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Kenya’s new railway and the emergence of the “government-to-government procurement” method

Cynthia Olotch's picture


Photo Credit: Xing Yihang | CRIENGLISH.com

Kenya recently launched its high-capacity, high-speed standard gauge railway (SGR) for passenger and freight transportation, which currently runs from the coastal city of Mombasa to the capital city, Nairobi. The SGR replaces the meter gauge railway passenger line that was constructed during the British colonial period that was commonly referred to as the lunatic express.

The Kenyan SGR is part of a proposed wider regional network for the development of railway connecting Kenya, Uganda, Rwanda and South Sudan. Each of these countries is expected to develop the part of the railway line falling within its borders. Kenya is ahead of the pack, being the first country in the region to operationalize the SGR.

The SGR is Kenya’s largest infrastructure project since the country gained independence from the British colonialists in 1963. From a public-private partnership (PPP) perspective, the SGR is a unique project for various reasons:

1. Procurement method for the construction of the SGR, as well as supply and installation of rolling stock

The procurement for the construction of the SGR and the supply and installation of the rolling stock marked an interesting turn in the manner in which some major infrastructure projects are procured in Kenya. SGR marked the introduction of what is now commonly referred to as “government-to-government procurement,” where the law allows projects financed through concessional loans and grants from foreign governments to be exempt from Kenyan procurement law. Terms and conditions imposed by such concessional loans and grants were therefore not subject to the procurement law.

This was controversial. The Law Society of Kenya filed a case in the Kenyan High Court challenging the procurement method used for the SGR, citing lack of competition as one of the grounds for the challenge. The construction of the SGR was funded through a concessional loan from the Exim Bank of China, which required that the engineering, procurement and construction contract be awarded to a specific state-owned Chinese corporation. The court ruled that the procurement was proper, recognizing government-to-government procurements arising from negotiated grants or loans as being exempt from the application of the procurement law, thereby setting a precedent in this regard. 

This procurement method is however not unique to Kenya. Early this year for instance, it was reported that Britain and Iraq had entered into an arrangement wherein Britain would advance 10 billion pounds in loans to finance infrastructure projects in Iraq over a 10-year period. One of the conditions of the loan was that it would only benefit British companies. Government-to-government procurements are however not necessarily a bad thing, provided the procurement meets the requirements of a viable PPP infrastructure project, which in the case of Kenya includes affordability, value for money and appropriate transfer of risk to the private party. Whether or not the Kenyan SGR is affordable and offers value for money however, has been subject of debate. Time will tell whether the investment in the SGR was worthwhile.
 

2. Procurement method for the operator of the SGR

During the 13th Summit of the Northern Corridor Integration Projects (NCIP), an initiative of Kenya, Uganda, Rwanda and South Sudan aimed at promoting integration by fast tracking regional projects for the benefit of citizens and the development of the region, the heads of state of these countries resolved that the Chinese firm that constructed the SGR would be appointed to undertake the operation of the railway line. Kenyan law currently allows procurements under bilateral or multilateral agreements between Kenya and any foreign government, entity or agency to be exempt from the application of the procurement law.

In accordance with the resolution made during the 13th Summit of the NCIP, therefore, Kenya appointed the same Chinese firm that constructed the SGR to operate the railway line. During Kenyan President Uhuru Kenyatta's visit to China in May 2017, the Chinese Government approved Kenya’s request for an additional 369 billion Kenyan shillings (~$3.59 billion) from the Exim Bank of China for the construction of the next phase of the SGR, which is expected to extend to Kisumu, the port city on Lake Victoria.

The timelines for completion of the entire SGR network is however still unclear as some of the countries that are part of the SGR network have not yet began implementing the project in their countries.

While the SGR marks an important milestone in Kenya’s infrastructure space, it also tested the government-to-government procurement method for major infrastructure projects and it will be interesting to see whether this procurement method is adopted for other major infrastructure projects, particularly regional projects, which would otherwise face procurement challenges arising from the different procurement laws across the different states. 

In determining the procurement method to be used for such projects however, the requirements for a viable PPP project should not be dispensed with, and if the government-to-government procurement method does not meet the cut, other options should be considered.
 

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Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post. 


