Kenya’s 2015/2016 fiscal year budget will have a major impact on the engineering sector with roads, power generation and supply, rail and marine transport being the biggest winners. The 2.1 trillion Kenyan shillings (KES) national budget is the largest budget in Kenya’s history. The new budget provides a total of 27% of the projected funds to Energy, Information and Communication Technology (ICT), and Infrastructure, all directly linked to the engineering sector. This marks the single largest budgetary allocation to any sector, thus highlighting the importance of engineering expertise and projects to Kenya current and future growth.
Spending on engineering-related projects and sectors is up almost 5% from the 22.6% allocated to these sectors in the 2014/2015 budget. The total budget is a 17% increase from that of the previous fiscal year and is expected to support both inclusive and rapid economic growth. The Kenyan Government is anticipating the economy to grow by 6.5 – 7% in 2015, partially supported by infrastructure projects and low global oil prices. Increased consumer confidence and higher total factor productivity reflecting continued implementation of structural reforms and increased investment in health and education also will assist Kenya’s growth rate. In contrast, the world economy is projected to grow by 3.5 percent and 3.8 percent in 2015 and 2016, respectively, up from 3.4 percent in 2014.
A cursory look at the new budget indicates that over KES 130 billion have been allocated to ongoing and new roads construction, with the emphasis shifting from the construction of new roads, and toward rehabilitation and maintenance of existing roads. Over KES 55 billion will go to Energy and a total of KES 143.8 billion has been allocated to the Standard Gauge Railway (SGR). The SGR was one of the six critical thematic areas of the 2014/15 budget in order to further fortify the platform for accelerated inclusive growth. This is good news for Kenya and sets it apart from much of the African continent that has experienced decades of underinvestment leaving much of its infrastructure in a crumbling state. The poor state of transport infrastructure adds between 63 and 75 % to the total cost of goods and services in Africa. Between 2005 and 2012, China and India invested 32 and 42 % of their GDP in their transport infrastructure respectively, according to figures from the African Development Bank (AfDB). By contrast, African countries invested only 15 to 25 %. Thus, Kenya’s new budget builds on the previous year’s and is another welcome step in the right direction.
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 fiscal year’s 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.
Infrastructure allocation highlights
The development of Information and Communication Technology (ICT) sector within Kenya continues to attract attention and funding, with the ICT Ministry being allocated KES 11 billion in this year’s budget. Kenya’s Government recognizes that ICT is one of the key sectors in the achievement of Vision 2030 goals. The budget also earmarked KES 1.9 billion for the continued roll out of the Integrated Financial Management Information System (IFMIS), an automated system that is supposed to enhance efficiency in planning, budgeting, procurement, expenditure management and reporting in the National and County Governments in Kenya. Konza Techno City received KES 800 million and another KES 250 million was set aside for the Presidential Digital Talent. Lastly, in a move likely to lead to the growth of a consumer electronics industry in Kenya, the Government zero rated all ICT inputs to be used in local assembling of electronics devices. This may have a lasting and positive effect on local ICT manufacturers and assemblers.
The budget will commit more resources towards infrastructure development and adopting innovative ways to hasten the delivery of better roads and other infrastructure. This is needed to reduce the cost of business and promote competitiveness and the productivity of Kenya’s economy. According to the Kenyan Treasury, a total of KES 132.4 billion has been allocated for roads. KES 63.5 billion of this sum will be used for on-going road construction. Another KES 26.7 billion will fund maintenance of existing roads. Foreign-financed roads will receive a share of KES 42 billion and a total of KES 5.0 billion has been set aside for the Road Annuity Programme. The Road Annuity Programme was rolled out in 2014 and is a government initiative to engage the public and private sectors in order to accelerate roads construction across Kenya at more affordable prices. The model is expected to give more business to local contractors, fill the gap the Treasury has in funding infrastructure and minimise delays in completion of projects. Roads will be built by contractors using loans from commercial banks that will be guaranteed and settled by the Kenyan government once a road is completed and in use.
According to Henry Rotich, Cabinet Secretary for the National Treasury, the roads department intends to construct 350 kilometres of new roads through the normal development allocation and 3,000 kilometres under the Annuity Programme during the 2015-16 financial year. In the year 2013-14, a total of 262.8 kilometres of new roads were constructed while a further 237.6 kilometres were rehabilitated at a cost of KES 93 billion. In the same year, the sub-sector maintained 57,280 kilometres of roads under the routine maintenance initiative, while a further 1,532 kilometres were also serviced through the periodic maintenance approach.
Capitalizing on the recent finalization of the Thika Super Highway and the Northern, Southern and Eastern bypass roads surrounding Nairobi, the Government intends to boost its road maintenance funding mechanism by increasing the Road Maintenance Levy by KES 3 per litre of fuel. This tax is supposed to ensure that these and other roads in Kenya remain well-maintained and functional.
