A REVIEW OF THE PUBLIC PRIVATE PARTNERSHIPS ACT NO 15 OF 2013

INTRODUCTION

Public Private Partnership (hereinafter referred to as PPP) is the partnership between the government and the private sector which is aimed at financing, designing, implementing and operating public sector facilities and services.  It allows the public sector to contract with private sector. A PPP is a Performance‐based contract under which the private Sector supplies public services over time and is paid by the public sector, end user or a hybrid of both. Output is specified by the Contracting Authority while input is the responsibility of the private sector.

Under the PPP contract:

• The Government will retain total strategic control on the service
• The Government will secure new infrastructure which becomes Government assets at the end of contract life.
• Project and performance risks will be allocated to the party best able to manage or mitigate.

The Public Private Partnership Act, No. 15 of 2013 (hereinafter referred to as the Act) is an Act of Parliament which is designed to provide for the participation of the private sector in the financing, construction, development, operation, or maintenance of infrastructure or development projects of the Government through concession or other contractual arrangements. In addition to this, it also provides for the establishment of the institutions to regulate, monitor and supervise the implementation of project agreements on infrastructure or development projects and for connected purposes.

Historical background of the Public Private Partnerships Act

Over the years, Kenyans have expressed frustration at the perceived inefficiency of government departments and public bodies in delivering services. These concerns are especially prevalent in cases where such public bodies enjoy a monopoly. It has been suggested that, given a chance, private bodies could deliver more efficient services, sometimes at a cheaper cost. This rationale led to the enactment of the Public Private Partnerships Act.

This Act was assented into law on 14^th January, 2013 and commenced operation on the 8^th February, 2013. This law was adopted in line with the national development program called “Vision 2030”, which is currently implemented in Kenya.  This plan aims to transform Kenya into an “average-income country”, particularly through the realization of key projects that require important funding, which, in practice, cannot be fully supported by the Government.

The following factors necessitated the enactment of this Act:

• The increased demand for quality and affordable services from citizens.  These services include, but are not limited to, transport, water and sewerage, telecommunications, power and social services.
• The need to reduce the funding gap for infrastructure which is estimated at USD 40 billion over the next eight years.
• The need to provide a new source of investment capital for required infrastructure projects
• The need to reduce government sovereign borrowings and associated risks
• The need to drive the creation of local, long term funding market
• The need to utilize efficiencies of the private sector in running public services
• The need to expand the economy and stimulate job creation 
• The need to increase quality of public services to the Kenyan citizens. 
• The need to guarantee continuity of investments even after a political transition, ending past cases where incoming governments would nullify old contracts in favour of the regime's associates.

Implications of the Public Private Partnerships Act

The Act provides an institutional and regulatory framework for public private partnerships in Kenya. It will regulate the process of engaging private parties and the manner in which public private partnerships are conducted so as to ensure the provision of high quality facilities and services. It also provides a comprehensive framework for carrying out public private partnerships and seeks to replace the existing regulations which are considered to be largely inadequate.  The Act will further aid in:

• Providing a legal capacity for public bodies to enter into PPP contracts.
• Creating more certainty and investor confidence.
• Addressing legal gaps and remove conflicts and overlaps in the law; (avoid the need for piecemeal amendments).
• Providing specific procedures of selection and contracting more suitable for the PPP mechanism.
• Ensuring that investor selection is done in a transparent, fair and competitive manner.
• Overcoming procedural, legal impediments and difficulties that would have been faced by the government to implement public private partnership procurement.
• Introducing of funding into Kenyan legislative framework for procurement

All these will help facilitate growth and development both at the national and county levels of government.

Institutions established under the Act

The Act establishes elaborate structures for determining whether a project is eligible for a PPP. For a project to qualify, it would have to be considered and approved by the following institutions:

1.       PPP Node

A contracting authority must establish a PPP Node if it intends to enter into a PPP arrangement. The PPN node is headed by the accounting officer of the contracting authority and consists of the following personnel: financial, technical, procurement; and legal.

The functions of the PPN node include:

• Identification and screening of projects
• Preparation and appraisal of each project agreement to ensure viability
• Ensuring parties comply with the PPP Act
• Undertaking tender processes
• Monitoring the implementation of the project agreement

2.       PPP Unit

The PPP unit is to be established under the State Department of Finance. It consists of a director; and such staff as the cabinet secretary, in consultation with the director, considers necessary.

The PPP unit acts as the secretariat to the PPP Committee. Its functions include:

• Conducting civic education; 
• Providing advice to contracting authorities; 
• Making recommendations on the approval or rejection of projects prior to submission to the PPP Committee; 
• Reviewing and assessing requests for government support

3.       PPP Committee

This institution replaces the PPP Steering Committee under the Privatization and Public Procurement and Disposal Act (No. 3 OF 2005).  Persons appointed as committee members of PPP Steering Committee are members of the PPP Committee.

The PPP committee comprises; Principal Secretary for Finance, Principal Secretary responsible for Government Co-ordination, Principal Secretary for Lands, Principal Secretary responsible for County Government,  Attorney General, Four persons who are not public officers (appointed by the Cabinet Secretary), The Director of the PPP Unit

The role of the PPP committee is to:

• Formulate policy guidelines on PPPs
• Review legal, institutional and regulatory framework of PPPs
• Approve project lists submitted to it by the PPP Unit
• Approve project proposals submitted to it by a contracting authority
• Ensure each project agreement is consistent with the PPP Act 
• Ensure approval and fiscal accountability of financial support granted by Government

The PPP Process

Minimum Contractual Obligations of a PPP

• Description of services, goods or works
• Ownership of the project’s funds and assets
• Authorizations, permits, and approvals;
• Tariffs and method of adjustment
• Payment arrangements and penalties;
• Dispute resolution mechanisms
• Risk allocation in respect of change in law, force majeure;
• Termination and compensation;
• Direct agreements and step-in rights of lenders where appropriate; and
• Asset handover provisions.

