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Jubilee's new magic bullet for mega infrastructure projects

By Dominic Omondi and Macharia Kamau | October 6th 2020

President Uhuru Kenyatta during a France-Kenya business forum hosted by MEDEF, the largest French business consortium in the world. The luncheon was attended by top executives of leading French companies.

President Uhuru Kenyatta’s launch of the Chinese-funded Standard Gauge Railway (SGR) commuter train between Mombasa and Nairobi in May 2017 was electrifying and sobering at the same time.

While the modern railway promised to uplift Kenyans by drastically reducing the travel time between the two cities, the multi-billion-shilling project had also pushed the country’s debt levels above the psychological red line of 50 per cent of gross domestic product (GDP).

Kenyans still yearning for more economic goodies were, however, afraid of the dangerous trajectory that public debt had taken.

They wanted the government to reduce its appetite for debt but not at the expense of hitting their dwindling incomes by raising taxes.

They wanted more gain without any pain. The government was in a fix.

Way out

And then in 2018, just after President Uhuru Kenyatta had unveiled the ambitious Big Four Agenda, the Treasury officials unveiled what they thought was a way out of this quagmire. In unveiling the Public-Private Partnership (PPP) Disclosure Portal, the Treasury mandarins noted that PPPs were the country’s saviour in the face of mounting debt.

“PPP is our way of having our cake and eating it,” said former Principal Secretary Kamau Thugge.

With PPPs, said Thugge, the country could continue with its mega projects without bursting the debt limit.

And last week, Kenya moved closer to finalising one such PPP project.

While on a State visit to France, President Kenyatta witnessed the signing of a deal for the construction of the first toll highway since such roads became obsolete.

Under the pact, French firm Vinci Highways-Concessions Company will undertake the expansion of the Rironi–Nakuru–Mau Summit highway at cost of Sh160 billion.

The road, which links Kenya to Northern Tanzania, will be one of the largest PPP projects in Africa, as the country moves away from debt-funded projects

By the time of going to press, the Financial Standard had not received a response from Vinci Highways, which is leading the construction of the road, on how it will charge motorists for using the road.

However, if the role of independent power producers (IPPs) in raising the cost of electricity for Kenyans is anything to go by, PPPs, too, are not likely to be painless.  

There is no gain without pain - Kenyans will have to pay private investors for the use of these utilities.

Besides the Rironi-Nakuru-Mau Summit Highway, some of the other PPP projects in the country include the construction of the Mombasa Petroleum Trading Hub, the 140MW geothermal plant at Olkaria and the 10,000km road annuity programme.

Others are the second Nyali Bridge Project and the Nairobi Expressway Road Project, which will link Nairobi’s Westlands area to Jomo Kenyatta International Airport.

China Road and Bridge Corporation (CRBC) will build the road at a cost of Sh65 billion. In addition to doing the design, sourcing for financing and undertaking construction work, it will operate the road for 27 years and recoup its investments through the collection of toll fees.

Besides the Sh65 billion construction cost, it is also expected to gobble up Sh25 billion to operate and maintain over the 27 years.

Earlier estimates by the company show that it expects to collect Sh2 billion from road tolls in the first year of operation, which will gradually go up and it could be collecting Sh10 billion by 2043 when the contract ends.

Initially, there were also plans to construct an expressway from Nairobi to Mombasa, which would then be tolled.

The government has since gone mute on the Sh300 billion project that was supposed to be done by Bechtel, a US-based private construction conglomerate.

But there are concerns over the project, with some critics apprehensive that the high fees charged by investors might be prohibitive for many ordinary Kenyans. 

Moreover, not only has the government guaranteed these loans, which means in case of a breach of contract, taxpayers might have to foot the bill, but there is also a sizeable liability for the State in these projects. As such, some critics have described PPPs as debt by a different name.

Economist David Ndii insisted that in the case of the Rironi-Nakuru-Mau Summit Highway, to “guarantee the availability of traffic”, the government would have to meet the shortfall in case toll revenue does not meet the hurdle rate.

A hurdle rate is the minimum rate of return on a project or investment required by an investor.

“And usually, the project cost is inflated so that if the hurdle rate is, say 15 per cent, the actual ROI (return on investment) is probably 20 per cent. It is called ‘de-risking.’ In short, it is off-budget debt,” said Ndii.

The government, however, insists PPPs are not equal to debt.

By the end of March, 80 PPP projects had been approved, as shown in the PPP Pipeline Status Report by the Public-Private Partnerships Unit domiciled at the Treasury.

Some 10 months earlier, the PPP projects listed in the Budget Policy Statement 2019 were valued at Sh1.23 trillion.

The government’s liability for these projects was estimated at 3.5 per cent of GDP, or around Sh326 billion.

In the case of the government’s plan to develop and rehabilitate 10,000km of the roads network, the private developer will be compensated through fixed and performance-related periodical payments (annuity) from public funds.

The annuity programme, which was unveiled in 2014, is valued at Sh260 billion.

