REPUBL3IC Or KENYA1 CE OF THE AUDITOlGENEN A REPORT TH E A U D ITOR-GENERA O0N THE FINANCIAL: STA SvO INFRASTRUCTURE: FINANCE-AN) PUBLIC PRIVATE PAÄRTNEKRSHIP PROETy - IIA CRIEDI T N.57K 30 JUNE.2017 THENATOA OFFICE OF THE AUDITOR GENERAL P.O. Box 30084- 00100, NAIROBI 3 0 SEP 2017 'RECEIVED REPUBLIC OF KENYA THE NATIONAL TREASURY INFRASTUCTURE FINANCE AND PUBUC PRIVATE PARTNERSHIPS (IFPPP) PROJECT IDA CREDIT NUMBER 51570- KE ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED JUNE 30, 2017 ISSUED ON: SEPTEMBER 30,2017 Prepared in accordance with the Cash Basis of Accounting Method of the International Public Sector Accounting Standards (IPSAS) ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2017 a) PROJECT INFORMATION AND OVERALL PERFORMANCE ..................... 2 b) STATEMENT OF PROJECT MANAGEMENT RESPONSIBILITIES.................. 15 c) REPORT OF THE INDEPENDENT AUDITORS-ON-THE-INERASTRUCTURE-FINANCE-AND PUBLIC PRIVATE PARTNERSHIPS (IFPPP) PROJECT ................. ....... 16 d) STATEMENT OF RECEIPTS AND PAYMENTS FOR THE YEAR ENDED JUNE 30, 2017.........17 e) STATEMENT OF FINANCIAL ASSETS AND LIABILITIES AS AT JUNE 30, 2017 .........18 f) STATEMENT OF CASHFLOW FOR THE YEAR ENDED JUNE 30, 2017 ..............19 g) STATEMENT OF COMPARATIVE BUDGET AND ACTUAL AMOUNTS ....... ........ 20 h) NOTES TO THE FINANCIAL STATEMENTS ....................... ........ 21 i) APPENDICES ..................34....... ................... 1Pa e IcuI TP11CIUb lhINAINU*L ANNUAL REPORT AND FINANCIAL STATEMENIS FOR THE YEAR ENDED )UNE 30, 2017 a) PROJECT INFORMATION AND OVERALL PERFORMANCE 1.1 Name and registered office The official name of the project Is infrastructure Finance and Public Private Partnerships-(IFPPP)- Project. The project is located at: Anniversary Towers. North Tower 7Th Floor, University Way/Monrovia Street NAIROBI Objective The main objective ofthe projectistoifmprove-theenabling-environmentto generate a pipeline of bankable Public Private Partnership (PPP) Projects. Address: The National Treasury Anniversary Towers, North Tower 7Th Floor, University Way/Monrovia Street Nairobi KENYA. The address of its registered office is: P.O.BOX 21190-00100 NAIROBI Tel: 020 -2122271/4 Email: info@piu.go.ke Contacts: Telephone: (254) 020-2210271/4 E-mail: info@piu.go.ke Website: wwpw.ggt.ke 2 P age A Nuu FINANCF AND pUBIC PRIVATE PARTNERSHIPS PROJECT ANNUAL REPORT AND FINANCIAL STIATEMENTS FOR THE YEAR ENDED JUNE 30,2017 1.2 Project Information Project Start Date: The project start date is 11 hFebruary,2013 Project End Date: The Project end date is 31st December, 2017 Project Manager The project manager is Mr. Ray Charles Musau Project Sponsor: The project sponsor is International Development Association (IDA) 1.3 Project Overview Dne Ministry/State The project is under the supervision of the National Treasury. Department of the project Project number 51570 -KE Strategic goals of the Overall Objective- to increase private investment in the Kenya infrastructure market project across sectors and to sustain this participation over an extended period of time, This involves three key areas of development: (i) enabling environment (ii) pilpeline of potential transactions and (iii) financing. Specific Objective- to improve the enabling environment to generate a pipeline of bankable PPP projects. Achievement of strategic The project is in YR5 and the following achievements are in reference to the YR 5 goals targets as documented in the Project Appraisal Document/amended during the mid- term review of the project. Project development objectives (i) Indicator 1- Expression of Interests (EOls) issued to prospective sponsors for three targeted PPP transactions YR 5 Target- 6 EOls by end of YR 5. Achievement- EOI issued; for Nairobi-Nakuru-Mau Summit Road. The EOI closed and EOI evaluation was completed, Four bidders were shortlisted and shall be