Kenya has borrowed heavily in the recent past to finance its ever growing budget. This is mainly to finance ambitious infrastructure projects. These investments are expected to accelerate economic growth and ultimately improve citizen’s general wellbeing.
The level of external debt has risen to more than 50 per cent of the total debt partly due to the governments’ conscious decision to tap into the global markets through the Eurobond.
The rapid accumulation of debt is putting pressure on the National government’s ability to service it. According to the draft budget policy statement, in 2018/19, it is estimated that Sh870.6 billion will be used to settle debt obligations which include interest and redemption payments.
This has grown by Sh221.2 billion from the current financial year and represents approximately 50 per cent of the total national domestic revenue.
The private sector presents a great opportunity to the government in terms of meeting its objectives while at the same time managing the debt level. This is mainly through public-private partnerships (PPP’s) to fund, develop, service and maintain infrastructure projects, ensuring infrastructure deficit is reduced and deliver high quality outcomes.
The telecommunications sector is a case in point where the private sector has demonstrated willingness to invest and provide services which would otherwise be a preserve of the public sector without need for partnerships with the State.
PPPs involves both opportunities and risks to the government. Through PPPs the government is able to tap the potential of the private sector to develop, maintain and operate a project more efficiently.
The private sector tends to be more efficient and this should reduce the overall project costs. It also saves the government scarce public resources hence allowing it to address other areas of the economy.
PPPs, however, run the risk of being implemented without proper controls on spending. Under PPPs, the government pays annuities to the private sector players who implement these projects.
The annuities are normally not recorded as part of government debt. They are, however, obligations which the government must meet. This movement of obligations relating to such public projects off the government’s balance sheet could raise public debt to unsustainable levels in the medium to long term. – The writer is a tax manager at Ernst and Young.