investment

Industrialisation in Kenya: What do political party manifestos say?

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This article first appeared in The East African on July 24, 2017

 

Further development of manufacturing can play a central role in driving economic transformation and job creation in Kenya. There is now a window of opportunity for Kenya (and other East African countries) to capitalise on positive underlying factors in the global economy – including rising wages in Asia, the rebalancing underway in China, and strong regional growth in Africa – and significantly expand its capabilities and global presence in export-oriented, labour-intensive manufacturing within the next 20 to 30 years.

But the recent performance of the Kenyan manufacturing sector has been weak. The share of manufacturing in Kenya’s gross domestic product (GDP) was only 9.2 percent in 2016 (well below average for a country with Kenya’s level of income) and this share has been declining in recent years. Several decades ago, Kenya had a relatively complex and substantial industrial sector by regional standards, but its East African neighbours have been catching up in recent years.

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(source: http://www.industrialization.go.ke/images/kenya_manufacturing.jpg)

Decisive and comprehensive action is required in order to reverse the decline, double manufacturing production and employment, and increase the share of manufacturing to 15 percent of GDP within the next five years. With this in mind, the Overseas Development Institute (ODI) and Kenya Association of Manufacturers (KAM) developed a 10-point policy plan to transform Kenyan manufacturing and create jobs. These 10 points, based on close co-operation amongst a range of stakeholders, aim to inform pre-election debates and can also be used by the new government to implement a more focused and effective industrialisation strategy.

There has been an analysis of the manifestos of the three main political parties to determine the extent to which they support manufacturing in Kenya and the region. The manifestos of Jubilee, the National Super Alliance (NASA) and the Third Way Alliance were launched at the end of June 2017. All three parties emphasise the industrial agenda as central to Kenya’s economic transformation in general terms, which is encouraging, with NASA emphasising innovative initiatives and especially the small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance being more specific in their recommendations.

There are a range of notable similarities with the 10 policy priorities in the KAM-ODI booklet. Firstly, all three parties prioritise addressing either general or specific aspects of the enabling environment. The Third Way Alliance commits to addressing counterfeit goods, one of the KAM-ODI action points. Secondly, all three parties want to enforce a fiscal regime that is predictable and fair, a key action point among the ten policy priorities, and emphasise fair taxation in particular. Jubilee further discusses the action point on devolution. The Jubilee manifesto discusses the KAM-ODI action point on land banks and NASA and the Third Way Alliance discuss industrial parks, which need land. The Third Way Alliance pledges to work with county governments to set aside land for industrial parks, offering a practical way to implement the KAM-ODI action point on securing land for SEZs and industrial parks.

The feasibility of the creation land banks and setting aside land for industry will be linked to issues of acrimony over land title and cost of relocating populations on said pieces of land. For example, an SEZ was due to be set up in the Western part of the country but had to be scrapped as an agreement could not be reached on what land could be used due to claims of title on the piece of land. Thus all parties will have to undergo a thorough land audit in the areas the government intends to develop industrial parks and SEZs and begin with areas where there is clear land title that is not contested.

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(source: https://www.newsecuritybeat.org/wp-content/uploads/2012/07/kenya1.jpg)

In terms of energy, NASA discusses the need for an energy policy. Jubilee highlights the need for lower electricity tariffs for industrial usage and the Third Way Alliance calls for liberalisation of the energy sector and revisions to electricity billing and pricing to reduce the cost of electricity for key manufacturing sectors. Both NASA and Jubilee highlight the need for investment in electricity infrastructure. Jubilee also emphasises green energy and, in a similar vein, NASA and the Third Way Alliance focus on ramping up clean and renewable power generation.

What most of the manifestos are not clear on is how they will reduce the cost of energy in the country. For example, Kenya needs a reduction of five cents per kilowatt hour would bring the cost down to that in Tanzania. It is only the Third Way Alliance manifesto that states they will tackle the cost of energy issues by liberalising the energy sector and revising electricity billing and pricing. However, an additional problem with energy in Kenya is power outages; Kenya has more power outages than Uganda, Rwanda and Ethiopia. None of the manifestos are not clear on how this will be addressed. All three manifestos are vague on the type of reforms and investments needed to address inefficiencies and incentivise investment in power transmission and distribution.

