A new era of electricity production and distribution is set to open in Kenya after the World Bank board of directors endorsed an innovative way to deploy the Bank Group instruments, and leverage private sector investment to help meet the country’s urgent power generation needs.
The Kenya Private Sector Power Generation Support Project will help deliver reliable power supply to Kenyans, as well as to manufacturing and services companies, which drive economic growth and job creation.
In a country hard-pressed to finance such major infrastructure investments, the key was to mobilise financing from the private sector, which has been traditionally hesitant to invest in the country’s energy sector. A US$166-million series of Partial Risk Guarantees was put in place to reassure commercial financiers concerned about the state-owned electricity utility and its obligations towards them.
The project is benefitting from long-term debt from the International Finance Corporation (IFC) and political risk guarantees for commercial financiers from the Multilateral Investment Guarantee Agency (MIGA).
This combination of instruments unlocked a total financing package of US$623- million, including US$357-million in private sector investments and commercial lending.
Mobilising private sector capital is a major component of the Bank’s Africa strategy for infrastructure.
Says Johannes Zutt, World Bank country director for Kenya: “The approach used has demonstrated how the Bank Group can leverage its resources and bring much-needed private investments in the region, while at the same time paving the way for low carbon development. This approach can be expected to be replicated in other countries in sub-Saharan Africa with well-performing energy sectors.”
For Pankaj Gupta, manager of the Bank’s Financial Solutions Group, the project shows the power of International Development Association (IDA) partial risk guarantees to mobilise private sector financing in difficult markets.
“Our group works with financial market actors every day on structuring deals so we think we have a good understanding of what the private sector is looking for when it considers investing in projects such as this,” says Gupta.
The harmonised project consists of three thermal power generation projects and one geo-thermal project. Kenya has been facing severe power shortages, which have stifled economic growth potential and efforts to improve the welfare of citizens. Only 25% of the population has access to electricity, and rural grid access is only about 5%.
Scaling-up access to electricity and ensuring reliable power supply are key elements of Vision 2030, the government’s national development strategy to promote economic development, growth and competitiveness, and job creation. The government has an ambitious goal: to achieve 40% energy access by 2030. This will be done by increasing electricity generation capacity to 11,510 MW from the current installed capacity of 1,473MW.
In the interim, Kenya plans to add new generation capacity of about 2,000 MW, which will be developed by the public sector and private sector through Independent Power Producers (IPPs), and utilising low-carbon resources such as wind and geothermal. Kenya Power and Lighting Company (KPLC), the state-owned distribution company, is the key institution in the Project. Over the next 12 - 18 months, KPLC expects to contract over 600 MW of new generation capacity through IPPs, with financing requirements of almost US$1-billion.
The financing challenge
Mobilising the resources needed to finance these investments over a short time period was a key issue, especially in the wake of the global economic recession and the financial crisis. The traditional security package offered to IPPs by KPLC was not considered sufficient by investors due to their perception of high political risk.
This was combined with a low risk appetite on the part of project developers and commercial banks. To overcome this challenge, and given the tight macroeconomic environment and debt ceiling agreed upon as part of an IMF program, the Kenyan government approached the Bank to explore alternative options that would address these constraints.
Under the approved structure, IDA will leverage its on-going sector engagement through the Partial Risk Guarantees. They provide liquidity support to the projects by backstopping three months of KPLC’s on-going payment obligations. IDA support is complemented by MIGA political risk insurance covering the equity and commercial lending for the projects.
The structure offered was able to provide the necessary comfort to investors and commercial lenders. IFC stepped in to provide long-term financing for two of the four IPPs, funding generally unavailable for long-term infrastructure projects. Moreover, IFC’s engagement reassured and supported South-South investors with an appetite for investments in Africa but with relatively limited structuring and project implementation ability.
Bernard Sheahan, IFC’s director for infrastructure in Africa and Latin America, said working on the initiative was a win-win situation.
“The extensive capital commitments from private investors, lenders, and from the Bank Group reflect the solid and consistent drive of the government of Kenya for regulatory reform, creating a conducive investment environment, and expanding access to basic services for the people of Kenya."
Edith Quintrell, MIGA’s director of operations, notes MIGA’s longstanding commitment to mobilising private investment into Kenya’s power sector.
“We have been supporting Kenya’s first geothermal independent power plant since 2000. This Bank Group collaboration represents a great step forward in our ability to mobilise even more private investment in infrastructure, and we hope this is the first of many examples.”
The Kenyan government says it intends to use a similar risk mitigation framework deployed in this project towards facilitating additional IPPs, which includes the proposed 300MW Lake Turkana wind project that is currently under preparation.
This article was re-produced with permission from the World Bank Group.