Kenya’s Energy Sector: 2015 Highlights

Posted on September 12th, 2018

By Geoffrey Muchiri | Cindy Oraro

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2015 started with some good news for Kenya’s renewable energy sector; M-Kopa, a system that has helped increase access to affordable solar energy across East Africa, won the 2015 Zayed Future Energy Prize. M-Kopa is a pay as you go system allowing users to access a solar power system that includes a panel, three lamps, radio and mobile phone charging kit at a minimal fee. Most Kenyans are able to pay for the whole system in 1 year.

Geothermal power’s contribution to the national energy mix increased to 51% in early February 2015 following the commissioning of two new plants with a combined capacity of 280 MW, Olkaria 1 and Olkaria 4 in the Rift Valley. Geothermal power is a renewable source of energy that is generated from natural steam from the earth from as far as 3 kilometeres underground and, unlike hydro, its output is not affected by the vagaries of the weather. Supported by the World Bank, Olkaria 1 is one of the largest single geothermal investment projects in the world. Other partners in the Olkaria project include the Japan International Cooperation Agency, the European Investment Bank, Agence Française de Développement and Germany’s KFW. Kenya aspires to produce at least 1900 MW of geothermal energy by 2017 and 5,000 MW by 2030, presenting great investment opportunities.

Towards the end of February 2015, Amu Power, a company formed by a consortium of Centum and Gulf Energy, announced plans to construct a coal-fired thermal power station in Lamu County. The 981.5 MW power plant is projected to cost USD 1.7 billion and will be the biggest single producer of energy in Kenya. It will also be the most cost-effective and efficient power plant in the country. Construction was expected to begin in September 2015 and last 21 months but is now expected to commence at the start of this year. The delay was occasioned by an objection from the losing bidder in the tender who challenged the tendering process but the Public Private Partnership Committee has confirmed that the tendering had followed due process. The bodies involved include the Ministry of Energy and Petroleum (MoEP), the National Land Commission (NLC) and the National Environment Management Authority (NEMA).

In late June 2015, Kenya Power (the country’s main power utility company) announced that it would for the first time reduce tariffs across the board for households consuming between 51 and 1500 KWh per month. The price cuts are the direct result of Kenya’s prioritization of renewable energy sources, including the launch in late 2014 of KenGen’s 280 MW Olkaria geothermal power plant, the largest facility of its kind in the world. KenGen is currently responsible for 80% of the country’s electricity generation.

President Uhuru Kenyatta met with investors led by world renown entrepreneur Sir Richard Branson, Founder of Virgin Group at his Harambee House office in Nairobi on July 11, 2015. The meeting explored how to make the most of Kenya’s abundant potential for green energy. The proposed renewable energy projects aim at displacing a percentage of diesel generation in off-grid stations and raise the supply of clean energy for productive use in support of Vision 2030 (the country’s main development blueprint).

Still in July, the President officially launched the Lake Turkana Wind Power Project. The project is expected to be the largest such project in Africa, generating 310 MW of electricity equivalent to 20% of Kenya’s current generation capacity. The USD 694 million project achieved full financial close in December 2014. It is expected to generate USD 150 million a year in foreign currency savings to Kenya. An international consortium of lenders and producers, including the African Development Bank, British Company Aldwych International and Standard Bank, aims to install 365 wind turbines. The 52-metre blade span windmills will take advantage of high winds in the remote area.

Kenya Power, which remains the country’s sole electricity distributor, announced in July 2015 that it had installed 170 new dedicated lines to ensure steady power supply for industrial customers. Kenya Power also plans to build 98 new substations and refurbish 12 others by the end of 2016 to create a greater degree of flexibility on the national grid.

At the July 2015 Global Entrepreneurship Summit held in Nairobi, the Ministry of Energy signed a KES 220 billion (USD 2.2 billion) deal with a North American company, SkyPower, to develop 1000 MW of solar energy in the country.

The East African Power Industry Convention (EAPIC) was held in Nairobi in August 2015 and gave delegates a chance to share knowledge, pinpoint investment opportunities and explore best practical solutions. The EAPIC aims to look into the energy industry’s challenges and find solutions to ongoing issues such as failing infrastructure and rising electricity demand.

In October 2015, global tech-giant Google announced its intention to invest KES 4 billion (USD 40 million) in the Lake Turkana Wind Power project for a 12.5 per cent stake.

Zambia, Tanzania and Kenya signed an Inter-Governmental Memorandum of Understanding in December 2015 to guide them in the implementation of the ZTK project, which creates opportunities for the reinforcement of grids in the three countries and the application of economies of scale in the development and exploitation of renewable energy resources.

Sources

Amu Power confirms construction of coal fired power plant in Kenya, Construction Review Online

Big investors eyeing Kenya’s energy sector meet Uhuru Kenyatta,  Daily Nation

Energy Bill 2015, Energy.co.ke

Kenya’s fast-growing energy industry powers on, and is hungry for more, Mail & Guardian Africa

Kenya’s Geothermal Investments Contribute to Green Energy Growth, Competitiveness and Shared Prosperity, World Bank

Kenya looks to greater generation capacity, Oxford Business Group

Kenya Power to compensate users for blackouts under new Bill, Business Daily

Kenya, SkyPower Plan Signing 1 Gigawatt Solar Deal, Bloomberg

New Energy Bill in Kenya table – the good and the bad, Polity.org.za

New Kenyan Law to Regulation Oil, Gas Exploration, Business Daily

Petroleum (Exploration, Development and Production) Bill 2015, Energy.co.ke

Positive outlook for power in Africa despite challenges – PwC survey, The New Times

Renewable energy as a catalyst of economic development in Kenya, Blue & Green Tomorrow

SkyPower signs US 2.2 billion agreement to develop and build 1 GW of solar energy projects in Kenya, SkyPower.com

Will Africa’s biggest wind power project transform Kenya’s growth?, CNN

Work on Lamu coal plant set to begin in December, The Star

Zambia-Tanzania-Kenya Power Interconnector (ZTK) Project, Energy.co.ke

Homeground Advantage: Entrenching Local Interests in the Extractive Industry

Posted on June 27th, 2018

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Background

Kenya has recently discovered several blocks of natural gas and oil spanning several counties. However, most of these counties are poor, including Turkana which is known to have the most promising oil fields that could be exploited as early as June, 2017. Lamu and Wajir also have natural gas.

It has been observed that countries which are rich in natural resources, specifically non-renewable resources like minerals and fuels, somewhat paradoxically tend to have slow economic growth, little or no democracy leading to authoritarian rule, sluggish development and are more prone to conflict as compared to countries with fewer natural resources. This situation has been coined the “resource curse” or the “paradox of plenty”.

Resource Curse

The term resource curse was first used by a British economist, Richard Auty, in 1993 to describe how countries rich in mineral resources were unable to use that wealth to boost their economies and how contradistinctively, these countries had lower economic growth, than countries without an abundance of natural resources.

Avoiding the resource curse was one of the key issues raised by the public in 2012 after the Kenyan government announced that commercially viable oil had been discovered in Turkana. Several members of the public were apprehensive as they did not want Kenya to suffer the same resource curse suffered by several African countries such as Equatorial Guinea, Liberia, Libya, Nigeria, Republic of Congo, Sierra Leone and Sudan.

The Local Content Bill, 2016

Cognisant of the above, the Senate Committee on Energy, Roads and Transportation introduced the Local Content Bill in July 2016 (the Bill). The Bill is intended to avert the conflicts that have rocked communities in oil and gas rich areas by ensuring that the majority of poor Kenyans in those areas are assured of enjoying the benefits of natural resources.

