Month: August 2024

The global effort aimed at addressing the harmful effects of climate change has gained impetus over the last decade. Indeed, countries and organisations across the globe have progressed from making mere pledges to reduce greenhouse gas emissions, to actively creating and implementing policies and legislation aimed at achieving the same. Most notably, institutional frameworks have been established to encourage the achievement of net zero emission targets.

The Paris Agreement of 2015 has been instrumental in advancing the role of voluntary cooperation and market-based approaches in this regard. This article focuses on the realisation of Article 6 of the Paris Agreement (Article 6) in Kenya. Article 6 creates a mechanism by which countries can voluntarily co-operate to achieve their emission reduction targets.

Article 6 and the Concept of Voluntary Co-operation

Carbon markets are one of the tools used by countries to reduce their greenhouse gas emissions. Carbon markets enable countries and private entities which have net-zero commitments, to buy carbon credits generated from projects which reduce or remove greenhouse gases from the atmosphere. The goal of Article 6 is to provide flexibility in achieving emission reduction targets, while also promoting sustainable development and ensuring environmental integrity.

Article 6 does this by providing various mechanisms through which voluntary co-operation by countries can be achieved. Firstly, Article 6.1 encourages party states to utilise voluntary cooperation to meet their self-defined emission reduction targets known as Nationally Determined Contributions (NDCs). Articles 6.2 and 6.3 introduce the concept of Internationally Transferrable Mitigation Outcomes (ITMOs), which are carbon dioxide offset units that can be used by party states to achieve their NDCs. The focus on voluntary cooperation and the introduction of ITMOs as a trading unit serves the purpose of facilitating a transition to the Sustainable Development Mechanism (SDM) introduced under Article 6.4, which aims to promote sustainable development, alongside efforts to mitigate greenhouse gas emissions. The Article 6.4 mechanism is intended to build on the Clean Development Mechanism (CDM) under the Kyoto Protocol of 1998. The process of transitioning CDM activities to the Article 6.4 mechanism is expected to begin in January 2024.

The other mechanism introduced under Articles 6.8 and 6.9 is the non-market-based approach, which aims to promote voluntary cooperation between countries in areas such as technology transfer, capacity building and financial and technical support.

Voluntary cooperation between countries, as envisioned under Article 6, creates a great opportunity for developing countries such as Kenya. The concept recognises the relationship between climate change and sustainable development. Further, it creates a framework that can spur the economies of developing countries by encouraging cooperation that can foster job creation, the development of projects, and the provision of water, food and renewable energy.

Given Kenya’s Vision 2030 agenda, as well as her status as a leading renewable energy producer globally, the country is a well-placed partner in the realisation of Article 6. Kenya is a signatory to virtually all major international treaties and conventions on the mitigation of climate change.

Accounting and Reporting

Article 6 calls for robust accounting to ensure the integrity of ITMOs. A major concern for investors and buyers of carbon credits is the gaps in accounting for how carbon credits are sold and thereafter retired to avoid double counting. Article 6 requires that ITMOs be subject to a rigorous accounting framework which ensures that emissions reductions are real, measurable and permanent, thereby entrenching integrity.

Within Kenya’s Ministry of Environment, Climate Change and Forestry’s (the Ministry) draft strategic plan for 2023 – 2027, strategies to enable the country to meet its climate change obligations are set out. The strategic plan envisages the development of carbon market frameworks. This is intended to accelerate climate change adaptation and mitigation programs. It also intends to provide an incentivizing framework for investment in carbon markets, as well as establish and support institutions to oversee carbon market activities in Kenya. To achieve this, a national carbon registry will be established and maintained. There will also be a deliberate effort to support carbon market sector players to effectively engage in carbon markets.

The Climate Change (Amendment) Act 2023

Currently, the guiding statute on carbon trading in Kenya is the recently passed Climate Change (Amendment) Act, 2023 (the Amendment Act). The Amendment Act builds on the Climate Change Act, 2016 which provided measures to achieve lower carbon emissions but fell short of creating an institutional framework for carbon trading. This gap precipitated the need to bolster existing legislation, thereby ushering in the Amendment Act.

The Amendment Act is the first major policy step Kenya has taken to operationalize Article 6. The Amendment Act introduces a national carbon registry, which is a central database with up-to-date information on all carbon credit projects in Kenya, authorisations granted to project developers, Kenya’s carbon budget and the greenhouse gas units available to trade, as well as the amount of carbon credits issued and transferred in Kenya and the cancellation and retirement of all carbon credits issued within the country.

The Amendment Act regulates the trading of carbon credits and ITMOs, whether they occur through private equity transactions, the voluntary carbon market or bilateral and multilateral trade agreements. It is anticipated that the national carbon registry will be part of a raft of measures that will bolster investor confidence in carbon offset projects in Kenya, as well as encourage Kenyan firms to participate in carbon trading. These measures are intended to create transparency in the generation and transfer of carbon credits.

