Kenya’s Infrastructure: A Continental Perspective

February 3rd and 6th, 2009

Vivien Foster & Cecilia Briceño-Garmendia, World Bank

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

Why infrastructure matters

Infrastructure’s contribution to growth in Kenyahas been less than in other African countries

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Uganda

Tanza

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South

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ca

Kenya

Ethio

pia

Guine

a-Bis

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Telecom Electricity Roads

Changes in growth per capita due to changes in infrastructure (2001-5 vs. 1991-5)

As a result, Kenya has a lot to gain from improving its infrastructure

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Niger

Uganda

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Main Telephone Lines Electricity Generating Capacity Length of Road Network

Potential changes in growth per capita from improving infrastructure to level of African leader (Mauritius)

The State of Kenya’s Infrastructure

Kenya’s transport network

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

Key findings for the road sector

Benchmarking indicates good quality, density low but adequate for connectivity

Source: Preliminary results AICD 2008

Unit LIC Kenya MIC

Paved road density km/1000 km2 of arable land

86.6 152 507.4

Unpaved road density km/1000 km2 of arable land

504.7 930 1,038.3

GIS Rural accessibility % of rural pop within 2 km from all-season road

21.7 32 59.9

Paved road traffic Average Annual Daily Traffic

1,049.6 1,108 2,786.0

Unpaved road traffic Average Annual Daily Traffic

62.6 38 12.0

Paved network quality % in good or fair condition

80.0 84 79.0

Unpaved network quality % in good or fair condition

57.6 63 58.3

Perceived transport quality % firms identifying as major business constraint

23.0 37 10.7

Fuel levy well aligned with maintenance needs and promptly collected

0 5 10 15 20 25 30

Niger

Ghana

Ethiopia

Kenya

Tanzania

US cents per liter

Optimal levy formaintenance plusrehabilitation

Optimal levy formaintenance

Actual fuel levy

Implicit fuel levy

Adequate provision for maintenance but large shortfall in allocation to rehabilitation

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100%

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Ethiopia Tanzania Uganda Kenya

Spe

ndin

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% o

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men

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Maintenance Rehabilitation

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

0.00.51.01.52.02.53.03.54.04.5

% o

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US

$/c

ap

As % GDP US$ per capita

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

Key findings for the air 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

Key findings for the maritime transport 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

….

Key findings for the rail 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

Key findings for water and sanitation sector

Benchmarking indicate good access to piped water but high reliance on surface water

Source: Preliminary results AICD 2008

Unit LIC Kenya MICAccess to piped water % pop 10.1 17.9 56.4Access to stand posts % pop 16.1 9.4 20.4Access to wells/boreholes % pop 38.3 21.6 6.3Access to surface water % pop 33.8 46.4 13.9Access to septic tanks % pop 5.3 9.0 44.0Access to improved latrines % pop 9.3 8.0 0.9Access to traditional latrines % pop 47.9 64.3 33.0Open defecation % pop 37.1 18.3 15.8Domestic water consumption liter/capita/day 72.4 63.0 NaUrban water assets in need of rehabilitation

% 35.5 42.0 25.0

Revenue collection % sales 96.0 95.0 81.1Distribution losses % production 33.0 40.0 6.1Cost recovery % total costs 56.0 58.0 80.6Total hidden costs as % of revenue % 130.0 173.9 84.9

US cents per m3 Kenya Scarce water resources

Other Developing Regions

Residential tariff 38.9 60.263.0 – 60.0

Non-residential tariff 45.7 120.74

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

Water

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% p

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tion

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acc

ess

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ea

r

Kenya SSA

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

0% 50% 100% 150% 200% 250% 300% 350%

Cape Verde

South Africa

Uganda

Kenya

Tanzania

Ethiopia

Nigeria

% of revenues

Unaccounted losses Collection inefficiencies Under-pricing

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

 