The Bill is premised on Article 69(1) of the Constitution which imposes an obligation on the State to among other things, ensure the sustainable exploitation, utilisation, management and conservation of the environment and natural resources and ensure the equitable sharing of the accruing benefits and to ultimately utilise the environment and natural resources for the benefit of the people of Kenya.

Objectives of the Bill

The Bill seeks to provide a framework to facilitate local ownership, control and financing of activities connected with the exploitation of gas, oil and other mineral resources. It also seeks to make provision for an increase in local participation along the value chain in the exploration of gas, oil and other mineral resources.

The Bill also seeks to ensure that local content is entrenched in every aspect of the extractive industry through the involvement of local communities which should lead to the enhancement of the income received by local communities following their involvement in the extractive processes, for example, by ensuring that landowners and owners of resources receive the revenue due to them following use of their land and resources.

Further, the Bill looks to facilitate the development of local economies through the creation of employment opportunities and by ensuring the procurement of goods and services that are produced locally. Additionally, the Bill aims to stimulate local industrial development, capacity building and to increase the local capability to meet international standards in the supply of goods and services.

Local Content Committee

The Bill establishes a Local Content Development Committee (the Committee) whose functions include overseeing, coordinating and managing the development of local content in Kenya; making recommendations and advising the Cabinet Secretary in the Ministry of Mining (the Cabinet Secretary) on formulations of policy and strategies for the development and implementation of local content; making recommendations to the Cabinet Secretary on the minimum standard requirements for local content and the development of the local content plans; appraising, evaluating and approving local content plans and reports submitted to the Committee; overseeing, in consultation with the county governments, the implementation of local content policies and strategies by operators and collaborating with county governments in the implementation of strategies to improve the capacity of local persons, businesses and the capital markets to fully leverage the objectives of the intended Act.

Local Content Plan

Under the Bill, oil and gas companies will now be required to state how local communities will benefit from the proceeds of the extractive processes before they are licensed. The companies are required to submit a Local Content Plan (the Plan) to the Committee in which they should set out information regarding the procurement and utilisation of locally produced goods and services, the qualification requirements and employment of local persons to be engaged in the extractive industry, workforce development strategies in relation to locals and strategies for the support of local participation in the activities of the operator.

The operator is also required to set out in the Plan the strategies through which it intends to give priority to goods produced and services delivered locally and to also give priority to qualified local persons with respect to employment opportunities.

Skills and Technology Transfer

The Bill requires oil and gas exploration companies to commit to a skills and technology transfer agreement with local firms and individuals. This will ensure more Kenyans are employable and have the skills required for job opportunities in the extractive industry.

An operator is also required to submit to the Committee, a succession plan for any position not held by a local person within a period of six (6) months from the commencement of its operations. This provision seeks to ensure that where a certain position is held by an incumbent expatriate, the role will be taken up by a local person within a specified time.

The Bill also requires the Cabinet Secretary for Environment and Natural Resources to issue guidelines and contracting standards on thresholds to be attained by each operator with respect to the percentage of local equity ownership of companies engaged in the extractive industry.

Local Content Training and Development Fund

The Bill established the Local Content Training and Development Fund (the Fund) and requires the extractive industry players to remitsuch percentage of their net revenues to the Fund as will be determined by the Cabinet Secretary in consultation with the Committee for the purpose of training locals. This provision is aimed at ensuring that in the future, local content requirements are fully implemented as required under the Bill.

A Nigerian Perspective

It is arguable that the discovery and exploitation of oil in Nigeria has been more of a curse than a blessing. The oil has benefited only a few people and this has resulted in frequent conflicts amongst communities, particularly in the oil-rich Delta region.

The Nigerian Oil and Gas Industry Content Development Act, 2010 (the Nigerian Act) on local content was thus enacted with similar intentions as the Kenyan Bill. The Nigerian Act seeks to increase indigenous participation in the oil and gas industry by prescribing minimum thresholds for the use of local services and materials and to promote transfer of technology and skills to the Nigerian labour force in the industry.

Like the Kenyan Bill, the Nigerian Act provides for preferential treatment of local ventures and workforce. It also provides a host of requirements designed to ensure workforce development of and technology transfer to Nigerians as a first option. It requires that, whenever possible, operators should hire Nigerians. When the operators are unable to find skilled workers, the Nigerian Act then requires that they put in place programs and procedures for training workers and to make periodic progress reports to the Nigerian Content Monitoring Board.

In addition, the Nigerian Act mandates that operators provide a succession plan for all positions filled by expatriates, except for five percent (5%) of management positions, which may be permanently held by foreigners, with Nigerians taking over after a maximum of four (4) years of apprenticeship under incumbent expatriates.

Conclusion

While the Memorandum of Objects and Reasons of the Kenyan Bill states that one of its objectives is to provide a framework to ensure that landowners and owners of resources receive the revenue due to them, it would appear that the Bill does not have express provisions on exactly how the proceeds of the extractive industry are to be shared with the local community.

The Bill seems to place more focus on the involvement of the local community in the mechanical processes of the extractive industry through the provision of goods and services required for the industry and less on actual distribution of the income generated from the extractive industry.

It may therefore be concluded that while the Bill provides a good starting point on addressing the concerns of the public regarding the direction Kenya is taking to safeguard local interests in the extractive industry, the question as to how effective the Bill will be in achieving its stated intention will be answered once the Bill is passed into law and with the passage of time.

On the Way: A look at Kenya’s New Road Annuity Programme

Posted on June 27th, 2018

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Overview of the Kenyan Road Infrastructure Sector

In recent years, the Government of Kenya has expended a large part of its budget on road infrastructure. This effort has been in fulfilment of the country’s economic growth strategy under Kenya’s Vision 2030 initiative (the country’s development blueprint). Currently, the sector relies heavily on the Treasury and proceeds from the Roads Maintenance Levy Fund (RMLF) to build new roads and maintain existing road networks. Despite this, huge gaps remain in financing. For instance, in the 2014/2015 financial year, only KES 27.3 billion (USD 273 million) was available for the annual roads programme. This is less than 50% of what was required for road maintenance, rehabilitation and development of new roads.

As a result of these gaps, it is estimated that the Ministry of Transport, Infrastructure, Housing and Urban Development owed contractors KES 25.3 billion (USD 253 million) in outstanding payments for projects that had yet to be completed, as well as for those which had been certified as complete as at 31st December, 2013. Moreover, private road contractors were owed an estimated KES 88.3 billion (USD 883 million) for commitments yet to be billed and certified as at 31st December, 2013. This necessitated government initiatives to plug the funding gap, and key amongst these initiatives was the Road Annuity Programme (RAP)

The Road Annuity Programme: Objectives and Expected Outcomes

In June 2014, President Uhuru Kenyatta launched RAP, which was subsequently approved by the Cabinet on 10th March, 2015. Pursuant to RAP, the Government shall:

(a) identify a maximum of 10,000 kilometre (km) priority roads distributed across the country;
(b) procure long term contracts for design, finance, construction and maintenance of identified roads under a public private partnership arrangement within the meaning of the Public Private Partnership Act, 2013 (the PPP Act), with payments linked to the completion of roads and performance based maintenance; and
(c) pay for the services delivered by the private contractors through the normal budget process.

The Roads Annuity Fund (the Fund) was established under the Public Finance Management (Roads Annuity Fund) Regulations, 2015 (the Annuity Regulations). The Fund was established for the purposes of providing capital to meet the national Government’s annuity payment obligations for the development and maintenance of roads under RAP. The Annuity Regulations provide that withdrawals from the Fund shall only be made for the purpose of payment of approved annuity payment obligations and operational expenditures.

