Annex 1 POVERTY IN KENYA

Transcription

1 1 Annex 1 POVERTY IN KENYA Box: Determinants of Poverty in Kenya National Income: Falling per capita income growth has led to a rise in poverty. The sectors where the poor are to be found, in the agricultural sector, declined drastically and reduced personal incomes as well as national income. Income Distribution: A high level of inequality income inequality, regional inequality has a negative relationship on growth and poverty reduction. Unemployment: Few jobs have been created in the recession period. In 1999 only, 8,700 new jobs were created in the formal sector. Unemployment is a major determinant and characteristic of poverty. Wages and Earnings: Employment in the informal sector expanded by 11.5% creating 385,000 additional jobs in However, the wage levels in the informal sector have been drastically lower than in the formal sector. Other factors: Poverty has many facets and therefore causes: Participatory assessments draw attention to the exclusion, isolation and lack of trust in public agencies as causes of poverty. HIV/AIDS: A recent contributory factor to poverty in Kenya has been HIV/AIDS. The overriding poverty related HIV/AIDS concerns are AIDS orphans, population size and growth, cost of health care and child mortality. Environment and Poverty: Poor people depend on natural resources for their livelihoods especially on common property resources and they are more likely to live in marginal areas. This is the case of ASAL regions where a higher proportion of the poor are found. Insecurity and Poverty: Poverty means more than inadequate consumption, education and health. Voices of the poor require to be heard. These voices manifest themselves in forms of illness, crime and domestic violence, harvest failure, fluctuations in food prices, insufficient demand for labour and lack of social security in old age. Corruption and Poverty: Corruption increases poverty both directly and indirectly. It diverts resources to the rich people and weakens Government ability to fight poverty. Women and Poverty: Gender is an essential concept for eradication of poverty since women are more vulnerable. Governance and Poverty: Developing the capacity for good governance is a prerequisite for the sustainability of poverty eradication efforts. Source: PRSP, May 2001 Based on the 1997 Welfare Monitoring Survey (WMS III) the incidence of rural food poverty in Kenya was 51%, while overall poverty reached 53% of the rural population. In urban areas, food poverty afflicted 38% and overall poverty 49 % of the population. The overall national incidence of poverty stood at 52%. WMS III of 1997 was estimated at 52 % based on Welfare Monitoring Survey (WMS III of 1997). The number of poor increased from 3.7 million in to 11.5 million in 1994 and is estimated in 2000 to have reached some 15 million or 51% of Kenya s population. In the urban areas, Kisumu Town recorded the highest prevalence of absolute poverty (63%), followed by Nairobi (50%), Nakuru (41%) and Mombasa (38%).

2 2 Box: Characteristics of the poor Proximate determinants of poverty are the factors associated with poverty. They are considered as intermediate determinants or consequences of poverty. They are also known as characteristics of the poor and in Kenya they have been found to be: Demographics: Poor households in Kenya have been found to have large families. Average household sizes for poor families were 6.4 members compared to 4.6 members in non-poor households. Of the poor households, female-headed households depicted a higher level of poverty. Incomes: Wage employment is a major source of income in urban areas while livestock and crops revenue was the main revenue in rural areas. Subsistence farmers are among the poorest and most vulnerable. Expenditure: The poor devote a higher proportion of their income on food (77.4 per cent in 1997 compared to 60 per cent for the non-poor). Health: Poor health is a quick way to fall into poverty. The time taken to reach a health facility is an important indicator of access to health facilities. The WMSII found that poor households in rural areas took over 60 minutes to reach the nearest health facility. For urban, it was 10 to 30 minutes. In addition, access to health services by the poor availability, affordability and physical accessibility of drugs and consultations has been limited due to factors ranging from cost sharing and long distances to health facilities. Education: Education is considered as a vehicle for poverty reduction. Poverty has been observed to be highest among people without any schooling. For example, the cited studies show that there was virtually no poverty among households headed by university graduates. Water and Sanitation: Access to safe water and safe sanitation varies by poverty status and locality. Two thirds of the rural poor do not have access to safe drinking water and 42.2 per cent of the poor had no access to sanitary facilities. Agricultural production: The poor have low yield per acre due to differential access to fertilizers, quality of land, credit, irrigation and other inputs. Household amenities: The type of cooking fuel is an important indicator of the standard of living in a given household. The WMS III of 1997 found that the majority of the poor (97.5 per cent) in rural areas use firewood. A majority (92.4 per cent) in the rural areas use paraffin for lighting. Source: PRSP, May 2001 (WMS II /1994 and WMS III/ 1997) In Kenya the poor tend to be clustered into certain social categories such as: (i) The landless; (ii) People living with disabilities; (iii) Female-headed households; (iv) Households headed by people without formal education; (v) Pastoralists in drought-prone ASAL districts; (vi) Unskilled and semi skilled casual labourers; (vii) IDS orphans; (viii) Street children and beggars; (ix) Subsistence farmers; (x) Urban slum dwellers; (xi) Unemployed youth.

