M7 RIGHTLY BLOCKS K’LA-JINJA WAY PROJECT PROTESTING IFC, FRENCH ECONOMIC SABOTAGE
By Mulengera Reporters
Recently as he prepared to fly out to Tokyo for the Japan-Africa conference, President Museveni held a meeting during which he showed displeasure with the Finance Ministry officials for failing to detect the bad deal IFC (part of the WB) is leading them into ostensibly to serve the commercial interests of the French, Germans and other European powers.
During that meeting, the Finance Ministry tabled a list of loans that required approval at that political level including the $1.1bn required to finance the construction of the Kampala-Jinja Expressway. The 97km road project is lotted into two namely; Kampala Southern bypass (18km) and Kampala-Namagunga-Jinja/Njeru (79km). It’s meant to ease travel for the ostentatious wealthy travelers who can afford paying to circumvent time-wasting jams on the main Jinja road (via Mukono, Lugazi, Mabira etc) the way we know it today.
The road is to be delivered/built under the Public-Private Partnership (PPP) arrangement according to which a cash-constrained government permits the private sector to invest money into its construction and recover their money through collecting toll revenues over an agreed period of time. In this case, 30 years is being looked at as ideal for the private investor to have generated enough traffic onto the new private luxury road and collected cash to recover their money and move on. They basically build, operate, maintain and eventually transfer back to government at the expiry of the agreed period.
The PPP principles require that for such a levy to be permitted on a road (that would ordinarily have been a free service provided by government), there must be another option (in this case for road users) that is free. Such a road is free but travelers aren’t comfortable using it because they require additional convenience as the rest of financially-constrained optionless citizens suffer the inconvenience of using the free option. The inconvenience could be in the form of potholes, traffic jams and having to share with shabby users like boda riders, taxi drivers etc. Some could opt to use the commercial luxurious private road purely for reasons of ostentation and as long as they pay, its business for the government’s PPP partner. For the case of the 97km Kampala-Jinja Expressway, the free road options include Mukono-Kayunga-Njeru; Katosi-Nyenga-Njeru and the Gayaza-Kalagi lane.
The Museveni government rightly believes the Kampala-Jinja Expressway is a worthy effort leading to enhanced business and work efficiency as wealthy busy citizens save on time that would have been lost on travel. The practice is that, to make such PPP projects attractive to the private sector, the government provides a fraction of the funding (technically called Viability Gap Funding). Then the traffic projections viability report will guide the investor in making the decision to plunge the money into the project since it will show the minimum toll revenue that can be collected in the agreed period (30 years in our case). Having projected the possible minimum toll revenue collection in the 30 years to be around $900m, the GoU is providing VGF of $400m, leaving the PPP investor to raise the remaining $700m.
These are highly technical things which is why the Finance Ministry has retained International Finance Corporation (IFC which is part of the WB) to be the transaction advisor as the PPP partner is being sought. The IFC role has included advising on the best source from which the GoU can obtain the required $400m to meet its part of the bargain. They also advise on the best PPP agreement clauses between the GoU and the concessionaire. The thing is since we don’t readily have the money, the Museveni government has had to depend on foreign sources to raise the $400m.
This is the loophole that is being taken advantage of by European powers to get the deal for their respective companies-and its mostly Germany and the French that are increasingly becoming assertive on the deal, something that has made Museveni (lately used to Chinese generosity) anxious. He who contributes most towards enabling the GoU raise the required $400m will naturally have leverage when it comes to determining who eventually gets selected to be the GoU PPP partner on the 97km project. In total 8 entities expressed interest in becoming the GoU PPP partner.
And the shortlisting was done recently with four entities being chosen (as shown in the UNRA screenshot below). Whereas one (CCCC-CFHEC) is from China, the rest are from France (VINCI Highways/KJ Connect), Portugal, Germany (Strabag/Ictas), Austria, Poland, Turkey (Egis Projects SA) and Republic of Korea. Sources close to him say Museveni is concerned the Europeans (especially the French) are being unusually very aggressive about this $1.1bn deal.
And this is how GoU is sourcing the $400m; $200m is a loan from African Development Bank (AfDB), $100m grant from EU and another $100m is a grant from French Development Agency (FDA). The remainder ($700m) is what the PPP partner has to mobilize and bring on board. Whoever gets selected, from the four shortlisted entities, signs up to the contract ideally accepting to take the traffic risk to recoup their money (principal, interest and profit) by way of collecting toll fees on users of the luxury road. Making the private road attractive to motorists would involve innovatively investing in things like real estate and recreation in its neighborhood to boost traffic on it.
