Financing and Funding Kenyan PPPs – Emerging Trends and Issues World Bank webinar, 25th October 2016

Agenda Introductions Brief background to Kenya’s PPP Programme Kenya’s road PPPs Financing Issues Funding Issues

Introductions

Nick Allen Adviser to Kenya’s PPP Unit Main responsibility = Road Sector PPPs 25 years experience advising on transactions between the public and private sectors in developed and emerging markets, mostly with PricewaterhouseCoopers

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Kenya’s PPP Programme

Background Legislation in place – 2013, room for improvement – rather restrictive around procurement process, but workable PPP Unit well established, but under-resourced Institutional framework in place, but very limited capacity in Contracting Authorities and Debt Management Office Low visibility/ awareness of the Programme – except when things go wrong Slow progress to date – but 2017 promises to be a breakthrough year (although we have been doing IPPs for 20 years) Significant support from 5 year World Bank credit

Kenya’s road PPPs

Kenya’s road PPPs Project Description Nairobi-Mombasa Highway 30 year DBFOM c.480km c.$1.3-2.3bn To be procured in 3 packages Nairobi-Nakuru Highway c.240km c.$700-1200m New Nyali Bridge c.$170m Nairobi Southern Bypass 10 year O&M c. 30km Nairobi-Thika Highway c. 60km Tolling operator 5-7 year DBFOM

Key Transaction Features All roads will be tolled National Tolling Policy developed, but not yet approved All projects are Availability Based >> Revenue Risk remains with government Traffic volume risk (cost impact) with concessionaire Land acquisition a significant challenge on three of the projects – funding and process management Resettlement a particular challenge for new Nyali Bridge Highways pass through/ close to parks, forests, conservancies, World Heritage Sites Procurement launches – November/ December 2016

Key Financing Issues

We face a number of financing challenges Multiple projects – 7 + Tolling Size of individual projects – even with packaging, c.$600m Quantum of aggregate financing requirements - $2.3bn ($3.8bn with augmentations) => 10% of GoK’s current debt stock Limited commercial bank appetite/ experience Limited LC financing – particularly long term, particularly fixed rate (basically none) Development banks back Projects rather than Bidders >> presents challenges for securing committed terms at bid stage >> risks of procurement failure Contracting Authority credit standing

How are we mitigating these challenges? Quantum of Financing Requirement (what we hope are) Sweet Spot size packages Procurement phasing Quality developers and operators Early, active and continuous banking market engagement

How are we mitigating these challenges? Limited commercial bank appetite Limited long term LC financing Early, active and continuous banking market engagement Government to retain forex risk Government to retain LC interest rate risk

How are we mitigating these challenges? Development banks back Projects Parallel Dialogue with “non-tied Qualified Banks” Option of neutralising financing terms in bid evaluation Option of running financing competition post-selection of Preferred Bidder

How are we mitigating these challenges? Contracting Authority Credit Standing Ringfenced National Toll Fund Commitment to minimum Funding Level (x months of Availability payments) Treasury backstopping of CA financial obligations under PA (inc. termination)

Key Funding Issues

Kenya’s roads sector 156,000km of classified roads, only 9% paved (14,000km) Largely development partner financed Maintenance (under)-funded via Fuel Levy – severely eroded by inflation over last decade, although recently increased (not by enough) Current maintenance backlog estimated at US$3.5-4bn

Ambitious road investment plans To support Vision 2030 US$9n of capex planned over 10 years, to 2015 Five road PPPs 10,000km of smaller roads – also on PPP basis Funding gap peaks at US$15bn in 2020

Closing the gap Increases to the Fuel Levy >> politically challenging; risk of smuggling Re-introduction of Vehicle licensing Tax on motor insurance premiums Road Tolling

Kenya’s National Road Tolling Policy Policy in draft awaiting Cabinet approval Key objectives: Sustainable funding source to enable road investments Equity – “User Pays” Principle Influence traffic and congestion Influence modal split

Kenya’s National Road Tolling Policy Applicability: Irrespective of method of financing – PPP or non-PPP Superior/ improved quality of roads Financially viable – NPV of tolling costs < 30% of tolling revenues No requirement for a free alternative

Kenya’s National Road Tolling Policy Toll levels and structures: National (not project specific) Reference Toll Influenced by: Ability and willingness to pay User benefits (cost and time savings) International benchmarks Costs imposed on roads by users Set, initially, by Government Inflated annually, adjusted periodically for x-rate movements, income growth etc Discounts for local/ frequent users; limited exemptions (military, emergency services)

Kenya’s National Road Tolling Policy Systems and Technologies: Electronic free flow tolling using RFID technology Pre-paid system Manual cash/ card lanes available for occasional and foreign vehicles Supported by National Vehicle Registration Database and Number Plate Recognition Option of conventional temporary toll plazas as back office systems are tested and rolled out

Kenya’s National Road Tolling Policy Operations: Single private sector operator to supply, finance, install, roll out, operate and maintain across all five road PPPs 5 to 7 year contract (indicatively) Competition to be introduced for new roads or at end of initial contract

Implications for PPP projects Kenya’s Road PPPs would not happen without Tolling >> unaffordable for government Toll revenues provide a source of comfort for financiers where government’s credit standing is sub-investment Projected Toll revenues exceed projected Availability Payments – over the period of the concessions – although shortfalls in early years require Treasury support

Key Points

Key Points Development banks critical to Kenya’s larger PPP projects – process needs to recognise this PPPs are not just about financing – budgets are often more stretched than balance sheets >> Funding is key Toll revenues can underpin a project, but revenue risk need not be passed and toll operator can be independent of asset concessionaires

Thank You