In 2019, Kenya entered into a Public Private Partnership (PPP) under the BOT (Build-Operate-Transfer) model with China Road & Bridge Corporation (CRBC) to finance and construct a 26.7-kilometer Class A dual-carriageway road, dubbed the ‘Nairobi Expressway’. According to CRBC’s 2021 Annual Report, the estimated total investment budget for the project was RMB 4.7 bn (USD 696.5 mn). The expressway, which runs from Mlolongo to the James Gichuru Road / Waiyaki Way intersection, is expected to ease traffic flow on Mombasa Road, Uhuru Highway and Waiyaki Way.

The Moja Expressway Company, a subsidiary of CRBC, will operate the project for 27 years and thereafter hand it over to the Kenya National Highway Authority (KeNHA). To recoup its investments, CRBC will collect toll fees from road users. On 31^st December 2020, the Ministry of Transport gazetted the base toll rates for the expressway, with motorists expected to be charged between Kshs 100 – Kshs 1,550 ( USD 0.90 – USD 13.3). However, in April 2022, following the continued depreciation of the Kenya shilling, the base rates were adjusted upwards to range between Kshs 120 – 1,800 (USD 1.0 – USD 15.4). Key to note is that the rates depend on the type of vehicle and the entry and exit points and may be adjusted as per the Consumer Price Index and Exchange Rate on and after the commercial operation date.

The expressway was officially opened for the public for  trial in May 2022, a year earlier than the expected launch date, with Moja Expressway indicating that motorists using the expressway can pay either through; Cash, Toll card or an Electronic Toll Collection (ETC) service. As at May 2022, the Cabinet Secretary for the Ministry of Transport, Infrastructure, Housing and Urban Development indicated that over 11,000 people had registered to use the expressway.

Comparable Project

Senegal’s Dakar-Diamniadio toll road, which opened to the public in 2013 was the first greenfield PPP road in Sub-Saharan Africa. The 25-kilometer toll road was constructed under a PPP between the Eiffage Group, a leading construction group based in Europe, and the Government of Senegal. Eiffage constructed the project under the Build, Finance, Operate and Maintain (BFOM) model, with the estimated cost of the project being USD 462 mn. Since its launch, the toll road has been very successful.  The World Bank attributes the success to the relatively low fees charged by the operator (the base rate ranges from USD 0.32 – USD 1.29), the involvement and commitment of the Senegalese government as well as the participation of development institutions in both the public and private financing of the project.

Nairobi Expressway – The Numbers

We sought to find out the viability of the project. We looked at how much CRBC has invested how much they stand to gain during the project’s life. We also determined whether CRBC can exit the project early after breaking even. We conducted a sensitivity analysis and adjusted our assumptions based on the volume of cars using the expressway.

The table below highlights the assumptions made;

Source; Kenya Gazette, Moja Expressway

To determine the payback period for the project, we assumed that 80% of the revenues generated would be the After Tax Cashflows. According to MFG Asset Management, toll roads operate at very high EBITDA margins, with typical urban toll roads using 10-20% of their revenues to operate and maintain the road.

Key take outs from the table above;

1. On a base case scenario, assuming 30,000 cars use the Expressway daily, CRBC will generate USD 32.5 mn in revenues per year and USD 878.1 mn as profits over 27 years. On this basis, assuming only 20% of the revenue generated is used as Operating Expenses, the payback period for the project will be 27 years, and,
2. In the conservative case, assuming only 22,000 cars use the Expressway daily, CRBC generates revenues worth USD 28.1 mn annually and USD 758.8 mn over the project life and breaks even after 31 years.

The table below highlights the number of years it would take CRBC to break even based on various scenarios;

Conclusion

It is evident that for the Nairobi Expressway to be viable and for CRBC to exit the project within 27 years, approximately 30,000-32,000 cars must use the expressway daily. Given that in May 2022, approximately 31,000 cars had used the expressway daily, this range is feasible. Additionally, according to a publication by the Inter-America Development Bank dubbed ‘Mechanisms for Financing Roads: A Review of International Practice’, for a toll road to be financially viable, an average of 5,000 cars need to pass through it daily. However, should the volume of vehicles using the expressway daily fall below 30,000, we foresee a scenario whereby CRBC will need to review the tenor of the operating period upwards.

Increased traffic congestion along Mombasa Road will continue to be the main driver in increasing the traffic volume on the expressway. The Asian Development Bank indicates that traffic on toll roads can increase 2x- 3x in 5 years as activity along the toll road increases, however, any increase in the toll rates constrains this growth, as these increases are often larger than originally planned. As indicated at the beginning of this blog, the Ministry of transport recently adjusted the base rates upwards following the depreciation of the Kenya shilling. With the shilling continuing to weaken against the dollar, the Ministry of transport may be forced to relook the base toll rates as they try to cushion CRBC against exchange rate losses.

By Ann Wacera, Senior Analyst InVhestia Africa Limited