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Comments

Submitted by Hassan on

I will appreciate if any one can share a report on Annual Fiduciary Report on procurements of government development project funded by international funding agency. In other words, what are the likelyhood of lapses when the procurements are done following the government PPR where funding agency does not play any significant roles. Thanks

Submitted by Dr.Mohamed Taher Abdelrazik Hamada, Ph.D on

Certainly, government to government finance for infrastructure is a unique
method to support huge projects through PPP perspectives such as the construction
of railway systems for passengers and freight transportation such large world
authorities like the World Bank should be involved at least as mediators in the case of government to government procurements , because the World Bank and similar
financial institutions are capabale to give the right consulations from their well
qualified experts in different fields of investment .
The World Bank and it's affiliations represent legal channels in such deals
because the World Bank is the mastermind of all PPP projects.
Yours Very Respectfully,
Dr. Mohamed Taher Abdelrazik Hamada, Ph.D
Retired Professor at Strayer University, USA

Submitted by Jacques Cook on

I think the criticisms of this project based on the government to government procurement model miss one vital point; no other procurement method (PPP, ICB or MDB financing) would likely produce a project of this size and complexity. It is perhaps unfortunate from a procurement perspective that the Chinese have all the chips and can call the shots. But
would it be better to have no project at all?

Submitted by lucky bhila on

I know there are terms and conditions on any given loan, but is China helping local enterprises to grow by taking them under their armpits, so as to enhance their capabilities for their future? And does the fund help individuals who may have massive projects that may help the communities sustain themselves.

Submitted by Md Jasim Uddin on

It looks great deal between two countries. G2G deal not bad if the negotiation strongly held. Negotiation technical and product cost very vital. More important neogotiation in operational aspects . Long time concessional contract every clause of contract documents for operation and maintenance and tolls to be looked carefully . It is theoretically looks sound that risk transfer to private sectors but bad deal always keep pressure on taxpayers.

Submitted by TA on

Colleagues,
(This is personal view only)
Such major infrastructure contracting and delivery methods may adopt any good practices and arrangements provided that the delivery strategy is well researched in advance, justified and convincing to assure the achievement of core principles of public sector procurement. After all, the ultimate objectives of all procurement lays, regulations, directives and procedures is to assure the achievement of development objectives through effective, efficient and economical use of public resources. If the G2G project implementations arrangements and negotiations are giving sense and justified to be the best way of meeting development objectives and are assuring achievement of fair value for the public money, I trust any country's law has provisions to adopt fit-for the purpose approach. G2G method looks Closer to use of force account or Direct Contracting delivery methods and this might be fit- for -the purpose, based on circumstances. Competitive methods are generally proven methods to meet the requirements of core public procurement principles, but may not be fit for all circumstances. If the negotiation process is transparent, the prices are reasonable, quality of delivery are assured and the asset's life cycle cost is considered to be minimum and affordable...etc, these are what to justify the means.
Thanks,

Submitted by shelton hwande on

Team Members

Thanks for the interesting views. I do concur strongly with the sentiments expressed by Dr.Mohamed .T.A. Hamada and TA above. Transparency , accountability & sound-favourable contractual terms are critical factors to consider in G2G procurement. If countries do not have the relevant supply chain expertise in-country ; engagement of established institutions like World bank is a prudent idea, provided parties can negotiate the political elements in view of the project funding coming from China.

Thank you very much

Submitted by Ernest Olotch on

PPPs is a new concept in financing expensive infrastructure projects like the one mentioned above ( Kenya and China: Iraq and Britain). Does someone know of any other PPP'S between two so called developed countries or between two developing countries?

Submitted by O-DULLO peter on

A worthwhile investment for the country - though it's "government-to-government" tag, and the operator clause with the contractor - opens the PPP component suspect and a probable conduit for rent-seeking !

Submitted by Olufemi Osanyinro on

Another factor to consider is the strength of the borrowing government's procurement system. While most lenders refrain from lending to countries with a poor procurement system because of the implementation risks associated, the 'government to government' procurement method may be a means to mitigate that risk. However, much lies upon the borrowing government's negotiation power to ensure that transparency, accountability, and value for money through obtaining a competitive price and/or transfer of skills for local content development is achieved.
And as said in the article, this procurement method may be a better option to eliminate the legal and regulatory bottlenecks surrounding the implementation of Regional projects.

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