 Recent  Inflation  Islamic Finance: Minimization Kenya Economic Dynamics, Food New Opportunities of Costs in Public Prices and Policy for Driving Infrastructure Performance and Responses Development Investments. Growth Prospects Agenda Page 4 Page 6 Page 9 Page 7 Policy Monitor Supporting Sustainable Development through Research and Capacity Building I s s u e 8 N o . 4 A P r I l – J u N e 2 0 1 7 Islamic Finance: New opportunities for Driving Development Agenda Editorial Team: • Bernadette Wanjala • Paul Odhiambo Contents • Boaz Munga I s s u e 9 • Ann Gitonga • James Gachanja 4 • John Nyangena Kenya’s Economic Performance and Growth Contributors: • Benson Kiriga Prospects • Bernadette M. Wanjala • Adan Guyo Shibia • Christopher Onyango • Helen Hoka • Victor Mose • Humphrey Njogu • James Gachanja Inflation dynamics, Design and Photos: food prices and policy JJ Studios responses 6 Published by: Kenya Institute for Public Policy Research and Analysis (KIPPRA) 7 Bishops Garden Towers, Islamic Finance: New Bishops Road Opportunities for Driving P.O. Box 56445-00200, Nairobi, Kenya Development Agenda Tel: +254 20 4936000 +254 20 4936000 / 2719933/4 Fax: +254 202719951 Cell: +254 736 712724 +254 724 256078 Email: monitor@kippra.or.ke Website: www.kippra.org Minimization of Costs Twitter: @kipprakenya in Public Infrastructure Vision Investments 9 An international centre of excellence in public policy research and analysis In this Issue: Mission To provide quality public Lowering transaction Costs in EAC policy advice to the cross-border trade through trade Government of Kenya by conducting objective facilitation .......................................... 11 research and analysis and Policy news ........................................12 through capacity building in order to contribute to the KiPPRA news and Events ..................14 achievement of national Current KiPPRA Research Projects ...15 development goals KiPPRA in pictures .............................16 2 Editorial Welcome to the April-June 2017 edition of KIPPRA Policy Monitor. The lead articles in this edition cover recent Kenya economic developments and prospects with a detailed focus on inflation dynamics given the Dr Rose ngugi prevailing drought conditions. The edition also looks at Executive Director, KIPPRA Islamic finance as an alternative source of financing the development agenda, minimization of costs in public 2017/18, 5% in 2018/19 and 4% by 2019/20, in line with infrastructure investments and the opportunities to lower the EAC convergence criteria. This demonstrates the transaction costs to boost intra-regional trade. There are commitment by the government to continue with prudent highlights on key domestic and global policy news during macroeconomic management. the period, key ongoing KIPPRA research projects, as well Islamic finance is increasingly expanding the range of as KIPPRA news and events. financial instruments to finance development while also The recent data released by Kenya National Bureau of enhancing financial inclusion. Therefore, this edition Statistics indicates that the economy grew by 4.7% in the reviews the key shari’ah products in the Kenyan market, first quarter of 2017, a slightly lower growth rate compared and the ongoing efforts to strengthen their institutional to 5.3% in the first quarter in 2016. Growth in the second structures including the establishment of Islamic Finance quarter of 2017 may be slower due to prolonged drought, Project Management Office by the National Treasury. In and slow uptake of domestic credit. Further, should the addition, this edition highlights the launch of M-Akiba, invasion of army worms destroy a significant proportion which is a special retail bond aimed at promoting a of grain crops, overall inflation could be affected because culture of saving while also contributing to infrastructure of higher food prices. On the upside, the launch of the financing. Further, insights are provided on how to 480km Standard Gauge Railway (SGR) on 31st May 2017 minimize the costs of public infrastructure investments marked a significant milestone in transport infrastructure through consideration of social and environmental costs development. The railway is expected to contribute and other costs such as those arising from project financing towards improving the investment climate and therefore and land speculation. Consideration of these costs form boosting economic activity. With the General elections in an integral part of the initial project assessment. Kenya slated for 8 August 2017, the presentation of the This edition also highlights the prospects of lowering 2017/18 Budget Statement was brought forward to end- transaction costs through trade facilitation to promote March to allow for timely approval of the Appropriations intra-regional trade. Despite regional integration Bill. The budget proposes to reduce fiscal deficit (inclusive initiatives in the continent, intra-African trade remains of grants) gradually from 9% in 2016/17 to about 6% in relatively low given the high trade costs, especially the cost of compliance associated with collection and processing of information and charges for trade-related services, and indirect costs resulting from administrative processes and inventory charges. It is the government’s ...we highlights the launch of objective to enhance growth in trade by deepening M-Akiba, which is a special retail economic integration especially at regional level. bond, aimed at promoting culture of saving while also contributing to infrastructure financing. I s s u e 9 A P r I l – J u N e 2 0 1 7 3 Recent Kenya Economic Performance and Growth Prospects By Benson Kiriga Recent economic performance The Kenyan economy has Comparing Kenya’s economic salaries by the national government. remained resilient in the last performance in 2016 with other EAC As a result, the overall fiscal balance, few years. It grew by 4.7% in the countries, only Tanzania had a higher on a commitment basis (excluding first quarter of 2017, a slightly lower growth rate of 6.6% than Kenya. The grants), amounted to a deficit of growth rate compared to 5.3% in average growth rate of Sub-Saharan Ksh 507.4 billion (6.6% of GDP), the first quarter in 2016. In addition Africa was 1.4%, which was much which was slightly higher than to the continued prudence in lower than that of the EAC countries the expected deficit of Ksh 476.3 macroeconomic management, the in 2016. It was also lower than the billion (6.2% of GDP). Total gross key