The CEO will participate as a speaker in a Webinar organized by KO Associates LLP in conjunction with the Kenya School of Law on 10th July 2020 from 1430 to 1630hrs. The objective of the webinar is to take stock of the Public-Private Partnership Program in Kenya in light of the Covid-19 pandemic. The other panelists are as indicated below:
- Mr. Isaac Otolo, Director, Advisory Transactions, PwC.
- Mr. Crispine Odhiambo, Senior Partner, KO Associates LLP.
- Mr. Samuel Akhwale, Kenya School of Law – Moderator.
“The key problem in Africa is not a lack of funding, but the lack of well packaged, bankable projects”; this has been the opening remarks in most forums on infrastructure financing in Africa.
According to the Infrastructure Financing Trends in Africa Report of 2018, Africa which has a growing infrastructure financing deficit estimated to oscillate between $53 to $93 billion has not been able to attract sufficient infrastructure investment unlike other emerging regions in the world due to lack of attractive project pipelines. The lack of capacity and financing challenges for project preparation has been cited as one of the key reasons behind this.
Project preparation is multifaceted and includes a set of upstream activities and initiatives in the infrastructure project cycle meant to produce “procurement ready” projects. This includes project conceptualization, feasibility studies, deal structuring and transactional support.
According of the Global Infrastructure Hub, project preparation is a critical enabler of infrastructure development and has been identified as a key pillar in the G20 strategic road map to develop infrastructure as an asset class. As African public debt continues to grow, most of the countries are fiscally stretched to be able to increase investment in infrastructure development. This has been exacerbated by the adverse effects of the Covid-19 pandemic which has necessitated the realignment of resources to the health ministry.
As such, there is urgent need for the continent to tap into the private sector investment to augment resources and accelerate the modernization of infrastructure. How can the continent streamline her project preparation framework so as to attract more private sector into this journey?
The continent needs to develop a robust legal, regulatory, policy and institutional framework necessary to guide the project preparation process both at national and sub-national levels of government. The framework should address mechanisms that can help in the prioritization of projects so as to ensure that those that contribute towards long term economic growth are considered first. Additionally, the framework should inculcate a systematic assessment of infrastructure gaps that can aid in developing a prioritized and actionable project pipeline.
In the wake of Covid-19 pandemic, the African continent should standardize the project preparation processes so as to enable the duplication of the processes in the different levels of governments or ministries. For example, a Central Unit in the National Government’s Ministry of Transport can be deployed to help in the preparation of projects in the devolved units of Government.
As the world now focuses on building sustainable infrastructure, the African continent should continuously review her project preparation framework so as to ensure that it is resilient in the wake of global pandemics like the Covid-19. The framework should absorb the shocks caused by global pandemics and ensure that they timely deliver well packaged projects. Most importantly, the countries should seek to learn from challenges of preparing and structuring similar projects in Africa.
The project preparation framework should also identify approaches and mechanisms that can be adopted to identify, ring-fence and direct financing towards the different activities in the preparation process. Besides raising funds from Multilateral Development Banks (MDBs), the African Governments should develop Project Development Funds (PDFs) that can help augment the efforts by the MDBs led initiatives. The PDFs should be supported by effective governance, oversight, institutional capacity and sustainable financing especially in their early stages of development.
Most of the financial institutions operating in Kenya and the East African region have not embraced project financing as a model of financing project. This is because of a myriad of reasons ranging from the risk appetite profiles, lack of good understanding of project financing, lack of regulatory framework etc.
Project financing is a financial structure whereby the lenders have recourse primarily to the projected revenue streams of the project or asset they are financing. As such the lender cannot smell beyond the projected revenues and access the balance sheet in an event of default. The lender will evaluate the projected project revenues during the proposed loan life and the project life and confirm their adequacy to secure the required debt service.
Unlike the contemporary corporate lending practiced by most Kenyan banks which advance lending for a period not more than six years, project financing entails lending for a longer term of at times up to 20 years.
The Public Private Partnership (PPP) unit of the National Treasury has lined up a number of projects which it intends to undertake through partnering with the private sector.
