Remarks by the Chairman, Capital Markets Authority, Mr. Kung’u Gatabaki, during the Conference For County Governments, Thursday 31st October 2013, Safari Park Hotel 

The Chief Guest, Cabinet Secretary for Devolution and Planning, Ms. Anne Waiguru;

The Chairperson of ICPSK, Catherine Musakhali;

The Chairman of the Ethics and Anticorruption Commission, Mr Mumo Matemu;

The Chairperson of the Public Service Commission, Prof. Margaret Kobia;

Distinguished Governors, Deputy Governors, Speaker of the National Assembly; Speakers of the County Assemblies; County Executives and members;

The Chief Executives of intermediaries;

Distinguished guests, Speakers and Panelists;

Ladies and Gentlemen;

All protocols observed.

1.It gives me great pleasure to join you this morning. I am indeed enthused to be part of this exciting event that presents an opportunity to engage on the topical issues around the importance of governance and investments at the county level;

2.Ladies and Gentlemen: I welcome the opportunity to give remarks on corporate governance and investment, a subject that I am very passionate about due to it’s fundamental significance to achieving sustainable economic development and wealth creation, and its importance as a pillar underpinning the development of capital markets. Sound corporate practices support economic development by promoting the efficient use of resources and by creating conditions that attract both domestic and foreign capital. 

3.Ladies and Gentlemen: Good corporate governance is fully enshrined in CMA’s strategy in developing and deepening our capital markets. It is the basis on which we can achieve the Vision 2030 ambition of transforming Nairobi into an International Financial Centre and thus becoming the gateway for capital raising in Africa.

In view of the pivotal role of capital markets in realizing the Vision 2030 objectives, the CMA Board appointed a nine-member committee to review the Corporate Governance framework in the capital markets in January this year.

The committee, with members drawn from professionals from the Registrar of Companies/Attorney General’s Office; Ethics and Integrity Institute, the Nairobi Securities Exchange; Center for Corporate Governance; listed companies and Academia is led by the Institute of Certified Public Secretaries of Kenya Chair, Ms Catherine Musakali, who is with us here today. This committee has been carrying out a series of stakeholder engagement geared at revolutionizing the way we think about corporate governance in the capital markets and wider nation.

Further, the Authority has constituted an industry led Capital Markets Master Plan Committee, charged with conceptualizing, designing, and developing a work plan for capital markets growth and deepening over the next 10 years. In this context we are extremely conscious of the critical link between creating an appropriate environment for transparent governance as a foundation for effective development of investment through the capital markets. 

4.Ladies and Gentlemen: I will now turn to county financing. In Kenya, spatial inequalities have been the reason behind the Constitutional agitation for devolution. It is a obvious fact that economic activities and indeed development in our nation has been concentrated along a narrow corridor between Mombasa and Kisumu, leaving wide swathes of the country behind in terms of development and employment. The same is true of service delivery where many of the rural-based Kenyans have for many decades have been forced to make long and expensive journeys to urban areas to obtain basic services such as health, education and registration documents 

The promulgation of the Kenya Constitution has therefore paved way for a county government structure based on key principles of democracy, gender equity, revenue reliability, accountability and citizen participation. 

In this regard, the role that you play towards achieving milestones within your respective county governments is very pivotal. We at the Authority will continue to engage you on opportunities to finance long term infrastructure projects through the capital markets through the use of variety of products. We are in the process of structuring viable country bonds that would target improving infrastructure across all 47 counties. The awareness of county Governments of the capital markets as an avenue for cheaper long-term funding for activities within their jurisdiction is therefore crucial for sustainable development within the counties.

5.Ladies and Gentlemen: It is important to note that in aggregate the counties began the 2013/2014 Fiscal Year with a deficit of Kshs 32.7 billion with individual county deficits ranging from 36% and 91%. In this regard my humble appeal to you as our leaders today is to look beyond the Commission for Revenue Allocation and tax levies for funding of your development programs. 

In the words of the Controller of Budget on August 12, 2013 “The Controller of the Budget cannot start releasing money to a county that has shown a very big deficit, because how is that deficit going to be closed? If we released the allocation and the county runs out money, it will not even be able to pay salaries” 

It is obvious that the current allowable levies on agriculture, road use, water use, entertainment and so on, may not be sufficient to augment what is being disbursed from the national Government. 

This is where the capital markets come in as there will be unique opportunities to raise funds through Vanilla products (such as Initial Public Offerings for the companies operating at county level and County Bond); Structure products (such as Project Financing), Asset Backed Securities and other innovative products such as Public Private Partnerships (PPPs). 

To facilitate financial access to potential providers of capital, there will be abundant opportunities in investment banking, stockbroking, asset management, investment advisory and credit rating services at devolved levels:

6.Ladies and gentlemen: All this may sound very exciting and many of you are likely to emulate the Greek physist Archimedes with the discovery cry ‘Eureka’ , but I would like to warn you that today’s meeting is the easy part.

  • As a starting point, each county Government will have to look critically at internal capacity to help identifying cash generating projects and to internalize issues around fiscal discipline and closing out leakages if you want to fully benefit from raising capital through the capital markets.
  • Secondly counties will have to introduce laws allowing them to fund projects through the capital markets.
  • Thirdly counties will have to seriously consider developing or improving learning institution to build capacity expected with the introduction of capital markets products; such as through introduction of capital markets curricular in universities and institutions of higher learning;
  • Fourthly county governments will need to formalize pooled investments such as chamas to increase savings and investment levels
  • Fifth and most importantly, counties need to start talking to experts on the mechanics of determining the most appropriate structure as the Capital Markets Authority can only provide the necessary environment but it is industry players and the counties that will need to conceptualize and implement the funding solutions. In this regard there are a number of CMA licensed and approved transaction advisors in Kenya 

On our part as regulator and promoter of the capital markets the part in Kenya, we will be regularly engaging with willing county government as a key deliverable under our investor education and public awareness strategy over the next five years. 

Our focus will be discussing the opportunities available in the capital markets and bringing to the table possible facilitation areas that the counties would need assistance. We will review the existing capital markets legislative framework where necessary and also explore the need for separate county specific policy and regulatory framework for capital markets products and services. 

In addition the Authority will further interrogate the current provision of the Constitution requiring national governments assent and guarantee of raising capital by the county governments to provide guidance on their proper implementation. 

7.Ladies and gentlemen: As I conclude I wish to state that against the backdrop of a dynamic devolution environment, the Authority will conduct an investor profile study crucial for determining demographics on capital markets for planning at county level. Following this study we will collaborate with key stakeholders such as the national Government, other financial sector regulators, market intermediaries, exchanges, commercial banks and other important players in the capital markets to develop a capital markets devolution strategy that will guide the industry on orderly devolution of capital markets products and services 

With these few remarks it is now my pleasure to invite the Cabinet Secretary, Devolution and Planning to make her Keynote address.

Thank you.

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