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Creating an Enabling Environment forStimulating Investment forCompetitive and Sustainable CountiesKENYA ECONOMICREPORT 2013

Kenya EconomicReport 2013Creating an Enabling Environment forStimulating Investment for Competitiveand Sustainable CountiesNairobi, Kenya2013

© 2013 Kenya Institute for Public Policy Research and Analysis (KIPPRA)Bishops Garden Towers, Bishops RoadPO Box 56445-00200, Nairobi, KenyaTel: +254 20 4936000; 2719933/4; Fax: +254 20 2719951Cellphone: +254 724 256078, 736 712724Email: admin@kippra.or.keWebsite: http://www.kippra.orgAll rights reservedThis volume is a product of the Kenya Institute for Public Policy Research and Analysis(KIPPRA). The findings, interpretations, and conclusions expressed herein do notnecessarily reflect the views of the Government of Kenya or its agencies. Although alleffort has been made to ensure accuracy of data and interpretations, the Institute doesnot guarantee the accuracy of the data included in this volume.Rights and permissionsThe material in this publication is copyrighted. Copying and/or transmitting portionsor all of this work and its derivatives without permission from the Institute may bea violation of applicable law. KIPPRA encourages dissemination of its work and willnormally grant permission to reproduce portions of the work promptly.For permission to photocopy or reproduce this work or any of its parts, please send arequest with complete information to admin@kippra.or.keISBN 978996605801010Other Available Kenya Economic Reports2009: Building a Globally Competitive Economy2010: Enhancing Sectoral Contribution towards Reducing Poverty, Unemployment andInequality in Kenya2011: Transformative Institutions for Delivering Kenya Vision 20302012: Imperatives for Reducing the Cost of Living in Kenya

CContentsFigures and Tables..................................................................................................................................................................................ivForeword....................................................................................................................................................................................................xPreface.....................................................................................................................................................................................................xiiAcknowledgments................................................................................................................................................................................ xivAbbreviations and Acronyms............................................................................................................................................................ xvExecutive Summary............................................................................................................................................................................xixPART I: MACRO AND SOCIO-ECONOMIC PERFORMANCE......................................................... 1Macroeconomic Performance..........................................................................................................................2Governance........................................................................................................................................................ 12Poverty, Inequality and Population Growth............................................................................................... 19Labour Market and Employment Opportunities...................................................................................... 29Health................................................................................................................................................................. 35Education and Skills Development............................................................................................................... 54PART II: SELECTED SECTOR PERFORMANCE.............................................................................. 73Agriculture......................................................................................................................................................... 74Manufacturing................................................................................................................................................... 77Trade and Foreign Policy................................................................................................................................ 87Financial Services............................................................................................................................................. 98Tourism............................................................................................................................................................105Micro and Small Enterprises (MSEs)........................................................................................................115Infrastructure and Economic Services.......................................................................................................121Environment and Natural Resources.........................................................................................................135PART III: MEDIUM TERM PROSPECTS......................................................................................... 156Medium Term Prospects.................................................................................................................................................157PART IV: CREATING AN ENABLING ENVIRONMENT FOR STIMULATING INVESTMENTFOR COMPETITIVE AND SUSTAINABLE COUNTIES................................................................. 168An Enabling Environment for Stimulating Investment for Competitive andSustainable Counties.....................................................................................................................................169References........................................................................................................................................................207Annex................................................................................................................................................................219Index..................................................................................................................................................................225kenya economic report 2013iii

FFigures and TablesFiguresFigure 1.1: GDP growth and GDP per capita (2009-2012)........................................................................................ 2Figure 1.2: Gross investment and savings in Kenya....................................................................................................... 4Figure 1.3: Components of investment........................................................................................................................... 4Figure 1.4: Incremental capital output ratio................................................................................................................... 5Figure 1.5: Gross capital formation and gross savings in selected countries............................................................ 5Figure 1.6: Current account deficit as percentage of GDP (1996-2012)................................................................. 6Figure 1.7: Diaspora remittances to Kenya (US$)........................................................................................................ 6Figure 1.8: Overall inflation rate........................................................................................................................................ 7Figure 1.9: Inflation by income groups............................................................................................................................ 7Figure 1.10: Exchange rates of selected major currencies............................................................................................ 7Figure 1.11: Public expenditure allocations by MTEF sectors, 2011/12-2013/14............................................... 8Figure 2.1: Overall government performance..............................................................................................................13Figure 2.2: Country governance trend: Composite score..........................................................................................13Figure 2.3: The most problematic factors for doing business in Kenya...................................................................14Figure 2.4: Public trust in Kenya’s Parliament/National Assembly (%).................................................................16Figure 2.5: Performance of Members of Parliament/National Assembly representatives (%)..........................16Figure 3.1: Population and poverty trends, 2006 -2012.............................................................................................20Figure 3.2: Rural poverty, 2005-2012.............................................................................................................................20Figure 3.3: National poverty profile by county, 2005/06...........................................................................................21Figure 3.4: Rural poverty head count by county, 2007-2012....................................................................................21Figure 3.5: Kenya population pyramids for 1990, 2000 and 2010...........................................................................22Figure 3.6: Selected population indicators, 1962-2011..............................................................................................23Figure 3.7: Education attainment and total fertility rates...........................................................................................23Figure 3.8: Stages of demographic transition................................................................................................................24Figure 3.9: Urban poverty profile....................................................................................................................................25Figure 3.10: Urban poverty head count, 2007-2012...................................................................................................26Figure 3.11: Population density and urbanization by county, 2009.........................................................................27Figure 4.1: Share of recorded employment in Kenya by sector................................................................................30Figure 4.2: Share of informal and formal employment by county, 2009.................................................................30iv kenya economic report 2013

F i g u r e s a n d T a b l e sFigure 4.3: Under-employment rate for 15-64 year olds by county, 2009..............................................................31Figure 4.4: Unemployment rate for 15-64 year olds by county, 2009.....................................................................33Figure 5.1: Assistance during delivery in Kenya..........................................................................................................37Figure 5.2: Deaths of children under five per 1,000 live births.................................................................................38Figure 5.3: Contraceptives use by method in Kenya...................................................................................................41Figure 6.1: Primary school gross enrolment rate (GER) and net enrolment rate (NER)...................................60Figure 6.2: Primary completion rate (PCR) and primary to secondary.................................................................62Figure 6.3: County distribution of literacy by gender.................................................................................................64Figure 6.4: KCPE performance mean scores by county, 2012..................................................................................65Figure 6.5: KCSE performance index by county, 2012...............................................................................................69Figure 7.1: Percentage change in GDP growth in agriculture...................................................................................75Figure 7.2: Average annual spending on the agriculture sector, 2007/08 – 2009/10..........................................75Figure 8.1: Manufacturing sector growth rates, 2009-2012.......................................................................................78Figure 8.2: Growth patterns of GDP and the manufacturing sector in Kenya.......................................................78Figure 8.3: Manufacturing sector value added and contribution to GDP..............................................................78Figure 8.4: Comparative structure of 2009 manufacturing sector value added (% share at 2000 constant ...prices) ..............................................................................................................................................................79Figure 8.5: Manufacturing wage employment vis-à-vis contribution to wage employment..............................79Figure 8.6: Exports to AGOA (% of total Sub-Saharan exports under AGOA)...................................................82Figure 8.7: Manufacturing exports as a share of merchandise exports (%)...........................................................84Figure 9.1: Contribution of wholesale and retail trade to GDP................................................................................88Figure 9.2: Leading Kenyan exports (Ksh million).....................................................................................................90Figure 9.3: Kenya tea exports, 2002-2012 (Quantity in million Kg)......................................................................90Figure 9.4: Leading Kenyan export destinations (% share of total exports)..........................................................91Figure 9.5: Leading Kenyan imports by broad economic category (% share).......................................................91Figure 9.6: Leading sources of Kenyan imports...........................................................................................................91Figure 9.7: Kenyan exports to the EAC.........................................................................................................................93Figure 9.8: Kenya’s exports to EAC partner states.......................................................................................................93Figure 9.9: Kenya’s EAC trade.........................................................................................................................................94Figure 9.10: Kenyan exports to leading COMESA countries...................................................................................95Figure 9.11: Share of COMESA trade to total world trade........................................................................................95Figure 10.1: Lending, deposits rates and the Central Bank Rate in Kenya.......................................................... 101Figure 10.2: Lending rates (%) for selected countries............................................................................................. 101Figure 10.3: Interest rate spread (%) across selected countries............................................................................. 101Figure 10.4: Private sector credit distribution (%)................................................................................................... 101Figure 10.5: Domestic credit to the private sector (% of GDP) for selected countries.................................... 102Figure 10.6: Non-performing loans for selected countries..................................................................................... 102Figure 10.7: Nairobi Securities Exchange 20 Share Index and NASI................................................................... 102Figure 10.8: Stock market capitalization (% of GDP) of selected countries....................................................... 103Figure 11.1: Tourist arrivals by region, 2012............................................................................................................. 107Figure 11.2: Share of tourist arrivals by purpose....................................................................................................... 107Figure 11.3: Tourist arrivals by purpose, 1995-2012 (‘000).................................................................................. 107Figure 11.4: Visitors to game parks and reserves, 2007-2012................................................................................ 108Figure 11.5: National parks, reserves and other tourism infrastructure............................................................... 111Figure 12.1: Micro and small enterprise establishments, 2011.............................................................................. 115Figure 12.2: MSEs employment figures ..................................................................................................................... 116Figure 12.3: MSEs employment trends...................................................................................................................... 116kenya economic report 2013v

F i g u r e s a n d T a b l e sTable 6.9: Secondary school NER by counties, 2009.................................................................................................63Table 6.10: KCPE performance and candidates, 2009-2011.....................................................................................65Table 6.11: Details on competency levels and required competencies...................................................................66Table 6.12: Percentage of pupils reaching reading competency level (%), 2007..................................................67Table 6.13: Percentage of pupils reaching Mathematics competency level (%), 2007........................................68Table 6.14: Cross-country analysis of learning achievements...................................................................................69Table 6.15: Performance in KCSE, 2009-2011............................................................................................................70Table 6.16: Admission trends to public universities, 2006/07-2010/11................................................................71Table 8.1: Comparative world share of manufacturing exports (%)........................................................................80Table 8.2: EPZ performance indicators, 2007-2011...................................................................................................81Table 8.3: Structure of EPZ sub-sectors: Share in total EPZ, 2012.........................................................................81Table 8.4: Status of 2008-2012 MTP targets and objectives.....................................................................................82Table 8.5: Comparative structure of manufacturing...................................................................................................83Table 8.6: Comparative industrial property and patent registration........................................................................85Table 8.7: Comparative World Bank investment climate indicator rankings.........................................................85Table 9.1: Kenyan exports to the US under AGOA (US$ 1,000)............................................................................92Table 9.2: Sub-Saharan Africa: US imports under AGOA (selected countries)...................................................92Table 11.1: Hotel star rating comparison, 1991 and 2003...................................................................................... 108Table 11.2: Distribution of hotel bed-nights by zone, 2004 to 2011.................................................................... 108Table 11.3: Comparison of beds in licensed/classified hotels per province in Kenya...................................... 109Table 12.1: E-licensing (as at December 2012)........................................................................................................ 118Table 13.1: Infrastructure contribution to GDP (%)............................................................................................... 122Table 13.2: Trends in development expenditure and absorption rates in selected infrastructure portfolios(Ksh millions)............................................................................................................................................ 122Table 13.3: Trends in recurrent expenditure and absorption rates in selected infrastructure portfolios(Ksh millions)............................................................................................................................................ 123Table 13.4: Roles and responsibilities of institutions in Kenya’s water services sub-sector............................. 125Table 13.5: Benchmarking Kenya’s water and sanitation indicators, 2009.......................................................... 126Table 13.6: Performance in the roads sub-sector 2009/10 – 2011/12................................................................ 131Table 13.7: Analysis of roads sub-sector expenditure (Ksh millions).................................................................. 132Table 14.1: Roles and responsibilities of institutions in water sector .................................................................. 136Table 14.2: Government forest plantation stocking, 2007-2012........................................................................... 140Table 14.3: Categories of forest ownership in Kenya............................................................................................... 140Table 14.4: Trend in forest cover, 1990-2010............................................................................................................ 141Table 14.5: Actual and projected revenue collection, 2009-2012 (US$ millions)............................................. 141Table 14.6: Growth rate of GDP by industry (2008-2012) percentage changes............................................... 144Table 14.7: Observed temperature changes, 1960-2006......................................................................................... 149Table 14.8: Rainfall performance categorization...................................................................................................... 152Table 15.1: Economic projections for 2013-2015.................................................................................................... 156Table 15.2: Alternative scenario–Selected economic indicators........................................................................... 156Table 15.3: Population and the labour market.......................................................................................................... 157Table 15.4: Education projections 2012 to 2016 (millions)................................................................................... 160Table 15.5: Projected international tourist arrivals, earnings and value added in hotels and restaurants..... 164Table 15.6: Water sector priorities, 2013-2016......................................................................................................... 162Table 15.7: Road sub-sector programmes and sub-programmes 2013/14-2015/16........................................ 165Table 15.8: Roads sub-sector resource requirements (Ksh millions)................................................................... 166viii kenya economic report 2013

F i g u r e s a n d T a b l e sTable 16.1: Approaches to creating an enabling environment............................................................................... 170Table 16.2: Planning and budgeting process in national and county governments........................................... 173Table 16.3: Budget performance in selected local authorities ............................................................................... 176Table 16.4: Trends in Human Development Index (HDI) for selected countries, 2006-2011....................... 188Table 16.5: Trends in life expectancy for selected countries, 2006-2011............................................................ 188Table 16.6: Summary of existing incentives for investment in the forestry sector............................................. 199Table 16.7: County-level tourism institutions........................................................................................................... 201kenya economic report 2013ix

FForewordThe Kenya Institute for Public PolicyResearch and Analysis (KIPPRA)Act 2006 requires the Institute toprepare a report on the performanceof Kenya’s economy during thepreceding financial year and economic prospects forthe next three years. This is the fifth Kenya EconomicReport prepared pursuant to the KIPPRA Act.The compilation of the Kenya Economic Report2013 is a milestone in the government’s efforts totake stock of the economic gains Kenya has achievedand challenges ahead. More importantly, the reportgives the government and the private sector, andindeed all citizens, the opportunity to benchmarkour mode of economic activities with what ishappening in other countries that we share similarhistorical and economic orientation with.As a country, we have documented our visionon the development path we want to follow inKenya’s Vision 2030. The theme of KER 2013,“Creating an Enabling Environment for StimulatingInvestment for Competitive and Sustainable Counties”,recognizes that the Constitution of Kenya 2010envisages that the country’s development modelis anchored on regional governance structures,constituted into 47 counties. With the formationof counties, creation of an enabling investmentclimate will enable them to attract investment fordevelopment, poverty reduction and employmentcreation within their jurisdiction. Investmentis a key driver in production and productivityand therefore can play a major role in achievingbalanced regional growth. But investment will onlymaterialize if we build capacities in entrepreneurialattributes/competencies and also enhance the stateof technology, market access, infrastructure andinstitutional support to businesses. By and large, theextent to which these factors influence investment isdependent on stability in the macro environment.To facilitate growth in counties, it is important toput in place interventions that attract and retaininvestment.As the country grapples with the issues highlighted inthis report, we are clearly aware of the circumstancesfacing our nation today, more so the challengeof creating social cohesiveness, and building thecountry’s social capital. We are alive to the criticalchallenges we have faced during the implementationof the First Medium Term Plan 2008-2012, andthe critical resource requirements for the SecondMedium Term Plan starting 2013. Economic growthin 2012 stood at 4.6 per cent against the MediumTerm Plan target of about 9.8 per cent. There areother challenges such as fiscal pressure related tothe implementation of the Constitution, significantx kenya economic report 2013

F o r e w o r ddeficits in our current account, and over 13 per centunemployment that mainly affects young people. Itis against this background that the country shouldboldly reflect on the right policies that will not onlydrive us to be a middle income country in a fewyears to come, but also those that promote overallinclusiveness of Kenyans to participate in the marketeconomy.policies, smooth transition to a devolved governmentand promote investment across counties. We needa structural change that involves shift of resourcesfrom low productivity to higher productivity sectorsin order to address the intertwined problems ofunemployment and poverty. We shall be able todo this only with predictable and accountableregulatory and legal frameworks.Consequently, as a nation, we must prioritizethe implementation of prudent macroeconomicAnne Waiguru, OGWCabinet SecretaryMinistry of Devolution and Planning2013kenya economic report 2013xi

F o r e w o r dPPrefaceThe Kenya Economic Report (KER) 2013 is the fifthin a series of annual reports on the Kenyan economyprepared by the Kenya Institute for Public PolicyResearch and Analysis (KIPPRA). Pursuant to theKIPPRA Act No. 15 of 2006, the report is preparedin consultation with the Ministry of Devolution andPlanning, the National Treasury, and the CentralBank of Kenya.The KER 2013 analyses Kenya’s recent economicperformance and medium term prospects. Thetheme of KER 2013 is “Creating an EnablingEnvironment for Stimulating Investment forCompetitive and Sustainable Counties”. This is timelyas the implementation of the devolution processcontinues to gather momentum. The Constitutionof Kenya and the County Governments Act No. 17of 2012 envisage that the 47 county governmentswill play an important role in Kenya’s economicdevelopment. The report underscores the need tobuild effective and capable county governmentsthat will deliver on their constitutional mandates.Effective coordination and cohesive intergovernmentalrelations are required to especiallysupport effective public financial management,leveraging partnerships, infrastructure and humanresource development, growth of micro and smallenterprises and land adjudication.The Kenyan economy is on a strong recovery path,and the medium term prospects are positive,predicated on smooth transition to devolvedgovernance system, continued implementationof the reform agenda as outlined in the MediumTerm Plan and Vision 2030, regional stabilityand security, favourable weather conditions and astable global economic environment. Nonetheless,the government needs to maintain flexibility inorder to effectively respond to the changing policyenvironment.This report projects that the economy will grow byabout 5.5 per cent in 2013 and further to 6.3 percent in 2014. In the recent past, all the sectors of theeconomy registered positive growth. However, thereis potential to increase the contribution to growthby the various sectors if the challenges identified inthis report are effectively and deliberately addressed.For instance, following the discovery of oil, gasand other minerals such titanium and other rareearth minerals, the mining sector has the potentialto contribute significantly to growth. However, acoherent legal and policy framework is required tomaximize both forward and backward linkages tothe rest of the economy, and support accountabilityand productive use of earnings from Kenya’s naturalassets.xii kenya economic report 2013

F o Pr re ew fo arc dePart I of the report analyses macro and socioeconomicperformance, Part II analyses the keysectors of the economy, namely: agriculture,manufacturing, trade and foreign policy, financialservices, tourism, micro and small enterprises,infrastructure, and environment and naturalresources. Part III presents the medium termprospects for the economy under different policyscenarios. Part IV of the report analyses variousaspects of creating an enabling investment climate,including effective management of public resources,leveraging public private partnerships, naturalresource management, development and growthof small and micro-enterprises, and strongerproperty rights through land adjudication. Theoverall message from KER 2013 is that Kenya is ona recovery path, and the prospects remain positive.Implementation of the Constitution 2010 providesthe country with the opportunity to upgradegovernance structures that will help enhance theeffectiveness of the State and global competitiveness.Going forward, the main challenge is to continueto deepen structural reforms and build effectiveand capable county governments that will supportKenya’s development agenda.Dr. John M. OmitiExecutive Director2013Prof. Agnes Mwang’ombeChair, KIPPRA Board2013kenya economic report 2013xiii

F o r e w o r dAAcknowledgmentsThe Kenya Economic Report 2013was prepared and produced by staffof the Kenya Institute for PublicPolicy Research and Analysis(KIPPRA) under the overallleadership of the Executive Director.The report was prepared in consultation with theCentral Bank of Kenya, the National Treasury, theMinistry of Devolution and Planning, the NationalEconomic and Social Council, the Kenya NationalBureau of Statistics and the Ministry of East AfricanCommunity, Commerce and Tourism.Comments and suggestions on earlier drafts of thereport were very helpful in shaping the content andquality of analysis.xiv kenya economic report 2013

A b b r e v i a t i o n s a n d A c r o n y m sAAbbreviations and AcronymsACEACTAGOAA-i-AAIDSAPRARVsASALsATMsBRRUCAACsCAADPCARECCBDCBKCBRCCKCCVICDECDFAdult and Continuing EducationArtemisinin Combination TherapyAfrica Growth Opportunity ActAppropriations-in-AidAcquired Immune DeficiencySyndromeAnnual Progress ReportAnti-RetroviralsArid and Semi-Arid LandsAutomated Teller MachinesBusiness Regulatory Reform UnitCatchment Area AdvisoryCommitteeComprehensive Africa AgricultureDevelopment ProgrammeCentral Asia Regional EconomicCooperationConvention on Biological DiversityCentral Bank of KenyaCentral Bank RateCommunications Commission ofKenyaClimate Change Vulnerability IndexCentre for Development andEnvironmentConstituency Development FundCFAsCISCMACOMESACPICRADFIsDTMsEACECAECDEEFAEMCAEMISEPZsERDESPEUFAOFBOsCommunity Forestry AssociationsCredit Information SharingCapital Markets AuthorityCommon Market for Eastern andSouthern AfricaConsumer Price IndexCommission for Revenue AllocationDevelopment Finance InstitutionsDeposit Taking MicrofinanceInstitutionsEast African CommunityEconomic Commission for AfricaEarly Childhood and DevelopmentEducationEducation for AllEnvironmental Monitoring andCoordination ActEducation ManagementInformation SystemExport Processing ZonesExternal Resources DepartmentEconomic Stimulus ProgrammeEuropean UnionFood and Agriculture OrganizationFaith-Based Organizationskenya economic report 2013xv

A b b r e v i a t i o n s a n d A c r o n y m sFDIFGMFMCFFMTPFPAKFPEFTAFTECGAVIGDPGERGHGGJLOSGMSGNPGoKHDIHELBICORICTIEBCIFMISIGTILOIMFIUDsJABJICAJKIAJMPJSCKCPEForeign Direct InvestmentFemale Genital MutilationForest Management andConservation FundFirst Medium Term PlanFamily Planning Association ofKenyaFree Primary EducationFree Trade AreaForeign Trade and EconomicCooperationGlobal Alliance for Vaccine InitiativeGross Domestic ProductGross Enrolment RateGreen House GasesGovernance, Justice, Law and OrderSectorGreater Mekong Sub-regionGross National ProductGovernment of KenyaHuman Development IndexHigher Education Loans BoardIncremental Capital Output RatioInformation and CommunicationsTechnologyIndependent Electoral andBoundaries CommissionIntegrated Financial ManagementSystemImpaired Glucose ToleranceInternational Labour OrganizationInternational Monetary FundIntra-Uterine DevicesJoint Admissions BoardJapan International CooperativeAgencyJomo Kenyatta International AirportJoint Monitoring ProgrammeJudicial Service CommissionKenya Certificate of PrimaryEducationKCSEKDHSKEFRIKEMRIKEMSAKENAOKENTRAKEPIKERKEWIKFSKIHBSKIPPRAKNBSKNECKNHKNTCKQKRAKTBKTDCKTMMKwhLAIFOMSLAPSETLASDAPLATFLTMsMDGsMFIsMIAKenya Certificate of SecondaryEducationKenya Demographic and HealthSurveyKenya Forestry Research InstituteKenya Medical Research InstituteKenya Medical Supplies AgencyKenya National Audit OfficeKenya National Trunk RoadsAuthorityKenya Expanded Programme onImmunizationKenya Economic ReportKenya Water InstituteKenya Forestry ServiceKenya Integrated HouseholdsBudget SurveyKenya Institute for Public PolicyResearch and AnalysisKenya National Bureau of StatisticsKenya National ExaminationCouncilKenyatta National HospitalKenya National TradingCorporationKenya AirwaysKenya Revenue AuthorityKenya Tourist BoardKenya Tourism DevelopmentCorporationKIPPRA-Treasury Macro ModelKilowatt hoursLocal Authority Integrated FinancialOperations Management SystemLamu Port -South Sudan andEthiopia TransportLocal Authority Service DeliveryAction PlanLocal Authorities Transfer FundLong Term MeansMillennium Development GoalsMicrofinance InstitutionsMoi International Airport(Mombasa)xvi kenya economic report 2013

A b b r e v i a t i o n s a n d A c r o n y m sMICEMIPsMMRMoHMoPHSMoUMPHSMSEsMSMEsMTEFMTPMWINAFTANASINBINCCKNCDsNCICNCPBNCPDNCRNEMANERNGOsNHIFNIBNICsNPLsNPSCNRWNSENWCPCOSSMeetings, Incentives, Conferencesand ExhibitionsMedical Insurance ProvidersMaternal Mortality RateMinistry of HealthMinistry of Public Health ServicesMemorandum of UnderstandingMinistry of Public Health andSanitationMicro and Small EnterprisesMicro, Small and MediumEnterprisesMedium Term ExpenditureFrameworkMedium Term PlanMinistry of Water and IrrigationNorth American Free TradeAgreementNairobi All Share IndexNile Basin InitiativeNational Council of Churches ofKenyaNon-Communicable DiseasesNational Cohesion and IntegrationCommissionNational Cereals and Produce BoardNational Council for Population andDevelopmentNairobi Cancer RegistryNational Environmental MonitoringAuthorityNet Enrolment RateNon-Governmental OrganizationsNational Health Insurance FundNational Irrigation BoardNewly-Industrialized CountriesNon-Performing LoansNational Police Service CommissionNon-Revenue WaterNairobi Securities ExchangeNational Water Conservation andPipeline CorporationOne-Stop ShopsPAYEPCPBPFMPMCTPPPPSDSR&DRECsREDDRIARMLFROSCASSACCOsSACMEQSAGAsSEZsSMEsSPVSSATBKTEAMsTIVETTOTUAEUNDPUNECAUNICEFUNWTOUSAIDPay As You EarnPest Control Products BoardPublic Financial ManagementPrevention of Mother to ChildTransmissionPublic-Private PartnershipPrivate Sector DevelopmentStrategyResearch and DevelopmentRegional Economic CommunitiesReducing Emissions fromDeforestation and ForestDegradationRegulatory Impact AssessmentRoad Maintenance Levy FundRotating Savings and CreditAssociationsSavings and Credit CooperativesSouthern and Eastern AfricaConsortium for MonitoringEducation and QualitySemi-Autonomous GovernmentAgenciesSpecial Economic ZonesSmall and Medium EnterprisesSpecial Purpose VehicleSub-Sahara AfricaTea Board of KenyaThe East African Marine SystemTechnical, Industrial, Vocational andEntrepreneurship TrainingTurnover TaxUnited Arab EmiratesUnited Nations DevelopmentProgrammeUnited Nations EconomicCommission for AfricaUnited Nations Children’s FundUnited Nations World TourismOrganizationUnited States Agency forInternational Developmentkenya economic report 2013xvii

A b b r e v i a t i o n s a n d A c r o n y m sVATWABWARMAWASREBWEFWHOValue Added TaxWater Appeals BoardWater Resources ManagementAuthorityWater Services Regulatory BoardWorld Economic ForumWorld Health OrganizationWRUAsWSBsWSPsWSSWSTFWTAWTOWater Resource Users AssociationsWater Service BoardsWater Service ProvidersWater and Sanitation ServicesWater Services Trust FundWorld Travel AwardsWorld Trade Organizationxviii kenya economic report 2013

