[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. -- With Kind Regards, Bildad Kagai MD - Circuits & Packets Communications Ltd Content & Training Partner - JKUAT E-Government Academy Suite B2, Tetu Apartments, State House Avenue P. O. Box 20311 - 00200 Nairobi, Kenya Tel. 254 20 2728332 Fax. 254 20 2726965 Cell. 254 724 226600 URL. www.circuitspackets.co.ke URL. www.JKUATEgovAcademy.ac.ke