Kenya in major policy shift on support for PPPs

Sunday November 18 2018

A view of the Nyali Bridge in Mombasa in this photo taken on 3rd October 2018.

The Nyali Bridge in Mombasa. The bridge was expected to be funded through a PPP. FILE PHOTO | NMG 

JAMES ANYANZWA
By JAMES ANYANZWA
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NJIRAINI MUCHIRA
By NJIRAINI MUCHIRA
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Over 70 projects being implemented under the public-private partnership framework in Kenya face an uncertain future, after a government decision to withdraw financial and risk guarantees.

Despite a push by the government for the private sector to be actively involved in cash-intensive infrastructure projects, the National Treasury has unveiled a new policy that is bound to have far-reaching ramifications for PPP projects.

The latest policy shift, which will no longer automatically offer offer financial and risk guarantees to PPP projects, could make it impossible for private investors to mobilise financing from either local or international lenders.

Ironically, the new policy comes after the government a strong statement that private sector is not only critical in bridging massive infrastructure financing gaps but also in supporting the Big Four Agenda spur economic growth.

Besides, Kenya has enacted a robust PPP Act that that was expected to attract private investors into the risky infrastructure projects space, whose returns are often long-term.

“We hope to leverage both private-sector funds and expertise in the delivery of essential services to the public. In this regard, the government is keen on utilising PPPs to ensure projects are delivered on time and on budget,” said Henry Rotich, National Treasury Cabinet Secretary after launching a PPP projects disclosure portal.

Projects

However, according to the new policy, the government will only support projects that are considered strategic and in the public interest.

This means that the majority of PPP projects will now be locked out of the government support mechanisms in the form of letters of support and comfort, repayment guarantees and political risk covers.

Private investors have relied on these guarantees to secure funding because they act as insurance for lenders in the event of unseen eventualities that make it impossible for the borrower to repay.

“For the avoidance of doubt, not all projects may be supported by a government support measure (GSM). A GSM shall be issued in very exceptional circumstances for projects that are considered strategic and that are of public interest, as approved by Cabinet,” reads the policy.

It adds that the government’s intention over the medium to long-term is to greatly reduce the scope of GSMs as private parties build stronger trust in public investments.

This decision was taken after it became apparent that private investors under the PPP framework have been abusing the government support measures exposing taxpayers to potential losses of millions of dollars.

Financial obligations

The policy is expected to minimise the likelihood of unforeseen financial obligations being incurred by the government in case, say, private investors do not carry out proper due diligence on their projects.

The government contends that private investors have decided not to carry out proper due diligence on their projects in the expectation that the government will any way issue them with letters of comfort to secure funding.

With the policy shift, several PPP projects being implemented across various sectors like transport, housing, energy, water, health, agriculture, manufacturing, education, and tourism sectors now hang in balance.

Key among these are the second Nyali Bridge project in Mombasa, the Nairobi-Nakuru-Mau Summit highway, Lamu-Garissa-Isiolo highway, the Likoni Cable Car project, 35 MW Ormat Orpower geothermal power plant project.

According to the new policy, private investors will be required to structure transactions in a manner that minimises the need for issuance of a GSM.

The current legal framework for GSMs is grounded in the Constitution of Kenya, the Public Finance Management Act, 2012, and the Public Private Partnerships (PPP) Act.

Loopholes

The National Treasury however, says the current framework of GSM has loopholes that permit proper due diligence in the assessment of potential projects, encouraging investors to view GSMs as upfront as opposed to final assurances and invite and present opportunities for financial mischief.

“Although there is a legal and institutional framework that currently governs the issuance of GSMs, the current framework does not comprehensively address the entirety of the identified problems,” says the Treasury.

While Kenya acknowledges that deeper private sector participation in public investment programmes is key to sustainable development in the country, the government support to private sector-driven projects should be streamlined to avoid exposing taxpayers to unnecessary loss of funds.

“For such investments to happen, it is essential that risks are appropriately allocated, and resourced, based on the principles of which party between the public and private sectors possesses the greater ability to manage, absorb or mitigate the given risk,” reads the policy.

GSMs shall be approved in principle by Cabinet and issued by the National Treasury.

“In some instances, there has been observed a tendency by project investors to seek wider protections under a GSM, beyond what the primary contract documents create by way of obligation on government,” says National Treasury.

“In other instances, GSMs are requested almost as an after-thought, in that one finds no anticipation in primary transaction documentation, but parties make the request for a GSM at an advanced stage of project development.”

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