“Privatization and Public-Private Partnerships Crisis Driving Investors Away
Investor-State Dispute Settlements (ISDS): When Corporations Sue Governments Over Lost Billions:
“Privatization and Public-Private Partnerships Crisis Driving Investors Away”
- Studies have shown that infrastructure is primarily a public sector issue, with the government often blamed for its shortcomings. The public sector invests significantly more in infrastructure compared to the private sector. However, even for the most publicly-managed infrastructure services, private sector involvement plays a crucial role in ensuring successful service delivery. When seeking private sector participation to deliver infrastructure services, a grantor, which is usually the government, has several options for restructuring projects, such as privatization and public-private partnerships.
- The motive for seeking private sector involvement in infrastructure is to address the underperformance of public sector utilities, the inadequate technical management of resources, and the investment demands that surpass available public funds.These demands include high upfront capital for initial investment and substantial costs for periodic maintenance. The grantor aims to improve public sector management, implement advanced technology, and secure project financing, which is typically classified as government debt.Example KENTRACO, the STANDARD GAUGE RAILWAY (SGR).
- Privatization and PPP arrangement equals management by the service provider against control of assets hence the options available are for operation and management where a private entity provides services whole or utility for a fee usually for delivering satisfactory services, Affermage - where a private entity builds and/or refurbishes an operation. This is a service usually delivered directly to consumers, and the grantor finance project any major capital expenditure. The private entity generally collects tariffs directly from consumers.
- The Public Private Partnership Act No.14 of 2021 states a Public-Private Partnership (PPP) is an arrangement where a private party undertakes a specific function on behalf of a public contracting authority. In return, the private party receives compensation, which may come from public funds, fees collected from users or consumers of the service, or a combination of both. The private party assumes the risks associated with performing the function, as outlined in the agreement, and ultimately transfers the facility or service back to the contracting authority once the contract period ends.
- In Kenya, Public-Private Partnerships (PPPs) are governed by the Constitution of Kenya of which its provisions and legislation outline how the government collaborates with private entities to deliver public services and infrastructure.Article 201 on Public Finance Management emphasizes on responsible financial management in the use of public resources, which applies to PPP projects involving public funds.
- Procurement of Public Goods and Services under Article 227 requires that PPP agreements, be conducted in a fair, equitable, transparent, competitive, and cost-effective manner. Article 71 on the Management of Public Assets, mandates parliamentary approval for contracts involving the exploitation of natural resources by private entities, which may include PPPs in sectors like mining, energy, and water. Devolved Governance and Service Delivery on Articles 174 & 175.These articles allow county governments to engage in PPPs to improve service delivery while ensuring public participation and accountability at the local level. Finally on Economic and Social Rights Article 43 the state is obligated to ensure access to essential services like healthcare, water, and education.
- The United Nations (UN) plays a key role in promoting PPPs through Agenda 2030 and the Sustainable Development Goals (SDGs), particularly SDG 17, which encourages partnerships to mobilize private sector resources for public services and infrastructure. Additionally, the UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects offers model laws and best practices for structuring PPPs, ensuring legal clarity and balanced risk-sharing.
- The World Bank PPP Legal Frameworks offer policy advice on structuring, financing, and regulating PPPs globally, while the IMF Public Investment Management Assessment (PIMA) evaluates how countries integrate PPPs into their public investment strategies to ensure financial sustainability. Similarly, the Organisation for Economic Co-operation and Development (OECD) has established the Principles for Public Governance of PPPs on Annex A and B which promote transparency, stakeholder engagement, and risk management. Finally the OECD Guidelines on Corporate Governance of State-Owned Enterprises, which ensure fair competition between public and private actors. World Trade Organization (WTO) sets international procurement standards through the Agreement on Government Procurement (GPA), promoting fair and transparent public procurement processes, including PPP contracts.In Africa, the African Union (AU) and regional institutions have also developed frameworks to enhance PPPs. Agenda 2063 emphasizes the role of partnerships in infrastructure development, including transport, energy, and digital services.
Types of contracts
- Build-Operate-Transfer (BOT) model, the private company builds the infrastructure (such as a road, power plant, or water
facility), operates it for a set period to recover its costs and make a profit, and then transfers the ownership and operation back to the government at the end of the agreed period. The private company usually earns revenue by charging fees to the government or utility, not directly to consumers. This allows the government to get the infrastructure developed and managed without having to pay upfront costs but still retains control after the transfer.- In Build-Own-Operate-Transfer (BOOT): This model is similar to BOT, the difference is that the private company owns the infrastructure during the contract period. It builds, owns, and operates the facility, making revenue through charging fees either to the government, utility, or consumers (depending on the arrangement). After the agreed period, the private company transfers ownership and operation back to the government. This model gives the private company more control over the asset during the contract term, with a longer-term investment focus.
