kenya report for linkedin

March 2012

KENYA BUSINESS

ENVIRONMENT & POWER

SECTOR REPORT

March 2012

Property of Kareem El-Hini

Table of Contents

Chapter: Title ………………………………………………………………………………………………. Page

Section 1: Country Overview ........................................................................... 4

1.1 Political System ................................................................................................................................... 4 1.2 Legal System ....................................................................................................................................... 4 1.3 Economic Overview ............................................................................................................................. 5 1.4 Fiscal and Monetary Policy ................................................................................................................. 6 1.5 Credit Rating ....................................................................................................................................... 6 1.6 Labor Relations ................................................................................................................................... 6 1.7 Competition Policy ............................................................................................................................... 7 1.8 Economic Outlook ............................................................................................................................... 7

Section 2: Energy Sector Overview .................................................................. 9

2.1 Energy Sector Perspective: Historical and Futuristic Perspective ....................................................... 9 2.2 Resources Currently Mobilized for Energy Consumption in Kenya ................................................... 10 2.3 Energy Balance ................................................................................................................................. 12 2.4 Energy Prices .................................................................................................................................... 12

Section 3: Power Sector Overview ................................................................ 14

3. 1 Background of the Sector .................................................................................................................. 14 3.2 Institutional Aspects In the Power Sector .......................................................................................... 14 3.3 Description of the Power System ...................................................................................................... 15 3.4 Electricity demand ............................................................................................................................. 17 3. 5 Electricity Imports .............................................................................................................................. 19 3.6 Selling price of electricity ................................................................................................................... 19 3.7 Energy resources available for future power supply ......................................................................... 22 3.8 Ministry of Energy Least Cost Power Development Plan .................................................................. 25 3.9 Screening Candidate Generation Projects ........................................................................................ 26 3.10 Terms of PPA .................................................................................................................................... 28

Section 4: Types of Companies ...................................................................... 30

4.1 Company limited by shares (resident) ............................................................................................... 30 4.2 Companies limited by guarantee (resident) ....................................................................................... 30 4.3 Companies with unlimited liability (resident) ..................................................................................... 31 4.4 Representative offices of foreign companies (non-resident) ............................................................. 31

Section 5: Tax Regime ................................................................................... 32

5.1 Corporate Income Tax ...................................................................................................................... 32 5.2 Dividend Tax .................................................................................................................................... 32 5.3 Compensating Tax ........................................................................................................................... 32 5.4 Value Added Tax .............................................................................................................................. 32 5.5 Withholding Taxes ............................................................................................................................. 33 5.6 Stamp Duty ........................................................................................................................................ 34 5.7 Losses Carried Forward .................................................................................................................... 34 5.8 Double Taxation ................................................................................................................................ 34 5.9 Personal Income and Benefits Tax ................................................................................................... 34 5.10 Other Tax Issues ............................................................................................................................... 35 5.11 Conclusion on Taxes ......................................................................................................................... 35

Section 6: Customs/Duties ............................................................................ 36

6.1 Customs Rates Relevant to LNG Project .......................................................................................... 36

March 2012


6.2 Import Declaration Form (IDF) fee .................................................................................................... 36 6.3 Custom Bonded Warehousing .......................................................................................................... 37 6.4 Overview on EAC and COMESA ...................................................................................................... 37

Section 7: Investment Incentives and other Issues ........................................ 38

7.1 Investment Allowance ....................................................................................................................... 38 7.2 Extension for carrying losses forward ............................................................................................... 38 7.3 VAT Exemption ................................................................................................................................. 38 7.4 Customs Duty Exemption .................................................................................................................. 39 7.5 Other Issues: Investment Protection ................................................................................................. 39 7.6 Other Issues: Foreign Company Concerns ....................................................................................... 39

Section 8: Project Finance ............................................................................. 40

8.1 Background on Power Project Financing .......................................................................................... 40 8.2 Government of Kenya and KPLC role ............................................................................................... 40 8.3 Project Financing Terms ................................................................................................................... 41

Appendix A - Kenyan Shilling vs. US Dollar (2 and 5 year movement) ............ 42

Appendix B - Selected Petroleum Products Consumption Trends .................. 43

Appendix C - Structure of the Downstream Petroleum Industry .................... 44

Appendix D - Price Formula for Wholesale and Retail Pump Prices ............... 48

Appendix E - Detailed Breakdown of Existing Sources of Energy ................... 50

Appendix F - Least Cost Power Expansion Plan: Installed Capacity by Source 51

Appendix G - Least Cost Power Expansion Plan Details ................................. 52

Appendix H - Committed Generation Projects (as of February 2011) ............ 56

Appendix I – Committed and Planned Transmission Projects ........................ 58