RAP aims to transform the country into a low-cost investment and trading destination and bring Kenya closer to the realisation of Vision 2030 and attainment of middle income economy status. RAP also aspires to build the capacity of local firms with a view to enabling them to take up the development of all infrastructure projects in the country and to generate adequate employment opportunities for graduates, amid high unemployment rates among the growing youth population.

Additionally, the new road network will promote national integration and improve security as a result of connectivity of regions and communities. It is reported that in urban areas such as Nairobi, RAP is expected to reduce pollution and traffic jams, which are estimated to cost KES 57.8 million (USD 578,000) per day in lost productivity. RAP will also create more arteries in and out of cities thus decongesting traffic and reducing travel time.

The Government’s initial plan was to complete 2,000 km of small roads within the 2014/2015 financial year, followed by 3,000 km in 2015/2016 made up of 80% small roads and 20% highways and 5,000 km in 2016/2017. Once completed, RAP would have nearly doubled the number of Kenya’s asphalt surface roads from the current 14,000 km, equivalent to 8.8% of the 161,451 km of classified roads, to 24,000 km.

However, RAP almost collapsed in late 2015 amid concerns of inflated construction costs, with contractors quoting twice more than the Government’s budget for building a km of road. The Government had expected to spend about KES 25 million (USD 250,000) for every km of rural roads and between KES 50 million to KES 80 million (USD 500,000 to USD 800,000) for each km of urban and trunk roads.

Significantly, lenders also differed with the Government on the rate of interest to be charged on loans issued to shortlisted contractors amid a volatile forex environment, soaring lending rates, rising inflation and a high risk of default among borrowers. The Government had proposed a uniform rate of 12% to 13%, which commercial banks rejected arguing that contractors were borrowers like any other and would therefore be assessed based on their respective risk profiles. (Previously , the prevailing commercial bank interest rate was on average approximately 20% but is now capped at 4% above the Central Bank of Kenya’s base rate). The stalemate on the interest rates applicable led to widespread perception that the RAP had collapsed.

However, in April 2016, the National Treasury Cabinet Secretary, Henry Rotich, clarified that contrary to earlier statements, RAP had not reached a dead end. Around the same time, it was reported that the Government had negotiated a KES 150 billion (USD 1.5 billion) concessionary loan from the World Bank’s private wing, the International Finance Corporation (IFC), to revamp RAP by enabling local contractors to access funds at affordable interest rates. These funds would be disbursed by local banks at interest rates of between 5% and 6%.

The Annuity Road Financing Model (ARFM) represents a major shift from the traditional road development financing models such as the Engineering, Procurement and Construction (EPC) model the Build, Operate and Transfer (BOT)-Toll model. Under the EPC model, which had traditionally been used in Kenya, the Government would invite bids for engineering knowledge from private players and meet all procurement costs. The private sector’s participation was therefore limited to the provision of engineering expertise while the Government bore the whole risk of the project.

In the BOT-Toll model, the developer has to construct and maintain the road and thereafter recover the construction costs by collecting toll proceeds. There is, however, an additional traffic risk that the developer has to bear.

The Annuity Road Financing Model Explained

The ARFM was introduced in Kenya to help the road sector overcome its financing constraints while ensuring faster turnaround in execution of road construction. The Government is using this model for roads that may not be viable for conventional tolling which is more suitable for heavy traffic roads whose users can generate sufficient revenue to offset construction and maintenance costs. According to the Kenya Private Sector Alliance, the model has been tried in road construction in other countries with success and Kenya will be the first African country to use this model.

Under the ARFM, contractors will design, finance and construct the roads within a stipulated time not exceeding three (3) years and guarantee construction quality. The successful bidders will be required to raise at least 70% of the total cost of a project, before they are awarded a contract. Contractors will also maintain the roads post-construction for a maximum of eight (8) years, based on fixed annual payments by the Government, which will be extended after construction. The role of the Government will involve negotiating loans with banks based on a payment modality to be agreed upon by the Government, the contractor and the bank, giving guarantees to local banks in the form of letters of comfort and certifying the works upon completion. The Government, which would have provided 30% of the funds, will then repay the loans at a uniform rate in equal instalments (annuity) over an agreed period from the time a given road is completed.

The Various Regulators
RAP will be implemented by the Ministry of Transport and Infrastructure, Housing and Urban Development through the Kenya National Highways Authority, Kenya Rural Roads Authority and Kenya Urban Roads Authority.

It is hoped that RAP will benefit from a new dispensation and strengthened institutions. Case in point, the Engineer’s Act, 2011 established the Engineers Board of Kenya (EBK) which is mandated to register engineers to ensure that they carry out their duties in accordance with the EBK’s Code of Conduct. In addition, the National Construction Authority is responsible for regulating the construction industry and ensuring contractors provide quality services. Both these bodies can caution, censure, suspend or remove registered persons from the register.

The Public Private Partnership Committee established under the PPP Act is mandated to, among other things, ensure each project agreement is consistent with the provisions of the PPP Act. The Public Private Partnerships Node also established under the PPP Act is mandated to, among other things, identify, screen and prioritise projects, based on guidelines issued by the Public Private Partnerships Committee.

The Indian Perspective
The National Highways Authority of India recently launched a new financing model, which is a mix between the ARFM and the EPC Model. Under this hybrid annuity model, the government contributes 40% of the project cost in the first five (5) years through annual payments (annuity). The remaining 60% is paid as a variable annuity amount based on the value of the assets created and the performance of the developer. This means that during the construction stage, the developer has to raise the remaining 60% in the form of equity or 6loans. Under this model, revenue collection is the responsibility of the National Highways Authority of India. The National Highways

Authority of India will collect toll and refund the developer in equal instalments over a ten (10) to twenty (20) year period. The Indian Government’s policy is that this model will only be used in stalled projects where other models are not applicable.

Benefits of the Annuity Road Financing Model

Notably, under RAP, the contractor has the assurance that payment for work done will be made on time in contrast with past experiences of non-payment. The Annuity Regulations provide that the contracting authority shall process and submit a request for payment to the officer administering the Fund within ten (10) days of receipt and that the officer shall settle applications for payment within twenty one (21) days of receipt. The ARFM also gives the Government the opportunity to offload the risk associated with construction of roads to the consortiums which will help reduce the cost of building and maintaining roads. Paying contractors for roads built and certified as complete will also help eliminate poor workmanship. The Annuity Regulations provide that a contracting authority shall only request for payments from the Fund once an independent engineer has certified that the contractor has met all obligations for which payment is claimed under the project agreement.

Conclusion

There is no doubt that once fully implemented, RAP will improve access to markets and facilitate the uplifting of the socio-economic condition of the entire nation due to increased connectivity across the country. RAP will also help build local capacity, facilitate job creation, improve national integration, boost trade, economic growth and security. In that sense, the RAP addresses a number of the socio-economic development patterns envisioned under the new Constitution and under Vision 2030.

A Matter of “Competing” Principles: Confidentiality and Disclosure in PPP Procurement

Posted on June 26th, 2018

By Walter Amoko

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Even though public-private partnership (PPP) projects are increasingly widespread across the world, it is only now that they are beginning to gain traction in Kenya. However, the efficacy of PPPs as a new investment phenomena in Kenya (like most developing countries) is virtually untested.

More importantly, despite the passage of relevant legislation to facilitate PPPs for public investment, the principles and practices that underpin the attitudes of PPPs’ implementation remain largely undeveloped. There is still a lot of ambiguity and weaknesses in the interpretation and implementation of key provisions of the law that are critical to the realisation of the true objectives of PPPs for achievement of the maximum public benefit from such projects.

