China's investment cap leaves State grappling with two toll tariffs

The splitting of the contract to expand the Rironi–Mau Summit Road has caused complications for the roads agency, as it emerges that the two consortia had proposed different toll rates and annual price escalation rates. 

The Kenya National Highways Authority (KenNHA) last week announced that the expansion of the road, a critical artery for Kenya and its neighbours, would be undertaken by the two companies that had submitted Privately Initiated Proposals.

Neither of the firms could do it single-handedly, owing to the caps on how much they can invest outside China.

Construction works will now be split into two sections, one to be undertaken by the consortium of China Road and Bridge Corporation (CRBC) and the National Social Security Fund (NSSF), while the second will be built by Shandong Hi-Speed Road and Bridge International Engineering Company Ltd (SDRBI).

The split followed restrictions by China on its State-owned enterprises that have to secure what have been termed as lengthy approvals from Beijing for overseas investments of upward of $1 billion (about Sh130 billion).

The upgrade of the entire project is expected to cost Sh200 billion ($1.54 billion). 

The CRBC-NSSF consortium had, in September, been named the preferred project proponent on account of different factors.

These included a lower toll rate of Sh8 per kilometre as well as an annual adjustment rate of one per cent. This was in comparison to Shandong, which had proposed a toll rate of Sh10 per kilometre that would be adjusted annually by three per cent.

The project, which broke ground last Friday, will be undertaken through a public-private partnership model.

It will largely be built on the existing right of way, which is seen as part of the government's contribution, with the private players now expected to design, finance and build the road in a process that will be completed in 2027.

The companies will further operate and maintain the road for 28 years, during which they will charge users toll fees for the maintenance and to recoup their investments.

“The financial evaluation reveals that CRBC-NSSF’s Feasibility Study is the preferred option due to its greater toll rate affordability, offering a lower tariff of Sh8 per kilometre compared to SDRBI’s Sh10  per kilometre and a slower escalation rate of one per cent versus three per cent per year,” said KeNHA in an October report.

“This makes CRBC more accessible to road users over the long term. Despite a lower project NPV and IRR, CRBC and NSSF demonstrate better cost efficiency, with life cycle costs forming a smaller proportion of both EPC cost and revenue. Its financial structure supports sustainability while prioritising public affordability, making it a more socially responsible choice.”

According to KeNHA, the CRBC-NSSF consortium also offered a lower operation and maintenance cost to project cost ratio of 65 per cent against Shandong’s 176 per cent.

This, the roads’ authority said, offered a more efficient and cost-effective long-term operation of the highway, translating into better value for money for the public.

Following the split-corridor approach, sources say the differing toll rates and the annual increment rates are among the sticky issues that need to be resolved even as the project gets underway, even as President William Ruto seeks to fast-track the construction and have the road ready for launch by June 2027.

An official at KeNHA told Financial Standard that the authority is likely to seek a standardised rate, noting that what the firms had made were proposals that are subject to further review by KeNHA and the PPP Directorate.

The official, who spoke anonymously since he is not authorised to speak publicly on behalf of the roads agency, said while the project had been split into two sections, the tariff as well as the annual increment rates are likely to be uniform

He observed that while the final rates are subject to further discussions, the base rate of Sh8 per kilometre and an annual escalation rate of one per cent proposed by CRBC-NSSF is likely to prevail across both sections. 

It is yet to be seen whether Shandong will take a lower tariff and the impact that is likely to have on its investment in the project.

The PPP Directorate recently said that while different sections would be developed and, on completion, would be managed separately by the two consortia, the toll rates on the entire corridor would be harmonised.

The consortium of CRBC-NSSF was all set to build the Rironi-Mau Summit until just a few days before the groundbreaking of the project last Friday. 

After the submission of the privately initiated proposals on the upgrade of the critical road, the CRBC-NSSF consortium had emerged as a preferred project proponent ahead of Shandong, with KeNHA getting the nod from the National Treasury to negotiate on the delivery of the project with the consortium. 

During negotiations, according to KeNHA, it emerged that restrictions by China on its State-owned enterprises investing more than $1 billion (Sh130 billion) overseas would hamper the speed of project execution.

The restrictions require Chinese State-owned firms such as CRBC and Shandong to seek what has been termed as lengthy further approvals from Beijing to pump in the Sh200 billion ($1.54 billion) required for the project.

“Negotiations, however, did not succeed after the preferred proponent confirmed a firm internal investment cap under the Chinese State-Owned Enterprise (SOE) outbound investment regulations, which indicates that investment approvals exceeding $1 billion require an extensive and tedious internal review process of approximately one (1) year for project financing, which limited its ability to undertake the entire corridor as initially recom- mended, within the stipulated timelines,” said KeNHA, adding that it terminated the full-corridor negotiations with CRBC-NSSF.

“In line with Section 57(6) of the PPP Act, the Reserve Proponent (Shandong) was engaged, and SDRBI similarly confirmed that it was unable to take up the full scope due to the same investment cap limitation.”

This saw KeNHA resort to a review of a second set of proposals that the two firms had submitted earlier, in which each firm had made a proposal to build different sections.

The highways authority said it had, in September, asked each proponent to present two sets of proposals – for full corridor and split-corridor development.

This, KeNHA noted, was in “anticipation of probable delays on account of lengthy approval processes applicable to Chinese State-owned enterprises, for investments above $1b”.

“With neither of the proponents able to deliver the full-corridor within the terms of the PPP Act the Contracting Authority (KeNHA), guided by the National Treasury and Economic Planning, initiated evaluation of the Feasibility Study Reports of the alternative split-scope proposals earlier submitted by the proponents in accordance with Section 43 of the PPP Act, Cap 430 and thereafter submitted the Evaluation Reports to the (PPP) Directorate for recommendation(s) thereon to the PPP Committee for approval,” said KeNHA. 

In the split corridor proposal, the CRBC-NSSF would develop the Rironi-Gilgil section of the road as well as the 58-kilometre Rironi-Maai Mahiu-Naivasha Road, with the works spanning a total length of 139 kilometres.

Shandong would upgrade the 94-kilometre stretch from Gilgil to Mau Summit.