sectors that contributed to this world economic growth rate at 3.1%. domestic debt stock increased by growth were accommodation and The cumulative national revenue 18.1% from Ksh 1,646.7 billion as at restaurants (15.8%), Information and collection, including appropriation end of March 2016 to Ksh 1,945.0 Communication (11.4%), Transport in aid, for July 2016 to March 2017 billion as of March 2017, while total and Storage (9.9%), Mining and totaled Ksh 984.6 billion (12.8% of external debt stock, including the Quarrying (9.7%), Real Estate GDP), which was slightly lower than International Sovereign Bond, stood (9.6%) and Construction (8.4%). The the target of Ksh 1,050.5 billion at Ksh 2,101.4 billion (27.4% of GDP). agriculture sector contracted by 1.1% (13.7% of GDP). This was mainly The current account deficit more mainly due to persistent drought due to shortfalls in Income Tax, than doubled in the first quarter of conditions in the quarter caused by Appropriation in Aid collection, 2017 to Ksh 123.2 billion from Ksh 43.4 failure of the short rains for 2016 and Investment Income and IDF fee. The billion in the first quarter of 2016. delay in the expected long rains for total cumulative expenditure and This was mainly due to merchandise 2017. The second, third and fourth net lending inclusive of transfers trade, which registered a deficit of quarters of 2016 saw revisions of to county governments for the Ksh 259.6 billion, an increase of 67.3% economic growth rates to 6.2%, 5.7% same period amounted to Ksh from a deficit of Ksh 155.2 billion in and 6.1%, respectively, which has 1,492.0 billion against a target of the corresponding quarter of 2016. resulted to an annual growth rate of Ksh 1,526.8 billion attributed to The exports declined by 2.3% to Ksh 5.8% for 2016. low absorption levels in wages and 152.0 billion while imports increased by 32.4% to Ksh 411.6 billion in the first Growth in real Gross Domestic Product (%) quarter of 2017. The exports declined due to reduced exports to EAC (Ksh Country 2014 2015 2016 2017* 2018* 2019* 2,207 million) and to COMESA region Burundi 4.5 (4.0) (1.0) 0.0 0.1 0.4 (Ksh 2,580 million) and also notable Kenya 5.3 5.6 6.0 5.3 5.8 6.2 decline in key principal exports such Rwanda 7.6 8.9 5.9 6.1 6.8 7.3 as medicinal and pharmaceutical products by 31%, horticulture 44.6% South Sudan 2.9 (0.2) (13.8) (3.5) (1.1) 3.9 and cement 2.5%. On the other Tanzania 7.0 7.0 6.6 6.8 6.9 6.7 hand, imports increased due to Uganda 5.2 5.0 4.7 5.0 5.8 6.2 increased import value of petroleum Sub-Saharan Africa 5.1 3.4 1.4 2.6 3.5 3.6 products, industrial machinery and World 3.5 3.4 3.1 3.5 3.6 3.7 automatic data processing machines and telecommunication equipment. Source: International Monetary Fund, World Economic Outlook Database, April 2017 However, trade in services posted a * projections surplus of Ksh 50.9 billion in the same quarter compared to a surplus of Ksh 38.1 billion in the corresponding 4 quarter of 2016. This is attributed to concerns. The external risks include economic growth rate. Thus, the increased travel inflows following the unpredictable policy dynamics in envisaged long term growth of 10% improved tourism arrivals in the the USA and other trading partners, in Vision 2030 may not be achieved quarter under review. Diaspora the commodity price slump, low in the medium term. remittances also increased by 5.5% performance of exports, and Going forward, maintaining to Ksh 45.1 billion as compared Ksh poor performance in international macroeconomic stability remains 42.8 billion in the first quarter of tourism leading to low arrivals. critical in supporting strong 2016. The projections below show that economic growth. In addition, policy Growth forecast economic growth in 2017 will be interventions to support growth dismally different from 2016 at 5.9%. in exports, and a boost in private The short-term economic In the medium term, the growth rate investments are imperative for a performance looks promising, with is expected to reach 6.2% by 2019. sustained strong inclusive growth to inflation expected to ease, and the Increased government investment be maintained. Kenya shilling exchange rate having is expected to support the expected remaining stable for the better part of 2017. The nominal first quarter GDP at Ksh 1,948,094 million was the Economic growth prospects 2017 -2019 highest when compared to all the 2014 2015 2016 2017 2018 2019 preceding quarters, thereby giving a GDP growth rate 5.4 5.7 5.8 5.9 6.0 6.2 stable base for the second quarter. Interest rates have stabilized with Inflation rate 6.9 6.6 6.3 9.5 6.8 5.2 the capping introduced in late 2016, Private consumption (% change) 6.5 2.5 7.2 7.1 6.4 6.2 and this is expected to support Government consumption (% change) 1.7 13.0 7.0 5.1 5.5 5.8 investments despite some hiccups Private investments (% change) 2.5 6.1 -11.5 1.3 3.9 4.5 on credit availability. Government investments (% change) 50.3 2.0 -9.1 4.8 6.7 6.2 However, the poor rains during the Exports goods and services (% 5.8 6.2 0.6 3.0 3.2 4.8 long rains in 2017 will have an effect change) on agricultural output, which is Imports goods and services (% 10.4 1.2 -4.7 3.3 4.3 4.5 the mainstay of Kenya’s economy, change) The upcoming general elections Current account balance/GDP -9.8 -6.8 -5.1 -4.1 -3.6 -3.2 in August 2017 could also lead to Fiscal deficit/GDP -5.4 -6.0 -5.4 -5.5 -5.3 -5.2 investors adopting a wait and see Public expenditure/GDP 26.6 26.1 25.2 26.4 25.7 25.3 attitude, thus impacting on private Interest rate 8.9 10.8 8.5 8.6 8.8 8.8 investments, uptake of domestic credit, and could raise security Exchange rate (Ksh per dollar) 87.9 98.2 101.5 103.4 103.4 103.4 Source: KIPPRA Treasury Macro Model (KTMM) I s s u e 9 A P r I l – J u N e 2 0 1 7 5 Inflation Dynamics, Food Prices and Policy Responses By Bernadette Wanjala Kenya’s monthly inflation was by 2.7% between May and June 2017.on an upward trend since June The recent high food inflation was 2016, increasing from 5.8% in June largely occasioned by an increase in 2016 to 6.4% in December 2016, and prices of such food items as sugar, accelerating to 11.7% in May 2017 maize grain, fresh packeted milk, before declining to 9.2% in June 2017. increase in inflation, with headline onions and fresh unpacketed milk. This has kept the level of overall inflation increasing from 6.8% in April The slowing rate of inflation in inflation above the government 2017 to 7.2% in May 2017, against June 2017 is, however, attributed to inflation