On September 17, the High Court handed down a judgment that will shape how Kenya structures public-private partnerships (PPPs) for years to come.
In the petition brought by the Katiba Institute, Justice Nyaundi declared sections 59, 60 and 72(1) of the Public Private Partnerships Act, 2021 unconstitutional to the extent they allow PPP projects that create government expenditure, guarantees, public debt or other public liability to proceed without parliamentary approval.
Parliament need not approve the project itself, but it must approve the spending and commitments that come with it.
The hard question is, with Kenya increasingly relying on private capital to build infrastructure, what message does the ruling send to investors, lenders and project sponsors that the country depends on? PPPs involve collaboration between a government agency and a private-sector company.
They can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centres.
The court rejected the proposition that structuring a transaction as a “PPP” can, by itself, take it outside Parliament’s oversight of public expenditure.
The test is whether the arrangement, in substance, exposes the national government to spending, borrowing, a guarantee or other public liability. If so, the court held that parliamentary approval is constitutionally required, regardless of the structure adopted for the transaction.
The PPP Committee was created under Kenya’s PPP framework in 2013 and re-established under the 2021 Act. Under the Act, PPPs do not need prior parliamentary approval, and Katiba Institute argued that leaving final approval with the PPP Committee shuts Parliament out of decisions that commit public funds.
There were counter arguments that Parliament stays informed through annual reports, but the court held that this does not meet the constitutional requirement of oversight. This being the case, the PPP Committee’s sign off will no longer be the last word in the case of PPPs that put public money or guarantees on the line.
This ruling could change the picture for one instrument in particular: the Letter of Support. Letters of Support have long been a compromise instrument providing lenders and investors comfort that government stands behind a project without the rigours, cost and time required for a full sovereign guarantee.
The court names government support measures such as Letters of Support as arrangements that can expose the State to substantial fiscal obligations. This being the case, where a letter contains provisions that work like or may be construed as a guarantee, it may need to be treated, and approved, as one, regardless of its name.
This may have practical consequences for how these instruments get negotiated going forward. Sponsors and lenders will likely push for Letters of Support with genuine payment obligations because that is what makes a project bankable.
They will however have to allow for additional time for parliamentary approval, rather than relying on PPP Committee sign-off alone. Contracting authorities on the other hand may try to draft support provisions that stop short of binding payment commitments, to keep the instrument outside the scope of parliamentary approval.
Whether that satisfies lenders and investors is a separate question altogether.
The court suspended its declaration of invalidity for six months to let Parliament make the necessary amendments. The challenge for Parliament is therefore how to strengthen oversight without undermining investor confidence.
Investors and lenders will be watching for clear guidance as to how parliamentary oversight will be exercised, which support arrangements need approval, a predictable timetable for getting it, and how projects already at an advanced stage will be treated.
Getting this right could strengthen Kenya’s PPP regime but getting it wrong could give way to hesitation by investors and financiers.
As for now, expect longer negotiation cycles in the near term as both sides work out how to navigate the new requirement, at least until Parliament’s amendment gives the market clearer direction.