issued with RFP in Q1, FY 2017/18. On the other hand, E0es for the following 5 projects in the larger Kenya PPP program were issued on various dates during the project period. The current status of the project is also indicated; * 10,000 KM Road Annuity program (Phase 1) -contract negotiations ongoing for Lots 3, 33,f18 and 15 attained commercial close and discussion on financial close are being finalised. Commercial close negotiations are ongoing for Lot 32 * 980 MW Coal Power Plant in Lamu- contract negotiations with the 1st ranked bidder on the Power Purchase Agreement (PPA) are being finalized * Kenyatta University Student Hostels project- project is at commercial close * Civil Servants Housing Project- contract negotiations ongoing with st ranked bidders for Park Road and Starehe Lots. RFQ evaluation for Shauri Moyo is ongoing. * Multi-Level Car Park in Nairobi CBD- RFQ evaluation is ongoing 3 P ag u~4FASTlL1ciRIE 1NANCE AND puJnt ic PRIVPA 1 I 'vj INFRASTRUCTUR FIANI ANNUAL REPORT AN D FIN AN(CIAL STATEM LIN"'s F O R T 1 H E Y A R E I D D - o v l ' (i) indicator 2- ppP Regulatons a b ted With MoF YR 5 Target- Yes Achievement- Yes tted in December 2014 and submitted (a) National PPP Regulations- these were gaze to) tPe Amiament) C It- Te dmen to the PPP Act were passed by. the National Assembly and forwarded for approval by the Senate. The bill is at the 3" reading stage in the Senate. (c) ouny PP reulaion- stakeholder consultations on the draft CountyWPPP (c) County PPP regulations steo le of the Regulations, a review Of the reg laton s 7 w r o n cld e d ro to i S s son te, i m r c s P vs io ns in provisions In the PPAt203tadrs oeothimrecise Sena in primary statute is ongoing, The amendments to the Act are beto re at (d) Petition Regulations- stakeholder consultations on the draft Petition regulations were concluded and process was put on hold PendIng completion of amendments to the PPP Act 2013. keholder consultatons on the draft (e) Project Facilitation Fund (PF e os e concluded. The PFF regulations project FacilritatiOn Fund (PFE) regulations werecnldd h E euain were gazetted in May 2017 orted with the development (fpLw Reform- law reform In aid of PPP PrOlect wadns tpoie wth Pt deepised of draft L an (mndment) Bill, 2016. The amed nt to the P1hctrepse byteNtonal Assembly and forwarded for approval by the Senate. The billisate 3rd reading stage in the Senate. (iii) Indicator 3- PPP Fiscal Commitment and Contingent Liability Frameonrk operationalized as measured by- upstream Debt Management Department (DM) due diligence on prospective (feasibility stage) transactions completed in line with Law. YR 5 Target- Yes Achievement w was adopted by the PPP Unit & PDMO and is currently being The FCCL frame ok was atry approvals. Preliminary FCCL assessments have bee*n oneu o th roes (icudes 4 first mover projects). The frameworKlis hoee no full utrlieds thclere is need to simPlify the model and increase the capacity of the poMG to ful oly utillize It. The National Treasury is working closely with the World Bank to finalize the iramework. Once the framework is finalized, it shall be presented to the PPP Committee for approval. ds in medium and (iv) Indicator 4 Regular Issuance of Government benchmark bondinmiuad long-term maturities up to 7110 year tenUres YR y Target- At least one issue by maturity bucket per year and minimum size of benchmark issue e Calender was published in July 2016. FY 2017118 Achievement- The first Issuance Cale to whthe Central Bank with a target to calendarlis under preparation in consultation wt h eta akwt agtt finalie by August 2017. Once completed, necessary approvals will be sought to disseminate. 