band of 2.5-7.5% since a target of 5%. The increase was reductions in prices of Irish potatoes, February 2017. largely driven by a sharp increase fresh packeted milk, kales, and in food prices and higher energy The surge in inflation was mainly cabbages following the onset of the prices. Tanzania experienced slight driven by food inflation as shown in long rains. We can thus deduce that increases in inflation from 5.2% in the chart below. This was attributed prices of staple foods have a larger January 2017 to 6.4% in March 2017, to unfavourable weather conditions effect on inflation as compared to before declining to 6.1% in May 2017 characterized by drought and lower the non-staples. and 5.4% in June 2017. The slight than expected rains during the long Similar surges in inflation were increase in inflation was attributed rainy season. The food and non- experienced during the 2011 drought to an increase in food prices. alcoholic beverages inflation index where, for instance, the year-on- increased consistently from 1.0% in Food inflation is critical because food year inflation gained double digit, September 2016 to 1.7% in January has a weight of 36% in the consumer increasing from 5.4% in January 2011 2017, 3.1% in February 2017, 3.18% in price index and contributes a to 12.1% in April 2011, 15.5% in July 2011, March 2017 and 3.6% in April 2017. In monthly average of over 40% to 17.3% in September 2011 and 19.7% in May 2017, the high inflation was also overall inflation in Kenya. There is November 2011, before declining to sustained by increased restaurant thus a direct impact of an increase in 18.9% in December 2011 and 18.3% in and hotels inflation index. The non- food prices on the overall inflation. January 2012. It was not until July food non-fuel inflation remained Indirectly, food prices can be 2012 that a single digit inflation was stable below 5%, suggesting that transmitted by further reinforcing realized. The surge in inflation then demand pressures and pass- price and wage pressures and was also attributed to an increase in through effects of high food prices inflation expectations. the prices of staple foods, such as were muted. The decline in overall maize flour, maize grain, sugar and The policy response to address inflation in June 2017 was mainly rice. inflation depends on whether food attributed to a significant decline inflation has an indirect effect on in inflation index for food and non- Comparatively, in the EAC region, overall inflation. So far, only the alcoholic beverages, which declined Uganda has also experienced an direct impact of food prices seems to have a significant contribution Kenya Inflation Rates (January 2016 – June 2017) to increase in inflation. As such, the Monetary Policy Committee 25.0 of Central Bank of Kenya has 20.0 maintained the policy stance with no 15.0 adjustment in the policy rate with no 10.0 threat of demand driven inflation. To 5.0 ease food inflation, the government 0.0 has increased the imports of maize, while also subsidizing maize millers and fixing retail prices. Overall Inflation food inflation Cont. P7 Source: Kenya National Bureau of Statistics, Leading Economic Indicators and CPI & Rates of Inflation Releases 6 % change on same month of previous year Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 islamic Finance: new opportunities for Driving Development Agenda By Adan Shibia Globally, Islamic finance has in the recent years recorded spectacular growth with total assets estimated at over US$ 1.9 trillion. The Islamic Financial Services Industry Stability Report 2017, published by the Islamic Financial Services Board (IFSB) based in Malaysia, shows the composition of these assets as: Islamic banking two investment funds, one investment company, and 79%, sukuk (Islamic bonds) 17%, Islamic funds 3%, and two SACCOs. The government has also demonstrated takaful contributions (Islamic insurance) 1%. Middle East commitment to enhance supportive infrastructure for and North Africa jointly account for 30% of the global the development of Islamic finance. Islamic finance assets. The Sub-Saharan Africa accounts Islamic finance differs from the conventional finance as for 1.7% of total Islamic finance assets. its principles are rooted in the shari’ah law, which is the The Vision 2030 envisages positioning Kenya as a regional Islamic Divine Law deduced from the Quran (the Islamic financial hub. Thus, broadening financial instruments by holy book) and Sunnah (The sayings and the practices of tapping into the burgeoning opportunity presented by Prophet Muhammad), as well as the consensus (ijmāʻ) Islamic finance is worth considering. Islamic finance in and analogy (qiyās) by Islamic scholars. The Quran and Kenya is at a nascent stage, but it is fast growing, and the Sunnah are the primary sources of the shari’ah as they large by the Eastern Africa (excluding Sudan) regional form the basis for the consensus and analogy by Islamic standards. The licensing of the Dubai Islamic Bank in April scholars on emerging issues. The shari’ah prohibits 2017 brought to three the fully fledged Islamic banks in charging or receiving interest, products with excessive Kenya. The Gulf African Bank and the First Community uncertainty, and financing of prohibited activities such Bank were licensed in 2007 and 2008, respectively. as gambling, alcohol and pork. Since the prohibition of Eleven other conventional banks operate Islamic finance interest charges eliminates conventional debt system, windows through a branch or a dedicated unit. The scope the provider of financial capital shares in the business of Islamic finance in Kenya has also gone beyond banking risks in return for the profits and losses. With risks sharing to include one takaful company, one takaful broker encouraged, Islamic finance then is largely an asset- for general takaful products, one retakaful company, based transaction where the ownership and trading of a physical product is a vital element. The sanctity of Cont. from P6 contracts and the preservation of property rights are vital and, Given the significant contribution necessary imports are made in good therefore, full disclosure of the of food inflation to overall inflation, time as exports are also restricted. information is a key requirement to there is need to comprehensively In addition, it is important that allow the parties to the contract/ address the supply side constraints, the existing social safety nets are exchange accurate assessments of especially of staple foods