Country Report Kenya October 2012

Update Country Report Kenya 13 Aug 2012

Bottlenecks ease following new investment in transport

Kenya's deficient transport infrastructure, especially its roads, railways and ports, continues to be a significant constraint on economic growth and trade, owing to bottlenecks, congestion, delays and comparatively high costs. By some estimates, transport can account for 40% of the final price of goods. However, the situation is improving gradually following new investment, and this trend is set to continue in the coming years.

After a pile-up of containers in early 2012 at Mombasa port, a key bottleneck, congestion has eased markedly, owing to new investment and equipment, as well as improved management (under a dedicated rapid response initiative). Notably, the dredging of a new, deeper channel-completed in March following investment of around US$62m-and the deployment of new handling equipment have allowed the container terminal to receive the latest super-sized vessels.

As a consequence, traffic grew by 23.9% year on year in the first half of 2012 to 458,156 units, according to the Kenya Ports Authority. At the same time, the clearance rate has quickened and the backlog of containers in storage has declined. The planned construction of a second container terminal, costing US$300m, would double capacity, although it is unlikely to be operational until 2015-16.

Port traffic continues to rise

Conventional cargo flows have also continued on an upward trajectory, rising by 15% year on year in the first half of 2012 to 10.7m tonnes-ahead of expectations and far quicker than the 5% increase (to 20m tonnes) recorded in 2011. Imports for Kenya and other members of the East African Community (plus South Sudan) account for around 85% of port traffic. Work is also advancing on a second major port at Lamu, further north, to relieve pressure on Mombasa and to provide a new outlet to the sea for landlocked South Sudan and Ethiopia.

In July, following the formal launch earlier in 2012 of the US$20bn-25bn Lamu Port-South Sudan-Ethiopia Transport Corridor (LAPPSET), including a port, roads, railways, a new airport, an oil pipeline and a possible refinery, the government opened bidding for the contract to design and construct an initial three berths. However, these are unlikely to come into service before 2015-16, while the wider project could take a decade to complete and may not proceed in full. The new port alone is expected to cost more than US$5bn.

Donors provide funding for major road projects

To accompany port expansion, Kenya is also investing heavily in road and rail networks, backed by significant donor funding. In a key development, Japan approved a US$360m loan for roadworks in late May, focused principally on the environs of Mombasa port. Plans include a new ring road and a bypass connecting the south coast with the main route toward Nairobi. Work is expected to start by the end of 2012 for completion in 2018. Several major road projects are also planned in the capital, after the opening earlier this year of a new 50-km highway to Thika, which has given a significant boost to business along the route and cut journey times from three hours to around 45 minutes.

Adding to the momentum, the World Bank approved a new US$300m credit in early August for the Nairobi Urban Transport Improvement Project, which envisages a string of roadworks (including the widening of the main Uhuru Highway and the outer ring road) as well as investment in traffic management and a rail link from the international airport to the main railway station. Tendering for the projects is expected to take place in 2013. Notably, Kenya hopes to invest US$24bn in roadworks over 15 years, including US$7bn in the first of three five-year phases.

The rail network also attracts new investment

Kenya's neglected cross-country rail network is also being overhauled, with the aim of shifting traffic from the overburdened roads. Less than 10% of cargo at Mombasa port is currently transported by rail, although Rift Valley Railways (RVR), the private firm that won a 25-year concession in 2006, hopes to lift this to 35% within five years. RVR was initially dogged by disputes over ownership and management, but these were resolved in 2011, allowing the firm to secure US$164m in fresh funding for new investment from a consortium of donors.

A first phase, costing US$62m and due for completion by the end of 2014, is geared towards modernising locomotives and rolling stock and repairing a badly worn 70-km section of track between Mombasa and Nairobi. This will permit greater volumes of traffic to travel more quickly. Proposals for a new standard-gauge railway costing up to US$2bn, to complement the existing narrow-gauge network, secured cabinet approval in early August.

However, despite the investments already undertaken and the ambitious scale of future plans, years of neglect mean that congestion and delays will persist into the medium term, especially given brisk growth throughout the East African region. Improvements in transportation will nevertheless boost Kenya's standing as an investment destination and help to cement the country's role as a regional hub.

© 2012 The Economist lntelligence Unit Ltd. All rights reserved
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