Track Record of Kenya’s PPPs

• Mtwapa and Nyali Bridges Concessions signed in 1959; Charges in 1984 Pedestrians (10cts), cattle head (20cts), motor cycle(50cts),salon (sh. 2.00), w/wagon (sh. 2.50), lorry (sh 4.00 -7.00), bulldozer (sh.10).
• Westmount 46 MW (not active), Iberafrica 1997 (56MW and 53 thermal power plant), The 74 MW Tsavo/Kipevu IPP, 2000, Orpower -Olkaria III 2000/2008(48MW Geothermal Plant), Mumias (34MW power plant); 90 MW Rabai Independent Power Project in 2009, Mumias 26 MW cogeneration.
• KPLC , 2005, 2yr management contract
• Port of Mombasa Grain Terminal – BOO, 1998;
• JKIA – Cargo Terminal, 1998 
• Kenya – Uganda Railways 2006, BOT
• Malindi water utility, 1999 – 5yr management contract 
• Nairobi Urban Toll Road , 2009 – Failed

Opportunities Arising From the Public Private Partnership Act

There are several opportunities that arise from the PPP Act in Kenya and I classify them as hereunder: -

1.       Opportunities the Public Private Partnership Act Provides for Investors: -

• Risk mitigation(Letters of Support, Guarantees (Demand/Traffic Guarantee), subsidies; 
• Inflation and interest rate indexation; 
• Performance monitoring mechanisms; 
• Direct Agreement and step-in rights to Lenders; 
•  Compensation for termination/ extra-ordinary events/ direct impact of change of Laws/political event; 
• Establishment of a Viability Gap Fund to support economically viable projects which may not be financially viable without Government support; 
• A clear, transparent, fair and competitive process for PPPs, covering Project identification, selection, prioritization, preparation, appraisal, procurement , approvals and procurement of project Advisors; 
• A clear institutional framework for development and approval of PPP projects – Cabinet, PPP Committee, PPP Secretariat, Contracting Authorities and the role of Treasury in fiscal risk management and Contingent Liabilities; 
• Government will prepare bankable projects before going to the market; and 
• Use of Privately Initiated Investment Proposals (unsolicited) method of procurement when there is urgent need for continuity and where there is intellectual /innovation.

2.       Opportunities for Infrastructure Investments 2012-2020

	SECTOR	AMOUNT IN USD M
1.	Energy (power and others)	19,808
2.	Ports	4,800
3.	Roads	9,000
4.	Water and sanitation	4,567
5.	Railways	7,248
6.	Airports	906
7.	Tourism	2,050
8.	ICT	7,850
9.	Local Government	2,000
10.	Housing	2,901
11.	Public Works	1,000
12.	Lamu Port Corridor	3,723
TOTAL NEEDS		62,176
AVAILABLE (GOK – 2012 - 2020)		25,000
FUNDING GAP		37,000

POSSIBLE CHALLENGES IN IMPLEMENTING THE ACT

In terms of best practices, the Government of Kenya has top overcome a number of challenges in the implementation of PPPs. These include: -

• develop and establish strong legal and regulatory frameworks that can clarify the legal authority to grant concessions,
• lack of clarity in the procurement process,
• the contribution from the public authority of assets that can make the project viable
• the rebalancing of tariffs which will make the project viable from a financial point of view.
• lack of guarantees in political commitment to give confidence to the partners to make investments.
• lack of an effective public administration through a dedicated central PPP unit located within Government that can oversee the whole PPP process and has cross cutting authority over all Ministries.
• lack of an appropriate insurance regime for investors involved in PPPs with the government. Indeed, the probability of risk materialization directly depends on the PPP partners’ behavior. Consequently, the risk allocation is dependent on the particular transaction.
• the complexity of PPP arrangements and the high costs involved

CONCLUSION AND RECOMMENDATIONS

This Act 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 issues discussed in this report all raise significant challenges to conduct of successful PPPs.

The complexity of such arrangements and the high costs involved is enough cause for the government to take a careful approach to PPPs. It should also recognize that PPPs pose many of the same problems inherent in procurement or privatization and are not a panacea for development. There is need for the Government to establish clear operational guidelines with respect to: -

• Acceptable forms of PPPs and their prioritization;
• Procedural clarity on the basic steps in establishing PPP projects (conceptualization and initiation);
• Basic approaches to risk allocation, value for money and principles around the provision of guarantees;
• Financial and budget evaluation criteria;
• Approaches to regulation (especially cross-sectoral considerations);
• Parameters for the management of privatization issues (retrenchments, empowerment, etc.);
• Project feasibility appraisal criteria;
• Authorization procedures;
• Recourse procedures and dispute resolution; and
• Treatment of unsolicited bids

We trust that the above will be useful in your decision making processes regarding Public Private Partnerships. However, should you have any further queries regarding PPPs in Kenya, please do not hesitate to contact us at info@stralexgroup.co.ke or on + 254 715 310 677 for clarification.

Yours faithfully,

For: Strategic Legal Solutions Group Limited

Centre for Legal Research & Policy Development – a participating consultancy firm in the SLS Group of consultancies. 

REFERENCES

1.       Constitution of Kenya, 2010;

2.       Public Private Partnerships Act No 15 of 2013;

3.       Koimett, E., CBS, Investment Secretary, GoK, 2012, “Public Private Partnerships in Kenya”

4.     Ong’olo D.O., 2006, Spellman & Walker Co. Ltd., PUBLIC PRIVATE PARTNERSHIPS (PPP) Practice and Regulatory Policy in Kenya, The Institute of Economic Affairs (IEA, Kenya).