Appendix J - World Bank Survey: Tax Issues .................................................. 59

Appendix K - Financing of the Rabai Power Station by BWSC ........................ 60

March 2012


Section 1: Country Overview

The Republic of Kenya, whose capital is Nairobi, is a country in East Africa that rests on the equator. It

lies along the Indian Ocean and borders Tanzania, Uganda, South Sudan, Ethiopia and Somalia. The

president is Mwai Kibai and the official languages are English and Swahili. Kenya has a population of 42

million with at least 60% living in rural areas. Most Kenyans receive an education and 85% of the

population is literate. The GDP in 2011 was approximately US$bn 34.6 (per capita: US$ 880) which is a

4.1% boost in real growth from 2010. The portion of the population living below the poverty line is

around 50%.

1.1 Political System

Powers of government are traditionally divided into three main branches: the Executive, the

Legislature and the Judiciary. The Executive consists of the president, who is the head of state and

chief of government, and also cabinet members. The Legislature consists of 224 members who are

elected to a five year term. They are tasked with making laws which are carried out by members of the

Executive. The judiciary is independent and is headed by the High Court and Court of Appeal. The Chief

Justice and the Judges of the High Court and Court of Appeals are appointed by the President. There

are over 40 registered parties although two coalitions, the Party of National Unity (PNU) and the

Orange Democratic Movement (ODM), dominate the political scene

The current president Mwai Kibai, head of the Party of National Unity, will stand down in 2012 and

there will be a power struggle for the countries leadership. Elections will take place during 2012 for

president, parliament, and most other government positions. Tension in the political sphere is

currently high, since two notable candidates, Uhuru Kenyatta and William Ruto, have been called to

stand trial at the International Criminal Court for crimes against humanity.

1.2 Legal System

The Kenyan legal system contains a mix of Kenya statutory (written) law and Kenyan and English

common law mixed with elements of tribal and Islamic law. Although a new constitution was approved

in 2010, implementing changes in the legal system has been hampered by resistance from the police

and judiciary. The judicial system is considered weak and mired in incompetence, executive

interference and corruption. The Corruption Perception Index points to significant corruption in Kenya,

as it is rated 2.1 out of 10 (1 being high) and the constitution calls for a new anti corruption agency.

http://en.wikipedia.org/wiki/East_Africa

http://en.wikipedia.org/wiki/Equator

March 2012 Page 9


Section 2: Energy Sector Overview

2.1 Energy Sector Perspective: Historical and Futuristic Perspective

The energy sector is considered a key enabler to achieving Kenya’s Vision 2030. The energy policy in

Kenya evolves through sessional papers, regulations and Acts of Parliament. The Sessional paper

established the Department of Price and Monopoly Control (DPMC) to monitor trade and enforce

pricing in various sectors, including the petroleum sub-sector. In 1981, the National Oil Corporation of

Kenya Limited (NOCK) was established by the government with the aim to coordinate oil exploration

(upstream) activities. In 1988, the company was mandated to supply 30% of the country's crude oil

requirements to be sold to oil marketing companies for refining and sale to consumers.

The Petroleum Act and the Petroleum Exploration and Production Act are used to guide operations in

the sector. In 1994, there was further implementation of policies to liberalize most sectors including

petroleum products.

In 2004, the Ministry of Energy (MoE) outlined a number of broad objectives including ensuring

adequate, quality, cost effective and affordable energy supply to meet development needs, while

protecting and conserving the environment by more efficient use of natural resources. A Wider use of

renewable energy technologies in the energy supply mix is being encouraged.

The natural resources available for exploitation are Small Hydro, Geothermal, Coal, Biomass, Biogas,

Cogeneration, Tidal Waves, Solar and Wind. However, in order to meet energy demand the country

depends on imports such as petroleum and electricity from Uganda and Tanzania. Consequently the

Government of Kenya (GoK) has embarked on the following broad objectives in the medium term to

mitigate the current situation:

a) Diversification of the country’s energy sources in order to lessen dependence on

unsustainable sources like hydro power;

b) Development, rehabilitation and expansion of generating power plants;

c) Regional interconnections;

d) Expansion and extension of the national grid;

In tandem with other sector reforms, the GoK has undertaken structural reforms in the commercial

segments of the energy sector with a view to improving operational efficiency and induce competition

March 2012 Page 10


to attract investment. As Kenya aspires to be a middle economy, it faces a major task of meeting

energy needs to power its growth.

2.2 Resources Currently Mobilized for Energy Consumption in Kenya

a) Domestic Resources:

Wood fuel and charcoal (biomass) supply close to 76% of total energy consumption in Kenya. Of the

balance, 21% is supplied by imported petroleum products and 3% is supplied by electricity. Wood fuel

is used in rural areas by almost 80% of the population mainly for cooking and heating. Charcoal and

wood fuels are also widely used in urban areas as electricity use is considered expensive for cooking

and heating.

