Public Sector Modelling: Why Does It Matter?

The effectiveness and efficiency of a country’s public sector is vital to the success of development activities in that country. To achieve a well oiled and functioning public sector one thing is critical, decisions made need to be driven more by analysis and quantification of intended impact and less by gambles and political agenda.  At InVhestia we are proud to be a pioneer in supporting Governments and parastatals improve the quality of their decision making through financial modelling. While the majority of our work is private facing, we have realized that it can also inform the public sector. Financial modelling which sits at the core of what we do develops tools that can be used to remove the gamble from complex decisions, be they business choices or public policy.  Over the last couple of years we have been involved in a number of assignments which show how modellling can support the public sector to improve effectiveness and efficiency.

Support for the Government of Zambia in Fiscal Regime Review and Setting

Zambia is highly dependent on mining as its major productive industry contributing to 68% of the countrys foreign exchange earnings, anything that affects their extractive sector significantly affects the countrys economy. Since 2018, through the Zambia Extractives Industries Transparency Initiative, InVhestia has been offering support to the Government of Zambia through capacity building in financial modelling focused on fiscal regime setting and in consultancy services. The consulting services have been geared towards reviewing the impact of changes in fiscal regime on Zambia’s earnings from the extractives sector and the impact on company returns.  Whenever a Government is thinking about changing its taxes in the extractives sector, two factors need to be balanced, how the government take (total earning to the state) will change compared to company returns (these can be measured using the Net Present Value, Internal Rate of Return etc).

Through this work, we have seen improved skills in model build and review and in better engagement between the Government of Zambia and mining companies.

Benchmarking of Kenyan Mineral Royalty Rates with Peer Economies

According to the economic survey, the mining sector in Kenya contributes 0.8% to the country’s GDP. The State Department for Mining is mandated to provide regulatory oversight through the implementation of the Mining Act, 2016. In 2017 InVhestia was enaged to offer financial modelling support in seeking to establish whether royalties charged for gold, coal and titanium under the Act and accompanying regulations and gazette notices were adequate. Our report, as commissioned by the Extractives Hub and written in conjunction with Open Oil was presented to the then Cabinet Minister, Ministry of Mining. The high-level benchmarking exercise showed that Kenya’s fiscal regime falls broadly within norms observed in peer countries.

In preparation of the report we modelled out sample mines for the three resources under the Kenyan fiscal regime and compared the earnings to the Government to what other leading countries were charging and earning from similar resources.

Turkana Oil, should Kenyans be excited?

In 2018, InVhestia published an analysis on one of the oil blocks in Turkana which you can download here. In the report we sought to answer questions such as, how much Kenya will earn from exploiting the resource, how this will be split between the National and County Government and the community, the returns to the Contractor on the project among others.

The report and the accompanying model had critical analysis which at the time was useful in the debate around what formula should have been used to split the earnings from Oil. It also shed light on the feasibility of the project under different price scenarios.


The public sector requires financial models to inform strategic decisions. This is an effort that is also supported by the African Development Bank (AfDB) who launched a project on strengthening domestic resource mobilization through financial modelling for the extractive sector in transitional countries. One key objective is to enhance the capacity of state agencies to forecast and monitor revenues from projects and investments. While it would appear that the focus is largely in the mining sector, public policy in oil and gas, energy, transport and infrastructure, health, housing, planning, industrialization among other sectors can also benefit from the analysis of data through financial modelling.

More and more, financial modelling is proving useful to contribute to pertinent debates which in most cases, have a bearing on livelihoods of millions of persons. Johnny West from Open Oil put it well when he said, “Models can be great ‘rumour killers’, they may show that a country’s offshore sector is not going to save the entire economy, public finances, or end poverty. Or, they may demonstrate that a deal was actually OK.”

We are pleased to be pioneers in this space. We plan to share an update on our Turkana Report before the end of year. To join the mailing list, fill the form on our website.

Stephen Gugu, David Ndungu, Nyambura Ngumba

Personal Development for University Students: The Launch of InVhestia Financial Modelling Competition 2020

‘Education is key to personal development and the future of societies. It unlocks opportunities and narrows inequalities. It is the bedrock of informed, tolerant societies, and a primary driver of sustainable development. The COVID-19 pandemic has led to the largest education disruption ever. We are at a defining moment for the world’s children and young people.’ These are the words of Antonio Guterres, the ninth Secretary-General of the United Nations at the launch of the policy brief: Education During Covid-19 and Beyond.