This financing model is the most ideal for the large infrastructure projects considering the ballooning debt levels of the country.
The PPP model of financing projects entails engaging the private sector to finance public projects and operate the project for a specified period of time so as to recoup their investment and margins.
World over, the financiers of projects under PPP would run the projects for an average of 25 years. The question that quickly comes to mind is how will the Treasury be successful in securing financing for these projects when the financial institutions are not prepared to lend for longer term? How will this ambitious drive be successful if the banks do not have customized project finance facilities to undertake these projects?
As such, most of the bidders will be foreign companies who will loop foreign lenders that have better understanding of how to sculpture and arrange project finance facilities.
According to the study dubbed “The State of Infrastructure PPP in Countries Affected by Fragility, Conflict or Weak Institutions” undertaken by the Public-Private Infrastructure Advisory Facility (PPIF) of the World Bank, weak financial institutions have been cited as one of the impediments to the implementation of projects under the PPP model in emerging markets.
The study found out that majority of the funding for projects implemented under PPP came from international commercial banks and multilateral development banks since local banks do not have the capacity and appetite to finance them.
Moving forward, there is an urgent need to establish a think tank comprising of the Central Bank of Kenya, the Kenya Bankers Association (KBA) and representatives from the commercial banks so as to demystify project finance and establish a route map that will lead to the establishment of project finance facilities.
Additionally, there is need to ensure that the PPP Act and the regulations safeguard the lenders of the projects so that banks have the comfort that they will recoup their investments.
Kenyan banks need to invest more than just Relationship Managers who screen project proposals based on the profitability of the borrowers and available securities.
Johnson Kilangi, lead consultant in charge of project finance, Lean Africa Consultants Limited.
The Infrastructure Consortium for Africa is key in influencing Africa to deliver infrastructure projects efficiently
Lack of modern and efficient infrastructure in Africa has been cited as one of the biggest impediments stifling the continent’s efforts to become competitive globally. According to the African Development Bank, Africa requires an annual injection of $ 130b to $170b so as to fix the infrastructure gap. According to the Infrastructure Financing Trends in Africa 2017 report published by the ICA, a tripartite relationship between bilateral donors, multilateral agencies and African institutions that are involved in financing infrastructure, total funding for infrastructure in 2017 stood at $ 81b, the highest since 2010 and 22% higher than in 2016. This rise is mainly attributed to increased Chinese investment and expenditure by African governments in infrastructure.
Out of the $ 81b funding raised for infrastructure in 2017, only a paltry $2.8b was injected by the private sector. This is despite initiatives by most African countries to establish and strengthen their Public-Private Partnership regulatory framework to attract the private sector into infrastructural development. Most of the mega infrastructure projects in Africa are Greenfield and as such the private sector has shied away and opted for brownfield projects; as the latter bypasses the development and construction risk exposures inherent in Greenfield projects.
Given the challenges of marshaling private funding into infrastructure, the ICA is left at the center stage in the modernization of infrastructure in Africa. How then can these players influence the way Africa conceptualizes, structures, implements and manages infrastructure projects? The following measures by the ICA can turn around this situation:
i) Strengthening and participating in project preparation and planning
The Government’s contracting authorities should engage the expertise of the private sector in the preparation and planning stage especially for large and complex projects. The ICA should also second staff to join the team to enhance efficiency in this critical stage more so in ensuring that the projects are packaged to meet the conditions, requirements and limitations of the specific lenders and grantors of those projects.
However, the cost of preparation and planning of large infrastructure projects can gobble up 5 to 10 % of the total project cost, hence straining the project budget. As a result, most contracting authorities tend to overlook this critical stage, leading to project failures. The ICA and other bodies like the Project Preparation Facilities Network should therefore strengthen and ease Governments access to funding meant for project preparation and planning.
ii) Close monitoring of project implementation schedules and cost structures
Project lenders and governments need to agree on a project monitoring and reporting framework which will then serve to guide the team during the implementation of the project so as to ensure projects are delivered on time and within the set budget. As much as most governments would see this as meddling with the internal affairs of their operations, close monitoring of project costs and time schedules will ensure that contracting authorities instill discipline and procedures that will ensure project costs are well managed and that projects are delivered within the required time frames.
