The Sh340 billion National Infrastructure Fund will not be used to finance projects simply because they are politically popular or socially important, Treasury Cabinet Secretary John Mbadi has said, setting out strict conditions that investments must meet before receiving funding.
Mbadi told the Finance and Planning Committee that the government is designing the fund around a commercial model that requires investments to protect the money put into them, earn returns and bring in additional financing from private investors.
“A project may be socially important, but if it is not commercially viable, it is not a candidate for NIF,” Mbadi told the finance and planning committee on Thursday.
He said projects that fail to meet the required financial standards would not be allowed to draw money from the fund, warning that financing such ventures could weaken the fund and put public money at risk.
Projects that are considered necessary but cannot generate enough revenue in the short or medium term will instead continue to depend on the Exchequer for financing.
The Treasury is taking the position as it prepares to put the National Infrastructure Fund into operation. The fund will receive money from the privatisation and divestiture of State assets and is expected to provide another avenue for financing major infrastructure projects outside the ordinary national budget.
Jomo Kenyatta International Airport (JKIA) upgrade funds have emerged as the first major project seeking support from the NIF. However, it remains to be seen how much money the fund will put into the project, which other investors will participate and whether the airport upgrade will satisfy the financial conditions that will apply to all NIF investments.
Mbadi said the Treasury would not approve a project based only on its benefits to the public. Instead, the project would need to demonstrate that it can stand on its own financially and attract more money from investors.
The approach is expected to allow the fund to concentrate on investments capable of producing returns while leaving the national budget with more room to finance projects such as roads, schools and hospitals that may have high public value but limited direct financial returns.
Under the proposed rules, projects will be required to show commercial viability, financial sustainability and the capacity to raise additional capital. They will also be subjected to technical and financial feasibility checks before they can proceed.
The final decision on whether an investment qualifies will rest with the NIF board.
“The Treasury is particularly keen to prevent the fund from becoming another source of financing for politically motivated projects,” said Mbadi
Mbadi said political considerations could damage the purpose of the fund, which is why the government was putting strict conditions in place to keep investments that cannot generate adequate returns out of the scheme.
A further requirement will involve the use of debt to finance projects. Mbadi said at least 60 per cent of a project's capital structure is expected to be financed through debt.
This requirement is expected to provide an additional test for projects because lenders would only be willing to offer non-recourse financing where a project can generate enough income to support its obligations.
“If the project is not properly appraised and found to be commercially viable with adequate and sufficient internal rate of return, that would convince an investor,” Mbadi said.
The fund will invest in priority areas such as transport, energy, agriculture and livestock, water and irrigation, alongside other sectors that may be approved under the government's policy framework.
At the same time, the government is putting limits on the amount that can be committed to individual sectors and projects to avoid putting too much of the fund's money in one area.
Mbadi said no priority sector would be allowed to take more than 40 per cent of the total fund, while a single project would have a ceiling of 20 per cent.
Based on the current Sh340 billion value of the NIF, the 20 per cent ceiling would allow a maximum theoretical investment of Sh68 billion in one project.
The fund will also use separate special purpose vehicles (SPVs) for individual projects. This structure is intended to keep liabilities linked to one project from affecting the wider fund.
Centum Investment chief executive James Mworia, who is involved in setting up the NIF structure, told lawmakers that the fund would only be exposed to the amount it puts into a project's SPV as equity.
He added that any debt raised by the project would be non-recourse to shareholders, meaning lenders would not have a claim against the wider fund beyond the equity invested in the individual SPV.