E X e c u T i v e s u m m a r yEExecutive SummaryThis report analyzes the recent performance ofthe Kenyan economy and provides an assessmentof the medium term prospects under differentassumptions. The key areas that are analyzed includerecent macroeconomic performance, governance,social economic development, and the main sectorsof the economy such as agriculture, manufacturing,trade and foreign policy, financial services, tourism,micro and small enterprises, infrastructure andeconomic services, and environment and naturalresources.The theme of the report is Creating an EnablingEnvironment for Stimulating Investment forCompetitive and Sustainable Counties. This is timelyas the implementation of devolution gathers fullmomentum. The Constitution and the CountyGovernments Act No. 17 of 2012 envisage that the47 county governments will play an important rolein Kenya’s economic development. The Kenyaneconomy is on a strong recovery path, and themedium term prospects are positive, predicated ona smooth transition to devolved governance system,continued implementation of the reform agendaas outlined in the Medium Term Plan and Vision2030, regional stability and security, favourableweather conditions and a stable global economicenvironment. Nonetheless, the government willhave to enhance capacity and policy flexibilityto respond effectively to the changing policyenvironment.Macroeconomic PerformanceThe Kenyan economy registered improved economicperformance in 2012 with an annual growth of4.6 per cent in GDP compared to 4.4 per cent in2011. The macroeconomic environment witnessedimproved price and exchange rate stability. However,per capita income growth, which is largely explainedby labour market dynamics, has been relatively slowat 1.7 per cent in 2012. The Kenyan labour marketis characterized by a large share of informal sectoremployment, which partly explains the low levelsof income per capita and productivity. The informalsector is generally characterized by low productivity,vulnerability of employment, and low incomes.Recent growth has largely been driven by growth indomestic household consumption and investment.Household consumption accounts for about 77.3per cent of GDP and grew by about 5.5 per cent in2012. The share of investment in GDP in real termswas about 27.6 per cent and grew by about 9.6 percent. The corresponding share in nominal termswas 20.1 percent, implying that the relative priceshave been favourable for investment goods. All thekenya economic report 2013xix

E X e c u T i v e s u m m a r ysectors of the economy witnessed positive growthin 2012. However, there is potential to increasethe contribution to growth of various sectors ifthe challenges that have been identified can beaddressed effectively.For instance, the mining and quarrying sector hasthe potential to contribute significantly to growthfollowing the discovery of oil, gas and otherminerals. However, a coherent legal and policyframework is required to maximize both forwardand backward linkages to the rest of the economy,and support accountability and productive use ofearnings from natural resources. Similarly, the weakcapacity of the domestic construction industryneeds to be addressed to ensure increased benefitsfrom the enhanced investment activity in theinfrastructure sector.Macroeconomic stability should remain a toppolicy priority for the government as there arepotential risks emanating from internal and externalimbalances. These include: fiscal pressure arisingfrom implementation of Medium Term Planprogrammes, the 2010 Constitution, and demandsfor higher wages and salaries; a growing currentaccount deficit; and investment-savings resourcegap. The government should be ready to respondflexibly to the changing economic landscape inorder to ensure exchange rate stability, and alsoensure that inflation expectations are anchoredwithin the policy target. Effective operationalizationof the Public Finance Management (PFM) Act 2012is critical in establishing a sound public financialmanagement system to support management ofpublic resources both at the national and countygovernment level.GovernanceKenya’s aggregate governance performance is abovethe continental average score based on the MoIbrahim African Governance Index, 2012. However,an assessment of Kenya’s governance based onWorldwide Governance Indicators produced bythe World Bank reveals that there is greater scopefor improving governance on all fronts, namely: i)Voice and Accountability, ii) Political Stability andAbsence of Violence, iii) Government Effectiveness,iv) Regulatory Quality, v) Rule of Law, and vi)Control of Corruption.The implementation of the Constitution is amajor milestone in uplifting Kenya’s governanceperformance. Various independent offices havebeen established that have their foundations in theConstitution to spearhead reforms in various spheresof the society. They include the Independent Electionand Boundaries Commission (IEBC), the Salariesand Remuneration Commission, the TransitionAuthority, the Controller of Budget, the Ethics andAnti-Corruption Commission, the Commissionon Revenue Allocation, and the Judicial ServiceCommission. The Judiciary has historically facedsevere capacity gaps in infrastructure and humanresource. However, efforts are being made to addressthese challenges, including through recruitment ofjudges and expansion of court infrastructure.With regard to the Legislature, the BicameralLegislature (two Houses) with representativeselected to either the Senate or the National Assemblyhas become operational. However, accordingto results from the Afro-barometer, less than 40per cent of Kenyans have trust in the NationalAssembly. Timely and effective implementationof the Constitution is an important instrumentfor streamlining governance so as to enhanceaccountability, transparency, predictability andparticipation in management of public affairs andresources.Poverty, Inequality and PopulationGrowthThe fight against poverty is a top priority on Kenya’sdevelopment policy agenda. The government’scommitment to the realization of MDGs, eliminationof hunger and poverty, and achievement of inclusiveand equitable growth is contained in various policydocuments such as the Medium Term Plan andxx kenya economic report 2013

E X e c u T i v e s u m m a r yVision 2030. In the recent past, the economy hasfaced various shocks and challenges resulting inhigh cost of living and below-target growth rates.Consequently, the overall poverty levels increasedfrom 48.8 per cent in 2007 to 50.8 per cent in 2008before declining marginally to 49.8 per cent in2012. In terms of the number of poor people in thepopulation, it was estimated at 18.2 million in 2007and the number soared to 19.5 million and later 20.1million in 2008 and 2010, respectively. The increasein 2008 is largely explained by the slowdown in theeconomy, and high inflation following the postelectionviolence, drought, high international foodand energy prices, and the global financial crisis. Thelevel of income inequalities is relatively high, andKenya’s urban population is growing at 4 per centper annum.The magnitude of poverty varies from county tocounty. Counties such as Kitui, Marsabit, Mandera,Samburu, Tana River, Turkana and West Pokot havepoverty levels above 70 per cent. These counties arealso characterized by relatively weak infrastructureand poor access to public services.Kenya is undergoing a demographic transitionwhere the ratio of working age to non-workingage population is increasing. Experts use the termdemographic dividend to refer to potential benefitsof this transition, such as reduced dependence ratios.Kenya’s dependence ratio in 2011 was estimated at82.14. Middle income countries are at an advancedstage of transition with much lower dependenceratios. For instance, Malaysia’s dependence ratio in2011 was around 53 per cent. These trends indicatethe need for the government to invest more insocial services and infrastructure, and ensure that agrowing economy creates jobs for the large youthfulpopulation.Labour Market and EmploymentThe employment rate (proportion of employedpersons to the working age population) is about 69.2per cent. The rate of unemployment is estimated at8.6 per cent, having improved from 12.7 per cent in2005/06. However, a high proportion of employmentis in the informal sector and small-scale agricultureand pastrolism. The rates of unemployment varywidely across the counties, although analysis ofavailable data shows that counties with high rates ofurbanization such as Kisumu, Nairobi and Mombasa,and counties in ASAL areas tend to have relativelyhigher levels of unemployment.The Kenyan labour market is characterized by anumber of challenges including: (i) high youthunemployment. The respective unemploymentrates for the 15-35 and 15-24 age groups based onthe 2009 Census data are 10.4 per cent and 14.2 percent; (ii) high levels of under-employment; and (iii)high levels of employment in the informal sector.Informality is widespread across Kenya’s regions butis more pronounced in rural areas. The bulk of theemployed labour force is in smallholder agricultureand the rapidly growing informal sector. However,most of the informal economy jobs are vulnerable,i.e. the jobs lack the ‘collective aspects’ that makeup decent work. These aspects include: productivework, workplace security, better prospects forpersonal development, social protection, andsocial integration; and (iv) Kenya’s labour forcehas relatively low education attainment comparedto middle-income countries. About 65 per centof the population has only primary or incompletesecondary education, while another 10 per centhas never attended school. Given the above labourmarket challenges, government interventions toaddress unemployment should also give attention toskills development and training.HealthIn the recent past, the health sector has recordedmixed performance. While some health indicatorshave registered strong performance, there arenumerous gaps in health outcomes. Remarkableachievements have been made in reducing underfivemortality from 115 per 1,000 live births in2003 to 74 per 1,000 live births in 2008/09 andinfant mortality from 77 per 1,000 live births to52 per 1,000 live births over the same period. Thekenya economic report 2013xxi

E X e c u T i v e s u m m a r yrate of immunization increased from 64 per cent in2005/06 to 77 per cent in 2009. The plan to reduceHIV prevalence to 6.3 per cent by 2010/11 wasalmost met. However, performance on indicators ofmaternal health has been dismal. Data from the KenyaDemographic and Health Survey (KDHS) revealthat Maternal Mortality Ratio (MMR) deterioratedfrom 414 in 2003 to 488 deaths per 100,000 livebirths in 2008/09. Nutritional status of children hasalso not improved considerably. Staffing levels in thesector fell below the WHO recommended minimumof 36 and 356 doctors and nurses, respectively, per100,000 population. Moreover, accessibility tohealth facilities varies across counties, with the worstaffected areas being in the Northern part of Kenya.Health sector financing is also below the WHOrecommendation.Most other targets in the health sector have notbeen met. The target for skilled birth attendancewas 66 per cent for 2010/11, yet only 43 per centof deliveries were performed by a health professionalin the same year. In 2010/2011, the immunizationtarget was 77 per cent against a target of 90 per cent.Non-communicable diseases such diabetes andcancer are increasingly contributing to morbidityand mortality.The government should double efforts on thecommitment to improve health sector infrastructure,attaining acceptable standards and norms withoutadversely affecting staffing, equipment, infrastructureand operating costs across all counties.Education and Skills DevelopmentOverall, there has been remarkable increase inaccess and participation rates in the educationsector as reflected in indicators such as enrolmentrate (both gross and net) and gender parity acrossall levels. However, there are disparities acrosscounties, with the worst affected areas being thearid and semi-arid lands and those areas with highpoverty levels. Primary education recorded thehighest participation rate, while access rates atECDE, secondary and tertiary education are stilllow. Literacy levels are still low in some counties,which calls for the need to strengthen adulteducation programmes in the affected areas.Disparities in education outcomes at county levelare further aggravated by inefficient utilization ofavailable resources, as manifested through teacherabsenteeism and limited emphasis on monitoringof actual performance. Learning outcomes at thesecondary school level are still weak, with about 70per cent of KCSE candidates failing to achieve C+,which is the minimum requirement for admission touniversity. Transition to university is below 40 percent.The government should consider various policyoptions to enhance performance of the sector,including: automatic promotion from pre-primaryto primary and to secondary education, developobjective instruments to support monitoring andevaluation of education outcomes, strengthenquality assurance, implement staffing norms so asto achieve equitable distribution of teachers, andestablish more tertiary institutions.AgricultureThe performance of the agriculture sector wasadversely affected at the beginning of 2012 whena severe frost dealt a blow to tea production,while the delay in the onset of long rains ledto suppressed agricultural activities. However,improved and widespread rains during the secondand third quarters of the year contributed to strongperformance of the sector. The sector grew by 3.8 percent in 2012 compared to 1.5 per cent in 2011 andreceived about 4.0 per cent of national expenditure,although this is below the allocation of 10 per cent asper the Maputo Declaration.Agriculture functions have been devolved underthe Constitution of Kenya 2010. The countygovernments can leverage public-private partnerships(PPPs) to enhance agricultural production andproductivity. Potential areas for application ofPPPs include cold chain infrastructure; use ofxxii kenya economic report 2013

E X e c u T i v e s u m m a r yICT in collecting, processing and disseminatinginformation; development of cottage industries; andskills development. Development of inter-countymarkets also offers opportunities for increasingaccess to markets.ManufacturingThe manufacturing sub-sector in Kenya constitutes70 per cent of the industrial sector’s contributionto GDP with building, construction, mining andquarrying cumulatively contributing the remaining30 per cent. The share of the manufacturing sectorin GDP has stagnated at about 10 per cent, withthe sector’s growth during the first Medium TermPlan being a mere 3.16 per cent. The sector ispredominantly agro-processing, with manufactureof food, tobacco, beverages and textile accountingfor over 34.0 per cent of total sectoral value added.Consequently, the performance of the sector isgreatly affected by erratic weather patterns.The sector grew by 3.1 per cent in 2012 comparedto 3.4 per cent in 2011. The weak performanceis attributed to high costs of production, stiffcompetition from imported goods, high costs ofcredit, drought incidences during the first quarterof 2012, and uncertainties due to the 2013 generalelections. The influx of counterfeits and volatility ininternational oil prices also affected the performanceof the sector. Although the sector value addedimproved from Ksh 292.4 billion in 2011 to Ksh316.7 billion in 2012, the sector’s contribution toGDP declined from 9.6 per cent in 2011 to 9.2 percent in 2012. The number of wage employment inthe sector increased from 276,900 employees in2011 to 277,900 employees in 2012, a mere 0.4 percent improvement. This unfavourably compareswith 3.4 per cent employment growth between 2010and 2011. The sector’s contribution to total wageemployment has actually gradually worsened from13.9 per cent in 2008 to 12.9 per cent in 2012.Kenya’s manufacturing is largely agro-based. Thiscontrasts with newly industrialized countrieswhere food manufacture constitutes a small share,with manufacture of chemicals, electronics andmachinery constituting over 40 per cent of totalvalue added. Kenya’s exports under AGOA are about0.8 per cent, comparing favourably with Tanzania,Uganda and Ethiopia, each having a share of less than0.3 per cent. However, it compares unfavourablywith Angola (20%) and South Africa (17%). Kenya’sshare of manufacturing in total merchandise exportsis 35 per cent compared to South Africa (47%),Malaysia (67%) and Singapore (73%). This indicatesample opportunities for Kenya to increase the shareof manufacturing exports.To revitalize the performance of the sector, policyincentives geared towards high-value manufacturing,inter-firm linkages and enhanced FDI should beencouraged. To combat counterfeits, regional effortsto establish harmonized anti-counterfeit laws shouldbe expedited. Further, increased public awareness oncounterfeits, coupled with enhanced financial andhuman resources for the Kenya Anti-CounterfeitAgency, should be considered. To address costs ofproduction, enhanced investments in alternativeenergy sources including geothermal, wind andsolar energy are vital. This should be corroboratedby addressing other factors contributing to the highcost of doing business, such as infrastructure andcontract enforcement.Trade and Foreign PolicyVision 2030 and the Medium Term Plan identifytrade as a key driver of growth. Domestic tradeaccounts for about 10 per cent of GDP in Kenyaand about 16 per cent and 60 per cent of recordedformal and informal employment, respectively. Inrecent years, Kenya has recorded a rapid growth insupermarkets and hypermarkets; between 2000 and2010, a growth of 32 per cent was realized. Kenyansupermarkets such as Nakumatt and Uchumi areexpanding to regional markets. Domestic tradefaces many challenges, including a large informalcomponent, access to finance, interference from localauthorities, insecurity, and lack of physical facilities.The areas that require strategic interventions includekenya economic report 2013xxiii

E X e c u T i v e s u m m a r yprovision of infrastructure, and regulatory andadministrative barriers.Kenya’s external trade is highly skewed towardsagricultural commodity exports, and the leadingimports are non-food industrial supplies such as fueland lubricants, and capital goods. In recent years,growth in imports has outstripped exports, thusleading to deterioration in external trade balanceand current account. Kenya’s exports to AGOAhave largely been limited to only two commoditygroups, namely: textiles and apparel and agriculturalproducts. The EAC accounts for about 27 per centof Kenya’s total exports. With implementation ofthe Constitution of Kenya 2010, Kenya is nowintegrating external trade as part of foreign policy.In addition, there is great potential for sub-nationaldiplomacy anchored around county governments,including cross-border cooperation.Financial ServicesThe financial sector plays a critical role in thedevelopment process. In Vision 2030, for example,the sector is expected to drive high levels of savingsand financing of Kenya’s investment needs. As at2012, the sector comprised 43 commercial banks,1 mortgage finance company, 5 representativeoffices of foreign banks, 8 deposit taking microfinanceinstitutions, 112 foreign exchange bureausand 2 credit reference bureaus. In the same period,there were 45 licensed insurance companies and 3locally incorporated reinsurance companies. Otherinsurance intermediaries and insurance serviceproviders were 154 licensed insurance brokers, 23medical insurance providers and 4,205 insuranceagents. Other insurance players included 126investigators, 78 motor assessors, 20 loss adjusters,2 claims settling agents, 10 risk managers and 26insurance surveyors. The pension industry had1,262 retirement benefit schemes with over 1.7million members, 16 registered fund managers,26 administrators and 12 custodians. While theNairobi Securities Exchange (NSE) was the onlystock market in Kenya, there were 130 Savings andCredit Cooperative Societies (SACCOs) licensed asdeposit takers.Though the sector continued to witnesstransformational policy changes in 2012, growthslowed to 6.5 per cent from 7.8 per cent in 2011.Similarly, the sector’s contribution to GDPdecreased from 6.3 per cent to 5.2 per cent in thesame period. Even though the banking sector showsgrowth in assets, deposits and profitability, thetrend in interest rates is off the Medium Term Plantarget. The Plan envisioned achieving lower lendingrates and higher deposit rates, thereby reducing theinterest rate spread to 6 per cent, which currentlystands at 11 per cent. The large spread is a seriousimpediment to expansion and development offinancial intermediation because it may discouragepotential savers with low returns on deposits, andpotential investors with reduced feasible investmentopportunities.In 2012, the stock market performance improved.The NSE 20 share index increased by 29 per centto close at 4,133.02 points from 3,205.02 pointsin 2011. Although market capitalization recordedan increase of 46.5 per cent, it is still low whencompared to aspirator countries such as Korea,Chile, Malaysia, South Africa and Singapore. Kenya’smarket capitalization is below 50 per cent of GDP,thus far below the medium term target of 90 per cent.The emerging policy issues include long-term creditgap and the limited menu of financial instrumentsin the capital market. Though Kenya’s financialsector has a wide range of products, institutionsand markets, there are glaring gaps in long-termcredit. While commercial banks have not managedto supply long-term capital, the stock market hasremained shallow and thin, limiting long-termresource mobilization by firms. Thus, to boost longterminvestment growth, deliberate efforts must bemade to adequately develop vehicles for mobilizinglong-term capital in Kenya. The developmentfinance institutions that the government created as adeliberate effort to fill a development financing gapare still a viable option. The government thereforexxiv kenya economic report 2013

E X e c u T i v e s u m m a r yneeds to formulate a strategy towards this end.The capital market offers a limited menu of financialinstruments, mainly equities and bonds. In orderto enhance long-term resource mobilization forinvestment, there is need for diversification offinancial instruments in the capital market. Thiswill not only provide investors with more riskdiversification opportunities, but it will also fostercompetition and innovativeness and allow biggerfinancial investments. Such new products in themarket would include derivative securities that arenot currently traded in the capital market.Micro and Small EnterprisesThe Micro and Small Enterprise (MSE) sectorin Kenya is an important and fast growing sectoremploying 42 per cent of the working population,and accounting for 75 per cent of all modernestablishments in Kenya as at 2011. MSEs dominatein majority of the sectors, including wholesaleand retail trade, restaurants, hotels, communityand social services, insurance, real estate, businessservices, manufacturing, agriculture, transport andcommunication and construction. Interestingly,while the number of employees in MSEs increasedbetween 2010 and 2011, there was a decline withrespect to employees in medium and large enterprises.The manufacturing value added contribution madeby MSEs also increased, though the contributionis still low, accounting for 14.2 per cent yet twothirds (67%) of manufacturing firms are MSEs. Thestatistics on tax performance reveal that Pay as YouEarn (PAYE) and income tax payments have beenincreasing over the years. Value Added Tax (VAT)contributions, however, experienced a decline in2008/09 and 2010/11, which is attributable to theintroduction of Turnover tax (TOT), which hasbeen increasing steadily since its implementation.Informality within the sector is a huge challenge,with statistics revealing that the number of personsoperating informally has been increasing over theyears, in spite of the licensing reforms that includethe introduction of a Single Business Permit.While licensing reforms have ensued, includingthe introduction of an E-registry to electronicallyhost the licences, multiplicity of licences issued bydifferent regulatory agencies is a key concern. Thisis further exacerbated by the decentralization of theregulators, who are scattered in different Ministriesand different locations. While the E-registry wasexpected to lower transaction costs associatedwith obtaining licences, there seems to be limitedawareness of this service. It is approximated that 30per cent of businesses are not aware of the service;majority of those who are aware of it have not usedthe service. Further licensing changes are expectedunder the Constitution, which splits licensing rolesbetween the national and county governments.Best practice, however, reveals that decentralizinglicensing can lead to increase in licences andconsequently increase transaction costs. Thereis therefore need to institutionalize RegulatoryImpact Assessment (RIA) to help the governmentidentify whether a regulation (such as a licence) isneeded, what the costs and benefits of the proposedregulation are, and whether there are alternativesolutions to regulation. This should ensure thatlicences are not arbitrarily introduced.The government should additionally introduce asystem where MSEs can access several differentlicensing agencies, business registration andinstitutions that administer other statutory rightsat one physical location at the county level. Furtherconsideration should be made for the introductionof a single licence that amalgamates all relevantlicences. This would reduce transaction costs andmay consequently encourage investment due to thereduced costs of starting a business.Lack of authoritative data is also an outstandingchallenge that the government needs to address.Relevant data though frequent surveys would beof great benefit to the sector as it would assist thegovernment in policy and strategy formulation andimplementation.kenya economic report 2013xxv

E X e c u T i v e s u m m a r yTourismTotal tourist arrivals declined marginally by 0.3per cent in 2012 to 1,780,768 tourists comparedto 1,785,382 tourists in 2011. Estimated receiptsfrom tourism in 2012 was Ksh 96.02 billion, a 1.92per cent drop from the Ksh 97.90 billion realizedin 2011. Europe is still the main source market forKenya with a share of 43 per cent, followed by Africaat 24 per cent, America at 13 per cent, Asia at 12 percent, Middle East at 5 per cent and Oceania at 3 percent. However, there was a decline in the number ofvisitors from major European sources such as theUK, Italy and Germany, which could be explained bythe economic slowdown in the Eurozone. However,tourist arrivals from Asia increased.Tourism performance fell below the mediumterm targets. The government needs to implementstrategies to accelerate growth of the sector, includingfull operationalization of the Tourism Act 2011,increased investment in infrastructure, improvedsecurity, implementation of Vision 2030 flagshipprojects such as development of resort cities, andcontinued diversification of source markets.Infrastructure and EconomicServicesInfrastructure development is a basic pillar forcompetitiveness and growth of the economy. Itis critical for trade, lowering costs of productionand transactions, facilitating flow of materials andinformation, reducing inequalities and poverty,and enhancing economic capacity. The governmentis giving greater emphasis on infrastructuredevelopment as evidenced through increased budgetresource allocation.Two sub-sectors are key in infrastructuredevelopment, namely: water and sanitation androads. Kenya is considered to be water scarce, withonly less than 20 per cent of the country’s safe yieldof renewable freshwater resources having beenexploited. The government’s national target is toachieve safe water services coverage of 80 per centby 2015. National access to piped water is estimatedat about 17.9 per cent. About 44 per cent of Kenyansrely on unprotected water sources, mainly madeup of streams, lakes, ponds, dams, water vendors,and unprotected wells and springs. There are widedisparities in access to improved water sources.More than half (26) counties score below thenational average access rate of 48.5 per cent. Urbanareas have a high level of access to improved watersources, estimated at about 53.1 per cent. Access toimproved sanitation is also low, with about 21 percent of rural households using poor faecal disposalmethods such as buckets and bush. The subsectorfaces various challenges, including fundingfor water infrastructure, low budget absorption,water distribution losses, inefficiencies, and poorspatial coverage. The roads sub-sector has also beenreceiving increased budget resource allocation forconstruction of new roads, bridges, rehabilitation ofroads and periodic maintenance. However, the roadnetwork and density and conditions vary across thecountry, which require to be addressed.Environment and Natural ResourcesThe Constitution of Kenya (2010) places highpremium on environmental conservation. Itemphasizes the role of government in holding thenatural resource in trust for the people of Kenya. Assuch, the government must remain accountable toits people regarding all its functions and operations,and specifically with regard to management ofnatural resources for the benefit of the country.It has been observed above that Kenya is a waterscarce country with only a per capita renewablewater resource of 647m 3 . About 50 per cent of thecountry’s water resources are trans-boundary. Thewater resource is skewed and unevenly distributed,with Tana River, Lake Victoria North and Southaccounting for 86 per cent of the total water resource.Accurate figures are difficult to obtain, since only65 per cent of stream flows are monitored. Thecountry’s surface water is generally described as bothbrown and turbid due to contamination from pointxxvi kenya economic report 2013

E X e c u T i v e s u m m a r yand non-point pollution, suggesting a link betweenwater pollution and unsustainable land managementpractices. Non-Revenue Water (NRW) is a bigchallenge in the sub-sector. Kenya has also suffereddegradation of catchment areas due to populationpressure and deforestation resulting from destructionof natural vegetation through unsustainable land usepractices; lack of proper environmental assessmentfor development of infrastructure; forest excisionfor settlement and wood fuel; illegal logging; andhuman encroachment.Managing Kenya’s forests sustainably is a majorchallenge especially with the devolved system ofgovernance and, therefore, requires policies thatcan be adapted to accommodate varying countyconditions, and forest product needs over time.The Forest Act 2005 emphasizes the need toinstitutionalize sustainable management of theforestry sector. Success of this initiative will, to alarge extent, depend on availability of up-to-dateand accurate inventory data relating to forest areas,growth and yield, and clearly defined modalities ofexecuting the agreements. Appropriate mechanismsfor achieving harmonization of the various sectoralpolicies that touch on forestry should urgently beput in place. Moreover, there are great opportunitiesfor the private sector to invest in the forestry sectorin forest-rich counties.The policies, laws and institutions that presentlygovern the mineral sector in Kenya need significantreform if the sector is to grow sustainably andcontribute to economic development and povertyreduction in the counties. The highest priority mustbe given to finalizing the Geology, Mining andMineral Bill (2012), which has remained in draft forsome years. Kenya has a maritime boundary disputewith Somalia, in the Indian Ocean waters. Thisdispute includes the gazetted oil and gas explorationblocks that are located in the disputed area of theoffshore Lamu Basin, and resolution of the dispute assoon as possible is needed to avoid resource-fuelleddisputes, which are even harder to mediate. Thedisputed Ilemi triangle between South Sudan andKenya also lies in the Tertiary Rift Basin stretchingover three exploration blocks in that region.Kenya should develop a Comprehensive KenyaNatural Resource Charter based on the Constitutionof Kenya 2010 and leverage on good practicesglobally. Moreover, such a charter should be giventhe force of law, and adopted by all the 47 countyassemblies and endorsed by Parliament to guide theoperations of the oil and gas sector, as well as therest of the extractive industries in Kenya. This willhelp in ensuring that benefits and costs are sharedthroughout the whole country in an acceptablemanner to avoid tensions and conflicts that havebeen the bane of such efforts globally.Medium Term ProspectsThe economy registered a growth of 4.6 per cent in2012, compared to 4.4 per cent in 2011. Growthprospects for 2013 were enhanced by the peacefulgeneral elections of March 2013. Short andmedium term growth will largely be determinedby successful implementation of the Constitution,including a smooth transition to a devolvedgovernment system, regional and global economyperformance, macroeconomic stability, security,and successful implementation of key reforms andpublic expenditure programmes, most of which areoutlined in the Medium Term Plan. The economyis projected to grow by 5.3 per cent in 2013, andincrease to 6.3 per cent in 2014 and further to 7.1per cent in 2015.The Vision 2030 objective in the economic pillarspecified a target of economic growth rate of 10 percent by the year 2012/2013. This can be realizedin the medium term given a stable internationalenvironment, effective implementation of MTPflagship programmes, and exploitation of full growthpotential arising from mineral resources and theinfrastructure and construction industry.kenya economic report 2013xxvii

E X e c u T i v e s u m m a r yCreating an Enabling Environmentfor Competitive and SustainableCountiesThe theme of the Kenya Economic Report 2013,Creating an Enabling Environment for Competitiveand Sustainable Counties, is informed by threeconsiderations. First, the investment climate ispivotal to achieving the goals of Kenya’s Vision2030. Second, the Constitution envisages thatKenya’s development mode will be anchoredon devolved governance structures. Third, anenabling environment is required to addressregional disparities in resource endowments, anddevelopment and access to infrastructure and othersocio-economic services.Given the transition to a devolved governancesystem, effective institutions for effective countygovernments are a key priority. In this regard, aneffective Public Finance Management system ispivotal to successful devolution through improvedmanagement of public resources and servicedelivery. Public finance reforms at the county andnational levels should be anchored on the Strategyfor Public Finance Management Reforms in Kenya2013-2018. Moreover, there is need to enhancedownward and upward accountability, and supportcapacity building in public finance management.County governments can leverage limited capacitythrough partnerships (public-private partnerships)with businesses, community organizations andknowledge institutions in delivering their mandates,especially with regard to infrastructure, agricultureand tourism. However, lack of funding should notbe the sole reason for deciding on the PPP option.Other critical considerations should includecapacity and administrative costs for managementof PPP contracts, transaction costs, and explicitand implicit liabilities imposed on the national andcounty governments.Other critical areas for improved investmentenvironment are human capital development, landadjudication, investment in county infrastructure,creating an enabling environment for micro and smallenterprises, development of wholesale and retailtrade, and investment in natural resources. Overall,human capital development is not only below theVision 2030 target but there are also large regionaldisparities. The four counties with the strongestperformances are Nairobi, Nyeri, Uashin Gishu andKericho while the weakest performance is noted inTurkana, Mandera, Tana River and Wajir. Countiesneed to leverage free primary and day secondaryschool education to enhance education attainmentand also focus more public policy attention to thehealth sector. Infrastructure development is key forcompetitiveness. In the water sector, specifically,national and county governments should workclosely with water companies to address distributionlosses, cost recovery, enhance resource utilization andexpand access to water in rural areas. The challengesto be addressed for the road sector include politicalinterference in project implementation, maintenancebacklog, local construction capacity, encroachmenton road reserves, and mobilization of additionalresources. Land is a critical factor of productionand, thus, important for overall competitiveness.There is need to resolve land conflicts and disputes,and fast-track adjudication and registration throughcost-effective methods as has been used in Rwanda,Ethiopia and Madagascar. There is great potentialfor the enhanced role of natural resources in Kenya’sdevelopment following the discovery of oil and otherminerals. However, there is need for a firm legal andpolicy foundation to facilitate efficient exploitationof the resources, and avoid conflicts and inordinatedelays as have been experienced in the recent past.xxviii kenya economic report 2013

PART IMACRO ANDSOCIO-ECONOMICPERFORMANCEThis part reviews macroeconomic performance,governance, population dynamics, poverty, labourmarket, health and education. The analyses coversthe period up to 2012 and, where data is available,the review is conducted at both national andcounty government levels. The analyses and policyrecommendations relate to the recent recoveryin growth, the new governance framework underthe Constitution of Kenya 2010 and the observeddisparities across counties in terms of access tovarious social services and opportunities.

