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Brexit: Did Boris Johnson Hand Kenya Poisoned Chalice With Discredited PPP Deals?

GBR Team 26/02/2020

The British government should stop exporting rip-off PPP programs to Kenya after it signed a post-Brexit deal to mobilize private finance for Kenyan projects known as Private Finance Initiatives or Public-Private Partnerships, debt watchers say.
Boris Johnson and other senior UK government officials have in the past been fierce critics of the public finance initiative (PFI) model of funding public projects that the UK government announced it would sign to export to Kenya.
Delivering blistering indictment of PFIs also known as Public-Private Partnerships (PPPs), Mr. Johnson in 2010 called it theft.
“In other countries this would be called looting. Here it is called PPP,” Mr. Johnson was quoted saying in the Financial Times.
But during a recent visit to the UK by Kenya President Uhuru Kenyatta at the head of a business and trade delegation, Mr. Johnson signed PFI deals with Kenya with the British High Commission in Kenya praising them.

But according to Jubilee Debt Campaign (JDC), a UK-based debt watchdog, the UK is exporting these “rip-off PFI schemes” abroad without telling foreign governments, especially in developing countries, their true cost.

“PFI deals can be used as a way to invest in public infrastructure while keeping the costs off the books and not included in overall debt figures,” Tim Jones of JDC said in an email to GBR.

“However, in the UK they cost more than twice as much as if the government borrowed the money directly to build the infrastructure. PFI deals should not even be considered unless the costs to the government or public will be less than through government direct borrowing. However, this is usually not the case. They are a more expensive way to invest in public infrastructure.”

The UK experience with PFI/PPPs was so bad that the former UK Chancellor of the Exchequer, George Osbourne termed them “totally discredited.”

Britain has been keen to secure bilateral trade deals with foreign countries after it exited the European Union Common Market last month including signing a memorandum of understanding with the Kenyan government to mobilize private finances for development projects in Kenya.

Contacted for comment, the UK High Commission in Kenya did not respond to questions on the PFI other than to say that other commercial deals had also been signed as well as a new UK initiative for infrastructure in the region.

“On background, just to clarify, the £1.3 billion referenced in the press release is private sector investment by British companies into Kenya. The breakdown of these three investments comes from Tullow, Diageo and Globaleq. This is all private investment, there are no PPPs or PFIs,” Joy Odero, the deputy Head of Communications at the British High Commission in Nairobi.

Yet in a press release after the UK-Kenya meeting in London during the UK-Africa Summit, the Commission here said.
“A new Memorandum of Understanding was signed to collaborate on mobilizing private finance into Kenyan projects,” wrote Jane Marriott, the UK High Commissioner to Kenya.

“This partnership will bring British expertise and mechanisms to increase economic development to Kenya.”

According to senior Kenya Treasury officials, the PFI/PPP projects that the UK is targeting in Kenya include some housing projects as well as the proposed Sh28billion Nairobi Railway City.
“They are very interested in housing and the finance sector,” Dr. Geoffrey Mwau, the senior advisor to Kenya’s Treasury Secretary said. “There is also talk of urban renewal in Nairobi, and the (Nairobi) Railway City.”

Already a UK project management firm, MML Turner and Townsend, has indicated signs of gearing up for increased activity on the PPP scene.

The firm recently advertised for a project communications specialist with experience working with government and PPP infrastructure projects.

Already the firm has hired Mr. Sidhartha Patnaik as Director and Head of Infrastructure for East Africa signaling an expected scale up in operations. Mr. Patnaik did not respond to GBR email queries on what specific projects MMLTT expects to work on this year.

But one of the major projects that is likely to be on the radar for UK firms is the Nairobi Urban Renewal project covering a sprawling 3,000 acres in the Eastlands part of the city that is meant to put up 117,000 houses.

The other is the Nairobi Railways City project which is meant to occupy 425 acres beginning from where the Nairobi Railway station sits today all the way to Bunyala Road including the railway yards and land bordering Industrial Area to the south.
The project is expected to cost Sh28billion.