3 3 Annex 2 Table Objectives of GoK Fiscal Strategy for 2002/ /05: i. Changing composition of expenditure with the ratios of wages and salaries, interest payments and goods and services expected to decline significantly as a share of GDP by 2003/04 and consequently allowing for higher shares of investment and goods and services in later years. ii. Utilising available privatisation proceeds to reduce the domestic debt: over the 2001/ /04 period, approximately KShs.5,500 million is expected to accrue to the Government as net proceeds. If a more aggressive privatisation stance is adopted a higher level of domestic debt reduction will be achieved. iii. The overall deficit on a commitment basis (including grants) is expected to total Kshs 25,928 million in 2001/2002, equal to 2-3% of GDP. The deficit is expected to rise to Kshs 32,077 million in 2002/2003 and thereafter declining to Kshs 11,814 million by 2004/2005. It will also imply a reduction in the real Government expenditure from 27.6% GDP to 24.9% in 2003/2004. iv. Maximising on foreign concessional financing: over the 2001/ /04 a total of KShs.47,504 million is projected for external concessional borrowing compared to net principal repayments of KShs.67,174 million, while domestic borrowing is projected at KShs.66,711 million compared to repayments of KShs.55, 413 million. v. Optimising the core functions of central government, Universities and State Corporation by rightsizing employment levels with a view to minimising the fiscal impacts of any salary adjustments and allowing for a reduction in the public wage bill to GDP ratio. Table: Expected Outcomes i. Economic Growth: expected to follow a gradual recovery path with an average 2.6 per cent, allowing for a reversal in the declining per capita income trend of ii. Government revenues: expected rise from KShs.194,312 million in 2000/01 to KShs.237,881 million in 2003/04, with an average nominal growth of 7.5 %. The GDP deflator will rise by an average 6.8 % over the period, and this will allow real revenues to grow by 0.9 % annually over the period. iii. Total expenditures: expected growth from KShs.178,319 million in 1999/2000 to KShs.244,629 million in 2003/04, with an average growth of 11.4 % over the period. The figure for 2000/01 includes substantial drought related expenditure and as such does not constitute a base for comparison. Over 2001/ /04, nominal expenditure growth will average 3.4 %, implying a decline in real terms. iv. Deficit and Financing Strategy: The strategy will focus on reducing the deficit by maximising external financing. Consequently, the domestic debt is expected to stabilise at 21.3 % of GDP in 2001 June to 21.8 % in 2004 June. Over the same period, external debt will decline from 45 % to 33 % of GDP, despite an increase in the overall level of borrowing.

4 4 Table: Key Fiscal Variables 2002/ /05 (in % of GDP) 99/00 00/01 01/02 02/03 03/04 04/05 Revenue (excl. Grants/GDP) Grants/GDP Total Expenditure/GDP Deficit/GDP Wages and Salaries/GDP Goods and Services/GDP Interest Payments/GDP Transfers/GDP Development/GDP MTEF Reallocation/GDP Table: other economic indicators (est) GDP (annual change) Gross Domestic Investment/GDP Gross Domestic Savings/GDP Total debt/gdp Current account balance/gdp GDP Deflator

5 5 Annex 3 Kenya s regional and trade agreements Kenya is on of the 20 Member States ( 1 ) of Common Market for Eastern and Southern Africa (COMESA), which exists since 1994 to promote cooperation and regional economic integration through trade development; with a population of 385 million Comesa has the potential of a major integrated trading block. Although Kenya s exports into this region are comparatively modest (Ksh Bln 53,4 in 1999) with even less imports from this region (Ksh Bln 2,5 (1999)), Kenya sells to Comesa - unlike to its traditional basic exports to Europe and the United States - manufactured goods of higher added value. Envisaged are common external tariffs by the year 2004 and a monetary Union by The East African Community (EAC), defunct since 1977, was revived in July 2000 as result of the regionalism as a strategy for trade development in the 1990s. Its members are Kenya, Uganda and Tanzania, who - through the newly established East African Cooperation arrangements want to promote economic cooperation, sustainable utilization of the region s natural resources, and ensure peace and security through their cooperation. The intention of EAC is to establish a Customs Union. Preparations of a protocol on the establishment of an EAC Customs Union are ongoing. The negotiations on the common external tariff which seek to harmonize the external tariffs of the three countries are making steady progress. Some success was achieved on macro-economic convergence, free circulation of persons with EAC passports (operational) and on building up regional infrastructures in road and telecommunication. The Inter-Governmental Authority on Development (IGAD) was established in 1986 by Djibouti, Ethiopia, Kenya, Somalia, Sudan and Uganda, and joined in 1993 by Eritrea. The initial role of IGAD was to combat the devastating effects of drought and desertification prevailing in the Horn of Africa during the eighties. With most of the countries in the region being involved in internal conflicts over the years, IGAD was revitalised in 1996 and assigned a new role in promoting food security, economic cooperation and political and humanitarian affairs. IGAD is recognised as one of the regional building blocks of the African Economic Community. While there is a clear role for IGAD to play, particularly in policy harmonisation and conflict management in the Horn, there is serious concern that IGAD has neither sufficient resources nor expertise to fulfil its new mandate. Kenya is an active member of the Regional Integration Forum Facility (RIFF), the old Cross Border Initiative, a policy framework jointly supported by the World Bank, the IMF, African Development Bank and the European Commission. WTO agreements: Kenya is a founding member of WTO. However, Kenya is experiencing difficulties in implementing WTO arrangements due to inadequate capacity and therefore unable to take full advantage of rights and obligations embodied in these agreements. (1) COMESA members are: Angola, Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Zambia, Zimbabwe.