This is particularly true in Kenya where the Public Private Partnerships Act, (PPP Act) was only enacted in 2013. Though prior to the enactment of the said Act, a number of national projects were developed using the PPP approach, such projects were under-regulated and provisions were largely tucked into the Public Procurement and Disposal Act (Cap.412C(as amended)). As such, some projects were successful while some failed for varied reasons, including the lack of proper controls and poor regulation of for instance, the tendering processes. Successes include the Mtwapa and Nyali Bridges Concessions, the 74 MW Tsavo/Kipevu IPP, 2000, Orpower-Olkaria III 2000/2008 (48 MW Geothermal Plant), Mumias (34 MW power plant) and the Port of Mombasa Grain Terminal – BOO, 1998. One notable failure is the Nairobi Urban Toll Road, 2009.

Kenya now has a substantive Act of Parliament that governs the entire PPP process from project conception to hand over and establishes the relevant institutions such as the PPP Committee, the PPP Unit and the PPP Petition Committee (the Petition Committee) to oversee PPP projects from conception to execution and finally completion. So far, a number of independent power production projects are ongoing under the new legislation and a number of projects have been identified and approved by the Cabinet to be implemented under the new PPP framework. The current list of pipeline projects includes fifty nine (59) projects from different sectors of the economy.

Nonetheless and perhaps owing to the nascent state of the PPP Act, the underlying principles and values that ought to govern the critical tendering processes of PPPs and to ensure competitive, fair and transparent private investment under the framework remain largely undeveloped. Key among them being the proper balance between the need for transparency and accountability vis-à-vis the protection of commercially sensitive information relating to the tendering process, all of which are aimed at protecting the integrity of the entire process.

Confidentiality is Essential

One of the fundamentals of any PPP process is confidentiality of information exchanged between the contracting authority and bidders. The underlying theory on the need for confidentiality is for the protection of commercially sensitive information which, if disclosed to the public, may harm the financial position of the Government or of a competitive bidder. Confidentiality is also required to ensure that none of the bidders abuse the system by knowing the contents of the bids submitted by the others and thus compromising the competitive process.

But so is Transparency

However, of equally fundamental importance to ensure integrity and competitiveness of the process is transparency, fairness and accountability through the entire process. The PPP Act and regulations plainly espouse these fundamentals both during and after tender evaluation and award. Notably, Regulation 40(5) of the Public Private Partnerships Regulations, 2014 requires that, “the proposal evaluation team shall preserve the confidentiality of a tender evaluation process and shall not be influenced or directed by any person regarding the evaluation of a proposal except in accordance with the Act and these Regulations.” Section 29 on the other hand, requires that, “unless otherwise provided under the Act, all projects shall be procured through acompetitive bidding process and that in procuring and awarding a contract to a private party under the Act, a contracting authority shall be guided by the principles of transparency, free and fair competition and equal opportunity in accordance with the guidelines made under this Act.”

A Balancing Act

These two fundamentals require careful balance as it is almost impossible to achieve transparency and accountability without information. Still, unless the flow of information is checked, particularly at the stage of pre-award and execution of the tender agreement, commercially sensitive information may be jeopardised both for the bidders and the Government. This may thereby put to question the competitiveness of the entire process with serious ramifications on value for public funds. In this regard, the Petition Committee, which was established to adjudicate challenges relating to a PPP process, plays a major role. Unfortunately, in the initial challenges brought before the Petition Committee in which the issue of disclosure arose, it adopted a very narrow understanding of its powers, rejecting applications by aggrieved parties to compel disclosure of relevant information relating to the evaluation process by contracting authorities. The Petition Committee held that it had no jurisdiction to do so, a holding that wholly undermined its ability to review impugned decisions of contracting authorities. This seemingly, elevated confidentiality over transparency and accountability with the resulting twin effects of considerably limiting the rights of parties challenging evaluation outcomes to fair hearing and compromising the competitiveness of PPP tender awards.

The APM Terminals Case

The above position has now been put right by the High Court in Republic vs. Public Private Partnerships Petition Committee & 3 Others ex Parte APM Terminals (2015) eKLR (the APM Terminals Case). As appreciated by the High Court (Korir J.) in that case, the Petition Committee’s jurisdiction was focused and specialised for the development of jurisprudence on PPP matters. It goes without saying therefore that its decisions, especially at the nascent stage of the PPP Act, are bound to play a crucial role in developing the PPP procurement regime in the country, in the same fashion as other monitoring mechanisms provided for in law. It is therefore crucial that it grasps these principles and develops the same to the highest standards possible.

Confidentiality of commercial information if over protected would obviously threaten the integrity of PPPs and foster a lack of trust, unfair competition and unaccountability. The need to strike a balance between the two is therefore critical and more so in circumstances where, as per the court in the APM Terminal case, ‘shenanigans’ in public procurement have been known to cost taxpayers value for money in public projects’. Therefore, confidentiality and/ or technical rules for the same should not be used by parties or condoned by the Petition Committee as a shield, when questions are raised on hideous decisions and/or actions of the contracting authority and/or any other person involved in the process. Transparency and accountability is nothing without information.

A matter of merits
  • Yet disclosure cannot and should not be a remedy in all instances. Each situation must be considered on its own merits and disclosure ordered only in deserving circumstances and within regulated parameters, so as to assure protection of commercially sensitive data. Establishing a threshold for the same is therefore critical. The Court in the APM Terminals case has set the ball rolling in that regard and has established sound principles that can be built on, going forward. The said principles re-affirm the fundamentals of fairness, transparency and accountability in PPPs and shall hopefully assist the Petition Committee, private investors and the contracting authority in making decisions on disclosure rights and obligations while ensuring confidentiality and integrity of commercially sensitive information. The Court crystallised the principles to be considered in balancing the twin confidentiality and disclosure obligations in PPP Procurement thus;
  • Where a losing bidder desires disclosure, the application should be made without delay at the time of filing the petition or complaint. The request should be accompanied by the reasons for the application for the disclosure and the specific information required to be disclosed
  • A request for disclosure before the Petition Committee is not of the nature under Article 35 of the Constitution. It is for the protection of the right to fair administrative process and fair hearing as provided by Articles 47 and 50(1) of the Constitution
  • Statutory administrative procedures such as those before the Petition Committee can be augmented with common law rules whenever it appears necessary to promote fair hearings. Where it would be in the interests of justice to allow discovery, an administrative tribunal should do so even where its rules do not expressly provide for discovery. The main point to consider is whether denial of discovery would result in denial of justice to a party
  • In order for contracting authorities to embrace fairness, transparency, competitiveness, equity and cost-effectiveness in public procurement, the Petition Committee must stress this message by giving decisions that encourage and support these principles. A decision that goes against these principles is a decision against public policy
  • The requirement for confidentiality is only found in the Public Private Partnerships Regulations, 2013 which limits confidentiality to the proposal evaluation team. That provision does not apply to the Petition Committee or mainstream courts and both are therefore not bound by the same. They have the power to order disclosure of information relating to PPP evaluations on application
  • As is the case in the European Union, contracting authorities are under an obligation to disclose substantial information concerning other tenderers’ offers (notably, at least the winning tenderer) to all participating tenderers and/or disappointed bidders in order to allow them to effectively challenge award decisions. This obligation is sufficiently discharged only when the contracting authority provides very detailed information about the tender evaluation process and, in particular, gives information that enables the disappointed tenderer to perform a relative comparison of its offer vis-à-vis the tender of the winning bidder
  • An unsuccessful tenderer who wishes to challenge the evaluation process is in a uniquely difficult position. He knows that he has lost, but the reasons for his failure are within the peculiar knowledge of the public authority. In general terms therefore and always subject to issues of proportionality and confidentiality, the challenger ought to be provided promptly with the essential information and documentation relating to the evaluation process actually carried out, so that an informed view can be taken of its fairness and legality
  • Due to the short time limits imposed by the Regulations on those who wish to challenge the award of public contracts, the start of the relevant period is triggered by the knowledge which the claimant has (or should have) of the potential infringement However, the Court must always consider applications for specific disclosure in procurement cases on their individual merits. In particular, a clear distinction may often be made between those cases where a prima facie case has been made out by the claimant (but further information or documentation is required), and those cases where the unsuccessful tenderer is aggrieved at the result but appears to have little or no grounds for disputing it
  • Any request for specific disclosure must be tightly drawn and properly focused. The information/documentation likely to be the subject of a successful application for early specific disclosure in procurement cases is that which demonstrates how the evaluation was actually performed, and therefore why the claiming party lost. Other material, even if caught by the test of standard disclosure, is unlikely to be so fundamental that it should form the subject of a separate and early disclosure exercise
  • Ultimately, applications for disclosure must be decided by balancing, on the one hand, the claiming party’s lack of knowledge of what actually happened (and thus the importance of the prompt provision of all relevant information and documentation relating to that process) with, on the other, the need to guard against such an application being used simply as a fishing exercise, designed to shore up a weak claim, which will put the defendant to needless and unnecessary cost
  • It is only such disclosure which will assure those who participate in public tenders that the tender process is above board

