LEGAL AND REGULATORY FRAMEWORK FOR PPPs IN KENYA

Ronoh TUIMISING N., PhD

Legal Expert – PPP Unit

THE NATIONAL TREASURY

3 NOV 2015

WORLD BANK WEBINAR SERIES 2015

Structure / Overview • The Development Context for PPPs in Kenya

• PPP Policy, Law and Institutions

• Key Challenges

• Ongoing Initiatives

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THE DEVELOPMENT CONTEXT FOR PPPS IN KENYA

1.

3

Public Infrastructure

Public infrastructure comprises both economic and social infrastructure.

Inadequate or insufficient infrastructure impedes economic growth, reduces competitiveness, quality of life and loss of productivity etc.

Government’s Role:

Against the economic and social environment of today, the provision of infrastructure becomes not only an investment in economic growth but also a moral obligation on governments.

Needs

Resources (3T’s)Taxes

Tariffs Transfers

Reality 101: The Perpetual Challenge

Where Do We Find the Money?

Central Government transfers

Donors

Private lenders

Revenues from Tax/Tariff

Infrastructure Funding Gap of US$ 2-3 B p.a.

Legacy Issues with Publicly-financed, Publicly-delivered Infrastructure

Infrastructure: Basic for economic growth and improvement of quality of life

completiondelays

costoverruns

poormaintenance

poorproject

selection

poordesign

butoften

affectedby

corruptionconcerns

Viable Alternative

With the country’s infrastructure deficit estimated

to require sustained expenditures of about $2 – 3

Billion per year over the next decade...

Public Private Partnerships (PPPs) can be a major force in bridging this gap, modernizing

infrastructure in affordable ways and in improving the

quality of life among the local communities.

The Hope…• Expansion of resource

mobilisation for faster infrastructure development (quantity, quality, speed)

• Closer identification, monitoring and management of FCCLs

• Contribution to sustainable development

• Faster realization of Equitable Development:

• Public finance working for all

• Procurement of public goods occurring under uniform systems, affording of equality of opportunity, transparency and open competition 10

Thus….Rationale for PPPs in Kenya

Vision 2030 aims to transform Kenya into a

middle income country by 2030.

Heavy infrastructure investment is

thus paramount

Additional funding from

private sector, hence

reduction of funding gap

Reduce Government

sovereign borrowings

Govt. strategy - reduce debt to GDP (ratio) to below 45% in the medium

term

Utilize private sector

efficiency & innovation to deliver public

services

Increase business

opportunities for the

domestic market

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Drivers of a Healthy PPP Market

Finance

Framework

Projects

BALANCE MATTERS! Kenya has a story on each of the three cogs…

PPP Project [ideas] in Kenya – 71 so far…

Analysis18 Transport & Infrastructure13 Edu, Sci & Tech12 Energy & Petroleum13 Environment, Water, Natural Resources

3 Housing, Urban Devpt5 Health1 Interior & Coordination of Nat. Gov't1 Industrialization & Enterprise1 Agriculture, Livestock, Fisheries3 Tourism & Commerce2 ICT

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23No. - Concept stage 13No. - TA Procurement 26No. - Feasibility Study stage 4No. - Tender stage 3No. - Negotiations ongoing 2No. - Operational

Current Status (as at Oct, 2015):

PPPs CAN BE IMPACTFUL…THOUGH NOT A REPLACEMENT OF PUBLIC INVESTMENT PROGRAMMES

1963 - 2013 2013-2017

• GOK development loans stand at USD$18.5Bn– In 100s of not so-well developed projects

• Riddled with all manner of public sector investment and project management inefficiencies

• Plus large revenue leaks

• PPP investment target – USD$22Bn

• In 71 PPP projects in various economic sectors

• Targeting multiplier effects and cross-sectoral development gains and efficiencies 18

KENYAN PPP LAWS & REGULATIONS2.

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The march towards adopting a structured policy and regulatory framework for PPPs in Kenya has been ardous:

Since 1996, and as a result of progressive liberalization of the economy, Kenya has attracted private investments into the country's economic infrastructure sectors including energy, transport, water and sewerage. These investments demonstrated the interest in these sectors by private investors, lenders and operators.

However, the PPP transactions that occurred during that era were undertaken without a governing PPP policy or legal framework.

Regulation of PPPs at the time was by contract and it is this that partly explains why:

Some of the early PPP transactions took longer to be prepared, approved and experienced protracted negotiations;

Key analyses regarding affordability and the value for money were not adequately conducted;

There was uncertainty about the legal process by which contracts should be tendered, procured and awarded; and

Once contracts were executed, significant cases of renegotiations, litigation and arbitrations were witnessed.

