The Kenyan Budget 2014/15 has clear elements that are directly relevant to the engineering sector in Kenya. A brief overview of the budget reveals a total allocation of KES 1.779 trillion of which 22.6% went to Energy, Infrastructure and information and communication technology (ICT); all dockets directly relevant to the sector.For infrastructure, the government allocated KES97.7 trillion, ICT got an estimated KES 1.54 trillion and Energy KES 43.6billion. Other allocations relevant to the engineering sector include:

–    Real Estate: The Ministry of Land Housing and Urban Development was awarded KES 17.6 billion for the year 2014/2015. This carries implications for construction and building.
–    Education: KES6.4 billion to expand and equip Technical and Vocational Education and Training (TVET). This is relevant to the development of lower skilled individuals in the sector. In addition, KES 55.0 billion was allocated for university education which would indirectly benefit aspiring engineers.
–    Water: KES 8.2 billion for construction of water pans and dams
–    Digital Migration: KES 0.6 billion for Digital migration

It is important to note that this year’s budget allocation for Infrastructure, IT and Energy is KES 255.5 billion; less than that of 2012/13 which gave the sectors 268.1 billion but more generous than that of 2013/14 which allocated KES 220.8 billion.

Despite the fluctuations in allocation, it is clear that government views these three sectors as central to the country’s development and continues to prioritise investment particularly given that developing this physical capital has multiplier effects such as better accessibility to markets, employment and additional investment, all of which are crucial to economic growth.

Infrastructure allocation highlights

Roads
The government is committed to upgrading/construction of the 3,471 KM (Class A, B, D, C, D, E and other rural roads projects) and made the following allocation for roads:

–    KES 41.0billion allocated to on-going roads construction 
–    KES 10.0 billion for new roads
–    KES 22.4 billion for road maintenance
–    KES 42.3 billion for foreign financed roads
–    KES 1.0 billion for decongestion of road junctions in Nairobi

Roads remain a priority for government given the role they play in connecting people, goods, services, knowledge and markets. However, an important factor that may dampen the positive effects of the expansion in the road network is the cost of fuel and the strength of the shilling.

Petroleum products are Kenya’s single largest import item and fuel imports account for at least a quarter of Kenya’s total imports. This is coupled with a year in which the Kenya shilling weakened thereby making imports more expensive. These factors may reduce the economic stimulus of expanded road networks.

Ports
KES 1.65 billion has been allocated for on-going upgrading of Kisumu and Isiolo Airports, and construction of 3 new Airports (Mandera, Malindi and Suneka).

Rail
KES 19.4billionwas allocated for Standard Gauge Rail and KES 3.5billion for the Urban Commuter Rail System to ensure completion of the line linking the JKIA to the Central Railway Station.

ICT
Key allocations for the sector include are:

–    KES 6.3 billion to develop the connectivity infrastructure to enhance county connection to the National Optic Fibre Backbone Infrastructure (NOFBI).
–    KES 579 million to support the local Business Process Outsourcing (BPO) industry
–    KES 1.1 billion for the Kenya National Electronic Single Window System aimed at improving the process of clearing imported goods at the various ports of entry.
–    KES 800 million for the roll out of IFMIS – Integrated Financial Management Information System, an ICT based management system that tracks how public funds are spent.
–    KES 600 million for digital migration

According to conservative estimates, the ICT sector currently contributes 2.9% to Kenya’s GDP. The government remains committed to investing in the sector given its target of making ICT contribute8% to GDP by 2017.

Energy
The sector has the following key allocations:

–    KES 10.0billion for geothermal development
–    KES 23.0billion for power transmission 
–    KES 10.6billion for the rural electrification programme

Energy is tied to economic growth. Constant electricity  supply for example, is crucial tomanufacturing enterprises as well as the informal sector; the former is negatively affected by high tariffs and periodic black outs while the latter is negatively impacted by the fact that goods cannot be sold after dusk due to poor visibility. As ICT becomes a bigger player in the economy, the supply of energy will become increasingly important, a fact of which the government seems well aware. The dip in energy allocation however, may be explained by the fact that there was robust private investment in the energy sector in 2013.

In fact, it is important to note that there has been no specific allocation for the emergent field of oil and gas exploration by government. This is because it appears government seeks private sector investment for the prospecting activities of these energy related sectors. Indeed, the Kenya government plans to increase private sector participation in the energy sector.

How does Kenya’s budget compare with global standards?

Engineering related allocations in Africa (specifically infrastructure), compared to other developing countries, is trailing in terms of the volume of funds but is clearly on a rise in terms of percentage of allocation. Between 1998 and 2007, spending on African infrastructure rose at a compound annual rate of 17 %, significantly outstripping the growth of global infrastructure investment. For comparison, in China the government has been earmarking an estimated 8.5% of GDP for infrastructure and India has been allocating about 4.7% of GDP.

