the Public policy Executive program conducted by the Strathmore business school in Nairobi- August, 2015.

1. Public Private Partnerships
By Dr. Robert Mudida

2. What is a PPP?
 A Public Private Partnership (“PPP”) is a contract between a public sector institution and a
private party, in which the private party assumes substantial financial, technical and
operational risk in the design, financing, building and operation of a project
 Two types of PPPs are specifically defined-:
 where a private party performs a public institutional/municipal function for a “user
pay pricing mechanism” Example, Toll Road; and
 where the private party acquires the use of public/state property for a commercial
purpose(s). Example, a Specialized hospital
 A PPP can also be designed as a hybrid of the above types
 Payment in any scenario involves one of three mechanisms-:
 the public institution/municipality paying the private party for the delivery of the
service, or
 the private party collecting fees or charges from users of the service, or
– a combination of these
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3. Characteristics of PPP projects
– Important characteristics and or pillars of PPP projects-:
 Genuine risk transfer,
 Value for Money,
 Output specifications,
 Promise of better project structure and design,
 Affordability, and
 Efficiency.
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4. • Public sector transfers an asset to a private sector
entity, usually for the term of the arrangement
• Private sector builds, extends, renovates a facility
• Public sector specifies the service to be provided through
the facility
• Private sector provides the services, using the facility for
a defined period
• Private sector entity agrees to transfer the asset back to
the public sector at some point
PPP – General Features
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Source: Darren Grimsey and Mervyn K Lewis, ‘Public Private Partnerships’, 2004, Cheltenham: Edward Elgar

5. • Build Operate Transfer: private sector raises funds, carries
out construction, operates the asset for a period, then
transfers it back to the public sector
• Build Own Operate: control and ownership remains in
private hands
• Leasing: concession contracts, in which the private sector
designs, builds and operates (or a combination) but the public
sector finances
• Joint venture: joint financing and operation
PPP – Types
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6. Generic PPP Structure

7. Special purpose Vehicle
• Is a key feature of PPPs
• Is a legal entity
• It facilitates the allocation and diversification of risk
and financing requirements to more than one party
• SPV undertakes the project
• All contractual agreements between the various
parties will be negotiated between themselves and
the SPV
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8. Regulatory environment
– Careful consideration of the legal regime is necessary to examine the extent to
which it:
–
 Provides the legal framework to enter into an enforceable contract,
 Provides the private sector the necessary legal coverage to finance, build, operate
and collect revenues or service payments,
 Covers issues related to regulatory control, obligations of parties, services, land
acquisition, risk and profit sharing, pricing and handover of facilities, and
 Deals with issues- eg monitoring, dispute settlement mechanisms,
 Guarantees safety of investment
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9. Framework for PPPs in Kenya
 Kenya has a New Constitution (2010) that provide democratic and
governance institutions (stability, judiciary, etc.)
 Conducive Regulatory framework to facilitate PPPs (Energy, ICT,
Transport)
 There is a strong Contract law (contracts will be honoured)
 Government issued PPP Regulations, March 2009
 PPP Policy issued by Government in December, 2011
 The Public Private Partnerships Act, No. 27 of 2013 (PPP Act)
 Draft Regulations for PPP Act, 2013
 PPP Toolkit, Procedures and standard documents
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10. Ongoing PPPs
• There are on-going Independent Power
Producers (IPPs) projects where GoK
has sought Partial Risk Guarantees
from the World Bank/African
Development Bank and Political Risk
Insurance from MIGA.
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11. IPPs
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IPP Name Type Capacity MW Remarks
Thika Power Thermal 87 Financial Close
Triumph Thermal 82 Financial Close
Gulf Power Thermal 80 Financial Close
Orpower Geothermal 52 Financial Close
LakeTurkana Wind 300 Under negotiations
TOTAL 600
ESTIMATED COST:
USD 1.3 BILLIO N

