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The Government’s Role in Encouraging Public Private Partnerships in Kenya.
Presented at
World Services Group, African Regional Meeting 2011
held at Hotel Intercontinental, Nairobi, Kenya
PRESENTED BY: ENG STANLEY K. KAMAU
DIRECTOR/HEAD, PUBLIC PRIVATE PARTNERSHIP SECRETARIAT
MINISTRY OF FINANCE/TREASURY
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STRUCTURE OF PRESENTATION
1. The PPP Concept
2. Factors of a Conducive PPP Market
PPP Projects
Financing for PPP
PPP Framework
3. Potential PPP Projects in Kenya
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What is a PPP?
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Outsourcing
• Capitalisation is for the Government Account
• Government buys specific services but retains risk
• Fixed and movable assets typically belong to Government
Privatisation
• State assets sold
• State liabilities dispensed
• Government has Regulatory function only
PPPs
• Private Party:
• Finances (whole or most)
• Designs
• Builds
• Operates
• Government purchases complete service and/or enables business
• Fixed assets belong to Government
Degree of Risk Transfer
What is a PPP?
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A formal agreement between Government
institution and a private party.
Private party performs a public function on
behalf of Govt. according to output specifications.
Substantial project risk (financial, technical,
operational) is transferred to the private party.
Government becomes purchaser/ enabler of
services.
Payment received by private party either:
▫ Fees from government budget
▫ User fees
▫ Some combination of government fees and user fees
Why PPPs? Increase infrastructure stock to promote social
and economic development.
Funding Gap – USD 47 Billion in 5-8 YRs
Efficiency and competitiveness
Fund outside budget (Debt: GDP Ratio = 45%)
Increase and expand business opportunity for private sector
GDP growth resulting in higher taxes for the country
Malaysia PPP Investments - USD 50 Billion
UK PPP Investments - ₤56 Billion
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KENYA - INFRASTRUCCTURE INVESTMENTS 2011-2015
SECTOR
AMOUNT IN USD
MILLIONS
1 Energy (power and others) 19,808
2 Ports 4,800
3 Roads 6,046
4 Water and sanitation 4,567
5 Railways 7,248
6 Airports 906
7 Tourism 2,050
8 ICT 7,850
9 Local Government 2,000
10 Housing 2,901
11 Public Works 1,000
12 Lamu Transport Corridor 3,723
TOTAL REQUIREMENTS 59,176
AVAILABLE FROM GOK (2011-2015) 15,000
FUNDING GAP 44,176
Key Requirements for PPPs Strong Government Support
Appropriate Regulatory Framework: clear, stable and detailed regulation
Well prepared projects
Stable, predictable and reliable revenues
Long-term investors (equity and debt) Positive business outlook: potential for growth, market driven environment, transparency
International market standards: contracts, financing structure, risk allocation, insurance
Creditworthiness of contractual counterparties
Risk – Return balance
Bankability
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Factors of a conducive PPP market
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Finance
Framework
Projects
The projects
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Projects
National planning (Vision 2030)
Sectoral planning (line Ministries)
Budget process Multi-year Medium Term
Expenditure Framework (MTEF)
Sector Working Groups (SWGs)
PPP Pipeline
List of Potential PPP Projects (Not prepared)
Financing available for PPPs
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Equity is readily available Domestic private equity:
TransCentury, Catalyst, Centum, Miliki, Pamoja…
Foreign private equity: Acumen, Actis, Citadel, Leapfrog…
At least 37 PE firms active in Kenya
Deloitte survey: 8 PE firms to invest Ksh2-4 billion in 2011, 7 to invest up to Ksh2 billion in 2011
Plus project developers, high net worth individuals…
Finance
Financing for PPPs
Finance
Banking sector is healthy and growing Total assets at FY 2010: Ksh1.5
trillion (23% annual growth)
Total deposits at FY 2010: Ksh1.2 trillion (28% annual growth)
Pre-tax profits FY2010: Ksh35 billion (42% increase)
Plus IFC, AfDB, EIB, KfW, AFD…
IDA Credit for PDF and VGF under preparation
Source: CBK 2010 Annual Report
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Financing available for PPPs
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Financing constraints:
Project finance lending generally limited to tenors of 7-10 years at most
Domestic banks still building project credit analysis capabilities
Foreign banks prefer hard currency lending
Limited capital market options
Finance
PPP Framework Kenya uses Common Law
which is conducive for PPPs
Existence of strong regulatory framework of utility sectors
Strong Procurement and Contract laws (contracts will be honoured)
Taxation law clear
PPP Regulations (flexible regulations), March 2009 which provides the current PPP framework
Justice systems
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Framework
PPP Framework -Regulations, 2009
Institutions: Cabinet, PPP Steering Committee, Central PPP Unit at Treasury, Nodes.
