Financing options and Revenue structure for Higher Education Institutions

Transcription

1 Financing options and Revenue structure for Higher Education Institutions By CPA Ferdinand Othieno 27 April 2018 Credibility. Professionalism. AccountAbility

2 Agenda 1. Financing options and revenue structure: experience of higher education institutions 2. Funding higher education institutions

3 What do universities do Global reach Educate graduates to meet Kenyan and global demand for higher-level skills A = πr 2 Research Generate world-class research that transforms lives Innovation Drive innovation that supports local and national economic growth 3

4 The youth bulge in Africa

5 % of pop Demographics a youthful population Kenya s population is projected to continue growing at a brisk pace of 2.6% per year in , and to reach 50m in Given the youth bulge, approximately 2million new young adults become eligible for employment annually. Kenya has a youthful population, with 42% aged under 15 which will continue to put pressure on the education system, the labour market and social services; while the economically productive population represents 55% of the population. In order to create opportunities for this number of youth graduating into employment the economy needs to expand by at least 7-10 % pa over the next 5-10 years consistently. The population is heavily concentrated in the central and western regions, which contain the most arable agricultural land. The urban population accounted for about one-third of the total in the latest census (2009); its share is forecast to rise to 40% in 2020

6 Population dynamics - Japan

7 Demographic Dividend: EA population dynamics

8 workers, millions Structure of non-farm employment KEN YA : EVOLUTION A N D STR UCTUR E OF EM PLOYM EN T 12.0 Informal/Micro Est. Formal Est Self The informal sector has consistently faster growth over the years - Jua Kali manufacturing, informal segments of transport and communication, and retail trade constitute the fastest growing activities of the informal sector. Formal sector employment growth seems to have picked up on account of increased construction activity, financial services and transport and communication

9 Students career aspirations by country and sector South Africa Ghana Nigeria Kenya 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Self-employment Public sector Private sector Academic Further study Charity/ NGO Multiple

10 Education activity 6 5 Education Activity to GDP -6.22% Investment Opportunities? Primary Secondary Higher Decreasing Education Activity as % of GDP - Budgetary Allocations have not increased in percentage terms Source:- Kenya Economic Survey 2018

11 Growth in HE institutions TVET Growth 2, % 2, % 1,500 1, % 30.0% 20.0% 10.0% % TVET TVET_G TVET ,300 1,962 TVET_G 0.3% 15.8% 48.7% 50.9% Private Public University University_G 1.9% 0.0% 9.4% 1.7%

12 18-23 Age group population and tertiary enrolment in SSA

13 Ghana profile: Population: 25.9 million GNI per capita: $3,900 Tertiary GER: 12% Kenya profile: Population: 44.4 million GNI per capita: $2,780 Tertiary GER: 4% Nigeria profile: Population: million GNI per capita: $5,360 Tertiary GER: 10% South Africa profile: Population: 53.2 million GNI per capita: $12,530 Tertiary GER: 20%

14 MAGNITUDE OF IMPACT Investment in Higher education Investment in Education needs to recognize unique characteristics to plug in large deficits Formulation of clear policy, regulatory framework, monitoring service delivery, and project design is critical Highly regulated with multitude of agencies Understanding the value chain in Education would help develop appropriate models Education sector prone to low public spending Recent Government Initiatives would completely transform Education sector landscape COMPLEXITY OF THE PROBLEM 14

15 Adaptation

16 Financing higher education Innovative resource mobilisation for higher education has been recognised as critical to both university education and high quality national human resource development which are, in turn, sine qua non to the successful achievement of Kenya s Vision [Prof. Crispus Kiamba, 2014] 16

17 Financing higher education Who pays? Government? Students? Research sponsors? Private donors? Marketplace? Tax policy that stimulates private donations (charitable contributions) Ownership of intellectual property The entrepreneurial university The privately-supported but publicly committed Institution 17

18 Financing higher education Who pays? Government? Students? Research sponsors? Private donors? Marketplace? Tax policy that stimulates private donations (charitable contributions) Ownership of intellectual property The entrepreneurial university The privately-supported but publicly committed Institution 18

19 What is Project Financing A financing structure which relies on the project s cash flows as it is primary source of repayment The project s, not the owner s, assets, rights, and interests are held as collateral, or security for repayment on the loan

