Banks to earn Sh9bn from roads financing deal

Politics and policy

President Uhuru Kenyatta is welcomed to an infrastructure development meeting in Nairobi. Kenya has a huge infrastructure funding gap. File 

By Neville Otuki

In Summary

• With ready bank loans, the State has set three years (up to 2017) for completion of the first 10,000km road network.
• Officials said the money for guaranteeing loans borrowed by contractors and annuity payments would come from an independent fund that the Treasury plans to set up for the purpose.

Banks participating in the State’s annuity financing programme will earn Sh9.1 billion every year as interest on loans, raising cost of building county roads by 35 per cent. Projections indicate that interest payment will push up the cost of developing a 10,000-kilometre road network to Sh351.2 billion by the time the last annuity payment is made in 2024.

 

Under the model, contractors will access loans guaranteed by the Treasury from banks, enabling them to design, construct and maintain the roads. The Treasury will repay the loans in equal instalments (annuity) over eight years, starting from the time the road section is completed.

President Uhuru Kenyatta launched the annuity concessioning last week, paving the way for contractors to borrow up to Sh260 billion from commercial banks to build roads in remote areas.

The National Bank, KCB and Co-op Bank have become the first financial institutions to embrace the new infrastructure financing model.
“We are trying this out as a mortgage where the pace of development will be accelerated with the assurance of a steady flow of cash outlay,” said Stanley Kamau, the Treasury’s director of public-private partnership.

With ready bank loans, the State has set three years (up to 2017) for completion of the first 10,000km road network. Officials said the money for guaranteeing loans borrowed by contractors and annuity payments would come from an independent fund that the Treasury plans to set up for the purpose.

“The government will allocate funds for road annuity programme in the budget every year to be sent to an escrow account or dedicated fund,” said Mr Kamau. Some Sh3 billion has been set aside for the annuity payment this fiscal year.

Another Sh34.1 billion has been earmarked for a 3,000km road network in the 2015/16 financial year while Sh44.3 billion will go to the remaining 5,000km in the 2016/17 fiscal year. This leaves a balance of Sh178.6 billion – expected to come from banks – to meet the project’s deadline of 2017. The State will reimburse the banks plus accrued interests through phased payments stretched up to 2024.

The first phase of the project which covers 2,000km will be rolled out off this fiscal year while the second phase of 3,000 kilometres will be completed in the 2015/16 financial year. The third phase that covers 5,000 kilometres is planned for 2016/17.

Funding gap

Official statistics indicates that Kenya’s infrastructure funding gap stands at Sh180 billion a year, out of which Sh40 billion is for roads. Out of the 10,000km planned roads, 2,000km will be highways. The road network covers 161,000km, of which only 14,100km or 8.7 per cent is paved.

The expansion of paved roads stands at an average of 242 kilometres per year. The government looks to spend Sh25 million for every kilometre of rural roads and between Sh50 million and Sh80 million per kilometre of urban and trunk roads.

The project is being undertaken jointly by all roads agencies – Kenya Urban Roads Authority, Kenya National Highways Authority and Kenya Rural Roads Authority.