Kenya is ready to originate bankable PPP infrastructure projects

Kenya's economy has made great strides in its 60+ year post-independence development journey but perhaps could be much further ahead given the brilliant economic blueprints that have been developed over the decades. There is a common joke that S. Korea borrowed its early days economic plan from Kenya and proceeded to leapfrog the nation to earn itself a seat at the table of the G20.

The Kenya Vision 2030 Economic Blueprint is a masterfully crafted plan that was launched by former President Mwai Kibaki in June 2008 and was designed to be implemented in several 5-year stages, starting with the first stage covering the period 2008 - 2012. This first stage characterized careful financing and execution planning which set up former President Uhuru Kenyatta's administration for a season of rapid infrastructure development that saw a marked improvement in the road network across the country, expansion of the power transmission grid including completion of the Ethiopia-Kenya Transmission Interconnection Line that promotes power trade between the two countries, operationalization of the famous Nairobi Expressway, amongst others.

Today the World Bank classifies Kenya as a lower-middle income nation based on its economic indicators, whilst the Kenya Vision 2030 aims to elevate the standard of living and transform the nation into a newly industrializing, middle-income country by the year 2030.

Recent history in developing PPP infrastructure projects in Kenya

The Kenya PPP story in the last 15-20 years is a mixed one with successes and failures. The road sector had an ambitious program to build 10, 000km of road work under the annuity program with very few kilometers built under that format. Student housing and civil servant housing were other ambitious programs that took off like a tornado but fizzled off as projects struggled to cross the Commercial Close line. By 2015 a robust PPP projects pipeline consisting of 70 projects had been published on the PPP Directorate website and the market was teaming with international Transaction Advisors, Financiers and Developers. Local consultants and banks were also invigorated at the prospects of getting engaged in the world of infrastructure development. Unfortunately, by the second term of the Jubilee administration and the advent of the handshake era, hope had started to fade, and the PPP project pipeline was abandoned altogether. Non the less some good PPP projects have been developed and operationalized including the Lake Turkana Wind Power Project featured below. There have also been some flat failures like Kinangop Wind Power project, whilst others have dragged on painfully like the Likoni Cable Express.

Lake Turkana Wind Power PPP Project was conceptualized in 2005 and went from groundbreaking in 2015 to full commercial operation in July 2017. It is noteworthy that it took an entire decade to go from project concept to groundbreaking which is too long. The project had to wait for more than a year for the transmission line completion by KETRACO despite being ready to sell power to KPLC by mid 2017. The delay in the completion of the transmission interconnector saw taxpayers slapped with a hefty penalty of Sh18 billion due to the delay in completing the 428 km high-voltage power line from Marsabit to the Suswa sub-station in Narok. The penalty was specifically related to Deemed Generated Energy (DGE) charges. DGE arises when the power plant is available to generate electricity but cannot deliver it to the grid. Seen as one of the PPP success stories, the Lake Turkana Wind Power (LTWP) project, Africa’s largest wind farm, has been a significant milestone in Kenya’s renewable energy landscape.

The Likoni Cable Express project story is not as rosy having been conceptualized before the transition from NARC administration to Jubilee administration and has now transitioned to the Kenya Kwanza administration with no signs of the project moving to construction. It was submitted to the PPP Directorate as the first Privately Initiated Investment Proposal (PIIP) project in Kenya. The urban cable car in the Kenyan city of Mombasa was mooted since 2013. In 2018 the project was approved, and the people responsible were able to secure important sites at the end of 2021. The start of construction was planned for April 2022 but there are no signs of groundbreaking as yet. The project proponents and Kenya Ferry Services team worked with the PPP Directorate to develop regulations for PIIP projects and navigated the treacherous road of negotiating way leaves between KeNHA and KPA. In between the Likoni floating bridge was constructed, commissioned and opened to the public, but is now being demolished much to the amazement of the public – it cost Sh1.9 billion to build and was specifically intended to ease congestion at the Likoni ferry and to help curb the spread of Covid-19. The Likoni area residents are still hopeful that the much-publicized cable car will be constructed. ?

Listen to a news reporting by Kenya's Victoria Rubadiri as she describes the Likoni Cable Express Project: https://youtu.be/ImNGmlYccbs?si=6jPybWFzohkgX-4- (credits: Citizen News online).

Is Kenya’s PPP framework robust enough now to unlock PPP projects?

