54906 June 2010 | Edion No. 2 Running on One Engine: Kenya's uneven economic performance with a special focus on the port of Mombasa Poverty Reducon and Economic Management Unit Africa Region TABLE OF CONTENTS FOREWORD i ACKNOWLEDGEMENT ii ABBREVIATIONS AND ACRONYMS iii EXECUTIVE SUMMARY iv The State of Kenya's Economy 1 1. Recent Economic Developments 2 1.1 Highlights over the Last 18 Months 2 1.2 An Assessment of Kenya's Crises Management 5 2. Outlook for 2010 and 2011 ­ the Recovery Connues 8 3. Running on One Engine ­ Analyzing Kenya's Economic Imbalances 10 3.1 Taking Stock of a Poor Export Performance 10 3.2 The 2000s ­ Economic Imbalances Widen Despite Beer Growth Performance 11 3.3 Kenya's Economy Has Been Transformed ­ Differently Than Expected 13 Special Focus ­ The Port of Mombasa 15 1. The Significance of the Port 16 2. Operang at Full Capacity and at Low Efficiency 18 3. The Future for the Port of Mombasa ­ An Agenda for Implementaon 23 ANNEXES Annex 1: Key Macroeconomic Indicators 28 Annex 2: Sectoral shares in GDP, 2009 29 Annex 3: Products where Kenya has Acquired Revealed Comparave Advantage (RCA) 30 Annex 4: Kenya: Assumpons Underlying the 2010 Growth Forecast 31 Annex 5: Sub-Saharan Africa Forecast 32 Annex 6: Exports of goods and services (% of GDP) 33 Annex 7: Share of imports by countries of origin 33 Annex 8: Composion of VAT, Corporate Tax and PAYE by Economic Sector 33 Annex 9: Composion of GDP in Selected Sub-Saharan Countries 34 Annex 10: Share of total exports by countries of desnaon 34 Annex 11: Principal Import Commodites in 2009 34 Annex 12: Kenya's Poor Connecvity with Global Trade Routes 35 LIST OF FIGURES Figure 1: Kenya's economy is recovering ­ slowly but surely v Figure 2: Manufacturing falls behind service sectors vi Figure 3: Kenya's Economic Performance in 2009 3 Figure 4: Kenya's Economic Imbalances 4 Figure 5: A Stable Macroeconomic Environment 5 Figure 6: Counter Cyclical Monetary Policy 6 Figure 7: Fiscal Smulus: 57 percent implementaon 7 Figure 8: Maize prices are coming down aer Kenyans paid a high price 7 Figure 9: Growth will rebound: high growth possible in 2011 if Kenya avoids shocks 8 Figure 10: In the next two years, Kenya's growth will be similar to the SSA average 10 Figure 11: Kenya's Share in World Exports of Goods and Services, 1970-2008 11 Figure 12: Rising and Strong Domesc Demand 12 Figure 13: A decade of sectoral transformaon (growth by sectors, 2000-2009) 13 Figure 14: Mombasa - The gateway to East Africa 16 Figure 15: Singapore ships 50 mes more goods than Mombasa 17 Figure 16: Mombasa goods go mainly to Kenya and Uganda 17 Figure 17: Dwell me declines while CFSs grow 19 Figure 18: It takes 20 days for a container to go through the port and by road to Nairobi, Kenya 21 Figure 19: It takes 22 days for a container to go through the port and by road to Kampala, Uganda 21 Figure 20: It takes 24 days for a container to go through the port and by road to Kigali, Rwanda 21 LIST OF BOXES Box 1: What is Port Community Based System? 20 Box 2: What is a Landlord Port? 22 Box 3: Summary of Key Suggested Port Reforms 26 LIST OF TABLES Table 1: Key Indicators 2007-2012 (Base Case) 9 Table 2: Port reform is possible: examples from Africa and the Middle East 23 FOREWORD T his is the second edion of the Kenya Economic Update. The launch of this report also marks the pass- ing of 50 years of World Bank presence in Kenya. Over the last 50 years we have built many partner- ships with the public, government, academia, private sector, non-government organizaons, development agencies and other stakeholders. These Economic Reports are prepared in close partnership with Kenyan stakeholders and represent a new model of a strong knowledge engagement with our local partners. We are parcularly grateful to the Central Bank of Kenya, the Office of the Deputy Prime Minister and Ministry of Finance, the Ministry of Planning and Development, the Kenya Ports Authority, the Kenya Revenue Authority, the Kenya Naonal Bureau of Stascs, and the Kenya Instute of Public Policy and Research Analysis, which have contributed to this report and provided guidance during its preparaon. This report, like its predecessor, provides an update of recent economic trends as well as a special focus on a selected topical issue. The reports aim to support all those who want to improve the economic manage- ment of Kenya. They are intended to help inform and smulate knowledge and debate on topical policy issues, and so to make a contribuon to unleashing Kenya's growth potenal. This edion of the Economic Update has three main messages. First, Kenya's economy connues to recov- er. Aer two years of low growth, we project 4.0 percent growth in 2010, which means that most Kenyans will again experience an improvement in their living condions. Second, Kenya has been "running on one engine" ­ the theme of this report. Domesc consumpon is the main driver of Kenya's economy, while exports have disappointed. Over the last decade, this imbalance has become even more pronounced, as reflected in the sectoral performance of Kenya's economy -- several service sectors have now overtaken manufacturing, which stagnated at around 11 percent. For Kenya to achieve and sustain high levels of growth, it will need to restart the export engine. Third, one of the main reasons for this economic imbalance is Kenya's infrastructure deficit. In this report we highlight the role and performance of the port of Mombasa, East Africa's most important infrastruc- ture asset. Despite some improvements, the port is sll underperforming. Reforms have not kept up with the momentum in other African countries and the port remains heavily congested, which explains why it has lost significant business as a transshipment port. Over the next years, the pressure on the port will increase further. East Africa's economies are expected to grow at 5 percent. With oil exploraon in Uganda and a stronger aachment of southern Sudan to the region, the port of Mombasa has a great opportunity to become the major regional hub. This is an opportunity that Kenya cannot afford to miss. Johannes Zu World Bank Country Director for Kenya June 2010 | Edion No. 2 i ACKNOWLEDGEMENT T his edion was prepared by a team led by Wolfgang Fengler and Jane Kiringai. The report's special focus on the port of Mombasa was led by Andrew Roberts. The core team also included Dimitri Stoe- linga, Yira Mascaro, Sachin Gathani, Solomon Waithaka, Jean Kabanguka, Chrisna Savescu, Roger Sulli- van, Millicent Gitau, Catherine Gachukia, Rosemary Oeno, Grea Mhanna, Fred Wamalwa and Carolyn Wangusi. The team is very grateful for the close collaboraon with the Central Bank of Kenya, the Office of the Deputy Prime Minister and Ministry of Finance, the Ministry of Planning and Development, the Kenya Ports Authority, the Kenya Revenue Authority, the Kenya Naonal Bureau of Stascs, and the Kenya Instute of Public Policy and Research Analysis. This report reflects the inputs they provided during an Economic Roundtable meeng (May 12, 2010) chaired by the Governor of the Central Bank, Prof. Njuguna Ndung'u. In addion, the report benefited greatly from the comments and insights shared by Sco Rogers (IMF), Aly Khan Satchu (www.rich.co.ke), Marc Juhel, Praveen Kumar (both World Bank), and the Maersk Line, Kenya. The team is also very thankful for the support and advice received from the World Bank managers Johannes Zu (Country Director), Kathie Krumm (Sector Manager), and Sudhir Shey (Sector Director). June 2010 | Edion No. 2 ii ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CBK Central Bank of Kenya CBR Central Bank Rate CCK Communicaon Commission of Kenya C&F Clearing and Forwarding CFS Container Freight Services COMESA Common Markets of East and Southern Africa CT Corporate Tax DWT Deadweight DRC Democrac Republic of Congo EAC East African Community GDP Gross Domesc Product GNFS Goods and Non-Factor Services ICT Informaon and Communicaon Technology KNBS Kenya Naonal Bureau of Stascs KPA Kenya Ports Authority KRA Kenya Revenue Authority NSE Nairobi Stock Exchange PAYE Pay As You Earn PCBS Port Community Based System SSA Sub-Saharan Africa TEUs Twenty-foot equivalent unit UAE United Arab Emirates USA United States of America UK United Kingdom VAT Value Added Tax WB World Bank WDI World Development Indicators June 2010 | Edion No. 2 iii EXECUTIVE SUMMARY K enya has entered a new decade with renewed momentum for strong and sustained growth. Being part of Africa's strong recovery aer the global crisis and a regional leader in services, Kenya has high hopes for a strong economic performance during this new decade. Aer two years of low growth, the World Bank projects 4.0 percent growth in 2010 which means that most Kenyans will again ex- perience an improvement in their living condions. To achieve and sustain high growth over the next decade, Kenya will need to address its economic imbalances, avoid domesc shocks, and manage the impacts of future external crises. The theme of this second Kenya Economic Update, "Running on One Engine", reflects the structural imbalance of Kenya's current economy -- Kenya's strong engine is do- mesc consumpon; its weak engine is exports. In order to restart the export engine, Kenya will need to address a number of issues, especially the infrastructure deficit. The port of Mombasa, for example, is Kenya's most important and concentrated infrastructure asset. As the special focus secon of this re- port concludes, the port needs substanal reform and upgrading to reach internaonal standards and to meet the demands of a growing and increasingly integrated East African Community. KENYA'S RECOVERY respond to the crisis proacvely by lowering lend- ing rates and preparing a fiscal smulus package K enya's economy connues its path of recovery (supporng social protecon and infrastructure in- ­ slowly but surely. For 2010, the World Bank vestments). Many of Kenya's macroeconomic fun- projects that Kenya's growth rate will reach 4.0 per- damentals improved despite the crisis. Inflaon cent, which represents a robust recovery aer the declined further to below 5 percent by end 2009, four consecuve shocks Kenya experienced in the enabling Kenya to issue domesc debt at lower previous two years. If posive economic trends con- rates. The share of Non-Performing Loans was also nue, Kenya could grow at 5 percent in 2011, bring- lower in 2009 than in 2007. ing the country back into the high growth momen- tum it experienced between 2004 and 2007. Kenya's fiscal challenge today is not mobilizing resources ­ but effecvely implemenng its pub- Recent economic developments have been prom- lic expenditure program. While Kenya's aggregate ising and create opmism that Kenya will begin the fiscal performance remains very strong, the im- new decade on an upward growth path. At the end plementaon of the fiscal smulus has proceeded of 2009, Kenya's growth accelerated and this growth slowly. Domesc revenues remain among the high- momentum connued into 2010. Strong rains have est in Africa. Deficits over the last decade have been helped in the recovery of the agriculture sector ­ low and with relavely high growth. Kenya has been which had contracted by a combined 7.5 percent in able to reduce its debt levels from 60 percent (2000) 2008 and 2009. The more stable provision of energy to 40 percent (2008) of GDP despite never having since January 2010 supported a moderate rebound received substanal debt relief. This strong fiscal in manufacturing. Services connue to perform posion allowed the government in 2009 to embark strongly with an ICT revoluon which connues at on a fiscal smulus program of Kshs 22 billion, equal the same pace as one year ago. Phone ownership to 1 percent of GDP, which increased the projected is likely to have exceeded 20 million, which means fiscal deficit to 6.6 percent. However, nine months that stascally every adult in Kenya now owns a into the fiscal year the government has only spent phone. 57 percent of the smulus, which, when combined with the government's tradional weakness in im- Kenya, along with most of Africa, entered the cri- plemenng the development budget, translates sis buoyed by a strong macroeconomic posion into substanal under-spending on Kenya's crical and subsequently managed the global financial public investment program. As a result, the overall crisis well. A strong fiscal posion, banking reforms fiscal deficit for FY 2009/2010 is unlikely to exceed and declining inflaon allowed the government to 5 percent. June 2010 | Edion No. 2 iv Going forward Kenya can match Africa's growth Kenya is among the few developing countries in rates if it avoids domesc shocks and manages the the world which has seen its external sector shrink impacts of future external crises. Africa and East rather than grow over the last five decades. Ken- Asia have recovered fastest from the 2009 global ya's exports as a share of GDP have declined from financial crisis. By 2011, African growth rates are 40 percent in 1960 to 26 percent in 2009. While expected to again exceed 5 percent, almost back most emerging economies have invested in their to pre-crisis levels. Kenya has the potenal to grow export producon, Kenya has seen its tradional in line with Africa's average, although per capita agriculture exports, mainly coffee and tea, stagnate growth would be lower (see figure 1). For this to as a result of weak governance in markeng instu- happen, the Kenya Government will need to avoid ons. Meanwhile, Kenya developed robust horcul- domesc shocks, for example by successfully man- tural exports (flowers, vegetables) and has seen an aging this year's constuonal referendum process increase in its service exports, mainly tourism and and any future drought. External crises could also air transport, and an emerging outsourcing indus- adversely affect Kenya's growth prospects. The in- try (e.g. call centers). However, these new growth terrupon in commercial air traffic to Europe earlier areas were not enough to counter the downward trend in exports as a percent of GDP. in 2010, caused by the erupon of the Icelandic vol- cano, briefly impacted Kenya's horcultural exports. As a result of rapidly increasing imports of basic The current crisis in the euro zone, brought on by commodies (fuel, clinker and maize) to support Greece's debt situaon, has led to an appreciaon its domesc economy, and stagnang exports, of the Kenya shilling. Over me a weak euro could Kenya's trade deficit has been widening in the result in a reducon in horcultural exports to Eu- last years. The current account deficit is financed rope and tourists vising Kenya from that region. by increasing capital inflows, which reached a new Kenya can migate the impacts of these potenal record of 9.5 percent of GDP by 2009. This is re- external crises by seeking more diversified markets markable given the global financial crisis and low for both its agriculture and its tourism. FDI into Kenya. These inflows drive investments into Figure 1: Kenya's economy is recovering ­ slowly but surely construcon and services, helped to move Kenya's 8 balance of payments into posive territory and keep 7 the exchange rate stable. 