Domestic energy consumption patterns in Kenya portray more of fuel stacking than fuel switching,

where households use multiple fuels to meet different energy demands. Fuel switching is when a

household completely shifts and uses a new fuel. National energy supply is summarized below:

Table 3: National Energy Supply

Energy source Millions of GJ Share of Energy Use

Wood fuel 250 36%

Charcoal 280 40%

Petroleum 150 21%

Electricity 20 3%

TOTAL 700 100%

Source: Least Cost Power Development Plan (LCPDP), 2011

b) Imported Resources

i. Petroleum

In 1994, the GoK deregulated the operations of the downstream market including liberalizing the

distribution and partial liberalization of product supply. Since then, a number of operators have

emerged who import, export, distribute and wholesale petroleum products.

Petroleum accounts for 21% of the country's primary energy. The demand for petroleum has been

growing steadily at above 10% per annum since 2004. Appendix B contains trends for selected

petroleum products.

Despite sinking over 32 exploratory oils since independence, Kenya has yet to strike any oil or gas.

Exploration interest in Kenya increased after oil and gas deposits were found in neighbors like Uganda,

March 2012 Page 17


3.4 Electricity demand

The demand for electricity has shown an upward trend in the last 6 years. Demand was 4,200 GWh in

2004/05 and increased to 5,318 GWh in the year 2009/10. In Kenya electricity is supplied to less than

15% of the total population, predominantly middle and upper income groups.

Table 10: KPLC Sales by Customer Category (GWh)

TARIF

F

COVERED BY THIS TARIFF 03/04 04/05 05/06 06/07 07/08 08/09 09/10

00 DC Domestic 900 956 1,028 1,113 1,255 1,254 1290

SC Small Commercial 476 522 522 558 590 823 823

B Mdm Commercial/Industrial 819 885 901 985 996 n/a n/a

C Lrg Commercial/Industrial 1,683 1,776 1,877 2,054 2,108 n/a n/a

CI Commercial and Industrial n/a n/a n/a n/a n/a 3,020 3,153

IT Off-peak 55 53 54 50 74 43 n/a

SL Street lighting 7 8 9 11 13 15 16

TOTAL 3,940 4,200 4,391 4,771 5,036 5,155 5318

% INCREASE P.A. 7.8% 6.6% 4.5% 8.7% 5.6% 2.4% 3.5%

Source: LCPDP, 2011

Historical Peak Demand in MW

Source: LCPDP, 2011

899

920

987

1044

1072

1107

800

900

1000

1100

1200

1300

2005 2006 2007 2008 2009 2010

March 2012 Page 18


a) Regional Comparisons

Total electrical consumption in the East African Power Pool (EAPP) region is 128,000 GWh while GDP

for the region is US$ 143,000. Per capita consumption in Kenya is approximately less than half the

regional average. Kenya’s GDP per Capita is approximately 16 % higher than the regional average.

Table 11 : Regional Comparisons in Consumption

Country/Region

Population

(Millions)

Total Electrical

Consumption

(GWh)

Per Capita

Consumption

(KWh)

GDP

(US$bn)

GDP Per

Capita

(US$)

EAPP 385.56 128,001 332 182.16 472

Egypt 75.68 104,092 1,375 113.48 1,500

DRC 64.39 5,997 93 0.74 12

Kenya 36.91 5,476 148 20.21 547

Sudan 39.38 3,438 87 13.25 337

Tanzania 39.38 3,182 81 11.75 298

Ethiopia 79.94 3,130 39 10.95 137

Uganda 30.26 2,068 68 8.11 268

Djibouti 0.69 260 375 0.54 777

Rwanda 10.14 232 23 2.46 242

Burundi 8.78 126 14 0.66 76

Source: Kenya Power Report Q3 2010 Published by Business Monitor International, June 2010

March 2012 Page 22


3.7 Energy resources available for future power supply

a) Hydro potential

Kenya has considerable hydropower potential estimated in the range of 3000-6000 MW. At least half

of the overall potential originates from smaller rivers that are key for small-hydro resource generated

electricity. This hydropower potential is located in five geographical regions, representing Kenya’s

major drainage basins.

Challenges for further development:

The economic risk in hydropower projects is large, because they are capital intensive. A hydropower-

dominated power system like Kenya’s is vulnerable to large variations in rainfall and climate change. In

the recent past the failure of long rains has resulted in power and energy shortfalls.

b) Geothermal resources

Geothermal activities in Kenya are concentrated in the East African Rift which has been associated with

intense volcanism and faulting resulting in development of geothermal systems.

