International Project Finance Association (IPFA): Roads PPPs taking shape across East Africa

30 March 2017


In March 2017, representatives from the Uganda National Roads Authority (UNRA), the Kenyan National Roads Authority (KeNHA) and the Kenyan PPP Unit gathered in Nairobi to attend the "International Project Finance Association (IPFA): Roads PPPs Taking Shape across East Africa" briefing.

Co-hosted by Gowling WLG and KMPG, and attended by delegates from various public sector bodies, international and regional developers and banks, DFIs, investors, and advisory firms, the event provided UNRA and KeNHA with the opportunity to update the attendees on the progress of the Kampala - Jinja expressway and the Kenyan roads PPP programme. It also gave the audience the chance to question a panel featuring representatives from the roads authorities, the Kenyan PPP Unit, Gowling WLG and Nedbank on various technical, financial and legal issues critical to the projects' success.

The event was opened by Andrew Jackson (Head of Advisory, KMPG East Africa), with keynote addresses from Eng. Patrick Muleme (Head of Design, UNRA), Eng. George Kiiru (Head of PPP Section, KeNHA) and Eng. Stanley Kamua (Director Kenyan PPP Unit). Patrick, George and Stanley were later joined for a panel discussion by Daniel Odongo (Regional Coverage, Nedbank) and Tom Gray (Projects and Construction, Gowling WLG), chaired by James Woodward (Head of Infrastructure Hub, KPMG East Africa).

Eng. Muleme spoke about the Kampala - Jinja expressway project, Eng. Kiiru gave an update on the Nairobi - Nakuru - Mau Summit PPP and the other roads projects yet to be launched in Kenya (including Thika road, the Nairobi - Mombasa road, the second Nyali Bridge, and the concession for all tolling operations) and Eng. Stanley discussed the role of the Kenyan PPP Unit in the management of PPPs in Kenya.

In addition, the panel debate covered various issues such as the successes and lessons learnt from the procurements to date, the impact of regional elections, the form and strength of the government guarantee/letter of support intended to be issued to concessionaires, and land acquisition issues pertinent to linear transport projects, topics which our experts have written about previously (see our guidance on Kenya's burgeoning roads sector, and also how to go about constructing roads in Kenya), as well as taking questions from the audience.

The event was attended by 120 delegates, supported by the East African Branch of the International Project Finance Association and co-sponsored by Gowling WLG and KMPG. It was held at KMPG's offices in Nairobi.

Progress on east African PPPs

In Kenya, ten consortia have submitted request for qualification (RFQ) responses for the Nairobi - Nakuru - Mau Summit project, a long term design, build, finance and operate concession with an estimated capex of USD550m. The shortlist has not yet been announced by KeNHA and the PPP Unit, but is expected by mid-April.

The PPP Unit and KeNHA intend to release RFQs for further projects over the next few months, including Thika road (a ten year O&M concession) and/or the Nairobi - Mombasa road (a DBFO project).

The Kampala - Jinja RFQ is expected to be launched in April 2017, with a submission deadline of June 2017, shortlisting and release of the RFP (request for proposal) by August 2017 and final submissions due in Q4 of 2017. UNRA expects to sign the concession by Q2, 2018.

Regional elections

With Uganda holding presidential and parliamentary elections in February 2016, UNRA has already experienced any delay to the project launch and procurement process that political campaigning and voting might bring. Kenya goes to the polls on 8 August 2017, and various stakeholders have expressed concerns this will disrupt or delay the roads PPP procurement.

Both KeNHA and the Kenyan PPP Unit gave assurances that electoral issues would not affect the PPPs, and they remain confident that the procurements will stay on track. Panellists at the conference spoke about the importance of the PPP Unit and project delivery team within KeNHA continuing their strong management and leadership of the process, and championing the PPP projects into the next Administration.

It may be that the procurement timetable is adjusted in recognition of the various demands Government stakeholders will have on them in the run-up to August, but fear of delay should be tempered with the apparent political will to press on with infrastructure development before and after the elections (for example the new single gauge railway from Mombasa to Nairobi is due to open, as scheduled, on 1 June 2017).

Financing PPPs in East Africa

The Kampala - Jinja PPP is set to benefit from the support of a number of development finance institutions (DFIs) and multi-lateral banks, providing viability gap funding and various credit enhancement products to mitigate certain risks which investors had previously raised. The phased project will receive grant funding from the European Union and French Development Agency, as well as a partial risk guarantee from the African Development Bank (AfDB) and anchor investment from the same institution into a bond issuance to cover the local currency portion of the debt.

The extent to which the Kenyan projects will receive similar support has not yet been publicised, but developers and lenders looking at the projects have positively received the news that both programmes will benefit from an availability payment structure with no traffic risk imposed upon the concessionaire.

Given the ambition, location and size of the roads programmes, this appears to be a critical bankability decision. As the procurements develop, lenders and developers will be interested in the deemed commissioning, force majeure and compensation upon termination regimes contained within the concession agreements, and the public sector or DFI funds/risk products that will be available to meet any payment obligations under these regimes.

Tolling revenues

It has been well publicised in the regional and international press that both UNRA and KeNHA will charge users a toll for using the roads that are to be constructed and/or operated under the PPP programmes. In both countries, tolling revenues collected from road users will flow into a central account (in Kenya's case there will be a single account for all of the roads PPPs) and, in the ordinary course, the availability payments owing to the concessionaires will be made from these accounts. However, each Government remains obliged to make the entirety of the availability payments notwithstanding the level of tolling revenues collected and deposited in the account (only making deductions as part of an agreed penalty regime, for example for unavailability or poor performance).

In Uganda, it is planned that these payments will be at least partially guaranteed by the AfDB, through a partial risk guarantee backstopping the Government's payment obligation. KeNHA has yet to publically discuss how it will guarantee the availability payments, and it is hoped that the publication of the National Tolling Policy (which we understood has been approved by Cabinet but remains un-issued) will provide some more detail on how this fund is to be managed. The traditional form of Government support letter in Kenya is currently being discussed, and what will replace it is unknown.

Land acquisition

As with any linear transport project such as a road or railway, the land acquisition process and its timely completion is a critical issue to developers considering bidding the Kenya and Uganda roads projects (and their lenders). In both Uganda and Kenya, the Governments have committed to providing the required land package, and the necessary rights of way, easements and access, to each concessionaire.

While various stretches of the new roads follow and upgrade existing routes, there are new sites to be acquired and both KeNHA and UNRA reassured the audience that the relevant processes were in hand, that suitable social and environmental (and where necessary resettlement) assessments were being undertaken, and that they would continue to update the developer and investor community as progress was made.

Moving forward

Despite some delays, it is apparent that the procurements are progressing and developer and lender interest has been sustained. Certain measures are being taken to mitigate bankability concerns (such as adding various credit enhancement tools to the financing structure of the Kampala - Jinja expressway) and UNRA and KeNHA remain confident of retaining momentum as various projects move towards RFQ launch or shortlisting.

Your next steps

Our African PPP experts have worked on a number of transport projects in Sub-Saharan Africa and are regularly on the ground in the African countries within which Gowling WLG works and has associations.

If you would like more detail about the projects mentioned above, or have questions about any other energy and infrastructure opportunities in the region, please do not hesitate to contact us for advice or guidance.

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