An exterior of the International Monetary Fund (IMF) headquarters in Washington, DC.
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State warned of the hidden risks in PPP project contracts
The government has been cautioned against committing large, complex infrastructure projects to Public Private Partnerships (PPPs), which may expose citizens to fiscal risks, mainly foregone revenues in the future.
The International Monetary Fund (IMF) in the latest report capturing economic developments in the country notes that while the State appears active to procure large public investment projects through PPP contracts, there exists huge risks that could cost taxpayers later if not well executed.
The IMF advised the government to consider setting a limit on the size of projects that can be undertaken under the PPP framework, a strategy some countries have already adopted.
“PPP contracts, due to their long-term nature, may create the illusion of additional fiscal space, as short-term budget outflows are exchanged for future payments or foregone income from user fees. However, these projects entail fiscal risks, attributed to explicit or implicit contingent liabilities, often arising from asymmetric information between the government and contractors, especially in complex projects,” the IMF warned.
The multilateral lender observes that the real effect of PPP projects will depend on their productivity once completed, and how the government contains fiscal risks associated with them.
“A centralised framework is necessary to integrate PPP projects within the national public investment and budget framework. Some countries have implemented limits on the size of their PPP portfolios as a safeguard for public finances –a practice that Kenya could consider,” the IMF advised.
Already, the State has lined up PPP projects valued more than Sh740 billion to be launched starting July, from which it expects to mobilise Sh50 billion. “Currently, the PPP Directorate has a pipeline total of 31 projects at various stages of the PPP project cycle, with most of them being at procurement stage. With these PPP pipeline projects, the government envisages mobilizing Sh50 billion within the next FY 2024/25,” Treasury said in the 2024 draft Budget Policy Statement (BPS).
The IMF, however, cautions that the projects’ impact on the economy will depend on “the balance between the efficiency the private sectors bring and realization of fiscal risks.”
In an update to the IMF, the government said it would carefully evaluate cost and risks associated with PPPs, to ensure that “only projects with the highest socio-economic returns are chosen and fully integrated into the PIM planning and monitoring framework.”
The government also told the IMF that as part of strengthening the PPP Directorate’s reporting on risks, an online public register of all active PPP projects and their contracts will be maintained by the directorate and entities under which the projects are being implemented.
Among key PPP projects the government has lined up is the $3.6 billion (about Sh582 billion) Nairobi-Mombasa Expressway, two electricity transmission lines valued Sh171 billion, two terminals at the Jomo Kenyatta International Airport (JKIA), and irrigation projects whose value has not been disclosed.
