Challenges in the Implementation of PPP Projects

A Renewed Interest in Railways

On September 14 2010, the Managing Director of Kenya Railways, Mr Nduva Muli presented a most interesting address to members of the Institution of Engineers of Kenya at a function held at Silver Springs Hotel.

He discussed two topics, namely: “Challenges in the Implementation of PPP Projects” and “A Renewed Interest in Railways”.

Regarding the PPP projects, Mr. Muli explained to the audience that given the stringent budget constraints we continue to face, the Government cannot afford to allocate the necessary resources to meet infrastructure development projects. Accordingly, PPP interventions were necessary to supplement the governments’ efforts to increase infrastructure investments. He rightly defined PPP as “The combination of a public need with private capability and resources to create a market opportunity through which the public need is met and a profit is made”, and he cited the Kenya Bus Service and Nairobi City Council partnership in the provision of commuter services within the city as having been a typical example of PPP.

“This was a good arrangement, which would have provided the much needed experience that would have been applied for future partnerships in sectors such as the energy, telecommunications, water, sanitation and transportation had it not been for the sudden entry into the market of the unregulated Matatu sector and subsidized rail commuter services,” he said.

Mr. Muli then wondered why some countries are able to attract more investments in the form of public-private partnerships than Kenya; why certain types successful of PPPs are found in some countries but not in others and what determines the extent of private sector participation?

In answering those questions, he identified allocation of risk as the greatest challenge for developing a successful PPP explaining that too many risks assumed by governments will likely put unjustified pressures on taxpayers, while too few will prevent potential private investors from participating in the venture. He further remarked that the risk factor reduces with increased demand to the extent where Studies have shown that PPP’s are more common in countries where aggregate demand is sizable, and where markets are large enough to allow for cost recovery.

He gave two case studies one a road PPP project in Mozambique and the other a power generating project in Tanzania where demand was over-estimated forcing the respective governments to shoulder expensive usage guarantees – situation that would discourage venturing into PPPs.

He then added that Governments friendly to market-oriented policies are more likely to engage in PPPs. “PPPs are more prevalent in politically stable countries with accountable governments. Examples of political risk include nationalisation, adhoc changes in laws and regulations, adverse government action or inaction, persistent political force majeures, acts of violence and destruction and rampant corruption,” he said.

Expanding on Political risk, he said that credibility and the stability of the Macro-economic conditions of a country play a major role in PPP decision making by investors, accordingly, PPPs are more prevalent in countries with credible, predictable, and stable macroeconomic conditions. “In particular, countries with lower inflation and stable exchange rates are more attractive candidates for PPPs,” he remarked.

Another area he highlighted was the quality of our institutional and legal frameworks. “Countries with weak institutions and low-quality bureaucracies are more likely to display high country risk and are therefore less likely to foster PPPs. PPPs will be more common in countries with strong and effective legal institutions and they will be more prevalent in environments where the legal code (laws on books) better protects investors’ rights, giving them confidence that in the event of political resentment to the ‘privatization’ due to price increases or retrenchments, for instance, their investment would be well protected,” he said.

In conclusion he emphasized that although using PPP’s as a means for infrastructure development comes with considerable risk, these risks are generally worth taking or at least worth considering since neither the governments nor private firms alone are likely to have the resources to build essential infrastructure and bear all of the risks. “There is need to build a scope for mutually beneficial partnerships between public and private sectors where there is a balance between the allocation of rights and risks,” he concluded.

Mr. Muli then appraised the gathering on the rail commuter projects being developed for the cities of Nairobi, Mombasa and Kisumu and how the development will be targeting PPP intervention. He said that while Mombasa and Kisumu projects were still at concept stage, Nairobi project was already at implementation stage where the Government had provided funding to fast tracking the development of rail commuter services to JKIA.

Mr. Muli reminded the audience that Kenya Railways mandate included ‘Management of Non-Conceded Assets’ of which there is an extensive property portfolio across the country. “These assets present major revenue and growth opportunity for KRC, accordingly a property development master plan has been developed and the Corporation is at various stages of rolling it out mainly through PPP framework,” he said.

