The truth about the infrastructure bond

• Very few analysts will be persuaded that the funds will end up funding projects in the country

The global economy is currently experiencing a significant financial shock, which has led to a sharp deterioration in growth prospects.

The Kenyan economy is not insulated from the worrying economic trends. The budget deficit is acute, at a time when infrastructure spending and investment are paramount for the long term sustainability of the economy. In the midst of this, the government has launched a maiden 12-year term bond and labelled it an ‘Infrastructure Bond’.

As a career infrastructure finance practitioner, I have been following and reflecting on the talk about the bond. All very good I say, so long as we continue to think about fixing our broken infrastructure, the closer we will get to finding solutions.

However, I’ve been speaking to corporate, financial and government stakeholders to explore specific implications of the bond. And, we’ve been left scratching our heads and questioning whether it really makes sense.

Analyses and opinion pieces I’ve read since last week’s launch seem to agree on two basic things: Firstly, this bond is a 12-year T-bill. You can call it an infrastructure bond, but you can also call it a ‘special purpose bond’.

That ‘special purpose’ could be whatever the government desires. This bond in fact may have little to do with financing infrastructure.

Secondly, it seems to be that this is offered at a ‘good rate’ – a high rate of return is being offered to investors.

While some might argue that we should all give the government some credit for this ‘experiment’, my personal opinion is that it is a hazardous experiment and one that has potentially damaging impacts on our economy and financial markets – at a time they can ill-afford.

Without any substantive projects explicitly identified, limited independent oversight and a thirsty budget deficit; the government could have a hard time convincing investors that the ‘uses of funds’ is solely for infrastructure.

I’ve heard investors cast doubts over the usage of funds in the $750 million Ghana sovereign bond – which is also supposed to be earmarked for infrastructure. This precedence doesn’t help persuade the sceptics.

For these reasons and more, my fear is that very few credit analysts evaluating the sovereigns’ credit will be persuaded that the funds will end up actually funding Kenyan infrastructure. And I worry whether they can be persuaded that these projects – many still on the drawing board – will ever be able to service the debt over the tenor of the bond.

If the government does not take active steps to address these issues, then in a worst case scenario, it could find itself hard pressed to maintain Kenya’s credit rating.

Ironically

Our bank market is not affected by the credit exposures and toxic loans of their peers around the world, but it seems to be catching the ‘credit flu’. There are also signs of gluttony in the syndications market.

I do not believe any corporate can borrow five-year money for less than 500 basis points over 91 Day T-bills (an effective rate of 13.6 per cent). I would be pleasantly surprised to find a corporate in Kenya today who can borrow-six month money lower than 300 basis points over T-bills (an effective rate of 11.6 per cent today).

In this scenario investors have little options but to turn to the bond market for cheaper capital. Ironically, however, the government’s bond is in danger of: (a) reducing liquidity in a fragile market; (b) raising the cost of borrowing from the bond market; (c) putting the ability of corporates to access the bond market in the short to medium term at risk.

Hypothetically speaking, if the government bond remains undersubscribed – it will have a severe impact on the chances of corporates raising debt in the near future from the bond market. It will particularly hurt those that have already publicly disclosed their interest in doing so.

While the bond will have an impact on the availability of funds to other borrowers, I fear it will be hurt by the government’s failure to maintain fiscal discipline.

A different and preferable approach is for the government to cut interest rates; provide tax incentives to corporates wanting to access the bond market to spur a sluggish economy – and accelerate its Public-Private Partnership programme to tap into private sector participation.

I have no doubt that there is large ‘social infrastructure spend’ required in Kenya today – one that cannot be private sector financed. Separating out these projects from those that can be procured through a PPP structure, getting a grip on fiscal management and controlling the budget should be a higher priority, given the state of our economy.

Vishal Agarwal heads the Infrastructure Finance business for PricewaterhouseCoopers across sub-Saharan Africa. The views expressed here are his own.