Irony of State's borrowing binge amid increased private sector financing

In its pursuit of private sector players to build infrastructure projects through the public-private partnership (PPP) model, the government had sought to stay away from lenders but also avoid frequent hikes in taxes. 

Or so the government made Kenyans believe, particularly when trying to get the citizens' buy-in for new PPP deals.

But despite private players increasingly warming up to PPP projects in the country, pumping or lining up billions of shillings into the different infrastructure projects, the government continues to borrow at what analysts have described as an alarmingly high rate, as it continues to make proposals that point to higher taxes for Kenyans.

While PPPs were off to a slow start, attracting only Sh10 billion over the 10 years to June 2022, according to data by Treasury’s PPP Unit, they are gathering momentum.

The PPP Directorate said private capital investments have surged to Sh145 billion between the inception of PPPs in 2013 and June 2025, with the bulk of the investment mobilised in recent years.  

Over the current financial year, the directorate said, the government targets to mobilise at least Sh65 billion worth of private sector capital investments in PPP projects.

While still low relative to Kenya’s annual development budget of Sh700 billion, there are indications that private sector investments have the potential to account for a significant proportion of the country’s required investments in development projects.

The increased role that the private sector is now playing in infrastructure development has, however, not stopped the government from speedy acquisition of debt, which analysts have noted is already at unsustainable levels, and even called some of it spurious.

It is also not lost to many that some of the borrowed money is going to recurrent expenditure, against Kenya’s public finance management laws.

The Treasury has severally noted that PPPs are key in addressing Kenya’s infrastructure gap while at the same time reducing the need to borrow more or tax Kenyans more. 

“PPPs are expected to partly bridge the investment-financing gap. With competing pressures on the national budget, PPPs remain one of the most viable solutions to mobilise private capital for public good-delivering bankable, resilient, and transformative projects,” says Kiptoo in a foreword to the latest annual report by the PPP Directorate on the state of PPPs in Kenya.

As PPPs gather momentum, the government has also increased the pace of acquiring debt.

Kenya’s debt stood at Sh12.054 trillion as of September this year, according to the latest data by the National Treasury on debt, growing 12.3 per cent in one year from Sh10.734 trillion in September 2024.

Over the three years that the Kenya Kwanza administration has been in office, which had promised it would go easy on borrowing, debt has grown by 38.5 per cent - from Sh8.701 trillion in September 2022. 

Other than debt, the government has in recent months securitised taxes not yet earned, including the Road Maintenance Levy, in which Treasury used the Sh7 out of the Sh25 that motorists pay at the pump to secure loans that it said have been used to settle pending bills owed to contractors. 

In addition to borrowing, the government has also been imposing more taxes on Kenyans, including the higher Road Maintenance Levy, housing levy, and higher pay as you earn (PAYE) tax for some employed Kenyans.

Recent proposals, which are also in addition to the discussions with the International Monetary Fund (IMF) for a new funding programme, point to more taxes. The government has proposed raising $18.73 billion (Sh2.42 trillion) for energy projects.

The Energy Ministry said the money, which will be used to modernise and expand power generation and transmission and distribution infrastructure, will be sourced partly from the private sector ($7.91 billion or Sh1.03 trillion) and the balance ($10.82 billion or Sh1.40 trillion) from the public sector.

The latter will be drawn from funds in the Consolidated Energy Fund, which will be financed by high taxes on fuel and electricity, as well as allocations in the budget.

The government is also looking at operationalising the Sh1.5 trillion National Infrastructure Fund. The fund would not entail debt or higher taxes, but leverage on the proceeds of the privatisation of the State-owned entities to attract private sector investments. 

While the mix of higher debt, growing PPPs and higher taxes offers a lifeline of sorts to Kenya Kwanza’s cash-strapped administration, it could be sinking the country into a deeper hole. 

Justin Muturi, who served as cabinet secretary and Attorney General in Ruto’s cabinet, dismissed the Sh1.5 trillion infrastructure fund as a “tragic irony of our times”, noting that the Kenya Kwanza regime has been looting from Kenyans, with one hand while begging with the other.

“Kenyans are already overtaxed, overburdened and squeezed to the bone. What this country needs is not another fund, levy or loan. What Kenya needs is discipline, integrity and competence in public management

“Kenyans have no more to give. What they want now is not a new fund but a new culture of responsibility…. President Ruto must understand that you cannot fund development by impoverishing the people. You fund development by governing with integrity.”

