A Presentation by

Charles Kairu

Senior Economist,

The National Treasury, Kenya

At the National Treasury of South Africa/OECD Forum on African Debt Management and Bond Markets

Cape Town, South Africa, June 26-28, 2013

Outline

1. Background of the program

2. Performance of Infrastructure Bonds Issued

3. Observations

4. Challenges

5. Going Forward

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1. Background to the program

Objective was to Support Kenya‟s Development

Agenda

Development Expenditure about 30% of budget

deficit component to be funded from domestic

borrowing.

Issue Infrastructure Bonds (IFBs)to partly finance

development budget.

Issue bonds to raise funds to fund infrastructure

projects in key economic sectors; Transport

(Roads), Water & Irrigation and Energy sectors.

Government entities and private sector to follow

suit and tap from capital markets to fund capital

expenditure 3

Background…..

IFB Features & Incentive Package Tenor – Dependent on projects turnaround time

Coupon rate – Fixed interest rate

Amortization – Redemption of principal in portions

Tax – All earnings/returns from IFBs exempt from taxation

Minimum amount – Ksh 100,000

Issuance Method – Public offer, Multi-price Auctions

Secondary trading – Bonds trade at the NSE, not used for Yield curve construction because of special features

Target Investors – Local & foreign

Institutional and retail investors

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Unlike conventional bonds, Infrastructure Bonds target specific projects, with potential for reliable income streams and great economic value.

Projects with national character: geographical distribution of the projects around the country is important.

Projects are factored in the annual Budget Estimates of the Government to ensure transparency.

Why

infrastructure

Bonds?

For overall growth, development and poverty alleviation to be robust and sustainable, it was vital that Kenya invest heavily in infrastructure.

Recognition that capital markets play a pivotal role in raising much needed capital through a well developed bond market.

Rationale

Investment

Features

Relatively high yields with returns.

Tax exemption for infrastructure bonds.

Amortization.

Bonds qualify for statutory liquidity ratio requirements for banks.

Tradable at the Nairobi Securities Exchange.

Used as collateral for commercial credits.

Projects funded;

Transport – Construction of new roads and rehabilitation of new ones, Northern Corridor Improvement Project , among other roads.

3.1 Infrastructure bonds: Targeted Projects/Sectors

Projects funded;

• Energy – Drilling of Electricity Generating Steam Wells, upgrading the National Grid System with New Transmission Lines and expanding the Rural Electrification project .

3.2 Infrastructure bonds: Targeted Projects/Sectors

Projects funded;

Water, sewerage and irrigation – construction of water supply and sewerage systems, water reservoir dams, sinking of boreholes and irrigation schemes spread all over the country.

3.3 Infrastructure bonds: Targeted Projects/Sectors

4. Performance of Infrastructure

Bonds 4.1 The First IFB Issue No. IFB1/2009/12

Yr

9

Infrastructure Bonds Conference held in October 2008 in Nairobi

First IFB worth Kes. 18.6b successfully issued in February 2009.

4.2 Second IFB: Issue No. IFB 2/2009/12

Yr

10

Bond worth Kes. 18.4b successfully issued in November 2009.

4.3 Third IFB: Issue No. IFB1/2010/8

Yr

11

Bond worth Kes. 16.0 b successfully issued in February 2010.

4.4 Fourth IFB: Issue No. IFB2/2010/9 Yr

12

Bond worth Kes. 30.6b successfully issued in August 2011.

4.5 Fifth IFB: Issue No. IFB1/2011/12 Yr

13

Bond worth Kes. 37.2b successfully issued in an original auction in October 2011and in subsequent 5 monthly tap auctions up to February 2012.

Bond issue

no.

Issue date Offer amnt

(Kes mn)

Bids received

(Kes mn)

Successful

bids (Kes mn)

Coupon

rate (%)

IFB1/2011/12 03.10.2011 20,000 13,297 11,597 12.0

IFB1/2011/12

07.11.2011 8,403 274 274 12.0

IFB1/2011/12

05.12.2011 8,129 209 209 12.0

IFB1/2011/12

02.01.2012 7,920 1,390 1,390 12.0

IFB1/2011/12

06.02.2012 6,530 5,060 5,060 12.0

IFB1/2011/12

27.02.2012 18,370 18,661 18,661 12.0

Total 37,501 37,191

5.Observations

Program has been a tremendous success:

Market appetite: All five bonds have been

oversubscribed, with a total of Kes. 121bn (US$1.4 bn)

on face value terms raised

Market deepening: Bonds have not only attracted

institutional but also retail market

Specific projects targeted: sense of Patriotism

Aggressive marketing and promotion

Incentivized packaging of bond features

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Challenges & Lessons learnt – What can be

learnt from the Kenyan experience?

IFBs not strictly “true” infrastructure bonds. Only 2

SOCs have successfully issued IFBs – Need to

restructure SOCs to have healthy balance sheets.

Macroeconomic stability a prerequisite to successful

issuance of securities – Kenya‟s experience with

volatility in 2010/11.

Successful Bond issuance requires efficient markets

– Kenya going through market reforms with

assistance from ESMID/GEMLOC. Current OECD

initiative laudable. However, there is need to

coordinate reform initiatives.

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6. Going Forward

Government infrastructure bonds program –

Government agencies and private sector to take advantage

of the market appetite to tap funds for their development

projects by issuing „True‟ Infrastructure bonds.

Public Private Partnerships (PPP) – Law

establishing PPP framework enacted in January 2013 to

Support key economic sectors e.g. roads, ports, power,

irrigation etc

Developing Diaspora Bonds -Tapping from

Kenyans living and working abroad

IFB program has been and continues to be key in bond

market development.

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Thank you

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