KENYA PPP DIRECTORATE TO BECOME THE KEY DRIVER OF PPP PROJECTS IN KENYA: A DETAILED LOOK AT KENYA’S NEW PPP LAW
Public private partnerships (PPPs) have long been proposed as the answer to Kenya’s ever-widening infrastructure gap. There was therefore optimism when the Public Private Partnerships Act, 2013 (2013 Act) was enacted and the role it would play in helping the country meet the demand for infrastructure through public private partnerships. However, the implementation of projects under the 2013 Act has frequently been frustrated by the lengthy, inflexible, expensive and inefficient processes and procedures under the 2013 Act. This necessitated a review of the 2013 Act, which culminated in the enactment of the Public Private Partnerships Act, 2021 (the New Act).
The New Act repeals and replaces the 2013 Act with effect from 23 December 2021 (the Commencement Date).
The New Act is a significant step in the right direction. We commend the PPP Directorate, under the leadership of Mr. Christopher Kirigua, OGW, for the steps they have taken to reinvigorate PPPs in Kenya, including leading the development of the New Act.
Below, we have highlighted some of the key issues arising under the New Act:
- The impact of the New Act on PPP projects which were still in the tender or negotiation phase as at the Commencement Date
The savings and transitional provisions under the New Act do not preserve ongoing tender proceedings where a project agreement had not been entered into by a contracting authority and a private party.
Therefore, all ongoing tender processes under the 2013 Act are annulled as of the Commencement Date and will have to be reinitiated under the New Act. This includes projects where the private party had submitted a privately initiated investment proposals to a contracting authority but in respect of which no project agreement had been signed.
- The impact of the New Act on ongoing PPP projects where a project agreement has been signed
The transitional provisions in the New Act provide that any project agreement that had been entered into by a contracting authority and a private party under the 2013 Act shall be deemed to have been entered into under the New Act.
Given that there is no distinction under the New Act between projects where the project agreement is effective and those that are still in the process of attending to the conditions for the effectiveness of the project agreement, our understanding is, therefore, that any PPP project agreement duly signed before the Commencement Date remains valid and will be managed and implemented pursuant to the New Act.
We would, However, recommend that any private party which has entered into a project agreement undertake a review of the project agreement to ensure that the agreed contractual provisions comply with the New Act. It is unclear at this point whether existing project agreements will have to be varied/amended in order to comply with some of the requirements of the New Act.
- Commencement of the Project after execution of the project agreement:
Under the New Act, construction of all projects must commence within 12 months after signing of the project agreement. Failure to do this leads to an automatic termination of the project agreement with no liability to the contracting authority or to the government.
This will apply to all signed project agreements that are not effective, although it appears to ignore the fact that failure to commence the project may result from a default by the Government or the Contracting Authority to satisfy certain conditions precedent.
This is a very aggressive timeline and does not reflect current market realities with respect to the financing process for PPP projects. This timeline will have to be re-visited by legislators and the PPP Directorate, or parties will otherwise have to progress financing for projects at a relatively early stage in order to ensure that this timeline can be met.
- Duration of PPP arrangements:
The New Act provides that a contracting authority shall not enter into a PPP arrangement for a period exceeding 30 years. It is not entirely clear if all PPPs, including signed project agreements, are capped to 30 years since the New Act goes on to state that the PPP Directorate may extend the tenure of a project agreement subject to the approval of the Attorney General and the PPP Committee. We hope that this will be clarified by the PPP Directorate in guidelines to be issued in due course.
- Application of the Public Procurement and Disposal Act, 2015 (Procurement Act):
A project company that uses public assets is considered a public entity for purposes of the Procurement Act and is required to undertake its procurements in accordance with the provisions of the Procurement Act. The New Act has, however, clarified that project companies that are fully financed by a private party are exempt from the provisions of the Procurement Act. This is a welcome change as projects financed entirely using private funds will now not be subject to the inflexibilities under the Procurement Act. That being said, any project which contains a public entity as a shareholder and utilises public funds as part of its capex or op-ex will also be subject to the provisions of the Procurement Act (including with respect to the use of open/competitive tendering in procuring goods, works or services).
- Local content:
The New Act introduces local content requirements for all PPP projects. While it is expected that guidelines or regulations will be issued in due course in relation to the local content requirements, we would recommend that parties to a project agreement that has been signed consult with the PPP Directorate on how to ensure that they comply with the New Act on this point.
- Procurement methods:
The competitive solicited bid process is still the default procurement method, but the New Act has further enhanced this process by codifying the competitive dialogue process.
Privately initiated investment proposal has been renamed to “Privately-initiated Proposal” (PIP). The New Act now provides a clearer process and path for the implementation of PIPs with more definite timelines. Worth mentioning is the inclusion of a project development stage as part of the PIP process to allow the private party and the contracting authority to further evaluate and develop the project. This appears to be a direct response to concerns raised by the public sector that private developers were submitting attractive proposals that were not sufficiently developed to enable contracting authorities make an informed decision. Following the project development phase, a project may be abandoned, proceed to direct negotiations between the private party and the contracting authority, or be reopened to open competitive tender.
