How State can easily raise Sh260 billion for roads

Kenya: The Uhuru Kenyatta administration deserves a part on the back for crafting a programme set to double the length of tarmacked roads from the current 12,000 kilometres over the next three years.

Nobody should be surprised that its implementation is facing challenges. Indeed, the surprise would have been if there were no such challenges. The good news, however, is that the team picked to implement the programme is up to the task. The first challenge is money.

The first phase, consisting of 2,000 kilometres is, for example, projected to cost Sh260 billion. The innovation the government has come up with, however, is that Treasury does not have to come up with this amount. It does not have to go cup in hand to multilateral or bilateral development partners either.

After all, experience has shown that these partners are still caught up in the old ways of doing business, prefering to fund projects, which they have conceptualised themselves and which are based on what their calculations tell them the country can afford. President Kenyatta demonstrated his knack for thinking outside the box when, as Finance minister, in Kibaki’s government, he came up with the idea of paying for public works by borrowing from the same members of the public through the floatation of infrastructure bonds. The first such bond was worth Sh22 billion, an astronomical sum then. To everyone’s surprise, the bond was massively oversubscribed.

Apart from the intended infrastructure projects, the biggest beneficiary proved to be public and private companies. The companies soon lined up to tap the same mother lode. The result has been that almost all the firms that have floated bonds have got the sums they sought at the now revitalised Nairobi Securities Exchange.

There is reason to believe that the latest innovation of getting local banks to finance the contractors guaranteed by the government will not only prove a success but will have unexpected consequences which will spur the country’s development still further and push it into registering the seven per cent.

The fact that Treasury’s financing arrangement has a component of performance contracting means that a contractor who delays completion of a project also delays his payment. In addition, the requirement that the contractor remains responsible for maintaining the road he has built for ten years removes the onus of supervision from the government and puts it where it rightly belongs - with the contractor.

Domestic banks

This development will be hugely beneficial to the public who have long suffered the burden of maintaining newly built roads because the civil servants paid to supervise contractors often turn a blind eye to their shoddy work after receiving payments under the table. The expectation is that the local banks will soon come to an agreement with the government on ways to structure the deals that will give winning contractors the money they need to get on with the job in January as planned. This will allow the parties involved to move on to the other phases.

 

There are expectations, too, that the majority of the winning contractors, 27 out of the 49, will not need local financing because they can get financed from banks in their home countries. The country stands to benefit mightily were these contractors to take this route as this type of financing would amount to direct outside investments.

It should, therefore, be encouraged. At the very least, this would ease the pressure on domestic banks and give them time to come up with a financing mechanism acceptable to all. This is where the local insurance companies can also show their innovative streak by coming up with products that would reduce the risks borne by the banks and the government. Yet another challenge facing the government is awarding the contracts in a manner consistent with promoting local entrepreneurship.

The history of local contractors, who in the 80s and 90s came to be known as cowboy contractors is replete with unfinished contracts and those that were so badly done that the state of the roads became worse than they were before after the tarmacked sections peeled off like an orange. Not surprisingly, the public has welcomed the influx of contractors mainly from China who are doing a much better job.

Perhaps, a better way of overcoming the quality challenge is to require foreign contractors to sub-contract some of their work to their local counterparts whom they would supervise and pay after completion of their work. This way, the hopefully new breed of local contractors would get the experience they need to take up new contracts on their own. The complaining local contractors, and their supporters in and outside the government, need to be reminded—for some seem to have forgotten—the huge losses the country is still bearing for their past greed and don’t care attitude. These losses involve not just the money paid out to them and their predecessors but the business opportunities better built roads would have opened up.

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