The problem with PPP deals
By Domnic Omondi
| March 2nd 2021
Motorists who use Mombasa Road may be irked by the current traffic snarl-ups as a result of the ongoing construction of the monumental Nairobi expressway.
But some take comfort in the much-anticipated smooth ride on the 27-kilometre highway when it is completed by end of the year. But this blissful drive might come at a high cost.
Although traffic might get lighter after the completion of the expressway, which will run from Westlands to the Jomo Kenyatta International Airport (JKIA), the pain for the motorists will not necessarily abate. Instead, it might come in a different form.
To use the road, motorists will be required to pay China Road and Bridge Corporation, the contractor, user fees for 27 years.
Known as a toll fee, this charge has already been fixed and was only revealed later after the contract had been signed and construction was underway.
Analysts fear the fee could be prohibitive for many road users, forcing them to avoid the expressway altogether.
Should this happen, the contractor will be left holding on to an "unbankable" project.
Nonetheless, taxpayers will have to pay for the lost revenue as the government books this as a “contingent liability,” a loss that may occur depending on the outcome of an uncertain future event.
Toll fees are just one of the ways a cash-strapped government can have its cake and eat it - incentivise the private sector to participate in the construction of projects that are critical for economic growth but which the government cannot fund as it has run out of fiscal space.
It is a form of public-private partnership (PPP), which President Uhuru Kenyatta’s government has identified as the panacea for the growing debt crisis.
Since 2013, the government has incurred massive loans to build railways, roads, seaports, airports, energy projects and many other infrastructure projects.
However, this has come with a cost of increased debt service costs, which have eaten into the State's tax revenues, with the bulk of government revenues being set aside for the repayment of debt.
Fearing that continued accumulation of debt might lead to a financial crisis, with the possibility of the country defaulting on payment of its loans, the government turned to PPPs.
There are 41 PPP projects in the pipeline, from roads to college hostels and energy plants. They are worth around Sh800 billion. Another 64 PPP projects are either in the pre-procurement or procurement stage.
A big chunk of the projects, 39, whose agreements have already been signed is power projects. Only two are road projects.
Besides the Sh60 billion expressway, another road project under the ambit of PPP that has already been signed is the Road Annuity Programme, which will cost Sh10.7 billion.
The annuity programme involves the construction and rehabilitation into bitumen standards, the roads in the 90.55km stretch of Ngong-Kiserian-Isinya and Kajiado-MashuruIsara.
So determined is the government about the success of this public financing model that President Uhuru recently appointed Christopher Kirigua as the new PPP Director-General.
In its post-Covid-19 Economic Recovery Strategy, the National Treasury has projected that it will conclude PPP projects valued at Sh200 billion.
The projects to be implemented are in the transport, energy, health, housing and manufacturing sectors.
In 2018, just after the President had unveiled the ambitious Big Four agenda, Treasury officials unveiled what they hoped would be the way out of this quagmire. In unveiling the Public-Private Partnership (PPP) Disclosure Portal, the Treasury mandarins noted that PPPs were the country’s saviour in the face of mounting debt.
The country was just coming from an election, with poll-related expenditures pushing up the government's budget for the 2016-17 financial year.
At the time, the budget deficit - or the difference between spending budget and tax revenues, which is plugged using borrowed cash - had widened to 8.4 per cent of the gross domestic product (GDP) or total economic output.
Increased debt accumulation saw relations between Kenya and the International Monetary Fund (IMF) grow strained after the latter discontinued a Sh150 billion precautionary credit facility. Without the fiscal space to continue borrowing, the government turned to PPPs to continue with its mega projects.
The longest experience Kenya has had with PPP is in power, where independent power producers (IPPs) have signed power purchase agreements with State-owned electricity distributor Kenya Power (KP).
But this has not gone according to plan. Most of the IPPs have been generating power using expensive diesel, a cost that has been passed on to consumers whenever the price of the fuel goes up.
In 2016, President Uhuru called for the review of some of these power purchase agreements, noting that they might have been signed in a cloud of obfuscation that resulted in a heavy cost to Kenya.
“We must also ask ourselves, are we also negotiating with our independent power producers in a transparent manner?”
Just as structured contracts have led to an increase in the cost of electricity, analysts fear this can also be a likely pitfall in the road tolling system.
Lack of transparency is just one loose end in the PPP Act, 2013 - the legal framework that underpins PPPs in the country, according to Johnson Mwawasi, the CEO of Lean Africa.
Mr Mwawasi, while insisting PPPs will help the country to revitalise and modernise its infrastructure, decried the fact that the legal framework does not offer a good disclosure system.
"Information is thus not availed to the public on, for example, the reasonable rates,” said Mwawasi, noting that this is a recipe for a crisis in case users have no capacity to pay.
The government acknowledges the existence of these lacunas and has promised to amend the PPP Act to remove unnecessary approvals and redundant processes.
It also plans to restructure and strengthen institutions responsible for implementing PPP projects.
On Thursday last week, the Public-Private Partnerships Bill, 2021 was among the bills that the Cabinet approved to be transmitted to Parliament.
Jason Braganza, an economist who also works for African Forum and Network on Debt Development (Afrodad), an NGO that champions debt relief for developing countries, said Kenya will pay heavily for the toll.
“A toll is like a fuel levy; it is a hidden tax. The rate at which they set the fee will be a huge disincentive for road users,” said Braganza, noting that this was the fate the befell the Gauteng Expressway in South Africa.
The problem, perhaps, is how a toll fee is designed. The government bears all the risk, the private investor carts away all the profits, at least in the short-run.
Should the investor not recoup their investment, they will simply ask the government to compensate them for the loss, a situation that has made controversial economist David Ndii to describe tolling as an “off-budget debt.”
To attract investors, the government in the Post Covid-19 Economic Recovery Strategy, dangled “partial risk guarantees and indemnity guarantees” in addition to a government letter of support.
Meanwhile, the government says it will speed up the approval of PPP projects to increase private investment as part of its wider strategy of jump-starting an economy that has been hit hard by the Covid-19 pandemic.
The government also acknowledges the need to make some of the PPP projects environment-friendly to attract green funding. To this end, the Jubilee administration intends to work with KCB Bank to support local companies to access the Green Climate Fund (GCF).
KCB is the only local private bank that has been accredited by GCF, a global platform whose mission is to help developing countries reduce greenhouse gases by offering funds to be invested in low-emission and climate-resilient development.
Ironically, the largest PPP project so far is the yet-to-be-constructed coal power plant in Lamu County, which has been the target of numerous court cases and a punching bag for environmentalists.
As a result, some financiers have backed out of the Sh218 billion project, citing the dangers of coal as a dirty source of power.
That is why Mwawasi reckons it is time to review the project pipeline. Projects such as Lamu Coal, he said, will not attract credible investors.
"There has been a lot of negative publicity around that project, there are court issues so I don’t think it is doing us a favour to still have that project in the pipeline.”
Mwawasi said several projects have become unattractive for PPPs, having been there for more than five years.
“In my opinion, they need to be thrown out,” he said, adding that there is a need to bring in new projects.
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