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eChapter1Macroeconomic Performance1.1 Economic GrowthThe Kenyan economy registered improvedeconomic performance in 2012 with an annualgrowth of 4.6 per cent in GDP compared to 4.4 percent in 2011. The macroeconomic environmentwas relatively stable as inflation eased during theyear, while the exchange rate stabilized againstmajor foreign currencies. This performance suggeststhat the economy has continued to weather thechallenges of high international oil prices, droughtconditions that were experienced in the Horn ofAfrica, and weak global performance in 2011. Inaddition, during the last half of 2011, the economyfaced risks of macroeconomic instability reflectedin high inflation and a weakening of the shillingagainst other international currencies. The strongperformance in 2012 is largely explained by therecovery that started during the second half of theyear. Although rains were erratic, some regionsreceived above-normal rains, and thus agriculturegrew at 3.8 per cent compared to 1.5 per cent in2011.Kenya’s real GDP per capita increased by 1.7 percent from Ksh 38, 941 in 2011 to Ksh 39, 607 in2012. However, this growth was lower than the 3.7per cent growth registered in 2010, but marginallyabove the 1.5 per cent growth in 2011. Kenya’s lowper capita incomes and growth is linked to structuralbottlenecks in the labour market, especially the highshare of informal sector jobs and unemployment.The jobs in the informal sector are characterizedby low productivity and wages. In this regard, thereis need to enhance the quantity of decent jobs.In addition, efforts geared towards increasing thestock of human capital through training and skillsdevelopment can help increase the potential GDP.Figure 1.1: GDP growth and GDP per capita(2009-2012)Percentage7654321020092010Years2011 2012GDP Growth (%)GDP Per CapitaGrowthData Source: Kenya National Bureau of Statistics (Various), Economic Survey2 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c e1.2 Sources of GrowthAll the sectors of the economy posted positivegrowth in 2012. The services sector is the mostimportant source of GDP growth, accountingdirectly for about 50 per cent of growth. In 2012,the leading sub-sectors were wholesale and retailtrade, transport and communication, financialintermediation, and education sector services.These four sub-sectors accounted for about 38.2per cent of overall growth in GDP. The wholesaleand retail sub-sector was the second single largestsource of growth after agriculture. While the sectoris a major source of employment and growth, it ischaracterized by a large number of small and microenterprises,and informality. However, supermarketshave grown spectacularly by about 32 between 2000and 2010.The agriculture sector is the single largest sector ofthe economy accounting for about one quarter ofGDP. About 18 per cent of growth in GDP in 2012was from the sector, up from 7.5 per cent recorded in2011. The sector grew by about 3.8 per cent in 2012,compared to 1.5 per cent in 2011. The growth waslargely due to relatively better weather conditions.The government is undertaking important reformsin the sector, including legal and institutionalreforms, increased allocation of resources towardsirrigation, and improved access to inputs, especiallyfertilizer and seeds.The industrial sector comprising mining andquarrying, manufacturing, electricity and watersupply, and construction, account for about 15 percent of GDP. Manufacturing was the largest subsectoraccounting for about 9.2 per cent of GDP in2012. Growth in the manufacturing sector declinedto 3.1 per cent in 2012 from 3.4 per cent in 2011.The manufacturing sector suffers from limited valueaddition and diversification, high cost of inputs andlow competitiveness.The mining and quarrying sub-sector has highpotential to contribute to economic growthfollowing the discovery of oil, coal and otherminerals. In 2012, the sector grew by 4.1 per centcompared to 7.1 per cent in 2011. Its share in GDPstood at 6.5 per cent in 2012. Exploration has beenstepped up following the discovery of oil, gas andother minerals such as titanium and other rare earthminerals. In order to reap maximum potential, bothdirect and indirect, the government needs to addressemerging issues such as land use, benefits sharingbetween the national and devolved governmentsand communities, and linkages between thenatural resource sector and other sectors of theeconomy in order to maximize both forward andbackward linkages, and to develop a robust legal andinstitutional framework that will support productiveuse of proceeds from minerals by enhancingtransparency and accountability, while sealingloopholes for rent-seeking. These concerns need tobe factored in the Geology, Mining and MineralsBill 2012 and other existing policy frameworks.The construction industry grew by 4.8 per cent in2012 compared to 4.3 per cent in 2011. The subsector’scontribution to GDP growth was 3.7 percent in 2012. The sector’s potential contributionto growth can be enhanced given recent increasedexpenditure on infrastructure development, if thegovernment effectively addresses the challengesfacing the sector. These include the weak capacityof the local construction industry, which leads toover-reliance on foreign firms and inputs, and poorworkmanship and delayed completion of projects(Patroba, 2012).On the demand side of the economy, growth haslargely been driven by domestic demand, mainlyprivate household consumption and investment.The share of private consumption in GDP was 77.3per cent in 2012, and grew by about 5.5 per cent. Thevolume of public investment has been growing at adouble-digit rate and, as a result, public investmentas a share of GDP increased from about 2.3 per centin 2003 to 4.6 per cent in 2012. The contribution ofexternal demand to GDP growth has been rathermuted as growth in volume of Kenya’s exports ofgoods and services has been slower than that ofkenya economic report 2013 3

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eimports. For instance, while real exports of goodsand services grew by 4.7 per cent in 2012, importsgrew by 12.5 per cent. Kenya relies on low-valueprimary exports, and imports non-food industrialsupplies, fuel and lubricants, and other capitalequipment that are high value. This has contributedto the persistent current account deficits.Table 1.1: GDP growth in the East African region2008 2009 2010 2011 2012Burundi 5.0 3.5 3.8 4.2 4.0Ethiopia 11.2 10.0 8.0 7.5 7.0Kenya 1.5 2.7 5.8 4.4 4.6Rwanda 11.2 4.1 7.2 8.3 7.7Tanzania 7.4 6.0 7.0 6.4 6.9Uganda 7.7 7.0 6.1 6.7 2.6Source: International Monetary Fund - IMF (2013)Growth in the region has been relatively strong.Rwanda, Ethiopia and Tanzania have been thefastest-growing economies in the region. Kenya’sgrowth rebounded in 2012 supported by improvedagricultural performance and macroeconomicstability. The tight monetary policy adopted by theBank of Uganda partly explains the slowdown ingrowth in Uganda. Burundi, which is classified as a‘fragile’ economy by the IMF, is also lagging behind(Table 1.1). Nevertheless, regional economiesare projected to continue growing strongly (IMF,2013). Kenya can thus exploit its geographicallocation as a regional hub to spur the growth of theeconomy through cross-border trade and regionalintegration.1.3 Investment and SavingsThe levels of investment, savings and efficiency(measured by the incremental capital outputratio) are key determinants of the achievablerates of economic growth and employment. TheMedium Term Plan 2008-2012 targeted to realizean investment rate of 23.2 per cent in 2008/09,increasing to 24.6 per cent in 2009/10, 27 per centin 2010/11, 29.7 per cent in 2011/12 and 32.6per cent in 2012/13. The targets for gross nationalsavings were 16.2 per cent in 2008/09, 18.5 per centin 2009/10, 21.4 per cent in 2010/11, 24.4 per centin 2011/12 and 27.7 per cent in 2012/13. However,actual performance shows that these targets forsavings and investment were not achieved duringthe Plan period due to a combination of factors,including internal and external shocks such as the2007/08 political crisis, the global financial crisis,slow economic growth and slow implementation ofplanned reforms.Figure 1.2: Gross investment and savings in KenyaPercentage of GDP25.020.015.010.05.00.020072008 2009 2010 2011 2012Gross Investment as a % of GDPGross Savings as a % of GDPResource Gap as a % of GDPSource: Kenya National Bureau of Statistics - KNBS (2013), Economic SurveyYearFigure 1.3: Components of investmentKsh MillionPanel A600,000500,000400,000300,000200,000100,00002004200520062007YearPrivate Investments2008200920102011Public Investments4 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c ePercentage40.0030.0020.0010.000.002005 2006 2007 2008 2009 20102011YearGrowth in private invesmetGrowth in public investmentGrowth in total investmentFigure 1.4: Incremental capital output ratio3.42004 2005 2006 2007 2008 2009 2010 2011 2012Source:2.9 2.82.7Figure 1.5: Gross capital formation and grosssavings in selected countries12.87.43.44.74.4Panel BSource: Kenya National Bureau of Statistics - KNBS (2012), Economic SurveyTrends in gross savings and investment ratios areshown in Figure 1.3. Gross investment rose fromKsh 624,483 million or 20.5 per cent of GDP in2011 to Ksh 691,052 million or 20.1 per cent ofGDP in 2012. Most of the expansion has been dueto investment in transport equipment, which grewby 29.5 per cent, other machinery and equipment(which grew by 14.5%), and buildings andstructures (which grew by 10.4%). Gross savingsdecreased by 2 per cent from Ksh 426,283 millionin 2011 to Ksh 419,052 million in 2012. The rateof savings has stagnated and remains far below themedium term targets. For all the years, investmenthas stayed above savings, generating a resource gapaveraging 6.3 per cent between 2007 and 2012.The share of public investment in gross investmenthas increased. In 2004, public investment share ingross investment was 13.6 per cent, while privateinvestment share was 86.4 per cent. However, by2012, the relative shares for public and privateinvestment were 23.4 per cent and 76.6 per cent,respectively. This shows that public investmenthas grown relatively faster than private sectorinvestment.Percentage of GDP60 48 52 50364034 33 323020100ChinaIndiaIndonesiaTanzaniaCountryGross capital formation (% of GDP), 2011 Gross savings (% of GDP), 2010Source: World Bank (2012)292126 31 251625 19 22 21 20 16KenyaUgandaGhanaSouth AfricaEfficiency of capital as measured by the IncrementalCapital Output Ratio (ICOR) shows signs ofreduced performance. A trend analysis of ICORbetween 2004 and 2012 in Figure 1.4 shows thatthe ratio has been quite erratic. Between 2004 and2007, the ratio was on a downward trend, indicatingan improvement in investment efficiency. However,the ratio shot to 12.8 in 2008 and to an average of6.5 between 2008 and 2012, showing a decline ininvestment efficiency. The 2008 kink is attributed tothe slowdown in growth in output due to the adverseeffects of post-election disturbances, drought andthe global financial crisis.Comparisons of savings and investments in Kenyawith other countries in Figure 1.5 show that thelevels existing in Kenya are much lower than thoseposted by fast-growing economies such as Chinaand India. Out of the nine countries selected,Kenya’s gross savings rate of 16 per cent is thelowest. However, Kenya’s gross capital formationrate of 25 per cent is within the range of her Africancounterparts, but far much lower than those existingin fast-growing Asian economies. The nominal ratekenya economic report 2013 5

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eof investment is lower than real investment rate dueto relative prices that favour investment goods.1.4 External Sector PerformanceKenya’s overall external position improved in 2012to Ksh 123,185 million compared to Ksh 21,847million registered in 2011. However, the currentaccount position continued to deteriorate, reachingits highest level in two decades. The current accountdeficit as a percentage of GDP increased from 9.7 percent in 2011 to 10.4 per cent in 2012. The servicesaccount of the current account has remained insurplus due to strong performance in transportationservices, tourism and remittances. In the recentpast, remittances have recorded strong performance(Figure 1.7). The financial and capital account ofbalance of payments recorded an improved surplusfrom Ksh 332, 569 million in 2011 to Ksh 438,038million in 2012. This strong performance is largelyexplained by strong performance in long-term andshort-term capital inflows, which increased fromKsh 287,866 million in 2011 to Ksh 398,794 millionin 2012.Figure 1.6: Current account deficit as percentage ofGDP (1996-2012)Percentage2.00.0-2.0-4.0-6.0-8.0-10.0-12.0%199619982000200220042006200820102012%GDPSource: Kenya National Bureau of Statistics – KNBS (2013), Economic SurveyThe merchandise account deficit as a percentageof GDP improved from 24.5 per cent in 2011to 23.0 per cent in 2012. This performance islargely explained by faster increase in merchandiseimports of about 5.7 per cent compared to a 1.0per cent increase in export earnings. There was alsodeterioration in terms of trade (price of exportsrelative to price of imports).Figure 1.7: Diaspora remittances to Kenya (US$)Remittances (US$)120,000100,00080,00060,00040,00020,0000Jan, 2010Mar, 2010May, 2010Jul, 2010Sep, 2010Nov, 2010Jan, 2011Mar, 2011May, 2011Jul, 2011Sep, 2011Source: Central Bank of Kenya, www.central bank.go.keMonth, YearForeign Direct Investment (FDI)Nov, 2011Jan, 2012Mar, 2012May, 2012Jul, 2012Sep, 2012Nov, 2012Despite having one of the most diversifiedeconomies in the region, Kenya’s FDI flows havebeen consistently lower than those of its neighbours(Table 1.2). In 2012, Tanzania attracted FDIs worthUS$ 1.70 billion, focused largely on its offshoregas fields. Uganda received US$ 1.72 billion ininvestment, while Kenya drew in US$ 259 million.Available data indicate that China is emerging as akey source of foreign direct investment for Kenya.Table 1.2: FDI inflows for selected yearsYear US$ millionsKenya Tanzania Uganda2008 96 1,383 7292009 115 953 8422010 178 1,813 5442011 335 1,229 8942012 259 1,706 1,721Source: UNCTAD (2013)In the 1970s, Kenya was one of the most favoureddestinations for FDI in East Africa. Kenya isprojected to attract about US$ 1.3 billion (approx.Ksh 108 billion) per annum over the next five years6 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c ein foreign direct investment inflows, and recent oildiscoveries may contribute to this remarkably.1.5 Monetary Policy and InflationThe key monetary policy objective is to maintainprice stability, defined as an overall inflation of thetarget range of 5 ± 2 per cent. In 2011, the countryfaced substantial inflationary pressure that wasexacerbated by high international oil prices, droughtconditions and exchange rate depreciation. As aresult, the rate of inflation increased to a peak of19.72 per cent in November 2011, prompting theCentral Bank of Kenya to adopt a tight monetarystance.Figure 1.8: Overall inflation ratePercentage20181614121086420Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Source: Kenya National Bureau of Statistics – KNBS (2013), Economic SurveyThe tight monetary policy stance adopted by theCentral Bank of Kenya helped to stabilize theexchange rate. An appreciation of the Kenya shillingagainst all major currencies was recorded fromDecember 2011 all through the first half of 2012.It is expected that the Central Bank of Kenya willcontinue pursuing a prudent monetary policy thatwill support price and exchange rate stability, bothin the short and medium term periods.Figure 1.9: Inflation by income groupsPercentage2520151050JanuaryFebruaryMarchAprilMayJuneLower incomeOtherJulyAugustSeptemberMonthMiddleCombined NairobiOctoberNovemberDecemberUpperTotal KenyaSource: Kenya National Bureau of Statistics – KNBS (2013), Economic SurveyFigure 1.10: Exchange rates of selected majorcurrencies600Accordingly, the Central Bank of Kenya raised theCentral Bank Rate (CBR) from 6.25 per cent inSeptember 2011 to 18 per cent in December 2011.The tight monetary policy was maintained throughJuly 2012 when the CBR was lowered to 16.5 percent and further to 13 per cent in August 2012. Theeasing of the monetary policy was in response to theimproving inflation outlook (Figure 1.8).Mean exchage rate (Ksh)500400300200100Jan-11Mar-11May-11Jul-11Sep-11Nov-110Jan-12Mar-12May12Jun-12MonthSep-12Nov-12100 Japanese YenEuroSterling PoundUS DollarThe inflation rate declined across all the incomegroups. However, the decline was more significantfor the upper and lower income groups, which werebelow the national average for the country.Source: Central Bank of Kenya (2012), www.centralbank.go.ke/index.php/exchange-rates/1.6 Fiscal Policy and PerformanceKenya maintained relative fiscal discipline despitepressure from external shocks and politicalkenya economic report 2013 7

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c euncertainty due to national elections in 2013.Total revenue collected increased compared tothe previous year, and government expenditurewas largely in line with priority areas. Public debtto GDP ratio exceeded the 45 per cent ceiling inthe debt management strategy. However, the mostrecent debt sustainability analysis by IMF showsthat Kenya continues to face a low risk of externaldebt distress (IMF, 2013).1.6.1 RevenueEstimated total revenue for 2012/13, includingA-I-A, is Ksh 932.4 billion (25.3% of GDP)compared to 748.2 billion over the same period in2011/12. This represents a 25 per cent growth intotal revenue collected. However, according to theMinistry of Finance (2013), by the end of the thirdquarter (March 2013), total cumulative revenuecollection, including A-I-A, was below the targetby Ksh 98.2 billion. Most of the poor performancewas attributed to a poorer than expected economicenvironment.1.6.2 ExpenditureTotal government expenditure and net lending as ashare of GDP has increased in the last five years asshown in Table 1.3. The current public spendingprogramme is expected to ensure continuity inresource allocation based on prioritized programmesconsistent with Vision 2030 and the Medium TermPlan to accelerate growth, poverty reduction andemployment creation. In the last three years, publicspending priorities have been in social programmes(mainly education) and infrastructure (Figure 1.11).An analysis of the 2012/13 budget reveals thatVision 2030 projects, water supply, police services,Judiciary and Parliament also received large shares.Figure 1.11: Public expenditure allocations byMTEF sectors, 2011/12-2013/14SectorsEnvironmental Protection, Water andHousingSocial Protection, Culture andRecreationNational SecurityPublic Administration & InternationalRelationsGJLOSEducationHealthGeneral Economic, Commercial andEnergy, Infrastructure & ICTAgriculture and Rural Development0 10 20 30Share (%)*Expenditure CeilingSource: Ministry of Finance (2013), Budget Policy Statement1.6.3 Fiscal deficitThe estimated overall fiscal deficit, excluding grants,in 2012/13 was 308.3 billion (8% of GDP) against a2013/14*2012/132011/12Table 1.3: Fiscal outturn (% of GDP)Fiscal Outturn (% of GDP) 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12* 2012/13**Total Revenue 21.63 22.02 21.80 23.86 23.95 22.8 25.3Revenue 19.72 20.20 20.37 21.92 21.86 21.05 23.05A-I-A 1.92 1.82 1.43 1.93 2.09 1.75 2.25Expenditure and net lending 24.33 27.25 26.62 29.50 29.13 28.89 33.46Recurrent expenditure 17.80 20.55 19.46 20.77 21.25 19.72 21.26Development expenditure 4.66 6.70 7.16 8.73 7.87 9.16 12.07Deficit excluding grants (commitment basis) -2.70 -5.23 -4.82 -5.65 -5.18 -6.08 -8.17Grants 0.90 1.30 0.81 1.27 0.67 0.47 1.49Deficit including grants (commitment basis) -1.78 -3.93 -4.01 -4.38 -4.50 -5.62 -6.68Deficit including grants (cash basis) -2.10 0.39 -5.23 -7.09 -4.26 -5.62 -6.64Financing 2.10 -0.39 5.23 7.09 4.26 5.23 6.64Foreign financing -0.14 0.32 1.84 0.93 1.02 3 3.82Domestic financing 2.24 -0.71 3.39 6.16 3.24 2.23 2.83Source: Ministry of Finance (2012) Quarterly Budget Review, 2012/13; and Ministry of Finance (2013), Budget Policy Statement8 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c etargeted deficit of Ksh 250.3 billion (6.5% of GDP)as shown in Table 1.4. This was higher than thebalance over the same period in the previous year,which stood at Ksh 199.6 billion or 6 per cent ofGDP. When including grants, the estimated fiscalbalance was at 6.7 per cent of GDP in 2012/13compared to 5.6 per cent in 2011/12.1.6.4 Overall public debtThe annual fiscal deficit arising from the increasedexpenditures that are not matched by increasedrevenues has led to an increase in the stock of debtin Kenya. Total stock of debt increased from 1.49trillion (49.3% of GDP) in 2011 to 1.63 trillion(45.8% of GDP) in 2012. Consequently, debt percapita has continued to increase from Ksh 22,382in 2007 to 31,837 in 2010 and Ksh 38,523 in 2012(Table 1.5). However, compared to the previousyear, domestic debt declined from 49.3 per cent ofGDP to 45.8 per cent of GDP in 2012. This is as aresult of significant fiscal consolidation and prudentexternal borrowing, as well as a strengthenedmacroeconomic environment. According to themost recent debt sustainability analysis, the biggestrisks that Kenya faces to external debt sustainabilitycome from exchange rate shocks and less favourableterms on new public sector loans.In 2011, Kenya’s fiscal performance comparedwell with countries such as Ghana and India whenits revenue collection reached 21 per cent of GDPwhereas that of Ghana and India was about 20 percent and 12 per cent, respectively, in the same year.However, between 2010 and 2011, Kenya’s fiscaldeficit declined slightly from -5.87 per cent to -4.55per cent, while that of Ghana declined significantlyfrom -7.17 per cent to -3.96 per cent (Table 1.5).1.6.5 Fiscal policy and implementationof devolved governmentAs the country implements the new Constitution,some of the biggest issues are on how thegovernment (at both national and county levels)will manage its finances, especially with regard tofiscal discipline; ensure that resources are allocatedaccording to priorities; and ensure ‘value for money’.The main laws that have been enacted and pertainto devolution are the Urban Areas and Cities Act2011; Transition to Devolved Government 2012;Intergovernmental Relations Act 2012; CountyGovernment Act 2012; and the Public FinanceManagement Act 2012.The Public Finance Management Act 2012 isparticularly key in informing public expendituremanagement reforms in the devolved systemof government. The Act is comprehensive as itconsolidates and repeals various laws, includingthe Government Financial Management Act 2004,the Fiscal Management Act 2009, the NationalGovernment Loans Guarantees Act, and theContingencies Fund and County EmergenciesFunds Act. It further provides a framework for thebudget process at the national and county levels,Table 1.4: Central government’s public debt, 2007-20122007 2008 2009 2010 2011 2012Domestic Debt** (ksh milion) 404,706 430,612 518,507 660,268 764,223 858,830External Debt ***(ksh million) 396,564 439,967 540,875 569,138 722,805 774,555Total debt 801,270 870,579 1,059,382 1,229,406 1,487,028 1,633,385GDP (ksh million) 1,833,511 2,107,589 2,366,984 2,553,733 3,048,867 3,440,115Population (million) 35.8 36.7 37.7 38.5 39.5 40.7Debt per capita 22,381.9 23,721.5 27,011.3 31,836.9 37,759.2 38,523.2Domestic debt as a % of GDP 22.1 20.4 21.9 25.9 25.3 24.1External debt as a % of GDP 21.6 20.8 21.1 22.2 23.2 21.7Total debt as a % of GDP 43.7 41.3 43.0 48.1 49.3 45.8** Domestic debt is reported on gross basis.*** Includes public and publicly-guaranteed foreign currency loans, end of period exchange rate.Source: Kenya National Bureau of Statistics – KNBS (2013), Economic Survey; and Central Bank of Kenya (2012b) Statistical Bulletinkenya economic report 2013 9

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 1.5: Cross country fiscal indicatorsRevenue, excluding grants (%of GDP)Expense (% of GDP)Cash surplus/deficit (% ofGDP)Country Name 2008 2009 2010 2011 2008 2009 2010 2011 2008 2009 2010 2011Chile 24.51 19.05 21.51 22.66 18.56 21.46 20.60 20.00 4.51 -4.23 -0.42 1.29China 11.10 11.92 11.53Egypt, Arab Rep. 27.62 26.92 24.78 21.93 30.32 30.08 28.86 29.19 -6.36 -6.56 -7.73 -10.08Ghana 15.69 15.42 16.63 19.56 20.55 18.03 20.08 21.35 -5.87 -5.65 -7.17 -3.96India 12.50 11.22 12.88 11.78 16.87 16.56 16.32 15.34 -4.87 -5.42 -3.64 -3.68Kenya 19.41 19.67 20.31 20.67 21.39 20.87 22.41 22.84 -4.08 -5.32 -5.87 -4.55Korea, Rep. 24.03 23.05 22.65 23.27 20.60 21.85 19.87 20.39 1.64 0.02 1.65 1.82Mauritius 23.46 22.76 22.45 21.65 22.66 20.90 0.58 -2.37 -1.15Singapore 20.74 17.54 17.37 17.90 14.74 14.71 12.85 13.43 7.75 1.61 7.73 9.55South Africa 31.10 28.62 28.80 29.00 31.45 33.60 32.58 33.21 -0.68 -5.12 -4.05 -4.42Thailand 20.12 18.63 20.32 21.28 18.24 19.67 18.62 20.61 0.50 -3.05 -0.62 -1.22Tunisia 29.26 28.56 28.81 31.02 27.40 27.79 27.84 32.77 -0.62 -1.47 -1.36 -3.69Uganda 13.25 12.58 12.37 16.38 15.35 13.87 16.31 18.96 -1.36 -0.92 -3.93 -3.88Source: World Bank (2012)covering key areas such as Treasury functions,Parliamentary oversight; and national and countygovernments responsibilities with respect to themanagement and control of public finance. The lawalso envisages that the national government willprovide the support for creation of the necessaryinstitutional structures and capacity building toenable the county governments to function anddeliver on their mandates, including reporting ontheir budgets.Effective operationalization of the Public FinanceManagement (PFM) Act requires variousregulations that will need to be given priority. Theyinclude:(i) Those relating to fiscal responsibility principles;(ii) Creation and operation of AutonomousGovernment Agencies and Semi-AutonomousGovernment Agencies both at national andcounty government levels;(iii) Public sector accounting standards andregulations;(iv) A framework for issuing debt guarantees forcounty governments and the medium term debtstrategy; and(v) Treasury Single Account (TSA) regulationsand/or implementation strategy.1.7 Macroeconomic PolicyChallenges and OptionsMacroeconomic stability should remain a toppolicy priority for the government. Kenya isfacing potential risks emanating from internal andexternal imbalances. The macroeconomic landscapedepicts increasing fiscal pressure arising from theimplementation of Medium Term Plan programmesand the Constitution of Kenya 2010, especially withregard to devolution, a growing current accountdeficit and an investment-savings resource gap.Moreover, Kenya’s economic growth remainsvulnerable to external shocks, especiallydevelopments in the global economy, regionalstability and security, and weather-related supplyshocks. On the domestic front, political stability10 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c eand national cohesion are essential for improvedbusiness confidence and policy predictability.Kenyan authorities should develop mechanismsto respond flexibly to macroeconomic risks andshocks.The Medium Term Plan targets on growth,investment and savings are not being achievedas planned. This under-performance is explainedby exogenous shocks related to weather, regionalsecurity, global slow-down in growth and politicaluncertainty in 2007/08. However, there has alsobeen slow implementation of planned programmessuch as special economic zones, public-privatepartnership frameworks and pension reforms. Acoordinated effective implementation of governmentdevelopment programmes, especially within thedevolved government system, will support effectiveand timely realization of development goals.Smooth implementation of the Constitutionwith regard to transfer of functions and the legalframework for public expenditure management asoutlined in the Public Finance Management Act2012 will help support fiscal discipline, efficientallocation of resources and reduced wastageof public resources. Moreover, Kenya has highpotential for increased foreign direct investmentand increased contribution of the natural resourcessector to economic growth. The enabling legal andgovernance frameworks will need to be fast-tracked,with the aim of maximizing benefits from resourceexploitation for long-term sustainable growth.kenya economic report 2013 11

