Infrastructure

Mega infrastructure development not silver bullet for economy

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This article first appeared in my weekly column with the Business Daily on August 20, 2017

It is not a secret that the current and previous Kenyan governments (Kibaki and Kenyatta administrations) have prioritised investment in and the development of infrastructure. Kenya has prioritised infrastructure spending and development for the past 15 years. As the Brookings Institution points out, there is the view that investment in infrastructure- energy, transport, communication, irrigation, and water supply- propels economic output. The direct effect is raising the productivity of land, labour, and other physical capital. For example, steady supply of electricity reduces disruptions and time wasted at the work place. It complements the contributions of education, health, marketing, and finance. Infrastructure investment is seen as a foundation for and enabler of economic growth.

Government has allocated a significant percentage of annual budgets to infrastructure. Indeed, between FY 2016/17 to FY 2019/20, the government committed about 30 percent of total budget expenditure to infrastructure; compare this to 2.8 percent to agriculture. The concern is that despite this fiscal commitment, we have not seen the attendant economic growth; the economy has never even pretended to reach the 10 percent target of Vision 2030. So this begs the question as to what Kenya is getting wrong. Why isn’t infrastructure investment notably boosting economic growth? There are several reasons that provide insights to answer this conundrum.

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(source: http://www.theeastafrican.co.ke/image/view/-/2332200/medRes/528395/-/ssuyxr/-/infra.jpg)

The first, harsh, reality is that the link between infrastructure and economic growth is more tenuous than previously assumed. The London School of Economics points out, the most recent studies on the magnitude of infrastructure’s contribution to growth tend to find smaller effects of infrastructure investment on growth than those reported in the earlier studies; this is linked to improvements in methodological approaches. Kenya shouldn’t assume that infrastructure investment and development will automatically lead to significant improvements in economic growth. Yes there is a link between the two, but less pronounced than was previously assumed.

The second reason that could explain the muted effect of infrastructure spend is that Kenya has such a massive infrastructure deficit that current investment has barely had any notable effect. According to the Capital Markets Authority, Kenya’s current estimated infrastructure funding gap is USD 2-3 billion per year over the next 10 years. However, the reality is that the infrastructure deficit in Kenya’s neighbours is likely more pronounced, yet the fact that countries such as Ethiopia have emphasised infrastructure investment and routinely hit double digit growth questions the plausibility of this argument.

Image result for Kenya infrastructure

(source: http://www.kachwanya.com/wp-content/uploads/2015/05/infrastructure-development-in-kenya.jpg)

The final question to ask is: Is Kenya investing in the right infrastructure? The Brookings Institution makes the point that a push for more infrastructure only raises economic growth and people’s well-being if the focus is on quality and impact and not on the quantity and volume of investment. Has Kenya has fallen short here? Has the government conducted an audit of the impact of investment infrastructure investment and development thus far? Has there been an audit on the quality of the infrastructure developed thus far? Is Kenya investing in the right infrastructure? How efficient is our investment into infrastructure? Without an answer to these questions, the country will not learn from past mistakes and thus infrastructure development will not be recalibrated to be more effective.

It is therefore crucial that the government undertakes a thorough analysis on the nature, scale, efficiency and impact of infrastructure investment and developments made thus far so that the required improvements can be effected.

Anzetse Were is a development economist; anzetsew@gmail.com

Lingering effects of interest rate cap

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This article first appeared in my weekly column with the Business Daily on July 9, 2017

The interest rate cap has led to several consequences, some of which have been elucidated in this column. The most concerning are the effects is has had on monetary policy and access to credit for the private sector. However new medium to long-term effects are beginning to emerge.

The first is that, private sector, particularly SMEs are getting used to functioning without the credit lines on which they used to depend. Data from the CBK indicates that credit to the private sector expanded at 3.3 percent in the year to March 2017, the slowest rate in more than a decade. So while some private sector may be turning to the shadow lending system for credit, many more may be growing accustomed to getting by with no credit lines at all. In effect, the cap may be dampening the private sector’s appetite for credit. Thus the concern is not only that the economic engine of the country is being starved of liquidity, the engine may be getting to used to ticking away at sub-optimal levels due to poor access to credit with dire consequences to GDP growth. GDP grew at just 4.7 percent in the first quarter of the year, and although part of this is due to a contraction in agriculture, the cap has also informed the sub-par growth. Will dampened appetite for credit become a long-term trend or will private sector aggressively take up credit lines if the cap is reversed?

