Why banks are not keen on funding 10,000km roads project

Construction workers build a road in Kisumu.
Construction workers build a road in Kisumu. PHOTO/FILE
Local banks are taking a cautious approach towards financing the proposed 10,000km roads project, a move that threatens to stall Kenya’s most ambitious infrastructure plan since independence.

According to industry sources, banks are shying away from bankrolling the project due to the ambiguity of the financing model and repayment terms, which could expose them high levels of non-performing loans.

The annuity concessions financing model, which is largely borrowed from India, will see contractors sourcing for loans guaranteed by the Treasury to design, build and maintain roads for up to eight years.

The Treasury, which will provide 30 per cent of the funds, will then repay the loans in equal instalments (annuity) over eight years from the time a given road is completed.

The cost of the project will be pre-determined and the government will negotiate low interest rates for contractors who will be awarded contracts after demonstrating their ability to raise 70 per cent of the costs.

READ: Kenya sets tough rules for 10,000km roads tender

Sourcing of funds will be an uphill task for contractors owing to the fact that most banks have recently reported a surge in non-performing loans that have been linked to customers operating in the road construction sector.

Public Private Partnership Unit director Stanley Kamau has indeed admitted that the participation of the local financial sector has not been promising.

Mr Kamau was Tuesday quoted by the Daily Nation as saying: “We are trying to see how we can bring them on board so that we can discuss what the challenges are…We are not going back on these 10,000km and must complete them.”

Meanwhile, the Kenya Commercial Bank (KCB) and the Co-operative Bank of Kenya have committed Sh48 billion to finance the Sh300 billion project.

On Friday, during a meeting held in Nairobi and chaired by Deputy President William Ruto, KCB chief executive Joshua Oigara said his bank would commit Sh40 billion – which together with the Co-op Bank’s allocation of Sh8 billion leaves a funding gap of Sh130 billion.

READ: KCB commits Sh40bn to road projects

Local banks are expected to issue up to Sh178 billion in loans to finance the 10,000km road network that is due for completion in five years. The lenders are expected to earn Sh9.1 billion annually as interest on the loans.

Tenders for the first 650km were received in December last year and nine bids opened in January but the contracts are yet to be awarded despite a string of promises.

The government on Friday promised to award the tenders on March 20.

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