Author: InVhestia

Co-investment Funds to the Rescue; Addressing the Valley of Death

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Whether you believe in it or not the Valley of Death (VoD) is real! If you are still wondering about its whereabouts, talk to any seasoned entrepreneur. The VoD refers to that phase of a company where it is too early to attract any / huge appetite from early stage investors and it’s also not generating enough cash from its operations to choose not to look for investors. The solution for most startups in terms of how to navigate this stage is usually to rely on funding from ‘the three Fs’, family, friends and fanatics (feel free to use your own label for the last ‘f’), angel investors in some instances grants.  African entrepreneurial ecosystems while rich with opportunities probably have some of the deepest and longest VoDs, a lot of work is going into how to reduce the fears elicited by these valleys, not to mention the casualties they record. One of the actors keen on addressing the challenge of VoDs is the Government. As would be expected, different Countries are at different stages in this journey; some have started while others are still getting their act together.

Recently, the South African government initiated a co-investment fund that is meant to address the problem posed by these VoDs and improve number of the Companies that make it to the other end alive. The Initiative is being championed by the  Technology Innovation Agency (TIA) whose goal is to bridge the innovation chasm between research and development. The body focuses on education institutions, science councils, public entities, private sector and commercialization. TIA will adopt a one-to-one matching such that for every Rand invested by an angel investor or syndicate of angels, the agency will also invest a Rand as loan up to a maximum loan of R 500,000 (USD 35,000). The loan will be done through a royalty financial instrument (repayable by taking a percentage of the revenues of the company over a period) that is currently priced at an IRR of 20%. The loan plus accrued interest is repayable should the start-up have enough money (definition not clear) to repay TIA and should it fail, it has no obligation to pay the loan.

To ensure that the fund has maximum impact, it will channel funds to entrepreneurs who suffer the highest casualties as they scale the VoD. Priority will be given to entrepreneur applicants who are either black or women. Further for efficient fund allocation and to catalyze local capital all applications will require joint investment committee approval from both TIA and an Angel Investor or Angel Group.

Co-Investment funds can play a critical role in catalyzing local capital and addressing the VoD challenge faced by indigenous entrepreneurs. Corporates, DFis, Governments and other actors should consider them as a means of addressing systemic challenges in most African Silicon Savannas. The intervention by South Africa’s Government looks to be a good starting point for players interested in experimenting with this model. Other interventions working under the same principles and with notable traction include Catalyst a cross-stakeholder initiative that aims to increase the pool of capital available to promising African growth-stage entrepreneurs, as well as support the startup ecosystem including hubs and angel networks. As with everything the proof of the pudding is in the eating, the co-investment model offers a different approach to address the VoD challenges, more initiatives need to be launched to better design the model for the African Continent.

Written by Adeliade Njoki and Stephen Gugu

The State of the Kenyan Economy in 2020: Are you Prepared?

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InVhestia hosts a cocktail event for clients every year. This event celebrates the year that was while providing a platform for our clients and partners to hear from experts on what to expect from the year to come. Last year’s the cocktail was held at Park Inn by Radisson on the 5th of December. Additional to hearing from experts, the evening serves as an opportunity for our clients and partners to; learn more about InVhestia’s various offerings which include- financial modelling consulting and training, project and corporate finance advisory, and capital raising; witness the awarding of our financial modelling competition finalists; and to network with each other.

The theme for the night was “A Touch of African’ and the effort on the part of the invited guests cannot go unmentioned. There was a flair of colorful ankara prints and beautiful African accessories all around the room.

The highlight of the night was the keynote address by renown Economist Dr. David Ndii, on “The State of the Kenyan Economy & How it Affects Businesses.” In this blog we would like to highlight some of the key messages from his key note address.

  1. The country has recorded an economic growth over the past couple of years of between 5% and 6%. The feeling on the ground is different as citizens claim not to be feeling this growth, well-articulated by the Kenyan phrase “kwa ground vitu ni different” (On the ground things are different). Additional to this a number of companies have issued profit warning not to mention laying off staff. Dr Ndii attributes this disconnect between the economic development and the reality on the ground, to two main factors i.e. bad economics and bad politics.
  2. Elections have a negative impact on GDP growth, whenever Kenya has had an election there has been a notable reduction in GPD and in the overall over a 30-year period the impact is a 40% reduction on GDP performance. When comparing the GDP growth rates and Average Annual Income per capita of East African countries, there is a visible trend of economic decline during election periods. This is as a result of the expectation of unrest that comes with election which forces investors to apply a ‘wait-and-see’ strategy which in turn contributes to decline in the economic growth.
  3. For bad economics in the country, we look at the contributors of economic growth, which are human capital, physical capital, factor productivity and employment as shown in the figure below. Dr Ndii explains that human and physical capital contribute to factor productivity. When money is borrowed for the economy to fund infrastructure projects (physical capital), and in turn these projects are not productive, this results in reduced productivity leading to reduced tax collections which means that the economy may not be in a position to pay back the loans which may result to economic distress. Kenya is currently going through this, loans borrowed for mega infrastructure projects e.g the the SGR, Dams etc have not resulted to productivity increase and the impact can be partly seen in the Kenya Revenue Authority missing its tax collection targets.

