Transcript PPP Challenges
Investing in Infrastructure for Development
Daniel Ngumy 3 December 2013
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Infrastructure needs for Kenya (2012 – 2020)
Sector Expected Cost (USD bn)
Energy Ports Roads Water and sanitation 19.8
4.8
9.0
4.6
Railways Airports Tourism ICT Local Government Housing Public Works Lamu Transport Corridor
Total Financing Requirement
Estimated funding gap (excluding GOK funds available)
*source: National Treasury and Vision 2030 secretariat
7.2
0.9
2.0
7.8
2.0
2.9
1.0
3.7
65.7
40.7
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The Importance of Public Private Partnerships
• “Across the African continent, average
infrastructure challenges 2 per cent decline in economic growth
account for an 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.” Corporation - Long-term Infrastructure Financing Options for Africa, 2010) (African Finance • Less than
half of 1 percent
of East Africa’s improved performance during the 2000s can be
per capita growth 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) 3
• • •
Kenya needs to overcome challenges
Large funding gap
o As of 2006, Kenya needed and additional meet the infrastructure funding goal.
$2.1 billion per year (11% of GDP)
to
Heavy long term expenditure horizon
o Sustained expenditures of approximately required over the next decade.
$4 billion per year (20% of GDP) 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 technologies o Less-ambitious targets for infrastructure development
“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)
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Examples of PPPs
Lamu Port Railway projects
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Examples of PPPs cont’d…
Lake Turkana Wind Power Project University housing projects
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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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LEGAL FRAMEWORK
Key legislation that impacts private-public partnerships
Privatisation Act, 2005 Public Procurement & Disposals Act, 2005 Public Private Partnerships Act, 2013 The Constitution County Governments Act Government Contracts Act Public Finance Management Act Transition to Devolved Government Act 10
Capital structuring for infrastructure projects
Senior Debt Mezzanine Finance Equity
Form of Capital Typical proportion Capital providers Ranking Security Term Income Stream Equity kicker Working Capital Bridge Finance Medium/Long term Debt 65% - 80% Commercial Banks DFIs Senior Secured Project term (8 -12 yrs) Coupon None Structured with debt or equity features 5% - 10% Private Capital Mezzanine Funds DFIs Second Subordinated Flexible Coupon Warrants Ordinary shares or preference shares 20% - 35% Private Capital Capital Markets Third None Indefinite Dividends Shares 11
• • •
Addressing risks
Political Risk is main investment constraint
(Economist Intelligence Unit Report) Typical Political Risks: o War, insurrection, civil commotion; o Expropriations; o o o Change in law & taxes; Failure to issue or renew authorisations; 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 12
THANK YOU
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BOTSWANA BURUNDI ETHIOPIA KENYA MALAWI MAURITIUS MOZAMBIQUE RWANDA SUDAN TANZANIA UGANDA ZAMBIA
NAIROBI
Anjarwalla & Khanna ALN House, Eldama Ravine Gardens, Westlands PO Box 200-00606, Sarit Centre, Nairobi, Kenya Apollo Centre, 2nd Floor, Wing A, Ring Road Parklands, Westlands PO Box 200-00606, Sarit Centre, Nairobi, Kenya T +254 (0) 20 364 0000, + 254 (0) 703 032 000 F +254 (0) 20 364 0201 E [email protected]
MOMBASA
Anjarwalla & Khanna S.K.A. House, Dedan Kimathi Avenue PO Box 83156 – 80100, Mombasa, Kenya T +254 41 2225090/6 F +254 41 2224996 Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.
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