All three parties suggest the establishment of industrial funds or development banks specific for industrialisation, such as an export-import bank (Jubilee and the Third Way Alliance) or a co-operative fund for agro-processing (NASA). But none of the parties place strong emphasis on suggestions for financial sector development. Similarly, the three parties’ manifestos do not give attention to foreign direct investment (FDI) to promote industrialisation. While these plans sound feasible, the implementation of these financing schemes will determine uptake by private sector. Ideally, the funds should offer financing perhaps at concessionary rates. The most important factor however is that the funds need to be patient such that private sector has time to use the capital effectively and generate returns over a realistic period of time. Yet the manifestos are not very clear on how financing to the sector will be structured. The Jubilee manifesto comes closest to specifics, stating that they seek to provide long-term credit funded by long-term bonds; one wonders why this strategy has not already been deployed. Further, none of the parties place strong emphasis on suggestions for financial sector development or how to promote FDI to support industrialisation.

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In terms of skills, NASA and the Third Way Alliance highlight the importance of general education, whilst Jubilee prioritises the need to nurture a globally competitive work force to power industrialisation. NASA and Jubilee stress the importance of linkages between universities and the rest of society, although Jubilee seems clearest on this and explicitly mentions the need to develop formal linkages between the private sector, academia and government. At the moment, there is a sizeable gap between what is taught to students and what the job market requires. Therefore, if curricula are not significantly revised and linked to a push to encourage students to take up of science, technology, engineering and maths (STEM) subjects, any partnerships with academia may not be fruitful in terms of creating a labour force with skills required for industrialisation. Jubilee manifesto’s pledge to promote the study of science, technology, engineering and maths but again, one wonders this has not already been done. Both the NASA and Third Way Alliance manifestos do not contain specific details on which subject areas to target for educational improvements.

NASA and Jubilee highlight the role of a fit for purpose civil service to support industrialisation. NASA stresses the need to reduce contractors’ cost of doing business with government, streamline procurement, process payments promptly and inculcate a zero tolerance approach to corruption. Jubilee wants a truly fit for purpose public service, and mentions the importance of reducing waste, dealing with procurement and rationalising the public sector wage bill. The Third Way Alliance has a narrower focus on measures to combat corruption. This element will likely prove to be the most difficult to implement as Kenya has notoriously been unable to hold those implicated in corruption scandals to account. Thus, it is dubious as to whether any of the parties have the political will required to implement this element of the manifestos.

The Third Way Alliance manifesto places strong emphasis on developing value chains in priority manufacturing sectors, including agro-processing, textiles and leather; but some of the Alliance’s proposals to support value chain development are quite protectionist in nature. The NASA and Jubilee manifestos also mention value chains, with the NASA manifesto emphasising synergies and linkages amongst enterprises. The issue of value chains is closely linked to agriculture and what has become clear over the first iteration of devolution is that agriculture seems to be neglected by both county and national governments in terms of budget allocations. According to the International Budget Partnership (IBP), national government allocated the sector as follows: 2 percent in 2015/16, 1.3 percent in 2016/2017 and 1.8 percent in 2017/18. As IBP points out, the Maputo Declaration 2003 calls for allocation of at least 10 percent of total national budget towards agriculture. The average expenditure on agriculture in Africa is 4.5 percent; Kenya’s national allocations are clearly sub-par. Thus for the value chain manifesto declarations to work, there is need to more robust allocations to agriculture at national and county level and better coordination between the two levels of government; none of the manifestos articulate how they would make this happen.

In the context of the EAC, the push for exports in the KAM-ODI booklet is important. Both NASA and Jubilee press for better market access, NASA for SMEs in particular. Improving and/or maintaining market access in the EAC is an important element of the NASA and Jubilee manifestos, aligning well with the KAM-SET call for an export push. The Jubilee manifesto focuses on expanding Kenya’s access to the US in textiles, whereas NASA emphasises market access for MSEs. In contrast, improving access to markets for Kenyan exports is not prioritised in the Third Way Alliance manifesto.

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To be clear, access to EAC for manufactured goods is riddled with problems. Total exports from Kenya the EAC registered a 4 percent decline in 2016 to KES 121.7 billion, with exports to Uganda and Rwanda falling by 9.3 percent and 2.5 percent respectively. Further, opportunities offered by the EAC’s integrated market has institutional and regulatory barriers to trade such as such as customs clearance, standards and certification, rules of origin, licences and permits, truck inspections and language barriers.  None of the manifestos address these issues. Further, the entry of China and India into the regional market has eroded Kenya’s EAC market share from 9 percent in 2009 to just 7 percent by 2013.  The World Bank claims that Kenya’s trade performance is declining quickly due to an influx of goods from China into Uganda and Tanzania, which are major export destinations for Kenya.  In the manifestos it is not clear how EAC market access issues will be addressed. The Jubilee and NASA manifestos make general statements about Kenya’s role within the EAC, but there is little detail in either manifesto in terms of specific measures or priorities to support access for Kenyan goods in the EAC market. The Third Way Alliance’s manifesto does not make any reference to Kenya’s role in a regional context.