The Government through the Ministry of Energy, GDC, KenGen and other partners has undertaken

detailed surface studies of some of the most promising geothermal prospects in the country. These

prospects are clustered into three regions namely the Central Rift (1,800MW), South Rift (2,450MW)

and North Rift (3,450MW). Geothermal is currently the most promising indigenous resource for

development of power. However, due to the high risk of geothermal drilling securing the necessary

private sector financing has proven an obstacle to the development of geothermal resources.

c) Biomass

Biomass includes wood fuel and agricultural residues. Wood fuel is the highest supplier of household

energy consumption in rural Kenya. At the national level, wood fuel and other biomass account for

about 68% of the total primary energy consumption.

d) Cogeneration

Cogeneration using bagasse as a primary fuel is common practice in the domestic sugar industry in

Kenya. Biogas potential in Kenya has been identified in Municipal waste, sisal and coffee production.

The total installed electric capacity potential of all sources ranges from 29-131MW.

March 2012 Page 23


e) Solar Energy Resources

Kenya has great potential for the use of solar energy throughout the year because of its strategic

location near the equator.

Over the last three years, the number of home systems installed has grown at an average of 20,000

units per annum. With the enhanced state support, it is estimated that the rate of market penetration

for home units will improve considerably.

f) Wind resources

There is little experience in using wind for power generation in Kenya, however, awareness and

interest is steadily growing. The most recent investment in wind energy in Kenya is KenGen’s 5.1MW

farm in Ngong. A further 610MW are to be developed by IPP’s including the 300MW by Lake Turkana

Wind. Local production and marketing of small wind generators has started and pilot projects are

under consideration. Still, only very few small and isolated wind generators are in operation so far.

g) Fossil fuels - Local coal reserves

The Government is currently undertaking coal exploration activities in Mui basin. The Ministry of

Energy has so far drilled 40 appraisal wells in the basin intercepting coal seams of up to 16 meters in 27

of the wells. The GoK recently selected China's Fenxi Mining Group to develop coal mines in its Eastern

Province, where production is expected to kick off in the next three years. Further coal resource

exploration work has also commenced in other prospective sites such as Taru basin in Kwale District.

Local coal is expected to feed the governments new 600 MW coal-fired plant at Mombassa, which is

back on track after recently securing a suitable plot of land.

h) Fossil fuels - Imported coal

Kenya imports an average of 3.6 million tonnes of coal annually for use mainly in manufacturing

industries. Coal can also be used as a substitute for more expensive oil in generation of electric power.

The Ministry will explore coal resources for exploitation including for power generation and industrial

use.

i) Petroleum products imports

Currently about 35% of the country’s electricity installed capacity is petro thermal based which

requires a lot of imported petroleum products. Petroleum products used in power generation in Kenya

are Heavy Fuel Oil, Industrial Diesel, and Kerosene.

March 2012 Page 24


j) Power Imports and Exports

This will be made possible by way of Regional Interconnections. The regional interconnections are

progressively evolving with the expected planned transmissions lines linking regional countries likely to

be implemented under the Eastern Africa Power Pool (EAPP) the Nile Basin Initiative and the Nile

Equatorial Lakes Subsidiary Action Programme. These lines include Kenya- Isinya-Tanzania (Arusha)

400kV line, second Kenya (Lessos)-Uganda (Jinja) 220kV line, Kenya-Ethiopia 500kV DC line and a 132kV

cross-border electrification line to Moyale town from Ethiopia.

March 2012 Page 25


3.8 Ministry of Energy Least Cost Power Development Plan

Kenya’s power industry generation and transmission system planning is undertaken on the basis of a

20 year rolling Least Cost Power Development Plan (LCPDP) updated every year. The purpose is to

forecast future power needs and determine the most cost effective way to expand the system by

considering the availability and cost of available local and imported resources. Appendix F displays the

installed capacity of each source each year up to 2030 according to the plan, while appendix G provides

complete details of the expansion plan.

a) Peak Load Forecasts

The MoE forecasts the energy capacity and consumption for the period 2010-2030 for three scenarios

based on the following growth rates:

Scenario / Year 2010 - 2020 2020 - 2031 2010 - 2031

High growth scenario 16.50% 14.10% 15.30%

Medium growth scenario 14.50% 12.20% 13.40%Low growth scenario 13.40% 10.50% 11.90%

Table 15: Average Yearly Growth Rates of Power Needs

Source: LCPDP, 2011

The MoE has forecasted the following peak load capacity and consumption forecasts for three cases:

Table 16: Peak Load Capacity Forecast

YEAR GWh MW Load factor GWh MW Load factor GWh MW Load factor

2010 6,683 1,120 68.1% 6,683 1,120 68.1% 6,683 1,120 68%

2015 10,040 1,729 66.3% 10,597 1,830 66.1% 11,554 2,001 66%

2020 15,887 2,768 65.5% 18,156 3,163 65.5% 21,744 3,791 65%

2025 25,795 4,528 65.0% 31,620 5,512 65.5% 39,762 6,890 65.9%

2030 41,409 7,254 65.2% 54,761 9,458 66.1% 72,837 12,423 67%

LOW SCENARIO REFERENCE SCENARIO HIGH SCENARIO

Source: LCPDP, 2011

b) Implementation of the plan

The MoE shall ensure successful and timely implementation of the following projects through the

project implementation committee. Details of the committed and proposed projects are included in

Appendix H.

March 2012 Page 26


Table 17: Commited and Proposed Generation and Transmission Projects

Project description Capacity MW /

length of KM

Time lines Implementing

agencies

Approximated

present value

costs

Committed generation projects 1,815 MW 2011-2015 KENGEN and IPP US$ 3.9 billion

Proposed generation projects 18,920 MW 2015-2031 KENGEN and IPP US$41.4 billion

Proposed transmission projects 10,345Km 2011-2031 KETRACO US$4.48 billion

3.9 Screening Candidate Generation Projects

As part of the LCPDP, screening curves were constructed for all candidate units to provide an

illustration of annualized costs of electricity generation for different sources of generation. The

technique is an approximate method that captures major tradeoffs between capital costs, operating

costs and utilization levels for various types of generation. The screening curve method expresses the

total annualized electricity production cost for a generating unit. This approach is useful for quick

comparative analyses of relative costs of different electricity generation technologies. Annualized costs

are based on the following assumptions:

Crude Oil Price = 90 US$/bbl

Coal Price = 100 US$/tone

Natural Gas = 9.11 US$/GJ

March 2012 Page 27


Table 18: Annualized Cost of Generation by Source

Geothermal Coal GT-

Kerosene OCGT**-

NG MSD*** Import Wind Hydro

Capacity* 140 MW 300

MW 180 180 160 1000 300 140

Fixed Cost

579.7

715.8

144.8

144.8

232.5

484.8

740.0 613.0

Capital (USD millions) 511 631 135 135 218 455 690 507

Capital ($/kW) 3650 2104 750 750 1364 455 2300 3621

IDC Factor

1.124

1.134

1.073

1.073

1.065

1.065

1.073 1.209

Annuity Factor

0.094

0.094

0.102

0.102

0.102

0.094

0.094 0.082

Interim Replacement 0.92% 0.92% 0.35% 0.35% 0.35% 0.35% 0.64% 0.87%

Fixed Annual Capital ($/kW/yr)

426.00

245.50

84.70

84.70

153.10

47.10

246.90 396.1

Fixed O & M ($/kW/yr)

56.0

69.0

11.8

11.8

62.5

30.0

28.1 19.8

Total Fixed Annual Cost ($/kW/yr)

482.0

314.0

97.0

97.0

216.0

15.0

275.0 416

Total Outage Rate

0.068

0.267

0.078

0.078

0.098

0.150

0.133 0.0969

Outage Adjustment

1.073

1.364

1.085

1.085

1.108

1.176

1.153 1.107

Annual Fixed Cost ($/kW.yr)

517

429

105

105

239

91

317 461

Annual Fixed Cost ($/kWh) 0.0590 0.0490 0.0120 0.0120 0.0273 0.0104 0.0362 0.0526

Variable Cost

Fuel Price ($/GJ)

-

4.557

19.370

9.110

11.080

-

-

-

Heat Rate (kJ/kWh)

-

9,914

11,440

9,504

9,336

-

-

-

Fuel Cost ($/kWh)

-

0.045

0.222

0.087

0.104

-

-

-

CO2 tax ($/kWh)

-

0.011

0.009

0.004

0.007

-

-

-

Variable O & M ($/kWh)

0.0056

0.0043

0.0120

0.0010

0.0090

0.0500

0.0010

0.0053

Total Variable ($/kWh)

0.0056

0.0603

0.2425

0.0916

0.1194

0.0500

0.0010

0.0053

Total Variable ($/kW.yr)

49

528

2,124

802

1,046

438

9

47

Total Cost ($/kWh)

0.0646

0.1093

0.2545

0.1036

0.1467

0.0604

0.0372

0.0579

Total Cost ($/kW.yr)

49

528

2,124

802

1,046

438

9

47

* Most likely configuration of plant ** Open Cycle Gas Turbine ***Medium Speed Diesel Source: LCPDP, 2011

March 2012 Page 33


the good or service. There are nine schedules of VAT which define the tax rate, specify which goods

and services are exempt or zero-rated, and provide other relevant information. The most pertinent

schedules are one, two, five and eight.