6 5 The economic factors causing the imbalance in the 4 external sector can also be seen in Kenya's secto- Percent 3 2 ral growth trends. Sectors which produce goods for 1 the domesc market ("non-tradables") have been 0 -1 2007 2008 2009 2010 2011 doing well, especially the strong service sector. Sec- -2 tors which produce export goods ("tradables"), have GDP Kenya GDP SSA Percapita Kenya Percapita SSA been doing poorly in aggregate, even though some Source: KNBS, World Bank staff esmates sub-sectors and strong companies have defied the odds, e.g. producers in the horculture industry. RUNNING ON ONE ENGINE The sector which has been seriously underper- T he drivers of Kenya's economy are not in bal- ance. Even if the country avoids another crisis in the coming years, it will be very difficult for Kenya forming over the last decade is manufacturing. In emerging economies, a high performing manu- facturing sector is associated with a strong export to achieve high growth over an extended period of performance. In 2000, manufacturing was Kenya's me because of its exisng economic imbalances. second largest economic sector aer agriculture. By Kenya's strong engine runs on domesc consump- 2009, manufacturing slipped to fourth place. Over on, which accounts for 75 percent of GDP. Kenya's the whole decade the share of manufacturing in weak engine remains its exports which have been the economy remained stable at 11 percent. Dur- declining sharply in relave importance. ing the same period, services expanded and two June 2010 | Edion No. 2 v service sectors overtook manufacturingin 2004 they are more likely to make medium-term invest- transport and telecommunicaon became Kenya's ments in sectors such as manufacturing. second largest sector, and in 2007 wholesale and retail trade surpassed manufacturing as a percent- The port of Mombasa is possibly the single most age of GDP (see figure 2). important piece of infrastructure in East Africa and Figure 2: Manufacturing falls behind service sectors has the potenal to become the crical transport hub for the region. The port is already the lifeline Manufacturing overtaken by Transport and Communicaon Manufacturing overtaken by Wholesale and Retail trade for most of East Africa's raw material and petrole- um product imports. In the next years, East Africa's economies are expected to grow at above 5 per- cent, which will further increase the flow of goods through East African ports. Over the medium term oil exploraon in Uganda is expected to result in a flow of equipment imports and eventually exports of oil and petroleum products, which would all pass through Mombasa. Growing economic acvity in southern Sudan would result in addional demands Source: KNBS, World Bank staff esmates Note: GDP constant 2001 prices all industries for capacity at Mombasa to handle the raw material imports for an emerging economy. In addion the To increase and sustain broad-based economic port has untapped potenal to be a transit route for growth the structure of producon will require new Kenyan manufacturing exports as two-thirds of reorientaon towards the producon of tradable the containers bringing imports into the port return goods and services. This can be achieved through empty. The port could also serve as a hub for the incenves to diversify and increase the share of transshipment of goods within Eastern and South- service exports, restart manufactured exports, and ern Africa. gradually reduce the share of government and pri- vate consumpon in aggregate demand. The port of Mombasa is operang at full capacity and not very efficiently, with the resulng costs RESTARTING THE EXPORT ENGINE rippling through the economy, affecng manufac- turing and other import dependent acvies. The LEVERAGING THE PORT OF situaon is parcularly acute for container traffic, as MOMBASA the absence of reform and new investment will re- sult in increased vessel delays, port congeson sur- R estarng Kenya's export engine will require charges and higher costs to customers. Moreover the government to undertake a range of in- the use of IT to speed up clearance procedures and vestments and policy iniaves, including those introduce greater transparency to port operaons that would improve the efficiency and expand the should represent a quick and cost-effecve soluon capacity of the port of Mombasa, the gateway for to improve efficiency. Kenya's imports of fuel and raw materials. Kenya needs to address a range of inter-related issues Port reform is possible; many ports in Africa and around improving efficiency of the port's operaons elsewhere have demonstrated that improvements (improved customs and inspecon procedures, so can happen fast. In Nigeria, the adopon of the called `so infrastructure') and expanding capacity port landlord model in 2006, a form of public-pri- to meet the expected high growth in cargo traffic. A vate partnership where the public sector regulates beer run port, one that has adequate capacity to and the private sector invests in and operates the meet the growing import and export requirements port, has resulted in a dramac inflow of private of the region, needs to be an essenal part of Ken- investment and a rapid increase in the efficiency ya's economic growth strategy. Once local and for- of port operaons. Ghana also adopted the port eign investors see that the government is intent on landlord model in 2007 as part of its `Ghana Gate- strengthening operaons at the port of Mombasa, way' program to service its neighboring landlocked June 2010 | Edion No. 2 vi countries as well as meet its own economic needs. · Implement the IT Port Community-Based System. The results have been posive with the port of Ac- · Approve the concessioning of berths 11-14 through cra delivering compeve service approaching in- a compeve and transparent process. ternaonal standards. Jordan increased port capac- In the next 6 to 12 months ity through a low-cost Truck Control System in 2005 which resulted in 25 percent more cargo moving to · Clarify the metable for a full landlord port status and from the port of Aqaba with the same number as well as the role of KPA. of trucks. · Clarify the roles and responsibilies of public and private port stakeholders. The Government of Kenya needs to take acon now · Undertake reforms of customs collecons, making to forestall the port of Mombasa from becoming them more efficient and transparent. an impediment to economic growth. While plans · Strengthen port operaonal capacity of the Min- have been drawn up in the past, the government istry of Transport. has failed to comprehensively address the range of issues associated with efficient port administraon In summary, Kenya has put in place programs in and operaon. The government could improve the the last few years that will smulate the economy performance of the port in a short period of me and set the stage for renewed growth. However, if it were to implement a number of reforms and Kenya has been running on one engine, domesc investments now. Among the most crical are: consumpon, while developing a chronic current In the next 3 to 6 months account deficit. For long-term double - digit growth, Kenya will need a greater response from its export · Idenfy a coordinang body with a mandate for sector, including manufacturing industries. Invest- reform. ment will flow into manufacturing, as it has in tele- · Appoint the managing director of the KPA on a communicaons and other service sectors, if poli- 3-year performance contract. cal stability connues in the medium term and the · Decide on the route for the Mombasa by-pass policy environment remains appropriate. A crical and start implementaon together with the link incenve will be that the port of Mombasa has seen road from the port. improvements in its overall capacity and operang · Set up a system of incenves to enable full efficiency. 24-hour port operaons by mulple stakeholders. June 2010 | Edion No. 2 vii The State of Kenya's Economy The State of Kenya's Economy T his first part of the Kenya Economic Update examines Kenya's recent economic performance and puts these trends in the context of a structural transformaon of the economy. Secon one de- scribes recent economic developments and evaluates the government's response to the series of eco- nomic crises that befell Kenya in 2008 and 2009. It shows that Kenya's economy connues its modest recovery. Secon two provides the growth forecast for 2010, showing a slightly more posive projec- on for the year, in part as a result of the good rains in early 2010 which are crical to agricultural producon and the producon of hydroelectric power. Secon three examines the structural composi- on of Kenya's recent growth and highlights a connuing (and unsustainable) trend: one where the economy is "flying on one engine" ­ domesc consumpon fueled by imports ­ while exports have stagnated. 1. Recent Economic Developments some of the worst aspects of the 2009 global down- turn. However, a domesc food crisis developed 1.1 Highlights over the Last 18 Months in 2009 brought on by a severe drought and com- A er recovering from four waves of economic shocks, Kenya's growth improved and reached 2.6 percent of GDP in 2009. This is a moderately pounded by weak governance and irregularies in the operaons of the government run maize board. In addion, the drought caused enduring electricity strong recovery in view of the global economic cri- short-falls which hit the manufacturing sector. sis and it exceeded growth in Sub-Saharan Africa (see figure 3). As we reported in our first Kenya In 2009, the agriculture sector disappointed again Economic Update (December 2009), contracng by 2.4 percent. The sector the post-elecon violence, the food was hit hard by the drought. The situ- and fuels crisis, the global financial aon was most severe for maize, Ken- crisis and the 2009 drought almost Last year's growth ya's main food staple. Due to shortages caused the Kenya's economy to stag- was mainly driven and imprudent policies which led to the nate. Growth dropped from 7.1 per- by services and a "maize scandal", prices increased to dou- cent in 2007 to 1.6 percent (2008), strong construcon ble of world market levels hing the before reaching 2.6 percent in 2009. poor especially hard. On a more posive sector In both years the recovery was below note, the livestock sub sector expanded populaon growth and for the sec- by 3 percent despite the severe drought ond consecuve year the incomes of most Kenyans as a result of policy incenves and micro credit to contracted. Last year's growth was mainly driven by dairy farmers, which demonstrates the potenal services and a strong construcon sector, overshad- of agriculture once appropriate incenves are in owing the low growth in manufacturing and con- place. The export performance among Kenya's key tracon in ulies (see figure 3). export crops has been mixed and partly benefied from rising prices: While Kenya has responded to the global shocks · Horculture exports experienced a double dip of very well, the 2009 drought created a heavy toll on declining output and prices, reflecng a down- economic acvity. Despite the global financial crisis, turn in global demand. Kenya's tourism rebounded strongly in 2009 from · Tea, tradionally Kenya's strongest export earner, depressed 2008 levels. Moreover, Kenya's strong suffered in reduced output from the drought but macroeconomic policies and its relavely limited benefited from global prices increases. integraon in the global economy shielded it from For more details see secon 1.2 and the "Special Focus" in World Bank, Kenya Economic Update 1st Edion, December 2009. June 2010 | Edion No. 2 2 The State of Kenya's Economy · Coffee received a double dividend, with both ture projects. The weak performance in manufac- volume and prices increasing. However, coffee turing was caused by the spillover effects from the accounts for only about 4 percent of Kenya's ex- drought transmied through higher costs (and out- ports. ages) for ulies, water and electricity. However, the sector was also affected by the ban of fish prod- ucts to the European Union, and a reducon in the Industry in 2009 grew at 3.5 percent. A lot of the import quota for Kenyan garments into the United growth in industry can be aributed to the con- States of America. strucon sub sector (represenng 4.2 percent of GDP) which experienced double digit growth (14.1 The service sector connues to drive Kenya's econ- percent), while the much larger manufacturing sec- omy. Services grew by 4.2 percent led by Commu- tor, at 11 percent of GDP, stagnated at 2.0 percent nicaon, Transport and Trade. Tourism rebounded growth (figure 3). Cement producon and cement to almost reach 1 million tourists (close to 2007 lev- consumpon recorded impressive growth rates, of some 20 percent due to high demand for infrastruc- els). Kenya's informaon and communicaon revo- Figure 3: Kenya's Economic Performance in 2009 Growth at 2.5 percent... ...driven by services, but agriculture contracted again Economic Growth Sectoral Growth Rate Transport & Communicaons, Trade and Construcon are the leading sectors... ...and the ICT revoluon connues Telephone Connecons (millions) Internet Users ('000) Internet users ('000) Telephone connecons (millions) Source: KNBS, CCK, GEP and World Bank staff esmates For a summary of all the sectoral shares in the economy and the 2009 growth rates, see Annex 2. June 2010 | Edion No. 2 3 The