Part XIV – PUBLIC DEBT MANAGEMENT · PFM Regulations

176Guiding principles for county government borrowing

County government borrowing shall be guided by the following principles—

(a) need to ensure stability of domestic financial markets;

(b) promotion of inter-generational equity in the sharing of burdens and benefits of public borrowing;

(d) use of objective criteria for evaluating county government eligibility for national government debt guarantee; and

(e) prudence and equity in setting limits for debt stock levels for each county government.

177Borrowing powers for county governments

(1) The County Executive Committee Member derives powers to raise loans for the County Government from section 140 of the Act.

(2) A county government may from time to time borrow within and outside Kenya such sums of money in such amount and on such terms and conditions as to interest, repayment, disbursement or otherwise as the County Executive Committee Member may think fit, in any of the following manners—

(a) by issuing County Treasury bonds;
(b) by bank overdraft facility from the Central Bank of Kenya; and
(c) by any other loan or credit evidenced by instruments in writing.

(3) Any borrowing by a county government under paragraph (2) (a) and (c) of this regulation shall require a national government guarantee pursuant to section 58 of the Act.

(4) Any borrowing under paragraph (2) (b) of this regulation, shall be in accordance with section 142 of the Act and shall be deemed guaranteed by the Cabinet Secretary and that guarantee shall be secured by the county equitable share of the revenue raised nationally.

178Borrowing Purposes

The county governments may borrow in pursuant to the requirements of sections 140 of the Act for the purpose of—

(a) financing county government budget deficits; or

(b) cash management; or

(d) mitigation against adverse effects caused by an urgent and unforeseen event in cases where the Emergency Fund has been depleted; or

(e) meeting any other development policy objectives that the County Executive Committee Member shall deem necessary, consistent with the law, and as County Assembly may approve.

179County total public debt threshold

(1) Pursuant to section 50(5) of the Act, a county public debt shall not exceed twenty percent (20%) of the county government's most recent audited revenues, as approved by county assembly.

(2) The annual debt service cost of a county government shall not exceed fifteen (15%) percent of the most recent audited revenue of that county government, as approved by county assembly.

(3) Parliament may review the limit under paragraph (1) of this regulation five years after the commencement date of these Regulations.

180Setting Debt Limit in the County Medium Term Debt Management Strategy

(1) Pursuant to Section 141 (2) of the Act, 2012, the debt limit at any given time shall not exceed the nominal value of the total county public debt that is determined county assembly within the limits set under Section 50(5) of the Act and in accordance with fiscal responsibility principles under regulation 25 of these Regulations.

(2) The debt limit under paragraph (1) of this regulation shall be specified annually in the county fiscal strategy paper and the medium term debt management strategy paper.

(3) The annual new government debt shall be consistent with the debt limits set out under paragraph (1) of this regulation.

(4) For the purposes of monitoring compliance with the limits under paragraph (1), the amount of county government debts which are not denominated in Kenya shillings shall be recalculated at the prevailing exchange rate of the Central Bank of Kenya.

181Eligibility and evaluation criteria for guarantee requests by county government

(1) Pursuant to the provisions of section 58 of the Act, the capital project expenditures of county governments for which a guarantee for issuance of domestic government security is requested, shall meet the following requirements—

(a) the county government shall demonstrate that the project could not be financed on reasonable terms and conditions without a county government loan;
(b) an economic analysis is made demonstrating the projects cash flow clearly setting out a borrowing and repayment plan;
(c) it is a feasible project that has been approved by the county 'government entity as may be required by county legislation;
(d) the county government meets all the fiscal responsibility principles set out in the Act and these Regulations;
(e) the borrowing shall be for financing a devolved function capital project; and
(f) any other requirements as the Cabinet Secretary may prescribe in the gazette.

