Building Kenya's roads - tackling issues for developers and lenders

03 January 2017


Progress continues on the Kenya Roads PPP Programme, and over the last few months Kenya National Highways Authority (KeNHA) has hosted an Investor Conference and launched the Nairobi - Nakuru - Mau Summit Highway Project. At the conference, Kenyan Government representatives and the Transaction Advisory teams advising on the programme introduced each project and held meetings with interested developers and lenders.

Nairobi - Nakuru - Mau Summit Highway

The prequalification documents for this project were released in November, with a response deadline of 9 January 2017. It is envisaged that the Request for Proposals will be released early February, and bids due in June 2017.

The Nairobi - Nakuru - Mau Summit Highway project consists of the improvement and operation and maintenance of various pieces of highway between Nairobi and Mau Summit, including the A8 Highway, the A8 South Highway, and the Nairobi Southern Bypass, with an estimated Capex of USD550m. The successful bidder will enter into a 30 year project agreement with KeNHA, and will receive a performance based service payment (primarily linked to road availability).

Stringent pre-qualification criteria have been set by KeNHA, including experience of:

  1. roads PPP projects aggregating 3.500 lane-km within the last 5 years;
  2. roads construction projects aggregating 5,000 lane-km within the last 10 years; and
  3. roads O&M projects aggregating 3,500 lane-km in the last 10 years.

It is likely that at least some bidders will be required to bid in consortia, in order to successfully pre-qualify. Local content requirements are also likely.

As with the other projects in the roads PPP programme, and as discussed by us previously, the service payments will be made from a ring-fenced fund, described in further detail below.

Separate toll operator and a ring-fenced toll fund

A third party tolling operator will design and operate tolling across all of the projects under a performance-based operations and maintenance contract, also to be procured under the Kenyan PPP Act. It was confirmed at the conference that developers bidding the roads PPP projects may also bid to be the tolling operator.

A national tolling policy is drafted, and will be finalised shortly. However, the Kenyan Government has already stated that it will establish a ring-fenced National Toll Fund, where it will collect all tolling revenue from the roads PPP projects, and out of which the service payments due to each concessionaire will be made.

KeNHA has stated that road users will not be offered free alternative routes and its preliminary analysis is that toll revenue will be sufficient to cover the service payments. However, interested developers and lenders will be reassured to know that the Kenyan Government has promised to fund any deficit between the toll revenue and service payments itself, but should note that the Government's planned mechanism for doing so is not yet clearly defined.

Backstopped service payments

Both developers and lenders will be interested to understand the means by which the Kenyan Government will backstop the service payments - should the National Toll Funds prove insufficient. How the Government will monitor toll revenue amounts and the payment process pursuant to which it will make good any shortfall are important issues, and merit further discussion.

Additionally, whether and how the National Toll Fund will be pre-funded (perhaps from revenues collected from completed projects like the Nairobi Southern Bypass - constructed outside of the PPP Programme - or O&M only projects, such as the Nairobi - Thika Highway), and how revenue in the National Toll Fund will be allocated among the various concessionaires, are key issues.

FX and inflation

The Government has indicated that it will take local currency inflation risk, USD/KSH exchange rate risk and local currency interest rate risk on the roads PPP projects - all to be dealt with through the payment mechanism in the concession agreements. Further details are not clear, and it is likely that developers and investors will not fully understand how these risks are mitigated until the project agreements are released (this is scheduled to happen first on the Nairobi - Nakuru - Mau Summit Highway Project, in early February 2017).

Kenyan Government support

The Kenyan Government is preparing an international investment guiding framework with the intention of improving the conditions for investment into the country's public infrastructure. What form this framework will take and what support mechanisms it will provide is not yet known.

Government support in Kenya has traditionally been provided by Ministry of Finance issued letters of support, covering political risks such as change in law, expropriation, war, riot and civil commotion. Whilst certain changes to each letter are made on a project by project basis, in essence the Government offers financial compensation should political risks impact the project, and ultimately, should the Government fail to provide adequate compensation and the developer elects to terminate the concession, the letter guarantees an accompanying termination payment, sufficient to cover project costs.

However, certain recent events have meant that the Ministry of Finance is currently considering alternative options to issuing support letters in their current form. The Government team at the conference stated that Government support would be offered for the roads PPP projects, and indicated that political, land acquisition, revenue and currency risk will be borne by the Government, and force majeure risk will be shared with the private sector. However, the type, form or level of support that would be available for the projects is not yet clear, a topic which will need to be further discussed during the procurement and bidder discussion process.

Bidder and lender input to project agreements

Bidders will be entitled to submit comments and clarifications on the Request for Proposals and Project Agreements for each project, pursuant to a formal clarification process, pre-bid conference and competitive dialogue process. Following the conclusion of the bidder discussions, a final RFP and set of Project Agreements will be released.

It was also discussed at the conference that KeNHA is considering running a debt finance competition independent to the procurement of the roads concessionaires. This process will allow lenders to choose a particular roads PPP project, discuss and comment on the terms and structure of that project with the Government, and then align themselves with the successful bidder, once chosen. While this type of structure has been used elsewhere, it will be an interesting dynamic in an emerging PPP market such as Kenya.

Things to be aware of

As reflected above, it is apparent that KeNHA, the PPP Unit and the Kenyan Government in general, have all made a successful and collective effort to prepare the groundwork for a successful PPP programme. They have listened to market concerns and have structured the projects and risk allocation in a manner which, in principle, will give encouragement to developers and lenders looking to bid the roads projects. However, those parties will now be looking for further information and clarification on certain points, including those set out above, in order to fully assess the remaining key bankability issues.

Aside from the Nairobi - Nakuru - Mau Summit Highway project, presentations were also given at the conference on the following upcoming roads projects:

  • the second Nyali bridge,
  • the Nairobi - Mombasa; and
  • Nairobi - Thika projects (a 10 year O&M concession).

The second Nyali bridge project RFQ is due to be released in February 2017, with a pre-qualification conference to follow.

Gowling WLG has an established projects team, with a track record of supporting clients to successfully bid and develop roads projects and other PPPs (including in Kenya). The team includes project development and project finance lawyers and is closely linked to Gowling WLG's Africa Group, headed by Jonathan Brufal. Members of the Africa Group are regularly in Kenya, and Senior Associate Tom Gray, is currently on secondment to the firm's local partner in Kenya. We have good relationships with a range of local and international developers and lenders operating (or looking to operate) in the region.

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