Impact of the 2016/2017 Kenya Budget on engineering and EAC neighbour

Last Updated 6 months ago by Kenya Engineer

Kenya will continue to see billions of shillings pumped into the fast-growing and indispensable engineering sector according to the 2016/17 fiscal year (FY) budget. Similar to the 2015/16 FY budget, roads, power generates on and supply, rail and security will be the biggest winners. Agriculture, irrigation and mining were also big winners. For example, the 2.3trillion Kenyan shillings (Kshs) (US$22 bn) national budget provides a total of KSh506.6 billion to the Energy, Information and Communication Technology (ICT) sector along with the Infrastructure sector, all of which have direct links to engineering and Kenya’s engineers. This is a 4 per cent increase from the previous FY.

It also marks the single largest budgetary allocation to any sector, thus highlighting the importance of engineering and engineering-related projects to Kenya’s current and future growth. According to analysis by the International Budget Partnership, the 2016/17 FY budget has shifted more resources toward infrastructure, water and governance, and correspondingly reducedallocations for education and public administration. The budget is all part of what the Treasury has themed “Consolidating Gains for a Prosperous Kenya.”

Economic Growth and Revenue Stream Estimates

Because of firm growth largely based on heavy investment in infrastructure projects, Kenya is fast emerging as East Africa’s main development hub and Kenya’s short- and long-term growth is directly tied to important engineering sectors. For example, the country has been making a concerted effort to improve and expand its rail and road infrastructure in order to unlock its potential for continued growth and economic development. Like the previous FY budget, Kenya’s government has again allocated a massive chunk of its national budget for infrastructure projects and development thus making it clear that Kenya’s government views Energy, ICT and Infrastructure as central to the country’s development.

The Government of Kenya (GOK) anticipates Kenya’s economy to grow by 5.9 per cent in 2016, and increase to 6.1 percent and 6.2 percent in 2017 and 2018, respectively. This projected growth is based on support from major infrastructure projects such as the standard gauge railway (SGR) and continuing low global oil prices. Over the next few years, the GOK is counting on increased consumer confidence, a low inflation rate of circa 5.0 per cent as well as higher total factor productivity. These factors reflect the continued implementation of structural reforms and will likely assist in maintaining Kenya’s growth rate. In contrast, the world economy is projected to grow only by 2.4 percent in 2016.

The 2016/17 FY budget will be financed from multiple sources, with individual Kenyan taxpayers and businesses picking up the largest bill.The Kenya Revenue Authority (KRA) has been tasked by the Treasury to increase tax collection to KSh1.37 bn, from the KSh1.18 bn target it had set in the 2015/2016 FY. According to The East African, beyond taxation, money for the budget is expected to come from project loans (KSh345.4 bn), domestic borrowing (KSh241 bn), donors who will possibly fund specific, but largely unidentified programmes (KSh3.8 bn) and commercial financing (KSh153.7 bn).

EAC Budget Comparison
A cursory look at the new budget when compared to those of three other East African Community (EAC) states, Tanzania, Rwanda and Uganda, indicates that Kenya will likely spend almost twice as much on its engineering sector given that its budget (US$22 bn) dwarfs those of its neighbours. For example, Uganda’s entire 2016/17 FY budget is reportedly 26.361 trillion Ugandan shillings (US$7.90 bn); Rwanda’s estimated expenditure will rise to 1.95 trillion francs (US$2.60 billion) in 2016/17, from 1.81 trillion francs last FY; Tanzania’s budget is expected to be 29.54 Tanzanian shillings (US$13.51 billion). Yet Kenya and itsEACneighbours share a common problem: borrowing massive amounts of money as well as over reliance on nebulous and restrictive donor funding, most of which remains unidentified. For example, Tanzania intends to borrow TSh7.48 trillion from domestic and external sources. Rwanda expects internal revenues to be RF1.22 trillion, or equal to 62.4 per cent of its budget, with external revenues at RF733 bn, reflecting an increase of RF99.7 bn.

