THE FIRST ROAD PPP IN EASTERN AFRICA
The Main Challenges
The road connection between Nairobi and Nakuru is part of the so-called Northern Corridor, the multi-modal transport corridor linking the land locked countries of Uganda, Rwanda and Burundi with Kenya’s maritime port of Mombasa. Similarly, the Northern Corridor serves Eastern part of the Democratic Republic of Congo, Southern Sudan and Northern Tanzania. Thus, Northern Corridor infrastructure connects all the five countries of the East African Community and beyond.
The capacity of the road corridor is insufficient to adequately and safely accommodate current traffic, let alone future demand
The Nairobi - Nakuru highway, a 175 km dual carriageway, is unable to accommodate the increasing traffic leading to extensive travel times and worsening road safety. In particular the slow-moving heavy goods vehicles -that do not have to power to maintain their speed in the hilly terrain- slow down the traffic and lead to dangerous situation upon overtaking. Also, the limited facilities for park and rest forcing trucks to park on the side of the road is concerning. In particular beyond Nakuru at Salgaa and further at Mau Summit trucks stop for park and rest even despite the absence of the necessary facilities. The road is considered by some to be among the 22 most dangerous roads in the world.
Already the traffic exceeds the design capacity of the road for most parts. Driven by the growth of the economy and the population, the traffic is expected to continue to grow significantly in the coming years further worsening the mobility and road safety even in the most pessimistic growth scenario.
Augmentation of existing road is the recommended technical solution
Thus there is an urgent and relevant need to expand the capacity of the road connection between Nairobi and Nakuru and improve the quality of service to the users in order to reduce travel time and improve road safety, necessary to accommodate the economic growth potential and social development of the region and beyond. This is also confirmed in the Ministry of Transport’s Road Sector Investment Plan 2010 - 2030, which highlights the expansion of the road capacity between Nairobi and Nakuru as a strategic priority.
Government wants to apply PPP
In order to develop and manage the necessary road capacity expansion, the government of Kenya is considering to apply the concept of PPP, whereby a private developer will be retained to design/engineer, build, finance, maintain and operate the agreed upon infrastructure facilities. This initiative is part of a broader program from the government to involve the private sector more extensively in the delivery of infrastructure projects and related public services through the concept of PPP.
It is recognized following international experiences that using PPP would enable the government to accelerate the necessary infrastructure investments, enhance the effectiveness of project delivery and improve the efficiency of related public service delivery. It is also recognized following international experiences that PPP arrangements are complex and require a conducive environment and thorough project preparation.
The envisaged PPP delivery scheme will be challenging given the limited road PPP experiences to date in Africa
Up to now only 11 road PPPs have been implemented in Africa of which 7 in South Africa (albeit already more than 10 years ago). As such Africa accounts for a mere 1% of the total number of road PPPs implemented worldwide (some 918 since 1990 according to the PPI database).
Kenya has made significant progress in the PPP landscape over the past few years. Guidelines were passed in 2009, marking the first set of regulations governing concession projects. The 2009 Guidelines were followed by the PPP Act in 2013, which governs private investment in public projects, irrespective of the government agency contracting out the service or asset. This full-fledged law has made PPPs an integral part of the Kenya’s Private Sector Development Strategy, and has been assessed positively by external commentators. The 2015 EIU Africa Infrascope places Kenya within the top three in the region for PPP readiness.
