Kenya risks not getting return on infrastructure investments – WB

November 1, 2016
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According to the report, total factor of productivity has stagnated at about 1.1 per cent with projections indicating a decline to about 0.5 per cent.

, NAIROBI, Kenya, Nov 1 – Even as Kenya continues to increase public investments, the returns on these infrastructure projects are falling due raising projects costs and project management hurdles

According to a new report by the World Bank, the country has continued to heavily invest in infrastructure as investments on infrastructure now averages at 21 per cent of Gross Domestic Product (GDP).

The budget for economic infrastructure sectors that include energy and petroleum, roads, railway, port and ICT has quadrupled from Sh100 billion to Sh400 billion in a span of six years and is estimated at Sh800 billion in the 2016/2017 financial year.

The net result of these investments means improved infrastructure quality in Kenya. According to the World Bank’s Logistics Performance Index, Kenya has improved its ranking on the index from being number 76 out of 150 countries in 2007 to 42 out of 160 countries in 2016.

However, efficiency and effectiveness of public investments in Kenya have been declining in recent years.

According to the report, total factor of productivity has stagnated at about 1.1 per cent with projections indicating a decline to about 0.5 per cent.

Another proxy for productivity, the incremental Capital Output Ratio (ICOR), which measures the additional amount of investment necessary to generate an additional unit of production, has been rising.

There is also a growing difference between funds allocated for public projects and utilization of these funds.

In 2010/11 the difference was 1 percent of GDP compared to 3.7 percent of GDP in 2014/15, though expenditure in absolute terms was higher.

Meanwhile, decomposition of Kenya’s growth, according to the report, shows the contribution of net investment to GDP growth declined in the recent years.

investment-to-growth

“For the period 2008-12, investment contributed 1.9 percentage points to GDP growth compared to 0.9 percentage points in 2013-15, which was even lower than 1.1 percent for the period 2003-07,” the report indicates.

Other factors that have added to the cost of public investments include high cost of land acquisition and compensation, and drawn out land resolution mechanisms.

“An acre of land in Upper Hill has shot from Sh60 million in 2007 to Sh470 million in 2014, a 789 percent jump. This is only comparable to Hong Kong,” said World Bank’s Jane Kiringai.

The Kenya Economic Update notes that the country should ready itself for potential downside risks that could derail growth, and recommends improving the productivity of public investment to further accelerate growth potential.

While Kenya is set for further medium-term growth, the report recommends reforming the systemic weaknesses of the country’s Public Investment Management (PIM) system, to see stronger growth. PIM is currently characterized by low execution and cost escalation of infrastructure project.

Kenya’s investments are debt financed, which has resulted in a widening of the budget deficit and corresponding increase in debt.

The budget deficit increased from -5.4 per cent in 2012/13 to -9.4 per cent in the 2016/17 budgets while the stock of debt increased from 42 to 53 percent of GDP.

Third, the investment drive has delayed fiscal consolidation and the country is running the highest deficit in the East Africa region.

“The situation for a period of time can be a sensible strategy if there is a credible expectation of future payoffs in terms of increased productivity and derived additional economic growth. However, models of medium term future developments in productivity does not support expectations of productivity increases,” the report underscores.

Kiringai says it will be essential for Kenya to establish minimum criteria for project preparation, appraisal and inclusion of a project in the budget, while establishing an escrow account for financing land acquisition and resettlement.

“It will also be crucial to strengthen transparency and accountability for management of the portfolio of public investment projects,” adds Kiringai.

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