In Uganda, Finance Minister Matia Kasaija noted, “In financial year 2015/16, it was projected that the budget would be partly financed by issuing Government securities worth 1.384 trillion [Ugandan] shillings. In the financial year 2016/17, government domestic borrowing will be significantly reduced and will amount to 612 billion [Ugandan] shillings. This is meant to provide more space for private sector credit growth.”Yet Uganda, like Kenya and its neighbours, can be accused of performing fuzzy maths. For example, according to Cabinet Secretary (CS) of Kenya’s National Treasury, Henry Rotich, the current account deficit has narrowed due to a lower oil import bill, improved earnings from tea and horticulture exports, and strong diaspora remittances. The deficit was estimated at 6.8 percent of GDP in 2015, a reduction of 3 percentage points from 2014, and is expected to narrow further in 2016. Yet CS Rotich offered no firm figures. In addition, in another speech Rotich noted that Kenya’s deficit would be US$6.9 bn, a figure equivalent to 9.3 percent of Kenya’s GDP.According to the IBP, the government expects to collect KSh1.50 trillion in revenue, leaving a deficit of roughly KSh 555.4 bn. This is justifiably suspect and appears unsustainable given an overreliance by the Treasury on estimates that often fall short of the target numbers.

Outline of Sector Funding
By sector, the Department of Transport is due to receive KSh181.6 bn; the Department of Infrastructure KSh176.8 bn; the Ministry of Energy and Petroleum KSh122.3 bn; and the Ministry of Information Communication and Technology KSh25.9 bn. According CS Rotich, transportation is a top priority for Kenya, with allocations of KSh117.6 bn for roads construction and repair, including KSh30 bn for low volume seal roads. The budget also calls for KSh154.4 bn for the SGR. These figures and other allocations are explored in greater detail below.

Agriculture & Rural Development

With the new budget, Kenya hopes to put in place measures to drive agricultural and industrial transformation so as to build resilience in the economy, ensure food security and lower food prices, as well as increase quality and diversification of exports, accelerate inclusive growth, create jobs and reduce poverty. The GOK is cognizant of the massive role that agriculture plays in Kenya, given that the majority of the Kenyan population lives in rural areas and derives their livelihood from agriculture. The GOK is also intent on delivering 10 per cent of Kenya’s economic growth from agriculture under Vision 2030. Accordingly, KSh69.6 bn has been set aside for agriculture and rural and urban development of which KSh28.9 bn has been allocated to the Ministry of Land Housing and Urban Development; KSh21.6 bn to the State Department for Agriculture; KSh13.3 bn to Livestock; KSh4.2 bn to Fisheries with the National Land Commission allocated KSh1.6 bn. The GOK has also indicated its commitment to the Galana-Kulalu model farm by allocating KSh7.7 bn even though the project has been plagued by reports of mismanagement, bad harvests and corruption.  The GOK has earmarked KSh1.97 bn for the country’s Strategic Grain Reserves; KSh0.6 billion for the modernization of the Kenya Meat Commission to ensure the quality and safety of meat meant for export and domestic consumption; KSh0.2 bn for the beleaguered Pyrethrum sector; and KS1 bn for a crop diversification programme for Meru farmers of miraa.

In regards to rural development, the Treasury has allocated KSh5.1 bn for its ongoing Rural Electrification Programme. The tarmacking of roads, as discussed below, along with agricultural development and increased productivity are expected to improve rural lives thereby enhancing food security, creating employment, generating income, eventually stimulating the growth of sectors such as agro-processing, storage and transport, wholesale and retail and construction, all of which are tied directly to Kenya’s engineering sector.

Roads
The 2016/17 FY budget will commit resources to infrastructure development and adopting innovative ways to hasten the delivery of better roads and related infrastructure. This is sorely required to reduce the cost of business and to promote competitiveness and the productivity of Kenya’s economy. KSh117.6 bnhas been earmarked for ongoing road construction, of which KSh62.8bn is locally financed and KSh54.8 bn is foreign financed. This includes KSh30 bn specifically allocated for construction of 3,800km of low volume seal roads across Kenya, reportedly in order to speed rural connectivity and development.

In his address in early June 2016, CS Rotich noted, without giving specifics, that major roads projects include the Northern Corridor Transport Improvement Project (NCTIP), decongestion of cities and urban areas, improvement of roads in cities and urban areas, the rehabilitation of access roads as well as projects associated with the Lamu Port-South Sudan-Ethiopia Transport Corridor (LAPSSET) are all on-going.Furthermore, priority will reportedly be given to the construction of the East Africa Road Network, the construction of the Kisumu-Kakamega road, the expansion of the Mombasa – Nairobi – Malaba Highway, and the construction of the 600km South Sudan link road.Rotich also note that the GOK would use Public Private Partnership (PPP) arrangements to develop 500km of roads using the annuity approach. Funding for expanded roads network would also come from the Road Maintenance Levy which will increase from KSh12 per litre to KSh18 per litre.

