Announcements Public Sector Rating Alerts

GCR has affirmed the County Government of Kisumu’s national scale long-term issuer rating at BB(KE); Outlook Stable.

Rating action

Nairobi, 28 July 2021 – GCR Ratings (“GCR”) has affirmed the County Government of Kisumu (“Kisumu County” “the County”) national scale long-term issuer rating at BB(KE), with the Outlook maintained as Stable. At the same time, GCR has affirmed the national scale short term issuer rating of B(KE).

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
County Government of Kisumu Long Term issuer National BB(KE) Stable Outlook
Short Term issuer National B(KE)

Rating Rationale

The ratings on Kisumu County balance low levels of leverage and increasing own sources of revenue (OSR) against weak operating performance, low levels of liquidity and successive poor audit outcomes. Some tentative improvements in performance are noted.

Kisumu County is home to a population of around 1.2 million people and hosts Kenya’s third largest city, Kisumu City, which is the key centre for trade, transport and services in Western Kenya. The County is the 7th largest contributor to national GDP and evidences a more diversified spread of Gross County Product by sectors, and lower reliance on agriculture than most. However, Kisumu’s economic growth has fallen behind that of Kenya as much of its industrial capacity has fallen into disrepair, particularly in the sugar cane sector. Overall GCP growth registered at around 4.0% over the 2013-2017 period, compared to the national growth rate of 5.8%, while GCP per capita growth was around 1.2%, compared to national growth of 2.8%. Around 35% of its people are subject to multi-dimensional poverty, below the average for Kenya (53%), but well above the level for urban areas (28%).

Kisumu’s OSR growth has been erratic over the last 5 years with collections consistently falling below target (FY18/19: 61.0%, FY17/18: 76.2%), albeit with some improvement in FY19/20. The County is reliant on Exchequer releases with the OSR to Total revenue at 11.4% in FY18/19 and 7.9% in FY19/20. Although the average over the last 5 years is slightly above the national average of 8.7%, it compares poorly to other urban centres (Nairobi: 47.1%, Mombasa: 27.5%, Nakuru: 14.5%, Kiambu: 19.8%). Property rates offer significant potential to enhance OSR but remain hampered by an un-updated valuation roll and uncollected arrears of about KES9bn.

High recurrent expenditure levels have also negatively impacted operating performance, with Kisumu’s staff costs as a proportion of total costs at 49.8% in FY19/20 (FY18/19: 45.8%, FY17/18: 52.3%), in breach of the 35% in the Public Finance Management (PFM)(Amendment) Regulations, 2015. Development expenditure has averaged around 50% of budget, with the ratio of development expenditure to total expenditure averaging 24% over the last 5 years (below the recommended 30%).

Leverage and cash flow is a positive assessment as Kisumu has not made use of debt funding over the review period. GCR’s liquidity assessment, however, is a negative rating factor given the KES2.9bn in pending bills at end of FY18/19 (FY17/18: KES2.0bn). Although Kisumu had KES1.5bn in cash at FY18/19, equating to cash coverage of 108 days, it declined during FY19/20. Moreover, the amount is not sufficient to settle the 60% of historical pending bills that GCR assumes should be settled in subsequent periods. This would reduce the allocation of funds to new projects in forthcoming budgets.

Management and governance is the most significant negative rating factor for Kisumu County as the county’s financial statements have received “Adverse Opinions” from the Office of the Auditor General in prior years. While an improved draft “Qualified Opinion” has been received for FY19/20, and there has been some progress in strengthening oversight committees, there remain material qualifications. These include differences in Integrated Financial Management Information System (IFMIS) and the financial statements, a lack of reconciliation of bank accounts and balances, unexplained expenditure, lack of asset register and some unexplained differences to asset acquisition amounts.

GCR has factored government support into the ratings. This is because Kisumu County fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for their citizens. Division of revenue to the counties is enshrined in the constitution, and there are procedures for approving projects which are supported by the national government. In addition, the PFM Act 2012 Section 94 (1) (a) (i) states that failure to make payments and as when they fall due is a material breach that requires National Treasury intervention in terms of Article 225 of the constitution. The extraneous financial support consideration is also somewhat tempered by the constrained National fiscus which has worsened since our previous rating exercise.

Outlook statement

The Stable Outlook reflects the view that the rating reflects the weaknesses in Kisumu’s operating performance and financial position. However, this could be amended if there is further deterioration.

Rating triggers

Positive rating action could arise if the county has sustainable increases in OSR, reduces its consumptive expenditure, particularly the high staff costs and improves its development budget implementation, audit outcomes and liquidity profile especially through addressing the pending bills.

Negative rating action is likely if pending bills continue to increase, cash flows and cash on hand deteriorate, there is a further deterioration in audit outcomes and budget implementation worsens.

Analytical contacts

Primary analyst Eleanor Kigen Senior Analyst
Nairobi, KE EleanorK@GCRratings.com +254 703 041618
Committee Chair Eyal Shevel Sector Head: Public Sector Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Local and Regional Governments, June 2019
GCR Rating Scales, Symbols and Definitions, May 2019
GCR Country Risk Scores, June 2021

Ratings history

County Government of Kisumu

Rating Class

Rating class

Review Rating scale Rating class Outlook Date
Long Term issuer Initial/last National BB(KE) Stable March 2020
Short Term issuer Initial/last National B(KE)

RISK SCORE SUMMARY

Rating factors and sub-factors Risk score
Operating environment 7.00
Double country risk score 8.00
Sector risk adjustment (1.00)
Business profile (3.75)
Entity profile (0.50)
Operating profile (1.50)
Management and governance (1.75)
Financial profile 0.25
Leverage and capital structure 2.00
Liquidity (1.75)
Comparative profile 2.00
Government support floor 2.00
Peer comparison 0.00
Total Risk Score 5.50

Glossary

Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capital Expenditure

(“capex”)

Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Gearing Gearing (or leverage) refers to the extent to which a company is funded by debt.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
Local and regional Governments (“LRG”) Government entities possessing revenue raising capacity that are responsible for the administration of public policy for a given jurisdiction. These include metropolitan councils, local municipalities (of all sizes), district councils and state governments.
Long term See GCR Rating Scales, Symbols and Definitions.
Own Source Revenue Own source revenue are those income streams that are directly under the control of the public entity, and may include property rates, business and other licence fees, hospitality fees, fines, or any other charges through which an LRG can generate income.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Short Term See GCR Rating Scales, Symbols and Definitions.
Transfers Income received from a third party, most often a higher level of government or a donor. Includes exchequer releases, income provided by Government Departments, and or external parties such as development finance agencies.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to County Government of Kisumu. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

County Government of Kisumu participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from County Government of Kisumu and other reliable third parties to accord the credit ratings included:

  • Audited financial results to 2018/2019 (Plus four years of comparative numbers);
  • County Integrated Development Plan 2018-2022
  • Kisumu Annual Development Plans and
  • County Debt management Strategy Paper
  • Various procedure documents
  • Gross County Product Report 2019.
image_pdf


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.