The New Act has also introduced two new procurement methods, direct procurement and restricted bidding. Both procurement methods borrow heavily from the Procurement Act.
- Duration of PPP arrangements:
As discussed above, when structuring new PPP projects, private parties should note that the New Act provides that a contracting authority shall not enter into a PPP arrangement for a period exceeding 30 years. We anticipate that the ambit of this cap will become clearer once the PPP Directorate issues guidelines for the determination of the duration of project agreements.
- Government Support Measures (GSM):
The New Act is now more prescriptive on when and what GSMs may be made available for projects. Under the New Act, the menu of GSMs has been limited to:
- a binding undertaking;
- a letter of support;(c) a letter of credit;
- a credit guarantee, whether partial or full;
- approval for issuance of partial risk guarantees and political risk insurance; or
- any other instrument that Cabinet Secretary for the National Treasury may, on the advice of the PPP Committee, determine:
Further, GSMs will only be issued:
- where it is necessary to support a project to lower premiums factored for the profiling of political risks; or
- to underwrite approved commercial risks under a negotiated project agreement.
This clarity is a welcome addition as it expands the scope of use of a GSM beyond just protecting against events akin to “political force majeure” and makes it clear that a GSM may be used to backstop commercial risk.
- Success fees and recovery of transaction costs by the Contracting Authority and PPP Directorate:
The payment of success fees to the PPP Project Facilitation Fund is now mandatory for every project that reaches financial close. Financial Close defined as the date when all conditions precedent required to be met to achieve first draw down on senior debt under a project agreement are met. This appears to exempt PPP projects that are not debt financed from the payment of a success fee. The fee is capped at 1% of the total project cost.
In addition to the success fees, the costs of the contracting authority and the PPP Directorate incurred in support of project preparation and procurement are recoverable and payable to the PPP Project Facilitation Fund. This implies that such costs cannot be set off against the contracting authority’s contribution to the project where this is provided for under the project agreement. It is anticipated that guidelines (including appropriate caps on liability) will be issued by the PPP Directorate on the determination of such costs and ideally prescribe a cap.
- Public Participation:
A contracting authority now has a duty to ensure public participation and stakeholder engagement in projects. Regulations are expected to provide more clarity on the scope and form of public participation required.
- Possibility to renegotiate signed agreements:
Where the Directorate determines that there has arisen an imbalance in the distribution of benefits, and for the purpose of promoting the sustained transfer of project linked economic benefits to the citizens of Kenya, the Directorate shall, in consultation with contracting authority, initiate the amendment or variation of the project agreement. This does not give the Directorate or Contracting Authority the power to unilaterally amend the terms of signed contracts but does allow them to formally initiate a process of renegotiation.
- Upside Sharing:
Under the New Act, every project agreement shall make provision for the revenue sharing mechanisms and thresholds between a private party and the Government, where a project’s revenue performance meets and exceeds the target return on investment negotiated under a project agreement. Upside sharing will therefore become a feature of all project agreements going forward.
- New limb to the definition of a PPP:
The definition of a PPP has been expanded to include a requirement that the facility must be transferred back to the contracting authority. This requirement has the unintended effect of making the number of PPP arrangements under the Second Schedule which do not include a transfer back to the contracting authority obsolete. These include Brown field concession Build Own Operate Scheme Rehabilitate Own and Operate, JV partnerships (newly introduced) Strategic Partnerships, Land swaps.
- Other changes worth noting:
- The New Act establishes the PPP Directorate which serves as the secretariat and technical arm of the PPP Committee to replace the PPP Unit. While it may at first appear this to be a simple change in nomenclature, the change is significant in the context of the civil service hierarchy.
- The Director General now ranks directly under the PS to the National Treasury, and the Directorate is a full-fledged department in the National Treasury. It is anticipated that this will allow the PPP Directorate more influence and autonomy in the implementation of its mandate. From an administrative perspective, the New Act has eliminated many of the previous overlaps between the functions of the PPP Directorate and the PPP Committee. The PPP Directorate is now responsible for the day-to-day operations of the PPP framework with the broader oversight and policy guidance obligations remaining at the PPP Committee level. There was a feeling that the procurement process under the 2013 Act required an unnecessary number of approvals. The New Act has tried to speed up and simplify the process by eliminating some approvals and granting the PPP Directorate the power to issue certain approvals with only the key approvals requiring the attention of the PPP Committee. The PPP Directorate is empowered under the New Act to issue binding guidelines on certain aspects of the PPP process in place of regulations by the Cabinet Secretary. This avoids the lengthy process of gazettement of regulations and allows the PPP Directorate flexibility in reacting to market realities and providing direction to contracting authorities and private parties.
- The New Act has established a process for the procurement of PPPs by County Governments that is separate from and less onerous than the national government PPP process. The New Act has, however, retained safeguards to avoid the abuse of this process, including requiring that:
- a feasibility report must be prepared for each project in accordance with the New Act
- the County Government must liaise with the Directorate during each phase of the Project
- PPP Committee approval is mandatory
- Cabinet Secretary approval will still be required where the project requires a GSM or where the project exceeds the fiscal ability of the County Government
The Bowmans Projects team will be keenly following the implementation of the New Act and will keep you updated as and when any new development arise.