The government was forced to pull a Sh38.85 billion ($300 million) dam project from the Public-Private Partnership (PPP) programme after it emerged that the water tariffs required by the contractor to recoup its investment would be too high.

The National Irrigation Authority (NIA) said it had been directed to restructure the Galana Dam project from a PPP model into a deferred-payment arrangement that will see the State corporation sell water and repay the contractor from the proceeds.

The proposed Galana Dam was conceived as a critical piece of infrastructure to unlock large-scale irrigation in the Galana River basin and support Kenya’s long-standing ambition of achieving food security.

Consequently, the government launched the Galana-Kulalu (Nafaka) Food Security Project, a PPP venture located on the border of Kilifi and Tana River counties, with the aim of reducing dependence on rain-fed agriculture and enhancing food security.

“The second attempt was to do the Galana dam. But when the proponents submitted, we found a financing gap,” Charles Muasya, chief executive officer of NIA, said.

“Financing gap means the revenue streams from selling the water were not enough to finance the whole project,” he added, noting that the revenue streams could only support about Sh23.3 billion, leaving a financing gap of about Sh15.5 billion.

Tariff trouble

Mr Muasya described the model that emerged from the restructuring as a form of engineering, procurement, construction and financing (EPCF), or a hybrid PPP. EPCF is an integrated project delivery model in which a single contractor assumes responsibility for designing, building and securing financing for implementation.

“The government guarantees the loan, but we, as NIA, sell the water and pay the contractor,” the official said.

Unlike in a conventional PPP arrangement, where the private investor provides services directly to users for a fee, the government will sell the water to investors engaged in production and use the proceeds to repay the contractor.

A World Bank report shows that irrigated land as a share of Kenya’s cropland stagnated at about 1.6 percent for many years, largely due to the substantial capital investment required to develop irrigation infrastructure.

The country’s limited fiscal space has compounded the challenge, leaving Kenya unable to take on additional debt to bridge its infrastructure deficit, which Treasury Cabinet Secretary John Mbadi estimates at about Sh647 billion ($5 billion) annually.

To navigate these fiscal constraints, President William Ruto’s administration has increasingly turned to PPPs, under which investors finance, design, build and operate projects for a specified period, typically 30 years, while charging user fees. Ownership reverts to the government at the end of the concession period.

However, in some instances, the user charges proposed by contractors have exceeded market rates, forcing the government to abandon planned PPP projects.

Recently, the government terminated plans to construct the Nairobi-Mombasa Expressway under a PPP arrangement, citing, among other concerns, high construction costs that would have translated into expensive toll charges for motorists.

Galana-Kulalu, one of the largest irrigation projects being implemented through a PPP framework, has since reached financial close, with investor Selu Limited already growing maize on 10,000 acres.

The project aims to enhance food security by bringing 20,000 acres under production and generating an estimated 720,000 bags of maize and 160,000 bags of soybeans annually over a 30-year concession period.

→ dakure@ke.nationmedia.com

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