Construction and support services KENYA MARKET REPORT 2017 WE KNOW THE LANDSCAPE. sunbirdgroup.co

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1 Construction and support services KENYA MARKET REPORT 2017 WE KNOW THE LANDSCAPE sunbirdgroup.co

2 A MESSAGE FROM THE CEO Our services are built from expertise, understanding the landscape, and a passion for improvement. In Kenya we have experienced and contributed to the changing landscape. ABOUT SUNBIRD Sunbird Group is a collection of specialist services companies in Africa. Together our companies provide integrated construction and support services that can be delivered across the value chain to small and medium enterprises and multinationals. Formed in 2013, the team applies developed market expertise to these emerging and frontier economies, combining skills and corporate expertise with the local knowledge of our on-ground operating companies. With offices in London, Nairobi and Johannesburg and operations in over 15 locations across the region we have developed a powerful network of experience and expertise in our markets. Our core objective is to provide essential secondary infrastructure (housing, offices, industrial storage), with long term support through downstream services (facilities management, workspace solutions), all delivered to developed market standards. Our recent expansion into South Africa is indicative of the market opportunities present in Eastern and Southern Africa. We believe that now is the time for Africa and that the services we provide are vital for enterprises to succeed and grow. We have the ambition to match this opportunity and the desire to become the leading integrated services platform in the region. Sunbird has an established presence in Kenya, which also serves as our regional headquarters in East Africa. Our existing operations include multiple premium Serviced Offices delivered through our local operating company, ESBC, which has built a reputation for quality and service. Furthermore, we have existing construction projects in Nairobi and Mombasa building residential communities and data centre sites for regional developers. We offer the full range of long term support services including facilities management, workplace solutions and sustainability solutions to promote environmental responsibility will see a major expansion of activity for the Group as we go to work with a variety of blue chip and local customers. Kenya s economy continues to prove itself to be resilient and strong. Nairobi is an anchor for the group and a spring board into the region. We are optimistic that this year s elections will pass peacefully and the country will continue to lead the region by example. Michael Aldridge Co-Founder & CEO

3 CONTENTS CONTRIBUTORS 1. COUNTRY PROFILE POLITICAL OVERVIEW Devolution Security DEMOGRAPHICS INVESTOR AWARENESS Doing Business Foreign Exchange Regulations Judiciary Tax KENYA S ECONOMY MACRO-ECONOMIC OVERVIEW Monetary Policy Debt AGRICULTURE TOURISM MANUFACTURING CONSTRUCTION BUSINESS SERVICES FINANCIAL SERVICES TELECOMS INFRASTRUCTURE OVERVIEW ROADS RAIL AIRPORTS PORTS LAPSSET POWER NAIROBI NAIROBI ROADS REAL ESTATE Retail Office Residential Alternative Sectors Real Estate Investment Trusts TRAFFIC CONCLUSION 65 John Hoyle Managing Director Sunbird Developments jhoyle@sunbirdgroup.co Joseph Cottingham Director of Research Sunbird Developments jcottingham@sunbirdgroup.co Michael Rodwell Market Research Analyst Sunbird Developments mrodwell@sunbirdgroup.co 2.9 OIL MINING ECONOMIC OUTLOOK 35

4 WE KNOW THE LANDSCAPE INTRODUCTION Sunbird s 2017 Kenya market report is a comprehensive update to our 2016 report. Our complete series of reports cover Zambia, Mozambique, Tanzania and Uganda. Kenya is Sunbird's biggest market with all service lines established in Nairobi. With a young and educated population, political stability, a diversified economy and established infrastructure, Kenya is a thriving market for a range of investments. SUNBIRD Kenya The report seeks to outline the enormous potential that the country holds, while at the same time drawing attention to the challenges of doing business in the Kenyan market. Inevitably there are numerous hard lessons for any investor in African markets to learn and this report aims to provide a pragmatic guide to navigating the Kenya-specific risks that anyone operating in this country will encounter. The continued realisation of Kenya s potential will be affected by a myriad of factors and this report selects the most important in terms of politics, economics, demographics and infrastructure to provide a balanced overview of the country as a whole. We hope that it provides valuable insight into the excellent opportunities that Kenya can provide. 1

5 1. COUNTRY PROFILE Key figures President Uhuru Kenyatta Deputy President William Ruto Opposition Leader Raila Odinga Senator of Baringo Gideon Moi Governor of Bomet Isaac Ruto Former President Daniel Arap Moi Key indicators $69.1 GDP (bn) 5.9% GDP growth $949 Median GDP per capita 45.5m Population 2.7% Population growth p.a Median age (years) $ 46 Internet users per Mobile subscriptions per 100 1,182 Active mobile money accounts per nd Doing Business Ranking 139 th Transparency Int. Corruption Ranking 96 th Global Competitiveness Ranking 3

6 1.1 POLITICAL OVERVIEW KENYA S POLITICAL LANDSCAPE 2017 PRESIDENTIAL ELECTION Kenya is bracing itself for another hard fought and potentially divisive election. The date is set for 8th August Demonstrations against the perceived bias of the Independent Electoral and Boundaries Commission (IEBC) have already taken place. 1 Concerns are growing as to whether the election will erupt into violence, as in 2007 when over 1,000 people died, or will remain peaceful, as in The election will see the Jubilee Party (JP) leader and incumbent, President Uhuru Kenyatta, pitted against the newly formed National Super Alliance (NASA). While the leader of this alliance is yet to be officially confirmed it is likely opposition heavyweight, Raila Odinga (CORD), will remain the presidential candidate, possibly for the last time. This would be a re-run of the 2013 election which saw Kenyatta win with 50.5% of the vote to Odinga s 43.7%. NASA is the bringing together of as many voting blocs as possible in the hope they can challenge the Kikuyu and Kalenjin support base of the JP. The election is expected to be fought over key issues including corruption, security, health and education. Jubilee will emphasise its successes in infrastructure development, GDP growth, a stable currency, low inflation and title deed issuance. 2 NASA, which includes the Coalition for Reform and Democracy (CORD), Amani National Congress (ANC) and a supposed 15 other parties, will continue to play on the dissatisfaction with spiralling debt levels, the rising public deficit and misuse of public funds. They will also accuse the government of failing to relinquish the powers pledged within the process of devolution to the county governments. INDEPENDENT ELECTORAL BOUNDARIES COMMISSION An ongoing concern is the public protests against the IEBC. After replacing a succession of commissions tarnished by incompetence and corruption, the IEBC once again came under fire. In February 2015, British courts found two directors of the British firm, Smith and Ouzman, guilty of bribing Kenyan election officials. 3 Although the directors were jailed in the UK, the officials under investigation in Kenya are yet to be charged. Weekly protests began early in These later became known as teargas Mondays owing to the level of police suppression. 4 Tensions eased in September as the nine electoral commissioners offered to step aside in return for a compensation settlement. The focus has now shifted to who will replace them. Beyond creating a dangerous flashpoint for unrest, the scandal has eroded public confidence in the institution. The establishment of another committee must be a priority to ensure a peaceful election and to stop further disorder. THE JUBILEE PARTY In September 2016, the Jubilee Party, formerly the Jubilee Alliance, officially became a political party. The 11 parties within the old coalition disbanded and unified under a single banner, free of division and ethnic identification. 6 The occasion was a lavish affair and garnered wide support. However, the move was not without its critics. Some have suggested that the unification meant little as many of the merging parties were dormant entities with no real electoral or political representation. 7 Others have argued that party leaders allowed themselves to be incorporated into the new party for their own political or financial gain. 8 The opposition cited the extravagant procession as proof to back up their earlier accusations that the government had syphoned off money raised through Eurobonds to fund their campaign war chest. 9 Whether these allegations are true or not is of little significance as it seems likely the JP will run a formidable campaign and leverage their access to the apparatus of the state. Presidential election results 2013 No majority Jubilee CORD Parliamentary election results 2013 No majority Jubilee CORD Maps outlining the political landscape of Kenya WHAT IS NASA AND WHO DOES IT INCLUDE NASA is the newest attempt to unify the opposition to unseat the JP. NASA currently has four leaders, Raila Odinga (CORD), Kalonzo Musyoka (Wiper Democratic Movement), Moses Wetangula (FORD- Kenya) and Musalia Mudavadi (United Democratic Forum Party). 10 Odinga remains the favourite to lead the challenge but who his running mate is has yet to be decided. While politicians might reject any assertions that Kenyan voting behaviour is still defined by tribe it is clear this uncomfortable truth remains at the heart of their campaign strategy. NASA is the bringing together of as many voting blocs as possible in the hope they can challenge the Kikuyu and Kalenjin support base of the JP. Reports suggest Odinga is planning to target the Luo vote, Kalonzo the Kamba, Wetangula and Mudvani the Luhya. There are of course no guarantees, especially regarding the Luhya, whose allegiance is far from Population density Low density Medium density High density Traditional tribal areas Kalenjin Luhya Luo Kikuyu Maasai Kamba Other/mixed Source: Kenya National Bureau of Statistics Source: Kenyan Embassy to the UN, Kenya National Bureau of Statistics fixed. All four have called on Gideon Moi and Isaac Ruto to join them in a bid to break into the JP stronghold of the Rift Valley. Critics claim NASA is simply a campaign strategy based on crude and divisive tribal mathematics with no legitimate manifesto for governing. 11 As with the launch of any new political movement, especially so close to an election, there is hype and endless speculation. What impact this new alliance can actually have will only become clear in August. Before then it will be fascinating to see this new twist to the story unfold. NASA is the newest attempt to unify the opposition to unseat the JP. 4

7 RIFT VALLEY POLITICS As the election approaches, the political landscape remains fluid. Both parties are working to consolidate their support base and even confirm who will lead their campaigns. Kenyan politics is no stranger to drama and Sunbird believes there will be significant twists and turns before polling day in August. Much has changed since 2013 and, as the arrival of NASA shows, both sides are still weighing up their options through the strengthening and disposing of political allegiances and allies. Although politicians consistently criticise block voting along tribal lines, and it can be argued it is becoming less prevalent. Tribal allegiances are deep rooted, emotive and still used to great effect to mobilise. The Rift valley has the most registered voters out of all provinces and the Kalenjin, traditionally from the Rift Valley region, are the most powerful political force within it. The outcome of the current dynamics within its polity could be key in determining the outcome of the election. Whilst the JP has, on the surface, consolidated its platform, underneath it is less concrete. The fear within the party is that William Ruto, Deputy President, no longer offers the guarantee of the Kalenjin, or the wider regions, vote as he once did. Over the last 15 years Ruto has played a smart political game, coming from relative obscurity in the late 1990 s, by repeatedly out-manoeuvring establishment insiders like Gideon Moi, and becoming the focal point for the Rift Valley. His sway over the highly populous region ultimately earned him his seat in the JP and, more importantly, the post of Deputy President. However, this has changed. The unifying call in opposition to the ICC is no longer available and accusations of corruption, neglect and failure to deliver have persisted. As a result, Ruto is said to have lost the respect of key elders in the Rift Valley. In addition, the Kalenjin relationships he damaged on his way to the top have come back to bite. In particular, the former President and Kalenjin supremo, Daniel Arap Moi. Once a mentor to Ruto, he is now a powerful detractor. It is rumoured that Moi s refusal to back Kenyatta in 2013 was borne out of a distrust of Ruto; apparently once describing him as a political conman. The outcome of the current dynamics within the Rift Valley's polity could be key in determining the outcome of the election. As Ruto s support is questioned, his long-time rival, Senator Gideon Moi, chairman of KANU Party and son of former President Daniel Moi, has only grown in strength and stature. The rivalry between Moi and Ruto dates back over a decade and has been an ongoing struggle in Kalenjin circles for years. Since winning his senatorial seat in 2013, Moi has been campaigning hard within the Rift Valley. If he can continue expanding and consolidating his support he will become a highly prized political ally or powerful opponent. It is tempting to assume Moi's rift with William Ruto will prohibit him from backing the Jubilee. However, Sunbird believes that Gideon Moi's father will advise his son to steer clear of NASA, especially if Odinga retains the candidacy. Rift Valley Voting William Ruto Deputy President 2017 Election 4m+ registered voters in the Rift Valley Est. 25% of all registered voters in Kenya Who will the Rift Valley vote for? Jubilee Party (JP) Uhuru Kenyatta - President Wants big win after narrow margins in avoided rerun by 0.5% of the vote Relies on William Ruto to bring the support of the Rift Valley Needs the support of the Rift Valley to avoid a rerun Enjoys huge support in Rift Valley Heavily criticised by opposition Does he still hold the sway he once did? Historic rivals Possible but not likely NASA needs the support of either, or both, Ruto and Moi if they are to tempt voters in the Rift Valley away from the JP. Their decision could decide the fate of the opposition in August. Politicians competing for Rift Valley votes KANU Gideon Moi Senator of Baringo Intense rivalry with William Ruto Son of former President Moi What position would he have in NASA? Rift Valley Province - Most populous region Population 10m National Super Alliance (NASA) Undecided leadership Raila Odinga Moses Wetangula CCM 14 Counties Musalia Mudavadi Kalonzo Musyoka Isaac Ruto Governor of Bomet Fierce critic of William Ruto Could remain independent until 2021 Does he risk alienation if he backs NASA? Kenya has a stable and business friendly government. Changing dynamics of Rift Valley politics 7