6 6 KENYA: The Physical Infrastructure Annex 4 A. Transport. 1. Transport is not just an economic sector. It has a trans-sectoral widespread influence contributing to general economic and social development. It is no accident that in Kenya and many developing countries, transport has been identified as one of the top priorities during the PRSP consultations. Civil society, from economic operators to community based organisations, has pointed out the necessity of better transport perspectives with a view to alleviate poverty, to boost economic growth and to ease the incorporation of local and national economies into world wide markets. The good performance of the transport sector has definitely a major impact on access to employment and a wide range of social services. As a facilitator of the circulation of goods and persons it is a key element for the functioning of the markets, contributing to match supply and demand. Furthermore, it is a key instrument for regional integration and generates a supportive environment for private initiative. An efficient transport sector also has a substantial influence in the country s competitiveness and it is one of the decisive elements in determining the price of goods. 2. In Kenya, a comprehensive transport policy involving the different modes of transport (roads, railways, sea and inland marine transport, air transport and pipeline transport) does not exist yet although some policy elements have been defined for the different transport sub-sectors. However, common trends can be observed within the ongoing transport reforms that are in line with the general Kenya reform programs aimed at re-establishing the macro-economic balance and reducing state participation. Furthermore, they all relate to three fundamental points: the different sub-sector strategies imply important institutional reforms with a view to improving efficiency. policies being implemented or discussed focus openly on sustainability and financial practicability a progressive disengagement of the State and the liberalisation of the sub-sector is presently being considered or is underway ; An integrated strategy for the different modes of transport, emphasising inter alia their complementarity, needs to be defined with a view to accomplishing a comprehensive approach to the transport sector. Moreover, the fact that Kenya is an important transit country underlines the need for increased cooperation in the region, particularly among Eastern African Community Countries, in order to harmonise national policies and implementation mechanisms. In this respect, a recent stakeholders conference on policy and strategy for the roads sector in Kenya, held on May , formulated an action plan for a study to draw up a national Transport Sector Policy and a Roads Sub-sector Strategy to be funded by the EC. 3. Kenya's transport system is composed of a major sea port (Mombasa); a road network totalling 158,103 km including the classified road network of 63,942 km ( 8,671 km paved); a single track rail network (2130 km) consisting of a main line and a few branch lines; 38 airports and airstrips (22 with paved runways) of which 3 are international airports, and an oil pipeline connecting Mombasa and Nairobi with extensions to Eldoret and Kisumu. The Government currently owns all of the transport infrastructures: the port, roads, railways, airports and pipeline. Except for the road transport and aviation where transport services are essentially provided by the private sector, the other transport means are operated by public corporations.

7 7 In Kenya, transport activities are concentrated in the northern corridor, along the country's main transport itinerary which connects the port of Mombasa to Nairobi and, further, to landlocked countries and regions of Eastern and Central Africa (Uganda, Rwanda, Burundi, Eastern Congo and Southern Sudan). The transit traffic generates important annual earnings for the Government (approximately M US$). 4. The transport infrastructure expanded substantially in the 60s, 70s and the 80s to meet new demands and economic growth. However, this trend reversed in the recent years. The poor performance of the transport sector is nowadays perceived as an obstacle to economic and social development. Poor road condition, inefficient railways, high port charges in Mombasa (despite recent improvements in the port performances) represent major impediments to the country's development and affect the Kenyan international competitiveness. The reasons for this bad record lay essentially with the lack of an adequate policy and absence of a harmonised institutional framework. Despite important advances in recent years, namely the introduction of key specific measures such as the establishment of the Road Maintenance Levy Fund in 1994 and the Kenya s Roads Board in 2000, the implementation of a global, sustainable, and efficient sector policy remains a major challenge for Kenya s administration. 5. In this context, for instance, it is estimated that each Euro saved on road maintenance results in a twoto-three Euro increase in global vehicle operation costs. Nevertheless despite increasing road transport economic costs, the patterns of transport have been significantly modified in recent years and an important shift from rail to road has occurred. The expansion of the road network, in particular the increase in paved roads within the classified network (from 3, 000 to over 8, 000 km), the rising performance of vehicles, the construction of the oil pipeline, and many years of poor management eroded the competitiveness of the Kenyan rail. Whilst in 1980 a freight volume of 4.3 M t was attained, current figures now approximate 2.5 M t per year (50% of the potential volume). Fig: 1 Transport infrastructure density in selected countries Area (km²) Population Rail (km) Rail density Km/km 2 Classified Road network (km) Road density Km/km 2 Paved roads Density Km/km 2 Kenya 582,650 30,765, , Zimbabwe 390.,580 11,365, , Cote d Ivoire 322,460 16,393, , Colombia 1,138,910 40,349,388 3, , Thailand 514,000 61,797,751 3, , France 551,602 59,551,227 31, , United Kingdom 244,820 59,647,790 16, ,

