Government adopts alternative financing in roads construction

Nairobi, Kenya: The government will built 10,000 kilometers of roads in the next five years through sustainable alternative framework of financing known as annuity concessions.

According to the Cabinet Secretary for Transport and Infrastructure Eng. Michael Kamau   the 10,000 kilometres are spread out in three phases with phase 1 covering 2,000 Kms of small roads expected to be completed in 2014/15.

In  Phase  2  which will cover 5,000 Kms, he added , 80  per cent  will be small roads , and 20 per cent highways to be delivered in 2015/16 and phase3  3, 000 Kms , 80 per cent s small roads and 20 per cent highways to be delivered by 2016/17.

He emphasized that this arrangement has a component of performance contracting where the government will pay for the roads that have been built as opposed to those that are being built. 

Mr. Kamau noted that under the annuity concessions the contractor is remunerated through a fixed, periodical payment (annuity) by government rather than through toll proceeds.

Mr. Kamau was addressing a press conference at the Deputy President William Ruto’s official residence in Karen today where the later received a report of the joint technical committee of the government and the private sector on implementation of alternative framework for financing road infrastructure.

The CS stated that under this arrangement, the contractor is responsible for both the construction of the road as well as operating and maintaining it for 10 years.

Noting that under the arrangement payment for the services is made against agreed fixed installments which guarantee predictability in the budget; Mr. Kamau added that the annuity payments do not begin until the road is constructed in accordance with quality standards set out in the contract.

The CS pointed out that alternative infrastructure financing models will be implemented in two phases, in phase I the contractors will arrange financing with banks and other institutions with the support of government.

He said, “Under this model, the contractors will borrow money from the banks and other financial institutions and undertake the projects with expectation of payment by government over a period of 8 to 10 years.

Phase II he added, will constitute a move towards the standard annuity financing model, with greater involvement of and risk transfer to the private sector through long term contracts.

In the report which was handed over to Mr. Ruto it was stated that although it was the responsibility of contractors to borrow funds from banks the agreement will be structured such that the Government provides the necessary comfort to banks that funds will be paid promptly.

With the support of the government, contractors/ consortia will negotiate the terms of lending with banks. They however have the option to bring cheaper financing, the report indicates.

The report said that ongoing works commitments will be considered in the same manner under the proposed financing framework and added that maintenance obligations shall be agreed on separately.

Speaking on behalf of Banks the CEO and Managing Director of the National Bank of Kenya Munir Sheikh Ahmed    expressed the banks support for the new arrangement saying it will lower the costs of road construction, increase the certainty of banks getting back their money from the contractors and that funding for road construction will be seamlessly done to deliver the roads in good time.

While the road and civil engineers association chairman Kishan Gehlot hailed the programme as the best public private partnership (PPP) arrangement that all are committed to seeing its success.