8 Moi is not alone in this challenge. Isaac Ruto (no relation to William) the current Governor of Bomet County and the head of his new party, the Chama Cha Mashinani (CCM), is also hitting out at Ruto s failure to deliver. Isaac Ruto has been a long-standing critic of the JP but remains outside of CORD and NASA. Who, if anyone, Isaac Ruto puts his significant political weight behind is made even more intriguing given the arrival of NASA. While Ruto enjoys considerable support in his constituency it is also a Kalenjin stronghold and thus he is, to a certain extent, beholden to where their allegiances lie on a national level. There would be significant risks attached to formally backing the opposition, risks only worth considering if there was a high degree of certainty they would win. Furthermore, the crowded leadership of NASA would mean he would not necessarily command a top job. It is likely Ruto will remain on the periphery rather than risk tarnishing his reputation. CONCLUSION Historically the Rift Valley region, predominantly Kalenjin, has been unified behind a single national politician and it is this unity which has been the source of their political power. The current disruptions to this unity are unusual and the impact therefore unknown. A senatorial by-election in Kericho County was billed to be a litmus test of William Ruto s hold on Kalenjin support; the Jubilee candidate won, suggesting that he still holds sway. However, if we see the Rift Valley vote divided, the ramifications of this, both in the coming election and the long term, could be dramatic. It was the support of the Kalenjin, combined with the Kikuyu, which enabled the Jubilee to sweep to power, and should this division set in, the Jubilee would be considerably more vulnerable. Understanding the shape these secretive and ever-changing political allegiances will take is near impossible. This transient and complex environment is fascinating, and promises to deliver intrigue and drama right up to polling day. Given the fine margins of victory in 2013 there is everything to play for. STRUCTURE OF THE COUNTY GOVERNMENTS DEPUTY GOVERNOR GOVERNOR COUNTY ASSEMBLY - Speaker - Elected members HEAD OF COUNTY PUBLIC SERVICE COUNTY DIRECTORS (10) COUNTY SERVICE DEPARTMENTS Finance & accounting Agriculture & livestock Environment & national resources Health services Education culture, social Physical planning/housing Public works & utilities Public service management Trade, industrial development & regulation Roads & transport KEY Elected EXECUTIVE COMMITTEE (COUNTY MINISTERS) Appointed Devolution The 2010 constitution created 47 new counties in Kenya all with their own county governments, Governor, Senator and County Assembly. The Treasury allocated $3 billion in the fiscal year 2016/2017 to County Governments, roughly 13.4% of total expenditure. With 33% of the total revenues collected, this is more than double the constitutional minimum figure of 15%. In total, over the four years since devolution has been implemented, the national government has transferred nearly $10 billion to County Governments. 12 The key responsibilities for the County Governments include infrastructure, health, agriculture and community development. 13 DEVOLUTION: CHANGING NATIONAL DYNAMICS Devolution has created an even wider field of political and ethnic competition. Whilst the county elections were relatively overshadowed by the national election in 2013, intense competition at county level is expected in As the importance and power of county governments increases it is highly likely we will see increased attention and competition. The role of County Governors will be hotly contested as they, have become critical players within Kenyan polity. 15 This is evident from provinces dissolved 47 counties formed the increased courting of Governors by national politicians and the increasingly vocal stances they take on the national discourse, Isaac Ruto being a prime example. Fears that the devolution of power will bring the devolution of unrest are also mounting. 16 THE STRUGGLE FOR POWER As with the devolution of any power, there are elements within the traditional centre which resist the change and attempt to obstruct and restrict the new political forces. This is being achieved by the manipulation of old processes and positions or the introduction of new ones. Unsurprisingly, the most common battle ground has been determining financial control. In July 2015, the High Court ruled the proposed County Government Amendment Act 2014 to be null and void. 17 Under devolution, counties are given the power to allocate their own funds for local development projects, and the amendment would have effectively returned control to the national government. Despite losing this battle, MPs have successfully fought to retain the Constituency Development Fund which channels 2.5% of county revenue into their hands Highest funded counties 1 Nairobi, $151m 2 Turkana - $116m 3 Kakamega - $105m 4 Mandera $100m 5 Nakuru - $97m Lowest funded counties 6 Tharaka Nithi - $35m 7 Isiolo - $34m 8 Lamu - $25m Civil Servants Departments The creation of counties and their funding 8 9

9 These are essentially skirmishes, and while County Governments do hold significant control over their finances, the National Treasury still has the ultimate decision as to how funds are budgeted. According to the constitution, funds are supposed to be divided equitably between county and national government and this decision is, in theory, a consultative process between the Treasury and County Governments. However, in 2016, after a compromise had been agreed, the Treasury ignored the County Governments requests and issued their own proposed budgets. 18 There are elements within the traditional centre which resist the change and attempt to obstruct the new political forces. The Executive branch of government is also guilty of attempting to retain power and control. Under the 2010 constitution the old provincial administration structures were to be phased out. However, President Kenyatta has steadily been reinstating key posts, such as provincial commissioners, from the old system. The President claims their role is to monitor and control national government programmes at county level, while critics such as Isaac Ruto have called it an attempt to reinstate the provincial administration as a more powerful monster. 19 Time will tell how this dynamic plays out, but for now it shows clear recognition, at the national level, of how important it is to maintain a presence in county politics. CORRUPTION Such a huge and bureaucratic project is highly susceptible to corruption and abuse. Reports by Edward Ouko, Auditor General, paint a picture of corrupt and unaccountable financial transactions across at least 28 county governments. In Baringo County it was reported that $2.6 million had been paid to ghost workers in 2014/ In Kilifi County demonstrators stormed the governor s offices demanding Governor Kingi be removed from office after it was reported $500,000 had gone missing. On the other hand, some county governors are working hard to resolve the problem. Governor Altogether, do you support devolution i.e. having county governments in Kenya? Yes No Refused to answer 78% 21% 2% Total (1,964 respondents) Results of survey for support of devolution IPSOS SURVEY 77% 23% 1% Jubilee Supporters (867 respondents) 80% 18% 1% CORD Supporters (623 respondents) Ranguma, Kisumu County, has invited the Ethics and Anti-Corruption Committee and the Directorate of Criminal Investigations to carry out a life style audit on all senior county officials. 21 As with the development and growth of any system there are predictable pitfalls and it was unfortunate that the abuse of power would be one of them. Efforts need to be made to ensure the entire project is not derailed by this. ASSESSMENT The Kenyan public overwhelmingly support devolution. However, a recent Ipsos poll found that whilst most are supportive of the principle, they are critical as to how it is performed. 22 Around one third of those polled had little or no confidence in their County Governments or County Assembly representatives. Moreover, just under half the participants of the poll were dissatisfied by the lack of opportunities for participation in local government. A recent poll found that whilst most are supportive of devolution, they are however critical as to how it is performed. The opposition has blamed the government for a lack of support and a failure to fully implement devolution. 23 CORD leader, Raila Odinga, accused the government of failing to fulfil promises, including laptops for Standard One pupils, irrigation projects and road tarmacking. He has called for the government to disburse 45% of national revenue to County Governments. Devolution is an incredibly ambitious project and it remains in its infancy. Although many of these concerns and accusations are valid, progress is being made and institutions and processes are improving. While it is likely to continue to face challenges including organisation, corruption, capacity building and national intrusion, its overall success, or failure, will only be understood in the long-term Security As with many countries throughout the world, Kenya has security concerns. Kenya joined the African Union (AU) Mission in Somalia (AMISOM) in 2011 to help the Somalian government fight the militant group al-shabaab. Since this intervention, the group has launched several terrorist attacks within Kenya, killing over 400 people. The Kenyan government has remained resolute in its support for AMISOM and has steadily increased security spending since Kenya is a regional leader in defence spending and has vowed to modernise its security apparatus, allocating $1.2 billion to the Defence and National Intelligence Service and $1.4 billion to the State Department of Interior and Coordination of National Government in 2016/ Inspite of this, in November the President ordered the withdrawal of Kenyan troops from South Sudan. 26 Regionally, Kenya will remain a vital player, especially with regard to issues of security and regional integration. KEY UGANDA Attack Travel warning area Land invasions Security map Lokichogio Kisumu Nakuru Lodwar Marsabit ETHIOPIA Mado Gashi Isiolo Nairobi Garissa Wajir Mombasa El Wak SOMALIA Mpeketoni Lamu 10 11

10 A literate, skilled and hard working workforce is proving to be a vital factor for investors decisions. In 2016, Sunbird reported on the historical visit of President Obama to Kenya, highlighting the country s continued importance on the regional and international stage. Regionally, Kenya will remain a key player, especially with regard to issues of security and regional integration. However, while the US has been a strong ally of Kenya under Obama, understanding the level of support and cooperation afforded to Kenya under the Trump Presidency will be interesting. The arrival of ISIS in Somalia in the past year has received little attention, yet as they are steadily defeated in Iraq and Syria, it could be argued that Somalia offers fertile new territory. This comes as the AU announces a new schedule for its mission in Somalia, stating the beginning of withdrawal of troops will take place during If ISIS were to relocate operations to the Horn of Africa, Kenya would be on the front line of this global battle. Kenya has remained relatively calm during the past year. However, al-shabaab still remains active within Somalia and in border areas. Warnings remain in place against travelling within 60km of the border with Somalia and within the Eastleigh suburb in Nairobi. 27 LAND INVASIONS IN LAIKIPIA Since November 2016 there have been persistent and increasingly violent invasions of private ranches and conservation areas in Laikipia by pastoralists from Samburu and Pokot regions. Some reports claim that up to 10,000 people with around 135,000 head of cattle have entered the region since it began. With no real resistance, the attackers have grown in numbers and confidence. Recent attacks have included large groups of armed men invading and, in some cases, burning, homes and farms, destroying wildlife, stealing cattle and even killing people. The dynamics of this ongoing situation are complex and varied. THE SEARCH FOR WATER AND GRASS Initially their arrival was explained by the drought (declared as a national emergency) in the region and the desperate search for water and grass. Traditionally ranchers allow pastoralists onto their land in times of drought. However, this has been disputed as the level of violence has increased and more cattle arrive. THE POLITICS While ultimatums and deadlines have been issued by the government, little has been done to quell the violence. This has led many to accuse politicians themselves of being behind the invasion. It is no secret that cattle are notoriously difficult for the Kenya Revenue Authority to assess and are thus a common investment for corrupt money. Known as cattle barons, these businessmen/politicians are extremely powerful and with the upcoming election looming, there appears to be little appetite at the top to take them on. Some media have even implied racial overtones, pointing out that an estimated 1 million acres in Laikipia are owned by white Kenyans. The government s most basic duty is the protection of its people and to enforce the laws that it has imposed, this therefore represents a critical failure of the state. THE COST These ranches and conservancies employ thousands of people, support and run countless schools and health clinics and act as the backbone to communities. Their destruction will have a huge impact on the local economy. Furthermore, Laikipia is, after the Maasai Mara, Kenya s top tourist destination. Security is already a concern for the sector and this will only set its recovery back. The episode is even more damaging to the Kenyan Government whose seeming inability, or worse, unwillingness to enforce the most basic of laws and rights does not instil confidence. Private property and land is being invaded and destroyed, residents beaten and killed, police and politicians attacked and ignored and all met with no response. The government s most basic duty is the protection of its people and to enforce the laws that it has imposed, this therefore represents a critical failure of the state. 12

