Kenya’s National Infrastructure Fund has begun investing part of its KES340bn ($2.62bn) seed capital in domestic government bonds, seeking to generate income for infrastructure projects and increase liquidity for private-sector lending, chief executive James Mworia told Reuters on October 7.

The state-backed fund began buying bonds in July, although Mworia did not disclose how much had been invested. Once fully deployed, the KES340bn portfolio is expected to generate approximately KES42bn ($324mn) annually, implying a yield of about 12.35%. Mworia expects full deployment by June 2027.

Mworia expects the purchases to increase banking-system liquidity and encourage lending to businesses and households. However, the fund has not disclosed the purchases’ counterparties or demonstrated an increase in private-sector credit.

Kenya’s government securities market has more than $50bn in outstanding debt, with commercial banks among the largest holders. At KES340bn, the planned investment is equivalent to roughly a third of the government’s domestic borrowing target for the financial year ending June 2027, Mworia said.

“We have a high debt service level relative to our income, we have high social needs and we have a limit to which you can tax Kenyans,” Mworia told Reuters. “But on the other hand, we have an infrastructure deficit.”

The fund’s initial capital was to come from the privatisation of Kenya Pipeline Company (NSE: KPC.0000), which operates the country’s petroleum products pipeline network and raised KES106.3bn ($819mn), and the government’s sale of part of its stake in telecommunications operator Safaricom (NSE: SCOM) to South Africa’s Vodacom (JSE: VOD) for KES204.3bn ($1.57bn).

Reported estimates of the fund’s capital have ranged from KES310.3bn to approximately KES350bn, partly reflecting different treatment of a KES40.2bn ($310mn) advance against future Safaricom dividends. Mworia estimated capitalisation at KES347bn in July but gave a KES340bn figure in his October 7 interview, without explaining the difference.

The Safaricom transaction faces a significant legal challenge. On September 15, Kenya’s High Court declared the sale of the government’s 15% stake unconstitutional and ordered the shares restored to state ownership, citing inadequate public participation and other procedural violations.

The government has filed a notice of appeal and Vodacom has said it will also appeal, leaving the legal status of a substantial source of the fund’s capital uncertain.

The fund aims to mobilise KES3.6 trillion ($27.7bn) over the next decade through investment returns, borrowing and co-investments with domestic and international partners, below the government’s earlier KES5 trillion ($38.6bn) ambition. It will target commercially viable projects in energy, transport, logistics, information and communications technology, water and agriculture.

Mworia said the fund was assessing potential investments and had attracted interest from prospective partners in Kenya and abroad.

“We have a lot of interest from other investors who would like to co-invest alongside the National Infrastructure Fund,” he told Reuters.

Investment managers have previously warned that Kenya’s relatively high government bond yields discourage institutional investors from financing infrastructure. Jonathan Stichbury, chief executive of Sanlam Allianz Investments, said in September that pension trustees were reluctant to assume additional project risks when government securities could yield up to 15%.

Kenya’s Parliamentary Budget Office warned in September that the withdrawal of KES46bn ($354mn) in budget funding for 41 energy projects ahead of their transfer to the fund could delay implementation. The projects would require fresh commercial viability and financing assessments, while some existing lending arrangements might need restructuring.

Mworia also said the fund was considering taking an equity stake in Nigerian billionaire Aliko Dangote’s proposed $16bn oil refinery in Lamu, although he did not disclose the potential investment amount or financing structure.

The government had previously outlined plans to acquire a 10% stake in the refinery, but it remains unclear whether the National Infrastructure Fund would finance all or part of that investment.

The proposed state participation faces legal challenges. On October 6, the High Court certified as urgent a petition seeking disclosure of the government’s proposed financing, guarantees and other commitments to the project. The court ordered responses from the authorities but did not immediately restrict state participation.

See IntelliNews: Dangote’s $16bn Kenya refinery faces second legal challenge over state stake

The refinery, designed to process 700,000 barrels per day (bpd), held its groundbreaking ceremony on September 30, attended by Dangote and President William Ruto. It is intended to supply petrol, diesel and jet fuel to Kenya and neighbouring East African markets.

The development also faces a land dispute involving 133 residents. A court has ordered the status quo maintained on the disputed land pending an October 14 hearing.

Mworia, who became the fund’s founding chief executive on September 7, previously headed Nairobi-listed Centum Investment Company (NSE: CTUM). The fund was established in March under legislation intended to attract private capital into infrastructure and reduce reliance on conventional public borrowing.

The fund itself faces a constitutional challenge. In July, the High Court allowed it to continue operating but ordered the Treasury to provide Auditor-General-certified accounts detailing receipts, expenditure and allocations, followed by quarterly transaction reports.

See IntelliNews: Kenya appoints James Mworia CEO of infrastructure fund targeting $38.6bn investment