  1. The above borrowing has not only been in the external markets but in local markets too. This has resulted in the Government crowding out the private investors from the local debt market. This means that the private sector is not able to attract as much credit from the local debt market, which reduces its growth and contribution to the economy leading to a reduction in the tax contributions as explained above. The resulting deficit needs more borrowing to be filled and leads to a vicious cycle where the Government needs to borrow more to fill the deficit which increases the debt service leading to less allocation to development in the budget, reducing growth and contribution of the private sector, and the cycle continues. Left uncorrected this may lead to financial distress in the economy.

The implications of this state of affairs on the economy are as follows;

  • Increased taxation with aim of offsetting the large debt service requirements
  • Reduction in the spending power of the consumers due to increase in cost of living
  • “Wait-and-see” approach by private investors, especially for short term investments that reduces the economic growth due to private investing
  • An Economy that is in a fragile state can get to distress at any time. Distress would have any of the various dire implications including a weaker Kenya Shilling, aggressive taxation, reduced expenditure by the Government on essential services to name a few.

According to the Economist, to reduce adverse effects of the current economic state of the country, some mitigations can be employed. He suggests that for the recovery to take place, the Government should reduce their debt appetite; especially for local debt. The Governments should release credit to the private sectors, as they are the major economic drivers, it should also create investor confidence by cutting their expenditure and finding cheaper foreign loans. This is much easier said than done and would need political will to tighten the belt not only for the Government but for Kenyan’s too.

As local businesses in the country, there are measures that can be taken into account, in preparations for the economic wave. These include;

  • Making long term investments as opposed to short term ones. This will reduce the risk of loss that make come with any short-term changes in the economy
  • Companies can think regionally and not restrict operations to inside the country alone. This will be a way to diversify operations as well as tap into new markets
  • Rationalize costs. As is the situation for any time of difficulty companies have to learn to reduce costs
  • Create a buffer. Always make sure that you have a cushion for a rainy day

In closing, Dr Ndii reiterated the power of the private sector has to make change in the country. He suggests that the private sector should converge and tap into their power to be able to influence policy in the country.

For more details on this discussion visit our official YouTube page and watch the video on Dr Ndii’s address here.

This blog was written by Jihan Haji, a financial analyst at InVhestia

Email Cliché Your Way To Successful Tax Practices As The Year Ends

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  1. Please find attached organized documents: Be sure to file them and not pile them in a corner shelf somewhere. Ensure
    • They are not torn and better still in soft copy format where possible
    • They are not arbitrary figures but actually available for example credit cards statements, mileage records, expense receipts etc.
    • They have a note describing their nature specifically the receipts and
    • Yes, they relate to the current year
  2. Per our conversation please provide receipts for the donations to your non-profit/charitable organizations: Donations are just a nice thing we all do. Who needs to brag about it, after all? Well, for these donations to be tax deductible the burden of proof is on you and the best way to guarantee their tax deductibility is to donate to recognised and registered charitable entities such as foundations or charitable organisations.
  1. Sorry for the late reply is unacceptable while paying The Revenue Authority: It will not do away with their gall to penalize you even after only one missed deadline!
  2. I hope you are doing well my accountant: Despite the daylight robbery that is their fee per hour to add up numbers – it is accrual world and they will get your books in order to save you the last minute hustle. Tax practices are a daily exercise and involve more than end of financial year tax position review.
  3. I look forward to your positive feedback retirement: Contributions to a registered retirement benefits scheme are tax deductible to a maximum of Kes 20000 p.m. or Kes 240000 p.a. With the first Kes 600000 of lump sum upon withdrawal of benefits and Kes 25000 monthly pension received from such scheme tax free.
  4. Thank you in advance for the timely remittance and settlement of Tax Invoices: This allows for Cross Matching of Invoices in iTax during VAT Auto Assessment (VAA). VAA is a system based solution that:
    • Detects inconsistencies between purchase and sales invoices which have been declared in the VAT returns and notifies the inconsistencies to both the buyer and the seller and
    • Generates auto assessments on the buyer on any outstanding inconsistencies which affected taxpayers are required to resolve within a given period from the date of system notification
  5. Best tax plan: Taxes are enforced, not voluntary, contributions so employ strategies to:
    • Obtain tax deductions such as capital deductions
    • Obtain tax offsets (credits)
    • Move income away from an entity paying a high rate of tax to an entity paying a lower rate of tax.
    • Move profits and losses between tax years, either to defer tax or take advantage of a more favourable tax rate
    • Reduce the amount of assessable capital gains from an investment sold at a profit

