The Kenyan IPP experience

Abstract

Public and concessionary finance for the expansion of power systems in Kenya dwindled in the 1990s. Meanwhile, demand for electricity services was on the rise. Private investment emerged to fill the gap with four Independent Power Producers (IPPs) established in the country by the second half of the decade. From 2000, the private market appears to have collapsed. Expansion of the power sector is once again led by the incumbent state-owned utility. This paper examines the investment and development outcomes of the four IPP projects, and highlights a number of interesting features of this experience. Firstly, the regulator matters. Established after the first wave of IPP developments, the regulator helped to bring tariffs of the second wave down. Secondly, the tendering process (i.e. an international competitive bid) does not ensure competition for a country that has significant political risk. Bidders self select well before the tender begins, a process which led one Kenyan tender to attract only two bidders (one of which was non-compliant). Thirdly, local partners matter. Half of the projects had local partners, and those that did faired better in the long run. The impact of project financing, public perception and currency devaluation is also evaluated to glean lessons learned of past projects and help pave the way for a more sustainable future for the Kenyan power sector—which presently serves only 15% of the population.