The annuity financing mechanism that the Kenya government launched in July for road projects is a first in the region. It requires contractors to seek funds for road projects from financial institutions, which will only pay the contractor upon certification of the work done. Then the state will reimburse the banks over an agreed period.

The costs of the road projects are pre-determined, with the government negotiating low interest rates for the contractors. The contractors are tasked with maintaining the roads they have constructed for six years.

Kenya is seeking to use the model launched in July by President Uhuru Kenyatta to develop 10,000 kilometres of paved roads in five years. If accomplished, this will be a major leap in infrastructure development in the country, where only about 14,000 kilometres of roads have been paved since Independence.

The government believes that the mechanism will help reduce corruption, poor workmanship and delays, even as it helps to spur investment in infrastructure. Top government officials have praised the model as an innovation that benefits the taxpayer because it focuses on value for money.

“It achieves this by ensuring performance and the generation of synergies from co-operation among stakeholders. It guarantees faster and more efficient construction while reducing administrative costs,” said President Kenyatta at the launch.

According to documents posted on the Transport and Infrastructure Ministry’s website, the government plans to use the model to construct some 2,000 kilometres of feeder roads in the 2014/2015 financial year. In the 2015/2016 financial year, 3,000 kilometres will be done, of which 80 per cent will be feeder roads and the rest highways.

The 2016/2017 financial year will see some 5,000 kilometres constructed with a similar proportion maintained between feeder roads and highways.

Infrastructure Principal Secretary John Mosonik told the media recently that the annuity scheme is expected stimulate economic activity in the country especially in the rural areas. He had said the state will help to secure Ksh40 billion ($448 million) in the current financial year and that the initiative will eventually mobilise Ksh260 billion ($2.9 billion) from the private sector.

Deputy President William Ruto said the model would “immensely benefit” Kenyans and particularly the youth, while manufacturers will benefit from the demand for materials.

Although the initiative has drawn praise as a means of implementing the public-private partnerships in road construction, the model has inherent weaknesses that may lock out local contractors and financial institutions, which are required to keep financing road construction before being reimbursed by the government.

It may also turn out to be a risky venture in that it the financier-contractor partners are expected to factor into their bids the unpredictable swings in the rates at which the Kenya shilling exchanges with other currencies, particularly the dollar, over the eight-year period.

Although the contractors will be expected to maintain the roads for six years, they may not be in a position to control the axle loads of vehicles using the roads. The use of roads by overloaded vehicles leads to high maintenance costs.

There are also those who say that the mechanism will impose a big financial burden on a government that appears to have developed an unsustainable appetite for debts. But, in documents seen by The EastAfrican, the government appears to believe that it will meet the additional debt obligations from the expanded tax base that will be created once the roads open up new areas.

It says that when constructed, the roads will support primary growth sectors such as commerce, tourism, agriculture, rural production and extractive industries. The state believes that such growth will consequently create more economic ventures that will in turn enable it to meet such obligations from an expanded tax base.

There are others who say that financial institutions may shy away from the venture because the government has a habit of taking too long to pay contractors. Local banks are also said to be reluctant to engage in the annuity scheme, fearing that the risks are too high when weighed against short-term and retail lending that has generates super profits.

At the same time, the regulations set out by the Central Bank do not facilitate their participation in annuity financing.

Following these concerns, there has also been a plan to set up a long-term financier of projects in the country. The proposed Development Bank of Kenya is expected to consolidate into a larger institution all local development financial institutions such as the Kenya Tourism Development Corporation, Industrial Development Bank, Agricultural Finance Corporation and others.

The Development Bank of Kenya will be used for long-term financing of projects. Other people have suggested that the unclaimed assets fund running into billions of shillings be used to provide annuity guarantees to commercial banks.

Local consortia are considering partnering with overseas contractors, particularly from the United States and Europe, which they say would help mitigate against losses brought about by fluctuations in exchange rates. They believe that foreign companies will be in a position to source cash directly from foreign banks and insurance companies.