Infrastructure Bond With Kenyan Diaspora Component General Information Supplement
12 Year Infrastructure Bond Offer Prospectus Kes 20,000,000,000 due in Year 2023 12 YEAR BOND ISSUE NO. IFB1/2011/12 TOTAL VALUE KSHS 20 BILLION VALUE DATE OCTOBER 3RD 2011 The Budget for Financial Year (FY) 2011/12 specified that the Government will raise Kes 119.5bn through domestic borrowing. Out of this amount Kes 35.85bn will be raised through issuance of Infrastructure Bonds to fund specific new and ongoing projects. The sectors of the economy highlighted in the Budget are; Roads: Kes. 7.36bn, Energy: Kes.18.78bn and Water: Kes.9.71bn. The continued emphasis on these three sectors is a testament to their crucial roles in supporting the growth of other economic sectors. Energy Sector continues to receive special attention given the Government s determination to explore new power sources such as geothermal and other forms of renewable energy. The Republic of Kenya ( the Republic or the Issuer ) is offering a Kshs 20,000,000,000 in an Infrastructure Bond Issue ( the Issue ), as a first tranche to the total borrowing of Kshs. 35.85bn to be raised through Infrastructure Bonds. The proceeds of the Bond as has been the case with previously issued Infrastructure Bonds will be used to finance specific projects in the Roads, Energy, and Water & Irrigation Sectors as opposed to the traditional objective of general budget support purposes, with no specific project financing being earmarked at the time of raising finance. The Bond will be open to all investors, but as a departure from normal Kenya Government fund-raising in the local capital markets, this offer will place special emphasis on getting participation from Kenyans in the Diaspora. Kenya has successfully issued Infrastructure Bonds since 2009 when the first Bond was issued to raise Kes18.5bn to fund specific projects in Transport, Energy, Water, and Irrigation Sectors. So far, four Infrastructure Bonds amounting to Kes. 82bn have been issued to fund the various projects. The Republic of Kenya is cognizant of the need to get infrastructure financing through the tapping of finance from the capital markets and has exceptionally structured this Infrastructure Bond with Kenyan Diaspora component. This is a reflection of the Government s commitment to supporting economic growth through raising development funds as provided for under the provisions of the Internal Loans Act Cap 420 and also the Capital Markets Act Cap 485A. Repayment risk for the Bond is, therefore, identical to the repayment risk on the other Kenya Government Treasury Bonds. Contents Infrastructure Bond 2
The proceeds of the Bond as has been the case with previously issued Infrastructure Bonds will be used to finance specific projects in the Roads, Energy, and Water & Irrigation Sectors as opposed to the traditional objective of general budget support purposes, with no specific project financing being earmarked at the time of raising finance. This Infrastructure Bond issue will be denominated in Kenya Shillings ( Kes ) and may be subject to reopening or reissue on a continuing basis. The maximum aggregate principal amount of all Bonds from time to time is subject to review by the Issuer, in accordance and in compliance with the Internal Loans Act Cap 420 and the Capital Markets Act Cap 585A. The offer price, aggregate principal amount, maturity and interest payable in respect of this Bond, have been determined by the Issuer and the Agent, at the time of issue, in accordance with prevailing market conditions and as set out in the Financial Year 2011/12 Infrastructure Bond Prospectus. Bonds issued under the Infrastructure financing Programme will be classified as Infrastructure Bonds for tax purposes, and will be tax exempt. This tax incentive applies to this Bond offer. In order to ease redemption pressure on the Issuer associated with bullet maturities, and avail an early exit window to investors; redemption of the principal outstanding amount will be on an amortization basis at the end of the fourth, eighth and a final redemption at the end of the twelfth year, in proportions specified in the Prospectus. The interest payment will be semi-annual, based on the original principal amount (or in case of amortization, on outstanding principal amounts, and NOT the original principal amount). The Infrastructure Bond will be listed for trading on the Nairobi Stock Exchange ( NSE ), and the applicable approval for listing by the Capital Markets Authority (CMA) of Kenya has been obtained. The Infrastructure Bond will be issued in a book entry registered form and held by the Registrar of National Debt ( the Registrar ) and NOT in Bearer Certificate form. The Issuer shall, in the event of any material changes affecting the information set forth in the Prospectus, issue a Public Supplement in electronic and/or print form which shall be of relevance and applicable in respect of all issues of this Bond after the date of issue of such information. This supplement is to be read in conjunction with the prospectus issued for this bond over. The Infrastructure Bond will be listed for trading on the Nairobi Stock Exchange ( NSE ), and the applicable approval for listing by the Capital Markets Authority (CMA) of Kenya has been obtained. Targeted Projects The preamble below summarises the infrastructure sectors to be financed by this Bond. More detailed information on the underlying projects is contained in the General Information Supplement to this Prospectus. To ensure success of this Issue, the Government has identified projects whose implementation will open up areas of great potential to the economy. The Issuer has provided incentives for potential investors which include: withholding tax exemption on interest income, amortisation commencing in Year 4, tradability on the NSE and rediscounting at the CBK as a last resort. For this debut Issue, the Government has identified the following viable projects in the roads, energy and water & irrigation sectors to be financed through the Kenya Diaspora Infrastructural Bond. 1) Roads Sector Kes. 