State Halts Annuity Road Program Over Inflated Costs

Kenya will adopt the Engineering, Procurement, and Construction (EPC) model for building roads, driven by the cost challenges of the annuity program.

Transport and Infrastructure CS Kipchumba Murkomen says the government has abandoned the annuity programme in favour of the traditional EPC (Engineer/Procure/Construct) model over concerns about inflated costs.

Speaking in Nairobi during the recent unveiling of the Kenya National Highway Authority’s 2023-2027 Strategic Plan, Murkomen pointed out the impracticality of annuity, terming it a costly method for road delivery.

The CS said building a 45km road under annuity will cost Sh15 billion, instead of “under the normal contracting will cost Sh3 billion including maintenance.”

“[This is] nothing short of a rip-off,” he said, emphasizing the need to shift back to the traditional EPC model from the annuity approach introduced by retired President Uhuru Kenyatta’s government in 2014.

Indeed, the CS said that the Ilasit-Njukini road, connecting Kajiado and Taita Taveta counties, originally planned under the annuity program, will now be executed through the EPC contracting.

Construction is set to commence next month.

EPC is a contracting agreement where contractors handle detailed design, procure materials, and construct a complete facility for clients.

This is different from the 10,000km annuity financing program, where the government was to negotiate uniform loans from banks while the contractors would design, build and maintain the roads for a maximum of eight years.

READ: Doubts Cast on 10,000km Roads Project

The Treasury, which would have provided 30% of the funds, would then repay the loans in equal instalments (annuity) over eight years from the time a given road is completed.

The government had proposed a uniform interest rate of 12-13% to be levied on loans to short-listed contractors, but the proposal was rejected by commercial banks, which said the rate would be based on the prevailing market conditions.

The annuity programme later proved very slow because it involved many parties — financiers, legal teams and contractors — who had to agree on every aspect.

Besides, several local contractors were struggling to get funding because banks did not find their balance sheets and creditworthiness quite appealing.

As a result of these difficulties, only the Ngong-Kiserian-Isinya and Kajiado-Imaroro roads were constructed using the annuity fund.

The final cost of the roads amounted to Sh28 billion, a substantial increase from the initial estimate of Sh10 billion, as reported by CS Murkomen.

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