11 1.2 DEMOGRAPHICS Kenya s demographic story is a powerful one. A growing, young and well educated population offers both a flourishing consumer market as well as a productive workforce. As is common across the region, Kenya s human development indicators have improved dramatically over the past 15 years. Despite rapid population growth, the nation s economic prosperity has allowed for a steady rise in living standards for most. While urban areas are growing at a rate of 4.3%, Kenya remains a predominantly agricultural society, with 75% of people still living in rural areas. 28 The ability of the Kenyan government to harness population growth as a positive force will be key to the success of the nation between now and Despite rapid population growth, the nation s economic prosperity has allowed for a steady rise in living standards for most. Total population 45.5m AGE GROUP Population 2015 Urban Rural POPULATION (millions) KENYA 25% 31% 75% 69% REGIONAL AVERAGE Tribes Tribalism remains a deep-rooted and volatile issue in Kenya, as the 2007 post-election violence demonstrated. The presidency has rotated between the Kikuyu and Kalenjin in some kind of de facto agreement. Political appointments are significantly influenced by tribe, particularly with regard to the most important postings, such as security and finance. In the recent era of coalitions, tribal affiliations have become an ever more valuable and delicate political tool. Kikuyu and Kalenjin political dominance also extends to the commercial environment. However, Kenyans prioritise commercial success over ethnic favouritism, particularly in Nairobi, which is a cosmopolitan capital city. As an investor, it is recommended to operate with an understanding of these local dynamics. The 2016 ethnic audit by the National Cohesion and Integration Commission (NCIC) found that of Kenya s 47 counties only 15 (31%) met the constitutional requirement of ensuring that at least 30% of public positions were allocated to individuals outside of the dominant local tribe. 29 The Maasai are a small but prominent tribe within Kenya. Their unique clothing and culture continue to distinguish them from their fellow Kenyans. Originating from north of Lake Turkana, they have migrated south throughout the Rift Valley. While come continue to live in their traditional way, many Maasai have become wealthy landowners, politicians and business people Asian-Kenyans Asian-Kenyans, or Wahindis as they are known in Swahili, are influential in almost all areas of business, from car trading to land ownership. Predominantly Indian, they also comprise Ismaili, Pakistani and Persian, amongst other Asian nationalities. Historically, there have been incidences of persecution, as demonstrated by the purge in Uganda in the 1970s. This has led to the cultivation of a close-knit and cooperative Wahindi culture. Despite only numbering 100,000 in a population of over 40 million, they have amassed impressive wealth and status within Kenya. In 2013, Kenya saw the election of two MPs of Asian descent, Abdul Rahim Dawood and Sonia Kaur Birdi. Rural/urban divide LUHYA Accounting for 14% of the population but with few political affiliations, they are often viewed as swing voters. Currently they largely support Odinga, however, this is far from concrete. The JP will campaign hard in their region. The Luhya s vote, in a close fought election could be critical. KENYA UGANDA Median Age (years) Literacy (%) Mortality rate, under 5 years (per 1,000 live births) Fertility rate (births per woman) Life expectancy at birth (years) KIKUYU As largest tribe in Kenya they led the country to independence and have largely controlled government and business since. Alone they cannot command the votes necessary to guarantee the presidency and thus must make alliances. KALENJIN The dominant force in the most populous region of Kenya, the Kalenjin have held key positions in government, including the Presidency, since Independence. Their close alliance with the Kikuyu has kept their influence strong at the top of politics. ZAMBIA Nairobi KAMBA Originating from Mount Kenya, they are closely linked to the Kikuyu. Their political affiliations are not entrenched. It is said that most would support Kalonzo Musyoka if he became the Presidential candidate for NASA, otherwise support will go to Kenyatta. LUO MOZAMBIQUE Traditionally close partners of the Kikuyu and pivotal in the success of independence and forming the first government. However, relations have soured and today Odinga, the current leader of the opposition is their natural political leader. Demographic Snapshot Traditional tribal areas 14 15

12 1.3 INVESTOR AWARENESS Doing Business Kenya led Sub-Saharan reformers in the World Bank s Doing Business 2017 report. Four landmark laws have streamlined Kenya s business climate; the Special Economic Zones (SEZ) Act, the Companies Act 2015; the Insolvency Act 2015; and the Business Registration Act The cumulative effect of these Acts is the simplification and standardisation of Kenya s outdated business procedures. Despite these advances, Sunbird advises that investors must remain mindful of the intricacies which beset the Kenyan landscape. It is highly likely business procedures will take longer than the time estimated by the World Bank. The private sector is still hampered by bureaucracy, infrastructural inefficiencies and corruption. Businesses can temper the effects of these by operating with the following measures at the forefront of their approach: Undertake substantial due diligence measures Understand the political context, local dynamics and commercial landscape Engage a reputable local partner Develop a transparent relationship with government officials Implement corporate social responsibility Foreign Exchange Regulations Following the repeal of the Exchange Control Act in 1995, Kenya has become an attractive destination for investment. There are no exchange controls for anyone transacting business within the country and no restrictions on non-cash transactions, which is a significant advantage for foreign investors in comparison to other more restricted environments such as Mozambique. 1st 10th 87th 116th 142th 145th 151st 167th Denmark United Kingdom Zambia Tanzania Mozambique Kenya Uganda Somalia Transparency International s Corruption Perceptions Index Ranking 2017 Number of days Judiciary Accusations of judicial corruption came to the fore in 2016 with the IEBC scandal causing outrage [see 1.1 Political Overview]. The 2010 constitution required all judges and magistrates to undergo individual vetting. 31 A Judges and Magistrates Vetting Board was convened in 2012 to screen, identify, and remove unsuitable judges and magistrates from the judiciary. Its final report was released in 2016, which set out recommendations for the future appointment, training and mentoring of judicial officials. 32 Regardless of the progress made, Sunbird emphasises the continuing political influence and interference upon the Kenyan judiciary. Appointments are not transparent, often politically motivated and can be made in line with tribal affiliations. Courts are understaffed and inadequately financed, which means the solicitation or bribing of court officials is common. Costs of claim (% of claim) Quality of judicial processes (0-18**) KENYA No. of admin procedures UGANDA ZAMBIA KENYA UGANDA ZAMBIA MOZAMBIQUE SUB- SAHARAN AFRICA OECD COUNTRIES* MOZAMBIQUE No. of days * OECD - Organisation for Economic Cooperation and Development SUB-SAHARAN AFRICA OECD* COUNTRIES * OECD - Organisation for Economic Cooperation and Development. **Quality of judicial processes 0=low, 18=high. Registering a Business - Doing Business Report 2017, World Bank Enforcing a Commercial Contract - Doing Business Report 2017, World Bank 16 17

13 The past ten years has seen a rapid growth in the number of approved development projects across the country, especially in Nairobi Tax Capital Gains Tax (County GovernmentsT) remains at 5% on any property transfer. Property is defined as being either land, buildings or securities. A transfer is defined as anything from a sale, exchange or conveyance to disposal or loss. Deductibles include incidental costs such as stamp duty, legal fees or advertising, and capital losses. 33 Non-resident corporate (%) KENYA UGANDA ZAMBIA MOZAMBIQUE Standard Corporate Income Capital Gains 5 Incorporated in Corporate Income. Incorporated in Corporate Income 5 (called PTT)* 32 VAT Stamp Duty Up to N/A 2-10 (called SISA) Resident corporate (%) KENYA UGANDA ZAMBIA MOZAMBIQUE Standard Corporate Income Capital Gains 5 Incorporated in Corporate Income. Incorporated in Corporate Income 5 (called PTT)* Incorporated in Corporate Income WHT Dividends VAT Stamp Duty Up to N/A 2-10 (called SISA) The table offers a snapshot of the some of the main areas of taxation in the respective countries but is not comprehensive. The rates provided are intended as headline rates only and do not take into account various factors that could impact the tax rate, such as double tax treaties and other local tax reliefs. *Property Transfer Tax (PTT) is charged on the disposal of land, property and shares (in Zambia). Tax Snapshot Comparison 18

14 WE NAVIGATE 2. KENYA S ECONOMY THE LANDSCAPE 10% Central Interest Rate World Bank Forecast 6.1% 2018 Growth 5.9% GDP Annual Growth (2016/17) $69.1bn GDP 6.5% Inflation 2.1 MACRO-ECONOMIC OVERVIEW GDP $bn 60 Kenya remains the largest economy in East Africa and has experienced robust growth over the past five years. GDP is expected to have grown by an improved 5.9% in 2016, compared to 5.6% in The Kenya National Bureau of Statistics (KNBS) reported growth in all sectors with agriculture, forestry, transportation, real estate and retail leading the way KENYA UGANDA ZAMBIA 2016 MOZAMBIQUE The forthcoming year will prove to be difficult as the election inevitably interferes with the economy. 35 Although the World Bank estimates 6% growth in 2017, Sunbird advises that it could easily remain below this figure, depending on how the campaigns and election unfold. 36/37 Beyond 2017, the Kenyan economy is expected to maintain strong growth as productivity and regional trade should begin to reap the benefits of key infrastructural investments. Whilst there is a growing concern over debt levels, it should be noted that the majority of this debt has been accumulated through large investments in infrastructure, which the economy should benefit from in the longterm. The rapid growth of Sunbird economies KENYA $1.4bn UGANDA $1bn $1.9bn ZAMBIA $1.6bn MOZAMBIQUE $3.7bn Foreign Direct Investment (2015) - World Bank 21

15 2.1.1 Monetary Policy Debt INTEREST RATES The high cost of credit in Kenya, averaging 18% APR, has long been seen as a key hurdle to achieving greater growth. In 2016, Kenya passed controversial legislation capping commercial bank lending rates to four percentage points above the base rate. 38 While the central bank and the financial sector criticised the move, Kenyatta claimed it was the only way to ensure rates came down after previous, softer approaches had failed [see 2.8 Financial Services]. The Bank of Kenya has eased monetary policy, cutting the base rate to 10% in September 2016, its lowest level since June The Central Bank s Monetary Policy Committee stated this was necessary in order to boost sluggish growth in the private sector. 40 country s export value as a percentage of GDP is restricted. While Kenya has enjoyed healthy sectoral growth across the board in recent years, exports have, up to 2016, performed poorly, falling from 21.6% in 2011 to 15.7% in East Asian countries which experienced rapid growth in their manufacturing sectors did so, in part, by starting with a weak currency. Sceptics argue that the strength of the Shilling is damaging the export market especially the manufacturing sector. 50.9% Debt to GDP ratio 9.3% Fiscal deficit $35.2bn Total public debt $7bn International reserves B+ Standard & Poor s credit rating (2016) from 38% to 50.9% between 2010 and This is above the Debt Sustainable Framework threshold of 50% set out by the African Development Bank and IMF. Reuters estimated that the cost of servicing this debt would amount to 14% of total revenue or 40% of tax revenues, in /50 In December 2016 Treasury Secretary, Henry Rotich, reported that nearly $6bn dollars of debt repayments would need to be achieved in Given reports that Kenya plans to increase its external stock by funding $4.6 billion of its financing requirements in from external sources, these concerns are unlikely to dissipate. 51 Public debt is forecast to stabilise at around 54-55% of GDP in the medium-term and gradually decline thereafter. 52 This is subject to Kenyan authorities implementing their mid-term fiscal consolidation plans. Inflation fell from a high of 8% in December 2015 to stabilise at around 6.5% at the end of INFLATION Inflation fell from a high of 8% in December 2015 to stabilise at around 6.5% at the end of 2016, remaining within the government s target range of 2.5% -7.5%. SHILLING The Kenyan shilling has been stable in 2016, gaining 1% against the dollar, compared to depreciating 11.3% in The government has negotiated a support loan from the IMF to guard against shocks and foreign reserves are healthy at $7 billion has seen a resurgence of Kenya s exports, specifically agricultural produce. However sceptics argue that the strength of the Shilling is damaging the export market, especially the growth of the manufacturing sector. 42 A strong or overvalued currency effectively means the country s exports are expensive relative to the region and, as such, the TRADE Patrick Njoroge, Governor of the Central Bank of Kenya, said the current account deficit is expected to have eased to 5.5% of GDP in 2016, down from 6.8% in Agricultural produce has traditionally been a major strength of Kenya s export economy and the introduction of new logistics technology has led to a surge. The introduction of controlled climate containers has increased the distance perishable goods can travel. This innovation is accredited with the 34% increase in avocado exports in In addition to this, tea earnings jumped 29% between 2015 and 2016 and are expected to increase even further over the next 12 months. Flowers continue to contribute to Kenya s earnings and horticultural companies are pushing for more direct flights to Latin America to broaden the market. 45 The growth in exports has been accompanied by a slow-down in imports. As with other regional countries Kenya has benefited from lower oil bills in The National Treasury reports a drop-in consumer imports and importation of machinery and transport equipment. 47 Debt Snapshot The IMF argues Kenya s risk of external debt distress remains low and the overall public sector debt remains sustainable. 48 However, concern is growing across the region as East African debt levels continue to rise. In Kenya, the debt to GDP ratio slipped Debt as % of GDP IMF forecast: Debt to GDP ratio 2006 IMF debt sustainability threshold Public debt is forecast to stabilise at around 54-55% of GDP in the medium-term and gradually decline thereafter IMF Forecast