The Amendment Act also envisions the creation of a national authority which will be the custodian of the national register. This body will authorise and approve participation in carbon offset projects that fall under the Paris Agreement. Furthermore, it will monitor and report on carbon offset projects. This will assist in meeting the requirements of Article 6 on robust reporting.

Further Policy Initiatives on Reporting

The Ministry’s draft strategic plan for 2023 – 2027 proposes the creation of a Climate Change Mitigation and Knowledge Management Directorate (the Directorate). The Directorate will be tasked with coordinating the creation and application of guidelines for the processes and regulations governing the carbon market. It will also co-ordinate a national climate change knowledge and information system and evaluate and report on Kenya’s compliance with international responsibilities. This system will facilitate voluntary cooperation between Kenya and other countries. This will be achieved by improving the institutional framework for carbon trading and creating transparency in the transfer of carbon credits and ITMOs.

Benefit Sharing

The Paris Agreement is conscious of the nuances between climate change mitigation, equitable access to sustainable development and the eradication of poverty. Parties engaging in carbon trading are encouraged to make provisions for benefit sharing with local communities and ensure environmental integrity.

Following the enactment of the Amendment Act, a project developer hoping to commence a carbon offset project in Kenya will be required to do so through a Community Development Agreement (CDA), which outlines the connections and responsibilities of the project’s proponents to the public and community and where the project is being developed. This provision works to cushion the impacted communities and to ensure environmental protection and the equitable distribution of funds generated from carbon offset activities. For land-based projects, the Amendment Act requires a provision in the CDA for annual social contributions of at least forty percent (40%) of the project’s aggregate earnings, while for nonland-based projects, the requirement is that at least twenty-five percent (25%) of the project’s aggregate earnings should count towards the annual social contribution to the community.

Under the Amendment Act, the CDA should contain information relating to the stakeholders of the project, the annual social contribution of the aggregate earnings of the previous year of the community to be disbursed and managed for the benefit of the community, how the project developers will engage local stakeholders, how the benefits from carbon markets and carbon credits will be shared between the project proponents and impacted communities and the proposed socio-economic development around community priorities, among other things.

Environmental Integrity

Article 6 provides that all voluntary cooperation projects must ensure environmental integrity, particularly because developing countries are vulnerable to resource exploitation.

Kenya’s commitment to environmental protection is established in the preamble of the Constitution of Kenya, 2010, which explicitly provides that the environment is the country’s heritage, which it is determined to sustain for the benefit of future generations. Further, the Amendment Act requires all carbon offset projects to undertake an Environmental Impact Assessment before obtaining approval.

Conclusion

Kenya has made great strides in enacting and proposing legislation to facilitate a conducive environment for carbon trading. Once instituted, this regulatory environment is expected to encourage stakeholders across the carbon trading value chain to leverage the opportunities offered by Article 6 in carbon trading projects within the country. By recognising and harnessing the potential of carbon trading as a means of voluntary cooperation, Kenya is a step closer to meeting its sustainable development and emission reduction goals. Carbon trading is a useful tool in mitigating climate change and its growth ought to be encouraged.

In recent years, the financial services landscape has undergone a remarkable transformation, driven by the convergence of technology and finance. Fintech companies, at the forefront of this evolution, have harnessed digital innovation to revolutionise access to financial resources, particularly in regions with limited traditional banking infrastructure.

Digital credit providers (DCPs) leverage technology and data analytics to assess borrowers’ creditworthiness and provide quick and convenient access to short-term loans or credit facilities. Notable examples of DCPs include Inventure Mobile Limited (trading as Tala), M-Kopa Loan Kenya Limited, and Ngao Credit Limited. As of April 2023, the Central Bank of Kenya (the CBK) had licensed thirty-two (32) DCPs to operate in Kenya. While the growth of fintech companies has brought about significant benefits, it has also raised concerns regarding consumer protection and data privacy. For instance, many borrowers who access loans through online platforms often lack a comprehensive understanding of how these companies operate, or even their official identities.

To address these concerns and align the industry’s operations with the Constitution of Kenya 2010, the CBK – exercising its powers under section 57 of the CBK Act – formulated the Digital Credit Providers Regulations 2022 (the Regulations). These Regulations are designed to govern the licensing, operations, and compliance requirements of DCPs in the country. Notably, the Regulations do not apply to banks, financial institutions, microfinance institutions, Sacco societies, or any entity whose digital credit business is regulated under any other written law, or any other entity regulated by the CBK.

