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Kenya's Sh300b 'thank you gift' road project to the US sparks fresh tender wars

By Paul Wafula | Published Tue, September 12th 2017 at 10:51, Updated September 12th 2017 at 11:01 GMT +3
Director General of KENHA Engineer Peter Mundinia (left), Chairman Engineer Erastus Mwongera (center) and BNT Construction and Engineering Kenya Region President for Africa Andrew Patterson (right) during contract signing for the construction of the Nairobi-Mombasa Expressway (Photo: Willis Awandu)

IN SUMMARY

  • The expressway will be one of the most important infrastructure project in the East African Community
  • The Project has been structured to achieve early completion, under a fast-track delivery model, with concurrent design and construction

Kenya’s Sh300 billion ‘thank you gift’ road project handed to an American firm on a silver platter has sparked a fresh tender war among implementing agencies.

As attention of country was focused on the August 8, General Election, a small team of government officials were holed in meetings to dot the i’s and cross the t’s on what is set to be the single largest road project in Kenya.

The team, largely drawn from the Kenya National Highways Authority (KeNHA) and the Ministry of Transport, had already sent the project draft to the Attorney General’s office for comments and clearance.

Three days before Kenyans lined up to vote, the final signature was put on paper, handing over the lucrative contract to build the 473-kilometer high-speed expressway between Nairobi and Mombasa to a US firm, Bechtel International Inc.

Unlike previous announcements of government projects of such scale, there was no press conference from the Ministry of Transport to break the news. There was also no announcement from State House.

Instead, government officials chose to make the announcement at lunch time on Saturday when everyone was training eyes on the political rallies, as the pessimists rushed to the shopping malls to stock pile food and other home supplies in case of  political stalemate.

It also not clear why the announcement had to be done in such a hurry and on a day when most government offices were closed.

Chinese company

The press release sent to media houses at 1.30pm did not have the most important details of the project; the cost.

But as details of the deal start to become available, it is emerging that the mega project has stark similarities to the controversial Standard Gauge Railway (SGR) contract which was handed to a Chinese company in another sweet heart deal in the run up to the 2013 general election.

The Financial Standard has come across some working papers from insiders at the Treasury and the Ministry of Transport that raise sharp questions on why the project had to be announced in a rush and why it was not competitively done.

The brief raises a question as to why the American firm was not allowed to compete with others for the tender if at all it was the cheapest in the market.

Government insiders are referring to the project a ‘thank you gift’ to America, given in the spirit of reciprocity, for some unspecified support the US government has extended to Kenya.

Both the contracts of the SGR and the Expressway project were signed shortly before the general elections. The firms constructing them are the ones tasked with determining project costs.

Worse, both have been single sourced and were entered in the cover of government to government contracts, in deals that reduce the level of public disclosure and scrutiny that open tenders go through.

The biggest concern for sources familiar with government financing is that in both cases, these projects are now going to be financed largely from borrowing, coming at a time when the government is exhausting its headroom to stock up any additional debt.

Treasury is understood to be concerned that despite having so much debt that it is struggling to repay for the big projects already underway, it will be required to take a commercial loan to finance land acquisition.

The other concern is whether the road is the most important project at this time given that it is coming to compete with the railway even before the dividends of the rail start being felt.

Infrastructure projects

The deal has also brought back the American government on the front row seat of firms that have bagged big infrastructure projects after being elbowed out by Chinese companies.

A brief by the State Department of infrastructure as it sought concurrence to proceed with the project says Kenya will borrow funds from American lenders (US Exim Bank and through Overseas Private Investment Corporation (OPIC)) and then sign an Engineering, Procurement, and Construction (EPC) contract to build the road on a single source basis - where the engineering and construction contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct to deliver a functioning facility or asset to their clients.

The brief queries why a previous model financed by the World Bank was abandoned and how it was determined that the single sourcing approach would offer taxpayers better value for money and would be faster than a Public Private Partnership (PPP).

“Although the proposal is being referred to as ‘alternative project concept’ or ‘highway development concept,’ it is simply a non-competitive, single source procurement of an EPC contractor who is able to bring financing with it,” the brief notes.

Engineer George Kiiru, the head of PPP at KeNHA told Financial Standard that the government changed its focus from a PPP to EPC because it will be delivered faster as compared to PPP.

“Achieving commercial and financial close for PPP contracts can take two to three years thereby delaying the start of construction and completion of the project,” Kiiru explained.

“A comparative analysis between a PPP model for a 20-30 year concession shows that cumulative repayments under the PPP approach would be higher compared to the alternative approach with ECA (US Exim/OPIC) support,” Kiiru said.

The brief from the State Department of Infrastructure however suggests that there is no reason to suggest that the construction will take longer under the PPP arrangement. “Indeed, there are strong arguments that overall construction period may be shorter under the PPP project as it splits construction between three different EPC contractors.

In any event, the constraining factor is always likely to be land acquisition, so it would be a mistake to assume that the Bechtel proposal can deliver construction completion more quickly,” the brief notes.

KeNHA says the government is yet to determine the exact cost of the project and is waiting for a complete detailed design, which is yet to be undertaken, before it can determine the actual cost.