by reviewed to ensure they are better risks and rewards. The principles enhancing production and also targeted to protect the most of Islamic finance are thus broadly creating adequate buffer stock to be vulnerable groups, since they are classified as partnerships and used during drought. There is also the most hit by food inflation. exchange contracts. Centralized need to diversify the food basket shari’ah supervisory boards set up with, for example, drought-resistant food products to cope with weather shocks. Furthermore, enhanced monitoring and timely response to early warnings will ensure that ... Eleven other banks operate Islamic finance windows – where conventional banks offer Islamic finance activities through a branch or a dedicated unit I s s u e 9 A P r I l – J u N e 2 0 1 7 7 by regulatory authorities, as is the case in Malaysia. These regulations of Takaful businesses. are vital in assessing shari’ah compliance, standardizing The recent Finance Act 2017 made amendments to the the rulings and reducing compliance costs. In Kenya, Co-operative Societies Act and the SACCO Societies Act individual financial institutions establish their own shari’ah to facilitate shari’ah compliant products and enhance supervisory committee or board to regularly review and financial deepening. It also amended the Public Finance appraise the products, and issue pronouncements on Management Act to recognize sukuk as one of the shari’ah compliance. national government securities. The Cabinet Secretary The growth of Islamic finance globally is both policy for the National Treasury is now empowered to make and commercially driven. On the policy side, financial regulations for raising money through sukuk, both locally inclusion agenda, and diversification of financial capital and internationally, specifying the purpose for which the through sovereign and corporate sukuk are some of money is raised. Other amendments relate to the Income the key factors. On the commercial front, high demand Tax Act, VAT Act and the Stamp Duty Act to provide for for shari’ah compliant products by financially excluded equitable tax treatment of Islamic financial products with Muslim populations coupled with emergence of shari’ah the conventional financial products. Other developments standards issuing institutions such as IFSB, and the include empowering the Cabinet Secretary for National Bahrain-based Accounting and Auditing Organization Treasury to make Regulations under the SACCO Societies for Islamic Financial Institutions (AAOIFI) serve as an Act to facilitate the licensing and supervision of Shari’ah opportunity for tapping into this market by financial compliant cooperative societies carrying out deposit- institutions. Islamic financial products are also embraced taking businesses. in non-Muslim majority countries. The UK, Singapore and Going forward, there is need to consider engaging Hong Kong have already undertaken policy reforms to shari’ah advisors on sukuk structuring and documentation facilitate sukuk. The Government of Hong Kong issued and setting up of a special purpose vehicle to support the US$ 1 billion sukuk in 2017, having made other sukuk issuance. Unlike conventional bonds (debt instrument), issuances in 2014 and 2015. sukuk represents ownership of shari’ah-compliant Policy and institutional reforms in Kenya to support assets which form the basis for returns. The specificity Islamic finance date back to 2008 when the Banking of the assets is therefore an important step in issuance Act was amended through the Finance Act of 2008 to of sukuk. Low public awareness and misconceptions is recognize banking institutions offering Islamic financial perhaps foremost constraint to the deepening of Islamic products. The Islamic Finance Project Management finance. Skills deficit may further constrain growth of Office (PMO) was established in December 2015 to work Islamic finance industry. In addition, establishment of a with the Financial Services Regulatory Forum (FSRF) in National Shari’ah Supervisory Board is vital for enhanced developing a policy framework for the Islamic finance governance and standardization of the products across industry. The forum is composed of the Central Bank of the financial institutions. The other area that requires Kenya, Insurance Regulatory Authority, Capital Markets improvement include guidance on Islamic contracts Authority, Retirement Benefits Authority, and SACCO and regulatory supervision that is anchored on shari’ah Societies Regulatory Authority. Further, the Insurance compliance with respect to co-mingling of funds, deposit Act was amended in 2016 to incorporate definition of insurance and the reporting standards. takaful business and empower the Cabinet Secretary for National Treasury to make Regulations for licensing and 8 Minimization of Costs in Public infrastructure investments By Helen Hoka, Victor Mose, James Gachanja and Humphrey Njogu Efficient and effective infrastructure plays a significant For the case of SGR, 90% of the cost incurred in phase 1 role in economic development process. It plays an was borrowed, with concessional loan amounting to enabling role as envisioned in Kenya Vision 2030, East approximately Ksh 145.8 billion, secured at 2% interest Africa Community Vision 2050, African Agenda 2063 and per annum with a grace period of seven (7) years and the Sustainable Development Goals (SDGs). repayment period of 13 years. The commercial loan A key policy issue emerging from the public discourse on component was about Ksh 148.5billion with an interest infrastructure investments is project cost. The big concern rate of LIBOR + 360 base point interests per annum. A is on maximizing the value for money and therefore LIBOR rate is annual interbank lending rate, and whose appropriately costing the projects. In 2016, for example, average has been between 0.561% to 1.376% between 2010 the World Bank finds that investment in infrastructure was and 2016, according to Global-Rates (2016). approximately 21% of GDP with a budget of approximately Private sector engagement models through the annuity Ksh 800 billion for key infrastructure sectors. In Kenya, model proposed in 2015 to finance roads would have the Standard Gauge Railway (phase 1) spent Ksh 327 changed the financing of infrastructure projects in Kenya. billion, Langata Road Ksh 2.6 billion, Thika Super Highway However, its implementation has been complicated by Ksh 32 billion, Southern Bypass Ksh 18.7 billion, and the high unit cost of submitted bids and