12. PPP pipeline
• Nyali Bridge, Mombasa-Transport/Roads
• Nairobi- Thika Road ( O&M)-Transport/Roads
• Mombasa –Nairobi Road (400km)
• Nairobi Commuter Rail-Transport
• Kisumu Sea Port-Transport/ Airport
• Nairobi Jomo Kenyatta Airport Expansion-
Transport/ Airport
• 2nd Container Terminal Mombasa
• 60 MW wind power in Ngong-Power
• Kinangop Wind Power project-Power
• 560MW Geothermal IPPs, Olkaria-Power
• 400 Geothermal IPPs, Menengai-Power
• Cancer/Diagonistic Center-Health
Housing for Security Forces-Accommodation
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13. 1. Establish A Jurisdictional PPP Constitution
2. Separate the Analysis, Evaluation,Contracting/Administrating,and Oversight
Agencies
3. Ensure That the Bidding Process Is Reasonably Competitive
4. Be Wary of Projects That Exhibit High Asset-Specificity,Are Complex or Involve
High Uncertainty,and Where In-House Contract Management Effectiveness Is
Low
5. Include Standardized, Fast, Low-Cost Arbitration Procedures in All P3 Contracts
6. Avoid Stand-Alone Private Sector Shells With Limited Equity From the Real
Private Sector Principals
7. Prohibit the Private-Sector Contractor From Selling the Contract too Early
8. Have a Direct Conduit to Debt Holders
1. Vining and Boardman, ‘PPPs, Eight Rules for Governments’, Public Works Management Policy, 2008
Eight rules for governments1
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14. Establish a jurisdictional PPP constitution
• Adopt provisions to ensure transparency for all PPP
agreements.
• A vital aspect of transparency is the deposit and availability of
all contracts.
• If there is no credible tying of hands on transparency for the
whole PPP process potential private partners will always chip
away claiming various special reasons for secrecy in their
particular PPP.
• These constitution-like mechanisms will serve to commit later
generations of politicians so that political shocks cannot panic
them into renegotiating on pricing and so on.
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15. Rule 2: Separate the analysis, evaluation,
contracting/administrating, and oversight agencies
• Separate the agency that analyses the
desirability of projects, decides which of the
alternative provisioning models to employ,
evaluates whether a PPP model would provide
best social value; administers the PPP process
(the tendering of bids, selects partners, makes
the final decision whether to proceed with the
PPP) and monitors the implementation of the
contract; and evaluates the overall success of
projects. 15

16. Rule 3: Ensure that the bidding process is reasonably competitive
• The government should be proactive in
searching for bidders when there are no
optimal number of bidders.
• For most infrastructure projects, at least three
to five bidders is probably close to optimal.
• Generating this number of bidders should
overcome the inevitable political pressures to
favour local bidders or restrict bidding to
domestic producers.
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17. Rule 4:
• Be wary of projects that exhibit high asset-
specificity are complex or involve high
uncertainty, and where in-house contract
management effectiveness is low.
• When projects involve considerable
uncertainty and are complex, changes in
plans and implementation are inevitable after
the project has begun.
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18. Rule 4
• Long-term projects involve a fair amount of uncertainty.
• It is impossible to foresee every possible contingency and,
even if it were possible, the costs of anticipating every
possible contingency would be prohibitively high.
• When in addition, one participant usually the private sector
has made an asset-specific investment associated with the
project, the costs of renegotiating can be very high. The ability
to renegotiate at a reasonably low cost can be thought of as a
valuable option.
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19. Rule 4
• Government is especially vulnerable to
opportunistic behaviour by private sector
participants, when it has low contract
management skills, either specifically related
to the project or pertaining to the contract
more generally.
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20. Rule 5: Include standardized, fast, low-cost arbitration
procedures in all PPP contracts
• The advantage of this rule is that it directly reduces
transaction costs from law suits. In some cases these
costs have been extremely high.
• Even more problematically, they have often taken
extremely long to complete.
• Two procedures should be adopted: one for those
disputes parties agree are minor and secondly, for
disputes that at least one party considers to be a
major breach of contract.
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21. Rule 6: Avoid stand-alone private sector shells with
limited equity from the real private sector principals
• The key idea is to ensure that private sector
partner or partners have sufficient equity at
risk to give them the proper incentives.
• Forming a separate stand-alone corporation
for a particular PPP may make it easier for the
parent organisations to minimise the amount
of their own capital at risk.
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22. Rule 7: Prohibit the private sector contractor from selling the contract too early
• At the operational stage it may make sense for
some other contractor to take over the
contract.
• If a contractor thinks it can sell a contract
before all the challenges are known, they will
have an incentive to underinvest in the
project, especially in the early phases.
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23. Rule 8: Have a direct conduit to debt holders
• If the private sector equity participant
declares bankruptcy, there should be a clear,
legally enforceable conduit to the debt
holders.
• Without it governments may face serious
delays as courts will normally control the
situation if bankruptcy arises.
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24. The End
Thank You
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