Kenya tackles multi-modal upgrades to remain East Africa's transit hub

Transport and logistics are at the core of Kenya’s economic narrative due to the country’s role as a trans-shipment hub for goods moving on to landlocked countries in East and Central Africa. The Port of Mombasa is a crucial landing point for goods, and links to the Northern Corridor that runs west across the country to the neighbouring markets of Uganda, Rwanda, Burundi and the Democratic Republic of Congo.

Serving the region means maintaining sufficient transport and logistics capacity for now and for the future, meaning that the government is expending significant capital on transport networks, often in collaboration with private investors. Among the large public sector investments currently under way is the $4bn Standard-Gauge Railway (SGR), a new railroad from the Port of Mombasa to Nairobi and beyond that will alleviate congestion of the country’s busiest highway and reduce transit times from the region’s largest port.

Land transport grew by 4.1% in 2015 compared to 3.4% the previous year, while air transport contracted for the second year in a row, according to the Kenya National Bureau of Statistics. The combination of all other transport rose by 4.5% in 2015 versus a growth rate of 2.4% in 2014. As a portion of GDP in 2015, land transport composed 6.2% while air transport and other transport accounted for 0.3% and 1.8%, respectively.

Roads

The highways network plays a pivotal role in the Kenyan economy as well as that of the region, as about 90% of goods in Kenya are transported by road. Of the country’s approximately 177,800 km of roadways, 63,575 km are classified and 44,100 km are considered in good condition, according to the Kenya National Highways Authority. Of the total network, seven roads totalling 3755 km are considered Class A international trunk roads, slightly over two-thirds of which are paved. There are 10 Class B roads that serve as national trunk roads; these total 2799 km and 1339 km are paved.

In addition to the Kenya National Highways Authority, there are two other entities at the national level involved in road constructions and maintenance: the Kenya Urban Roads Authority, which handles all municipal roads with the exception of national trunk lines that pass through cities; and the Kenya Rural Roads Authority, which is responsible for Class D and E rural roads. Counties are to oversee their own roads according to the 2010 constitution, but some lack the capacity to do so in terms of operating and maintaining the necessary machinery, according to the Kenya Institute for Public Policy Research and Analysis.

Funding

Road financing comes in part from the Roads Maintenance Levy Fund – a KSh18 ($0.18) per litre tax on consumer fuels – but this alone has not been enough to raise needed cash. Kenya has supplemented the tax with donor funding. The largest multilateral donor is the World Bank, which plans to invest over $1bn per year in the country between FY 2014 and FY 2018.

As of August 2016 there were $4.3bn worth of backlogged maintenance projects and arrears to existing road contractors of more than $1bn. Given the state’s legacy of slow progress and struggles with maintenance and payment, it hopes that private investment will quicken the pace and has explored potential models using the public-private partnership (PPP) structure.

One proposed template was the National Road Annuity Programme, based on the build-operate-transfer model. Contractors would be encouraged to design, build and maintain roads, securing their own financing in the process, with government guarantees available to help them. In return, the state would provide regular payments to these companies as projects are ongoing – as well as for maintenance – rather than having them wait until a road is completed or until it needs maintenance before issuing funds. However, securing financing was costly under this model, due in part to higher levels of perceived risk by lenders, leading the government to explore other methods.

In July 2016 local media reported that the government was seeking a $1.5bn line of credit from the International Finance Corporation to complete its 10,000-km road building programme. The money would be put to use for the completion of 4000 km of urban roads, with state funding used to complete 6000 km of rural roads. The government requires almost KSh550bn ($5.4bn) to complete the project.

Air

The total number of international visitor arrivals in Kenya fell for a fourth consecutive year in 2015, dropping to 1.18m – 35% lower than in 2011 – a reflection of ongoing security concerns over Al Shabab, a terrorist group in East Africa. Additionally, macroeconomic headwinds are having a significant effect, according to Austin Nyawara, regional manager East Africa and Middle East of South African Airlines, particularly on the number of business tourists coming to Kenya. “Corporate contracts have been dropping due to depressed commodity prices, with companies mothballing energy and commodity projects in the region, Nyawara told OBG. “This has resulted in a disproportionate reduction in business class volumes.”

