The Rise in Nairobi Expressway Toll Fees: The Fast Lane Costs More than Projected.
Category: Economic Development
By: Fiona Okadia,
In a Public-public-private partnership, the private partner typically assumes many responsibilities throughout the project life cycle. In a Build-Operate-Transfer (BOT) model, the private entity is responsible for an infrastructure project’s design, construction, financing, and operation for a specific period. The private entity, called the concessionaire, operates the project and recovers construction costs through user fees, such as tolls. In 2019, the Government of Kenya entered a similar arrangement with China Road and Bridge Corporation (CRBC) to finance and construct a 27.1-kilometre Class A dual-carriageway road in Nairobi. The road starts from Mlolongo to the Waiyaki Way intersection in Nairobi, where it ends but a possibility also exists to extend it to other destinations.
After a predefined period, ownership and operational responsibilities of the project are transferred back to the public sector. BOT projects, widely employed for large, extensive infrastructure initiatives, such as highways, bridges, and power plants, embody this transfer feature. In the case of the Moja Expressway, a subsidiary under CRBC, the operational tenure is designed to span 27 years before its control by the subsidiary is transferred to the Kenya National Highway Authority (KeNHA). During this period, CRBC will implement toll fees for road users as part of recouping its investments. This financing model underscores the collaboration between the private and public sectors, allowing the private entity to recover costs and facilitate the eventual handover of the infrastructure to public stewardship.
Base Tolls Fees
Section 4B (3) of the Public Roads Toll Act stipulates that the Minister or the Cabinet Secretary for Roads and Transport will notify the public of the approved tolls under Section 4B (2). The toll fees, to be collected by Moja Expressway Company based on the agreement with the Roads Agency, are subject to approval by the Minister. The initial toll rates for the expressway were officially disclosed on December 31, 2020, through the Kenya Gazette. These rates vary according to vehicle type, entry and exit points, and may be adjusted based on how they affect the cost of living based on the price information portrayed by the Consumer Price Index and Foreign?? Exchange Rates. The most recent adjustments to these toll fees were made on December 19, 2023, as communicated through the Ministry of Roads Communication Desk following the depreciation of the shilling and increased inflation.
Adjusting toll fees in line with the prevailing exchange rate and the consumer price index maintains the real value of revenue generated from tolls over time. The integration of both CPI and exchange rate considerations in the pricing formula presents a more comprehensive approach to preserving revenue value because CPI influences the prices paid, impacting the maintenance of the project and the investor’s profitability, particularly in the context of a project denominated in foreign currency. By incorporating both the domestic and foreign elements of the cost of living, the value-preserving strategy becomes more balanced and reduces the risk of overlooking critical market factors like those driving the depreciation of the revenue collected.
When Nairobi Expressway was inaugurated in May 2022, the USD-Ksh exchange rate was 116.28, according to CBK. However, by December 2023, the exchange rate had risen to 156.46, signaling a 34% depreciation of the Kenyan Shilling against the USD. This depreciation implies that more units of Ksh are required to equal one USD. This means that the investor will experience increased costs for the payments that are denominated in USD. Given that toll fees are typically denominated in Ksh, this currency devaluation poses a risk, potentially diminishing the actual value of toll revenue, particularly because the project costs were denominated in foreign currency. This is what the adjustment of toll fees and related prices based on the consumer price index and the foreign exchange rates is trying to address.
Reviewing CPI data reveals that in May 2022 it stood at 123.12 and in December 2023 it was at 137.55. Without toll fee adjustments, the value of Ksh 310 that would cost a motorist from Mlolongo to Westlands would have diminished to approximately Ksh 277.47, reflecting a 10.5% decrease when subjected to a simple inflation adjustment formula.
Look at it this way, imagine you’re comparing values over time. Let’s say, for instance, you’re looking at how the value of something changes from May 2022 to December 2023. Assume the original value was designated as 1.00 as of December 2023. This change, often measured by economists, can be expressed through the Depreciation Factor. If the value (price) of the same thing now is 1.12, it is like looking at how much the value of a local currency has shifted over that period. In this case, the local currency has lost value because more units of it are used to buy the same good or service (1.00 unit versus 1.12). The local currency has depreciated by 12%, which is the depreciation factor.