16 A key concern across Africa is the changing dynamic of state owned debt. In the past, most of its debt originated from multilateral and bilateral concessional loans, whereas today an increasing amount is held privately. Typically, private loans cover a shorter tenure and offer higher yields, making it a more difficult environment for indebted countries. It is also important to recognise that the cost of these bonds and loans are determined by factors beyond the control of the debtor country. These can include commodity prices, global capital markets and the monetary policies of creditor countries. These factors leave Kenya vulnerable to external shocks. On the other hand, Kenya s recently agreed $1.5 billion Standby Credit Facility, with the IMF, and their strong foreign reserves, $7 billion (five months of import cover), should help mitigate such issues. 53/54 KENYA S LOANS FROM CHINA (ONLY THOSE OVER $50 MILLION SHOWN). Date Loan Source 2010 China Exim Bank Loan value Project $86.5m Geothermal Well Drilling 2010 China $174m Southern Bypass Road 2010 China Exim Bank $95.5m Kenyatta University Hospital 2012 China $61.7m China Youth Service Phase II 2012 China Exim Bank $59.7m Fibre Optic Backbone Infrastructure 2012 China $82.9m Garissa-Wajir Transmission Lines Henry Rotich, has forecast that the budget deficit for the 2016/2017 will widen to $6.9 billion, equivalent to 9.3% of GDP. 55 He stated that the goal is to gradually reduce this to 4% of GDP, although it is difficult to visualise how this will be achieved without a radical improvement in tax collection. Kenya s bullish bet on infrastructure being the key to building its future economy is a long-term play and will require significant further investment. Indeed, there are already numerous loans set up KENYA S DEBT COMPOSITION TOTAL DEBT = $35.2bn (50.9% of GDP) % of GDP Type Description for 2017, including whispers of another Eurobond. 56 The World Bank warns that Kenya must do more to ensure that infrastructure projects will provide the returns needed to service debt. 57 The SGR project alone is expected to cost $8.8 billion but could rise to $10 billion if current over spending margins persist, equal to 30% of total debt today. With this level of future borrowing it is difficult to see how either the budget deficit or debt to GDP ratio, will achieve their targets. The World Bank has warned that fiscal policy space could quickly erode. 58 Interest rates (%) Maturity rates (years) Creditor Breakdown (%) % of total debt The SGR project alone is expected to cost $8.8 billion but could rise to $10 billion if current over spending margins persist China Exim Bank 2013 China Development Bank 2015 China Exim Bank $138 million $3.8bn $1.5bn Nairobi City Centre Voltage Upgrade SGR Mombasa-Nairobi SGR Nairobi-Naivasha Domestic (KES) 26.5 Treasury Bills Treasury Bonds Issued by central banks in local currency. Short maturity. Issued by central banks in local currency. Long maturity Commercial banks, investment houses, funds and individuals. 75 Other Misc ($18.3bn) USD BILLIONS GDP DEBT GDP DEBT 2016 China $600m Help Budget Deficit GDP DEBT GDP DEBT DEBT GDP External (held in US dollars) 24.4 Concessional Loans Market Loans Eurobonds Loans granted on favourable terms, most commonly very low interest rates and long maturity. Loans offered at market rates with limited maturity. Issue of sovereign guaranteed bonds by governments. High rates and short maturity Multilateral (World Bank, EU, USAID, DFID etc.) Bilateral (Paris Club Members) China Private entities (funds and investment houses) Commercial banks, investment house, funds etc. Unknown Unknown Unknown Unknown 16.6% ($2.8bn) 48 ($16.9bn) 0 KENYA UGANDA Publicly guaranteed debt against national GDP (2016) ZAMBIA MOZAMBIQUE Information presented in our debt table is based on data provided by the Kenya National Treasury, World Bank, IMF and Central Bank of Kenya statements which have not been verified. It should be noted that these debt levels are estimates only and may be subject to change owing to market volatility and other external factors which have not been accounted for. The objective of the table is to highlight current trends in borrowing levels from third party sources only and should not be used as the basis for any investment decision

17 Nairobi continues to grow and Kenya continues to flourish. Co-founder Insight Manufacturing GDP BREAKDOWN BY SECTOR Although we can already feel the expected cooling down period in the lead up to the election it would be impossible for a city like Nairobi to stand still. The real estate sector continues to thrive as a result of new roads, developments being announced daily, and each project subtly raising the bar in terms of quality and design. Household names and corporate multinationals are steadily filtering into the country. Carrefour now have a firm foothold, Volkswagen has announced plans for an assembly plant and Wrigley s are on their way. This shows the level of confidence in the country and its future. On the other hand, it is important to emphasise that entering and establishing operations still presents a broad range of unique challenges, especially to companies from developed markets and countries. As a result, there has been a slow shift in strategy by some major arrivals. Having arrived with aggressive growth plans, the realities of operating on the ground have given reason for pause. The prevailing global headwinds have only encouraged this more cautious approach. The government continues to push its ambitious infrastructure agenda. It is a significant gamble given the cost, but the benefits, especially in Nairobi, are already being experienced. I believe that a key objective must be to fully incorporate the public-private investment framework into their development agenda as this will ensure a far greater degree of efficiency and sustainability in the future. I hope the elections pass without incident and we can all get back to the task at hand, building Africa s newest powerhouse. Will Sykes Kenya Tourism Industry UGANDA GDP $25.6bn % KENYA The largest economy in East Africa GDP $69.1bn GDP $46.6bn ZAMBIA GDP $20.5bn Agriculture Services MOZAMBIQUE GDP $12bn 27

18 2.2 AGRICULTURE 2.3 TOURISM Agriculture is a hugely important sector in Kenya accounting for over 29% of GDP. 66 Favourable weather has supported growth in this sector, rising to 5.5% in 2016, up from 4% in The government committed 6% ($500 million) of national expenditure to agricultural investment in the 2016 budget. As a signatory to the 2014 Malabo declaration, an African Union initiative to boost agricultural productivity, Kenya remains committed to raising this to 10% by At least $200 million of the budget will be allocated to nationwide irrigation projects including the Galana-Kulalu and Mwea irrigation schemes. A further $100 million loan from Israel for the Galana- Kulalu project has been secured and an initial 10,000 acre trial farm has produced its first maize crop. 68 As we reported in 2016, the Galana project aims to cultivate up to a million acres. Bush clearing is currently up for tender to further expand the project Progress in the Turkana region following the discovery of vast aquifers, which we reported in 2016, has been slow. Initial tests have indicated that the water is too salty to drink and unsuitable for irrigation. Further studies are ongoing, including the feasibility of desalination facilities and the results expected within two to three years. 70 As the graph shows, Kenya has seen considerable improvements and modernisation over the past 15 years. The average usage of fertilizer per hectare has increased by 25.23kg since However, if agriculture is to fulfil its heralded potential, the government must maintain its budgetary commitment. Kenya s tourism sector has shown significant signs of recovery during Reports suggest visitor numbers were up by as much as 18% over the first three quarters of 2016, compared to the same period in the previous year. 72 Visitor numbers peaked at 1.75 million in 2011 but have steadily fallen since as a result of security concerns and misperceptions regarding the Ebola outbreak (see map). 73 The government countered this in 2016 by investing $160 million to market the sector internationally. 74 The tourism sector, which contributes roughly 10% KEY Ebola outbreak Conflict zone/attack Munich of GDP, remains one of the most successful and diversified in Sub-Saharan Africa. 75 Tourist numbers are forecast to return to 2011 levels by the end of Unfortunately, recent land invasions by pastoralists in Laikipia (see section 1.1.2) have thrown a spotlight on the vulnerability of the sector. It will be important that the elections pass peacefully and that the security situation improves, however, investor optimism for the Kenyan tourist industry is evident by the building of 16 new hotels over the next five years, adding 2,900 rooms to the market Ayia Napa tourist hotspot Aleppo - conflict zone 315km distance Sierra Leone 4,976km to Munich Guinea The Ebola outbreak occurred closer to Munich than Nairobi. Ayia Napa is closer to Aleppo than Garissa is to Diani. KG per hectare of arable land The epicentre of the Ebola outbreak 5,657km to Nairobi Liberia Nairobi Garissa - site of terrorist attack 400km distance Diani - tourist hotspot KENYA UGANDA ZAMBIA MOZAMBIQUE Kenya s increasing use of fertilisers Tourists' misperception of danger in Kenya 28 29

19 2.4 MANUFACTURING 2.5 CONSTRUCTION 2.6 BUSINESS SERVICES Latest figures show manufacturing accounts for 11.36% of Kenya s GDP. 78 The sector has seen strong growth for the past five years. However, in 2016 this slowed to 3.2%. 79 Formal employment within the sector stood at 295,400 in As we noted in our 2016 report, the government has enacted the Special Economic Zones Act 2015, which aims to attract foreign investment and increase Kenya s manufactured exports. The first three zones will be set up in Kisumu, Mombasa and Lamu. Land has been identified at each of the three flagship locations and planning, designing and contract drafting is complete. 80 Further SEZs are being considered at Naivasha and within Jomo Kenyatta International Airport. 81 The government has enacted the Special Economic Zones Act 2015, which aims to attract foreign investment and increase Kenya s manufactured exports. Incentives for licensed operatives within SEZs include: 82 Exemption from all existing taxes and duties payable under the Customs and Excise Act, Income Tax Act, East African Community Customs Management Act and Value Added Tax Act on all special economic zone transactions Value added tax (VAT) exemption on all supplies of goods and services to enterprises, reduction in corporate tax to 10% from 30% for a period of 10 years of operation and 15% for the next 10 years Entitlements to work permits for up to 20% of their full-time employees (additional work permits may be obtained for specialised sectors). High energy costs Inefficient tax system High cost of capital Cheap imports The construction sector in Kenya is undergoing a huge boom as the government invests heavily in upgrading the country s infrastructure. The industry registered growth of 13.6% in 2015 and a 50% increase in total government expenditure in Coupled with massive FDI inflows, this trend should continue through 2017 and beyond. 83 Over the next 10 years, FDI is forecast to become the main driver of growth in the sector as government spending becomes increasingly difficult to sustain. 84 The government is updating building regulations to reduce housing construction costs as it attempts to plug a chronic shortage. The British Standards and Codes of Practice, which has been implemented since the 1960s, will be replaced by the European Construction Guidelines by It is hoped this will lower costs by allowing the use of local materials and easing structural regulations, without compromising safety. 85 Cost of acquiring a construction permit (% of warehouse value) Kenya leads the way in the region for the provision and use of business services. While still a young industry, with many of the key players operating for less than 10 years, it is developing quickly. Enabled by the progressive technology sector, the uptake of cutting-edge technologies and software has been a key component of this development. The focus is still on core competencies rather than offering vocational training or capabilities but this is an area which offers substantial potential. The two areas experiencing the highest levels of use are the outsourcing of back office functions and human resources, with 61% and 46% of CEOs outsourcing these capabilities. The construction industry registered growth of 13.6% in 2015 and a 50% increase in total government expenditure in Number of procedures to obtain permit Number of days Key challenges to manufacturing KENYA UGANDA ZAMBIA MOZAMBIQUE SUB-SAHARAN AFRICA TFA is Sunbird s construction company with headquarters in Kenya. Dealing with construction permits - Doing Business Report 2017, World Bank 31

