Wednesday, 28 February 2018

Kenya confounds critics, raises $2 bn Eurobond

 Work on Nairobi -Naivasha section of SGR

 Kenya last week shook off negative news about its economy to raise US$2 billion in the second issue of a Eurobond in four years.

 The initial bond issued in 2014, was also met with bad news following an attack by “Al-shabaab” in Mpeketoni, Lamu, where 100 people were killed. The attack was seen in some quarters as an attempt to sabotage the issue, coming the day the issue opened.

The Market shrugged off the bad news bidding $8 billion. This time around, the country shook off a downgrade of the bond by Moody’s and the withdrawal of a standby facility by IMF. The recent issue was oversubscribed seven times, with bids totaling US$14 billion. There is also a feeling that the bad news was also designed to sabotage this issue.

 The success of the second issue has critics scrambling for metaphors.  if they had the sabotage of the second issue on the bad news, then they must be a disappointed lot. And now, they are harping on the country's alleged indebtedness to safe face. 

LTWP power station: Funded entirely by debts
The bad mouthing that characterized the first issue is also common with the second. The 2014 issue has been dogged by allegations of wrongdoing, with an allegation that US$1 billion was actually stolen. No evidence was ever provided to support the allegations. But the allegations continue. The second issue is being criticized for adding to the country’s debt burden.

The shake-off is a reflection of the horizon perspectives between traders and investors. Traders count the profits at the end of the trading day. Investors have a longer-term view, looking at the rate of return over a longer period rather than the difference between purchases and sales at the close of business daily.
 Investors have shaken off fears about the debt-to GDP ratio approach which traders are worried about. The ratio, which according to anti-debt activists is 54 percent, is said to be headed towards unmanageable levels.
Investors do not think so. They heard that before. The question is: how do the economic fundamentals look like? They are firm and looking good. Where will the money go? To be invested in infrastructure. Infrastructure is enablers of economic growth. That is it! The future looks bright.

But the Debt-to GDP ratio is still causing concern. However, there are two ways of lowering it: Fast economic growth while holding the debt levels low or cut borrowing and allow slow or static economic growth rate.

 Kenya has chosen to borrow to hasten economic transformation and set the stage for fast growth in the future through borrowing. Borrowing is bringing the benefits of future earnings to the present. 
 Kenya's borrowing  is anchored on her long-term development strategy whose aim is to create a “Globally competitive and prosperous country with a high quality of life by 2030.”   The idea is to shift the supply curve outwards to a new level of increased goods and services. That is, expand and diversify economic activity. Kenya’s GDP is expected to hit $120 billion by 2025, almost double the current level. That level will not be achieved unless the current bottlenecks are removed.

 Currently, agriculture, the driver of the economy is not operating at full potential. The manufacturing sector is also reeling under the weight of heavy costs. These inefficiencies are blamed on poor or insufficient infrastructure- energy, transport infrastructure, water, you name it.

This means massive investment, especially in infrastructure- and infrastructure is expensive. The country cannot provide the needed infrastructure from our tax revenue, even if a huge chunk of it went to infrastructure.

In fact, the current budget proposal gives the Ministry of transport, infrastructure, and housing Lion’s share of the budget in the coming financial year and probably beyond. And this will not be enough to build 10,000km of roads, seaports, airports, railway lines, water dams, and homes! That means some money has to come from elsewhere. There are only two options: bring in the private sector through PPP or borrow from them to invest.

 Given that investors have no stomach for sunk capital risk in areas such as generating geothermal power, the government has to take the risk and that means borrowing funds to sink in developing such sources. Borrowing from bilateral and multilateral lenders is almost out of the question for a country in a hurry to develop. The resources are not available from these sources because they also face budget constraints.
Smooth  and faster roads: Funded by debt
 Africa’s multilateral lender, AfDB, in its 2018 African Economic Outlook encourages Africa to tap into the US$100 trillion in savings held by Institutional investors and Commercial banks. Among the instruments it recommends is sovereign borrowing and PPPs.

To be sure, it cautions against creating personal monuments- projects that have no potential economic benefit but are politically palatable. And that is what everyone should be fighting against. It calls on Africa to invest in profitable Infrastructure to transform and industrialize Africa. It lists investment in the order of priorities as Energy, transport infrastructure and water. These are also the priority projects in Kenya.

So what is wrong with borrowing? Nothing! If invested in productive projects. Is there any evidence that borrowed funds have been wasted? We are yet to see it.  But we see goods roads, increased power supply, new railway lines and rolling stock, improved harbours, and water dams. Critics need not look far, Thika Highway was funded by debt, we are enjoying jam free rides. The Lake Turkana wind power project, worth US$786 million was funded entirely on debt. Come August and the project will add some 310 Mw in the national grid and, given its large size, we could soon see lower electricity bills. All these are infrastructure that enables economic prosperity as they cut the cost of doing business and create more jobs.
Therefore the question of not being able to repay the debts once the projects are up and running does not arise. The major concern should be that the projects are completed in time so that the country can enjoy the envisaged benefits and help repay their debts.