This blog is brought to you by the InVhestia Accounts Department

 

My InVhestia Competition Experience

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I started my internship in late August 2019. My role was to help organize and facilitate the 4th InVhestia FAST Standard Financial Modelling Competition. I was very ‘green’ in aspects of finance, modelling, and everything related to the field. I did however, have a background in event organizing as the Vice President of AIESEC at my alma mater JKUAT. I had also helped organize the training for the 2017 edition of the InVhestia competition. So you can say I did know my way around when it came to events.

Coming from a background of Mechatronic Engineering, one would imagine that project management would be a lot less technical. I knew I could rely on my knowledge of student events, but I had to learn quickly that there is a science behind marketing, a voice that has been honed by InVhestia. There needed to be a balance between making things fun and suitable for student audience, but also maintain a level of formality and professionalism, if I can call it that.

As we approached different new universities, I was able to appreciate the diversity of Kenyan universities. I was encouraged by the enthusiasm of administration personnel who are eager to give their students opportunities to learn outside of the standard curriculum. It felt like we all shared a common goal, to have financial modelling using the FAST Standard known by all students.

Here are my key takeaways from the competition:

  1. Be open minded

Another huge learning for me was not to close off your brain with regards to what you can or can’t do. Your background should not make you shy off from new challenges. My first task was to create a poster, something I had not done before. Stress! But once I got the right tools, it realized that I could do it. The same thing with social media; it was somewhat new for me, but again, the analytic tools helped me figure my way. Once I was in the zone, I was able to have an enjoyable experience.

I am glad I got to work in a corporate space. Here, you have to know what your plan is for every day so that you’re productive. My background was mostly field work, so I had to learn how to manage my time quite fast.

  1. Take the initiative

My first training was at UON. I thought all I had to do was plan and schedule the training, and that was it. That didn’t go as planned. My supervisor Nyambura asked me to talk about the competition in front of the students. It wasn’t something we had talked about so it caught me off-guard. I am not a public speaker, so it was quite honestly nerve-racking. However, it did also serve as an eye-opener. It pushed me to learn more things about the company and the competition. I saw the importance of knowing your stuff when talking to people so that you stand out as an authority.

The exposure I got at InVhestia was beneficial not just for me but the students I was interacting with too. They showed interest in and engaged more with the brand. It was evident that, for some, it was a once in a life-time kind of experience that pushed them to take the initiative. It was refreshing to see students looking to self-improve. It is not often that you see students take that kind of initiative. By the end of the campus tours, I had been added to quite a number of student WhatsApp groups. And I’m proud to say, mimi ni member!

  1. Patience

My other lesson was being patient! Each campus we went to had students who had different exposure as far as working in Excel. For some, building formula was a walk in the park but for others, we needed to go step by step, several times. This repetition also showed resilience in the students, their willingness to learn. By the third day of the competition, very few students had submitted their models. This was discouraging for me, especially because I had seen the excitement in the training sessions and groups. But in true Kenyan fashion, the submissions started flooding in on the last day, and the last hour, the last minute, to the last second. This year we had 92 submissions, which is the highest it’s ever been and I am very proud of that.

Final thoughts

What stood out for me was the impact that the FAST Standard Financial Modelling Competition has on students. You could see that they needed the exposure, and when they got it, they ran with it. Truth is, there were highs and lows, but the highs by far outweighed the lows. The marking is now ongoing and I am now excited to see the results and the impact in the lives of the students.

Written by Wangui Kinyori

The NSE Ibuka Program

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The Nairobi Securities Exchange (NSE) launched an incubation and acceleration program called the Ibuka late last year. Ibuka is a Swahili word meaning to emerge. The program seeks to end a prolonged listing drought at the bourse by taking small and medium sized companies through a 10 month incubation period. The program is designed around Hosting on non-trading boards; these are the Incubator Board and the Accelerator Board. The program will enable select Kenyan companies fast-track their development by accessing financial advisors and consultants to help them structure their businesses, enhance visibility and get exposure to local and international investors.