ICT appointed as Transaction Advisor
Government of Kenya through The National Treasury and Kenya National Highways Authority has appointed in February 2015 Intercontinental Consultants and Technocrats (ICT) from India in joint venture with Grant Thornton India to provide Transaction Advisory Services for the Development, Operation and Maintenance of Nairobi-Nakuru PPP Project including Feasibility Study, preparation of Transaction Documents and Assistance in Financial Closure. In June 2015 Marcel van den Broek was retained as Team Leader for the Transaction Advisory services
Project Features
Client: ICT
Beneficiary: KenHA
Funding Agency: Worldbank
Period: 2015 - 2017
Activities Performed:
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Project Management
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Feasibility Study including:
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Traffic Analysis
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Design
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Cost Analysis
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Economic Analysis
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Financial Analysis
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Environmental Impact Analysis
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Social Impact Analysis
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Legal Due diligence
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Value for Money Analysis
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Procurement Strategy
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Project Structuring including:
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Request for Qualification
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Request for Proposal
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Draft PPP Agreement
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Tender support including;
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Evaluation of Expressions of Interest
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Competitive Dialogue Process
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The Project
Within a year, ICT delivered a comprehensive Feasibility Study recommending an appropriate technical solution and possible PPP structure. The Feasibility Study included a detailed and cohesive analysis of the technical, economic, financial, legal, environmental and social implications of the project.
Augmentation of existing alignment is the recommended technical solution
In total 11 alignment options were studied and a comparison matrix was prepared to analyse the most preferred option for development which shall address most of the technical issues on the existing highway with minimum disturbances for environmental sensitivities, minimum resettlement impacts and optimum capitalization.
The recommended technical solution included
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Operation and Maintenance of Nairobi Southern Bypass (28 km)
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Operation and maintenance of A8 Gitaru to Rironi section (12 km)
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Widening to a four lane separated highway, and operation and maintenance of A8 from Rironi to Mau summit (175 Km)
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Strengthening, operation and maintenance of A8 South from Rironi to Naivasha (58 Km)
The economic analysis concluded that the development and operations of the recommended alignment option provides an economic rate of return of around 40%, which is well above the minimum hurdle rate of 12% typically applied for emerging economies. This confirms the need and the added value for the project. The main benefits identified include:
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Savings in Vehicle Operating Costs;
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Savings on Travel Time; and
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Savings in Road Maintenance Expenditure
The preliminary Environmental and Social Impact assessment confirmed a number of additional positive impacts including:
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reduction in vehicular pollution;
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enhanced safety levels for users through better road signage, better information to users, and provision of non-motorized traffic facilities;
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reduction in accidents;
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generation of direct and indirect employment in the region.
The Feasibility Study reviewed possible PPP arrangements, most notably a user pay mechanism where the private partner would be allowed to levy tolls to recover the costs, and a government pays mechanism where the private partner would be reimbursed by the government based on pre-defined service indicators and the government would collect tolls through a third party to offset the government payments.
Following submission of the Feasibility Study early 2016 and after extensive deliberations, it was finally decided to opt for the government pays model. The main rationale was to reduce the risk exposure for the private partner, specifically the demand risk, which has been one of the main reasons for prior road PPP initiatives in Sub-Saharan Africa to fail.
Based on the agreed upon project structure the tender documents were further outlined and in November 2016 the tender was launched followed by an investors conference in Nairobi to present the project to interested parties.
10 Expressions were received and in February 2017 4 companies were pre-qualified including:
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Vinci (France) and Meridiam (France)
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Mota Engil (Portugal), African infrastructure Investment Managers (South Africa), Egis (France) and Orascom (Egypt)
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IL&FS (India) and ITNL (India)
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Strabag (Austria), Kolin (Turkey) and Group Five (South Africa)
These 4 companies were issued with a Request for Proposal and invited for a competitive dialogue. Following several round of dialogue in 2017, the RFP and the contractual provisions were finalized taking into account the comments from the pre-qualified bidders. In the end KenHA received in April 2018 2 bids from Vinci and the Mota Engil consortium respectively and following an extensive bid evaluation the contract was awarded in March 2019 to Vinci and Meridiam.
Results
The project appraisal, structuring and tendering has been a lengthy process covering some 4 years. Main reasons for this extensive period included the use of the competitive dialogue process which took time though allowed tailoring the contract to the needs and requirements of the investors and possible lenders keeping in mind the value for money potential of the arrangement. And the long-lasting bid evaluation which was facing some tax issues and a challenge from the losing bidder. All in all, it has resulted in the commercial close for the first road PPP in Eastern Africa using an innovative project structure that could pave the way for more road PPPs in Sub-Saharan Africa.