8 8 B. Road sector Description 6. The current Kenyan economy is highly dependent on road transport: it accounts for over 80 percent of Kenya s total passenger and freight transportation. This situation is not expected to drastically change in the following years even if the serious impediments experienced by other transport modes, in particular railway transport, will be cleared up. The Kenyan road fleet comprises some over 600,000 vehicles, most of them in relatively bad condition. Kenya s public road network totals approximately 158,103 km connecting most parts of the country. The classified network represents some 63,942 km whose development and maintenance is coordinated and overseen by the recently established Kenya Roads Board (KRB), an independent body composed of representatives from relevant stakeholders in the roads sector. The expansion of the Road network carried out in the 70s and the 80s didn't take recurrent costs much into account. The road condition has therefore fast deteriorated given the lack of adequate maintenance along with poor expertise and damage from grossly overloaded vehicles: 40% of the existing network is estimated to be in poor condition and 40% beyond repair. This situation is particularly alarming in the non paved network. Fig 2: Kenya's Road network Road category Network (km) Maintenance Agency Classified network Paved: 8,672 Unpaved: 55,270 Roads department (class :A,B, C) District Road Committees (Type:D, E, and Special Purpose Roads) and Unclassified network Rural Roads: 74,200 Forest roads: 6,816 National parks and Reserves: 7,145 Urban roads: 6,000 Total 158,103 Source: JICA Study on Road Maintenance (KRB Jan 2002) Ongoing reforms and policy elements KWS (roads within national parks) County Councils ( MOLG) Forest Department (MENR) KWS Local authorities (MOLG) 7. In the aftermath of the "Road Maintenance Initiative" launched by the World Bank in the early 90s, the GoK engaged a first strategic analysis on road policy with a view to identifying the necessary reforms for sustainable improvements in the road sector. This led to a certain number of concrete measures such as the set up in 1994 of a Road Maintenance Levy Fund (levies excised on petroleum and transit tolls), a first attempt to secure funds allocated to road maintenance. A more comprehensive approach had to wait until the Strategic Plan for the Road Sector (1997) and subsequently the "Road Sector Reforms Action Plan" (1999) were set up, allowing he identification of some strategic trends (with EC funded technical support). - Reforming and strengthening the institutional framework: 8. The 4 administrations previously in charge of development, rehabilitation and maintenance of Kenya s road network are overseen by a single, independent organisation, the Kenya Roads Board (KRB) established by law on July 1st The Board is in place and draws its membership from

9 9 both the public and private sectors. The Board has hired an Executive Director, General Managers in charge of Planning, Finance and Technical compliance. It has also hired managers and other members of staff. All members of staff of the KRB were hired following public advertisement. The progressive decentralisation and disengagement of the State initiated with the establishment of the Kenya Roads Board, was complemented with the implementation of three road agencies in charge of the execution of annual road works programmes, preliminarily agreed with KRB. These agencies are the Roads Department (RD) in charge of the class A, B and C roads and 70 District Road Committees (DRC) created to execute road works on classes D, E, SPR and unclassified roads, and the Kenya Wildlife Service which caters for roads within National Parks and Game Reserves.

10 10 Road Sector Institutional Framework Ministry of Transport & Communications Ministry of Roads & Public Works Controller & Auditor General Strategy Policy Orientations 1. National Road Policy 2. Regulatory Framework 3. Long-term Planning Kenya Roads Board Fund - Road Maintenance Fuel Levy - Transit Tolls - Donor Funding - Other sources Ministry of Finance & Planning EX-officio members representing 5 ministries - Advise on Policy - Implement Policy - Oversee maintenance, rehabilitation and development - Manage Road Fund - Internal Audit - Information Kenya Roads Board Executive Director 8 Private sector stakeholders External Audit Road Agencies District Road Committees maintenance works: class D, E, SPR and other roads Roads department: Maintenance works: class A, B, C Kenya Wildlife Service (KWS) Maintenance works on roads within Park boundaries Other Potential Agencies

