Private partnerships will lead to reduced public debt

When the budget was read two weeks ago, one of the key questions that kept coming up was the issue of growing public debt in Kenya. In the 2017/18 National Budget, the Kenya government plans to borrow Sh524.6 billion (6 per cent of GDP).

Views differ on whether Kenya’s debt is sustainable. Some are of the view that given the massive gaps in key sectors such as energy and transport infrastructure, the country must continue to do everything possible to finance and address the gaps and that debt accrued now will pay off in the long term.

Further, they argue that at a debt-to-GDP ratio of about 53 per cent, Kenya is still well below the World Bank ceiling (or tipping point) of 64 per cent.

And while the IMF has raised concern about Kenya’s public debt, it is below what they view as the applicable ceiling for Kenya at a 74 per cent debt-to-GDP ratio. Others are of the view that a debt-to-GDP ratio beyond 40 per cent for developing and emerging economies is dangerous. Further, at about 53 per cent, the debt-to-GDP ratio is above the government’s preferred ceiling of 45 per cent, raising questions as to why this ceiling is being openly flouted.

Public Private Partnerships

Beyond the number crunching on debt figures, the broader concern for the country is that the substantial investment requirements cannot be met by debt alone.

This is where Public Private Partnerships (PPPs) come in. PPP refers to a contractual arrangement between a public agency and a private sector entity in which the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In short, government teams up with private sector to finance, manage and operate projects that are for public use.

There are numerous forms of PPPs ranging from projects where government owns the project and private sector operates and manages daily operations, to where private sector designs, builds, and operates projects for a limited time after which the facility is transferred to government. As the Africa Development Bank points out, PPPs are a useful means through which investment in development can continue in the context of growing pressures on government budgets. But as the World Bank points out, for PPPs to work the private sector needs political stability, a pipeline of bankable projects, transparent and efficient procurement, risk sharing with the public sector and certainty of the envisaged future cash flows.

The good news is that the Kenyan government seems to be aware of the importance of PPPs at both national and county level. Numerous county governments are working with development partners to build their PPP capacity as well as identify viable county-level PPP projects.

At national the level, the government seeks to lock in investment through PPPs worth about $5 billion between 2017 and 2020. This will be important in managing the growth of public debt in the medium and long term.

Through the intelligent use of PPPs, government can put the country on the path of sustainable development financing.