Kenya: Planning for Public Private Partnerships
Friday, 04 May 2012
Vision 2030 aims at making Kenya a middle income economy by 2030, and a key element in Kenya’s growth strategy is infrastructure development. Much of it is to be financed through a range of Public Private Partnerships (PPP) models. Gideon Kiarie looks at the different ventures that the Kenyan government seeks private sector co-operation for.

The need to invest in Kenya’s infrastructure is widely accepted – this is from the World Bank’s 2010 Country Partnership Strategy (CPS): ‘Underinvestment in infrastructure, including maintenance, increases the cost of doing business, undermines competitiveness, and adversely affects trade. The 2008-09 multi-donor infrastructure diagnostic for Kenya found that GDP growth would expand by two percentage points with infrastructure similar to Mauritius, and that investment in road rehabilitation, electricity generation, and water operations and maintenance would provide the highest medium-term returns.’

The funds required for these ventures cannot be raised by government alone. The Government of Kenya therefore hopes to raise the financing for a range of ambitious infrastructure and other development projects through a range of Public Private Partnership (PPP) models: ‘It is currently estimated that there is a funding gap of approximately USD44bn that is needed to address the infrastructure requirements in the next five to eight years. The PPP arrangements, therefore, offers an opportunity for Kenya to attract enhanced private sector participation in financing, building and operating infrastructure services and facilities in order to close this huge funding gap,’ said Ministry of Finance Permanent Secretary Joseph Kinyua in February 2012.

By far one of the most ambitious infrastructure – and PPP – projects is the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) Corridor. It aims to link Kenya to principally South Sudan and Ethiopia through roads, rail, pipelines and a fibre optic cable. While the different component projects, including resort cities, are expected to be handled separately under various government agencies and departments, the PPP model is an overriding factor in its realisation.

The USD21.5bn project will be anchored through the Lamu Port whose first three berths are expected to be ready by 2016 and, due to its good depths of up to 18 metres, will be able to handle Panamax ships, unlike the shallower Mombasa port. The project is largely expected to operate under the Build, Own, Operate, Transfer (BOOT) model. In March 2012, President Mwai Kibaki and Prime Minister Raila Odinga attended a groundbreaking ceremony for Lamu Port. The recent oil find in Kenya’s northern Turkana region has given additional momentum to these plans.

Trying out PPP

Kenya has had some degree of PPP success with the restructuring of the RVR concession in 2010 when Egyptian Citadel Capital acquired 51%, Kenyan TransCentury 34% and Ugandan Bomi Holdings 15% in a 25-year deal with USD287mn investment plan.

But there have been failures too, according to Treasury PPP Director Eng. Stanley Kamau. The Nairobi Urban Toll Road Project, which includes 106 km rehabilitation and expansion of trunk road and bypasses through central Nairobi (including a viaduct flyover through downtown), has not yet materialised. There were a number of concerns for investors, including the USD1.3bn price tag, and eventually the IFC pulled out.

In a World Services Group meeting held in October 2011, Treasury PPP Director Eng. Kamau outlined possible PPP projects in Kenya in different sectors:
  • Several geothermal projects: The most imminent is the 400MW project in Menengai under which Geothermal Development Company (GDC) will develop the steam and sell to an Independent Power Producer (IPP) to produce power. The project’s first phase will be financed by Africa Development Bank (AfDB).
  • Coal mining concession in Kitui: In December 2011, Chinese firm Fenxi Mining Group signed a contract with the Ministry of Energy after it won the contract for coal mining in the Kitui coal fields worth KES290.5m (USD3.5m). Once parliament approves the concession, the firm is expects to commence operations in 2013.
  • Construction of a new container terminal in Mombasa: The project worth KES21bn, with KES16bn being financed by Japan, had initially been scheduled for completion by 2013, but after repeated delays, it is now anticipated to be ready in 2016. It is expected to double the perennially congested port’s capacity and provide some much needed relief with its 1.2mn TEUS capacity. Unlike the current container terminal, the new terminal will be run as a concession, which is expected to increase efficiency and reduce politics, both of which have been cited as contributing to the clogging up.
  • Developing the greenfield terminal of Nairobi’s Jomo Kenyatta International Airport (JKIA) and other airport facilities: On average, traffic at JKIA is expected to grow at 12% for the next twenty years. Originally designed to handle 2.5m passengers, the airport received 6.29m arrivals in 2011. The completion of Terminal 4 in 2012 will ease congestion as it will raise capacity to 9.3m. However, the USD500mn greenfield terminal with a 20mn capacity is expected to enable the airport deliver its part of Vision 2030. The substantial investments are partly expected to be borne by the private sector, although some core investments like runways and security installations may remain the responsibility of KAA. Kenya Airways, which intends to increase its fleet from 37 to 107 by 2021, has floated the idea of participating in the developments as a private partner after the president called for a speedy completion of the projects. The groundbreaking for the greenfield project is expected to be in August with a completion date of 2015.
  • Konza City: This is a flagship Vision 2030 project that is expected to cumulatively cost about USD7bn. The government procured the 5,000 acres on which it will provide basic infrastructure, with more emphasis to ICT related infrastructure, and lease land to prospective investors under a build and operate model. A BPO Technopark and a Science Park are expected to form the backbone of the project. There has been interest expressed from various quarters, including London-based DVK Group Africa Investment Fund. Given its size and complexity, the project struggles with some teething problems, most recently the dispute between Information PS Bitange Ndemo and Attorney General Githu Muigai over the mode of land acquisition. The groundbreaking is expected to be in early 2013.

