Effect of Project Financing on Performance of Independent Power Producers in Kenya

Abstract

The financing of energy projects is essential to the development of infrastructure. Because governments’ activities are becoming increasingly diverse and because governments can no longer serve as the exclusive source of funding for infrastructure projects, a variety of alternative methods of financing infrastructure development are now being used worldwide. Project financing has increasingly become a preferred model of financing for many infrastructure projects in the energy sector. The aim of this study was therefore to investigate the effect of project financing on the performance among IPPs in Kenya. The study is guided by the resource dependency theory, frank knight’s risk bearing theory, and modern portfolio theory. A descriptive survey research design was adopted with 5 IPPs in Kenya as the target population and analyzed variables including plant availability, plant capacity, energy generated, capital expenditure, annual operation expenditure, cost of debt, capital structure and capacity factor. The study findings showed how variables affect performance showing that at ceteris paribus; one unit change in plant capacity, OPEX, log of Energy generated, Capital structure and cost of debt lead to an increase in the performance of the project by 0.04%, 0.005%, 0.3424%, 0.0129%, 33.2089%. Separately, one unit change in plant availability, CAPEX, capacity factor leads to a decrease in project performance by 4.02%, 0.8057%, 0.5921%. The findings showed that out of all factors analyzed, cost of debt has the most positive effect on project performance. This shows that a firm that uses project financing realizes better returns due to the huge tax savings on interest on debt. Project financing, can therefore be concluded to be the most effective financing model as it consists of more debt than equity and as shown in the results and has better effect on profitability of an IPP. The study recommended that IPP project investors should be encouraged to adopt project financing as it promotes performance mainly through tax savings. The Government, through the Regulator can embark on providing incentives to project financing as a model of financing for capital intensive projects.