4 Page A'IJINL AJ\U FUHLIC PRIVATE PARTNERSHIPS PROJECT ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2017 COMPONENT 1 Intermediate Results () Indicator a- Capital Markets Authority Bill 2011 approved by Cabinet for Indicators- submission to Parliament YR 5 Target- Yes Achievement- In progress Bill was revised and re-submitted to the National Treasury (NT) as the Financial Seryices Authority Bill. The NT has finalized review of the bill. The bill was subitced to the Cabinet for consideration and approval (ii) Indicator 2- Securities and Investments Bill 2011 approved by Cabinet for submission to Parliament YR 5 Target- Yes Achievement- In progress The Securities and Investments Bill 2011 was revised and repackaged as the Securities, Investments and Derivatives Bill respectively. Both bills shall be finalized after Parliament approves the Financial Sector Authority (FSA) Bill, The FSA was submitted to the Cabinet and is pending approval. .COMPONENT 2 (i) Indicator 1- Ten feasibility studies completed and submission by contracting authorities to the PPPSC (PPP Committee) acceptable to the Association, including Safeguards YR 5 Target- 10 Achievement- 10 The PPP Committee approved 10 feasibility studies that were done with support from the IFPPP project. The projects are; Nairobi-Nakuru Road, Nairobi Southern By Pass, Nairobi-Thika Road, Nairobi-Mombasa Road, 2nd Nyali Badge. Also approved were student hostel projects for five higher institutions of learning namely Moi University, Egerton University, University of Embu, South Eastern Kenya University and Kenya Technical Trainers College (ii) Indicator 2- Line Ministries and Agencies "Nodes" for First Mover Transactions established and operational YR 5 Target- 2 Achievement- Yes A total of 59 PPP Nodes have been established and operational in various government Ministries and Agencies. COMPONENT 3 (i) Indicator 1- PPP Fiscal Commitment and Contingent Liability Framework, including Disclosure Procedures approved by Cabinet Secretary, National Treasury YR 5 Target- Yes Achievement- In progress 5 IP a e NFAT C1J I(E ~HANGCE A-ND FPU13LiC PRIVA itI\ 'F A U EORT AND FINANCIAL STATeMFrwS FORUA THEP EREDED) JUNE 30,2017" -1he PPP Unit and PDMO have adopted the FOL Management Framework However, it requires to be refinement of the artlndologes foi valuntioni ot guarantees and estimating expected payments arising from thle contingent liability The NT has requested PPIAF to support this, Oc finalizedb it shall be tabled to the PPp Committee for approval and subsequently circulated by CS/NT via a circular. The Draft Disclosure Framework was reviewed by stakeholders and is being inalized for approval. k,te\PPP APL Other important By helping to strengthen the PPP enabling environment framework, the IFPPP background information I will assist the GoK to develop a solid foundation to systematical ly prepare PPPS of the project and realize the benefits of PPPs more effectively. This would foster increased private investments in infrastructure. increased employment opportunities. impiovad service delivery to enterprises and the population in general, improved fiscal impact on government fr better project preparation more balanced risk allocation, increased transparencyf wider quality control, greater efficiency, and enhanced financial sector tranpr. y Thisdeork all cenable an increase in the availability and quality of support. This framework will enblebooetrrs rwhand productivity and infrastructure in different sectors to boost enterprise growth prodctivod was improve the well-being of Kenyans. The current IFPPP APLI project pro a extended to December 2017 The GOK has requested for USD 50 million additional financing from the World Bank. The fundingls for the period 2018-2022. This request is currently under review by the World Bank and approval is expected to be received by October 2017 Current situation that the COMPONENT 1: INSTITUTIONAL SUPPORT AND REGULATORY REFORM Curn siutonme ta th Uott P stitutions iproject was omdt a) SuboOmponeOnt I A - Support to PPP Insiton intervene The