Infrastructure market in Kenya

Kenya is East Africa’s largest economy and a key regional player. The country is a major communications and logistics hub with an important Indian Ocean port and strategic land borders representing a critical lifeline for landlocked neighbouring countries.

Kenya is viewed as one of the fastest growing economies in Sub-Saharan Africa. Kenya’s youthful and growing population, dynamic private sector, highly skilled workforce, improving infrastructure and pivotal role in East Africa give it the potential to be one of Africa’s great success stories.

Kenya is positioning itself as a major business process outsourcing (BPO) destination in Africa, rivalling South Africa and Egypt. Kenya’s geographic location, well‑educated population, fast-improving telecom infrastructure and status as the gateway to the East Africa sub-region are some of the factors working in its favour.

In 2018, the World Bank estimated that Kenya had an infrastructure financing deficit of US$2.1B annually, constraining growth and development. Sustained expenditures of almost US$4B per year are required to meet the country’s infrastructure needs.

Kenya has developed a legal framework to encourage private sector participation and to help address a funding gap in the infrastructure sector. This has resulted in a renewed public-private partnerships (P3) law, better government capacity to manage P3s, and an interest in developing a strong pipeline of P3 projects.

Kenya’s population and agricultural activity are heavily concentrated in the southern half of the country, along the corridor linking the coastal city Mombasa to the country’s capital city Nairobi and then on to the major city Kisumu in the west and into neighbouring Uganda.

Kenya’s infrastructure backbones, including the country’s principal road artery and its major power transmission and fibre optic backbone have followed this route. The northern half of the country, by contrast, is sparsely populated and characterized by fragmentary infrastructure coverage.

Over the years, the P3 framework has enabled the Government of Kenya to implement high-quality infrastructure projects, especially in the energy and road sectors. These infrastructure projects have helped buttress and build resilience in the Kenyan economy, moving it towards achieving its full potential.

Key opportunities for Canadian infrastructure companies in Kenya

• Recent discussions with the P3 Directorate confirmed that the government will prioritize opportunities relating to water, ports, transport and energy.
• Excellent P3 framework in place and keen interest in pursuing P3 projects to address infrastructure development, with some successful projects already delivered.
• Opportunity to work with the incoming government at the beginning of its term.

Notable challenges for Canadian infrastructure companies in Kenya

• Kenya is largely reliant on external funding for public infrastructure projects.
• Significant presence of Chinese companies in the civil construction sector.
• Kenya continues to face significant challenges to sustainable and inclusive economic growth which have been exacerbated by COVID-19’s economic disruptions.
• Long-running challenges continue due to corruption and economic inequality. 

Infrastructure business landscape

The Kenyan construction industry contributed 5.6% to GDP in 2019. With economic growth averaging over 5% per annum in the decade before the pandemic, the Kenyan government was on the cusp of rolling out a comprehensive slate of infrastructure development plans, with approximately 80 P3 projects.

The government’s infrastructure development plan slowed significantly in the face of the pandemic. The incoming government is keen to support private sector involvement in infrastructure development as a means of reigniting economic growth and supporting economic recovery.

However, it is not yet clear if the previously identified P3 projects will make up the bulk of the new government’s priorities, or if the project list will be adjusted.

The Kenyan government is seeking to upscale its P3 model for the delivery of strategic pipeline infrastructure projects. Kenya is currently managing a growing debt portfolio.

As noted earlier, the World Bank estimates that Kenya requires a sustained expenditure of close to US$4B over the next decade to close its existing infrastructure deficit, which can only be addressed through private sector participation.

Enacted in 2013, Kenya’s P3 Act made it the first country in East Africa to have legislation governing P3s. The Act has assisted in recently closing two major P3 projects: the Can $2.06 billion Nairobi-Nakuru-Mau Summit highway, an access-controlled four-lane, 175-km project awarded to French firm VINCI Concessions for 30 years; and the Can $893 million Nairobi Expressway, a four-lane 27-km toll road awarded to China Road & Bridge Construction, which has helped ease traffic from the main airport to the outskirts of the city.

Although several projects have been identified as P3s, the uptake by the private sector has been slow with the current law failing to deliver additional resources.

To address this, Kenya’s National Treasury introduced changes to the existing law to address deficiencies identified by potential investors that now bring the law in line with international best practices.

Some of the changes in the new P3 Bill 2021 include:

• A Directorate and Project Implementation Team to strengthen the institutional and governance structure
• Five new types of P3 arrangements: brownfields; build transfer; annuity-based design, build, finance & operate; JVs; and strategic partnerships
• New requirements for privately initiated investment proposals to ensure they meet national priorities and direct procurement under exceptional circumstances (e.g., government-to-government initiated projects).

The P3 Directorate is also in the process of listing several projects that are planned for private investment in various sectors, including roads, bridges, housing, power transmission, energy, healthcare, agribusiness, and water & sanitation.

In line with the new government’s commitments to climate change, the P3 Directorate has expressed an interest in projects that provide climate smart solutions such as electric bus-rapid-transit (BRT) systems, smart city solutions and transition from fossil fuel to gas power.

In addition to projects focused on climate change, the P3 Directorate has highlighted its interest in social impact projects, such as sports infrastructure, hospitals, water dams and education-related infrastructure.

Summary

Kenya is East Africa’s largest economy and a key regional player. Its new government is committed to P3s and will leverage the existing strong P3 framework to develop a pipeline of projects.

Kenya’s geographic location, well-educated population, excellent telecom infrastructure and status as the gateway to the East Africa sub-region are some of the factors working in its favour.

For more information on infrastructure in the Kenya market please contact Crista.McInnis@international.gc.ca