4,163,919,000 The size of Kenya s Road Network is estimated at 177,500km comprising 63,000km classified roads and 114,500km of unclassified roads. The poor state of the road infrastructure has been identified as a major constraint to economic and social development. While there has been commendable work done to repair these roads, the Government recognises that there is need for more concerted effort to build world-class road network as engine of accelerated economic growth. Accordingly, the government has been negotiating with development partners to obtain financing for improving roads conditions in Class A, B and C categories. Consequently, Construction and civil works in a total of 57 districts across the country, overhaul and refurbishment of civil works and capital grants to Government Agencies and other levels of Government will be funded to the tune of Kes. 4,164mn. conditions in Class A, B and C categories. Consequently, Construction and civil works in a total of 57 districts across the country, overhaul and refurbishment of civil works and capital grants to Government Agencies and other levels of Government will be funded to the tune of Kes. 4,164mn. Infrastructure Bond 3
To ensure success of this Issue, the Government has identified projects whose implementation will open up areas of great potential to the economy. The Issuer has provided incentives for potential investors which include: withholding tax exemption on interest income, amortisation commencing in Year 4, tradability on the NSE and rediscounting at the CBK as a last resort. 2) Energy Sector Kes. 10,516,800,000 Kenya currently suffers from an energy shortage: capacity is about 1,300 MW, against rising demand of more than 2,000MW. Moreover, aging, frequent breakdown and leakages mean that the installed capacity is rarely fully available. The result of this supply/demand imbalance is an unreliable power supply, resulting in increased production costs for Kenyan manufacturers vis-à-vis their competitors in other countries. The Government is committed to increased consumer connectivity, especially in rural areas in order to create a platform for rural economic development, including fibre optic connectivity. The Government, through the Kenya Electricity Generating Company Limited ( KenGen ) and the Kenya Power & Lighting Company Limited ( KPLC ) plays a key role in developing the power sector. In addition to the efforts by these two companies, the Government is also charged with laying out the platform for these companies to generate and distribute power, especially where the components of this platform are not immediately commercially viable. It is this platform development that the Government seeks to raise Kes 10.517bn in the 2nd quarter of FY-2011/12 to finance key projects in the energy sector. The projects to be funded in this sector will include Geothermal and Coal Resource Exploration and Development, power transmission, Rural Electrification and Construction and Civil Works. Additional Information: Additional Information to guide investors make informed decisions may be obtained from the Issuer (Director, Debt Management Department at the Treasury Nairobi Kenya) and/or the Agent (Director, Financial Markets Department, Central Bank of Kenya). They can be reached on the following addresses: The Central Bank Of Kenya P.O. Box 60000-00200, NAIROBI, KENYA, Tel: +254 20 286000 Fax: +254 20 2863723 Email: ndo@centralbank.go.ke Website: www.centralbank.go.ke OR The Ministry of Finance P O Box 30007 NAIROBI, KENYA Tel: +254-020-2252299. Email: dmd@treasury.go.ke Website: www.treasury.go.ke 3) Water, Sewerage & Irrigation sector Kes. 5,319,281,000 Water sector continue to face numerous challenges both in urban and rural areas of this country. Major urban areas such as Nairobi, Mombasa, Kisumu, Nakuru, Eldoret and Nyeri are facing acute water and sewerage facilities shortage. Frequent water rationing and inefficient sewer systems facing most of the country s urban dwellings continue to make lives of the country s citizens difficult. With urban population rising rapidly, demand for these services is increasing much faster, thus requiring immediate intervention. In addition, lower farm acreage under irrigation with more frequent droughts continues to undermine increased agricultural production in many parts of the country. As a starting point, the government allocated Kes. 1,241mn in the 2nd quarter of FY 2011-12 to finance construction of rural and urban water supplies in 283 districts and Kes. 114.8Mn in construction of sewerage systems in 31 districts to improve distribution network, support water storage facilities, upgrade water treatment works and repair/replace the pumping systems. In an effort to guarantee food security as a key ingredient of the economy, the government allocated Kes 3,616mn in the 2nd quarter of FY 2011-12 to fund irrigation infrastructure to spur agricultural sector growth. This will be used to fund the design, carry out feasibility studies, and construction of dams and irrigation projects. The Government also allocated Kes 468mn towards self-sustaining projects in drilling of boreholes in the ASAL areas and flood control management. All these projects will be funded by the issuance of Kshs. 35.85bn Infrastructure Bonds. The Bond will be issued in two tranches with this first tranche seeking to raise Kshs. 20bn. Infrastructure Bond 4
