Eurobond was a win-win deal for Treasury and investors, says Rotich

Nairobi, Kenya: Unprovoked attacks on innocent Kenyans and rising political intolerance in recent weeks and months have cast a gloomy cloud across Kenya. Positive stories have been hidden in an avalanche of terrorist attacks and heated verbal exchanges across the political divide.

One such story is the scramble for an opportunity to invest in Kenya by American and European investors through the Eurobond floated by Kenya last week. The over-subscription to the bond was a major image and confidence boost for this country.

The successful bond came as good news, not only for foreign and local investors, but also for the ordinary Kenyan and Government.

How will the ordinary Kenyan benefits from the Eurobond — described as the biggest in sub-Saharan Africa?

The answers came from Finance Cabinet Secretary Henry Rotich in an exclusive interview with The Standard on Sunday in his office on Thursday. Rotich led the team that went out to market the Eurobond in London in the UK and San Francisco on the Western Coast of the United States.

Mr Rotich is excited that they were able to access cheap credit at a more favourable rate than commercial banks and other financial institutions offer in the domestic money market.

Rotich and his team secured a ten-year $1.5 billion (Sh131 billion) bond at an interest rate of 6.8 per cent; a much lower rate than the 12 to 14 per cent they would have been charged locally. They also secured a five-year $500 million (Sh 44 billion) bond at an interest rate of 5.875 per cent.

“When the exchange appreciates, the bond becomes cheaper, and that means we have to take proper care of our exchange rate so that we can manage this resource  and use it for its intended purpose,” said Rotich.

The Government has cause to celebrate because, for example, it is paying $10 billion to $12 billion (Sh875 billion to a trillion shillings) on foreign debts acquired since independence.

On the other hand, repayments on domestic debt add up to $125 billion (Sh11 trillion), yet the ratio of foreign to domestic debt is almost 50:50.

“So, you can see that we are paying only 12 per cent on one side, and 120 per cent on the other,” said Rotich.

Thus, if all of Kenya’s debt was externally borrowed at six per cent, the country would save billions of shillings.

But the common man who will be more concerned about how the money will help bring down the cost of living. Rotich’s answer is that they intend to pump all the Eurobond money into the production of cheaper energy, better infrastructure and cheaper food.

“What is forcing the cost of living to rise? It is energy costs, and it is only proper usage of the money to reduce electricity and fuel costs that will help the ordinary Kenyan,” said the Cabinet Secretary.

The country is currently experiencing an electricity shortage because it only produces 1,700 megawatts of power, far below the 5,000 megawatts required.

Many factories use generators, thus passing on fuel costs to the consumer and, pushing the cost of living to unsustainable levels.

“On average, consumers pay about 18 to 20 cents per kilowatt, but we want to bring it down to single digits so that we can compete with South Africa and Ethiopia in manufacturing,” said Rotich.

The reason why South African energy is cheap is that they use a lot of coal power, which goes for four cents per kilowatt. Kenya relies heavily on thermal power, produced through generators. It costs 35 cents to produce a kilowatt, which is then supplied to consumers at a much higher cost.

Rotich expects that the country should have an additional 5,000 megawatts in two years’ time, including the 470 MW to be released into the national grid in the next two months.

POWER LINES

“We want to put in 5,000 MW in two years and sort out the generation and distribution issues. We need to speed up geothermal plants, whose tariffs are a lot cheaper,” said the Cabinet Secretary. “Everything is dependent on energy; cooking, the packet of chips you buy and so on.”

A large percentage of the cash will be spent on the construction of power lines across the country because of massive private sector interests in the fast-growing and cheap geothermal power production sector.

More funds will also be poured into the distribution of power to heavily populated areas where the infrastructure is no longer sustainable because of growing populations and uncontrolled construction of houses.

“Kileleshwa used to have structured bungalows but now there are flats everywhere. Embakasi also has the same kind of growth, yet the power lines are still the same. We need to deal with transmission, distribution and generation at the same time.”

Alternative cheaper sources of power in the country include the coal deposits in Kitui and the gas deposits recently discovered in Turkana and Lamu.

Hopefully, Kenya will also soon be importing cheaper gas from Qatar for processing and inland piping from a plant earmarked for the proposed Lamu port.

“If we are not competitive, we will either lose factories or they will not be able to expand and yet when we set up one big textile factory, we will get 5,000 jobs at a go and when people get employed, the economy will improve,” said the ever smiling technocrat.