However, tourism continues to be the country’s biggest draw and figures are rebounding. This is in part helped by government efforts to step up security measures. Mustafa Özkahraman, country director of Turkish Airlines, told OBG, “From the perspective of airlines, the government’s response in addressing security risks related to terrorist incidents has been satisfactory.” In July 2016 tourists accounted for 76% of arrivals at Nairobi’s Jomo Kenyatta International Airport (JKIA) and 97% of those at Moi International Airport in Mombasa. For the entire 2016 year, JKIA and Moi brought in 878,000 visitors, according to the Kenya Tourism Board, compared to 748,710 in 2015.

Kenya Airports Authority (KAA) oversees eight airports and two airstrips in the country. The main facility is JKIA, which hosts more than 40 passenger carriers and 25 cargo transporters. In 2015 approximately 300,000 tonnes of cargo was processed at the airport. Other key airports include Moi International, which hosts 18 airlines connecting Kenya to Europe and to 20 regional cities; and Eldoret International Airport, in Kenya’s north-west. The latter was built to support tourism and exports from the region, and it currently operates three scheduled cargo flights per week.

Liberalisation

The closest competition Nairobi faces as a regional air travel hub comes from Ethiopia’s Addis Ababa Bole International Airport, which sees traffic of around 1.6m passengers per year compared to the 672,000 processed by JKIA in 2015. In terms of registered-carrier departures, however, Kenya’s 81,437 on the year represented a much smaller difference with Ethiopia – where the total was 83,940 – reflecting Ethiopian Airlines’ increased focus on long-haul routes and its access to the US market.

As a result, Kenya’s national flag carrier, Kenya Airways, has reorganised its business model to focus and consolidate its business in Africa, and sought to raise funds by selling or leasing some of its larger aircraft. As a part of the airline’s Operation Pride reorganisation strategy, it cancelled a number of long-haul routes to destinations outside of the continent. In early 2016 the airline sold its morning landing slot at London’s Heathrow Airport to Oman Air for KSh7.5bn ($73.2m), setting a record for the sale of such rights at the airport.

The liberalisation of African aviation markets could benefit Kenya Airways significantly. Most African countries – including Kenya – agreed to liberalise their aviation markets in the Yamoussoukro Decision that became binding in 2002, but the agreement has fallen short of implementation across the board. At the November 2015 meeting of the African Airlines Association, 13 member states said they would liberalise by 2017, Kenya among them. If liberalisation does happen, it could be a boost for the whole continent. An International Air Transport Association study found that liberalisation in 12 African markets would generate 155,000 jobs and $1.3bn in GDP. As of July 2016 the industry supported 7m jobs and $80bn in GDP across the continent.

Kenya Airways looks forward to a helping hand. In November 2015 the airline announced a loss of $115.8m for its fiscal year ending in September 2015 – a fourth consecutive net loss period. In addition to regional security concerns, CEO Mbuvi Ngunze cited competition from other airlines, exchange-rate volatility and fluctuating fuel prices. The airline is currently going through a cost optimisation process, which is aimed at enhancing its long-term capital base.

Airport Infrastructure

The airline is likely to benefit from the ongoing overhaul of its main hub. Recent upgrades at JKIA include the refurbishment of Terminal 1 after a fire in 2013 and enhancements to the sole runway, taxiways and apron. In late 2016 the government moved away from its ambitious plan to construct a new terminal in favour of paving a second runway and enhancing the current terminal’s facilities. Consultants have been hired and construction of the runway is expected to commence in 2017 at a cost of KSh37bn ($361m), according to local media. Terminal upgrades will allow the current 7.5m passenger capacity to reach 10.5m passengers upon completion.

The KAA has also been working to restore access to the US market. Concerns cited at JKIA in the past included buildings near the airport in the flight path, and the need for departing and arriving passengers to be kept separate from each other within terminals. However, by September 2016 JKIA had met all 149 conditions required, and the airport was granted Category One status by the US Federal Aviation Administration in early 2017. Long-haul flights to the US are expected to resume in late 2017 after nearly three decades.