Reducing reliance on

surface water

Increasing reliance on

surface water

Aggressive reformers scoring over 80% on Rural Reform Index

Uganda Tanzania

Moderate reformers scoring 40-80% on Rural Reform Index

Ethiopia Chad

Slow reformers scoring under 40% on Rural Reform Index

 KenyaNiger

0% 20% 40% 60% 80% 100%

Burkina Faso

Uganda

Tanzania

Chad

Ethiopia

Rwanda

Sudan

Kenya

South Africa

Niger

Rural Index score

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

Sanitation

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% p

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Kenya SSA

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

Key findings on the power sector

Benchmarking indicates poor reliability and relatively high prices

Source: Preliminary results AICD 2008

Unit LIC Kenya MICInstalled power generation capacity MW/mil. people 24.4 33 796.2Power consumption kWH/capita 99.5 146 4,473Power outages Day/year 40.6 53 5.6

Firms’ reliance on own generator % consumption 17.7 15 0.5Firms’ value lost due to power outages % sales 6.1 3 0.8Access to electricity % population 15.4 18 59.9Urban access to electricity % population 71 51 83.7Rural access to electricity % population 12 4 33.4Growth access to electricity % population/year 1.4 1 1.8

Revenue collection % billings 88.2 98.7 99.9Distribution losses % production 25.7 18.1 15.7Cost recovery % total cost 90.0 108.0 125.7

Total hidden costs as % of revenue % 74.0 15 3.5

US cents Kenya Predominantly Hydro Generation

Other Developing

RegionsPower tariff (residential at 75 kWh) 12.7 10.27 5.0 – 10.0Power tariff (commercial at 900 kWh) 21.7 11.73Power tariff (industrial at 50,000 kWh) 19.0 11.39

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

0% 100% 200% 300% 400% 500% 600%

South Africa

Kenya

Uganda

Tanzania

Ethiopia

DRC Congo

% of revenues

Unaccounted losses Collection inefficiencies Under-pricing

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

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Under-pricing Under-collection Distribution losses Total as % GDP

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

Power outages are a major problem resulting in very high levels of own generation

0 20 40 60 80

South Africa

Ethiopia

Uganda

Eritrea

Tanzania

Kenya

% of firms with own generator

Own Generation Economic Cost

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Burkina Faso

Cameroon

Benin

Niger

Cape Verde

Madagascar

Senegal

Kenya

Uganda

Tanzania

Percentage of GDP

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

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

Simulated location of potential large and small scale irrigation schemes

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 costlyprices should fall with three new submarine cables (Seacom, TEAMS

and EASSy) competing to be first to start servicesbut critical to ensure competition between landing stations

Key findings for the ICT sector

Benchmarking indicates high GSM coverage but relatively high ICT prices overall

Source: Preliminary results AICD 2008

Unit LIC Kenya MIC

GSM coverage % population 48.2 86.2 97.2International bandwidth Mbps/capita 5.8 6.3 30.2Internet subscribers/100 people 0.1 0.3 2.0Landline subscribers/100 people 0.8 0.9 9.4Mobile phone subscribers/100 people 15.1 30.2 86.7

Kenya Without Submarine Cable

Other Developing Regions

Price of monthly mobile basket 15.9 11.12 9.9

Price of monthly fixed line basket 21.0 13.58 nav

Price of 20-hour Internet package 81.5 67.95 11.0Price of a 3-min call to US 0.62 2.59 2.0Price of inter-Africa tel. calls, mean 1.04 0.72 nap

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Coverage Gap Efficient Market Gap Existing Coverage

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

Financing Kenya’s Infrastructure

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

Economic target Social target

ICT Fiber optic links to neighboring capitals and submarine cable

Universal access to GSM signal and public broadband facilities

Power 990 MW new generation, 270 MW inter-connectors

Electricity coverage of 50% (100% urban and 32% rural)

Transport Regional connectivity by good quality 2 lane paved road

National connectivity by good quality 1 lane paved road

Rural Accessibility Index 75%, Urban popn within 500m paved road

WSSNa.

