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Why you will have to pay to use some Ugandan roads
The Kampala - Entebbe Expressway nearing completion. Although the flagship project under the toll system will be the Kampala-Jinja Expressway because of its size and structure of the toll, five projects, excluding the Kampala - Entebbe Expressway, will be tolled. PHOTO BY RACHEL MABALA
What you need to know:
- UNRA insists the project is viable because of the studies they have made. It is important to note that for the investor to recover the costs of the project and also generate a return, they will be charging a fee for the road usage.
- At year end, the annual traffic recorded on the expressway is compared against the maximum expected traffic agreed at contract signing and in the event, the actual traffic count has exceeded the forecasted amount an excess revenue share (to be agreed during dialogue) with the SPV is paid.
Kampala – In the 1990’s, there used to be a road toll in Lukaya, Masaka District, along the Kampala – Masaka Highway. Motorists would stop and pay money to the toll managers before they could be allowed to proceed.
However, this was scrapped and since then, all Ugandan roads have been free of road tolls. In other words, for anyone to use roads, it is more like a free service, a public good. This is about to change once at least five expressways are worked on by the government through a public-private partnership arrangement with the private sector.
The first toll will be on the Kampala-Entebbe Expressway, a road expected to be completed in 2018. Work on the Kampala-Busega-Mpigi expressway is expected to commence this year. This will also be a tolled road. However, the flagship project under the toll system will be the Kampala-Jinja Expressway because of its size and structure of the toll. Government is taking a gamble on this as it finds a solution to do construction without dipping its hand into the Consolidated Fund.
Why the tolls?
Road projects in the past have been a task for the government to raise the money from the Consolidated Fund and use it to pay for any new road project. The tolled model is now, however, being explored to create a more sustainable model, especially with regard to meeting debt obligations.
“The intention is to tap on the efficiencies of the private sector and their experience on service provision. The private sector is also often good at controlling the costs of production. Also, they might have good innovative ways of managing the project. Also because money will be paid to include maintenance costs, the public should expect a road that is well maintained,” Mr Patrick Muleme, the head of design at Uganda National Roads Authority (UNRA), explains.
Often, for road repairs to take place, there has to be a release of cash from the government, which can even take six months. That means the road deteriorates because there is no access to funds to carry out the repairs. Working with the International Finance Corporation (IFC), the studies that the Uganda National Roads Authority undertook indicate that tolled roads are a sustainable approach if a country is to attract financing from agencies and even private sector companies. In 2016, UNRA launched five projects that will be funded through a Public-Private Partnership arrangement and all will be tolled. That includes the Kampala-Jinja Expressway (KJE), Kampala-Busunju Expressway, Kampala-Busega-Mpigi Expressway, Kampala Outerbelt and Kampala-Bombo Expressway.
A narrow and potholed road in Katwe, a Kampala suburb. The ambitious road projects in the country aim at improving the transport situation through decongesting the available roads through construction of new ones and renovating the diapidated ones. FILE PHOTO
“It will be a group of expressways linked together. There will be the overall efficiency of road networks and deals away with the economic loss that comes with road delays. The operator will be available for the duration of the road being managed and operated by them. They will be there to deal with issues such as accidents by deploying ambulances, among others. Operation and maintenance will be better for the duration of the project,” Mr Muleme says.
The unique Kampala-Jinja expressway
The first test for the government will be the Kampala-Jinja expressway whose estimated cost is going to be $1b (Shs3,578.7 trillion) for the 77-kilometre stretch. According to Mr Muleme, once a call for expression of interest is put out, they will be looking out for a consortium that will finance, build, operate and about 30 years later, transfer the road to government.
“We are not going to be looking out for a contractor for just engineering works. We are going to look out for one who can design, build, operate and maintain, collect tolls and finance. It is a whole collection of expertise. We assess all the above requirements before we award the contract,” he points out.
The models for the other tolled roads such as the Kampala – Entebbe Expressway and Kampala-Busega-Mpigi Expressway are different because in this case, the money was already available.
That means the government will now need a contractor to build and operate in order to generate money to finance the loans from China and African Development Bank for the two roads respectively.
A year ago, UNRA hosted an investor conference where it invited financiers and investors from all over the world to take a look at the concept of the project. Already there is confidence built around the project with the European Union and French Development Agency committing $400m (Shs1.4 trillion) to the first phase of the project and $100m (Shs357.9b) to the second. This, in part, builds confidence for any consortia that is willing to finance the project. The IFC is playing more of leading role on the project in terms of technical assistance with several consultants from Italy, UK, and France. The first phase of the project will be the Southern Bypass and the stretch between Kampala and Entebbe because it is a high traffic area.
However, for some, the private sector funding a project like a road may escalate costs because the money they have is borrowed at commercial terms. This has been the case with the Bujagali Hydro Power project where the cost of the dam construction appears to have led to a tariff that is four times the target price of the government. For a road, high costs may turn the project into a white elephant.