State of Kenya's Economy luon connues. Mobile telephone and internet Kenya has also experienced moderate investment connecvity expanded by another 20 percent. Tel- flows in the last three years which contributed 2.6 ephone ownership reached 19.7 million people by percent to the GDP growth in 2009. The growth in end 2009. If this strong growth connues through investment was achieved through increased credit 2010, stascally every Kenyan above the age of supply to the private sector and heavy infrastruc- 15 would be connected to mobile services. Internet ture investments by the public sector, part of the connecvity had reached 4 million by smulus program and planned invest- the end of 2009 (see figure 3). ments under the government's Vision Kenya's govern- 2030 strategy. The current account def- In 2009, sectors which are mainly pro- ducing for the domesc market, so ment has managed icit widened further and negave net exports reduced growth by 2.1 percent called "non-tradables" which include the global crisis (see figure 4). most of the service sectors and con- well while the do- strucon, have been doing well. Do- mesc crises have Kenya's overall balance of payments mesc demand grew at 4.0 percent hit the country returned to surplus in 2009. Aer and led Kenya out of its economic cri- hardest declining to -1.6 percent of GDP in sis. In 2008, domesc demand, espe- 2008, the overall balance of payments cially private consumpon, contracted reached 3.3 percent of GDP in 2009. when the post-elecon violence interrupted eco- nomic acvity and when food prices rose sharply. This improvement was driven by the surplus in the The price of maize, Kenya's main staple, doubled be- capital and financial account which increased from tween early 2008 and mid-2009. Once government 4.0 percent in 2008 to 9.5 percent of GDP in 2009. removed maize tariffs in mid-2009 and increased However, imports and exports contracted reflecng imports, the domesc price began declining though sll remaining well above internaonal prices. Good the impact of domesc and external shocks. The producon in early 2010 has led to further maize current account balance improved to -5.5 percent price reducons. of GDP in 2009 compared to -6.6 percent in 2008. Figure 4: Kenya's Economic Imbalances Consumpon is driving GDP... ...at the expense of a large current account deficit Ave contribuon to GDP growth Balance of payments % GDP Source: CBK and World Bank staff esmates June 2010 | Edion No. 2 4 1.2 An Assessment of Kenya's Crises Management gram was disappoinng and reinforced Kenya's In the last two years, the Kenyan government has challenges in implemenng its development budg- gained a lot of experience in crisis management. et. The response to the 2009 drought was broadly The country had to manage four waves of crisis, in- successful and built around an effecve partnership cluding the fuel and food crisis, post-elecon vio- between the government and the internaonal lence, the global financial crisis and a drought. Ken- community. At the same me, Kenya's agricultural ya's government has managed the global crisis well policies, especially the inefficiencies in the Naonal while the domesc crises have hit the country hard- Cereals and Produce Board (NCPB), have created a est. In this secon we analyze in parcular the gov- large burden on the government's effort to acceler- ernment's macroeconomic response to the global ate growth and reduce poverty. financial crisis, the fiscal smulus, and the response to rising food prices. CBK connued implemenng expansionary mon- etary policy and consistently reduced the Central Despite these quadruple shocks, Kenya's macr- Bank Rate (CBR) rate by 150 basis points in 2009. oeconomic fundamentals connue to improve The CBK adopted this policy to smulate the econo- while microeconomic and instuonal challenges my and broadly achieved the intended results. The have become more pronounced. Inflaon has de- Treasury bill rate declined by 156 basis points which clined to below 5 percent in 2010 and allowed the also helped the government to finance the fiscal Central Bank to sharply cut interest rates. A strong smulus program at lower interest rates (see figure fiscal posion allowed the government to embark 5). These measures helped to expand credit supply on an ambious smulus program focusing on so- by another 7.2 percent of GDP in 2009 to smulate cial protecon and infrastructure investments. the economy. However, the implementaon of the smulus pro- Figure 5: A Stable Macroeconomic Environment Inflaon declined sharply, ... ... T-Bill rates (91 days) respond to counter cyclical monetary policy ... ...and the exchange rate remained stable Source: CBK and World Bank staff esmates June 2010 | Edion No. 2 5 The State of Kenya's Economy Figure 6: Counter Cyclical Monetary Policy Central Bank Rate reduced by 150 basis points More credit to the private and public sector Allocaon of new credits Source: Central Bank Kenya and World Bank staff esmates Kenya's sharp decline in inflaon has allowed the of GDP in 2009 (reflecng increased credit risk by Central Bank to lower its policy rate which has banks), while credit to government increased by not been fully translated into lower commercial 2.8 percent of GDP in 2009 in line with the smulus bank lending rates, yet. Kenya's inflaon rate has package (see figure 6). declined substanally from 19 percent end 2008 to below 5 percent in March 2010. Commercial Banks The government also responded to the global have been slower to lower interest rates because downturn by formulang a Kshs 22 billion (US$ of an addional risk premium in the 300 million, 0.9 percent of GDP) fiscal context of the global financial crisis smulus program. The fiscal smulus and Kenya's sluggish economic per- focused mainly on social sectors, includ- formance. As a result, the spread be- Kenya has tradion- ing social protecon and infrastructure tween commercial bank lending and ally followed a high investments. The global crisis provided deposit rates remained relavely high, maize price policy an opportunity to implement crical in spite of the decline in the CBR (see which benefits a public investments that Kenya would figure 6). However, even more aggres- small number of also need in normal mes. The fiscal sive Central Bank policies that reduced smulus was complemented by other its lending rates much further in 2010 maize farmers measures that responded to the do- have started to lead to lower overall mesc food crisis, such as duty exemp- lending rates for commercial banks, as other com- on on maize. pensang factors such as cost of funds and credit risk have also started to subside. Overall the bank- For the fiscal year 2009/10 revenues fell short of ing sector remains stable registering high capital program targets, although indirect domesc taxes adequacy, high liquidity raos and declining share exceeded the budget esmates. The highest short- of nonperforming loans to total loans (from 7.1 per- fall in revenues stemmed from trade taxes as a cent in 2008 to 6.8 percent by the end of 2009). result of duty exempon on imported maize. The strong revenue performance for indirect taxes, es- Credit to the private sector increased substanally pecially VAT, has connued through the first quar- by 5.4 percent of GDP in 2009. Most of this credit ter of 2010. As the government connues to face went to investments in the service and construcon difficulty in implemenng its development budget, sectors which have shown the greatest response the overall fiscal deficit for FY2009/10 is likely to be when credit terms become more aracve. Credit below 5 percent (compared to 6.6 percent in the to households contracted by about -1.0 percent budget). The numbers reflect the government's new computaon methodology, introduced in October 2009, which brought the Kenyan measurement in line with internaonal standard. June 2010 | Edion No. 2 6 The State of Kenya's Economy plicated subsidy scheme aimed at stabilizing the Figure 7: Fiscal Smulus: 57 percent disbursment aer nine months price of maize. Instead of opening the market for imports, the government opted for a maize scheme Educaon that tasked NCPB to import three million 90kg-bags Public health for the strategic grain reserve and to distribute the maize at prices fixed at Kshs 1,700 per bag to maize Agric. irrigaon, Youth affairs, regional dvpt millers. This price level was equivalent to a 50 per- Public works Disbursed cent subsidy and millers were expected to forward Allocated the subsidy to consumers. Other Fisheries The implementaon of this policy achieved the Industrializaon opposite results it intended: maize prices kept on rising at a me when global prices retreated to Kshs million pre-crisis levels. The subsidy scheme failed because Source: Ministry of Finance; Status: End March 2010 all economic incenves were aligned against its im- plementaon. Most market players had the opon The implementaon of the fiscal smulus has to sell subsidized maize at market prices and Kenya proven as difficult as the regular development did not have the instuonal strength to enforce budget. By end-March 2010, about Kshs 13 billion, subsidies across Kenya. If governments with weak 57 percent of the program, had been disbursed (see implementaon capacity try to set prices different figure 7). The bulk of the funds were allocated to from the market, it oen results in more opportuni- educaon, public health and rural infrastructure. es for corrupon, instead of benefits for the poor. The low levels of disbursements can be aributed to problems in the educaon sector following alle- In the end, a small number of groups benefied gaons of corrupon in programs administered by from the allocaon of the low price maize. As ex- the Ministry of Educaon. With only 3 months to pected the scheme created opportunies for cor- the end of the fiscal year, it is unlikely that the full rupon and misconduct. According to a conserva- smulus will be implemented. ve esmate (PriceWaterhouseCoopers), at least 27 percent of the maize did not go to millers but While the government's response to the financial directly to traders who then sold the maize at a crisis was very strong, the response to the food cri- substanal margin. In addion, 50 percent of all sis was belated and weak. Kenya has tradionally maize allocaons of the scheme's first phase went followed a high maize price policy which benefits a small number of maize farmers. However, in 2009 Figure 8: Maize prices are coming down aer the prices reached levels never seen before. Ken- Kenyans paid a high price ya's maize prices increased sharply since the onset of the global food crisis in 2008. However in 2009, 420 Duty suspension when internaonal maize prices declined, Kenya's 370 Drought Bumper Harvest consumers had to pay ever higher prices, on aver- 320 Kenya age double the internaonal price. While domesc Polical crisis USD/MT shocks (polical violence and drought) contributed 270 to the sharp increase of maize prices, Kenya's agri- 220 cultural policies also played an important role. 170 Global 120 The most recent and prominent example of poor Apr07 Apr08 Apr09 Apr10 Oct07 Oct08 Oct09 Jan07 Jan08 Jan09 Jan10 Jul07 Jul08 Jul09 policy was the government's "subsidized maize scheme". In May 2008, at a me when global and Source: World Bank commodity price data-stream; Regional local maize prices had almost doubled compared to Agricultural Trade Intelligence Network a year earlier, the government established a com- June 2010 | Edion No. 2 7 The State of Kenya's Economy to only 10 companies, including a transport com- cent below the budget. Revenues remain broadly pany which was not known to be an acve player in on target by end-December, recording a perform- Kenya's maize markets. By March 2009, when maize ance rate of 97 percent, and a revenue growth prices reached record highs (close to US$ 400 per of 11.7 percent. However, expenditures will fall metric ton) and double the internaonal prices, the short of inial plans due to the government's dif- system broke down and government abandoned ficules in implemenng both its development it. By end 2009 prices started to decline due to the budget and its domesc smulus package (see suspension of the duty on maize imports and good previous secon). rains which led to a bumper harvest in early 2010 (see figure 8). · Stock market rebounded. The Nairobi Stock Ex- change (NSE) index rebounded and reached close to 4300 points in May 2010, up from a low of 2500 2. Outlook for 2010 and 2011 the points in February 2009. This recovery was pri- Recovery Connues marily due to foreign investment, which indicates the improved confidence in the Kenya market as T owards the end of 2009 Kenya's economy start- ed to recover more strongly and this posive momentum has been sustained a whole. Since the beginning of the financial crisis, the NSE has moved in parallel with the Dow into the first months of 2010. Favorable Jones. And since early 2010, the weather, a relavely stable domesc envi- The World Bank NSE has outperformed the Dow ronment, and pro-acve government poli- upgrades its Jones. cies led to mostly posive developments in growth forecast the economy, for example: to 4.0 percent Building on these broadly posi- · Agriculture producon improved. As a for 2010 ve trends, the World Bank is result of strong rains in early 2010, agri- revising its growth projecon cultural output rebounded. Producon for 2010 upward to 4.0 percent. of various commodies increased including the There is even the possibility that Kenya grows at staples, maize and beans, which led to decline in a rate above 4 percent in 2010, especially if agri- culture and manufacturing rebound very strongly prices. which would depend mainly on connued favora- · Tourism back at 2007 levels. Tourist arrivals regis- ble weather (see figure 9). This posive trend reg- tered a 18.9 percent growth in the first quarter of isters an important improvement compared to the 2010 compared to the same period last year and sluggish performance of the last two years. And for equaled 2007 arrivals. the first me since 2007 the average income of Ken- · Inflaon and interest rates declined. In the first Figure 9: Growth will rebound: high growth is possible quarter of 2010, inflaon declined further to 4.6 in 2011 if Kenya does not experience shocks percent aer it reached 5.6 percent in the fourth 8 Economic Outlook quarter of 2009. The interest rate of the standard 7 7.1 Treasury bill (91 days) declined as well to average 6 5.8 at 6.2 percent. 