Compliance Requirements

The Regulations introduce a framework to ensure that DCPs operate responsibly, protect consumers, and maintain the integrity of the financial system, an overview of which is as follows:

a)Licensing

Rule 4(1) of the Regulations prohibits a person from carrying on a digital credit business in the country without licensing from the CBK. Contravention of this provision constitutes an offence that attracts a penalty, upon conviction, of imprisonment for a term not exceeding three (3) years or a fine not exceeding KES 5,000,000. An application for a licence is submitted in a prescribed form (CBK DCP 1), which contains information such as the name and address of the applicant and the source of funds for the proposed business. Rule 4 (3) further requires the application to be accompanied by documents such as the applicant’s data protection policies and procedures and the applicant’s Anti-Money laundering and combating the financing of terrorism policies and procedures (which shows their commitment towards combating anti-money laundering and terrorism financing).

If satisfied that the applicant meets the requirements of the Regulations, a licence is issued within sixty (60) days of submission of a complete application, and it remains valid unless suspended or revoked by the CBK. The CBK is also obliged to publish the name of every licensed DCP in the Kenya Gazette and on its website within thirty (30) days of issuing the licence. The CBK is further required to publish the names and addresses of all licensed DCPs in the Kenya Gazette and on its website before the 31st day of March of every year.

Once licensed, DCPs are required to pay annual fees and submit a return to the CBK, certifying their compliance with the Regulations by the 31st day of December of every year. However, it is worth noting that the CBK retains the authority to suspend or revoke a licence, as per Rule 9 (1) of the Regulations. This can occur if the licencee fails to pay annual fees or a monetary penalty imposed by the CBK, provides false information during the licence application process, or ceases to carry on the business of a DCP. Before such revocation or cancellation, the CBK is required to notify the DCP and allow it to be heard.

1. b) Credit Information Sharing and Data Protection

The Regulations allow DCPs to disclose both positive and negative credit information regarding their customers to licensed credit reference bureaus (CRBs). This disclosure is only permitted when such information is reasonably required for the performance of the functions of either the DCP or the licensed CRBs. However, the Regulations impose restrictions on submitting negative credit information in relation to a customer where the outstanding amount does not exceed KES 1,000. Before submitting negative information, DCPs are mandated to notify the concerned customer at least thirty (30) days in advance.

After submitting credit information to a CRB, DCPs are required to notify the customer within thirty (30) days from the date the information was submitted. This ensures that customers are informed about any changes to their credit history. Moreover, the information submitted must be timely, complete and accurate.

Most importantly, information derived from CRBs is to be used by DCPs in making decisions on customer transactions or for purposes authorised under the Regulations. DCPs are therefore required to implement measures to ensure the security of the information submitted or provided to CRBs. Accordingly, sharing of information with third parties is only permitted under the Regulations or relevant laws. This is because the security of shared information is crucial for confidentiality and integrity.

c)Conduct of Digital Credit Business

To further protect consumers, DCPs are prohibited from introducing a new digital credit product to the market or varying the features of an existing product without prior approval from the CBK. Additionally, DCPs are obliged to notify the customers at least thirty (30) days in advance before effecting such variations. The Regulations stipulate a maximum limit on the amount DCPs can recover from a non-performing loan, which prevents them from continuously accruing interest beyond the principal amount. To this end, the in duplum rule is applicable to DCPs, as affirmed in the case of Mugure & 2 others v Higher Education Loans Board (Petition E002 of 2021) [2022] KEHC 11951 (KLR).

Moreover, Rule 20 of the Regulations prohibits DCPs from engaging in any of the listed actions against a borrower or any other person during debt collection. Some of the prohibited actions include the use of threats, violence, or other means to harm the borrower, their reputation, or property if they fail to settle their loans; use of obscene or profane language sent to the borrower or the borrower’s references or contacts for purposes of shaming them or accessing the customer’s phone book or contacts list and other phone records for purposes of sending them messages in the event of untimely payment or non-payment.

d)Consumer Protection

DCPs are required to issue transaction receipts or acknowledgements of customer transactions, whether conducted electronically or through other acceptable means. To address customer concerns, a complaints redress mechanism should be established with dedicated communication channels. Complaints should be promptly resolved within thirty (30) days and records of such complaints and resolutions maintained.

DCPs are also obliged to implement secure and reliable information systems that uphold information confidentiality, integrity, and availability to minimise disruptions. Further, DCPs must provide detailed terms and conditions of loan agreements to customers prior to granting the loan. Some of the information contained in the terms includes the loan amount, the interest rate to be charged and whether on a reducing balance, the date on which the amount of credit and all interest are due and payable and how the same may be calculated and the annual percentage rate of interest.