Maritime

The current focal point of Kenya’s maritime sector is the Port of Mombasa, the largest in East Africa. More than 200m people rely on the goods unloaded here, and the road from the port to Nairobi is one of the continent’s most crucial economic corridors.

Cargo traffic grew 7.3% in 2015, with a total of 26.7m tonnes of cargo passing through during the year – up from 24.9m in 2014. Container traffic totalled 1.08m twenty-foot equivalent units (TEUs), just short of the port’s goal of 1.1m. Typically ships arrive fully stocked and leave with much less on board – a common issue throughout sub-Saharan Africa. Imports reached 22.7m tonnes on the year, with exports at 3.5m tonnes.

Kenya has also seen a return of cruise ships to its coastline, with 3302 visitors in 2015 and 2717 in 2016. This form of tourism had been dormant in recent years due to piracy off the Horn of Africa, but with those risks having abated, the country is hoping to return to previous levels. In 2004, for example, 42 cruise ships brought approximately 15,000 visitors.

Ports in the country are managed by the Kenya Ports Authority. The port at Kisumu, on Lake Victoria in western Kenya, is considered an important trans-shipment point for goods trucked in from Mombasa or Nairobi. Traffic here has fallen in recent years, but a round of fresh investment – including KSh22.5bn ($219.5m) in upgrades and rehabilitated roads – may boost throughput. The SGR is also expected to help revive the facility.

Port Upgrades

With competition from other facilities along the Indian Ocean increasing – including the Port of Djibouti, the Port of Dar Es Salaam and Maputo Port, all of which are in the midst of significant expansion programmes – Kenya’s government has prioritised investment in its ports with a constant stream of capacity upgrades and logistics improvements at Mombasa. The $217m Kipevu Container Terminal, for example, was opened in 2016 and adds another 550,000 TEUs of capacity. Infrastructure around Mombasa is another focus, with both road and the SGR links under way.

The port’s focus for 2017 is on reducing the time required to import goods from 11 days to just under four, as well as dredging to accommodate larger ships. While productivity could be further improved, results to date have enhanced the experience and reduced the need for some facilities. “The port is not congested anymore, so we don’t need 17 container freight stations,’’ Steve Felder, managing director for East Africa at Maersk Line, told OBG. The biggest port investment under way is at Lamu, the planned terminus of the Lamu Port South Sudan-Ethiopia Transport Corridor. The plan calls for a new deep-water port with three berths; dredging began in October 2016 and was 20% complete by April 2017. The China Communication Construction Company is responsible for construction, and when it is completed the port will serve as the entry point for a new transport corridor with access to South Sudan, Somalia, Uganda and Ethiopia.

Rail

Freight rail service has grown more than passenger service in recent years, as total cargo traffic rose by 4.4% in 2015 to 1.6m tonnes, and passenger journeys dropped from 32.8m in 2014 to 2.4m in 2015.

Kenya’s railroads were built under British occupation as part of a regional network, and were managed by the East African Railways and Harbours Corporation until 1977, when the state-owned Kenya Railways assumed oversight of the domestic parts of the system. A 25-year concession agreement was granted in November 2006 to Rift Valley Railways (RVR), a private company whose holdings include the network’s continuation into Uganda. The firm manages a total of 2352 km of track as part of the deal. However, RVR has come under scrutiny by the government for not fulfilling multiple agreement requirements, and in early 2017 Kenya Railways moved to terminate the agreement.

Kenya Railways is also overseeing the SGR. Work has been ongoing since 2013, progressing from Mombasa inland. About 90% of the financing for the estimated $3.8bn project – the largest single foreign investment in Kenya – has come from Chinese state entities. The first phase of the project is the 609-km route from the coastal port city to Nairobi. From there construction will proceed in a series of phases, starting with a 120-km continuation to Naivasha and then another 262 km to Kisumu. The rationale for building the SGR is to move goods faster and cheaper. Presently, a train trip between Nairobi and Mombasa takes 12 hours – and sometimes longer when delays occur – and a truck full of cargo may need 25 hours. The SGR will slash those durations to four hours for passenger trains and to eight hours for cargo hauls.