Then, let’s say you have a toll fee that needs adjusting according to this Depreciation Factor. Think of it like this: if you paid a certain amount for toll fees in May 2022, now due to inflation and changing economic conditions, that same amount won’t have the same purchasing power in December 2023. So, you’d adjust it using the Depreciation Factor to get a more accurate value of what that toll fee would be worth in December 2023. This adjusted toll fee helps ensure fairness and accuracy in pricing, reflecting the changes in the economy over time. So, rather than just looking at numbers and calculations, it’s a way to understand how prices change in real terms, making sure everyone pays or receives a fair value.
- Depreciation Factor = CPI in December 2023/CPI in May 2022
(137.55/123.12) = 1.117
- Adjusted Toll Fee = Original Toll Fee/Depreciation Factor
(310/1.117) = Ksh 277.4
This adjustment, is positive, as inflationary pressures typically erode the purchasing power of money. The adjustment of toll fees based on the CPI proves essential in accounting for the overall increase in prices within the economy. This strategic adjustment ensures that toll fees remain aligned with the escalating cost of living and the heightened expenses associated with the maintenance and operation of the infrastructure.
Sensitivity of Demand to Price
The toll fees have recently increased, sparking public discussions. The principle of sensitivity of demand, which economists call “price elasticity of demand” or the sensitivity of the amount of a good bought to the change in its prices reflects the basic idea that in situations where resources are not enough relative to the needs they are employed to satisfy, price changes can drastically influence the amount of the good consumed. In this particular case, increases in toll rates) can substantially reduce the amount of traffic on toll roads, thus decreasing revenue collection. When toll fees increase and subsequently lead to a decrease in the usage of the toll road beyond what was initially projected, the revenues that were projected to be collected decline accordingly. The decline is greater, the more sensitive the road traffic is to toll charges; thus, price elasticity is very important, both in determining the toll rates, and in the long-term projections of revenues from tolls.
In economic terms, where the percentage change in quantity demanded is proportionally larger than the percentage change in price, it signifies an elastic demand. Elastic demand implies that consumers are highly sensitive to changes in price, and thus a small price increase can lead to a large reduction in the quantity of a good demanded. It is very important as it helps policymakers to evaluate the impacts of price changes on demand for public utilities and on revenues that can be collected relative to social costs involved in providing them. Moreover, information on the price elasticity of demand is crucial in planning infrastructure and in the pricing of its services, e.g., volume of traffic on roads, air, lake, or sea.
In the context of the expressway, the toll rate adjustments for the Nairobi Expressway may affect the demand for using the toll road, according to the elasticity of traffic volume concerning toll fees. Consequently, if the quantity demanded declines, it could prompt a reconsideration of the operating period, potentially extending it beyond the initially set 27 years. This is because for the investor, a decline in demand, reduces their return on investment and therefore they will need to extend the period to maintain this element. Information on the price elasticity of demand for services of the Expressway can help avoid unnecessary extension.
This conclusion aligns with a study by the Asian Development Bank, which suggests that toll road traffic can double or triple within five years as activity along the toll road intensifies. However, any rise in toll rates beyond some threshold point, impedes this growth, prompting extension of the transfer period beyond the initially projected horizon.
Conclusion
Roads cannot be strictly categorized as public goods. Toll roads exemplify the feasibility of exclusion, limiting access to only those who pay. Additionally, the consumption of road space is not entirely non-rivalrous, particularly during congested periods when there is competition for space. Consequently, the impact is felt predominantly by those who use the road, and this comes as the inherent cost of usage and there are alternative routes that are not tolled. Tolls can also be used to reduce congestion which is a negative externality in addition to their revenue-earning role. Also, while the exchange rate adjustments address the impact of currency depreciation on project costs and revenues, the CPI adjustment addresses the broader inflationary pressures affecting the economy.