Challenges

While the Regulations aim to foster a safer and more transparent financial ecosystem, they also present formidable hurdles that fintech companies must navigate. Some of these challenges include the following:

a)Delayed Approval Process

Since the implementation of the Regulations, numerous DCPs have submitted their licensing applications to the CBK. However, prevailing reports indicate that many DCPs are still awaiting approval. These delays are attributed to the comprehensive documentation required for each application, coupled with increased industry scrutiny. Consequently, this situation has disrupted the operational continuity of the DCPs and has made potential investors hesitant to provide funding without the CBK’s certification.

b)Compliance Costs and Administrative Burden

To ensure compliance with the Regulations, DCPs are forced to allocate resources and invest in compliance measures. This includes the establishment of mechanisms for tracking and reporting various operational aspects, such as transaction receipts, customer complaints and credit information sharing. These compliance efforts impose financial burdens and administrative complexities, particularly for start-up DCPs.

c)Risk Assessment and Responsible Lending

The Regulations underscore the importance of responsible lending practices. DCPs are required to implement effective risk assessment models that accurately evaluate a customer’s creditworthiness. This requirement can be challenging, particularly when dealing with customers who lack traditional credit histories. Additionally, limitations on debt collection procedures and techniques have contributed to a rise in loan repayment defaults, forcing fintech companies to write off some debts as bad debts.

d)Product Innovation and Regulatory Approval

Introducing new digital credit products or modifying existing ones requires obtaining regulatory approval. This can slow down the pace of innovation for DCPs, potentially hindering their ability to respond quickly to market demands and adapt to changing customer needs.

Conclusion

As fintech companies endeavour to adapt to the evolving regulatory landscape, the intricate web of compliance obligations, data privacy concerns and consumer protection mandates demand a strategic recalibration of their operations. These challenges, while formidable, also present opportunities for fintech companies to cultivate a culture of responsible innovation and customer-centricity. By embracing the challenges as catalysts for progress, fintech companies have the chance to shape financial services, bolster customer trust and drive inclusive economic growth in a technologically empowered era. Collaborative efforts between industry stakeholders and regulatory authorities are therefore pivotal in the pursuit of a cohesive financial services ecosystem.

In the recent past, Kenya has seen increased investment in its electric mobility sector, a growth which is in tandem with the shift towards a greener economy and addressing the challenges posed by climate change. Electric mobility, also known as e-mobility, refers to the use of electric vehicles (EVs), as a cleaner and more efficient alternative to traditional internal combustion engine vehicles (ICEVs).

The increased use of EVs in Kenya helps the country comply with its international obligations set out under the Paris Agreement. Indeed, Kenya has focused on a shift towards more environmentally sustainable practices, including the development of government policy to encourage investment in the same. For example, the National Climate Change Action Policy 2018-2022 includes measures aimed at reducing greenhouse gas (GHG) emissions and promoting sustainable development. It is notable, however, that there is no similar policy to encourage investment in the e-mobility sector.

Nonetheless, Kenya recently submitted its Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat on 28th December 2020, where the country committed to reducing GHG emissions by thirty-two percent (32%), below business-as-usual levels by 2030.

Industrial Developments

Although the development of policies and regulations surrounding Kenya’s electric mobility sector is still in its nascent stages, the production and development of electric buses and motorcycles, charging infrastructure and technical standards have been catalysed by key partnerships in the sector.

One notable partnership is between Kenya Power and Lighting Company (KPLC) and Deutsche Gesellschaft fúr Internationale Zusammenarbeit (GIZ). In February 2023, the partnership hosted an e-mobility conference with the aim of developing a roadmap and consultative approach for electric motorisation in Kenya. KPLC has also expressed its intention to exploit one thousand one hundred megawatts (1,100 MW) off-peak load to kick off Kenya’s transition to electric mobility.

BasiGo and Associated Vehicle Assemblers (AVA) are also in partnership, working together to build modern electric buses in Kenya. As at January 2023, AVA reported the completion of the assembly of fifteen (15) electric buses. The partnership has further set a target of producing over one thousand (1,000) electric buses within the next three (3) years, which target has in turn reportedly created more than three hundred (300) new manufacturing jobs, and additional jobs in charging, maintenance, and financial ecosystems to support the operation of EVs.

Additionally, private sector-led companies are quickly establishing charging points and battery-swapping stations to promote the growth of clean transportation. One such company is Ecobodaa, which is already testing fifty (50) electric motorcycles, with plans to expand to one thousand (1,000) motorcycles by the end of 2023. The motorcycles have a range of up to seventy kilometres (70 km) on a single charge and can be charged using solar power.

With the aim of reducing EV range anxiety, several companies are collaborating to establish charging infrastructure for EVs in Kenya with the aim of ensuring that EV users have reliable and easily accessible charging options. Various charging stations for EVs have been installed in several locations including the KenGen offices in Nairobi, Two Rivers Mall, Garden City Mall, The Hub Karen, the Kenya Ports Authority premises in Mombasa and Kisumu.