On 18th September, 2019,  InVhestia was officially onboarded to the Ibuka Program. We are part of both the Accelerator and Incubator boards as Financial Consultants and Lead Transaction Advisors respectively. We are excited to be a part of this game changing program that will enable small and medium sized companies to compete at the next level. The objective for the advisors and consultants is to assist the hostee companies to develop their capabilities and operations so as to enable them to have access to the capital market.

Through this program, the hostee companies, which are companies accepted into the program after a rigorous evaluation and vetting process making, will undergo two phases. The first is the incubation phase, involving enhancing their financial, technical, operational, commercial and strategic aspects of their businesses whilst the acceleration phase, will enable the companies to raise capital through debt and equity market as they track valuation as well as produce specialized documents such as capital raising and equity raising reports.

The hostee companies can benefit from joining the Ibuka program by getting visibility and exposure. The program exposes companies to both local and international investors in the capital market. The companies will gain credibility due to association with the NSE which is the largest securities Exchange in the region and one of the largest in Africa. The companies will also get expert advisory, through the consultant and advisors appointed to the incubation and accelerator boards. The consultants/advisors will offer technical expert advisory services to the companies to help improve their structures.

The program which now has a total of 17 member companies. These include Moad Capital, Vehicle and Equipment Leasing Limited (VAELL), Globetrotter Travel Agency Limited, Nile Capital Limited, HomeBoyz Entertainment Limited and Tusker Mattresses Limited (Tuskys) among others. The NSE is targeting to list their first firm from the program program by the end of the first quarter of 2020. As per an article in the Business Daily, NSE chief executive Mr Geoffrey Odundo said that companies already in the program are at different stages of compliance. He affirmed that the program is helping the companies meet the required terms and that we should be expecting announcements by the end of the first quarter of 2020.

 

 

Kenya is an Oil Exporter; How Much Do We Receive For The Oil We Sell?

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HOW WILL THE REVENUE BE SPLIT AND WHAT DOES THIS MEAN?

Turkana is Kenya’s first oilfield. It was discovered in 2012 by the Anglo-Irish firm Tullow Oil which has aroused great interest in Kenya. Kenya introduced new rules to share revenues from natural resources as part of a broader move to strengthen the county governments.

The fiscal regime is challenging since the contracts for the two areas in the Turkana project, 10BB and 13T, have not been published. We modelled the fiscal regime on the contract for 10BA, which was licensed in the same round and for which headline terms are available and, where appropriate, public comments by officials.

The President of Kenya, Uhuru Kenyatta on August 1st 2019 said the following:
“We (Kenya) are now an oil exporter. Our first deal was concluded this afternoon with 200,000 barrels at a price of USD 12 million.”

The USD 12 million is good income for the economy for various reasons including forex flows, jobs, GDP contributions etc but it would be good to understand how much would actually flow to the country and the split among various parties. It would be good to know how much would flow to the National Government, Counties and to the Community.

To answer these questions, one needs to have a view on assumptions around the project’s economics and on the fiscal regime. Below we highlight the assumptions we used to come up with approximate values of how the revenue generated would be shared.

So how would the USD 12 Million be distributed?

  1. Cost recovery: Tullow oil has incurred development costs, exploration costs and recurrently incurring operating costs. Before sharing, the company is allowed to use 60% of the oil revenue to recover the costs incurred until full recovery. In our case, since it’s the initial sale the company is required to use 60% of the USD 12 Million to recover the costs, that is, USD 7,200,000. This results to a profit oil of USD 4,800,000.

 

  1. Government and the company profit oil sharing:
  • The government receives 60% of the profit oil, that is, USD 2,880,000
  • The company receives 40% of the profit oil, that is, USD 1,920,000

  1. National Government, County Government and Community Share
  • National government receives 75% of total government share (USD 2,880,000), that is, USD 2,160,000
  • Turkana county receives 20% of total government share (USD 2,880,000), that is, USD 576,000
  • Turkana community receives 5% of total government share (USD 2,880,000), that is, USD 144,000

 

Summary of the Oil Export Proceeds

What does this mean?

The sale of oil does not mean actual income to the Government. One has to look at the production sharing contracts to arrive at how much the Country would make from a sale and how much the company ends up making. Unfortunately, in Kenya we do not have the details of the production sharing contracts and as such cannot tell how much cash SHOULD go to the National Government, the Counties or the Community. This is quite unfortunate because it then means numbers cannot be verified!