Finally Mr. Muli appraised the audience on the Master Plan for railway development within the country and the region. Mr. Muli’s presentation outlined the merits of rail transport and listed key railway developments in Africa and Asia, including the Kenya Government’s plans to build a standard gauge railway network within the country and connected to Uganda, Ethiopia and Southern Sudan. He detailed the technical specifications for the proposed railway including specifications for the track, signalling and communication and rolling stock.

Of particular interest to the audience was a proposal to extend the proposed Lamu – Juba railway across Africa to Douala in Cameroon on the Atlantic Ocean coast and via Bangui in Central Africa Republic. He called it the ‘Great Equatorial Land Bridge’, and with a pipeline and fibre optic cable in addition to the railway, this link across the centre of Africa would undoubtedly rival the Suez Canal, carrying oils, minerals and merchandise between the Indian Ocean and the Atlantic Ocean. He visualized the railway carrying mainly transit goods including containerized traffic. “The Land bridge will be ideally located to reduce the cost of shipping by enabling the Panama-X vessels, which currently transport freight between the East and the West, to travel shorter distances. These vessels that are in addition very expensive to operate will save at least 3-weeks of travel time they presently require to navigate around the Cape,” he said.

He was confident that many countries, and especially China and large shipping companies would support the idea and invest into the railway and other transport and communication elements in the corridor. “In order to progress the idea, there will be need to approach organizations such as the African Fund Development Bank (AfDB) and other development partners who have the resources and personnel to assist ‘sell’ the idea to the other African counties along the route of the proposed bridge. In this regard we recognize AfBD policy to promote infrastructure projects interconnecting African countries,” he said.

He predicted that the Great Equatorial Land Bridge would bring prosperity to the countries through which the railway would traverse and not least to Kenya and Cameroon and that in the case of Kenya, Lamu would in time become Kenya’s main seaport and a thriving city on the Indian Ocean.

Mr. Muli urged the audience that in order for this country to survive economic turbulence and retain its position as a transport hub in Africa, “Kenya must look beyond East Africa and must champion the building of the ‘Great Equatorial Land Bridge’,” he said.

In order to demonstrate to the audience that a project of that magnitude was technically achievable, Mr. Muli gave the example of the recently completed 1,100 kilometres Qinghai – Lhasa Railway in China and provided the following facts and figures about the railway:

• Three major tunnels: 1,338 metres long at 4,905 metres above sea level and the longest tunnel 3,345 metres long at 4,264 metres above sea level;
• 960 kilometres or 80% of the line laid at an altitude of over 4,000 metres above sea level;
• Track required 675 bridges  totalling  159.88 kilometres;
• 550 kilometres or 50% of the track laid on permafrost soil conditions – very soft in wet season; very hard in dry season,
• Worst gradient achieved 2%.

He highlighted several challenges encountered by the construction team including:

• The oxygen content along the railway is only 50-60 percent of that at sea level as some 960 km of tracks are built on plateau - more than 4, 000 meters above sea level;
• The highest point reaches 5,072 meters, about the same height as Mount Kenya;
• Workers had to carry oxygen bottles to get to work;
• The annual average temperature on some construction sites is below zero degree Celsius with the lowest temperature at  minus 45 degree Celsius.
• Tibetan Plateau is a cold desert: average temperature is 34 degrees F (1 degree Celsius) and average rainfall 380 mm;
• Some 100,000 construction workers (engineers, technicians, craftsmen and general labour) got involved in building this engineering feat, 10% of them were from local ethnic groups.
• Sound management of the site ensured that none of the workers died of altitude sickness.
• Environmental considerations, particularly with respect to wild life, were given priority and mitigation costs exceeded US$ 1.5 billion mostly for providing underpasses for the migrating animals.
• Construction work started 01-03-01 and was completed on 12-10-05 (i.e. four and a half years) and the line was officially opened for traffic on 01-07-06

Mr. Muli described technology for railway development as being highly advanced in China and many other countries and that there was no need to fear concerted planning for railway projects in the country and in the region.