The first schedule states that the general tax rate is 16%.

The second schedule contains a list of goods exempted from tax. The relevant goods are: petroleum

oils and crude, regular and premium motor spirit (gasoline), other light oils and preparations, partly

refined (including topped crudes), other medium petroleum oils and preparations, gas oil (automotive,

light, amber, for high speed engines), and natural gas in gaseous state.

Schedule five contains zero-rated goods (effectively 0% tax). It includes: kerosene type jet fuel,

illuminating kerosene, liquefied natural gas, propane and other liquefied petroleum gases.

Schedule eight contains special goods which are zero rated and includes: capital equipment for

privately financed electric power generation projects with capacity to sell electricity into the national

grid, subject to a written approval by the Permanent Secretary to the Treasury. (Excluding motor

vehicles, spare parts and office equipment)

5.5 Withholding Taxes

Table 19: Witholding Tax Rates Resident Non-Resident

Management fees 5% 20%

Professional fees 5% 20%

Royalties 5% 20%

Equipment Leasing 3% 5%

Interest (bank) 0% 15%

Rents - buildings (immovable) N/A 30%

Rents - other (except aircraft) 3% 15%

Pensions/provident schemes 10-30% 5%

Consultancy and agency 5% 20%

Contractual 3% 20%

Source: Price Water House Cooper East Africa Tax Guide, 2011

March 2012 Page 34


5.6 Stamp Duty

Stamp duty is paid on the following transactions:

Table 20: Stamp Duty Rates Tax Rate

Increase of share capital 1%

Transfer of stock or market securities 1%

Transfer of immovable property 4%

Lease (1-2 years) 1% of annual rent

Lease (any other period) 2% of annual rent

Source: Deloitte Tax Matters, 2008

5.7 Losses Carried Forward

Losses may be carried forward for five years including the year they were incurred. Losses may not be

carried back and capital losses are not deductible.

5.8 Double Taxation

Kenya has double taxation treaties with UK, India, Germany, Zambia, Norway, Sweden, Denmark and

Canada. Treaties are not in place, however, with Egypt or Japan.

5.9 Personal Income and Benefits Tax

Personal income is taxed based on an individual’s annual salary:

Tax Bracket (In USD; 82.7 KES/USD) Tax Rate

0-1,411 10%

1,411-2,822 15%

2,822-4,233 20%

4,233-5,643 25%

5,643+ 30%

Table 21: Personal Income Tax Rates

Source: Price Water House Cooper East Africa Tax Guide, 2011

Most benefits (staff meals, electricity, servants, water, security, etc.) are taxable at the higher of the

cost to the employer of providing the benefit or the fair market value.

Housing provided for an employee is typically taxed at a 15% tax rate while vehicles provided for

private use are taxed at a progressive rate which increases with the size of the engine.

Fringe Benefit Tax (FBT) is payable on interest free or low interest loans granted to employees.

Whether exempted or not, the employer must pay the tax at the resident corporate tax rate of 30%.

The benefit is the difference between actual interest charged and the interest defined by the

Commissioner’s prescribed rate published quarterly.

March 2012 Page 35


An employer must contribute a maximum per employee of KES 2,400 and KES 3,840 to the national

social security fund and hospital insurance funds respectively. The rate is 5% and 1% of payroll

respectively.

5.10 Other Tax Issues

Thin Capitalization: Deductibility of interest expenses is only proportionally restricted for

foreign controlled companies (control defined as participation of at least 25%) when the ratio

of all interest bearing liabilities is three times greater than the companies paid up capital plus

retained earnings/accumulated losses (i.e: Debt : Equity > 3:1).

There is no capital gains tax on disposal of immovable property.

There are no real property taxes or capital duty taxes (for individuals).

5.11 Conclusion on Taxes

As a concluding note, Kenyan tax law is very complicated and often ambiguous. The law has changed

often and is likely to keep evolving, possibly as early as this year. In a survey conducted by the World

Bank, foreign companies ranked tax rates as the number one constraint on doing business (results in

Appendix I). Moreover, the time firms spent in meetings with tax officials averaged 6.7 days per annum

in Kenya compared to 2.7 days per annum on average in Sub-Saharan Africa. Justifiably, Kenya ranks

166 out of 183 in Paying Taxes. Foreign entities who have failed to understand the significance of tax

law on profitability have paid a heavy price.

Therefore, before submitting a financial proposal to the GOK, it is highly recommended to seek

professional tax and legal advice. Local tax specialists can assist in designing a capital structure which

mitigates the issue of thin capitalization while also appealing to the project owners. Specialists can also

appraise the project assets, cash flows, etc. and recommend tax incentives to target during

negotiations, as well as lobbying the GOK on the client’s behalf.