(2) Pursuant to the provisions of section 58 of the Act, the capital project expenditures of county governments for which a guarantee is requested, shall meet the following requirements—

(a) the county government shall demonstrate that the project could not be financed on reasonable terms and conditions without a government loan;
(b) provide the projected cash flow clearly setting out a projected disbursement Schedule and repayment plan;
(c) the county government shall contribute a substantial portion of project funds from their own resources and in any case not less than fifteen (15) percent;
(d) a county government that defaults on a loan shall not be eligible for a loan guarantee and shall only be eligible upon successful completion a financial recovery programme agreed by the County Treasury and National Treasury;
(e) it is a feasible project that has been approved by the county government entity as may be required by national or county legislation;
(f) the application of the guarantee shall be submitted with a signed loan agreement but only for loans on concessional terms in the case of external loans;
(g) any county government applying for a national government guarantee shall meet all the fiscal responsibility principles set out in the Act and these Regulations unless exempted under certain conditions by the Cabinet Secretary;
(h) the borrowing shall be financing a devolved function capital project in line with the Fourth Schedule of the Constitution;
(i) the lender is of good credibility and standing with the Government of Kenya;
(j) the guarantee is in the public interest; and
(k) any other guidelines as Cabinet Secretary may prescribe in the gazette.

182Criteria for issuance of county government securities

(1) The issuance of county government securities to raise debt capital shall be by way of auction or such other method as County Executive Committee Member may determine with the concurrence of the Cabinet Secretary.

(2) Despite the provisions of paragraph (1) of this regulation, the auction of domestic county government securities shall take into account the following factors—

(a) pricing of the domestic county government securities;
(b) refinancing risk of the domestic county government securities;
(c) the domestic market stability when taking up domestic county government securities; and
(d) the borrowing programme which is consistent with the county medium term debt strategy and county fiscal strategy paper.

183Process of issuance of Treasury Bonds on behalf of county governments

(1) Pursuant to section 144 of the Act, a county government which intends to issue a Treasury Bond shall be guided by the following procedures—

(a) before seeking the national government guarantee, the County Executive Committee Member for finance shall develop and submit the cash plan, indicating the borrowing requirements to the County Executive Committee for approval of the borrowing including its terms and conditions;
(b) after approval by the County Executive Committee, the County Executive Committee Member shall submit the cash plan referred to above to the County Assembly for approval of the borrowing including its terms and conditions;
(c) upon approval by the County Assembly, the County Executive Committee Member shall submit the final cash plan and the approval of the County Assembly to the Cabinet Secretary requesting for the guarantee of the Treasury Bond and their inclusion in the issuance calendar;
(d) the Cabinet Secretary to the National Treasury, after receiving the request from the county government, shall seek the recommendations of the Intergovernmental Budget and Economic Council in fulfillment of the requirements of section 58(2)(i) of the Act;
(e) the Cabinet Secretary to the National Treasury may, upon taking into account the recommendations of the Intergovernmental Budget and Economic Council, approve or reject the request;
(f) the Cabinet Secretary shall reject a request for loan guarantee with reasons and communicate the same to the concerned County Executive Member;
(g) upon approval of a loan guarantee request, the Cabinet Secretary to the National Treasury shall submit the request to Parliament with recommendations seeking its approval;
(h) the Cabinet Secretary to the National Treasury shall communicate the decision of Parliament on the draft loan guarantee to the respective County Executive Committee Member for finance;
(i) upon approval by Parliament, the Cabinet Secretary shall include such authorized Treasury Bonds in the overall national issuance calendar;
(j) once the issuance calendar is known, when the national governments advertises its bond issuance for a specific month it shall also incorporate those to be issued on behalf of county governments;
(k) on the issuance day, the county whose bond is being issued, shall be represented in the auction committee meeting by the County Executive Committee Member or his or her representative; and
(l) after the National Treasury and the county government sign an on-lending agreement, the National Treasury shall transfer the proceeds of the Treasury Bond to the Revenue Fund of that county government and such on-lending transactions shall attract a fee to be determined by the National Treasury.

(2) The cash plan prepared under paragraph (1) above shall indicate—

(a) financing amounts from the issuance of Treasury Bond;
(b) the timing of the bond issuance;
(c) redemption and interest payment of previously issued Treasury Bonds plus the interest payment of the intended Treasury Bond; and
(d) the county government's cash plan to be integrated into the national government borrowing program to prepare the market for issuance.

