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Public private partnerships in Kenya help to fill public services gaps as the government turns to private investment but can they deliver?

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By Ashvin Ramasamy

Non-debt Financing & PPPs

Recent development in the Kenyan economy has sounded the alarm as government spending is approaching dangerous fiscal deficit. To avoid financial crisis, according to the Central Bank, attention has turned to the private sector to support the obligation of public services. Instricially, the relationship between a public institution and a private enterprise comprises a mutual understanding to develop and operate a project with full responsibility borne by the private party. This is termed public-private partnership (PPP), and it is a model that is becoming increasingly popular in African domestic politics.

The financial issues arguably come at a time where the PPP landscape in Kenya is constrained by challenging market factors. Very few bankable projects in infrastructure have garnered little attention from private investors. For example, public water supply has relied mostly on subsidies and donations because market-based tariffs far exceed acceptable levels. That political leaders have already fallen behind in other economic infrastructure sectors the populace would seethe over cost increase. Road construction, for instance, faces prohibitive cost in Kenya. Financing existing and new roads with toll revenue will likely not be sufficient. There is not enough traffic volume on toll-targeted roads. , market-based tariffs exceed the price people will pay if expensive Kenyan road construction projects go through.

The PPP Framework: Space for Improvement

Successful PPP models in Malaysia, Indonesia and Singapore share a bright, common thread: fiscal incentives. Private entities obtain varying degrees of tax breaks or development and expansion incentives. In comparison, Kenya does not offer tax incentives;  in fact, Kenyan-based corporations pay a corporation tax of 30 percent, without the government providing any sort of provision for investment allowances. With the difficulty experienced in drawing and retaining private companies in bankable projects, retooling the fiscal criteria for making PPPs more appetizing is sound. Elsewhere, devolution of powers is an ongoing process that has gained significant traction. However, subnational governments are also feeling the squeeze of indebtedness. In 2017, a legal assessment of the Kenyan PPP landscape called for a robust PPP procurement plan such that subnational officials can negotiate fair-value contracts from private investors. Have counties since been able to streamline PPPs? The answer is negative. Counties believed that devolution from the central government meant free reign on the procurement process. The misguided approach came in violation several times, and in a public communication, the director of the Private Partnership Unit noted that, by and large, PPP proposals submitted were unsolicited and targeted a few select sectors. One can imagine that preference is being given to projects that embrace the wishes of responsible authorities — and not necessarily those of the people they represent.

Poised for Economic Growth

The World Bank in its 2017 Benchmarking PPP Procurement noted strong legal and regulatory capacity, including several dozen projects in the pipeline in line with PPP protocol. Economic growth can be supported with PPPs in several important sectors but looming questions come to the fore.

● Will government-led poor, feasibility studies continue disabling potential lenders from achieving bankable status as has been the case in road construction projects?
Will central governments participate in regional and local policy-making for bettering creditworthiness? This is essential in burgeoning local economies that require central government payments as part of risk protection schemes to attract private investors.
● Can decision-makers strengthen unsolicited proposal requirements and the “single bidder scenario” to attract cost-effective bids but implement a robust screening procedure of qualified bidders?
● Will lawmakers incorporate fiscal incentives in the PPP regulatory framework, creating a welcoming climate for private investors committed to seeing PPPs through?

These questions weigh heavily on Kenya’s Vision 2030, which seeks to transform the nation into a middle-income country with high quality of life for all by 2030. Moreover, the PPP framework will likely be a tool of choice for electrification delivery, namely in the renewable energy sector as development creates a larger appetite for energy supply — starting with the newly struck deal of the 35 megawatt Menengai geothermal power plant.

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