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Treasury bets on private sector ties to deliver Sh1trn projects

Nairobi Expressway

The ongoing construction of Nairobi Expressway to the Jomo Kenyatta International Airport, along Mombasa Road in this picture taken on November 8, 2020. PHOTO | DENNIS ONSONGO | NMG

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Summary

  • When President Mwai Kibaki assented to the Public Private Partnership (PPP) Act in January 2013, Kenyans expected to see a thriving pipeline of privately financed public projects within no time.
  • Eight years down the road, many would-be projects remain a mirage, although to its credit the government has finally lined up a couple of mega projects in the roads sector.
  • Construction has started on the 27-kilometre, Sh60 billion Nairobi Expressway, which will run from Jomo Kenyatta International Airport (JKIA) to the James Gichuru junction on Waiyaki Way.

When President Mwai Kibaki assented to the Public Private Partnership (PPP) Act in January 2013, Kenyans expected to see a thriving pipeline of privately financed public projects within no time.

Eight years down the road, many would-be projects remain a mirage, although to its credit the government has finally lined up a couple of mega projects in the roads sector.

Construction has started on the 27-kilometre, Sh60 billion Nairobi Expressway, which will run from Jomo Kenyatta International Airport (JKIA) to the James Gichuru junction on Waiyaki Way.

In October this year, work will also begin on the 175-kilometre, Sh180 billion Rironi-Nakuru-Mau Summit highway, which is being expanded to cater for increased traffic along the busy corridor.

The Kenya Rural Roads Authority (KeRRA) has also used the PPP model, under the road annuity programme, to construct the 91-kilometre Ngong-Kiserian-Isinya to Mashuru-Isara road.

During the public participation hearings for the 2021 budget, a proposal was raised to consider using the PPP model for the construction of stadia, which remain a key promise of the Jubilee government that it is now racing to fulfil less than two years to the end of President Uhuru Kenyatta’s term.

The Treasury said in the 2021 Budget Policy Statement released last month that its PPP unit would consider this proposal.

These ongoing and planned projects, according to experts, are however only a fraction of what could have been achieved in PPP project financing if Kenya had put more emphasis on this line of financing.

The country has had some shortcomings—regulatory, policy and capacity issues— that have prevented it from exploiting the huge pile of capital looking to finance public projects in Africa, according to Johnson Mwawasi, the chief executive officer of Kenyan project finance advisory firm Lean Africa Consultants Limited.

For instance, the regulations allowing private companies to collect toll levies on Kenyan roads were only passed last year, meaning that any company which would have wished to do a PPP road prior to that would have faced a regulatory hurdle when recouping its funds.

“Kenya has wasted a lot of time. The World Bank and other organisations have spent a lot of money to build capacity and improve the regulatory framework around PPPs since we started this in 2009 and introduced some policies…fast forward 11 years we only have two projects and another that might start later this year,” said Mr Mwawasi.

He also highlighted the lack of clear dissemination of information to the public, who are eventually going to foot the bill for the PPP projects either through regular direct payments such as road tolls, or in their taxes through the exchequer.

“There is information asymmetry. Our regulatory framework does not provide for a very robust disclosure framework, so a lot of information about the projects is not availed to the public,” he said.

“For example, we got to know the rates they are going to charge on the Nairobi Expressway just the other day. What if they finish the project and then find that the public cannot afford to pay the rates being charged? That brings problems to the whole project.”

The lack of competence in handling PPP deals is also a drawback to the speedy implementation of potential projects, according to Mr David Wright, a director at British firm PPP Solutions, which offers advisory services for such projects across the world.

“Looking from the outside, competence is a challenge, either from the procuring authority and also in the local participants, whether they be contracting companies, engineering companies, law firms or advisory firms, because they haven’t done such projects before.

There is a lot of money sitting in development banks to support PPP projects in sub-Saharan Africa, but hardly any projects because of lack of competence in putting together the right kind of project and selecting the right proposal,” said Mr Wright

The solution, he added, is for the government to look at PPP as an opportunity rather than a problem, and approach it as a genuine alternative avenue for funding public projects.

Economists and commentators have also differed on whether the current model of sourcing the PPP projects is giving Kenyans value for money.

The two big projects in the roads sector have each had a different approach to sourcing private sector partners.

In the case of the Nairobi Expressway, the project was a result of privately initiated proposal where only one firm was in the running, while the Nairobi-Nakuru highway had several consortiums that were competing to win the tender.

Although competitive bidding might have led to better cost discovery for the project, the speed at which the Expressway is being constructed—it will be completed by the end of the year—suggests that the approach used for the project may be the right one, considering Kenya’s track record with public projects.

On the other hand, the losing consortium in the Nairobi-Nakuru road wasted no time lodging a complaint with the Public Private Partnership Petition Committee, continuing a trend where losers in project bidding drag their grievances through time consuming litigation.

“It is hard to conclude that we got a raw deal with the Expressway because we needed a solution to the traffic problem on this road. If we went the solicited way, I don’t think we would have made any progress so far, so maybe this was the only way for us to get it done,” said Mr Mwawasi.

“We could have done it better though, and ensure the rates charged are reasonable to encourage use and pass the message to the public so that in future projects we have more and more buy in from the public and private sector.”

He added that Kenya’s credit profile also meant that it would have been difficult to convince financiers to jump at the project.

To a great extent, Kenya’s renewed faith in the PPP model has been driven by the harsh realities of the country’s public finances.

In the last seven years, the government has borrowed heavily to invest in infrastructure, driving up public debt more than four times from Sh1.77 trillion in February 2013 to Sh7.28 trillion in December 2020.

This sharp growth in public debt, which is now up to 65 percent of gross domestic product (GDP), has limited the financing options for further infrastructure investment.

Kenya is already turning away from external commercial loans due to cost concerns, while huge domestic maturities have also meant that a large share of domestic borrowing is going towards repayment or rolling over of old debt.

The Covid-19 pandemic has made things worse, hurting tax revenue performance due to job losses and business closures.

This hit on the exchequer has widened the fiscal deficit, which the Treasury now expects will stand at nine percent of GDP by end of the current fiscal year, nearly double the projection of 4.9 percent that was contained in the 2020 budget statement.

With limited options therefore, the government has had to get creative, paving the way for the entry of PPP financed projects.

Overall, the Treasury is betting on the PPP model to finance up to 80 projects valued Sh1.1 trillion, cutting across diverse sectors of the economy with the bulk in transport and infrastructure, energy, health and education.