LEGAL CONSIDERATIONS THAT MAKE PPPs SUCCESSFUL
Rose Kananu, PMP?, CP3P-Foundation, Civil Engineer
Business Leader | Infrastructure Projects Advisor I Project and Program Management Consultant | Capacity Building Expert | Facilitator/Trainer | Youth Mentor
Public-Private Partnerships (PPPs) in the energy and infrastructure sectors in East Africa involve a range of legal considerations that are crucial for the successful structuring and operation of these projects. Public-Private Partnerships (PPPs)?play a crucial role in financing infrastructure projects worldwide. To ensure their success, robust?legal frameworks?are essential.
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A well-designed PPP legal framework, integrated into a country’s broader legal and political systems, is vital for achieving key PPP objectives. Such a framework enhances a country’s ability to attract competitive private sector and overseas investor interest. It ensures that PPPs meet public needs while adhering to government policies. Key benefits include value for money, fiscal sustainability, social and environmental responsibility, and transparency. The World Bank has developed comprehensive guidance to assist countries in creating effective PPP legal environments. While there’s no one-size-fits-all solution, the guidance emphasizes tailoring frameworks to each jurisdiction. Key considerations include flexibility, alignment with national infrastructure policy, and institutional empowerment.
In this article I explore the top five legal considerations for success in PPP infrastructure projects. Let’s first look at Kenya’s journey in developing its PPP framework. Initially, PPPs were governed by the?Public Procurement and Disposal (Public Private Partnership) Regulations, 2009. The Kenyan government recognized the need to enhance the PPP framework to encourage private sector participation in the country.
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Notable accomplishments include:
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The New Act established the PPP Directorate which serves as the secretariat and technical arm of the PPP Committee to replace the PPP Unit. While it may at first appear this to be a simple change in nomenclature, the change is significant in the context of the civil service hierarchy.?The Director General now ranks directly under the PS to the National Treasury, and the Directorate is a full-fledged department in the National Treasury. It is anticipated that this will allow the PPP Directorate more influence and autonomy in the implementation of its mandate.(Bowmans, January 2022, Kenya PPP Directorate to Become the Key Driver of PPP Projects in Kenya: A Detailed Look at Kenya’s New PPP Law | Bowmans (bowmanslaw.com) )
As we delve in the legal considerations outlined below, it is important to point out that successful PPP projects in East Africa require a thorough understanding of the local political, economic, and social context. Engaging with local communities, ensuring the project’s social and economic benefits are clearly communicated, and building strong partnerships between the public and private sectors are also key factors in the success of PPP projects in the region.
Regulatory Compliance and Approvals
PPP projects must navigate a complex regulatory environment, including obtaining necessary approvals from governmental and regulatory bodies. This includes compliance with national laws and regulations on energy, infrastructure, environmental standards, and foreign investment. Understanding the specific regulatory landscape of the East African country involved is essential, as there can be significant variations between jurisdictions.
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Navigating the regulatory landscape for?Public-Private Partnerships (PPPs)?in Kenya can indeed be intricate. ?Here is a typical serving of what one would need to go through when seeking necessary approvals from governmental and regulatory bodies:
1.??? The Public Private Partnerships Act of 2021:
·???????? This legislation provides the framework for PPPs in Kenya, harmonizing institutional processes and regulating procurement methods.
·???????? It establishes the?Public Private Partnership Committee?responsible for overseeing PPPs.
·???????? Key provisions include various?procurement methods, such as direct procurement, privately-initiated proposals, restricted bidding, and competitive dialogue.
·???????? The Act emphasizes?project identification, selection, and prioritization.
·???????? Before canceling a tender, consent from the?Attorney General?and the PPP Committee is required
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2.??? Engaging with Regulatory Bodies:
o??? Ministry of Finance and Planning: Obtain guidance on financial aspects, risk assessment, and budgetary approvals.
o??? Kenya Investment Authority (KenInvest): Seek advice on investment policies, incentives, and regulatory compliance.
o??? County Governments: Depending on the project’s location, engage with relevant county authorities for approvals and permits.
o??? Kenya National Highways Authority (KeNHA)?or other sector-specific bodies: For infrastructure projects, ensure alignment with sector regulations.
3.??? Environmental Impact Assessment (EIA):
o??? For large-scale projects, conduct an EIA to assess environmental impacts.
o??? Obtain approvals from the?National Environment Management Authority (NEMA).
4.??? Land Acquisition and Zoning:
o??? Secure land rights and approvals from the?National Land Commission (NLC).
o??? Ensure compliance with zoning regulations from local authorities.
5.??? Financial Approvals:
o??? Obtain?Treasury approval?for financial commitments.
o??? Engage with relevant ministries or agencies for project-specific approvals.