20 What does this really mean? The key element is that the financial institutions are agreeing to look to the project for all repayment of their loans, as are the project sponsors for a return on their investment Therefore, if something goes wrong the banks may not be paid This means that the banks are sharing in the risks of the project, to a greater or lesser extent, as are the project sponsors Thus, thorough risk analysis and risk allocation is fundamental to pricing and accepting the deal

21 So why do it? Greater risk means greater reward for both the sponsors and the lenders Sponsors can gear projects to a higher rate, requiring less equity and achieving higher returns Banks can charge greater premiums and fees

22 Project finance formal definition The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash-flow generated by the project. International Project Finance Assoc. A loan structure that relies primarily on the project s cashflow for repayment, with the project assets, rights, and interests held as secondary security or collateral Investopedia

23 What is project finance? Holdco Bank Borrower Corporate lending On balance sheet Direct recourse to Holdco 23

24 What is project finance? Holdco Project lending Off balance sheet Equity Joint Venture (Project Sponsors) Dividends No recourse to parent Investment Recourse to equity holders Non-recourse to Holdco Special Purpose Vehicle Bank 24

25 25 Project finance Vs Corporate Finance Project Finance Features Corporate Finance Security Financing Financiers look at cash flows of a single asset (the project) for repayment. No / limited guarantees for project finance debt Project contracts are usually the main security for lenders; project companies physical assets are likely to be worth much < the debt Strength of a company s balance sheet and projections, All assets of the company can be used for security Has access to whole cash flow from spread of business as security, thus even if project fails, corporate lenders can be repaid.

26 Control Duration Project finance Vs Corporate Finance Project Finance Project has a finite life as such the debt must be repaid by the end of this life Features Corporate Finance Company assumed to remain in business for an indefinite period and losses can be rolled over. Lenders exercise close control over activities of Project Company to ensure value of project is not jeopardise. Leaves management of company to run business as they see fit

27 Project finance Vs Corporate Finance As a result of the limited recourse, project finance structuring is: Based on cash flow certainty high level of due diligence by lenders Credit intensive lenders require all risks to be assessed and mitigated Highly structural expensive to establish Usually long term Relatively low margins to bankers Done very selectively by Banks

28 Why Project Finance? Benefits to the investors Projects are highly leveraged leads to a higher return on equity (ROE). Risk spreading enables risk of investment to be borne by the party best suited to shoulder the risk Limited risk contamination between the project and the rest of the investor s business (risk is quarantined to invested equity) 28

29 Why Project Finance? Benefits to the investors Increased borrowing capacity of investors with the reallocation of project risks to other contracting parties Avoids restrictive covenants on the corporate balance sheet arising from a project s debt financing. Small amount of equity commitment required enables parties with different financial strengths and skills to work together. 29

30 Why Project Finance? Benefits to the investors Matches each commercial undertaking with the specific assets and skills required to build and operate it. Off balance sheet financing where equity represents a minority investment 30

31 Why Project Finance? Benefits for the Public Authority (PA) The increase in investor s financial capacity creates a more competitive market for projects, to the benefit of the PA. Involvement of 3rd parties (lenders and advisers) would mean that a rigorous review of the risk transfer is carried out and any weaknesses exposed (independent due diligence undertaken by financiers) 31

32 Why Project Finance? Benefits for the Public Authority (PA) Highly leverage inherent in a project-finance structure helps to ensure the lowest cost to PA. There is transparency as project financing is selfcontained and the true costs of the service can more easily be measured/monitored. 32

33 Sources of funding Key questions 33

34 Revenue diversification & Cost mgt Ancillary activities _ SU Solar University industry partnerships _ KU + Chandaria Data driven decision making Kenyan Universities on the African map? Internationalization strategy? Efficiency, effectiveness via Digital Learning platforms Lecturer mobility Versus Moonlighting? Collaborative research _ IDRC 34

35 Adaptation the analogy of AMH Investors, managers, regulators, policymakers are neither rational or irrational; they re human They innovate, compete, adapt, reproduce, and evolve (within a generation, via heuristics) The environment is as important as their behavior in determining market dynamics Well known models can be useful in capturing these dynamics, but they, too, evolve Biology may be a better analogy than physics 35

36 On Investing in anything

37 Questions & comments