Effect of sovereign risk and debt‐side governance on cross‐border infrastructure risk premium in a developing nation: The case of Kenya

Salome Oyuga, Edward Godfrey Ochieng and Geoffrey Ngene

Development Policy Review, 2025, vol. 43, issue 3

Abstract: Motivation Developing countries' reliance on foreign capital for large‐scale infrastructure projects makes sovereign risk premium and debt‐side governance practices key determinants of cross‐border infrastructure risk premiums. Purpose This study estimates the effect of international sovereign bond spreads (systematic risk) and debt‐side governance (unsystematic risk) on cross‐border infrastructure risk premiums in Kenya's major infrastructure projects from 2011 to 2020. Approach and methods We use pooled and random‐effects panel data analysis of secondary data. Findings The findings show that rising international sovereign bond spreads (ranging from 9.6% to 32.39%), corruption levels, external debt‐to‐import ratios, loan utilization rates, disbursement delays, and climate risk disclosure significantly contributed to increasing cross‐border infrastructure risk premiums. The interaction between bond spreads and corruption had a compounding effect in increasing cross‐border infrastructure risk premiums. On the other hand, longer loan maturities, higher internal rates of return, substantial government involvement, and a rising external debt to total investment ratio reduce project risk premiums. Policy implications These findings underscore the need for Kenya's modern Public Debt Management Office and infrastructure execution institutions to reduce external borrowing costs through governance reforms that improve transparency, project oversight, and environmental standards. By strengthening debt‐side governance, Kenya can reduce its external borrowing costs and improve the sustainability of infrastructure‐led debt. As such, the study offers actionable insights for low‐ and middle‐income countries, emphasizing the role of modern sovereign debt management tools that target sustainability and strategic governance reforms at the project level in attracting more favourable borrowing rates for infrastructure financing.

Date: 2025
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