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Cautious on debt, Ruto woos Japan with public-private deals for projects

Sunday February 11 2024
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Kenya’s President William Ruto (L) and Prime Minister Fumio Kishida attend a joint press conference after their talks in Tokyo, Japan on February 8, 2024. PHOTO | PCS

By LUKE ANAMI
By ANTHONY KITIMO

Kenya has turned to Japan to support its infrastructure ambitions, opening up for Tokyo to tap into public-private partnerships (PPPs) as a way of reducing the load of debt owed to external lenders.

This week, President William Ruto made an official visit to Japan, which State House inaccurately labelled a state visit and confirmed that PPPs would be central to the discussions.

Some governments adopt PPPs to avoid debt by inviting investors to fund projects and then recoup their money by charging users of the facility before handing it over to the government. One such PPP is the Nairobi Expressway built by the Chinese. The model usually works well where the demand to use the facility is high.

After a series of talks, President Ruto said his administration was upending financing arrangements for mutual benefit.

Read: Kenya-Japan firms in $620m eco-energy, car assembly deals

“The Prime Minister and I discussed the modalities of financing national development, including through frameworks like government-to-government and public-private partnership,” said Dr Ruto at a joint press briefing in Tokyo.

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“As a consequence, a PPP framework was signed between our governments. We therefore agreed to take deliberate steps to facilitate the private sector to play a leading role in Kenya-Japan economic cooperation programmes and projects,” he added.

The President witnessed the signing of the three memorandums of understanding (MoUs) on cooperation in the ICT sector and on the enhancement of the capacity of the Kenya Medical Research Institute to build on its pandemic management potential. The two countries also signed a letter of intent concerning defence cooperation.

After the trip, Kenyan government officials said they had clinched financial deals worth Ksh350 billion ($2.19 billion). Most of these were on green energy, manufacturing, transport, roads and agriculture.

The largest projects to benefit are the Dongo Kundu infrastructure ecosystem and the Mombasa Gate Bridge at the cost of $1.63 billion. These two projects were already ongoing.

Read: Kenya buys 94pc of used vehicles from Japan

Kenya also secured Ksh30 billion ($188 million) from the Japan Bank for International Cooperation to purchase heavy machinery and mechanised assets.

“The key sectors of cooperation include roads and transport, health, energy, ICT, Education and agriculture,” Ruto said.

The most crucial pieces of infrastructure for Kenya lie in mobility. Nairobi has been looking for financiers to extend its standard gauge railway to the border with Uganda, but this trip was not successful to obtain that kind of financing.

President Ruto and Prime Minister Fumio Kishida also agreed that Kenya will issue a Ksh40 billion ($250 million) Samurai bond in Japan to finance energy and infrastructure projects. A Samurai bond is a yen-denominated bond issued in Tokyo by a non-Japanese company. The bond is, however, subject to Japanese regulations.

The agreements were signed by Cabinet secretaries Davies Chirchir (Energy and Petroleum), Kipchumba Murkomen (Roads and Transport), Rebecca Miano (Investment, Trade and Industry) and president and CEO of Toyota Tsusho Company Ichiro Kashitani.

Kenyan officials had indicated they would seek the removal of double taxation to free Japanese funded projects from duplicated taxes. It is a promise President Ruto had made to PM Kishida when he toured Nairobi last year in May.

At the time, President Ruto argued Japan’s Ksh10 billion ($63 million) official development assistance (ODA) projects needed certain privileges to enable their faster implementation.

Read: Kenya vehicle dealers export sales in EA increase 39pc

“We are pursuing the expeditious resolution of this matter within the due process of relevant institutions,” Dr Ruto told his guest at the time.

“The impact of this assistance is evident across the country; it has contributed immense benefits to the lives of millions of Kenyans.”

Tax incentives for the Japanese aren’t entirely new in Kenya. President Ruto’s predecessor, Uhuru Kenyatta, had offered a similar inducement to Japan in 2021 when the National Treasury waived income tax for Japanese businesses and workers earnings from 15 projects valued at Ksh328 billion ($2 billion) at the time.

Last year in March, the High Court declared the move illegal as the Treasury CS lacked such powers.

The High Court, however, left a door open for such moves, with Justice Dennis Magare saying such an exemption or waiver can only be granted by Parliament through legislation and after the same is passed as a money bill provided in the constitution after public participation.

Kenya is Japan’s biggest recipient of ODA in Africa even though Tokyo is also one of the biggest creditors of Nairobi, owed some $1.45 billion. The Japanese have offered loans, grants and other forms of funding for health, irrigation, roads and an economic development zone in Mombasa. Recently, they completed the $68 million Phase 2 of the Mombasa Port area road development project.

But no project could benefit locals better than the Mombasa Gate Bridge, which is to be erected over the Likoni Channel. According to a schedule shared by the Ministry of Transport, the project could take up to 36 months to complete and will connect the Mombasa mainland southern regions to the Mombasa Island. This will ease congestion and address safety issues often associated with ferries.

Read: Plans in high gear for East African coast highway

“The new bridge is important as Mombasa is Kenya’s main port and improving the city’s traffic flow will help boost the country’s economy as a whole. With the new bridge in place, there will be environmental benefits also as the old causeway restricts the flow of water,” states a bulletin from the Ministry of Transport.

Since 2020 when Kenya signed a deal with the Japan International Cooperation Agency (Jica) for the provision of a development loan of up to Ksh47 billion ($290 million) for the project, authorities remained mired in compensation claims.

The entire bridge could cost more than Sh85 billion, and Jica is expected to fund the project to the tune of 90 billion Japanese yen ($602 million) while Kenya, through the Kenya National Highway Authority will pay the rest.

In the project masterplan, the bridge will have a 1.4-kilometre viaduct on the island side, 1.3-kilometre main bridge and 0.65 kilometres of the Likoni viaduct connecting to the Mombasa Special Economic Zone.

This is the second major infrastructure project in the Coast region for Jica to undertake after the completion of the phase two of the Dongo Kundu bypass. The bypass is an 8.96km section that runs from the interchange for four kilometres, crossing the Mwache creek and going through Tsunza peninsula before turning eastwards across the Mteza creek.

Last month, Mr Hiroshi Ogihara, the Japanese ambassador to Kenya, led a delegation concerned with the implementation of the Mombasa Gate Bridge to meet with the Principal Secretary for Roads Joseph Mbugua to finalise the project funding.

Accompanied by the Chief Representative of Jica in Kenya Shubane Makoer, the team discussed the progress of all preliminary preparations to facilitate the successful commencement of the project. A dispatch from the meeting said the construction will begin immediately.

Once completed, the bridge will be an iconic landmark and a tourist attraction because it will be the largest stayed cable bridge in sub-Saharan Africa.

The bridge could firmly place Japan among Kenya’s main bilateral funders of infrastructure projects alongside China, even though they tend to pursue their economic policies, including lending, differently.

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