5 4.5 4.9 4 · Credit increased. Credit grew by 20 percent in the 4.0 4.2 3 3.1 first quarter of 2010, with credit to public sector 1.7 2.6 2 growth of 44 percent and to private sector growth 1 of 14 percent. 0 2007 2008 2009 2010 2011 · Fiscal posion remained stable. The fiscal posi- on remained strong and the fiscal deficit is likely Low case Base case High case to be lower at 4 - 4.5 percent, more than 2 per- Source: World Bank Staff Esmates June 2010 | Edion No. 2 8 The State of Kenya's Economy Table 1: Key Indicators 2007-2012 (Base Case) Variable 2007 2008 2009 2010 2011 2012 GDP 7.0 1.6 2.6 4.0 4.9 5.4 GDP per Capita 4.2 -1.0 -0.2 1.3 2.2 2.8 Private Consumpon 7.3 -0.4 3.8 3.2 3.9 4.2 Government Consumpon 7.2 3.7 5.5 4.1 3.4 4.0 Gross Fixed Investment 13.3 8.9 0.6 6.7 8.5 11.8 Exports, GNFS 6.0 7.5 -7.0 6.2 7.6 5.5 Imports, GNFS 12.7 6.6 -0.2 5.5 6.1 6.6 Current account Balance (% of GDP) nominal -3.8 -6.6 -5.5 -6.6 -6.0 -5.1 Populaon Growth 2.7 2.7 2.8 2.7 2.7 2.6 Stascal Discrepancy (share of GDP) -0.9 -1.3 -1.3 -1.3 -1.3 -1.3 Source: World Bank Staff esmates; GNFS: Goods and Non Factor Services yans will rise by about 1.3 percent. In the absence export market growth is projected at 5.2 percent of any new shocks, the World Bank esmates that in 2010, accelerang to about 6.5 percent in 2011- the recovery will accelerate in 2011 to 4.9 percent 2012. Kenya's merchandise exports will grow much which would bring Kenya back into the range of less rapidly than world merchandise exports, and high growth experienced between 2003 and 2007. indeed than developing countries' merchandise But if Kenya experiences another exogenous shock, exports, translang into a connued loss of market polical volality, or a less conducive external envi- share for Kenyan exports, and for manufacturing ronment, growth could be more subdued at around exports in parcular. A strong recovery in tourism, 3.0 percent. albeit from a low base, will boost service exports. Consumpon will connue to be the key driver Strong domesc demand and higher internaonal for growth, benefing from higher agricultural in- commodity prices will accelerate import growth comes and weaker inflaonary pressures. Private which in turn will perpetuate the structural current consumpon growth is projected to grow at 3.2 account deficit. In 2010, imports and exports will percent. Government consumpon will increase by recover; the surplus in the service account will not 4.1 percent, partly explained by the (delayed) im- be sufficient to offset the deficit in the goods trade. plementaon of the economic smulus program The current account deficit is projected to reach 6.6 (see table 1). percent of GDP in 2010 before it will narrow slightly in 2011 to 6.0 percent (see table 1). The highest growth will be in investment in the near term as countercyclical fiscal and monetary The economic recovery will be felt across all sec- policies start to pay off. Investment is projected to tors. Agriculture is expected to rebound the strong- grow by 8.4 percent in 2010, accelerang to 11.9 est while services will connue to drive the econo- percent in 2011. Public sector investment will con- my, for the following reasons: nue to play a catalyc role with heavy investments in infrastructure, parcularly roads and energy, · Agriculture. The sector is rain fed and is expected crowding in private sector investment, which would to enjoy a good year as most parts of the coun- also benefit from lower interest rates. try will receive above average rainfall. The good harvest will cap the pressure on domesc food Exports will recover in 2010 reflecng the more prices. Furthermore, government investment in posive regional and global environment, but the irrigaon will also increase food supply boosng current account deficit will remain large. The de- consumpon. mand for Kenyan exports will resume, especially in · Industry. Output will normalize in 2010, benefit- Europe and Sub Sahara Africa, the desnaons of ng from more normal power provision as well more than 60 percent of Kenya's exports. Kenya's Growth in the Euro area is projected at 0.9 percent in 2010 and 1.5 percent in 2011. Growth in the EU is projected at 1.1 percent and 1.8 percent in 2010 and 2011 (Global Economic Prospects, January 2010). June 2010 | Edion No. 2 9 The State of Kenya's Economy as increased credit supply to the private sector. stability, remain Kenya's most important risk to sus- Construcon connues to lead economic recov- tained growth and poverty reducon. In the coming ery, stemming also from high public investment months, the first important test will be a peaceful in infrastructure. referendum on the new constuon, which will in turn give a first indicaon of the polical risks head- · Services. Transport, communicaons, tourism ing towards the 2012 naonal elecons. and domesc trade are the major sectors driving the economy and are also leading the economic The sovereign debt crisis in Greece and the recent recovery. Tourism arrivals show a posive trend closing of Europe's airspace also highlight the po- and together with aggressive market diversifica- tenal of connued internaonal risks. Even though on by government and the 2010 FIFA World Cup Kenya's economy is less dependent on exports than in South Africa, the sector is expected to perform in the past, Kenya's highest value exports, especially strongly. horculture and tourism, remain very concentrated If realized, Kenya's growth rates will be close to and depend on European markets. This high degree the average for Sub Saharan Africa of 4.4 percent of export concentraon makes Kenya vulnerable to in 2010 and 5.0 percent in 2011. Nevertheless, for localized shocks and points to the need to further di- the third consecuve year, Kenya's growth will con- versify export markets. A connuaon and spread- nue to lag behind its neighbors. Kenya's expected ing of the Greek sovereign debt crisis could generate growth performance will be significantly lower than a general flight to developed countries which would the projected growth rates for Uganda, Tanzania, result in an increase of borrowing costs for devel- Ethiopia, Rwanda and Ghana (see figure 10). How- oping countries. In addion, the ongoing deprecia- ever, the strong growth rates of Kenya's neighbors on of the euro against other currencies, including create opportunies for increased market manufac- the Kenya Shilling, made Kenya's exports to Europe turing exports, as well as an increase in transport already 7 percent more expensive since the Greek exports. debt crisis begun in March. If this crisis degenerates Figure 10: In the next two years, Kenya's growth will be into a new global downturn, investment across the similar to the SSA average world would fall, bringing the world economy into a double dip scenario, which would also again impact GDP growth rates on African economies. 2010 2011 3. Running on One Engine Analyzing Kenya's Economic Percent Imbalances 3.1 Taking Stock of a Poor Export Performance O ver the last 50 years, Kenya has neglected its Ethopia Tanzania Uganda Rwanda SSA Kenya South average Africa export sector. In 1960, exports represented 40 Source: World Bank GEP percent of Kenya's economy. This share of global integraon was arficially high as it was also the result of Kenya's colonial status and the resulng The projected recovery remains fragile due to the exports to Britain. However, since the mid-sixes risk of polical instability in the run up to the 2010 Kenya's exports declined more than expected. It constuon referendum. In the last two years do- boomed at 20 percent of GDP in the mid 1980s, mesc shocks have severely interrupted Kenya's before the sector partly recovered to 27 percent quest for growth. Therefore, the outcome from the by the end 2000s. Many of the world's successful constuon review process is a crical determinant economies ­ including Ireland, China, Korea and for Kenya's economic performance in 2010 and Chile ­ followed the opposite strategy and consid- 2011. These domesc shocks, especially polical in- erably increased their exports in GDP over the same June 2010 | Edion No. 2 10 The State of Kenya's Economy period. Korea, for example, which had similar levels Figure 11: Kenya's Share in World Exports of Goods and Services. 1970-2008 of income to Kenya in 1960, increased its exports from almost zero percent in 1960 to more than 55 0.30 percent today. 0.25 0.20 At independence Kenya had a relavely sophis- Percent cated industrial base and a vibrant export sec- 0.15 tor; a strong foundaon for turning these sectors 0.10 Services into major engines of growth. However, Kenya has 0.05 Total turned inward, neglecng to stay compeve in its 0.00 Goods manufacturing sub-sector, and also losing market 1970 1975 1980 1985 1990 1995 2000 2005 share in agriculture exports. Government inter- venons in commodity exports, especially through markeng boards, created disincenves for farmers Source: World Bank WDI to produce and led to a long-term decline in the cof- which accounts for about 75 percent of GDP. The fee sector from which Kenya has yet share of exports in GDP increased only to recover. In the few episodes when marginally while imports soared. As a the country grew strongly, such as be- result the contribuon of "net exports" tween 2003 and 2007, the driver was Kenya has turned (exports minus imports) to growth was domesc consumpon which has inward, neglecng fuelled the growth of non-tradables, to stay compeve negave and widening (see figure 12). especially the service sector, which is Kenya's growth thus heavily relied on in its manufactur- one engine, domesc demand. Although now also represenng an increasing share in Kenya's exports. ing sub-sector, and the external account remains broadly also losing market sustainable, the domesc shocks of Kenya gradually lost export shares share in agriculture 2008 and 2009 have demonstrated Ken- in the global market and Sub Sahara exports ya's vulnerabilies. If the economy relies Africa. In 1970 Kenya's export shares heavily on domesc consumpon, it can represented 0.12 percent of global exports, but this grind to a halt when negave domesc has connuously declined reaching only 0.04 per- shocks hit the economy. cent in 2008. Kenya's export growth lagged behind the average for Sub Sahara Africa. Its share of exports Ten years ago, Kenya's exports could pay for two in the region declined from 3.7 percent in 1970 to thirds of its imports today, exports pay for less 2.2 percent in 2008. Kenya's tradional strength in than half of its imports. Furthermore, Kenya's service exports has also been eroded over me de- compeveness­measured through the Terms of clining from a global share of 0.21 percent in 1970 Trade­has equally deteriorated, declining from 100 to 0.06 percent in 2000 before it recovered slightly in 2001, to 83 by 2007 before improving marginally to 0.09 percent in 2009 (see figure 11). in 2008 and 2009. Kenya's Terms of Trade are now 3.2 The 2000s Economic Imbalances Widen substanally lower than those for Uganda and Tan- Despite Beer Growth Performance zania. The strength of the domesc sector and the weakness in exports have created a large and grow- Over the last decade Kenya's economic perform- ing current account deficit which had reached 5.5 ance improved averaging 3.7 percent, despite a se- ries of negave shocks in the last two years. How- percent of GDP by end 2009. This current account ever, the key driver of the growth connued to be deficit was mainly financed by increasing short term domesc demand, especially private consumpon financial inflows (see secon 1). Terms of trade are defined as the rao of export unit value indexes to import unit value indexes (see World Bank 2010. World Development Indicators) June 2010 | Edion No. 2 11 The State of Kenya's Economy Figure 12: Rising Imports and Strong domesc demand Rapid growth in imports ... ... contributes to an increasing current account account deficit Trade as a share of GDP 1990-2008 Average contribuon to growth 2000-2009 percent Source: WDI and World Bank staff esmates While the exports of goods have shown mixed But Kenya can do even beer. By one measure of results, service exports have recovered and in- diversificaon which ranks countries by the number creased from 8 percent in 2000 to 12 percent of of products they have "a Revealed Comparave GDP in 2009. Total exports increased from 22 per- Advantage (RCA) in", Kenya scores above-average cent in 2000 to 28 percent in 2005, but have stag- with 747 products. This is a key asset the country nated since. This strong increase between 2000 and can build on to further strengthen its goods and/or 2005 was mainly due to the increase in services ex- manufactured exports. Countries with diverse ex- ports from 8 to 10 percent of GDP, as well as the ports have more diverse capabilies as an economy, increase in manufactured exports, from about 3 and hence are more likely to innovate and expand percent in 2000 to close to 6 percent in 2005 (part exports to include new product lines. of the increase in manufactured exports between 2003-2005 is due to the increase in the export ca- If recent trends connue, service exports will pacity of the Export Processing Zone). However, maintain their growth momentum. Kenya's serv- the exports of manufactured goods have stagnated ice exports are built around its tradional strengths since 2005 as a share of GDP, while the exports of of transport (especially Kenya Airways) and travel non-manufactured goods (agricultural and mineral which account for 90 percent of the total. Conn- exports) have slightly decreased. By contrast, serv-ued growth in Kenya's neighboring countries, espe- ice exports increased to 12 percent of GDP in 2009 cially Uganda and Ethiopia, will create opportunity from 10 percent in 2005 (reaching levels previously for transit services which are expected to improve aained in the 1990-1995 period). as ongoing improvements in Kenya's road infrastruc- ture are completed. Kenya could also see an expan- There are also some glimmers of hope for Kenya's sion in tourism, if it succeeds in further diversify- exports