The Kenyan government has also taken steps to prioritize the electric mobility sector and introduced incentives to promote domestic production of EVs and their components. Among these incentives are tax exemptions for EV manufacturers and importers, as well as subsidies for the installation of charging infrastructure.

Notably, through Schedule 1 to the Excise Duty Act, 2015, the government has reduced the excise duty imposed on all vehicles which are fully electric-powered, from twenty percent (20%) to ten percent (10%). Additionally, KPLC has proposed a special tariff for EV charging, being KES 17 per Kilowatt hour (KWh), which will be lower than the residential tariff.

Investors therefore have a plethora of investment opportunities in Kenya’s electric mobility sector, to aid not only in its growth but to also promote sustainable development. These opportunities include EV manufacturing, EV charging infrastructure development and EV battery manufacturing.

Challenges

Electric mobility is a promising solution for Kenya’s transportation sector, which is plagued by high fuel costs and air pollution. However, despite the benefits associated with electric mobility, there are significant challenges that must be addressed in order to achieve widespread adoption.

The need to develop a comprehensive legal framework will be indispensable towards the success of electric mobility in Kenya. For instance, in Norway, the comprehensive legal framework has not only made the country a global leader in electric mobility but has also created a predictable and stable environment for EV manufacturers and investors.

In Kenya, lack of a comprehensive legal framework governing the use of EVs creates uncertainty for investors and manufacturers with respect to the legal and regulatory risks involved in such investment, the supply chain for EVs and the regulatory requirements in the sector. Notably, the existing regulations and policies do not adequately address the unique characteristics of EVs, such as their charging infrastructure and battery management.

Limited charging infrastructure is another major barrier to the success of electric mobility in Kenya. Lack of a robust charging infrastructure limits the range, accessibility, and convenience of EVs. As a result, many potential EV consumers are hesitant to make the switch from traditional ICEVs.

Technical standards ensure that EVs are manufactured to a consistent level of quality and safety. The lack of appropriate and adequate technical standards therefore gives rise to the risk of substandard battery quality, which may undermine the safety and performance of EVs and pose a challenge to regulators to enforce and monitor compliance.

Moreover, without sufficient knowledge and understanding of the advantages of EVs, consumers may be hesitant to adopt the technology. As a result, EV manufacturers are finding it challenging to market their products to potential consumers. Limited public awareness may also hinder the government’s ability to create policies and initiatives that support the growth of electric mobility.

Additionally, the high import taxes on EVs in Kenya has a direct impact on the success of electric mobility. The twenty-five percent (25%) import duty raises the price of EVs above those of ICEVs. The price disparity hinders the widespread adoption of the EVs since they are more expensive, thereby making them less attractive. Needless to state, the marked depreciation of the Kenyan Shilling has also affected the implementation of electric mobility as it has raised the cost of importing EVs and their components, including batteries, making them less affordable to Kenyan consumers. Additionally, the high cost of importation might affect the availability of spare parts and maintenance services for the EVs.

Recommendations

As the demand for cleaner and more sustainable transportation options continues to grow in Kenya, there is a pressing need to address the legal, technical, and economic challenges facing the adoption of electric mobility.

To promote the development of a robust electric mobility ecosystem in the country, it is crucial to adopt a range of strategies to help overcome these challenges. For instance, development of a comprehensive legal framework tackling the registration and licensing of EVs as well as the construction and operation of charging infrastructure and battery-swapping stations is encouraged. This is especially so because the construction of charging infrastructure requires the allocation of land for that purpose.

Additionally, to make EVs more affordable and competitive with ICEVs, as well as to encourage the development of charging infrastructure in the country, the government can offer tax incentives such as reduced or waived registration fees for EVs, income tax incentives for individuals who purchase or lease EVs, lowered or waived parking fees for EVs and tax credits or rebates for EV buyers to offset the cost of EVs.

Further, to foster public-private partnerships, the government can work with EV manufacturers, technology providers, and charging stations to accelerate the development of electric mobility infrastructure. This can be made possible by providing incentives such as tax breaks or subsidies for companies that invest in the sector. Additionally, the government can partner with private investors to finance the development of electric mobility infrastructure, with the former providing funding for electric mobility infrastructure projects, and the latter contributing technical expertise and finance.

In order to raise public awareness about the benefits of EVs, the government can also work with media outlets to increase the coverage of EVs and their benefits. This may include interviews with EV owners, feature stories on EVs, and coverage of events related to electric mobility. The government may also use social media outreach to raise awareness.

Conclusion

The implementation of electric mobility in Kenya presents a promising opportunity to reduce the country’s carbon footprint and dependence on fossil fuels, while simultaneously promoting economic growth and innovation. It also presents numerous opportunities in various sectors of the economy such as data protection and privacy, intellectual property, financial structuring, and regulatory compliance.

