Rubber meets the road as Nairobi Expressway tests PPP model
The Sh73.5 billion Nairobi Expressway is the litmus test for the public-private partnership (PPP) model for funding capital-intensive projects.
Set for completion early next year, the expressway is the first major PPP project of its scale in the country.
But questions abound about the viability of the project and whether the contractor - China Road and Bridge Corporation (CRBC) - will recover its funds before transferring the project to the government after 30 years.
But according to the Transport ministry, the investors could recover their capital within the first six years of operation.
This is assuming the project clocks average annual revenues of Sh11.2 billion, bringing the total revenues to Sh305 billion by the end of the 27th year.
CRBC had previously estimated the static payback period – the amount of time it will take to recover the capital investment pumped into the project – to be 7.8 years.
This means that barring unforeseen circumstances, the firm will continue to enjoy profits for more than two decades as per the PPP agreement, only setting aside a fraction of the money earned for the operation and maintenance of the road.
CRBC is expected to rake in a profit of Sh107 billion ($977 million) or an average of Sh3.9 billion per year.
The PPP model of constructing large public infrastructure projects is relatively new in Kenya despite more than a decade of policy development and revisions in the primary legislation.
This includes the introduction of the Public-Private Partnerships Bill, 2021 meant to update the PPP law to deal with challenges that have been blamed for delays in unlocking billions of shillings worth of PPP projects.
Despite the fact that the PPP legislation was enacted in 2013, only eight projects have reached a financial close, key among them the expressway.
“The lengthy prescribed PPP process should be shortened significantly and customised to the Kenyan environment to avoid the substantial delays affecting project implementation,” said Parliament’s Committee on Finance and National Planning in a report on the proposed amendments.
According to the departmental committee, the lengthy timelines discourage potential investors from opting into projects since the delays add a layer of risk to realising the return on investment.
The time difference further introduces other challenges such as regime change that could cause jitters among investors.
Last month, the National Treasury revealed that seven infrastructure projects with the combined value of Sh139 billion carry a financial risk of Sh158 billion on taxpayers should the government default on its financial obligations.
The carries more than half of this financial risk, with analysts keen to see how the private sector and government will manage this risk.
CRBC foresees revenues of Sh2.3 billion ($20 million) over the first year of operation, which was initially expected to be 2023.
This is expected to incrementally grow to Sh5.7 billion ($51.1 million) by 2028 and over Sh11 billion per year by 2043.
The firm, through a local subsidiary called Moja Expressway, has recently started recruiting officials to manage the toll stations on the road.
Motorists will pay between Sh100 and Sh1,550 to use the road daily, with charges depending on the type of vehicle as well as the point of entry and exit, with heavy commercial vehicles paying the most.
Saloon cars will pay a base rate of Sh310 to use the entire length of the road (27.13 kilometres), with the cost rising based on the weight of the vehicles.
Heavy commercial vehicles with four or more axles will pay five times the base rate, which will translate into Sh1,550 (or Sh57 per kilometre).
The Chinese firm will be at liberty to change the charges, depending on inflation, the increase in traffic on the expressway and also depending on how weak or strong the local currency is against the US dollar.
“The project company has the right to adjust the tariff based on market demand… the Kenya shilling tariff when the currency rate changes,” said CRBC in a 2019 report.
The Transport ministry in December last year gazetted the expressway as a toll road.
“The dual carriageway with Class A standard that connects Mlolongo with James Gichuru Road along the median strip of the A8 National Road (Mombasa Road and Waiyaki Way) are declared to be toll roads, with immediate effect,” read the gazette notice.
The announcement was accompanied by the charges as well as a list of essential service vehicles such as ambulances, police and military vehicles exempt from paying tolls.
“The toll road starts from African Inland Church Mlolongo and it runs in the central reserve all the way to James Gichuru… total length of the alignment is 27.13 kilometres,” the notice said.
Motorists using the road will take about 15 minutes between Mlolongo and Westlands, a distance that currently takes over two hours, especially during peak time.
Transport and Infrastructure Cabinet Secretary James Macharia said during a recent tour of the project that the road will be critical in enhancing movement within Nairobi as well as easing traffic passing by the city.
“We wanted our transport infrastructure to be properly integrated,” said Mr Macharia, who noted that passengers arriving in Nairobi through the Jomo Kenyatta International Airport, the Standard Gauge Railway and even the Mombasa-Nairobi highway take hours to get to the central business district and other destinations due to congestion on Mombasa Road and Waiyaki Way.
“There was a missing link in the road infrastructure.”
There have been concerns that Kenyan businesses rarely benefit from mega road projects such as the expressway, especially during the construction phase.
The contractors ship in their equipment and other materials such as cement and steel mostly from their sister firms in China.
They also bring in their countrymen to oversee the projects, with Kenyans relegated to holding low-paying menial jobs with no security.
Also, little knowledge transfer takes place.
Plans to introduce the 40 per cent rule, where the contractors would be required to source at least 40 per cent of their materials and labour locally, have not taken off.
This is because the proposal is not backed by law or entrenched in the contracts that State agencies sign with the construction firms.
But CS Macharia said about a third of the project cost goes to sourcing materials from local businesses.
“We are spending about Sh20 billion on local content. Small businesses supplying sand, steel have benefitted a lot,” he said.
“It is no surprise that the construction sector recorded the highest growth at 11 per cent.”