Njuguna Ndung'u: Kenya's Ksh.18.5 billion infrastructure bond
Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the
Launch of the Ksh 18.5 billion Infrastructure Bond Issue, Nairobi, 28 January 2009.
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1.0. Background
Since 2001, the Government pursued a deliberate policy action to restructure domestic debt,
with a view to developing a vibrant bond market for generating long term finance. The
success in lengthening the maturity profile of debt instrument has been phenomenon.
Several measures were instituted to facilitate development of a robust bond market
(a) In 2003, the government lowered the cash ratio for commercial banks to release
liquidity held with a view to reducing interest rates.
(b) The Government also streamlined its domestic Borrowing Cash Plan in favour of
bonds. As a result, the volume of Treasury bonds rose from Ksh.80 billion in June
2001 to Ksh.318 billion by end December 2008. The Proportion of long term debt to
total domestic debt was reversed from 70:30 and now stands on average at 70:30.
But what is needed now are bonds specific to projects of a developmental nature.
Infrastructure financing is one such target. The government organized the first ever
Infrastructure Bond Conference on October 27-28, 2008 at the Kenya School of Monetary
Studies. The ambition was to launch a series of infrastructural bonds to finance targeted
projects and emulate other countries like: South Africa, Ghana, Botswana, Nigeria, Malaysia,
and Singapore, among others have used capital markets to finance infrastructure projects. It
is against this background that the government is launching this first infrastructure bond as a
starting point.
2.0. Projects/sectors to be funded
Kenya aspires to be firmly interconnected through sophisticated network of roads, railways,
ports, airports, and also provide water and sanitation facilities, and telecommunications as a
key pillar of economic development in the Vision 2030 blueprint. But the challenge is the
huge capital outlay required, leading to the initiative we are starting today. This recognition of
infrastructure provision has been recognized as an inhibition in competitive production due to
heavy transaction costs.
The targeted projects are well documented in the prospectus. We may in future allow a
monitoring process for these projects to completion.
3.0. The features of this infrastructure bond
Given the long term nature of the projects, the infrastructure bond will be of 12 years to
maturity with face value of Ksh.18.5bn. This issue is meant to create impact to the market.
However, the infrastructure bond will be redeemed partially in 2015, 2017 and 2021 as an
attractive feature for medium term investors who may wish to recoup investment back before
expiry of the life of the bond. It will also help Treasury at redemption given the huge amount
involved.
A number of incentives have been given to make the issue attractive and successful. They
include; exemption from withholding tax on interest income, we have revised agency
commission upwards, the bond will qualify for statutory liquidity requirements; the bond will
be listed for trading at the Nairobi Stock Exchange, the holders can use it as collateral to
acquire loans from banks and banks can pledge it as collateral for repos. The infrastructure
bond also gives attractive coupon rate of 12.5% p.a. The minimum placement amount will be
Kshs.100,000.00 while any additional amounts will be in multiples of Kshs.50,000.00.
The bond will be issued under the provisions of the Internal Loans Act Cap 420 and the
Capital Markets Authority Act Cap 485A.
This pioneer infrastructure bond is expected to lay ground for government agencies to issue
their own specific infrastructure bonds. Moreover, future infrastructure bonds will be
structured alongside the balance sheets of the issuer where stream of earnings from funded
projects will be used to service the bonds. Such bonds will be issued strictly under the
Capital Markets Authority's Asset Backed Securities regulations.
Honorable Minister, Distinguished guests, ladies and gentlemen, it is my hope and prayer
that this Infrastructure Bond will be attractive and be fully subscribed to finance our
infrastructure - a necessary condition for our economic development.