The private sector will play a key role in addressing Kenya’s infrastructural needs

A new report released today by the rating agency, Moody’s Investors Service revealed that private sector investments in Kenya are likely to play an increasing role in helping the country meet its annual $4 billion infrastructure spending need. This growth in investment is due to the improvement in Kenya’s business climate, favourable growth outlook and its deep financial sector will remain a concern for potential investors.

According to Christopher Bredholt, a Vice President – Senior Credit Officer electricity generation and transmission, rail and road networks and water access and irrigation will likely be the main beneficiaries of private sector investment, as these are key areas of focus for Kenya’s government.

Currently, the country is faced with several challenges which include the creditworthiness of key counterparties, corruption, land issues and evolving and relatively untested regulatory framework.

However, Moody’s expects that to encourage investment from the private sector there needs to be continued innovation in risk mitigation, buoyed by multilateral development banks.

The World Bank estimates that increasing infrastructure financing could improve Kenya’s per capita growth rate by three percentage. But in the face of these sizeable financing requirements, the improvement in Kenya’s business environment over the second half of this decade (following a period of decline) is positive for the sector. Since 2015, Kenya has moved up 75 places to 61st out of 190 countries on the World Bank Doing Business Indicators 2019. The rankings note improvements in resolving insolvency, protecting minority investors and registering property – important considerations for infrastructure investors relying on a complex suite of permits and contracts.

This improvement follows the adoption of a new constitution in 2010 that introduced a bicameral legislature, devolved county government and gave the judiciary power to rule on the constitutionality of decisions taken by the executive or legislative branches.

The country has also marginally improved its ranking in the World Economic Forum Global Competitiveness Index (GCI). The overall quality of infrastructure remains a constraint, however, with Kenya ranking, 105th out of 140 countries in the GCI – marginally better than single-B rated Sub-Saharan Africa peers such as Nigeria, Ghana, Tanzania, and Uganda but well behind South Africa.

The government of Kenya has introduced legislation to stimulate private investment in infrastructure. Kenya in 2008 adopted the “Vision 2030” development plan, with the aim of becoming a middle-income country by 2030. Under the plan, Kenya aims to increase investment in physical infrastructure to boost its competitiveness, implement governance reform and fiscal devolution, and increase employment and productivity in key sectors such as agriculture.

In 2013, the Public-Private Partnerships (PPP) Act came into force. With support from the World Bank, the government developed PPP regulations and established a PPP Unit under the National Treasury. Although progress has been slow, 76 projects are in the National Priority List of PPP projects as of December 2018, in sectors including transport, energy, health, education, water, housing and agriculture. In 2017, President Uhuru Kenyatta released a new policy agenda called “the Big Four”, which focuses on four development areas: manufacturing, affordable housing, universal healthcare and food security. This has been a key growth driver in the country.

The government also seeks to address supply-side constraints arising from inadequate infrastructure through investment in electrification, transportation and water projects. The rating agency expects that efforts to support geothermal and other renewable energy sources such as solar and wind will continue to increase energy diversification, as the country reduces its significant dependence on hydropower, which accounts for over 30 percent of installed capacity.

The geothermal and hydropower plants are used to meet baseload, that is, the minimum amount of electric power needed to be supplied to the electrical grid over any given time. So far, Kenya has performed well in expanding access to electricity and had the highest rate of access in East Africa in 2018 at around 75 percent, compared with 27 percent in Uganda and 33 percent in Tanzania.

Historically, Kenyan infrastructure has relied on financing by the government, multilateral development banks (MDBs) and other development finance institutions (DFIs). The MDBs have stepped up efforts to crowd-in private finance to make the best use of their limited resources and tap into the $trillions of assets managed by institutional investors. The Joint MDB Statement of Ambitions for Crowding in Private Finance (July 2017) sets out explicit undertakings by the principal MDBs to increase the mobilisation of private sector capital for sustainable infrastructure investment. These undertakings include measures to expand MDB-provided credit enhancements.

The credit enhancement provided by MDBs can be an efficient, targeted form of intervention that de-risks investment opportunities in more difficult sovereign environments, crowding-in private sector capital to finance infrastructure development.

Moody’s is also of the opinion that Kenya has reasonably well-developed pensions and insurance industries, with assets of around $10 billion and $6 billion, respectively. Increased allocation to infrastructure – away from dominant cash and government securities – will support the sector’s local currency financing needs  (estimated at $24 billion through 2030), but significant foreign capital will still be required.