Announcements Corporate Public Sector Rating Alerts

GCR has downgraded the County Government of Bungoma national scale long-term issuer rating of BBB(KE) to BBB-(KE); Outlook Stable.

Rating action

Nairobi, 19 July 2021 – GCR Ratings (“GCR”) has downgraded the County Government of Bungoma (“Bungoma County” “the County”) national scale long-term issuer rating of BBB(KE) to BBB-(KE), with the Outlook maintained as Stable. At the same time, GCR has affirmed the national scale short term issuer rating of A3(KE).

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
County Government of Bungoma Long Term issuer National BBB-(KE) Stable Outlook
Short Term issuer National A3(KE)

Rating Rationale

The ratings on Bungoma County balance absence of leverage, strong liquidity, and increasing own sources of revenue (OSR) against the small and undiversified status of the Gross County Product (GCP), moderately weak operating performance and qualified opinions from the Auditor General. The rating has been downgraded to reflect the more constrained Kenyan fiscal position, given the County’s high reliance on Exchequer releases and grant income.

Bungoma County is situated to the north-western region of Kenya and is predominantly rural, with just c.10% of its estimated population of 1.8 million living in urban centres. The county’s population growth is estimated at c.3.5%, ahead of the national average of 2.5%, driven by both organic growth and migration of people from neighboring counties into Bungoma’s urban centres. Positively, the growing population, and some improvements in infrastructure have resulted in GCP growth averaging 7.7% p.a between 2014 and 2017 (compared to the national average of 5.6%). As a result, the county now has the 11th largest GCP in Kenya, accounting for 2.4% of the total. During the same period, GCP per capita increased at a CAGR of 5.7%, compared to the national average of 2.8%. On the downside, around 71% of the population are estimated to live in multi-dimensional poverty (national average 53%).

Bungoma’s OSR grew from around KES485m in FY14/15 to KES675m in FY18/19, and further to KES860m in FY19/20 despite the Covid-19 pandemic. Bungoma benefits from significant amounts of Appropriation in Aid due to the number of national government staff deployed in the county (FY19/20: KES478m). The County’s reliance on Exchequer releases and grants (FY19/20: 91.6%, FY18/19: 93.7%) is at the national average of about 91.3%. Positively, the realisation of OSR in relation to budget has consistently outperformed the national average, with the county exceeding its targets in FY18/19 by 4.7%. To increase OSR, the County is looking to improve its legal and policy framework, which will expand the scope of products which will incur cess taxes and garner more fees through service delivery. In addition, the automation of the revenue collection process should support greater collections of outstanding land arrears and property rents.

Positively, staff costs to total expenditure improved from 48.6% FY17/18 to 40.9% in FY19/20, comparing favourably to the 45% average for all counties. Nevertheless, it remains above the minimum recommended 35% in the Public Finance Management (PFM) (Amendment) Regulations, 2015. To further manage costs downwards, the county is freezing non-essential employment and automating revenue collection, with a relative reduction anticipated to materialise from general growth in OSR. The high staff costs base has impeded development activity.

The average absorption of its development budget at 56.1% over the last 5 years is lower than the national average of 58.4%. As a result, development expenditure has amounted to just 13.4% of total expenditure, well below the recommended 30%.

As Bungoma has not made use of debt funding over the review period, leverage and cash flow is a positive assessment. Over the longer term, the County is considering approaching the debt capital markets to raise debt for development projects. If the initial amount remains below the 20% of recurring income, the County should have sufficient resources to meet debt service obligations.

Bungoma County’s liquidity assessment is also a positive rating factor as the County has reduced its pending bills to a relatively low KES234m in FY2018/19 (FY2017/18: KES326.4m). In addition, Bungoma had KES2.3bn in cash at FY18/19 (cash coverage of 96 days) which could comfortably settle all the remaining pending bills, albeit cash holdings eased in FY19/20.

Management and governance is a slight negative rating factor as a result of the qualified opinion from the Auditor General. The main issues raised by the Auditor General in the FY18/19 report include differences in Integrated Financial Management Information System (IFMIS), unauthorised reallocations of expenditure and failure to prepare and submit financial statements for the County Revenue Fund for Audit.

GCR has factored government support into the ratings. This is because Bungoma 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, there are procedures for approving projects which are supported by the national government and 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 which 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.

Outlook statement

The Stable Outlook reflects GCR’s view that Bungoma will continue to report increasing levels of OSR and better expense management, which should increase the resources available for development expenditure.

Rating triggers

Positive rating action could arise if the demonstrates improved expenditure management, including reducing the wage bill below 35% of total expenditure, strengthens the implementation of development projects, improves the scale and diversity of OSR and achieves unqualified audit outcomes.

Negative rating action could arise if consumptive expenditure remains high, pending bills increase placing pressure on liquidity, the County raises excessive debt leading to weak debt service metrics and if there is no meaningful improvement in development expenditure.

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 Country Risk Scores, June 2021

Ratings history

County Government of Bungoma

Rating Class

Rating class

Review Rating scale Rating class Outlook Date
Long Term issuer Initial/last National BBB(KE) Stable March 2020
Short Term issuer Initial/last National A3(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 (4.50)
Entity profile (3.00)
Operating profile (1.00)
Management and governance (0.50)
Financial profile 2.50
Leverage and capital structure 2.00
Liquidity 0.50
Comparative profile 2.00
Government support floor 2.00
Peer comparison 0.00
Total Risk Score 7.00

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 Bungoma. 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 Bungoma 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 Bungoma 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
  • Bungoma Annual Development Plans and
  • County Debt management Strategy Paper
  • Various procedure documents
  • Gross County Product Report 2019.
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