Design flaws cast doubt on Kenya’s new infrastructure fund strategy

NAIROBI: KENYA’s proposed infrastructure fund, designed to ease mounting public debt and unlock private capital for development, risks falling short of its ambitions due to significant design and governance flaws, according to a project finance expert.

The fund, backed by new legislation, aims to mobilise financing for critical sectors such as roads, energy and ports through public-private partnerships, privatisation proceeds and institutional investment.

It comes at a time when Kenya’s debt burden has surged, with public debt rising by more than a third in three years to 12.30 trillion shillings (about $94.6 billion) by December 2025.

While the initiative reflects growing urgency to bridge an annual infrastructure financing gap estimated at $2.1 billion, analysts warn that weaknesses in the fund’s structure could undermine its effectiveness.

A central flaw lies in the governance framework. Although the fund is structured as a state-owned enterprise expected to operate independently, the power to appoint so-called independent directors rests with the treasury cabinet secretary who also sits on the board.

This dual role raises concerns about political interference and compromised oversight, effectively eroding the independence the fund is meant to uphold.

Experts argue that board members appointed under such conditions may feel compelled to align with the appointing authority, weakening accountability mechanisms. The same conflict extends to performance oversight.

The treasury secretary is tasked with setting targets and evaluating the board’s performance, despite being part of that board a structure critics say makes objective evaluation unlikely. The fund’s performance framework is another point of concern.

Current provisions rely heavily on audited financial statements, a conventional but limited metric that fails to capture whether the fund achieves its broader development objectives.

Analysts argue that performance should instead be measured by tangible outcomes such as the volume of private capital mobilised, actual investments delivered, project efficiency, and knowledge transfer to build local capacity.

The omission of these indicators risks creating a system where financial reporting takes precedence over real economic impact.

Overreliance on asset sales

Another weakness is the fund’s reliance on proceeds from the sale of government assets as a key financing source.

Experts caution that such assets are limited and unpredictable, making them unsuitable as a primary funding pillar.

Moreover, the legislation provides limited clarity on how private sector participation, a central objective of the fund will be actively incentivised.

This contrasts with models in other countries, such as South Africa, where blended finance mechanisms are explicitly embedded to attract private investors.

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A further contradiction emerges in provisions allowing the treasury to issue guarantees, letters of credit and other forms of state support.

While intended to de-risk projects, these instruments can effectively add to public debt undermining the fund’s stated goal of reducing reliance on government borrowing.

Key strategic elements are also missing. The legislation does not define clear capital mobilisation or investment targets aligned with national development timelines, leaving the fund without measurable benchmarks for success.

In addition, the framework prioritises financial returns while overlooking the broader social benefits of infrastructure investments, such as improved healthcare, education and workforce productivity.

Analysts also note the absence of provisions to strengthen Kenya’s capital markets a potential long-term benefit of the fund through the development of new financial instruments and mobilisation of pension and diaspora capital.

Operational uncertainties

At the operational level, critical details remain undefined. The law does not specify the amount or source of initial “seed” capital required to make the fund functional, raising questions about its early viability.

Experts recommend restructuring the treasury secretary’s role to an ex-officio position to reduce conflicts of interest, and legally ring-fencing proceeds from future asset sales to ensure consistent funding flows.

With over 70% of government revenue already absorbed by debt servicing, Kenya has limited fiscal space to fund infrastructure through traditional means.

The proposed fund represents a potentially important shift towards alternative financing.

However, without addressing governance weaknesses, aligning incentives with development outcomes, and strengthening the legal framework, analysts warn the initiative risks becoming another underperforming public vehicle rather than a transformative financing tool.