History of the Regulatory Framework

Legal & Regulatory History

Until 2009, Kenya did not have a Legal framework for PPPs – such

projects were regulated by contract.

In 2009, the PPP Regulations (2009) were issued under the PPDA, 2005.

Nov 2011, a formal PPP policy was issued articulating the govt.'s

commitment to PPPs and provided a basis for the enactment of a PPP

Law.

8th Feb 2013, the PPP Act became effective.

Section 3, PPP Act 2013:

Applies to ALL processes aimed at procuring a PPP project

agreement

At BOTH LEVELS OF GOV’T

Key Pillars of the Kenyan PPP Legal Framework:

The Constitution of Kenya

PPP Policy Statement Nov. 2011

The PPP Act No.15 of 2013

PPP Regulations (several)

Public Finance Management (PFM) Act, 2012

County Governments Act, 2012

PPP Regulations • PPP Regulations 2014, L.N. No.171 of 19 December 2014

• PPP (County Government) Regulations 2015 (draft)

• PPP (Petition) Regulations 2015 (draft)

• PPP Petition Guidelines, 2014 (in force)

• PPP (Project Facilitation Fund) Regulations 2015 (draft)

TWO CRITICAL NON-

REGULATORY TOOLS

1. FCCL GUIDELINES

2. PPP MANUAL & HANDBOOK

What the PPP Act 2013 Achieves• Defines key concepts, incl. ‘PPP’

• Establishes regulatory and project development institutions

• Including a disputes management system

• Prescribes the PPP Project Cycle – in a sequenced manner

• Articulates stage-specific project requirements

• Creates the framework for assessment of FCCLs arising from a PPP project

• Prescribes procurement methods

• Regulates PPP tender processes, contract award and project implementation phases

• Including minimum PPP Contract provisions

• Makes provision for Government Support mechanisms

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PPPs: The Core Principle• “PPP” is a legislated concept in Kenya

• An “arrangement” (CONTRACT-BASED)• Between a public entity and a private entity• Based on the performance of a PUBLIC FUNCTION• For a CONSIDERATION (user fee, other public-fund based compensation)• Transfers risks

• Effect: a legal relationship• Creates Reliance and contractual expectancy • Gives rise to systems of hard claims (fiscal and financial) on Government

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CONTEXT:

PERFORMANCE OF A PUBLIC

FUNCTION – See s.65(3)

s.23(2)…Projects to flow from a

CA development Programme

the PPP Project cycle… 1. PPP Project

Proposal

2. Feasibility Study

3. Tender Documents

4. Prequalification of Bidders &

Tendering

5. Proposal Preparation

6. Evaluation of Bids & Ranking of

Bidders

7. Contract Negotiation

8. Commercial Close 9. Financial Close

10. Project Implementation

11. OMR Phase

12. Project Close-Out

Both a Procurement and a Compliance Prescription

Procurement Professionals Key to Process Fidelity

and Speed

Political Input?!?

s.60; s.63

s.65

s.64

Before Step 1…

A whole set of activities supporting the identification,

screening, prioritization of PPP project ideas (usually

supported by a sector strategy, a sector diagnostic, or a planned development

programme

Template

Templates

RfQ and RfP Templates

Template

The PPP process in the Kenya is a structured and sequential one with review and approval steps built-in at various stages of a project’s lifecycle:

Gate Keeping Structure (PPP Act 2013)

PPP Institutional Framework

PPP Regulatory Bodies

PPP Project Implementers

i.e. Contracting Authorities

For the successful delivery of PPPs in Kenya, the PPP Act, 2013 establishes a 2-tiered institutional framework i.e.:

Contracting Authority Institutional Framework

• Project Appraisal Team (PAT)

• Prequalification Committee (PC)

• Project Evaluation Team (PET)

• Negotiation Committee (NC)

PPP Node(the only

permanent feature)

PROJECT LEVEL – aligned with PPP Project Life Cycle

PPP REGULATORY INSTITUTIONS – PPP Act, 2013

•

Petition Committee

PPP Unit

PPP Committee

Cabinet/ Parliament

A structured and sequential PPP process, with Gate Keeping reviews built-in

at various stages of a Project’s CycleStep 1

PPP Project Proposal

• Pre-feasibility

• Pre-viability

Step 2 Feasibility

Study Report

Step 3 Evaluation

Report

Step 4Project & Financial Risk Assessment

Report

Step 5 Contract

Execution

Financial Close

PPP Committee Approval*

PPP Committee Approval

PPP Committee Approval

Transaction Advisor

by ContractingAuthority

PPP Committee Approval

Cabinet Approval

*Cabinet Approval of the National Priority List

PPP Procurement Methods – PPPA, 2013Solicited (Competitive) Tender

• S.29(2)