Distinctly, the Kenyan government seized this opportunity to accrue additional rents. This assertion is based on the substantial adjustment made from Ksh 310 to Ksh 500 for the maximum price, representing a notable 61.2% difference. Despite accounting for inflation and exchange rate differences at 10.5% and 34%, respectively, the government imposed a fee increase exceeding these factors by approximately 16%. This discrepancy suggests that the adjusted toll fees could have been reduced by at least Ksh 50, emphasizing a missed opportunity for a more moderate adjustment that aligns closely with economic indicators.
Finally, there is a need for the government to enhance transparency regarding this PPP agreement. Transparency is particularly crucial in understanding the correct elasticity of demand, a factor that could be illuminated by publishing comprehensive data, such as the total number of road users every month. This additional transparency becomes imperative, especially in light of the recent adjustments made to sustain the financial viability of the project. By disclosing such information, the government not only fosters accountability but also enables citizens to make more informed assessments of the economic implications and fairness of the toll fee adjustments within the framework of the PPP agreement.
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The Rise in Nairobi Expressway Toll Fees: The Fast Lane Costs More than Projected.
| Post date: Mon, May 13, 2024 |
| Category: Economic Development |
| By: Fiona Okadia, |
In a Public-public-private partnership, the private partner typically assumes many responsibilities throughout the project life cycle. In a Build-Operate-Transfer (BOT) model, the private entity is responsible for an infrastructure project’s design, construction, financing, and operation for a specific period. The private entity, called the concessionaire, operates the project and recovers construction costs through user fees, such as tolls. In 2019, the Government of Kenya entered a similar arrangement with China Road and Bridge Corporation (CRBC) to finance and construct a 27.1-kilometre Class A dual-carriageway road in Nairobi. The road starts from Mlolongo to the Waiyaki Way intersection in Nairobi, where it ends but a possibility also exists to extend it to other destinations.
After a predefined period, ownership and operational responsibilities of the project are transferred back to the public sector. BOT projects, widely employed for large, extensive infrastructure initiatives, such as highways, bridges, and power plants, embody this transfer feature. In the case of the Moja Expressway, a subsidiary under CRBC, the operational tenure is designed to span 27 years before its control by the subsidiary is transferred to the Kenya National Highway Authority (KeNHA). During this period, CRBC will implement toll fees for road users as part of recouping its investments. This financing model underscores the collaboration between the private and public sectors, allowing the private entity to recover costs and facilitate the eventual handover of the infrastructure to public stewardship.
Base Tolls Fees
Section 4B (3) of the Public Roads Toll Act stipulates that the Minister or the Cabinet Secretary for Roads and Transport will notify the public of the approved tolls under Section 4B (2). The toll fees, to be collected by Moja Expressway Company based on the agreement with the Roads Agency, are subject to approval by the Minister. The initial toll rates for the expressway were officially disclosed on December 31, 2020, through the Kenya Gazette. These rates vary according to vehicle type, entry and exit points, and may be adjusted based on how they affect the cost of living based on the price information portrayed by the Consumer Price Index and Foreign?? Exchange Rates. The most recent adjustments to these toll fees were made on December 19, 2023, as communicated through the Ministry of Roads Communication Desk following the depreciation of the shilling and increased inflation.
Adjusting toll fees in line with the prevailing exchange rate and the consumer price index maintains the real value of revenue generated from tolls over time. The integration of both CPI and exchange rate considerations in the pricing formula presents a more comprehensive approach to preserving revenue value because CPI influences the prices paid, impacting the maintenance of the project and the investor’s profitability, particularly in the context of a project denominated in foreign currency. By incorporating both the domestic and foreign elements of the cost of living, the value-preserving strategy becomes more balanced and reduces the risk of overlooking critical market factors like those driving the depreciation of the revenue collected.