March 2012 Page 40


Section 8: Project Finance

8.1 Background on Power Project Financing

There are currently 43 licensed commercial banks in Kenya including a number of international banks.

These international players have previously teamed up with Development Financial Institutions (DFI)

such as the World Bank and IFC to finance mega infrastructure projects. For example, African Financial

Development Bank (AFDB) was the lead arranger for the USD 773 million, Lake Turvana Wind Farm

along with Stanbic Bank, NedBank (both locally listed International Banks) and other co-arrangers.

Locally owned banks do not have sufficient funding availability for this project.

Private Banks have a greater appetite for financing IPP’s when development funds are involved.

Although Sub-Saharan Africa projects with DFI funding tend to take longer to reach financial close than

privately funded projects, project sponsors argue that having multilateral development institutions

helped them maintain contracts with governments and resist pressure to reduce tariffs. For example,

the IFC arranged all the debt for Tsavo, owner of Kipevu II in Kenya, and took a 5% equity stake. Tsavo

has since resisted KPLC pressure to reduce its tariffs. Conversely, OrPower4, also in Kenya, had no

multilateral involvement in its debt or equity and reduced its tariff for the second phase of the plant.

For a case study outlining the financing of Rabai Power Station, see Appendix K.

8.2 Government of Kenya and KPLC role

The GoK has not provided sovereign guarantees to IPP’s so a series of alternate arrangements are

made. Key documents provided are the Letter of Safety provided by the GoK and the security package

provided by KPLC. The Letter of Comfort addresses force majeure and political issues, but is not a

sovereign guarantee due to its limited coverage. The security package comprises: an escrow account

that KPLC must provide one month’s payment for duration roughly equivalent to period of primary

debt repayment; and a stand-by Letter of Credit, which covers three months billing. Initially 100% cash

cover was required for the Letter of Credit; however, this has since been eased to 20%.

March 2012 Page 41


8.3 Project Financing Terms

International Banks can offer tenors up to 10 or 12 years depending on bankability. Syndications which

involve multiple tranches are common in large loans. Private Banks typically lend up to 70% of the

projects value but this figure can reach 75% when DFI’s are involved.

Banks typically lend at LIBOR + six percent, LIBOR + five percent with DFI’s. Commitment fees and

upfront fees vary from 50 basis points to 150 basis points.

While the bulk of funding will be from offshore banks, funding from “on the ground” banks is useful

since they will lobby the GoK to guarantee the bankability of the project which is useful to the project

developers also.

March 2012 Page 60


Appendix K - Financing of the Rabai Power Station by BWSC

(Source: Industrialization Fund for Developing Countries)

The following is a classic example of project financing based on a financial structure where financing is

provided through project debt and equity. This case provides an example of project financing in

difficult times where access to credit is scarce; it is completely financed by the project sponsors and a

number of leading Development Financial Institutions (DFI’s). Burmeister & Wain Scandinavian

Contractor (BWSC) is a Danish turnkey contractor and operator of medium and large diesel engine

based power systems. One of BWSC’s projects was a 90 MW plant, which lies outside Mombasa, and is

able to provide electricity to more than 400,000 households. BWSC and Aldwych International are the

lead sponsors of the project, and are responsible for the construction, operation and maintenance of

the plant.

The financing of the project is based on a typical purchase power agreement structure to reduce the

risk. This project is based on a 20-year PPA entered with the national transmission and distribution

company, Kenya Power & Lighting Company, providing solid financial security for future income. The

complete contractual structure of the project is presented below:

BWSC Spare Parts Supply Agreement (10 yrs)

BWSC EPC Off-Shore Supply Contract EPC On-Shore Contract

Rabai Operation & Maintenance Ltd. (Kenyan Co. - BWSC 51%, Aldwych 49%) O&M Agreement (20 yrs)

Kenya Power & Lightning Co. Site Lease Power Purchase Agreement Letter of Credit

Government of Kenya Letter of Comfort

Fuel Supplier Fuel Supply Agreement

Aldwych Construction Mgmt. Kenya Ltd. (Aldwych 100%) Construction Management Agreement

Rabai Power Ltd. Kenya

March 2012 Page 61


26.7

79.0

5.6

Type of Financing (in million EUR)

Equity (24%)

Senior Debt(71%)

Mezz. Debt(5%)

BWSC was able to put together a financing agreement

with Europe’s leading DFI’s to finance the 111.3 EUR

million project. 24% of the financing of the plant is equity,

contributed from Aldwych, BWSC, Danish Industrialization

Fund for Developing Countries (IFU) and FMO.