• Aligned to Art.227

• Adopts the elaborate and sequential PPP Life Cycle discussed earlier

• Enables fair price discovery (s.28)

• Efficacy aligned to CA quality

Privately Initiated Investment Proposals

• S.61

• Non-Compete method, recognizes place and role of innovation

• Open to misuse

• Subject to narrow conditions

• Law and practice under-developed

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Optional Procurement

Methods

1. Preliminary Bidders Meeting, s.41

2. Competitive Dialogue, s.45

The Problem with PIIPs Too many suitors – on projects not necessarily within one’s overall development

programme (s.23(2))

No way to ascertain value for money (zero price discovery) – hence Part VIII of

PPP Regns

Difficult to dissociate from corruption (frequently triggered by public officials)

Many require Government support measures (fundamentally problematic under

Art.227)

Hence…..limited public financial support to such projects (draft PFF Regns)

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ONLY 1 PIIP SO FAR

APPROVED…

The Likoni Channel Aerial

Cable Car Project ($51 million)

The (3) Statutory Tests in all PPPs• Value for Money (s.2, PPPA, 2013)

• Affordability (s.2, PPPA, 2013)

• Risk Transfer [optimal allocation]

Reflected in PPP Feasibility Study Requirements…(s.33,PPPA)

1. Project Legal requirements (Performance Standards + Project

DD) – cf: s.43(2)(b, c, d), PPPA 2013

2. Project Technical requirements (Output Specs)

3. Project Social, Environmental, Economic Impact (Quantified)

4. Financial Assessment (affordability, value for money, public sector

comparator assessment)

5. Requires approval of fiscal risks and contingent liabilities by

PDMO/NT

OBJECTIVE:Evidence of clear strategic and operational benefits of entering into a PPP as opposed to normal provisioning

(s.31(2), PPPA)

PPP contracts awarded on the basis of the economic advantage that would accrue to the CA, and the comparative balance between the technical and financial elements of the bid proposals (s.48(3), PPPA, 2013)

Commonly Applicable Statutory Prescriptions• Formation of Project Company and limitations on

ownership changes – s.59

• Disclosure of project information – s.60

• Minimum content of a PPP project agreement – s.62

• Kenyan law applicable to all PPP project agreements – s.63

• Any PPP touching on exploitation of natural resources requires parliamentary approval – s.55

• Amendments or variations to project agreements are subject to Committee approval and PDMO clearance – s.64

• Proper implementation of project agreements (contract management) – s.65 (note: Economic Crimes Act, 2002)

• Petitions: Petition Committee has universal jurisdiction – s.67

• Financial reporting and audit requirements – s.69

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THE LEGAL FRAMEWORK FOR GOVERNMENT SUPPORT MECHANISMS, FCCL RISK MANAGEMENT, AND MANUAL

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Measures and MechanismsSupport Measures• S.27• Guarantees• Letters of comfort• Government undertakings

• Requires FCCL assessment and approval

• FCCL Unit established within PDMO• FCCL Management Framework

adopted and under implementation

The Framework / Mechanism• PPP Project Facilitation Fund (PFF) –

s.68 & draft PFF Regulations, 2015

• Four (funding) Windows• Project Preparatory incl. TA services• Viability Gap Funding• Contingent Liability (source of liquidity)• Unit’s activities

• Institutional Structure• PPPC, OAF, Secretariat

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Sources of Funds for the PFF (s.68)• Grants and donations

• Levies or tariffs imposed on a project

• Success fees paid by a project company

• A-in-A

• Moneys from any other sources approved by the National Treasury (includes a lending window and TA arrangements)

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The (Draft) PPP Manual• Basis: s.7, PPP Act, 2013; work started early 2015

• A Manual and a Handbook: unique needs of Kenya

• Adopts a project cycle outlook, embeds tools/templates

• Has been validated with internal and external stakeholders, under finalization within the Unit prior to release: End, 2015

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The PPP project is a public function = A GOVERNANCE ISSUE

The PPP transaction structure is an agreement = A

CONTRACT

The PPP asset is a financial asset = A FINANCIAL ISSUE

The PPP programme is a resource mobilization strategy = A

PUBLIC POLICY ISSUE

The private party identification process is a procurement

issue = LEGAL AND POLICY ISSUES

In effect: Kenyan law tends to characterise PPPs thus…

REFLECTIONS ON OUR EXPERIENCE & EMERGING CHALLENGES

4.

