Kenya proposes 'investor friendly' PPP law reforms

Kenya was one of the first east African countries to bring a dedicated PPP Act into force, which was enacted in 2013. Some PPP projects have been closed on the basis of the 2013 Act, including the Nairobi-Nakuru-Mau Summit Highway at a project cost of around US$1.3 billion. Although more PPPs are currently in the pipeline, private sector interest and investment has not materialised to the extent hoped for by the government of Kenya.

The new draft bill aims to address some of the deficiencies of the 2013 Act from an investor perspective. Changes include a more certain and streamlined project process with clear timelines; expanded procurement options and a more investor-friendly process for unsolicited proposals, termed 'privately initiated investment proposals'. The bill also envisages a more robust project management and institutional framework through the establishment of a PPP Directorate and project implementation teams.

If passed, the bill will generally bring Kenya's PPP laws into line with international best standards in PPP regulation and is a genuine attempt to address the shortcomings of the 2013 Act. The institutional changes seem well conceived overall, and should make a more investor-friendly process. The changes to the procurement process contain some problematic amendments, but still provide contracting authorities with added options and a more streamlined approval process.

Institutional changes

The institutional aspects of the new bill are intended to "enhance good governance by 'separating policy from operational roles' at the three levels of Cabinet, PPP Committee and the PPP Directorate".

The 2013 Act established the PPP Committee, together with a PPP Unit. The PPP Committee is the body with primary approval responsibility, and retains this status under the new bill. The bill proposes to replace the PPP Unit with a new entity, the PPP Directorate, which would sit within the National Treasury and, unlike its predecessor, have functions which are largely separate from those of the PPP Committee.

The PPP Directorate as envisaged has a far broader mandate than that of the PPP Unit. It will originate, guide and coordinate the selection, ranking and prioritisation of PPP projects within the public framework. It will also be given proactive licence to originate and lead in project structuring and PPP programmes in Kenya. The PPP Directorate will have a hands-on role in assisting contracting authorities with oversight and technical support, and contracting authorities will be required to involve it in every stage of a project.

The previous requirement for two separate functions within each individual contracting authority – a 'PPP Node' and a project appraisal team – has been removed in the new bill. The functions of the PPP Node as set out in the 2013 Act have been reworked as duties placed on the relevant contracting authority generally. These duties require more cooperation with the PPP Directorate, including when monitoring the implementation of a project agreement; liaising with key stakeholders during the project cycle; and preparing and appraising each project to ensure its legal, regulatory, social, economic and commercial viability. Once feasible projects have been identified through this process, a project implementation team made up of a representative from the PPP Directorate and experts from within the contracting authority is then established to deliver specific PPP projects. The PPP Directorate will also be required to assess whether the contracting authority has the technical expertise to carry out the project.

The PPP bill centralises certain approvals in the PPP process within the PPP Committee, but pushes others down to the PPP Directorate. For example, the PPP Committee takes over some oversight functions from the Debt Management Office, and the final approval for a contracting authority to enter into a PPP agreement now rests with the PPP Committee rather than at government or parliamentary level.

These institutional changes are generally likely to be received positively by the private sector. The increased responsibility of the PPP Directorate outside of a political structure like the PPP Committee should streamline project identification and development in particular, in cooperation with contracting authorities. Doing away with PPP Nodes creates a more centralised approach, allowing for the development of a Kenyan PPP expertise base in one place rather than having it spread across the numerous nodes.

Additional consistency in who gives approvals, more appropriate levels for approvals and the addition of timelines will offer greater clarity for investors and should create a more efficient process for PPP development. Furthermore, by reducing the direct role of the government in PPPs by removing the Cabinet's approval function, projects are de-politicised and are less susceptible to being derailed to meet competing political objectives.

Expanding the scope of PPPs

In some African jurisdictions, PPPs are defined only in general terms – typically by reference to the taking over of a public function by a private party, risk transfer and payment. The 2013 PPP Act contains a definition along these lines but also further specifies the permissible contract forms for a PPP; covering common structures such as build-own-operate-transfer and leases with royalties, but also allowing the possibility of exemptions from strict compliance with these structures.

The PPP bill does not change this approach, but it does create an additional element within the definition of a PPP, in that it requires the transfer of the facility to the contracting authority's balance sheet at the end of the project term. This may well have arisen from policy considerations. However, it may also have budgetary implications for the Kenyan government, as there is likely to be an expectation to make maintenance budgets available in order to preserve the asset after the transfer.

The bill also adds a number of permissible contract structures, including some that are not traditionally considered PPPs such as public-private joint ventures and strategic partnerships. The effect of these changes is to broaden the scope of what is classed as a PPP, funnelling more contracting arrangements between the public and private sector through the PPP Directorate. The implication is a potentially larger workload for the PPP Directorate, creating the need for greater resourcing within the Directorate.

