Infrastructure PPP frameworks in the Eastern Africa Region – Comparative Performances

Some track and field events where both Ethiopian and Kenyan sportsmen participate, especially middle and long-distance races, almost always end with the best athletes of the two countries locked neck and neck, regardless of who wins.?I have had the privilege of practicing infrastructure engineering in the Eastern African region and more (16 African countries) and therefore, I noted that the competition between the policy environments of Ethiopia and Kenya?mimics this classic athletic rivalry.

It manifests itself especially in terms of reforms to the institutional and regulatory frameworks that are integral to private investment in infrastructure. This healthy competition is fostered by the fact that there are no conflicting geopolitical interests between the two countries unlike in the case of other neighbors like Ethiopia and Egypt, or Rwanda and Uganda.

This appears to be the case in their network length of trunk and major roads, gross GDP’s, doing business indices, etc. There are of course areas that buck the trend like internet penetration, percentage of banked population, export earnings, trade balance, GDP per capita, sectors in which Kenya almost consistently beats its rival neighbor hands down. When it comes to PPP implementation in roads infrastructure, though, while Kenya may have had some head-start in the legislation aspect by operationalizing several policy organs since the original PPP Act of 2013, Ethiopia’s performance is almost stellar considering the fact that she enacted the first PPP law only in 2018.

Ethiopia launched the first tolled expressway in 2014, Kenya is building its first user-pays toll expressway which has been commissioned a few weeks ago, Uganda began collecting tolls in early January this year (2022) on the equivalent Kampala-Entebbe Expressway, a major and faster gateway to the country’s international airport. The infrastructure privatization miracle for Uganda continues, as in the next five years, four more tolled expressways are already in the pipeline. These will be the Kampala-Mpigi, Kibuye-Busega, Kampala-Bombo, Kampala-Jinja and Kampala-Busunju expressways, all currently at different stages of procurement, design or construction.

At any rate, this is a decade in which Eastern Africa is slowly warming up to the idea of private financing of transport infrastructure.

These achievements pre-suppose the existence of a well-designed national PPP framework in order to be successful. A PPP framework in a national context is generally defined as a set of strategic and foundational outlines that rule and de-limit the overall use of PPP as a procurement option for a country. These may include the legal/policy framework, operational or process management framework, fiscal management and institutional framework, with these areas or sub-frameworks overlapping significantly.

These frameworks require time for the involved institutions and processes to mature. So governments usually launch their experiment in road sector reform towards alleviating the burden on the public coffer by levying a fuel tax coupled with establishing a road fund.

Fuel Levy and Road Funds

Fuel levy as a road maintenance funding instrument is not a new concept in sub-Saharan Africa, as it has been implemented since the early 1990s. On the other hand, private sector financing as an infrastructure delivery method alternative to traditional public procurement presupposed the establishment of infrastructure as an investment asset class. In a continent where capital markets are far from developed, harnessing the power of hedge funds and institutional investors would be no mean feat, so fuel levy and road funds served the purpose in the meantime.

The sources of road funds usually include road user charges including fuel levy, transit fees, road license, axle load fines, tolls, weight/distance charges, and traffic and road safety fines. In some jurisdictions like Ethiopia, the treasury also contributes to the funds.

The road fund for Ethiopia was only established in March 1997 while the Road Maintenance Fuel Levy Fund was enacted by Kenyan Parliament a bit earlier, in 1993. Tanzania established its own road fund as early as 1991, which however did not become effective as an institution until 1998. On the other hand, the Road?Maintenance?Fund?(RMF) for Rwanda was established?in 1998, while the equivalent Uganda Road Fund (URF) came into existence by an Act of Parliament in 2008.