objectives of this cbpcompone nt Is to support the establishment and functioning of a PPP Unit at the National Treasury and PPP Nodes in selected line Ministries and to build the capacity of Gca stakeholders to implement the PPP program through tn experience exchange. technical assistance, awareness and communication programs. Progress; As part of instiftutional support and regulatory reform; all PPPU experts and specialists in post.The PPPU staffing structure was approved by the Public Service Commission (PSC) and recruitment of the 5 deputy directors commenced during the period under review. Two of these deputy directors were appointed and are in post Senior Deputy Director and Deputy Director Economic Services. . PPP draft manual is in place. Graphic design for the manual is being finalized. * Procurement for contractor to renovate and equip PPPU's new offices (located at the Reinsurance building) is being finalized. The assignment is scheduled to commence in September 2017 and be completed in December 2017. *During the reporting period, nine (9No.) public officrs were supported and attended internaional trainings on PPPs. Since commencement of the PPP program, a total fifty one (51N.) public officers (drawn from the PPP Committee, Petition Committee, PPP Unit National Treasury and other MDAs) have been supported and attended international trainings on PPPs, 8 have undertaken online PPP courses, 24 have attended local PPP related courses. 6 1)P8 ANNAUi IAN1LC PRIVATE PARTNERSHIPS PROJECT ANNUAL REPORT AND FINANCIAL STATEJAENTS FOR THEYEAR ENDED JUNE 30, 2017 * During the period under review, a number of training institutions were contracted and provided various PPP course. The International Law Institute (iLl) was contracted and facilitated training in December 13-16, 2016 where 21 public officers were trained on Project Preparation, Analysis and Finance as it relates to PPPs. ILI also facilitated training in May 24-28, 2017 where 20 public officers were trained on Project Finance in PPPs. IP3 was contracted and facilitated training locally in June 12-14, 2017 where 20 public officers were trained on Effective Management of PPPs. IP3 also facilitated training locally in June 26-30, 2017 where 20 public officers were trained on PPP Project Monitoring and Evaluation. During the previous FY, IP3 was contracted and facilitated seven (7) modular trainings between June 2015 and May 2016. The number of public officers trained is as follows; (i) Module 1- Foundations of PPPs- 73 Public Officers (ii) Module 2- Project Selection - 32 Public Officers (iii) Module 3- Financial Modelling- 42 Public Officers (iv) Module 4- Fiscal Risk Management- 31 Public Officers (v) Module 5- Legal Agreements- 47 Public Officers (vi) Module 6- PPP Procurement- 35 Public Officers (vii) Module 7- PPP Contract Management- 41 Public Officers. In addition, 9 public officers were trained locally on PPP Contract negotiations. The training was facilitated by Crown Agents (UK) on 131h.17th June 2016. * The following PPP awareness/promotional workshops were held during the period under review, the number of participants is indicated in brackets: Toll roads workshop with Private Sector was held May 18, 2017 (40), The Kenya PPP Roads Investor Conference was held on 15th& 16th November 2016 (350 participants; 200 of them international from 167 organizations participated). On the other hand, PPP awareness/promotional workshops were held with the following during past FYs; State Department of Higher Education (7), Maasai Mara University (35 ), Embu University College (23), Egerton University (7), Nairobi County PPP sensitization workshop (20), Mombasa County PPP sensitization workshop (47), Airports Sub- Sector PPP sensitization workshop (31), Roads Sub-Sector PPP sensitization workshop (45), Ports Sub-Sector PPP sensitization workshop (37), Financial Sector PPP