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Kenya's Power Shortage Problem Meets Innovative Finance

OrPower facility in Kenya's geothermal fields. Credit: Rebecca R. Post/World Bank
New guarantees will help Kenya build energy infrastructure like the OrPower 4 geothermal facility.

April 5, 2012

By offering a unique package of partial risk guarantees, the World Bank Group enabled the private sector and the Kenyan government to work together on ways to increase access to electricity in the country.



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 Bank Group instruments and leverage private sector investment to help meet Kenya’s urgent power generation needs.

The Kenya Private Sector Power Generation Support Project will help bring a reliable power supply to Kenyans in their day-to-day lives, as well as to manufacturing and service companies that help the economy grow and create jobs.

In a country hard-pressed to finance such major infrastructure investments, the key was to mobilize financing from the private sector, initially hesitant to invest in the energy sector in the country. 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 Impact of the Guarantees

With private sector investors concerned about the security of a return on their investments in Kenya's energy infrastructure, the government was struggling to finance the large-scale investments needed.

The World Bank Group was able to encourage the private sector to step up by offering a unique package based on US$166 million in partial risk guarantees.

Those guarantees reassured commercial financiers, who then agreed to invest in the project. Paired with long-term debt and political risk guarantees from the IFC and MIGA, the overall financing package reached US$623 million, more than half of that from the private sector.

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), as well.

This combination of instruments unlocked a total financing package of US$623 million, including US$357 million in private sector investments and commercial lending.

Mobilizing private sector capital is a major component in the Bank’s Africa strategy for infrastructure. Johannes Zutt, World Bank country director for Kenya, says “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 mobilize private sector financing in difficult markets.

“Our group works with financial market actors every day on structuring deals,” he said, “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. I’m glad that we’ve been able to work across the Bank Group in a pragmatic and complementary way to bring a consolidated solution to private financiers and investors and, ultimately, to Kenyans who will benefit directly from this project.”

Power solutions

The harmonized project that will now get underway consists of three thermal power generation projects and one geo-thermal project. Kenya has been facing severe power shortages, putting pressure on the country’s economic growth and its efforts to improve the day-to-day lives of Kenyans. Only 25 percent of the population has access to electricity, and rural grid access is only about 5 percent.

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 create jobs. The government has an ambitious goal: to achieve 40 percent energy access by 2030 by increasing electricity generation capacity to 11,510 MW by then from the current installed capacity of 1,473MW.

Staff at the OrPower4 facility in Kenya's Olkaria geothermal fields
The Kenya project consists of three thermal power generation projects and a geothermal plant.

In the interim, Kenya plans to add new generation capacity of about 2,000 MW, developed by the public sector as well as by the private sector through Independent Power Producers (IPPs), and utilizing low-carbon resources such as wind and geothermal. Kenya Power and Lighting Company (KPLC), the public distribution company, is the key Kenyan 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

Mobilizing 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 ongoing sector engagement through the Partial Risk Guarantees. They provide liquidity support to the projects by backstopping three months of KPLC’s ongoing payment obligations. IDA support is complemented by MIGA political risk insurance covering the equity and commercial lending for the projects.

Johannes ZuttThis approach can be expected to be replicated in other countries in Sub-Saharan Africa with well-performing energy sectors."  || Johannes Zutt, Country Director for Kenya, World Bank

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.

"IFC is very pleased to join with our Bank Group partners in supporting these projects,” Sheahan said. “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 mobilizing 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 mobilize 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, currently under preparation. As Country Director Zutt notes, “Bank Group engagement has set a new benchmark for long-term commercial financing for infrastructure in Kenya, and more broadly for the region”.

 

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Last updated: 2012-04-05



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