Kenya has attracted private investments in economic and social infrastructure sectors since 1996. The country emerged from the initial stages of building and strengthening the regulatory and institutional framework for PPPs at various levels and progressively moved on to the actual implementation of an ambitious project pipeline.?The Kenya Infrastructure Finance/PPP project received World Bank approval in November 2012 and established the PPP Directorate which further strengthened Kenya's commitment to driving PPP projects and bridging its infrastructure gap. The country emerged from the initial stages of building and strengthening the regulatory and institutional framework for PPPs at various levels and progressively moved on to the actual implementation of an ambitious project pipeline.?The Kenya Infrastructure Finance/PPP project received World Bank approval in November 2012 and established the PPP Directorate which further strengthened Kenya's commitment to driving PPP projects and bridging its infrastructure gap.

Kenya's Public Private Partnership (PPP) legal framework has also undergone a transformative journey originating with the PPP Policy of 2011 and the subsequent 'Public Private Partnership Act 2013. The Government of Kenya recently repealed and replaced it with the PPP Act of 2021. This new legislation prioritizes efficiency by streamlining PPP process timelines and significantly enhancing private sector involvement in financing and managing infrastructure projects. The PPP Act of 2021 is a pivotal step, emphasizing prompt project implementation and reinforcing collaboration between the public and private sectors. This legal evolution signifies a commitment to creating a conducive environment for PPPs, acknowledging the crucial role of the private sector.

The legal and regulatory framework for PPPs in Kenya includes:

o??? The?Constitution.

o??? Legislation such as the?PPP Act (2021)?and the?Public Procurement and Assets Disposal Act (2015).

o??? Court rulings, regulations, guidelines, and tribunal determinations.

This stable framework defines PPP ideology, provides substantive and procedural laws, and governs both levels of government.

Notable accomplishments in this institution strengthening include:

• Establishment of the?Roads Annuity Fund Regulations?and the?Public Private Partnership (Project Facilitation Fund) Regulations.
• Creation of a?PPP Disclosure Framework.
• Introduction of a?PPP Screening Tool?to assess project readiness.
• Development of a?Fiscal Commitment and Contingent Liability (FCCL) Framework?for PPP Projects.
• Drafting of?National Toll Fund Regulations.
• Advancement in creating a?Governance and Operational Manual?for the Project Facilitation Fund.

The PPP Directorate team is revamped and has a Director for Deal Origination & Structuring who is spearheading the creation of a bankable projects pipeline, whilst the Legal team is working on refining the legal and regulatory framework. With these strides made over the years Kenya's PPP shop is open and ready to transact PPP infrastructure projects.

Bankability key to success in PPPs for infrastructure development

When PPP investors are asked what they look for in a project, they would typically reply they like projects that are bankable, where risks are fairly allocated between the government and the sponsor. When one probes deeper though as to where they normally invest, you might elicit this response: in a market where there is deep commitment by the government to undertake an effective PPP program. This is a very telling answer sometimes lost to governments that want to pursue ambitious PPP programs. Bankability for a developing country involves more than de-risking projects. More importantly, it entails de-risking the country and its PPP program (Cosette Canilao, August 2017, World Bank Blogs: Bankability: More than de-risking projects (worldbank.org) ).?In 2023, civil unrest saw the recently operationalized Nairobi Expressway, built as a PPP between a Chinese investor and Government of Kenya, vandalized by rioting citizens. The government moved quickly to reassure the investor by keeping the rioters away with visible military guards.

Bankability in the context of Public-Private Partnership (PPP) projects refers to the project’s overall structure being such that lenders are willing to finance it. Lenders play a crucial role by funding a significant portion of the capital required for these projects, sometimes up to 90% of the necessary capital. Therefore, ensuring bankability is critical during the project structuring phase.

Ensuring bankability involves addressing these critical factors to create a project that lenders find attractive and financially viable. By doing so, PPP projects can secure the necessary funding and move forward successfully.

PPPs can expose the country to fiscal liabilities

Perhaps the one significant aspect both Jubilee and Kenya Kwanza administrations were unprepared for is the impact of fiscal exposure and contingent liabilities occasioned by infrastructure development financing. The latter took up office crying foul and complaining that they had inherited empty coffers. Never before had the country been captivated by commentaries from a diverse range of experts (real and assumed) on the state of the economy, doom stories about a looming sovereign debt default, case files about public looting, explanations about the Russia-Ukraine war and its effect on rise in cost of living, etc. Just as citizens were trying to make sense of it all in came the taxation bonanza which earned the newly elected President the nickname of Zakayo. The opposition also made things interesting with civil protests which saw citizens vandalize the newly operationalized Nairobi Expressway assets.

