Will banks accept State plan to finance road construction?

Opinion and Analysis

 

President Uhuru Kenyatta at a past press briefing. PHOTO | FILE | NATION MEDIA GROUP 

By GEORGE BODO

In Summary

• Accumulation of pending payments has reduced banks’ appetite for road construction projects.

It seems funding of road contractors is becoming a tricky business for banks and nearly all commercial banks that have reported a surge in non-perfoming loans cite customers linked to road construction as part of the problem.

KCB’s Q3 provision for bad loans doubled on a quarter-on-quarter basis, and in answering the next obvious question, the bank said it had to fully provide for, among others, some accounts in the construction sector linked to government payments (which can only be road contractors whose payments have been delayed).

A similar story came out sometime back when Standard Chartered bank shocked the market after reporting a 300 per cent year-to-date growth in its non-perfoming loans portfolio at the close of the second quarter.

And there are many more such cases in the banking sector that remain unreported.

Indeed there’s a massive delay in payments to contractors by the government. At the close of 2013, the value of road works yet to be certified totalled Sh88 billion. At the close of April 2014, pending approved payments totalled Sh25 billion.

Data from Central Bank of Kenya (CBK) shows that the share of non-perfoming loans (NPLs) in the building and construction sector, as percentage of total industry NPLs, recorded the biggest growth between December 2010 and September 2014; rising from just 2.4 per cent at the close of 2010 to 10 per cent as at third quarter, and could rise further in 2015 if the delay continues.

This accumulation of pending payments has not only reduced banks’ appetite for road construction projects, but has also eroded confidence between the government on one side, and contractors and banks on the other.

As part of confidence rebuilding, the government plans to allocate Sh16 billion in the second supplementary budget for the current fiscal year 2014/15 to help clear some of the outstanding payments to contractors.

The government is very keen in building this much-needed confidence because they’ve now built a new solution to the problem; and the solution is that the Ministry of Transport is implementing the new annuity programme of financing road construction.

Under this new programme, contractors will obtain loans from banks to construct roads, but get paid back by the Treasury through regular disbursements each year for up to eight years.

It is a design, build, finance and maintain model whereby the contractors will negotiate for financing from banks before submitting their bids. A contract will be won on the basis of the lowest annuity payments.

There will pre-agreed milestones between government and contractors, and upon certification, banks will release money. A contractor will then be responsible for maintaining the road(s) for up to eight years.

And the government has rolled out an ambitious plan of building 10,000 kilometres of roads in four years under this programme.

But the difference between the current model and this new annuity programme is that the government has established mechanisms to ring-fence annual budgetary allocations for the annuity programme from the usual politics and outright embezzlement, through the creation of a Roads Annuity Fund which will be managed by an independent board; and even the money wired to the fund will sit in an escrow account (complete with a very complex access procedure).

The government, in its own analysis, says it will require nearly Sh47 billion for yearly payment of annuity for 3,000 kilometres of roads.