Weak revenues test Ruto's bid to shift from debt to PPPs

President William Ruto's ambitious plan to reduce Kenya's reliance on debt-funded mega projects is facing a harsh fiscal reality marked by persistent revenue shortfalls, a widening budget deficit and mounting pressure on public finances.

Analysts warn that the challenges could complicate the National Treasury's efforts to reduce borrowing and shift towards increased use of private capital to finance infrastructure and other strategic development projects.

According to a pre-budget review by PwC, the government is seeking to reposition itself from being the primary financier of development to a facilitator of investment, relying increasingly on Public-Private Partnerships (PPPs), the National Infrastructure Fund (NIF) and the Sovereign Wealth Fund (SWF) to mobilise capital. At the same time, Treasury is pursuing an efficiency-led fiscal consolidation agenda through expenditure reforms, improved public financial management and measures aimed at broadening the tax base through enhanced compliance and digital enforcement rather than significant tax rate increases.

However, PwC cautions the strategy is being pursued against a backdrop of weak revenue performance, a widening fiscal deficit and persistent implementation gaps that continue to undermine public finance reforms.

"Despite improved macroeconomic indicators, revenue collections continue to fall short of targets while debt-servicing obligations are consuming a large share of government resources," said Alex Nyaga, PwC Partner for Public Sector and International Development.

The firm notes that the success of the government's new financing model will depend not only on attracting private investment but also on improving execution, strengthening governance and restoring confidence in the state's ability to deliver on its fiscal reform agenda.

According to Nyaga, the pressures have pushed the government to shift strategy from being a financier of development to a facilitator of investment, moving away from debt-driven development toward private capital mobilisation through PPP, NIF and SWF.

“Historically, the State played the dominant role in financing development through tax revenues and both domestic and external borrowing. While this approach supported infrastructure expansion over the past decade, it also resulted in rising debt-service costs, reduced fiscal flexibility, and increasing pressure on domestic credit markets, as government borrowing crowded out private sector access to finance,” 

“In this context, the shift reflects both necessity and policy evolution: public resources alone are no longer sufficient to meet Kenya’s growing development needs. While contingent liabilities and guarantees are expected to rise under the new model—and will require careful measurement, transparency, and oversight—the move toward risk-sharing structures has the potential, if well managed, to improve the sustainability of public financing relative to traditional debt-funded approaches.”

The government has recently established the National Infrastructure Fund (NIF) that will be used to attract private sector funding for infrastructure building. Money that the government got from the part privatisation of the Kenya Pipeline Company and the expected offloading of some of its stake in Safaricom are expected to be used as seed capital for the Fund. The government expects to attract more than Sh5 trillion in private sector funds into the NIF over the next decade, which will then be used to build roads, energy-generating plants, railways, mega dams and other infrastructure.

“The emerging model seeks to reposition the State as a catalyst rather than a primary financier, to crowd in long-term private capital. This is to be operationalised through a combination of blended finance structures, a strengthened project pipeline, and expanded use of PPPs across sectors such as transport, energy, housing, and water,” said Nyaga.

“In parallel, catalytic public vehicles—including the NIF and domestic institutional capital such as pension funds—are expected to play a central role in co-investment and de-risking. The ambition is significant: to mobilise Sh5 trillion, leveraging up to 10 times private capital for every unit of public investment.”

The government also finds itself in a tight spot, where despite growing needs, it cannot increase taxes with many Kenyans feeling they are stretched too much and are likely to reject push for higher taxes, Instead, to sustain recurrent expenditure, Nyaga said that greater emphasis will likely be placed on expanding the tax base rather than raising the rates. While these approaches may ease pressure on public debt, PwC cautions that it could introduce risks related to execution, governance, and investor confidence.