Process for PPP procurement plus unsolicited proposals
Types of PPP engagements,
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Framework for Risk Allocation Optimal Risk Allocation
Private Party risks
Design, Construction, Operational, Technology, Credit,
Public Party
Political risks, indiscriminately change in law
Both Parties (case by case)
Demand, collection, tariff, force majeure and site risks
GoK is providing Letter of Support backed by WB (PRG and MIGA) – Political event and its effect
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Further Improvement of PPP Framework A PPP Policy and a PPP Bill, 2011
prepared and awaiting Cabinet approval
New PPP Law expected by Dec 2011
Guidelines and processes plus standard docs
Manual/Toolkit
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Why a PPP Law? Provide a legal capacity to enter into PPP
contracts; Create certainty and investor confidence; Address legal gaps, remove conflicts and overlaps
in law; (avoid need for piecemeal amendments) Clarify roles and responsibilities of various bodies; Establish legal institutions to process PPP
projects; Reduce negative impacts on risk profile of PPP
projects; Give scope, types, minimum contractual
obligations; Provide framework for PPP project cycle including
procurement; and Establish a Project Facilitation Fund
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Concession Types Management contract; Output Based Performance
contracts
Lease: private party pays rent or royalties for exploitation of minerals< 30 yrs
Build-Own Operate-Transfer
Build-Own Operate: provided service for agreed time
Build-Operate-and-Transfer
Build-Lease-and-Transfer
Build-Transfer-and-Operate
Develop-Operate-and-Transfer
Rehabilitate-Operate-and-Transfer
Rehabilitate-Own-and-Operate
Land Swap; any other scheme approved by Cabinet
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Maintenance Contract
Construction (EPC)
Contract)
*Project Company (Private Entity)
Contractor
Shareholder
Government Entity
Financiers
Facility Management
Contractor
Typical Structure of PPP
Loan
Agreement
* Typically a Special Purpose Vehicle (SPV)
Shareholder
Agreement (Equity)
Execute PPP
contract
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History of PPPs in Kenya o Mtwapa and Nyali Bridges Concessions signed in 1959;
Charges in 1984 Pedestrians (10cts), cattle head (20cts), motor cycle(50cts),salon (sh. 2.00), w/wagon (sh. 2.50), lorry (sh 4.00 -7.00), bulldozer (sh.10).