6.??? Sector-Specific Approvals:
o??? Depending on the project type (e.g., infrastructure, healthcare, education), engage with relevant sector ministries or agencies.
o??? For healthcare PPPs, liaise with the?Ministry of Health?and the?Pharmacy and Poisons Board.
7.??? Legal and Contractual Approvals:
o??? Draft and negotiate project agreements, ensuring legal compliance.
o??? Obtain approvals from the?Attorney General?for contract validity.
8.??? Public Participation:
o??? Involve stakeholders through public consultations and hearings.
o??? Address concerns raised during the process.
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One must keep in mind that each project may have unique requirements, and collaboration with legal experts, consultants, and relevant authorities is crucial.?In the next article I will talk about the role of transaction advisors and consultants.
Contractual Arrangements and Risk Allocation
Listen to Mark Moseley (Global Infrastructure Hub talk about - Allocating risks in PPPs (youtube.com)
(The World Bank and the Global Infrastructure Hub (GI Hub) are pleased to announce that the GI Hub is joining the World Bank’s Infrastructure Practice Group as an associated Global Knowledge Trust Fund of the Public-Private Infrastructure Advisory Facility (PPIAF) with a funding contribution from the Kingdom of Saudi Arabia.?(PPIAF | The Global Infrastructure Hub (GI Hub) to join the World Bank )?)
Structuring a Public-Private Partnership (PPP) project?involves allocating responsibilities, rights, and risks to each party within the PPP contract. This process is crucial for defining the project’s risk structure, financial structure (including payment mechanisms), and other key commercial terms.? PPP structuring aims to create technically feasible, economically viable, fiscally responsible, and value-for-money projects.?It’s a collaborative effort involving public authorities, private partners, and legal experts. Three key aspects to consider when structuring PPP projects are outlined below.
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1.??? Key Commercial Terms:
o??? Initial Concept: Begin by developing the project concept, outlining the project’s physical features, technology, desired outputs, and target beneficiaries.
o??? Risk Allocation: Proper risk allocation is fundamental. Identify and prioritize project risks, considering technical, financial, and operational aspects.
o??? Responsibilities and Rights: Allocate responsibilities and decision-making rights based on risk ownership. For instance, construction risk may be assigned to the private party, making them responsible for construction-related decisions.
o??? Payment Mechanism: Determine how the private party will be compensated. User-pays mechanisms, availability payments, or other models can be considered.
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2.??? Process of Structuring:
o??? Extended Process: Structuring evolves over time, not immediately through a detailed contract. It starts with defining the?key commercial terms:
§? Outputs: Specify the desired project outcomes.
§? Risk Allocation: Allocate risks to the party best suited to manage them.
§? Payment Structure: Determine how the private party will be remunerated.
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o??? Feasibility Study and Economic Viability: Inputs from feasibility studies and economic viability analyses inform the structuring process.
o??? Commercial Viability and Value for Money: Ensure the PPP structure aligns with commercial viability, affordability, and value for money.
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3.??? Contract Structure:
o??? Scope and Responsibilities: Clearly define the scope of work and responsibilities for each party.
o??? Financial Structure: Address financial aspects, including funding sources, cost-sharing, and revenue streams.
o??? Risk Structure: Allocate risks (e.g., construction, operational, demand) to the appropriate party.
o??? Transparency and Efficiency: Ensure the contract structure promotes transparency, efficiency, and accountability.
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The success of PPP projects hinges on well-structured contracts that clearly define the roles, responsibilities, and obligations of all parties involved. This includes detailed provisions on risk allocation, particularly concerning financial risks, operational risks, and force majeure events. Effective risk allocation mechanisms are vital for attracting private investment and ensuring project viability.
Financing and Security Arrangements
Structuring the PPP project is?the process followed for defining the risk structure, the financial structure (including the payment mechanism) and other key commercial terms of a PPP contract, as well as the structure or main features that will govern the tender process. The finance structure is the combination of equity and debt, and contractual relationships between the equity holders and lenders. Typical PPP Project Structure shows a typical contract structure for a PPP project. The government's primary contractual relationship is with the project company.
1.??? Financing Structures for PPPs:
o??? Special Purpose Vehicle (SPV): In most PPP contracts, the private party establishes an SPV—a project-specific company. The SPV raises finance through a combination of equity (from shareholders) and debt (from banks, bonds, or other financial instruments).
o??? Equity and Debt: Equity investors (project shareholders) develop the PPP proposal and bear higher risk. Debt providers (lenders) include commercial banks, development banks, institutional investors, and multilateral institutions.
o??? Risk Allocation: Equity investors accept higher risk and require a higher return. Debt financing minimizes project costs by using a significant proportion of debt.
o??? Financial Modeling: PPP financial models tailor debt service and expected dividends based on revenue, construction costs, and ongoing expenditures.
