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

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

3. Introductions

4. 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

5. Clemens Calice
XXX

6. Kenya’s PPP Programme

7. 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

8. Kenya’s road PPPs

9. Kenya’s road PPPs Project Description Nairobi-Mombasa Highway
30 year DBFOM
c.480km
c.$ bn
To be procured in 3 packages
Nairobi-Nakuru Highway
c.240km
c.$ m
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

10. 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

11. Key Financing Issues

12. 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

13. 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

14. 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

15. 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

16. 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)

17. Key Funding Issues

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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)

24. 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

25. 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

26. 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

27. Key Points

28. 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

29. Thank You