sensitization workshop (60), PPP sensitization workshop for Professionals (83), PPP sensitization workshop for Cabinet Secretaries and Principal Secretaries (36), PPP sensitization workshop for Counties in Coast Region (27), PPP sensitization workshop for Higher Education sub-sector (160), Stakeholders Workshop on Roads Annuity Fund Regulations (90), Road Annuity Programme Consultative meeting with the financial sector (95), PPP sensitization retreat for the Media (35), * A Public Relations firm was contracted in March 2016 and contract execution is ongoing. Tasks accomplished by the PR firm include; supported organizing of investor conference held November 15-16, 2016, designing the PPPU website, drafting of PPPU Communication Strategy and Toll Roads Communication Strategy. 7 P a e CVRAS TIIYI WI C [NP~l TNY SNtI RV\L[ AN N IIAl. REPORi AND IlNANCIiAL SIlV%EMENTI FOR THE YEAR ENDED UNE 20 b)-Subcomponenlt-IB- LegaLand Regulatory Reform The objective of this sub-component is to support ppp policy dialogue and implementation of the PPP Act including preparation and adoption of the Regulations and effective implementation. IPro gress; Pr.ore;of R s completed and finalization is pending Dapproval of the PPP amendment bill 2016. Ption Procedures and-Registry..Manual tinalized and is being implemented The Petition Committee is operationalizing the Petition Procedures and Registry Manuals - Consultant to assist in the development of Tolling Strategy was hired by TMEA The National Surface Transport Funding Policy was been finalized and approved by the Cabinet in December 2016. Subcompfnet 1DC - Institutional Development for Financial Products and PPP Approaches The obective of this sub-component is to support institutional arrangements for a range of financing instruments such as VGF, guarantees, infrastructure funds, financial intermediary lending facilities and development of local capital markets. Progress; * The Consultant commenced work in December 2014 and contract ended in October 2016. Medim term Debt Management Strategy, Annual Public Debt Management Report and the 2071/18 Medium Term Debt Management Strategy was developed by Treasury and submitted to Parliament, CRA and County Governments as required by Law. The first Issuance Calender was published in July 2016. The current FY 2017/18 calendar is under preparation in consultation with the Central Bank with a target to finalize by August 2017. Once completed, necessary approvals will be sought to disseminate. *Various stakeholder workshops with PPP stakeholders have been conducted between CMA ABS adviser and market participants. CMA issued the revised guidelines in August 2016. *The activities under this sub_component have since been moved and are being implemented under the Financial Sector Support Project (FSSP) which commenced in April 2015. COMPONENT 2: PPP PIPELINE PREPARATION The objective of this component is to assist contracting authorities with to ensuring that the first projects to come before the PPPSC and PPPS are well prepared, "bankable "and take into account lessons learned from previous PPP projects, the privatization program in Kenya and regional and international experience. Progress; Sector Advisors Since commencement of the PPP program, 13 PPP Advisors/Consultants have been hired to support PPP Nodes in preparation of PPP projects. The beneficiary sectors are; Water. Education Health, Ports. Airports, Energy, Rail. 8 cPag ANNUAL REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2017 Advisors/consultants were also hired for Director PPP Unit, PPP Procurement. Capital Markets, PPP Manual, FCCL and Counties. Contracts of these advisors ended expect for Advisor to Director PPPU, PPP Water Sector Advisor whose execution is ongoing. Transaction Advisors (TAs) Since commencement of the PPP program, 8 Transaction Advisors have been hired under the IFPPP