Ideas & Debate

Why PPP is key to delivery of mega projects dream

Standard gauge railway terminus in Miritini, Mombasa. FILE PHOTO | NMG
Standard gauge railway terminus in Miritini, Mombasa. FILE PHOTO | NMG 

Recent reviews by Nation Newsplex have revealed a continued poor performance of the private sector, especially those listed on the Nairobi Securities Exchange.

It has shown that two-thirds of companies actively participating on the bourse reporting losses or reduced earnings over the last financial year.

It goes on to state that 15 of the 64 companies reported losses, two less than in the 2015 financial year, while 25 of the companies, or 39 per cent — recording a fall in after-tax incomes. Yet, another 23 firms, or a third, declaring increased profits.

Among the factors cited as contributing to this drawback are increased competition from imported goods, reduced access to capital, rising overhead costs — personnel costs, energy costs, and high cost of other inputs.

Low circulation of money in the economy did not miss on that list too. This trend has also been supported by the latest Purchasing Managers’ Index (PMI) by the Stanbic Bank of Kenya.

The PMI has shown that business conditions have continued to deteriorate, edging up to 48.1 in July from 47.3 the previous month. The reasons from which are the same apart from the mention of the General Election.

Vision 2030 Directorate has also given its account that a continuation of this trend may jeopardise the country’s mission towards attaining a middle-income class status by the 2030 timeline. This then shows how much the private sector is of great significance towards the economy; in particular, infrastructure progress.

Yet, according to the Global Infrastructure Outlook Report by the G20, Kenya will require about Sh1 trillion annually to attain a 21st century infrastructure status — transportation; water; communications; and electricity.

The country as it is, is experiencing financial challenges to advance its infrastructure ambitions. It has made it clear that debt repayment has become the single largest item that it’s National Treasury must deal with.

As at end of March, gross public debt stood at Sh4.04 trillion, about 52.6 per cent of gross domestic product. This implies that it must spend more of its finances on debts than its total expenditure on development — infrastructure. This also comes at a moment when it has realised a revenue collection shortfall of Sh70 billion during the financial year 2016/17.

With huge capital requirements for infrastructure, increasing debt and low revenue collections, it then leads us to question the budget deficit of the country.

Many economists and financial analysts have started giving worrisome opinions on the increasing budget deficit stating that it is going to pose a huge risk towards growth and stability of the economy.

In fact, running a large deficit would not only devalue the local currency but also affect the private sector in that it will crowd them out of the capital markets.

Consequently, a quick overview of the global landscape would show you that most governments are increasingly engaging the private sector to deliver and maintain infrastructure through public, private partnerships (PPP).

The government has started tapping into the potential of the private sector for assistance in furthering its infrastructure ambitions. A good example being the Road Annuity Programme, where the private sector, notably the banks were involved in the financing part.

The government had at some point — earlier this year, abandoned the engagement of the commercial banks and therefore the financing model.

The banks had started to perform poorly and therefore could not provide a sustainable financing ground for the partnership to co-exist and thereby enable for 10,000km of road network to be built as expected.

They in turn blamed their weak performance on the government’s move to cap interest rates. The programme however, took another path of engaging the World Bank so that it could meet its objective. This is just a classic case that tested the government’s readiness to partner with the private sector for infrastructure prowess.

Yet, in the near future the government will need to provide a conducive environment that will enable for the growth of the private sector.

This would be through provision of better tax administration; keeping regulations friendly and maintaining a consistency in policy making and implementation; improving trading; keeping the cost of utilities low; and maintaining political and economic stability.

Therefore, with tight financing and inadequate technical skills required for infrastructure advancement, the government will need the support of the private sector to fill in this gap.

PPP is the next big thing for the country to deliver on mega infrastructure projects that are yet to come and thereby seal its infrastructure deficit.

George Otieno is Regional research co-ordinator for Africa at Bechtel, a global engineering, construction and project management company.