interest rates quoted Northern and Eastern Bypass Ksh 9.2 billion. In addition, by financier beyond government target. the Lake Turkana Wind Power 310MW power project cost Capital costs in infrastructure projects increase due to Ksh 68 billion and GDC 300MW Ksh 9 billion. import duty and level of technology applied, though Infrastructure financing takes various forms. For example, exemptions are applied on some projects such as SGR. debt financing that attracts loan interest depends on the Labor costs are affected by policies such as those requiring type of loan. Unlike the concession loans, commercial a certain proportion of local content, especially on loans attract higher interest rates, shorter payment employment of local labour force. To enhance productivity period and sometime shorter grace period. In addition, insurance cost and foreign exchange contingencies may be accrued to loans. The high risk profile of infrastructure projects attract more cost of credit, as opposed to low risk investments. Private sector engagement models such as the annuity model in the road sector would have changed the trends in financing infrastructure projects I s s u e 9 A P r I l – J u N e 2 0 1 7 9 of the local labour, multiple trainings are required as representation showing the spatial distribution of land the project traverses various host communities and this values in a given geographical area at specific time, increases training costs. which will be used for valuation of land. In addition, full Land speculation, environment protection, resettlement implementation of the Community Land Act, 2016 will of project affected entities and alteration of project design unlock the constraint of access to land for infrastructure. are typical obstacles. In addition is the failure to honour The Act provides for mapping and planning of community project lead times, and manipulation of compensation land and allocation of rights. plans which tend to inflate project costs. Relevant To avoid reemergence of additional costs on environmental authorities need to be engaged to investigate such cases. and social concerns, the assessment of environmental Inadequate project appraisal may result to over or and social impacts (ESIA) should be conceived as an under-estimation of costs. Furthermore, infrastructure integral component of project appraisal as opposed to project appraisal tends to largely concentrate on actual being perceived as an auxiliary project component. This construction costs. Although manuals and standard unit should be undertaken at early stage of project cycle. rates exist to guide project costing, they lack dynamisms Development of a comprehensive and integrated leading to delays in project implementation and increasing framework applicable to all infrastructure sectors is costs. For example, estimates are often adjusted during a priority. This would provide a common platform procurement process necessitated by higher costs by and source of data for cost estimation in the project bidding contractors. lifecycle and lay a foundation for knowledge and data Least estimated in project costing is social and management. environmental costs, leaving room for cost escalation. To address costs arising from project financing, an optimal Social costs manifest through speculation in land mix between debt and equity financing is required. This acquisition and resettlement of persons and relocation of requires strategic negotiation on the balance between social amenities such as markets, schools, hospitals and concessionary and commercial loans. Adequate allocation churches. Environmental estimates capture environmental of risks among stakeholder and incentives to de-risk restoration, conservation and sustainability costs. the investments should be considered too. Integrity In costing, data is critical to guide the process but it is issues can be fundamentally addressed through moral not readily available. Absence of centralized repository suasion guided by the National Values and Principles of to support analysis and decision making brings about Governance. In addition, effective supervision, monitoring unclear estimates. For example, the proposed Transport and evaluation of projects will enhance transparency and Sector Indicator Framework (TSIF) developed in 2010 accountability. was designed to focus on sector performance and To reduce capital costs, the policy on exemption of duty on measuring policy dimensions of transport service has to be sustained. Enhanced research, innovation and delivery such as access, quality, affordability, efficiency technology transfer will significantly reduce importation. and financial sustainability. The overall objective was to Labour costs can also be addressed by continued support guide defining, collecting, collating, analyzing, storing and strengthening of Technical and Vocational Training. and disseminating indicator data. Its implementation The TIVETs need to establish joint training programmes therefore is desirable. with institutions attached to international contractors for The need for effective cost minimization by controlling transfer of appropriate skills and knowledge. sources of escalation cannot be gainsaid. Costs related to land speculation can be minimized through effective Land Value Index. The “land value index is an analytical To address costs arising from project financing, an optimal mix between debt and equity financing should be strongly considered. 1 0 Lowering Transaction Costs in EAC Cross-border Trade through Trade Facilitation By Christopher H. Onyango Intra-regional trade in Africa has as high as 200% in ad valorem tariff remained dismal despite concerted equivalent terms for lower-middle- Improvements in trade facilitation efforts to remove tariff and non- income countries and more than along transport corridors in the tariff barriers within regional trade 250% for low-income countries. East Africa Community (EAC) have agreements. African markets are not Transaction costs can be classified significantly lead to increased cross- just fragmented but remain largely as direct, i.e. (i) direct costs or border trade and reduced transaction isolated from the global trade arena. costs of compliance associated costs due to faster clearance and For instance, in 2015, the share of with collection and processing of transit times. For instance, clearance Sub-Saharan Africa’s imports from information and charges for trade- and delivery of containers from the its own region was merely 17.5% related