Despite facing several challenges, there is growing momentum towards the adoption of EVs in the country. With the right policies and continued investment, the government and private sector can work together to accelerate the development of electric mobility in Kenya and create a cleaner and more sustainable future.

The Government of Ghana has admitted that the country is going through some economic challenges. Even though the political actors do not agree on the cause of the challenges, they agree on the fact that there are economic challenges. One evidence of the economic challenges is the international and domestic debt restructuring that the Government acting through the Ministry of Finance is undertaking. With the domestic debt restructuring, the Government has implemented the domestic debt exchange (DDE). One unintended consequence of the debt restructuring activities by the Government is declining investor confidence in the debt market, especially in the acquisition of government debt instruments. These negative or adverse economic effects may also have some advantages. One such advantage is that they present solutions to the fundamental challenges of businesses in Ghana in terms of access to funding for the business and the cost of funding. Since investors are reluctant to invest in Government instruments, funds are available looking for investment opportunities. Private sector businesses must take advantage of this to attract such investments. This article explains how private-sector businesses must position themselves to attract such funds.

Challenges of Assessing and Cost of Funding

Private businesses need capital to operate and expand. The capital is injected either as equity or debt. In other instances, companies capitalise on their profits. Access to funding and the cost of funding have been the twin problems bedevilling the start and growth of businesses in Ghana. A simple online search lists these twin issues as major issues affecting businesses and entrepreneurs in Ghana. Whilst there may be many reasons accounting for this, one major reason is the fact that the government competes for scarce funds available, especially from investors on the domestic market. In such competition, investment in government instruments is generally the winner.

Preference for government instruments and securities

Investors have traditionally preferred government instruments or securities. The general assumption has been that investing in government instruments or securities is less risky than investing in private businesses. This has accounted for instances where even financial institutions (banks and non-banking financial institutions) invest a considerable part of their funds in government instruments and securities. As it is always said, the government is crowding out private access to capital. It is assumed that the risk of government default on its debt obligations to investors is very low. It is not that often that there is a default of sovereign debt obligations in comparison to the default of corporate entities to satisfy their debt obligations.

However, the economic challenges leading to government debt restructuring are debunking these assumptions. Investors are therefore reluctant to invest in government securities and instruments. The under-subscription to the recent debt instrument issued by the government in the domestic market is clear evidence of this position. Even instruments issued on behalf of government corporates (Cocoa Bill) have also been undersubscribed, leading to the government’s inability to pay maturing debts, hence rolling over the maturing debts in circumstances that can be construed as default.

These circumstances signify dwindling investor confidence in investing in government instruments and securities. Undoubtedly, government instruments can now be considered high-risk instruments as there is the possibility of default by the government or delay in honouring its maturing debt obligations. This, it is suggested, is an advantage to private businesses looking for funds. Investors now hold funds looking for investment opportunities. Banks, non-banking financial institutions, and institutional and private investors will now be reassessing their investment strategies in terms of the risks of investing in government instruments and securities.

Attracting Investors

The increasing risks of investing in government instruments or securities will mean investors will look to diversify their investment portfolio into what they traditionally considered riskier than the government instruments and securities. Investors will therefore consider the option of investing in instruments issued by private businesses by looking out for equity and debt options for private businesses. However, for such businesses to attract investors, they must consider restructuring their equity and debt instruments to be attractive to investors. In addition, there must be mechanisms that reduce risks that account for the hesitation of investors to traditionally invest in such businesses.

As indicated, businesses traditionally require investment in the form of equity and debt. In equity investment, shares are issued to investors in return for consideration – cash or non-cash considerations. Such equity investors are deemed “owners” of the business. The returns on the investment are an increase in the price of the shares and dividend distribution when the company makes profits.

Alternatively, the investors invest in a business by acquiring debt instruments. The investor becomes a lender who grants a loan to the company with clear terms on interest and repayment. The return on the investment is the interest payable on the principal by the company, who is the borrower.

For the corporate entities to attract funds that previously would have been invested in government instruments, it is suggested that private businesses must efficiently structure their equity and debt instruments to attract such investors and back such instruments with suitable mechanisms to minimise risks of the investors.

Structuring corporate instruments to attract investors

Most government instruments are fixed-term instruments with fixed returns. That is the number one attraction to investors. The certainty of knowing what to expect periodically as the coupon payment and the expectation of a definite date for the payment of the principal. In order to attract such investors, private businesses need to structure both equity and debt instruments to mimic these requirements.

