Project Financing through Public Private Partnerships

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Mutui Peter: PUBLIC PRIVATE PARTNERSHIPS (PPPS)
1. Introduction
In many countries, provision of basic citizenry services and development of infrastructure
are considered as fundamental responsibilities of the government (Sharma and
Bindal,2014). As such, the government is expected to continuously invest in all sectors of
the economy in fulfillment of the overarching goal of providing quality social wellbeing and
creating supporting environment for investment and business opportunities.
However, with mounting population pressures associated with urbanization and
developmental trends, the government’s capacity to adequately provide public good and
services through traditional approaches is constrained. This has resulted into many
governments throughout the globe to progressively call for more private sector involvement
in the provision of public goods and services as an alternative to supplement public sector
investments. This cooperation between public and private institutions is commonly referred
to as Public Private Partnerships (PPPs) (Sharma and Bindal,2014). PPPs are becoming
important enablers in addressing socio-economic challenges that many governments are
struggling with, Rybnicek, R., Plakolm, J., & Baumgartner, L. (2020).
The PPP framework is gaining a lot of popularity in both developed and developing
economies due to its integral role in development of key infrastructure projects (Warsen
et al., 2018). Moreover, the huge financial involvement has caught the attention of many.
For instance, the U.K. government under premiership of Tony Blair entered 563 deals worth
£35.5 billion, while Australia had finance initiative (PFI) arrangements valued more than
A$20 billion within a span of five years (Hodge and Greve,2007). In Kenya, there were 64
PPP projects as at May, 2021.
However, there is no consensus about what is really a PPP. For some, it is a new tool of
governance that is meant to replace conventional methods of providing public goods and
services through competitive procurement. Others perceive it as merely a reintroduction of
private sector entities in the provision of public goods (Linder,1999). There is also argument
that PPPs are a mechanism of developing infrastructure projects such as roads, harbors,
railways and other strategic government installations using private funds.
In view of the forgoing, it appears there is no clear understanding of what is actually PPPs
despite the fact that everyone appears to be talking about them. In attempt to understand
PPPs, this paper seeks to evaluate the following aspects of PPPs, that is; definition of Public-
Private Partnerships (PPPs), features distinguishing PPPs from Traditional Public
Procurement (TPP) methods, institutional arrangement of PPPs, models and parties to PPP,
and status of PPPs in Kenya. The paper will also highlight limitations of PPS and provide
recommendations on the best ways to use PPPs.
2. Public Private Partnership (PPP)
2.1 Definition of PPPs
There are varying views about the definition of PPPs. However, scholars agree that PPPs
can benefit both public and private sectors due to uniqueness of each sector and that there
will be better results if the qualities of the two sectors are combined in the provision of
public goods and services (Rosenau 2000).

