Will Kenya’s Ambitious Road Financing Program Pay Off?

Will Kenya’s Ambitious Road Financing Program Pay Off?

Al-Shabaab terrorists hijacked a bus in November, killing 28 passengers in Mandera, a dusty town bordering Somalia in Northern Kenya.

Most of the focus in the aftermath was on the gruesome act and the increasing level of lawlessness. What was not heavily reported how the poor state of roads made it easier for the gunmen to carry out the act.

The bus driver had to use a dilapidated road that flanks Somalia because the main road, which is further inside Kenya, is in even worse condition.

Kenya is not alone. Aid trucks trying to deliver goods in rural DRC got stuck in mud in February 2014.

Marsabit County in Northern Kenya began construction of its first tarmac road in August on 10-kilometer stretch.

Fifty years after gaining independence, Kenya has 161,100 kilometers (100,000 miles) of roads but only 14,100 kilometers (8760 miles) have been paved — just 8.8 percent, according to government data.

That is one of the reasons the country is embarking on a massive road project dubbed the Annuity Financing Framework. Kenya will be the first country in Africa to use this model.

Starting February, Kenya will attempt to build more roads in five years than it has done since gaining independence.

The Kenya National Highways Authority, the state-owned enterprise in charge of major road construction, will announce the names of companies that win the tenders to build 10,000 kilometers (6,214 miles) of tarmac roads connecting major towns across Kenya.

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How the program is supposed to work

The government will let private companies build roads and maintain them for a period. Initially, private companies will have to use their own funds or borrow from banks at lower rates than usual due to a guarantee by the government.

In exchange, contractors will be collecting a check every year from the government, allowing them to pay off the debt and keep the balance.

The beauty of the program, the government said, is that contractors will not be paid if they do shoddy work or do not maintain the road.

This payment system was proposed instead of tolls because toll roads are not feasible in areas that do not have high traffic, according to the government.

At the moment Kenya has 14,000 kilometers (8,700 miles) of tarmac road which translates to a density 28 kilometers (17.4 miles) of roads per 100 square kilometers of land.

Data from the World Bank and financial consultancy PwC paints a picture that is neither so good nor so bad when Kenya is compared to other African countries.

Kenya’s road density is lower than South Africa’s, which has a density of 62 kilometers of roads per 100 square kilometers of land. But East Africa’s largest economy has a higher road density higher than Angola’s four kilometers of roads per 100 square kilometers of land.

An infrastructure report by PwC said that while most parts of the continent do not have enough roads, countries such as South Africa are stars, even by global standards.

“Ghana’s road density is similar to the level in China, while South Africa comes close to matching the U.S.’s road density of 67 kilometers of roads per 100 square kilometers,” according to the report.

Economists say as ambitious and expensive as the annuity financing is, it’s an investment that will yield a high dividend in future.

The financing is expected to cost about $440 million a year, which is a fifth of all Kenya’s projected infrastructure spending ($2.1 billion).

Nelson Wawire, chairman of Kenyatta University’s macroeconomics department, said rural and farming communities are are among those that will definitely feel the effects of new roads.

“We can revamp that sector if we can get livestock to the markets,” Wawire told AFKInsider. “This is something that we have not done very well.”

He added that the ambitious road program will only be effective if it is rolled out in areas that are productive. “There is no point of constricting a tarmac road that will lie idle,” he said.

The African Development Bank, which has financed major road projects in Kenya, estimates that 12 percent is the minimum internal rate of return a for a “good” road investment in Kenya.

Some economists say Kenya is one of a few countries on the continent where the massive amounts of dollars being spent on infrastructure show signs of actually being used well.

“Nairobi and Abidjan are the few places in Africa where, when you go, you see government spending at work,” David Cowen, Citi’s economist for Africa told AFKInsider. The New York City-based Citi is an American multinational banking and financial services corporation.

Cowan warned, however, that since the Kenyan government is borrowing to finance such projects it should make sure that it only draws funds when there are readily available projects. Delays mean that interest on debt is growing with no work being done.