because of the ongoing diversificaons in the country's export package. Over the last decade, ing its source markets. One of the newer and more for example, Kenya has moved towards higher val- successful service exports is business outsourcing. ue products and there is also potenal to develop Starng from a low base and benefing from re- new products. Comparing Kenya's export package cent investments in fiber opc cables which have between 2003 and 2007 Kenya gained comparave greatly improved internet connecvity and reliabil- advantage in chemicals and allied products, stones ity, Kenya is developing state of the art call centers plaster and cement and food (See Annex 3). that have begun aracng global customers. According to World Bank Staff Calculaons, based on the CEPII BACI database (2007). See also Annex 3. June 2010 | Edion No. 2 12 The State of Kenya's Economy 3.3 Kenya's Economy Has Been Transformed Kenya's economic transformaon of the last dec- Differently Than Expected ade was fuelled by rapid growth in tradable goods and services. Although the share of service exports Over the last decade, Kenya's economy has experi- enced a significant structural transformaon. As in increased over the decade, there was limited diver- sificaon and the service sector's exports are sll other emerging economies, the role of agriculture dominated by transport and travel. Between 2000 in the economy has been declining from 32 percent and 2009, the sectors that recorded average growth (2000) to 26 percent (2009). However, this decline rates in excess of 4.0 percent are largely non trad- in agriculture has been almost exclusively absorbed able while the tradable sectors like agriculture and by the service sector which increased its share of industry were below the 3.7 percent average growth GDP from 50 percent in 2000 to 55 percent of GDP rate (see figure 13). To increase and sustain broad- in 2009. Meanwhile the contribuon of the indus- based economic growth the structure of producon trial sector to GDP remained broadly the same from will require reorientaon towards the producon of 2000 to 2009 at 19 percent. tradable goods and services. This can be achieved through incenves to diversify and increase the The incenves for the Kenyan private sector are share of service exports, restart manufactured ex- directed towards the domesc market. As a result, ports, and gradually reduce the share of government sectors like telecommunicaons and wholesale & and private consumpon in aggregate demand. retail trade experienced the highest growth rates during the last decade. Both sectors are now larger Manufacturing has been the growth engine in than Kenya's manufacturing sector. To achieve and many emerging developing countries, especially in sustain high levels of growth in the coming years it Asia ­ but not in Kenya. In 2000, manufacturing is important to restart and accelerate the second was the second largest sub-sector of the economy. engine twining Kenya's vibrant and expanding serv- In 2004, transport and communicaon overtook ice sector with a re-energized manufacturing sec- manufacturing. The sector grew at an annual aver- tor that can increase its performance as a source of age growth of 7.0 percent, led by an exceponal export growth. annual rate of 19 percent in telecommunicaon throughout the decade. Figure 13: A decade of sectoral transformaon (growth by sectors, 2000-2009) Average growth 2000-2009(%) Share of GDP 2009 (%) Ave Transport and communicaon 7.0 14.4 Electricity and water 5.0 2.6 Construcon 5.0 4.2 Wholesale and retail 4.6 11.7 Hotels and restaurants 4.5 1.6 Mining and quarrying 3.4 0.5 Manufacturing 3.3 11.5 Finance and real estate 2.3 10.9 Agriculture and fishing 1.7 25.5 Other services 1.5 17.1 0.0 2.0 4.0 6.0 8.0 0.0 10.0 20.0 30.0 Source: KNBS and World Bank staff esmates Note: GDP at basic constant 2001 prices June 2010 | Edion No. 2 13 The State of Kenya's Economy While Kenya's agricultural sector declined in eco- Kenya's future growth path will be largely influ- nomic importance there have been important enced by how it helps to restart the other engines shis within the sector. Most notably, horcultural of its economy. Kenya is in a good geographical po- has become Kenya's major export sector, produc- sion with its port and major distribuon routes ing flowers and vegetables for European to neighboring countries and global markets. At the same me, exports of growth poles. There are several strat- the main tradional cash crops, coffee In most high egies already in place which would and tea, have mostly stagnated. Over help Kenya start the other engines the last decade agriculture grew at low growth countries, of growth, including Vision 2030, the rates, averaging only 1.7 percent per an- especially in Asia, Medium Term Plan 2008-2012, the num. Manufacturing fared beer with a manufacturing has Private Sector Development Strategy, per annum growth rate of 3.3 percent been leading eco- the Master Plan for Kenya's Industrial but remained below the average of all nomic growth in Development, and the Naonal Trade sectors. In most high growth countries, Kenya it has been Policy which has already been draed. especially in Asia, manufacturing has However these have not translated been leading economic growth in lagging the service into a robust, priorized and targeted Kenya it has been lagging the service sectors industrial policy for Kenya. sectors. However, manufacturing conn- ues to be the principle tradable sector of emerging A secure investment climate and beer infrastruc- economies, and has also the potenal to increase ture are the essenal ingredients for achieving Kenya's export compeveness. sustained growth. The government has already put a lot of effort in grading roads and launching Kenya's poor record in industrial producon partly energy projects, even though implementaon has explains the economy's poor export performance oen been slow. Port investments are also crical despite improvements between 2000 and 2005. to ensure Mombasa meets Kenya's growing import Strong domesc demand and poor incenves for needs without incurring increased costs from port export create an environment where investments constraints (see also special secon in this report). flow to non-tradable goods, such as real estate and Once transport costs decline and reliable energy construcon, diverng resources (land, labor and supply is secured, Kenya will be able to aract new capital) from the tradable sectors of the economy. and larger manufacturing investments. June 2010 | Edion No. 2 14 The State of Kenya's Economy The Port of Mombasa June 2010 | Edion No. 2 33 Special Focus ­ The Port of Mombasa T his special focus secon provides an analysis of the port of Mombasa. The port has strategic impor- tance far beyond the borders of Kenya. As the largest port in East Africa, it is the main gateway for the import and export of goods not only for Kenya but also to countries of the East African Community (EAC), the Democrac Republic of Congo (DRC), southern Sudan and southern Ethiopia. Inefficiency of port operaons and constraints on capacity are threatening the growth of Kenya and its neighbors. It is a problem which is set to get worse very quickly unless decisive acon is taken now. The report concludes with a series of specific follow-up acons for government to consider and suggests that unless invest- ments and reforms at the port are implemented quickly, the port will not be able to support projected increases in imports, and to a lesser extent, exports, in 2011 and beyond. 1. The Significance of the Port Imports into Mombasa have been rising connu- ously since 2005, with the excepon of 2008. Im- T he Port of Mombasa is the largest in East Africa ports of liquid bulk (principally petroleum) has been and a vital gateway for imports to Kenya and rising at an average annual rate of 9.7 percent, con- its neighboring countries (see figure 14). The im- tainerized cargo 11.5 percent and dry bulk (mostly ports that pass through the port of Mombasa are maize, clinker and wheat) at 23 percent (see Annex crical to Kenya's economic growth, and to the eco- 11). The weight of goods imported in containers has nomic well-being of its neighbors. Liquid bulk items, risen by 55 percent since 2005. The rate of growth mostly petroleum, oil and lubricants, are the single of containerized cargo slowed in 2008, reflecng greatest import item by weight. Without these im- the slowdown in Kenya's economy. Imports of liq- ports, Kenya's economy (and most other countries uid bulk and dry bulk rose significantly in 2009 due of the EAC), which depends on imports for all of its to the addional energy needs brought about by petroleum needs, would grind to a halt. The next prolonged drought condions. Imported petroleum four largest items by weight, maize clinker, wheat, connues to be required to supplement Kenya's fall iron and steel, are crical in meeng the country's in hydropower output, whilst imported maize to food needs and in supporng its vibrant construc- cover food shoralls was responsible for the signifi- on industry. cant rise in dry bulk. Figure 14: Mombasa ­ The gateway to East Africa Despite the strong import growth, the overall vol- umes handled in Mombasa are low by internaon- al standards. In 2008, Mombasa handled 616,000 Twenty Foot Equivalent Units (TEU, which is the standard measurement of port acvity). This rep- resents double the volume of Dar es Salaam, but less than a quarter of Durban and only 2-2.5 per- cent of the volumes which go through the busiest ports in the world, Singapore and Hong Kong (see figure 15). In 2009 imports made up 87 percent of the total weight of goods handled by the port. Mombasa is the major channel for the importaon of oil and raw industrial materials for Kenya's manufacturing Source: Kenya Ports Authority sector. Of all imports to Mombasa, 72 percent were June 2010 | Edion No. 2 16 Special Focus The Port of Mombasa Figure 15: Singapore ships 50 mes more goods than Mombasa (in thousands TEU) TEU Of the roughly 300,000 containers imported full in 2009, only about 96,000 or one-third were exported full, with the remaining two-thirds exported empty Source: Containerizaon Internaonal online (www.ci-online.co.uk), 20-05-2010 neighboring countries. Most exports shipped from Figure 16: Mombasa goods go mainly to Kenya and Uganda Mombasa originate in Kenya, some 85 percent of the total. Uganda represents the second largest exporter accounng for 12 percent of Mombasa's exports. The majority of exports are containerized, though of the roughly 300,000 containers imported full in 2009, only about 96,000 or one-third were exported full, with the remaining two-thirds export- ed empty¹. The volume of transshipment goods handled by the port has steadily declined in recent years. To- day, these goods only represent a minimal aspect of port operaons (less than 1 percent of the total goods handled in 2009). The Kenya Port Author- Source: Kenya Ports Authority, Annual Review and Bullen of Stascs, 2009. ity (KPA) is currently turning down transshipment business due to capacity constraints, thus liming desned for the Kenyan market, with the remainder Mombasa's potenal role as a regional transing to a number of neighbor- hub port. ing countries. Since 2005 the weight of transit goods has risen 38 percent The gradual reducon in trade barriers KPA is currently from 3,202 to 4,412 (`000'DWT). Ugan- in recent years within the EAC has in- da was the largest market for transit turning down trans- creased the importance of infrastruc- goods in 2009 consuming 80 percent, shipment business ture in determining the compeve with eastern DRC the second largest due to capacity advantage of domesc industries. Port desnaon (see figure 16). constraints and road infrastructure is at the heart of regional integraon. As a crical link in The port of Mombasa is also a barom- the logiscal chain and the major chan- eter of Kenya's imbalance: exports represent only nel for the importaon of raw industrial goods for 13 percent of the total volume of goods handled manufacturing in Kenya and its neighbors, the op- by the port. Horcultural products, significant to eraonal effecveness of the port of Mombasa has the Kenyan economy, are airlied and most of Ken- a direct influence on the compeveness of Kenya ya's manufactured goods are exported overland to businesses and the wider cost of goods in the EAC. Kenya Ports Authority, Annual Review and Bullen of Stascs, 2009. June 2010 | Edion No. 2 17 Special Focus The Port of Mombasa 2. Operang at Full Capacity and Looking ahead, exports, especially from newly dis- covered oil countries could become a significant at Low Efficiency part of port operaons in the medium term. The highest growth rates in Africa ports over the past T he port of Mombasa has exceeded its design few years have been experienced in oil-exporng capacity, yet it is expected to handle grow- countries, such as Nigeria and Cameroon. Recent ing imports and exports. It is already operang at oil discoveries in Uganda will most likely have a big maximum capacity for both general and container- impact on the volume of raw and manufactured ized cargo, and will suffer progressive declines in products exported through Mombasa. Reserves in operaonal effecveness unless both capacity and Uganda are conservavely esmated at 800 million efficiency issues are urgently addressed. In terms of barrels. Even with refinery capacity in Uganda to capacity, container imports at the port have risen on sasfy regional demand for petroleum and petro- average 10 percent each year since 2005², despite leum products, around 150,000 to 200,000 barrels relavely low GDP growth rates in 2007-2008. With per day would need to be exported. In addion, oil growth in the East African economies predicted to discoveries on the western side of the Alberne Ba- reach 5 percent per annum or more sin in eastern DRC are also ancipated. over the next five years, this trend Again, Mombasa would seem the most looks set to connue. And big engi- obvious port opon given it represents neering projects in the region will also The Mombasa port the shortest route to export, but would add significantly to demand. Tullow is facing, in the require significant investment in new Oil, for example, esmate the need to import 200,000 