Comparison of legislations

Kenya boasts a comparatively enabling regulatory environment and an impressive pipeline of projects as part of its pioneering Roads Annuity Program (a government-pays variant of PPP), some pure user-pays PPP and possibly some shadow-toll modalities. The irony is that the PPP project that is closest to commissioning is the Nairobi Expressway Toll project, which did not appear in Kenya’s pipeline of projects as late as 2015. Considering the speed and efficiency of its implementation, one is tempted to believe that it must have been an unsolicited proposal.

The Public-Private Partnership Act, 2013 (the PPP Act) was updated into the public-private partnerships Bill 2021. The new law, which repealed the 2013 legislation, now provides an elaborate legal framework to cover both national and county level PPP projects in Kenya. It allows entities in PPP deals to single-source work through direct procurement and Privately-Initiated Investment Proposals (PIIPs), unlike the previous decree that limited investors to competitive bidding procedures.

Tolls were first introduced in Kenya for road maintenance in the 1980s and abolished in 1994 in favor of the fuel levy. The legislation providing for the imposition of transit toll levies was however not repealed and the Public Roads Toll Act that empowers the Cabinet Secretary in charge of roads to declare any public road as a toll road has remained in place.?Cabinet also approved a National Road Tolling Policy in 2016, which was the same year when there was a huge public outcry against Kenya National Highway Authority (KeNHA) billboards on the Southern Bypass announcing the introduction of tolls.?The Government was forced to backtrack, citing the need for a more elaborate framework. Finally, the Public Finance Management (National Road Toll Fund) Regulations 2021 established the National Roads Toll Fund gazetted on 3rd November 2021.

On the other hand, Ethiopia has never had a PPP policy, tolling policy, nor an enabling institutional and regulatory environment until the mid-2010’s, yet it had implemented its first railway PPP much earlier than any country in Africa. It launched its first railway in 1894, in a pioneering financing initiative launched in capital markets from Paris to London to New York, and commissioned it in 1917. The project qualifies as the oldest PPP venture accomplished in the framework of a partnership between an indigenous African public entity and private investors on African soil. This venture of 128 years ago by Emperor Menelik distinguished itself from other colonial lines of the same epoch in Africa as one initiated by indigenous foresight and enterprise and financed by private capital. [Early Implementation of Infrastructure PPP in Africa: The Ethiopian Railway Experience 1894-1917 (https://trid.trb.org/View/1737444 )]

Kenya apparently adopted a more conscious approach to putting in place these frameworks, while Ethiopia more or less followed every framework with an action, indicating that she chose a more pragmatic approach by enacting laws only when they are needed, and not in response to policy recommendations by multilateral/bilateral partners. These entities, such as IDA, MCC/Compact, USAID etc have their own prescriptions for enhanced institutional performance and requirements on regulatory completeness for developing countries.

Considering the policy framework for toll roads, for example, Kenya has had a tolling policy in place since the 1980s, it even had a stint with tolling which did not last long because it was abolished in 1994 in favor of the enactment of the Fuel Levy Fund.

On the other hand, Ethiopia has never had any tolling policy and the first mention of a toll fund in its legislative vocabulary appeared only in 2014 when it completed the Addis-Adama Expressway. It then enacted the Toll Roads Proclamation no 843 and went ahead with the regulatory decree that established The Ethiopian Toll Roads Enterprise (ETRE) all in the same year. The Enterprise since then added two additional toll roads to its management portfolio: Dire Dawa –Dewele Expressway (220km with a cost of US $179m) which was commissioned in June 2019 and the Modjo-Hawassa Expressway (209 km) which was partially commissioned this year (2022).

Institutional performance

Ethiopia had a head-start in implementing 3 major toll roads since 2014, while Kenya is yet to fully put in place its Nairobi Expressway toll road, which it commissioned a few weeks ago. The pipeline of PPP road projects on the side of Ethiopia, however, is not as impressive as it is for its enterprising neighbor.?

A notable achievement for Kenya in that aspect is the launching of the Roads Annuity Fund and the launching of Lot 33 - the 91km Ngong-Kiserian-Isinya (48km) and Kajiado-Imaroro (43km) Road Project. Awarding this project with Kenya Rural Roads Authority (KeRRA) as client was where Kenya excelled in being the first to implement the Annuity Road Financing Model in Africa.

