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Kenya turns to capital markets to fund mega projects

By Frankline Sunday | October 5th 2014

Kenya: Investors stand to win big as the country looks to the capital markets to raise billions of shillings needed to jump-start massive infrastructure projects. This comes as traditional avenues of finance dwindle, forcing developers to turn to the local capital markets and the private sector to finance massive developments in energy and transport infrastructure across the region.

“We need $48 billion (Sh4.272 trillion) to fund energy and infrastructure projects, mostly energy and transport, and the only way we can fill this gap is through the capital markets and public–private partnership (PPPs),” said Laila Macharia, founder and CEO of advisory firm Scion Real Estate Ltd.

Kenya is currently in the middle of more than half a dozen energy, transport, and infrastructure projects whose combined cost is close to Sh4 trillion.

Konza Technopolis is one of these projects and the largest within the country. Expected to be East and Central Africa’s first ICT metropolis, Konza Technopolis has an estimated price tag of Sh1.2 trillion, most of which is expected to be funded by the private sector.

The Lamu Port and the Lamu Southern Sudan-Ethiopia Transport Corridor (LAPSSET) is another mega-project part of Vision 2030 whose cost has been pegged at Sh2 trillion and is expected to be financed by the East African countries and development partners.

Other mega-projects include an overhaul of the country’s rail network and introduction of commuter rail transport in major urban centers, the Nairobi metropolis project, and development of nuclear energy.

Returns at the NSE

According to Eddy Njoroge, the chairman of the Nairobi Securities Exchange (NSE), Kenya’s capital markets have the potential of raising this capital and at the same time giving back tangible returns to both retail and institutional investors. “There is so much liquid capital that people are holding and this is what we are convincing investors to bring to the securities exchange anchored on what we started with the KenGen Initial Public Offering (IPO),” he says.

Kenya is looking to raise more than $17.5 billion (Sh1.5 trillion) in just under two years to set up 5,000 megawatts of power.

For Mr Njoroge, who was at the helm of KenGen during its successful 2006 IPO, the NSE is the best bet for raising this colossal figure and more local participation is necessary to make this happen.

“We pitched our tent very wide with the KenGen IPO because we wanted to attract a lot of people and the allotment criteria was skewed towards the small investors and we ended up with 275,000 shareholders,” he recalls.

Mr Njoroge further says that Kenyan investors today understand that they can make tangible returns in the market which has seen unprecedented increase in value over the years.


“If you ask any market analyst to do a projection of Sh5 million shillings in 2004 placed in any five counters randomly the value of that investment today will come up to Sh25 million shillings,” he states.

Kitili Mbathi, managing director of CFC Stanbic Bank states that foreign investors are optimistic on the Nairobi capital markets and despite last year’s spate of insecurity, investor confidence is still high.

“The Standard Bank group has for several years now been holding investment conferences in London profiling the Nairobi and Lagos markets where we have operations,” he says.

“Six years ago we almost had to force foreign investors to attend because people did not understand Africa and what was in it for them but in June this year at our most recent conference we had to put a cap on attendance.

“This just tells us that the demand right now for African securities is greater than the number of slots available and this optimism is only set to go up.”

According to Mr Mbathi, foreign investors are drawn to the Nairobi bourse because returns at the NSE are significantly more than what is generated in the US markets which are experiencing the impacts of quantitative easing. “The opportunities are clearly there and the recent NSE IPO is a poster child for investing in IPOs going by it’s over subscription and stock rise,” he says.

Mr James Mworia is the CEO of Centum Investment Bank which is in charge of putting together financing for the Sh177 billion 960 megawatt Lamu coal plant.

The Lamu coal power project will largely be financed with debt is going to raise up to Sh44.2 billion from equity financing and Mr Mworia says that retail investors should be on the forefront of benefiting from this opportunity. “Kenya’s market has a lot of retail participation compared to other markets and this is mainly because we have increased the product range starting from Kengen to Safaricom to the recent NSE IPO and there is so much on offer to retail investors,” he explains.

Best counters

“We also have a lot of idle capital for example the money sitting in bank deposits which is in excess of Sh2 trillion which is earning less than three per cent interest. “This money can be put in guaranteed infrastructure investment and a lot of these infrastructure assets have real return rates of between 10 and 12 per cent and these are opportunities for our local retail investors to take advantage of but instead they are taken up by foreign investors.”

“Simplifying the investment opportunity by developing the corporate structure and governance system makes it easier for retail investors all over the country to improve their confidence in the market and put money in it,” he says.

His sentiments are echoed by Mr Njoroge who adds that the demutualisation of the NSE was a step towards opening up the market and debunking old myths that the Nairobi bourse was a reserve for an elite club of people.

“Demutualisation was meant to demystify the NSE and change the perception of it as a private club for stockbrokers and stress the fact that it is an open market where anyone can participate,” he explains.

“The next step for us is investor education to help people understand what exactly happens when the market is volatile for example and which counters are best and over how long, aspects which most retail and first time investors are struggling with.”


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