Kenya manufacturing shrinks and exports to region fall, contributing to job losses, raising more questions on #BBIReport

I had not realized quite how badly this was going, as reported in Standard story this weekend.

No wonder Kenyans On Twitter are energized against the performance of the Government in a seemingly broader and deeper way than in the past when the the economic malaise did not get as deep into the “middle class”.

The employment emergency described by the BBI Report is real, but the proposed solution is rapid industrialization for regional exports. There was already a credibility problem for the current Government as to what in the Building Bridges Initiative would make that type of rapid growth likely to happen. Now we see that the actual performance of the current system is not slow growth but rather a sharp decline in manufacturing and regional exports.

And again, a lot of the problem is thinking based on a relatively paternalistic environment where as long as Kenya “played by the rules” the major world economic powers that could otherwise squash Kenyan manufacturing at least conceptually would cheer Kenya on in developing into a regional manufacturing leader. In the real world of 2013 to date and in the future envisioned by the BBI, Kenyan manufacturing has to compete with Chinese manufacturing both domestically and for regional exports. And China doesn’t have the debt problem that Kenya now has.

Bechtel Mombasa-Nairobi Expressway project background

Ambassador McCarter has been engaging with Kenyans on Twitter following an Embassy media release on US support for the proposed Mombassa-Nairobi expressway.

For background:

U.S. withholds funding for Sh. 300 billion Mombasa-Nairobi expressway. This was the news on May 27, 2019, as reported from A1Autoservice,Ltd.com:

Nairobi-Mombasa expressway funds stalled 

The US Government has temporarily shelved funding for the proposed Sh. 300 billion Nairobi-Mombasa expressway over cost implications. The construction of the 485-kilometre road to ease perennial traffic snarl-ups was to be done by American engineering firm Bechtel after Kenya and US struck a deal during last year’s meeting between Presidents Donald Trump and Uhuru Kenyatta at the White House. The US ambassador Kyle McCarter, said the US was scrutinising the proposal to establish whether Kenyans would get value for their money. He said the cost was in question at a time when the country is struggling with piling debt. 

Responding to queries whether Bechtel had lost the contract to China, McCarter said: “Bechtel did not lose the deal, we are still working on the finance. Kenya has a challenge of debt and we are wary of burdening Kenyans”. “We did not want to sign onto a project whose cost would turn out to be three to four times higher than the actual. We want to ensure there is an honest return on investment for Kenyans before we break ground.” 

In 2015, PriceWaterhouseCoopers (PwC) — in a feasibility report — indicated that the costly project was viable.McCarter said US zero tolerance for corruption forced them back to the drawing board and would only embark on the project once they are satisfied it guarantees value for money for Kenyans and will not sink the country deeper into debt. 

The envoy affirmed US support for the war against corruption and termed the plunder of public coffers an act of outright thievery. “Calling it corruption makes it mystical, like those behind it share the proceeds with the nation. But the truth is that it is simply taking what is not yours and that is thievery,” he said. 

The proposed road will be a dual-carriage motorway with four lanes to ease congestion and cut travel time between the two cities from the current 10 to about four hours.It will run parallel to the current Nairobi-Mombasa highway and will help promote trade and movement in Kenya and the neighbouring countries of Uganda, Rwanda, Burundi, DRC and South Sudan. 

Working documents on the project show that it is expected to start any time after the June budget release.Bechtel estimates that construction of the expressway will create 500 jobs and involve local businesses supplying up to 100,000 tonnes of cement and 40,000 tonnes of steel.

Here is a digest of stories on the project from July 2017 to July 2018:

The battle for road tenders hots up as U.S. giant opens Nairobi office, Construction Kenya, July 11, 2017:

. . .

As a starting point, the US construction giant has already expressed its interest in the forthcoming expansion of the 485-kilometre Mombasa-Nairobi highway into a six-lane dual carriageway.

The US Export Import Bank is strongly pushing Bechtel to secure the contract in an arrangement similar to that of the China Export Import Bank where the Asian bank funds projects contracted to Chinese firms.

“With the support of the US government agencies such as Overseas Private Investment Corporation (OPIC) and the Export-Import Bank, we can provide solutions to move this critical project forward quickly with a high standard of quality,” Mr Patterson added.

The entry of Bechtel – along with its financial backing by the US Exim Bank – will complicate matters for Chinese multinationals who have been winning all tenders for projects financed by the China Exim Bank. . . .

U.S. firm wins deal to build Kenya’s first high speed highway, Construction Kenya, Aug 17, 2017:

US-based engineering firm Bechtel International Inc. has signed a Sh230 billion commercial agreement with the Kenya National Highways Authority (KeNHA) for construction of a 473-kilometre Nairobi-Mombasa high-speed expressway.

