James Mworia took up the role of founding CEO of the newly created National Infrastructure Fund (NIF) on Monday, marking his exit from Centum Investment Company after nearly 17 years.
Through the fund, he aims to mobilise at least Sh400 billion annually to relieve the pressure of development spending on commercially viable infrastructure from the Exchequer.
Business Daily sat down with him to discuss his agenda for infrastructure development in the country.
You are banking on the growing domestic capital pools and, more so, the Sh3.1 trillion assets under management held by pension funds to crowd in on infrastructure projects. Fund managers will, however, tell you that they are worried about asset-liability mismatch when it comes to investing in infrastructure as an asset class. How do you address this hurdle?
One of the solutions I have in mind to address the asset-liability mismatch risks is that we create a National Infrastructure Development Fund, which can borrow from the Regulation of Development Real Estate Investment Trusts.
This will then allow investors to come into a liquid instrument and automatically address the asset-liability mismatch concerns. It will also address the challenge of political perception risk because if investors come directly into National Infrastructure Fund-financed projects, some will argue that it borders on privatisation via the backdoor, but with a vehicle that is listed, all investors can come in transparently.
Can we infer then that NIF will be a Fund of Funds such that we have subsidiary funds within for co-investment purposes?
It is important to have funds because for those who have fundraised, they appreciate that it is very tedious to fundraise on a project-by-project basis and from a pension fund-to-pension fund basis where you are moving from one fund manager to another. If we create a fund, we can then have investment criteria that the projects need to meet for the fund to then invest in at a prescribed commitment level.
There’s a finite number of assets that can be privatised, whether partially or wholly, and that means the National Infrastructure Fund needs to have a robust liquidity-generating mechanism beyond privatisation proceeds. How do you plan to realise this?
The National Infrastructure Fund Act allows us to make investments in government securities. The yield we are expecting to get there is about 12.5 percent in annual return, and so we should be making just about Sh42 billion income per year.
We are working with Sh40 billion as a benchmark. The idea is to ensure that we preserve the seed capital because, as you pointed out, there are limited assets that can be privatised.
How do you see the National Infrastructure Fund fitting within the country’s larger public finance framework as far as Kenya’s annual budget is concerned?
If we do our job well, then we should easily take out just about Sh400 billion from the national budget because then we will reduce reliance on the Exchequer for commercially viable infrastructure projects.
Right now, what’s happening is that any infrastructure project taken to the National Treasury and is considered to be commercially viable is then routed to my team at the National Infrastructure Fund.
In fact, a few projects were directed to us over the weekend of September 5 and 6, just before I was appointed CEO.
The National Infrastructure Fund targets a crowd-in factor of 1:10, meaning for every one shilling from privatisation, the fund should be mobilising another Sh10 from private sector players. That is, by all means, very ambitious. How much have you crowded- in so far, and how do you intend to realise this crowd-in factor?
I don’t think it is ambitious. Pension funds are currently at Sh3.2 trillion in assets under management and mobilising an average of Sh350 billion in fresh capital from Kenyans every year. So, over the next five years, we will have mobilised another Sh1.5 trillion into pension fund assets, and that is ignoring the returns.
The Retirement Benefits Authority allows up to 10 percent allocation to Infrastructure Funds, and yet right now we are at 0.02 percent. I also saw the submissions of the Capital Markets Authority to the National Assembly on the Investment Policy Statement, and one of the proposals was that they will develop regulations to allow the development of Infrastructure Funds under Collective Investment Schemes. So, if anything, what we may end up being short of is not the capital but viable projects.
When I read that Investment Policy Statement tabled in the National Assembly, I found the document wanting as far as spelling out risk mitigation mechanisms goes. What safeguards do you have in place for such a colossal fund?
We are required to prepare a Risk Management Framework to be approved by the Fund’s Governing Council, but we first had to work on the Investment Policy Statement and get it approved before we can work on the Risk Management Framework. Parliament approved, with comments, the Investment Policy Statement at the end of August, and we are currently finalising it for gazettement. We have also prepared the Risk Management Framework, which is now with the Governing Council for approval.
Lastly, is the National Infrastructure Fund, in any way, looking to crowd-in capital from Development Finance Institutions (DFIs)?
We are having conversations with some DFIs to set up a Project Preparatory Fund so that by the time projects are coming to market, they are more or less getting to financial close because pension fund money is not appropriate for use at those very early stages.
So, by that time, it will be a project that has line of sight on debt, clarity on income, technical questions have been answered, and board approvals have been done. There are different views about how large this Project Preparatory Fund could be, but it might be just about $100 million (Sh12.94 billion).
