The pioneering, but stalled Laikipia Infrastructure Bond has been in the news lately prompting ongoing debate on social media. Young Laikipia professionals asked me about it in a Spaces forum, Monday night.
At Sh1.16 billion the bond is relatively small. Being novel, it has attracted a lot of attention in the years it has been under consideration. Current debate has suffered three misconceptions. To shed light, here is an explainer.
Misconception number 1: That the smart towns construction works were contracted without budget. Repeated often by senior county officials, this is not true, as can be easily ascertained by looking at the 2021/22 Laikipia County Appropriation Act.
Pressed, the senior officials are now saying that the contracting was done before the money was in the bank. This is a misplaced view, because all procurement is done against an approved budget, not cash in the bank.
Misconception number 2: That the bond was rejected by parliament, or that the National Treasury guarantee request lapsed.
Parliamentary procedure is such that the report of a committee of the house cannot die – it has to be dispensed with by the plenary.
The Senate Finance Committee tabled its report recommending approval of the bond guarantee, debate was initiated, but no vote was taken, parliament having run out of time. In proper parliamentary procedure, therefore, the matter remains live, albeit in purgatory. Senior parliamentary leadership have informed me that it can and will be concluded.
Misconception number 3: That smart towns were not a priority for the people. The smart towns and water for production strategies and how I would finance them, were in my campaign manifesto that got me elected.
The strategies were of course in the CIDP and other planning documents. No programme has to date received more in-depth public participation.
At great effort, the bond is at the finish line but has not been issued. It took three years to clean up Laikipia finances, get recurrent expenditure and salaries and wages under control, get a good audit report, finish the planning of the smart towns and design the water for production projects, conduct economic analysis of the proposed projects, and undertake detailed public participation.
The National Treasury guided us. We got a credit rating from Global Credit Rating (GCR).
The results were approved by the County Assembly as part of the 2021/22 budget in mid 2021, including in the County Fiscal Strategy Paper and Debt Management Strategy for the same financial year.
The next approvals were by the CS Treasury, Inter-Governmental Budget and Economic Council (IBEC) and Cabinet in 2021 and 2022.
Thereafter, CS National Treasury requested for Parliament’s approval of the guarantee as required by law. The request was processed half-way.
Elections brought a change of government. The new administration has not been keen to complete projects initiated by their predecessor.
From the leasing of county vehicles and road construction equipment, to the Laikipia Health Service transformation, to the Sh3.3 billion Laikipia Economic Stimulus programme, they cancelled contracts and programmes, and stopped works.
The new team wants the bond proceeds applied to different projects. This is not possible as bond proceeds are project specific as contained in the prospectus, the county appropriation Act 2021, all approvals and cannot be redirected.
Frustrated, the new administration decided to stop the works on the projects. The cancellations led to a number of commercial disputes that are now under determination in arbitration and in courts.
All new administrations want resources to fund their programmes. But should they cancel existing projects and commercial contracts to free resources? This question is key to assessing political risk, and drives structuring of investment transactions.
As leasing companies explained to county officials at the February Own Source Revenue (OSR) Conference, they are not accepting county leases for periods beyond current electoral terms.
This has made the repayment period short, and monthly instalments quite high. The leasing companies are not to blame. They are reacting to the behaviour of current county governments who cancelled leasing contracts on assuming office.
Political risk is a major problem for financiers, investors, and citizens. In the Laikipia case, citizens will pay the costs of cancellation or frustration of contracts, and again if the projects are ever implemented.
These costs could have been avoided if county officials respected contracts. Parliament and county assemblies should legislate to provide for personal liability of political leaders or technocrats who incur public costs by acting unlawfully.
The writer is the Chairman of Kenya Revenue Authority (KRA). Email: [email protected]
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