Kenyans could in three years’ time start paying for the use of new tarmac roads financed through a phased $260 billion payment plan that was launched by President Uhuru Kenyatta this week.

The 10,000 kilometres of roads will be built by contractors using loans from commercial banks that will be guaranteed and settled by the government once a road is completed and in use.

The annuity financing programme aims to construct the roads in three years, with work on 2,000km expected to start in December. It could increase the length of tarmac roads in Kenya from 14,000km to 24,000km.

Recovery of investments

“The recovery of initial investments through this programme will be through toll proceeds and viable roads such as the Northern Corridor and the Thika Superhighway,” Kenya National Highways Authority (Kenha) director-general Meshack Kidenda said.

Treasury Cabinet Secretary Henry Rotich said the government was bringing in a new model of financing where the private sector will play a big role.

“This model has been used in Australia and the United Kingdom, where the private sector enters into financing agreements with the government for infrastructure projects,” he said.

The cost of a tarmac road ranges between $460,000 to $1.1 million per kilometre, depending on the scope of works. These costs relate to design standards, contract overheads (financing and management costs) and price escalation mainly due to prolongation of contracts and compensation events.

Agreed milestones

“With this model, the government will benefit by transferring initial financing, construction and project completion risks to the contractor,” said Public-Private Partnership Unit director Stanley Kamau. “The banks will only pay contractors based on agreed milestones while the government will allocate adequate funds for annuity payments of six to 10 years.”

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The contractor will design, build, maintain and arrange funds for the roads. Contractors will be given a grace period of two years not to service the loans but be required to maintain the roads for eight years. They will also be required to complete a project within three years.

“A payment modality will be agreed upon between the government, contractor and bank [certification of works, milestones and assignment],” said Mr Kidenda. “The government will then reimburse the consortium or banks at a uniform rate over an agreed period [annuity].”

The government will only give specifications and approve the standards, marking a clear shift from now when the Infrastructure Ministry is involved in the design, supervision and maintenance of roads.

The model is expected to give more business to local contractors, fill the gap the Treasury has in funding infrastructure and minimise delays in completion of projects.

Safeguarded from diversion

Further, money for paying the annuities — the Road Annuity Programme — will be provided for in the budget each year and safeguarded from diversion. Contractors and investors will submit invoices quarterly or bi-annually to the authorities, who will approve the payments within a given timeframe.

“We contracted PricewaterhouseCoopers as the financial adviser to prepare the documents and assist the government to secure financing for identified road projects under a design, build, finance and maintain [DBFM] model,” said Mr Kamau.

Speaking at the launch of the programme at the Road Infrastructure Development Stakeholders Conference, President Kenyatta said 2,000km of small roads would be completed by July next year and 3,000km by 2016. The bulk of the roads would come through in 2017, a month prior to the general election.

“We have already provided Ksh3 billion [$34 million] to kick off the first phase of 2,000km from December this year,” said the head of state.

Transport and Infrastructure Secretary Michael Kamau said contractors would have their consultants design the roads, reducing complaints of price escalation when government consultants did the designs.

“Previously we had consultants complaining of wrong designs which led to escalation of costs in the past. Now the onus will be with them because they will have to repair the roads for a period of six years,” says Mr Kamau.