However, based on publicly available data one can see that there’s a long way to go before Oil can become a key contributor to the economy. To put the numbers in perspective, the just announced 2019/2020 budget is at USD 28 Billion. The amount earned from the initial oil sale contributes to just 0.043% of this. Further if you look at the Turkana County Allocation for the budget 2019/2020 of USD 111,778,110, the Turkana County earnings from this sale would only contribute to 0.515%. Lastly if you look at the community in Turkana (in this case understood to mean the inhabitants of the county), there is a population of 1,341,972 as at 2016 as per County Allocation of Revenue Bill 2019. If the amount was to be shared among each of them, the per head amount would be USD 0.107.

Early oil is definitely a good start in proving viability of the Kenya’s Oil, however a lot still needs to be done to ensure Kenya’s Oil play the role it should in the Country’s growth!

Sources:

What is finance without the concept of time?

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You know that distress call that comes in once in a while from a distant family member or friend asking for a boost because it’s mid-month? I’m sure many can relate. It is always followed by a long text providing the reasons why you should help them. In most cases these reasons, end up guilt-tripping you into sending them MPESA which is then followed by a Thank You note from them and a promise to repay by end month. Well, this promise is never kept and you end up doing constant follow-ups only to be repaid the original amount after a few months. At this point you are just happy that they have repaid you not noticing that from an economic stand point, you have been short-changed since the repaid amount is worth less because of inflation. This is also known as the concept of time value of money. It holds that a dollar today is worth more than a dollar tomorrow. From this one can deduce that time is a very important metric in any financial transaction. It lays the foundation for any form of asset valuation and interest on loans.

When coming up with a financial model, a financial analyst should take into consideration the operations of a business or a project over the modelling period. The timing aspect of a financial model is tracked using the time sheet in the model. The time sheet forms a foundation of any financial model as it is used to map out all the transactions and balances from the beginning of the model period to the end. In a FAST Compliant Financial Model, a time sheet contains calculations with respect to dates, flags and any other time-related computations.

Why is it important to have a time sheet in a financial model?

  • A time sheet provides the basis of the timelines for the financial model. For instance, the time sheet would indicate which columns detail historical values and which ones indicate forecasted values within a financial model
  • A time sheet also helps in answering the question “when?”. A time sheet can be used to map out when a given financial transaction will happen within the financial model timelines
  • It improves flexibility within the financial model. Models that do not incorporate a time sheet in their structure are rigid especially when it comes to making changes that relate to time. For instance, when one wants to change when the valuation for a business will be done, the valuation will need be recomputed in a different cell (relating to the new period) as opposed to just changing the valuation period date

What is contained in a time sheet?

A typical time sheet in a FAST compliant Financial Model will contain the following sections:

  • Time Ruler – This section maps out all the financial model timelines from the beginning of the financial model period to the end
  • Flags – A flag is an ON and OFF switch in a financial model. A flag is normally in binary form whereby a YES will be indicated as 1 and a No as a 0. It is mostly used to indicate the occurrence of an event. For instance, a pre-forecast period flag would show 1’s in the historical period and 0’s in the forecast period

We have received requests from various financial analysts on the need to develop a course that maps out the steps for creating a time sheet. We have put together a short course on the same that can be accessed using this link.  This is the first of several resources we plan to launch on our learning platform. We hope you enjoy the course.

Written by David Ndungu

Renewable Energy: A Visit to Olkaria Geothermal Plant

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An analysis of the national energy sector in Kenya carried out by Energising Development Programme (EnDev) shows heavy dependency on wood fuel and other biomass that account for 68% of the total energy consumption (petroleum 22%, electricity 9%, others account for 1%).  This dependency on biomass is not sustainable in the long run and thus the move to renewable energy. As consultants in the Energy sector the InVhestia team, with the invitation of KenGen, decided to take an educational excursion to the Olkaria Power Plant.

KenGen is the leading electric power generation company in Kenya, producing about 75 percent of electricity capacity installed in the country. The company utilizes various sources to generate electricity ranging from hydro, geothermal, thermal and wind. Currently, KenGen’s generated capacity is up to 1630MW in the proportion of 50% Hydropower, 33% Geothermal, 15% Thermal and 2% Wind power. The organization is looking to phase out the non-renewable energy plants by commissioning more in the renewable energy plants especially geothermal in the Olkaria Area.