When Nairobi Expressway was inaugurated in May 2022, the USD-Ksh exchange rate was 116.28, according to CBK. However, by December 2023, the exchange rate had risen to 156.46, signaling a 34% depreciation of the Kenyan Shilling against the USD. This depreciation implies that more units of Ksh are required to equal one USD. This means that the investor will experience increased costs for the payments that are denominated in USD. Given that toll fees are typically denominated in Ksh, this currency devaluation poses a risk, potentially diminishing the actual value of toll revenue, particularly because the project costs were denominated in foreign currency. This is what the adjustment of toll fees and related prices based on the consumer price index and the foreign exchange rates is trying to address.
Reviewing CPI data reveals that in May 2022 it stood at 123.12 and in December 2023 it was at 137.55. Without toll fee adjustments, the value of Ksh 310 that would cost a motorist from Mlolongo to Westlands would have diminished to approximately Ksh 277.47, reflecting a 10.5% decrease when subjected to a simple inflation adjustment formula.
Look at it this way, imagine you’re comparing values over time. Let’s say, for instance, you’re looking at how the value of something changes from May 2022 to December 2023. Assume the original value was designated as 1.00 as of December 2023. This change, often measured by economists, can be expressed through the Depreciation Factor. If the value (price) of the same thing now is 1.12, it is like looking at how much the value of a local currency has shifted over that period. In this case, the local currency has lost value because more units of it are used to buy the same good or service (1.00 unit versus 1.12). The local currency has depreciated by 12%, which is the depreciation factor.
Then, let’s say you have a toll fee that needs adjusting according to this Depreciation Factor. Think of it like this: if you paid a certain amount for toll fees in May 2022, now due to inflation and changing economic conditions, that same amount won’t have the same purchasing power in December 2023. So, you’d adjust it using the Depreciation Factor to get a more accurate value of what that toll fee would be worth in December 2023. This adjusted toll fee helps ensure fairness and accuracy in pricing, reflecting the changes in the economy over time. So, rather than just looking at numbers and calculations, it’s a way to understand how prices change in real terms, making sure everyone pays or receives a fair value.
- Depreciation Factor = CPI in December 2023/CPI in May 2022
(137.55/123.12) = 1.117
- Adjusted Toll Fee = Original Toll Fee/Depreciation Factor
(310/1.117) = Ksh 277.4
This adjustment, is positive, as inflationary pressures typically erode the purchasing power of money. The adjustment of toll fees based on the CPI proves essential in accounting for the overall increase in prices within the economy. This strategic adjustment ensures that toll fees remain aligned with the escalating cost of living and the heightened expenses associated with the maintenance and operation of the infrastructure.
Sensitivity of Demand to Price
The toll fees have recently increased, sparking public discussions. The principle of sensitivity of demand, which economists call “price elasticity of demand” or the sensitivity of the amount of a good bought to the change in its prices reflects the basic idea that in situations where resources are not enough relative to the needs they are employed to satisfy, price changes can drastically influence the amount of the good consumed. In this particular case, increases in toll rates) can substantially reduce the amount of traffic on toll roads, thus decreasing revenue collection. When toll fees increase and subsequently lead to a decrease in the usage of the toll road beyond what was initially projected, the revenues that were projected to be collected decline accordingly. The decline is greater, the more sensitive the road traffic is to toll charges; thus, price elasticity is very important, both in determining the toll rates, and in the long-term projections of revenues from tolls.
In economic terms, where the percentage change in quantity demanded is proportionally larger than the percentage change in price, it signifies an elastic demand. Elastic demand implies that consumers are highly sensitive to changes in price, and thus a small price increase can lead to a large reduction in the quantity of a good demanded. It is very important as it helps policymakers to evaluate the impacts of price changes on demand for public utilities and on revenues that can be collected relative to social costs involved in providing them. Moreover, information on the price elasticity of demand is crucial in planning infrastructure and in the pricing of its services, e.g., volume of traffic on roads, air, lake, or sea.
In the context of the expressway, the toll rate adjustments for the Nairobi Expressway may affect the demand for using the toll road, according to the elasticity of traffic volume concerning toll fees. Consequently, if the quantity demanded declines, it could prompt a reconsideration of the operating period, potentially extending it beyond the initially set 27 years. This is because for the investor, a decline in demand, reduces their return on investment and therefore they will need to extend the period to maintain this element. Information on the price elasticity of demand for services of the Expressway can help avoid unnecessary extension.