Image result for small business Kenya

(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Secondly, since the cap has made government the preferred client for many banks, the cap has created the very situation government has been stating it has been trying to avoid and that is crowding out the private sector. Thus the irony is that in government assenting to the cap, it has created the very situation it sought to circumvent. Indeed in the 2017/18 financial year government plans to finance 60.7 percent of the fiscal deficit using domestic sources. In the past government would somewhat limit heavy borrowing from domestic markets but in the age of the interest rate cap, government is well aware of its priority status and thus seems to be leveraging this to finance the budget with domestic sources perhaps more aggressively than had previously been the case. Will this become a long-term habit that proves difficult to break?

Image result for domestic borrowing Kenya

(source: http://www.businessdailyafrica.com/image/view/-/3947270/medRes/1621958/-/62ktdm/-/NT.jpg)

Thirdly, however, there is a silver lining in the cloud; banks are going to come out of this period more efficient than ever. The cap has caused banks to ask themselves hard questions such as: how much labour is actually required to effectively meet client needs? How many branches need to remain open to serve clients and hit targets?  The cap may be accelerating the automation drive that had already began to occur in the banking sector and banks should embrace this era of capped rates to become more efficient. Banks will likely emerge from the interest rate cap as leaner and more efficient entities than would have been the case if the cap hadn’t been effected. This is a long term effect on the banking sector and may well have lasting benefits on profit margins.

Anzetse Were is a development economist; anzetsew@gmail.com

 

What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

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(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

Anzetse Were is a development economist; anzetsew@gmail.com

The economic cost of marginalisation

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This article first appeared in my weekly column with the Business Daily on January 29, 2017


Over the past week I have been travelling around the country and have visited what can only be described as grossly neglected areas of the country. The difference between the state of infrastructure, water and sanitation systems, schools and even internet access in areas which have enjoyed government and private sector investment, and those which have not, is truly stark. And although devolution has brought some attention to counties and communities locked in neglect, a pattern of leaving ‘those areas’ to the NGO world and food relief organisations still lingers. This chronic marginalisation is costing the country millions.

Firstly, the lack of investment in human capital mainly in the form of education, healthcare as well as physical and food security has implications on productivity. In failing to ensure that every Kenyan is well fed and has access to basic healthcare and schooling, the country has written off millions of Kenyans, their ingenuity, their potential and their ability to develop the country. Individuals who are sick, poorly educated and malnourished are far less productive than those who are healthy, well-educated and food secure. The neglect has meant that employment-creating businesses were not opened, important innovations not discovered and ingenuity not tapped into, all of which could have had a positive impact on the country’s economic development.

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(source: http://tweakyourbiz.com/management/files/shutterstock_128167007.jpg)

Secondly, there is a notable lack of support to businesses in vast swathes of the country. In those areas, businesses often fail to become successful due to external factors, not due to a lack of intelligence, determination or business acumen. Many good business ideas die due the lack of transport infrastructure and electricity rather than because the business idea was a poor one. If Kenyans marvel at how Thika Highway unlocked entrepreneurship along that road alone, imagine what a truly robust transport network could deliver. Business in many parts of the country do not take off due to external factors and as a result entire regions of the country fail grow and contribute to the GDP and wealth of the nation.

Finally, even if small pockets of private sector activity thrive in neglected areas, they probably function at subpar levels, unable to expand and grow optimally. Not only do they have to live with the reality of poor transport and energy networks, finding skilled labour for business operations is close to impossible due to low levels of education and a high disease burden. And if individuals manage to earn an education in such areas, they often leave the region as soon as feasibly possible. As a result, businesses in such regions operate below potential leading to subpar contributions to the economy.

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(source: http://www.standardmedia.co.ke/images/wednesday/Poverty_Standard_040913.jpg)

However, as with all clouds, there is a silver lining. There is a grit, resolve and spirit of determination in areas that have been forgotten. While some have resigned to their lot, others have a tenacious spirit determined to succeed. But what is clear is that there is a need for creative investment strategies to develop remote regions executed through blended financing and alliances of public, private and civil society actors. It is clear that just one type of financing or support is inadequate. There is a need for professionals and business people to step out of their bubbles and leverage their combined financial and skills assets towards shared interests. Without the pooling of resources and talent, the potential of millions of Kenyans will continue to go waste and fail to build the personal and communal wealth the country so desperately needs.

Anzetse Were is a development economist; anzetsew@gmail.com

 

Infrastructure investment and economic growth

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This article first appeared in my weekly column with the Business Daily on September 18, 2016


There appears to be an on-going assumption that publicly funded infrastructure investment will spur economic and social growth and development in Kenya. In fact, the government is so certain of this that they are getting into substantial debt in order to finance infrastructure projects. Indeed according to the International Budget Partnership, Kenya’s 2016/17 national budget 30.4 percent of total gross expenditure was allocated to energy, infrastructure and ICT. Infrastructure investment in this article refers primarily to investment in energy and transport infrastructure.