KeNHA director general Peter Mundinia said the signing of the deal has paved the way for the next stage of mobilisation of financing from export credit agencies in the United States of America.

. . .

It is expected that agencies such as the US Export-Import Bank and the Overseas Private Investment Corporation (OPIC) will finance the project.

“It is projected under the proposed commercial contract that the 473km highway will be completed in ten sections within the next six years,” Mr Mundinia said.

The first section, from the junction with Namanga Road near Kitengela will have an interchange near Konza ICT City and a spur road to Kyumvi (Machakos Turnoff) on Mombasa Road. This section is anticipated to open to traffic in October 2019. . . .

U.S. rejects Kenyan press criticism of $3B Bechtel roads deal, Global Construction Review, Sept. 25, 2017:

The US embassy in Kenya has rejected a newspaper’s criticism over a $3bn road contract awarded to Bechtel without competitive bidding.

The embassy said the Nairobi-to-Mombasa expressway had been under discussion for two years, and had been evaluated to ensure Kenyans receive value for their money. 

It also rejected press claims that the award was a “thank you” to the US for its political support of the Uhuru Kenyatta government. 

On 13 September, the day after the article appeared, the embassy tweeted: “US private firms (bound by US anti-corruption laws) investing in Kenya’s future bring jobs, tech transfer and development. This expressway has been under development for two years to bring best value. The US embassy does not and will not give political favours for commercial deals. On Kenyan election 2017, we’ve been and will continue to be strictly neutral.”

Kenyan government officials also defended the Bechtel deal. Peter Mundinia, director general of the Kenya National Highways Authority (KeNHA), said on 18 September that Bechtel was selected because of its experience of handling large infrastructure projects “over 119 years”.

He added that the Kenyan government had entered into an agreement with the US government in July 2015 whereby US companies would develop key infrastructure projects with US funding.

The US and Kenyan authorities were responding to an article in Kenya’s Financial Standard newspaper that questioned the way the project was announced and quoted from a Ministry of Transport briefing, carried out before the contract award, which argued the project should be put out to tender as a public–private partnership (PPP).

The Standard highlighted the fact that contract for the 473km A8 expressway between Mombasa and Nairobi was announced three days before the 8 August general election, and broke with established practice by being made without a Ministry of Transport press conference or an announcement from the president’s office. 

Instead, the announcement was made on a Saturday afternoon when government departments are usually closed, and made no mention of the project’s estimated price. 

The newspaper drew a comparison with the way the government had awarded the country’s standard gauge railway (SGR) scheme to Chinese contractors before the 2013 general election. In both cases the winner was appointed without putting the work out to competitive tender. 

In the SGR case, the choice was determined by the fact that China was making the funding available for the line; in the case of the motorway, the motive was to thank America for an “unspecified service” that the US had done for Kenya, according to unnamed “government insiders” quoted by the Standard.

According to the Standard there are now concerns within the Kenyan government over the amount of debt the country is taking on. The combined cost of the rail and road link between the country’s main port and the capital is likely to be at least $6.7bn, or almost 10% of the country’s GDP.

The controversy comes at a sensitive time in Kenya after the results of the 8 August election, which recorded a victory for the country’s incumbent president Uhuru Kenyatta, were annulled by Kenya’s Supreme Court on 1 September. 

The court cited irregularities and illegalities in the transmission of results and ordered the election to be held again within 60 days. It is due to take place on 26 October. Kenya has a history of serious post-election violence.

Nairobi-Mombasa expressway project dogged by serious concerns, Construction Kenya, July 4, 2018

Almost a year after Kenya signed a deal with US engineering firm Bechtel for construction of a Sh300 billion high-speed expressway between Nairobi and Mombasa, the two parties are yet to agree on how to finance the project despite a series of extremely high-level talks.

On the one hand, the Kenyan government wants the 473-kilometre Nairobi-Mombasa expressway to be completed through the Public Private Partnership (PPP) model where private investors will build and operate the facility for up to 25 years – charging toll fees – to recoup their investments and margins.

On the other hand, Bechtel International is opposed to the PPP model which it says will cost the Kenyan taxpayer Sh540 billion over next 25 years.

The company has therefore urged Kenya to undertake the project under an engineering, procurement, construction and commissioning (EPCC) contract.

Under the EPCC model, a contractor is obliged to deliver a complete facility to a developer who needs only to turn a key to start operating the facility; hence such deals are sometimes referred to as turnkey construction contracts.

But the government, which is concerned about the fast rising public debt, has made its stand clear. . . .

“We will commence detailed discussion on how the financing approach will be undertaken under that project. We will be discussing modalities, financing structuring and the details for us to be clear on how to undertake this project,” Treasury secretary Henry Rotich said on Tuesday.

Is Washington finally losing patience with governance by UhuRuto? If so, what is seen as “the way forward”?