42

!! The Political Economy !!• Novelty of the PPP ideology: Capacity

• [Lack of] Sector diagnostics

• Quality of the Pipeline

• Devolution (inter-Gov’tal Relations)

• Institutional Quality

• PIIPs

• Accounting

• FCCLs

• Political Input/Strategic Interventions + political calendar

• Local TA Teams

Other Unfolding Challenges• Project land acquisition

• Some land requirements (e.g. Nyali Bridge Project) exceed project cost

• Unavailability in most cases impair and can completely frustrate project closure

• A major trigger for CLs to crystallise

• Project Preparation (PFF a potential answer)

• VGF

• Identification, Quantification & Management of CLs

• Depth of domestic money and capital markets

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Sub-National PPPs• Constitutional Reality: DEVOLUTION

• 47 Counties• Depend mainly on Transfers from National Government; limited budgets; limited revenue bases

• But there are also:• Regional Development Authorities• State Owned Enterprises (national) and county corporations (county governments)

• All constitute sub-national institutions, with power to undertake PPP programmes

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Overview of the Draft County PPP Regs.

The draft Regulations –

1. Establish county-level PPP institutions that mirror, in a simplified manner, the national PPP institutions

2. Split the functional jurisdiction of the County PPP Committee from that of the national government PPP Committee, reserving some national level mandates of the PPP Committee for the national process

3. Prescribe the procurement methods for county PPP projects, which admit of the same ones under the Act: (a) the solicited approach, and (b) the privately initiated investment proposal approach

4. Give clear details to counties on the conditions to be satisfied prior to the execution of a PPP project agreement

5. Ensure that the legal dispute framework is unified, harmonized and stabilized by stating that all county PPP disputes are to be resolved by the PPP Petition Committee

County PPP Bodies

1. County Gov’t PPP Committee

2. The County PPP Node

3. PAT

4. PQC

5. PET

6. NeC

County FCCL UNITS

Challenges with the sub-national PPP Space• Existing PPP Pipeline is heavily

national-government-level focused (very few sub-national PPP projects included)

• The PPP legal process applies to all levels of government – transaction costs can become onerous for sub-national entities (driving negative externalities)

• The draft County PPP Regulations (2015) provide clarity on the institutional and regulatory framework for PPPs in counties

• Nonetheless, counties, and to a large extent, many sub-national entities, face several challenges that undermine attractiveness of PPPs at this level

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The Main Issues• Sub-nationals are frequently

opaque – both institutionally and from a project information perspectives

• Impairs project quality, and depict institutional weaknesses

• Sub-nationals have narrow revenue bases – limiting their project undertaking capacity (affordability)

• Sub-nationals also have narrow capacity to contract (any) debt

• Decision making capacity is low (institutional strength/quality)

• Investor preference for a direct link to the ‘Sovereign’

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What Needs to Change?

• No need for significant shifts in prevailing policy, institutional or regulatory framework to address sub-national PPP challenges

• Critical need: capacity building of sub-nationals, and resourcing the project preparatory facility to improve the quality of sub-national PPP pipelines

• Designing and implementing institution reform and strengthening interventions to address institutional quality issues

• Currently: delivering County PPP Advisory support, and plans to expand these interventions at an advanced stage, with 2No. full time local staffers on county PPP work49

Further PPP Regulatory Reform:

Amendments to the PPP Act: In Nov 2014, the Unit has initiated

discussions with the Kenya Law Reform Commission about possible amendments to the PPP Act (2013);

The Act has received its first amendments, effected through S59 of the Finance Act No.14 of 2015

A draft set of other amendments has been prepared and under discussions

Amendments of Sector Laws when in conflict with the PPP Act: Process is being dealt with at

project level through sector and transaction advisors

Concluding Notes• The Kenyan PPP programme is greatly benefited by a reasonably clear and well-elaborated legal and

regulatory framework

• The statutory PPP institutions are gaining clout and recognition

• PPP disputes are helping instil project discipline amongst contracting authorities (with personal consequences sometimes being visited on individuals) - Compliance is growing, albeit slowly

• The problem of sub-national PPP programmes is mainly one of practice, rather than a lacuna in either laws, institutions or policies: awareness, capacity building, and enforcement is the key

• Sector Advisory work (11 sectors) intended to refocus the pipeline and boost capacity of CAs (improve PPP-readiness and implementation capabilities)

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Questions?

THANK YOU!

E: NTUIMISING@PPPUNIT.GO.KEW: WWW.PPPUNIT.GO.KE ENQUIRIES: INFO@PPPUNIT.GO.KE

STAY IN TOUCH!

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