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Investing in Infrastructure for Development

Daniel Ngumy3 December 2013

Infrastructure needs for Kenya (2012 – 2020)Sector Expected Cost (USD bn)

Energy 19.8

Ports 4.8

Roads 9.0

Water and sanitation 4.6

Railways 7.2

Airports 0.9

Tourism 2.0

ICT 7.8

Local Government 2.0

Housing 2.9

Public Works 1.0

Lamu Transport Corridor 3.7

Total Financing Requirement 65.7

Estimated funding gap (excluding GOK funds available) 40.7

*source: National Treasury and Vision 2030 secretariat

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The Importance of Public Private Partnerships

• “Across the African continent, infrastructure challenges account for an average 2 per cent decline in economic growth per annum. The 48 countries in Sub-Saharan Africa with over 800 million people generate roughly the same power as Spain with only 45 million people.” (African Finance Corporation - Long-term Infrastructure Financing Options for Africa, 2010)

• Less than half of 1 percent of East Africa’s improved per capita growth

performance during the 2000s can be credited to improved structural and stabilization policies (Calderon, 2008)

• Africa needs an estimated US$93 billion per year to develop its infrastructure, with two-thirds required for new physical infrastructure and the remainder for maintenance and operations (Sanusi, 2012)

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“The size of the gap forces Kenya to be realistic about targets and to be very deliberate about how it spends the relatively limited resources available” (World Bank, 2011)

Kenya needs to overcome challenges• Large funding gap

o As of 2006, Kenya needed and additional $2.1 billion per year (11% of GDP) to meet the infrastructure funding goal.

• Heavy long term expenditure horizono Sustained expenditures of approximately $4 billion per year (20% of GDP) required

over the next decade.• Existing inefficiencies extending targets

o If Kenya did not increase infrastructure spending, it would meet infrastructure targets in 18 years by eliminating existing inefficiencies in infrastructure sectors.

As a result…The funding gap can be addressed only by:o Raising additional finance, or alternatively o Adopting lower-cost technologieso Less-ambitious targets for infrastructure development

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Examples of PPPs

Lamu PortRailway projects

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Examples of PPPs cont’d…

Lake Turkana Wind Power Project University housing projects

Mindset of the Government

• “Experience the world over has shown that public private partnerships are more applicable to infrastructure services and facilities than any other sector as this is where inadequate services are more visible.”

• “Allow me also to restate the role of Public Private Partnerships as a preferred delivery option for key infrastructure services and the commitment of Government of Kenya on Public Private Partnerships.”

• “The Kenya government is working towards providing this enabling environment by having a strong political will, robust legal and institutional framework as well as strengthening public sector capabilities to effectively handle Public Private Partnership projects successfully.” (Hon. Uhuru Kenyatta – Minister of Finance, 2010)

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Mindset of the Investor

• “Infrastructure investing has traditionally been seen as a low-return, long-horizon investment best left to the public sector.”

• “That view is slowly changing. While infrastructure plays may generally be expensive to construct and maintain, the barriers to entry are high — giving first movers the advantage. Infrastructure investments are good counter-cyclical plays: They tend to be immune to most normal business cycles, their correlation with other assets classes is low, revenues are implicitly linked to inflation, and cash-flows tend to be reasonably stable in many types of infrastructure investments.” (Marwan Elaraby, Managing Director, Citadel Capital)

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Why an Investor would need good legal advice

• Regulatory advice

• Transaction structuring advice

• Practical issues such as addressing political risks

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Key legislation that impacts private-public partnerships

Privatisation Act, 2005

The Constitution

County Governments

Act

Public Procurement & Disposals Act,

2005

Public Private Partnerships

Act, 2013

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LEGAL FRAMEWORK

Government Contracts Act

Public Finance

Management Act

Transition to Devolved

Government Act

Capital structuring for infrastructure projectsSenior Debt Mezzanine Finance Equity

Form of Capital Working Capital Bridge FinanceMedium/Long-term Debt

Structured with debt or equity features

Ordinary shares or preference shares

Typical proportion 65% - 80% 5% - 10% 20% - 35%Capital providers Commercial Banks

DFIsPrivate CapitalMezzanine FundsDFIs

Private CapitalCapital Markets

Ranking Senior Second ThirdSecurity Secured Subordinated NoneTerm Project term (8 -12

yrs)Flexible Indefinite

Income Stream Coupon Coupon DividendsEquity kicker None Warrants Shares

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Addressing risks • Political Risk is main investment constraint (Economist Intelligence Unit Report)• Typical Political Risks:

o War, insurrection, civil commotion;o Expropriations; o Change in law & taxes; o Failure to issue or renew authorisations; o Currency inconvertibility; o Arbitration award defaults

• Addressed by:o Political Risk Insurance (PRI) instruments issued by Multilateral International

Guarantee Agency (MIGA)

o Debt and Equity Investments by Development Financial Institutions (DFIs)

o Certain Loan Structures used by DFIs

o Government Guarantees/Support Letters

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THANK YOU

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BOTSWANABURUNDIETHIOPIAKENYAMALAWIMAURITIUSMOZAMBIQUERWANDASUDANTANZANIAUGANDAZAMBIA

Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.

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