tonnes of con- immediate term, storage capacity at the port. Finally, a referendum in 2011 could see southern tainerized cargo annually from 2011 very serious Sudan breakaway from the north, which to exploit oil resources in Uganda capacity problems would likely place greater emphasis on -- an addional 5 percent by weight trade routes south, such as Mombasa, of current containerized imports. In as the southern Sudanese seek access to terms of efficiency, several key issues need to be ad- the sea along the Northern Corridor. dressed for both imports and exports that relate to the excessive me it takes to move goods through The Government of Kenya needs to address a range the port, and inefficiencies caused by the manage- of issues related to increasing the port's physical ment of trucks loading and unloading goods, collec- or `hard' infrastructure, and to improving the man- on of custom dues, inspecons, etc. agement of port operaons, the `so' infrastruc- ture. There are broadly three areas which impact The operaonal capacity for containerized cargo is on port performance: a) a port's ability to service parcularly acute. With seasonal growth expected ships at the quayside (or at berth), b) yard capacity in the second half of 2010 and addional further (to store goods before collecon) and c) clearance growth in 2011, the Mombasa port is facing, in the and transfer: immediate term, very serious capacity problems. Short-term immediate impact will be an increase a) Quayside Efficiency in vessel delays, port congeson surcharges, and slower throughput of the port (when congested), Two main factors affect quayside efficiency -- the causing significant cargo delays and higher costs to amount of me a ship is kept waing to enter the importers. Exporters will also experience increased port and, once at the berth, how quickly the goods costs because of possible unscheduled delays at the can be handled to and from the ship. Shipping lines port, disappoinng customers who have based their will tend to serve Mombasa with their less perform- own business decisions on fixed delivery schedules. ing and less costly ships because uncertainty, in to- Overall, the capacity issues at the port of Mombasa tal port call me, threatens the integrity of shipping could act as a brake on growing trade within the re- schedules which are crical to their business per- gion. formance. In 2009 the average ship waing me in ² TEUs Twenty Foot Equivalent Units 18 Special Focus The Port of Mombasa Mombasa was 2.3 days and the average number of b) Yard Capacity port days for a containerized vessel was 3.1 days. Dockside congeson and high dwell mes remain The rao between the waing me and me at a problem. Whilst KPA can claim some success in berth, called the waing rao, reaches on average reducing dockside congeson - the average current 74 percent for container vessels at Mombasa. Full dwell me is around 5.7 days³, depending containerships will typically not on where the goods are desned ­ it does tolerate more than a 10 percent not compare favorably with internaonal waing rao. If they do, they will standards which are typically 1-3 days. charge demurrage fees, or add a For Kenya to ben- Mombasa has been struggling with conges- freight surcharge to the desna- efit from the re- on for some me due to a limited space on on. Large waing raos are a ma- ducons in costs the dockside to store containers and other jor deterrent to shipping lines. related to global goods. The situaon is compounded by slow shipping, the port customs clearance procedures which mean But more than that, part of the will need to be that exisng yard capacity is not used effi- problem is the relavely small size of the volume of goods modernized and ciently. The soluon for imports to Kenya was the transfer of cargo to privately oper- passing through Mombasa. This to operate more ated inland container depots, so called `Con- has led to smaller container and efficiently tainer Freight Services' (CFS)s in and around other vessels operang in Mom- Mombasa town, from where containers are basa compared with the super stored and eventually cleared. KPA figures container ships and oil tankers that service major for dwell me do not account for the large volume global ports. Greater efficiency at Mombasa, beer of domesc goods moved to CFSs. regional integraon along the Northern Corridor, and increased capacity for transshipment business There has been a large transfer of goods desned are important factors which will aract more ships for the Kenyan market from KPA facilies to CFS and increase port traffic. For Kenya to benefit from operaons since 2007 (from just over 8 million to the reducons in costs related to global shipping, almost 12 million DWT - see figure 17). KPA quote the port will need to be modernized and to operate a dwell me from 11.3 days in 2007 to 5.9 days in more efficiently. Annex 12 describes in detail Mom- the second quarter of 2009, though the indicator basa's relavely poor connecon with global trade does not give a complete picture of port opera- routes. ons for domesc goods. Domesc cargo moves rather quickly from KPA facilies (average 3.7 days) Variaon in terminal performance at the port is to CFSs where it typically spends 11 days. Transit very costly to shipping lines as they are unable to cargo (which does not enter CFSs), spends longer at plan ahead. In recent years the KPA has invested in updang its handling systems at its container ter- Figure 17: Dwell me declines while CFSs grow minal, but much of these investments are outdated and not properly maintained. Ship-to-shore, gantry 11.3 equipped, state-of-the-art container terminals will 10.7 9.1 offer as a minimum 40 moves per hour per ship, with a more common objecve being 60 and above. 5.9 Despite the move to 24 hour port operaons KPA registered on average 14 moves per hour in 2009, with a lot of variaon depending on labour avail- ability and the state of the equipment. Source: Transit Transport Co-Ordinaon Authority of the Northern Corridor, 2009 ³ KPA, Container Dwell Time Study for the Port of Mombasa, March 2010 KPA, Container Dwell Time Study for the Port of Mombasa, March 2010 World Bank analysis 2010 following interviews with CFS operators and the private sector June 2010 | Edion No. 2 19 Special Focus The Port of Mombasa dockside undergoing inspecon. KPA esmate the es, logiscs and transport infrastructure. Since 2005 current dwell me for transit cargo to be on average and the introducon of KRA's SIMBA IT system, 7.5 days. on-line processing of vessel manifests by shipping agencies and customs declaraons by c) Clearance and Transfer clearing and forwarding (C&F) agencies, has improved the speed of revenue as- Cargo clearance procedures at the port connue to be slow and open to The use of mod- sessment. However, the SIMBA system opportunies for corrupon. The cur- ern customs prac- does not provide automac noficaon to other border control agencies, i.e. rent lack of real me informaon on ces, informaon that cargoes have been declared and cargo is a major constraint on supply systems and inte- it does not communicate in real-me chain performance. The introducon grated IT systems the status of cargo awaing clearance. of a Ports Community-Based System (PCBS) which would significantly in- in port operaons Thus, owners are not able to see where crease efficiency and reduce corrupon should represent the weak/slow links are in the full clear- a major goal for ance chain. has been in progress for over 1.5 years so far with no compleon date set. Kenya Improvements in regional trade would The use of modern customs pracces, follow if customs clearances and in- informaon systems and integrated IT specons for all EAC goods were processed in systems in port operaons should represent a major goal for Kenya, parcularly as more open and trans- Mombasa. Under the EAC customs union, the col- parent processes would diminish opportunies for lecon of revenue at the port of entry, i.e. Mom- corrupon. A funconing PCBS would improve the basa (possibly under joint supervision), would im- port's efficiency and support Kenya's future obliga- prove efficiency and transit mes and help resolve the issue of transit goods being dumped in Kenya. ons in providing supply chain security. If full clearance procedures were also introduced, e.g. inspecons were undertaken, it would reduce >> Box 1: What is a Port Community Based System? transit mes. A PCBS is an IT-based plaorm aimed at streamlin- ing a port's administrave procedures. The system The costs of entering and transing the Mombasa allows the stakeholders doing business around the port have a significant impact on the cost of doing port to exchange informaon and perform business in both Kenya and the EAC. The lack of business transacons in a unified, secure and effecve integrated rail and road links means that Mombasa remains poorly equipped to handle con- structured way. It ensures that all pares involved receive mely and accurate informaon on each tainers and other goods. Linking quayside services transacon and, moreover, that the transacon is to the Northern Corridor is fundamental to trade performed correctly. Having a PCBS in place dras-facilitaon and regional integraon. Increased im- ports volumes have placed increased stress on land cally increases both the speed and transparency of transport, and have generated the need for faster the port. And it maximizes the physical infrastruc- ture and helps manage the efficiency of the port and more efficient intermodal connecons. Progress operaon as a whole. in this area has been poor. The failure of the railway Source: World Bank staff staff system has resulted in a large number of new truck movements in and around the port contribung to The Kenya Revenue Authority (KRA) faces two the growing problem of truck congeson and park- major challenges with clearance: introducing ef- ing and road deterioraon. Rail transport carried fecve risk management, as currently nearly all around 80 percent of goods transing Mombasa in import containers are subject to me consuming the early 1970s. Today only 5 percent of Mombasa's physical inspecon, and improving efficiency and freight moves on rails, a decline that has been due transparency in its operaon. Clearance and trans- to the absence of sustained government investment fer involves a complex mix of government process- in the railways and, most recently, the lack of invest- June 2010 | Edion No. 2 20 Special Focus The Port of Mombasa Figure 18: It takes 20 days for a container to go through the port and by road to Nairobi, Kenya Ship's KPA MSA Kenya Kenya - Nairobi Avg Port Facilies CFSs Road Transit Inland Terminal Days Days Transit 3.7 Days 11 Days 18.3 Days Source: Transit Transport Co-Ordinaon Authority of the Northern Corridor, 2009, KPA 2010 World Bank analysis 2010 Figure 19: It takes 22 days for a container to go through the port and by road to Kampala, Uganda Malaba(U) Malaba(K) Ship's KPA Kenya Uganda Kampala Avg Port Facilies Road Transit Road Transit Inland Days Days 980 Km 280 Km Terminal 7.5 Days 4 Days 0.5 1 Day 2 Days 3 Days Days 11.1 Days 10.5 Days Source: Transit Transport Co-Ordinaon Authority of the Northern Corridor, 2009, KPA 2010 World Bank analysis 2010 Figure 20: It takes 24 days for a container to go through the port and by road to Kigali, Rwanda Malaba(U) Malaba(K) Ship's KPA Kenya Gatune(R) Uganda Katune(U) Rwanda Kigali Avg Port Facilies Road Transit Road Transit Road Transit Days Days 980 Km 280 Km 95 Km Magerwa 7.5 Days 4 Days 0.5 1 Day 3 Days 0.5 0.5 1 Day 2 Days 11.1 Days 12.5 Days Source: Transit Transport Co-Ordinaon Authority of the Northern Corridor, 2009, KPA 2010 World Bank analysis 2010 June 2010 | Edion No. 2 21 Special Focus The Port of Mombasa its EAC neighbors. Figures 18, 19 and 20 show the contribuon Mombasa port makes to the total me it takes to transport goods to Nairobi, Kampala and Kigali respecvely from the moment they arrive at the port. For goods desned to Kenya, the propor- on of me spent at KPA facilies, including the CFS hold me, is esmated at 90 percent of the total me it takes for goods to move from ship arrival to Nairobi. Port-related costs for low value bulk commodies such as raw industrial materials or grain, which make up the highest proporon of cargo entering the port, can be more than 15 percent of the de- The failure of the railway system has resulted in a large livered market value. And this cost to businesses number of new truck movements in and around the port and consumers is compounded by the uncertainty of delivery mes due to variable port perform- ment by Ri Valley Railways, ance. the company that operates the Mombasa to Uganda rail It's much more Trucking rates in the region also remain dispro- line. For now there is no al- expensive to poronately high. It much more expensive to ternave to the movement transfer a transfer a container from Mombasa to Kampala of heavy trucks through an than it is to move the same container from Japan container from increasingly crowded town to Mombasa by ocean freight. In addion, KRA im- centre. Mombasa to poses a double-licensing arrangement on trucks Kampala than it is which requires that those authorized to carry The inefficiency of Momba- to move the same only transit goods, cannot return to their country sa has a significant impact container from of origin with import cargo, i.e. they have to re- on transport mes for im- Japan to Mombasa turn empty. This adds further to the cost of doing ported cargo to Kenya and business in countries beyond Kenya's border. by ocean freight Box 2: What is a Landlord Port? The most popular port-management model employed worldwide is the landlord port, in which the public sector, in Momba- sa's case Kenya Ports Authority, withdraws from front-line cargo handling operaons, allowing these to be concessioned to the private sector. The port authority focuses on broader aspects of port development such as estate management, naviga- on and planning. The system is in extensive use throughout Europe, the Americas and Asia. It is also a concept being taken up in Africa, but is it far from being the norm. Praccally speaking, in the majority of cases the first step in this direcon is the concessioning of container-terminal acvies ­ that is, the port authority withdraws as the