The memo discusses financing strategies for Kenya's goal of building 500,000 housing units by 2022 to address its deficit of over 2 million units. It recommends leveraging both domestic and international public and private sources of capital. Specifically, it suggests (1) improving tax collection domestically, (2) working with the OECD to address tax avoidance by multinationals, and (3) attracting private investment through public-private partnerships, blended finance models, and credit enhancements from the World Bank's Multilateral Investment Guarantee Agency. The World Bank is recommended to provide support in structuring a public-private partnership or blended finance vehicle to access financing for the housing program.

1. MEMO
To: Henry Rotich, Finance Minister of Kenya
From:Directorate of Public Debt Management (Debt Policy, Strategy and Risk
Management Office)
National financing strategy for development
Background
The government has set a target of providing 200,000 housing units annually for
all income levels. However, the production of housing units is currently at less
than 50,000 units annually, well below the target number, culminating in a
housing deficit of over 2 million units1
. It has set a target to build 500,000 by
20222
. This paper explores the potential to raise both internal and external
finance to meet that target.
Estimated financing needs
The government is heavily dependent on Official Development Assistance
(ODA) and remittances for its revenues3
. Kenya received £2.92bn of ODA in
2017 that constituted 43% of total resources, according to World Bank Group
(WBG) data. It relied on the International Development Association and the
United States for 45% of ODA. Remittance payments from Kenyans living in
other countries provided another 29% of revenues. Portfolio investment (money
from overseas invested into stocks, bonds &c) makes up 11% while foreign
direct investment (FDI) another 10%. The chart shows Kenya’s reliance on two
main sources.
1
https://vision2030.go.ke/social-pillar/#68
2
Third Medium Term Plan, 2018 – 2022. Republic of Kenya, 2018
3
https://public.tableau.com/views/OECDDACAidataglancebyrecipient_new/Recipients?:embed=y&:display_cou
nt=yes&:showTabs=y&:toolbar=no?&:showVizHome=no

2. Source: World Bank database
Available source of revenues
Tax revenues are 15.6% of GDP, only just above the 15% that the WBG sees as
the minimum required to meet the basic needs of citizens and businesses.
Revenues have underperformed targets by an annual average of 3.7% of GDP
since 20114
. A revenue raising strategy can look to both domestic and
international sources and public and private avenues.
Domestic
Domestic tax mobilization initiatives will enable the government to raise extra
resources, but it must be careful to ensure that the impact is fair. Tools include:
• Improve the tax register to ensure more tax coverage
• Reform tax policies to remove loopholes and misdirected tax incentives
• Review exemptions, 88% of which go to the financial, health,
manufacturing, and social work.
• Fight tax evasion through early detection, smarter auditing, and effective
investigation and prosecution
International
• Work with OECD to ensure multinationals are not using transfer pricing
and base erosion profit shifting
• Target illicit financial flows by focusing on flows and activities that have
a clear connection with illegality
4
http://documents.worldbank.org/curated/en/140071512474376644/Kenya-economic-update-Poised-to-
bounce-back-reviving-private-sector-credit-growth-and-boosting-revenue-mobilization-to-support-fiscal-
consolidation

3. Leveraging international private capital
Increasing the domestic tax take will not be sufficient to fund the estimated
$20bn needed for the homebuilding program given other demands on the
budget5
. Kenya will need to find ways to attract some of the estimated $100tr in
assets under management by institutional investors globally. There are tools
available that are not mutually exclusive:
i. Public private partnerships (PPPs)
PPP, an agreement between the government and private companies, can be a
tool to meet infrastructure need, as long as it is designed well and
implemented in a balanced regulatory environment. However, the
government will need to work to make projects "investor ready". Kenya is
61st
out of 190 in the World Bank Doing Business report with weaknesses in
starting a business and enforcing contracts6
.
Source: Doing Business Report. World Bank. 2019
ii. Attracting private finance
An alternative is to attract private finance. One option is what is now called
“blended finance” — a combination of non-market rate (“concessional”)
financing from donors or third parties and market rate finance from private
financiers. To attract private finance to infrastructure, the government must
improve and expedite project pipelines. This can be done by establishing
5
https://www.belex.com/en/news/kenyas-programme-to-build-one-million-low-cost-houses/
6
https://www.doingbusiness.org/en/data/exploreeconomies/kenya#

4. suitable legal and policy environments, building and strengthening local
capacity to develop projects, and increasing projects’ bankability through
standardization, guarantees and other risk mitigation. The World Bank offers
Country Private Sector Diagnostics to barriers that need to be overcome to
create markets7
.
iii. Insurance and credit enhancement.
One barrier to private investment is a perceived risk of a breach of contract,
government expropriation, political instability and failure to honour
obligations The World Bank’s Multilateral Investment Guarantee Agency
provides cover against those events that will enhance the credit rating of the
project. MIGA has supported Kenya’s energy sector by insuring a non-
shareholder loan to independent power producers8
.
Integrated National Financing Framework
International capital markets are complex and governments wishing to attract
finance must show they have a strategy for attracting, using and monitoring
investments. An integrated national financing framework will help to both
evaluate all sources of finance available — public, private, domestic,
international. It will also make it easier for the government to show that it has e
identified the priorities, opportunities, and gaps that will help both strengthen
financing strategies and also more effectively execute them..
Recommendation
All options outlined above could help access finance for the housebuilding
programme. Given that many are provided by the World Bank Group and
knowing that the bank is focused on providing advice, we recommend asking
for their support in structuring a PPP or a blended finance vehicle with
international companies or banks. The government should also work with or
provide financing and risk mitigation instruments.
7
https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications/
cpsds
8
https://www.miga.org/press-release/miga-deepens-support-kenyas-energy-sector