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eChapter2Governance2.1 IntroductionKenya’s Vision 2030 political pillar aims to realize ademocratic political system that is issue-based, andadherence to the rule of law applicable to a modern,market-based economy. These will enhance Kenya’sglobal competitiveness and promote economicdevelopment. Good governance is essential instrengthening democracy, promoting effectivepolicy implementation and application of rule oflaw. Good governance promotes accountability,transparency, efficiency, and rule of law in publicinstitutions at all levels. In addition, it allows forsound and efficient management of human, natural,economic, and financial resources for equitableand sustainable development. Moreover, undergood governance, there are clear decision-makingprocedures at all levels of public offices, citizenryparticipation in decision-making processes, and theability to enforce rights and obligations throughlegal mechanisms. Without proper functioning ofinstitutions of governance (based on the rule oflaw) that promote social stability and legal certainty,there cannot be any investment and assumption ofrisk that form the basis of a market economy.2.2 Governance PerformanceIndicatorsAccountability: All public officials must beaccountable or answerable for their actions.Accountability rests largely on the effectivenessof the sanctions and the capacity of accountabilityinstitutions to monitor the actions, decisions, andprivate interests of public officials. Accountability isa key requirement of good governance.Participation: This is the involvement and ownershipby citizens of critical decisions in the developmentprocess of the country. Participation could beeither direct or through legitimate intermediateinstitutions or representatives.Transparency: This entails clarity and opennessof decision-making. Transparency thus entailspublic knowledge of the policies and actions ofgovernment, existing regulations and laws, and howthey may be accessed by the citizenry. It requiresmaking public accounts verifiable, and officialbehaviour amenable to scrutiny.Fairness: Rules should apply equally to everyone insociety. A society’s well-being depends on ensuringthat all its members feel that they have a stake in itand do not feel excluded from the mainstream ofsociety by subjecting everyone to equal treatmentbefore the law.2.3 Overall PerformanceThere is scope for improving governance as reflectedin the World Bank’s (2012) Worldwide Governance12 kenya economic report 2013

M a c r o e c o n o m i c P eG ro fv oe rmn a n c eIndicators (Figure 2.1). The indicators comprisesix aggregate governance indicators for the period1996-2011. These are: i) Voice and Accountability;ii) Political Stability and Absence of Violence; iii)Government Effectiveness; iv) Regulatory Quality;v) Rule of Law; and vi) Control of Corruption.One area where Kenya underperforms is ongovernment effectiveness, scoring 35 per cent,below the 50 per cent average score. Before theenactment of the Constitution of Kenya 2010,the Judiciary was probably the weakest of thethree arms of government. The Judiciary was notperceived as independent, and was prone to politicalmanipulation and interference from the Executive.The civil service is expected by law to be efficientand impartial and to act with integrity. Between1998 and 2002, the effectiveness of the governmentdropped due to political uncertainty that precededthe 2002 elections. South Africa, Rwanda and Ghanahad the best rating in government effectivenessin the last decade (The Ibrahim Index of AfricanGovernance, 2012).Though the performance was below the 50 per centaverage, Kenya’s score in Regulatory Quality (48%)and Voice and Accountability (50%) was relativelybetter than was the case for other indicators, andindeed had generally improved between the period2002 and 2011. Regulatory authority is the powerthat the Legislature gives a government agency toenforce statutes, to develop regulations that have theforce of law, and to assist the public in complyingwith laws and regulations.In 2011, Kenya scored below 20 per cent in allthe three areas of Rule of Law, Political Stability/Absence of Violence, and Control of Corruption.Notably, the country also experienced a downwardtrend in these areas between 2006 and 2010. TheRule of Law maxim implies that governmentdecisions are made by applying known legalprinciples. The poor performance in Rule of Lawand Control of Corruption may suggest nonenforcementor selective application of laws.Figure 2.1: Overall government performanceIndex60504030201001996 1998 20002002 2003 2004 2005 2006 2007 2008 2009 2010 2011YearSource: Ibrahim Index of African Governance (2012)Voice and AccountabilityPolitical Stability/Absence ofViolenceRegulatory QualityRule of LawHowever, based on an aggregated governance score,Kenya’s governance performance scores are higherthan the continental average (The Mo Ibrahim Indexof African Governance, 2012) in the last decade asshown in Figure 2.2.Figure 2.2: Country governance trend: Compositescore100806040200 00 0102 03 04 05 06 07 08 09 10 11Confidence IntervalAfrican AverageSource: Ibrahim Index of African Governance (2012)The poor governance performance highlightedabove may have contributed to the drop in Kenya’scompetitiveness as illustrated in Table 2.1.kenya economic report 2013 13

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 2.1: Select rankings on the GlobalCompetitive IndexCountry 2011-2012 2012-2013Switzerland 1 1Singapore 2 2Finland 4 3United States 5 7United Kingdom 10 8South Africa 50 52Rwanda 70 63Botswana 80 79Ghana 114 103Kenya 102 106Egypt 94 107Rank Country Bribery Aggregate4 Burundi 18.85 Rwanda 2.5Source: Transparency International (2012)Corruption restricts investment and holds backeconomic growth. It undermines programmesdesigned specifically to aid the vulnerable sectionsof the society. As Figure 2.3 shows, corruption isthe single most important challenge to creation of apredictable and favourable investment environmentin Kenya.Figure 2.3: The most problematic factors for doingbusiness in KenyaSource: World Economic Forum (2012)Kenya’s competitiveness ranking fell from position102 in 2011 to 106 in 2012. Beyond the challengesassociated with overall governance, the GlobalCompetitiveness Report 2012-2013 suggests thatthe decline in Kenya’s competitiveness was also asa result of poor scores in key areas such as ethicalbehaviour of firms, strength of investor protection,integrity of auditing and reporting standards and theprotection of minority shareholders.The prevalence of bribery in Kenya remains high,with likelihood of bribery demand of 29.5 per cent,though the country performs better when comparedto Tanzania and Uganda (39.1% and 40.7%,respectively). As Table 2.2 shows, Rwanda remainsthe least bribery-prone country in the region with anaggregate index of 2.5 per cent followed by Burundiwith an index of 18.8 per cent.Table 2.2: Likelihood of bribery demand across theEast African countriesRank Country Bribery Aggregate1 Uganda 40.72 Tanzania 39.13 Kenya 29.5Corruption-20.8Inflation - 13.9Tax rates - 11.0Crime and theft - 9.3Access to financing - 9.0Inadequate supply of infrastructure - 8.1Inefficient government bureaucracy - 5.6Policy instability - 4.4Poor work ethic in national labour force - 3.3Foreign currency regulations - 2.9Inadequately educated workforce - 2.4Tax regulations - 2.3Insufficient capacity to innovate - 2.2Government instability/coups - 2.1Poor public health - 1.4Restrictive labour regulations - 1.4Source: World Economic Forum (2012)0 5 10 15 20 25 30Percent of responsesCorruption undermines trust and thus is aninvestment risk since there are no guaranteesabout the enforcement of contracts. Consequently,corruption raises transaction costs, createsuncertainty, and is therefore a disincentive toinvestors.2.4 The ExecutiveThe Kenyan Executive derives its autonomy fromChapter 9 of the Constitution. The Executivearm of government is responsible for effectingand enforcing laws. With the promulgation of theConstitution in 2010, the Executive was vested withthe powers to draft crucial bills to ensure smoothtransition to the two-tier government–national andcounty governments. The Executive has alreadyassented to a number of bills that are necessary for14 kenya economic report 2013

M a c r o e c o n o m i c P eG ro fv oe rmn a n c ethe smooth functioning of county governments.They include the County Governments Act 2012,the Public Service Commission Act 2012, theTransition to Devolved Government Act 2012, theIntergovernment Relations Act 2012, the NationalLand Commission Act 2012, and the Leadershipand Integrity Act 2012. The government iscontinuing to implement governance reforms in linewith the Constitution. For instance, the Executivehas overseen the formation of various constitutionalcommissions. These include the IndependentElectoral and Boundaries Commission (IEBC), theSalaries and Remuneration Commission (SRC),and the Judicial Service Commission ( JSC).In 2012, the Judicial Service Commission recruited15 judges of the Land and Environment Courtand 12 judges of the Industrial Court. Since thepromulgation of the Constitution, the Judiciaryhas instituted other reforms. They include theestablishment of the Ombudsman office, expansionof court infrastructure, launching of mobile courts,acquisition of Land Rovers and application ofinformation communication technology in itsservices. The Court Fees Calculator is beingtested and will be in use to eliminate avenues forcorruption. In addition, faini chap chap (mobilefines payment) has been introduced and will helpminimize graft (Government of Kenya, 2012).2.5 The JudiciaryThe Constitution lays the basis for the exercise ofjudicial authority. Article 159 states that “judicialauthority is derived from the people and vests in,and shall be exercised by the courts and tribunalsestablished by or under this Constitution.” TheJudiciary is thus required to administer justice,promote alternative forms of dispute resolutionmechanisms (including reconciliation, mediationand traditional dispute resolution mechanisms)while promoting and protecting the purpose andprinciples of the Constitution. The hierarchy in theJudiciary comprises the Supreme Court, the Courtof Appeal, the High Court, the Industrial Court, theEnvironment and Land Court, and the SubordinateCourts (Magistrates Courts, Kadhis’ Courts, CourtsMartial and Tribunals).The Judiciary has historically faced severe capacitygaps in its infrastructure and human resource.Between 2011 and 2012, the Judiciary made effortsto address these challenges. For instance, the numberof judges and magistrates increased from 345 in2008 to 543 in 2012 (KNBS, 2012; Government ofKenya, 2012). The number of judges as of 2011/12was 104 and the Judicature Act amended in 2012has stipulated that the number be raised from 70 to150.2.6 The LegislatureKenya’s Legislature (Parliament) derives its powersand authority from Chapter 8 of the Constitution,which envisions a Bicameral Legislature (twoHouses) with representatives elected to either theSenate or the National Assembly. The Senate has 68members. These comprise 47 members, each electedby the registered voters of the 47 counties, with eachcounty constituting a single member constituency.There are also 16 women members nominated bypolitical parties according to their proportion ofmembers of the Senate; two members, one man andone woman, representing the youth; two members,one man and one woman, representing persons withdisabilities; and the Speaker, who is an ex-officiomember. The National Assembly has 350 memberscomposed of elected representatives from 290constituencies, 47 women elected by the registeredvoters of the counties, 12 members nominated bypolitical parties according to their proportion ofmembers of the National Assembly to representspecial interest groups, and the Speaker, who is anex-officio member.Figure 2.4 shows that less than 40 per cent ofKenyans have trust in the National Assembly. Thiscould be a pointer to the fact that Kenya’s NationalAssembly is ineffective in its legislative work andkenya economic report 2013 15

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c ealso in safeguarding the interests and rights ofcitizens.Figure 2.4: Public trust in Kenya’s Parliament/National Assembly (%)Percentage35302520151050Not at All Just a Little Somewhat A lot Don’t KnowSource: Afrobarometer (2012)It is also worth noting that the performance ofKenya’s Legislature has a public approval rating ofbelow 50 per cent (Figure 2.5). Members of theNational Assembly have often been accused ofclamouring for higher pay at the expense of theirlegislative performance and constitutional mandate.This is because the quality of legislative bills passedin the house has a direct impact on the quality of lifeof citizens.Figure 2.5: Performance of Members ofParliament/National Assembly representatives(%)Percentage35302520151050NeverRarelySource: Afrobarometer (2012)Often Always Don’t knowIt can be argued that lower public trust andperformance of the Legislature are related (SeeFigure 2.4 and Figure 2.5). However, with thetwo-tier Legislature (national and county levels),it is expected that the level of public trust in theLegislature will increase as the Constitution placesaccountability and citizen participation at the centreof governance.On equal gender participation, though thenumber of female legislators has improved sinceIndependence, the rate is less than satisfactory(Table 2.3).Table 2.3: Women representation and participationin Kenya’s Parliament: 1 st to 10 th ParliamentParliamentPeriod1 st 1963-19692 nd 1969-19743 rd 1974-19794 th 1979-19835 th 1983-19886 th 1988-19927 th 1992-19978 th 1997-20029 th 2002-200710 th 2008-2012Source: Kihoro (2007)No. ofWomenelectedTotalNo. ofConstituenciesAvailableslots fornomination158 0 12 0158 1 12 1158 4 12 2158 5 12 1158 2 12 1188 2 12 0188 6 12 1210 4 12 5210 10 12 8210 16 12 6No. ofwomennominated16 kenya economic report 2013

M a c r o e c o n o m i c P eG ro fv oe rmn a n c eAccording to Article 81(b) of the Constitution, “notmore than two-thirds of the members of electivepublic bodies shall be of the same gender.” Thisimplies that at least 117 Members of Parliamentwould have to be female or male if women made upthe majority in Parliament. However, in December2012, the Supreme Court of Kenya ruled thatthe one-third gender representation rule is notachievable in the March 2013 elections, but will beprogressively implemented to be fully realized byAugust 2015.2.7 Policy Issues and OptionsThough the country has recorded improvementin the Judiciary, Executive and Legislature, timelyimplementation of the Constitution is central toimproving governance in Kenya. Overall, holdingcredible elections, handling of internal and externalsecurity threats, management and equitableallocation of public resources, and improvingsocial cohesion lay the foundation for improvedgovernance in Kenya2.7.1 The ExecutivePolitical and ethnic tensions still characterize theKenyan society and can be a challenge to governmentefforts in addressing excessive bureaucracy, red tapeand inadequate capacity building within the civilservice. The culture of embracing institutional orderneeds to be cultivated through, say, civil education,so that institutions such as the National Cohesionand Integration Commission (NCIC) and theEthics and Anti-Corruption Commission (EACC)can play their rightful roles. It is important tostrengthen the National Police Service Commission(NPSC) and the Independent Policing OversightAuthority (IPOA) for proper enforcement of thelaw, and also the Kenya School of Government toenhance capacity building in the civil service.2.7.2 The LegislatureA breakdown in democratic ideals has led to thecreation of ethnic based political parties that arenot issue-based. This undermines democraticgovernance as parties are mainly ethnic-based andwill only address ethnic-based issues. The twotierand Bicameral Legislature has the potential toimprove governance at national and county levels,given more inclusiveness in governance structures.The challenge is the capacity of both leadership andcitizenry in internalizing the mechanisms that makedevolution work. There is urgent need to integratequalified staff in executive committees both atnational and county levels. Counties will needtechnical teams similar to the Parliament BudgetOffice to improve participation in the budgetprocess at county level.2.7.3 The JudiciaryWhile the Judicial Service Commission ( JSC)has initiated several reforms in the Judiciary, moreneeds to be done especially in capacity building toaddress the shortage of magistrates and judges in theJudiciary. The Judiciary should address the followingareas:• Training and staff development: To addressthe shortages of judicial staff, including judges,magistrates, paralegals and court administrators,there should be more collaboration withteaching institutions, such as universities, toincrease training opportunities.• Court infrastructure: With a devolvedgovernance system, the Judiciary has also todevolve its services up to the county levelby building more court stations, especiallymagistrates’ courts. This has budgetimplications, and more Treasury allocationand Appropriation-in-Aid options should beexplored. The implementation of mobile courtsto serve areas where physical infrastructureis lean should be fast-tracked. The Judiciaryshould fast-track the efforts of rationalizingkenya economic report 2013 17

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c emore budget allocation for recruitment andconstruction of court premises.• Public trust and confidence: The Judiciaryought to ensure that public trust and confidencein this relevant institution is restored. Casebacklogs constitute the single most importantsource of public frustration with the Judiciary.To this end, the Judiciary should explore theoption of Alternative Dispute ResolutionMechanisms and enforce more independencein judicial decisions. Further, the JudiciaryOmbudsperson should be swift in receiving andinvestigating complaints against judicial officersby the public, especially if it has to do with delayof cases, graft and general misconduct of judicialofficers. The Judges and Magistrates VettingBoard should expedite its mandate so that onlyjudges and magistrates of integrity remain inoffice.18 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c eChapter3Poverty, Inequality andPopulation Growth3.1 IntroductionPoverty and population dynamics, includingchanges in population growth rates, age structureand distribution are closely linked to national andglobal development challenges. Consequently,for the country to effectively plan for its people,including planning for service delivery, it isimportant to understand the population-povertynexus and implications of demographic changes.For instance, population issues form an integral partof the development agenda from a two-prongedperspective: a) evolving population dynamics,including changing population structures anddistributions, and b) access to reproductive healthand protection of reproductive rights, becausethey represent a critical challenge for achieving adignified human development and well-being forall. This Chapter focuses on poverty, inequalityand population dynamics and related policyimplications.3.2 Poverty and PopulationGrowthDuring the 2005 World Summit, the internationalcommunity reaffirmed its commitment to reduce byhalf the number of people living in extreme povertyby 2015. This, among other targets, constitutes theMillennium Development Goals (MDGs), whoseultimate aim is to attack the root causes of povertyusing a multidimensional approach. The globalpopulation of 7 billion is projected to rise to 9.3billion by the year 2050. It is estimated that a hugeproportion of the population will be accounted forby the developing countries. Specifically, nearly allof the net increase will be from urban areas wherepoverty is rising very fast. High fertility rates andrapid population growth are not conducive forsustainable economic growth and development.Managing fertility rates and investing in the healthand education of people is crucial. Given fewerdependants (children and older people) relative toa larger healthy and working age population, it ispossible for a country to realize economic savingsand high investments, which could spur economicgrowth and reduce poverty.The fight against poverty remains a top priority onKenya’s development agenda. According to KenyaVision 2030, the government commits to therealization of MDGs and elimination of povertyby 2030. Given the multidimensional nature ofpoverty, there is no single channel of reducingkenya economic report 2013 19

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c epoverty. However, the ultimate goal is to reducethe number of people living in poverty. Previousliterature shows that low income is one of themost important correlates of poverty that definesthe poor. Studies that are more recent have usedthe Multidimensional Poverty Index to explainpoverty. Poverty profiles have also helped to explainvarious dimensions of poverty. As shown in Figure3.1, the number of people falling into poverty hasincreased annually and is projected to rise for aslong as poverty persists. For instance, in 2007, thenumber of poor people in the Kenyan populationwas estimated at 18.2 million, rising to 19.5 millionand later 20.1 million in 2008 and 2010, respectively(Figure 3.1). The rise in the number of peoplefalling into poverty is as a result of the violence thatresulted from the disputed 2007 elections, and lowand un-redistributive economic growth.Figure 3.1: Population and poverty trends,2006 -2012Percentage52515049484746454443Total Population Poor population Poverty headcount38.637.2 38.3 39.4 40.4 41.4 42.4 4550.84050.549.8 49.7 49.8 3548.830252046.11517.8 18.1 19.4 19.9 20.1 20.6 21.1 10502006 2007 2008 2009 2010 2011 2012Source: KIPPRA computationsYearMillionsFurther, during the period 2007-2012, the economyfaced various shocks resulting in periods of highinflation and slow growth, whose implication isthat overall poverty increased from 48.8 per centin 2007 to 50.8 per cent in 2008, before it declinedmarginally to 49.8 per cent in 2012. Throughoutthe period under review, rural poverty remainedhigh above urban poverty. The proportion of ruralpoor people in the total population accounted forabout 56.4 per cent in 2008, while urban populationaccounted for only 36.2 per cent of the population.Since then, rural poverty has only declinedmarginally to 55.0 per cent while urban poverty wasestimated at 35.5 per cent in 2012.In terms of the poverty gap, poor people in therural areas have, on average, much lower incomescompared to the poverty line, and their incomedistribution does not seem to change much over theyears. This means that the poor have remained poor,while the rich have retained their riches. Moreover,the degree of inequality among the rural poorpopulation is, on average, the same as the degree ofinequality in the urban poor; that is about 10 percent between 2008 and 2012.Figure 3.2: Rural poverty, 2005-2012Percentage6050403020100Poverty head count Poverty depth Poverty severity49.1 50.4853.7217.5 18.24 19.108.80 6.90 7.9456.43 56.03 55.02 54.97 54.9823.23 22.61 21.08 21.00 21.0113.12 12.35 10.42 10.33 10.332005/06* 2005/06 2007 2008 2009 2010 2011 2012Source: Authors’ projections based on KIHBS 2005/06; Note: 2005/06* Actualfrom survey dataThe magnitude of poverty varies from one countyto another (Figure 3.3). Moreover, in Kenya, somecounties have much higher poverty compared toothers. Kitui, Marsabit, Mandera, Samburu, TanaRiver, Turkana and West Pokot, for instance, havepoverty levels above 70 per cent. These are countiescharacterized by harsh weather conditions. They alsooccupy vast land areas with low population density.In such regions, it is very costly to deliver some ofthe essential services such as education and health.In most cases, the people there live in isolation andtend to lag behind in economic development. These,among others, are some of the counties that needspecial consideration when resources are beingshared across the counties.The level of rural poverty is not uniform across allthe counties. It is highest in Turkana, Marsabit,Mandera and Wajir, and lowest in Kajiado, Kiambu,Kirinyaga, Narok, Nyeri and Murang’a (Figure 3.4).Despite remarkable progress in the fight againstpoverty, some counties still lag behind others. AYear20 kenya economic report 2013

P o v e r t y , I n e q uMa la ict ry oa en cd o nP o pm ui c l aP te iro fn ogr rm oa wn tc heFigure 3.3: National poverty profile by county, 2005/2006Percentage100908070605040302010065596346 52 55 5541 4412514126Poverty headcount Poverty depth Poverty severity662587 8062 73 5656 6445 474638 41 47 50 493228 30 34 31217836557549 4993856844 4046BaringoBometBungomaBusiaElgeyo MarakwetEmbuGarissaHoma BayIsioloKajiadoKakamegaKerichoKiambuKiliKirinyagaKisiiKisumuKituiKwaleLaikipiaLamuMachakosMakueniManderaMarsabitMeruMigoriMombasaMurang'aNairobiNakuruNandiNarokNyamiraNyandaruaNyeriSamburuSiayaTaita TavetaTana Riveraraka NithiTrans NzoiaTurkanaUasin GishuVihigaWajirWest PokotNationalCountySource: KIHBS 2005/6Figure 3.4: Rural poverty head count by county, 2007-20121201002007 2009 2012Percentage806040200BaringoBometBungomaBusiaElgeyo MarakwetEmbuGarissaHoma BayIsioloKajiadoKakamegaKerichoKiambuKilifiKirinyagaKisiiKisumuKituiKwaleLaikipiaLamuMachakosMakueniManderaMarsabitMeruMigoriMurang'aNakuruNandiNarokNyamiraNyandaruaNyeriSamburuSiayaTaita TavetaTana RiverTharaka NithiTrans NzoiaTurkanaUasin GishuVihigaWajirWest PokotSource: Authors’ projections based on KIHBS 2005/6Countymultidimensional approach to poverty shows thatcounties with highest poverty levels also lack accessto a wide range of resources.In particular, they have very poor infrastructureand, therefore, have limited access to facilities suchas schools, health centres and markets. Anotherpossible explanation is that spending in thesecounties does not target the sectors where the poorare concentrated. In the spirit of devolution, there isneed for equitable fiscal resource allocation at bothnational and county levels. Priority should be givento sectors that will help improve human resourcedevelopment and also create job opportunities forthe unemployed.3.3 Demographic TransitionThe transition in the population age structure isimportant for economic growth and developmentof a country. The transition is a major determinantof the population in school, working or retired. Ifopportunities for job creation are realized, morejobs will be created for the working age population,and the demographic bonus would result in higherproductivity, savings and economic growth. InEast Asia where poverty has dropped dramatically,this demographic dividend is estimated to accountfor about one third of the region’s unprecedentedgrowth between 1965 and 1990. A demographicdividend, based on falling fertility rates, could helpkenya economic report 2013 21

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eboost Kenya’s economic growth. Feasible policyoptions towards this end include reviewing familyplanning policies, deepening education on variousfamily planning methods, curbing early marriages,and ensuring the policy of compulsory primaryand secondary education is fully implemented.Other interventions include improving health andnutrition and ensuring economic development asmore women enter income-generating activitiesaway from home, and hence low number ofchildbirths. Educated women are also moreinformed on family planning methods due toexposure from government-steered family planningcampaigns. Furthermore, they stay longer in school,thus delay marriage and child bearing, whicheventually leads to fewer children. These and otherfactors have seen Kenya experience a decline in thenumber of children per family from 8.1 in 1978 to4.6 in 2008, and are projected to decline to 2.4 by2050 (Fengler, 2010).The composition and structure of Kenya’spopulation has also been changing (Figure 3.5).Some age brackets have larger proportionatepopulation increases than others. In the last threedecades, it is observed that more people seem tosurvive to old age, with declining number of youngchildren. Greatest increases seem to occur amongthe youth in the 15-35 years age bracket. Dependingon how the youth bulge is managed, it is likely to beeither a blessing or a curse.Figure 3.5: Kenya population pyramids for 1990,2000 and 2010MALE2.5 2.0 1.5 1.0 0.5Kenya: 1990Population (in millions)FEMALE80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-40.0 0.0 0.5 1.0 1.5 2.0 2.5MALE2.5 2.0 1.5 1.0 0.580+70-7460-6450-5440-4430-3420-2410-140-46000Kenya: 2000Population (in millions)FEMALE80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-40.0 0.0 0.5 1.0 1.5 2.0 2.5Male 2010Male 2050Female 2010Female 20504000 2000 0 2000 4000 6000Population (in thousands)Source: Republic of Kenya (2010); Fengler (2010)The observed population structure is a result ofchanges in the birth rate and death rate over time.Birth and mortality rates are key indicators ofpopulation growth. Birth rate is a factor of fertilityrate, which is a function of, among other factors,nutrition, culture (early marriages, values andbeliefs as well as sexual activeness), health andfamily planning services available (contraceptionand post-partum fecundity), women’s educationand work engagements. Mortality rate is a functionof, among other factors, income, health facilitiesand services such as vaccination and availability ofmedicine, nutrition, education (especially women’seducation), communication network, habitssuch as smoking, frequency of natural calamitiesand disaster management abilities in a country.Culture and religion can also influence mortality,for example in cases where seeking conventionalmedical services is against cultural or religiousbeliefs, or where certain retrogressive practices suchas Female Genital Mutilation (FGM) increase cases22 kenya economic report 2013