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

The importance of industry in economic development and regeneration

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This article first appeared in the Business Daily on July 16, 2017

 

A few weeks ago East Africa Breweries Limited (EABL) announced it would set up a KES 15 billion brewery plant in Kisumu which is anticipated to help create at least 110,000 direct and indirect jobs. This investment in this factory is crucial for the country and region for several reasons.

Firstly, EABL’s investment is an investment into industry and manufacturing. A 10 point plan to catalyse industrialisation in Kenya was developed by the Overseas Development Institute (ODI) and the Kenya Association of Manufacturers (KAM) which points to the significance of industrialisation to any economy in the world. Many economic development success stories owe a great deal to the role of the manufacturing sector. Manufacturing can play a crucial role in Kenya’s inclusive growth by absorbing large numbers of workers, including by creating many jobs indirectly through forward and backward linkages to agriculture, raising exports and transforming the economy through technological innovation. This investment is important as a significant private sector player that has been in the region for a truly long time, views investment into industry and manufacturing as a viable and solid investment option. This is good news for Kenya.

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Secondly, this investment into manufacturing is important as it is occurring in the context of a sector that has been financially neglected. As the ODI and KAM piece points out, although aggregate finance for manufacturing has benefited from an increased stock of bank lending to manufacturing, from USD 0.8 billion in 2006 to USD billion in 2015, the share of manufacturing in total lending declined from 15 to 11 percent over the same period. Thus EABL’s investment should indicate to local and global investors that the manufacturing sector is financially attractive when the right investment decision is made.

Thirdly, investment in the food and beverages (F&B) sector is a significant job creator. USA’s food and beverage companies are the biggest source of the country’s manufacturing jobs. The advent of a manufacturing facility out of Nairobi will create viable, good quality jobs for the millions of Kenyans in the region who are unemployed, under-employed or employed in the informal sector. The quality of jobs, particularly the direct jobs created by this investment, will allow numerous households in the region and country to benefit from the stability that comes from a stable and well-informed investor.

Fourthly, EABL’s investment has clear linkages to agriculture. As Kisero points out, it was David Mwiraria when he was Finance minister, who first to come up with the idea of introducing tax remission for beer made from sorghum, millet and cassava. The remission is only valid if the company develops and invest in a comprehensive value chain for these food crops. Thus EABL, knows that it is obligated to invest in agriculture that will feed into its investment. This presents a huge opportunity, particularly for small holder farmers, to diversify into more profitable crops; an option that did not previously exist. Thus the effect of EABL’s investment may well reap dividends for the local community in agriculture.

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(source: https://www.farmafrica.org/images/where-we-work/ethiopia/Barley-wide.jpg)

Fifthly, as an investment in 2017, EABL will likely invest in a state of the art facility that will encourage a reorientation of skills required to service the factory. In Trinidad, a survey on their F&B industry revealed that technology has led to an increase in automation in the manufacturing process. This engendered a shift for skills in manufacturing process away from manual labour to skilled machine operators. EABL’s investment will play a role in pointing to the skills deficit and skills requirements for F&B manufacturing in the Kenya. As a result, the local and national labour market could make good use of this opportunity to re-skill or up-skill for the development of a labour pool skilled for an industrialised Kenya in the 21st century. To be clear, this will not be easy as education policy and educational training is still largely outdated, oriented towards social sciences and not linked to industry needs. EABL’s investment presents an opportunity, along with other new investors in manufacturing, to get a true grip of the types of skills required to drive F&B manufacturing forward in the country.

And finally, this is the first new investment in the Nyanza region for a significant period of time. Western and Nyanza have long complained of being neglected in terms of significant investments. And although efforts have been made to revitalise Mumias Sugar Factory and Pan Paper, the economic logic of these investments have been questioned, and rightly so. EABL’s investment is being made with a clear vision of return, and this will extend beyond financial returns. While the bottom line is likely a focus for the EABL team, the investment will generate forward and backwards linkages into the local and national economy in a manner that grows income for the local communities. Thus, it would be an interesting exercise to analyse not only the financial, but also social returns created by this investment.

