Tough road ahead for Kenya’s infrastructure ambitions?

January 8, 2015

Kenya’s infrastructure deficit is popular theme among investors, and with good reason. From clogged roads, patchy railways and under-developed ports and harbors show the desperate need for better infrastructure, which is seen as a bottleneck to the country’s economic growth. It is widely known that President Uhuru Kenyatta, has promised completion of Lamu Port, new airports, industrial estates, Economic Zones, as well as 10,000 kilometers of roads nationwide in the next three years. The port network in particular is a major priority as President Uhuru Kenya see maritime connectivity as crucial to Kenya’s growth. According to an Australian expert working in Kenya, the minister for devolution and national development planning, certainly has its work cut out.

To deliver his 2013 to 2018 economic and social development plan, Kenya needs approximately $10 billion of infrastructure funding, with an estimated 70 percent coming from the private sector. That is a huge amount of money to pour into seaports, airports, power plants, roads and railways but the long term benefits are expected to be significant. So what are the key areas that President Kenyatta and his deputy William Ruto need to focus on?The most obvious one is narrowing the funding gap and reducing the unsustainable public debt that if unchecked will bring Kenyan economy to a juddering halt.Experts are hoping that the remaining 30 percent will come from the state budget, but this would mean a significant increase in 2015 – 2017 infrastructure allocations compared to previous years, even with the recent economic woes facing the country.It is hard to see how the government will raise all of this money unless it borrows more, which it is reluctant to do after a successful Euro Bond issued last year. Kenya would do better to focus on attracting more private investors and public-private partnerships, as well as simplifying the long and complicated process of land ownership.

It came as welcome news last year that President Kenyatta has instructed government officials to give private investors first pick of the most bankable, long-term infrastructure projects, rather than handing them to non performing state-owned enterprises and private businesses.The evidence shows that there are plenty of willing lenders such as those involved in the financial close of the $1 billion wind power project in Turkana and Kajiado counties so long as the investment environment is seen to be stable and transparent. Businesses need to feel confident that President Kenyatta can remove red tape and make it easier to get land.Regulations due to become effective this year should help improve the process, but more work is needed in this area in the future.There also needs to be a clear plan in place to deal with Kenya’s bulky state-owned enterprises.These enterprises, usually have a role in public private partnership projects as contracting agencies but otherwise have no clear incentive to be competitive or take on project risks, resulting in stalled projects. 

Replacing boards and senior executives in the worst performing SOEs is a good start, but is it enough? Privatization needs to be put on the table as an option to take advantage of private sector efficiencies.In particular, privatization could create diverse opportunities and promote new private infrastructure investment.It could also unlock capital to channel towards social and economic development projects.President Kenyatta has pushed for a prominent role in the China-led infrastructure investment , which is set to play a crucial part in Kenya’s infrastructure future. Seen by many as an alternative to the Western donors and funders, China is the darling partner of African countries like Kenya. Although total reliance on foreign financing would be risky, China could provide much-needed support for some of Kenya’s more ambitious projects.Lastly, political risk is a major factor affecting both Kenya’s infrastructure outlook and the wider economy.There are concerns about opposition from the Coalition for Reforms and Democracy, which could prevent President Kenyatta putting his plans into action.

Although this risk has settled considerably since President Kenyatta case at the International Criminal Court was dropped , it is likely to remain at heightened levels for the time being. In one scenario, President Kenyatta could use a weaker but resurgent opposition to keep his politicians nimble without the shackles of a flexible majority coalition, although this is far from certain. There is strong hope that 2015 will bring fresh ideas and momentum to resolve long-standing issues around Indonesian infrastructure. Coming in on a clean platform, and with clear messages regarding corruption, President Kenyatta is off to a good start. For his ambitious infrastructure plans to become a reality, he needs to do all he can to show that existing and new infrastructure projects are well prepared, properly structured and bankable, particularly for private investors.

Contador Harrison