Olkaria Geothermal Plant is located south of Lake Naivasha. Olkaria I Power Station was the first geothermal power plant in Africa. The plant was commissioned in three phases and has three units each generating 15MW of electricity bringing this to a total of 45 MW. The first unit was commissioned in June 1981, the second and third units in November 1982 and March 1985, respectively. The second phase of Olkaria I was commissioned in 2010. The plant operates at an efficiency level of 95% since commissioning this is due to the wellhead technology developed by the company.

We started off with a quick introduction to the process involved in converting the geothermal energy to electric energy. Wells are dug in the earth and can go to depths of up to 3 km. The aquifers release steam which is fed to the separator which separates into dry and wet steam. The distinction is based on the temperatures. When the steam is heated, anything below 150oC is considered wet steam and reinjected into the well after passing through the cooling towers. The steam that is above 150oC is dry steam and is fed into the turbines. The reinjection is important because it contributed to the green aspect of this type of energy and ensures no wastage. An important point to note was the fact that the only waste produced in the generation process is only water vapour, which is not harmful to the environment. Hydrogen sulfide is also a byproduct of the process which gives the plant the smell of eggs but is not harmful to humans and animals.

After the brief presentation and safety demonstration, we moved own to the plant which is divided into production wells as well as the transmission station. We noticed that there were pipes running throughout the site that were insulated and painted green for camouflage and some were even manipulated in a way that looked like they were passages or archways. We were informed that this was for the benefit of the animals at the Hell’s Gate National Park so that the plant does not interfere with the ecosystem in the park.

We first stopped at an old well which was not part of the production stream by had all the equipment up. The next stop was at the rig where a well was being dug up and we saw the height and magnitude of the rig that enables for the depth of the well to be achieved. The next stop was the power plant where we got to see how the steam from the wells is passed to the turbines. From the separator the steam is directed to three different reservoirs that service three main turbines. It is in the reservoirs that appropriate pressure of steam is regulated so as to enable them drive the turbines. The cooling tower is also part of the plant and is used to get the steam down to an appropriate temperature so it can be reinjected.

We wound up at the Geothermal Spa which offers recreational and therapeutic swimming in the Blue Lagoons. There are three cascading lagoons that receive geothermal water or brine, collected through a system of lagged pipes from various wells within the Olkaria Geothermal field. The brine is said to have a healing effects and is a recreational facility within the plant.

The Global Energy Perspective 2019 reports that wind and solar accounted for more than half of new power generation capacity additions in recent years. This is an indication that renewables will continue to penetrate the global energy mix. The Sustainable Development Goal (SDG) 7 – Ensure Access to Affordable, Reliable, Sustainable and Modern Energy for All, has also contributed to the move to renewable energy globally. This is evident even closer to home with KenGen working to do the same in their plants. As Consultants in the energy sector, InVhestia has worked on a number of energy projects, both wind and hydropower. This includes the Kipeto Wind Farm in Kajiado County that most recently reached financial close and has commenced construction and Embobut Hydropower in Kerio Valley that is currently in the pre-feasibility stage. The trip was imperative to the team, this is so that we are better informed when consulting clients and when a such a time comes that we are called upon to advise on a geothermal project we are sufficiently and appropriately prepared.

This article was written by Jihan Haji, a financial analyst at InVhestia Africa. Jihan has worked on assignments in energy and is a FAST Standard Level 1 Certified financial modeller.

The Affordable Housing Project In Kenya – Are You the Target Market?

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The Government of Kenya aims to transform the country into an industrialized middle-income economy by 2030 and it is on this basis that the Affordable Housing agenda was launched. This is one of the pillars of the Big 4 Agenda. The programme has received mixed reviews with the biggest questions on most Kenyans minds being if and how they will benefit. There has been uproar over the Finance Bill 2018, which introduced a 1.5% mandatory levy on worker’s gross salary as contribution for the program. The matter is still in court and seems to be the massive hurdle that the government needs to overcome. We had a look at the proposal and tried to address some of the concerns from the buyer’s point of view.

The Economic Times defines affordable housing as housing units that are affordable by that section of society whose income is below the median household income. Affordable housing projects are important for developing countries as they address the housing needs of middle and lower income households who can’t otherwise afford to buy houses at the market price. The Indian Government has been successful in implementing various affordable housing projects in conjunction with the private sector. Currently about 32% of Kenya’s population lives in urban areas, this number is bound to increase significantly with Kenya Country Private Sector Diagnostic (CPSD) Report – 2019 estimating that by 2050, half of Kenya’s population will live in cities. From this report, the target number of individuals for the affordable housing program has been estimated at around 97% of the formally employed population (close to 17 Million individuals or 4 Million households). The provision of the targeted 500,000 affordable housing units by 2022 will definitely go into satisfying a significant portion of the projected demand for housing in the country. The target beneficiaries are Kenyans who are unable to access long-term housing finance. Most local banks have products that are targeted at providing house finance for households that earn above Kes. 100,000 per month. The government is hence targeting households that earn below Kes. 100,000 per month. In a report produced by the SDHUD, the targeted beneficiaries are as indicated in sections 2 – 4 below:

How will It Work?