Bear in mind that Kenya has the Kenya Industrial Transformation Programme (KITP) developed by government to catalyse industry in the country. The EABL investment should be one of many aimed at pulling Kenya into an industrial age of prosperity and engender economic growth in a manner that informs economic development and regeneration.

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

 

 

How counties can attract smart investment

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This article first appeared in my weekly column with the Business Daily on April 16, 2017

The decentralisation of Kenya ushered in the county structure giving county governments power that was previously unavailable at that level. Sadly what seems to emerging is a focus by county governments is a focus on revenue generation through the imposition of new fees and levies on the private sector. This is arguably one of the most intellectually lazy means of generating income. In some ways it can be argued that the imposition of CESS, advertising fees and myriad of other fees is actually killing the business environment and the ability of private sector to generate jobs and money. So what short, mid and long term, can counties can deploy to attract the right type of investment and generate revenue?

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(source:www.montefeselfstorage.com/wp-content/uploads/2015/06/French-Investments.jpg)

An important action that can be done immediately is to determine the competitive advantage of counties. Within the County Integrated Development Plan (CIDPs), counties should articulate their competitive advantage, and strategies aimed at capitalizing on these in a manner that makes them profit and job generators. Further, it is crucial that important county leaders are identified. These include both those who live in the county as well as those with an attachment to the county. These leaders should be identified from all levels and include leaders in the private and public sectors, NGO leaders, village elders, women leaders, youth leaders as well as leaders from the disabled community. This county leadership should be consulted to develop an investment strategy in order to, among other things, identify county needs (health, education, infrastructure etc.), identify projects related to meeting these needs that are viable, identify sources of funding, develop the capacity required to raise the funds and source the skilled individuals needed to manage and implement the county projects.

In the mid-term, counties need to make an effort to make the county attractive for investment to both foreign and local investors. This includes reducing administrative and regulatory costs of doing business in the county, creating clear implementable strategies for ensuring stability and security, developing robust education and health structures and being seen to be visibly addressing corruption through the development of transparent county level public financial systems. Additionally, counties should participate in the Sub National Ease of Doing Business Index by the International Finance Corporation to determine how competitive their counties truly are.

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(source: https://anzetsewere.files.wordpress.com/2016/10/89a66-small-business-in-kenya-invest-africa-businesses.jpg)

In the mid to long term the county can make efforts to develop Public Private Partnership mechanisms to pull in the private sector to address county population needs. County governments should also clearly define accessible career pathways for the current and future skill needs of the county so as to identify those who are already well suited for key activities in the county in order to catalyse economic activity.

In the long term, counties should consider the development of an investment fund where some revenue can gain interest. This can be divided into short, medium and long term strategies that include deposits, treasury bills, treasury and corporate bonds as well as strategic equities with the ultimate aim of creating a county ‘sovereign wealth fund’. Through these strategies, county governments can build capital in a sagacious manner.

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

 

Use Public Private Partnerships to reduce debt burden

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

When the budget was read two weeks ago, one of the key questions that kept coming us was the issue of growing public debt in Kenya.  In the 2017/18 National Budget, the Kenya government plans to borrow KES 524.6 billion (6 percent of GDP).

Views differ on whether Kenya’s debt is sustainable. Some are of the view that given the massive gaps in key sectors such as energy and transport infrastructure, the country must continue to do everything possible to finance and address the gaps and that debt accrued now will pay off in the long term. Further, they argue that at a debt-to-GDP ratio of about 53 percent, Kenya is still well below the World Bank ceiling (or tipping point) of 64 percent. And while the IMF has raised concerns about Kenya’s public debt, it is below what they view as the applicable ceiling for Kenya at a 74 percent debt-to-GDP ratio. Others are of the view that a debt-to-GDP ratio beyond 40 percent for developing and emerging economies is dangerous. Further, at about 53 percent, the debt-to-GDP ratio is above the government’s preferred ceiling of 45 percent raising questions as to why this ceiling is being openly flouted.

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(source: http://www.worldbank.org/content/dam/Worldbank/Feature Story/Debt/Debt_Ladder-400X269)

Beyond the number crunching on debt figures, the broader concern for the country is that the substantial investment requirements for the country cannot be met by debt alone. This is where Public Private Partnerships (PPPs) come in. PPP refers to a contractual arrangement between a public agency and a private sector entity in which the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In short, government teams up with private sector to finance, manage and operate projects that are for public use.