I touched a few bases while briefly in Washington recently. I was left with the impression of general “benign neglect” on Kenya, which would be expected given the overwhelming number of more immediate crisis situations around East Africa, such as the South Sudan “civil war/state failure” situation, escalating tensions between the Kagame and Museveni regimes, the uncontained Ebola crisis, etc. And always the war in Somalia.

Nonetheless, there are those who work or engage with Kenya more specifically on a less seasonal basis who will unavoidably have noticed how badly the Government of Kenya has been underperforming just as a factual matter regardless of the diplomatic angles of the day.

All this is to lay the groundwork for my great interest in a couple of news items today:

1). First was the report that Ambassador McCarter had said in Kisimu that the U.S. was putting on hold financing for the Bechtel Mombasa-Nairobi expressway due to concerns about corruption risk and debt levels escalating costs such that the intended value to the Kenyan people was not delivered. Here is the version from “Kenyans.co.ke” which has been running a bunch of pieces bringing up events from political inflection points from years past with no specific explanation of the timing, such as the piece I posted about last week taken off from my June 2017 piece in The Elephant on “The Debacle of 2007: How Kenyan Politics was Frozen and a Election Stolen with U.S. Connivance“.

As a private American “friend of Kenya” and taxpayer I am quite gratified by this willingness to change policy to address current “facts on the ground” and to actually “walk the talk” on “anti-corruption” even if it involves possibly giving up a big subsidized project for a very big well-connected private business owned by a group of Americans.

I have been concerned about this project for the reasons identified by the Ambassador but have not wanted to say much without being close enough to have details and not wanting to be seen as an inveterate naysayer or unduly skeptical about things where I am not that well informed.

Maybe Ambassador McCarter can end up being a “breath of fresh air” and is actually serious in his talk of zero tolerance for corruption in a way that would be different from the ordinary diplomacy where we run hot-and-cold at best. If no one explained to him as a political appointee from outside Washington that “zero” among diplomats ends up as shorthand for a wide range of dollar values in varying circumstances explained in the addendums and codicils, as opposed to just “zero” as it might mean to a businessman in downstate Illinois, then maybe Kenyan cartel leaders need to be worried a bit after all?

And if people in Washington have their hands full or are not focused on the immediate situation in Kenya, and with what we read about how national security policy management is working in Washington these days, it may well be that McCarter has that much greater practical latitude “on the ground”? Likewise, usually an Ambassador in Kenya will have the potential distraction of career considerations not dissimilar to people working in the government in Washington; this would not seem to be a challenge for McCarter. (And maybe he isn’t looking to be a lobbyist for a neighboring warlord in a black hat, and an oil and gas consultant and an investor-broker in USAID-funded health business, for instance.)

There are obvious sociocultural and political barriers to how McCarter will be perceived in Washington and among Americans who typically engage with foreign policy on Kenya or are “Kenyanists” or “Africanists” with focus on Kenya, but open minds are warranted. And maybe that works both directions.

Part of what is so striking here is how much Uhuru Kenyatta has in the past seemed to be arguably “Donald Trump’s signature African leader”–not so much that they are seen to really know each other or have some personal rapport, but rather that in the face of general lack of signs of personal interest in Africa from Trump we still have Uhuru at least included in meetings and doing photo ops with Trump in Europe, Canada and Washington, if not yet Mar-a-Lago, during the first two years of the Administration. Even though he was such a favorite of some in the Bush-Obama years.

So surely putting the Bechtel deal on hold suggests that there is finally heightened willingness to openly acknowledge that governance is simply not now what it was cracked up to be from our previous public diplomacy in recent years.

2) Next is Macharia Gaitho in the Daily Nation publishing today’s column: “Either rebels in Jubilee ranks join opposition, or Uhuru steps down” calling out Jubilee’s divide:

The politicians who contrive to insert his name [Deputy President Ruto’s] into every issue do the DP no favours at all. It does not help his image or his 2022 presidential election prospects when his name is used to fly cover for disreputable leaders caught on the wrong side of the law.

. . . .

As an elected member in his own right, a Majority Leader [Sen. Kipchumba Murkomen] does owe a duty to his constituents. Where conflicted, however, he could consult internally within the government and party organs.If his concerns are not adequately addressed, then the honourable thing would be to relinquish the Majority Leader role so that he can, in good conscience, speak out for his people both inside and outside Parliament.

As it is, what we are seeing from Mr Murkomen’s now frequent outbursts are the hallmark of rebellion. This is rebellion not from one disaffected individual, but a powerful Ruto faction in Jubilee that is unhappy with the path pursued by President Kenyatta.

Jubilee cannot govern effectively when it has such a powerful opposition within; hence the rudderless, dysfunctional government seemingly sabotaging its own efforts.