- Design-Build-Finance-Operate(DBFO) In this setup, the public sector finances and owns the new infrastructure, while the private sector designs, builds, and operates it to meet specific goals. The operator takes minimal financial risk, receiving payments in installments as construction progresses. Once the project is completed, they are paid a success fee for operating it. The operator is responsible for design, construction, and operation, and will likely replace any parts that wear out prematurely.
- Design-Construct-Manage-Finance(DCMF) a private entity will finance and builds/refurbishes a facility that provides services to a single or small group of large In nature, in a BOT offtakers (often a public utility) or directly to consumers (e.g. toll roads, bridges and airports).
- Lease on existing assets and/or land is leased to a private entity for construction of new assets or refurbishment of existing assets to be used to provide services to a single or small group of large offtakers or directly to consumers
- In concession a private entity finances and builds and/or refurbishes and operates a service usually delivered directly to consumers. The private entity generally collects tariffs directly from consumers.
- Divestiture is where the assets are sold to a private entity, who provides services directly to consumers and collects tariffs directly from consumers.The United Nations Conference of Asia and Pacific 2015 states the concept that PPP have an advantage over traditional government procurement through the normal government procurement process, since here there is access to the private sector capital, meaning the government is relieved by an amount that is large enough to finance other equally important development projects.
The Importance of Public -Private Partnerships to an economy
The World Bank Institute breaks down the concept and argues that in PPP risk transfers to a private entity to manage it which can reduce overall cost to government, here there is predictably and cost of funding PPP focus on budgetary predictability over life infrastructure, therefore reducing the risk of funds not being available for maintenance after the project is completed. Also PPP's main focus is on service delivery to the general public and provides a wider scope for innovation. Another thing is the monetization of additional funding and this is aimed through charging users of additional additional costs.
This is done better from the Better allocation of risks and demand for infrastructure, through meeting the risk.
OECD provides another perspective on the success rate and economy growth. Africa Development Bank emphasizes on the importance of positioning the public sector as an equal partner to the private sector in a PPP. Finally, on accountability, government contracts are based on private parties pending agreeable output as quantity, quality and the expected timeframe is that the PPP contract aspect is what appropriate sector and project for the public-private sector. In context a PPP can be seen as a commitment of resources with the expectation of receiving future resources that will compensate the investor for;-
The time resources are committed,
The expected rate of inflation,
The risk which refers to the uncertainty of future payments. The investor is trading a known amount of resources against an expected future resources.
The Legal crisis pushing investors out
- Legal systems vary in their approach to contract enforcement, arbitration, and dispute resolution. In some jurisdictions, weak legal frameworks or biased judicial systems can make it difficult for private investors to protect their interests in PPP agreements.Legal disputes often arise when governments attempt to privatize sectors deemed essential for public welfare. Private sector projects often face stringent environmental and social impact regulations which can differ widely between regions. Privatization projects, especially in industries like mining, energy, and infrastructure, often face lawsuits due to environmental regulations that may conflict with economic or development interests, leading to costly legal battles and project cancellations.
- Changes in political leadership or government policies can lead to contract renegotiations, cancellations, or expropriation of assets. Investors often face legal uncertainty when long-term agreements are overturned due to new government priorities. Strict public procurement processes ensure transparency and fairness, inconsistencies in bidding procedures, corruption risks, or unclear legal guidelines can create challenges for private sector participation or third parties.
- Some host governments place procurement restrictions on the project companies to ensure that the local industry benefits from the project. Such as; who can bid, bid security, and limitation of negotiation. Jeffrey Delmon Private Sector Investments, gives an overview of how the doctrine of Ultra Vires where a company enters into an agreement which it’s not empowered to undertake forcing the grantor must undertake the obligation involved and must satisfy that the legal and are met.Allegations such corruption, favoritism, or lack of public consultation, often resulting in contract cancellations or criminal investigations.
- Private sector projects are often subject to varying tax policies, including VAT, corporate tax, and sector-specific levies.According to Anwar Shah, Editor, Fiscal Incentives for Investment Innovation. He states the investors find corporate tax treatment has effects on investments, and have varying effects on profitability.Sudden changes in tax regulations or double taxation agreements between jurisdictions can affect project profitability and financial structuring.
- Private sector projects often require significant land use, but unclear land ownership laws, indigenous land claims, or eminent domain regulations can lead to legal battles and delays in project execution.Large-scale privatization projects,often face resistance from civil society groups and unions. Legal challenges, such as lawsuits, injunctions, and public interest litigation, can delay or derail projects if not properly managed. Natural disasters, political instability, pandemics, and war can trigger force majeure clauses leading to liability and compensation.