To collect enough to build the infrastructure, Muturi explained that the government needed to stop corruption, end government waste, including cutting lavish foreign trips, empowering competence as opposed to rewarding “cronies and cartels”, and increasing accountability.

“Billions of shillings are lost monthly in inflated contracts, ghost projects and kickbacks. Seal these leaks and Kenya will have enough to pave every road without a single new tax…. Every shilling spent must be traceable. Independent oversight institutions must be strengthened, not undermined,” said Muturi. 

“Let us be clear: Kenya does not suffer from a shortage of money. It suffers from a shortage of honesty in leadership. If the President truly wants to build roads, he should start by building trust.”

The cancellation of high-profile projects, including the Adani deals and the award of the upgrade of the Rironi-Mau Summit road, may have affected PPPs in Kenya, sending jitters among many investors. 

This has however not had a major impact on the interest that private sector players have in putting their money in public infrastructure in Kenya, which is seen in the project pipeline.

Investors have lined up billions of shillings for power-generating and transmission projects, Special Economic Zones, large-scale agriculture and affordable housing.

Treasury, in a recent report, noted that the growing interest has been due to Kenya having in place the proper legislative framework and also moving “from policy to implementation”, that is, facilitating “several landmark projects across sectors-energy, transport, water, housing, and healthcare” all of which are evidence “that PPPs can and do work”.

Despite being on the verge of what appears to be a successful PPP run, the government is not slowing down on debt acquisition and its bid to tax Kenyans more. 

Kenya’s debt increased to Sh12.054 trillion in September, according to the Treasury’s latest debt bulletin. The debt note also shows that the government has heavily focused on domestic borrowing, with domestic debt accounting for 55.3 per cent of total debt, which is likely to raise concerns over the government crowding out the private sector from the credit market.

Domestic debt stood at Sh6.66 trillion while external debt stood at Sh5.393 trillion or 44.7 per cent of total debt as of September. There has been a shift in debt composition with local borrowing taking the larger share, unlike in the past, where external debt accounted for more than half of the total debt.

In September 2023, for instance, domestic debt accounted for 46.4 per cent of total debt while external debt was at 53.6 per cent.

As the government increased borrowing locally, this started to change, and domestic debt stood at 51.9 per cent of total debt as of September last year, while external debt was at 49.8 per cent.

Other than fast-growing debt, analysts have warned Kenyans to anticipate more taxes, with the government expected to start implementing new conditionalities as it gets into a new International Monetary Fund (IMF).

Kenya is currently in discussions with the Bretton Woods institution for a new funding programme. The latest programme, which ended in April this year, required Kenya to implement a raft of reforms, including high taxes on petroleum, as well as the removal of the oil subsidy programme and the push to privatise State-owned entities, which is seen to start bearing fruit now.

Dr Patrick Muinde, an economist, suggested that Kenyans may have been duped into accepting that PPPs would accelerate infrastructure development while holding taxes stable and also helping the government stay away from the debt market. 

“(PPPs) opened a new frontier not only to facilitate infrastructure in the country, but also a sweetener for the political class to lie that no new taxes or debts are involved,” he said.

David Ndiii, Ruto’s economic advisor, explained the rationale behind the National Infrastructure Fund, noting that the government planned to leverage on proceeds of the privatisation of State entities to attract private capital. 

“We are not putting debt on the balance sheet of the National Infrastructure Fund; it will have a portfolio of investments in bankable projects. 

“If we are going to be able to finance infrastructure, the way to do it is to take off budget, and our proposal was to capitalise on the infrastructure fund bank using privatisation proceeds,” he said, speaking at a recent local economic forum. 

“We have the sign off by the President, and as soon as we get the proceeds from the privatisation transactions, starting with KPC, we will capitalise this infrastructure fund and leverage on it to bring in blended finance, to crowd in private capital. We have a target of Sh4 for every Sh1 that we have.”

He also insisted that there is no way out of PPPs in infrastructure development, noting that Kenyans have put up with paying for certain services, including the use of roads through tolls, if Kenya is to build the infrastructure that it needs.

“There are about 2,000 kilometres (km) of highways that we think we can fund off budget through PPPs and tolling,” he said.

“There will be a lot of noise, but we will toll them. Otherwise, they will not be built. Then the money in the budget can build rural access roads. If you use all the money in the budget for highways that can be paid for, then you will not build the rural roads for agriculture.” 

