Kenya Beckons Banks With $3.2 Billion of Road-Building Deals

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Kenya will award contracts by next month for a $3.2 billion program that envisages almost doubling the paved-road network within five years with help from the nation’s banks, a Treasury official said.

The government announced last week it will set up a Road Annuity Fund to expedite construction of roads in a country where less than 10 percent of the 161,000-kilometer (10,000-mile) network is paved, according to the Kenya Roads Board. Instead of the state financing projects while they are in progress, contractors will pay for construction themselves and then be reimbursed at a premium on completion.

The Treasury will hand out 45 contracts “in two to three weeks” to groups of developers and financiers to build 10,000 kilometers of roads by 2020, said Public Private Partnership Unit Legal Expert Ronoh Tuimising. Kenya Commercial Bank Ltd., which has a 10th of the money it has lent out in road projects, estimates the projects would cost about 300 billion shillings ($3.2 billion).

 Kenya, East Africa’s largest economy, plans to raise as much as 1.2 trillion shillings over the next decade for the annuity fund as part of a plan to improve infrastructure and accelerate economic growth to more than 10 percent from 5.4 percent last year. An overhaul of the road network will improve links between cities in the country, President Uhuru Kenyatta said on July 30.

Bankers’ Backing

“The way we see it working is for banks to team up with builders in consortia to bid for projects,” Tuimising said in a March 12 interview in the capital, Nairobi.

Lenders may overlook past experiences of delayed payments from the government, which disrupted cash flow, and plan to increase lending to contractors, said Joshua Oigara, chief executive officer of Kenya Commercial Bank, the nation’s biggest by assets. “I will be meeting the deputy president and contractors to talk about the framework of the program” this week, Oigara said.

The bank may expand its lending for road construction by 5 percentage points after government awards the contracts, he said in an interview on March 12.

“It’s a very ambitious project, and we want all those who are able to, to support it,” said Oigara, who is also the chairman of the Kenya Bankers Association. “We are fully behind the program.”

A separate Project Facilitation Fund, or PFF, of about 750 million shillings will be established to finance activities including feasibility studies for proposed roads, according to Tuimising.

Foreign Funding

Budget allocations to the roads industry will go to the Road Annuity Fund with effect from the start of the new fiscal year on July 1, Tuimising said. Funds that aren’t required immediately will be invested in assets including Treasury bills, he said.

“The proposed sources of funds to the annuity fund will include disbursements from the exchequer, a fuel levy and grants from development partners,” Tuimising said. “It won’t be a self-perpetuating fund.”

Money for the PFF will come from the same sources, he said. In addition, so-called success fees of not more than 0.5 percent of the value of a contract will be paid by successful bidders into the fund, according to Tuimising.

“We have already got word from organizations like the Department for International Development that it is willing to contribute 52 million pounds ($77 million) to the facilitation fund,” Tuimising said.

Kenya Commercial Bank is already funding six pre-qualified contractors for the roads projects, Oigara said. He declined to provide further details.

(BloombergBusiness) 

To contact the reporter on this story: David Malingha Doya in Nairobi atdmalingha@bloomberg.net

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