[Kictanet] Day 8 of 10 : - Projected Impact of OFC on theStakeholders

[Kai Wulff]

Will this include the financing of the onward capacity which needs to be bought?

Kai
  ----- Original Message ----- 
  From: Bill Kagai 
  To: kai.wulff at kdn.co.ke 
  Sent: Wednesday, January 31, 2007 10:36
  Subject: Re: [Kictanet] Day 8 of 10 : - Projected Impact of OFC on theStakeholders




  On 1/31/07, John Walubengo <jwalu at yahoo.com> wrote: 
    Apart from IPO
    recommendation from Kai and Bill,  the financing models
    (Equity, Debt, etc) has not quite come through and I hope 
    someone could make comment on that within the remaining
    three days 

  This might be useful.

  [Summary of TEAMS financing discussion on www.stock-detective.co.ke]
  At a recent seminar hosted by the Nairobi Stock Exchange, options for
  infrastructure financing through the capital markets were
  comprehensively discussed by various financial experts.

  It is worthwhile to consider various financing options for the East
  African Marine System or Teams project, a fiber optic line linking
  Mombasa to Fujaira, in the context of various options for
  infrastructure financing through the capital markets discussed at the 
  seminar.

  A strong case was put forward for funding for infrastructure projects
  in Kenya through the NSE. Among the experts who made a pitch for the
  idea were NSE chairman Jimnah Mbaru, NSE CEO Chris Mwebesa, Suntra
  Investment Bank chairman James Murigu, and IFC Operations Officer for 
  Financial Markets, Ndiritu Muriithi.

  Infrastructure financing through the capital markets is still in its
  infancy stages in Kenya. Yet there is a huge opportunity for companies
  and government agencies to raise money cheaply to build roads and
  power dams through bonds and shares at the Nairobi Stock Exchange 
  given that the current government development budget stands at around
  Ksh. 70 billion.

  The cost of completing the Machakos-Limuru dual carriage section of
  the Mombasa-Busia highway alone is estimated to cost Ksh. 108 billion.
  This means that the government has to find alternative sources of
  funding (other than donor funding) to meet the massive shortfall in 
  funding for infrastructure projects.

  The government has indicated that it will consider raising money
  through an IPO to finance the Teams project. It recently signed an MOU
  with Etisalat of Dubai to implement the Ksh. 5.7 billion project.

  The government will hold a 40 per cent stake in the project, Etisalat
  20 per cent and the remaining 40 per cent will be offered to investors
  in the East African region. The government has set an ambitious date
  for the completion of the project by November next year.

  If the government proceeds with the IPO as indicated, the project is
  certain to generate considerable interest among investors given the
  potentially high returns and profits from the link once activated.

  But the question still begs an answer: why has infrastructure
  financing through the capital markets been slow to develop in Kenya
  even with the recent expansion of the stock market?

  In other words, why haven't institutions like Kenya Airports
  Authority, Kenya Pipeline, National Housing Corporation, to mention
  just a few, been issuing to the public?

  Experts cite bureaucracy and lack of concise policy as the main
  bottlenecks to infrastructure financing through the domestic capital
  market.

  Mr. Muriithi is of the view that although the demand for
  infrastructure financing is huge, policy questions on issues like the
  role of the capital market in the process are not fully settled.

  He added that discussions are still on-going and that technical issues
  such as the financing structure, type of instruments and so on, were
  yet to be refined.

  He further noted that state owned enterprise have to obtain approval
  from Treasury to borrow money from the capital. Where such approval is
  not forthcoming especially considering red-tape and other internal
  bottlenecks, the opportunity to source funds cheaply from the 
  investing public is squandered.

  Mr. Mbaru gave the example of East African Portland Cement which
  wanted to raise Ksh 2 billion through the capital markets to extend
  its line to Western Kenya and Uganda but shelved the plan after it
  failed to get Treasury approval. 

  Mr. Murigu on his part argued that many SOEs went shopping abroad for
  financing while they could raise funds for infrastructure projects
  locally and at a cheaper cost.

  If the government is to successfully push through an IPO by mid-2007,
  Treasury approval will then have to come fast. Otherwise, the project
  could end up in the bog of red-tape as Treasury mandarins dillydally
  over approval.

  In seeking to raise financing for the project through the capital
  market, the government has a variety of options to consider. And
  critical here will be the manner in which the government structures
  the deal for investors. 

  Mr. Mwebesa said of the market's ability to absorb
  infrastructure-backed instruments, that "if properly conceptualized
  and structured with detailed information on the specific
  infrastructure project, the capital markets will absorb the same". 

  If the government chooses the IPO way, then it will have to create a
  special purpose vehicle whose shares it will then offer to the public.

  According to Mr. Mwebesa once such government-driven SPVs are listed
  in the NSE, bonds for specific infrastructure projects can then be
  issued by the SPV.

  Kenyans can then invest in such bonds through various vehicles such as 
  pension funds, co-operative societies, insurance companies and
  collective investment schemes (companies or trusts created to mobilize
  investment funds from individuals). 

  Pension funds are a good way of mobilizing investment in
  infrastructure bonds since the long-term financing needs of
  infrastructure projects match the long-term liability profiles of
  pension/retirement benefit schemes. 

  Infrastructure or asset-backed bonds can provide income for retirees a
  few years down the line and are thus a viable investment option for
  pension fund managers.

  However, the law needs to be changed to facilitate such initiatives.
  In addition certain policy and tax incentives are needed to boost
  private sector participation.

  Mr. Mbaru proposes that income derived by investors from
  infrastructure-backed instruments be exempted from withholding tax to
  make them more attractive. He also proposes a 2-3 year grace period
  before interest payments to investors or alternatively the issue of 
  zero-coupon bonds (bonds issued at a discount to the price and
  principal and interest paid lump-sum upon maturity) to finance such
  deals.

  There is no doubt that the Teams project can be financed through the
  NSE. It is up to the government to speed up the creation of an SPV as
  well as Treasury approval and also give investors an attractive value
  proposition.

  This is not to mention that public awareness of the viability of the
  Teams project and its importance to Kenya's ICT sector and the economy
  as a whole is very vital and a condition precedent to the success of 
  the project.

  The government may also want to consider a cross-listing of the SPV
  once put in motion now that integration of the three stock exchanges
  is well under way.





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