"Kenya could have defaulted on its inaugural Eurobond due in June 2024, if the?International Monetary Fund (IMF) did not step in", President William Ruto's lead economic advisor, David Ndii said.?He added that as of now, the repayment for the $2 billion Eurobond sourced in 2014 to partly settle a syndicated loan and fund infrastructure is fully funded.? Kenya has been drawing the $2.3 billion facility approved by the IMF board in 2021 as part of the Extended Credit Facility to support its budget.?

Jubilee administration inherited an ambitious yet well-planned and prepared infrastructure projects pipeline from former President Kibaki's administration. It went ahead and structured a blend of financing that included infrastructure bonds, non-concessional loans, grants etc, from private and/or public sources. In 2014, Kenya issued its debut Eurobond with a total value of $2 billion (equivalent to Sh256 billion). The bond had a 10-year maturity and signaled Kenya’s shift toward commercial debt to fund its budget. The international debt market was favorable at the time, and Kenya secured the Eurobond at interest rates of 6.78% for the 10-year paper and 5.87% for the five-year issuance. The National Treasury aims to manage this by optimizing the use of concessional external funding sources and extending the maturity profile of public debt through medium to long-dated bonds. However, the country’s shrinking dollar reserves and high global interest rates pose challenges. The Russia-Ukraine war and monetary tightening in the US and Europe have limited Kenya’s access to the international market.

Public-Private Partnerships (PPPs) play a crucial role in infrastructure development, but they also come with fiscal implications and risks. PPPs are long-term contracts where the private sector provides infrastructure assets and services that were traditionally handled by the government. PPPs can lead to better project design, quality, and maintenance, and have the potential to create Value for Money because the private sector may offer the same quality of services at lower costs or higher quality at the same cost. PPPs help manage the uneven nature of infrastructure financing.

PPPs allow governments to exchange explicit fiscal costs for fiscal risks. Governments transfer risks to private operators, paying a corresponding risk premium. The full fiscal consequences become evident when PPP-related payment obligations affect the budget during operation. Governments need the capacity to monitor contract outputs and results over the project’s entire life cycle. Public entities operating privately managed facilities must manage interface risks. Understanding the difference between financing and funding is essential. while PPPs offer benefits, careful management is crucial to balance fiscal costs and risks. Governments must weigh the advantages of private sector participation against potential liabilities.

Not considering ESG can be a showstopper for infrastructure projects

The?Kinangop Wind Park (KWP), located in?Nyandarua County, Kenya, was an ambitious renewable energy project?- it remains a story of ambition, challenges, and unfulfilled potential—a reminder of the complexities involved in large-scale renewable energy projects.?

The project aimed to be the?first fully licensed, independent large-scale wind farm?in Kenya. Upon completion, it was expected to provide clean power to approximately?150,000 Kenyan households?via the national grid and the Kenya Power and Lighting Company (KPLC). The Kinangop Wind Park project began in?2004?as a joint venture between?EcoGen Wind Farms?and?Kengen.

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The project encountered?civil disturbances?in the local area, which caused significant?delays. These disruptions depleted the project’s funds and hindered progress. Court cases?related to land rights and other issues further complicated matters. Community hostilities?also played a role in creating an unfavorable environment for the project. In?April 2016, the project was placed under?receivership?by the?Standard Bank of South Africa, which had provided debt finance. As a result, the?turbines?intended for the project were?auctioned. Balancing environmental impact, community engagement, legal considerations, and financial viability is no easy task.

Many project promoters far underestimate the impact of neglecting public participation, stakeholder engagement and environmental impact assessment. There is a disturbing trend in the real estate sector where some foreign developers have made a mockery of the process by gathering neighborhood watchmen and house helps in barazas under the guise of conducting public participation just to get NEMA license. This kind of thinking can be the death knell to large scale infrastructure projects. A well-designed project with sustainability at its center is a project set up for success.

The $25 Billion LAPSSET infrastructure project connecting East Africa: https://youtu.be/bV6ncaFrz28?si=h9a5SkwwevlBCgEa

Kenya has traversed a treacherous yet determined journey to prepare the economy for execution of infrastructure projects with significant traction realized as governments transitioned over the last three decades. Despite political noise every time a new administration takes charge, the murky violence experienced during the 2007 elections that left a scar of internally displaced persons, Kenya has actually demonstrated ability to have sustainable continuity and transition. The Kenya Kwanza administration is bullish about making PPP a key feature of the Bottom-up Economic Transformation Agenda.

The author:

Rose Kananu, PMP?, CP3P-Foundation, Civil Engineer is the Founder and Managing Director of Howard Aidevo Consulting Ltd and the creator of the BCDIP brand.

She is on a mission to build capacity for professionals and contractors in PPP and Project Management so that Africa's infrastructure is built by Africans.