Without a doubt, the COVID-19 pandemic has adversely affected world economies. According to Deloitte’s May 2020 report on the Economic Impact of COVID-19 pandemic on East African economies, the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around USD 9tn; this is greater than the economies of Japan and Germany combined. According to the IMF World Bank, in comparison, Kenya and its neighbours will see a slower GDP expansion in 2020 but will likely experience at least some positive growth. This is because these countries are less resource intensive and therefore more resilient. Foreign direct investment which is one of the key sources of cash coming into these economies is likely to fall between 5-10%. With all these negative figures, what does this mean for the Kenyan construction sector?
Infrastructure projects in Kenya
Many may recall that a key pillar of Kenya’s Vision 2030, launched by the then President Mwai Kibaki in 2008, was infrastructure development. Around this time, China became Kenya’s third largest investor following UK and South Africa. This plummeted the country’s construction sector such that in 2015, the US$3 billion construction sector contributed 4.8% to the Kenyan economy.
However, even before the pandemic struck China was tightening its investment in Kenya. For example, the much hyped railway from Kenya’s coast to Uganda reached a premature halt early last year when China withheld some USD 4.9 billion which would complete the project. China tightened its pockets in the wake of fear over the extent of China’s debt exposure in Africa. What now exists of the project, is an incomplete railway line that stops in the middle of nowhere. Such disruption of the project is likely to cost contractors and subcontractors substantial amounts with resources such as labour and supplies lying idle.
On the other hand, and optimistically so, preliminary works have commenced on the Ksh 65 billion 27km highway stretching from Mlolongo, connecting Jomo Kenyatta International Airport to the city centre and ending at James Gichuru in Westlands. This project was launched last year and was due to commence in August 2019. It is now scheduled to complete in December 2022. The Kenya National Highways Authority (KeNHA) and China Road and Bridge Corporation (CRBC) has signed a public private partnership (PPP), with the latter constructing and managing the road. Public private partnerships are long term contracts usually between a government and a private party where the private party undertakes significant risk and responsibility in providing an asset. The term of the CRBC PPP is 30 years (including 3 years of construction) during which time CRBC will recover its investment through the toll charged to road users. On expiry of the period, the project will be handed over to the government.
The use of the PPP model to build infrastructure projects is a way to buffer Kenya’s debt which is set to touch KSh 7 trillion by 2022. With tourism adversely affected and low income in the wake of COVID-19 the PPP model should prove useful in continuing to develop infrastructure in the country. A key benefit of the PPP model to a government is that it increases the efficiency of the government’s investment and frees up government funds that can be used in other important socio economic areas. It also reduces government budgets and deficits.
The legal framework in Kenya
The Public Private Partnership Act came into effect in 2013 (the “Act”) to give government bodies such as KeNHA the legal grounding to enter into contracts with the private sector and create certainty and boost investor confidence. The Act aimed to streamline public private partnerships and assist with the economic development envisioned in Kenya’s Vision 2030.
Kenya is not new to PPPs. Past PPP projects include the 1998 Port of Mombasa Grain Terminal, the Malindi Water Utility built in 1999, the Kenya- Uganda Railway Concession in 2006, amongst others. The types of PPPs usually agreed include build operate transfer, build own operate, lease renovate operate transfer, build lease transfer, design construct manage finance and build own operate remove arrangements.
A reminder of what the Act offers private investors of PPP projects in Kenya
The Act provides a framework for PPPs and provides significant comfort for private investors such that:
- It establishes institutions to regulate, monitor and supervise the implementation of project agreements on infrastructure. For example, it creates the Public Private Partnership Unit (PPPU) which is responsible for matters relating to finance.
- It provides a clear and transparent process for PPPs and their evaluation. Before a PPP can be entered into a contracting authority must establish a PPP Node which consists of financial, technical, procurement and legal personnel and screens the various project, appraising each project agreement, ensuring parties to a project agreement comply with the Act and it monitors the implementing of a project agreement amongst other functions.
- Private entities can also enter into direct agreement with lenders to finance PPP projects and risk mitigation mechanisms such as letters of comfort, guarantees and subsidies can be agreed
- The Act requires a strict procurement process and requires a comprehensive feasibility study to be undertaken before a PPP project can be undertaken.
- A private investor under the Act can agree the basis of risk allocation where there is a change in law, unforeseeable accidents, force majeure (which could include compensation in the event of political instability).
- The Act provides the contracting authority or lenders to step in where necessary.
- It also allows parties to agree (subject to the PPP Committee’s agreement) to refer disputes to arbitration. The referral of disputes to arbitration is a significant advantage to an investor looking at a PPP project in Kenya as it allows the investor to agree to a mode of dispute resolution where it can nominate an arbitrator and have greater control over the process. In my experience, given the technical nature of PPP arrangements, it is most beneficial for parties to refer any disputes arising to arbitration through reputable institutional rules.
There is no doubt that the pandemic has impacted the construction sector and likely delayed many a project. But the Mlolongo- James Gichuru highway offers a beacon of hope and is a reminder of the many benefits of PPP projects and the fact that Kenya has in place a promising piece of legislation that offers comfort to private investors and will hopefully encourage investors in PPP projects, albeit at a recognised slower pace.
We have worked on several PPP project agreements in the region and arbitrations involving infrastructure projects and welcome discussion on any such aspects.
By Sadaff Habib
Sadaff is an Associate in the Dubai office of the law firm Beale & Co practising international arbitration with a focus on construction. She also sits as an arbitrator. Sadaff is ranked as a Rising Star with the Legal 500 in Construction and is recognized as Africa’s 50 Most Promising Young Arbitration Practitioners.