Is Nairobi Expressway a gold mine for the developers?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

10 November 2019

From the outset, let me be crystal clear that this is not a discussion of the merits and demerits of the upcoming Nairobi Elevated Expressway. Such a conversation is beyond the scope of this column. I will only consider the numbers that have been reported the media about this project and try to make sense out of them.

One newspaper reported that the developer will spend Sh60 billion (US$599 million) in constructing of the 27-km expressway. Some commentators quickly to divide these two numbers in a bid to find out if Sh2.2 billion per kilometer is a fair price.

The result of this division was then compared to the corresponding amount for the much larger 50km Thika Superhighway which cost Sh30 billion. The latter works out to Sh600 million per kilometer.

Unfortunately, such an analysis is a waste of time for two reasons: first, we haven’t seen the engineering drawings to understand the scope of work and, second, it is not our money being spent – it is the developer’s cash.

As a public-private partnership project, the developer will construct the Expressway on public land with their own money and then charge users a toll fee depending on the distance travelled.

This pay-for-use arrangement will continue for about 30 years, after which the Expressway will be handed over to the government. From that point, it will be free just like any other public road.

Media reports indicate that the developer will collect about Sh180 billion over that duration. Commentators have claimed that, at three times the initial investment, this return is too high. The question is: are they right?

During the same week that this project was unveiled, the government issued a Sh60-billion, 16-year infrastructure bond through the Central Bank of Kenya. The average interest after the competitive bidding came to about 12.5 per cent.

In other words, for the next 16 years, the government will be paying an interest of Sh7.5 billion to the bond holders annually. Cumulatively, this comes to Sh120 billion.

When we add the principal (which will have to be refunded), it turns out that the bond investors will get back a total of Sh180 billion in 16 years. Interestingly, this is the same amount that the Expressway developer is reported to earn in from their Sh60 billion, but, in 30 years.

Suddenly, the returns from this project do not appear to be very good. On simple interest basis, it works out to just 6.7 per cent per year. But when this is compounded, it works down to just 3.7 per cent per annum.

When I shared these numbers with a friend, he quipped: “it seems like we have really cheated that developer! They should have just invested their money in the bond instead of building the Expressway”.

For the avoidance of doubt: even though the Sh60 billion raised through infrastructure bond is the same figure as the reported cost of the Expressway, the bond money was not for that road. It is for other projects around the country.