Ensuring Returns

There are some concerns over the cost of the railway, which on a per-kilometre basis is pricier than the recently completed 780-km, $43.4bn Addis-Djibouti railway. This is in part a reflection of the challenging terrain that the track will pass through. There the estimated cost rises to $12.50 per km, up from $8 for the initial section. Still, the expected impact on the economy should be sizeable once the line is operational, and James Macharia, the cabinet secretary of the Ministry of Transport, has predicted a 1.5% jump in GDP growth on completion. “It’s a long-term play and you’ve got to consider that,’’ Felder told OBG. “There may not be any return on investment for the government, but there are a lot of secondary benefits.’’ URBAN TRANSPORT: Kenya is also looking to improve urban transport, with Nairobi a particular focus. The government has announced plans for a KSh41.3bn ($403m) 167-km mass rapid transit system, which will combine both bus rapid transit (BRT) and commuter rail to ease pressure on the city’s congested main thoroughfare, Mombasa Road, and improve access to outlying suburbs. The Nairobi Metropolitan Area Transport Authority was created in February 2017 to help manage the plan and will bring together the representatives of Nairobi, Kajiado, Murang’a, Kiambu and Machakos counties to address transportation issues.

However, some changes to the plan have surfaced, with Macharia saying in July 2016 that the BRT element of the project had been scrapped due to a lack of space on existing roads for new dedicated lanes. BRT projects are still under consideration in other larger cities, including Mombasa and Kisumu. The KSh15bn ($146.4m) commuter light rail project for Nairobi is still part of the scheme. It would encompass 24 km of track along three major thoroughfares – Wayaki Way, Ngong Road and either Thika Road or Langata Road – with the capacity to move at least 300,000 passengers per day. Another commuter-rail project would see track rehabilitation and expansion between Nairobi and Syokimau, a nearby town in Machakos County, as well as the acquisition of 10 new trains, for KSh12bn ($117.1m). Capacity of the line would jump from 12,000 passengers per day to 200,000.

Domestic Costs

The government hopes the new infrastructure projects will contribute to bringing down the cost of internal trade and distribution, which is currently high in comparison to other emerging markets outside of Africa. “Despite the considerable upgrades to Kenya’s transport infrastructure, transport and logistics costs in the region remain quite high,” Gil Recizac, managing director of international removals firm AGS Movers, told OBG. “This is due to non-tariff barriers, such as weigh bridges and roadblocks.”

The SGR will play a crucial role in this respect as an alternative to the present options, which include road hauling and the existing narrow-gauge rail network operated by RVR. Currently, the vast majority of goods are moved inland by truck. The SGR will allow trains to move faster and carry more. The cost of cargo shipment is expected to fall from $0.20 per tonne per km to $0.08. RVR pegs the price of moving goods to Uganda at $0.13 per tonne per km and estimates a drop of 35%.

Cross Border

The country’s soft infrastructure is also a priority for reform as the government looks to reduce delays and improve efficiency for cross-border transactions. In addition to local offices of the Kenya Revenue Authority and the Kenya Bureau of Standards, the Port of Mombasa hosts the tax authorities of countries receiving onward shipments, including those of Rwanda, Uganda, Tanzania and Burundi. Kenya has introduced a digital alternative for filing paperwork there: the Kenya National Electronic Single Window System. “Delays and corruption at the port are real problems, but there has been a substantial improvement from before,’’ Kwame Owino, CEO of the Nairobibased Institute of Economic Affairs, told OBG.

Outlook

The transport sector is a core part of Kenya’s economic strategy. The SGR, efficiency upgrades at the Port of Mombasa and enhancement of other ports and transit corridors are central to the effort to compete with neighbouring countries’ projects. Being at the developmental forefront of transport infrastructure will help Kenya recapture some lost revenue and maintain its leading transit role in the region.