InVhestia has run an inter-university competition over the last 4 years. The initiative was launched when we realized financial modelling is not a widely practiced discipline and that revealed a skills gap in recent graduates entering the workforce. Over the years we have trained students in in various Nairobi based universities with top students getting internships and working on projects for institutions such as Open Oil, and getting internships at institutions like KPMG, InVhestia, HEVA Fund and Horizons Africa.

Last year, the FAST Standard Organization and F1F9 sponsored the competition which saw us reach more students than previous years. One of those students is Valentine Wahome, a 4th year student at the University of Nairobi. Valentine sat in for the training session carried out by a former winner of the competition. “This was the first competition I’ve ever participated in. I learnt about the training session from a student leader. What stood out to me in the session was how easy and efficient working in Excel seemed. Our school curriculum teaches us to use notebooks and a calculator. I had a hard time understanding macros but I submitted my model. I did not think I stood a chance but figured I should give it a shot nonetheless,” he says. Valentine ranked as top 10 in the competition and secured an internship opportunity. “Through this experience, I’ve learnt that financial modelling does not only mean good Microsoft Excel skills but rather understanding the assignment at hand and what the business or investor wants to accomplish.” He sat his FAST Level 1 Certificate Test and passed.

We are launching our 5th Edition of the competition, but this will be one like none other before it. Given the prevailing circumstances, we cannot go to the universities. However, we are going to leverage our digital learning platform to give the students access to top notch financial modelling content . “This year we are opening the competition up to students across the continent which is the positive outcome of going strictly online. We will give them free access to our courses and conduct webinars that they can access at their convenience. We are also looking for partners who will allow us to reduce the barriers as far as internet access and by increasing internship opportunities for the finalists. We believe this is the best time to invest in the personal development of the youth and build the next generation,” said Stephen Gugu, Principal at InVhestia.

We are pleased to be partnering with the FAST Standard Organization for another year and look forward to impacting even more students.  We agree with Mr. Guterres that education is the key to the future of society.

Follow our LinkedIn, Facebook and Twitter pages to schedule important dates share with university students near and far.

If you would like to partner in this initiative, send an email to


The NSE Ibuka Program

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.



What is finance without the concept of time?

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

How Building a Financial Model Changed My Life

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 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


How Profitable is the Turkana Oil Project?

InVhestia has been in existence for several years, the company was founded in the year 2012 and has grown from a company offering services in Kenya only, to one which is active and offering services in over 5 African countries. Apart from Kenya our brand has been felt in Uganda, Rwanda, Tanzania, Nigeria, Ethiopia, Zambia and counting.

Other than geographical growth we have also realized over time that our services are not only useful in the private and public sector to answer purely commercial questions, but could also be quite useful in the public sector and the civil society space to contribute to pertinent debates which, in most cases, have a bearing on livelihoods on millions of persons.

In 2017 we launched our foray into this public and civil society space by deciding to commit resources to answer questions which to us looked to be interesting; questions which had a significant bearing on policy, law and eventually on cashflows to various arms of government and the population as a whole. Together with Open Oil, a Germany based company, we decided to work on a financial model on one of the oil blocks in Turkana. There had been lots of debate around how the revenues from the Oil discovered in Kenya were going to be shared, between the National Government, County Government and the Community. In all the articles we read we felt there was one thing missing, a financial model showing the impact of various options that one could review, make changes to and draw their own conclusions. Further there was the question of just how profitable these oil projects are; were they going to benefit the private oil companies at the expense of Kenyans?

File Photo of Oil Rig in Turkana County – The Star

The results to these questions are shared in our recently published report, Turkana oil field, Kenya Narrative Report, which can be accessed on this link. What is different about this report is that it does not only give the results of an exercise, it also publishes the financial model that was used to arrive at these conclusions. This is BIG since anyone interested in challenging our findings or seeking to answer other questions which we did not cover can easily do so by making changes on this FAST (Flexible Appropriate Structured and Transparent) compliant financial model.

While this is BIG for us we did not stop there. We have now worked with the Government of Kenya and that of Zambia on assignments by the Extractives Hub  to answer these kinds of questions and offer capacity building around financial modelling which is a critical piece to analyzing any kind of project, in this case mining projects.

Do enjoy the report and as always we welcome your comments.