iii) Project funding draw-down framework
Project lenders and project owners should agree on a project funding draw-down framework which is based on strict project milestones. Any deviation from the planned costs and time will jeopardize the access of funds to continue with the implementation of the project. This should be very clear from the onset so as to instill a culture of proactive project cash flow planning and timely draw-down of the project funds.
iv) Transparency and public information
So as to maintain public support, governments should avail information about the project to the public. Governments should periodically avail information about the status and progress of the projects so as to ensure that the public understands what the government is undertaking and the social and economic impact of the project. This can be achieved through publications on the contracting authorities’ website, in the press, on billboards etc. As a result, the public will be able to positively criticize the government when projects are delayed and in turn put pressure on the stakeholders involved to come up with corrective measures.
Lean Africa Consultants is an advisory firm incorporated in Kenya in 2015 that offers project finance and Public-Private Partnership (PPP) advisory services in Africa. The firm brings together a driven team of experts from different fields that jointly deliver quality services to clients. It recently hosted the inaugural edition of the East Africa Infrastructure Project Finance Conference in Nairobi. The high level conference sought to explore mechanisms that can increase investment in infrastructure in the regional market through efficient structuring of infrastructure projects. In the following interview with this magazine, Johnson Mwawasi, the organiser’s chief executive explains why Africa needs to package infrastructure project proposals efficiently to attract sustainable financing and why his consultancy is leading the way.
- What did you set out to achieve with Lean Africa Consultants?
Being in the construction for some time, I have seen major challenges faced by government contracting entities, EPC contractors and subcontractors that adversely affected the delivery of the projects on time and on budget. Projects that were fully funded were not left out either. It is clear that there are inherent problems that need to be addressed besides access to financing.
Lean Africa was funded to help clients to efficiently structure, plan schedule and package infrastructure projects so as to attract sustainable and longer term financing and ensure successful completion of projects.
- How has been the experience since starting out?
Just like any other business, packaging and marketing a new brand can be an uphill task. It has not been exceptional for our brand. It has been a difficult journey with challenges like convincing business owners that you can deliver, that you have the expertise, that there is value in contracting a local advisor over a foreign one, and the list is endless. However, there is value in building networks as the first contracts we signed were product of relationship that I had established during my employment time.
- Whom do you target with your solutions?
We have set our sights on the entire African market with a vision to structure sustainable project financing solutions that addresses the needs, requirements and opportunities in the continent. We have a strategic plan that sets out the milestones and guides us to achieve our ultimate goal to serve the entire Africa.
- Why should customer use your service/products?
I am a strong believer of the school of thought that the African youth that have the key to turn Africa into the continent of the future. This is because we understand the African terrain, the challenges and the opportunities that it offers. We leverage on the expertise of international players to deliver the best for our clients and at relatively fair rate.
- Is Africa well-resourced to compete globally?
As I said before, Africa is the continent of the future. Africa is among the few regions in the world whereby investors can earn double digit returns on their investment. According to the United Nations, more than half of the global population growth between now and 2050 is expected to occur in Africa. Yes, Africa can compete globally, we only need to realize that we need to do things right! For Africa to compete globally, we need to invest in our people, in efficient infrastructure and energy so that we can industrialize the continent. If we do this right coupled with the population growth, we have a direct ticket to compete globally.
- What are the social and economic benefits of infrastructure and project financing advisory to Africa and its investors?
Research indicates that for every 1 US dollar invested in infrastructure, we stand to recoup 3 to 5 US dollar in the next 20 years. Infrastructure development drives economic growth and plays a big role in improving the lives of the people. Imagine what the new roads and electricity connections have done to the Kenyan population living outside the major cities? These investments are reshaping the lives of Kenyans who are now playing a role in building the nation.
Our project financing advisory will ensure that these projects are structured properly so that the citizens get value for money. Proper planning and execution of projects will definitely assure investor confidence and thus attract direct foreign investment and private investment in infrastructure projects in the country. This will lead to improvement of lives in the entire country.