As aptly stated by the Court in the APM Terminals Case, there should be nothing to hide and nothing to be ashamed of, where goods and services of good quality are being procured at the best prices in the market. Indeed, the only way to assure that is by jealously guarding the transparency of the procuring process.

“More Power” to Investors: Kenya’s Promising Renewable Energy Market

Posted on June 26th, 2018

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No doubt, Kenya offers one of the fastest growing and dynamic markets for renewable energy in Africa. In 2015, the Climatescope Index ranked Kenya 6th out of 55 countries that invest in the generation of renewable energy. The country’s renewable energy flagship projects include the Lake Turkana Wind Power Project which aims to provide 310 MW of reliable, low cost windpower to the Kenyan grid. This is equivalent to approximately 20% of the current installed electricity generating capacity. As the single largest private investment in Kenya, the Project will replace the need for Kenya to spend approximately KES13.7 billion (USD 135 million) per year on importing fuel for electricity generation. Construction of the power plant commenced on 25th October, 2014. 50 MW to 90 MW of capacity will be ready for commissioning in September 2016. It is notable that when fully operational in April 2017, the windfarm will be the single largest one of its kind in Africa.

Smaller windpower projects such as a 90 MW windpower project in Mpeketoni, Lamu County have been proposed. Regulatory approvals have been granted for this KES 20 billion (approximately USD 200 million) project sponsored by Electrawinds, a Belgian company, in partnership with International Finance Corporation and a Kenyan company, Kenwind Company Holdings. In Kajiado County, the Kipeto windpower project is set to generate 100 MW of electricity. The project results from one of the most substantial United States foreign direct investments in Kenya. A Chinese firm was recently contracted to construct the plant at the cost of KES 22.6 billion (approximately USD 223 million). The construction phase has been estimated to be two (2) years.

In addition, SkyPower, the developer and owner of various utility-scale solar photovoltaic energy projects, signed an agreement in July 2015 with the Ministry of Energy and Petroleum for the development of 1 GW of world-class solar projects to be built in four phases in Kenya over the next five (5) years.

Centum Investments, a Kenyan investment company, together with three other foreign firms have also sponsored the construction of the 140 MW Akiira geothermal power plant at a projected cost of KES 30 billion (approximately USD 296 million). The project will be developed in two phases; it is estimated that 70 MW will be connected to the national grid.

The legal and policy framework

The above projects have been facilitated by Kenya’s extensive regulatory framework which supports the growth of Kenya’s renewable energy sector.

The Energy Act, 2006 defines renewable energy to mean “all non-fossil sources including but not limited to biomass, geothermal, small hydropower, solar, wind, sewage treatment and plant gas”.

The Sessional Paper No. 4 of 2004 on Energy, which is the foundational document for energy liberalisation in Kenya, provides for the government to undertake pre-feasibility and feasibility studies on the potential for renewable energy sources and for the packaging and dissemination of information on renewable energy sources to create investor and consumer awareness on the economic potential offered by renewable sources of energy.

The Energy Act, establishes the Energy Regulatory Commission (ERC). The ERC’s key functions include the regulation of production, distribution, supply and use of renewable and other forms of energy. The ambit of its functions covers the protection of interests of consumers, investors and other stakeholder interests. To compound this, the Energy Act obligates the Cabinet Secretary to promote the development and use of renewable energy technologies.

Government policy on feed-in-tariffs

In a bid to attract private investment into the renewable energy sector, the Government issued a policy on renewable energy feed-in-tariffs in 2008. The feed-in-tariffs were originally introduced for electricity generated from wind, biomass and small hydropower sources but after revision in 2010, they also provide support to geothermal and biogas sources as well as solar electricity generation. A feed-in-tariff as described in the policy is an instrument that allows power producers to sell renewable energy-generated electricity to an offtaker (the buyer of electrical energy for the purpose of selling the electricity to customers connected to the national or mini-grid systems) at a pre-determined tariff for a given period of time.

The objectives of the feed-in-tariffs system as outlined in the policy are: to facilitate resource mobilisation by providing investment security and market stability for investors in electricity generation from renewable energy sources; reduce transaction costs, administrative costs and delays associated with the conventional procurement processes. Another objective is to finally encourage private investors to operate their power plants prudently and efficiently so as to maximise returns.

The policy provides that small renewable energy projects with a capacity of up to 10 MW shall have a standardised power purchase agreement which shall incorporate certain features such as no bidding for renewable sites and resources. Feed-in-tariff values for small renewable projects are provided in the policy which further outlines principles that underline the calculation of the said values which include as stated in Section 25, a calculation on a technology specific basis using the principle of cost plus reasonable investor return.

The policy further provides that renewable energy projects which are larger than 10 MW of installed capacity shall meet load flow or dispatch and system stability requirements. The policy gives the feed-in-tariffs for each of the renewable energy sources it covers and one of the common features is that the feed-in-tariff is to apply for twenty (20) years from the date of the first commissioning of the respective power plants.

The developer is to bear the costs of interconnection including the costs of construction, upgrading of transmission lines, substations and associated equipment. The off-taker is to recover from electricity consumers 70% of the portion of the feed-in tariff, except for solar plants connected to off-grid systems, where the off-taker recovers 85%. Finally, the policy provides that renewable energy generators feeding into the grid will require a power purchase agreement and further that the project sponsor for such renewable generation projects must be an entity legally registered in Kenya.

The promulgation of the Constitution of Kenya, 2010 changed the governance structure of the country by creating a decentralised system of government with functions that were formerly exercised by the National Government being devolved to Counties. The roles of the National and County Governments in relation to energy have been clarified and hence this necessitated the review of the energy sector framework which led to the Draft National Energy and Petroleum Policy, 2015 as well as the Energy Bill, 2015 (the Energy Bill).

The Energy Bill

The preamble of the Energy Bill provides that it aims to achieve among other things the promotion of renewable energy. The Energy Bill describes obligations of the National Government and the Cabinet Secretary is mandated to develop a conducive environment for the promotion of investments in energy infrastructure development. The Energy Bill further provides that the National and County Governments shall, in their effort to promote energy investments, facilitate the acquisition of land for energy infrastructure development in accordance with the law.

The Energy Bill establishes the Energy Regulatory Authority whose functions shall be to regulate the production, distribution, supply and use of renewable and other forms of energy as well as to protect the interests of consumer, investor and other stakeholder interests.

The Energy Bill additionally establishes the Rural Electrification and Renewable Energy Corporation, whose functions shall include undertaking feasibility studies and maintaining data with a view to availing it to developers of renewable energy resources. Also to develop and promote the use of renewable energy and technologies.