There are several arguments that support massive infrastructure investment. The first, no brainer argument is that Kenya’s and indeed Africa’s infrastructure needs are so dire that any investment in the sector is bound to have positive effects. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year. Clearly, there is a need for this investment.

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(source: http://kbctv.co.ke/wp-content/uploads/2016/06/construction.jpg)

Additionally, the lack of infrastructure can be argued to be eating into economic growth. Some estimate that the negative effect of poor power supply alone reduces per capita growth by 0.11-0.2 percentage points in Africa. Further, other studies show that infrastructure investment increases the growth potential of an economy by increasing the economy’s productive capacity by lowering production costs or providing opportunities for human capital development for example.

Infrastructure is also tied into social development. According to a report by European Commission, good quality infrastructure is a key ingredient of sustainable development because countries need efficient transport, energy and communications systems. So some argue that not only does infrastructure boost economic growth, it can lead to a better quality of life for citizens as well.

This all sounds very impressive but massive and aggressive infrastructure investment carries sizeable risks. According to the London School of Economics emerging research seems to suggest that the magnitude of infrastructure’s contribution (to growth) display considerable variation across studies. So the notion that infrastructure is directly linked to or even engenders economic growth is not cast in stone.  Indeed recent literature tends to find smaller effects on links between infrastructure investment and economic growth than those reported in the earlier studies. So perhaps estimates that have previously linked infrastructure investment to economic growth and development may be overstating the causal effects.

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(source: http://www.startyourbusinessmag.com/wp-content/uploads/2016/06/economic-growth.jpg)

Further, it is assumed that government is making the right infrastructure investment decisions for Kenya and that the contracts are being given to the right people. The Economist makes the point that even in countries like the USA public investment is wasted on inflated contracts with politically connected suppliers. The same magazine also makes the point that even in countries like the USA whose public financial management is considered to be more transparent with lots of bureaucrats to conduct cost-benefit analyses, identifying the most beneficial investments is hard. These problems are magnified in countries like Kenya where there is limited information on how infrastructure projects were chosen, how the cost benefit analysis was done and how contractors were or will be selected.

Finally, the manner in which the infrastructure plans are implemented will inform if Kenya will truly gain from this investment drive. A study by FONDAD argues that in order for infrastructure investment to truly stand a chance to create economic and social development shifts, they have to be done with great economic scrutiny at the selection stage, integrity in procurement, efficiency in implementation, effective post-completion management to ensure maintenance and efficient operation and, continuing accountability to users.  Does Kenya tick all these boxes?

It is clear that infrastructure investment is a priority for government and the continued emphasis in government spending in this docket will continue. Bear in mind that, as KPMG states, a significant portion of these infrastructure projects are debt financed. It is therefore crucial that Kenyans are cognisant of the need for infrastructure investment but risks associated with aggressive infrastructure investment, and direct the warranted scrutiny at related projects.

Anzetse Were is a development economist; anzetsew@gmail.com

 

 

 

Land issues hampering Kenya’s development

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This article first appeared in my weekly column in the Business Daily on August 21, 2016

Kenyans are well aware of the tensions and dynamics around land ownership in the country. The contentious issues around land are often linked to tribal and ethnic tensions; indeed land issues informed the ferocity of post-election violence in 2007/8. But beyond being a tension between different communities, land ownership issues are hampering the country’s economic development.

Firstly, land directly affects agricultural productivity, or the lack thereof. At the moment, statistics indicate that small-scale farming accounts for at least 75 percent of the country’s total agricultural output and 70 percent of marketed agricultural produce. In short, most of the meals eaten by Kenyans come from a smallholder farmer working away on his or her small patch of land. However, one of the reasons why agricultural productivity is so low in the country is precisely because the vast majority of farmers are farming over-worked, nutrient-depleted, small pieces of land that have been subdivided for generations. The situation is made more complex by the fact that many small holder farmers do not have the title deed to the land.

So while there may be a general acknowledgement by their community that the land they farm is indeed theirs, the costs related to registering land and acquiring titles are too high for most smallholder farmers. As a result the farmers do not legally own the land and thus cannot use the land as collateral to access credit that could allow them to make improvements to their farms and farming practices. More importantly, smallholder farms cannot be conglomerated in one large piece that can be more efficiently farmed with higher levels of mechanisation, productivity and profitability. As a result, Kenyans agriculture sector is stuck in a rut with no foreseeable way out because of the land issue. If anything, the situation will worsen as the average size of land holdings continues to reduce due to the cultural practice of subdivisions of the land for each son in the family for inheritance purposes.