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Sharma and Bindal (2014) defines PPPs as a contract agreement based on a specific project
entered into between a government entity and a private sector company for the purposes of
delivering an infrastructure good or service on whose payment are derived from user
charges. In this partnership, the government entity could be the sponsoring authority while
the private sector entity is the legal entity established as project company commonly known
as Special Purposes Vehicle (SPV) intended to create and/or manage an infrastructure for
the purpose of the public use within a stipulated period of time on commercial terms during
which the private entity is engaged through open and transparent procurement system.
According to Kwak et al. (2009), PPPs are cooperative agreements between public and
private entities in which both partners agree to share risks, resources responsibilities and
rewards for mutual gain and attainment socio-economic and environmental objectives. In
Kenya, the definition of PPP is derived from the Public Private Partnership Act of Kenya
of 2013. The act defines PPP as an agreement between the contracting authority and private
entity. The private entity performs a public function or avails services on behalf of the
government and it is rewarded either by charging user fees, payment from public funds or
combination of both. In this arrangement, the private party is responsible for bearing risks
arising from performance of the public function in line with project agreement terms.
As such, PPPs exist in different types and, thus today’s literature on PPP is highly unclear
in-so-far as the types and terms are concerned, thus necessitating most scholars to label
such partnerships between private and public entities generally as PPPs.
2.1.1 Features that Distinguish PPPs from Traditional Public Procurement (TPP).
PPPs differ from the Traditional Public Procurement (TPP) approaches in a number
of ways, that is;
PPP is an implementation mechanism of a viable project: The partnership is
established through a legally binding agreement to share responsibilities arising
from implementation and operationalization of the project. The partnership brings
on board expertise of each party for sharing and allocation of risks, resources,
responsibilities and rewards.
Better project screening: Through PPPs, several benefits accrue from the
partnership, that is; enhanced screening of projects, availability of more resources
for investment, enhanced efficiency project implementation and management and
accessibility to advanced technology.
Value for money as the main justification for PPP: Unavailability of government
funding is the not main reason for using PPP option to implement projects. A
project is not appropriate for implementation through PPP unless its anticipated
benefits and efficiency far out-ways the cost of implementing the project. In this
regard, the value for money criterion is used in deciding whether to adopt PPP
option or not.
PPPs are an off-budget mechanism for infrastructure development: This
feature makes PPPs more attractive to government investments as there is no
immediate cash outlay, the project risks are largely borne by the private sector,

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increased efficiency in project delivery as well as accessibility to more
sophisticated technologies for designs and construction and service delivery.
PPP project is more complex than conventional project: The entire project
development and administration process of PPP is different and complex than
conventional procurement methods and there many parties involved. In PPPs, risks
are allocated depending on who is best suited to manage them. Similarly, the tenure
of the project in PPP is usually longer than the conventional project approaches.
Limitations of PPPs: PPPs have limitations which should be taken into
consideration by the parties involved. It is worth noting that not all PPP projects
are feasible and as such, the private parties are often inclined towards projects that
are bankable. The model may also not work in economies with regulatory
inefficiencies.
2.2 Institutional Arrangements of PPPs
A critical aspect for the success of PPP program is the development of an enabling
environment that ensures creation of a legal, policy, institutional and financial framework,
(Verougstraete,2017).
The legal arrangement is a key component in the success of PPP programme. The legal
framework ensures that the prevailing laws and regulations, contracts and other legal
documents relating to the PPPs are sufficient and where necessary, appropriate changes are
introduced. This component also ensures gaps in the legal instruments are identified and
addressed appropriately. Certain laws that are looked into for inconsistencies relates to
privatization laws, company laws, environmental laws, sector licensing and labor laws as
well as regulations such as foreign exchange regulations.
The regulatory regime plays a critical in the advancement of PPPs. The regime is
responsible for formulation of PPP laws and provision of oversight on market structures
and operations, contract pricing and consumer protection. Thus, the desired PPP model is
modified in case of conflict through amendments and correction of regulatory and capacity
gaps.
Another component of the PPP framework is the PPP structure. Usually, this structure is a
reflection of the existing tax regime, public service laws, dispute resolution procedures
labor laws and attendant regulations (Felsinger,2008). Thus, the corporate structures must
be consistent with company laws and related legal requirements. This implies of the need
to change laws so as to fit the desired PPP framework and should be updated to reflect
emerging trends of the PPPs.
The financial aspect is important in establishing an enabling environment for PPPs
(Verougstraete,2017). This aspect manifest itself in a number of ways. First, it entails
availing resources for establishing PPP unit and drafting PPP laws and contracts. As such
resources are required for recruitment of PPP technical advisors. The financial resources
are usually provided in the national budget. However, Multilateral Development Banks
(MDB) have also provided grants for the establishment of PPP structures.