The Energy Bill also establishes an inter-Ministerial Committee known as the Renewable Energy Resource Advisory Committee. This Committee is charged with the task of advising the Cabinet Secretary on amongst other things, the criteria for allocation of renewable energy resources, licensing of renewable energy resource areas, management of water towers, water catchments and management (and development) of renewable resources e.g. multi-purpose dams and reservoirs.

Lastly, the Energy Bill establishes a renewable energy feed-in-tariff system with the objective of catalysing the generation of electricity through renewable energy sources and encouraging locally distributed generation, thereby reducing demand on the network and technical losses associated with transmission and distribution of electricity over long distances, among other objectives.

Conclusion

Although Kenya has attracted notable large scale energy projects and has sought to streamline the regulation of its renewable energy sector, the country’s renewable energy potential remains largely untapped. This could be attributed to amongst others, a focus on large scale energy projects. Efficient licensing procedures and the ease of access to information on the same would therefore bolster the growth of smaller scale renewable energy projects in Kenya.

Lighting the Way: A Look at Kenya’s Growing Renewable Energy Sector

Posted on June 26th, 2018

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There has been a lot of talk about the changes in weather, depletion of the ozone layer and the general deterioration of the earth since the 1990s. As a result of this, there have been a lot of policy changes in various parts of the world in order to ensure that the environment is preserved. Energy policy changes have been made to ensure that the climate crisis does not worsen.

In the past 5 years, East Africa has emerged as a global leader in the implementation of renewable energy projects. Some of East Africa’s largest clean energy projects include a 280 MW geothermal project in Olkaria and a 310 MW wind farm in Turkana, Kenya. Ethiopia has embarked on the 6,000 MW Grand Renaissance Dam hydropower project, while Uganda has implemented the 600 MW Karuma and the 183 MW Isimba hydropower projects.

Rwanda and Burundi have also made strides in the renewable energy sphere with Rwanda having a 100 MW methane gas power project at Lake Kivu, the 28 MW Nyaborongo hydropower project and the 8.5 MW Rwamagana solar farm. It is also noted that Burundi has added 7.5 MW to its grid through the Mupuga Solar Farm Project. The projects above constitute the major energy renewable projects across East Africa. Several small-scale clean energy projects particularly in the solar energy field are dotted across the East African region.

The Kenyan Government seems committed to promoting electricity generation from renewable energy sources. The Energy Act, Act No. 12 of 2006 (the Energy Act) requires the Cabinet Secretary in charge of energy to develop and manage a prudent national energy efficiency and conservation programme.

The Energy Act defines renewable energy as energy from all non-fossil sources including, but not limited to biomass, geothermal, small hydropower, solar, wind, sewage treatment and plant gas.

Kenya’s Sessional Paper No. 4 on Energy (the Sessional Paper) encourages implementation of indigenous renewable energy sources to enhance the country’s electricity supply capacity. The Sessional Paper is implemented through the Energy Act of 2006, which provides for mitigation of climate change, through energy efficiency and promotion of renewable energy. In 2008, the Government of Kenya (GoK) adopted the so- called “Feed-in Tariffs Policy” through the Feed in Tariffs (FiTs) policy of 2008 (revised 2012) (FiT Policy) to attract private investment into the renewable energy sector. The FiT Policy guarantees fixed rates and connection to the grid for electricity generated from renewable energy sources. Projects are eligible for conditions of the FiT Policy if they have a certain size and are based on wind, biomass, small hydropower, geothermal, biogas and solar. Below is a quick run through on the progress being made on the different types of renewable energy sources in Kenya.

Solar

Solar energy can be used for lighting bulbs, heating houses and water, drying and generating electricity. Kenya’s location astride the equator gives it a unique opportunity to invest in solar energy since the country experiences high radiation. This makes solar energy an ideal source of energy.

Many Kenyans have opted to using this form of energy on a full time basis because of its cost effective nature. The use of solar energy is also common in large buildings and industrial plants that require lot of energy for the nature of their work. The Energy (Solar Water Heating) Regulations, 2012 requires all premises within the jurisdiction of a local authority with hot water requirements of a capacity exceeding 100 litres per day to install and use solar heating systems. Contravention of this provision attracts a fine of KES 1 million or imprisonment for a term not exceeding 1 year or both. Developers of a housing estate, architects, engineers and an owner of premises are advised to keep in mind the provisions of these particular Regulations.

It should be noted that one needs to be licensed by the Energy Regulatory Commission (ERC) as a solar water heating system technician or a contractor before undertaking any solar water heating system installation work.

Wind

The Government of Kenya together with various project financiers have agreements for the funding and construction of the Kinangop Wind Park and Lake Turkana Wind Farm. Preparations for a feasibility study for 12 wind sites are also underway together with the continued expansion of the Ngong wind power project. There are also steps being taken towards the implementation of a grid management program to assist Kenya in managing integration of intermittent renewable energy. Kenya has a high installed wind energy capacity to the grid. Exploitation of wind energy in Kenya has however been hampered by high capital costs and the lack of sufficient wind regime data among other factors.

Biomass and biogas

There are 14 prospective geothermal sites spread out in the Rift Valley. There are also ongoing upscaling projects for the smaller biogas plants for agricultural producers and processors for example, supporting co-generation by Mumias Sugar (one of Kenya’s largest sugar producers). There is also support for an initiative for the improved cook stoves for households and institutions. With regards to biogas, Kenya has various organisations supporting market transformation initiatives for efficient biomass stoves for institutions and SMEs with the help of the United Nations Environment Programme (UNEP) who are also providing support for cogeneration market in Eastern and Southern Africa, and the United Nations Development Programme who are promoting public-private partnerships in sustainable charcoal production.

Hydro

There is a community-based mini hydropower development project in upper Tana River basin where there is a construction of 7 mini-hydropower plants. The International Finance Corporation is providing advisory services on small/mini-hydropower development as well as risk mitigation schemes to commercial banks investing in small hydropower plants.

Geothermal

Kenya’s Energy Policy, 2012 estimates geothermal potential within the Great Rift Valley at between 7,000 MW and 10,000 MW. The Geothermal Development Company (GDC), a state-owned special purpose vehicle (SPV) established for the development of geothermal resources in Kenya is in the process of developing 90 MW of geothermal power in the Menengai field within the Rift Valley. In addition to supporting the GDC, the GoK is also expected to create a directorate to oversee renewable energy policy and a renewable energy lead agency to undertake the promotion of this resource, with a target 5,000 MW of geothermal power expected by 2030. There is also support by various stakeholders for the Olkaria I, II, III and IV expansion projects. The UNEP is providing technical assistance for surface exploration of geothermal energy through African Rift Geothermal Development.

Like all energy projects, renewable energy projects under a capacity of 1 MW do not need a licence or permit, those over 1 MW and under 3 MW need a streamlined Electricity Permit from ERC. Only renewable energy projects with a capacity above 3 MW must be licensed by ERC. Those licensing requirements are quite technical and a long list of data and documents must be submitted as listed in the Annexes of the Energy (Electricity Licensing) Regulations, 2010.

A total of twenty two (22) clearances are applicable to investors in the renewable energy sector. Six (6) of these clearances are sector-specific, three (3) are general environment related clearances, seven (7) are general clearances necessary to establish a company, and six (6) must be obtained to own/lease the land and construct the power plant. The clearances vary in nature and in scope. Some clearances have to be obtained by all investors under the FiT, others only by those investing in specific energy resources. For example, the investors in wind energy must obtain a clearance from the Kenya Civil Aviation Authority to ensure that the high structures do not interfere with air traffic.