Once an individual contributes to the housing fund for 6 months and has accumulated 2.5% of the value of the home they wish to purchase, they become eligible for the allocation process. The allocation process relies on a lottery process which is independent and automated with no human interface. There have been concerns over what happens when you contribute and do not get picked. However, our focus is assessing the affordability while taking into consideration the target market. The sizes and price of the houses are represented below:

Once selected, the individual can purchase a unit through mortgages or a national tenants purchase scheme (TPS). The National Housing Corporation (NHC) defines a tenant purchase scheme as a scheme where house allottees occupy the houses and the monthly payments made goes to redeeming the sale price over an agreed period and interest rate. The property in such a scheme is owned by developer until the sale price is fully paid. NHC has been successful in implementing TPS in some of their historical projects.It is important to note that while there is provision for social housing as well, we have focused on the affordable housing category.

Who is this for?

We computed the projected TPS amounts for the different unit components while making two assumptions; that the TPS duration would be 15 years, which mirrors the tenure of most local banks, and that the interest rate is 7% as provided for by Kenya Mortgage Refinance Company (KMRC).

* we have matched the unit components to the assumed targeted household income bracket
**is based on the 28/36 rule that states that a household should spend no more than 28% of its gross (before taxes) monthly income on housing expenses and no more than 36% on total debt. We have assumed that the income bracket is stated gross of taxes and hence we applied 28% on the highest amount on each income bracket. We have worked backwards to find out what the minimum income will be in order to qualify for TPS for the different units

We compared the maximum monthly debt amounts to the estimated TPS amounts to confirm whether the units will be afforded by the targeted groups. From the analysis, it was clear that:

  • Social Housing – this income group mainly contains individuals earning around the minimum wage up to Kes. 14,999 per month. They probably live in a single room or a bedsitter in Kawangware and are paying between Kes. 3,000 – 4,000 per month. The rent coupled with the ever-increasing cost of food and the daily commute expenses has really thinned their disposable income. With little to no amounts to save every month, their priorities would be mostly on getting enough money for rent and food and hence will not be able to pay for the units. The individuals will need to grow their monthly income to a minimum of 21,000 per month in order to qualify for the 1 room and Kes. 33,000 per month for the 2 rooms
  • Affordable Housing (Low Cost – Kes. 15,000 – Kes. 49,999 per month) – the individuals within this bracket are mostly straight from school and have gotten their first job. With this income, they want to move out from their parents’ house and start becoming independent as well as commence the repayment of their HELB loan. Things are tight for them, between impressing their supervisor by doing crazy late hours in the office and catching up with friends from their alma mater. They leave in bedsitters at secure areas close to the office to avoid spending too much on fare and pay between Kes. 8,500 to 15,000 per month. Their priority might not be to own a bedsitter or a 1 bedroom at this point, but to hit the hottest joint in town over the weekends to celebrate the passing of a week with crazy hours in the office. The affordable housing option might be a better option for them compared to renting since they can afford if they squeeze themselves a bit and they end up owning the units. However not everyone within this income bracket can afford the bedsitters and 1 bedroom, only those earning a minimum of Kes. 26,000 per month can qualify for the bedsitters and Kes. 33,000 per month for the 1 bedroom. Further, some of those who can afford it have aspirations and would prefer to buy a 2 or more bedroomed houses to accommodate their families as they move to the next stage of life.
  • Affordable Housing (Mortgage Gap- Kes. 50,000 – Kes. 99,999 per month) – most individuals within this bracket have been working for about 2 – 3 years and have more disposable income compared with the first two levels and can hence afford the units. They live in a one or two bedroom in Jamhuri and Ruaka paying 20,000 to Kes. 35,000 every month. They do not mind spending a few coins on tickets to that latest movie over the weekend and they have a preference for where they would like to live which then raises the issue of location for the affordable housing units as they have to be strategically placed in order to be attractive for this group. The issue of how big the units, the number of parking lots per unit, the designs for the building are all key factors for this group. It is good to note that, if one is within this income bracket, they will need to earn at least Kes. 65,000 every month to qualify for the 2 bedrooms and Kes. 97,000 per month to qualify for the 3 bedrooms.