20 2.7 FINANCIAL SERVICES 2.8 TELECOMS TELECOMS SNAPSHOT Access to credit is a major hindrance to commercial enterprise in Kenya. On 24th August 2016 President Uhuru Kenyatta moved to resolve this issue. He signed into law an interest rate cap for commercial loans saying, banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers. 86 Kenyatta reasoned that despite the Kenyan banking sector having one of the highest equity returns of investment on the continent, Kenyan commercial loans remained expensive at between 14%-22%. Mortgages are slightly cheaper at rates between 10%-18%. The new rate cap limits loans to within 4% of the Central Bank base rate, currently at 10%. The Kenyan mobile telecommunications market has a strong subscriber base of almost 40 million people and a reported 88% mobile penetration rate. 92 Competition in the sector has been fierce, forcing companies to lower tariffs, which has resulted in casualties. Essar Telecom exited the market in 2015 with Safaricom and Airtel taking over its subscribers and infrastructure. Additionally, Orange Group is reported to be preparing to exit the market in 2016/ In the opposite direction Equitel has entered the market, using Airtel infrastructure, offering mobile money and communications and has established a 3% market share m Zambia 694m Uganda 1.1bn Kenya 1.3bn Tanzania 2.3m (est.) Mozambique Mobile money Total number of transactions 2015 Transactions as % of GDP % 44% 53% This move has been opposed on several levels. The Governor of the Central Bank of Kenya, Patrick Njoroge, publicly disputed the bill, arguing it would discourage the banks from lending. 87 In the first full month the cap was in place it was reported that banks cut credit by 5.8% suggesting these fears could be realised. 88 The IMF echoed Njoroge s claims and added that the move could inhibit the government s ability to manage monetary policy and make it difficult to control inflation. 89 The World Bank has also alleged that interest rate caps can reduce the price transparency of loans, although, the Bank of Kenya has moved to warn commercial banks against raising hidden costs. 90/91 It is difficult to judge the impact this legislation will have. If the economy can avoid any major shocks, allowing monetary policy to remain constant, it is possible the numerous potential risks and costs listed by critics could be avoided. However, given Kenya s current debt levels and plans to borrow on the international markets it is likely the cap will create difficulties. As creditors expect more favourable rates given the prevailing concerns it will impose further costs on government borrowing. More broadly, the risk would be apparent when the Central Bank moves to tighten its monetary policy and the tools are either unavailable or limited in their impact. Safaricom has experienced a 77% increase in mobile data usage per customer, with overall smartphone ownership more than doubling. Safaricom continue to dominate the market and has officially launched 4G data services with plans to set up five hundred 4G base stations before the end of the year. 95 The expanded rollout will bring the firm s 3G and 4G footprint to more than 4,600 sites. Safaricom has experienced a 77% increase in mobile data usage per customer, with overall smartphone ownership more than doubling. To drive mobile data uptake, Safaricom has implemented a 36% reduction in data pricing. Kenya s telecoms sector continues to serve as a useful tracker of the sector more broadly on the continent. The increase in the use of data and the growing efforts to expand access to it, means data is quickly becoming the new driving force in the sector. As mobile technologies continue to offer cheap and efficient solutions to age-old problems, Sunbird expects to see consistent and rapid growth in this sector. per 100 people per 100 people Internet users Mobile subscriptions TOTAL VALUE 407% growth KENYA $31bn Total subscriptions m m UGANDA $11.2bn Mobile network coverage 100% of population covered by a network $ 24.6bn 0.2% 9% ZAMBIA MOZAMBIQUE $0.041bn $1.08bn Telecoms operators in Kenya % of subscriptions 66% 3% Airtel Safaricom 19% 12% Orange Equitel Kenya Telecoms Snapshot 32 33

21 2.9 OIL 2.10 MINING 2.11 ECONOMIC OUTLOOK Kenya is estimated to have around 750 million barrels of recoverable oil reserves. In conjunction with its development partners, Tullow Oil, Africa Oil and Maersk Oil, the government plans to initiate an Early Oil Pilot Scheme. This will see an initial 2,000 barrels per day exported by mid The oil will be transported by truck over 1,000km from the Lake Turkana region to Mombasa Port. Whilst not expected to generate any substantial income, if at all, it will offer county and national government a chance to understand the technical and logistical requirements of oil production. 97 The long-term plan is to construct an oil pipeline from Lockichar to the new port of Lamu as part of the LAPSSET project (see 3.6 LAPSSET). A Joint KEY Proposed Kenya pipeline Proposed Uganda pipeline Hoima UGANDA Malaba Lokichogio Lodwar Lokichar Development Agreement has been finalised between the government and its upstream partners for the development of the 891km pipeline. 98 Construction will cost around $2.1 billion and is expected to be completed by The pipeline is anticipated to have a capacity of between 80,000 and 150,000 barrels per day. 99 Uganda has pulled out of a deal to export oil through the pipeline, instead opting to export through Tanzania. This has jeopardised the project as some analysts have warned that Kenya s oil pipeline may not be financially viable unless more oil is discovered. 100 Eldoret KENYA Marsabit Isiolo Moyale Major road Wajir SOMALIA Mining is a nascent industry in Kenya. The Mining Ministry, only created in 2013, has a plan to grow the sector from its current level of just $16.5 million per year to 10% of GDP ($7 billion) by In addition to mining gold, copper, rare minerals and coal, the Finance Minister, Dan Kazungu, believes Kenya can become a regional centre for value addition. 101 The Mining Ministry, only created in 2013, has a plan to grow the sector from its current level of just $16.5 million per year to 10% of GDP ($7 billion) by Today much of the region s mining output is shipped to Asia for processing and refining and it is hoped that a new mining act passed in August 2016 will attract new investment, including the establishment of refineries. Kenya has signed a Memorandum of Understanding (MoU) with Sudan to deepen collaboration within the mining industry. The MoU aims to strengthen cooperation in mineral research and exploration. 102 The Kenyan economy is one of the most diversified on the continent and has achieved consistent and balanced growth over recent years. The new discoveries of oil have added to its positive outlook. 103 It is hoped the heavy investment in infrastructure will pay off and allow the country to benefit from reduced operational costs and ever greater integration into the East African Community. The private sector is vibrant, well developed and the government recognises the important role that business should play to help drive growth. 104 The government s immediate challenge is to reduce its budget deficit and ensure its national debt remains sustainable. Sunbird expects Kenya to remain resilient in the face of global headwinds and continue to offer highly attractive investment opportunities. Sunbird expects Kenya to remain resilient in the face of global headwinds and continue to offer highly attractive investment opportunities. Lake Victoria Kisumu Nakuru Nanyuki Garissa GDP increase ( ) Nairobi Lamu Voi Mombasa INDIAN OCEAN $12.7bn $69.1bn $111.7bn Tanga Kenya s oil infrastructure World Bank IMF Frederick S. Pardee Centre for International Futures 34 35

22 TOP 10 PRODUCTS Tea 22% Flowers 8.7% Vegetables 2.6% Metallic products 2.1% Cigarettes 1.9% Cement 1.9% Processed Iron 1.6% Unclassified transactions 5.6% Coffee 3.4% Gold 1.6% Fertilizer 1.4% Polyethylene 1.4% TV & radio transmitters 1.2% Iron coils 2.2% Wheat 1.6% Crude petroleum 2.9% Medicaments 2.3% Cars 3% Unclassified transactions 22% Palm oil 3.2% TOP 10 PRODUCTS EXPORTS Top 10 products make up 54% ($2.9bn) of total exports $5.54bn Total Export Value $16.4bn Total Import Value Top 10 products make up 41% ($6.2bn) of total imports IMPORTS TOP 10 PARTNERS USA 6.2% UGANDA USA SOUTH AFRICA 11% EGYPT UAE 4% 4.5% 3.5% DEMOCRATIC REPUBLIC OF CONGO 3.6% NETHERLANDS 6.8% UK 7.8% 7.4% 4.1% AFGHANISTAN 3.3% PAKISTAN 5.1% GERMANY 2.6% UK 3.3% INDONESIA 3.2% CHINA 12% INDIA 7.6% JAPAN UAE 5.9% 5.9% TOP 10 PARTNERS * OTHER AREAS 4.5% (Unspecified therefore not included in top 10) * OTHER AREAS 21% (Unspecified therefore not included in top 10) SAUDI ARABIA 2.2%

23 3. INFRASTRUCTURE 3.1 OVERVIEW Kenya has the most advanced infrastructure network in East Africa. Jomo Kenyatta International Airport is a major gateway into Africa and Kenyan Airways is one of the continent s largest carriers. 105 Mombasa is the region s busiest port handling over 13 million tonnes of cargo per annum. Yet, compared to economies such as Egypt and Nigeria, Kenya s networks are still inadequate. 106 President Kenyatta has placed enormous emphasis on infrastructure to provide a platform for growth. In 2016/2017 Kenya will allocate $3.5 billion to infrastructure, 15% of the total budget. 107 Road and power generation projects are underway and Phase 1 of the flagship Standard Gauge Rail (SGR) is almost complete. Kenya looks set to improve its position as the region s dominant logistics hub. KEY Juba / Major road/planned / SGR/Planned Primary city Secondary city / International airport/planned Domestic airport Border point Lokichogio Bridge ETHIOPIA Dam Narrow gauge rail / Port/Planned Proposed pipeline Lodwar Moyale UGANDA Lokichar KENYA Marsabit Wajir SOMALIA OPTIMISING Lake Victoria Malaba Eldoret Nakuru Kisumu Naivasha Nanyuki Isiolo Garissa Nairobi THE BUILT Voi Lamu INDIAN OCEAN LANDSCAPE Kenya s national infrastructure network Mombasa 39

24 3.2 ROADS 3.3 RAIL The Kenyan government continues to place great emphasis on developing its road infrastructure. The 2016/2017 budget allocated $1.74 billion to road transport which included a 123% increase in spending on the construction of roads and bridges. 108 The road network currently consists of roughly 178,000 km of road, of which only 9,273km is paved. 109 The government has pioneered a new financial model to accelerate road construction. The annuity financing framework allows contractors to borrow money from commercial banks with the Kenyan KEY Existing road Planned road Border point UGANDA Lake Victoria Lokichogio Lokichar Lodwar Eldoret Malaba Kisumu Nakuru ETHIOPIA KENYA Nanyuki Nairobi National Treasury acting as guarantor. Contractors must then design, construct, finance and maintain the road for 10 years before handing it over to the government. 110 The 2016/2017 budget included a 123% increase in spending on the construction of roads and bridges. Marsabit Isiolo Primary city Moyale Wajir Garissa Lamu Secondary city SOMALIA Kenya s existing network of narrow gauge rail was built at the turn of the 20th century by the British. Stretching from Mombasa through Nairobi and on to Kasese in western Uganda, it was named the Lunatic Express as few understood its purpose. Today the importance of rail in the region is disputed by few and it continues to dominate infrastructure investment. Indeed, 2017 will see the muchanticipated completion of Phase 1 of the Standard Gauge Rail (SGR) Project. RIFT VALLEY RAIL UPDATE Since 2010 Rift Valley Railways (RVR) have overseen the management and operation of the old narrow gauge line running from Mombasa through to Kampala. After initial success following investment and upgrades, the company and the network have fallen on difficult times. Due to a lack of adequate maintenance the track has once again fallen into disrepair and is unable to operate at designed capacity or offer the savings usually ascribed to rail transport. In its current state, it accounts for only 5% of total traffic to Mombasa, although it is claimed that it could carry up to 15%. Furthermore, it only offers a 5% saving compared to road haulage. The global average saving on rail freight is in the region of 30%. Today the importance of rail in the region is disputed by few and it continues to dominate infrastructure investment. The World Bank is examining irregularities regarding the deal that saw RVR purchase second-hand standard gauge locomotives which were then modified to use on metre gauge railway. It is rumoured the cost of converting to narrow gauge was more than the purchase price. The World Bank will inspect discrepancies over prices paid for the locomotives and the modifications made thereafter. 111 RVR are in an ongoing tax dispute in Uganda. The Uganda Revenue Authority (URA) claims RVR have $2.7 million of outstanding VAT receipts to pay. Rail accounts for only 5% of total traffic to Mombasa, although it is claimed that it could carry up to 15%. The decision by Tullow and the Ministry of Energy to truck Kenya's first oil to Mombasa rather than use rail is yet another blow. RVR had worked to gain a lucrative contract to move the oil but the deal broke down over the construction of loading facilities. Although RVR has been dropped from initially transporting the oil it is probable they will be reconsidered as oil production increases. 113 Moshi Voi Mombasa INDIAN OCEAN In September 2016, it was announced that Qalaa Holdings, the majority shareholder of RVR, was looking for buyers. This is the latest in a raft of changes in ownership over the past six to seven years and a further indicator of the lack of continuity and stability in management. RVR is also involved in numerous legal battles and is currently under investigation. 40 Kenya s major road network Nairobi will have a population of approximately 6.1m by 2030.