KeNHA also refused to give a cost range of the project on grounds that it did not want to speculate. This is despite the fact that costs are the first considerations in deciding whether or not a project is viable. “This project is a government to government initiative. The US Government nominated Bechtel International to work with the implementing agencies in Kenya to develop the project,” Kiiru reckoned.

KeNHA explained that in 2015, the governments of Kenya and the US signed a memorandum of understanding for development of priority infrastructure projects supporting Kenya’s Vision 2030.

Kenya later held discussions with the US government, for development of the highway. The American government through the US Exim Bank has provided a letter of support to Bechtel for the Expressway under a proposed government-to-government agreement.

“The US Exim Bank has shown interest to finance the project together with other US Export Credit Agencies such as the Overseas Private Investment Corporation (OPIC),” KeNHA said in its response.

He said that the Nairobi–Mombasa Expressway will be constructed as a Toll Road, and upon completion, the Government will procure and assign private firms to operate and maintain the highway.

Part of the tolled fee shall be applied towards repayment of ECA Loans. KeNHA says a feasibility study has been completed and it shows that the project is viable.

“The expressway will be designed for consistent speeds of 120kph, hence reduce travel time from Nairobi to Mombasa from the current 10 hours, to about four hours.”

A source at Treasury who spoke on condition of anonymity said that the plan was to get a private party to finance, build and operate the road for a 30-year period as per a feasibility study financed through a World Bank loan.

He revealed that the feasibility study had concluded that the PPP route offered better value for money than the traditional EPC procurement approach. “There is little chance that a contract not competitively procured will be cheaper than an international competitive tender,” noted the source at Treasury who understands government funding procedures.

The source seemed to agree with part of the State Department of Infrastructure brief that suggests that Kenyans may not get value for money from a non-competitive process.

The brief says Bechtel’s construction costs per kilometer are higher than estimates presented to the Ministry by PricewaterhouseCoopers. Bechtel’s costing proposal is estimated at Sh600 million per kilometer compared to Sh500 million per kilometer estimate given by PWC ($6 million Vs $5 million).

“The per kilometer costs under the PPP proposal includes all taxes and duties while Bechtel’s proposal assumes complete tax exemption for the project (corporate tax, income tax and import duties) - which could reasonably be assumed to cost the Government of Kenya an additional $1 million (Sh100 million) per kilometer,” the brief notes.

It argues that as part of the American firm’s proposal, an advance payment of $300 million (Sh30 billion) and also a payment of $100 million (Sh10 billion) as ‘establishment fee’ will be required.

“So Bechtel will be given $400 million  (Sh40 billion) in funds and highly cash positive before the start of the project whereby the Government of Kenya will be paying interest on this sum from day one as this will be drawn immediately by Bechtel at contract signing,” the brief notes.

There is also a further $60 million (Sh6 billion) of design management fees. The proposal from the American firm excluded all relevant taxes.

The Government is pushing for the deal on grounds that the US firm is one of the biggest construction companies in America and that this should give Kenyans comfort. Since the firm will also be seeking financing on its own, it also takes away the initial headache of having to source for financing.

But what the government is not saying is that Kenyans will eventually pay a premium price for it in one way or another. Bechtel is also not free from controversies in overseas countries where it has operated.

For example, it is fighting some bribery allegations in a Saudi Arabia family feud, which is now in court. There were other allegations on using middlemen named in British courts to win a contract in Abu Dhabi to build a petrochemicals plant.

A former vice president of the firm was also sentenced to 42 months in prison for accepting Sh520 million in kickbacks to manipulate the competitive bidding process for the State run power contracts in Egypt.

The other point of conflict is the sharing of risk. It is understood that the American contractor allocates itself the time and materials risk but passes on the price, quantity and overrun risks to the Kenyan taxpayer.

The project was expected to start by June 2010 but sources say the National Treasury delayed the project because it needed to allow contractors time to carry out due diligence of the project in order to transfer price and quantity risks to the contractors.

Unit rates

Bechtel contract is based on Unit Rates for elements of work based on historical cost and production data. This exposes the taxpayer to contingent liabilities because unit rates become firm when the design is completed.

Though no one is willing to share the estimated costs of the project, the State Department of Infrastructure brief suggests that the contract price will be at least $2.5 billion (over Sh250 billion).

The brief says 80 per cent of the contract costs – quantities and prices - are not fixed and this may see the additional costs spill over to the taxpayer

Given the other costs associated to the project like getting land, the price of the project could further go up after the design is completed.

A source at Treasury says the project will cost just as much as the SGR, whose contract price was Sh327 billion but other costs such as land compensation and finance costs have pushed it up to near Sh500 billion.

“If indeed, Bechtel is cheaper, then they can still tender under the proposed PPP project model and seek for financing themselves from OPIC or Exim Bank at their preferred cheaper rates,” the brief reads.

The brief had advised that the proposed method of developing the road under the Bechtel Proposal is not the best to the government, and asked KeNHA not to proceed, instead use the procurement process under the PPP arrangement, where Bechtel would be advised to participate alongside others. This advice was howver overruled.


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