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The government also intervenes to make the project financially attractive. This usually
occurs through viability gap funding where the government provides funds for PPP projects
that are not financially viable but they are socio-economic in nature. Other measures that
the government provides financial support is through tax exemptions, construction
subsidies and compensation of acquired land.
To ensure operationalization of the PPP program, a specialized unit has been established
for the development and supervision of PPP projects in many countries. The PPP units are
responsible for a number of functions. First, they ensure framework exist for PPP
framework. They also advise and approve proposed PPP projects in accordance with laws
and regulations and provide support and monitoring during the tenure of the projects.
In Kenya, for instance the Public Private Partnership Act of Kenya of 2013 established a
Public Private Partnerships (PPP) Directorate, under the National Treasury and Planning.
This directorate is responsible for facilitating implementation of the PPP Programme and
Projects in Kenya.
2.3 Models and Parties to PPPs
PPPs is one of the hybrid structures in project financing in which public projects are
financed with funds from private sources. PPPs have been used in numerous projects where
the private companies construct and operate the project before transferring it to the
government. Among the sectors where PPPs have been used includes; generation and
distribution of power, roads, railways, air traffic control stadiums, water and sanitation,
hospitals, school, information technology systems, housing, refuse disposal, correctional
facilities among others.
Different models of PPP have emerged and they vary based on several considerations such
as tenure of the contract, assumption of risks, ownership of assets as well as parties
responsible for investment (ESCAP, 2008). Generally, the PPP models are in five
categories based on the level of investment and risk assumption by the private entities.
These categories are; private ownership and Private Finance Initiative (PFI), concessions,
affermage and leases, turkey contracts and supply and management contracts.

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Figure 1: Features of PPP models
Source: ESCAP (2008)
There are several options in each of the five categories and abbreviations are used for the
different types of PPP agreements. For instance, BOT stands for Build, Operate, and
Transfer, BOOT for Build, Own, Operate, and Transfer and BOO for Build, Operate, and
Own. However, most of the PPP contracts are increasingly becoming hybrids and
combinations of various types to reflect and suit local requirements in which they exist
have been established, Felsinger (2008).
The variations in PPP models depends on the level of responsibility and risked assumed by
the private company as well as variations in contract structure and terms as summarized in
table 1 below:
The BOT and related arrangements (BOO and BOOT) are the common types of PPP
models. These are concessions in which financing and development new infrastructure
projects and or major components is done by the private sector in accordance with agreed
performance standards as set out by the government.

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Table 1: Categorization of PPP Models
Source: ESCAP (2008)
Under BOT arrangements, capital to the project provided by the private developer who
assumes ownership during the tenure of the contract for the recovery of investment
financing through user charges. Upon expiry of the contract period, the facility reverts to
the government which can elect to take up operating responsibility or appoint a new
operator under new contract terms.
When it comes Design, Build, Finance, operate (DBFO) option, it is the responsibility of
the private sector to undertake designing, building, financing, and operating of the facility.
This arrangement depends greatly on the extent of financial responsibility transferred to
the private party.
2.3.1 Parties to the PPP
PPP structures are quite complex, thus necessitating the need to involve various parties
ranging from the government, project sponsors, financiers, banks, contractors, suppliers,
customers and other third parties. Each party in the PPP has a role to play and they represent
different interests which informs the PPP option, thus leading to the attainment of the
overall PPP objective. Table 2 illustrates some of the parties to the PPP models and their
respective role and interests.
Usually, PPP projects are usually undertaken through establishment of separate project
company commonly referred to as Special Purpose Vehicle (SPV). The SPV is a key party
in most of the PPP projects. It is a legal entity that carries out all project undertakings
including negotiating and entering into contract agreements with government and other
parties to the project. The SPV is usually the preferred model of implementing PPP projects
Duration
Broad category Main variants
Ownership of Responsibility Assumption of of
capital assets of investment risk contract
(years)
Outsourcing Public Public Public 1-3
Supply and Maintenance Public Public/Private Private/Public 3-5
management
management
Operational Public Public Public 3-5
contract
management
Turnkey Public Public Private/Public 1-3
Affermage/Lease
Affermage Public Public Private/Public 5-20
Lease Public Public Private/Public 5-20
Concessions
Franchise Public/Private Private/Public Private/Public 3-10
BOT Public/Public Private/Public Private/Public 15-30
Private ownership BOO/DBFO Private Private Private Indefinite
of assets and PFI PFI Private/Public Private Private/Public 10-20
type Divestiture Private Private Private Indefinite

