Kenya: Kenya County Government PPPs

Last Updated: 25 September 2017
Article by Jonathan Brufal and Tom Gray

In accordance with Kenya's policy of devolution and empowering sub-national institutions to procure infrastructure projects that meet the needs of their locality, the Kenyan public–private partnership (PPP) Unit is trialling a number of "pilot" PPPs at County Government level. The first stage of the programme is project feasibility and initial design. Working alongside other advisors, including Kenyan law firm Professor Albert Mumma & Company Advocates, Gowling WLG's experts are supporting one of County Governments and the Kenyan PPP Unit in that process.

In this article written jointly by Gowling WLG and Prof. Albert Mumma & Company Advocates (a leading Kenyan law firm with particular expertise in public sector work), our lawyers analyse some of the opportunities and challenges that sub-national PPP procurement present for the public sector, lenders and developers, and give a brief overview of the relevant background and practical implications of this type of procurement, drawing on experiences from East Africa and elsewhere.

Devolution in Kenya

On 27 August 2010, Kenya adopted a new Constitution, introducing reforms which triggered significant changes to the institutional structure of the Kenyan state. Important political, fiscal and executive responsibilities were devolved from National Government to forty-seven County governments with the objective of increasing the involvement of the Kenyan people in governance and allowing for better supervision and implementation of public policy at grass root level.

A key element of the devolution reforms was the empowerment of County Governments to develop infrastructure projects locally. Pursuant to powers, functions and responsibilities delegated to the County Governments under the County Governments Act, 2012, County Governments can enter into partnerships with any private organisation in accordance with the Kenyan Public Private Partnerships Act 2013.

Sub-National PPP Projects

Several County Government PPP projects are currently planned (and various projects are already at the project feasibility stage). These "pilot" projects include developments in the water distribution, bulk storage, wastewater and solid waste management sectors and are intended to set the PPP model for future projects across a variety of sectors at County Government level.

Gowling WLG is currently advising one of the County Governments in Kenya on local PPP projects in the water sector (including distribution, treatment and storage). An important part of the pilot projects will be tounderstand the framework pursuant to which the County Governments (or other institutions within their control) are authorised to enter into PPP contracts, and how bankable project structures can be created at a local level, considering the smaller public sector balance sheet and potential capacity constraints.

Whilst the introduction of PPP projects at sub national level has opened up a new source of investment for infrastructure and has provided Kenya with a potential solution to overcome the funding hurdles County Governments are typically faced with, the implementation of such PPP projects poses some key considerations for both the public and private sector.

Considerations

Capacity

The complex nature of PPP projects and how they are procured means that they are most successful when the public sector has access to a skilled and experienced project team, who can structure, procure and negotiate the right deal. Whilst Kenya is increasingly establishing a reputation at a national level for transparent and efficient PPP/IPP procurement, there has not been as much activity at sub-national level.

There is a risk that County Governments will therefore face some capacity and resource constraints when procuring PPP projects. This can (and is) being mitigated by (a) the Kenyan PPP Unit playing a central role in the project appraisal and feasibility process (as it is likely to do in any subsequent procurement), thereby providing valuable advice and knowledge transfer to County Government teams; (b) the provision of advisory and management resources direct to the PPP Unit, County and National Government from organisations such as the World Bank, which is supporting the continued implementation of the Kenyan PPP programme; and, (c) the allocation of national and donor funds (such as financial support from the World Bank) for the purposes of engaging experienced external consultants and transaction advisors, to help build capacity at a local level and advise on "best practice" project structuring, procurement and documentation. Successfully procuring a small number of (relatively straightforward) projects at County level and then pointing to this track record when expanding the sub-national procurement programme will help ease capacity concerns amongst bidders in the future.

Size of project

In order to merit being procured as a PPP (given the required time investment and expenditure required) an infrastructure project needs to be of a certain capital size or "value" to its beneficiaries (and indeed the Kenyan PPP Regulations recognise this by including certain financial thresholds in the PPP approval process). The capex of the project and its estimated cash flows will also be a consideration for investors when deciding whether to bid for a project.

By their nature County Government projects are unlikely to involve the level of capital expenditure seen on IPPs such as the Olkaria geothermal plants, or the national roads PPPs currently in procurement. However, that is not to say that smaller or sub-national projects cannot be packaged as PPPs in a manner that means they are economically beneficial to the public sector and commercially viable for investors. Several other countries have procured regional or local authority projects, and Rwanda recently procured a series of small to medium sized capex projects as part of its Transport Logistics PPP Programme, which we advised and reported on here.

County Governments can innovate around this issue by "bundling" a number of smaller projects in their county into one (for example, extension of water networks, rehabilitation of existing facilities and some efficiency improvements could be procured as one "network improvement" project). Counties can also investigate opportunities for cross-County cooperation to create larger projects with economies of scale. However, to do so will require Counties to collaborate in the planning stage and potentially form contractual partnerships to implement projects.

Creditworthiness

A critical consideration in any PPP is the ability of the contracting authority to continue to meet its financial obligations pursuant to the PPP agreement. Often in emerging markets, developers and their lenders require credit support from the national government (usually through the national treasury or ministry of finance) and/or multi-lateral or development institutions (such as MIGA) in order to "de-risk" the project from a debt perspective. Kenya has recognised this and has implemented a Fiscal Commitments and Contingent Liabilities (FCCL) management framework, in order to provide support and guidance to procuring authorities when they are structuring PPPs and considering guarantees and financial liabilities, and a road map to obtaining the correct advice and approvals.

Given the comparatively smaller balance sheets of local governments as against the national government, developers and their lenders will be interested to understand the ability of a County Government, or an institution which it controls, to continue to make payments to a concessionaire or contractor (and how such payments will be guaranteed, whether by the relevant County Government or the National Government).  Kenya is currently going through a process of reviewing and potentially revising its credit support arrangements, as we reported here.

Transition

Devolution has triggered significant political change in Kenya, and has heralded a new era of decentralised authority. Whilst key legislative documents, such as the Constitution and County Government Act set out the core legal principles governing the transition of relevant powers to County Government, relevant sector law remains in the process of being updated and implemented in order to provide the clear framework that will support successful PPP procurement at a County level.

One such area in which legislative change is required to marry the relevant sector law with the principles of devolution is the water sector. Pursuant to the Water Act 2016 there have been various institutional changes to the sector's central committees, regional boards and regulators. Responsibility that previously sat with local authorities now sits with County Governments and the licensing arrangements pursuant to which the local Water Service Providers are authorised to provide water services and collect user fees have been amended. The practical implications of these changes are still filtering through, and will likely be further clarified as possible PPP projects are planned and procured.

Whilst each of the factors outlined above merit consideration, it is clear that Kenya (and indeed East Africa) is "open for business" in terms of infrastructure development, particularly through PPPs. It is apparent that national institutions are equipping themselves with the skills, advisory support and legislative framework to procure a pipeline of important projects that will aid economic development in the region. Our lawyers are familiar with Kenya and East Africa, and through relationships like the one we have with Professor Albert Mumma and Co Advocates, have access to first rate in-country advice and experience.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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