Commercial banks will provide funding to road contractors

The contractors are responsible for finance, design, construction and 10-year maintenance of the roads, with the government acting as the guarantor.

Even more worrying with PPPs, according to the International Monetary Fund (IMF), is the manner in which contracting of these projects has been shrouded in secrecy.

“There is no transparent disclosure of the full assets and liabilities relating to ongoing and planned PPPs despite this financing modality being increasingly preferred by the government. The total value of PPP projects in the pipeline is estimated at 13 per cent of GDP,” said the IMF in a fiscal transparency evaluation update on Kenya that was completed in August last year.

It noted that although Kenya has a well-defined legal and institutional framework for the management of PPPs, the PPP Act, 2013, has not been fully operationalised.

The PPP Unit is responsible for collecting, analysing and disseminating information on contingent liabilities to ensure the government’s commitments are sustainable.

The IMF noted that the PPP Unit has limited capacity to undertake effective oversight. The Washington-based institution further noted that while elements of termination, risk, government guarantees and annual fixed payments are stated, several other types of risk are missing.

“No risk analysis is undertaken for pipeline projects, which are sizable and growing in number,” said IMF.

Almost half of the PPP projects valued at Sh1.23 trillion are concentrated in six projects, all of which are at the procurement stage.

“There is no reporting on government’s rights, obligations and other risk exposures, some of which are on a fixed-term basis, such as the road annuity projects.”

PPPs are not new in Kenya, and neither are the challenges of setting them up. The government in the mid-1980s set up toll stations after the National Assembly passed the Public Roads Toll Act in 1984.

Since then, up until 1999 when the stations were abolished, the issues of raising money for road maintenance as well as double taxation and the modalities of operating road tolls has dominated public discourse on road tolling.

The road tolls were replaced with the Road Maintenance Levy.

The levy is appended to the retail price of super petrol and diesel and today, with motorists paying Sh18 per litre at the pump. This is managed by the Kenya Roads Board, which disburses the money to different road agencies for repair and maintenance.

The Ministry of Transport has for years been toying with the idea of tolling the Thika Super Highway to raise funds for what it has in the past said was the high cost of maintenance.

Other major road projects that the State plans to toll are the Nairobi Southern Bypass.

Luring private investors

This year’s review of the toll road management system is viewed as among the modalities of luring the private sector to invest in road infrastructure.

The Finance Act 2020 made it easier for private firms to partner with the Transport ministry in building roads as well as setting up tolls.

“It appears that the government is looking to enforce toll levies as one way of encouraging the private sector to invest in the construction of road infrastructure. The proposal will hasten the process of concluding agreements for road construction projects,” said business advisory firm KPMG.

In the Finance Act, the Treasury has also simplified setting up toll stations, which can be technology-enabled as opposed to the toll stations of the past comprising booths in the middle of the road. Technology will also enable defaulters to be pursued easily.

“The (Finance) Act has provided that an agreement to levy or collect tolls may provide alternative ways of doing so … this provides a leeway for toll collectors to institute other means of toll collections other than physical payment booths, which are associated with traffic jams,” noted KPMG.

While the push for public partnership has largely focused on transport infrastructure, especially in the recent past, PPPs are common in the energy sector.

In electricity generation, PPPs have had both hits and misses. While they have improved power generation, freeing the country from intermittent blackouts, this convenience has come at a heavy cost.

To bridge the power generation gaps of the late 1990s and early 2000s, the government decided to partner with private sector players in power generation. The private companies would invest in diesel-powered, electricity-generating plants, while the government would play a facilitative role as well as guarantee the private firms market for their power.

While it achieved the goal of increasing the installed power generation capacity and meeting power demand in the country, critics reckon thermal power has brought more harm than good.

The contracts signed with the government were heavily skewed in favour of the companies, guaranteeing them payments, even in instances when they do not feed the grid with any power, through fees referred to as capacity charges.

The contracts were also lengthy, while the power that these companies produce is the most expensive.

The cost per unit of electricity produced by these companies averages Sh30, against Sh7 per unit of power produced by geothermal power plants. This is the basic energy charge before other levies and taxes are loaded to the cost.

So airtight are the contacts that the thermal power producers have with Kenya Power - the country’s sole power distributor - that even after a 2016 directive from President Kenyatta that they be audited with a view to terminating some, the Energy ministry has not made any progress.

Instead, a committee set up to study the contracts advised that it would be too costly to terminate them and that the government should wait for contract expiry.

The installed capacity of power plants using thermal stood at 749MW as of December last year, according to the Economic Survey 2020. This is about 30 per cent of the 2,800MW installed energy generating capacity.

This could get more complex and possibly more expensive for power consumers as the State considers a similar model for putting up transmission lines.

The Treasury in June invited firms to express interest in offering the Kenya Electricity Transmission Company (Ketraco) transaction advisory services for proposed two major power lines that will be built using the PPP model – the Malindi-Galana and Rongai-Keringet-Chemosit transmission lines.

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