Originally published on The Star Kenya
Kenya’s aspiration to become an industrializing middle income country is encapsulated in its Vision 2030, which is aligned with the UN Sustainable Development Goals (SDGs). The Vision, now in phase III of implementation (MTP3), comprises four pillars known as "The Big Four Agenda": i) Achieving food security; ii) Providing affordable housing for all; iii) Becoming a manufacturing powerhouse; and iv) Providing universal healthcare coverage.
This agenda currently requires funding of about $20 billion, thus demanding greater volumes of financing given Kenya’s 2018-19 fiscal deficit of $6 billion. As the nation’s resource mobilization efforts intensify, especially with response to the global health crisis, blended finance offers a path to close the funding gap and assist with economic reconstruction for long-term inclusive and sustainable development.
Blended finance solutions leverage concessional capital from public and philanthropic sources to de-risk transactions to attract private investment. As a financing approach, Blended Finance can help improve the commercial viability of deals to attract a diverse range of private investors, and offer asset owners and asset managers the chance to create larger deals, and scale interventions to achieve development at scale.
Based on the Development Initiatives review of Kenya’s 2019-20 budget, it’s evident financing falls short across key sectors. For instance, 57% of the financing required to achieve universal health coverage (UHC) has been allocated to the health policy program, while 77% of financing has been allocated for early and basic education. Affordable housing faces a funding gap of $44 million, while manufacturing has only received 12% of the amount required. Overcoming the financing deficit will require addressing the risk-reward tension in development finance, and blended finance as an approach is intended to do that effectively. With that said, with Kenya’s capital market deepening–local pension assets were valued at $11.5 billion (or 13% of GDP) in 2019–the domestic capital markets are also capable of pushing private capital toward development projects.
Convergence data proves Kenya, at a global level, remains the leading destination for blended finance transactions. Over $13 billion has been invested across 77 deals in Kenya, with a majority of generalist funds investing in multiple sectors, followed by transactions in energy, financial services, agriculture, and health. While Kenya sees the highest number of transactions, the average deal size remains small when compared to other African countries and other regions.
At Convergence, we see three distinct benefits of leveraging blended finance to serve Kenya’s Big Four Agenda.
1. Blended Finance approaches can help create larger deal sizes that are better aligned with institutional investor mandates and risk-return profiles.
In 2018, Convergence awarded a design funding grant to Total Impact Capital to develop the Strengthening Health through Invoice Financing Technology (SHIFT) program. SHIFT leverages the 2017 Asset Backed Securities Law to securitize the receivables of pharmaceutical distributors to issue investment grade-rated senior notes, in addition to mezzanine notes, in the local capital markets. The program seeks to increase the volume of financing available to the pharmaceutical sector by engaging local institutional capital. In recent years, amongst domestic institutional investors, there has been increasing awareness that investors can preserve their capital and provide consistent income while also investing in the advancement of critical development and sustainability targets to support Kenya’s development agenda. This improved investor sensibility creates space for blended finance solutions that can create returns for both the investor and society.
2. Blended finance approaches can stretch limited public funds further, while freeing up capital for critical social and humanitarian interventions.
While leverage ratios in historical blended transactions vary by sector and region, based on our data, funds achieve the greatest average leverage of 4x. Budget allocations to the Big 4 through blended structures can help catalyze a higher percentage of capital from other sources, easing the burden placed on the public purse. For instance, limited public funding could be assigned to fund pre-investment stage project preparation as a means to nurture a pipeline of bankable projects for investors. These modest funds could ultimately originate transactions that raise private investment at an order of magnitude far above what the funding could have achieved in a single intervention.
3. Blended finance approaches are often comparable with structured finance products that are familiar to private investors.
Investors are comfortable with structures and instruments they understand and can measure. Structured finance; which reallocates risk to match investors’ risk-return profiles, includes instruments comparable with those created by blended finance approaches. For instance, Kenya’s landmark $40 million green bond issuance in 2019 is both a fixed income security and a blended finance transaction, with credit enhancement provided by the donor funded GuarantCo. Listed on the Nairobi Securities Exchange, there are plans to list the bond on the London Stock Exchange in the future to attract international investors, including those who incorporate environmental, social, and governance (ESG) guidelines in their investment strategies, or who have impact mandates. This structure can be replicated, scaled, and utilized across the sectors that underpin Kenya’s Big Four Agenda.
There is growing potential to address investor risk aversion and pull private investment towards the Big Four Agenda by creating investable opportunities that match the commercial mandates and constraints facing investors. Leveraging concessional capital strategically through blended finance to create bankable projects and commercially attractive transactions should be strongly considered to help Kenya close the funding gap towards achieving Vision 2030.