On 1/31/07, John Walubengo <jwalu@yahoo.com> wrote:

Apart from IPO
recommendation from Kai and Bill, the financing models
(Equity, Debt, etc) has not quite come through and I hope
someone could make comment on that within the remaining
three days

This might be useful.

[Summary of TEAMS financing discussion on www.stock-detective.co.ke]

At a recent seminar hosted by the Nairobi Stock Exchange, options for
infrastructure financing through the capital markets were
comprehensively discussed by various financial experts.

It is worthwhile to consider various financing options for the East
African Marine System or Teams project, a fiber optic line linking
Mombasa to Fujaira, in the context of various options for
infrastructure financing through the capital markets discussed at the
seminar.

A strong case was put forward for funding for infrastructure projects
in Kenya through the NSE. Among the experts who made a pitch for the
idea were NSE chairman Jimnah Mbaru, NSE CEO Chris Mwebesa, Suntra
Investment Bank chairman James Murigu, and IFC Operations Officer for
Financial Markets, Ndiritu Muriithi.

Infrastructure financing through the capital markets is still in its
infancy stages in Kenya. Yet there is a huge opportunity for companies
and government agencies to raise money cheaply to build roads and
power dams through bonds and shares at the Nairobi Stock Exchange
given that the current government development budget stands at around
Ksh. 70 billion.

The cost of completing the Machakos-Limuru dual carriage section of
the Mombasa-Busia highway alone is estimated to cost Ksh. 108 billion.
This means that the government has to find alternative sources of
funding (other than donor funding) to meet the massive shortfall in
funding for infrastructure projects.

The government has indicated that it will consider raising money
through an IPO to finance the Teams project. It recently signed an MOU
with Etisalat of Dubai to implement the Ksh. 5.7 billion project.

The government will hold a 40 per cent stake in the project, Etisalat
20 per cent and the remaining 40 per cent will be offered to investors
in the East African region. The government has set an ambitious date
for the completion of the project by November next year.

If the government proceeds with the IPO as indicated, the project is
certain to generate considerable interest among investors given the
potentially high returns and profits from the link once activated.

But the question still begs an answer: why has infrastructure
financing through the capital markets been slow to develop in Kenya
even with the recent expansion of the stock market?

In other words, why haven't institutions like Kenya Airports
Authority, Kenya Pipeline, National Housing Corporation, to mention
just a few, been issuing to the public?

Experts cite bureaucracy and lack of concise policy as the main
bottlenecks to infrastructure financing through the domestic capital
market.

Mr. Muriithi is of the view that although the demand for
infrastructure financing is huge, policy questions on issues like the
role of the capital market in the process are not fully settled.

He added that discussions are still on-going and that technical issues
such as the financing structure, type of instruments and so on, were
yet to be refined.

He further noted that state owned enterprise have to obtain approval
from Treasury to borrow money from the capital. Where such approval is
not forthcoming especially considering red-tape and other internal
bottlenecks, the opportunity to source funds cheaply from the
investing public is squandered.

Mr. Mbaru gave the example of East African Portland Cement which
wanted to raise Ksh 2 billion through the capital markets to extend
its line to Western Kenya and Uganda but shelved the plan after it
failed to get Treasury approval.

Mr. Murigu on his part argued that many SOEs went shopping abroad for
financing while they could raise funds for infrastructure projects
locally and at a cheaper cost.

If the government is to successfully push through an IPO by mid-2007,
Treasury approval will then have to come fast. Otherwise, the project
could end up in the bog of red-tape as Treasury mandarins dillydally
over approval.

In seeking to raise financing for the project through the capital
market, the government has a variety of options to consider. And
critical here will be the manner in which the government structures
the deal for investors.

Mr. Mwebesa said of the market's ability to absorb
infrastructure-backed instruments, that "if properly conceptualized
and structured with detailed information on the specific
infrastructure project, the capital markets will absorb the same".

If the government chooses the IPO way, then it will have to create a
special purpose vehicle whose shares it will then offer to the public.

According to Mr. Mwebesa once such government-driven SPVs are listed
in the NSE, bonds for specific infrastructure projects can then be
issued by the SPV.

Kenyans can then invest in such bonds through various vehicles such as
pension funds, co-operative societies, insurance companies and
collective investment schemes (companies or trusts created to mobilize
investment funds from individuals).

Pension funds are a good way of mobilizing investment in
infrastructure bonds since the long-term financing needs of
infrastructure projects match the long-term liability profiles of
pension/retirement benefit schemes.

Infrastructure or asset-backed bonds can provide income for retirees a
few years down the line and are thus a viable investment option for
pension fund managers.

However, the law needs to be changed to facilitate such initiatives.
In addition certain policy and tax incentives are needed to boost
private sector participation.

Mr. Mbaru proposes that income derived by investors from
infrastructure-backed instruments be exempted from withholding tax to
make them more attractive. He also proposes a 2-3 year grace period
before interest payments to investors or alternatively the issue of
zero-coupon bonds (bonds issued at a discount to the price and
principal and interest paid lump-sum upon maturity) to finance such
deals.

There is no doubt that the Teams project can be financed through the
NSE. It is up to the government to speed up the creation of an SPV as
well as Treasury approval and also give investors an attractive value
proposition.

This is not to mention that public awareness of the viability of the
Teams project and its importance to Kenya's ICT sector and the economy
as a whole is very vital and a condition precedent to the success of
the project.

The government may also want to consider a cross-listing of the SPV
once put in motion now that integration of the three stock exchanges
is well under way.