11 11 In parallel, GoK undertook supporting measures to sustain this reform process by instituting new rules for procurement of goods and services. Enforcement of Axle load restrictions was also strengthened in co-ordination with EAC countries and privatised Axle load controls (with EC support) have succeeded in reducing overloading of trucks. - The sustainability and viability of road investments: 9. A Kenya Roads Board Fund, which comprises the Road Maintenance Fuel Levy and any other funds that may accrue to it was created and is directly administered by the KRB. The revenue of the Fund is considerable: in 1999/2000 it reached Ksh 7.7 billion (approximately 110 M ). This sum should be sufficient to cope with the Government's objective of fully funding road maintenance (routine and periodic) for the roads classified network from domestic resources, whilst donor funding is required initially for clearing the current backlog of maintenance through rehabilitation required to bring the network into maintainable standards.. The KRB is also entitled to allocate funds to the implementation agencies and to ensure their correct use including the monitoring of the procurements and operations undertaken by the road agencies. In this context 24% of the Fund is allocated equitably to secondary roads (class D and E) whilst 16% is allocated equally to all constituencies in the country. This should guarantee that the maintenance funds are not exclusively concentrated in works related to the main roads. Furthermore, maintenance and rehabilitation of the existing road network are given priority over new road development, and the latter is being undertaken exclusively to remove major bottlenecks to economic activity. Fig 3: Classified Road Network: Road classes Road class Bitumen Gravel Earth Total (A) International 2, ,611 trunk (B) National trunk 1, ,671 (C) Primary 2,561 3,209 2,270 8,040 (D) Secondary 1,184 6,484 3,661 11,329 (E) Minor and special ,930 21,392 38,291 TOTAL NETWORK 8,671 27,154 28,117 63,942 Source: JICA Study on Road Maintenance (KRB Jan 2002) 10. An effort to improve public expenditure and budget controls (MTEF) was carried out in parallel to the improvement of donor co-ordination involving EC and major donors at a centralised and decentralised level. Targeted investment programmes such as the third highway sector project (2), the Roads 2000 (3) or the KUTIP (4), were also put in place in order to provide a better balance between physical investments and institutional development and harmonize the donor's and Kenya's investment programmes. - A growing role for the private sector and the emerging of business oriented practices: (2) The consecutive highway sector projects aim at the rehabilitation and strengthening of the main roads of the classified network. (3) Roads 2000 is a district based network approach to road rehabilitation and maintenance which is designed to raise operating conditions on the 55,000 kms of unpaved classified roads. (4) Kenya Urban Transport Infrastructure

12 Although road transport services are usually provided by the private sector, road infrastructure is still the realm of the State. The Kenya s road strategy, however, has been to progressively increase the private sector role in the sub sector. The first move from public to private comprised essentially the opening of the road works market. Actually, prior to 1992, most of the road maintenance works were executed by conventional force account units in the MORPW. Gradually, private contractors took over the construction, rehabilitation and periodic maintenance of paved roads. At present, 97% of the periodic maintenance on paved roads is done by private contractors. This proportion represents also 70% of unpaved roads but the intention is to increase this level up to 95%. In parallel, despite the fact that routine maintenance is still for a large extent executed in-house by MORPW, it is anticipated that in the near future the major part of routine maintenance of all roads will also be contracted out. In this context, the newly created road agencies and, in particularly the Roads Department have a clear objective to emerge as a commercially managed organization, acting in synergy with the private sector. The second move relates to an increasing participation of the private sector in road network management. The participation of important private stakeholders in the Board of the KRB is a clear sign that road network priorities are no longer defined exclusively around political lines. The third shift is yet to come. A general consensus exists to extend in the long-term the private sector responsibilities to ownership and/or concession agreements as far as the infrastructures themselves are concerned. As a general principle, policy and regulation will, in the long run, remain in the exclusive sphere of influence of the State. Current issues 12. Important reforms have been initiated in the Road sector in Kenya. However, the government must continue efforts to bring them into fully operational condition by strengthening both KRB and agencies capacities to oversee, manage and maintain the roads network. Also, specific technical support and the setting up of adapted information systems able to monitor the entire network are most important. Without accurate information and professional skills both the KRB and the implementation agencies will fail to identify comprehensive investment programs and to discuss detailed annual work plans. In parallel, the 70 District Road Committees also experience important difficulties to ensure operational activities: guidance on defining their strategy as well as the setting up of rules and regulations for their management and operations services are still required. 13. In addition, other pieces of work, some already in the pipeline, are necessary in order to define a more inclusive strategy for the road sector. These are, inter alia: - Road safety: is a major problem in Kenya with 2,600 deaths and 13,.000 injuries annually. This could be attributed to generally irresponsible driving behaviour and excessive speeds coupled on with poor state of roads and unroadworthy vehicles. The situation is expected to improve following the creation of a Road Safety Board. After approval by Parliament, the Road Safety Authority Bill could be used to harmonise road safety programmes and contribute to more discipline on the roads. Serious enforcement of road safety regulations will need to follow. - Environment: The MORPW has established an environment unit with the aim of developing in house capacity to tackle environmental assessment. The role of the MORPW in this domain has to be reinforced in order to provide guidance to the KRB and contribute to a more sustainable transport policy. - Regional integration: In order to support the objectives of the East African Community, Kenya, Tanzania and Uganda are now working towards co-ordinated harmonised and complementary

