Public Private Partnership Act in Kenya

Raising Real Estate Financing via Public Private Partnership in Kenya (PPP)

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Since 2013, the Public Private Partnership Act (PPP) has played a critical role in Kenya’s construction industry. Various real estate companies have been capitalizing on its provisions to secure support and facilitation from the government for their cash-intensive construction projects. (See Real Estate in Kenya – Low Capital Investment Options)

As a result, some even think of Public Private Partnerships as the next booming real estate investment model in Kenya. (Check out this article on the Trends Shaping Up Real Estate Returns in Kenya)

Well, for the most part, it has been smooth sailing for the few that know exactly how to leverage Public Private Partnerships.

But then get this- the accompanying benefits have been so attractive that even fraudsters have tried joining the party too. And perhaps unsurprisingly, they ultimately discovered various loopholes in the PPP act, which they subsequently used to trick the government to issue GSMs for ghost projects.

On the bright side, however, that didn’t last for long because the Kenya Government finally got wind of various fraudulent projects. Consequently, the National Treasury responded in 2018 by shifting its PPP policies to save taxpayers billions of shillings in potential losses.

So, here’s the deal at the moment. Numerous PPP projects in tourism, education, manufacturing, agriculture, health, water, energy, housing, and transport are now facing an uncertain future.

The Government of Kenya is no longer issuing random financial and risk guarantees to back random development proposals. Instead, they want to focus on the few projects that seem to be genuine.

That means your Public Private Partnership proposal has to be solid and airtight if you intend to convince the National Treasury to support your construction project.

And that’s precisely what this post covers. It explores the Public Private Partnership framework in Kenya, its current policies, plus the process of making a PPP proposal. Then towards the end, you get to learn exactly what you need to secure PPP support for your construction project.

That said, let’s begin from the top. What exactly is a Public Private Partnership? And what does the PPP Act in Kenya entail?

What is a Public Private Partnership (PPP)?

Public Private Partnership (PPP) is a special type of agreement between private stakeholders and the government, which fundamentally seeks to facilitate the design, financing, implementation, and running of selected infrastructure projects. Or in simple terms, the government supports your project through a performance-based contract.

But, make no mistake about it.  PPPs do not apply in the construction of privately-owned developments. Rather, the primary goal is to encourage developers to invest in projects that benefit the public.

Now, remember the Roads Annuity Program which was introduced by the cabinet in March 2015?

The Kenya Government studied a successful Private Public Partnership model in India, and then came up with a plan of replicating the whole thing locally.

The principal objective was to build 10,000 kilometers of bitumen-standard roads over a 5 year period. And the projects were supposed to be undertaken by private contractors, who would design, construct, and subsequently maintain the roads for a pre-specified period.

In turn, the Government of Kenya would issue adequate guarantees to help private contractors secure loans from commercial banks at reduced interest rates. Then once the road projects are completed, the government would proceed to repay the private contractors in equal instalments or annuity over a long time span.  

construction of roads kenya

Well, it seemed like a fair deal to both local and international investors. But then it failed terribly and didn’t even take it off as planned because of two major challenges.

The contractors, for starters, were accused of inflating their project rates. Then secondly, they had issues with their balance sheets and overall creditworthiness, which local banks were quick to point out as they rejected the loan applications.

Had the program progressed successfully, it would have almost doubled Kenya’s current tarmac road coverage. And the private developers would, on the other hand, make decent markups. Hence, a win-win for both parties.

So there you have it. That’s pretty much the same concept applied in Public Private Partnerships across all the other sectors. Even low cost housing projects are now a key focus of PPPs, as the government seeks to introduce affordable housing options in Kenya. (See how much it costs to build in Kenya)

What Benefits Can Investors Get From Public Private Partnership in Kenya?

Here are various ways in which the government assists private developers through PPP agreements:

  • Provision of a Viability Gap Fund as part of the Project Facilitation Fund.
  • Compensation in case the construction project is terminated or affected by extraordinary events like legislation enactment, politics, etc.
  • Direct agreement and step-in rights to Lenders.
  • Implementation of a performance-monitoring framework.
  • Loan interest rate and inflation indexation.
  • Risk mitigation through Government Support Measures (GSM) guarantees- Letters of Support and Comfort, Partial Risk Guarantees, etc.

