Kenya’s Infrastructure: A Continental Perspective

2. Kenya’s Infrastructure: A Continental Perspective February 3rd and 6th, 2009 Vivien Foster & Cecilia Briceño-Garmendia, World Bank

3. Methodology and approach • Methodology • Data collection by local/international consultants and Bank staff based on standardized methodology • Baseline year for data is 2006, does not reflect subsequent evolution • Approach • Focus on benchmarking Kenya’s infrastructure against African neighbors • Benchmarking group includes LIC (non-fragile), East African neighbors, South Africa, and regional outliers

4. Why infrastructure matters

5. Infrastructure’s contribution to growth in Kenyahas been less than in other African countries Changes in growth per capita due to changes in infrastructure (2001-5 vs. 1991-5)

6. As a result, Kenya has a lot to gain from improving its infrastructure Potential changes in growth per capita from improving infrastructure to level of African leader (Mauritius)

7. The State of Kenya’s Infrastructure

8. Kenya’s transport network

9. Key findings for the road sector • Trunk network: of adequate length and adequate surface type • Rural network: RAI 30% among best in Africa, although low in absolute terms • Institutional framework: high quality sector institutions • Fuel levy at 12 US cents, which is close to Kenya’s maintenance norms; no major collection problems • Good maintenance provision, but huge unfunded rehabilitation backlog, which absorbs maintenance funding • Relatively low overall roads spending, exacerbated by exceptionally low capital budget execution ratios and major implementation time and cost over-runs (26mos) • One-time spending spike would help clear the backlog, it is currently being implemented

10. Benchmarking indicates good quality, density low but adequate for connectivity Source: Preliminary results AICD 2008

11. Fuel levy well aligned with maintenance needs and promptly collected

12. Adequate provision for maintenance but large shortfall in allocation to rehabilitation

13. Road investment average in absolute terms with room to be increased as share of GDP

14. Key findings for the air transport sector • One of Africa’s leading players in air transport: key gateway • Air transport services: • International: Kenya Airways of SSA’s top three carriers and concentrates a large share in a oligopolistic market, safety rankings up to international benchmarks • Domestic: 4th largest domestic passenger traffic in Sub-Saharan Africa (after South Africa, Nigeria and Mozambique) with a marked trend toward route consolidation • Airport infrastructure: • Kenyatta Airport in Nairobi among the three major SSA hubs • Runway capacity not a limiting factor but major capital investment needed for taxiways, parking and terminal space • PPI and Regulation: • Greenfield project for Kenyatta Airport Cargo terminal (1998) • Formed but not fully implemented East African Civil Aviation Authority Enforcement aims at better safety at regional level

15. Key findings for the maritime transport sector • Mombasa one of the largest ports in Sub-Saharan Africa (both in cargo and container handling). Natural transshipment port for East Africa • Maritime transport services: • Recently introduced modern frontline cargo handling improving performance, yet Mombasa runs under a service port model ranking among the least advanced reformers in SSA • PPI experience mixed, with the only cancelled management contract in this sector (Operation Mombasa container terminal), but grain terminal concession operating very efficiently • Mombasa congestion worsened by poor interface transport system with roads and railways • Maritime infrastructure: • Mombasa port facing sever capacity constraints (ratio demand/capacity over 80% for both cargo and container traffic) consequently role in transshipment is declining

16. Key findings for the rail sector • Rail in bad condition, 50% of assets in need of rehabilitation • 25-year concession recently signed. Plans for a $206m investment over 5 years announced for rehabilitation of tracks • ….

17. Key findings for water and sanitation sector • Water • Average levels of access, but worrisome increase in use of surface water • In urban areas, utilities capture only 57% of corresponding revenues, institutional reform agenda recently advanced • In rural areas, little progress with reform agenda and discouraging trend in use of surface water • Sanitation • Majority of population using traditional latrine and flush toilet (only urban) • Discouraging increase in people practicing open defecation

18. Benchmarking indicate good access to piped water but high reliance on surface water Source: Preliminary results AICD 2008

19. Growing reliance on surface water and static trend in improved sources is worrisome

20. Hidden costs of water utilities high, due to distribution losses and under-pricing

21. Reliance on surface water increasing in rural areas and little progress on rural sector reform agenda

22. Discouraging trend in open defecation and relatively slow expansion of traditional latrines

23. Key findings on the power sector • Access rates lower than regional averages • Institutional reform have translated into huge efficiency gains for power distribution • Cost-reflective tariffs –high by regional standards 0.2$/kWh— reflect use of costly emergency generation • LRMC could be significantly lower ($0.08 kwh) • Poor reliability of service due to generation capacity constraints and inadequate capacity in the transmission backbone leads to major costs to the economy. • Power security likely the largest benefit of trade