White elephant?
UNRA insists the project is viable because of the studies they have made. It is important to note that for the investor to recover the costs of the project and also generate a return, they will be charging a fee for the road usage. If there is no traffic on the road as estimated, the investor has to be compensated by the government. That means tapping into the Consolidated Fund that the government had been avoiding in the first place.
This is where the negotiations with the PPP committee are at the moment. The PPP committee in the ministry of Finance has to come up with methods of the compensation for the investor just in case the traffic flow is lower than estimated.
“We are working with the PPP committee to find a mechanism for compensating the private sector if the traffic is not realised. The government must come in to compensate the private sector to ensure that returns are generated for the private sector. But based on the traffic projections, we are confident that the numbers will be reached. Even with our realistic estimate, we established that by the 10th year, the government will be generating a return because the private sector will be collecting more than what it is expected. In the overall lifecycle of the project, the government will get positive returns on the project plus taxes collected from the private sector company,” Mr Muleme explains.
For the Kampala-Entebbe expressway, the rate will be set by the government dependent on the interest payments and maintenance costs for the road project.
How much will users be paying?
At the moment, the government is yet to determine the amount to be charged on the tolls. First, the legal regime has to be in place to legalise the process. The ministry of Works has drafted a Toll Policy. This is currently before Cabinet. Additionally, amendments are being made to the Road Act in order to include clauses on tolling. The factor in determining the toll rates will, in part, be dependent on market factors such as inflation.
The minister setting the toll rate is more like what the Electricity Regulatory Authority does when setting the price of electricity on a quarterly basis. This is meant to, in part, protect the consumers from higher prices.
“The project is viable because we have carried out studies to determine that it is. One is to ensure that the proposed toll fees are affordable to the public. The private sector will be given clear operational guidelines for it to generate a clear return on investment because they will be incentivized to provide a world class viability. There are already safeguards in the project that will prevent the public from being overcharged,” Mr Muleme explains.
One of the mechanisms in place is UNRA to monitor the daily traffic and make estimates on what the investors will be collecting to avoid understating of figures.
As part of the project structuring, UNRA is compelling the private sector to have a range of payment options ranging from cash, mobile money and cards usage, among others. The estimation is that there will 65 tolling booths along the KJE.
Once the approval is made by the PPP committee, the tendering process will begin around April 2017.
Why Kampala -Jinja Expressway?
The road is meant to facilitate movement between Kampala and Jinja. This would boost trade around the Northern Corridor region and facilitate trade. The project is expected to generate up to 1,500 jobs during construction and 250 jobs during operations, a majority of which will be taken up by Ugandans. During operations, a journey time saving of up to 70 minutes is expected between Kampala and Jinja.
“In developing this project, UNRA has been very keen to take into account views of investors, contractors, and operators in developing the structure, which is explained in this Preliminary Information Memorandum (PIM). In order to ensure value is preserved and affordability maintained, our proposal is to tender this project as a design, build, finance, operate and maintain, a contract where toll revenue risk will be taken by UNRA, supported by the ministry of Finance,” Ms Allen Kagina, the UNRA executive director is quoted in the PIM for the project.
We recognise that a contract, where payments are linked to the availability of the expressway, presents the best option for a robust competition and attaining value for money. We want to see an expressway which is responsive to the needs of the travelling public across the region and for this to happen, we need a partner with vision, a long-term plan, and the best team to deliver it.”
How tolling will work
At contract signing, UNRA and the Special Purpose Vehicle (SPV) created by the successful bidder for purposes of carrying out the project will agree on a maximum number of vehicles per class expected on the expressway annually (total number of vehicles expected in the last year of the concession).
Prior to the commercial operations start date, UNRA and the SPV will set up a payments account which will be prefunded by an amount agreed to by the government of Uganda (GoU). Collected toll revenues are banked onto this payments account.
At year start, annual toll rates as stipulated by GoU will be communicated to the SPV. During the year, the SPV maintains the expressway, collects toll revenue and banks it directly to the payments account.
During any calendar month, the SPV can withdraw from the payments account an amount not exceeding the agreed monthly Uganda Shilling component of the availability payment.
At the end of each quarter, the SPV, the independent engineer, and UNRA reconcile the quarterly collected toll revenues against actual traffic usage. The SPV will compensate for any discrepancy and is also penalized for poor performance in accordance with a key performance indicator regime. Following any deductions and subject to any withdrawals made under paragraph 4 above, the quarterly US dollar component of the availability payment is made to the SPV.
At year end, the annual traffic recorded on the expressway is compared against the maximum expected traffic agreed at contract signing and in the event, the actual traffic count has exceeded the forecasted amount an excess revenue share (to be agreed during dialogue) with the SPV is paid.