Traditionally, corporate entities make applications to banks and non-banking financial institutions for loans. The lenders essentially dictate the terms. A change in this approach will be for corporate entities to properly structure their debt instruments to attract investor lenders to be interested in acquiring such instruments. These may take the form of corporate entities issuing corporate bonds or a series of loans on terms dictated by the corporate entities. Nothing stops a corporate entity from structuring its debt instrument similarly to government treasury bills or bonds. This type of structuring need not be limited to public companies since private companies can issue such instruments through private placements. Well-structured and thought-through terms on which a corporate entity requests a loan is likely to attract a positive response than just an application for a loan, especially if it is not from a bank. This calls for a properly written business plan or information memorandum on the business which clearly explains the sources of the receivables to be used for the repayments.

In relation to equity instruments, corporate entities should create different classes of shares that allow for payment of pre-determined fixed dividends with obligations on the company to acquire the shares back on pre-determined dates. This is permitted under our laws in the form of redeemable preference shares as to dividends. As a way of giving further assurances to investors, the dividends are made cumulative dividends by default under the law unless expressly otherwise indicated in the constitution of the company. The law allows for different rights and interests to be attached to different classes of shares. Private businesses need to understand what attracts investors to government bonds and seek to attach such rights and interests to the share instruments being issued to attract such investors.

The government domestic debt exchange reveals that many individual bondholders hold government debt instruments. This means corporate entities must not only position to attract institutional investors. Entrepreneurs must move from where they approach family, friends and potential business partners asking for funds without clearly structured instruments or terms on what they are offering. Such an approach must be based on clearly structured financial instruments or securities offered for funds from family, friends and other potential investors.

In addition to having well-structured instruments, corporate entities must establish their creditworthiness by putting in place mechanisms that give the investors (both equity and debt) comfort in acquiring the instruments on offer. These will include having a properly structured contract that reduces risks of not obtaining receivables that are to be used for the repayment, establishing escrow, waterfalls or debt service accounts that ensure the clear process of settling the liabilities and providing security as a fallback measure for lenders to recover their debts. In addition, having good corporate governance systems boost the confidence of the investors.

Conclusion

Whilst we all dwell on domestic debt exchange and international debt restructuring and its negative effects, businesses need to look beyond that and fashion out how they are able to not only survive but also strive in the midst of economic challenges. This requires tapping into funds hitherto that may be invested into government securities. However, for businesses to attract such funds, they must change their approach to raising funds by taking the lead in the process.

As it is said, success is where opportunity meets preparedness. Businesses and entrepreneurs must be prepared first by properly structuring the financial instruments on offer to attract investors who are reluctant to invest in government instruments.

To finance infrastructure projects, developing countries like Kenya are increasingly looking towards public-private partnerships (PPPs). PPPs do indeed present an opportunity for governments to receive private sector funding for infrastructure projects, whilst keeping such funding off sovereign balance sheets. PPPs allow the private sector to significantly contribute to the development, operation, and maintenance of public infrastructure projects by providing innovation and efficiency. Globally, private-sector participation in infrastructure development has proven to be effective in both emerging and mature markets. In Kenya, the Public-Private

Partnerships Directorate (the Directorate) reports that ten (10) PPPs, cumulatively worth USD 450,000,000, are presently in the post-procurement stage.

The country has recently introduced a new PPP regulatory framework through the Public Private Partnerships Act, 2021 (the PPP Act). The PPP Act was intended to address many of the pitfalls of its predecessor, including in the procedure required for Privately Initiated Proposals (PIPs).

This article explores the regulatory framework for PIPs under the PPP Act, the challenges that may arise, and how such challenges can be mitigated against.

Essence of PIPs

The PPP Act now enables private parties to propose projects to contracting authorities for implementation, aside from the standard direct procurement method where the government or contracting authority issues a tender for a proposed project. Generally, PIPs involve a private sector entity reaching out to the government with a proposal to develop an infrastructure project that may not have been budgeted or planned for. For this reason, PIPs are required to be in line with government policies and development objectives.

Accepting PIPs allows governments to benefit from the knowledge and ideas of the private sector on how to provide services people need. This is a significant advantage where limited government capacity means that the private sector is better placed to identify infrastructure bottlenecks and to devise innovative solutions. PIPs also provide the government with information about where commercial opportunities and market interests lie.

A PIP, as defined by the PPP Act, is a proposal that is originated by a private party without the involvement of a contracting authority and may include information that enables the complete evaluation of the proposal as if it were a bid. Such a proposal should justify why open competitive bidding would not be a suitable method of pro-curing the project. A review fee, capped at the lower of zero-pointfive percent (0.5%) of the estimated project cost or USD 50,000, is then paid to the contracting authority.

The receiving contracting authority then evaluates the proposal, including its alignment with national priorities, social necessity, value for money, fiscal affordability, contingent liabilities, fair market pricing, the sufficiency of supporting documentation and risk transfer efficiency. If satisfied, the authority submits the proposal to the Directorate.