“That is the trade-off that Kenyans have to face. Do you want the rural roads to your village… then you must pay for the highway. If you do not want to pay for the highway, then you stick without a rural road.” 

While the government presents a scenario where there are no other options other than toll roads, tax more and borrow more, experts point to illegal use of taxes and borrowed funds, which, if employed correctly, the ambitions of Kenya being the next Singapore would not be so far-fetched.

Bernard Muchere, a fraud expert, recently raised an alarm over the government's use of borrowed money against the Public Finance Management laws.

Muchere, who has previously worked with Treasury as an auditor for decades, noted that despite being required to direct all loans to development projects, President Ruto’s administration has, over the last three financial years, spent Sh958 billion on development projects.

He noted that the regime has cumulatively borrowed over Sh4 trillion, which may mean that over Sh3 trillion that was not spent on development projects was borrowed illegally.

“Whereas borrowings are lawfully required to finance only development expenditure, for the three financial years of the Kenya Kwanza rule, the actual development expenditure aggregated to approximately Sh958 billion.

If we assume that the development expenditures were financed by borrowings only (no tax revenue was used), it means President Ruto borrowed unlawfully (odious debts) of approximately Sh3.3 trillion,” he said.

Further demonstrating the huge infrastructure projects that can be delivered using the money that was borrowed but not used as the law prescribes.

Muchere said the about Sh4 trillion that the current regime has borrowed is enough to construct one large international airport at Sh1.1 trillion, construct 10,000 km of road at about Sh1.5 trillion assuming 150 million per km, construct 47 level six hospital at about Sh7.5 billion per hospital totalling to Sh352 billion, construct 100,000 classrooms at about Sh1.2 million per classroom total to Sh120 billion and construct 47 dams at Sh20 billion per dam totalling to Sh940 billion.

Such are the projects that the government plans to put up with the planned national infrastructure fund.

President William Ruto, offering a rationale of why Kenya needs the infrastructure fund, explained that Kenya needed to build airports, roads and power-generating infrastructure, which can only be financed by such a fund.

“Shortly we will be taking to Parliament the law to establish a national infrastructure fund to help achieve (these) objectives – (including building) 10,000 kms of power (transmission lines), expand our road infrastructure (through construction of) 1,000km of dual carriageway around Kenya, 10,000 km of tarmac, make sure we have a good airport, expand railway infrastructure and to generate sufficient water from 50 mega dams around Kenya that will generate at least 2,000 megawatts and enable us to put two million extra acres of land under irrigation,” said the President. 

The PPP projects are coming with their fair share of challenges that have ended up being costly to the taxpayer.

Other than the risk of inflating the cost of essential services, including travel, health and education, contracting goofs, as was the case with Adani, are now seeing the government pay billions for contract cancellation.

The government is in the process of terminating the Adani deal with the Kenya Electricity Transmission Company (Ketraco) to build power transmission infrastructure and is expected to see Kenya pay the Indian firm a cancellation fee.

The cancellation of the Rironi-Mau Summit award to the French firm Rift Valley Highway has cost the government Sh7.32 billion as a penalty for contract cancellation.

The PPP Directorate also disclosed that the government is set to pay for the cancellation of two contracts under the roads annuity programme.

It has already terminated the contract for Road Annuity Lot 32 of the Annuity Programme for the construction and rehabilitation of a 67-km road to augment the existing road network from Illasit to Taveta through Njukini.

The contractor will be paid about Sh438 million. It is in the process of terminating the contract for Road Annuity Lot 3 that entailed the construction and rehabilitation of Wajir–Habaswein–Samatar (68 km) and Rhamu-Mandera (75 km).

The PPP Directorate said the cancellation of the two road annuity projects was on account of “lack of value for money”.

In the annual report to June 2025, the PPP Directorate said Kenya's exposure to PPP project termination reached Sh217.7 billion as of June, stemming from 13 projects whose combined construction cost was Sh188 billion.

The majority of these are renewable electricity generation projects that have recently begun supplying the national power grid. “The total estimated exposure related to termination sum payments amounts to Sh217.7 billion,” said the Directorate.

“However, it should be noted that the likelihood, value, and timing of such termination payments cannot be determined with certainty in advance. Furthermore, it is improbable that all projects would be terminated simultaneously, thereby triggering the aggregate termination sum of Sh217.7 billion at once. 

“As such, based on the World Bank recommended six per cent probability of early termination by the Contracting Authorities, the maximum contingent liability for the PPP projects is hereby reported as Sh13.06 billion.”