operator, allowing a private sector company to take over as the terminal operator and manager. These concessioning exercises have aimed at tapping the considerable body of experse offered by internaonal terminal operators. The Government of Kenya commied to transforming Mombasa to a landlord port in 2002, but there has been lile progress on implementaon except for the de- cision to now go ahead with the concessioning of berths 11-14. Table 2 details some of the excing outcomes which have been achieved in Nigeria and Ghana which have adopted the landlord model. Port Reform Toolkit, World Bank, 2004 June 2010 | Edion No. 2 22 Special Focus The Port of Mombasa 3. The Future for the Port of sive conceptual framework for port expansion and reform. Mombasa an Agenda for Implementaon In recent years, a number of African ports have embarked on port reform. Nigeria has been Africa's T he Government of Kenya should act now to top reformer with a combined score of 80 (out of implement much needed instuonal reforms 100) reflecng improvements in legislaon, restruc- and deliver on its commitment to transform Mom- turing, policy oversight, and private sector involve- basa to a landlord port. It is important that reforms ment. Kenya, by contrast has scored only 40 ranking take place before or in parallel with significant new at the boom third in Africa. infrastructure investments. The complex organiza- onal structure of ports, where mulple govern- The outcomes of reform in Africa and elsewhere ment agencies are involved directly or indirectly, should be more than ample evidence of the poten- has always been a central issue in most aspects of al benefits. In 2006, Nigeria adopted the interna- port management. At Mombasa it constutes a ma- onally favored port landlord model. Ghana adopt- jor obstacle to the development of a comprehen- ed the same model in 2007, with port reform very Table 2: Port reform is possible: examples from Africa and the Middle East Reform Acons Outcomes Nigeria Adopon of the port - A policy framework which is centered on Public-Private Partnerships landlord model in 2006 - Scheduled private investment of US$ 500m (55 percent of total pri- vate sector investment in SSA ports) - Nigeria Ports Authority is now self financing - Private operators will pay in excess of US$ 5 billion to the govern- ment in rental/royalty fees - Reducon of congeson surcharges saved the Nigerian economy US$310 million within months of the concessioning - Improved turnaround me for ships and cargo - Improved cargo handling performance - Development undertaken with naonal and neighboring country Ghana Adopon of the port needs in mind under the `Ghana Gateway' program landlord model in 2007 - Rising volumes of transit, naonal and transshipment cargo - Progressing toward delivering compeve service in line with interna- onal standards Container terminal concession and Aqaba, introducon in 2005 of an electron- - System operaonal within 3 months Jordan ic Truck Control System to coordi- - Inland transport costs have fallen by 25% nate the movement of trucks to and - 25 percent more cargo moved with the same number of trucks from the port. Source: World Bank staff esmates The `port reform index' has been presented in the Africa Infrastructure Country Diagnosc, World Bank, 2009. Since this data was collected it is possible that Kenya lost addional ground because there have been important port reforms in Senegal, Angola and Benin, all countries which were ranked below Kenya. June 2010 | Edion No. 2 23 Special Focus The Port of Mombasa high on the government's agenda as it aims to im- world class port. And it did not address the many plement a barrier-free cargo gateway for countries instuonal, regulatory and legal changes which beyond its borders. In 2004 Jordan's mul-billion are also required. It did propose a number of short- dollar economic modernizaon strategy focused term projects, to be completed by 2013, and longer term developments up to 2015 to 2030. Short term on revitalizing it sole seaport of Aqaba. The freight proposals included the concessioning of berths 11- transport sector was underperforming due to the 14 to create more container handling capacity, the country's anquated road freight management sys- construcon of a second container terminal with an tem which was heavily regulated, fragmented and annual capacity of 700,000 TEU (to be managed by lacking performance incenves. An electronic truck the private sector) and dredging of the channel to control system, which turned this situaon around, enable handling of larger ships. Longer-term devel- was operaonal within 3 months. Simultaneously, opments included the construcon of a Mombasa bringing in a private operator, first through a 2-year by-pass linking the northern corridor to the south management contract and then with a full conces- coast region and northern Tanzania. sion arrangement, improved port performance without significant new hard infrastructure invest- A system of incenves combined with improve- ments. The outcomes of these reforms are outlined ments in so infrastructure should be implement- in Table 2. ed now to enable Mombasa to keep pace with demand before new container capac- The government also needs to have ity comes on line. Kenya and the region a clear objecve for Mombasa. cannot wait 3-4 years for new container Whilst the port is essenal to more There can be no capacity to come on-line without a seri- compeve Kenyan businesses, and strategic port plan- ous impact on trade. Port capacity could more effecve regional integraon ning unl the roles be increased in the immediate term by a in Eastern Africa, there is scant men- of the public and system of incenves to encourage port on of the port in the government's Vision 2030 document. Although ob- private sectors are stakeholders e.g. banking services and all government agencies involved in cargo jecves of port reform may be varied clearly defined and clearance, to move to full 24 hours op- and range from the need to expand failure to do this eraons. In addion, implementaon of and modernize container handling would put the con- the PCBS should be speeded up. Similarly, capacity, generate revenue and re- cession of berths a trucking control system, similar to that duce public expenditure, to smulat- 11-14 under stress implemented in Jordan, would improve ing growth of a distribuon-based cargo handling and effecvely increase economy centered on a regional port capacity. Implementaon of such IT so- hub, the government needs to be clear on what its ware should be measured in months and not years objecve is. as is the case in Mombasa. Kenya is not keeping up with demand. In the me The Government of Kenya faces a costly, me- it has taken the government to update the Mom- consuming and potenally acrimonious proc- basa port master plan, Dubai World has built the ess if structural and regulatory changes are not brand new Doraleh Terminal on a greenfield site inundertaken now in parallel with expansion and Djibou. The Djibou terminal has a capacity of 1.2 concession plans for berths 11-14. The past failed million TEU per year and is now the largest and most aempts at securing significant private sector par- modern in East Africa. And in the same me Nigeria cipaon in port operaons and investments are has concessioned a large number of its ports. testament to this. The reform of the KPA will be less successful unless there is simultaneous reform A Port Master Plan prepared for KPA in 2004 was of the acvies of customs and other agencies at updated in 2009. The Master Plan did not look ef- the port to streamline their acvies. Changes to fecvely at the complimentary hard and so in- the exisng roles of some government agencies frastructure needed to transform Mombasa into a would likely require changes in the laws which cre- June 2010 | Edion No. 2 24 Special Focus The Port of Mombasa ated them. There can be no strategic port planning deal with KPA, Ministry of Transport and the Minis- unl the roles of the public and private sectors are try of Roads. It makes long term strategic planning clearly defined and failure to do this would put the currently impossible with no joint approach to how concession of berths 11-14 under stress. Moving individual projects link to each other. Plans to mod- the boundary between public and private opera- ernize the port of Mombasa must look beyond im- tors requires strategic preparaon, redefinion of mediate port infrastructure and foster coordinated powers and mandates, and legal adaptaon before efforts to improve road and rail systems that pro- preparaon for the tendering process. Failure of vide linkages to the Northern Corridor and neigh- any concession would make the case for future pri- boring markets. vate investment in the port difficult and compound exisng problems. KPA should be free of polical interference and its managing directors appointed on 3 year perform- Clarity on the future role of KPA is needed. The ance management contracts following an open government's commitment to a landlord port would and compeve process. In the 18 years since suggest that KPA would retreat from front-line op- KPA's incepon it has had 14 managing directors. In eraons and another round of concessioning would the same period Tanzania Ports Authority has had need to take place for the terminals currently oper- 3. Instability at the top of KPA is not a recipe for ated by KPA. Controlled by the state, KPA currently good planning and reform. Ideally the government owns most of the port infrastructure and under- should undertake an internaonal search and ap- takes the majority of port operaons. point the best qualified candidate. The shi in the role of KPA from port service provider to landlord and regu- Narrow vested interests have un- lator will be a difficult change manage- Many of the chal- dermined investment and reform of ment exercise. It will require new skills, Mombasa for a long me. Many of the instuonal capabilies, and pracces lenges and the challenges and the reforms needed, including regulang unfair and an- reforms needed, and outlined in this report, are well compeve pracces, designing and and outlined in this known and understood. What is new negoang contracts with private pro- report, are well is the severity of the problem. Private viders of port services, performance known and under- investments which would lead to new monitoring and ensuring compliance stood. What is new local jobs, greater port efficiency and with standards. is the severity of a posive impact on growth in the re- A decision on the route for the Mom- the problem gion, have been thwarted by narrow basa by-pass is needed now. Momba- vested interests seeking to maintain sa town faces gridlock and the route to the status quo. For example, plans to the Mombasa airport will be blocked unless work on develop a new bulk ferlizer handling facility, which a new by-pass and link road is started immediately. could lower ferlizer costs in the region, have not If construcon of the by-pass is not speeded up and gone ahead due to interference and official intran- synchronized with new planned capacity increases sigence. Most oen developers and financiers walk at the port (though concessioning and expansion), away. And whilst unions and their workers might le- congeson will become a worse problem than it is gimately fear potenal downsizing this should be today, and new investments will not work efficient- ly. At the same me the government needs to focus viewed in the context of government plans for port on a new access road from the port linking to the expansion and the situaon on the ground today. by-pass or else all new port capacity will connue For example, despite concerns, the concessioning to be transported through an already congested of ports in other parts of the world has typically re- town centre. Unfortunately, private sector develop- sulted in net gains of jobs at the port and related ers currently looking to engage the government on industries. these important issues find themselves having to June 2010 | Edion No. 2 25 Strong polical will, and a clear mandate for re- the Mombasa port require a defragmented govern- form is needed. Whilst the Ministry of Transport is ment approach and a strong coordinang body to the lead agency for Mombasa port is does not have enforce reforms and make the decisions which are strong operaonal capacity for port reform and necessary. A summary of the key reform measures management. Nor does it represent all the interests government should consider to improve the opera- that are involved in the complex operaons of the onal effecveness of the port is provided below. port. The operaon, management, and expansion of Box 3: Summary of key suggested port reform measures In the next 3 to 6 months · Idenfy a coordinang body with a mandate for reform. · Appoint the managing director of the KPA on a 3-year performance contract. · Decide on the route for the Mombasa by-pass and start implementaon together with the link road from the port. · Set up a system of incenves to enable full 24 hour port operaons by mulple stakeholders. · Implement the IT Port Community-Based System. · Approve the concessioning of berths 11-14 through a compeve and transparent process. In the next 6 to 12 months · Clarify the metable for a full landlord port status as well as the role of KPA. · Clarify the roles and responsibilies of public and private port stakeholders. · Undertake reforms of customs collecons, making them more efficient and transparent. · Strengthen port operaonal capacity of the Ministry of Transport. June 2010 | Edion No. 2 26 ANNEXES Annexes Annex 1: Key Macroeconomic Indicators 2007 2008 2009 2010 2011 Annual Percentage change Macro aggregates Real GDP 7.0 1.6 2.6 4.0 4.9 GDP Per Capita 4.2 -1.0 -0.2 1.3 2.2 Private Consumpon 7.3 -0.4 3.8 3.2 3.9 Government Consumpon 7.2 3.7 5.5 4.1 3.4 Gross Fixed Investment 13.3 8.9 0.6 6.7 8.5 Exports, GNFS 6.0 7.5 -7.0 6.2 7.6 Imports, GNFS 12.7 6.6 -0.2 5.5 6.1 Prices Inflaon 5.7 15.4 9.2 4.5 4.1 GDP Deflator 5.1 13.5 6.7 3.2 4.1 Exchange rate (Kshs/US$) 67.3 69.2 77.4 76.6 78.1 % of GDP Revenue and Grants 22.0 21.6 22.6 23.1 23.2 Expenditure 23.3 28.3 30.3 29.2 28.1 Budget Deficit -5.9 -6.3 -6.6 -6.0 -5.2 Gross Domesc Investment 19.1 19.4 19.4 19.3 19.5 Government Consumpon 14.5 14.6 15.7 14.9 14.6 Private Consumpon 77.3 77.5 78.5 79.1 79.3 Exports 26.0 26.3 25.2 25.8 26.2 Imports 36.1 40.1 39.4 42.1 43.4 Current account balance -3.8 -6.6 -6.9 -6.6 -6.0 General government balance -3.0 -4.9 -5.6 -6.0 -5.6 Memo Nominal GDP (US$) 27,124.4 30,354.9 29,528.8 33,523.1 35,940.8 Source: KNBS, MoF and World Bank staff esmates June 2010 | Edion No. 2 28 Annexes Annex 2: Sectoral shares in GDP, 2009 Share of GDP Growth rate % % Agriculture, 25.5% Agriculture and forestry 25.5 -2.4 Mining and quarrying 0.5 -4.2 Industry, 18.8% Manufacturing 11.5 2.0 Ulies (Electricity and water) 2.6 -3.1 Construcon 4.2 14.1 Wholesale and retail trade 11.7 1.5 Hotels and restaurants 1.6 42.8 Transport and communicaon 14.4 6.4 Services, 55.7% Financial intermediaon 4.5 4.6 Real estate, renng, business services 6.3 3.0 Public administraon 3.8 1.6 Educaon 6.9 2.7 Other services 6.4 1.9 Source: KNBS and World Bank staff esmates Note: GDP constant 2001 prices June 2010 | Edion No. 2 29 Annexes Annex 3: Products where Kenya has Acquired Revealed Comparave Advantage (RCA) Innovaon - areas in which Kenya has acquired RCA (2003-2007) percent Note: This bar chart shows that out of Kenya's increase in export diversificaon (measured by the number of products with RCA), 39% is due to innovaons (new products with RCA) in the chemical or allied industries sector, 20% due to the stone, plaster and cement sector, and about 17.5% in the prepared foodstuffs and beverages sector. Note that Kenya has acquired a revealed comparave advantage in many new texle products, but has lost an equivalent amount - this suggests. June 2010 | Edion No. 2 30 Annexes Annex 4: Kenya: Assumpons Underlying the 2010 Growth Forecast Global Assumpons 1. World GDP growth will rebound to 3.3 percent in 2010, aer contracng by 2.1 percent in 2009. 