- Some countries impose legal restrictions on foreign companies owning or operating certain industries, may restrict on the percentage of shareholding by some directors, managers or company.The constitution can come in to ease the problem by allowing voting rights, other constraints may include auditing requirements, restrictions on the nationality of directors, managers specific through government rights. These legal barriers can complicate foreign direct investment and require complex partnership structures to comply with local laws.
- Monopolies or unfair competitive advantages for certain private players, raises concerns under anti-trust laws and resulting in legal battles over market dominance.In some host countries,strict foreign exchange regulations and capital controls, currency convertibility prevent private investors, particularly foreign firms from repatriating profits offshore which will be essential to pay foreign lenders creating financial and legal risks.
- Governments or state entities may delay payments due to budget constraints, causing liquidity problems for private companies. This often happens because fiscal powers are rarely fully decentralized. As a result, the government may need subsidies, guarantees, or other support, which may come from the budget or “state aid.” These delays can lead to breaches of contract, arbitration cases, or contract termination, affecting project continuity and investor confidence. In many privatization contracts, payments are tied to specific outcomes like revenue targets, service levels, or project milestones. Failure to meet these requirements can lead to legal disputes, delays, or financial penalties. Large infrastructure projects are prone to complex issues, which can be resolved through arbitration, court proceedings, adjudication, expert determination, or other alternative dispute resolution mechanisms, including international arbitration.
How unreliable arbitration Is wrecking economic growth
- International arbitration plays a crucial role in setting standards for dispute resolution, particularly in cross-border investments. However, many investors are increasingly reluctant to establish businesses in certain countries due to concerns about international arbitration of currency-related disputes. Investors are pulling back from certain countries due to growing concerns over international arbitration challenges that make dispute resolution uncertain, costly, and time-consuming.While arbitration is designed to provide a neutral and enforceable mechanism for resolving disputes, several key factors are making investors rethink their commitments.
- Investors are withdrawing from markets where governments interfere with arbitration proceedings or manipulate the legal system to favor domestic companies. Some governments have gone as far as changing laws retroactively to invalidate arbitration agreements or prevent enforcement of foreign awards, making investments in those regions too risky.Investors prefer jurisdictions where arbitration awards are enforceable with minimal legal resistance. While some states facilitates the recognition of arbitral awards in many countries, some nations still resist enforcing foreign judgments, creating risks for investors. If an investor wins an arbitration case but struggles to enforce the award, the investment loses its security.
- Many investment disputes arise from fluctuations in currency values, especially in emerging markets where exchange rates are unstable. International arbitration often involves determining compensation in foreign currencies, which can be difficult to enforce in jurisdictions with strict currency controls. Investors fear that local governments might intervene in exchange rate policies, impacting the final value of their settlements.
- The governing law of a contract may differ from the law of the place of arbitration. This divergence can affect the interpretation of contractual terms, the admissibility of evidence, and the overall fairness of the arbitration process. Countries with legal frameworks that do not align with internationally accepted arbitration standards create uncertainty for investors, discouraging them from committing capital.
- Institutional arbitration, governed by recognized arbitral institutions, offers more structured dispute resolution mechanisms. However, some countries prefer ad hoc arbitration, where the process is less predictable and subject to local judicial interference. This unpredictability makes investors wary of entering markets where arbitration outcomes may be inconsistent or politically influenced.
- Many countries impose restrictions on currency convertibility and capital transfers. Even if an investor wins an arbitration award, they may face difficulties repatriating funds due to government-imposed currency controls. These restrictions make foreign investors cautious about committing capital in jurisdictions where currency-related arbitration might not be honored in practice.
Contextualising
- In Africa, several countries have demonstrated the potential of Public-Private Partnerships (PPP) and privatization to drive economic development, improve infrastructure, and offer better public services. These initiatives have helped bridge the gap between the public and private sectors and attracted much-needed investment, enhancing growth and providing solutions to critical challenges like infrastructure deficits. Below are some successful examples in Kenya and across Africa.
- In Kenya, one of the most successful PPP initiatives is the The Standard Gauge Railway (SGR) in Kenya is a monumental PPP project aimed at improving transportation links between Nairobi and Mombasa. The SGR was financed through a partnership with China, with the Chinese government providing loans for the construction of the railway line. The project has significantly reduced travel time between Nairobi and Mombasa, enhancing the movement of goods and passengers. The SGR is expected to stimulate trade, improve logistics, and contribute to Kenya’s economic growth, while also creating thousands of jobs. Despite some challenges, the project stands as a testament to how well-structured PPPs can provide infrastructure that serves the public while boosting economic development.