Parties Involved in a Public Private Partnership

Apart from the private investor who acts as the developer, here are other the stakeholders involved in a typical PPP construction project in Kenya:

  • The Attorney General
  • The National Treasury
  • The primary cabinet ministry involved. In this case, the Ministry of Transport, Infrastructure, Housing, and Urban Development.
  • County governments, government agencies, or government parastatals where applicable.

Kenya Government’s Current PPP Policy

There are two approaches you could use to secure a PPP project in Kenya.

The most common one, to begin with, is the government-initiated approach, where interested private entities are usually invited to submit their project bids through PPP tenders.

The Roads Annuity Program is a great example of a government-initiated PPP. As a matter of fact, the Ministry of Transport, Infrastructure, Housing, and Urban Development continues to publish tender invitations for private contractors to take up selected PPP road construction projects.

But, if that doesn’t sound like something you’d be willing to do, the government allows you to come up with your own proposal.

The official legal term for this second option is “privately-initiated investment proposaland this is how it goes. You basically initiate the process by submitting an unsolicited proposal for a feasible PPP project.

Then guess what? It just so happens that privately-initiated investment proposals are not as competitive as government-solicited projects.

According to the 2017 Benchmarking PPP Procurement report by the World Bank, Kenya and Vietnam are the only two countries that do not necessarily subject privately-initiated PPP proposals through a competitive evaluation process.

Yes, that’s right. The government won’t invite other private investors to your party. It’s almost like a solo bid for a construction project.

Well, you might argue that the lack of a competitive bidding framework reduces the government’s chances of obtaining better value for money. Fair enough. But then again, it’s also a good way of encouraging private investors to actively participate in construction projects that benefit the public. The attractive markups here are certainly worth the effort.

There’s one caveat though. A proposed construction project has to be bankable for the government to proceed.

Public Private Partnership  approved

Since 2018, the government has been extremely strict about endorsing privately-initiated projects. Only PPP projects that prove to be strategic, especially when it comes to public interests, will be supported through financial and risk guarantees.

That’s not to say, however, the government is seemingly closing its doors to private investors. Not by a long shot. Rather, the government is apparently sealing loopholes that previously allowed people to abuse the PPP framework for quick fraudulent gains.

At the moment, the issuance of GSMs is governed by not only the Public Private Partnerships Act, but also the Public Finance Management Act of 2012, as well as the Constitution of Kenya. And according to the new GSM policies published by the treasury, a project will only proceed when risks are suitably assigned and resourced according to the risk management plus mitigation capabilities of both parties involved.

The point here is to streamline the whole PPP framework in Kenya and minimize the risks incurred directly by the government.

So, in a nutshell, GSM guarantees do not come automatically anymore. You have to conduct due diligence and then prepare a comprehensive report if you want to convince The National Treasury to provide proper guarantees that would help you secure funding.

What You Need To Secure Public Private Partnership from the Government of Kenya

Here are the precise documents you need for the National Treasury to give your PPP construction project a nod:

  • Comprehensive Feasibility Study Report – Going by the numerous feasibility studies Integrum has conducted for various PPP projects, we’d advise you to consider this as the most important part of the proposal. The government will countercheck even the tiniest details to assess the project’s viability. So, ensure the study is extensive and your accompanying report analyzes all the critical variables in detail.
  • Due Diligence Report – A contracting authority is expected to review your credentials and then prepare a report stating that you’re indeed an expert in handling similar construction projects.
  • Environmental and Social Impact Assessment Report
  • Initialed Project Agreement
  • Draft Letter of Support
  • Contracting Authority CertificationThe contracting authority should also certify and confirm that your proposal is fully compliant with all the GSM requirements, and is aligned with a specific government development plan.

Most Importantly, Remember…

The feasibility study report is the main element here. This is what will make or break your case. So, take your time and select an experienced team of professionals to study all the project variables comprehensively, and prepare an accurate report to back your proposal.

Otherwise, feel free to reach out to us if you have any questions regarding the Pubic Private Partnership application process in Kenya, particularly when it comes to construction projects.

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