12 Aug 2019
Section 3: Infrastructure in Kenya
Fitch Solutions Logistics Risk Index
- Kenya performs extremely well in Fitch Solutions’ Logistics Risk Index at the regional level, ranking first in East Africa out of 11 states and fourth out of 48 Sub-Saharan African states. The country ranks in 82nd position globally out of 201 states.
- Kenya outperforms the East Africa average for all components of the Logistics Risk Index: transport network, trade procedures and governance and utilities network.
Logistics Risk Index: Methodology and Components
- 100 = Lowest risk; 0 = Highest risk
- The Logistics Risk component is calculated using the average of the Transport Network, Trade Procedures and Governance and Utilities Network scores.
- Transport Network: this indicator assesses the extent and quality of road, rail, air and waterway transport networks within a country, which indicate capacity and ability to transport raw materials and finished goods around a country.
- Trade Procedures and Governance: this indicator assesses the time and cost required to import and export goods by container. In addition, a country's air freight volumes and connectivity to shipping networks is used to gauge its potential as a shipping or freight hub. An ideal market would have strong freight connections and low levels of trade bureaucracy.
- Utilities Network: this indicator assesses the quality and availability of electricity and fuel, and their costs, and considers the availability of water, industrial usage, and evaluates the quality and extent of the telecommunications networks and internet penetration. A well-developed utilities sector enables the smooth running of supply chains.
Electricity Supply & Costs
Kenya’s power infrastructure exhibits some shortcomings in terms of ease of access and infrastructure quality, resulting in patchy coverage in non-urban areas, and recurring power outages due to transmission and distribution losses in urban areas. Many businesses located outside main urban areas are consequently reliant on providing their own electricity supply, significantly increasing the cost of operations. That said, the situation has improved of late, in line with the government’s commitment to boosting electrification rates and the exploitation of renewable energy sources in the country. Access to electricity reached 73% of the population in 2017, the highest in the East African region, and the development of geothermal resources is slowly reducing the risk of blackouts, due to its baseload nature unlike hydropower.
Though grid electricity costs are relatively low by regional standards, with the notable exception of Ethiopia, businesses will find their costs inflated by the need to obtain and run on private generators during times of power interruptions. This will be particularly pertinent to energy-intensive manufacturing consumers. In the long-run, firms will likely benefit from energy tariff reductions as renewable energy sources displace more expensive oil-fired power plants and less reliable hydropower plants, and improvements are made to the grid network.
The price of fuel in Kenya is moderate by regional standards. The country remains vulnerable to global oil price shocks as the country is highly reliant on fuel imports, while increasing fuel taxes add further cost pressure to end-users. Fuel is mainly sourced from India, China, Malaysia and the Middle East, with India providing the vast majority. In addition to external supply chain risks, mismanagement of energy resources and storage facilities as well as internal disputes between retailers and the state also have the potential to disrupt the fuel supply. Energy-intensive businesses will have to maintain some back-up private fuel storage capacity in order to mitigate the risk of shortages and sporadic scarcity-induced fuel price shocks, the frequency of which can be higher outside of Nairobi and Mombasa. This risk could be mitigated in the medium-to-long term due to the discovery of oil in the country.
Kenya's transport network is the most developed in East Africa, offering good air, maritime and overland connectivity, such that despite some pertinent security and congestion risks, it remains the primary trading hub in East Africa.
Planned investment in transport infrastructure will improve the country's ability to capture a greater share of regional trade flows, making Kenya a key gateway for neighbouring landlocked states for years to come. There are a number of high-value transport projects currently under development in Kenya, with the infrastructure development around Mombasa part of China’s Belt and Road Initiative (BRI). Major projects include:
- The development of Standard Gauge Railway (SGR): Under existing plans, the SGR will be extended from its current operational route from Mombasa to Nairobi to link with Malaba on the Ugandan border, via Naivasha and Kisumu, joining up with the planned Ugandan SGR. Almost wholly funded by the China Export-Import Bank, the 1,300 km track forms part of a regional development called the Northern Corridor seeking to link Kenya, Uganda and Tanzania via rail to facilitate the flow of goods in the region and improve overall logistics capacity in the respective markets.
- Mombasa Port Development Project: the US$214.8 million expansion plan at the Port of Mombasa continues to forge ahead as the government works to reduce the time taken to import and exports goods and improve overall business costs. It is a partnership between Kenya and Japan, and the aim is to increase annual capacity from 250,000 twenty-foot equivalent units (TEUs) to approximately 1.5 million TEUs.
- Lamu Port: is intended to become an internal port with 29 berths handling over 4 million tonnes of cargo and is part of the wider Lamu Port South Sudan Ethiopia Transport (LAPSSET) corridor. The first phase of the project, involving the build of three berths carried out by the China Communications Construction Company (CCCC), entered into construction in October 2016.
Supply Chain Logistics
The quality of transport infrastructure in Kenya is good in comparison to other countries in the East Africa region. Nevertheless, there is significant need to reinforce roads, particularly in the northern regions of the country, upgrade ageing rail infrastructure and expand port capacity at smaller seaports and inland ports to ease supply chain bottlenecks. The central and southern areas of the country - around the main cities and economic centres of Nairobi, Mombasa and Kisumu - are well connected and supply chains in the most densely populated areas of the country are well served by the road network. This is essential given the location of ports in the latter two cities.
Kenya's export procedures are relatively competitive compared with other countries in the region; however, imports still require extended amounts of time to carry out, raising costs and delays for inbound freight. This is largely due to convoluted border checks, widespread corruption and congestion at the port of Mombasa. Nevertheless, Kenya is developing infrastructure and implementing bureaucratic reforms that are expected to reduce delays and enhance transparency over the medium term. This will help ease port congestion and reduce storage costs, demurrage and other surcharges, translating into faster turnaround times for trucks from the main port and decreasing the cost of goods for consumers and industries.
Tariffs & Trade Regulations
Overall, tariff barriers to trade in Kenya remain somewhat high; Kenya has an average tariff rate of 7.6%, placing a particular burden on firms reliant on imported inputs. That said, the government's Manufacturing under Bond program, provides a 100% tax deduction on plant machinery and equipment and raw materials imported for production of goods for export. (See section 4 for more detail on special tax and tariff rates).