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2.??? Non-Recourse Project Finance:
o??? Under non-recourse project finance:
§? Lenders are paid only from the project company’s revenues.
§? Equity investors bear losses first, and lenders suffer only if equity investment is lost.
§? Equity investors accept higher risk, demanding a higher return.
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3.??? Security Interests and Loan Agreements:
o??? Security Interests: Lenders secure their loans by taking security interests in project assets (e.g., infrastructure, revenue streams).
o??? Loan Agreements: These contracts define terms, repayment schedules, interest rates, and covenants. They also outline remedies if the borrower defaults.
o??? Direct Agreements: Sometimes, contracting authorities directly agree with lenders (e.g., step-in rights or senior debt repayment guarantees).
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4.??? Government Support Measures:
o??? Governments may provide support, such as revenue guarantees or availability payments, to enhance project bankability.
o??? Ring-Fencing: If government pays unitary payments, they must be ring-fenced to ensure timely project payments.
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PPP projects in energy and infrastructure require substantial capital investment. Legal considerations around financing structures, loan agreements, and security interests must be carefully addressed. This includes ensuring that the project agreements are financeable and that the security package is acceptable to lenders. Legal structures must also be in place to enable project revenues to service debt and provide returns to investors.
Land Acquisition and Environmental Concerns
Land related issues remain one of the main risks in the implementation of infrastructure projects in Kenya. Most of the recent major infrastructural projects in Kenya have been undertaken through a public private partnership arrangement under which one of the obligations of the public entity has been to provide the land for the project. In most case, the land required is not public land but private land forcing the public entity to pursue compulsory acquisition of the private land under the relevant laws. Private contractors of some of the ongoing major projects such as LAPPSET, and the Standard Railway Gauge, have been joined as interested parties in suits filed by residents or activists against the National Land Commission (“NLC”) and the relevant public project owners, complaining of non-compliance with the legal procedure for compulsory acquisition. (MMS Advocates, May 2023, Acquisition of Land for Mega Infrastructure Projects in Kenya - MMS Advocates ).
Legal issues related to land acquisition, including rights of way and access to project sites, are critical. This involves navigating local land ownership laws, compensation mechanisms for land acquisition, and resettlement issues. Additionally, compliance with environmental laws and regulations, including conducting necessary environmental impact assessments and obtaining environmental clearances, is essential for project sustainability and community acceptance.
Dispute Resolution Mechanisms
In the context of Public-Private Partnerships (PPPs), dispute resolution plays a crucial role in ensuring smooth project execution and maintaining healthy relationships between public and private entities. PPPs involve a contractual structure that allows private investors to limit their financial exposure by use of Special Purpose Vehicles, Tiered Sub-contracts and Risk Allocation.
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Dispute Resolution Mechanisms:
o??? Reactive Approach: Most PPP contracts include a multi-tiered dispute resolution procedure. However, this approach is reactive—it outlines the process to follow after a dispute has been formally notified.
o??? Better Solution #1: Dispute Avoidance:
§? Proactively avoiding disputes is essential. Consider implementing mechanisms to prevent conflicts before they escalate.
§? Explore options such as early warning systems, regular project reviews, and collaborative problem-solving.
o??? Better Solution #2: Effective Dispute Resolution:
§? When disputes arise, having an efficient resolution process is crucial.
§? Common methods include:
§? Mediation or Conciliation: Facilitated negotiation to reach a mutually acceptable solution.
§? Negotiation: Direct discussions between parties.
§? Dispute Resolution Board (DRB): A neutral panel that provides recommendations.
§? Expert Determination: Involves experts assessing technical or specialized issues.
§? Arbitration: Formal process where an arbitrator makes a binding decision.
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Given the long-term nature of PPP projects and the potential for disputes, establishing clear dispute resolution mechanisms is crucial. This includes defining the jurisdiction and applicable law in the event of a dispute, as well as specifying arbitration or mediation processes. The choice of dispute resolution forum and mechanism can have significant implications for the resolution of disputes and the overall risk profile of the project.
Successful PPP projects in East Africa require a thorough understanding of the local political, economic, and social context. Legal transaction advisors contribute significantly to PPP projects by ensuring legal compliance, risk mitigation, and effective project management.?Their expertise helps bridge the gap between public and private stakeholders, leading to successful infrastructure development.
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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.
Entrepreneur || Policy strategist |Gold Bars value chain & Investment / Funding Consultant, JV/DBFMO/BOT / PFI Funding Negotiator, Chartered Arbitrator & Lawyer.
7 个月In addition, there must be wide range consultations with both policy professionals and investment experts. Legal mechanism will help secure a sustainable protection of all interest in the basis of municipal law tied to sovereign instrument.