Download Model

Authored by Stephen Gugu

InVhestia’s 3rd Annual Inter-University Competition

The 3rd InVhestia inter-university financial modelling competition launched in August with campus tours running throughout the month of September. In our consulting experience, we found that financial modelling is a critical skill for any graduate pursuing finance and finance related courses. Over the last three years, we have trained over 800 students face to face as well as many more through our online platform.


This year we partnered with Aspen Network of Development Entrepreneurs ANDE. ANDE is a global membership of organizations that propel entrepreneurship in emerging markets. The East Africa Chapter brings together ANDE members who support small and growing businesses (SGBs) in East Africa by creating connections and opportunities to grow environments in which SGB entrepreneurs can thrive. In line with this, ANDE carried out career information sessions alongside our training at the various campuses. Some of their members such as Growth Africa and Youth For Technology also came to give information to the students pertaining to what they can look forward to when they start their careers. ANDE will be offering the some of the top students internship opportunities. The competition was also sponsored by Consonance Investment Managers who are excited to partner with us on building the talent pool of financial modellers coming out of universities.

Last year’s top student secured an internship with Open Oil. Bob was a final year student pursuing a Bachelors of Business Science in Finance at Strathmore when he took part in the competition. This is what he had to say about his experience:

“Building financial models using the FAST standard was a key learning point as I got to apply it in real life situations through the Public Policy and Due Diligence assignments I worked on during my internship. Being granted access to the Corporate Finance Online course from the first week of joining the firm was particularly helpful towards the theoretical learning. I also got to see the value of positive criticism as I got a lot of constructive feedback from the team on the various models I built which helped me further enhance my understanding of the FAST standard.”

We are pleased with the impact that this outreach is having on the students. We have prepared the profiles of the top 10 students of this year. Kindly email if you have opportunities available for them at your organization or would be interested in participating in the 2019 Edition of InVhestia’s Financial  Modelling Competition.

Turkana oil field, Kenya Narrative Report


Turkana is Kenya’s first oilfield. Discovered in 2012 by the Anglo-Irish firm Tulllow, estimated oil in place has reached over three billion barrels, appraisal is underway and a final investment decision (FID) is due in 2019. Other consortium partners are Africa Oil (25%) and Total (25%), the latter having bought out the share of Maersk Oil in 2017.

InVhestia Africa & Open Oil have prepared a  financial model, according to the FAST financial modelling standard[1], to address major questions of public interest, including:

  • What levels of revenues are likely to flow to county government?
  • What scale of project is likely to be developed under an FID taken in 2019?
  • What will be the effect of state participation rights of up to 20% in the fields, to be exercised by the National Oil Corporation of Kenya?
  • What are key factors in determining the project economics and profitability of the Turkana South Lokichar fields?
  • What is “government take” of profits in the project under various price and cost assumptions?

The Turkana discovery has aroused great interest in Kenya, which has licensed many other blocks but has no commercial oil development yet.  It came as Kenya introduced new rules to share revenues from natural resources, part of a broader move to strengthen  the county governments in the East African country. The newly elected government of President Kenyatta has also stated that exploitation of the country’s natural resources forms a key part of planned economic growth over the next few years.

An “Early Oil” scheme to truck small quantities of oil before full field development, which began in mid-2018, is not modelled, though is discussed.

The financial model is published under Creative Commons license. All data and assumptions are explicit and sourced.

Key Features & Assumptions

We have used the below Petroleum Resources Classification Framework for our modelling purposes. Important to note is that Tullow has identified the amount of oil and that is looking to develop as varying between 600 million barrels under a “2C” and 1.2 billion barrels under a “3C” scenario. The “C” in this case stands for “Contingent”.

Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies e.g. projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality.

Source: Petroleum Resources Management System, 2007 p. 4

The model uses three development scenarios: the so-called Foundation Stage development planning announced by Tullow and expounded in its 2017 annual report[2], and then two larger developments called “2C” and “2.5C”, representing production of 600 million and 900 million barrels respectively. Tullow has yet to announce reserves levels formally, but current (May 2018) contingent resources declared are 250 million (1C), 600 million (2C) and 1.2 billion barrels (3C).