13 13 transport policies. Also, an important effort has yet to be mobilised in order to continue the work initiated previously by the secretariat of the Commission for East African Co-operation and focussed on the completion of the regional road network, investment priorities at regional level, as well as the development of common approaches for standards, regulatory laws and their implementation. C. Railway sector Description 14. Railway transport is the second most important mode of transport after the road for both freight and passenger traffic. The railway system in Kenya consists of a single-track metregauge network of 2,130 km, with 156 crossing stations, operated essentially by the Kenya Railways Corporation (KRC) 5. The main line, from Mombasa to Malaba (1,082 km) is 95 lb/m while the branch lines rails range from 80 lb/m to 50lb/m. There has been no extension of the railway network since independence (1963). Kenya Railways Corporation (KRC) is a wholly owned government parastatal established in 1978, after the collapse of the EARC (East African Railways Corporation) in A board of directors consisting of a non- executive chairman and directors nominated from different ministries and other parastatal organisations and the private sector manages the KRC. 15. The railway system in the country was originally built by the colonial authority in the late 19 th and early 20 th century to provide a link between landlocked Uganda and the outside world. Later, the need to facilitate the transport of agriculture raw materials from central highlands to export markets overseas underlined the importance of the railway for the Kenyan economy. The KRC is essentially a freight railway. Nevertheless the total freight handled by KRC is declining rapidly, despite recent improvement, from 3.4 million tons In to 2.4 million tons in On the other hand the volume of cargo handled in Mombasa has been increasing since 1995, which implies a significant shift from rail to road and other transport modes. The decline is essentially due to aging and to poorly maintained rolling stock coupled with changes brought by the liberalization of the transport market. In fact, liberalisation highlighted a certain number of elements that have severely affected the railways competitiveness (high costs, unreliability) such as persistent management inefficiency, excessive and unskilled staff, as well as constraints imposed on train speeds by the existing narrow gauge, steep inclines and weight limitations.. Furthermore, road transport developed fast in the 60s and 70s. Heavy goods long distance transport vehicles appeared allowing increasing competition in the long distance freight transport. At the same period, increasing difficulties with the Uganda railways made the KRC loose important parts of the transit transport. The opening in 1978 of the Mombasa- Nairobi pipeline also took away some important cargo from the Rail. After dominating for a long time the long-distance freight transport, along the main corridors, rail has definitely lost its predominance to road. At present, for instance, it is estimated that road transport carries about twice the volume of railway (3.7 million tonnes against 1.6 million tonnes) along the northern corridor. (5) The line from Konza to Magadi (150km) is operated and maintained by Magadi Soda. Magadi Soda leases locomotives from the KRC and maintains them from their own resources.

14 Ongoing reforms and policy elements 16. KRC was expected to generate funds for investment in renovated material and to function smoothly. Nevertheless, the financial resources generated from KRC operations remain inadequate. The problems are worsened by excessive costs due to overstaffing but also to the obligation to sustain unprofitable passenger and branch line operations. Poor management, inefficient procurement practices and loss of business to road system contribute to aggravate the worrying situation. Since 1995 the KRC has suffered corporate losses and is now on the verge of bankruptcy. 17. The first serious attempt to reverse the KRC unsound position, achieve organisational restructuring and revitalise its operating performance occurred in the late 80s and early nineties with the support of donors. The project that also included regulation on the procurement of equipment and technical assistance failed given the poor project design but also lack of commitment from the Government and from the KRC management team. Donors pressure and the threat of bankruptcy, have forced the KRC to come up with a number of ad hoc decisions 6 aimed at increasing cost recovery and developing a more orientated business approach. Another aim of the reforms was to concentrate the company on its core function of transport provider, hence promoting private sector participation. Furthermore, following the 1994 policy paper on public enterprise reform and privatisation, the government appointed in 1998 a steering committee to identify and promote a global privatisation strategy for KRC and to develop a transitional management plan for the process. Current issues 18. Among the different modalities for a privatisation of the KRC, the Government seems currently favourable to a concession contract with a strategic private partner with adequate capital and technical capability. Infrastructure however would remain public property. Evidence from railway privatisation in other countries indicates that the private sector is willing to work with governments to achieve business objectives. Nevertheless, it is important to note that privatisation, whatever its form, involves a series of critical decisions on ownership, regulatory supervision, role of the State, contracts and future investment modalities. This last point is of particular interest as the necessary upgrading of existing railway lines will involve major investments in track realignment, signalling, safety systems and rolling stock. Privatisation appears therefore as a widespread process. Furthermore, the regional component plays also a major role in the KRC restructuring and will render the implementation of a privatisation strategy even more complex. As a matter of fact the whole exercise requires close contacts with the other EAC countries and in particular with Uganda and the Uganda Railways Corporation (URC). Traditionally the landlocked Great Lakes Countries (Uganda, D.R.C., Rwanda, Burundi) have been served by the competing regional corridors, namely the Northern Corridor from the port (6) Some relevant measures are: - The separation of passenger services from freight services to cope with basic cost accounting principles; - The externalisation of maintenance for 35 locomotives, to improve reliability; - A drastic reduction of staff: from 14,500 to 10,600 partially financed with surplus land selling; - The approval to discontinue services on unprofitable lines. The government had to underwrite the loss on such lines if that was to be considered a public services obligation ; 14