2. Global trade will recover in 2010, expanding 9.5 percent aer contracng 11.2 percent in 2009. However trade volumes will remain below the pre-crisis period in 2010. 3. Euro area economies will see a weak recovery, expanding 0.9 percent in 2010 aer a 4.1 percent contracon in 2009, while the UK economy will grow an esmated 1.4 percent, fol- lowing a 5 percent contracon in 2009. 4. Non-oil commodity prices will recover parally in 2010, expected to gain 18.8 percent aer plunging 21.6 percent in 2009. 5. Oil prices are expected to rise 32.8 percent, to average US$82 per barrel in 2010. 6. Tea prices (Kenya aucon) are expected to average 245 US cents per kg in 2010, 215 US cents per kg in 2011 and 190 US cents per kg in 2012. 7. The crisis in Greece is contained with lile spillover to other economies. Kenya Specific Assumpons 1. The forecast assumes normal rainfall and above average output in agriculture which will keep food prices low and inflaon within the policy target of 5 percent. 2. The government will connue implemenng the smulus program and only cut back spend- ing starng the year 2011. 3. The constuon review process will be smooth and the growth in tourism will connue as projected during the high season. 4. Remiances are expected to recover slightly in 2010, aer contracng marginally in 2009, as labor markets in major desnaon countries remain weak. 5. The impact from the disrupon of air transport in Europe to the horculture sector will be contained, as air transport resumes at full capacity. 6. The Euro Shilling exchange rate is likely to appreciate as a result of the crisis in Greece, re- ducing export earnings from the Euro area. This is factored in as the low growth scenario. Source: World Bank staff esmates June 2010 | Edion No. 2 31 Annexes Annex 5: Sub-Saharan Africa Forecast (annual percent change unless indicated Esmate Forecast otherwise) 2007 2008 2009 2010 2011 2012 GDP at market prices (2005 USD) 6.5 5.0 1.6 4.4 5.0 5.3 GDP per capita (units in USD) 4.0 3.0 -0.4 2.4 3.0 3.6 PPP GDP -4.4 -10.1 4.1 6.5 6.1 6.1 Private consumpon 7.6 2.5 1.1 3.5 4.4 4.7 Public consumpon 5.7 6.8 5.3 5.2 5.0 4.8 Fixed investment 16.7 11.8 4.9 6.7 7.4 8.0 Exports, GNFS 3.7 3.9 -6.8 9.3 6.5 6.7 Imports, GNFS 11.1 5.7 -4.1 9.8 7.3 7.4 Net exports, contribuon to growth -2.6 -0.8 -0.8 -0.6 -0.6 -0.6 Current account bal/GDP (%) -0.3 0.6 -2.2 -1.2 -1.5 -1.6 GDP deflator (median, LCU) 7.0 9.3 6.8 4.8 5.1 5.0 Fiscal balance/GDP (%) -27.2 0.7 -5.8 -4.8 -3.3 -2.2 Memo items: GDP SSA excluding South Africa 7.1 5.9 3.6 5.3 5.9 6.1 Oil exporters 8.0 6.3 4.0 5.7 5.7 6.1 CFA countries 4.5 4.2 2.4 3.8 4.0 4.5 South Africa 5.5 3.7 -1.8 2.8 3.4 3.8 Nigeria 6.4 5.3 5.6 6.1 5.7 6.4 Kenya 7.0 1.7 2.6 4.0 4.9 5.4 Source: World Bank, GEP January 2010 June 2010 | Edion No. 2 32 Annexes Annex 6: Exports of goods and services (% of GDP) 1960-70 1970-80 1980-90 1990-2000 2001-2008 Kenya 31.1 29.8 25.3 27.2 25.9 Ireland 32.8 40.7 53.0 76.1 86.1 Vietnam 15.3 39.5 66.8 Thailand 16.2 19.9 26.9 46.3 70.4 Korea, Rep. 8.3 26.4 33.5 31.9 39.9 China 2.6 5.5 13.7 22.0 33.1 Uganda 25.4 15.2 10.3 10.2 13.6 Rwanda 10.3 13.1 9.5 6.4 10.0 Ethiopia 6.5 8.7 13.3 Ghana 20.9 15.0 12.0 28.3 40.9 South Africa 27.2 28.9 27.7 23.9 30.2 Source: World Development Indicators Annex 7: Share of imports by countries of origin U.K U.S.A Germany Italy United Saudi France India South Japan other Africa Arabs Arabia Africa 2002 8.3 5.7 5.1 1.6 10.6 5.2 3.8 5.4 5.7 6.7 41.8 10.3 2003 7.0 5.1 3.9 2.1 11.3 8.6 3.2 5.3 8.3 6.6 38.7 13.2 2004 7.5 4.0 3.6 2.0 11.6 8.7 3.4 6.3 9.6 6.7 36.6 14.4 2005 12.1 9.2 3.4 1.7 13.4 5.9 3.0 5.2 9.1 5.0 32.1 13.2 2006 6.5 4.7 3.6 2.3 14.7 5.0 2.0 7.1 6.4 5.6 42.0 12.0 2007 4.9 7.4 3.7 2.2 14.8 2.9 2.7 9.4 5.8 6.8 39.5 11.9 2008 3.6 3.6 3.5 1.5 14.8 3.4 2.1 11.8 6.1 5.8 43.6 11.3 2009 4.9 6.3 2.8 1.8 10.7 3.2 2.1 10.6 9.2 6.2 42.2 13.5 Source: CBK Stascal Bullen Annex 8: Composion of VAT, Corporate Tax and PAYE by Economic Sector 2008 2009 Economic sector (% of total collecon) VAT CT PAYE VAT CT PAYE Acvies not adequately defined 0.0 4.5 8.3 0.0 6.9 11.1 Agricultural and livestock producon 0.1 1.6 2.0 0.2 2.2 1.5 Industry 32.2 26.7 15.8 32.4 21.5 14.7 of which Electricity and water 7.5 0.2 2.4 5.0 0.6 1.8 of which Construcon 2.2 3.9 1.1 2.5 1.0 1.1 Services 33.0 64.7 38.6 34.5 65.5 40.5 of which hotels and restaurants 3.9 2.0 1.4 4.1 0.6 1.6 of which transport and communicaon 4.1 13.4 7.9 5.1 10.4 8.0 Public administraon 34.8 2.5 35.3 32.9 3.9 32.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: KRA and World Bank staff esmates June 2010 | Edion No. 2 33 Annexes Annex 9: Composion of GDP in Selected Sub-Saharan Countries Share of GDP, 2008 Gross Private final Central Govt. naonal consumpon consumpon Investment Exports Imports savings Ethiopia 84.9 11.3 20.8 11.6 28.6 16.5 Ghana 80.8 13.6 32.0 36.8 63.2 19.6 Kenya 78.6 10.8 24.7 24.9 39.0 17.6 Rwanda 89.6 9.1 20.8 8.1 27.5 13.0 South Africa 61.5 20.2 22.2 36.3 40.4 14.0 Tanzania 79.2 10.6 17.4 16.8 24.2 10.1 Uganda 82.4 11.8 23.3 15.6 33.4 12.0 Source: World Bank, Africa Development Indicators 2010 Annex 10: Share of total exports by Countries of desnaon U.K Germany USA Netherlands Uganda Tanzania Pakistan France Egypt Belgium Other Africa 2002 11.6 2.6 2.0 6.5 18.5 8.4 4.9 1.4 4.0 1.4 38.8 48.3 2003 11.6 2.9 1.5 7.7 16.7 8.0 5.0 1.7 3.0 1.3 40.5 46.2 2004 10.4 2.1 2.0 8.0 16.9 7.7 5.2 1.7 3.2 1.2 41.6 46.4 2005 9.6 2.1 1.8 7.5 17.4 8.2 5.8 2.1 3.6 1.2 40.7 49.3 2006 11.0 1.9 7.2 7.9 11.2 7.4 5.9 1.5 4.0 0.9 41.3 43.5 2007 10.5 2.2 7.0 8.0 12.2 8.1 4.9 1.4 3.2 0.9 41.5 44.9 2008 11.1 1.8 6.0 7.6 12.3 8.5 4.1 1.4 4.5 0.8 41.9 47.3 2009 10.9 2.1 5.2 7.5 13.3 8.9 4.4 1.2 3.4 1.0 42.1 47.4 Source: CBK Stascal Bullen Annex 11: Principal Import Commodies in 2009 Commodity (`000'DWT) Petroleum, Oil, Lubricants 5,671 Maize 1,561 Clinker 1,135 Wheat 1,074 Iron and Steel 780 Other liquid bulk 760 Plasc 402 Rice 387 Sugar 281 Chemicals and Inseccides 218 M/Vehicles & Lorries 296 Paper and Paper Products 296 Source: Kenya Ports Authority, Annual Review and Bullen of Stascs, 2009 includes re-exports June 2010 | Edion No. 2 34 Annexes Annex 12: Kenya's Poor Connecvity with Global Trade Routes K enya is poorly connected to global shipping and Mombasa port has a low number of con- necons with other African countries. Greater ef- ket and who in recent years have enacted impor- tant port reforms and expansion. On intra-regional trade, i.e. the percentage of direct connecons with ficiency at Mombasa, beer regional integraon other African countries, West Africa tends to score along the Northern Corridor, and increased capacity higher. The decline in Mombasa as a transshipment for transshipment business are important factors port due to capacity constraints is reflected in the which will aract more ships and increase port traf- low percentage of direct connecons to other Afri- fic. Given the relavely modest amount of goods can countries. passing through the port annually, Mombasa is not well posioned to respond to the dramac changes Volumes of shipping container and cargo traffic in trade and shipping paerns which are occurring are both important measures of economic health. around the world. These changes mean that for In 2009 the port of Mombasa imported 301,460 Kenya, and by associaon her neighbors, to benefit containers,² which translates to a crude average from the reducons in costs related to global ship- of 5800 per week. Demonstrang the relavely ping, the port will need to be modernized and to low volumes of trade this represents, this number operate more efficiently. An overarching require- equates to the capacity of one modern vessel ply- ment to jusfy the larger and more efficient vessels, ing internaonal trade routes which rounely carry discussed below, will be an increase in port volume, between 7000 - 12000 containers each. To divert which will come over me as Kenya's economy, and these vessels from exisng East-West networks is those of its neighbors, expands. not financially viable for shipping lines, meaning that Mombasa is increasingly served by relavely Access to global markets depends to a large extent small feeder vessels (mostly under 2,000 TEUs) on marime transport connecvity as most of the from transshipment ports in the Middle East, mainly world's largest ports are situated on the main global Salalah (Oman) and Dubai (UAE), adding to me and shipping routes between East and West. UNCTAD's cost. Europe's main port, Roerdam (Netherlands), Liner Shipping Connecvity Index (LSCI), Table 1¹, has no direct container flows to either Mombasa or aims to capture a country's level of integraon into Dar es Salam. The direcon of trade may also be global shipping networks. The five components of changing as some lines consider services from Asia the index are: a) the number of ships vising a port; to the Caribbean and Lan America via southern b) the container carrying capacity of those ships; c) Africa. Marime transport costs have an important the maximum vessel size; d) the number of services; share in the landed price of bulk commodies, such and e) the number of companies vising a country. as clinker and crude oil. An increase of the size of ships entering Mombasa would enable realizaon China leads the LSCI ranking (1 out of 132 in 2009), of economies of ship size. followed by Europe and then Asia. Kenya ranks 13 within Africa, behind such countries as Ghana, Ni- The Government of Kenya is in the early stages of geria, Senegal, Djibou, Benin and Togo. Most Afri- considering building a major new port at Lamu, sev- can countries are far below the world average which eral hundred kilometers north of Mombasa. The is not surprising given Africa's share of world trade government's argument for the port is that it needs is less than 3 percent. And with East Africa currently to expand capacity for Kenya and the EAC away from having the smallest trading volumes in Sub-Saharan the busy and congested Mombasa-Nairobi corridor African¹, the region lags behind many countries in and develop markets in southern Sudan and Ethio- West Africa that are closer to the European mar- pia. According to government, this could be accom- ¹ UNCTAD Secretariat, using data provided by Containerizaon Internaonal Online, 2009 ¹ Review of Marime Transport, United Naons Conference on Trade and Development, 2009 ² Kenya Ports Authority, Annual Review and Bullen of Stascs, 2009 June 2010 | Edion No. 2 35 Annexes plished more rapidly through building a port on a ments. It could also add to further fragmentaon new site, rather than concentrang all future port in East African shipping, making it more difficult development in Mombasa. Lamu might also be- for efficient sized vessels to begin using Mombasa, come the transshipment point for oil exports from further delaying Kenya's connecvity to major ship- Uganda and, if deposits are proven up, the Eastern ping routes. Furthermore, the Lamu port would do DRC. Its construcon would require massive invest- lile to support enhanced regional integraon in ment in port, road and possibly rail infrastructure as no corridor currently exists. the EAC given its remoteness from the EAC market. Further study of the feasibility of Lamu port and its However, there is currently no trade passing through posive and negave benefits for Kenya and neigh- Lamu and no road or rail links to the EAC. It is not boring countries should be undertaken before any clear that a new port is the most efficient way to investment decision is undertaken. A study by the handle Kenya's and the EAC's growing trade require- government is on-going. June 2010 | Edion No. 2 36 Annexes Table 1: Indicators of African countries' connecvity in liner shipping % of direct LSCI World connecons with Ranking other African countries Egypt 17 15 Morocco 23 35 South Africa 29 40 Nigeria 50 43 Cote dÍvoire 53 45 Ghana 54 43 Djibou 58 24 Senegal 63 59 Maurius 64 41 Togo 68 52 Namibia 69 58 Benin 70 52 Kenya 72 32 Cameroon 73 50 Congo 74 43 Angola 75 43 Tanzania 83 30 Libya 84 13 Mozambique 85 48 Sudan 86 33 Gabon 88 48 Madagascar 91 63 Algeria 96 14 Guinea 97 54 Gambia 103 44 Mauritania 104 50 Tunisia 107 19 Sierra Leone 111 43 Liberia 112 67 Cape Verde 115 44 Comoros 117 64 Seychelles 118 75 Democrac Republic of Congo 137 100 Equatorial Guinea 141 55 Guinea-Bissau 143 50 Eritrea 145 33 Somalia 149 33 Sao Tome & Principe 153 45 Source: Review of Marime Transport, United Naons Conference on Trade and Development, 2009 June 2010 | Edion No. 2 37