P o v e r t y , I n e q uMa la ict ry oa en cd o nP o pm ui c l aP te iro fn ogr rm oa wn tc heof maternal mortality (Addio and d’Ercole, 2005;Cutler et al., 2006).The changes in population age structure thataccompany fertility decline are important (Mwabuet al., 2013). Life expectancy increased rapidlybetween 1962 and 1989 (Figure 3.6). In 1989, thegap between birth rate and death rate was highest,meaning that more people survived. However,these gains did not last. In less than a decade,convergence between the death rates and birthrates was witnessed. When this happens, it meansthat population growth slows down. The groupof individuals born during the period when thereis a big gap between birth rate and death rates areimportant for demographic transition. When theybegin to enter the working age and a smaller numberof infants are born after them, the ratio of workingage to non-working age population increases.Figure 3.6: Selected population indicators, 1962-20112520151050Total Fertility Rate Population Growth Rate Crude Death Rate (CDR)Crude Birth Rate (CBR)47.751.757.26.87.6 7.96.63.1 3.4 3.8 3.5Life Expectancy at Birth59.652.855.1 55.8 56.56057.1505 4.6 4.76 4.72 4.682.55 2.55 2.58 2.63 2.671962 1969 1979 1989 1999 2008 2009 2010 2011Source: NCPD (2011) and World Bank Databank, 2012The increase in the ratio has the potential to spureconomic growth. This potential is called thedemographic dividend.Although family planning has been practisedin Kenya since the establishment of the FamilyPlanning Association of Kenya (FPAK) in 1955,it did not realize major success until the late 1970swhen the government included family planningin its five-year development plan (1975-1979)70403020100(Toroitich-Ruto, nd), which led to reduced fertilityfrom 7.9 in 1979 to 4.7 in 2011.Fertility rates in urban areas (2.9 lifetime births perwoman) are much lower compared to those in ruralareas (5.2 lifetime births per woman). This could beattributed to increase in contraceptive use and theeffects of urbanization. As societal values change,women no longer wish to bear a large number ofchildren as a direct impact of increased educationlevels and participation in the national economy.The cost of raising children is also higher in urbanareas as opposed to rural areas.Highly educated women tend to bear fewer childrenas opposed to less educated women. Educationon family planning and contraception has beenembraced by several women. The fertility rateamongst women with secondary school educationand above was 3.1, while that amongst women withno education was 6.7 (Figure 3.7).Figure 3.7: Education attainment and totalfertility ratesFertility rate876543210No EducationSource: Government of Kenya, 2010Primary Incomplete Primary Complete Secondary PlusIn 2011, Kenya’s population was estimated at 41.6million. As at 2009, the population was growing ata rate of 2.44 per cent per annum, which compareswell with other African countries, except Ghanawhose population growth rate is estimated at 1.79per cent per annum. About 42 per cent of theKenyan population falls within the 0-14 years’bracket. At the provincial level, North EasternProvince has the largest proportion, with 51.7 percent of the population under 15 years. Nairobi andCentral provinces have the lowest proportion ofkenya economic report 2013 23

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 3.1: Population, growth rate and population composition for selected countriesCountryTotalPopulation,2011*Average AnnualPopulation GrowthRate (%)Population Age Composition, %, 2011Ages 0-14 15-64 65+Uganda 35,873,253 3.58 49.9 48.1 2.1Rwanda 11,689,696 2.75 42.9 54.7 2.4Nigeria 170,123,740 2.55 40.9 55.9 3.1Ghana 25,241,998 1.79 36.5 60.0 3.6Kenya 41,613,341 2.44 42.2 55.1 2.7Malaysia 29,179,952 1.54 29.6 65.4 5.0South Africa 48,810,427 (0.41) 28.5 65.8 5.7Indonesia 248,216,193 1.04 27.3 66.5 6.1Germany 81,305,856 (0.20) 13.3 66.1 20.6Source: World Bank (2012)youth, 30.3 per cent and 36.0 per cent, respectively.In the middle-income countries such as Malaysia,population transition is at an advanced stage,characterized by a fall in the level of dependence.For Malaysia, the proportion of the populationfalling between the 15-64 age groups is 65 per cent,while the proportion under 14 and over 65 is 29.6per cent and 5 per cent, respectively.When Kenya is compared to the generaldemographic transition models (Figure 3.8), thecountry is in the second stage but approachingthe third stage of demographic transition. This ischaracterized by declining birth and mortality rates,with birth rate still higher than mortality rate andhence the increasing ‘youth bulge’.Figure 3.8: Stages of demographic transitionAge65Stage 1 - expanding15Male (%) Females (%)High birth rate: rapidfall in each upward agegroup due to high deathrates; short lifeexpectancyStage 2 - expanding Stage 3 - stationary Stage 4 - contractingMale (%) Females (%) Male (%) Females (%) Male (%) Females (%)High birth rate: fall indeath rate as moreliving in middle age;slightly longer lifeexpectancyDeclining birth rate:low death rate; morepeople living to old ageSource: National Council of Churches of Kenya-NCCK (2012)Low birth rate: lowdeath rate; higherdependency ratio;longer life expectancyDemographic changes in the past decades have alsoled to a high youthful population in Kenya.Over the past decade, the rate of Kenya’s fertilitydecline has slowed down considerably, and the shareof the working age population has barely expanded(Mwabu et al., 2013). If the current pace of fertilitydecline accelerates, and if Kenya’s youthful workerscan find productive employment to support theirfamilies and save for the future, then Kenya willenjoy a demographic dividend, raising the currentstandard of living and stimulating economic growth.According to Mwabu et al. (2013), if resourcesgenerated by this first demographic dividend areinvested in physical capital and children’s educationand health, then Kenya may achieve a seconddemographic dividend that will boost economicgrowth over a longer period of time. The magnitudeof the first dividend depends largely on the speedof fertility decline and on whether Kenya’s hugeyouthful population can earn adequate labourincome. Similarly, the magnitude of the seconddividend will depend on how the savings from theprevious dividend are invested. This means thatthe most critical thing to do is to make the mostproductive use of the first dividend in order to raise24 kenya economic report 2013

P o v e r t y , I n e q uMa la ict ry oa en cd o nP o pm ui c l aP te iro fn ogr rm oa wn tc hecurrent standards of living and increase investmentsin human and physical capital.3.4 Dependency Ratio, Povertyand UrbanizationOverall, population dynamics have implications onthe economy. For instance, the percentage of theworking population has been increasing, while agedependency ratio (the proportion of the populationbelow 15 and above 64) has been declining (Table3.2).Table 3.2: Dependency ratio and workingpopulationYear Age DependencyRatio% of WorkingPopulation642002 86.33 81.1 5.2 53.672003 85.17 80.0 5.2 54.012004 84.20 79.1 5.1 54.292005 83.46 78.4 5.1 54.512006 82.92 77.9 5.0 54.672007 82.58 77.6 4.9 54.772008 82.37 77.5 4.9 54.832009 82.25 77.4 4.8 54.872010 82.18 77.3 4.8 54.892011 82.14 77.3 4.8 54.90Source: World Bank Databank (2012)This trend was experienced by developed countriesin their path to development. In these countries, thelarger working population has fewer dependants tosupport, leaving more for savings and investment.They also spend less time attending to dependantsand this saved time may be invested in incomegeneration or leisure, both of which are likely tohave a positive impact on productivity.Table 3.3 shows the dependency ratio by provinceas well as by urban and rural areas. Rural areasrecorded higher dependency ratio of 84.6 comparedto urban areas’ 57.1. This is mostly because a largecomponent of urban population comprises workingcouples who tend to have smaller families, as well asyouth migrants, thus leaving behind older parentsand younger siblings in the rural areas. In additionto older people retiring to the rural areas, HIVorphanedchildren mostly go back to their ruralgrandparents, thus increasing the rural dependencyratio.Table 3.3: Dependency ratio by region in 2005/06Region Ratio Region RatioNairobi 50.6 Nyanza 79.4Central 66.0 Rift Valley 80.1Coast 75.5 Western 88.9Eastern 79.0 Urban 57.1North Eastern 118.7 Rural 84.6Kenya 76.8Source: National Council for Population and Development - NCPD (2011)Urbanization has impacted negatively on the urbanpoor. The urban poor are, on average, about 15 percent below the poverty line (Figure 3.9).Figure 3.9: Urban poverty profilePercentagePoverty head count Poverty depth Poverty severity40 33.734.93 36.2229.7436.03 35.55 35.52 35.533020 11.4 11.1813.70 16.00 15.65 14.80 14.75 14.751011.995.5 6.85 8.8411.52 10.34 10.28 10.2902005/06* 2005/06 2007 2008 2009 2010 2011 2012YearSource: Authors’ projections based on KIHBS 2005/06; Note 2005/06* KNBScomputationsThis means that, on average, the amount of resourcesrequired to lift an urban poor person up to thepoverty line is less than the resources required to lifta rural poor individual. An analysis of urban povertyshows that poverty is high in all major urban townsexcept Nairobi (Figure 3.10).kenya economic report 2013 25

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eUrbanization brings other demographic challenges,such as concentration of a huge chunk of thepopulation growth in low-income neighbourhoods.According to UNHABITAT statistics, in 1990,Kenya had an estimated urban population of 6million, with 4 million living in slums. By 2001, theurban population was estimated to have reached 11million, with 8 million living in slums. About 60 percent of Nairobi’s population lives in slums, occupyingonly 5 per cent of the land (UNHABITAT, 2008).Figure 3.10: Urban poverty head count, 2007-2012Percentage60.0050.0040.0030.0020.0010.000.00UrbanPoverty2007 2009 2012Nairobi Mombasa Kisumu Nakuru OtherUrbanUrban townSource: Authors’ projections based on KIHBS 2005/06Nearly 50 per cent of the global population is livingin urban areas. Kenya’s urban population is growingat 4 per cent per annum. While it is easier to provideamenities such as water, sanitation and infrastructureto people living closer together, urbanization, ifnot well managed, can have a negative impact onsustainable development. According to UNFPA,fertility rates are lower in urban areas, yet mostof the global population growth will be in cities,particularly small towns, most of which have nocapacity to handle this population. Table 3.4 showsthe degree of urbanization of 20 selected countriesacross the globe. Kenya is above 30 per cent inurbanization compared to Singapore at 100 per centurban, Germany at 73 per cent urban, while Chinaand Nigeria are at 51 per cent. Uganda and Burundiare predominantly rural with 15 per cent and 10 percent urbanization levels, respectively.Table 3.4: Degree of urbanization in 2012S/No.CountryUrbanPopulation(% ofTotal)S/No.CountryUrbanPopulation(% ofTotal)631 Singapore100 11 Malaysia2 Kuwait98 12 China 513 Israel 92 13 Nigeria514 Ar-91 14 Ghana 44gen-tina5 Chile 87 15 Namibia396 Brazil 84 16 Kenya 327 Australia82 17 India 318 Canadswana80 18 Bot-249 Germanda73 19 Ugan-1510 Tunisia66 20 Burundi10Source: US Global Health Policy (2012)Figure 3.11 shows Kenya’s population by countyand degree of urbanization. The country’s urbanpopulation growth is mainly from rural-urbanmigration, the destination being small towns as wellas Kenya’s main cities – Nairobi and Mombasa –both of which show 100 per cent of the counties asurban. Urban population in Kenya was 12.5 millionin 2009. Majority of the counties are far fromurbanization. Decentralization might, however,contribute to rapid urbanization in the counties.26 kenya economic report 2013

P o v e r t y , I n e q uMa la ict ry oa en cd o nP o pm ui c l aP te iro fn ogr rm oa wn tc heFigure 3.11: Population density and urbanization by county, 2009Population densityUrban population120100806040200504540353025205 10150HundredsKenyaBaringoBometBungomaBusiaElgeyo MarakwetEmbuGarissaHoma BayIsioloKajiadoKakamegaKerichoKiambuKiliKirinyagaKisiiKisumuKituiKwaleLaikipiaLamuMachakosMakueniManderaMarsabitMeruMigoriMombasaMurang’aNairobiNakuruNandiNarokNyamiraNyandaruaNyeriSamburuSiayaTaita TavetaTana Riveraraka -NithiTrans NzoiaTurkanaUasin GishuVihigaWajirWest PokotCountySource: Government of Kenya (2011)High urban growth requires the countygovernments to invest in urban amenities suchas water, sewerage, waste management and otherinfrastructure, without losing sight of what attractspeople to urban centres. The counties, as well as thenational government, are faced with the challengeof making rural areas equally attractive throughprovision of amenities such as electricity and agood road network, in order to attract private sectorTable 3.5: Trends in income inequality estimates for Kenya, 1964-2006AuthorReferenceYearData SourceGiniCoefficientBigsten, 1986 1964 - 0.630Jain, 1975 1969 ILO, 1972 0.481Lecaillon et al. 1969 - 0.604Bigsten, 1986 1974 - 0.690ILO, 1984 1976 Based on National Accounts 0.599Van Ginneken and Park, 1984 1977 Social Accounting Matrix (synthetic data) 0.570Milanovic, 1994 1981-83 Chen, Datt and Ravallion, 1993 0.573Lecaillon et al. 1984 - 0.604Deininger & Squire, World Bank, 2004 1992 Welfare Monitoring Survey I 0.599World Bank Poverty Monitoring Database, 1992 Social Dimensions of Adjustment Survey 0.5692002World Bank Poverty Monitoring Database, 1994 Welfare Monitoring Survey II 0.4432002World Bank, World Development Indicators, 1997 Welfare Monitoring Survey III 0.4192004Society for International Development, 2004 1999 Integrated Labour Force Survey 0.556 (Noadjustment)0.625 (per capita)World Bank estimates 2005/2006 Kenya Integrated Household Budget Survey 0.452Source: World Income Inequality Database V2.0c May 2008 http://www.wider.unu.edu/research/Database/en_GB/wiid/kenya economic report 2013 27

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c einvestment in medium and small enterprises as wellas an efficient transportation system.3.5 Income InequalitiesWhereas poverty measures summarize income orexpenditure for the population below a poverty line,measures of income inequality are concerned withthe income or expenditure distribution across thevarious economic groups in the entire population.According to the Kenya National Bureau of Statistics-KNBS (2008), based on the KIHBS 2005/06,the lowest 10 per cent of households in rural areascontrolled 1.63 per cent of total expenditure, whilethe top 10 per cent controlled approximately 36 percent. Also, expenditure shares tend to be higher inpoor regions compared to richer regions. Moreover,poor regions tend to have larger proportions of theirpopulations in the lower expenditure deciles. Table3.5 provides estimates of the Gini coefficient forKenya from various studies and time periods. Theestimates suggest that income inequality in Kenyawas high from the 1960s to 1980s, while estimatesbased on recent household surveys (1992, 1994,1997 and 2005) suggest relatively lower but stillsubstantial income inequality.Table 3.6: Income inequality and poverty inselected countriesCountry Survey year Gini Populationbelow nationalpoverty line(%)China* 2004 0.469 4.6Malaysia* 1997 0.492 15.5Thailand* 2002 0.420 13.6Ghana* 1998/99 0.408 39.5Ethiopia** 1999/2000 0.300 23.0Malawi** 2004/2005 0.390 20.8Rwanda** 2000 0.468 60.3Tanzania* 2000/01 0.346 35.7Uganda* 2002 0.457 37.7Kenya* 1997 0.452 52.0Kenya*** 2005/2006 Rural:0.380Urban:0.44749.133.7Sources: **World Bank (20080; *UNDP (2007) and *** KNBS (2008)28 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c eChapter4Labour Market andEmployment Opportunities4.1 IntroductionEmployment, unemployment and other labourmarket issues attract considerable interest in Kenya.Creation of jobs for the youth is particularly amajor focus of development policy. The interest inthe youth is partly explained by their large shareof Kenya’s population. Individuals aged below 35years constitute about 80 per cent of the population,while the youth aged 15-35 years account forabout 37 per cent of the population. In addition,employment and unemployment are unevenlydistributed across age groups, with the youth havingparticularly higher rates of unemployment. As anexample, unemployment among the youths aged20-24 was about 24 per cent relative to an overallunemployment of 12.7 per cent in 2005/06 (KenyaNational Bureau of Statistics-KNBS, 2008). ThisChapter analyzes labour force growth, employment,unemployment and productivity in Kenya. Overall,the working-age population (persons aged 15-64years) in Kenya was estimated at 19.8 million personsin 2005/06, with a labour force participation rate of73 per cent. The working-age population increasedto about 20.6 million individuals in 2009 (KenyaNational Bureau of Statistics, 2010).4.2 EmploymentThe employment to population ratio for theworking-age population (15-64) was about 69per cent in 2009. Employment to population ratiowas relatively lower for the youths at 49 per centand 63 per cent for those aged 15-24 and 15-35years, respectively. Proportionately more males areemployed than females across all these age cohorts.Although total employment has increased, a largershare of the new jobs created is in the informaleconomy. Specifically, only about 19 per cent of allemployment is formal, while the share of informaleconomy jobs has steadily increased from 70 percent in 2000 to 83 per cent in 2012. The decliningcapacity of the formal sector to create employmentis evidenced by the fact that out of the 445,900new jobs created in 2009, 88 per cent were in theinformal economy (Table 4.1 and Figure 4.1). Thistrend presents a challenge on the appropriate mix ofinformal versus formal employment.kenya economic report 2013 29

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 4.1: Decent work indicators and employmentopportunities in 2009Age GroupDecent Work Indicator 15-64years15-35years15-24yearsEmployment-to-population 69.2 62.7 48.6ratio, in % 1Male 73.6 66.2 49.4Female 65.1 59.3 47.8Informal employment, in % 2 77.1 77.4 84.3Male 71.4 72.4 81.6Female 83.4 82.6 87.0Urban areas 52.8 54.3 84.2Peri-urban areas 78.5 79.0 63.4Rural areas 86.9 87.7 91.3Source: Government of Kenya (2010)Notes:1. Currently employed population of relevant age (e.g. 15-64 years), aspercentage of the total population of the relevant age group (aged 15-64 years).2. The informally employed included those in the informal sector (JuaKali), self-employed – informal, small-scale agriculture, self smallscaleagriculture, pastoralist employed, self pastoralist, and privatehousehold.It is estimated that about 10 million persons wereengaged in the informal sector in 2012, up fromabout 6 million and 9 million in 2004 and 2010,respectively. Most of the informal economy jobsare characterized by higher ratios of casualization,are more precarious, and exhibit lower productivityand wages. These outcomes imply that the relativelystrong economic growth since 2003 may not havetranslated into meaningful improvement in thequality of jobs created. This may have underminedthe welfare of workers and their families (Figure4.1).Figure 4.1: Share of recorded employment inKenya by sectorPercentage908070605040302010-197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011Public sectorPrivate sectorYearInformal sectorSource: Kenya National Bureau of Statistics - KNBS (Various), EconomicSurveyThe youth, particularly those aged 15 to 24 years, arerelatively over-represented in the informal economy,having a proportion of about 84 per cent. Femaleyouths in this age category are more likely to beengaged in the informal economy, with a proportionof about 87 per cent compared to about 82 per centfor the males. This could be an outcome of inequitiesin educational attainment and gender-based divisionof labour (Table 4.1).Employment in the informal economy is morepronounced in rural areas where about 87 percent of the working-age population is engaged ininformal activities relative to 78 per cent and 53 percent for peri-urban and urban areas, respectively(Government of Kenya, 2010). The more urbanizedcounties such as Mombasa and Nairobi tend to havelower shares of informal employment (Figure 4.2)Figure 4.2: Share of informal and formalemployment by county, 2009Percentage100806040200MombasaNairobiKiambuKajiadoNakuruUasin GishuMachakosLaikipiaKerichoKisumuTrans NzoiaNandiNyeriMakueniTaita TavetaKwaleIsioloKituiLamuEmbuMurang’aBaringoBometVihigaMeruNyandaruaKakamegaSource: Government of Kenya (2010)InformalFormalCountyTharaka NithiElgeyoKirinyagaKisiiNyamiraMigoriNarokSiayaBungomaHomaBayBusiaTana RiverSamburuGarissaMarsabitWest PokotManderaTurkanaWajirOtherSome of the reasons attributed to the expandinginformal economy are lack of incentive structuresfor informal enterprises to move to formality,cumbersome administrative requirements, and hightax rates. Within the formal sector, employmentgrowth was higher in the private sector. The ratioof private to public sector employment was 2 to 1in 2008 through 2010. Private sector employmentgrew by about 3.8 per cent in 2010 relative to its2009 level, while public sector employment grewby 1.5 per cent (Government of Kenya, 2012).Thus, the formal private sector is a key generator30 kenya economic report 2013

L a b o u r M a r k e t a nM d aEc mr op le oc oy mn oe nm t i c o PeP ro fr ot ru mn ai tn i ce esof modern sector jobs, and creating an enablingenvironment for its expansion is likely to increaseemployment opportunities further.The large share of employment in the informal sectorin Kenya indicates low productivity, low pay andhigh levels of unpaid family employment. Informalsector employees are also often excluded from socialsecurity schemes, and labour protection legislation.The growing informal economy is characterized byeither under-employment or working for very longhours, and a large share of the informally employedare classified as the working poor. These jobs aretherefore less attractive to most of the job seekers,who have preference for formal sector jobs. Relativeto workers aged 15-64 years, women and the youthare more likely to be engaged in informal activities.In addition to concerns about an expandinginformal economy, the labour market is also plaguedwith under-employment. Under-employment is oneof the manifestations of underutilization of humanresources. The proportion of the under-employed(to the total employed persons), defined as personsworking for less than 29 hours a week, was about 5per cent in 1998/99, 21 per cent in 2005/06 and 18per cent in 2009. With respect to absolute numbers,about 2.7 million Kenyans were under-employedin 2005/06, and this figure increased to over 3.3million in 2009. Based on the 2005/06 HouseholdBudget Survey, Pollin et al. (2007) indicate that 70per cent of the under-employed are poor, relativeto a poverty rate of 46 per cent for the overallpopulation. Figure 4.3 presents under-employmentlevels across Kenya’s counties in 2009 and indicatesthat these levels are significantly variable acrossthese regions.Figure 4.3: Under-employment rate for 15-64 yearolds by county, 2009BusiaSiayaHoma BayMigoriBungomaKakamegaKisiiKituiKisumuWest PokotVihigaNyamiraGarissaTrans NzoiaTana RiverLamuBometNandiElgeyo MarakwetTurkanaNarokEmbuBusiaKerichoUasin GishuMakueniMachakosKwaleBaringoMeruWajirLaikipiaNyandaruaManderaNakuruTharaka NithiMarsabitNairobiMurang’aKajiadoSamburuKiambuNyeriIsioloKirinyagaMombasa 5.80.0 5.025.223.524.720.314.4 16.117.414.414.114.013.413.412.812.312.312.312.111.410.710.510.49.59.910.310.39.49.39.29.29.29.17.8 8.68.99.07.77.57.47.27.06.16.66.97.029.110.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0Ratio of the under employed to total employmentSource: Government of Kenya (2010), and author computationsUnder-employment is prevalent in counties furthestfrom major urban cities. For instance, Nyanzaand Western provinces have the highest underemploymentrates; i.e. 14 per cent and above.Under-employment in Busia County is 9 timesthe under-employment in Mombasa County. Thepoorest counties are not necessarily affected byunder-employment.4.3 Unemployment and InactivityIn 2005/06, open unemployment rate was 12.7per cent, with the youth aged 15-24 recording anunemployment rate of about 25 per cent. Youthunemployment is more acute in urban areas, andin 2005/06 was estimated at 35.8 per cent amongthose aged 20-24 years.44.6Open unemployment using the conventionaldefinition was modest, estimated at 8.6 per centof the working-age population in 2009, havingimproved from 12.7 per cent in 2005/06 (Table4.2). The unemployment rates for the youths agedkenya economic report 2013 31

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c e15-24 and 15-35 years were 14.2 per cent and 10.4per cent, respectively, in 2009. Across all the agegroups, women have lower unemployment relativeto men. This is likely to be a reflection of the fact thata large share of women is inactive, and therefore notincluded in the labour force (Table 4.2).Table 4.2: Unemployment, 2009VariableAge Group15-64years15-35years15-24yearsUnemployment rate, in % 1 8.6 10.4 14.2Male 8.8 10.7 14.8Female 8.3 10.2 13.5Urban areas 11.6 13.8 21.2Peri-urban areas 9.3 11.7 15.8Rural areas 7.2 8.6 11.2Persons not in school and 15.9 16.0 14.9unemployedMale 9.8 9.9 9.9Female 21.6 21.7 19.9Source: Government of Kenya (2010)1Currently unemployed population of relevant age group (e.g. 15-64 years)as a percentage of total economically active (employed and unemployed)population of the respective age group.Although open unemployment is relatively low, theproportion of inactive persons to the total labourforce was about 30 per cent when full-time studentswere included. In 2009, about 14 per cent of thoseaged 15-64 years were inactive and the rates for theyouths aged 15-35 and 15-24 were 18 per cent and29 per cent, respectively. Inactivity sometimes ariseswhen labour market participants get discouragedowing to scarce job opportunities that meet theirexpectations. Among the youth aged 15-35 years, anestimated 11 per cent of their total population wasinactive (when full-time students were excluded),suggesting that youth inactivity is a significantchallenge in Kenya (Table 4.3).The unemployment and inactivity amongst theyouth can be attributed to inability of the economyto create a sufficient number of good quality jobs,a rapidly growing youth population, relatively lowlevels of education attainment, lack of appropriatelabour market skills, queuing for better jobs, skillsmismatch and information asymmetries in thelabour market, among others.Table 4.3: Population groups by activity status, percent, 2009Age GroupActivity status 15-64yearsActive population(labour force)15-35years15-24years44.8 43.0 38.1Employed 40.9 38.5 32.7Inactive population 14.1 18.2 29.0Other (undetermined) 0.23 0.22 0.23Total* % 100.03 99.92 100.03Total number (millions) 34.8 23.1 11.7Source: Government of Kenya (2010)*Totals do not add up to 100% due to rounding off.Figure 4.4 represents unemployment levels acrossKenya’s 47 counties. Unemployment levels varywidely across the counties. What is evident is thatthe counties with high rates of urbanization such asKisumu, Nairobi and Mombasa, as well as countiesin ASAL areas, tend to have relatively higher levelsof unemployment.Although measured open unemploymentusing the conventional definition is relativelylow, unemployment combined with inactivitypresent a significant problem. Efforts to addressunemployment need to expand their focus toinclude the problem of inactivity, particularlyamong the youth.Another component of the unemploymentchallenge for the youth is that majority of theunemployed youth lack employable skills. Out ofthe total unemployed youth, 92 per cent have no jobtraining other than formal schooling. This challengeis compounded by skills mismatch among graduatesat higher levels of education.32 kenya economic report 2013

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c enever attended school in 2009. These children arelikely to graduate into youths with little employablelabour market skills in the next decade. Theinterventions to reign in unemployment shouldthus go beyond the labour market and includeother related social sector areas such as enhancingboth access and survival in education. There is needfor review of curricula to match the labour marketdemands for skills. Enhanced investments in humanresource development should be a key interventionpillar. These interventions should be well targeted toencompass the poor.34 kenya economic report 2013

M a c r o e c o n o m i c P e r f o r m a n c eChapter5Health5.1 IntroductionThe goal of Kenya’s Vision 2030 for the health sectoris to provide equitable and affordable health careat the highest affordable standards to her citizens.Good health is a prerequisite for enhanced economicgrowth and poverty reduction and a precursor to therealization of Kenya Vision 2030’s social pillar goal.The Constitution of Kenya 2010 under the Bill ofRights provides for access to equitable health careas a right to every Kenyan. Against this background,the health sector is repositioning itself to fulfilthe expectations of Kenyans through improvedhealth infrastructure and service delivery systemsat both the national and county levels as providedby the Constitution on devolution of functions andresponsibilities. The health sector, by its very nature,is a multi-stakeholder and role player that has actorsranging from government, private sector, faith-basedorganizations, and development partners involvedin service delivery. In a centralized system, this posesmany challenges, which are significantly heightenedunder a devolved structure of government.The Constitution of Kenya 2010 is clear that theprimary health obligation falls on the state on allfronts ranging from development to service delivery.It is in this light that it is crucial that the health sectorcoordinating mechanisms have policy positions thatspeak to the proposed roles for all stakeholders inthe health sector, especially the private sector. ThisChapter focuses on health sector performanceduring the review period.5.2 Health Sector PerformanceDespite the relative good performance in healthindicators, there are numerous gaps in healthoutcomes. In fact, the country is not likely to achievesome of the Millennium Development Goalsby 2015. At 488 per 100,000 live births, Kenya’smaternal mortality ratio is high, mainly due to anumber of factors that include low levels of delivery(43%) through health institutions. Moreover,despite increasing use of contraceptives, the totalfertility rate has been stagnating at around five birthsper woman for the last 10 years.The Kenyan epidemiology profile indicates thatthe disease burden is still high. The top five causesof outpatient morbidity, namely: malaria, diseasesof the respiratory system, diseases of the skin,diarrhoea and accidents account for about 70 percent of total causes of morbidity. Malaria contributesabout a third of total morbidity. The leading causesof morbidity are infectious and parasitic diseases(42% of total mortality in 2008, based on KDHS2010), followed by diseases of the respiratorysystem (7%).kenya economic report 2013 35