Thereafter, the Directorate is expected to assess the private party’s compliance with set criteria within ninety (90) days, where such criteria may include public interest, project feasibility, partnership suitability and affordability. Following its assessment, the Directorate then submits an assessment report to the Public Private Partnership Committee (the Committee), which decides whether the project should proceed to the project development phase and what procurement method should be applied to the project.

Once approved, the proposal then enters the project development phase, where the private party undertakes essential activities like scoping, feasibility studies, impact assessments, partnership suitability evaluation, risk analysis and creating a comprehensive risk matrix. This phase is usually concluded within six (6) months of the Committee’s acceptance but may be extended for legitimate reasons.

Benefits of PIPs

PIPs provide governments with a unique opportunity to leverage the private sector’s ideas and expertise regarding the provision of essential services and other public goods. They utilise the unique knowledge the private sector has as a result of being in close contact with people at the grassroots level, which knowledge is crucial in the provision of services that are relevant to the people. Through PIPs, the government may benefit from proprietary information, trade secrets and intellectual property that is owned by private parties. In addition, PIPs provide foreign investors with the opportunity to pick sectors to contribute to, thereby participating in Kenya’s ongoing development.

PIPs are particularly advantageous in situations where governmental resources are constrained, since the private parties would play the lead role in identifying an opportunity for development and subsequently bear the cost of developing, building, operating and maintaining the project. The government, on its part, ensures that there is value addition to the public through these projects as it looks to improve and enrich the lives of its people. In addition, by giving private parties a leading role in building public infrastructure, PIPs allow for private parties to present joint proposals where they may undertake the proposed infrastructure project with a suitable partner who may best add significant value. This allows them to share risk, thereby presenting a more attractive opportunity for private sector players keen on getting involved in infrastructure and development.

PIPs can also expedite project development if used properly by allowing private entities to lead the fact-finding phase of PPP projects, minimising bureaucratic delays and enhancing the contracting authority’s approval speed. Likewise, the expertise and experience of private entities, either jointly or individually, would allow for increased efficiency at all stages of the project.

Ultimately, PIPs aid in creating an enabling environment for the growth of PPPs and, consequently, overall economic development as a result of increased PPP activity.

Challenges and Mitigation

Although PIPs encourage increased PPP activity, such proposed projects are still required to be undertaken for the benefit of the public at large and as such, should be in line with government development plans and priorities. A key concern relating to the use of the PIP method is that it may deny projects the benefit of a competitive procurement process. It is arguable that PIPs limit transparency, competition, and ultimately the value for money on the overall project due to how the procurement process is undertaken.

In a PIP method, a single bidder puts forward a proposal for consideration by the government agency based on the assessment of the proposed project. Had open competitive tendering been used, different private companies would have submitted bids to participate in the PPP project, where such competition generally aids in determining fair prices and quality, ultimately securing the government’s best deal. Generally, competition in a project helps boost value for money for the project by ensuring that the public receives the optimum balance between delivery of the project and price. With the reduced competition seen in PIPs proposals, concerns may be raised about the value for money of the proposed project.

To counter these concerns, the government can proactively work to enhance transparency by furnishing clear guidelines and practices pertaining to PIP submissions. An example of this may be through encouraging an additional round of bidding for projects that have already received submissions, to give an opportunity for price discovery. Another option that may be considered is the use of incentives, such as a “bid bonus system”, where the government grants an advantage to the original project proponent in the form of a premium used in the bidding procedure. This acts as an incentive to encourage private-sector involvement in PPPs through PIPs.

Further, PIP proposals may foster corruption due to the lack of transparency and competition that is inherent to their procedures. It is therefore important for contracting authorities to ensure that the assessment and approval of PIP proposals are free from external influences. In addition, it is important to put in place proper measures and procedures to ensure proper scrutiny and a competitive edge for each PIP. For instance, the “Swiss challenge” system may be of use where the PIP proposer is granted the right to counter-match the best offer from the competitive process and if they manage to do this, they are awarded the contract.

Lastly, the existing shortcomings of government agencies entrusted with various aspects of PPP execution may be dealt with by providing regular training to boost their knowledge and competencies in the respective procedures and processes of PPPs and PIPs. This will significantly strengthen their proficiency in overseeing PIPs.

Conclusion

PIPs may be a significant tool to unlock Kenya’s growth potential by filling gaps in development and infrastructure in the economy. PIPs provide further opportunities for the government and the private sector to join forces to finance and implement projects that benefit the public sector. By embracing PIPs and providing additional initiatives to address its existing concerns, Kenya can unlock new opportunities for private sector engagement, stimulating economic growth and ultimately improving the quality of life for its citizens through the successful implementation of PPP projects. In moving towards a more sustainable and inclusive future, these proposals can play a vital role in shaping our nation’s development landscape.