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Sep 14, 2012

Kenya pins middle-income transition hopes on big infrastructure push

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Kenya Airways CEO Titus Naikuni expressed his frustration last month over the controversies bedeviling the construction of a new terminal at Jomo Kenyatta International Airport (JKIA).

Delays to the $655-million project, dubbed the Greenfield Terminal, were caused by controversies surrounding the award of the contract to Chinese company Anhui Construction Engineering Group.

Naikuni said these did not auger well for the national carrier, which is in the midst of implementing an ambitious expansion programme, partly as a response to rising competition from other airlines on the continent. He expressed concern that a possible protracted interruption could undermine the airline’s growth aspirations.

“The significance of this project to our continued profitability as an airline cannot be underestimated. Kenya Airways and its partners in the SkyTeam Alliance will contribute 70% to 80% of the traffic to this new terminal,” he said.

Such frustrations and lamentations are not isolated. In many ways, they are represent-ative of broader anxiety – expressed by both foreign and local investors – over the state of the country’s infrastructure.

In fact, many argue that Kenya’s energy, transport, information and communications technology (ICT), and water and sanitation backlogs are the major constraint to a further acceleration in private-sector-led growth.

Compared with countries such as South Africa, Egypt and Ghana, against which Kenya is increasingly seeking to benchmark itself, the East African nation is facing acute growth-constraining infrastructure deficits.

For instance, high energy costs have nearly crippled the manufacturing sector, which, according to the Economic Survey 2012, contracted to record growth of 3.3% in 2011, compared with 4.4% the previous year and 9.8% in 2006.

Meanwhile, bottlenecks and inefficiencies at the Port of Mombasa mean that it takes at least seven days to clear cargo and another 14 days to transport the same cargo to Rwanda by road owing to the nonexistence of a properly functioning railway network. The existing network, which is over a century old, is a relic that is struggling to remain afloat, even after being concessioned to private operator Rift Valley Railways (RVR).

It is common cause that low levels of investment in infrastructure development for four decades have significantly hampered economic growth in East Africa’s largest economy. According to the World Bank, infrastructure contributed 0.5 percentage points to Kenya’s annual per capita gross domestic product (GDP) growth in the past decade. If Kenya could raise the infrastructure endowment to that of Africa’s middle-income countries, this would increase contribution by three percentage points.

But to reverse the infrastructure deficit, the country requires sustained expenditure of about $4-billion a year (20% of GDP) over the next decade. “Kenya’s infrastructure compares favourably with that of its neighbours, but it still falls short of what is needed to reach middle-income status,” comments World Bank country director Johannes Zutt.

Betting on Infrastructure
The realisation that infrastructure investments are key to accelerating economic growth and supporting the development ambitions outlined in the country’s growth blueprint, the Kenya Vision 2030 master plan, has prompted the authorities to prioritise infrastructure projects.

“No country has achieved and sustained a high economic growth rate with poor infrastructure. That is why we have decided to accelerate the expansion and rehabilitation of our infrastructure to enhance our efficiency and become globally competitive,” Planning, National Development and Vision 2030 Minister Wycliffe Oparanya tells Engineering News.

The current thinking in government of infrastructure being a growth catalyst has been captured in consecutive fiscal estimates, where Budgetary allocations for infrastructure projects have been increased yearly. In the 2012/13 financial year, government allocated $3.2-billion for various projects – a significant amount, compared with the $914-million allocated seven years ago. The current allocation, however, still falls short of the $4-billion that the World Bank contends Kenya must spend to tackle its deficits.

To finance the programmes, the government of Kenya has been borrowing heavily from both bilateral and multilateral development institutions, including the World Bank, the International Monetary Fund and the European Investment Bank. In recent years, Kenya has also floated at least two inter- national infrastructure bonds that have raised $466.5-million and increased borrowing from the domestic market.

The authorities have also been pushing for private-sector participation through public–private partnership (PPPs). To encourage the private sector to be more actively involved, government has drafted a PPP Bill, which has already been tabled in Parliament for enactment.

The Bill clearly defines the terms under which the private sector can be involved in infrastructure projects, which is a departure from the present situation, whereby the private sector is uncomfortable with a set of ambiguous regulations. “PPPs offer an opportunity for Kenya to attract enhanced private- sector participation in infrastructure projects in order to close this huge funding gap,” observes Oparanya.