What does this mean for the Buyers?

While the levy matter is being debated, the World Bank has approved USD. 250 Mio loan to the Kenya Mortgage Refinance Corporation (KMRC), a largely private sector-owned and non-deposit taking financial institution supervised by the Central Bank of Kenya (CBK). The KMRC loan will be used to finance the local banks who will then give mortgages to individuals to finance their units. There are some questions around who will be in-charge of the credit scoring process for TPS buyers, this could be where the banks come in as they already have an existing scoring process for mortgages?

That being said, most Kenyans, especially low and middle income earners, might not have housing as one of their priorities at the moment. “Kung’ang’ana tu! Hakuna kazi”, loosely translated to just struggling since there is no work, is perhaps the most common answer you will get from a Kenyan after asking them how they are doing. In an economy where the cost of living is constantly rising, the key question is whether affordable housing should rank as a top priority at this point. It will remain to be seen whether the system can be implemented within the next 3 years and still deliver 500,000 units before 2022.

This article was written by David Ndung’u, a financial analyst at InVhestia Africa. David has worked on several real estate and energy assignments and is a FAST Standard Certified financial modeller.

How Building a Financial Model Changed My Life

Posted on by InVhestia

Every year, InVhestia runs an inter-university Financial Modelling competition in the 3rd quarter of the year. Last year, the top student was Fiona Mzee from Strathmore University. Fiona was participating in the competition for the second time and this speaks to her determination to succeed. She will be graduating with a Bachelor of Business Science in Financial Economics in June. At the end of her internship with InVhestia, we asked her to let us know how this journey had impacted her.

Fiona being awarded by Antony Maina, ANDE

Q. Why enter the competition for the second year?

A. I participated in the challenge twice because I got a certificate the previous and that was a very good incentive for me personally. I was also eager to participate this year because I got to see the positive impact it had on the previous year’s winners Bob Mani and Faiza Omar and thought, wow that could be me next year. The first time I did the competition I did not incorporate the FAST Standard to the best of my knowledge but was able to execute it better the next year since I understood it better. However, I must admit it was a pleasant surprise to have won. I did my level best but it was still quite surprising for me and one of the major highlights for me this year. I’m still very grateful and happy when I think about it. Building that financial model has changed my life.

Q. Do you feel that your expectations were met?

A. This experience was definitely beyond my expectations. Financial modelling is very different theoretically and practically. You have to be very analytical and be very focused on the task at hand as each model has to not only make sense but to be as very close to the actual business as much as possible. It takes application of knowledge to learn what we are taught in class. I think the internship was well structured I was able to learn a lot. I wouldn’t personally change anything. Everyone was very helpful during my time here. I got to get a wholesome experience and gain a lot of skills that will be useful during my progression.

Q. What would you say are some of your key takeaways?

  • I have learnt how to strive for perfection in my work. Clients expect us to deliver above and beyond what they except and Invhestia strives towards perfection in everything they do.
  • I was able to get a sense of the practical aspects to consider when building a model which can be translated to a real life project.
  • I have been able to learn a lot about project finance and corporate valuation especially from the videos I was given access to.
  • I’ve definitely improved on my excel skills and added to existing knowledge

Q. What advice would you give students who like yourself are looking to beef up their skills?

A. I would definitely encourage all students to participate in the competition because it helps one learn the FAST modelling approach which is a very convenient way and innovative way of modelling. You get a certificate from participating in the competition which is a great addition to the CV and the videos on Invhestia.com are very beneficial as well. Not to mention, the internship experience was very fulfilling and definitely gave me a good sense of what working in the finance industry entailed. In my opinion it’s a wonderful start in the career of finance.

Q. What is next for you?

A. I’m currently applying for Masters in Economics and Finance. I would love to study abroad to enhance my knowledge in my field of study. I definitely want to go into corporate finance in the future and definitely continue with financial modelling as well. I would also like to do some academic work as well in the field of economics and finance. This whole experience has been a huge stepping stone in my career development and given me the chance to prepare myself for what lies ahead in the competitive field of finance.

During her time with us, Fiona worked on various assignments that helped her build her financial modelling and research skills. She also sat for her FAST Standard exam and is now FAST Level 1 certified. We are grateful to have had Aspen Network of Development Entrepreneurs and Consonance Investment Managers as partners for the 2018 edition of the competition. This partnership allowed us to find opportunities for 4 of the other top students, some of whom have been retained by our clients.

Should you want to plug in for the 4th Annual InVhestia Inter-University Competition, kindly reach out on learn@invhestia.com