Africa Growing Together Fund provides EUR 31.15 million loan for 84km Kenol-Sagana-Marua Road Project (Linked to Umbrella Project ID#36104)

On May 22, 2014, the African Development Bank (AfDB) and the People's Bank of China (PBOC) signed an agreement for the Africa Growing Together Fund (AGTF) (see Umbrella Project ID#36104). The purpose of this $2 billion loan facility was to finance mega projects in Africa over the following decade (2014-2024). The AGTF is sponsored by the PBOC and the administered by AfDB. Then, on January 9, 2020, AGTF signed an EUR 31.15 million loan agreement (ID#5050200000901) with the Government of Kenya for the 84km Kenol-Sagana-Marua Road Project. At the same time, the AfDB issued an EUR 178.02 million loan (ID#200200004504) for the project. The AGTF loan covered 12% of the project cost. The AfDB loan covered 69% of the project cost. The Government of Kenya agreed to finance the remaining 19% of the project cost (EUR 48.51 million for compensation and resettlement costs). The AGTF loan carries the following borrowing terms: a 24-year maturity (final maturity date: February 15, 2044), a 6.66-year grace period, an interest rate of 6-month EURIBOR plus a 1% margin, a 0.25% commitment fee, and a 0.25% upfront (management) fee. The borrower is responsible for making 34 semi-annual repayments of EUR 916,176 between August 15, 2027 and February 15, 2044. According to the Government of Kenya’s External Public Debt Register, one or more loan disbursements worth EUR 1,824,467 took place in Fiscal Year 2020-2021 and the loan’s amount outstanding was EUR 1,824,467 as of June 30, 2021. The loan proceeds are to be used by the borrower to finance a commercial (EPC) contract with China Wu Yi Co., Ltd., which was awarded (through an international competitive bidding process) on July 19, 2019. The purpose of this project is to upgrade an 84 km, two-way single carriageway from Kenos to Marua (via Sagana). The road starts at Kenol town and traverses through the trading centres of Makutano, Sagana, and Karatina before terminating at Marua. This 84 km road is the Kenyan section of the larger Trans-Africa Highway (TAH4), which runs from Cairo to Capetown via Nairobi and Moyale. The existing 84 km road is a single carriageway of bitumen standard. The civil works include construction of five bridges, drainage structures, two grade separated junctions, foot over bridges, installation of road safety features, environmental and social mitigation measures, and social complementary activities. The project involves the upgrading of a dual carriageway consisting of four lanes (two lanes each of 3.5m width on either side separated by median Island) with 2m shoulder on the outer side and 1m shoulder on the inner side. In addition the works will involve the construction of grade separated junctions (interchanges) at the junction with B24 (Makuatano) and B21 (Marua), construction of new bridges, box culverts, pipe culverts and foot bridges. For local traffic on the major town centers along the project road, the works will incorporate construction of service roads. The new pavement construction shall include: asphalt concrete surfacing (50mm) throughout the main carriageway, with 150mm Dense Bitumen Macadam Base, 150mm cement or lime improved gravel sub-base, and a variable thickness of natural material improved subgrade, Road pavement width 7.0m, with shoulders of 2m wide on the outer and 1m wide on the inner side and Single seal surface treatment to main carriageway.The design of the roadworks is as per the road design manuals considering environmental, social and safety issues. The project has been packaged into two lots: (A) Lot 1: Dualling of Kenol –Sagana Road (A2), which is approximately 47 km ending 2 kms after Sagana Town; and (B) Lot 2: Dualling of Sagana-Marua Road (A2) which is approximately 36km long ending at Marua (Junction with B21). China Wu Yi Co., Ltd. is the general EPC contractor responsible fo implementation. However, Jiangxi Transportation Engineering Group is also involved in implementation. The EPC contract went into effect on August 13, 2020 and it was expected to last 48 months. Site clearing and top soil stripping activities commenced in November 2020. The project’s expected completion date is December 2024. Its expected economic internal rate of return (EIRR) is 29%.

Additional details

1. The all-in interest rate (0.663%) as calculated by adding 1% to the average 6-month EURIBOR rate (-0.337%) in November 2019. 2. The margin of 1% is calculated by adding the Funding Cost Margin (unknown) to the Lending Margin (0.8%) and the Maturity Premium (0.2%). 3. The Kenol –Sagana–Marua Road The project road also links the Capital City Nairobi to some of the major commercially and agriculturally rich Mt Kenya region as well as to Ethiopia through the Moyale border. 4. The AfDB provides the following summary of its EIRR analysis: ‘The economic analysis was carried out using Highway Development and Management model (HDM-4, version 2.1) based on a cost-benefit analysis (CBA) methodology between “with the project” and “without the project” scenarios over a 20-year period. A 12% discount rate and a 20% residual value (assigned to the Project in the final year of analysis) were used. The costs taken into consideration include investment costs net of taxes inclusive of construction and maintenance costs at 2019 prices. For the economic analysis, these financial costs were converted into economic costs by applying a Standard Conversion Factor (SCF) of 0.9. The economic benefits are calculated as the difference between the “with the project” and “without the project” scenarios. The benefits include road user incremental benefits in terms of vehicle operating cost savings, time savings for passengers and cargo, and road maintenance savings from use of the upgraded project road. The current annual average daily traffic (AADT) on the different project road sections range from 6,997 to 11,880 vehicles per day. Traffic forecasting considered three categories of traffic, namely, normal, generated and diverted. For normal traffic based on medium growth rates, the annual growth rates due to increase upgraded road is estimated at 6.9% from 2020-2030, 5.2% from 2031 and 3.9% from 2037 onwards. 3.1.2 The measures of project worth used are the Economic Internal Rate of Return (EIRR) and the Net Present Value (NPV). The economic analysis base results based on medium traffic growth rates indicate that the upgraded project road yield an economic internal rate of return (EIRR) of 29.0% with NPV of USD348.7 million at a 12% discount factor. Sensitivity analysis results of a simultaneous increase in investment costs by 20% and reduction in benefits by 20% (worst case scenario), yield an EIRR of 22.7% and NPV of USD 228.9 million. The EIRR even in the worst case scenario is higher than the cost for capital for Kenya at 12.0%. Hence it can be concluded that the development solution chosen for the project road is economically viable. Switching values also support the conclusion.’ 5. The loan identification number in the Government of Kenya’s external public debt register is 2020012_1 .

Number of official sources

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