However, to the relief of Kenya’s many drivers, Rotich noted that the GOK will extend the current transition period for the imposition of VAT on petroleum products for one more year.

Marine Transport

The 2016/17 FY budget has allocated KSh5.5 bn to the expansion of Mombasa Port and related ongoing development projects. There has already been an expansion of container terminals and the ongoing integration of the National Electronic Single-Window System and other related systems should facilitate faster, efficient and competitive clearance of cargo. The Single-Window System is a trade facilitation idea that enables international (cross-border) traders to submit regulatory documents at a single location and/or single entity.

According to CS Rotich, this will continue to position the port of Mombasa as the preferred hub in Eastern and Central Africa.Additionally, the industrial park located at Dongo Kundu in Mombasa is also reportedly on schedule and will complement other planned industrial parks along the SGR route at Voi, MtitoAndei, Nairobi and Naivasha in order to spur manufacturing. Plans were also mentioned to develop a seaport in Kisumu, but no specifics were offered. Lastly, another KSh0.5 bn was set aside for the acquisition of two ferries for the Likoni Channel even though two ferries were reportedly purchased last year from a Turkish shipbuilder but have yet to be delivered.

Rail
The Standard Gauge Railway (SGR) is expected to significantly reduce the cost of transport, facilitate faster and cheaper movement of freight and passengers, and enhance the competitiveness of Kenya’s economy. Reportedly 80 per cent complete between Mombasa and Nairobi, the SGR is expected to be operational by June 2017. The GOK has allocated KSh154.4 bn to the SGR in this FY budget of which KSh118.2 bn is externally financed by a Chinese loan and KSh36.2 bn is from the GOK. In addition, funding discussions are reportedly complete and construction of Phase II of the SGR from Nairobi to Naivasha is expected to start in FY 2016/17.

LAPSSET
The FY 2016/17 budget and accompanying speeches by the CS made little mention of the Lamu Port-South Sudan-Ethiopia Transport Corridor Project (LAPSSET) and the mammoth infrastructure projects associated with it, to include roads, Lamu port, airports and pipelines. Indeed, only KSh10 bn was allocated to all projects associated with LAPSSET. This is likely on account of low oil prices and the cancellation of the jointly-proposed Uganda-Kenya Crude Oil Pipeline (UKCOP) which was shelved by Kampala in favour of building a pipeline from Uganda to Tanga, Tanzania last year. As such, the future of LAPSSET and the related export of Kenya’s oil reserves remains in question.

Energy
The Ministry of Energy and Petroleum is due to receive KSh122.3 bn this FY. Of this, KSh81.6 bn is reportedly from unidentified development partners and KSh38.5 bn is from the GOK. This is reportedly part of the GOK’s efforts to provide quality energy that is sustainable, competitive, cost effective and affordable. To this end, the budget has reportedly allocated KSh6.0bn for power transmission, KSh5.9 bn for Last Mile Connectivity and KSh5.1 bn for the Rural Electrification Programme. In addition, and adding to Kenya’s already impressive record, the budget provides KSh2.0 bn for geothermal development. Kenya is currently recognized as a global leader in clean energy.

In order to improve security and quality of life, KSh3.1 bn has been earmarked for the National Street Lighting Programme and an additional KSh7.6 bn for the electrification of public facilities.

In regards to Kenya’s nascent oil and gas sector, the budget reportedly provides KSh3.4 bn for the exploration and distribution of oil and gas.  In order to address the over reliance of many Kenyans on harmful charcoal for cooking, the CS has requested a reduction from 25 to 10 per cent of the import duty on energy efficient stoves. In addition, an attempt will be made to amend the VAT Act in order to exempt liquefied petroleum gas from payment of VAT to encourage its use.

Mining
Reflecting the increasing importance of Kenya’s minerals and mineral wealth, the Ministry of Mining is due to receive KSh4.6 bn. According to IBP analysis, the Ministry of Mining was allocated the highest percentage increase (132 percent) at the ministry level. This is driven largely by an increase of over 300 percent in the Mineral Resource Management Programme budget. The increase in funding is reportedly for mineral exploration and mapping as well as the establishment of a mineral lab and the purchase of aerial mineral surveying equipment.