(source: http://i.telegraph.co.uk/multimedia/archive/01537/farm_1537840c.jpg)

Manufacturing is also affected by Kenyan’s land problem because even if a company wants to expand operations to another part of the country, the process of procuring land on which the factory or plant will be built is daunting. The lack of legal title depresses demand for land because potential buyers do not want to negotiate the complexities of proving ownership. No one wants the nightmare of procuring a piece of land that is then mired in contention that prevents business activity from moving forward. Thus it must be asked: to what extent are land issues hampering the expansion of industry and manufacturing in the country? Further, the lack of legal ownership also makes it difficult for land holders to come together and combine smaller pieces of land into a mass that can more effectively attract capital investment. In short, both supply and demand are affected by the land question.

Finally, infrastructure development is more costly, mired in delays and incredibly complex because of land issues. In some cases communities do not agree with the valuation of land engendering renegotiations, in other cases absentee landlords make the process of land acquisition long and arduous. However, the most complex is where communities live on what they consider their ancestral land but the land is legally owned by another person or entity. Who is to be compensated in such cases not only from a legal, but also moral point of view? How is compensation to be negotiated without engendering protest? Land is a core factor behind the accrual of delays and expenses in some of the infrastructure projects in the country.

(source: http://www.theeastafrican.co.ke/image/view/-/2918134/medRes/528395/-/maxw/600/-/t4i5alz/-/infra.jpg)

In short, a great deal of Kenya’s economic potential is locked in the land. Sadly, due to the way politics is linked to tribal identity and thus land in Kenya, it may be decades before the country sees a crop of leaders prepared to address the land issue and unlock a great deal of the country’s economic potential.

Anzetse Were is a development economist; anzetsew@gmail.com

What to expect in Kenya’s economy in 2016

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This article first appeared in my weekly column with the Business Daily on January 10, 2016

The year 2015 was instructive for the Kenyan economy and government. So what is in store for the economy in 2016? There are key factors that will bolster economic growth as well as factors that may threaten growth.

Inflation

Inflation started inching upward last year and reached 8 percent in December 2015, above the 7.5 percent limit preferred by the Central Bank of Kenya (CBK). The bulk of this inflation has been import inflation associated with the KES weakening against the USD pushing up import bills. This spillover effect may continue to drive the cost of imports upward fuelling more rises in inflation. Therefore, the CBK should continue to keep an eye on inflation and take action to pull inflation below the 7.5 percent limit when needed.

(source: http://i.telegraph.co.uk/multimedia/archive/01811/inflation_1811026b.jpg)

Interest Rates

Part of the conversation that dominated conversation about the economy at the end of last year was rising interest rates. A combination of factors such as rate hikes to control KES depreciation, aggressive borrowing from government in domestic markets and high T-bill rates contributed to some banks signaling intent to raise rates. Sadly the news does not get better this year; as mentioned, inflation is at 8 percent and as this is above the preferred CBK limit, it is possible that the CBK will raise interest rates to try and manage upward pressure on inflation. Further, as the US economy continues to recover, it may lead to a further strengthening of the dollar against the KES. Thus again, as we saw last year, CBK may raise interest rates to manage KES depreciation against the dollar. In terms of any foreign borrowing in which government would want to engage this year, IMF’s Lagarde makes the point that the increase of interest rates in the USA has already contributed to higher financing costs for some borrowers, including those in emerging and developing markets. Therefore, government should be ready to borrow on more expensive terms in international markets this year. Also bear in mind that government’s management of the Eurobond has negatively impacted investor confidence in government fiscal management; this is likely to translate into more expensive borrowing terms as well.

Intensification of Political Activity

It is almost certain that electioneering will start this year with politicians beginning to build momentum for elections next year. Sadly in Kenya, intensification of political activity tends to be correlated with lower growth. Luckily this is a threat that can be managed if politicians on all sides of the political divide are responsible in comments made and avoid negative political sensationlisation of issues in their bid to garner votes.

Infrastructure

The good news for the economy is that key infrastructure projects are progressing well. In terms of transport infrastructure, the construction of the standard gauge railway in Kenya is ahead of schedule. Further there are updates and expansions in the country’s airports and ports and the tarmacking 10,000 kilometres of new road is ongoing. Secondly, important strides are being made in energy infrastructure; solar power projects will add 1 gigawatt of power to the grid, there is a 310-megawatt wind farm in Lake Turkana as well as the drilling of 20 new geothermal wells. The implications of how such investment, some of which complete this year, could fuel economic growth is apparent.

(source: https://d3n8a8pro7vhmx.cloudfront.net/windustry/pages/433/attachments/original/1437488150/ph2009112004317.jpg?1437488150)

Ease of doing business

Kenya climbed up 21 places on the World Bank’s Ease of Doing Business Index to stand at 108 in 2016. This is a positive sign to investors both local and abroad in terms of Kenya’s attractiveness as a business and investment destination. It is important that stakeholders keep the positive momentum going in order to bolster Kenya being perceived as san attractive country in which to invest.

Anzetse Were is a development economist; anzetsew@gmail.com