This is not a healthy situation. Maybe, it would be best for Mr Ruto and his cohorts to resign and go officially into opposition or for President Kenyatta to throw up his hands in surrender and leave the burden of leadership to those more able.

Now I don’t know and haven’t asked, but there have been recent times when Gaitho has seemed to be carrying a message, such as the time when he explained that Raila’s fellowship at Yale was intended to be a perk to ease into a honorable retirement, not a springboard to run yet again in 2017. Different Kenyan columnists are in this role at different times it has seemed over the years. See “Six years an Ambassador: Godec’s Kenya valedictory with Macharia Gaitho”.

This background made me figuratively “perk up my ears” when I read the Gaitho blast after the news on the Bechtel expressway deal.

As a practical matter, there are certain ironies any time it is suggested that “regular order” of some type is suddenly warranted in Kenyan politics. Uhuru Kenyatta himself as KANU leader and Leader of the Opposition in 2007, crossed the aisle to support “Kibaki Tena” without resigning, when party godfather, retired President Moi who picked Uhuru from relative obscurity to nominate as his successor in 2002, realigned his fortunes, so to speak, to be with Kibaki while being appointed as Kibaki’s diplomatic representative for Southern Sudan. So I think Ruto might scoff at Gaithos’s advice now, and I doubt Uhuru’s mother would be good with him resigning at this point with all the family has going on at stake. Too much water under the bridge for too many years to expect anyone “in government” to go formally into “opposition” voluntarily–reform can happen but not nearly so easily or cheaply.

A necessary and complimentary read is the latest from Rasna Warah in the East African Review with what needed to be said on the most egregious act of contempt toward what we used to call “the reform agenda”: “In whose interest? Reflecting on the High Court judgment against John Githongo?”

Kenya 2007 election Kibaki Tena Kazi iendelee re-election

Jubilee at 1; Kenya at 50 1/4

Half a Crossing

Africa Confidential‘s free article this month gives the best overall summary of the state of the Kenya government a year after Uhuru and Ruto took office, “A Year of Living Precariously”

Crime, inflation and grand corruption have risen sharply in the last year. Expectations of an economic take-off have dimmed since the cheers that greeted Kenyatta’s disputed election victory. The government has incurred new debt and inflated the public wage bill against a background of falling tourism revenue – the result of the Westgate terrorist attack and Islamist activity on the coast. Beside concern about loans from China and elsewhere, mostly for infrastructure expansion, there are worries about the growing cost of the new, devolved counties.

As for the environment in which to address these challenges, AC says “the politics of sycophancy reminiscent of President Daniel arap Moi’s era [are] now in full flow”.

Of course the most immediate critical issue on the referenced infrastructure projects involving Chinese loans is the construction of a new, “from scratch”, Standard Gauge Railroad. Renowned Kenyan economist David Ndii here explains why the project is far too expensive to make economic sense in lieu of renovating the existing railroad:

Part of the other side of corruption and maladministration in Kenya’s fiscal crisis is exposed in a gutsy report from The Standard this week, “Revealed: How Karuturi got away with denying Kenya millions in taxes“.

And from the National Endowment for Democracy’s Democracy Digest: “Kenya Declares Human Rights ‘Subversive'”.

Aid–gaming the current numbers, with risks in the long term?

From Ed Cropley at Reuters Africa Blog–“Donors’ aid squeeze to up Africa’s debts”

In 2005, donors at the G8 summit in Gleneagles, Scotland promised to double aid by up to $50 billion in five years — an ambitious promise that has not been matched by reality.
Furthermore, a trend since then towards more aid delivered via grants risks going into reverse as cash-strapped rich-country finance ministers seek out cunning ways to make their development budgets go further.
For instance, by most definitions a bilateral loan qualifies as “aid” if a quarter of it is a grant, meaning donors can cut today’s cost of their aid bill by 75 percent, and then swallow the cost of a low lending rate over the duration of the loan.
“In 2009, France’s proportions of aid going in loans just rocketed,” Coppard said. “This theoretically will need to be paid back.”
The implications of such a switch by other donors would be dire, burying many African states under the same mountain of obligations that triggered the 2005 Heavily Indebted Poor Countries (HIPC) debt forgiveness initiative.
For example, if all its overseas grants became loans tomorrow, Tanzania would be running a budget deficit of a staggering 25 percent of GDP — a ratio that would leave its plans for a $500 million Eurobond dead in the water.

Debt may be appropriate for specific projects that generate government revenues to service the debt, but if borrowed funds are sunk into more general budget substitution, experimentation, projects that reflect donor priorities that may not have local buy-in or results, it seems a stretch to equate a loan to a grant or gift.

Worth noting that Kenya specifically has a had a big run up of domestic debt recently.