Keeping cartels from affordable housing

Measures aimed at deterring the infamous cartel culture from infiltrating and derailing the government’s affordable housing agenda

The National Government under the Ministry of Housing and Infrastructure has put strict measures to determine developers who will be subcontracted to undertake different affordable housing projects in Nairobi.

This was revealed last week when the government invited bids from both international and local developers to build 1,500 affordable residential units at Nairobi’s Park Road estate situated in Ngara for low–income earners, a project which is expected to be delivered within 36 months.

According to the Request For Proposals (RFPs) advertised by the government, bidders are required to pay a bid security of Sh40 million during submission of the RFP and a commitment fee of 10 per cent of the project value within 30 days after notification of award, that will act as proof of financial capability of the developer to deliver the project.

However, Johnson Denge, Senior Manager-Regional Markets at Cytonn Investments, says that the bid, security and commitment fees required to be paid will force developers to incur huge upfront costs which is a limitation, given that access to funding for developers still remains a challenge.

Competitive funding

This is because the growth of credit to the private sector has been declining by 21.5 per cent points over the last three years, coming in at 4.3 per cent as at June 2018 compared to 25.8 per cent in June 2014 as a result of introduction of capped lending rates at 4.0 per cent points above the Central Bank Rate (CBR). 

“The government needs to consider alternative ways to gauge the financial capability of developers such as requiring letters of commitment by financiers and evaluation of financial records of the firms. The government also needs to look into ways to spur the development of alternative sources of funding at competitive rates such as structured products, which will reduce the overreliance on banks and provide financing for affordable housing,” said Denge.

However, on the other side these measures will bring back sanity in the industry and will ensure that no cartels will be involved in such projects and other projects. Currently the industry is facing enormous challenges in quality assurance because of the alarming rate of collapsing structures. Over the past five years alone, over 40 buildings have collapsed causing fatalities and injuring hundreds of innocent people.

He added that even though the government has made some commendable steps towards development of affordable housing such as providing land for use, and scrapping off of Nema and NCA levies to encourage developers to construct more units due to the reduction in costs and establishment of a land bank whereby excess land will be gathered together in a bid to address the challenges faced by investors and developers seeking to acquire land there is need to review the Public –Private Partnership (PPP) framework ,which is guiding the projects to facilitate the approvals process and to aid in establishment of special purpose vehicles to facilitate access to private capital.

“Lengthy and slow approval processes, uncertainty regarding revenue-sharing and the returns to private investors in PPPs, extended PPP time frames that make them unattractive to private developers who prefer to exit projects in three to five years and lack of a mechanism to transfer public land to a Special Purpose Vehicle (SPV) are some of the challenges which are facing this projects,” said Denge.

However, despite all the requirements, around seven companies have been awarded contracts to build the low-cost houses in Nairobi Metropolis. The companies are M/S Sovereign Group, which has been awarded the contract to develop 1,000 units at Pangani, Lordship Africa contracted to develop 2,520 units along Ngong road, Jabavu Village Ltd contracted to develop 1,500 units at Jeevanjee-Bachelors, KCB/S&L contracted to do 1,500 units at New Ngara, Stanlib Group, which has been contracted to develop houses at Uhuru Road, Kiewa Group contracted to do 1,050 units at Old Ngara and Directline Assurance Limited contracted to do 1,050 units at Suna road.

Public Private Partnerships

Other projects which have not yet been contracted are Shauri Moyo with 5,000 units, Makongeni with 20,000 units and Starehe with 3,000 units.  

This is in line with the government’s plan to develop 500,000 affordable housing units by the end of their term in 2022. This will be achieved through Public-Private Partnerships where the government’s role is to provide the land while the developer is tasked with the role of designing, funding and constructing the units.

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