Kenya is also increasingly looking East, particularly to China, India and Japan, for new funding sources. And in recent years, Brazil has also been identified as a potential funding partner.

Kenya is a major beneficiary of the $20-billion loan facility that the Chinese govern- ment has pledged for the African continent. Today, most of the huge infrastructure projects are financed and implemented by the Chinese. “We have been comfortable dealing with China because they don’t have conditionalities like the West,” the Minister avers.

But this dependence on debt, both foreign and local, to finance infrastructure projects is generating new challenges for Kenya.

According to Institute of Economic Affairs CEO Kwame Owino, the heavy borrowing could eventually lead to a debt crisis. “Every loan agreement that Kenya signs to finance infrastructure projects increases the burden of the external debt. This will get to a point whereby the country will be using a huge chunk of taxes to service the debts instead of [financing] development projects,” he explains.

A study by the Kenya Debt Relief Network, a nongovernmental organisation, argues that the country is already heavily indebted. The study indicates that, in 2011, Kenya’s external debt rose by 5.2% to $6.5-billion from $6.2-billion in June 2009. Apart from the worsening burden of the external debt, the substantial domestic borrowing by government of Kenya is making access for credit for the private sector expensive.

Powering Up
But the authorities believe that such leverage is acceptable in the context of the material opportunity loss associated with the current backlogs. Accelerating investments in infrastructure, thus, remains a priority.

While the whole spectrum of Kenya’s infrastructure needs improving and rehabilitating, government is concentrating on the critical areas first. Emphasis is being placed on energy, transport and ICT, which, according to Vision 2030, are the foundations of national transformation.

In the energy sector, where the country continues to experience recurring challenges owing to low investments in the past, a staggering $7.2-billion is being invested in generation, transmission and distribution projects required to solve current problems, meet demand and drive growth over the next eight years.

According to the energy master plan, $4.7-billion will be invested in generation projects, $1.9-billion in transmission facilities and $560-million in distribution facilities.

Kenya currently has a total installed capacity of 1 359 MW, compared with a peak demand of 1 250 MW. But, as the economy expands, demand is estimated to grow at an average of 8% a year. It is, therefore, estimated that Kenya requires at least 7 000 MW by 2020 and 15 000 MW by 2030.

“Kenya has a power surplus of about 15%, which is extremely low, compared with a world average of about 40%. For the country to get to that level, new projects must come on stream,” says Energy permanent secretary Patrick Nyoike.

Among the key projects currently under way in the energy sector are the 400 MW geothermal power project, being implemented by the Geothermal Development Company, in Menengai, and the 280 MW plant, being constructed by the Kenya Electricity Generating Company.

Apart from exploiting its geothermal potential, estimated at 15 000 MW, Kenya is also seeking to generate electricity from wind, nuclear, small hydro, coal and solar. Already a 400 MW wind power plant is nearing completion in northern Kenya, while proposals for constructing a 1 000 MW nuclear plant and a 400 MW coal-powered plant are at an advanced stage.

Resources are also being pumped into transmission and distribution facilities. Key transmission facilities include the 400 kV, 450 km high-voltage line from Mombasa to Nairobi, the 686 km, 500 kV bipolar line connecting Kenya and Ethiopia and the 400 kV double-circuit line linking Kenya with Tanzania. “The goal of these transmission lines is to create an Eastern and Southern power pool to facilitate power trade in the region,” explains Nyoike, adding that Kenya has already signed an agreement with Ethiopia to import 400 MW from 2016.

He says the recent discovery of oil in northern Kenya and the extensive exploration activities in various oil blocks could save Kenya the billions being spent on oil and oil products importation in the coming years. Currently, Kenya spends $2.6-billion annually on oil imports.

Kenya is also pushing ahead with other infrastructure priorities, particularly in the transport sector.

Super Highway
In October, the country will commission the first super highway in East Africa. Arguably, the $350-million Thika Super Highway is the embodiment of the massive resources Kenya is pumping to improve and rehabilitate the road network across the country. At least $735.2-million has been spent on the road network over the past five years in tar- macking over 2 700 km and rehabilitating over 4 000 km.

With the road network coming back to life, focus is now being directed to railways, airports and ports. In 2006, Kenya concessioned the existing age-old railway network to RVR, hoping the private investor would upgrade the system to make it efficient. However, protracted shareholding wrangles in RVR and delays in securing financing have been crippling. Recently, RVR was able to secure a $168-million loan from a consortium of financers to facilitate a five-year turnaround programme.