Assumptions on capital expenditure for the Foundation Stage are taken from the Tullow 2017 report: $1.8 billion for development of production reaching a plateau of 80,000 barrels a day, and $1.1 billion for a pipeline to run to Kenya’s Indian Ocean coast, near Mombasa. The model also assumes a 15% discount to Brent based on reports of the “waxiness” of Turkana crude as assayed from appraisal wells, and references in previous reports on the project.[3]

The fiscal regime is challenging since the contracts for the two areas in the Turkana project, 10BB and 13T, have not been published. Consequently, we have 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 main revenue stream under all conditions for the Kenyan government is the profit split mechanism, since Corporate Income Tax is deemed as “paid on behalf” – not a separate cost to the Contractor. The cost recovery ceiling of 60% generates profit oil at any level of production, with a sliding scale increasing the government share as production goes up.

The National Oil Corporation of Kenya has a back-in right of 20%, exercised at the time the Contractor declares commerciality. This model assumes NOCK exercises that right and finances its participation by borrowing from cash flows in the project at a rate of LIBOR plus four percent (4%).

A windfall profits tax is levied when the price of Turkana blend rises above the equivalent of $50 per barrel at the date of signature in 2010, indexed against a USD consumer price inflation index.


Local Revenue Flows will be substantial – and caps are marginal

The model shows clear results in terms of revenue flows to Turkana County, and the community level which could go some way to assuaging concerns. Local revenue sharing of profits from natural resource projects has been a hot political topic in Kenya for the last few years. Following the 2016 Mining Law, which allocated 20% of mining royalties to the county level of government, and an additional 10% to the immediate community of a mine, parliament passed a similar law for petroleum revenues in late 2017, with the same proportions applied to the profit split instrument.

But that bill was not signed by the president, and in early 2018 a counter proposal was made of 15% to the county government, and 5% to the community. According to media reports there has been an agreement over a third proposal, where the County Government will get 20% of the revenue share the Government received with the community receiving 5%.[4] This is the baseline scenario used.

The arguments on both sides are complex. Advocates of a higher local share argue that national government has long kept too much state revenues across the board, and there is no guarantee that revenues which go into central accounts will result in services across the country. On the other side, many officials argue that Turkana county government will not have the ability to absorb the large sums involved.

Comparison of likely oil revenues against Turkana’s continued ongoing allocation from the national government shows that the lower cap of 100% of the allocation from central government is unlikely to be reached, and that at both county and community levels revenue flows are going to be considerable. Turkana County’s allocation from central government is currently just on the $100 million a year mark, and has been rising by about 6% a year since the new system was introduced in 2013. Assuming a continued 6% rise, oil revenues under the base scenario of 600 million barrels of production, and a March 2018 Brent oil price of $65 per barrel, the allocation to Turkana county will never hit the proposed 100% cap compared to government allocation. The nearest point would be in the late 2020s and early 2030s. In 2030, for example, Turkana County would earn $224 million from oil revenues, under the currently proposed scheme, but the “cap”, its allocation from national government, is then likely to be $240 million.

Under this same scenario, the local community at Lokichar are due to receive some $700 million of revenues over the life of the project but will never hit the cap of 25% of the level of the government’s allocation to Turkana County as a whole.

Under Tullow’s currently publicised “Foundation Stage” development plan of 250 million barrels, neither level of cap, at county or community level, is reached at any historical level of oil price.

There are scenarios of very large scale production combined with high price under which the caps would be hit. For instance, the table below demonstrates revenue levels assuming 900 million barrels of production.

Over the life of the project, Turkana County would receive some $4.6 billion of oil revenues. Just over $600 million, or about 13%, would have hit the cap. Under the 2018 proposals Turkana County will receive $3.3 billion before the cap relative to funding from central government even comes into play.

Under the base scenario of 600 million barrels at a 2018 oil price, escalated by inflation, the community would receive just over $1 billion, with about $150 million held back under the cap rule. Similarly, under any scenarios of increasing price, or production, overall government revenue is driven up, which means that, at the 2018 proposed level of 5% of profit split, community level revenues reach over $700 million during the life of the project before the community level cap comes into play. In fact, since the community cap is based on the government’s allocation to Turkana County, the cap on revenues to the community is more affected by lower allocations from national government, through the mechanism of the Commission for Revenue Allocation, than by caps introduced to the Turkana oil project.

The lower splits of profit share affect the community allocation at lower levels of production. But it is important to understand that such revenues would still be significant. For instance, in the Foundation Stage scenario of 250 million barrels at $65 oil price, the community share would be about $200 million under the 2018 proposals.