Recent developments

Key to the continued growth of the renewable energy sector is the creation of a conducive regulatory environment. Kenya has proposed to create such a framework through the Energy Bill, 2015 (the Energy Bill). The Energy Bill recognizes the growth of the renewable energy sector in Kenya through the regulation of power production through clean energy sources, which previously was not specific under the Energy Act. It creates individual licensing regimes and regulatory agencies. One of these includes the Rural Electrification and Renewable Energy Corporation.

With the introduction of Kenya’s devolved system of government, project sponsors must now engage with county governments in seeking approval for projects. This will significantly increase the period between project inception and project implementation. In addition, project sponsors must engage local communities for the purposes of fulfilling the State’s requirements on local content. To this end, the draft Energy Local Content Regulations, 2014 aim to give preference to Kenyan citizens skilled in operations to be licensed under the Energy Bill.

The Energy Bill also proposes creation of an Energy Regulatory Authority (ERA) which will require that foreign project sponsors have an office located within the Republic of Kenya, where project management and implementation as well as procurement are to take place under the regulatory supervision of ERA. In respect of local content, licensed applicants are also required to have a local content plan which details the project sponsors,’ strategy for training and succession, employment, technology transfer, research and development and insurance, financial and legal services. “Local content” has been defined as “the use of Kenyan local expertise, goods and services, people, business and financing before the systematic development of national capacity and capabilities for the enhancement of the Kenyan economy”.

It can be seen from the various strides made in Kenya that renewable energy development is an integral part of the country’s energy policy with a broad objective to ensure adequate, quality, cost effective and affordable supply of energy through use of indigenous energy resources in order to meet development needs, while protecting and conserving the environment. Renewable energy can contribute to several dimensions of these energy sector challenges, including enhancing the energy security, making energy affordable, improving people’s access to energy services, and protecting the environment. This implies that there are co-benefits by scaling-up renewable energy resources

Benchmark: Effectiveness of Public Private Partnerships in Kenya

Posted on June 25th, 2018

By Walter Amoko | Gibran Darr

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In 2017, the World Bank published a report entitled Benchmarking Public Private Partnerships (World Bank Report) following the review of legislation and practices of eighty-two (82) countries (including Kenya). The objective of the World Bank Report was to give empirically based authoritative guidance on Public Private Partnerships (PPPs). This comparative analysis was conducted under the framework of the four (4) main areas of a PPP cycle being preparation, procurement, contract management and approach to unsolicited proposals (USPs).

World Bank Report

The World Bank Report assesses the relative performance of each country against a maximum score of a hundred (100) in each area. Kenya was assessed to have achieved above average scores of sixty seven (67) in the area of preparation of PPP’s, sixty five (65) in procurement and fifty two (52) in the area of contract management. Before popping the champagne bottle, it should be borne in mind that there is a paucity of PPP projects (according to the PPP Unit there are only seven (7) on-going PPP projects with a rather suspicious list of past projects) even though we have had the law on PPPs in our books for many years beginning with regulations under the Public Procurement and Asset Disposal Act and since 2013, a fully-fledged Act- the Public Private Partnership Act, 2013 (the Act).

Without making a fetish of the numbers (which admittedly are somewhat arbitrary), rather tellingly, by the World Bank’s ratings, South Africa significantly outperformed Kenya in each of these areas while some of our neighbours were ranked better in some aspects. For example, for procurement Tanzania was assessed at eighty (80) while for management Uganda scored sixty eight (68).

But such raw numbers teach us nothing. The real value of the World Bank Report, despite the inherent difficulties of lack of thorough analysis given such a high sample size and the inherent difficulties in comparing politically and economically diverse countries, is its provocative value. The results present an opportunity for identifying potential trouble-spots in our legislative landscape and for reflection as to whether we can do better.

One such area is USPs, also referred to as Privately Initiated Proposals (PIPs), flagged as the area of most concern and least progress earning against what the authors of the World Bank Report viewed as good practice. The principal weakness of our system of USP/PIPs, which we apparently share only with Vietnam, is the absence of a competitive
procuring procedure. A USP presents the rather unique form of PPPs as it is where the private party initiates the process.

Unlike procured PPPs for which there is a comprehensive regulatory framework under the Act – see generally sections 29 to 57 – with competition at its heart, the law on USPs/PPPs is much less extensive. The sum total of this is to be found in section 61:

“(1) A contracting authority may consider a privately initiated investment proposal for a project and procure the construction or development of a project or the performance of a service by negotiation without subjecting the proposal to a competitive procurement process where —                                                                                                          (a) there is an urgent need for continuity in the construction, development, maintenance or operation of a facility or provision of a service and engaging in the competitive procurement process would be impractical: Provided that the circumstances giving rise to the risk of disruption were not foreseeable by the contracting authority or the result of an unreasonable failure to act by the contracting authority;

(b) the costs relating to the intellectual property in relation to the proposed design of the project is substantial;

(c) there exists only one person or firm capable of undertaking the project, maintaining the facility or providing the service or such person or firm has exclusive rights over the use of the intellectual property, trade secrets or other exclusive rights necessary for the construction, operation or maintenance of the facility or provision of the service; or

(d) there exists any of the circumstance as the Cabinet Secretary may prescribe.

(2) A contracting authority shall, before commencing negotiations with a private party under this section—

(a) prescribe a criteria against which the outcome of negotiations shall be evaluated;

(b) submit the proposal to the unit for consideration and recommendation;                                                                 (c) upon obtaining the recommendations of the unit, apply for and obtain approval from the Committee to negotiate the contract; and

(d) conduct the negotiations and award the tender in accordance with the prescribed process in the regulations to this Act.

(3) A contracting authority shall not consider a project for procurement under this section unless it is satisfied that— 

(a) the project shall provide value for money;

(b) the project shall be affordable; and                                                                                                                           

(c) the appropriate risks are transferred to the private party

The Act provides for three (3) circumstances under which USPs/PIPs are possible, with seemingly unguided discretions conferred on a member of the executive to increase. As is clear, all the circumstances are situations where the legislature has decided competition is not feasible or possible. This appears to be something that the blunderbuss one-size fits all criteria adopted by the World Bank does not take into account. USPs are an exception to the norm and save for the rather anomalous discretion given to the Cabinet Secretary to expand them, they are restricted to situations in which competition is not a practical alternative. It is therefore difficult to follow the argument that our system should be faulted for the absence of competition. Of note is that according to the PPP Unit, four (4) of the seventy (70) PPP projects currently underway are USPs.

Perhaps a more valid criticism is why the availability of opportunities for PPPs should be so restricted for if the public can benefit from private sector finance in so many areas that were previously the exclusive reserve for the public. Surely, ideas and innovations on those areas should be equally welcomed. The concern should be how to ensure that this is not abused which is where competition becomes relevant and the World Bank Report is useful. Both of our neighbours, Tanzania and Uganda scored higher on USPs but that is only because of the rather arbitrary three-part criteria adopted by World Bank for assessment.

The Bangladeshi Perspective

While not as high scoring, lessons can be drawn from Bangladesh which has a broader regulation. Bangladesh’s primary legislation does not restrict the areas in which USPs are available but there is the subject of extensive subsidiary legislation, though we should add that we have not considered their enforcement.

Some of the salient guidelines are set out below:

Non-Mandatory Nature of Concept Note and/or Unsolicited Proposal

The guidelines ensure that the Government is not obligated to consider and accept a Concept Note and is not prohibited from using the asset that is the subject of the Concept Note in a conventional Government Project.