184Process for applying for a national government guarantee for external borrowing

(1) Pursuant to the provisions of section 58 of the Act and before a county government seeks a guarantee from the national government, the following requirements shall be met—

(a) the County Executive Committee member for finance shall submit the borrowing proposal to the County Executive Committee for approval of the borrowing including its terms and conditions;
(b) after approval by the County Executive Committee, the County Executive Committee member for finance shall submit the signed loan agreement and a sessional paper to the County Assembly for approval of the borrowing, including its broad terms and conditions;
(c) after obtaining the approval of the County Assembly, the County Executive Committed member for finance shall submit the final draft loan financing agreement and the approval of the County Assembly to the Cabinet Secretary requesting for the guarantee of the final loan financing agreement;
(d) the Cabinet Secretary, after receiving the request from the county government, shall seek the recommendations of the Intergovernmental Budget and Economic Council in fulfillment of the requirements of section 58(2)(i) of the Act;
(e) the Cabinet Secretary to the National Treasury, after receiving recommendations of IBEC, shall seek the recommendations of the Attorney-General;
(f) the Cabinet Secretary may, upon taking into account the recommendations of the Intergovernmental Budget and Economic Council and the Attorney-General, approve or reject the request;
(g) the Cabinet Secretary shall reject a request for loan guarantee with reasons and communicate the same to the concerned County Executive Member for finance;
(h) upon approval of a loan guarantee request, the Cabinet Secretary shall submit a sessional paper to Parliament with recommendations seeking its approval;
(i) the Cabinet Secretary shall communicate the decision of Parliament on the draft loan guarantee to the respective County Executive Committee Member for finance; and
(j) upon approval by Parliament the Cabinet Secretary shall issue a loan guarantee.

(2) After receiving the communication of the decision of Parliament on the draft loan guarantee, the County Executive Committee member shall report to the County Assembly of the decision.

185Use of moneys borrowed and credits obtained

All sums borrowed under the Act shall be expended only on the activities included in the approved estimates of expenditure of the county government entities.

186Objectives of county public debt management

The objectives of public debt management are to ensure that the county government's financing needs and payment obligations are met at the lowest possible cost over the medium to long term, with a prudent degree of risk, and to promote development of the domestic debt market while ensuring the equitable sharing of benefits and burdens of public debt between the current and future generation.

187County government medium term debt management strategy

(1) Any borrowing by the county government shall be informed by the county government medium term debt management strategy and shall set out the framework for the management of county public debt.

(2) The medium term debt management strategy, which is reviewed annually, shall be prepared and executed by the County Treasury.

(3) Medium term debt management strategy shall be formulated annually on a three year rolling basis.

(4) The Strategy shall be approved by the County Executive Committee.

(5) The county medium term debt management strategy shall be prepared taking into account—

(a) the borrowing needs of the county governments;
(b) fiscal responsibility principles set out in section 107 of the Act and regulation 25 of these Regulations;
(c) prevailing macro-economic conditions;
(d) prevailing conditions of the financial markets; and
(e) any other relevant factors.

(6) The county medium term debt management strategy shall include measures for minimising borrowing costs with a prudent degree of risks.

188Annual county government borrowing programme

(1) The county medium term debt management strategy shall be implemented through the annual county government borrowing programme for each fiscal year.

(2) The annual borrowing programme shall include issuance of county government securities, external guaranteed loans and disbursements for the fiscal year and show indicative dates of such issuance and disbursements.

189Formalization of agreements for loans

Negotiation with foreign governments and agencies for external loans shall culminate into and shall be formalized into one of the following recognized instruments in addition to the national government guarantee—

(a) loan agreements; or

(b) exchange of letters that constitute an agreement; or

(d) national government guarantee.