Do Off-Balance Sheet PPPs Hide Debt Risk?

But according to the Jubilee Debt Campaign, such PPP projects are fraught with undisclosed risk and unforeseen costs to the taxpayers.

“The risk with private finance initiatives is that they are very untransparent,” says Tim Jones of Jubilee Debt.

“So the costs of the schemes, including to the public sector remain hidden. In the UK’s experience ‘private finance’ is a very misleading term. It is the public sector who have paid the cost of ‘private finance’ schemes, at huge expense.”

But Treasury’s Mwau said PPPs will not be carried on the public debt books and will be assessed on whether they are cost effective.

“If you do it off-balance sheet it is not reflected in your debt position, that is the whole point, it is borne by the private sector. A PPP initiative is a private thing, if it is for affordable housing, if it is not affordable we do not sign it,” said Dr. Mwau.

But watchers criticize such projects as eventually finding their way into the taxpayers’ pocket as escalating costs and risks are passed onto the public.

Yet at the onset, the private enterprises that decided to take on PPP projects are supposed to bear the financial risk of the project since they are the investors.

The Standard Gauge Railway for instance is reported to have failed to meet it monthly maintenance costs and is now being subsidized. Ideally, the Chinese funders should bear the risk of the project and not pass it on to Kenyan taxpayers.

This is especially so because the PPP contracts signed with the Chinese have been opaque and not open to the public at the time of the signing.

According to Tim Jones, of the debt watchdog:

“All PFI projects (whether or not they involve UK companies) should be required to publish a full cost-benefit and value for money analysis, which is available for scrutiny by parliamentarians, media and civil society before any contracts are signed. These analyses should be compared with other options, such as direct government borrowing to fund a project.”

He adds:

“The UK should bring in a requirement that all loans to governments have to be publicly disclosed when they are given. These would enable parliamentarians, media and civil society to hold lenders and borrowers to account on how loans are used.”

Analysis

Trade between the UK and Kenya stands at about US$1.3billion with Kenya mainly exporting black tea (over 50% of UK market) and horticulture. Kenya on the other hand imports machinery, vehicles and chemicals mostly from the UK. In addition, a number of UK based firms have subsidiaries or joint-ventures in Kenya such as Diageo (East Africa Breweries), Vodafone (Safaricom) and so on.

Kenya and the UK have a bilateral investment treaty in place although this needs to be relooked at or allowed to lapse altogether as it offers a lot more protections to UK investors in Kenya without reciprocal measures allowing for space to regulate or hold such investments accountable.

Kenya runs a PPP department in the National Treasury. As at end of 2019, it had a pipeline of 80 projects ready for investment and drawn from Infrastructure, Energy, Health, Water and Education. Of these, 31 are considered front runner projects. One is already underway, while 11 have reached commercial close. These include the Jomo Kenyatta International Airport – James Gichuru expressway, the Likoni cable car project in Mombasa, and the Kenyatta University student hostels project. Others include geothermal power projects and roads.

Another Lot (8) is at contract negotiation stage and include the the Rironi-Nakuru-Mau Summit toll road, the Lamu-Garissa-Isiolo road, and the Naivasha Economic Zone.

Cost Revisions

Both the JKIA-James Gichuru expressway and the Nairobi-Nakuru-Mau Summit Highway have seen significant revisions in costs since they were first announced lending credence to the fears of overpriced projects once the initial agreements have been signed.

The JKIA one was to cost Sh51bn initially but is now slated to cost Sh61bn.

The 175km Rironi-Nakuru-Mau Summit project was meant to cost Sh159billion according to the bid placed by the winning RVC consortia but it is now said to cost north of Sh180bn, an increase of about Sh20bn (US$200m).

It will also be the costliest of any current road projects per kilometre basis, costing just over Sh1.02billion to construct per kilometre.