The financing of road construction and maintenance in Kenya has historically depended on the annual budget from the National Treasury and proceeds from the Road Maintenance Levy Fund. However, the government has encountered challenges such as budgetary constraints, high unit costs and escalation with the result that as at November 2016 out of an estimated 61,936 KM of classified roads, only 8,869 KM, or 15%, was pave. This huge infrastructure gap calls for alternative financing and delivery methodologies.
Pursuant to Kenya’s Vision 2030 blue print, the government has planned to allocate a total of KES. 115.9 billion for ongoing road construction projects while relying heavily on Public Private Partnership arrangements, as revealed in the 2018-2019 budget policy statement.
PPP is a partnership between the government by itself or through a public entity and the private sector for the purpose of delivering a project or a service traditionally provided by the public sector. In this arrangement, the government remains actively involved throughout the project’s life cycle while the private sector is responsible for commercial functions such as project design, construction, finance and operation. The private party is generally liable for risks arising from the project and is compensated from a public fund or fees/charges to consumers or both.
It is on this basis, that the government decided to invoke PPPs in the road sector by developing solutions such as the Roads Annuity Programme.
The Roads Annuity Programme
The Roads Annuity Programme was introduced in Kenya, based on its success in India. The model which is dubbed, roads 10,000 programme, was approved by the Cabinet in March 2015. The programme was planned for implementation within five years covering 10,000 kilometers with bitumen standard roads. The framework was to be implemented under the Ministry of Transport and Infrastructure through the roads authorities; Kenya National Highways Authority (KeNHA), Kenya Rural Roads Authority (KeRRA) and Kenya Urban Roads Authority (KURA). Under the programme the national government was required to:
- identify a maximum of 10,000 kilometer priority roads distributed across the country;
- procure long term contracts for design, finance construction and maintenance of identified roads under a public private partnership (PPP) arrangement with payments linked to the completion of roads and performance-based maintenance; and
- pay for the services delivered by the private contractors through the normal budget process.
The Programme is a variation of PPPs. Under this program, private contractors design, build and thereafter maintain the roads for a predetermined period. The contractor and the government will each meet agreed portions of the total construction cost. The government will then repay the contractor it’s portion (for which the contractor will typically have sought financing from commercial banks) in equal instalments (annuity) over a set period from the time a road is completed. The government may also provide the commercial banks with appropriate guarantees in support of the contractor’s borrowing towards the project.
Pursuant to the Public Finance Management (Road Annuity Fund) Regulations, 2015 the National Treasury established the Road Annuity Fund, the purpose of which is to enable the national government to make the annuity payments to private contractors for the development and maintenance of roads. The Fund primarily consists of money allocated by Parliament and from fuel taxes.
Challenges encountered under the Road Annuity Programme
The government’s initial plan was to complete 2,000 kilometers of small roads within the 2014/2015 financial year, followed by 3,000 kilometers in 2015/2016 made up of 80% small roads and 20% highways and 5,000 kilometers in 2016/2017.
However, the Programme faced serious challenges including inflated costs and slow pace of project approvals. In addition, contractors were struggling to get funding because banks were not satisfied with their balance sheets and credit worthiness. Under the circumstances, the programme failed to take off.
However, in April 2016, the National Treasury announced that the government was conducting negotiations with the International Finance Corporation for a KES. 150 billion (USD 1.5 billion) loan to revamp the programme by enabling local contractors to access funds at affordable interest rates.
Presently, two projects in Kajiado County have secured financing under the programme namely Ngong-Kiserian-Isinya and Kajiado-Imaroro roads. These are the first roads to be constructed using the annuity model at a cost of KES 11 billion.
Benefits to be realized from the Road Annuity Program
In an interview with Kenya Engineer, Mr. Linus Tonui, the former Director General of KENHA highlighted some of the benefits expected to be realized from the Programme including:
- opportunities for contractors, consultants, bankers, insurers, equipment suppliers and other industry players to increase their business and effectiveness;
- assurance for contractors that payment for work done will be made on time;
- elimination of poor workmanship since payments will only be linked to completion of roads and performance-based maintenance;
- sustainable funding for the expanded paved road network through the Road Annuity Fund; and
- employment opportunities within the road subsector.
Other PPPs models used in road infrastructure projects in Kenya
In late 2016 the Government unveiled five key road projects to be constructed and maintained through the PPP model. For most of these projects, the State is using the Design, Build, Finance, Operate and Maintain model to ensure sustainability. The projects include the dualling and upgrade of the Nairobi-Mombasa highway, the Nairobi-Nakuru-Mau Summit highway and the 2nd Nyali bridge in Mombasa.
In November 2016, the National Treasury published the project memorandum for the Nairobi-Nakuru-Mau Summit highway as it invited private investors to bid for funding of the project. For this project, Multilateral Investment Guarantee Agency (MIGA), the World Bank’s insurance arm, is looking to offer guarantees to banks and other financial institutions that will be supporting investors to build the Nairobi-Nakuru-Mau Highway which is the first highway PPP project to the market. As of June 2018 the PPP unit reported that evaluation of bids was ongoing.
Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.
 Shem Oirere, 'Kenya develops annuity road funding model' (World Highways, April 2015) http://www.worldhighways.com/categories/auctions-equipment-supply-servicing-finance/features/kenya-develops-annuity-road-funding-model/; Kenya Roads Board Annual Report 2016-2017 (2018).
 Project information memorandum for the Nairobi- Nakuru- Mau Highway Summit (Kenya National Highways Authority 2016
 The National Treasury, 2018 Budget Policy Statement (2018).
 Kenya Engineer, 'Implementing the annuity financed roads projects' (Kenya Engineer, 29 September 2014) https://www.kenyaengineer.co.ke/implementing-the-annuity-financed-roads-projects/
 PSCU, 'President Uhuru launches Jubilee’s 10,000km road plan' (Daily Nation, 30 July 2014) https://www.nation.co.ke/news/President-launches-Jubilee-10-000km-road-plan/
 The Public Finance Management (Road Annuity Fund) Regulations 2015 (regulation 2(2)).
 Supra, note 5.
 George Omondi, 'Kenya shelves 10,000km roads financing plan' (Daily Nation, 7 May 2017) https://www.nation.co.ke/business/Kenya-shelves-10-000km-roads-financing-plan-/.
 James Anyanzwa, 'Kenya looks to IFC for road construction funding' (The East African,) https://www.theeastafrican.co.ke/business/Kenya-looks-to-IFC-for-road-construction-funding-/
 Kenya Engineer, 'KENHA to begin implementing the Annuity Framework project in 2015' (Kenya Engineer, 28 September 2015) https://www.kenyaengineer.co.ke/kenha-to-begin-implementing-the-annuity-framework-project-in-2015/
'World Bank arm to insure Kenyan road contractors' (Business Daily, 24 September 2018) https://www.businessdailyafrica.com/news/World-Bank-arm-to-insure-Kenyan-road-contractors/
 The National Treasury (Public Private Partnership Unit), Advanced PPP Projects report (2018) pg.2.