services, e.g. for freight, Port of Mombasa to Kampala has compared to 55% from Europe insurance and handling; and (ii) reduced to 10 days from 20 days five and Asia. Similarly, total exports indirect costs or time sensitive costs years ago. Similarly, recent surveys accounted for 24.8% and 51.9% to SSA brought about by administrative indicate that the price charged and Europe and Asia, respectively. processes and inventory charges. by trucking companies to ship a Kenya’s share of total trade with There is a general consensus that container from Mombasa to Nairobi African countries was 15.7% in 2016 transaction costs can be remedied and other destinations beyond the during which the shares of imports through effective implementation Kenyan borders have declined by and exports from Africa were a of trade facilitation instruments. more than 30% between 2013 and paltry 9% and 29%, respectively. In Whatever the definitions, high trade 2016. Reduced operational costs in other words, Africa trades with itself costs which act as barriers to the the form of transit times and costs less than it does with the rest of the integration of developing and least are anticipated to be passed on in world. developed countries into the global form of lower transport costs and High transaction costs are among economy were the driving forces market prices. the major factors contributing behind the WTO’s Trade Facilitation Previous studies on Kenya have to Africa’s under-performance. Agreement (TFA) concluded in shown that improvements of Indeed, intra-African trade costs 2013 during the Bali Ministerial business environment, the quality are estimated to be 50% higher conference. The latter aims to of port infrastructure, the number than those in East Asia, and are the expedite the movement, release and of days required for enforcement highest of intra-regional costs in any clearance of goods, thereby further of contracts, and the activities that developing region. Furthermore, reducing the costs of trading across improve logistics performance have it is estimated that trade costs are borders. Cont. P12 I s s u e 9 A P r I l – J u N e 2 0 1 7 1 1 Cont. from P11 been critical in boosting the flow of foreign direct investments into the Policy news country. Reducing trade costs through trade facilitation can also be essential Domestic Policy news in addressing food insecurity by helping bring staple foods from Minimum wages increased by 18.6 Per Cent areas of surplus production across borders to growing urban markets he President of Kenya announced an 18.6% increase in the minimum wage and food deficit areas. Although Tduring the 1st May 2017 Labour Day celebrations. The minimum wage East Africa has the potential to feed increases form an average of Ksh 10,995 to Ksh 12,926. Employers expressed itself, some countries including fears that the increase in minimum wages could reduce employment creation Kenya suffer deficits and stand to and investments. However, based on many findings across the globe, low-wage benefit. labour has a relatively low elasticity of demand following a wage increase. An increase in the minimum wage is likely to have minimal effects on employment The potential for regional production levels in Kenya. chains in the EAC region to drive global exports of manufactures, such as those in East Asia, has yet to New form of Enhancing financial be exploited, due to high transaction costs. There are also opportunities securitization inclusion to develop regional value chains Movable Property Security The government issued the first around textiles as well mineral Rights Act 2017, which was ever M-Akiba Bond, which is commodities such as phosphates for assented to by the President on a special Retail Bond aimed at fertilizers and regional processing of 10th May 2017, allows the use of enhancing financial inclusion while nickel and copper. household goods, crops, live animals raising money to fund infrastructure In the services sector, cross-border and intellectual property to secure projects through individual’s trade in services in the region is commercial loans. The Act also saving via the mobile phone. The hampered by restrictions in various allows the formation of a centralized government intended to borrow a sectors and in various modes electronic registry for mobile assets, total of Ksh 5 billion, at an interest of of supply. Yet, trade in services which would be used by financial 10% per year, with maturity of three offers untapped opportunities for institutions to verify the security years, with a minimum investment exports as well as better access used to borrow a loan. of Ksh 3,000. The initial offer for Ksh for consumers to critical services 150,000 was launched in March while such as transport, communications, the second offer of Ksh 1 billion was Financial Services banking, distribution, health and made in June. education and firms to services Authority Bill such as accountancy and other In April 2017, Cabinet approved Mining (Use of Assets) professional services that boost the draft Financial Services Bill productivity. 2016 which proposes to merge four Regulations, 2017 Unlocking regional trade potential financial regulatory bodies, namely This regulation became Capital Markets Authority (CMA), effective on 9ththrough trade facilitation is therefore May 2017. Upon imperative if Africa is to remain Insurance Regulatory Authority termination of a mining license, the steadfast in her quest to use trade (IRA), Retirement Benefits Authority regulations provide that mining as means to drive her development (RBA), SACCOS Societies Regulatory companies will cease to own all agenda. Increased regional trade Authority (SASRA) into one central movable and immovable assets that can enhance the benefits of trade body. The Bill also harmonizes a were previously held by the mining by creating opportunities for number of regulatory, administrative company, including roads, power employment, increasing productivity and enforcement provisions, installations, schools and machinery. and improving general welfare. including the institutionalization Mining firms are resisting the use of self-regulation in the sector. The of assets regulations arguing that existing sectoral legislations will not the law violates Article 40 of the be repealed, but are amended to Constitution of Kenya and amounts conform to the Constitution and the to nationalization. Financial Services Bill itself. 