25 STANDARD GAUGE RAIL UPDATE The SGR project is the largest infrastructure project in the region and once complete will transform the region s transport, freight and logistics network. The project in its entirety will see standard gauge track laid from Mombasa on the Indian Ocean, across Kenya and Uganda, to Kisangani in the DRC and Kigali in Rwanda. The new railway has the potential to carry the equivalent cargo of 4,700 trucks per day. KEY / Border point SGR/Planned Port PHASE 1 As we predicted in 2016, Phase 1, stretching from Mombasa to Nairobi, has fallen behind schedule and is now expected to be finished in Q It is claimed the new railway will cut the current 12-hour journey time by up to eight hours. 114 Moreover, at full capacity, the new railway has the potential to carry the equivalent cargo of 4,700 trucks per day. 115 The Kenyan government has signed a five-year contract with China Communications Construction Company to operate the line once complete, a further setback for RVR. 116 Narrow gauge rail Planned port Primary city Secondary city PHASE 2 Phase 2 has been reconfigured since our last report (see map). It now comprises of three sections: 2A (120KM) NAIROBI NAIVASHA Finance has been secured from the Government of the People s Republic of China and is expected to cost $1.5 billion. Uhuru Kenyatta officially launched construction in October 2016 with the China Road and Bridge Corporation (CRBC) contracted to undertake the work. Construction is likely to be challenging and expensive as the line traverses the difficult rift valley escarpments. 117 Opposition from local communities will add to these difficulties and Sunbird expects the four-year forecast completion target to slip as the project moves forward Locomotives SGR PHASE 1 472km Line $3.8 billion 1,620 Freight wagons 40 Passenger coaches Lokichogio Lodwar ETHIOPIA Moyale 2B (262KM) NAIVASHA KISUMU Feasibility studies are being undertaken for this section of the route. A new high capacity port at Kisumu is proposed as part of the project. 98 Bridges 8 Underpasses Kenya s Standard Gauge Railway 4,000 Trucks off the road UGANDA Lokichar Marsabit Lake Victoria KENYA Malaba Eldoret Isiolo Nakuru Nanyuki Kisumu Naivasha Wajir Garissa SOMALIA 2C (107KM) KISUMU MALABA This section will link to the proposed Uganda SGR project. Feasibility studies are ongoing alongside consultations between Kenyan and Ugandan officials. ONGOING CHALLENGES It is estimated Phase 1 will eventually cost $4.3 billion, $500 million over the budgeted cost, with significant external financing. Kenya s rail network Nairobi Voi Mombasa Lamu INDIAN OCEAN Issues regarding loan repayments for Phase 1 have been resolved with Kenya s National Treasury guaranteeing two loans totalling $3.6 billion to China s Exim Bank. However, it remains to be seen whether the new line will generate sufficient income to meet the combined cost of operations and loan repayments. 119 Phase 2 has faced growing protests from conservationists and Maasai community members as the planned route runs directly across Nairobi National Park. The CRBC have agreed to put the rail on stilts through the park which has increased the cost of the project further. The Rwandan government has also dealt a significant blow to the Kenyan SGR. Rwanda had signed an agreement in 2013 that its own SGR would run north to Uganda and link into the Uganda-Kenya track. However, the Rwandan government has now opted to prioritise a link through Tanzania to Dar es Salaam Port which it sees as the more financially viable option. 120 This means future freight revenue on the proposed Uganda-Kenya SGR has been revised downwards

26 STANDARD GAUGE VS. NARROW GAUGE Analysis 3.4 AIRPORTS 3.5 PORTS There is little dispute regarding the importance and potential impact of a high quality and well managed rail network. Whether it needs to be a greenfield standard gauge line, when a narrow-gauge track already exists, is disputable. While standard gauge is touted as the premium standard, it is not always necessary. The only real, practical difference between narrow and standard gauge is the speed at which trains can run, and this advantage is limited due to the steep gradient from Mombasa to Nairobi. Arguments surrounding greater capacity are also negligible. As the track gauge does not dictate the carriage size, similar capacities are achievable by putting larger carriages on the narrow gauge. There are also huge logistical benefits of narrow gauge when crossing such uneven terrain as it can turn much tighter corners, a key reason Japan uses narrow gauge. Furthermore, refurbishing the existing track would have offered huge cost savings. One estimate claimed the entire network could be refurbished for $1.2 billion, just over a tenth of the potential SGR total. 121 COST At such a high cost, requiring significant external borrowing, and with a network already on the ground, there are legitimate questions as to the necessity of this huge undertaking. It is estimated Phase 1 will eventually cost $4.3 billion, $500 million over the budgeted cost, with significant external financing. Phase 2 will cost a further $1.5 billion and, if the plans to reach Malaba are realised, the entire project will have cost the Kenyan government $8.8 billion. Assuming the same margin of over-spending, this could rise to $10 billion. If revenues from the new railways are insufficient these loans could potentially become a major burden for the Kenyan government. CORRUPTION Such a huge project is inevitably highly susceptible to corruption and the SGR project has only served to prove the prevalence of such practices in Kenya. The project has, and continues to be, permanently under fire from critics who cite corrupt practices evident in resettlement payments, the tender processes, procurement, due diligence and execution. FINAL ASSESSMENT The SGR project is a highly politicised project that has become a legacy venture for leaders across the region. As such, rational objections have fallen on deaf ears and hype and prestige has taken hold. As debt in Kenya rises, the consequences of shocks and downturns will only grow, putting greater pressure of the economy and the government. Whether the SGR is worth the added risk its cost will bring is a question that can only be answered in the future. Kenya currently has five official international airports; Jomo Kenyatta International Airport (JKIA), Moi Airport (Mombasa), Kisumu, Eldoret and Wajir. Only JKIA and Moi Airport (Mombasa) carry significant international traffic. A sixth international airport is currently under construction in Isiolo as part of the LAPSSET project. 122 JOMO KENYATTA INTERNATIONAL AIRPORT (JKIA), NAIROBI JKIA is the largest international airport in Kenya and has rapidly developed into a regional hub for international airlines flying into East Africa. The Kenyan Airports Authority (KAA) which manages the airport, claims passenger numbers grew by 127% between 2002 and 2011, and growth currently sits at around 12% per annum. Recent upgrades at JKIA have increased passenger capacity from 2.5 million to 7.5 million passengers per year. 123 Ambitious plans for a new $600 million greenfield terminal which would have tripled capacity to 20 million, have been abandoned. The project has been cancelled after a re-assessment of its financial viability established that it did not offer value for money. 124 The KAA insists that further reorganisation and modernisation could raise capacity to 10.5 million. 125 The Ministry of Transport is expected to concentrate on building a second runway at the airport, yet consultations have moved slowly and progress is not expected before KEY International airport Planned international airport 5 International airports Wajir Eldoret Kisumu Lamu Mombasa Mombasa experienced a slight drop in container traffic in the first half of However, total tonnage of cargo increased by 1.4% over the same period in 2015 to 13.4 million tonnes. 127 President Uhuru Kenyatta inaugurated a new container terminal at Mombasa in September The terminal marked the completion of Phase 1 of the port s expansion. The new terminal has a capacity of 550,000 Twenty Foot Equivalent Units (TEUs) per year which increases Mombasa s annual cargo capacity from 1 million TEUs to 1.6 million. Dwell time has decreased by 24 hours and ship turnaround time has dropped from 3.7 days to 3 days. 128 Construction of the first phase was funded by the Japanese International Cooperation Agency (JICA) and cost $296.7 million, which will be paid back over a 40-year period. 129 Additionally, efficiency will be improved by new port access roads, weighbridges and a state-of-the-art SGR station which will have four rail mounted gantry cranes. 130 Financing for Phase 2 of the port s expansion has been agreed with a further $273 million loan from JICA 131. The second phase, which was due to be completed in 2017, will now commence in 2017 and has no current development timescale. Phase 3 will raise the total capacity of the port to 2.5 million TEUs annually. Nairobi Jomo Kenyatta International Airport capacity upgraded 2.5m m 2017 The government continues to back its pledge to infrastructure. Kenya s international airports 45

27 3.6 LAPSSET The Lamu Port Southern Sudan-Ethiopian Transport Corridor (LAPSSET) aims to create a regional trade and tourism hub with its plans to connect the new Kenyan port of Lamu via road, rail and oil pipeline to South Sudan and Ethiopia. At an estimated cost of $29 billion, it is the most ambitious project planned in the region and, as such, continually faces serious funding and feasibility challenges. While often earning considerable coverage in the press, the project is steadily being downsized and has seen limited progress in recent years. KEY Major road Primary city Planned port SOUTH SUDAN Juba Nakodot UGANDA Lake Victoria / Secondary city Border point Lokichogio Lokichar Lodwar ETHIOPIA Nanyuki ROADS UPDATE Detailed engineering stage (Construction to begin mid-2017) Isiolo Nairobi Marsabit Prioritised (Contract awarded China Wu Yi) Work ongoing Work complete SGR/Planned Narrow gauge rail Planned international airport Domestic airport Proposed pipeline Garissa Garsen To Addis Ababa Moyale KENYA Witu Lamu SOMALIA RAIL UPDATE The LAPSSET Corridor Development Authority reported that preliminary designs have been completed for the Kenya-Ethiopian SGR. It claims to have signed a Memorandum of Understanding with Ethiopia to fund the detailed engineering design stage of the project. Despite this progress, Ethiopia has recently finished construction of an electric railway from Addis Ababa to Djibouti s Red Sea Port. 132 In turn, this decreases the impetus for the Ethiopian government to pursue linking up with the LAPSSET project at Moyale to gain access to Lamu Port. 133 Progress on the Isiolo-Nakadok section of the railway has seen even less development and was omitted from the LAPSSET update report released in July OIL PIPELINE UPDATE Kenya s oil pipeline project was dealt a huge blow as Uganda opted to export oil through Tanzania rather than link up to the LAPSSET project at Lockichar. 135 This follows an earlier decision by Ethiopia to sign an agreement with Djibouti to construct a 550km oil pipeline from Djibouti s port access to central Ethiopia 136. Both these decisions have significantly reduced the amount of oil expected to flow through Kenya. Despite these developments, Kenya hopes to begin construction of its own crude oil pipeline from the Lockichar basin to Lamu in LAMU PORT UPDATE Work on the ambitious 32 berth port project has been intermittent as it struggles with financing amid Ethiopia and Uganda s decisions to pursue other port access routes. Yet, after being delayed three times, work on the first three berths has begun. 138 Construction and dredging is being undertaken and the first berth is expected to be commissioned in Support infrastructure at the port is also under construction including a port police station, port headquarters, water reticulation network and connections to the national grid. 140 AIRPORT UPDATE Intermediary airports have been planned at Manda Airport, in Lamu, and Isiolo Airport. Preliminary facilities have been completed at Lamu including a 2.3km runway and terminal building. In Isiolo, a 1km runway has been completed and the Terminal building is 80% complete. 141 LAND ACQUISITION The government has forged ahead with land acquisition for the project. The National Land Commission has issued a notice of the government s intention to purchase over 23,000 acres of land spread over eight counties. The land is earmarked for LAPSSET infrastructure and ancillary facilities including Lamu International Airport, Lamu Resort, Lamu Industrial Zone, Isiolo Resort City and Isiolo International Airport. OUTLOOK Sunbird stands by our assertion that the LAPSSET project will continue to encounter difficulties. The withdrawal of several financing countries only compounds the issues facing the project. It is difficult to envisage how the full scale of the original concept will be realised given the governments need for fiscal consolidation. A recent injection of $1.9 billion by a consortium of international investors led by the Development Bank of South Africa, has, however, given the project a lifeline. 142 Mombasa LAPSSET Map HGVs are a major cause of inner city traffic. 46