The 75 MW Tsavo IPP tendered in 1995, Olkaria III (48MW Geothermal Plant), Iberafrica (56MW thermal power plant), Mumias (34MW power plant);
Port of Mombasa Grain Terminal on a Built Own and Operate awarded in 1998;
Concession of Kenya Railways freight services for 25 years and passenger services for 5 years in 2006;
The 90 MW Rabai Independent Power Project in 2006;
Proposed Nairobi Urban Toll Road Project approved by Government in 2009;
Lake Turkana Wind 300MW IPP, 2010 and several other IPPs
Other small scale concessions at the airports etc
Solid waste, streetlight, public toilets
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RVR- PPP Worked (eventually)
Kenya-Uganda Railways
7 firms bid, but 5 dropped out awarded to RVR , Sheltam of SA in October 2005
Financial closing December 2006
Concession restructured in 2010 with new RVR shareholders
• In 2010, Citadel Capital acquires stake in Sheltam, litigation and arbitration
• Restructured in 2010 • Citadel 51% -
• TransCentury 34% - Kenyan
• Bomi Holdings 15% - Ugandan
• Shareholders commit to $287 million investment plan ($80mm equity, $164 million debt from IFC group plus Equity Bank of Kenya, $43mm from cashflows)
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A PPP that didn’t work
Nairobi Urban Toll Road Project
106 km rehabilitation and expansion of trunk road and bypasses through central Nairobi (including a viaduct flyover through downtown)
Originally tendered in 2006
Only one fully compliant bidder
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Key issues during tender and negotiations (and how they were resolved)
Proposed development pricetag of $1.3 billion too large, not financeable
Toll risk
Limited Ksh debt financing
Kenya to finance some sections via World Bank and contribute to concession
Kenya to guarantee tolls during construction (WB to backstop); Concessionaire to take toll risk after construction
Bulk of debt package to be USD financing from IFIs (including IFC) and foreign banks; tolls adjusted for exchange rates
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A PPP that didn’t work
Delays
2008: Concession negotiated after project scope redefined
2009: Concession renegotiated after security package redefined
2010: Concession negotiations frozen as World Bank/IFC evaluates PB’s compliance with safeguards
2011: Concession negotiations terminated as World Bank/IFC pulls out of financing
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A PPP that didn’t work Delays 2008: Concession negotiated after project
scope redefined
2009: Concession renegotiated after security package redefined
2010: Concession negotiations frozen as World Bank/IFC evaluates PB’s compliance with safeguards
2011: Concession negotiations terminated as World Bank/IFC pulls out of financing
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Lessons learned? Strong early stage technical and financial
advisory support is critical Resolve important business points before
tender, not after
Delays and uncertainty reduce bidder pool
Billion dollar projects do not make good pilot PPPs Financing difficulty
Political scrutiny
Reduced bidder pool
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POTENTIAL PPPS - Power Generation
Current generation capacity of 1531MW against demand of 1200MW.
Expected demand of 4000 by 2018
Focus on Geothermal which has potential of 7,000 to 10,000MW
Coal concessioning in Kitui under procurement
202MW already developed in Olkaria
GDC to develop 400 at Menengai – EOI issued
GDC to develop the steam (US$ 0.03/kwh) and sell to IPP who then generate and sell power to KPLC (US$ 0.09/kwh
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KENGEN or IPPs
Geothermal Development
Company
Geothermal Prospects
Bogoria
Olkari
a
Mene-ngai
Paka Silali
Geothermal Resource Assessment & Development
National Distributor
Off-Taker 2 Off-Taker 3
Power Purchase Agreement
Local & Foreign
Sources of Financing
Institutional Framework
Project Description
PPOTENTIAL PPP PROJECTS
Transport Construction of a New Container Terminal
Mombasa – USD 250M
Operation and Management of the 4th Container Terminal at Mombasa
Modernization and expansion of Commuter Rail Service in Nairobi
Infrastructure – USD 200 million
Rolling Stock – USD 138 million
JKIA Expansion from 2.5 mil pax per year to 13 mill per year - Greenfield Terminal at a cost of USD 500 million
Northern Corridor (Mombasa - Nairobi – Kampala – Bujumbura), Bridges and Parking spaces, footbridges
LAMU TRANSPORT CORRIDOR
Lamu Port – USD 3.4 Billion – 32 Berths
First 3 Berths - USD 700 million,
Development of Road, Rail, Airport, Refinery, Pipeline, Resort Cities (US$ 16 billion)
Potential PPP Projects ICT
Konza ICT City - located 60 km from Nairobi on a 5,000 acres of land; Estimated cost of US$ 7 billion - US$ 2.1 Billion for infrastructure and US$ 4.9 billion for real estate
National Data Centre Others i. Housing for public servants (Police - 50,000, Prison
Wardens – 16,000) ii. Hostels – Universities (KU – 5000 students) iii. Solid Waste Management -Nairobi, Mombasa, Nakuru iv. Off- Shore Oil Jetty/ Oil Storage facilities v. Uni-city -Kenyatta university vi. Health Facilities (Oxygen plants, vii. Conventional Centre in Mombasa viii.Lake Victoria Transport ix. Transit Hotel, JKIA, Kitchen, Hangers,
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