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eHIV prevalence estimates vary widely, but the latestestimates from the 2008/09 Kenya Demographicand Health Survey (KDHS) place the prevalencerate at 6.3 per cent, slightly lower than the previousestimate of 6.7 per cent (KDHS, 2003). Althoughthis reduction is small in terms of the number ofcases as compared to the total population, effectiveprevention programmes are key to keeping infectionrates low in the future.Remarkable achievements have been made in thereduction of under-five mortality from 115 per1,000 live births in 2003 to 74 per 1,000 live birthsin 2008/09, and infant mortality from 77 per 1,000live births to 52 per 1,000 live births in the sameperiod. The proportion of children fully immunizedagainst communicable diseases increased from 64per cent in 2005/06 to 77 per cent in 2009.The declining maternal health indicators areworrying. Maternal Mortality Ratio (MMR) hasdeteriorated from 414 in 2003 to 488 deaths per100,000 live births in 2008/09; only 43 per cent ofchildren are delivered in a health facility (KDHS,2008-2009). Births attended by skilled healthpersonnel declined from 51 per cent in 2007 to 43per cent in 2010/11.The nutritional status of children has also notshown significant improvement over the years.An estimated 16 per cent of children under-fiveare underweight, while 7 per cent are wasted,and 35 per cent are stunted. Regional level healthindicators show that North Eastern, Coast, Nyanzaand Western provinces have the worst infant andchild mortality indicators. High poverty levels andinadequate environmental sanitation, among otherfactors, may be contributing to these differences.The health sector monitoring indicators are shownin Table 5.1 and Table 5.2. The performanceindicators in the medical services sub-sector includemalaria mortality, births attended by skilled medicalpersonnel and access to ARVs. In the public healthsub-sector, the key indicators are child and maternalmortality, immunization coverage and prevalence ofHIV and AIDS. The performance of these indicatorsis highlighted below:Table 5.1: Performance of health status indicatorsin the medical services sub-sector, 2008/09–2010/11Indicators BaseYear(2007)Actual2008/09*Actual2009/10**Actual2010/11**Actual2011/2012**Target2011/2012**Reduce 19 17 16 16 15 17the burdenof disease:inpatientmalariamortalityas per centof totalinpatientmorbidityIncreased 51 67 44 43 43 64proportionofbirthsattendedby skilledhealthpersonnel(%)Increased 58 55 55 56.2 56 60coverageof eligiblepatientson ARVs(%)Source: *Kenya Demographic and Health Survey 2008/09; **Handbook ofNational Reporting Indicators, Health Management Information System.5.2.1 MalariaNearly 80 per cent of the population in Kenyais at risk of malaria infection. The malaria target(inpatient malaria mortality as a per cent of totalinpatient morbidity) has, however, not been met.Nevertheless, the contribution of malaria mortalityto total inpatient morbidity declined from 16 per36 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc hecent in 2009/10 to 15 per cent in 2011/12. This is,to some extent, due to the introduction of a newtreatment policy on malaria using ArtemisininCombination Therapy (ACT) and mosquito-treatedbed nets.5.2.2 Skilled birth attendantThe target for skilled birth attendance for 2010/11was 66 per cent. According to the most recent data,only 43 per cent of deliveries were performed bya health professional during the 2010/11 period,indicating that the target was not met. Factorsassociated with low proportions of birth at healthfacilities include high cost of delivery, long distancesto health facilities, and cultural barriers. During theperiod under review, the sector continued to upscaleinterventions, namely: improving access to skilleddelivery through construction and equipping ofmodel health centres, employment of health workersper constituency, and rolling out the output-basedapproach to cater for the poor.Figure 5.1: Assistance during delivery in Kenya7%21%16%28%28%Source: Kenya Population Data Sheet (2011)Nurse / MidwifeTraditional Birth AttendantRelative/OtherNo OneDoctorLess than one-half of births are attended by a skilledprovider (Figure 5.1). Skilled attendance duringdelivery reduces the risk of maternal and infanthealth complications and deaths. Among womenwho gave birth in the last five years, only 44 per centof the deliveries were attended by a skilled provider,including a doctor, nurse, or midwife. More thanone out of the four deliveries were attended by atraditional birth attendant, and one out of five wassupervised by a relative or friend. Mothers who didnot receive any form of assistance accounted for 7per cent of births registered.5.2.3 Access to Antiretrovirals (ARVs)The sector targeted to increase the proportion ofARVs from 58 per cent in 2007 to 70 per cent in2010/11. This target was, however, not met sinceonly about half (56%) of those eligible were ontreatment. Although the number of AIDS-relateddeaths has declined from 120,000 annually in 2003to the current 85,000 because of the availability ofARVs, this situation may not be sustainable becausethe financing of the ARVs is largely dependent ondonor support.Table 5.2: Performance of health status indicatorsin the medical services sub-sector, 2008/09 –2010/11IndicatorsReduceunder-fivemortality(ratio per1000)Reducematernalmortality(ratio per100,000)Immunizationcoverage(%)ReduceHIV prevalence(%)BaseYear(2007)Actual2008/09*Actual2009/10*Actual2010/11*Actual2011/12*Target2011/12**92 74 74 74 74 45414 488 488 488 488 20071.0 77.0 77.0 77.0 84.7** 90.07.4 6.4 6.4 6.4 6.3 6.4Source: Kenya Demographic and Health Survey 2008/09; Handbook ofNational Reporting Indicators, Health Management Information System5.2.4 Infant and under-five mortalityThe trend of national under-five mortality rate hasshown a decline over the years. The under-fivekenya economic report 2013 37

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c emortality declined to 74 deaths per every 1,000 livebirths in 2008/09 down from 115 deaths per every1,000 live births in 2003. The marked improvementin child health was attributed to variousinterventions, including increased immunizationcoverage from 71.0 per cent in 2007/08 to 84.7 percent in 2011/12. Birth spacing of at least two yearshas dramatic impacts on child health and well-being.Children born less than two years after a previousbirth are more than twice likely to die before agefive compared to children born three years after aprevious birth.Figure 5.2: Deaths of children under five per 1,000live birthsNumber140120100806040200Less than 2 years 2 years 3 yearsSource: Kenya Population Data Sheet (2011)5.2.5 Maternal mortalityMaternal mortality is a major challenge for thehealth sector. Maternal Mortality Ratio (MMR)is estimated at 488 deaths per every 100,000 livebirths according to estimates in 2008/09. There isno recent data for the MMR. The Medium TermPlan (MTP) target was to reduce MMR to 200deaths per every 100,000 live births by 2010/11.The target was therefore not met, hence the need toupscale interventions in future to reverse the trend.5.2.6 Immunization coverageOne of the most effective primary healthinterventions in reducing child mortality is childimmunization. The sector has continued tostrengthen immunization activities throughout thecountry under the Kenya Expanded Programme onImmunization (KEPI). The immunization coveragehas significantly increased over the years from 71per cent in 2007/08 to 77 per cent in 2010/11. Thetarget of 90 per cent in 2010/11 was, however, notmet.KEPI stepped up surveillance on Alpha Fetoprotein(AFP) and Be Healthy information program(B-Hip). The government and the Global Alliancefor Vaccine Initiative (GAVI) have introduced B(Hep) vaccination, and opened a site at KenyattaNational Hospital (KNH) to vaccinate childrenaged between one month and five years.5.2.7 HIV prevalenceThe HIV/AIDS pandemic poses tremendouschallenges to the health system in Kenya. To containthe HIV and AIDS pandemic, the sub-sectors havecontinued with prevention, treatment and careactivities, which have contributed to the decline inoverall prevalence to 6.4 per cent in 2010/11 downfrom 7.4 per cent in 2007. The target for 2010/11according to the Medium Term Plan was 6.3 percent, which has almost been met.Table 5.3: HIV prevalence for adult ages 15-49ProvinceHIV/AIDSAdults Ages 15-49 withHIV/AIDS ( %)HIV Testing FacilitiesOfferingYouth-Friendly HIVServices ( %)Total Women MenTotal 6.3 8.0 4.3 10Rural 6.0 7.2 4.5 -Urban 7.2 10.4 3.7 -Nairobi 7.0 10.8 3.4 21Central 4.6 6.2 2.6 3Coast 4.2 5.8 2.3 9Eastern 3.5 3.8 3.0 7North 0.9 0.9 0.9 0EasternNyanza 13.9 16.0 11.4 13Rift Valley4.7 6.3 2.8 8Western 6.6 9.2 3.4 27Source: Kenya Population Data Sheet (2011)38 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heOn prevention, Voluntary Counselling andTesting (VCT) and Prevention of Mother to ChildTransmission (PMCT) services have been scaled up.To date, there are 936 listed antiretroviral facilities,compared to 3 sites in 1998. Currently, there are3,000 PMCT sites caring for pregnant women. Thepublic health sub-sector avails condoms, whoseuptake is estimated at 24 million monthly.Table 5.4: Antiretroviral therapy facilities listed bycountiesCountyFacilityListedCountyFacilityListedBaringo 3 Meru 13Busia 21 Murang’a 13Garissa 7 Nandi 6Kajiado 19 Nyandarua 10Kiambu 34 Siaya 48Kisii 15 Tharaka Nithi 10Kwale 18 Uasin Gishu 9Machakos 19 West Pokot 2Marsabit 11 Bungoma 24Mombasa 21 Embu 14Nakuru 37 Isiolo 2Nyamira 11 Kericho 13Samburu 6 Kirinyaga 15Tana River 8 Kitui 22Turkana 20 Lamu 4Wajir 4 Mandera 4Bomet 5 Migori 51Elgeyo Marakwet 5 Nairobi 115Homa Bay 46 Narok 40Kakamega 45 Nyeri 15Kilifi 27 Taita Taveta 1Kisumu 49 Trans Nzoia 7Laikipia 24 Vihiga 15Makueni 28 Total 936Source of Data: eHealth - Kenya Facilities5.3 Non-Communicable DiseasesNon-Communicable Diseases (NCDs) areunderestimated causes of poverty and a barrier toeconomic development. Kenya, like most developingcountries, is faced with an impending epidemic ofchronic diseases, with NCDs contributing about32 per cent of total mortality rates (WHO, 2002).From 2005–2007, NCDs contributed over halfof the top 20 causes of morbidity and mortalityin Kenya (MoH, 2007). NCDs also contributedto half of the top 10 leading causes of mortality inthe country (MoH, 2007). In 2002, mortality fromcommunicable diseases was 68.2 per cent, whileNCDs contributed 31.8 per cent of total mortality(WHO, 2005). In 2007, NCDs contributed 33 percent of total mortality. Some of the causes of the risein NCD fatalities are thought to be the following: achange in lifestyle–as the population surges towardsurbanization and away from rural areas; unhealthyeating habits; reduced physical activity as moremotorized transport is used; and an increase insmoking and alcohol consumption.5.3.1 DiabetesStudies indicate that the prevalence of diabetes hasgrown from 3.3 per cent of the population to 7.2 percent over the last four years. Majority of those withdiabetes are between 20 and 59 years. In Germany,the prevalence rate is 6.6 per cent, with majoritybeing between the 60 and 79 age group.5.3.2 CancerCancer ranks third among the main causes of deathsin Kenya after infections and cardiovascular orheart-related diseases. Cancer accounts for up to18,000 deaths annually in Kenya. About 50 Kenyansdie daily from various forms of cancer. Accordingto Pact Kenya Cancer Assessment in Africa andAsia (2010), about 80,000 cases of cancer arediagnosed each year. According to the InternationalAtomic Energy Agency (2010), the cancer situationin Kenya is dire, with a severe lack of medicalpractitioners and equipment. The major policyconcern, however, is that the Ministry of PublicHealth and Sanitation has never had any designatedprogramme or budget line for addressing cancerkenya economic report 2013 39

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 5.5: Prevalence estimates of Impaired Glucose Tolerance (IGT), 2010Country Population 20-79 (000’s) IGT Prevalence Number of People with IGT (000’s) in the 20-79 age groupNational Comparative* 20-39 40-59 60-79 TotalUganda 13,486 7.2 8.6 485.9 301.9 185.0 972.8Rwanda 4,836 7.1 8.6 174.0 115.0 55.1 344.0Nigeria 72,060 6.7 7.6 2,258.8 1,595.8 979.0 4,830.5Ghana 12,870 12.7 14.1 742.2 531.9 364.1 1,638.2Kenya 18,795 7.2 8.6 669.5 453.5 238.1 1,361.1Malaysia 16,920 4.4 4.4 351.2 290.6 103.3 745.1South Africa 28,550 7.6 8.7 668.1 743.2 752.5 2,163.8Indonesia 152,828 10.7 11.0 6,203.2 6,608.9 3,515.1 16,327.3Germany 62,654 6.6 4.1 4.7 979.6 3,148.2 4,132.6Source: IDF (2009)* All comparisons between countries should be done using the comparative prevalence, which is adjusted to the world population.among other non-communicable diseases thatare silent killers. The only available data are fromNairobi and its environs through the Nairobi CancerRegistry (NCR), and even this scant informationonly dates back to 2000.Kenyatta National Hospital, the only publicinstitution that hosts most of the cancer expertsand technology in Kenya, is currently overwhelmedwith inpatient and outpatient cases and simplycannot cope. Cancer patients have to travel fromacross the country, some as far as 600km away toaccess treatment. Diagnostic services (laboratoryand radiological) are available mainly in Nairobi.The most common forms of cancer in women arethe cancer of the cervix and breast, while in menare cancers of the oesophagus, head, neck andprostrate. In children, the most common are bloodcancers (leukaemia) and lymphomas. Cancer of thedigestive tract, such as that of the stomach, liver,colon and rectum are also on the increase.The extent of NCDs is rising and is increasinglycontributing to morbidity and mortality, leading toa double burden as communicable diseases are notyet fully addressed. A major drawback in fightingNCDs is limited data and lack of a national policyon NCDs. Similarly, adequate finance and humanresources are major challenges and receive limitedgovernment support. Technical inputs have beenavailable through development partners, but havebeen piecemeal due to the wide scope of the workand interventions that are required to address theNCDs agenda.5.4 Access to Reproductive HealthReproductive health status, processes and outcomesin a given country are affected by norms regardingmarriage, childbearing and sexuality, as well as bywomen’s educational and economic status andethnic background. Reproductive health is alsoinfluenced by the capacity of the health systemto provide access to comprehensive, qualityreproductive health information and services as abasic human right to all.Overall, there is evidence of progress to qualityreproductive health information and services, butmany poor and less educated women, especiallyadolescents and young girls in rural areas, continueto lag behind with poor access and high demandfor such services. In addition, inequalities in accessto reproductive health information and servicespersist both within and across provinces, illustratedby the fact that an estimated 56 per cent of births40 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heTable 5.6: Family planning and maternal and child healthWomen Ages 15-49 whoReport their most RecentBirth was UnplannedPregnancy (%)BirthsAttendedby a SkilledProvider (%)Facilities OfferingComprehensiveEmergency ObstetricCare (%)Deaths to ChildrenUnder Five per1,000 Live BirthsTotal 47.1 43.8 7 74Rural 50.3 36.8 - 86Urban 34.9 74.8 - 74Nairobi 32.8 88.9 14 64Central 45.8 73.8 7 51Coast 29.8 45.6 5 87Eastern 46.1 43.1 3 52North Eastern 3.1 31.6 9 80Nyanza 53.8 45.5 10 149Rift Valley 50.5 33.7 7 59Western 61.3 25.8 2 121Source: Kenya Population Data Sheet (2011)take place without skilled attendance. Moreover,an estimated 39.4 per cent of married women aged15-49 in Kenya lack access to modern contraceptivemethods, and 47.1 per cent of pregnancies areunintended or unplanned.Figure 5.3: Contraceptives use by method in KenyaInjectables, 22%LactationalAmenorrhea, 1%Male Condom, 2%FemaleSterilization, 4%Any TraditionalMethod, 5%Implants, 2%IUD, 2% Pill, 7%Source: Kenya Population Data Sheet (2011)Not using FamilyPlanning, 55%The number of registered births reduced from747,600 in 2010 to 746,600 in 2011, while deathsdecreased from 175,800 in 2010 to 174,500 in 2011.The registration of births and deaths coverage ratesat national level reduced modestly by 2.5 per centand 3.3 per cent, respectively.5.5 Human ResourcesKenya has an average of 16 doctors and 153 nursesper 100,000 populations, compared to the WHOrecommended minimum staffing levels of 36 and356 doctors and nurses, respectively, per 100,000populations. The annual recruitment within theMinistry of Health has not drastically altered thenumbers because of the high attrition especiallyin the public sector, as well as performancemanagement issues, unequal distribution of staff,and diminishing productivity among the healthwork force.The Research and Development (R&D) sub-sectorin the Ministry of Health has been developing thecritical mass of human resource to conduct humanhealth research. Currently, the number of healthpersonnel (in post) stands at 204. Poor workingconditions coupled with brain drain are a majorchallenge affecting research and developmentcapacity in the sector. These shortages of humanresources have a negative impact on the sector’scapacity to deliver services.kenya economic report 2013 41

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 5.7: Family planning methodsProvinceWomen Ages20-24 Marriedby Age 18 (%)Married WomenAges 15-49 UsingContraception (%)AnyMethodModernMethodsFacilities OfferingModern Methods ofContraception (%)Married Women Ages 15-49 with Unmet Needs forFamily Planning (%)Total Spacing LimitingTotal 26.4 45.5 39.4 85 25.6 12.9 12.8Rural 31.3 43.1 37.2 - 27.3 13.5 13.8Urban 15.6 53.1 46.6 - 20.2 10.7 9.5Nairobi 7.2 55.3 49.0 68 15.1 6.5 8.6Central 16.8 66.7 62.5 89 15.6 6.1 9.5Coast 41.3 34.3 29.7 75 24.4 16.2 9.2Eastern 18.1 52.0 43.8 79 23.7 10.2 13.4North56.3 3.5 3.5 67 16.0 14.7 1.3EasternNyanza 32.0 37.3 32.9 93 31.7 18.6 13.1Rift Valley 30.1 42.4 34.7 92 31.1 13.7 17.4Western 26.9 46.5 41.1 93 25.8 13.9 12.0Source: Kenya Population Data Sheet (2011)Due to these challenges, the provisions for healthas a basic human right will require fundamentaltransformation to signify change in the health sectorwith major implications for the human resources forhealth. The government is committed to improvingaccess and equity of essential health care services andhas set critical and ambitious targets for providinghealth services to the population. This is throughinvestments in health and in implementation ofplanned investments.In order to achieve these national goals andobjectives, provision of a work force withappropriate skills, equitably distributed across thecountry, is critical. As in most developing countries,challenges in human resources for health impedethe health sector in planning, service delivery andachievement of expected national health outcomes.5.6 Physical InfrastructureThe health sector is a multi-stakeholder sector withgovernment, private, faith-based and developmentpartners involved in service delivery. This, in acentralized system, already poses many challengesthat will significantly be heightened under adevolved structure of government. Out of the 8,250health facilities in the health sector, the Ministryof Health operates 47 per cent of the facilities.The private sector and faith-based organizations(FBOs) complement the provision of health care byoperating 49 per cent of health facilities.Private and mission health facilities and publichospitals are important sources of health services forthe non-poor, while health centres in rural areas andurban slums are the primary health care providersfor majority of the patients from poor households.Therefore, improvement in rural and basic urbanhealth facilities would be more beneficial to thepoor.42 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heTable 5.8: County population, number of doctors and nurses in place and the minimum requirements/No County PopulationPopulationperDoctor*ApproximateNo. ofDoctorsMinimumRequiredNo. ofDoctorsPopulationperNurseMinimumRequiredNo. ofNurses*Approx.numberofNurses1 Baringo 555,561 278,000 2 56 4,115 592 1352 Bomet 724,186 103,000 7 85 4,210 951 1723 Bungoma 1,630,934 45,000 36 128 3,315 1,467 4924 Busia 488,075 31,000 16 70 1,148 793 4255 Elgeyo Marakwet 369,998 62,000 6 32 2,434 395 1526 Embu 516,212 13,000 40 54 1,060 551 4877 Garissa 623,060 52,000 12 61 2,316 665 2698 Homa Bay 958,791 44,000 22 92 1,949 1,028 4929 Isiolo 143,294 143,000 1 11 3,115 153 4610 Kajiado 687,312 76,000 9 66 7,723 733 8911 Kakamega 1,660,651 69,000 24 159 3,122 1771 53212 Kericho 758,339 15,000 51 58 1,823 630 41613 Kiambu 1,623,282 15,000 108 159 1,466 1,785 1,10714 Kilifi 1,109,735 48,000 23 84 2,655 1,184 41815 Kirinyaga 528,054 31,000 17 54 1,100 563 48016 Kisii 1,511,422 378,000 4 119 5,703 1,348 26517 Kisumu 968,909 15,000 65 92 1,433 1,033 67618 Kitui 1,012,709 26,000 39 96 1,770 1,081 57219 Kwale 649,931 46,000 14 63 3,080 693 21120 Laikipia 399,227 21,000 19 35 1,446 426 27621 Lamu 101,539 N/A 7 108 N/A22 Machakos 1,098,584 27,000 41 102 1,688 1,172 65123 Makueni 884,527 37,000 24 87 1,970 944 44924 Mandera 1,025,756 256,000 4 97 14,051 1,094 7325 Marsabit 291,166 321,000 1 26 1,967 311 14826 Meru 1,356,301 38,000 36 126 1,609 1,447 84327 Migori 563,033 24,000 23 88 1,478 978 38128 Mombasa 939,370 7,000 134 89 1,381 1,002 68029 Murang’a 942,581 17,000 55 87 1,609 951 58630 Nairobi 3,138,369 23,000 136 123 2,797 3,548 1,12231 Nakuru 1,603,325 32000 50 153 2,146 1,710 74732 Nandi 752,965 94,000 8 72 3,137 803 24033 Narok 850,920 41,000 21 83 3,128 908 27234 Nyamira 598,252 100,000 6 41 2,498 519 23935 Nyandarua 596,268 22,000 27 56 1,117 638 53436 Nyeri 693,558 5,000 139 67 654 740 1,060kenya economic report 2013 43

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c es/No County PopulationPopulationperDoctor*ApproximateNo. ofDoctorsMinimumRequiredNo. ofDoctorsPopulationperNurseMinimumRequiredNo. ofNurses*Approx.numberofNurses37 Samburu 223,947 25,000 9 20 1,037 239 21638 Siaya 842,304 44,000 19 82 1,815 898 46439 Taita Taveta 284,657 71,000 4 26 2,612 304 10940 Tana River 240,075 48,000 5 26 5,108 304 4741 Tharaka Nithi 365,330 21,000 17 32 1,773 389 20642 Trans Nzoia 818,757 273,000 3 76 6,110 873 13443 Turkana 855,399 285,000 3 83 14,748 912 5844 Uasin Gishu 894,179 4,000 224 86 706 954 126745 Vihiga 554,622 185,000 3 3,990 13946 Wajir 661,941 132,000 5 48 4,163 706 15947 West Pokot 512,690 73,000 7 53 1,979 547 259Source: Commission on Revenue Allocation - CRA (2011); *Computed by dividing population with population per doctorTable 5.9: Number of medical facilities listed bycountyCountyPopulation per Facility*Baringo 2,955.11Bomet 4,642.22Bungoma 11,170.78Busia 5,810.42Elgeyo Marakwet 3,008.11Embu 3,609.87Garissa 5,769.07Homa Bay 5,099.39Isiolo 3,494.98Kajiado 3,082.12Kakamega 7,537.22Kericho 4,956.46Kiambu 3,714.60Kilifi 4,762.81Kirinyaga 2,182.04Kisii 6,941.46Kisumu 6,374.40Kitui 3,421.31Kwale 6,631.95CountyPopulation per Facility*Laikipia 4,435.86Lamu 2,361.37Machakos 3,868.25Makueni 4,807.21Mandera 14,051.45Marsabit 3,064.91Meru 3,897.42Migori 5,620.65Mombasa 2,631.29Murang’a 3,800.73Nairobi 5,811.79Nakuru 4,674.42Nandi 4,429.21Narok 5,710.87Nyamira 5,808.27Nyandarua 4,887.44Nyeri 1,787.52Samburu 3,245.61Siaya 5,167.51Taita Taveta 3,429.60Tana River 4,139.2244 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heCountyPopulation per Facility*Tharaka Nithi 3,845.58Trans Nzoia 9,411.00Turkana 6,198.54Uasin Gishu 5,291.00Vihiga 7,020.91Wajir 6,244.73West Pokot 5,961.51Total 4,692.31Source: eHealth - Kenya Facilities; TISA *Computation by authorTable 5.10: Minimum number of health facilities*required per countySerialNo.CountyLevel2: DispensaryLevel3:HealthCentreLevel4:DistrictHospitalsLevel5:ProvincialHospitals1. Baringo 56 19 6 12. Bomet 89 30 9 13. Bungoma 138 46 14 14. Busia 74 25 7 15. Elgeyo Marakwet37 12 4 06. Embu 52 17 5 17. Garissa 62 21 6 18. Homa Bay 96 32 10 19. Isiolo 14 5 1 010. Kajiado 69 23 7 111. Kakamega 166 55 17 212. Kericho 59 20 6 113. Kiambu 167 56 17 214. Kilifi 111 37 11 115. Kirinyaga 53 18 5 116. Kisii 126 42 13 117. Kisumu 97 32 10 118. Kitui 101 34 10 119. Kwale 65 22 6 120. Laikipia 40 13 4 021. Lamu 10 3 1 022. Machakos 110 37 11 1SerialNo.CountyLevel2: DispensaryLevel3:HealthCentreLevel4:DistrictHospitalsLevel5:ProvincialHospitals23. Makueni 88 29 9 124. Mandera 103 34 10 125. Marsabit 29 10 3 026. Meru 136 45 14 127. Migori 92 31 9 128. Mombasa 94 31 9 129. Murang’a 89 30 9 130. Nairobi 314 105 31 331. Nakuru 160 53 16 232. Nandi 75 25 8 133. Narok 85 28 9 134. Nyamira 49 16 5 035. Nyandarua 60 20 6 136. Nyeri 69 23 7 137. Samburu 22 7 2 038. Siaya 84 28 8 139. Taita Taveta 28 9 3 040. Tana River 28 9 3 041. Tharaka 37 12 4 0Nithi42. Trans Nzoia 82 27 8 143. Turkana 86 29 9 144. Uasin Gishu 89 30 9 145. Vihiga* - - - -46. Wajir 66 22 7 147. West Pokot 51 17 5 1Total 3808 1269 383 41Source: Commission on Revenue Allocation - CRA (2011)* Community level has no physical health facilityIn view of the low investment in infrastructure,most public health facilities are old and dilapidated.Given the increases in population and demandfor services, these facilities do not conform to thecurrent infrastructure norms and standards.Accessibility of health facilities is estimated at 52per cent based on the 5km radius norm. However,kenya economic report 2013 45