28 3.7 POWER Global Competitiveness Index 2017 Sunbird s 10-year infrastructure index Kenya has made huge progress in recent years regarding both power generation and access. Since 2013 Kenya s installed capacity has increased 33% to 2,300MW and its long-term ambition is to reach 20,000MW by Increasing connections through the Last Mile Connectivity Project has seen access jump from 27% in 2013 to 60% in 2016, a connection growth rate of 113%. 144 This is not the same as access, which remains low. It is claimed the project is on course to reach universal access by Furthermore, by increasing the use of renewable sources, the price per unit has also dropped dramatically, KSh23 in 2013 to KSh13 in Both Vision 2030 and the Least-Cost Power Development Plan aim to facilitate this development by providing a clear framework. Under the plan, short-term demand will be met by expanding coal, geothermal and hydro generation whilst long-term demand will be met by adding further renewable solutions and a nuclear generation capacity. The Kenya Nuclear Electricity Board has signed a Memorandum of Understanding with leading South Korean nuclear power entities and is undertaking feasibility studies and knowledge sharing. 146 There are currently several large projects in development. The Lake Turkana Wind Power Project is the largest of these and intends to add up to 310MW of low-cost power to the National Grid. After ten years in development the project is anticipated to be finished by Q Additionally, the government run Geothermal Development Company (GDC) has been established to conduct exploration of Kenya s vast geothermal potential. The GDC identifies geothermal sites and contracts independent power producers to construct steam power plants also saw the long-awaited start of the Kenya- Ethiopia Highway Project. First tabled in 1982, the project will see a 1,068km long power transmission line stretch from Ethiopia to Kenya. The line will carry power into Kenya from the vast Grand Ethiopian Renaissance dam. The transmission line is being built by China Electric Power Equipment Technology and the substation at Suswa will be built by Siemens Transmission and Distribution. The total cost of the project is estimated at $1.2 billion, split between the World Bank, the African Development Bank and the French Government. 149 With a capacity of 2,000MW it is expected to provide power to 1.4 million households by Power Reliability Access Supply deficit Logistics Trucking Freight forwarding Customs 1= Extremely poor unreliable undeveloped 7= Extremely good reliable developed Ports Capacity Access Efficiency Railway Capacity Efficiency Condition Roads Coverage Paved vs. unpaved Maintenance Airports Efficiency Connectivity Condition Sunbird takes an intelligence led approach. As part of this approach, great emphasis and importance is placed on research. Sunbird s infrastructure index is the culmination of this primary and secondary research into the infrastructure networks of our markets. Using the World Economic Forums Global Competitiveness Index as a bench mark, Sunbird has surveyed 50 respondents to form a view on the future direction and capability of each key network over the next decade. Production and consumption Quality of supply World Economic Forum Access to electricity Sunbird Infrastructure Assessment Index 2,300 MW installed capacity Extremely unreliable 2 Kenya Extremely reliable 30% of the population have access to electricity 12.5% supply deficit 10% demand growth 96 Kenya s position 1 World ranking 144 7% rural access 60% urban access 48 Kenya s Energy Sector Snapshot Connections to electricity have increased by 113% since 2013.

29 PREPARING YOU FOR THE LANDSCAPE 4. NAIROBI Nairobi has been the primary East African city of the last 20 years. It has experienced rapid growth as the economy of Kenya has boomed. The government continues to prioritise investment in the city. Whilst its infrastructure network is creaking under the weight of a dramatically increasing population, its road network is still the envy of many of its neighbours. Not only is the city the gateway to the region by air but its new connection by Standard Gauge Railway to Mombasa and the Indian Ocean. will further drive its reputation as a centre for commerce. Cosmopolitan, in African terms, Nairobi offers higher standards of healthcare, accommodation, retail, and banking services than almost anywhere else in sub-saharan Africa. The city has already experienced much of the pain of early development which its neighbours have yet to navigate. This makes it an ideal entry point to the region. NAIROBI Capital city 3.8 million Population 5,400 people/km 2 Population density KENYA 13 yrs 4.3% Population growth POPULATION IN million 696km 2 Area Nairobi s demographics 51

30 4.1 NAIROBI ROADS There have been significant improvements to Nairobi s road network during the course of The city s master planners have aimed to move transit traffic away from the city centre and onto bypass highways; in particular this applies to the constant flow of heavy goods vehicles that travel via Nairobi on their way from Mombasa Port to regional destinations and the continental interior. The city s master planners have aimed to move transit traffic away from the city centre and onto bypass highways. KEY Major road Planned road Highway Due for upgrade CBD Traditional industrial area Westlands Kenya s National Library Limuru To Naivasha/Uganda Gitaru Western Bypass Waiyaki Way Ruaka Northern Bypass Thika Super Highway ToThika We have seen notable progress with the opening of the Southern Bypass extension which links the Langata Road to the Mombasa Road along the northern edge of Nairobi National Park. This stretch of highway has been the final phase of the Southern Bypass. It has created fast journey times from Gitaru in the north all the way to the Mombasa Road, and from there to Jomo Kenyatta International Airport and to the Eastern Bypass which in turn connects to the Thika Highway. It is also noted that the Southern Bypass and Ngong Road interchange was completed this year, which has made a marked improvement for commuter traffic to and from Karen. Together the Southern, Eastern and Northern Bypasses go some way in delivering the city planners intention of moving transit traffic to the periphery and away from the city centre. They are a key component of the enabling infrastructure required for Nairobi s continued decentralisation and the emergence of satellite industrial nodes. Together the Southern, Eastern and Northern Bypasses go some way in delivering the city planners intention of moving transit traffic to the periphery and away from the city centre. Other works that have been announced include major upgrades and reconstruction of the A104 road from Waiyaki Way at the James Gichuru junction to the B3 junction at Rironi. This is an important commuter route between Limuru and Nairobi and, in the long term, it has the potential to be an effective improvement to the city s infrastructure. The scheme will reportedly take three years to complete. There are however several challenges which first need to be addressed, including a resettlement plan for affected households. This will inevitably create delays in breaking ground. This forms part of the government and World Bank s vision to upgrade the entire arterial route between Limuru in the north and Jomo Kenyatta International Airport in the south. Work has begun on Phase 1 of expanding the Ngong Road between the National Library and Kilimani Junction. The Ngong Road is one of Nairobi s most notorious routes owing to its heavy congestion. When it is entirely converted to a dual carriageway it will become a vital artery into the central districts of the city. Southern Bypass Karen Kilimani Junction Ngong Road Langata Road Nairobi Southern Bypass Extension Nairobi National Park Mombasa Road Jomo Kenyatta International Airport Furthermore, it is reported that a deal has been agreed between the government and the China Road and Bridge Corporation (CRBC) for the construction of the proposed Western Bypass. This will be a 17km link between Ruaka and the Nairobi-Nakuru Highway which will complement the three other new bypasses. To Athi River 52 Nairobi road network Nairobi National Park.

31 4.2 REAL ESTATE The real estate sector has been booming in Kenya for some time. This is nowhere more evident than in the capital. Lack of transparency on values, legacy land ownership and rapidly inflating markets have produced a complicated landscape for developers to navigate. Sunbird believes that there are still significant opportunities across all sectors for the real estate investor Retail 2016 was a significant year for Nairobi s retail sector. Firstly, The Hub mall at Karen opened its doors to shoppers, adding 34,000sqm to the market. The mall has been filled with a variety of multi-national and regional tenants. The anchor tenant is Carrefour, the French supermarket chain, who chose Kenya as their entry point to East African markets. Reports so far indicate that the mall has experienced successful footfall in an affluent district previously underserved by the retail sector. The Two Rivers development by Centum opened in February It adds approximately 65,000sqm to the market and is the largest mall in East Africa. Carrefour is also taking significant space at this mall reportedly 10,000sqm. The mall is located in an affluent district dominated by the United Nations, the United States Embassy and many other diplomatic missions. It is likely Two Rivers will disrupt retail patterns, affecting footfall at close by Village Market Mall and alleviating the need for shoppers to travel to other districts such as Westlands to find TENANT LOCATION INVESTMENT KEY Major road Planned road Existing mall Planned mall CBD Westlands Highway Potential big box retail zone Due for upgrade Size (sqm) Tenant size (sqm) Tenant type Location Size (sqm) Approx. construction costs ($/sqm) Rental income (PS/sqm) Yields (%) Limuru To Naivasha/Uganda ToThika Safaricom Mall Informal sector 3,000 3,000 Local, self constructed, owner occupied, market stall, indigenous community. Community 2-20 n/a <$1 n/a Gitaru Two Rivers Village Market Ruaka Thika Super Highway High street Strip malls 2, Locally owned, legacy tenants CBD $5 - $15 n/a Sarit Centre Ngong Road Nairobi 10, Community tenants Peripheral areas $8 - $16 12 Southern Bypass Karen The Hub Southern Bypass Extension Mombasa Road Jomo Kenyatta International Airport Safaricom Mall Athi River Centre Big box retail 10, ,000 SUNBIRD DEVELOPMENTS VALUE PROPOSITION White goods, value clothing, kitchenware, furnishings, IT, car showroom, agricultural, building supplies, F&B. Entire spectrum Out of town 70-2, $12 - $16 10 Shopping mall Athi River >5, Entire spectrum 1,000-4, $10 - $45 9 To Mombasa Nairobi retail map Sunbird's African retail classifications 54 55

32 international brands. Given Village Market Mall is also expanding there will be steep competition for tenants and customers. Thirdly, the Sarit Centre in Westlands began its upgrade and expansion with another 30,000sqm added to the existing mall. When completed, and if successfully let, the combined mall will directly compete with the recently renovated Westgate Mall. Developers are looking beyond the affluent and expensive central districts and towards growing suburban districts where there is rising consumer demand. Furthermore, there are several proposals for new malls that will inject yet more space into the market. Although this includes BRITAM s plan for a mall on its development plot in the affluent central district of Kileleshwa, the majority of the proposals are in strategic peripheral locations. These include the NAIROBI KAMPALA Completed shopping centre space GLA (Sqm) Athi River Centre at Athi River, Mlolongo Mall in Machakos County, Enterprise Mall on the Mombasa Road and Vantage Mall on the Thika Road. Developers are looking beyond the affluent and expensive central districts and towards growing suburban districts where there is rising consumer demand. The city s decentralisation has been catalysed by the new highways and arterial roads and it will be interesting to discover whether this continuous growth in supply can be met with demand. Already prime rents are under pressure with developers forced to make considerable concessions in order to attract higher quality tenants and achieve their required tenant mix. Whereas prime retail rents are reported by brokers to be in the region of US$40-50sqm per month, effective prime retail rents are generally in the bracket of US$30-40sqm per month. We expect further pressure on rents in 2017 and 2018 as new leases and lease renewals are negotiated in the context of this marked increase in supply. Given malls further out of the city centre charge lower rents we also expect to see some retailers opt to locate stores in strategic peripheral locations rather than expensive city centre malls, supported by the accessibility afforded by the improved road network. Shopping centre development pipelines GLA (Sqm) 391, , , , Shopping centre space GLA (Sqm)/1,000 people Office The supply of office space continues to increase with several new office buildings recently completed and others under construction. Districts which have seen the largest increase in supply include Upper Hill, Westlands and the area surrounding it. For example, Riverside Drive is experiencing several large office developments, with developers betting on its prime location against low building density and relative lack of congestion. Brokers often continue to advertise unrealistic prime office rents, however usually tenants can agree effective prime rents at approximately $10sqm per month. The overriding theme is that many new office developments across the city are sitting partially vacant, owing to the glut in supply and many landlords who are resistant to adjust their prices accordingly. The market is in the phase of its cycle where prices should come down to restore demand, but this is happening slowly in Nairobi s case. Rents have been suppressed by the withdrawal of many natural resource companies from the region and the general election next year, both of which have reduced demand and commitment from organisations to take long office leases. Where new space has been absorbed, it has mostly been through tenants from Grade B or C buildings upgrading to grade A and fiercely negotiating for favourable terms Residential Parts of the residential sector in Nairobi are also in significant over supply, exacerbated by many new developments. Brokers report that prime rents have fallen between 5% and 8% this year. Despite this, many landlords are reluctant to agree to lower prices and rents and therefore many apartment buildings are not full. This applies to both apartments and houses across the city s affluent districts such as Westlands, Lavington and Kilimani. There remains significant opportunity at either end of the residential market s spectrum, bulk affordable housing, which is in short supply, is now subject to tax incentives recently introduced by the government. There continues to be demand for luxury high quality developments built and fitted to Western standards. Government statistics show that the number of mortgages in Kenya increased in 2015 by approximately 10% which is an encouraging sign for the market. Since then the government has enacted landmark legislation to cap interest rates, which have been very high for a long time and have rendered the mortgage market affordable to a tiny minority. It remains to be seen how this new cap will help boost the mortgage market and its effect on house prices. Government statistics show that the number of mortgages in Kenya increased in 2015 by approximately 10%. DAR ES SALAAM LUSAKA MAPUTO 107, , ,000 83, , , Brokers often continue to advertise unrealistic prime office rents, however usually tenants can agree effective prime rents at approximately $10sqm per month. 56 Retail statistics More people are living away from the city centre.

