Long-term finance for Infrastructure in Kenya
Project Development Objective (PDO)
This program aims to support the Government of Kenya to mobilize domestic institutional investors into infrastructure finance using capital market solutions. Specifically, it will: (i) improve the efficiency and transparency of Government bond market, creating market confidence and price reference that could be used for pricing infrastructure assets; (ii) establish regulatory incentives and build capacity for institutional investors to be able to participate in infrastructure financing; and (iii) create a new capital market financing-vehicle through a demonstration transaction which would be replicable to future transactions.
Infrastructure needs in Kenya are vast, and Government resources required to meet these needs are insufficient. As per the AICD Country Report titled “Kenya’s Infrastructure: A Continental Perspective, 2011, addressing Kenya’s infrastructure deficit would require sustained investment of almost USD 4 billion per year in the medium-term to meet the gap, which is about 6.1-7% of Kenya’s GDP. Kenya’s budget is under strain with a fiscal deficit expected to increase to -9.4 percent of GDP in 2016/17. Total sovereign debt has been growing fast and stands at 53% of GDP. Citing fiscal concerns, Fitch put Kenya under negative outlook in December 2016.
Kenya has embarked on a large Public-Private Partnership (PPP) program. For five years, the WBG has been supporting the PPP unit of the National Treasury with the origination of commercially viable projects (Infrastructure Finance PPP Project -IFPPP, additional financing in preparation). Five road projects are ready to go to market, and two are at pre-qualification stage. The total amount for these road projects is about USD 3.8 billion, or 6% of GDP. The Government is taking all the foreign exchange risk of the projects as it is committed to provide all availability payments denominated in USD, should bidders request it. As per the IMF SAP, March 2016, the foreign exchange risk exposure of the Government is aggravated by the fact that it has been relying heavily on foreign-borrowings, with an external debt-to GDP of 27% - considerably higher than its Sub-Saharan African neighbors .
Kenya has made relevant progress in developing its local currency domestic capital markets and is ready for demonstration projects in long term financing. The Government of Kenya has been working in a number of fronts to improve the efficiency and depth of domestic capital markets. This has included a broad agenda covering policy, regulatory and training work in government and non-government bond markets, financial infrastructure, and investment regulations for institutional investors. While reforms in these areas still need to be reinforced, there is already a good base to kick start financial innovations to finance infrastructure. These could have a catalytic impact in accelerating ongoing reforms.
In this context, it is critical to attract local currency financing for the large upcoming infrastructure projects. Kenya has the basic pre-conditions for mobilizing institutional investors into infrastructure projects including domestic institutional investors (pension funds, insurance companies) with assets under management at 18 percent of GDP and international interest in investing in Africa alongside local institutional investors.
Activities / Output
The envisaged outputs of this technical assistance are as follows:
Component 1: Efficient Government Debt Markets
The objective is to ensure that government bond provide an appropriate reference pricing for infrastructure assets, as opposed to crowding them out. Currently the pricing on the sovereign debt is volatile and high. A sovereign debt market reform plan has been approved in March 2016 by the National Treasury, in partnership with the Central Bank of Kenya (CBK) and the Capital Market Authority (CMA), which would improve primary issuance and the transparency and efficiency of secondary markets. The activities would support the implementation of this plan. This complements efforts from the Office of the Technical Assistance of the US Treasury (OTA), which has a resident advisor on public debt management, focusing on policy issues.
Component 2: Strengthen long-term institutional investors demand into infrastructure assets
The objective of this component is to provide an enabling environment and build the capacity of the regulators and investors so that institutional investors have the ability to invest in infrastructure assets.
Component 3: Development of capital market vehicles and framework for transactions
The objective of this component is to develop a framework to facilitate a demonstration transaction, using an appropriate capital market vehicle, to crowd-in financing from institutional investors. Focusing on creating a framework that can support a demonstration transaction will help mobilize private investors, and identify the potential bottlenecks. Ultimately the objective is to develop standards for a financing solution that can be replicated for future transactions. In Colombia, the WBG supported the establishment of the first infrastructure debt fund, which led to the subsequent creation of three other funds of this type without any DFI support.
The expected outcomes of the project are:
1. Improved primary issuance and the transparency and efficiency of secondary markets for government bonds), creating market confidence and price that could serve as a reliable reference to price infrastructure assets;
2. Regulatory incentives created to attract institutional investors to participate in infrastructure projects;
3. Increased readiness (capacity to assess risks and monitor exposures) for regulators and institutional investors;
4. Development of capital market vehicles suitable for institutional investors to invest in infrastructure assets; and
5. Increased capacity to use instruments/tools or procedures when implementing a PPP transaction for regulators and investors.