This archive report was first published on 4 October 2021.
As Kenya seeks to maintain the pace of spending on new infrastructure with funding from private backers, it faces a significant risk: a $1.4 billion penalty for terminating contracts with private firms that have built roads and solar power plants under the new public private partnership models.
According to the National Treasury, Kenya would pay $1.4 billion for early termination of the PPP contracts due to government default. This amount is estimated based on a worst-case scenario, where the government defaults on its obligations.
The Treasury has identified seven projects, including the Nairobi Expressway, roads, and power plants, that are either operational or under implementation. These projects are owned by private firms, including the China Road and Bridge Corporation (CRBC), and are expected to generate revenue through user fees, such as toll charges, for between 10 and 30 years.
However, analysts have raised concerns that such financing has often stumbled over government guarantees and revenue sharing arrangements. The Treasury has acknowledged these risks, stating that the estimation of contingent liabilities for PPPs is conducted based on a worst-case scenario.
Despite these risks, the government is turning to PPP deals as a means of financing costly infrastructure projects outside the limited State budget. The PPP model has been approved by President Mwai Kibaki since January 2013, but its use has failed to pick up in the past seven years.
As the government seeks to reduce borrowing and budget deficit, it is turning to PPP deals with the headroom for additional borrowing narrowing. In the past seven years, the government has borrowed heavily to invest in infrastructure, driving up public debt more than four times from Ksh1.77 trillion ($16 billion) in February 2013 to Ksh7.9 trillion ($71.4 billion) at the end of last week.