project for the following PPP projects; Kisumu Sea Port (BOOT), Nairobi Southern Bypass (O&M), Nairobi-Thika Highway (O&M), 2od Nyall Bridge (OBFMT), Nairobi-Mombasa Road (DBFMT) and Nairobi-Nakuru Road (DBFMT), umbrella University Hostels project, 140MW Olkaria V. Execution of these contracts is ongoing except for TA Kisumu Port and Nairobi Southern By Pass which ended. Procurement is underway for consultants to undertake feasibility studies for 300 Bed Hospital PPP project and Toll Operator PPP project. Stakeholders sensitized on PPP projects 'During the period under review, meetings were held with management of (a) Kenya Wildlife Services (b) Kenya Forest Service (c) National Transport Safety Authority (d) National Environment Management Authority to brief them on the Road PPP Projects COMPONENT 3: IMPROVEMENTS TO FISCAL COMMITMENT AND CONTINGENT LIABILITY (FCCL) RISK MANAGEMENT FRAMEWORK The objective of this component is to provide support and guidance to the Treasury and other relevant agencies on the fiscal commitment and risk framework associated with infrastructure, with emphasis on contingent liabilities from PPPs. Progress; * The FCCL framework was adopted by the PPP Unit & PDMO and is currently being used as an input to the regulatory approvals. Preliminary FCCL assessments have been done for 8 projects (includes 4 first mover projects). The framework is however not fully utilized as there is need to simplify the model and increase the capacity of the PDMO to fully utilize it. The National Treasury is working closely with the World Bank to finalize the framework. Once the framework is finalized, it shall be presented to the PPP Committee for approval. * Computer equipment and software (Oracle's Crystal Ball) has been supplied to the FCCL Unit at the PDMO * Process and structure has been setup for the collection and maintenance of leading economic indicators for use in FCCL work, Consisting of: GDP growth rate, Inflation Rate, Interest Rates and Exchange rate. This has now morphed into a wider consideration for creating a relational data base for the PDMO * 2No. Financial Graduate Analysts were recruited and are working towards strengthening the FCCL function of the PDMO COMPONENT 4: SUPPORT FOR PROGRAM MANAGEMENT 9 I |age IN F PA (Unpresented Cheoues) 5,438,314-00 z ReKept Ln5ank 5tatement not C t e Pe ae in Cash Book> 3 Payments in Bank Statement not the Cash Book> Bank Charges z > 4 Receipts in Cash Book not yet C_ recorded in Bank Statement Bank Balance as per Cash Book .......................... ... .......14,829,889.34 t PAYMENTS IN CASH BOOK NOT YEF RECORDED IN BANK SEATEMENT (UNPCtTEDCHEQU) _ CHEQUE Date PAYEE AMOUNT CHEQUE FAYEE AMOUNT sh o]40 Date s. No.0002084 20.06.2017 Intercontinental Nairobi 70,150.00 No.0002129 30.06.2017 Globus Tours & Travel Ltd 550,965.00 No.0002088 21.06.2017 Paymaster General 870,467.00 No.0002119 29.06.2017 Paymaster General 267,967.00 No.0002094 23.06.2017 Kenya Methodist Universiy 63,140.00 tri No.0002101 28.06.2017 Kemalex General Supplies 16,350.00 "C_ No.0002115 29.06.2017 Teodoro S. Regino 1,990,615.00 No.0002059 19.06-2017 Adah Olando 6,000.00 No.0002121 29.06.2017 NSSF 2,160.00 No.0002130 30.06.2017 Institute of PPPs 1,597,500.00 Totals 5,438,314.00 PREPARED BY: CERTIFIED BY: KC1B Bank Kenya Limited University Way Branch Anniversary Towers P.O. Box 7206-00300 Nairobi, Kenya P. •Tel: +254 20 3123891 2137011229227 Emaul: T Universitywav(&kcb.co-ke 06 July 2017 121$ CA 41 BRANCHES CERTIFICATE OF BALANCE Incorporated in Kenya! CERT1718713531 z KCB UNTVERSITY WAY 06 jUL 201 = Certitied tha- the -:plance at the CREDIT Of INvRASTRUCTUR INANCE AND P 0 A/C 1138915874 at the close of bus5 -eSS on 30 JUN 2017 was KES TWENTY Y!ILLION TWO 1-tDRED AND SIXTY EIGH? TUCUSAND TWO MUND D CENTS 'N:RTY FOE. KFS 20,268,2C3-.,i Examined by Manage- Service QuaLity S Conp.lncC Dranch aa.er h