Tullow’s Final Investment Decision will be about a 600 million barrel field – and the economics are still not locked in

Since the Turkana field was discovered in 2012, estimates of its scale and profitability have been volatile. On the one hand, Tullow, as operator, has continued to add to its estimate of the overall resource in place, until latest estimates (early 2018), put estimates of Stock Tank Oil Initially in Place (STOIIP) at 4.1 billion barrels, with contingent resource estimates ranging from 240 million barrels at high certainty (“1C”) to 1.2billion barrels at low certainty (“3C”)[5]. Such ranges are not unusual at the early stages of an oil project, although it is notable that Tullow has not upgraded its classification from “contingent resources” into actual reserves figures, despite extensive appraisal drilling[6]. On the other hand, there have been frequent delays to initial expected timelines.

Tullow’s 2017 annual report describes a phased approach to development, with what it calls a Foundation Stage to be built first, which would suffice to produce 250 million barrels of oil at a production plateau of 80,000 to 100,000 barrels a day. The company estimates $1.8 billion of capital development for this stage, together with $1.1 billion to build a pipeline to carry the oil to the Indian Ocean coast. The company also says it is working towards a Final Investment Decision (FID) in 2019.

What the model suggests is that such an FID will be around a substantially higher production profile than the Foundation Stage itself. The economics of a smaller field development look relatively weak since the fixed costs of developing the field and the pipeline are high, compared to running costs. Tullow has put on record that exploration and appraisal costs had reached $1.6 billion by mid-2016. A report in the Petroleum Economist also suggests that a project of 750 million barrels would be viable at a price of $55 per barrel[7].

The graph on the right demonstrates that the Turkana project would actually achieve negative NPV under the Foundation Stage scenario across the full life of the project, assuming a discount rate of 10 percent. Even under the 2C scenario, breakeven point would be $70 per barrel, constant price, while under the 2.5C expanded production scenario it would be in the mid-$50s.

In reality, the FID will be driven by so-called “point forward” economics, where the sunk investment will be largely disregarded. But the “full cycle” economics offer a perspective on the fact that while in Kenya expectations, and perception of potential profits, may be high, the commercial logic of the Turkana oil project is still not locked in.

From the investor perspective, there are still two large unknowns. One is a valuation for Turkana crude. This model posits a 15% discount to Brent, based on an earlier report’s citation of a Kenyan government official[8], and recurring references to its waxy nature. We assume the extra cost of catering to this characteristic has been built into Tullow’s own public estimates, which include heating the oil in the pipeline and in storage. What may be less predictable is a market valuation for Turkana crude, and also the requirement to heat the oil constantly adds engineering complexity, meaning the margin of uncertainty in costs might be higher.

A second unknown stems from continued political uncertainty, both at national level and around the project itself. Tussles between county authorities and the national government have included public sparring between the governor of Turkana County and the president, and blockading of sites where appraisal wells are being drilled. For now, there seems to be a truce with the government recently flagging off the Early Oil Pilot Scheme which will see oil from the Turkana region transported by trucks to Mombasa before the pipeline is constructed. The pipeline needed to bring Turkana oil to market runs 850 km through several counties, this might complicate how easy and fast the oil gets to market. In the current environment of county government seeking autonomous funding, including from natural resource projects, the route to market may appear to Tullow and its partners to still be some long way away from secure. From this perspective, it is even possible that the national government’s desire to truck oil early from the fields, which makes little commercial sense for either government or companies[9], is triggered by a desire to normalise oil production and shipping in terms of national politics. It may be that Turkana’s Early Oil proposal, itself delayed several times by ongoing debate, is intended to drive towards an FID for the project as a whole rather than simply provide early production.

Government take is in the ballpark

The IRR for the contractor is at 9.25% under the baseline scenario of 600 million barrels and a constant price of $65 per barrel. The government ends up taking 62% of the total project revenues at NPV0 These government take ratios are well within the ballpark of what an early producer country could expect, especially considering the ‘waxiness’ of the Turkana Oil. As seen below from our internal analysis while the Government take is slightly lower than other early producer regimes we have analysed in Africa, this can be accounted for by the ‘type of oil’. When we remove the 18% due to waxiness of the Turkana Oil the Government take increases from 62% to 66%.  Even with a “2.5C” level of 900 million barrels, the contractor only gets to 13% rate of return, and it is important to note that under any of the scenarios in the model the contractor does not make super profits, which might be defined as a rate of return over 20%.