1 2 Launch of Standard Gauge Railway Services Mergers and between Mombasa and Nairobi acquisitions His Excellence the President, second phase is divided into three he banking sector saw the on 31st May 2017, launched the sub-phases; 2A Nairobi – Naivasha; Tentrance of SBM Holdings much-awaited Standard Gauge 2B Naivasha-Kisumu; and 2C Kisumu- Ltd, a financial services group in Railway (SGR) passenger service Malaba. Kenya Railways has signed Mauritius pursuing “diversification christened the Madaraka Express. commercial contracts with China and internationalization”. The This marked a new dawn in Kenya’s Communications Construction acquisition of Fidelity Bank by SBM transport sector by replacing the Company towards development of Bank is informed by the company’s “Lunatic Express” which was built in the second phase. The Government strategy to increase its footprint 1902. With the completion of the first of Kenya secured loans from the in Africa. Fidelity Commercial Bank phase of SGR, the nation’s economy Chinese Government of Ksh 150 Ltd which was licensed in 1996 is is expected to benefit from creation billion for construction of the classified as small, with 15 branches. of jobs, improved efficiency of the Nairobi-Naivasha section and Ksh This acquisition comes at a time when transport sector, reduction in the 370 billion for the Naivasha to Central Bank of Kenya has enhanced cost of doing business and overall Kisumu section. their oversight of commercial banks. support to trade facilitation. The This follows the acquisition of Giro Commercial Bank by I&M Bank (effective February 2017). I&M bank Piloting the new education system in Kenya now has a total of 43 branches and additional advances, deposits and assets totaling Ksh 28.4 billion. Giro Bank which was also classified as small was licensed in 1992 and had 8 branches. The consolidation being witnessed in the banking sector is attributable to, among other things, new business models being adopted by individual banks to expand client base, deposit base, financial services and portfolio opportunities. Diamond Trust Bank’s (DTB’s) intention to acquire Habib Bank (K) was also revealed this quarter. The Kenya Institute of Curriculum Development has come up with a new school curriculum under the ongoing reforms in the education system. This is expected to address the shortcomings of the 8-4-4 system, which has been described in the 2012 report of Prof. Odhiambo’s Task Force on education as: expansive, heavily loaded and examination oriented and thus putting undue pressure on learners. The focus of the new curriculum is to identify and nurture talent from an early age and shift focus from competition to acquisition of knowledge and skills. The pilot for this new curriculum is underway. Affordable apparels from Kenya’s EPZs Under “Buy Kenya Build Kenya”, EPZ companies made a sale of quality clothes at affordable prices in the Kenya market. The sale follows government’s move to increase duty free local market access for designer apparels made by EPZ firms to 40% from the initial 20%. I s s u e 9 A P r I l – J u N e 2 0 1 7 1 3 Policy news Global news EAC moving towards One Belt, One Road: President Xi’s signature common airspace foreign policy takes off Flights within East African China hosted the Belt and Road Forum on 14-15 May 2017 in Beijing that Community (EAC) partner states was attended by twenty nine (29) heads of state and government and will be classified as domestic by representatives from over 130 countries, Kenya included. The new Silk Road the end of 2017 if EAC countries initiative is seen as President Xi Jingping’s signature foreign policy that intends sign an agreement negotiated by to create trade and economic corridors consisting of a network of roads, the regional aviation regulators. rail lines, ports and highways that will connect several countries across Asia, Liberalization of air transport is Africa and Europe. Since China is a major actor in transport infrastructure expected to lower the price of air development in the country, Nairobi is likely to benefit from the One Belt, One tickets by 12% and boost tourism. The Road initiative if Kenya realigns its transport development strategies to the realization of a common airspace new Silk Road phase in East Africa. will be a significant milestone in the EAC regional integration process with regard to the Common Market Protocol that came into effect in Djibouti as the logistics The East African Crude 2010. hub in the Horn of Oil Pipeline Agreement US pulls out of Paris Africa signed Climate Accord as Djibouti is increasingly positioning he President of Tanzania, His itself at the logistics hub in the TExcellency John Pombe Magufuli others soldiers on Horn of Africa after opening three and his Ugandan counterpart, His (Doraleh, Tadjourah and Ghoubet) Excellency President Yoweri K. President Donald Trump ports in two months. Currently, Museveni signed the East African announced that the US will Djibouti handles about 95% of the Crude Oil Pipeline Agreement withdraw from the Paris climate inbound trade for Ethiopia. The (EACOP) on the sidelines of the 18th accord agreed on by the international recent developments in Djibouti Ordinary EAC Heads of State Summit community in 2015. According are likely to have ramification on held in Dar es Salaam, Tanzania. The to Trump, the Accord imposed Kenya-Ethiopia cooperation on the inking of the EACOP paves way for unfair environmental standards on Lamu Port-South Sudan-Ethiopia- the construction of the proposed American businesses and workers. Transport (LAPSSET) corridor. 1,445km crude oil export pipeline However, leaders of the world’s from Hoima, western Uganda to the biggest economies under the G20 Tanzanian Port of Tanga. met in Hamburg Germany in July and resolved to continue shifting away from fossil-based economy towards a clean, affordable, reliable Kenya’s workplace gender gap among highest and sustainable energy future. Whichever way one looks at it, the globally Accord has implication on emerging he International Labour Organization (ILO) revealed that Kenya’s labour oil producing countries such as Tforce participation gender gap is 9.9 points while unemployment rates Kenya. for men and women were 13.0% and 9.0% respectively. Kenya’s gender gap in the ratio of contributing family workers was 47.8% and 20.0% for men and women respectively, which is among the highest globally. Significantly more women are engaged in activities that limit earnings and are precarious in nature than men – thus compromising the wellbeing of many women. 