But delays in improving the network prompted the Kenya government to invest in a parallel network. In effect, government is seeking funds to construct a standard-gauge railway line to link Kenya with Uganda. And to ease transport flow and decongest roads in the capital, Nairobi, a total of $315-million is being spent to implement a commuter railway service.

East Africa’s Gateway
According to Zutt, the efforts being made to improve the internal transport systems are commendable but for Kenya to become sustainably competitive, it needs an effective and reliable gateway system.

“Kenya depends heavily on imports. This makes it critical to have a proper functioning gateway,” he reckons.

Despite the controversies involving the Greenfield Terminal, to be constructed adjacent to JKIA, an elaborate expansion programme of JKIA has been ongoing since 2006 at a cost of $208-million. The expansion involves construction of aprons, taxiways, more parking areas and other associated facilities to enable the airport to handle increasing passenger numbers. JKIA was originally designed to handle 2.5-million passengers yearly, but is now handling over 4.8-million passengers and the traffic is expected to grow at a rate of 6% a year. The country has also completed the expansion of Kisumu International Airport and is rehabilitating airstrips.

To be an effective gateway, though, Kenya will need to make major improvements to its ports.

For years, Kenya and several East African countries like Uganda, Rwanda, Burundi and the Democratic Republic of Congo have depended on the Port of Mombasa for their imports and exports. The facility has been stretched to a point where it has become a bottleneck to the economies of the region.

Therefore, a $2-billion expansion programme has been launched, which involves the dredging and construction of a second terminal. The investment is designed to improve efficiency and position the facility for estimated throughput growth of 10% a year.

Besides enhancing the reliability of the Port of Mombasa, Kenya is also constructing another port in Lamu, which forms part of the ambitious Lamu Port–South Sudan–Ethiopia Transport (Lapsset) corridor project, which has a price tag of $24.6-billion.

The project, which has been termed a ‘game changer’ in terms of pushing the economic development of Kenya, South Sudan and Ethiopia, involves the construction of the Port of Lamu, oil pipelines linking the port with South Sudan’s oilfields, a medium-size refinery, a standard-gauge railway line and two airports, besides other facilities. “Lapsset will contribute significantly to the economy. It will be a catalyst for productive economic activities in various sectors,” notes Oparanya.

Apart from propelling growth, a critical aspect about Lapsset is the fact that it will open up a largely neglected area of Kenya, enabling it to participate in economic activities. This is because, currently, nearly the entire eastern region, which covers the Lapsset corridor, plays a minimal role in the economy.

Rural Development
The push to open up rural economies is also being facilitated through investments in ICT and social amenities like safe and reliable water and sanitation facilities. In ICT, Kenya has invested in fibre-optic cables like the Eastern Africa Submarine Cable System, the East Africa Marine System and the Seacom sub-marine fibre-optic network system with the aim of linking Kenya with the outside world. The cables, which have facilitated the growth of the ICT sector, have significantly enhanced communication. Today, over 80% of the Kenyan population has access to mobile telephony, compared with less than 20% a decade ago.

The next level in ICT, on which Kenya is set to embark, is investment in hubs that will enable Kenya to compete with countries like India in business processes outsourcing.

In April 2013, the East African nation will start implementation of its equivalent of the US’s Silicon Valley, with the construction of the Konza Technology City. The $7-billion techno city is aimed at transforming Kenya into a knowledge-based economy. Besides Konza City, Kenya also plans to invest in at least 47 technology parks that will be located within special economic zones.

If Kenya maintains the current pace of infrastructure investments, economists believe its transformation into a middle-income economy will not remain a deferred aspiration. But for this to be a reality, the country must find a way to shield the projects from political transition from one administration to another.

So far, all the ongoing projects have been conceived and are being implemented by the current regime. But with Kenya gearing for a transitional general election in March next year, the country can only hope the new regime will maintain or accelerate infra- structure investments.

“New governments have a habit of discarding projects started by their predecessors and this could prove costly if it happens after the elections,” says Owino.

Kenya has attempted to circumvent such an eventuality by adopting the Vision 2030 master plan as a national document.
 

Edited by: Martin Zhuwakinyu
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