LEGAL CONSIDERATIONS IN PUBLIC PRIVATE PARTNERSHIPS (PPP’s) IN INFRASTRUCTURE DEVELOPMENT IN KENYA.
Introduction
Did you know that the future of Kenya’s infrastructure lies in the delicate balance between public ambition and private investment? Public Private Partnerships (PPPs) have emerged as a powerful tool, transforming how roads, hospitals, and energy projects are brought to life across the country. But with such great potential comes complex legal intricacies that could make or break these partnerships. Understanding the legal landscape governing PPPs in Kenya is not just essential but it is the key to unlocking successful and sustainable infrastructure development. So, how do you navigate this legal maze? Let’s dive in.
To ensure that these partnerships succeed, legal and regulatory frameworks play a vital role. The primary legislation governing PPP’s in Kenya is the Public Private Partnerships Act, 2013 (the Act), which provides for the structure and regulations for initiating and executing these projects. According to the Act, a PPP is a contractual agreement between a government entity referred to as the contracting authority and a private company. In this agreement, the private company takes on the responsibility of carrying out a public service or function on behalf of the government, and in return, the private company is compensated in one of three ways:
- Receiving payment from public funds;
- Collecting fees or charges from users of the service; and
- A mix of both.
Another key element of a PPP is that the private company usually bears the risks involved in delivering the service or project, and at the end of the contract, the facility or service is handed back to the government.
1. Legal Framework governing PPP’s in Kenya.
The Public Private Partnerships Act, 2013 and the subsequent Public Private Partnerships (Amendment) Act, 2021, form the bedrock of Kenya’s PPP legal framework. The Act outlines the procedures for identifying, structuring, procuring and implementing PPP projects.
The Act establishes the PPP Committee under Section 6. The Committee shall be responsible for formulating policies on PPPs, overseeing the implementation of PPPs’ contracts, approving standardized PPP bid documents and proving feasibility studies, among many others.
Further, under section 15, the Act establishes the Directorate of Public Private Partnerships. The Directorate shall be responsible for, among functions, originating, guiding and coordinating the selection, ranking and prioritization of PPP projects, overseeing project appraisal and development activities of contracting authorities, guiding and advising contracting authorities in project structuring, procurement and tender evaluations.
Part III of the Act, in detail provides for the item of Public Private Partnerships. Under it, a contracting authority may enter into a public private partnership arrangement with a private party. The section moves to provide for the duties of the contracting authority which includes but not limited to liaising with the Directorate, undertaking tendering processes, preparing and appraising each project to ensure viability, overseeing the management of a project and monitoring the implementation of a project agreement.
Additionally, pursuant to section 37 of the Act, a contracting authority may procure a public private partnership project either through direct procurement, privately initiated proposals, competitive bidding or restricted biding.
2. Contractual Structure and Risk Allocation.
In PPP arrangements, contractual structuring is critical as it determines the allocation of responsibilities, risks, and benefits between the public and private partners. Generally, the private party is responsible for the design, financing, construction and operation of the project, while the public party provides oversight and ensures the project serves public interest objectives.
PPPs will be financed, managed and implemented under an enforceable project agreement between the contracting authority and the private party, with a sole purpose of executing the project. The agreement sets forth the term of the project agreement, a management plan, stepping in rights of lenders, a clear mechanism as to how tariffs, or user charges will be set, a clear payment mechanism, dispute resolution process, events of default, remedies and timings and the governing law and jurisdiction of the contract.
According to the Government of Kenya PPP Policy Statement, 2011, in order for PPP projects to be viable, they must carefully allocate all relevant risks to specific parties and must determine if a project is financially and commercially viable for the project’s given risk allocation structure. The common risks include financial risks, construction risks and demand risks. The contracts must therefore clearly outline these responsibilities to avoid ambiguity and ensure accountability, especially where substantial public funds or assets are at stake.
3. Case Study of PPP’s in Kenya.
a. The Menengai Geothermal Power Project.
Different sources argue that this is the most successful PPP implementation in Africa. The participants in this PPP were; the Geothermal Development Company (GDC), the Kenya Power and Lighting Company (KPLC), the Kenya Transmission Company (KETRACO) and three Independent Power Producers (IPP).
This was a key PPP initiative in Kenya aimed at harnessing geothermal energy for electricity generation. Located in the Menengai Crate, Nakuru County, it is part of Kenya’s efforts to expand renewable energy capacity. The project was developed under a PPP framework where the government partners with private investors to achieve large scale infrastructural development.
As discussed earlier, PPP agreements ensure that risks (like financing, construction, and operational risks) are shared between the public and private sectors. In this particular project, the Geothermal Development Company (GDC) assumed all the exploration risks (drilling for steam), while the private entities assumed the risk related to plant construction and operation.
The Menengai project, using a PPP approach, played a significant role in Kenya’s vision 2030 by boosting energy security, increasing electricity access, and promoting sustainable development.
b. The Olkaria III Geothermal Power Project.
This project is a pioneering geothermal energy initiative in Kenya and is notable for being the first privately funded and operated geothermal power plant in Africa. Located in Olkaria geothermal field near Naivasha, it plays a crucial role in the country’s renewable energy landscape.
The project is operated by Ormat Technologies, a private company, which developed and continues to expand the power plant under a Build-Own-Operate framework. This is different from traditional PPP models where the asset may revert to the government after a certain period.
Another unique feature of this PPP model, is that, unlike many PPP models where risks are shared between the public and private sectors, Ormat assumed the full exploration, development and operational risk for Olkaria III.
While not a traditional PPP where risks and rewards are shared, the PPP exists through the licensing and long-term Power Purchase Agreement (PPA) with Kenya Power and Lighting Company. This agreement ensures that KPLC buys the electricity generated by Olkaria III, providing revenue security for Ormat.
Conclusion
In conclusion, Public Private Partnerships (PPPs) represent a pivotal mechanism for infrastructure development in Kenya, offering a collaborative framework between the public and private sectors. The legal framework, anchored by the Public Private Partnerships Act of 2013 and its amendments, provides a clear structure for initiating, executing, and managing these projects, ensuring that both parties’ roles, responsibilities, and risks are well-defined.
As demonstrated by successful projects like the Menengai and Olkaria Geothermal Power Projects, PPPs have the potential to drive Kenya’s infrastructure development while fostering innovation, economic growth, and sustainable development. However, careful attention to contractual structure, risk allocation, and compliance with governing laws remains crucial for the success of any PPP arrangement. CR Advocates LLP remains committed to providing the necessary legal expertise to ensure that PPPs are executed efficiently and in line with Kenya’s regulatory standards, helping both public and private entities achieve their infrastructure goals.
Should you require any assistance in navigating the complexities of PPPs or in structuring your next project, our dedicated team of professionals is ready to support you at every step.
“The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.”
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