1 4 Current KiPPRA Research Projects Micro and Small Enterprises (MSEs) are an important (PEFA) covering six selected counties (Makueni, Kajiado, source of employment, goods and services and Nakuru, West Pokot, Kakamega and Baringo). This is the innovation in Kenya. They account for over 70% of all first sub-national PEFA to be undertaken for Kenya. The modern establishments. There have been a number of national government has undertaken four PEFAs, with policy developments over the years aimed at addressing the latest being in 2017. The PEFA Assessment focuses challenges facing the sector. However, implementation on seven key pillars, including: credibility of the budget; has often been ineffective. A key contributing factor to comprehensiveness and transparency of public finances; weak implementation is weak coordination among key asset and liability management; policy-based planning players and duplication of activities. and budgeting; predictability and control in budget KIPPRA was contracted by Micro and Small Enterprise execution; accounting, recording and reporting and; Authority (MSEA) to conduct a study to review the external scrutiny and audit. The assessment is expected sector’s coordination challenge with the aim of providing to provide a better understanding of public finance relevant policy recommendations. The study entails management in counties and identify key areas of PFM consultations with relevant key informants and review of reform. The outcomes will therefore be key inputs into relevant literature. The key outcome is the development the Kenya Devolution Support Programme (through of a Coordination Strategy to effectively coordinate and International Development Association funding) whose integrate MSE activities and programmes carried out by main aim is “to strengthen capacity of core national stakeholders in the public and private sector. and county institutions to improve delivery of devolved services at the county level”. Assessment of health care delivery Evaluation of FAOs Country in Kenya under devolved system Programme This study was commissioned by KIPPRA and encompassed all counties. The study assessed the uptake of health KIPPRA, Tegemeo and FAO’s Office of Evaluation care services in the context of the reforms introduced are undertaking a joint evaluation of FAO’s country by devolution process. The study is important in not programme covering the period 2013-2016. The purpose only documenting the effects that devolution has had on of the evaluation is to generate information to better provision of health care services but also in identifying orient FAO’s position in order to be more impactful and prevailing institutional and organizational gaps. Some relevant to the needs of the country. The project entails of the examined areas were: adequacy of legal and collecting evidence to support FAO’s achievements both legislative frameworks governing provision of health care at national and county level and will provide important in Kenya; compliance with the constitutional, policy and feedback for the next country programme framework. legislative provisions; and the appraisal of the availability of health inputs and levels of citizens’ satisfaction with the health services. Sub-national Public Expenditure and Financial Accountability Assessment (PEFA) KIPPRA, in collaboration with World Bank-Kenya, and with additional funding from International Development Research Centre (IDRC) is undertaking a sub-national Public Expenditure and Financial Accountability Assessment I s s u e 9 A P r I l – J u N e 2 0 1 7 1 5 KiPPRA news and Events As per its core mandate to support the government in (PSTD), Kenya Agricultural and Livestock Research the policy making process, KIPPRA staff participated Organization (KALRO), Agriculture and Food Authority various technical working groups in preparation for (AFA) - Tea Directorate, Kenya Tea Development Agency the Medium Term Plan III. This including Macro working (KTDA) among others. group, Devolution, Labour and Employment, Agriculture, Corporate Social Responsibility (CSR): KIPPRA, hosted Livestock and Fisheries, Manufacturing, Infrastructure, sixty students under the Pupils Rewards Scheme (PURES) Science, Technology and Innovation, Environment, Water on 24th May 2017. KIPPRA interacted with the students and Sanitation, Education and Training, Health, Gender, on the budget, policy and legislation making process and Vulnerable Groups and Youth, HIV/AIDS, and Financial the role played by economics, research and analysis in services. informing policy. KIPPRA staff also visited Gathirimu Girls’ In each of the working groups KIPPRA policy analysts High School Saturday 27thMay 2017 to interact students contributed in drafting of the situation analysis, from Gathirimu Girls, Mitahato and Ndiriti secondary performance review, policy, legal and institutional schools. Students were exposed to information on types reforms; development of implementation plan for of research, climate change, youth empowerment and Vision 2030 flagship projects; identifying all key policies, various opportunities available for the youth. Further, on programs and projects to be implemented over the period 26th May, 2017, KIPPRA Environment Committee Members of the plan, and selection of projects to be funded under joined staff of the University of Nairobi, College of Private Public Partnerships. This was mainly done through Agriculture and Veterinary Sciences in a tree planting event written submissions and participation in working retreats at Ndumbuini, Kabete. For the last four years, KIPPRA has organized by sector conveners. participated in tree planting as part of her commitment Launch of report on Transforming Agribusiness, Trade, and towards sustainable development goals. Leadership: A capacity Needs Assessment of Tea Value Chain KIPPRA Team Building: KIPPRA staff participated in a team in Kenya: On 28th June 28, 2017 KIPPRA in collaboration building exercise on May 30th to June 4th 2017 in Naivasha. with the African Capacity Building (ACBF) launched a The event embraced a mixed programme which included report on gaps in institutional and human capacities in formal presentations, lively deliberations and outdoor the tea sector and their recommendations. Participants team building activities. were drawn from the Ministry of Devolution and Planning, For upcoming events please visit KIPPRA website, www. the Vision 2030 Directorate, Ministry of Public Service kippra.org and Youth Affairs, Public Sector Transformation Division 1 6