Under the Annuity scheme, unlike other schemes, the government will pay for road projects completed under Annuity concessions where the contractor is paid through a fixed, periodical payment instead of relying on toll proceeds.

Another extraordinary accomplishment of the Annuity Fund is that it has revised the decades-old Kenyan pavement design manual with CESA (Cumulative Equivalent Standard Axles) of 1,000,000 as the minimum road pavement design standard. Since most Kenyan rural roads carry much less traffic, rural roads were overdesigned and construction costs were correspondingly higher under the old standard.

Under the new 10,000km of paved roads planned under the Annuity financing programme, KeNHA adopted a new standard for the low volume roads (Traffic Class T5), which represent 80% of the targeted roads. The roads have been classified further into five sub-categories ranging from T5-0 to T5-4 with different Cumulative Equivalent Standard Axles. For the T5-0 category, the CESA will be 500,000 to 1,000,000 while T5-1 will be 250,000 to 500,000, T5-2 will be 100,000 to 250,000, T5-3 is now set at 25,000 to 100,000 and finally, T5-4 will be less than 25,000.

This new standard for low-volume roads would result in a significant saving in the unit cost of road construction and maintenance/km, with the compounded benefits of a much-improved road network that will reduce journey times as well as congestion in urban areas.

However, the Annuity model as it is implemented comes with its own drawbacks. The short period of operation (8 years) has an adverse effect on affordability (i.e. the Annuity amount). First, 8 years coincide more or less with the first periodic maintenance. Meaning that shortly before the end of the contract, Project Companies will have to bear significant costs without having the possibility to amortize them, thus increasing the Annuity payment. Second, a longer operation period goes with a longer period to amortize debt and a variety of financing strategies (e.g. mini-perm with one or two refinancings). The shorter the amortization period, the higher the Annuity.

Typical implementation cases

A correction here may be in order regarding the misreporting of the Nairobi Expressway (27km at a cost of $520 million) as being the first one in East and Central Africa and the second largest toll road in Africa after the Dakar Toll Highway (https://www.the-star.co.ke/news/2021-12-30-2021-the-year-that-saw-nairobi-turn-into-key-infrastructural-site/ ).

Both claims are incorrect. Because if we consider pure chronology, the Addis-Adama Express tollway was commissioned in 2014 and so Ethiopia was the one that broke ranks with its neighbors with the first Expressway and also the first tolled highway in Eastern Africa. In terms of size, Addis-Adama Expressway is the longest and the largest by comparison, with 84.7km of six lanes each way and costing a colossal US $612 million versus the $570.71 million of the Dakar-Diamniado 2X2 tolled highway with a length of 31.6km. What is more, the PPP component of the Dakar Toll road consists of only the 20.4 km Pikine–Diamniadio section, which was concessioned to Société Eiffage de la Nouvelle Autoroute Concédée (SENAC), a Senegalese special purpose company created to implement the project, owned by the Eiffage Group (France).

While Dakar-Diamniado is the first privately-operated toll highway in the WAEMU (West African Economic and Monetary Union) region, it certainly is not bigger than Addis-Adama.

Finally, even assuming all the frameworks are in place, the privatization of transport infrastructure in emerging economies has a long way to go mainly because it requires attracting large institutional investors with infrastructure as an asset class. The second challenge is the lack of top-notch expertise in the procurement and management of PPP-built infrastructure which requires significant investment in capacity building and technology transfer. One last sine qua non that can’t be ignored is strict regulatory compliance with axle-load limitations, which warrants (joint) operation of weighbridge stations to the satisfaction of both the government and the operator.

The policy directions of governments should be geared in such a way as to find the optimal solutions to these institutional, policy, regulatory, financing and capacity bottlenecks.