The remaining 76% is debt financed by several DFI’s.

The project sponsors, Aldwych and BWSC, contributed

60% of the total equity (including 11% bridge equity)

equaling around 14% of the total project cost.

The remaining financiers are:

- IFU - the Danish development finance institution

- FMO - the Dutch development finance institution

- DEG - the German development finance institution

- PROPARCO - the French development finance institution

- EFP - European Financing Partners, a investment company owned by the European Investment

Bank and 12 European DFI’s (incl. all of the abovementioned)

- EAIF - Emerging Africa Infrastructure Fund, whose founding members are governments of

several European countries

The financial structure of the project is presented below. Blue squares indicate the equity holders,

green mezzanine debt and red senior debt.

EAIF

€ 2,800,000

Proparco € 2,800,000

DEG € 12,000,000

FMO € 19,800,000

EAIF € 19,800,000

Proparco € 19,800,000

EFP € 7,800,000

Aldwych € 7,740,000

BWSC € 5,340,000

IFU € 5,340,000

FMO € 5,340,000

Bridge Equity: Aldwych € 1,470,000

BWSC € 1,470,000

Rabai Holding Ltd UK

Rabai Power Ltd

Kenya

March 2012 Page 62


List of References

Documents

Updated Least Cost Power Development Plan Study Period: 2011 – 2031, March 2011

The Ministry of Energy 2nd National Energy Conference Report, October 2011

World Bank Ease of Doing Business Report: Kenya, 2012

Economist Intelligence Unit Country Commerce Report: Kenya, March 2011

Business Monitor Online Business Forecast Report: Kenya, 2011/2012

Business Monitor Online Power Sector Report: Kenya, 2010/2011

Kenya Institute for Public Policy Research and Analysis: A COMPREHENSIVE STUDY AND ANALYSIS ON

ENERGY CONSUMPTION PATTERNS IN KENYA, July 2010

The Income Tax Act: Kenya (Commenced in January 1974)

The Value Added Tax Act: Kenya (Commenced in January 1990)

The Companies Act: Kenya (Commenced in January 1962, Revised 2009)

Consultancy Service for Liquefied Natural Gas Study, Mott McDonald, December 2009

Components of the Kenya Petroleum Sector, Ministry of Energy, 2009

Websites

Deloitte Kenya Tax Guide: http://www.deloitte.com/assets/Dcom-

SouthAfrica/Local%20Assets/Documents/IntoAfrica/Kenya.pdf

Deloitte Economic Outlook, Kenya: http://www.deloitte.com/assets/Dcom-

Kenya/Local%20Assets/Documents/EconomicOutlook2011.pdf

PKF International Limited Tax Guide, Kenya: http://www.claytonmckervey.com/attach/worldwide-tax-

guide-kenya.pdf

EAC Common External Tariff: http://www.kra.go.ke/customs/pdf/EAC%20External%20Tariff.pdf

PWC East Africa Tax Guide: http://www.pwc.com/en_UG/ug/pdf/east-african-tax-guide-2011-2012.pdf

Companies in Kenya Guide: http://softkenya.com/law/companies-in-kenya-company-law/

March 2012 Page 63


AN OVERVIEW OF EXISTING REGULATORY ENVIRONMENT AND FRAMEWORK FOR INVESTORS:

http://www.liverpoollawsociety.org.uk/userfiles/file/Society%20News/Existing%20Regulatory%20Envir

onment%20and%20Framework%20for%20Investors.pdf

The Energy Act: http://www.erc.go.ke/ctariff.pdf

Kenya Revenue Authority Customs Services Department:

http://www.kra.go.ke/customs/faqcustoms2.html

Interviews

Onyango, Richard (Infrastructure Finance Manager) and Parker, Kwame (Director & Regional Head

Debt Solutions & Infrastructure Finance). Stanbic Bank. Nairobi, Kenya. 27 February 2012.

Nyambego, Obed.(Senior Tax Advise). PricewaterhouseCoopers Limited. 27 February 2012. Nairobi,

Kenya. 27 February 2012.

Mussa, Amyn (Partner). Anjarwalla & Khanna Law Firm. Nairobi Kenya. 28 February 2012.

Adi Bidu, Guracha (Manager – Investor Services). Kenya Investment Authority. Nairobi, Kenya. 28

February 2012.

Ondengo, Brown (Consultant). Mombassa, Kenya. 29 February 2012.

Sonoiya, David (General Manager) and Bante, Abdub (Project Analyst. Kenya Investment Authority.

Mombassa, Kenya. 30 February 2012.

Odumbe, J.O. (Operations Manager). Kenya Electricity Generating Company Ltd. Mombassa, Kenya. 2

March, 2012