Process for Submission of a Concept Note and Sector Policy Review

The guidelines establish a framework through which the Original Proponent of a Concept Note submits the same to the Contracting Authority while keeping the PPP Authority and Applicable Line Ministry in copy. This provides for a forum for discussion to clarify the scope of the Concept Note and ensure that the project is aligned with sector development plans and is likely to deliver a positive socio-economic benefit. There is a requirement for endorsement by the Applicable Line Ministry where the Concept Note is successful as well as provision for rejection and resubmission with Applicable Line Ministry feedback.

Assessment of Eligibility of the Concept Note and the PPP Project Proposal

This process provides for detailed assessment and a screening criteria through the Applicable Line Ministry, which formally submits the endorsed Concept Note and the PPP Project Proposal to the PPP Authority for processing of the same and in principal approval and makes provision for the PPP Authority to use of its own resources or seek professional support from qualified consultants in conducting its assessment. The PPP Authority may also contact the Contracting Authority, the Applicable Line Ministry and other relevant Government agencies to get more clarity on the Project.

A cursory reading of the guidelines suggests that the Government of Bangladesh has identified some of the possible exceptions and loopholes that may be created by a non-exhaustive statutory provision on USPs, the most notable of which is the provision that ensures that notwithstanding the submission of a USP, the contracting authority is not precluded from applying a project concept on a conventional project or what may be termed a solicited proposal. In addition, the fact that the guidelines make provisions and give a leeway for the use of external consultants by the Bangladeshi PPP Authority (the equivalent of the Kenyan PPP Unit) and allows it to seek support from appropriate sector line ministry resources when making its assessment gives the USP process further legitimacy and competitive justification on procedure.

The provisions of the Bangladeshi USP guidelines therefore serve as guideposts should we go the way of USPs. One only needs to take a look at the model of USP guidelines in Bangladesh to identify that a gaping hole and possibility of USP proponent litigation against the Government of Kenya and contracting authorities is real where the waters are muddied between solicited proposal tendering and a USP proposal in a situation where a project that formed the basis of a previous USP is later subjected to the conventional tendering process for solicited proposals.

Quite apart from protection of the contracting authority, the existence of USP guidelines would also ensure that the legitimacy of the USP process is not easily called into a question once a contract is awarded to a private entity, especially where a framework exists to ensure that the USP process itself was fair, competitive and received a nod of approval from sector consultants and specialists.

Conclusion

If Kenya decides to open up the circumstances in which USPs should be available, there will be need for guidelines and regulation of USPs in order to protect both the private contracting entity as well as the contracting authority. While the World Bank Report has noted that in developing economies the lack of USP regulations may be a consequence of an express desire of the public sector not to use USP procurement, it suggests that the subject may not have been considered.

Infrastructure, Projects & PPP

Posted on June 13th, 2018

Our Infrastructure, Projects & PPP practice group is at the forefront of providing commercially focused advice in rapidly growing sectors in Kenya including energy, power generation, telecommunications and transport.

We combine legal and sector expertise in advising on all stages of a project including structuring, drafting & negotiating and project finance.


Our recent experience in Infrastructure, Projects & PPP includes:

  • Advising the government-to-government collaboration between the Government of Kenya and China National Petroleum Corporation on a proposed USD 1.8 billion project to develop up to 350 MW of geothermal power plant.
  • We advised Kenya Commercial Bank Limited in relation to an annuity term loan facility worth USD 60 million to facilitate the 75% direct cost of road construction of the Ngong-Kiserian-Isinya Road and Kajiado-Imaroro Road.
  • Advising an international energy company on project structures, project documents as well as legal compliance issues in regards to a proposed 40 MW solar power project.
  • Advising a leading international real estate and development company, the lead member of the consortium that won the bid to re-develop the Nairobi City County Old Housing Estate on Ngong Road.
  • Advising a bidder on the proposed construction of a 2,000 km Kenyan road (an annuity scheme) via a PPP arrangement.
  • Assisted a team advising the developer of a 250 MW onshore wind farm in Kenya which was in part financed by the forward sale of Clean Development Mechanism credits.

Recent Insights

Kenya’s Energy Sector: 2015 Highlights

On Matters Energy: A Review of Some Key Developments in Kenya’s Energy Sector (Q2-2016)

“May as Well”: Additional Renewable Sector Updates for May 2016

On the way: A look at Kenya’s new Road Annuity Programme

A matter of “competing” principles: Confidentiality and disclosure in PPP procurement


Related services

Banking & Finance, Corporate & Commercial, Dispute Resolution


For more information about our Infrastructure, Projects & PPP practice, please contact George Oraro SC (Founding Partner), Jacob Ochieng (Partner) or Cindy Oraro (Partner).  Alternatively click here to download our Infrastructure, Projects & PPP profile.

Key Contacts
George Oraro SC
Founding Partner

 

 

E: goraro@oraro.co.ke

Jacob Ochieng

Posted on March 26th, 2018

Jacob is a Partner at Oraro & Company Advocates in the corporate & commercial practice group. With over 12 years’ experience, he has advised both local and international corporates on commercial contracts, corporate advisory, corporate restructuring mergers & acquisition, privatisations and infrastructure projects. 

Jacob was part of a team that advised in a complex debt to equity restructuring of Kenya Airways Plc that aimed to reposition the National carrier for long-term growth and business sustainability. He also acted for a leading commercial bank in the financing of the first road construction projects under the Road Annuity Program of the Ngong-Kiserian-Isinya and Kajiado-Imaroro Roads.

Chambers Global ranked Jacob, in its 2021 Guide, as one of the leading lawyers in Corporate/M&A in Kenya. Chambers noted that he is well regarded in the space by peers, who comment, [Jacob is] thorough in his thinking and extremely detailed in his output".

Jacob holds a Bachelor of Laws (LLB) from the University of Nairobi and a post-graduate diploma in Law from the Kenya School of Law.

“[Jacob is] thorough in his thinking and extremely detailed in his output”

Chambers Global, 2021.

Experience
  • Part of a team that advised Citigroup Global Markets Limited in its capacity as the underwriter and book runner for the offering of a total of 1,477,169,549 new shares by Kenya Airways Plc (KQ) in funding the pre-delivery payments to aircraft manufacturers in connection with the acquisition of 9 Boeing Dreamliner aircrafts and 10 Embraer aircrafts to finance KQ’s capital expenditure requirements.
  • Part of a team that advised the Government (through the office of the Attorney General) on the legal implications of the most complex debt and equity restructuring of Kenya Airways Plc.
  • Advising for a leading investment and real estate company in the acquisition of 40% stake a in a private Kenyan company that provides serviced office solutions for a potential investment of USD 2.5 million into the company.
  • Part of a team that advised Accion International, Velocity Capital and Progression Capital Africa Limited in a multi-jurisdictional due diligence and report in connection to the proposed acquisition of approximately 20% stake in the Cellulant Corporation.
  • Acting for a lender in relation to the financing of road construction of the Ngong-Kiserian-Isinya Road and Kajiado-Imaroro Road. These are the first road construction projects that are to be undertaken under the Road Annuity Regulations.
  • Part of a team that advised in the government-to-government collaboration between the Government of Kenya and a major national oil and gas corporation on a proposed USD 1.8 million project to develop up to 350 MW of geothermal power.

About Us

Oraro & Company Advocates is a full-service market-leading African law firm established in 1977 with a strong focus on dispute resolution and corporate & commercial law. With a dedicated team of 10 partners, 4 senior associates, 10 associates, 1 lawyer and 36 support staff, the Firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 as a top-tier firm in Kenya.

Oraro & Company Advocates is an affiliate member of AB & David Africa.

Contact Us

Oraro & Company Advocates
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P. O. Box 51236 - 00200, Nairobi, Kenya.
T: +254 709 250 000
E: legal@oraro.co.ke | W: www.oraro.co.ke

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