15 15 of Mombasa through Kenya and the Central Corridor from the port of Dar es Salaam through Tanzania. The predominant position of the Northern Corridor (transit traffic share 76% in year 2000) is likely to be affected by stronger competition from the Central Corridor following recent steps aimed at commercialising the operations of both the port of Dar es Salaam and the Tanzania Railways Corporation. D. Other transport sub-sectors Apart from road and rail, other transport modes in Kenya include water transport (essentially Marine transport), Air transport and Pipeline transport. Maritime/Water transport 19. The main water transport focus is at the Kilindini Harbour in Mombasa with a total rated capacity of about 20 million tonnes p.a. while actual cargo handled annually is around 8 million tonnes. The port has 16 deep water berths, developed quays and an important infrastructure including bulk oil jetties, handling facilities for coal clinker and cement and a three-berth container terminal and inland container depots in Nairobi, Kisumu and Eldoret. Mombasa port hinterland includes not only Kenya highlands but also Uganda and Northern Tanzania. Apart from Mombasa Harbour, the only water transport activity is to be found at Lake Victoria where some small ports connected to railway activities are managed by KRC and the Uganda and Tanzania Railway Authorities. 20. The Kenya Port Authority (KPA) is an exclusively parastatal entity with responsibility for all maritime port activities. Between 1989 and 1993, KPA made important operational surplus and important investments that had no real economic justification. Operation performance fell subsequently to the extent that major shipping lines have imposed a surcharge on containers shipped to Mombasa. This has prompted the government to launch a certain number of measures to boost productivity which have had positive results. However, whilst higher rates of productivity are possible in the short-term, the need for substantial investment in new equipment and expansion of the container terminal cannot be ignored in the medium term. Lack of funds, together with organisational problems, inadequate tariffs, overstaffing, and insufficient performance oriented management still hinder substantially the development of maritime transport. 21. In its policy paper on public enterprise reform and privatisation, the government identified a certain number of measures, including the necessity for clear financial and operational objectives and the necessity to associate the private sector in the provision of port services and activities. Little progress has been made since then in implementing these measures, although the Government has reaffirmed the will to accelerate KPA reforms in the framework of its medium term policies and reform programme. In particular the need to improve the availability and reliability of container terminal handling equipment (a key factor underlying the poor productivity of Mombasa port) by refurbishment and replacement, while partly privatising certain services of the port, including the container terminal through a strategic partner. Pipeline Transport 22. The pipeline is actually confined to transport of oil products from the Kenya Oil Refineries (Mombasa) to the hinterland. The pipeline infrastructure is managed by the Kenyan Pipeline Company (KPC), a government owned parastatal under the Ministry of Energy. The pipeline initiated its operations in 1978 between Mombasa and Nairobi. Later extensions to Eldoret and Kisumu were built and studies are complete to extend the pipeline to Kampala.

16 16 The KPC handles an annual volume of approximately 1.9 million of m³ of oil 7. The pipeline is in general good condition but some older sections now need repair. KPC was earmarked for privatisation in the year 2001 and a Cabinet Paper has been prepared on the same seeking Government approval of the privatisation process. It is also undertaking a number of programmes to improve its revenue as well as foreign earnings. Air transport 23. At present there are 38 civil aerodromes in Kenya including the three international Airports (Nairobi, Mombasa, Eldoret). Domestic scheduled air services are essentially provided by Kenya Airways and a few charter companies. International transport service is provided by some 30 companies operating essentially from Nairobi and Mombasa. Air transport is increasingly becoming vital to the country's development not only because of its booming tourism sector, but also because of its exports, especially horticultural crops and other high value agricultural products. Since Kenya Airway s privatisation in 1996, Air transport services are now exclusively handed by the private sector. However, Airport infrastructures remain State owned and managed by the Kenya Airport Authority, a parastatal company. In order to improve its efficiency, KAA, which became autonomous from the Ministry of Transport in 1991, has plans for an ambitious strategic program aiming to focus on marketing and service delivery under a business oriented approach. In parallel the development of existing infrastructures in particular the Jomo Kenyatta Airport (Nairobi) with the aim to transform it to a regional hub is at the core of KAA strategic plans. However this requires important investment and most probably targeted government support. Energy 24. Kenya s energy sector is largely dominated by imported petroleum for the modern sector and wood fuel for rural communities, the urban poor and informal sector. The current domestic demand for petroleum fuels accounts for about 27.7% of the total bill. In terms of energy supply, woodfuel provides about 68% of the total energy requirements, petroleum energy 20%, electricity 10% and other alternative sources account for 2%. 25. Hydro source account for MW (62%) of the total installed capacity while geothermal and imports from Uganda provides 57 MW (5%); MW (35%); and 30 MW (3%) respectively. The effective capacity under normal hydrological conditions is 1,000 MW. Delays in implementing planned power generating projects and low dam reservoir levels, particularly during periodic drought have impacted negatively on the manufacturing and commercial sectors. Power demand is expected to grow from 843 MW in 2002/03 to 1202 MW in 2007/08 while energy demand is estimated to rise from 4,632 GWH to 6,713 GWH representing a 6.4 mean growth per annum. To meet the growing demand, additional generating projects namely Olkaria II (64 MW), Olkaria III (36 MW) and Sondu Miriu (60 MW) will be completed and commissioned during the period 2002/07, adding a total capacity of 160 MW to the national grid. 26. The Rural Electrification Programme (REP) aims at facilitating the development of the rural areas. A Rural Electrification Master Plan for rid extension has been formulated to guide its implementation. However, it will need to be updated to incorporate non-grid supply. The programme targets market centres, public facilities and social amenities; and thus help in the (7) The pipeline transports only "white" petroleum products. Heavy fuel and bitumen still have to be transported by rail and/or road.

