By JACKSON OKOTH
With the exchequer under pressure to improve and expand the country’s road, railway and port facilities, the Government is toying with the idea of floating infrastructure bonds.
Even as the Treasury suspended its plans to issue a sovereign bond in the international markets, it is, however, keen to put in place structures that would allow some state corporations, especially those in the infrastructure sector, to raise capital through these bonds.
Eligible corporations will be those with strong balance sheets, sound management and good ratings. This list includes Kenya Airports Authority, Kenya Pipeline Company, Kenya Roads Board and Kenya Ports Authority.
Commuters disembark from a ferry at the Kilindini Channel.
"There is need to amend the law to allow some state corporations to issue bonds," Ministry of Finance PS Joseph Kinyua told a recent two-day conference on infrastructure bonds.
But even as focus shifts to bridging the financing gaps critical to upgrading the country’s infrastructure, the lack of clear-cut policy to protect and maintain such investments is undermining progress in the sub-sector.
In the case of the country’s road network, failure by the authorities to control overloading has made it difficult to maintain good road networks, with investments already committed going down the drain, owing to abuse of the axle rule.
Engineers interviewed reckon that most of the country’s road networks are collapsing because the four-axle trucks dominate the country’s highways.
It is argued that a single overloaded truck has the potential to destroy the rehabilitated Mombasa Highway in just one year.
jumpstarting process
But the situation on the ground indicates that hundreds of such trucks ply the route daily, thanks to corrupt junior police officers charged with manning the various weighbridges strategically located along the Mombasa-Malaba Highway.
However, fixing the country’s ailing roads would require tapping into all financing sources — capital markets, donors and the private sector — through partnerships. In the road sector, it is the Ministry of Roads that will be floating the bond. This is, however, not until the three boards — Kenya National Highways Authority, Kenya Urban Roads Authority and Kenya Rural Roads Authority are fully operational.
Details are still being worked out with the ministry, in order to jumpstart the process. A vehicle stuck in the mud. Treasury is expected to allow some state corporations, especially those in the infrastructure sector, to raise capital through bond issues. [PHOTOS: FILE]
"Based on funds collected from the fuel levy, the Kenya Roads Board can use this as a basis to issue bonds for financing road rehabilitation work.
On an annual basis, the road sector requires Sh150 billion for construction, and Sh10 billion for maintenance.
This year’s Sh66 billion budget for the roads ministry is below the Sh160 billion it needs annually.
Under the Roads Act, 2007, each of the road authorities can only issue a infrastructure bond through a special purpose vehicle.
LONG-TERM BONDS
In the energy sector, the Energy Act 2006 opened up participation of the private sector.
The two principal companies, Kenya Electricity Generating Company(KenGen)and Kenya Power and Lighting (KPLC) are quoted on the Nairobi Stock Exchange(NSE).
"The Energy Act makes it possible for the current market players, and any other person who wishes to initiate a project utilising long term bonds, to do so," says Mr George Oraro, a senior partner at Oraro and Company advocates.
Also allowed by the law to issue infrastructure bonds is Kenya Ports Authority.
In carrying out its concession, Kenya Railways procured the appropriate amendments to the Kenya Railways Corporation Act, which now makes it possible for a concession, but may also be utilised as a vehicle for issuance of bonds.
"The only limitation is that if the provisions are to be applied for purposes of issuance of infrastructure bonds, there is the limitation of the provisions containing a requirement to tender," says Oraro.
In the water sector, the act provides an avenue through which funds for implementing large-scale infrastructure services in water or sewerage, may be financed through issuance of infrastructure bonds.
Experts attribute the necessity for issuance of infrastructure bonds to significant gaps that exist in the provision of long-term finance. "The financial system has been long dominated by financial intermediaries such as commercial banks, which concentrate in offering short and medium term credit," says Mr Jimnah Mbaru, Secretary of the National Economic and Social Council.
market capacity
Figures indicate that equities capitalisation at the NSE is about Sh900 billion, while that of bonds is only Sh342 billion.
"This means that the large capacity of our capital markets to offer debt capital remains unexploited," says Mbaru. For instance, the corporate bond market is relatively small, and has eight bonds valued at Sh12 billion. Potential investors in infrastructure bonds include commercial banks, pension funds, insurance companies, and National Social Security Fund and Savings and Credit societies.
Treasury is expected to allow some state corporations, especially those in the infrastructure sector, to raise capital through these bonds.
In the road sector, it is the Ministry of Roads that will be floating the bond.
The Energy Act 2006 opened up participation of the private sector in the industry. Also allowed by the law to issue infrastructure bonds is Kenya Ports Authority.