Source: Internal Analysis


NOCK’s participation will not add state profits until the 2030s

One surprise result of the model is the relatively modest impact of a 20% back-in right by the National Oil Corporation of Kenya (NOCK), assumed to be in the contracts. So-called “state participations” have become a common feature of oil contracts in the last 30 years or so, as countries seek to capture more of the value of their national resources, and develop their own industries. The model assumes a 20% back-in stake, which the government can choose to exercise at the time when a company declares commerciality – in other words, goes from saying there is oil in the ground to committing to investing the money to extract it.

What the model shows is that such participation is likely to have only marginal impact on revenues flowing into the Kenyan treasury. The main issue here is: what are the terms of the “carry”, under which NOCK comes into the project after Tullow and its partners have discovered oil and then built a development plan?

This model assumes that a standard industry practice is carried out, whereby the Kenyan state borrows from the project itself to finance its own 20% stake. In other words, if and when Tullow announces an FID, the government declares its own 20% stake, which becomes immediately operative. But NOCK must pay 20% of all costs from that point forward, which include the heavy investments of development and the pipeline. It effectively borrows these sums from the Contractor, which it agrees to repay out of its 20% share of the Contractor’s share of the profit split (which is separate to the government’s core share) – once oil is being pumped. But since production will not start until several years after development, and then take further time to ramp up to high levels, the financing is extended as a loan with an interest rate attached, and the interest rate is payable too. The model assumes an interest rate of about 5%, which would be within the range for such a loan.

Once all these terms are put together, the model then predicts net financial results for NOCK’s participation. Once the payback of the carry is factored in, NOCK will not start earning extra income for the state of Kenya until the 2030s under most scenarios. For example, assuming a field size of 600 million barrels and constant price of $65, it would take NOCK until 2036 to pay back the carry. It would earn $530 million over the life of the project, representing less than 4% of the government’s total earnings in the project. Under a high price of $85 in today’s money, escalated by inflation over time, NOCK starts to earn extra net revenues in 2030.

Media reports in early 2018 have quoted officials as stating NOCK could seek a flotation on the Nairobi, London, and other stock exchanges[10]. This could change the economics of the company, as it would then be able to contribute its share of development costs, and reduce or eliminate a loan and the interest charges attached to it. But such a flotation would be unlikely to substantially change the assessment of NOCK’s contribution to state revenues, unless private investors were prepared to pay a substantial premium. If flotation goes ahead within a suggested timeline of 2019, this would be a suitable scope for a further modelling exercise.

The total government take, undiscounted, is in the low 60s% under most price and cost scenarios for a 600 million barrel field or above. This is within the range of comparable deals, since the contract was signed before there was any known prospectivity.

Information Gap Analysis

There are several significant gaps in information that, if filled, would improve the model:

  • Publication of the full text of the contracts governing the development of the Turkana South Lokichar project.
  • Estimates of operating costs and pipeline fees.
  • More refined forecasts of capital expenditure in the case of expansion of development into the 2C and 2.5C resource scenarios.
  • Project finance: loans and interest rates to be used by the Contractor to finance the project, and their allowability against tax liabilities.



[2] pp28-29




[6] The most widely used classification system for hydrocarbons is that developed by the Society of Petroleum Engineers


[8] p16



Johnny West, Stephen Gugu, June 2018

KPDA Affordable Housing Conference

The Kenya Property Developers Association recently held their Inaugral Affordable Housing Conference. The event brought together various stakeholders from government and private sector to discuss the opportunities in affordable housing in Kenya. At the event, KPDA released their 2018 Affordable Housing Report.  According to the Kenya National Bureau of Statistics Economic Survey 2017, it is estimated that the current housing deficit stands at 2 million houses with nearly 61% of urban households living in slums. The deficit continues to rise due to constraints on the demand and the supply side.

According to the report, the affordable housing sector experiences several challenges. Among them is the fact that few urban centers have implementable urban development plans. This means developers have to incur an additional infrastructure costs when constructing. This was highlighted during one of the panel discussions moderated by Mary Chege.  “We cannot develop affordable housing in a vacuum. The systems in place should support it. And expanding roads is not the solution. Other forms of movement of people should also be explored,” said Eng Nathaniel Matalanga, the Honorary Secretary of Institution of Engineers of Kenya.