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c ethere are variations in access in different parts of thecountry, with the worst areas being the Northernpart of the country.To provide a base for bed allocation within a countyjurisdiction in Kenya, the health sector needs toadopt a population-based method to measurethe distribution of acute care beds for each ofthe 47 counties under the Constitution, and theservice load for each hospital. The measure for beddistribution is the number of beds per 1,000 ageadjustednumbers of residents in a county, while theservice load of a hospital is measured by the numberof persons served per bed.Table 5.11: Bed distribution per province in KenyaProvinceBedsCentral 1,249Coast 848Eastern 1,371Nairobi 458North Eastern 260Nyanza 909Rift Valley 2,010Western 500Total 7,605Source: eHealth - Kenya FacilitiesTable 5.12: Bed distribution per county in KenyaCountyBedsBaringo 186Bomet 156Bungoma 138Busia 83Elgeyo Marakwet 123Embu 142Garissa 104Homa Bay 186Isiolo 41Kajiado 223Kakamega 200Kericho 153CountyBedsKiambu 371Kilifi 233Kirinyaga 194Kisii 166Kisumu 143Kitui 294Kwale 96Laikipia 84Lamu 31Machakos 260Makueni 183Mandera 52Marsabit 95Meru 261Migori 183Mombasa 357Murang’a 192Nairobi 458Nakuru 338Nandi 156Narok 149Nyamira 103Nyandarua 105Nyeri 387Samburu 69Siaya 128Taita Taveta 77Tana River 54Tharaka Nithi 95Trans Nzoia 60Turkana 78Uasin Gishu 159Vihiga 79Wajir 104West Pokot 76Total 7,605Source: eHealth - Kenya Facilities46 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc he5.7 Commodity Supplies andManagementThe Kenya Medical Supplies Agency (KEMSA)is responsible for the procurement, distributionand proper use of medicines and medical suppliesin public health facilities. However, the greatestchallenge relates to the shortage of essentialmedicines and non-pharmaceuticals due to supplychain management. As a result, patients are forced topurchase over-the-counter drugs, leading to the riskof drug resistance due to under/over-dosage.The sector currently receives just about 50 percent of the required funds for drugs and nonpharmaceuticalfunding, and development partnersfund 90% of ARVs. This situation is not sustainablein the long run and poses a major risk to the lives ofHIV/AIDS patients in the event that developmentpartners withhold their support.5.8 Environmental Protection,Water and SanitationThe Ministry of Lands, Housing and UrbanDevelopment is charged with improving housingconditions in the country, especially for slumdwellers. Provision of proper housing, water,environmental protection and sanitary conditionswill lead to better living conditions, hence reduceincidences of vector-borne and other communicablediseases, resulting in better health for all.Provision of a clean living environment is crucialin delivering health services as it ensures a healthypopulation. The target for MDG No. 7 was to halvethe proportion of people without sustainable accessto safe drinking water and basic sanitation by 2015.Table 5.13 shows those households in urban areasthat have both improved toilet facilities and accessto an improved source of drinking water.Table 5.13: Access to improved water andsanitation for households in KenyaProvinceHouseholdwith anImprovedToilet Facility(%)Householdswith Access toan ImprovedDrinkingWater Source(%)Total 22.6 63.0Rural 20.1 53.8Urban 29.8 89.3Nairobi 42.0 95.5Central 28.4 69.1Coast 21.2 64.8Eastern 19.4 51.1North Eastern 7.6 69.3Nyanza 18.1 52.7Rift Valley 19.5 57.5Western 24.4 74.3Source: Kenya Population Data Sheet (2011)5.9 Health FinancingCurrently, public financing for the health sector(recurrent and development) as a percentage oftotal government expenditure is only about 2 percent of GNP. Public per capita health spending wasUS$ 12.6 in 2010/11, which is largely inadequatewhen compared to the WHO recommendationof an average of US$ 44 per capita on health care.The overall allocations have remained at 6 per centon the overall government budget for the last threeyears.With respect to R&D, the significance of investingin research for health has been emphasized globally.The Global Ministerial Forum on Research forHealth, hosted by the Government of Mali inNovember 2008, resolved to launch a “Call toAction”, setting targets for increasing investmentsin research for health. The “Call to Action” urgesnational governments to allocate at least 2 per centof budgets of ministries of health to research andkenya economic report 2013 47

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c edevelopment agencies, and to earmark at least 5 percent of funding for research, including support toknowledge translation and evaluation as part of theresearch process.Actual expenditure for the health sector hasincreased over the period. In the 2010/11 financialyear, the actual expenditure was Ksh 35 billionup from Ksh 26.9 billion in 2008/09. Althoughthere is an increase in actual overall expenditure,recurrent actual expenditure as a per cent of overallexpenditure for the health sector declined from 85per cent in 2008/09 to 79 per cent in 2010/11.The health sector has seen an increase in the fundsdedicated to development. This can be attributed tothe government implementing the facility reformagenda. Over the period 2008/09 to 2010/11, actualexpenditure increased from Ksh 4.8 billion to Ksh 9billion. This is an 87 per cent increase over a periodof three years. Overall, unlike the recurrent vote, thedevelopment vote has been increasing from a 15 percent share in 2008/09 to 22 per cent in 2010/11.Table 5.14: Ministry of Health expenditures,2008/09–2011/12Vote Actual Expenditure2008/09 2009/10 2010/11 2011/12Recurrent26,926.50 30,001.00 33,110.70 40,0515.60Development4,869.80 7,835.70 9,088.80 18,888.00Total 31,796.3 37,836.7 42,199.50 58,903.60Recurrent85.0 79.3 78.5 67.9( %)Development15.0 20.7 21.5 32.1(%)Total 100.0 100.0 100.0 100.0Source: Government of Kenya (2012)A number of donors have continued to supportthe sector. There is existence of a fairly activemechanism for donor coordination in the formof the Health Sector Coordinating Committee,and the Development Partners on Health Group.Donor activities are coordinated by the ExternalResources Department (ERD) of the Ministry ofFinance, while the line ministries generally keepERD informed about the implementation of donorprojects. The expenditures for the period 2008/09to 2010/11 are shown in Table 5.15.Table 5.15: Analysis of externally-fundedprogrammes, 2008/09 to 2011/12Sub-sector 2008/09 2009/10 2010/11 2011/12Public 1,279.9 3,217.5 6,290 4,457Health andSanitationMedical 2,336 2,440 2,098 1,987ServicesResearchand Development3,452 6,155 5,027 6,663Source: Government of Kenya (2012)On average, more than 50 per cent of donor fundingis used on payment of personnel emoluments. Inview of the above, and in order to realize the KenyaVision 2030 goals, the government needs to increasefunding for research, which will specifically addressthe critical health needs for the country, while therole of donor funding is coordinated and structuredto support identified national priorities and criticalhealth needs.The Kenya Medical Research Institute (KEMRI)receives funding from collaborations and partnersand individual scientists through proposals. Donorfunding for KEMRI increased from Ksh 3,452million to Ksh 5,027 million, a 46 per cent increaseover the 2008/09 to 2010/11 financial years. Theproportion of donor funds as part of the overallKEMRI funds increased from 73.3 per cent withinthe same period. It is important to note that theseare off budgets, which are expended as per theindividual donors’ budgets – mainly supportingresearch activities that may not be priority issues forKenya.48 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc he5.10 Expenditure Review byProgrammesThis section presents an analysis of sectorexpenditure by programmes and sub-programmes.In line with the increase in government revenue,actual expenditure in the medical services hasincreased during the period under review fromKsh 20.7 billion in 2007/08 to Ksh 25.1 billion in2010/11. Recurrent actual expenditure rose fromKsh 19.3 billion in 2007/08 to Ksh 23 billionin 2010/11. Further, development expenditureincreased from Ksh 1.4 billion in 2007/08 to Ksh2.1 billion in 2010/11. The analysis reveals that:(a) The recurrent allocations and expendituresgenerally dominate overall ministry allocationsand expenditures. However, it is apparent thatthere has been gradual decrease of recurrentallocations from 87 per cent of total ministry’sallocation in 2007/08 to 76 per cent in 2010/11,indicating the government’s commitment tospending on investments (development).(b) The gross original and revised budgets for theMinistry of Medical Services in the 2010/11financial year were Ksh 28,815.19 million andKsh 31,564.2 million, respectively. The actualgross expenditure in 2010/11 was Ksh 25,109.2million.(c) Actual development expenditure declinedby 45 per cent in the 2010/11 financial yearcompared to the 2009/10 financial year. Overallexpenditure to development vote accounted for13.9 per cent of total ministry’s expenditure in2009/10 compared to 8.16 per cent in 2010/11.Much of the ministry’s expenditure is recurrentexpenditure, with only 8.2 per cent of the totalexpenditure dedicated to development in 2010/11.Recurrent expenditure was Ksh 22.8 billion in2008/09 and Ksh 23.1 billion in 2010/11 whiledevelopment expenditure in 2010/11 was Ksh2.05 billion. Since reliance on donor fundingfor development spending is not a sustainablesolution in the long term, there is need to increasegovernment development spending in order torealize the flagship projects as outlined in KenyaVision 2030.Table 5.17 shows the breakdown of actualexpenditures of the public health sub-sector byTable 5.16: Analysis of externally-funded programmes, 2008/09–2010/11Curative HealthActual Expenditure2007/08 2008/09 2009/10 2010/11 2011/12Recurrent BudgetCompensation to Employees11,849.0 12,370.0 12,318.1 15,567.611,395.0As % Total Recurrent 58.9 51.8 53.6 53.4 56.4Use of Goods and Services 2,558.0 4,955.8 4,384.4 3,357.7 2,99.6As % Total Recurrent 13.2 21.7 19.0 14.6 10.9Grants, Transfers and Subsidies 5,361.0 5,976.9 6,267.4 7,350.2 8,996.6As % Total Recurrent 27.7 26.2 27.1 31.9 32.6Acquisition of Non-financial Assets 24.0 72.0 73.9 34.9 23.4As % Total Recurrent 0.1 0.3 0.3 0.2 0.1Total Recurrent (Gross)22,853.7 23,096.5 23,060.9 27,581.2019,338.0Development Budgetkenya economic report 2013 49

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eCurative HealthActual Expenditure2007/08 2008/09 2009/10 2010/11 2011/12Compensation to Employees 550.0 254.0 - - -0.3As % of Total Development 39.0 12.9 - - -Use of Goods and Services 88.0 1,054.0 907.4 96.7 73.1As % of Total Development 6.2 53.4 24.4 4.7 4.2Grants, Transfers and Subsidies 170.0 204.1 241.0 328.1 290.0As % of Total Development 12.1 10.3 6.5 16.0 16.7Acquisition of Non-financial Assets 601.0 463.1 2,573.8 1,623.5 1,370As % of Total Development 42.7 23.4 69.1 79.3 79.1Total Development (Gross) 1,409.0 1,975.2 3,722.2 2,048.3 1,733.5Recurrent and Development BudgetCompensation to Employees12,103.0 12,370.8 12,318.1 15,567.311,945.0As % of Total 57.6 48.7 46.1 49.1 53.1Use of Goods and services 2,646.0 6,009.8 5,291.8 3,454.4 3,066.7As % of Total 12.8 24.2 19.7 13.8 10.5Grants, Transfers and Subsidies 5,531.0 6,181.0 6,508.4 7,678.3 9,286.6As % of Total 26.7 24.9 24.3 30.6 31.7Acquisition of Non-financial Assets 625.0 535.1 2,647.7 1,658.3 1,394.1As % of Total 3.0 2.2 9.9 6.6 4.8Total Expenditure (Gross) 20,747.0 24,828.9 26,818.7 25,109.2 29,314.7Source: Government of Kenya (2012)economic categories. Compensation to employees(personal emoluments) accounted for 56 per centof the total recurrent expenditure during 2010/11,which was a significant decline from 65 per centin 2009/10. Although expenditure on employeecompensation has significantly improved inabsolute terms from Ksh 2.5 billion in 2008/09 toKsh 6.7 billion in 2010/11, in terms of percentageof total recurrent expenditure, it represents a declineof almost 17 per cent. However, while the ministry’sspending on personnel emoluments has increased,there is still a shortage of health workers. Apartfrom this shortage, the other main challenge facingthe Ministry is that staff distribution is not alignedto workloads. Majority of the health workers areheavily concentrated in hospitals, while other healthcentres and dispensaries are staffed well below thenorms. This implies that the ministry will continueto experience shortage of human resources, which islikely to hamper service delivery.Expenditure on goods and services (O&M), grants,transfers and subsidies and acquisition of nonfinancialassets accounted for 32 per cent, 12 percent and 0.1 per cent, respectively, in the 2010/11financial year. The analysis further shows thatfunds allocated to the use of goods and services(O&M) in actual terms decreased from 33 per centin 2009/10 to 32 per cent in 2010/11. However,there is a significant increase from the previous year(2008/09), and this shows the ministry’s efforts toimprove service delivery and to maintain existingfacilities, especially the rural health facilities.User fee (cost sharing revenue) is an importantsource of financing health services in Kenya,especially in supplementing operations and50 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heTable 5.17: Analysis of expenditure by programme - MoPHSPreventive and Promotive HealthActual Expenditure2008/09 2009/10 2010/11 2011/12Recurrent BudgetCompensation to Employees 2,511.0 3,924.0 4,824.0 8,243.1As % Total MoPHS Recurrent 60.0 65.0 48.0 66.3Use of Goods and Services 607.9 2,006.8 3,799.2 2,714.1As % of Total MoPHS Recurrent 15.0 33.0 37.8 21.8Grants, Transfers and Subsidies 1,021.4 83.5 1,414.6 1,427.8As % of Total MoPHS Recurrent 25.0 1.0 14.1 11.5Acquisition of Non-financial Assets 25.2 30.2 12.1 49.4As % of Total MoPHS Recurrent 0.6 0.5 0.1 0.4Total Recurrent 4,165.5 6,044.5 10,049.8 12,434.4Total Recurrent per cent of Total 59.0 63.0 58.8 42.0Development BudgetCompensation to Employees 154.2 - 1,281.3 2,499.0As % of Total MoPHS Development 5.0 - 18.2 14.6Use of Goods and Services 2,141.7 2,288.1 1,567.5 11,514.2As % of Total MoPHS Development 74.0 63.0 22.3 67.1Grants, Transfers and Subsidies 312.8 177.5 676.9 1,717.0As % of Total MoPHS Development 11.0 5.0 9.6 10.0Acquisition of Non-financial Assets 285.7 1,160.5 3,514.9 1,424.4As % of Total MoPHS Development 10.0 32.0 49.9 8.3Total Development 2,894.4 3,626.1 7,040.5 17,154.5Total Development as a % of Total 41.0 37.0 41.0 58.0Recurrent and Development BudgetCompensation to Employees 2,665.2 3,924.0 6,105.3 10,742.1As % of Total MoPHS 37.8 40.0 35.7 36.3Use of Goods and Services 2,749.6 4,294.9 5,366.7 14,228.3As per cent Total MoPHS 38.9 44.4 31.4 48.1Grants, Transfers and Subsidies 1,334.2 261.0 2,091.5 3,144.8As % of Total 21.4 2.7 12.2 10.6Acquisition of Non-financial Assets 310.9 1,190.7 3,527.0 1,473.8As % of Total 12.3 19.1 20.6 5.0Total Expenditure 7,059.9 9,670.6 17,090.4 29,589.0Source: Government of Kenya (2012)maintenance funding. Cost sharing revenuecollections have tripled from Ksh 1.03 billion in2002/03 to Ksh 3.2 billion in 2010/11. However,cost sharing is also a hindrance to accessing healthcare especially for the lower end of the population.If these resources were to be pooled, they wouldprovide a more effective way of addressing healthcare needs in service delivery of the health sector.The development of the draft Health FinancingStrategy, since 2009, is aimed at strengtheningthe pooling of resources under the social healthinsurance and ensuring their efficient use.kenya economic report 2013 51

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 5.18: Registered members of the NHIF, 2006/07–2010/11Financial 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12*YearFormal Sector 1,620,000 1,775,390 1,800,000 2,286,205 2,197,940 2,452,146Informal201,098 301,106 376,470 555,730 688,746 875,353SectorTotal 1,821,098 2,076,496 2,176,470 2,841,935 2,886,686 3,327,499Source: Kenya National Bureau of Statistics (Various), Economic Survey * Provisional5.11 Health Insurance CoverageNational health insurance through the NationalHealth Insurance Fund (NHIF) seems to be thedominant insurance provider in all the 8 provinces.This may be attributed to the fact that contributionsto the NHIF are mandatory to all individualsworking in the formal sector. In the recent past,there has been a drive to recruit members from theinformal sector, and this is gaining popularity.As shown in Table 5.18, the number of registeredmembers of the NHIF increased by 14.3 percent from 2.8 million in 2006/07 to 3.2 millionin 2010/11. The formal sector contributed thehighest share of 78.2 per cent of the total registeredmembership of NHIF. Over the same period, theinformal sector registered a higher membershipincrease of 26.9 per cent compared to 10.6 per centin the formal sector.5.12 Conclusions and PolicyImplicationsWith Kenya’s population growing at a rate of 2.67per cent annually, the population will continue toplace a huge demand for health services. Thus, thecountry must continue expanding maternal andchild health services while developing the capacityof the health systems to cater for communicable andnon-communicable diseases, which are on the rise.The government has committed itself to improvingthe health sector infrastructure. Attaining acceptablestandards and norms has implications for staffing,equipment, infrastructure and operating costsacross all counties. Kenya’s health sector continuesto put efforts to deliver quality health services to thepopulation with limited funds.The prospects for additional funds in the healthsector in the medium term are bleak, as availablepublic sources are limited. The medium-termchallenge for the health sector is to use availablehealth resources more efficiently to deliver qualityservices and improve health outcomes across allcounties. Rationalizing existing physical and humanresources and use of more cost-effective budgetprinciples based on outputs, including an inputbasedapproach, has the potential of improvinghealth outputs and outcomes.Provision of an optimum and well-managedhealth workforce with appropriate skills, equitablydistributed across the country, is critical in order toachieve quality health care delivery. The NationalHuman Resources for Health Strategic Plan 2009-2012 identifies the required distribution pattern andskills mix. The Plan helps the health sector to setrealistic targets in the training and recruitment ofhealth professionals.At the moment, a considerable portion of thebudget is devoted to personnel. Health personneldeployments traditionally have not been basedon existing needs and are, therefore, inequitablydistributed across regions. Incentives should beprovided to deploy health professionals to work in52 kenya economic report 2013

M a c r o e c o n o m i c P e r f o rH me anl tc heremote rural areas with a shortage of health carepersonnel.Budget allocations to the health sector hassignificantly increased compared to the previousyears. The increase in government allocation to thesector shows its commitment towards preventive andpromotive health. This trend should be maintainedso as to reduce the burden of preventable diseases.The review has also shown that the initiatives by thegovernment have started to yield positive results.For instance, the implementation of the HealthSector Financial Management Information System(IFMIS) has significantly improved the absorptioncapacity of the sector. This implies that there ispotential to improve efficiency in the utilization ofbudget allocations by exploring other innovativestrategies. In particular, there is need for the sectorto explore mechanisms for improving efficiency ofM&E.Although the ministry has information on donorcommitments that are not reflected in the budgetestimates (off budget), the information does notindicate whether these are actual expenditures. Forthe information to be useful for planning purposes,it would be imperative for the donors and othernon-government providers of health services toprovide information on actual expenditures and notjust their commitments. This will enable the sectorto compare the outputs with the inputs.The analysis shows that budget allocation topersonnel emoluments has declined in the 2010/11financial year. Given that the sector continues toexperience severe human resource shortage, thecut in budget allocation may impact negativelyon the sector’s capacity to deliver services. Thesector’s intention is to fully implement the plannedactivities with the allocated funds. Inadequatebudget allocation and the deteriorating economicconditions in the country seriously affectimplementation of projects and other operations ofthe sector. Implementation of an income-generationpolicy is expected to stimulate the expansion ofincome-generation activities. In addition, delays indisbursement of allocated funds cause delays in theutilization of funds.kenya economic report 2013 53

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eChapter6Education and SkillsDevelopment6.1 IntroductionKenya Vision 2030, which aims at making Kenyaa globally competitive and prosperous countryby 2030, singles out education and training as oneof the levers that will drive Kenya into becominga middle-income economy. In addition, theConstitution (2010), the Basic Education Actof 2013, and Sessional Paper No. 14 of 2012 onReforming Education and Training Sectors inKenya, provide for Free and Compulsory Basic(pre-primary, primary and secondary) Educationas a human right to every Kenyan child. Vision2030 places great emphasis on the link betweeneducation and the labour market, the need tocreate entrepreneurial skills and competencies,and strengthen partnerships with the private sectorin investment and provision of education andtraining in the country. It also recognizes the needfor a literate citizenry and sets targets for enhancingadult literacy. This is consistent with the MDG andEducation for All (EFA) goals on universal accessand completion of education.According to the Constitution of Kenya, the countygovernments shall be in charge of pre-primaryeducation and village polytechnics. The nationalgovernment, through the ministry in charge ofeducation, is responsible for the provision andcoordination of education, training, research,education policy formulation and implementationand quality assurance at all levels of learning.Currently, the sector is managed by the Ministryof Education, Science and Technology. The mainfocus of the ministry has been on increased levels ofaccess, retention, equity, quality, relevance and theoverall effectiveness of the education sector. Otherpolicy objectives include exploiting knowledge andskills in science, technology and innovation forglobal competitiveness.The performance of the education sector, however,depends on a number of factors, key among themthe levels of resource allocation and investment inthe sector and the cost of education. This Chapterpresents a detailed account of the education sectorprovision and investment, performance, inequalitiesand financing issues. The analysis forms a basis forfurther analyses on investing on human capitalacross counties, which is presented in Part Four ofthis report.54 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc et6.2 Provision and Investment inEducation ServicesThe number of education institutions increasedby 4.6 per cent from 72,902 institutions in 2009to 76,264 institutions in 2011. Pre-primaryeducation centres increased by 3.3 per cent from38,247 institutions in 2009 to 39,500 centres in2011. During this period, pre-primary enrolmentincreased from 1.7 million to 2.4 million children(Table 6.1). The number of primary schools rose by7.1 per cent from 26,667 to 28,567 (31% private)while enrolment rose from 8.8 million in 2009 to 9.8million pupils in 2011. The number of secondaryschools increased from 6,971 in 2009 to 7,297 (27%private) in 2011. Secondary school enrolment was1.47 million in 2009 and 1.76 million in 2011.Table 6.1: Number of education and traininginstitutions, 2009-2012School Category2009 2010 2011 2012Pre-primary 38,247 38,523 39500 39,758Public 23,823 23,980 24,588 24,654Private 14,424 14,543 14,912 15,104Primary 26,667 27,489 28,567 29,161Public 18,543 19,059 19,848 20,307Private 8,124 8,430 8,719 8,854Secondary 6,971 7,308 7297 8,197Public 5,019 5,296 5,311 6,188Private 1,952 2,012 1,986 2,009Pre-primary71 125 122 125teacher trainingcollegesPublic 20 20 20 20Private 51 105 102 105Primary teachers 105 110 112 118training collegesPublic 20 21 21 21Private 85 89 91 97Secondary diploma3 3 3 3collegesTIVETinstitutions807 818 629 705School Category2009 2010 2011 2012Youth polytechnics754 765 585 647Institutes of24 24 14 14technologyTechnical training22 22 26 35institutesNational polytechnics2 2 2 7Polytechnic2 2 2 2university collegesUniversities 31 32 34 35Public 7 7 7 8Private 24 25 27 27Total 72,902 74,408 76,264 78,102Source: Government of Kenya (Various), Economic SurveyAt the tertiary level, enrolments rose from 80,981in 2009 to 104,173 students in 2011, enrolled in629 technical training institutions. The number ofnational polytechnics reduced from 4 to 2 owing tothe conversion of Kenya Polytechnic and MombasaPolytechnic into university colleges, leavingtwo national polytechnics, namely: Eldoret andKisumu. In 2011, there were 26 technical traininginstitutes and 14 institutes of technology; 585 youthpolytechnics; 21 public primary teachers trainingcolleges, 91 private primary teachers trainingcolleges and 3 secondary teachers training colleges.Enrolment in teachers training colleges increasedfrom 26,324 students in 2009 to 29,571 studentsin 2011. The number of universities increased from31 in 2009 to 34 in 2011 (79% private). Universityenrolment increased from 122,847 students in the2008/09 academic year to 198,260 students in the2011/12 academic year. Despite the expansion informal schooling in the country, issues of capacityfor effective management, sustainable financing,increasing demand for schooling and relevance ofthe curriculum to meet the demands of Vision 2030and labour market needs must be addressed both atnational and county government levels.kenya economic report 2013 55

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 6.2: Education expenditure by sector, recurrent and development (%), 2009/10-2011/12General Administrationand PlanningPrimary EducationTeacher EducationSpecial EducationEarly ChildhoodEducationSecondaryEducationTechnicalEducationUniversityEducationTotal (Kshbillion)RecurrentDevelopmentTotal2009/10 2010/11 2011/12 2009/10 2010/11 2011/12 2009/10 2010/11 2011/127.60 6.16 6.83 47.12 31.82 33.84 12.95 8.76 9.7649.00 41.57 44.10 31.38 12.59 6.93 46.62 38.64 40.060.16 0.11 0.11 0.23 0.50 0.40 0.17 0.15 0.140.15 0.31 0.23 0.00 0.00 0.04 0.13 0.28 0.210.14 0.22 0.20 0.23 0.26 0.11 0.15 0.22 0.1927.36 27.17 27.20 2.39 14.35 4.41 23.98 25.87 24.724.51 2.95 2.50 6.09 25.42 22.28 4.72 5.23 4.6511.07 21.50 18.83 12.55 15.07 31.99 11.27 20.85 20.26138,764.14 178,043.10 190,130.40 21,700.55 20,052.80 23,149.30 160,464.68 198,095.90 213,279.70Source: Government of Kenya (various); KENAO Audited Appropriation Accounts; * Estimates6.3 Trends in Public EducationSpending6.3.1 Budgetary allocation by subsectorThe total budgetary allocation of the educationsub-sector over the period under review has seen adramatic increase from Ksh 160.4 billion in 2009/10to Ksh 213.3 billion in 2011/12, representing a32 per cent increase. The primary education subsectorreceived the highest proportion of educationspending, with its share increasing from 38.6 percent in 2010/11 to 40.06 per cent in 2011/12. Thesecondary education sub-sector received 20 percent of public education spending. Expenditure forthe higher education, science and technology subsectorwas on an upward trend during the reviewperiod. As can be observed in Table 6.2, the subsector’sfunding for both recurrent and developmentvotes increased from 11.3 per cent to 20.3 per cent in2011/12. The sector’s absorption rates of the votedfunds have been considerably high. On average, theeducation sector has been absorbing over 90 percent of its budget, thus ensuring that it does not tiefunds that could have been used to fund other vitalgovernment activities.The total allocation to the Teachers ServiceCommission (TSC) has been increasing overthe years from Ksh 81 billion in the financialyear 2008/09 to Ksh 99 billion as at 2010/11, anincrease of Ksh 18 billion. This is attributed to:the implementation of the negotiated salary awardfor teachers amounting to Ksh 13.8 billion (phaseone and two); promotion of teachers through56 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etteacher proficiency courses, attainment of higherqualifications and through interviews for job groupM and above; normal annual salary increments forteachers and secretariat staff; and employment of6,000 additional teachers in the year 2008.It is important to note that a big percentage ofthe Commission’s budget is made up of recurrentexpenditure, 97.5 per cent of which is exclusivelyteachers’ salaries. Over the years, developmentexpenditure has been declining from Ksh 350million in 2008/09 to Ksh 30 million as at 2010/11.This is due to the completion of the TSC buildingat the end of 2009. The trends in expenditureallocation are summarized in Table 6.3.Table 6.3: Analysis of Teachers ServiceCommission’s total expenditure, 2008/09 –2010/11 (Ksh ‘million)Actual Expenditure2008/09 2009/10 2010/11Recurrent 80,878 89,591 99,441Development 305 60 11Total 81,183 89,651 99,452Recurrent as % of99.62 99.93 99.99TotalDevelopment as % ofTotal0.38 0.07 0.01Source: Education Sector Report (2013)6.3.2 Coverage of higher educationloansThe Higher Education Loans Board (HELB)disburses loans and awards bursaries andscholarships to university students in public andprivate universities. The total expenditure, includingoperations for HELB, was Ksh 2 billion and Ksh 3.4billion in 2008/09 and 2010/11, respectively. ForHELB’s capitation on student loans and bursary wasKsh 85 million in 2009/10 and Ksh 82.3 million in2010/11 despite increase in the cost of living andthe number of students admitted into universities.Table 6.4 shows the loans, bursaries and scholarshipsadministered by HELB. They include studentundergraduate and post-graduate loans, bursariesand scholarships. The number of beneficiaries forundergraduate loans increased from 42,563 inthe 2007/08 academic year to 77,141 students in2010/11.Analysis of recurrent expenditure for the educationsector shows that recurrent expenditure has been onthe increase in the range of between 86.5 per cent in2009/10 to 89.1 per cent in 2011/12. Developmentexpenditure was estimated at 13.5 per cent in2009/10 and 10.9 per cent in 2011/12. The declinecan partly be attributed to the withdrawal of directdonor budgetary support to the sector during thereview period and the increase in allocation towardsTable 6.4: Beneficiaries of university loans and bursaries by HELB, 2007/08-2010/1111 Year No. ofbeneficiariesUndergraduate Loans Post-graduate Loans Bursaries ScholarshipsTotal amount(Ksh million)No. ofbeneficiariesTotal amount(Ksh million)No. ofbeneficiariesTotalamount (Kshmillion)No. ofbeneficiariesTotalamount (Kshmillion)2007/08 42,563 1,949 980 121.53 15,759 82.4 36 10.452008/09 54,025 2,007 1,176 144.66 16,109 80.8 39 11.32009/10 69,383 3,112 1,279 157.70 18,996 85.4 37 11.152010/11 77,141 3,434 976 119.20 17,031 82.3 50 15.00Source: Higher Education Loans Board data setkenya economic report 2013 57

