Why Infrastructure Fund will only fund economically viable projects

State projects unable to demonstrate economic viability will be locked out of the National Infrastructure Fund (NIF), in line with a new Investment Policy Statement (IPS) introduced by Treasury.

National Treasury Cabinet Secretary John Mbadi on Thursday revealed that the NIF, currently holding Sh340 billion, will operate based on a strict commercial principle which seeks to ensure that capital is preserved and investments generate revenue.

Appearing before the National Assembly’s Committee on Finance and National Planning, where he tabled the IPS, the CS explained that development projects undertaken by NIF will undergo a rigorous assessment before being implemented, with the main aim being to lock out political projects.

“Some projects may be socially important, but if they are not commercially viable, then they will not be candidates for the National Infrastructure Fund,” stated Mbadi.

The MP Kimani Kuria-led committee heard that the introduction of political projects and short-term social projects that generate low income would lead to a depletion of the fund.

“The greatest danger the fund faces is the introduction of political projects. We are taking measures such as ensuring that there is capital preservation, liquidity and income generation in the operationalization of the fund by evaluating the implementation period of a project and the expected return on investment to ensure that we sustain the fund,” added the CS.

He explained that the funds amalgamated under the NIF were drawn from the privatization and divestiture of Safaricom and Kenya Pipeline Companies and would only be directed towards projects that demonstrated priority sector alignment, commercial and technical viability as well as demand.

Already, he said, the renovation of the Jomo Kenyatta International Airport (JKIA) has emerged as the first major project seeking the backing of NIF, but the proposal would have to be scrutinized and taken through a series of checks before a determination is reached by the NIF board on whether to finance the project.

“I am aware that the procurement for the renovation of JKIA has been done and is being implemented. We have received an expression of interest for funding but we are still at the preliminary stages of seeing how it will be funded...we have written to JKIA and told them that we are going to take the project through the IPS assessment model . They have been asked to provide all necessary information and if it qualifies then the NIF may fund it,” submitted Mbadi.

The CS was also adamant that the projects financed under NIF will ensure that other funds provided for under the exchequer would be freed to ensure they go towards projects such as hospitals, roads, schools which are of social importance but may not necessarily generate financial income.

Lawmakers also heard that under the proposed IPS, projects seeking to be backed by NIF must demonstrate commercial viability, financial sustainability and the ability to mobilize additional private capital before being approved.

They will also have to undergo technical and financial feasibility assessments, with the NIF board retaining the final authority to approve investments.

“The Treasury is particularly keen to prevent the fund from becoming another source of financing for politically motivated projects. If we go that route, then the fund will be depleted in no time,” remarked Mbadi

The CS also brought to the fore that the NIF board would be putting in place strict safeguards to lock out political projects. Key among them is the requirement for projects to attract substantial debt financing. He explained that while undertaking a project, NIF will only fund it to a maximum of 40 percent of the project cost, while 60 percent is expected to come from debt.

Notably, the NIF will focus on priority infrastructure sectors, including transport, energy, agriculture and livestock, water and irrigation, as well as other national priorities that might not be foreseen.

 “We have however, introduced diversification limits to stop the fund from becoming overly exposed to a single sector or project. In line with this, no priority sector will account for more than 40 per cent of the fund, while investment in a single project will be capped at 20 per cent of the total fund value,” added CS Mbadi.

Centum Investment Chief Executive Officer James Mworia, who has been co-opted into the creation of the NIF investment policy statement, noted that the maximum amount the fund could finance a single project would be Sh68 billion.

Mworia stated that the current Sh340 billion within the grasp of NIF would be invested in government securities such as bonds, with an expected return of 38 billion annually. The annual income will be used to start financing projects before the government begins drawing from the capital amount.