- The Thika Superhighway in Kenya is another successful example of a PPP. This landmark infrastructure project involved the upgrading of a major highway linking Nairobi to Thika and other surrounding areas. The project was a collaboration between the government and private investors who were responsible for various stages of construction. The highway has helped to alleviate traffic congestion in Nairobi, reduced transportation costs for businesses, and enhanced the movement of goods and people. It has also contributed to the growth of residential and commercial properties along the route, demonstrating the positive economic impact of infrastructure PPPs.
- The Mombasa Port is vital for Kenya’s economy, as it handles a significant portion of the region’s trade. Through PPPs, the government has entered into partnerships to modernize and expand the port’s facilities. The Mombasa Port Expansion Project involves private-sector participation in the development of additional container terminals, cargo handling, and warehousing facilities. The collaboration between the government and private sector investors has led to improved infrastructure and increased port capacity, thereby boosting Kenya’s trade and enabling it to better serve the East African region.
- In South Africa, the Gautrain Project is a prime example of a successful PPP in the transport sector. The project involved the construction of a high-speed rail link connecting Johannesburg, Pretoria, and the OR Tambo International Airport. The South African government partnered with private investors to finance the construction and operation of the rail system, with the private sector responsible for delivering the project on time and within budget. The Gautrain has significantly improved transport connectivity in one of Africa’s busiest regions, providing a faster, more efficient mode of transportation and easing congestion on roads. The partnership successfully brought together public and private resources, resulting in improved infrastructure and a boost to the country’s economy.
- Rwanda’s energy sector has benefited greatly from PPP projects that focus on expanding access to electricity and improving infrastructure. The government has partnered with private investors in several power generation, transmission, and distribution projects. A notable example is the Kabu 16 Hydroelectric Project, where a private developer worked with the Rwandan government to build a hydropower station that has helped diversify the country’s energy mix and provide sustainable power to its citizens. These partnerships have played a significant role in increasing electricity access in rural areas, which is crucial for supporting industrial growth and improving the livelihoods of Rwandans.
- The privatization of Telkom Kenya was one of the landmark moves in Kenya’s telecommunications sector. The government sold its majority stake in the state-owned telecommunications company to a private French company, Orange S.A., which later rebranded Telkom Kenya. This privatization allowed for significant capital injection, technological upgrades, and increased efficiency in the company’s operations. The partnership with Orange helped improve the delivery of telecommunication services, increase customer satisfaction, and expand access to mobile services across the country, contributing to Kenya’s rapid growth in the mobile sector.
- Uganda has seen great success in its roads concession program, which has been a model for PPPs in the transport sector in Africa. The government entered into agreements with private companies to finance the construction and maintenance of key road networks. The Entebbe-Kampala Expressway is one such example where private investment played a key role in the development and management of this vital infrastructure project. The program has helped address Uganda’s road infrastructure gap, reducing traffic congestion and promoting smoother trade and transportation across the country. It has also encouraged private-sector participation in infrastructure projects, setting a precedent for future developments.
Conclusion
- In both Kenya and across Africa, PPPs and privatization have proven to be valuable tools for enhancing infrastructure, boosting economic growth, and improving public services. These successful examples show how strategic partnerships between the public and private From prosperity to panic, the investor is at a low-risk tolerance abandoning high-risk markets. International arbitration is meant to provide a neutral and fair dispute resolution mechanism; concerns about enforcement, currency volatility, and legal unpredictability deter investors from entering certain markets. Inconsistencies are wrecking growth and countries seeking to attract foreign investments must establish clear and reliable arbitration frameworks, ensure judicial independence, and create stable currency policies that protect investor interests.
References
Books
Susumu Ito, Infrastructure Development in Public-private Partnership: The Case of Philippines Springer Nature Singapore (2022)
Anwar Shah, Editor, Fiscal Incentives for Investment Innovation Oxford University Press (1995)
Gaukrodger D, ‘The Balance between Investor Protection and the Right to Regulate in Investment Treaties: A Scoping Paper (2017) SSRN Electronic
J Delmon, Private Sector Investment in Infrastructure: Project Finance, PPP Projects and Risk, Kluwer Law International (2009)
Leahigh D and Reilly FK, Solutions Manual, Investment Analysis and Portfolio Management, Eighth Edition, Frank K. Reilly(Thomson/South-Western, 2006)
Shah A, Fiscal Incentives for Investment and Innovation (Oxford University Press 1995)
Gaukrodger D, ‘The Balance between Investor Protection and the Right to Regulate in Investment Treaties: A Scoping Paper (2017)SSRN Electronic Journal
Legislation
The Constitution of Kenya (2010)
The Public-Private Partnership Act No 14 of 2021
Comments