Kenyan Diaspora participation in the FY 2011/2012 Infrastructure Bonds The above Infrastructure Bonds for Financial Year 2011/2012 will be opened to Kenyan Citizens living abroad. They can participate as individuals or through their incorporated companies and other institutions with 100% Kenyan shareholding. The Investors will need to provide proof of their Kenyan Citizenship. Investors can participate directly or through commercial banks and other institutions licensed by the Capital Markets Authority to trade in Government Securities. This is an initiative to open up Government securities market to Kenyans living abroad. It is therefore expected that these Kenyans will also be able to invest in other Government securities issued regularly Requirements Kenyans in the Diaspora wishing to invest in Government of Kenya Securities will be required to fulfil the following: Central Depository for Government Securities Accounts (CDS) All investors in Government of Kenya Securities will be required to open a CDS account with the Central Bank of Kenya (CBK). The Accounts will be opened by appearing in person or online through the Central Bank of Kenya Website. All the necessary documents, account opening forms, application forms, prospectus, information supplement and others relevant materials will be availed in the CBK Website. The confirmation of the identification and account documents will involve certification by the investor s commercial bank through countersigning and SWIFT confirmations. Central Bank of Kenya reserves the right to confirm the authenticity of the availed documents from the relevant issuing authorities. Requirements for opening and/or changing details for the CDS accounts for corporate entities (these include companies and other corporate entities established by statutes). All authorized signatories will be required to complete a mandate card which in this case is the specimen signature mandate card (the card). The cards should be completed in block letters, neatly and clearly inscribed and names must be written in the order that they appear on the identification document. Any alterations/errors must be signed against and the card must not be disfigured in anyway. Authorized signatories are required to sign the card in the presence of their commercial bank s official, a designated CBK officer or an authorized CBK agent. The investor s commercial bank/financial institution must be licensed by the Central Bank of Kenya or the licensing authority in the country of operation. On completion, the card(s) will be submitted to CBK online or in hard copy together with one certified and recent colour passport size photograph. The certification to be done by the investor s commercial bank, a designated CBK officer or an authorized agent. Original or certified copies of the following documents for certification. (Note that the copies will be retained by the Bank). i. Certificate of incorporation and/or valid license to operate. ii. Board resolution appointing authorized signatories. iii. National Identity cards and/or valid Kenyan passport. Two signatories of the investor s bankers, whether a commercial bank or financial institution, must sign and stamp the card on the space provided, confirming the bank account details. Payments will be made to the bank account specified in the mandate card. At least two signatories should sign for any transactions involving Government securities for corporate entities. On receipt of all the requirements, CDS account applications will be processed and the details confirmed accordingly. Change of address may be advised through a letter signed by the signatories to the account as per the mandates. Infrastructure Bond 5
Kenyan Diaspora participation in the FY 2011/2012 Infrastructure Bonds Requirements for Opening or Changing details for Individuals/Joint CDS accounts Individuals may hold CDS accounts singly or jointly. Each individual CDS account holder/applicant must complete the CDS accounts specimen signature mandate card (the card), The card(s) should be completed in block letters, neatly and clearly. Names must be written in the order that they appear on the identification document. Any alterations/errors must be signed against and must not be disfigured in anyway. Signatories to the CDS account will be required to sign the card in the presence of a designated official of the investor s commercial bank, CBK officer or any CBK authorized agent. On completion the cards will be submitted to CBK together with: i. One certified and recent colour passport size photograph. ii. The original or certified copy of the National Identity card or valid Kenyan Passport. Two signatories of the bankers, whether a commercial bank or financial institution, must sign and stamp the card on the space provided, confirming the bank account details. Payments will be made to the bank account specified in the mandate card. Change of address may be advised through a letter signed by signatories as per the mandate. Payments: Offer Amount, Interest and Redemption Offer, interest and redemption payments will be made through the Investor s local or overseas commercial bank. Investors remitting funds from abroad will make payments directly to the Central Bank of Kenya through the CBK s correspondent banks abroad; likewise, interest payments and redemptions will be made through CBK s correspondent banks abroad. The conversion rate applicable on any transaction will be the daily CBK Mean Rate for the day of the transaction, in the case of the offer payments, the applicable rate is for the value date. These rates are published in the CBK Website. The transactions and variations costs arising from payments process and exchange rates will be borne by the investor. Central Bank of Kenya correspondent Banks BANK NAME BIC CODE PHYSICAL ADDRESS Federal Reserve Bank New-York FRNYUS33 Citibank NA. NewYork CITIUS33 Federal Reserve Bank of NY, 33 Liberty St, New York, NY 10045-0001 USA 111 Wall Street, FL 19, Zone 1, New York, NY 10043 USA JPMorgan Chase Bank New-York (JPCHASE) CHASUS33 4 New York Plaza 17TH Floor NEW YORK, New York 10004-2413 USA Bank of England London BKENGB2L Bank of England Threadneedle Street London EC2R 8AH ACCOUNT NO. 021084571 KENYA 36053278 0011542115 GBIIBKEN 1000004181007 Rediscounting The Central Bank of Kenya will rediscount the Bonds as a last resort at 3% above the prevailing market yield or coupon whichever is higher, upon written confirmation to do so from Nairobi Stock Exchange. In the case of the Diaspora investors, the request for rediscounting should be issued by the investor upon confirmation of the instructions by the Central Bank of Kenya. Rediscount proceeds will be paid through the investor s Bank account as provided in the CDS account records. Infrastructure Bond 6