The Government’s Role in Encouraging - World Services … Group PPPs... · The Government’s Role in Encouraging ... Substantial project risk ... ICT Konza ICT City - located 60

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

Oct 28, 2011 WSP Regional Meeting 2011 1

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


What is a PPP?


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?


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




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

Sept 9, 2011 NESC meeting of Sept 2011 8

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

9 Oct 28, 2011 WSP Regional Meeting 2011

Factors of a conducive PPP market


Finance

Framework

Projects

The projects


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


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

Oct 28, 2011 13 WSP Regional Meeting 2011

Bond Market


Financing available for PPPs


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


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


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


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


Level playing ground


Competition


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


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


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


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)


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


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


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


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


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


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


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

JKIA – TERMINAL 1

NAIROBI: COMMUTER RAIL


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,


NAIROBI: KIBERA SLUMS

Copyright: Maridadi Pix

Oct 28, 2011

WSP Regional Meeting 2011

Nairobi, City in the Sun

Copyright: Maridadi Prix

Oct 28, 2011 WSP Regional Meeting 2011

The First step in PPP is the hardest

Sept 9, 2011 NESC meeting of Sept 2011 45

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Documents

The Government’s Role in Encouraging - World Services … Group PPPs... · The Government’s Role in Encouraging ... Substantial project risk ... ICT Konza ICT City - located 60