 The Standard Gauge Railway between Mombasa and Nairobi was completed 18 months ahead of schedule and the Nairobi- Naivasha section will be completed three months ahead of schedule. This eliminates cost-overruns and at the same time gives the country a bonus. The Nairobi Mombasa line has been operational for eight months now. This is because the funds are available and ring-fenced for the projects. Those funds were made available by borrowing.

Tuesday, 13 February 2018

Africa’s yawning gap in investment in infrastructure

Lake Turkana wind power station
Africa needs to spend a total of US$ 130-170 billion a year over the next seven years on productive and profitable infrastructure projects, says the Africa Development Bank. The expenditure in order of priority is US$ 35-50 billion on energy, $35-47 billion on transport, and $55-66 billion on water and sanitation.  Of the total capital needed, some $65 billion is already committed by governments and donors. That leaves a yawning gap of $68-108 billion dollars that must be mobilized from elsewhere.
There is no shortage of funds looking for sound investments. An estimated $100 trillion are held by Institutional investors and Commercial banks and sovereign fund managers.  A small proportion of these huge savings is needed to develop Africa’s infrastructure.

  A Solar Power farm
 All Africa needs is to craft bankable resource mobilization strategies to tap into this reservoir in order to industrialize, create jobs and enable inclusive development and dent the poverty rate.  . The continent, therefore, needs to dust off funds mobilization strategies. These include; Private-Public Partnerships and Foreign Direct Investments and bankable debt instruments.  Such attractive strategies would make Africa a major destination for investments funds.  And the economic prospects in the continent are mouth-watering. The middle class on the continent is growing and driving domestic demand for goods and services.

In fact, says AfDB, the growing middle class is part of the factors that insulate African economies from external shocks. The continent has proven resilient to external shocks, posting robust growth rates amid declining fortunes elsewhere. It is this growing middle class that is driving the growth in tax collection because it is driving demand for local manufacturers making them profitable tax-payers. This has seen tax collection in Africa rise to US$500 billion a year, elbowing out donor funding which stands at US$50 billion, below remittances which stands at $60 billion. Africa is thus a ready market for infrastructure services and a high return market for investment in such services.

But why, given the huge tax revenue does Africa need investors in infrastructure? why not devote more funds to infrastructure? Simple, there are more competing demands for the limited tax revenue. Therefore, more funds are needed targeting infrastructure development. The resources should be preferably ring-fenced to develop infrastructure.
Entebbe Expressway Uganda: Easing travel time
AfDB prioritizes energy because of its huge economic potential. More than 640 million Africans have no access to energy, giving an electricity access rate for African countries at just over 40 percent— the world’s lowest. Per capita consumption of energy in Sub-Saharan Africa is 180 kWh, against 13,000 kWh per capita in the United States and 6,500 kWh in Europe. Further, access to energy is crucial for reducing the cost of doing business, unlocking economic potential and creating jobs.

Africa’s energy potential, especially renewable energy, is enormous, yet only a fraction is employed. Hydro power provides around a fifth of current capacity, but not even a tenth of its potential is utilized. Similarly, the technical potential of solar, biomass, wind, and geothermal energy is huge.  What is lacking is a pipeline of bankable projects which can attract foreign investors.
 JKIA Nairobi: Easing international travel

The ball is now in Africa’s court to structure debt instruments to tap into that huge pool. The structuring should be geared towards attracting private investors into the actual development of certain infrastructure projects. Wind and solar are emerging as quick to install sources compared to say, geothermal energy, which takes decades to develop fully.

 But why prioritize investment in physical infrastructure? Unlike other social investments such as in health and education, infrastructure directly affects productivity and output in the short-run. Increased output in electricity generating capacity will not only raise the stock of energy generating plants, it is also part of GDP formation as an input to the production function of other sectors. Increased availability of electricity will reduce power rationing, thus eliminating the need to invest in standby generators by manufacturing plants. This cuts the production costs by enabling a more efficient use of conventional productive inputs.

Modern transport systems could increase manufacturing competitiveness by cheaply and quickly, moving raw materials to producers and manufactured goods to consumers. Investment in transport infrastructure compliments investment is energy by opening up the market for the goods produced in the continent and cuts the cost of doing business. And the resulting growth creates demand for employees thus reducing unemployment and poverty levels.
An SGR line: Easing bulk transport due to high speed

 However, African governments must now start weaning themselves from the provision of all infrastructure.  They must begin to charge the market price for Infrastructure services such as water, electricity, and road tolls. Such payments will ensure that there is enough money to repay the debt, a return to investors and foot maintenance costs thus easing the burden on the government budget. Dependence on tax revenue leads to decaying infrastructure due to a limitation of funds for maintenance.

Studies show that other infrastructure sectors are also profitable with IRRs ranging between 16 percent and 25 percent. Thus they are a good candidate for private sector investment providing a source of stable income flows in the longer term.

 Studies also show that  Capital markets in Africa are vibrant and sufficiently sophisticated to mobilize funds for infrastructure projects. Funds managers out there are you listening?