Achievement of MDG for water and sanitation

Possible infrastructure targets over next ten years

$ bn/ year Capital O&M Total

ICT 0.03 0.03 0.06

Power 0.75 0.27 1.02

Transport 0.27 0.29 0.56

WSS 0.13 0.36 0.49

Total 1.17 0.96 2.13

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

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Cape Verde

Kenya

Sudan

Uganda

Tanzania

Ethiopia

DRC

MIC

Oil-Exporting

LIC-No-Fragile

LIC-Fragile

SSA

% GDP

Capex O&M

0 10 20 30 40 50 60 70 80

Cape Verde

Uganda

Kenya

Tanzania

Sudan

Ethiopia

South Africa

LIC-Fragile

Oil-Exporting

MIC

LIC-No-Fragile

SSA

US$ bln per year

Capex O&M

Burden of financing needs is relatively manageable for Kenya

Existing financing flows to Kenya, US$ billion per year

O&M Investment Total

Public Public ODA Non-OECD PPI Total Investme

nt

ICT 0.28 0.05 0.00 0.00 0.32 0.36 0.64

Power 0.41 0.15 0.06 0.00 0.01 0.22 0.63

Transport 0.28 0.08 0.09 0.02 0.02 0.20 0.49

WSS 0.01 0.03 0.05 0.00 0.00 0.09 0.10

Total 0.98 0.31 0.20 0.02 0.35 0.87 1.85

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

Existing effort on infrastructure spending is already quite substantial

0 5 10 15 20

Sudan

Uganda

Tanzania

Kenya

Ethiopia

Cape Verde

Oil-Exporting

LIC-Fragile

MIC

LIC-No-Fragile

SSA

% GDP

Capex O&M

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Lesotho

Sudan

Uganda

Tanzania

Ethiopia

Kenya

South Africa

LIC-Fragile

Oil-Exporting

LIC-No-Fragile

MIC

SSA

US$ bln per year

Capex O&M

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

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ICT Power Transport WSS Total

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Kenya: Financing Gap

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

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

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SouthAfrica

Tanzania Ethiopia Kenya Sudan Uganda DRC

% o

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Roads Development Budget: Execution Ratio

Source of funding 2001/2 2002/3 2003/04 2004/5 2005/6

GoK (exchequer) 68 51 44 47 61

Appropriation in Aid 26 44 45 57 57

Total 42 46 45 55 58

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

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

Power

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0.2%

0.4%

0.6%

0.8%

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Kenya LIC

% o

f G

DP

Collection inefficiencies as % of GDPUnaccounted Losses as % of GDP

Water

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0.4%

0.6%

0.8%

1.0%

Kenya LIC%

of G

DP

Collection inefficiencies as % of GDP

Unaccounted Losses as % of GDP

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

Underpricing

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0.2%

0.4%

0.6%

0.8%

1.0%

Power Water

% G

DP

Kenya LIC

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

Electricity

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100%

Q1 Q2 Q3 Q4 Q5

% p

op

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tio

nKenya

Water supply

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100%

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% p

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Piped water Stand posts

Wells/boreholes Surface water

Those with access (and many of those without access) do not face major affordability problems

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Cost of minimum household consumption of waterCost of minimum household consumption of electricityKenyaLIC

Cost of minimum household consumption of water

Cost of minimum household consumption of electricity

US$ billion ICT Power Transport WSS Total

Financing gap 0.00 0.39 0.07 0.40 0.86

Reallocate spending across categories 0.27 0.00 0.00 0.00 0.27

Raise capital budget execution 0.00 0.04 0.01 0.02 0.07

Reduce operating inefficiencies 0.00 0.05 0.00 0.02 0.08

Improve cost recovery 0.00 0.04 0.01 0.03 0.08

Remaining gap 0.00 0.27 0.05 0.32 0.36

Overall funding gap of US$0.9b can be substantially reduced by reallocating spending

Most of these measures have already been taken since 2006

Main findings

• Kenya compares very favorably with LIC benchmark, but remains some distance from MIC benchmark

• Port logistics and electricity costs are the biggest brakes on trade and productivity

• ICT reforms have brought major benefits in terms of universalizing GSM coverage

• Sound framework for maintenance of road network, but rehabilitation remains an issue

• MDGs seem to be receding with more people using surface water and practicing open defecation

• Government has taken many important efficiency measures to reduce infrastructure funding gap

Emerging policy messages

• Prioritize improvements to Mombasa port, moving towards landlord model and greater PSP

• Prioritize investments in expanding generation capacity and strengthening transmission links

• Ensure competitive access to submarine landing stations to ensure full economic benefits

• Consider one time investment effort to clear rehabilitation backlog of the roads sector

• Improve public investment framework: planning, project screening, procurement, budget execution and project implementation