ICT
The development of Information and Communication Technology (ICT) sector within Kenya continues to attract attention and funding, with the ICT Ministry being allocated KSh25.9 bn, up from KSh11 bn the previous FY. ICT is considered one of the key sectors in the achievement of Vision 2030 goals. It also holds one of the keys to revenue collection. As such, in order to increase efficiency and improve revenue reliability, the GOK will move all government payments to the Government Digital Program. The E-Citizen platform currently offers 115 services from government agencies online and 40 Huduma centres are already operational, with a goal of blanketing all 47 counties by June 2017. In addition, CS Rotich noted that the Kenya Tradenet System has resulted in a 50 percent reduction in time to process documents for importation. KSh6.1 bn has also been allocated for the Single Window Support Project (mentioned above), the Research Development Fund, rolling out of the Integrated Financial Management Information System(IFMIS), the development of Konza Technopolis, Digital Migration, and the Presidential Digital Talent Programme.

Lastly, the GOK has allocated KSh172.2 bn to the governance, justice, law and order sector. This includes KSh25.9 bn for military and police modernization, to include surveillance, thus touching heavily on the ICT sector and potentially providing revenue and jobs to Kenya’s engineers and engineering sector.
Irrigation and Water and Natural Resources
Signifying the importance of generating safe, clean and reliable water resources for human and animal consumption along with crop irrigation, the Treasury allocated KSh92.9 bn to the environmental protection, water and natural resources sector. Specifically, the Ministry of Water and Irrigation is due to receive KSh62.3 bn.
KSh26.0 bn is earmarked to the Ministry of Environment, Natural Resources and Regional Development Authorities (RDAs). Work has reportedly already begun on projects such as the Thika Dam Water Project in order to enhance and sustain measures to control floods and harvest rain water. The Treasury has therefore allocated the following resources for the construction of water pans and dams (KSh2.5 bn); water supply and sanitation (KSh12.6 bn); as well as environmental protection, conservation and management (Kshs 19.5 bn).

Endnotes:
1.    Indeje, David. (2016, June 8). Kenya Budget Highlights for the Financial Year 2016/17. Soko Directory. http://sokodirectory.com/2016/06/consolidating-gains-for-a-prosperous-kenya-was-the-main-theme-for-the-20162017-kenyan-budget-estimates-as-tabled-by-henry-rotich-the-kenyan-cabinet-secretary-for-the-national-treasury-with-a-nationa/
2.    The National Treasury (2016). Highlights of the 2016/2017 Budget: The ‘Mwananchi’ Guide. The National Treasury. http://www.treasury.go.ke/
3.    The National Treasury (2015). Highlights of the 2015/2016 Budget: The ‘Mwananchi’ Guide. The National Treasury. http://mygov.go.ke/file/2015/05/HIGHLIGHTS-OF-THE-2015_16-BUDGET-_The-Mwananchi-Guide.pdf
4.    Kinuthia, John and Lakin, Jason. (2016). Kenya: Analysis of the 2016/17 National Budget Estimates. International Budget Partnership. http://www.internationalbudget.org/publications/analysis-of-2016-17-kenya-national-budget-estimates
5.    National Treasury. (2016, June 8). PRESS RELEASE ON THE 2016/17 BUDGET STATEMENT BY CABINET SECRETARY / THE NATIONAL TREASURY MR. HENRY K. ROTICH, EGH. The National Treasury. http://www.treasury.go.ke/
6.    National Treasury. (2016, June 8). Budget Statement for the FY 2016/17 by Mr. Henry Rotich. The National Treasury. http://www.treasury.go.ke/
7.    Ngirachu, John. (2016, April 30). Kenya government proposes Ksh2.26 trillion 2016 budget. The East African. http://www.theeastafrican.co.ke/news/Kenya-government-proposes-Ksh2-26-trillion-2016-budget-/-/2558/3183628/-/yu3930z/-/index.html
8.    Kibuuka, Paul. (2016, June 14). Tanzania: Budget 2016/17 – Hard but Necessary Choices. Tanzania Daily News. http://allafrica.com/stories/201606140116.html
9.    Reuters. (2016, June 9). Uganda, Tanzania and Rwanda budgets for fiscal year 2016/17. Citizen Digital. http://citizentv.co.ke/business/uganda-tanzania-and-rwanda-budgets-for-fiscal-year-201617-129579/