Kenyan Government Support Measures: a more formal approach
With the assistance of Michael Kontos and Wassim Mohamedali of Walker Kontos Advocates, Nairobi
Alongside many other countries, Kenya has been grappling with the issue of how to provide the necessary governmental support and security required to attract inward investment from the private sector in national infrastructure, and balancing this need against minimising liabilities on the government’s balance sheet.
In October 2018, the government published a new policy document on the issuance of Government Support Measures (GSMs) for investment in public infrastructure projects. GSMs have taken many forms, including letters of comfort or support; sovereign, non-sovereign and repayment guarantees; political risk cover; binding undertakings of financial support; government notes and letters of exchange; joint investments in projects, or any mix of these. A legal framework governing the issuance of GSMs already exists (and is grounded in the Constitution of Kenya, the Public Finance Management Act 2012 and the Public Private Partnerships Act 2013) but until now there has been no formal policy in place, meaning challenges for investors when trying to understand how to secure support, and assessing whether their project is eligible. The application process and the nature and issuance of GSMs has been negotiated on a case-by-case basis, with much appearing to rest with the relative bargaining power of the parties.
The newly-published policy aims to address these concerns by establishing a stable and transparent system, and standardising the application process and assessment criteria across the range of projects. The giving of GSMs won’t be automatic simply because a previous project received them, and the intent is for all projects to receive the same level of scrutiny (which could be beneficial for some projects, although may cause others to collapse).
The new policy allows for five types of GSM to be issued - letters of comfort; letters of support; non-sovereign guarantees; binding undertakings, and contractual guarantees – although the door is left open for further bespoke GSMs, provided an application is approved in principle by the Cabinet upon the recommendation of the Cabinet Secretary of the National Treasury (though it remains unclear what criteria the treasury will consider where a developer requires a bespoke GSM).
It is up to the relevant Ministry, State Department, Agency or County Government participating in an infrastructure project to submit the request for a GSM, which will be issued to the project developer (for the benefit of itself and its financiers) and importantly, will not be transferable without the consent of the National Treasury. Also, of note is that any GSMs issued will apply to a closed list of identifiable risks only, with certain “non-negotiable” conditions attached. From a government perspective, by requiring all project risks to be identified and allocated to the party best placed to manage or mitigate them, the aim is to ensure that GSMs are only issued where appropriate, thereby minimising exposure to the public purse and creating greater public financial accountability.
So how is the market reacting to this development? Initial views are mixed, with publication of the policy seen as something which will “shake up” the market. What does seem to be agreed on is that greater clarity is required, and to this end the government has undertaken to provide “guidelines, practice notes and templates” within six months of the policy date, followed by a review of the legislative framework within three years. For those projects due to complete imminently, this leaves participants somewhat in limbo, with little option but to continue with bespoke negotiations.
Investors are understandably nervous of the potential that further guidelines and a more formalised process may have a negative impact on project development timelines, but more fundamental is the fact that the medium to long-term aim, clearly highlighted in the policy, is to “greatly reduce the utility and scope of GSMs, as private parties build stronger trust in public investments”. The government has made it clear the focus will be on “projects that are considered strategic and that are of public interest”, but until the guidelines are developed, it may be difficult for investors to gauge in advance whether their project will be eligible for support, and if so, what support will be available.
Whatever is ultimately concluded, it is imperative that the government’s position on each project is transparent; and that the guidelines are clear. If it is anticipated that Ministries and other government departments will retain jurisdiction (and discretion) over whether a GSM will be issued, there is a fear that equally deserving projects may not necessarily get the same treatment.