24. Benchmarking indicates poor reliability and relatively high prices Source: Preliminary results AICD 2008

25. Hidden costs of power utilities low, reflecting recent major efficiency gains in distribution

26. KPLC reforms save 1% of GDP by reducing under-pricing and collection losses

27. Constraints in generation capacity lead to unreliable service and high cost emergency leases • Power outages are a major issue in Kenya • Power outages led to welfare losses of 2 percent of GDP • More than 70% of firms report owning back-up generators • Immediate response has been leasing of emergency generation • Lease payment absorbs 1.5 percent of GDP for <10% capacity • Cost is around US$0.25/kWh relative to LRMC of US$0.08/kWh • Government working on long term solutions • Expansion of supply will add more than 300MW • Diversification by increasing trade and developing geothermal resources

28. Power outages are a major problem resulting in very high levels of own generation Own Generation Economic Cost

29. Key findings on water resources • Significant hydrological variability, which impacts the country’s economy (floods & droughts) up to 2% GDP per year. • Water stressed country with per capita endowment of <650 m3 per year and storage infrastructure of <124 m3 per capita • Large untapped hydropower and irrigation potential • Urgent need to develop additional multi-purpose storage reservoirs (small, medium, large) • WRM Authority needs further strengthening to effectively fulfill its mandate as custodian of the water resource base, and trans-boundary RBO also need special attention

30. Key findings on irrigation sector • Current irrigated area of 103,000 has represents only 2% of cultivated area • Simulation suggests could be economically viable to irrigate a further 370,000 has for a total investment of US$0.2b and a BCR of 2.2 • About half relates to large-scale irrigation schemes associated with existing dams • Other half relates to small-scale irrigation schemes

31. Simulated location of potential large and small scale irrigation schemes

32. Key findings for the ICT sector • Leading African reformer in ICT sector • Market already quite competitive, but could support more competition both in fixed and mobile segments, as well as in backbone • Very high GSM coverage and tiny market efficiency gap, but prices relatively high in spite of competition • Prices falling as fourth mobile operator just began operations • Important to define suitable scope for public versus private investment in backbones • Internet: relatively high usage but costly • prices should fall with three new submarine cables (Seacom, TEAMS and EASSy) competing to be first to start services • but critical to ensure competition between landing stations

33. Benchmarking indicates high GSM coverage but relatively high ICT prices overall Source: Preliminary results AICD 2008

34. Tremendous progress in expanding GSM coverage with market efficiency gap of only 5%

35. Financing Kenya’s Infrastructure

36. Key findings on infrastructure finance • Moderate spending needs of US$2.1b for infrastructure, almost balanced between investment and maintenance • Burden of spending needs is manageable given Kenya’s economy • Existing infrastructure spending of US$1.9b mainly on ICT and power • Effort on infrastructure spending relatively high • Particularly strong at leveraging PPI for ICT finance • Public investment in transport looks relatively low • Infrastructure financing gap of US$0.9b or 5% of GDP, mainly in power investment and water maintenance

37. Possible infrastructure targets over next ten years

38. To meet these targets, Kenya would need to spend US$2.1b per year for next decade

39. Burden of financing needs is relatively manageable for Kenya

40. Kenya already spends US$1.9b on infrastructure with significant leveraging of PPI

41. Existing effort on infrastructure spending is already quite substantial

42. Overall financing gap of only US$0.9b or 5% of GDP, mainly in power investment and water O&M

43. Financing gap of US$0.9b pa could be reduced by efficiency gains Evidence of historic under-spending on maintenance that is inflating current investment requirements Enormous scope for reallocation of public funds from ICT to other infrastructure sectors if private finance could be captured Significant scope for raising capital budget execution rates, particularly in rodas Scope for improving distribution losses in power sector Significant scope for improving cost recovery in the water sector Capturing all possible efficiency gains would virtually close financing gap; many of these actions have already been undertaken by govt Key findings on potential efficiency gains

44. About 25% of infrastructure assets require rehabilitation, indicating inadequate maintenance

45. Poor execution ratios and high overruns in road sector call for better planning, project selection and management Based on a sample review of the roads portfolio in 2007: • Cost overruns: 90% of roads development portfolio reached more than 80 percent of the original contract sum • Time overruns: Actual time for completion more than two times that at the tender stage

46. Relatively efficient utilities, although distribution losses nonetheless absorb 0.4% GDP

47. Under-pricing is relatively small, but nonetheless amounts to 0.4% GDP

48. Access to power and water very inequitable making existing subsidies highly regressive

49. Those with access (and many of those without access) do not face major affordability problems Cost of minimum household consumption of electricity Cost of minimum household consumption of water

50. Overall funding gap of US$0.9b can be substantially reduced by reallocating spending Most of these measures have already been taken since 2006