By Moses Cherono
The recent launch by the president of the construction of the Nairobi Expressway as well as the tender for a concessionaire for the proposed KNH PPP hospital elicited vigorous debate among many Kenyans on the merits of these projects. The debate centered on the project costs, affordability and justification of PPPs as a mode of providing public services. For example, some press articles and social media users questioned the “exaggerated project costs borne by the government coupled with exorbitant user charges” in the Nairobi Expressway Project while others queried the motivation behind the development of a “private hospital’ by KNH. This debate points to a legitimate confusion in the general public on the concept of Public Private Partnership (PPP) and its justification. This confusion is not surprising since public private partnerships is an emerging concept.
So what exactly is a PPP and what is the motivation behind it? In a nutshell, there is no universally accepted definition of PPP. In fact, different jurisdictions have differing views on the definition of public private partnerships.
In Kenya, PPP is legally defined by the PPP Act, 2013 as an “arrangement between a contracting authority and a private party under which a private party— (a) undertakes to perform a public function or provide a service on behalf of the contracting authority; (b) receives a benefit for performing a public function by way of- (i) compensation from a public fund; (ii) charges or fees collected by the private party from users or consumers of a service provided to them; or (iii) a combination of such compensation and such charges or fees; and (c) is generally liable for risks arising from the performance of the function in accordance with the terms of the project agreement.”
From this definition, several features emerge on what a PPP is in the Kenyan context. The first is that the government transfers the provision of a public function to the private sector for a defined period of time. Schedule four of the constitution of Kenya, 2010 lists an array of public functions vested in both the national and county governments which the government may transfer to the private sector. This feature differentiates PPP from conventional procurement. Under conventional procurement, the provision of public functions remains with government.
The second feature is that in return for providing a public function, the private sector is compensated either through payments from a public fund such as the annuity fund, consolidated fund, road maintenance levy fund or through user chargers such as toll fees on a road.
The last and most important feature is that the private sector is expected to not only contribute a significant portion of financing but also to bear a bulk of the risks involved in providing the public service. In general, the government typically carries a lot of risks in providing public services. This may include financing risk including lack of funds to finance a project, cost overruns due to delay in implementation of projects, and costs associated with maintaining the asset to the required standard over its life. As a result of these risks, it is often the case that the government is not able to provide a service and if provided, it is not able to provide it to the required standard consistently. The private sector is usually considered to be more efficient in managing some of these risks with lower cost through its ability to better assess risks and mitigate the probability and consequences of risk events.
Based on this concept of financing and risk transfer, it follows that it may be more economically viable for the government in some situations to shift the provision of certain public services from the public to the private sector. Section 61 of the PPP Act, 2013 provides a basis on which to decide whether a public service is better provided by the government directly or by the private sector. Specifically, a project can only be procured under PPP Act, 2013 if it meets some key conditions including affordability, value for money, and transfer of appropriate risks to the private sector.
In carrying out an affordability test, the government conducts an assessment on whether users are able to pay for the service. In other words, the government satisfies itself that the provision of the service by the private sector does not price out the public at large. With respect to value for money, a public function can only be transferred to the private sector under the Act if it can be shown that the private sector can provide it at a lower cost than the public sector over the lifecycle of the project. This assessment is usually done by comparing the cost the government incurs on a similar project over its lifecycle viz a viz quotations received from the private sector for delivery of the same project under the PPP framework. Finally and as mentioned previously, the private sector must carry a bulk of the risks associated with the provision of the service.
From the foregoing, it is evident that the evaluation and structuring of PPP projects in Kenya follows a systematic process. This process is designed to ensure that the provision of public services by the private sector under the PPP framework results in efficiency and remains affordable to the general public. The development of the Nairobi Expressway and proposed KNH hospital Projects have been subjected to this rigorous process.