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We must scrutinise projects funded through public-private partnerships

BUSINESS
By Patrick Muinde | Mar 19th 2022 | 5 min read
By Patrick Muinde | March 19th 2022
BUSINESS

A general view of the Nairobi Expressway along Uhuru Highway, Nairobi. [Elvis Ogina, Standard]

Last Monday but one I visited a doctor for a check-up. In the small chit chats in the consultation room he learned I have had a short stay in Beijing. Without any preamble he asked if the talk of Kenya being colonised by the dragon nation bear any credence. The question clearly implied the perceived captive Chinese debts linked to key infrastructure projects in the country.

Coincidentally, we are in the process of adopting the Public Finance Management (National Roads Toll Fund) regulations of 2021. This effectively operationalises the Public Roads Toll Act, Cap. 407 of 1984, as amended by the Finance Act of 2020. This permits the minister to impose toll charges for motorist on green-fields (new roads) and brown-fields (existing roads).

Specific roads to be tolled are those deemed to be commercially viable. The regulations are obviously timed to facilitate the tolling of the Nairobi Expressway due to be completed in March/April 2022. The project has been done under a public-private partnership (PPP) arrangement with Chinese contractors and project financiers. The PPP Knowledge lab indicates there are currently 34 active PPP projects in road, electricity and ICT sectors with a total investment estimated at $4.769 billion (Sh543.7 billion) at current exchange rates. Thirty-nine PPP projects have been initiated since 1990. Majority of these projects are on energy and their role on cost of our electricity bills is under public scrutiny now.     

Financial re-engineering

At a technical level, PPP contractual arrangements can be as complex as any project under them. They are financial innovations to mobilise resources for accelerated economic growth and development. The central purpose of PPP arrangements is to bring private investors to participate in the provision of public goods and services. The primary motivations by governments to rope-in private actors into public projects are to increase investments (attract private capital), reduce cost (private sector effectiveness/efficiency) and access expertise.

As a matter of necessity, the private sector is forced by market forces to innovate and build competitive advantages on costs, productivity and customer experience. On the contrary, governments are bureaucratic systems that mostly enjoy monopoly power in the goods and services they offer. Taxes, levies, fees and other sources of revenue to the government are mandatory contributions with legally enforceable sanctions in case of default. Thus, for public entities to attain private sector effectiveness, they must be intentional or adopt private-sector innovations.

The key challenge in structuring PPP contracts is on the alignment of the interest of the private investors with those of ‘public good’ that public entities are obligated to maintain. Thus, this conflicting interest is a major hurdle for any government that seeks to utilize PPP innovations responsibly and sustainably. Private sector rules are dictated by returns on investment/profits while the public sector is driven by broader interests like obligations under basic human rights, inclusive growth and development, social welfare, national and mutual interest with other countries.

For a project to be eligible for PPP, it must be commercially viable, technically sound, the existence of institutional capacity, legally and environmentally compliant among any other specified criteria. Additionally, the private investor must demonstrate the capacity to raise requisite funding, experience and commitment to meet their contractual obligations to execute the project without any undue delays.

Appraising our case

Given this basic threshold for PPP to be beneficial to the economy, the logical question to ask is whether as a country we are appropriately suited to go this route. If so, could there be risk that may negate the demonstrable benefits?

Enabling legislations notwithstanding, PPPs social-economic risks can pose a huge danger to the inclusive growth and intergenerational prosperity of a nation. Without supporting integrity and value-based culture within the hierarchy of government and political elites, PPP is the easiest route to mortgage a country and/or lose sovereignty.

Three critical elements must be taken into account before we dance to this wonder baby in our public resource mobilisation strategy. There is demonstrable evidence of very high risks for each of them.

One, transparency and accountability – given the commercial interest of private investors, PPPs as a matter of necessity demands higher levels of probity on the part of the government and her officers. A good case in point is the Nairobi Expressway. While the project is due for completion, there are very scanty details about the contractual obligations of either party.

For instance, the user fees (toll charges) remain vague; the local partners to the Chinese contractors if any and their beneficial interest remain unknown. The actual project cost has been a moving target without any proper public disclosure. At initiation, it was reported to cost Sh65.2b. In September 2021 the cost was varied by an additional Sh7.6b. Now, days to handover, new information has emerged that the project has been pegged at Sh87.9b.

These variations translate to Sh22.1b or 33.9 per cent of the initial project cost. The Toll regulation in Parliament subjects PPP contracts to existing legal frameworks. Section 139 (4)(c) & (e) of Public Procurement & Asset Disposal Act, 2015 restricts project variation costs to 25 per cent of the initial contract price. Variations beyond 25 per cent are to be tendered separated as per Section 139 (6). Such significantly huge variations coming in the dying months of the project stinks to the heavens!

Commercial viability

Two, commercial viability – it is an open secret that the majority of our megaprojects are vendor-driven. This poses a mortal risk to the commercial viability of these projects. A good case study is the SGR project touted to turn into profitability by 2019, though not exclusively under a PPP framework. Despite official denials, credible evidence has filtered into the public domain that taxpayers continue to underwrite differential operating costs compared to revenues generated. The PFM (National Roads Toll Fund) regulations, 2021 opens a window for taxpayers to take the tap for any short-falls through normal budgetary allocations (Reg. No. 14(b)). The Finance Act of 2020 removes the oversight role of the National Assembly as provided in Cap. 407 by deleting Sections (4A)(4 & 5)).

Thus, all the authority to conceptualise, procure, contract and administrate toll funds have been vested in the contracting entity, the PPP Directorate and the executive committees established under the PPP Act 2021 and the National Treasury. This eliminates any checks and balances prior to PPP commitments.

Finally, unambiguous standardised contract documents –if we must go the PPP way, then it becomes a solemn duty and responsibility to enforce well thought out, published and publicised PPP contracting norms and standards. This must exclusively specify minimum acceptable thresholds for any PPP; costs, risks and benefits sharing formulae; dispute resolution mechanisms; exit clauses for either party; and only subject to Kenyan laws and/or those that conform to a constitutional democracy like ours.                       

 

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