Other projects include:
  • The Nairobi Metropolitan Mass Rapid Transport System (MRTS): The private sector is to provide the rolling stock for a new 16mm standard gauge railway. Kenya Railways expects to rehabilitate about 160km of rail around Nairobi besides building a new 7km extension to JKIA to cater for a part of the 1.5mn city commuters. The project, to be funded as a PPP, has attracted some interest with Kenya-Uganda railway operator RVR who indicated that they would bid to run the lucrative network.
  • Housing for public servants (50,000 units for the police and 60,000 units for prison wardens).
  • Construction and running of a national data centre.
  • A 5,000 capacity hostel in Kenyatta University (ongoing).

Planning Faster than Legislating?
Currently, PPPs are guided by a subsidiary legislation of 2009 under the Public Procurement and Disposal Act. The existing legislation is fragmented and has failed to provide enough legal guarantees. As a consequence, the private sector has only responded reluctantly to PPP opportunities when advertised.

In December 2011, the cabinet approved the PPP policy and the PPP Bill 2011. The policy is intended to provide the government and its agencies with transparent guidelines on PPP project formulation and implementation. According to the Permanent Secretary in the Ministry of Finance, Joseph Kinyua, the bill, expected to be tabled in April or May 2012, will consolidate all issues relating to PPPs into one law. It will also establish legal institutions to prepare and approve PPP projects, provide a legal basis for agencies wishing to enter into PPP arrangements, and provide a clear approval process for PPPs.

The PPP Bill will
  • provide the legal capacity to government bodies to enter into PPP contracts;
  • create certainty and investor confidence;
  • address legal gaps, remove conflicts and overlaps in law;
  • clarify roles and responsibilities of various bodies and institutions that may have an input to the PPP process;
  • establish legal institutions to prepare and approve PPP projects;
  • reduce negative impacts on risk profile of PPP projects;
  • provide a framework for PPP project cycle;
  • provide a clear approval process for PPPs;
  • provide for a procurement process for both solicited and unsolicited; and finally,
  • establish a Project Facilitation Fund to provide for project preparation funds, viability gap funds and any government subsidies.

However, the bill coincided with constitution implementation bills in parliament and, even though key economic projects depend on it, does not appear very high on the list of priorities. Kenyan legislators are notoriously slow and will be further distracted by campaigning for the upcoming elections, currently anticipated for March 2013.  

World Bank Support to Build PPP Management Capacity
The World Bank’s Infrastructure Finance and Public-Private Partnership Project (IFPPP) was conceptualised to address the various capacity bottlenecks to PPPs success in Kenya. The recent KES11bn (USD130m) financing commitment by the World Bank is directed towards these efforts: ‘The IFPPP project will help Kenya derive greater value for money from the PPP program through better project preparation, better risk allocation, increased transparency, wider quality control, and greater efficiency.’

The project will result in
  • a fully functional PPP Secretariat with the capacity to advise the PPP Steering Committee on the feasibility, bankability and risks of proposed PPPs;
  • an agreed set of operating guidelines for PPP transactions;
  • an increased closure rate of quality vetted PPPs (at least three by the end of the IFPPP project);
  • an improved regime for management of fiscal risks from PPPs and other sources.

Included in the project is also support to Kenya in improving its legal and regulatory environment for PPPs, including a PPP law and regulations consistent with global good practice.

The IFPPP project is expected to commence in September 2012 and projects to be supported include those involving construction, rehabilitation of infrastructure structures and in some cases land acquisition.

Perspectives: Starting Small?
In February 2012, various stakeholders met in a workshop that was intended to look at the process of identifying several bankable projects. In a similar PPP workshop held in April2012, Kamau indicated that a prioritised list of projects that consultants had been working on would soon be released. The PPP arrangements will include long term management contracts, leases, concessions, Build-Operate-and-Transfer (BOT), Build-Own-Operate (BOO), Rehabilitate-Operate-and-Transfer (ROT), or as may be negotiated with and approved by the government.

‘These first mover projects can then be provided with project development funding and/or viability gap funding to support the success of these projects. The government is closely working with the World Bank to develop the necessary support mechanisms and to provide some resources to jumpstart the process, said Kinyua.

The commuter railway line in Nairobi, the operation of the Nairobi by-passes as toll roads and the construction of a port in Kisumu have been mentioned as some of the priority projects. These are relatively small compared to the expected scale of cooperation between the public and private sector in the future and may therefore be useful pilots to test the Kenyan government’s capacity to manage such ventures. The LAPSSET corridor project is largely expected to be a PPP undertaking and the success of the government in handling these initial projects transparently and competently will be indicative of the success of the bigger ventures and would help to instil confidence in the private sector.

The Africa Development Bank (AfDB) has also indicated it would be interested in funding several projects within the larger LAPSSET project in line with its regional support policies. The bank has been financing the expansion of Thika Road with its maintenance, management and operations of toll stations later expected to assume a PPP model. More recently, the bank has provided a loan of USD143m and a grant of USD17.2m for the development of the first phase of a 400 MW geothermal power station in the Menengai steam field. The project has been earmarked as a PPP project.

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