One of the other challenges developers face, as per the report, is high cost of construction. Construction finance loans are increasingly challenging for developers to obtain and so financing costs are included in the price when selling property. Another bottleneck is faced when it comes to registration. According to the 2017 Doing Business Survey, Kenya has a ranking of 121 out of 190 with respect to property registration. This inefficiency with the titling process is further complicated by devolution with different counties showing different levels of efficiency.

However, it is not all gloom and doom. There was discussion on some of the strategies that developers can adopt. Land joint ventures are one of the ways developers can increase returns and help land owners monetize their assets. Building smaller units can also help reduce the price of units while allowing developers to retain their margins. Another suggestion was incremental housing. The affordability of housing may be increased by making use of basic materials with the provision that home owners scan make improvements on the house over time. Finally, managing one’s cashflow is paramount. It is important to have a robust financial model at the onset of a development. We, at InVhestia, developed an online tool to assist with this. We have extensive experience working in the real estate space and have been involved in conducting financial viability assessments for various projects. Our web-based application appraises real estate projects and provides output that can be used in presentations for fundraising purposes. The platform is easy to use and gives you value for money. Try it for free at

You can read more about the KPDA Conference and report here

Project Finance Online Financial Modelling Course

InVhestia’s online financial modelling training offering has grown over time, catering for the needs of those who are unable to attend in class courses due to distance, costs or preference. InVhestia is happy to announce the addition of a new course, the Project Finance financial modelling course based on a real estate case study. InVhestia already has an introductory course to financial modelling, and a corporate finance and valuation course. The project finance course provides comprehensive coverage and a step-to-step guide towards understanding and evaluating a project with the added benefit of doing this from the comfort of your office or living room, at your own pace.

The course is hosted on the InVhestia online platform and is taught using instructional videos. Once you subscribe, you will access the course materials and handouts which have been organized in a modular manner. This means you can choose to start the course from the beginning or tackle specific items based on where you feel your challenges are. The only pre-requisite is a fair knowledge of MS Excel to enhance the quality of your experience.  If, however this is a challenge you can get started with the introduction for financial modelling course using FAST to bring you up to speed. The course is taught using the internationally recognized FAST Standard approach to financial modelling ensuring that upon completion any models you prepare can be used internationally and that they are Flexible, Appropriate, Structured and Transparent. Another key advantage of the FAST standard is that you can choose to sit the certification which sets you apart from other modellers and is a good indicator of your level of skill to employers and clients.

The aim of this course is to equip learners with the skills to make forecasts and evaluate projects with no historical information. This means that by the end of the course you should be able to create models for greenfield projects in various sectors. Instructed by Stephen Gugu, who has several years of experience in the project finance field and as an instructor, the course starts by defining the broader aspects of project finance. The course approaches modelling based on the three phases of the projects; development, construction and operations. It examines financing of projects, calculation of taxes, key ratios and returns from both the project and the equity basis. Sensitivity and scenario analysis are also covered just like in real world situations where these tend to be more important than the base cases.

It took us 48 hours to shoot the content for this course and more than 200 hours in editing and reviewing to ensure that the user gets the best product possible. The content was examined and reviewed by our team of junior and senior associates for ease of understanding and accuracy. The final product usually makes the work done in the background look easy, trust us it’s not! On one of the shooting days, the instructor powered through a battle with a flu, which explains the deepening voice when dealing with construction finance. Quips aside, we take pride in this course which we designed to pass along model build and audit skills in a way that makes for good retention. We have incorporated a discussion forum on the platform that allows one to engage with InVhestia’s experienced financial modelling team for any issues, and the good news is you are always guaranteed a response within the shortest time possible. Aside from that, a one-time purchase guarantees you a lifetime access which means you can refer, refresh and review the material at any time. If the lifetime access is not for you, paying per month at reduced rates is also part of the menu, reach out to us at to get access to the course in the way that makes most sense to you.

The course is carefully structured with over 10 hours of content presented in 5 – 12 minute videos. The case study covers modules such as project finance timeline, construction costs, construction finance, operating revenue and cost and final exit of the project. The modules make it easy for one to understand the theory behind project finance, building a FAST-compliant project finance model and evaluate various projects using measures as IRR, NPV and ratios. Using other teaching tools, we have made it possible for you to follow the practical modelling and model alongside the instructor.

As an introductory offer, we have extended a 50% discount to anyone who signs up for the course by the end of November 2017. Don’t miss out!! Register for FM102 and use the coupon code F701C2C8C9 to take advantage of this offer.

Watch the Introduction to Project Finance video here