190Modes of payment (disbursement) of loan funds

The procedure to be followed in the disbursement of loan funds shall be defined in the respective agreement and shall generally assume one or more of the following methods—

(a) credit purchase; or

(b) direct disbursement to the County Revenue Fund; or

(c) reimbursement, where the county government pays for goods and services supplied and later on claim reimbursement from the financier.

191Credit purchases

Where development partner have opted to give loans through credit purchase or commodity loan arrangements, for the purposes of budgeting and accounting, the following procedures shall be followed—

(a) the amount of expenditure and matching direct payment as agreed and as applicable, shall be included in the development estimates under separate items;

(b) accounting officer shall apply through the County Treasury for utilisation of the credit purchase facility in the prescribed manner as set-out in the loan instrument;

(c) after supplying goods or services, the development partner shall notify County Treasury of the amount disbursed against the loan;

(d) the County Treasury shall record the amounts disbursed as a drawing against each loan facility;

(e) the County Treasury shall forward invoices and debit advices to the accounting officer concerned to bring the expenditure involved into account;

(f) the accounting officer shall, on satisfying herself or himself of receipt of goods and services, record the transactions in the stores ledger card and the accounting officer shall notify the County Treasury on the receipt of goods and services; and

(g) upon receipts of the notification under paragraph (f) of this regulation, the County Treasury shall notify the Cabinet Secretary of the receipt of goods and services.

192Redemption, conversion and consolidation of loans

The County Executive Committee Member may, on such terms and conditions as he or she may determine, and when necessary, with the concurrence of the lender and the Cabinet Secretary—

(a) repay any loan prior to the redemption date of that loan; or

(b) convert the loan into any other loan; or

193County government entities to provide data on debt

A County Treasury shall submit to the National Treasury a report on county public debt as prescribed in these Regulations.

194County annual debt reporting

(1) Not later than three months after the end of each financial year, the County Executive Committee Member shall prepare and submit an annual report to the county assembly on public debt.

(2) The annual public debt report shall be in the format gazetted by the Cabinet Secretary and shall include the following information—

(a) review of previous year's financing of budget deficit;
(b) composition of domestic debt;
(c) composition of external debt;
(d) on-lent loans and contingent liabilities;
(e) debt strategy and debt sustaimbility;
(f) outlook for the medium term; and
(g) any commitment fees and penalties paid on any undisbursed amounts of a loan.

(3) The County Treasury shall maintain an inventory of all loans made to the county government and make the record available to the county assembly within seven days of request.

(4) The following information shall be included in the inventory under paragraph 3 of this regulation—

(a) the principal of the loan and the terms and conditions of the loan, including interest and other charges payable and terms of repayment and location of the project financed; and
(b) the amount of the loan advanced at any particular time.

195Roles and responsibilities of accounting officers in debt management operations and loan administration

For the purposes of debt management operations and loan administration, the accounting officers of a county government entity shall be responsible for the following—

(a) preparing project proposals and submitting them for approval to the County Treasury;

(b) where authorisation has been granted for the project to start, the accounting officer shall ensure public disclosure to intended beneficiaries within thirty days of the allocation and disbursement of the loan;

(c) after disbursement of loans, the loan recipient accounting officer shall report within fifteen days after the end of each quarter to the intended beneficiaries on the expenditures and performance achieved in relation to the loan;

(d) during the project identification and design, the intended beneficiaries shall be involved through the public participatory approach to planning through public forums to enhance leadership, ownership, social accountability and sustainability of the project;

(e) preparing expected disbursements profiles;

(f) submitting loan disbursement claims for approval by the County Treasury;

(g) making comments on draft loan agreement from the County Treasury;

(h) participating in all consultations and negotiations of all loan agreements for projects and programmes under their jurisdiction; and

(i) implementing, monitoring and evaluating, in close collaboration with the county government entity responsible for county planning, all projects and programmes within their jurisdiction.

196Default of payment of guaranteed loan

In case of default of payment of a guaranteed loan by a county government, the provisions of section 61 and 94 of the Act shall apply.

PFM Regulations

Part XIV – PUBLIC DEBT MANAGEMENT