- What are the emerging trends infrastructure/project/investment financing and their impacts on your operations?
Today, there is sufficient project financing around the world scouting for well structured, thought-out and well packaged projects. Investors, project lenders and donor countries are more than before keen on ensuring that they get their investment and margins back within their preferred investment tenures. Investors are keen to invest in infrastructure projects where governments have invested in proper and transparent procurement processes, where governments adhere to the rule of law, where governments have put in place a conducive environment for business. If all these are in place, Africa needs not to beg for funds, it will actually attract sustainable financing partners for its infrastructure projects.
These emerging trends of course present enormous opportunities for the consulting fraternity as things have to be done right going forward.
- Have you faced challenges? Possible interventions?
I am a strong believer that nothing worthwhile comes easy. Challenges exist to strengthen our resilience and make us stronger. We are still wading in a pool of challenges but this will not bring us down. How then do we become mentors for the youth if we throw in the towel on the way? We survive this by having mentors who have made their way before us; they build our stamina and give us reason to continue fighting.
- Any future prospects?
We recently organized a successful conference dubbed the 1st East Africa Infrastructure Project Finance Conference that brought together infrastructure development stakeholders in the region to discuss the importance of efficient structuring and planning of infrastructure projects in attracting sustainable capital for infrastructure. Our goal is to package the annual conference so as to reengineer how we conceptualize, plan, structure and implement infrastructure projects in Africa so as to ensure we achieve value for money and quickly improve the lives of Africans.
- Other pertinent issues?
Africa needs to realize that we are not going to live in this continent forever. We need to realize that time has come for us to do things right. We will not make any progress if we do not start to put the future of our continent close to our hearts.
Governments around the world have in the recent past embraced the private sector in major infrastructural development that they are undertaking.
The private sector has proved to be a solid partner that has enabled the government to concentrate on offering important services to her citizens. The Kenyan Government has not been left behind
Private Public Partnership (PPP) prospers where there is a stable regulatory and institutional framework that establishes, guides and controls the PPP agreements.
The government implemented into law the PPP Act of 2013 and the PPP regulations of 2014 that established the framework for identification, selection, evaluation and monitoring PPP projects.
This has given the potential investors some confidence and attracted bidders for projects in the pipeline. Other key regulations and guidelines that will improve the framework include Project Facilitation Fund Regulation 2017, draft
PPP (Amendment) Bill 2016, Draft County PPP Regulations 2015, and Draft Petition Regulations 2015.
However, there is need to improve the law so as to make it accommodative of new developments for instance, when only one bid is received, unsolicited proposals, and participation by county governments in PPP projects.
According to the Benchmarking PPP Procurement report of 2017 conducted by the World Bank, Kenya lagged behind Tanzania in a survey to evaluate the effectiveness of governments in managing the PPP projects.
Kenya has made strides in ensuring that the public are informed of the prospective projects that are going to be implemented jointly with the private sector.
In June 2018, the PPP Disclosure Portal was launched. The portal which was meant to improve transparency and accountability has significantly improved the Kenya’s standing in the global space. As such, potential investors are able to keep track of the progress made by the PPP Unit.
The PPP Unit is a specialised team within the National Treasury that is mandated by the PPP Act of 2013 to coordinate the PPP engagements in the country. It provides advisory services to Treasury and various governmental contracting authorities on the identification, procurement and management of PPP engagements.
The PPP Unit which became operational in 2010 has been strengthened with technical, legal and financial expertise necessary to undertake their mandate. The Unit is fundamental in shortening the turnaround time for uptake of PPP projects.
A number of projects have not been able to take off because the project sponsors have not been able to meet the preparatory costs. Most of the lenders of PPP projects will start injecting debt once the project reaches financial close.
Expenses like transaction advisory, legal fees can be substantial. Consequently, the government operationalized the project facilitation fund under the Project Facilitation Fund Regulations of 2017.
This fund is a big relief as it provides the required cash flow to fund any preparatory expenditure which can be subsequently recovered from the project’s special purpose vehicle in later cycles.
JOHNSON KILANGI, Lead consultant, project finance, Lean Africa Consultants Limited.