The 2015/2016 budget has allocated a whopping KES 1.3 billion for purchase of new ferries to serve Mombasa. The purchase of new ferries by Kenya Ferry Services (KFS) will likely ease movement of passengers and cargo across the Likoni and Mtognwe Channels. KFS has over the years struggled to improve services across the two channels and the last time it bought new vessels was during President Mwai Kibaki’s tenure when two ferries were imported from Germany. On average it is estimated that over 300,000 people cross the channel every day. The new ferries are estimated to cost approximately KES 7 billion and will have the capacity to carry 1,800 sitting passengers, per voyage.
In another move to boost the Kenya’s shipping sector, the Cabinet Secretary has increased the shipping investment deduction from 40% to 100% on purchase of a ship of 125 tons and above from the current 425 tons limit. Furthermore, the government remains committed to expanding Mombasa Port though monetary figures were not given.
The Standard Gauge Railway (SGR) received a dedicated KES 143 billion of which KES 25.7 is funded by the Railway Development Levy Fund (RDLF) and KES 118.1 is financed by a loan from China (PRC). The construction of the railway started in early 2015 and is expected to be completed around mid-2017, though the Government stated that construction of the rail network is ahead of schedule. While Kenya is making strides in the rail sector, rail transport in Africa as a whole remains largely underdeveloped with 80 % of all goods and 90 % of all passenger traffic conveyed by road. The completion of the SGR is likely to significantly reduce the cost of transport within Kenya and the region, reduce fossil fuel consumption and therefore be beneficial to the environment. Furthermore, according to the Government, the railway could employ up to 30,000 Kenyans at the peak of construction. In addition, the Government is said to have insisted on a 40 % local content requirement that should result in the creation of further business and employment opportunities for Kenyan businesses, industries, and entrepreneurs.
KES 55.2 billion has been earmarked for energy-related projects, of which Sh13.2 billion is for geothermal energy. Kenya is currently recognized as a regional leader on clean energy with over 80 % of the energy mix reportedly being green. The new budget, according to Cabinet Secretary Rotich, should position Kenya’s economy as a green industrial hub, leveraging cheaper and cleaner geothermal power, steam and water to competitively produce goods of high quality for the region as well as the global market. Furthermore, rural Kenyans are known to suffer serious indoor pollution and associated respiratory diseases occasioned by fossil fuel and firewood for domestic cooking. As such, the government is keen to encourage use of clean and affordable biogas energy system for cooking and lighting to rural households. Accordingly, the Cabinet Secretary proposed a Value Added Tax (VAT) exemption on plastic bag biogas digesters for use in this sector.
Agriculture, Irrigation & 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 its 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. Accordingly, KES 79.2 billion has been set aside for agriculture, rural and urban development of which irrigation projects are to receive KES 13.8 billion. A further KES 63 billion has been allocated for environment, water and natural resources projects. Tax incentives have also been promised for water investments by smallholder farmers.
Tax Measures and Licensing
In a move to reduce time and costs associated with conducting business in Kenya, the Government proposed cutting the procedures for registering a business, getting electricity and registering property by 80%. It also hopes to reduce the process, time, and cost of getting construction permits and making tax payments by 50% and 60%, respectively. Finally, newly proposed tax measures are meant to encourage job creation, promote equity, ease compliance, further reforms and encourage growth. For example, in order to encourage the hiring of interns and apprentices, employers are to get tax rebate for training ten or more youth for 6-12 months.
1. The National Treasury (2015), “Highlights of the 2015/2016 Budget: The ‘Mwananchi’ Guide,” available at http://mygov.go.ke/file/2015/05/HIGHLIGHTS-OF-THE-2015_16-BUDGET-_The-Mwananchi-Guide.pdf
2. Sunday, Frankline, “Funding for roads, electricity supply up in Kenya’s budget,” The Daily Standard, available at http://www.standardmedia.co.ke/article/2000165384/funding-for-roads-electricity-supply-up-in-kenya-s-budget
3. Wangalwa, Elayne, “KENYA TO UNVEIL ITS LARGEST BUDGET IN HISTORY,” cnbcafrica.com, available at http://www.cnbcafrica.com/news/east-africa/2015/06/10/kenya-budget-20152016/
4. Rotich, Henry, “Budget Statement for the Fiscal Year 2015/2016.” Speech given the Kenyan Parliament by the Cabinet Secretary for The National Treasury on 11 June 2015; available at file:///C:/Users/owner/Downloads/Budget%20Statement%202015%20-%202016.pdf
5. Kalinaki, Daniel K. “Africa needs to invest more in transport, energy infrastructure, and stop fighting,” The East African, 16 June 2014. Available at http://www.theeastafrican.co.ke/news/Africa-needs-to-invest-more-in-infrastructure-and-stop-fighting/-/2558/2385672/-/item/2/-/e8iccx/-/index.html
6. KPMG, “KPMG Budget Brief 2015,” KPMG.com, available at https://www.kpmg.com/eastafrica/en/Documents/KPMG_Kenya_Budget_Brief_2015f2.pdf