This can be compared to South Africa which allocated 8% of GDP. Although Africa’s average is 2-3 % of GDP, the scale and pace of government support by India and China will likely decline over the longer term relative to historical high levels. The opposite can be said of Africa, Kenya included, which are increasing investment in infrastructure into the foreseeable future.

This situation is even more pronounced when comparing African infrastructure allocations with developed economies, ‘many governments–especially those in Western, developed nations–are cutting back on infrastructure spending because of budgetary concerns. In the Euro zone, the austerity measures that many governments implemented after the debt crisis have significantly constrained spending on infrastructure development and repair’. In fact, in America only 1.7% of GDP was earmarked for infrastructure in 2011.

Therefore, the engineering sector should take note of these trends and develop strategies to ensure that the sector becomes a crucial local partner in implementing and managing projects aligned with the infrastructure allocations.

How does Kenya compare with other African countries?

In 2012, in terms of absolute national budget numbers the biggest allocations for infrastructure were, ‘South Africa’s $29.08bn, Kenya’s $3.04bn, Namibia’s $2.97bn, Tanzania’s $1.66bn and Ethiopia’s $1.65bn’. In terms of the largest infrastructure share of the national budget, first was, ‘Cape Verde’s 44%, followed by Namibia’s 39%, Uganda’s 28% and South Africa’s 24%’.

Between 2010 and 2012, the highest increases in total infrastructure budgets were reported by, ‘Liberia, Zimbabwe and Kenya while São Tomé and Príncipe, South Sudan and Sierra Leone saw the greatest overall reductions’. In 2012, ‘South Africa and Kenya were ahead with their energy budgets in absolute numbers of10.42bn and $0.99bn respectively’.

Transport featured prominently in 2012 with South Africa which budgeted, ‘$9.04bn while Kenya, Namibia and Tanzania allocated $1.75bn, $1.69bn and $1.12bn respectively’. In terms of ICT, average annual growth rates, ‘were highest in Liberia – surging from practically zero to $2m – and Kenya where ICT is one of the key sectors in its “Vision 2030” strategy’.

Budget related opportunities and constraints for the engineering sector

In terms of this year’s annual budget, there are opportunities for the engineering sector. The most obvious is, given the healthy allocation, the players in the sector have a solid chance to secure contracts in Energy, ICT and Infrastructure related projects and activities. It would be prudent for the engineering sector to estimate the capacity of individuals and companies active in the sector to meet Kenya’s Energy, ICT and Infrastructure needs. Doing so and aggressively marketing the sector’s capacity could provide a clear opportunity for government to prioritise local companies in the tendering process.

There is also opportunity for direct employment in government projects in the Energy, ICT and Infrastructure such as dam construction, digital migration, roll out of the Integrated Financial Management Information System and National Digital Services, as well as rural electrification.

Allocations to the Ministry of Land, Housing and Urban Development can also be made use of by engineers with expertise in this sub-sector as the government estimates that there is an annual deficit of 150,000 housing units and a backlog of nearly two million units.

The budget also removed import duty on machinery, spares and inputs for direct and exclusive use in the development and generation of solar and wind energy. This augurs well for engineers in the renewable energy sector as the tax break may spur investment and development in the sector.

However constraints exist; for example the budget raised duty rates on iron and steel industries from 0% and 10% to 25% to cushion local industries from cheap imports. This may dampen activity in the related sector in the short term as it may cause a spike in prices particularly for firms that prefer foreign sourced iron and steel. This may have implications with regard to engineering projects that use iron and steel.

An overall constraint for the budget is absorption. Last year, there was low budget execution in infrastructure related ministries which had an average 60% execution rate, below the 80% government target. There are numerous theories on the underlying reasons with some asserting it is due to the, ‘persistent challenge of lengthy procurement procedures’, while others argue that it is due to low levels of absorptive capacity. Absorptive capacity here refers to constraints that prevent the sector from making gains from the potential benefits from additional investment due to weak capacity.

Ergo, even if additional investment were made available, it would have little effect on growth as a saturation point has been reached.It is clear that the infrastructure related ministries, in which the engineering sector is a dominant actor, are affected by these capacity constraints(source : Bourguignon and Sundberg).

In conclusion, there are clear budgetary allocations directly relevant to the sector and there is ample opportunity for the engineering sector to not only ensure the annual budget is informed by suggestions from the sector, but also ensure that budgetary allocations use and build the expertise of the sector.

Key Endnotes
1.    The National Treasury (2014), ‘Budget Highlights: The Mwananchi Guide’,
2.    Standard & Poor’s Financial Services (2014), ‘Global Infrastructure: How To Fill A $500 Billion Hole,
3.    African Development Bank (2013), ‘Infrastructure Financing Trends In Africa: Ica Annual Report 2012’,
4.    The East African Standard (2014), ‘How Budget billions will be shared’,
5.    KPMG Kenya (2012), Budget Brief Kenya 2012.

 

 

 

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