This conclusion aligns with a study by the Asian Development Bank, which suggests that toll road traffic can double or triple within five years as activity along the toll road intensifies. However, any rise in toll rates beyond some threshold point, impedes this growth, prompting extension of the transfer period beyond the initially projected horizon.
Conclusion
Roads cannot be strictly categorized as public goods. Toll roads exemplify the feasibility of exclusion, limiting access to only those who pay. Additionally, the consumption of road space is not entirely non-rivalrous, particularly during congested periods when there is competition for space. Consequently, the impact is felt predominantly by those who use the road, and this comes as the inherent cost of usage and there are alternative routes that are not tolled. Tolls can also be used to reduce congestion which is a negative externality in addition to their revenue-earning role. Also, while the exchange rate adjustments address the impact of currency depreciation on project costs and revenues, the CPI adjustment addresses the broader inflationary pressures affecting the economy.
Distinctly, the Kenyan government seized this opportunity to accrue additional rents. This assertion is based on the substantial adjustment made from Ksh 310 to Ksh 500 for the maximum price, representing a notable 61.2% difference. Despite accounting for inflation and exchange rate differences at 10.5% and 34%, respectively, the government imposed a fee increase exceeding these factors by approximately 16%. This discrepancy suggests that the adjusted toll fees could have been reduced by at least Ksh 50, emphasizing a missed opportunity for a more moderate adjustment that aligns closely with economic indicators.
Finally, there is a need for the government to enhance transparency regarding this PPP agreement. Transparency is particularly crucial in understanding the correct elasticity of demand, a factor that could be illuminated by publishing comprehensive data, such as the total number of road users every month. This additional transparency becomes imperative, especially in light of the recent adjustments made to sustain the financial viability of the project. By disclosing such information, the government not only fosters accountability but also enables citizens to make more informed assessments of the economic implications and fairness of the toll fee adjustments within the framework of the PPP agreement.
More Blogs
The Grounds to Repeal the Price Control Act of 2011
The Price Control Act of 2011, with its imposition of price ceilings on essential goods, represents a significant intervention in the natural forces of supply and demand that govern a free market. The Act empowers the Minister to control the prices of essential goods, preventing them from becoming unaffordable. The Act outlines a specific mechanism […]
Why is Kenya’s Fiscal Consolidation Agenda Facing Failure?
The earliest proposition of fiscal consolidation can be traced back to the Keynesian theory which argues that fiscal austerity measures reduce growth and increases unemployment through aggregate demand effects. According to this theory, government undertaking contractionary fiscal policies of either reducing government spending or increasing tax rates, will eventually suffer a reduction in aggregate demand […]
Is Monetary Policy Too Tight?
We recommended (“And then, Floods”) that the Central Bank of Kenya policy rate should be lowered by 300 basis points, from 13 to 10 percent, from August 6. Instead, a reduction of just 25 basis points, from 13 to 12¾, was made on that date. Someone is wrong. Who? In explaining the 25bp decision, it […]
Tax 101: Misconceptions on the Withdrawal of the Finance Bill and Its Implications on Kenya’s Appropriations.
There has been a misconception that when the Finance Bill 2024 was formally withdrawn, all government operations would stop because revenues would not be raised. To understand this misconception, we need to understand what a finance bill is, what revenue-raising measures are, and how that is related to the tax code. A Finance bill is […]
The Constitutional Argument on Why Fiscally Decentralized Resources Cannot Be Shared Based on Population Alone?
1. Introduction Fiscal decentralisation is a core part of Kenya’s Constitutional order. Fiscal decentralisation is allocating revenue and expenditure responsibilities to lower levels of government. Kenya’s identity as a sovereign republic, as stated in Article 4 of its Constitution, is deeply intertwined with the national value of devolution, emphasised in Article 10. This unique relationship […]