Why annuity concessions is the way to go in funding new roads

Kenya: Despite past attempts to address it, lack of sustained and bankable funding remains one of the most serious problems facing Kenya’s efforts to build modern infrastructure.

Nowhere is this more evident than in road building. It is indeed telling that some 51 years after independence, only a paltry 14,100 kilometers, or 8.8.per cent of Kenya’s 161,000 kilometer road network is paved. What is more disturbing is the rate at which we have been paving our roads. At a turnaround rate of 242 kilometers of paved roads every year, we are barely scratching the surface in meeting our targets.

For the current financial year, the allocation from the Government for ongoing commitments and pending bills arising from road projects amounted to Sh41 billion. This is barely adequate.

Away from new capital projects, funding road maintenance also remains a major challenge. The optimal budget for the routine and periodic maintenance of our roads stands at Sh40 billion, but the special fund created for this purpose (the Road Maintenance Levy Fund) nets just Sh25 billion annually, leaving a yawning deficit of Sh15 billion. The end result is that only 11 per cent of Kenya’s road network can be classified as being in a “good” condition, with 33 per cent adjudged as “fair” and a residual high of 56 per cent “poor.”

Evidently, and since business as usual is not working, Kenya needs to come up with a new workable funding model to meet the Jubilee Government’s target of having 10,000 kilometers of new paved roads within the next five years and overall developmental needs as captured under Vision 2030, our flagship blueprint for economic takeoff.

On July 30, the country made a major, game-changing leap in this quest when President Uhuru Kenyatta launched a new initiative under which the country’s roads would now be built: the Annuity Financing Mechanism for Roads Development. The main aim of the mechanism is to provide a sustainable means of funding for road projects, while ensuring faster turnaround in execution.

The other component under the new initiative is a review of design standards and construction methods to ensure appropriate solutions e.g. low volume sealed roads.

The annuity model is being pursued for roads that may not be viable for conventional tolling through PPPs (Public Private Partnerships). The latter works best for roads with heavy traffic whose users can generate enough revenue to offset construction and maintenance costs.

This is how it works: the Government negotiates loans from banks; the contractor designs, builds and maintains the road; banks pay the contractor upon certification of the works done by Government; Government reimburses banks over an agreed period through periodic payments known as annuities. Under this mechanism, contractors are expected to complete works within the stipulated time (three years). They are also expected to guarantee construction quality and undertake post-commission maintenance of the road.

The model presents several advantages. For starters, it takes the funding pressure from Government and puts it in the hands of the private sector. This goes also for money to be used in monitoring and supervision. Secondly, the contractor is incentivized to do a good job and finish the project on schedule. Money is only paid to the contractor based on the rate of turnaround and completion to certain pre-agreed specifications. The fact that the road-building project has a short turnaround time also means that project costs can be nailed in advance and shielded from over-shoots that make such projects so dear. Also, the fact that the cash is from a secure and stable source (a bank) means that the relevant funds are somewhat ring-fenced from handling and potential pilferage.

Already, a framework for engagement between Government and the private sector has been agreed upon and contrary to sentiments expressed elsewhere; consultation with all concerned stakeholders has been a central feature of this initiative. Designs for a majority of the roads to be put under this program are complete. Some 5,000 kilometers of roads, that shall constitute Phase 1 of the project have been chosen while a Request for Qualifications (RFQ) has already gone out. Tender documents are being finalized and will be released after pre-qualification stage, while the project’s first phase has benefited from a Sh3 billion provision.

As Government, we believe there is adequate capacity and appetite among local financiers and their partners for this kind of business opportunity. Annuity concessions will not only increase the paved road network in Kenya, with the attendant improvement in access to markets and enhanced rural production.

It will also improve national integration, trade and security, income distribution, while addressing rural-urban migration and poverty. There is also a huge latent potential in revamping Kenya’s construction and financial sectors, besides building local capacity, facilitating job creation and most importantly, enhancing economic growth.