There are numerous forms of PPPs ranging from projects where government owns the project and private sector operates and manages daily operations, to where private sector designs, builds, and operates projects for a limited time after which the facility is transferred to government. As the Africa Development Bank points out, PPPs are a useful means through which investment in development can continue in the context of growing pressures on government budgets. But as the World Bank points out, for PPPs to work the private sector needs political stability, a pipeline of bankable projects, transparent and efficient procurement, risk sharing with the public sector and certainty of the envisaged future cash flows.

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(source: http://www.neoias.com/index.php/neoias-current-affairs/617-public-private-partnership)

The good news is that the Kenyan government seems to be aware of the importance of PPPs at both national and county level. Numerous county governments are working with development partners to build their PPP capacity as well as identify viable county-level PPP projects. At national level, the government seeks to lock in investment through PPPs worth about USD 5 billion between 2017 and 2020. This will be important in managing the growth of public debt in the medium and long term. Through the intelligent use of PPPs, government can put the country on the path of sustainable development financing.

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

How fiscal policy can attract the right type of investment for Africa

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This article first appeared in my column with the Business Daily on March 30, 2017

Someone once told me that there are three types of foreign investors in Africa. The first are those who invest in the country in order exploit raw natural resources and direct them to their projects outside the country. The second are those who invest in countries in order to flood the country’s markets with their products. The third are investors who invest in the country for the long-term in a manner that creates employment, builds incomes, contributes to GDP growth and of course, generates profits. Africa seems to have little problem in attracting the first two investor type, but often struggles to secure the third type. The question for Kenya is, which type of investor is the country attracting? And what can be done to attract the third type of investor?

These questions are important in the context of fiscal policy, of which a key event will take place today when the National Budget 2017/18 will be read. Fiscal policy ought to and can play an important role in attracting the right type of investor to Kenya.

Over the past ten years, the government has been on an investment drive to build the country’s infrastructure. In principle, efficient public investment in infrastructure can raise the economy’s productive capacity by connecting goods and people to markets. The national budgets over the past few years have thus has allocated significant amounts to energy and transport infrastructure such as LAPSSET, the Standard Gauge Railway (SGR), Rural Electrification and the Last Mile Project. With the SGR due to be completed this year, it will become clear what dividends the country will reap from such heavy fiscal commitment to infrastructure. That said, infrastructure investment is a prerequisite to attract the third investor type as the ease and cost of transporting goods are an important business cost and variable.

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The second fiscal strategy that can bring long term investors as well as bolster food security and manufacturing is tax incentives to create productive agricultural value chains. Fiscal policy can more effectively engender a shift from subsistence to commercially productive farming by identifying commercially viable agriculture value chains and linking small holder farmers to manufacturers. Through incentives such as tax remissions along key food and beverage manufacturing value chains, fiscal policy can incentivise higher productivity in farming and contribute to making manufacturing more dynamic than is currently the case. The key however, is consistency in fiscal policy with no abrupt changes in tax remissions or other incentives so as to engender long term investment in food value chains.

Thirdly, the right investor type can be attracted to the country through investment in Kenya’s human capital. As the IMF points out, more equitable access to education and health care contributes to human capital accumulation, a key factor for growth and an improvement in the quality of life. Fiscal policy has two roles here; the first is creating incentive structures for private sector investment into the country’s private and public education and health networks and the second being the country’s own fiscal commitment to health and education sectors. National budget allocations to education stand at about 23 percent, while commitments to health are at about 6 percent of the national budget. Health allocations are paltry and while the education allocations look impressive, a great deal of the funds are directed to free primary education. In order to develop a healthy, highly skilled and productive labour pool, government ought to consider reorienting the almost obsessive fiscal commitment to infrastructure towards more robust allocations to health and post-secondary education. This should be complemented by the creation of incentive strategies that attract investment into national priority nodes for the sectors.Image result for health kenya

(source: https://investinkenya.co.ke/components/uploads/0942a7f713ab6801a17e2cfb325fc99c.jpg)

The fourth means through which fiscal policy can attract the right investors is by managing tax rates at national and county levels.  At the moment, private sector is facing numerous tax burdens due to the lack of harmonisation of tax rates between national and county governments. Fees and charges at county level are unpredictable, non-standardised and onerous; business face multiple payments for advertising and transporting goods across county borders. While these are not technically taxes, they are a form of tax exerted on private sector with no clear link to the service that should be expected for such payments. At national level, the main concern for private sector beyond VAT refunds, is that a small segment of business and individuals are onerously taxed due to the narrow tax base in the country. Thus national government ought to develop a long-term strategy for broadening the tax base.