MORE M7 CONCERNS
What Museveni has disliked lately is the attempt by the GoU officials to alter the PPP agreement terms to deliberately disfavor the GoU. Whereas the ideal practice is for the concessionaire (PPP partner) to 100% rely on toll revenues to recoup their money within the agreed time, the impugned officials had compromised to require GoU to guarantee the investor that it will either make annuity payments or top up whenever the toll revenue collections follow short of the anticipated projections. Museveni is furious this would only make more costly the already very expensive funding option for the Kampala-Jinja Expressway.
The President is rightly wondering why GoU officials are hostile to using Export Credit Agency (ECA) arrangements to get the required funding as was done by the Kenyan government on the Nairobi-Mombasa Expressway or even GoU for Kampala-Entebbe Expressway which cost mere $476m. He wonders why GoU should be stampeded into indemnifying the concessionaire to such an extent. He prefers that the risk to recover the cash entirely remains on the concessionaire who must engage in innovative approaches to make the new road attractive to motorists, generate adequate traffic and recover the money within the stipulated period of 30 years.
He rejects imposition of annuity fees on the GoU likening it to distorting the ideal way in which PPP arrangements operate. Reliable sources say that in that same meeting, the well briefed man from Rwakitura furiously threw out the concerned GoU officials saying he wouldn’t allow them to mortgage the country just like that. He wondered why GoU should accept such contingent liability, and costly financing options, as if it isn’t aware of cheaper alternatives. He that argued instead of unpatriotically tying up money in such counterproductive projects, GoU officials should be committed to cheaper options so that the resultant savings can be pushed into delivering more road projects and infrastructure.
Museveni is also reportedly prepared to forfeit the $100m grant the French are offering through FDA if that is the price that must be paid for the country to circumvent and escape an obvious “debt trap” against which the IFC transaction advisors are curiously not cautioning the concerned GoU officials about yet they are to earn a cool $10m (1%) off the entire deal as their professional fees.
The big man thinks the contingent liability clauses are being inserted into the PPP agreement because the concerned GoU officials and their IFC allies have already determined to contract a lazy concessionaire that won’t have to work exceptionally hard to attract the necessary traffic so as to realize the projected toll revenues within the 30-year period. Annuity payment by GoU is being rejected as something that will shield the concessionaire against hard work and innovation as he will be assured of being indemnified using the taxpayers money as the Kampala-Jinja Expressway project degenerates into another white elephant to the political detriment of NRM whose opponents will be out saying this is evidence of wastage and poor planning.
“The H.E. is extremely right on this occasion because globally, the PPP principle rotates around the private sector bearing the traffic risk on such road projects as government is never required to shoulder any burden to subsidize those rich citizens that shun free options and prefer making ostentatious trips through those luxurious roads yet those unfortunately are some of the distortions the new annuity payment clauses are leading to,” says one of the deeply knowledgeable assistants closely working with the President when making such big decisions.
Some are advising the H.E. to even call off the Expressway because in the same neighborhood many other alternative road options have just been constructed including Mukono-Kayunga-Njeru. Things must even be more complicated since the big man doesn’t expect much technical guidance or assertiveness from the current UNRA establishment since Nakawa these days suffers from inadequate supply of technical actors that are sufficiently knowledgeable on mega road projects delivered under PPP arrangements.
It’s also understood that the current UNRA leadership (that is still grateful for the noise EU donors made against GoU proposals to disband the entity) wouldn’t be comfortable giving the H.E. any advice that can make especially the French uncomfortable (at a time their VINCI is on the verge of scooping such a mega business deal). Even the few knowledgeable technical people at Nakawa are too frightened to raise a finger saying things that can discomfort the French and the entire EU delegation that was very vehement in opposing proposed scrapping of UNRA.
The President is also curious as to why a transaction advisor like IFC is being paid a whopping $10m as professional fees yet they can’t see and accordingly advise the GoU that this is deal is bad abnitio (as lawyers say). Ironically the practice is for a transaction advisor to be paid whether the deal he advises the employer into is good or bad. This is something Museveni finds equally intriguing when it comes to such financing arrangements. (For comments, call/text us on 0200900416 or email us at email@example.com).