New and updated procurement methods

The PPP bill proposes a significant expansion of the procurement options available to a contracting authority. Although competitive bidding is still the 'default' for most projects, the procurement process via privately-initiated investment proposals (PIIPs) has been revised and the ability to procure through direct negotiation has also been included.

The overall structure of the competitive bidding process has been retained. The only significant changes are greater clarification of the competitive dialogue process with shortlisted bidders for a PPP project and the inclusion of a 'best and final offer' process at the conclusion of competitive dialogue. Clear timelines have been stipulated for certain processes, including the period within which bids must be evaluated and for appeals by bidders.

Privately-initiated investment proposals

The current PIIP process is one of the more problematic aspects of the 2013 Act. It does not tend to accord with certain generally accepted requirements for a robust PPP framework such as the 'Swiss challenge' process, and the approval gateways and evaluation process are unclear and not particularly rigorous.

The bill corrects a number of these faults by setting out clear circumstances in which a PIIP can be considered, including where the project meets a demonstrated societal need in terms of national infrastructure priorities and can be delivered at a fair market price. It also sets certain minimum requirements for a proposal, to ensure that the contracting authority is able to properly evaluate proposals. For instance, detailed studies must be provided for financial viability as well as operating plans, risk allocation and environmental and social studies. Extensive due diligence must then be carried out by the PPP Directorate and the relevant contracting authority at the cost of the private proponent prior to accepting the proposal, creating an additional layer of verification absent in the 2013 PPP Act.

Once a proposal is approved, the bill then requires that the project move into a 'development' phase, which the private proponent must carry out under a project development agreement within a four-month timeframe. This will include detailed technical, financial and legal feasibility studies, which are then subject to review.

Should the PIIP still be considered viable as a PPP at this stage, the contracting authority is then entitled to proceed with direct negotiation under certain limited circumstances. These include where the project is unique; where it is unlikely to generate competitive interest; or where it would be in the public interest to proceed with the project. If none of these apply, the contracting authority must invite competitive bids. This may take the form of a 'Swiss challenge' process in which the original proponent of the scheme receives some benefit - for example, a scoring bonus of up to 10%, automatic shortlisting or reimbursement of development costs – at the discretion of the contracting authority.

Direct negotiation

The bill also allows for direct negotiation more generally. Direct negotiation will be permitted not only in instances which are typical for procurement legislation – including single supplier arrangements and emergency procurement - but also in some unusual cases. These may include where the costs can be reduced due to the private party qualifying for concessional funding; international cooperation arrangements; and even where the price is "fair and reasonable" in relation to other 'known' prices.

Overall, the changes in the procurement process would be a major positive step for Kenya's PPP regime. The new PIIP process in particular corresponds with the approach taken by other regional PPP laws through the inclusion of the Swiss challenge process, and should provide greater confidence to investors.

However, some concerns still remain. Firstly, the new Swiss challenge process could act as a disincentive to the private sector engaging in unsolicited bids, especially if the contracting authority does not exercise its discretion to include a compensation mechanism for the proponent in return for the costs it will presumably have incurred during the development phase. Unsolicited bids should be encouraged, and a more creative framework would consider other methods of evaluating the value for money benefits of an unsolicited bid, for example through benchmarking data rather than relying on a Swiss challenge process, which is generally a disincentive to potential proponents.

Another concern is that the ability to proceed to direct negotiation under the PIIP process is subject to fairly vague requirements such as where a project is "unlikely to generate market interest" and for reasons of "public interest". Similarly, direct negotiation outside of a PIIP is available under a far wider set of circumstances than is the case in most African PPP legislation.

Looking after Kenya

The final additions in the PPP bill worth noting are those which ensure that PPP projects produce a tangible benefit for the state by directly leveraging the participation of the private sector.

The inclusion of success fees is made mandatory, with the PPP Directorate permitted to impose a maximum success fee of 1% of the project value. The usage of success fees is also clarified, with the transaction advisory costs covered first and any further success fees put towards the PPP Facilitation Fund. This should encourage contracting authorities to appoint skilled transaction advisers, ultimately benefiting both the public and private side of the PPP transaction. However, as no credible adviser will work on a success fee basis, the PPP Directorate or Kenyan government will still be required to fund advisory costs on its budget, with the hope of a transaction reaching financial close so that these costs can be partially recovered from the successful bidder.

Local content requirements have also been introduced, as well as requirements that Kenyan goods and services meeting a minimum standard are given priority and that skilled and qualified Kenyan citizens are employed where possible. The local content guidelines have not yet been issued, but the PPP Directorate is obliged to provide these. The success of local content requirements may well hinge on these guidelines and standards.

The imposition of local content requirements is an important policy objective, but the net effect will be to make PPPs more expensive - a cost which will eventually be passed back to the government of Kenya.

Co-written by Reuben Cronjé and Aliyah Ince of Pinsent Masons.