33 Industrial Industrial real estate continues to be an attractive proposition to investors given the growth of the manufacturing and assembly sectors. For example, Volkswagen has announced that it is opening a car assembly plant at Thika, making it the first European automobile manufacturer to re-enter the East African market. This is in the context of several government initiatives to increase the economy s exports, for example the introduction of Special Economic Zones (SEZ) that provide attractive tax breaks. Furthermore, we have observed the an emerging trend in which firms consolidate from multiple facilities to fewer, larger and customised facilities that provide both cost and operational efficiencies. Industrial real estate continues to be an attractive proposition to investors given the growth of manufacturing and assembly. KEY Major road Planned road Highway Due for upgrade Emerging industrial centres CBD Traditional Industrial Area Westlands To Naivasha/Uganda Limuru Southern Bypass Nairobi Traditional Industrial Area Thika Super Highway Mombasa Road To Thika Eastern Bypass Northlands In addition to manufacturing and assembly, there is increasing demand for better and more reliable distribution and supply networks across the country to serve business operations and retail chains. This requires first class warehousing and handling facilities in strategic locations. There are several experienced industrial real estate developers from both Europe and elsewhere who see this is a significant opportunity to introduce international standards into warehousing. We are seeing new developments along Nairobi s existing industrial corridors, particularly the Mombasa Road to Athi River and the Thika Highway. Given the proximity to the International Airport, the Eastern Bypass in particular, is experiencing this trend. Infinity Industrial Park is a prime example. There are several proposed warehouses with floor plates greater than 10,000sqm. In some cases the warehouses are being built on a speculative basis subject to funding. African Logistics Properties are due to begin construction on two separate sites in 2017 offering grade A logistics facilities. Conversely, there are examples of global logistics firms which have commissioned bespoke warehousing solutions. Time will tell if speculative warehouse developments attract sufficient demand at the prices modelled by their developers. There is increasing demand for better and more reliable distribution and supply networks across the country to serve business operations and retail chains. Rental target values for new warehousing are currently in the $5-$8 per sqm a month range but they rarely achieve this. Once again the key theme is decentralisation in favour of better road access, proximity to key transport nodes and competitive pricing away from congested and expensive parts of the city. As expected, sites close to the key transport nodes and road interchanges have seen the best land value and rental growth. 9 No. of procedures Quality of land admin Index (0-30*) 61 Number of days * 0=low, 30=high. Cost (% of land value) Registering a property - Doing Business Report 2017, World Bank Athi River To Tanzania To Mombasa 58 The decentralisation of Nairobi's industrial sector The ever changing skyline of Nairobi.

34 FRAME TYPE FLOORING INSULATION GROUND WORKS Approx. size of market (m 2 ) Build costs ($/sqm) GRADE 1 GRADE 2 GRADE 3 Certified steel Steel Concrete Engineered load bearing concrete Concrete Partial/poor quality Full Partial None High quality/designed for use Limited/basic Restricted/poor Nairobi Dar es Salaam Lusaka LEVELS OF WAREHOUSING WAREHOUSE MARKET COMPARISONS Nairobi Dar es Salaam Lusaka Nairobi Dar es Salaam Lusaka 465,000 72,000 40,000 1,705, ,000 1,000, ,000 1,080,000 1,450, Alternative Sectors Given that several conventional real estate subsectors are in over supply, investors are increasingly turning to alternative sectors. Alternative sectors include markets such as hospitality, student housing, healthcare, hotels and data centres. For example, investment is being sought to fund a Public Private Partnership (PPP) for a student housing scheme at Kenyatta University that will accommodate as many as 10,000 students. Demographic and socioeconomic trends strongly support the case for rapid growth in the education sector; however, such capital intensive and complex multi-party deals are only suited to well-funded and experienced developers. Data centres form a new asset class in Kenya. Demand has been created by the exponential increase in internet usage in Kenya and a desire by some organisations to store data within their home jurisdiction. Examples of data centres include one under construction in Mombasa by Icolo and one due to be constructed by IX Africa in Nairobi Real Estate Investment Trusts A significant step in the development of Kenya s real estate sector has been the introduction of Real Estate Investment Trust (REIT) legislation and the subsequent launch of the Stanlib income REIT (known as an i-reit) last year. More recently, Fusion Capital, a Nairobi headquartered investment company, launched the country s first development REIT (known as a d-reit). Kenyan REITs are listed on the Nairobi Securities Exchange (NSE) and regulated by the Capital Markets Authority (CMA). They behave in a similar manner as any other listed stock or share, allowing investors to indirectly invest in the real estate sector; in the case of Stanlib s i-reit from a minimum subscription of just Ksh20,000. In addition to their accessibility, REITs are transparent and liquid in comparison to direct real estate investment. In the long term, we expect the REIT market in Kenya to take hold as a popular form of real estate investment as it has in other emerging markets. However, at the moment, the REIT market has struggled to gain traction and viable subscription levels, possibly as a result of a lack of confidence and understanding in the product and the bad timing of launching the REITS in the current phase of the real estate cycle. Rents (sqm/month)) Proportion of market (%) 2016 vacancy (%)) $3-4 $5-10 $5-8 $2-3 $3-8 $4-6 $1-3 $3-5 $ At the moment, the REIT market has struggled to gain traction and viable subscription levels. 60 Warehouse market comparison across Sunbird s target cities Alternative real estate sectors are attacting more investment.

35 4.3 TRAFFIC As with other rapidly growing cities, traffic is a major issue in Nairobi. Indeed Nairobi is often cited as having the worst in the region. It is difficult to quantify the actual economic impact on the city itself, however, accessibility is a key consideration for the users of real estate assets leading to a direct impact on value. The slowly emerging middle class is driving a surge in car ownership that road networks are unable to keep up with. While not a new problem, it is getting steadily worse. With all roads converging on the CBD there is heavy traffic throughout most of the working day. This is exacerbated by the continued use of city centre roads by of Heavy Goods Vehicles (HGV). As with Dar es Salaam, Kampala and Lusaka there are already moves to push certain uses, particularlyindustry, towards the periphery of the city and this should help ease the problem. In November 2016 Sunbird conducted its second Nairobi traffic study. The following graphs demonstrate journey times throughout the 24 hour period of a working day (Monday to Friday) with average speed providing an indicator of the volume of traffic on these chosen routes at different times of the day. The routes were chosen to reflect a variety of typical journeys around the city. Journey times were assessed by a written survey of a sample of 89 different professional vehicle users across the city and as such reflect opinions on journey times as opposed to an average of measured journey times. Nairobi is the only city to see improvement in journey times. The findings of our survey have produced a variety of results that highlight the problems of traffic in Nairobi. As expected the results largely mirror our previous findings in There are two periods of heightened activity throughout the day during the period of morning and evening rush hour. The evening period is slightly less busy on longer routes that enter the city from the periphery whilst the morning period is quieter on the shorter routes that run closer to the CBD. The contrast between morning and evening journey times is most stark on the shorter journeys. This indicates that there is a build-up of traffic over the course of the day that creates more congestion in the evening for vehicles entering or leaving the city centre. Journeys taken closer to the CBD are most affected by this contrast. Nairobi is the only city to see any improvement in journey times. The completion of the Southern Bypass and its extension has had a noticeable impact, particularly those originating or ending in Karen. Although the bypass already experiences high levels of traffic at peak times, it has reduced journey times overall. The journey from Karen to the airport has benefited the most. Beyond this exception, traffic and journey times have increased. This is most notable at peak times, especially in the evenings. As these graphs show, congestion is debilitating within the city centre and this forms a core element to Sunbirds belief in out of town developments. Nairobi road development is advance in comparison to other regional capital and this is opening the window for people and businesses to look outside the traditional centres. The cost to business as well as the demand for improved access and facilities, not to mention the well being of ordinary people, are driving this migration. Over the next decade we will see the city landscape change dramatically. KEY CBD to Muthaiga Muthaiga to Karen Hardy Riverside to CBD Riverside to Upper Hill Upper Hill to Karen Karen to JKIA Traffic pinch point KEY A2 Distance CBD to Muthaiga 7 km Distance Muthaiga to Karen Hardy 23 km Distance CBD to Riverside Drive 5 km Avg. speed 27 km/h Non rush hour 6 km/h Rush hour Avg. speed 44 km/h Non rush hour 12 km/h Rush hour Avg. speed 19 km/h Non rush hour 3 km/h Rush hour A104 A104 Riverside Muthaiga CBD A2 Minutes :00 12:00 Time of Day 00:00 Minutes :00 12:00 Time of Day 00:00 Minutes :00 12:00 Time of Day 00:00 Karen Upper Hill Jomo Kenyatta International Airport Distance Upper Hill to Riverside Drive 7 km Avg. speed 20 km/h Non rush hour 4 km/h Rush hour Distance Karen to Upper Hill 24 km Avg. speed 70 km/h Non rush hour 27 km/h Rush hour Distance Karen to JKIA 36 km Avg. speed 70 km/h Non rush hour 31 km/h Rush hour Karen Hardy A104 Minutes :00 12:00 Time of Day Minutes :00 12:00 Time of Day 00:00 Minutes :00 12:00 Time of Day 00:00 Nairobi's journey map Journey time graphs 62 63

36 5. CONCLUSION Kenya s political stability and robust economic growth continue to provide an attractive investment climate. As with many African countries, development is coupled with challenges and 2017 will inevitably be defined by a hard-fought election. The political landscape will be tense and the risks of protests and unrest will be heightened. However, as Kenya has proved in the past, it is resilient and capable of overcoming significant challenges. The current efforts to institutionalise devolution are a sign of growing political maturity, despite the difficulties that it brings. The biggest long-term obstacle will be to bleed corruption out of politics, public service and business. Whilst it is allowed to exist in its current form, it suffocates innovation, erodes growth and prevents genuine trust between the electorate and their government. Kenya is a powerhouse economy that continues to prove its resilience and agility in the face of global economic headwinds. WE KNOW THE LANDSCAPE Kenya's economy remains one of Africa s most robust and fastest-growing. The government's progressive and shrewd approach to its investment strategy continues to reap rewards. Improved infrastructure will help unlock the enormous potential of the country s growing, young, well-educated and increasingly well-connected population. Shortterm growth could be stunted as investors await the election outcome but the long-term outlook is extremely positive. Sunbird expects the Kenyan economy to remain amongst the most exciting and dynamic economies on the continent. Within this context, Sunbird is hugely optimistic about Kenya s substantial investment opportunities. 65