A key component of broadening the tax base is addressing informality in the economy where millions of informal businesses do not pay taxes. The aim here is not to tax informal businesses, as most are micro-enterprises barely making profits, but rather creating an ecosystem that encourages the development of informal business. Again, fiscal action can be taken by government to direct financing focused at developing micro, small and medium enterprise through more the strategic deployment of the Youth, Uwezo and Women’s Funds. The financing architecture of these three funds has to be fundamentally rethought to focus on building technical skills and business management capacity, and improving productivity and profitability in the informal sector.

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Additionally, the government ought to develop a strategy for Kenya’s cottage industry which is the Jua Kali (informal industry) sector linked to solid fiscal commitments. Through fiscal action, the government should create an investment environment that attracts traditional investors as well as non-mainstream financing such as angel investors, impact investors and venture capitalists to invest in Jua Kali. In this manner, action will not only invest in the informal sector, it will create incentives for investment into a sector in which over 80 percent of employed Kenyans earn a living, in a manner that complements fiscal policy.

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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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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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

 

 

 

The effect of raising US interest rates on the Kenyan economy

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This article first appeared in my weekly column with the Business Daily on November 15, 2015

There is an increasing expectation coming out of the USA that the Fed will raise interest rates in December this year. Many African economists have been keeping an eye on the Fed and with good reason as the rate raise is likely to have an effect on frontier markets. The precise effect is hard to determine definitively but there are key elements of which one should be aware.

Firstly, a rise in interest rates will make investment in the USA more attractive after the Fed having pursued a zero interest rate policy for seven years. However, as the Financial Times speculates, because a rate hike has been anticipated for so long, the response to an actual hike may be muted. From a Kenyan perspective there are two ways we could go in terms of our own interest rates to keep Kenya an attractive investment destination. Interest rates could be cut to help the economy grow more robustly and boost domestic productivity, or rates could be maintained or increased in order to deter investors from taking their money abroad.

(source: http://gainspainscapital.com/wp-content/uploads/2015/09/focus-interest-rates.jpg)

Secondly, a US rate hike will inform the value of the Kenya Shilling. As has been seen in recent times, a stronger US dollar which will now be backed by higher US interest rates, has tended to place downward pressure on the value of currencies in Africa. Bear in mind that Kenya has been battling a weak shilling for months and the currency seems to have finally reached some point of stability. An interest rate hike in the US may put all the effort put into stemming KES depreciation to waste. Indeed, the CBK should expect the KES to depreciate when the rate hike is announced and will now face a renewed challenge of stemming the KES plummeting having already used most of the monetary policy tricks at their disposal. Further, although some say that investors may not react to a rate hike, there is the real risk that because the hike will strengthen the dollar, this may attract capital away from emerging and frontier markets. In short there may be a severe contraction of US dollars from global markets, especially frontier markets. Bear in mind the emerging and frontier economies as a whole benefited from an estimated $4.5 trillion gross inflow between 2009 and 2013. The thought of that scale of funds leaving emerging and frontier markets, Kenya included, is a daunting prospect.

Thirdly, Kenya has been accruing a great deal of dollar denominated debt and the government has largely been able to do so because of the leakage effects of the very low interest rates tied to the dollar. Rate hikes may therefore present the challenge of making such debt unsustainable. What can be sure is that any future sovereign bond issues by Kenya and other countries will not be nearly as favorable, with regards to interest rates, as was the case even last year. The serendipitous combination of plenty of QE informed liquidity and low interest rates in the US and Europe from which Africa and Kenya has benefited for so long, is not likely to occur again in the near future. Kenya will have to price any debt it offers particularly competitively to attract the scale of funds raised in the recent past.

(source: http://blog.heartland.org/wp-content/uploads/2013/10/debt.jpg)

However, the bottom line is that a rate hike will be a clear signal that the US is well into recovery terrain and thus US investors will be better placed and more confident in investing in general. This particularly good news for Africa, Kenya included, given the challenges the Chinese economy has been facing in the recent past. Also bear in mind that the QE from European Central Bank may buffer Africa and Kenya for a while still as a fresh round of liquidity enters global markets from Europe this time.

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