Public Debt

 

Generally, Public Debt is defined as borrowings by governments to finance expenditures not covered by current tax revenues and other incomes. 

 
Constitutional Provision

 

It is instructive that the Constitution of Kenya 2010 makes mention of the Public Debt. Excerpts from Article 214, in Part 3 - Revenue Raising Powers and the Public Debt:

214. (2) ........, “the public debt” means all financial obligations attendant to loans raised or guaranteed and securities issued or guaranteed by the national government.

In Kenya's context of a two-tier government, Public Debt refers to borrowings by both the National and County governments. 

 
Allocation

 

The New Constitution permits a County government to borrow to finance expenditure, subject to approvals from a willing National Government as guarantor, and from its County Assembly in the framework of checks and balances:

212. A county government may borrow ......... (a) if the national government guarantees the loan; and (b) with the approval of the county government’s assembly.

The keen reader may note from the National Government Loans Guarantee Act of 2011 that the Cabinet Secretary responsible for Treasury is the official mandated to guarantee such a loan on behalf of the National Government. However, the Act also allows a County to petition Parliament in the event that the Secretary declines to guarantee a loan request. It is easy to see that this process is likely to draw public interest and attract political contests if not well handled by all involved.

The Act is silent on whether the Cabinet Secretary can review (downwards), the amount requested by a County Government. Thus a County would have to restart a loan request if the initial one is declined. The Act does provide for the Cabinet Secretary to petition a Court of law in the event that a County Government is unable to repay a debt, so it can be permitted to recover from future allocations of devolved funds to the County in question. It should not also be lost on the reader that upon approval, the loan money is only given to the County upon the authority of the Controller of Budget in line with all withdrawals from any Public Fund. Section 6 of the National Government Loans Guarantee Act of 2011:

6. (2) Money payable under a guarantee may be paid only if the payment has been approved by the Controller of Budget.

Besides the two conditions for borrowing given above in Article 212., the amount of Public Debt a County is servicing will be factored into new requests and could hinder any future allocations out of both the Equalisation and the Consolidated Funds:

203. (1) The following criteria shall be taken into account in determining the equitable shares provided for under Article 202 and in all national legislation concerning county government enacted in terms of this Chapter(b) any provision that must be made in respect of the public debt and other national obligations;

Indeed the whole issue of Public Debt (including external debt) has a social aspect to it, and the New Constitution acknowledges the same when recommending caution and prudence in its allocation:

201. The following principles shall guide all aspects of public finance in the Republic—  (c) the burdens and benefits of ......... public borrowing shall be shared equitably between present and future generations;

Every Public Debt will in future be governed by legislation. This is a good measure to ensure prudent borrowing. As if that's not enough, transparency will be the by-word on matters of Public Debt: on how, why and from whom the government intends to or has just borrowed from. Further to this, the Secretary for Finance is obligated by the New Constitution to prepare regular public reports of updated details of Kenya's indebtedness:

211. (1) Parliament may, by legislation— (a) prescribe the terms on which the national government may borrow; and (b) impose reporting requirements.
(2) Within seven days after either House of Parliament so requests by resolution, the Cabinet Secretary responsible for finance shall present to the relevant committee, information concerning any particular loan or guarantee, including all information necessary to show— (a) the extent of the total indebtedness by way of principal and accumulated interest; (b) the use made or to be made of the proceeds of the loan; (c) the provision made for servicing or repayment of the loan; and (d) the progress made in the repayment of the loan.

It is not enough that there is money to be borrowed. There must be reasonable justification to do so and ability to repay comfortably.

 
Administration

 

It is refreshing to observe that as the supreme authority of the land, the people of Kenya (through their elected representatives) have taken control of all Public Finance including Public Debt. Therefore, adequate checks and balances have been incorporated into the New Constitution to govern a County government's intentions of borrowing. The County must seek the authority and approval of its legislature - County Assembly - and a guarantee from the National Government for the debt. Excerpt from Article 212:

212. A county government may borrow only— (a) if the national government guarantees the loan; and (b) with the approval of the county government’s assembly.

These guarantees by the National Government will also be subject to similar open and transparent checks and balances as those that oversee borrowing by a County government. 

213. (1) An Act of Parliament shall prescribe terms and conditions under which the national government may guarantee loans:

These terms and conditions are captured in the National Government Loans Guarantee Act of 2011. The Act emphasises a uniform set of laws to guide the National Government, so it may treat unequals equally with respect to all Counties. As usual, for purposes of checks and balances and separation of powers, the National Government must report to the National Assembly to explain its rationale for any debts it guarantees to a County government:

(2) Within two months after the end of each financial year, the national government shall publish a report on the guarantees that it gave during that year.

In spite of the provision that the National Government has to guarantee every Public debt taken by Counties, Kenya's system of devolution means such a debt can be charged on any of the Public Funds mentioned in this discussion:

214. (1) The public debt is a charge on the Consolidated Fund, but an Act of Parliament may provide for charging all or part of the public debt to other public funds.

This author holds the view that the reason that perhaps informed the provision in Article 214. (1) was that Public Fund money not spent in a given financial year, should be available to off-set debt. 

The issue of Public Debt was discussed early in the term of the First Senate, whereby the Senators wanted the National Government to take over all outstanding debts owed by local authorities and which were inherited by the County Governments after the 2013 General Elections, in order that the regional governments can begin on a clean financial slate - unshackled by debt. However, this motion was vehemently opposed by public financial experts who argued inter alia, that this was "....... tantamount to punishing those local authorities that exercised prudence and fiscal discipline in the management of the (Local Authority Transfer Fund) LATF. ....... it is also a way of condoning financial irresponsibility and impunity in public institutions." (Njeri, W wa, 2013).

It will be interesting to see what course of action the heavily indebted County Governments will take should the Senate's resolution fail to pass into legislation, given the convoluted and costly judicial process that accompanies any attempts at public debt recovery and corruption prosecutions. 

 

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