17 17 creation of business opportunities and improvement of social well being of the rural population. To increase coverage, the Electric Power Act (1997) will be amended to allow vertically integrated suppliers in the rural areas. Further amendments will be effected to provide a domestic power pool and generators to access large retail customers. E. Elements for an EC response 27. The need for comprehensive, sustainable sector strategies in most of the ACP countries became apparent in the late 80s when long term underlying structural economic difficulties were brought to the fore. This was also the case for Kenya which found itself in possession of a full range of relatively inefficient and unsustainable transport modes, including roads and railways but also air and water transport. This situation set off a long and difficult reform process implying often complex analyses and difficult political decisions. The outcome of this process was a number of parallel exercises, for each sub-sector, partially inter-linked by certain global objectives (decentralisation/privatisation, business oriented structures, stakeholders involvement ) but without a comprehensive integrated approach. This bottom-up approach did, however, contribute towards a pragmatic and realistic sector reform process, based on existing situations and stimulated real progress, albeit on unequal basis and at different speed as each transport mode had specific functional constraints. 28. The EC and other major donors have gradually become more involved in Kenya s transport sector, in particular in the road sector. The Commission alone has approved some 130 Million for the road sector in the last five years. EC projects include, inter alia, two important road sections (232 km) of the Northern corridor 8. Furthermore, following a regional meeting in 1999 with EAC countries, the Commission decided to finance a feasibility study to strengthen the Mombasa-Bachuma Gate section of the Northern corridor (105 km). These decisions were linked with the Government s efforts that have started in the early 90s to define a more coherent strategy for the road sector. The EC did support these efforts from the outset and was particularly involved in the development of a new and more appropriate institutional framework. In this context, the EC accepted to finance a three phased study to assist the Government with several key reform policy issues such as the establishment of an autonomous Roads Board, the creation of separate agencies responsible for the management of trunk, feeder and municipal roads and the enforcement of axle load control and transport regulations. 29. The EC has only been marginally or indirectly involved in other sub-sectors through its general support to the public enterprises reform and to the privatisation program. With the exception of roads, the EC and major donors have not financed any major infrastructure investments (railway, ports, airports) in Kenya. The reasons behind this attitude are diverse. They obviously relate to the fact that roads are, and will remain for a foreseeable future, the most important transport mode in Kenya. Further, it is clear that, due to the current state of the roads infrastructure, previous efforts to maintain (8) Sultan Hamud Mtito Andei Road and Mai Mahiu-Naivasha-Lanet Road

18 18 the roads network cannot be sustained if considerable funds for rehabilitation works are not directed, in parallel, to recover the network to a maintainable level 9. The nature and level of progress attained in other transport modes reforms could further explain donors general hesitance to commit themselves in related sub-sectors. There is also a general understanding that the private sector should play a leading role (financial and/or managerial) in the process and/or that reforms were far from being completed. In sub-sectors such as the railways, where a privatisation scheme is under preparation and where the private sector can and may play a central role including financial, considerable grant support would be difficult to justify. Furthermore, an active donor presence in such a context would most probably bias efforts made so far to promote private sector involvement. 30. The EC proposes a two fold strategy for the sector. In the short- and medium term, efforts must be concentrated on consolidating the ongoing reform process in the road sector. Challenges ahead remain important as many of the reforms steps accomplished have not yet been operationalised (e.g. the Kenya's Railways Corporation). It is further necessary to clarify the possible role of the private sector in domains such as road infrastructure development and management. Regardless, progress in the road sector reforms has to be progressively integrated into a broader regional strategy. EC must also take into consideration its previous commitments for the sector, such as those derived from the leading role it assumed in the rehabilitation of the Northern Corridor. The outcome of the PRSP exercise, in which road infrastructure has been identified among the priorities, will further influence EC s detailed response for the sector in view of EC s primary aim to address poverty reduction throughout its country support strategy. In the medium- and long run, the establishment of a comprehensive transport sector policy supervising operations of the different modes of transport is of vital importance to maximise transport efficiency in the Kenyan economy. Such a policy should firmly define linkages between different transport modes and how they can complement each other. This top-down approach, that will require further institutional reforms, should be put in place gradually in parallel with progress accomplished in the restructuring of various sub-sectors. Preliminary studies to prepare the ground for such future initiatives should already be launched. The adoption of such a wide-ranging approach should also facilitate the identification of new financing mechanisms, such as sector budget support, once a global assessment of the transport sector is available. (9) The Road maintenance reforms were based on the assumption that the road network would be generally in a maintainable condition, which is not the case. Therefore a rehabilitation/ reconstruction backlog requiring considerable donor funding had to be solved on a preliminary basis.