Funding crisis slows down road projects

The government is defaulting on payments to road contractors, a situation that is threatening to put the brakes on Kenya’s ambitious infrastructure development plan.

Minutes of a meeting involving three roads authorities, the Ministry of Roads and the Roads and Civil Engineering Contractors Association (RACECA) last month show the latter as saying that the government owes contractors at least Sh20 billion in outstanding payments.

“A number of projects have either slowed down on progress or stopped. There is an urgent need to formulate a way out of the current financial crisis facing road projects in the country,” RACECA is quoted as arguing in the minutes of the August 22, 2012 meeting seen by the Sunday Nation.

RACECA chairman S. K Gehlot said 60-70 per cent of ongoing contracts are experiencing default in payment.

He claimed that contractors were losing a lot of money in heavy penalties to creditors and some banks had started to label them as ‘risky clients’. He urged the government to provide annuities on ongoing contracts and guarantees to the banks.

However, Ministry of Roads PS Michael Kamau dismissed the proposal, saying that the government cannot take steps that would lead to fiscal commitment due to budget limitations.

He warned the roads authorities that they would have to get themselves out of the mess by focusing on realistic financial measures including reducing the number of projects to manageable levels.

“Every authority will have to bite the bullet and work out an exit strategy out of the current funding crisis noting that scaling down of ongoing contracts may be necessary,” read the minutes.

At the time of the meeting, the Kenya National Highway Authority (KENHA) owed contractors Sh12 billion while the Kenya Rural Roads Authority (KERRA) and the Kenya Urban Roads Authority (KURA) owed Sh6.8 billion and 400 million respectively. (Read: Sh2 trillion roads Kenya’s top asset)

KeNHA director general Meshack Kidenda confirmed that the meeting took place and that the authority owed contractors Sh12 billion at the time. He attributed the situation to a slow payment structure imposed on the roads authorities.

“Because of the payment process, at any given time we will be owing contractors...but owing is different from defaulting. Only when the process of obtaining cash is too slow do we default,” he said.

He added that the negotiations with contractors would continue until the matter is resolved and declined to comment any further on the matter.

When contacted by the Sunday Nation, an official at KURA denied that the authority owes contractors any money.

“We do not owe anyone money. Everyone who has completed their work has been paid,” said KURA corporate affairs manager, Mr John Cheboi.

Efforts to get comments from RACECA, Ministry of Roads PS and KERRA were unsuccessful.

Roads projects have been allocated Sh34 billion in Treasury’s budget. Sh2 billion was released by the exchequer last month for the projects.

Mr Kamau said that no money would be on offer to the roads sector except the amount already set aside in the 2012/2013 budget estimates. He further warned that there will be no dramatic increase in the roads budget in coming years as Kenya expects only 10 per cent annual increment to be realised over the next three years.

The directors general of the three authorities were directed to provide contractors with estimates of cash flow per project for the next three years. They will also author reports to the PS reviewing all ongoing projects and making recommendations on cost-cutting measures.

Major road construction projects in Kenya have been carried out with funding obtained largely from development partners.

The African Development Bank (AfDB) contributed Sh12.5 billion to the construction of the Sh30 billion Thika Superhighway. The Japanese government recently gave a grant worth Sh1.6 billion to the Ministry of Roads to improve traffic flow within Nairobi.

During the August meeting, industry players vowed to develop more creative financing as they seek to meet national demand to avoid over-reliance on donors and the government.

In some countries, government agencies have partnered with the private sector or taken loans to construct roads. The funds are then repaid by levying road users fees for a certain period of time. However, these methods bring about their own complications.

“If you decide to construct a road by levying the road users, the law might require alternative routes for those users who are unwilling to pay the levies,” said Kenya Institute of Public Policy Research and Analysis (KIPPRA) head of infrastructure and economic division, Dr Eric Magolo.

The expansion of the country’s road network is a key component of the Vision 2030 plan to make Kenya a middle-income economy.

Recently, the Ministry of Roads said that it was planning to spend Sh2 trillion expanding Kenya’s road network over the next 15 years.

Reports that the government is not honouring deals made with contractors, therefore, bring to question the feasibility of Vision 2030 and the government’s commitment to improving roads infrastructure in the country.

“Roads are crucial to this country’s development. They help in opening markets and making the costs of goods and services cheaper. They will also aid in national integration. It is important that contractors working on these projects get paid in time if they are to work efficiently,” said Dr Magolo.

Defaulting on payments to contractors is not the only funding crisis facing the roads sector. KRB says that lengthy procurement procedures led to roads authorities in the country constructing only 69 per cent of their target in the 2010/2011 fiscal year.

The stakeholders will meet again on September 12.