Implementing the annuity financed roads projects

Last Updated 11 years ago by Kenya Engineer

The President of Kenya, Uhuru Kenyatta and his Deputy William Ruto officially launched the annuity financing framework at the Kenyatta International Conference Centre on 30th July 2014. The annuity programme is planned for implementation in the next five years covering 10,000km with bitumen standard roads. This is a very ambitious programme considering that for the last fifty years only 14,600km of bitumen standard roads have been done.

This method has been tried in other countries before Kenya.  Kenya has chosen to implement the model close to the one adopted in India. This model‘s effectiveness and success in India erases all doubts to its workability in Kenya. This framework involves the formation of special purpose vehicles or consortiums. These consortiums will consist of consulting engineers, contractors, financiers, and project managers. Insurers, equipment suppliers and material suppliers are set to benefit businesswise from this arrangement.

The framework is to be implemented under the Ministry of Transport and Infrastructure. This will take place through the roads authorities; Kenya National Highways Authority (KENHA), Kenya Rural Roads Authority (KeRRA) and Kenya Urban Roads Authority (KURA). The government will give guarantees in the form of letters of comfort, have the role to certify the works and authorize payments.

Opportunities

The prequalification of these works is in progress and documents were to be submitted by 28th August 2014. This is therefore an opportunity for the contractors, consultants, bankers, insurers, material providers (e.g. cement and steel), equipment suppliers and other industry players to increase their business and effectiveness within the sector. The suppliers of construction equipment and materials need to be co-opted to increase their business opportunities and ensure all the capacity needed is in the consortium.

The consultants and contractors will design and construct the roads while financing is done by bankers with guarantees from the government. The model will increase business between, commercial banks, contractors and the government. Insurance companies will insure the works while performance guarantees will be provided by the banks as usual. The increment of money circulating in the economy will benefit all other sectors of the economy indirectly through economic multiplier effects.

The contractor has the advantage and assurance that the payment for work done will come in time. This will be based on the progress of the work, unlike the previous experiences that ended up with many contractors on the losing end after work. Since 2010 contractors have only been receiving their dues intermittently thus interrupting their work and practice.

The government has the unique opportunity to offload the risk associated with construction of roads to the consortiums. This will help in reducing the cost of building roads and subsequent maintenance of them. 

Challenges
We have to bear in mind that in the efforts to effect this wonderful arrangement there are challenges. The government of Kenya has to set aside an adequate budget annually against all the other competing interests. The government must also provide guarantees without adding to the debt burden and passing it to the consortium.

The preparedness of the private sector to take advantage of the opportunity presented in this innovative and attractive business model is in question. The private sector has been dependent on the government spending and must now take more risks. These are risks associated with the construction of roads and their maintenance. This includes the quality of the works as well.

The contactors will have to take maintenance responsibilities for longer periods, say 10 years. It is imperative to the contractors and consultants to adopt innovative technologies that save costs and keep roads in good conditions for longer periods against unpredictable traffic patterns. The contractors must complete the works on time as agreed with the government, otherwise they will attract penalties.

There has been skepticism on the quality and performance of the local contractors for a long time now. There is however a new dispensation and strengthened institutions. Since the enactment of the Engineer’s Bill, the Engineers Board of Kenya (EBK) has the mandate to register engineers and ensure that engineers carry out their duties as per the EBK code of conduct. Another new body is the National Construction Authority (NCA). This body has the responsibility to regulate the construction industry and ensure contractors do a quality job. These bodies should ensure all the players in the industry perform as desired or else face penalties which include blacklisting. As long as EBK and NCA perform their roles, there should be no cause for worry.

How will the annuity framework at the county level? The roads at the counties are of all classes A, B, C, D and E. The county governments also have an interest to handle the construction and maintenance of roads besides the national government.  It is yet to be seen how the annuity framework will accommodate the county governments.

The consulting firms are also warned that the contractors may want to cut them off by the use of in-house design engineers. The consultants as a result of this would like the ministry to give direction on this issue. Moreover, some contractors may opt for consultants from outside the country maligning the local consulting industry.

There are also concerns on how the consortium agreements would look with respect to sharing the revenue. It is imperative therefore for the roads authorities to ensure that the agreements signed do not take care of only the major contractors but all the members of the consortium. The EBK should ensure that only the registered consultants with EBK are included in these consortiums. EBK should then ensure that engineers are fully involved in the consortium affairs. The Request for Proposal (RFP) being prepared by the ministry should clearly include the particular roles of the consulting engineers.

Will the banks also look into the financial health of the consortiums after the approval of the government? Bankers should realize that we are coming from an era where contractors did not have their payment in time. Their financial history should consequently not be used against them. The government approval and guarantee should then take precedence.

There are other concerns and questions say: will the government limit how many consortiums one can participate in. This is in a bid to limit big players from locking out the small ones. How will the government ensure the equitable participation of all involved?

How to form a consortium

The Roads and Civil Engineering Contractors Association (RACECA) and the Association of Civil Engineers of Kenya (ACEK) have had two meetings to review how best the method will work. The Ministry of Transport and Infrastructure has organized a workshop in order for prospective bidders to understand how best this method will work. It is hoped that RACECA will join hands with ACEK and EBK to formulate the best workable framework. The small and medium scale contractors have raised concerns on how they will fit into the annuity framework. KEPSA is of the opinion that this group should be included and protected within the program.

Through the legal notice number 114 of 2013, works under KES 1 billion should be done by Kenyans. For works above this, local and international companies will go into joint ventures with the locals getting not less than 40 percent of the works. KEPSA constantly works for the legal notice to be enforced.  The enforcement of this legal notice will lead to the works being divided amongst all those who deserve it. The government should also seek for ways within this annuity framework to take care of the 30 percent youth and women participation in tendering.

The project manager should be an employee of the government to improve their ability to do their supervisory role. The role of these project managers will be to control quality, time and cost of the projects.

The annuity programme attempts to bring us closer to Vision 2030 where Kenyans will achieve a middle income economy status. This program is one of the ways to empower the Kenyan contractors to build capacity with the view of taking up the development of all the infrastructure projects in the country.

It will also help generate adequate employment opportunities for graduates from the universities. It is an opportunity to spur innovation for the industry growth in a sustainable manner.

In conclusion, the success of this programme will be gauged by how it will reduce the perennial pending bills to contractors and more importantly on how effective it will be in building capacity of our local firms.