Challenge
Only 25% of Kenya’s population has access to electricity and rural grid access is only five percent. Scaling-up access to electricity and ensuring reliable power supply are key elements of Vision 2030, the government’s national development strategy.
In the wake of the ongoing global economic recession and the financial crisis, it was a challenge for the Government of Kenya (GoK) and Kenya Power (KPLC), the national utility, to mobilize the resources needed to finance publicly new investments in electricity generation to help meet critical power shortages. The key was to attract the private sector to develop and implement the projects and to mobilize long-term commercial financing for the investments. However, despite extensive energy sector reforms with improved governance, and despite a track record of sustaining previous IPP projects supported by development finance institutions (DFIs), private investors were hesitant to invest in the energy sector.
In part due to their perception of high political risk in Kenya, investors expected that the GoK would offer sovereign guarantees as part of the security package to attract investment for energy generation. Given the tight macroeconomic environment and debt ceiling agreed as part of an International Monetary Fund (IMF) program, the GoK wanted to optimize its use of security instruments to attract investors, including commercial banks that had not provided support to earlier rounds of IPPs. The GoK approached the World Bank in order to explore alternative options to overcome these challenges of efficiently leveraging and attracting private investment in the sector.
Solution
The World Bank leveraged scarce IDA resources through Partial Risk Guarantees (PRG) in order to expand power supply and generation to Kenyan beneficiaries, including households, commercial entities and industry, by mobilizing long-term financing for private sector investment in 270 megawatt (MW) of urgently needed power generation capacity PRG in the amount of US$166 million equivalent (involving an IDA allocation of US$41.5 million) to back-stop liquidity support for certain ongoing power purchase agreement (PPA) payment obligations from Kenya’s national power utility to private project developers. IDA involvement enabled KPLC to offer security arrangements on favorable terms with minimal resort to sovereign guarantees under their agreements with the IPPs.
Under the structure approved by the Board on February 12, 2012, IDA support is complemented by MIGA guarantees to cover the relatively larger amounts required if the specific IPP projects were to be terminated. The complementary risk mitigation structure offered was able to provide the necessary comfort to investors and commercial lenders efficiently, with minimal resort to sovereign guarantees. In addition, the IFC stepped in to provide long-term financing for two of the four IPPs, which is generally unavailable for long-term infrastructure projects in Kenya. The overall package will be enabled by the Bank’s long-standing and ongoing sector involvement, which positions the Bank well to help address any future sector or off-taker issues in a timely manner.
The innovative Kenya program demonstrates how to leverage the complementary strengths of the WBG sister institutions to bring a pragmatic and consolidated solution to meet the client’s needs by providing comfort to investors and ultimately to ordinary Kenyans who will benefit directly from this project.
Results
Three of the four IPP projects supported already achieved financial closure in the past year under challenging conditions in the global financial markets, within less than a year after Board approval in February 2012, while the fourth project is also underway to that milestone.
Partners
In addition to IDA, the IFC and MIGA, other partners include the African Development Bank (AfDB) in Thika Power, and commercial lenders such as ABSA and Standard Bank (South Africa).
Moving Forward
The WBG engagement has set a new benchmark for long-term commercial financing for infrastructure in Kenya, and more broadly for the region. This approach can be expected to be replicated in other countries in Sub-Saharan Africa with well-performing energy sectors that, like Kenya, have instituted sector reforms and improved governance.
