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.