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which are non- recourse in nature and such that the lenders rely only on cash flows and
assets of the project as the means for debt repayment.
Table 2: PPP Parties and Stakeholders
PPP Party/Stakeholder Party/Stake holder Role
Government The government may intervene to make the project
financially attractive. This is done through viability gap
funding and provision of incentives such as exemptions,
construction subsidies and compensation of acquired land.
Project Sponsors These could be the equity investors and owners of the project
company. It could be either be a single party or a consortium.
Sponsors may also establish subsidiaries to act as offtakers,
feedstock providers and sub-contractors to the project
company.
In PPP projects, the government may also act as sponsor by
providing equity and retaining ownership stake in the project.
Project Company (SPV) This is a key party in most of the PPP projects. It is a legal
entity that carries all project undertakings including
negotiating and entering into contract agreements with
government and other parties to the project.
Contracting Authority This is the procuring entity. It could be a government
ministry, council, municipality, state department or a state
corporation responsible for floating tenders to the private
sectors, evaluating tender documents and awarding
successful project sponsor to implement the project.
Lenders Lenders organize financing of the project. For mega-project,
several banks team up to provide syndicated loans which
would otherwise be too big for individual lender. The lenders
may also come together to reduce credit risk exposure.
Contractors These are the parties responsible for performance obligations
of constructing and operating the project especially if the
contract adopted is that of the Engineering, Procurement
and Construction (EPC) and Operations and Maintenance
(O&M).
Technical Advisors They provide technical expertise on all aspects of the
projects. They could be in form of a consortium with experts
drawn from different fields such financial advisors, lawyers
and surveyors.

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Figure 2: Sample of PPP contractual structure
Source: Gardner & Wright (2012)
2.4 PPP Status in Kenya
One of the key aspects of the PPP approach is to enable the government to enhance
efficiency in service delivery through partnering with private sector operators while still
focusing on overarching responsibilities of regulation and supervision. When PPP
approach is properly utilized, the government gains by having its overall cash outlay
reduced while providing quality and affordable services to the citizens.
The PPP model for Project Financing (PF) has been embraced over the world. This is
evidenced by the fact PPP deals have been growing in size and value over the last 15 years
(Pinto, 2017). Table 3 illustrates global PPP deals by year for the period 2000-2014.

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Table 3: Global PPP Deals by year for the Period 2000-2014
Source: Pinto (2017)
Developing countries have been identified as emerging markets for infrastructure financing
through private sector participation. For instance, between 1998-2004, developing regions
had the highest investment financing in transport sectors than any other part of the world
(Felsinger,2008). There was also active participation on managerial and operational roles
by the local and regional players.
In Kenya, there has been rigorous effort by government to utilize PPP approach in service
delivery. As such, the government enacted the Public Private Partnership Act (2013).
Under this act, the Public Private Partnerships (PPP) Directorate was established for
facilitation and implementation of PPP programs and projects. According to the website of
this PPP unit, there were 64 projects in Kenya financed through project finance as at May,
2021. These projects were spread across 9 sectors of which transport and infrastructure
sector had the largest share of 21 projects. Education and water and sanitation sectors came
second and third with 14 and 10 projects respectively. Other sectors with projects financed
through project finance were health (6), energy and petroleum (5) and many others as
illustrated in Figure 2: PPP Projects in Kenya
Project finance loans
Year
Number of deals
Total value Percent of total
[$US million] value
2000 271 68,667.7 3.3%
2001 255 58,547.0 2.8%
2002 232 48,319.1 2.3%
2003 224 63,.925.8 3.0%
2004 234 58,874.0 2.8%
2005 222 76,319.5 3.6%
2006 211 100,783.7 4.8%
2007 332 153,311.5 7.3%
2008 535 214,201.1 10.2%
2009 468 166,510.3 7.9%
2010 597 203,789.6 9.7%
2011 609 218,654.2 10.4%
2012 537 195,.142.7 9.3%
2013 588 221,861.1 10.5%
2014 620 259,904.4 12.3%
Total 5,935 2,108,811.8 100.0%

