaningful infrastructure investments; moreover, their OSR is not sufficient for funding the quantum of urban infrastructure needed. As such, there is a need for a suitable mechanism that will allow county governments that have adequate repayment potential to access long-term financing in an accountable manner. One such mechanism is the County Creditworthiness Initiative (box 4.2).

BOX 4.2

County creditworthiness

The County Creditworthiness Initiative (CCI) is a collaboration between various partners, including the National Treasury, the Commission on Revenue Allocation (CRA), the Capital Markets Authority (CMA), and county governments, with support from the World Bank Group. The overarching objective of the initiative is to improve the creditworthiness of county governments and enable them to access market-based financing for public infrastructure and overall development through capital markets. The CCI aims to strengthen financial management systems in counties, assess the readiness of capital markets to facilitate county borrowing, address any known bottlenecks, develop a fiscal structure that supports responsible borrowing, and develop an institutionalized framework that will oversee sustainable borrowing by county governments.

The World Bank Group, in partnership with the CRA, has been providing training, capacity building, and technical assistance under the CCI. Nine county governments were prequalified by the CRA to serve as the pilot cohort under the initiative. In January 2019, the nine counties participated in the first County Creditworthiness Academy, an intensive one-week capacity-building workshop for county government financial officials and the central government staff to master the underlying principles of creditworthiness. Out of the nine counties, three (Bungoma, Kisumu, and Makueni) were selected by the CRA to undergo a shadow (private) credit rating, which was later publicly disclosed at the request of the three rated counties.

The next phase of the initiative is expected to include provision of technical assistance to (1) address weaknesses identified through the credit rating and diagnosis of the three counties; (2) develop capital investment plans, climate-smart investments, and public-private partnerships; (3) help the National Treasury strengthen the county borrowing framework and approval processes; and (4) scale up creditworthiness training to other counties.

Source: World Bank.