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Figure 3: PPP Projects in Kenya
Source: PPP Directorate website (2021.
2.5 Limitations of PPPs
PPPs have been widely embraced and used to enhance service delivery by many
governments while retaining ownership of the project facilities. But their success has not
been without challenges, some of which are real while others are perceived (European PPP
Expertise Centre,2015). This section highlights some of the challenges encountered by the
public sector while using PPPs for service delivery:
Legal, Policy and Institutional Framework: The use of PPPs requires adoption of new
legislations, policies and practices to prepare, design, deliver and manage PPP projects in
the delivery of public services. However, PPPs are said to be more complex than
conventional procurement methods, thus they are time consuming which delays service
delivery. In other situations, limited legal, policy and institutional framework has
constrained adoption of PPPs in some areas.
Limited Project Preparation and Processes Capacity by the Public Sector: Besides
inadequate institutional frameworks, limited capacity in project preparation and processes
in the public sector is a constraint in the implementation of PPP projects. This limitation
cuts across all stages of PPP project cycle from initiation stages to operation and
management of contracts as the requisite skills, some of which may be new, may not be
readily available both in the public and private sectors.
Project Operation: PPPs projects encounter challenges during operational stage. This
occurs when the underlying project turns out to be inappropriate and becomes difficult for
the project to repay the debt. This is an indication that the project was not properly selected
and prepared for PPP model. Equally challenging is when the Procuring Authority lacks
capacity for day-to-day running and management of the project and contract.
1
14
5
6
2
3
21
2
10
0 5 10 15 20 25
Agriculture, Livestock & Fisheries
Education
Energy and Petroleum
Health
Privately Initiated Investment Proposals (PIIPs)
Tourism, Trade & Industrialization
Transport and Infrastructure
Transport and Infrastructure, Privately Initiated…
Water and Sanitation
Number

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Market availability for PPP projects: Establishing the best value to pitch for PPP
projects and having assurance that the market has the capacity to take up the project is a
constraint when launching PPP projects for uptake.
Funding PPP projects: PPPs usually create substantial future financial obligations for
governments. Sometimes it happens that the Procuring Authority is unable to afford this
commitment when they fall due. Failure to meet these financial obligations threatens the
continuity of the PPP contract and may result into costly and endless court battles, thus
defeating the purpose of the project as well as inability to deliver service as expected.
3. Conclusion
The forgoing discussion attests that PPP as a project financing approach can play critical
role in enhancing the capacity of the government to accelerate infrastructural development
and service delivery to the people. More often, there will be value for money as the PPP
approach is used when its benefits far outweigh its costs even if the project was to be
undertaken by the government through conventional procurement methods. Accordingly,
there is need to have a proper enabling environment at macro and micro levels including
adequate legal and institutional framework as well as adequate preparedness of the
procuring entities and the project itself. By so doing, this will ensure proper and timely
development and delivery of successful PPP projects.
While it is inviting for the public sector to adopt PPPs for enhanced efficiency and value for
money, it should not be lost that certain challenges derail full utilization of PPP approach.
As such, these bottlenecks should be addressed appropriately through suitable interventions.
These interventions incudes stable and supportive legal, policy and legal framework, strong
political support, technical competency in the public and private sector participants, good
governance in the public sector and capacity for project management. Other measures for
successful implementation of PPP project should include engagement and participation of
all relevant stakeholders, well established private sector market to respond to PPP bids and
implement projects and effective communication, accountability and transparency of PPP
project throughout their life-cycles from inception to operation and maintenance.

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