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c efree primary and secondary education schooling,including spending on personnel emoluments.6.3.3 Education spending relative toGDPOverall, education spending as a percentage of GDPincreased from 6.5 per cent in 2009/10 to 7.5 percent in 2011/12. This comprises of 34.9 per cent oftotal government outlays in 2011/12 up from 27.6per cent in 2009/10 (Table 6.5). These funds aremainly sourced through taxes (through the centralgovernment, CDF, and LATF).Table 6.5: Spending in education as percentage ofGDP and total outlays, 2009/10-2011/12 (Kshbillions)Total Ministry of Education% of GDPTotal Ministry of Education% Governmenttotal expenditureTotal Ministry ofEducation recurrent% Government totalrecurrentMinistry of Educationdevelopment % ofGovernment developmentMinistry of Educationrecurrent % ofMinistry of EducationexpenditureMinistry of Educationdevelopment % ofMinistry of EducationexpenditureA-I-A (External financing)% of Ministry ofEducation2009/10 2010/11 2011/126.5 7.1 7.527.6 33.2 34.933.2 41.6 43.313.2 11.9 13.486.5 89.9 89.113.5 10.1 10.90.9 0.8 0.7Source: Government of Kenya (Various); KENAO Appropriation AccountsThe education burden on households is high despitefree primary and secondary education schooling.Although estimates for the extent of contributions byhouseholds and non-public entities are not available,according to the KIHBS 2005/06, householdsspend an average of Ksh 2,879 and Ksh 6,195 onpublic primary and secondary school educationper child per annum. Assuming the primary schoolenrolment of 9.8 million and 1.76 million forthe respective levels, then households could bespending a total of Ksh 28 billion and Ksh 10 billionat the respective levels per annum. This representsthe burden of schooling on households despitefree basic education schooling. Households financeprivate education at all levels, and costs in theseinstitutions are even higher than for public learninginstitutions. Further, the sector receives unreporteddirect contributions to schools from non-publicentities and households in the form of cash and inkindcontributions. Households (through user fees)finance pre-primary, boarding costs and non-salaryinputs at tertiary level. They also finance all indirectcosts (such as uniforms, transportation, meals, etc.)of schooling at all levels of education. The sector alsogets a huge contribution from non-public entities,including NGOs, FBOs, individuals and corporateorganizations whose contributions are in theform of improvement of school infrastructure andsupport to needy students. However, most of thisoff-budget funding for the sector is rarely capturedin the aggregate education spending for the country.All these costs make education expensive on thepart of both government and households, and havecontributed to unsatisfactory performance and highinequalities in education across regions.6.4 Performance of the EducationSector6.4.1 Access and participationThere have been various interventions aimed ataligning the education sector to the Constitutionand Vision 2030, as well as aligning to internationalcommitments such as the MDGs. These58 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etTable 6.6: Gross enrolment rates (GER) and net enrolment rates (NER), 2009-2012School Level Enrolment Type Gender 2009 2010 2011 2012Pre-primary Gross Enrolment Rate Both sexes 60.6 60.9 65.6 66.3Net Enrolment Rate Both 49.0 50.0 52.4 53.3Primary Gross Enrolment Rate Male 112.8 109.8 115.0 115.4Female 107.2 109.9 115.1 115.9Both 110.0 109.8 115.0 115.8Net Enrolment Rate Male 93.6 90.6 94.9 95.0Female 92.1 92.3 96.6 95.7Both 92.9 91.4 95.7 95.3Gender Parity Index 0.98 0.96 0.96 0.97Primary completion rate 83.2 76.8 74.6 80.3Transition rate from primary to secondary 66.9 72.5 73.3 76.6Secondary Gross Enrolment Rate Male 49.0 50.9 51.0 51.0Female 41.8 46.3 46.8 47.0Both 45.3 47.8 48.8 49.3Net Enrolment Rate Male 36.5 38.0 32.6 32.6Female 35.1 38.9 33.1 33.5Both 35.8 32.0 32.7 33.1Gender Parity Index 0.96 1.02 1.01 1.01Source: Government of Kenya (2013 )interventions have resulted into the expansion of theeducation sector, including improving access andequity in education; improving quality, transitionand relevance; and deepening integration of scienceand technology in the sector. Overall, all sectors ofeducation recorded remarkable increase in accessand participation rates (Table 6.6).6.4.2 Early childhood developmentand educationEnrolment in the Early Childhood Developmentand Education (ECDE) sub-sector increased from1.69 million children (880,000 boys and 810,000girls) in 2007 to 1.914 million (967,544 boys and946,678 girls) in 2009 and further to 2.13 million(1,100,890 boys and 1,092,181 girls) in 2010 and2.37 million in 2011.The Gross Enrolment Rate (GER) increased from60.2 per cent (61.6% for boys and 58.7% for girls) in2009 to 60.9 per cent (60.3% for boys and 61.4% forgirls) in 2010 and 66.3 in 2012. The NER increasedfrom 42.1 per cent (43.1% for boys and 41.1% forgirls) in 2007 to 49.0 in 2009 and further to 53.3 in2012.However, there are disparities in access andparticipation levels across the country and in someof the regions. Low participation in some regionscan be attributed to low uptake of pre-primaryschooling as children directly join primary schoolswithout the relevant background, and this increasesrepetition and drop out levels as a result of pooracademic performance.kenya economic report 2013 59

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 6.7: ECDE NER by county, 2009County Male Female Total County Male Female Total1 Nyeri 61.6 61.9 61.8 25 Isiolo 42.1 41.2 41.72 Kiambu 60.8 60.9 60.8 26 Vihiga 41.3 42.0 41.73 Kisumu 59.6 61.0 60.3 27 Samburu 42.1 39.8 40.94 Nairobi 57.4 58.0 57.7 28 Machakos 40.1 40.7 40.45 Mombasa 57.2 57.6 57.4 29 Trans Nzoia 39.3 41.2 40.26 Homa Bay 56.3 57.9 57.1 30 Murang’a 39.3 39.8 39.57 Nyandarua 54.8 55.0 54.9 31 Busia 35.9 37.9 36.98 Nakuru 54.2 55.3 54.7 32 Kakamega 35.1 37.7 36.49 Uasin Gishu 51.7 52.9 52.3 33 Kwale 34.7 35.9 35.310 Migori 51.0 52.1 51.5 34 Bungoma 33.5 35.8 34.711 Laikipia 51.4 51.5 51.4 35 Meru 33.5 34.5 34.012 Taita Taveta 50.6 51.9 51.2 36 Tharaka Nithi 33.8 34.2 34.013 Nandi 49.9 51.6 50.7 37 Embu 32.6 33.1 32.814 Nyamira 48.3 48.8 48.5 38 Makueni 31.5 32.4 32.015 Elgeyo Marakwet 47.9 49.1 48.5 39 Kitui 30.3 32.1 31.216 Kisii 47.9 48.6 48.2 40 Narok 29.5 29.6 29.617 Kericho 47.0 48.6 47.7 41 Tana River 29.9 28.7 29.318 Kirinyaga 47.8 46.8 47.3 42 West Pokot 28.9 29.5 29.219 Siaya 45.1 47.0 46.0 43 Marsabit 24.4 24.2 24.320 Baringo 44.0 46.2 45.0 44 Turkana 19.0 19.0 19.021 Lamu 43.2 45.0 44.1 45 Garissa 6.8 6.7 6.822 Bomet 41.9 42.7 42.3 46 Mandera 6.2 6.3 6.323 Kajiado 42.1 42.0 42.1 47 Wajir 5.2 5.0 5.124 Kilifi 41.8 42.2 42.0 48 National 41.3 42.3 41.8Source: Ministry of Education EMIS data6.4.3 Primary educationThe continued implementation of Free PrimaryEducation (FPE) from 2003 has led to improvementin access to primary school education. The numberof pupils in formal primary schools increased from5.9 million in 2002 to 8.8 million (4.5 million boysand 4.3 million girls) in 2009, an increase of 60 percent. In 2010, the enrolment was 9.38 million (4.75million boys and 4.63 million girls), an increase of6.6 per cent compared to 2009 and 9.86 million in2011.Figure 6.1: Primary school gross enrolment rate(GER) and net enrolment rate (NER)Percentage140120100806040200108107.6 104.884.5 82.8 83.5108.9 109.891.6 92.5110109.892.9 91.4115115.895.7 95.3GERNER2004 2005 2006 20072008 2009 2010 2011 2012YearSource: Ministry of Education EMIS, and Government of Kenya (2013)60 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etTable 6.8: Primary school NER by county, 2009Male Female Total Male Female Total1 Murang’a 93.2 93.7 93.4 25 Trans Nzoia 81.8 84.3 83.12 Nyeri 92.1 93.1 92.6 26 Homa Bay 82.2 83.7 82.93 Kirinyaga 91.3 92.4 91.8 27 Nandi 80.9 84.7 82.84 Embu 60.4 92.1 91.3 28 Kakamega 81.1 83.9 82.55 Kiambu 90.4 91.2 90.8 29 Migori 81.7 83.3 82.56 Nyandarua 89.7 91.2 90.4 30 Busia 81.0 83.3 82.27 Machakos 89.4 90.7 90.1 31 Mombasa 80.6 81.6 81.18 Makueni 88.7 90.4 86.6 32 Laikipia 80.6 80.9 80.89 Bomet 87.9 89.6 88.7 33 Lamu 74.4 75.1 74.710 Tharaka Nithi 87.3 89.1 88.2 34 Kajiado 73.2 73.0 73.111 Kericho 87.4 89.0 88.2 35 Narok 69.5 69.7 69.612 Nyamira 87.6 88.7 88.1 36 Kwale 69.1 69.9 69.513 Vihiga 86.1 88.9 87.5 37 Kilifi 67.9 69.0 68.514 Elgeyo Marakwet 86.3 88.3 87.3 38 Baringo 67.2 69.8 68.515 Nairobi 86.6 87.2 86.9 39 Isiolo 63.2 63.7 63.516 Kisii 85.9 87.4 86.7 40 Tana River 53.8 51.5 52.717 Taita Taveta 85.6 87.3 86.5 41 West Pokot 50.2 52.1 51.118 Nakuru 85.1 86.8 85.9 42 Marsabit 49.0 47.7 48.419 Uasin Gishu 84.0 86.2 85.1 43 Mandera 42.9 40.6 41.920 Meru 84.1 85.9 85.0 44 Samburu 43.1 39.5 41.321 Siaya 84.0 85.7 84.9 45 Wajir 35.9 32.9 34.622 Bungoma 83.2 85.7 84.5 46 Garissa 35.0 32.9 34.123 Kisumu 83.2 84.8 84.0 47 Turkana 24.7 24.6 24.624 Kitui 82.3 84.9 83.6 48 National 90.6 92.3 91.4Source: Ministry of Education EMISThe Gross Enrolment Rate (GER) increased from108.9 per cent (118% and 106% for boys and girls,respectively) in 2007 to 110.0 per cent (112.8%and 107.2% for boys and girls, respectively) in 2009and dropped slightly to 109.8 per cent (109.8% and109.9% for boys and girls, respectively) in 2010.The Net Enrolment Rate (NER) increased from91.6 per cent (94% and 89.0% for boys and girls,respectively) in 2009 and then dropped marginallyto 91.4 per cent (90.6% and 92.3% for boys andgirls, respectively) in 2010. The country still facesregional disparities with low enrolments despitethis impressive performance. There are gender andregional disparities in access and participation inprimary school education.Garissa and Turkana have especially low NERs of34 per cent and 25 per cent, respectively, against anational average of 91.4 per cent in 2010 and 95.7per cent in 2012. In general, the primary schoolNER for boys was higher than that of girls in mostcounties, except in some counties in Central andEastern regions.6.4.4 Primary school completion andtransition levelsThe primary school completion rate is computed asthe number of Standard 8 graduates as a proportionof the 13 year olds. The pupil completion rate stoodat 81.0 per cent (86.5% and 75.7% for boys andkenya economic report 2013 61

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c egirls, respectively) in 2007 but dropped to 79.8 percent in 2008 and then increased to 83.2 per cent in2009. In 2010, the pupil completion rate dropped to76.8 per cent (79.2% and 74.4% for boys and girls,respectively), before further dropping to 74.6 percent in 2011 (Figure 6.2).The transition rate from primary to secondaryschool has been increasing over the years, from 59.6per cent (56.5% for males and 63.2% for females) in2007 to 66.9 per cent (64.1% for males and 69.1%for females) in 2009, further increasing to 72.5 percent (68.9% for males and 75.3% for females) in2010 and 73.3 per cent in 2011.Figure 6.2: Primary completion rate (PCR) andprimary to secondary908070605040302010083.28178.4 79.880.377.6 76.876.874.6 76.672.5 73.364.1 66.959.6 59.956 57.32004 2005 2006 2007 2008 2009 2010 2011 2012Pupil Completion RatePrimary to secondary Transition RateSource: Ministry of Education EMIS; and Government of Kenya (Various),Economic Survey6.4.5 Secondary educationThe secondary school GER increased from 38.0per cent (41.4% for boys and 34.6% for girls) in2007 to 45.3 per cent (49.0% for boys and 41.8%for girls) in 2009. In 2010, the GER increased to47.8 per cent (50.9% for boys and 46.3% for girls).The NER recorded an increase from 28.9 per cent(29.8% for boys and 27.9% for girls) in 2007 to35.8 per cent (36.5% for boys and 35.1% for girls)in 2009. In 2010, the NER dropped to 32.0 per cent(32.4% for boys and 32.9% for girls). The GenderParity Index improved from 0.94 in 2008 to 0.96in 2009 and in 2011, it is in favour of girls at 1.01.However, there were disparities across counties,with Turkana County recording the lowest NER of25 per cent while Kiambu County recorded a highof 50 per cent. The national average was 24 per centin 2009/10.6.4.6 University and tertiary (TIVET)educationThe annual admission to public universities underthe Joint Admissions Board ( JAB) increased by31.6 per cent from 12,261 in 2007/08 to 16,134in 2008/09, by 24.4 per cent to 20,073 in 2009/10and by 20.6 per cent to stand at 32,820 in the2010/11 academic year. The achievement was asa result of increased capacity in the constituentcolleges and special consideration to vulnerablegroups. Currently, there are 7 public universities, 15constituent colleges and 23 private universities (11chartered, 9 with letters of interim authority and3 registered). The total expenditure on universityeducation and higher education support servicessub-programmes was Ksh 18,589 million andKsh 2,340 million for recurrent and developmentexpenditures, respectively. Enrolment stands at183,497, and is expected to increase drastically inthe current year with the planned accelerated intakeof the 2009 and 2010 cohorts, and the creation ofthe Open University and the Pan African University.Enrolment and retention in universities were furtherenhanced through increased provision of bursaries.A total number of 8,386 students were awardedbursaries amounting to Ksh 380 million in 2009/10.The number of fully registered Technical,Industrial, Vocational, Entrepreneurship Training(TIVET) institutions rose from 180 in 2009/10to 411 in 2011/12. Additionally, the number ofprovisionally-registered institutions increased from200 in 2009/10 to 302 in 2011/12. Consequently,total enrolment in TIVET programmes increased62 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etTable 6.9: Secondary school NER by county, 2009Male Female Total Male Female Total1 Turkana 3.8 3.1 3.5 25 Kericho 20.4 22.4 21.42 West Pokot 5.4 6.0 5.7 26 Meru 19.1 25.3 22.33 Garissa 7.2 6.5 6.9 27 Taita Taveta 20.7 25.6 23.14 Wajir 7.5 6.8 7.2 28 Homa Bay 24.0 22.6 23.35 Tana River 8.2 6.6 7.4 29 National 22.2 25.9 24.06 Samburu 7.5 8.1 7.8 30 Vihiga 22.5 27.8 25.27 Mandera 9.2 8.3 8.9 31 Uasin Gishu 23.8 29.9 26.98 Kwale 8.7 9.6 9.1 32 Kajiado 25.0 28.9 27.09 Marsabit 10.0 8.8 9.4 33 Makueni 24.2 30.4 27.210 Kilifi 10.6 10.4 10.5 34 Tharaka Nithi 23.9 30.6 27.211 Narok 9.9 11.3 10.6 35 Kisumu 28.1 28.3 28.212 Busia 16.7 15.9 16.3 36 Machakos 26.2 32.5 29.313 Lamu 15.6 17.3 16.4 37 Nakuru 29.7 34.9 32.314 Isiolo 16.6 16.9 16.7 38 Mombasa 33.6 31.5 32.515 Kitui 15.0 19.0 17.0 39 Laikipia 30.1 35.1 32.516 Bungoma 15.8 19.5 17.7 40 Embu 28.3 37.0 32.617 Baringo 16.2 21.0 18.5 41 Nyandarua 31.2 39.4 35.218 Nandi 16.2 21.7 18.9 42 Kisii 34.4 36.0 35.219 Migori 19.7 18.8 19.2 43 Kirinyaga 34.0 42.1 38.020 Kakamega 17.5 21.0 19.3 44 Murang’a 36.0 42.1 39.021 Elgeyo Marakwet 17.4 22.2 19.8 45 Nyamira 37.9 43.2 40.522 Siaya 19.1 20.5 19.8 46 Nyeri 42.5 50.3 46.323 Bomet 17.9 22.1 20.0 47 Nairobi 49.0 47.2 48.024 Trans Nzoia 18.7 21.9 20.3 48 Kiambu 47.5 52.4 50.0Source: Ministry of Education EMISfrom 36,586 in 2009/10 to 79,114 in 2010/11.The number of government-sponsored studentsadmitted to public universities per year increasedfrom 16,134 in 2009/10 to 32,648 in 2011/12 andthe beneficiaries of bursaries increased from 71,349in 2009/10 to 95,198 in 2011/12 (Government ofKenya, 2011, Economic Survey).6.5 Education Outcomes6.5.1 Adult LiteracyThe Medium Term Plan for Kenya’s Vision 2030recognizes the need to have literate citizens and setsa target of increasing the adult literacy rate from 74per cent in 2007 to 80 per cent by 2012. However,Figure 6.3 shows the extent of vertical and horizontalinequality in literacy across gender and counties.The figure illustrates the disadvantage of womenacross all the counties, their greatest attainmentscoming in Nairobi and, surprisingly, Uasin Gishuand Nandi counties. Figure 6.3 also shows that inWajir, Turkana, Samburu and Garissa, as well asMandera counties, females are most disadvantagedwith respect to literacy. The figure also illustratesthe horizontal disparities in literacy levels acrosscounties. Nairobi County had the highest maleand female rates at 97 per cent and 94 per cent,respectively, while Turkana (29%) and Mandera(6%) had the lowest male and female rates.kenya economic report 2013 63

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eFigure 6.3: County distribution of literacy by genderPrecentage of literacy rates10094 97 95 95 95 948888 93 93 92 92 92 92 92 91 91 91 91 909089 88 888587 8784818277 78 79 81 81 8385 85 85 84 8479 79 80 8183 82 8182 81807477 75 76 75 77686970706665626050403020100518074 78 714977 76 76 73 75656063 61 6051 5350464240 393531282924 24 23968NairobiNyeriKerichoKiambuKisumuUasin GishuTaita TavetaMigoriMakueniMachakosKisiiEmbuMombasaHoma BaySiayaNyamiraVihigaNyandaruaBungomaBometKakamegaMurang’aKituiBusiaKirinyagaNakuruElgeyo MarakwetNandiLaikipiaKwaleMeruTrans NzoiaBaringoKajiadoLamuIsioloNarokiWest PokotGarisaSamburuTana RiverWajirMarsabitManderaTurkanaSource: Kenya National Bureau of Statistics, KIHBS (2006)FemaleCountyMaleFrom a policy perspective, improving literacy ratesacross counties will require not only increasingenrolments but also a concerted effort to reach thenon-literate population that is beyond the schoolgoingage bracket. Both the national and countygovernments would need to include in their strategicplans and budgets, programmes for combatingilliteracy levels while providing opportunities forthose who have totally missed formal educationopportunities.6.5.2 Learning achievementsAnother measure of education outcomes isperformance in summative examinations andlearning achievements. KCPE examinationcandidates increased by 6.7 per cent from 727,100in 2009 to 776,214 in 2011 (Table 6.10). However,the aggregate mean score has remained relativelylow at about 53 per cent or average mean score ofC. This is a major policy issue since majority of thelearners have not attained requisite skills at thislevel of schooling. In 2011, it was only in Scienceand Religious Education where the mean score wasover 60 per cent. Mean performance in languages(English Language, Composition and KiswahiliLugha) was below 50 per cent.Further, there are regional variations in KCPEperformance across counties, with only 23 countiesattaining a mean score of between 300 and 250marks against the maximum possible of 500 (Figure6.4). The data further indicates that 22 countiesattained mean scores of between 200 and 250marks. Two counties recorded mean scores of lessthan 150 marks. Learning achievement is a majorpolicy concern and has implications on progressionto post-primary school levels.6.5.3 Primary school educationnumeracy and readingcompetenciesKenya is a member of the Southern and EasternAfrica Consortium for Monitoring EducationQuality (SACMEQ). Other countries include64 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etTable 6.10: KCPE performance and candidates, 2009-2011Number of candidates 2009 2010 2011 2012Male 381,600 388,221 400,814 415,620Female 345,500 357,859 375,400 369,310Total 727,100 746,080 776,214 811,930Subject Mean Score (%)English Language 45.76 49.12 47.10 48.16English Composition 40.48 42.70 42.45 42.43Kiswahili Lugha 57.28 52.76 41.46 46.38Kiswahili Insha 53.68 50.30 54.68 54.98Mathematics 49.56 53.80 52.18 56.30Science 59.92 60.86 67.48 62.76Social Studies 62.42 64.93 56.32 60.87Religious Education 61.60 60.07 62.45 75.75National Mean score 53.84 54.32 53.02 55.95Source: Government of Kenya (2013)Figure 6.4: KCPE performance mean scores by county, 2012300250Mean Score200150100500KirinyagaElgeyo MarakwetNandiUasin GishuBaringoMakueniBusiaKisumuWest PokotVihigaSiayaKajiadoKakamegaNairobiNyeriBometHoma BayMachakosKerichoEmbuTrans NzoiaBungomaNyandaruaNarokNakuruKiambuTurkanaMigoriSamburuLaikipiaNyamiraMeruKisiiMombasaMurang’aKituiIsioloMarsabitCountyTaita TavetaLamuKwaleTana RiverWajirGarissaManderaSource: Kenya National Examination Council (2013) data setBotswana, Lesotho, Malawi, Mauritius,Mozambique, Namibia, Seychelles, South Africa,Swaziland, Tanzania, Uganda, Zambia, Zanzibar andZimbabwe. The Consortium has so far undertakenthree monitoring surveys (in 1997, 2000 and 2007)focusing on Standard 6 pupils and their teachers.According to the SACMEQ III Survey of 2007, 8competency levels and 8 Mathematics/Numeracycompetency levels were set (Table 6.11).kenya economic report 2013 65

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 6.11: Details on competency levels andrequired competenciesLevel Skill Details on RequiredCompetenciesReading1 Prereading2 Emergencyreading3 Basicreading4 Readingformeaning6 Inferentialreading7 Analyticalreading8 CriticalreadingMatching of words and picturesinvolving concrete concepts; everydayobjects and following short,simple written instructionsMatching of words and picturesinvolving prepositions and abstractconcepts; using the cuing system tointerpret phrases by reading onInterpreting meaning in a shortand simple text by reading on orreading backReading on or reading backin order to link and interpretinformation located in variousparts of the textReading on and reading back inorder to combine and interpretinformation from various parts ofthe text in association with externalinformation that completes andcontextualizes meaningReading on and reading backthrough longer texts in order tocombine information from variousparts of the text so as to infer thewriter’s purposeLocating information in longertexts by reading on and readingback in order to combineinformation from various parts ofthe text so as to infer the writer’spersonal beliefsLocating information in a longertext by reading on and reading backin order to combine informationfrom various parts of the text inorder to infer and evaluate what thewriter assumed about both topicand characteristics of the reader5 InterpretivereadingLevel Skill Details on RequiredCompetenciesMathematics1 Pre-numeracy2 Emergencynumeracy3 Basic numeracy4 Beginningnumeracy5 CompetentnumeracyApplying single-step additionor subtraction operations.Recognizing simple shapes.Matching numbers and pictures.Counting whole numbersApplying two-step addition orsubtraction operations involvingcarrying, checking, or conversionof pictures to numbers. Estimatingthe length of familiar objects.Recognizing common twodimensionalshapesTranslating verbal informationpresented in a sentence, simplegraph or table using one arithmeticoperation in several repeated steps.Translating graphical informationinto fractions. Interpreting placevalues of whole numbers to thousands.Interpreting simple commoneveryday units of measurementTranslating verbal or graphicalinformation into simple arithmeticproblems. Using multiple, differentarithmetic operations (in thecorrect order) or whole number,fractions, and/or decimalsTranslating verbal, graphical,or tabular information into anarithmetic form in order tosolve a given problem. Solvingmultiple-operation problems usingthe correct order of arithmeticoperations. Converting basicmeasurement units from one levelof measurement to another.66 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etLevel Skill Details on RequiredCompetencies6 Mathematicallyskilled7 Concreteproblemsolving8 AbstractproblemsolvingSource: Hungi et al. (2010)Solving multiple-operationproblems involving fractions,ratios and decimals. Translatingverbal and graphical representationinformation into symbolic,algebraic and equation forms inorder to solve a given mathematicalproblem. Checking and estimatinganswers using external knowledgeExtracting and converting informationfrom tables, charts, visual andsymbolic presentations in order toidentify and then solve multi-stepproblemsIdentifying the nature of an unstatedmathematical problem embeddedwithin verbal or graphicalinformation, and then translatingthis into symbolic, algebraic, orequation forms in order to solvethe problemThe national reading mean score was 543.1, withNairobi recording a high of 622.1 and Westernrecording a low of 497.3 using the 2007 survey data(Table 6.12). However, only 60.6 per cent of thelearners attained level 5-8 reading competencies.Most learners (21.8%) had only attained level5 reading competencies while only 6.4 per centattained level 8 competencies on critical reading,including locating information in a longer text byreading on and reading back to combine informationfrom various parts of the text in order to infer andevaluate what the writer assumed about both topicand characteristics of the reader.According to the data presented in Table 6.13, theoverall Mathematics or Numeracy mean scorewas 557, with Nairobi recording a high of 610 andWestern recording a low of 549.2. Only 29.5 percent of the learners attained level 5-8 numeracycompetencies. Majority of the learners (32.1%)had only attained level 4 of numeracy competencieswhile only 1.4 per cent attained level 8 competencieson abstract problem solving, including identificationof the nature of an unstated mathematical problemembedded within verbal or graphical information,and then translating this into symbolic, algebraic, orequation forms in order to solve the problem.Table 6.12: Percentage of pupils reaching reading competency level (%), 2007Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Level 7 Level8% level5-8MeanscoreCentral 1.9 4.2 9.7 14.2 16.7 18.2 23.4 11.7 70.0 574.3Coast 0.5 3.9 8.0 22.3 24.5 20.2 14.4 6.2 65.3 553.8Eastern 1.8 3.6 9.1 20.9 23.0 22.6 12.7 6.2 64.5 550.6Nairobi 0.2 2.0 2.8 11.0 15.2 19.6 25.8 23.3 83.9 622.1North4.9 5.6 9.9 16.6 15.1 19.5 14.8 13.6 63.0 560.4EasternNyanza 2.4 3.7 9.6 19.5 25.3 21.6 14.3 3.6 64.8 545.1Rift Valley 1.9 7.9 14.5 21.0 22.9 17.1 9.6 5.0 54.6 527.5Western 5.5 10.4 19.7 22.6 20.4 12.6 7.6 1.3 41.9 497.3National 2.3 5.7 11.8 19.6 21.8 18.7 13.7 6.4 60.6 543.1Source: Hungi et al. (2010)kenya economic report 2013 67

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 6.13: Percentage of pupils reaching Mathematics competency level (%), 2007Numeracy Level 1 Level 2 Level3Level 4 Level 5 Level 6 Level 7 Level8% level5-8MeanscoreCentral 0.4 8.4 24.7 26.4 19.3 14.6 4.1 2.0 40.0 574.4Coast 0.4 4.2 26.4 34.7 19.2 10.4 2.4 2.4 34.4 569.8Eastern 0.8 7.0 24.2 35.5 14.7 12.8 3.3 1.7 32.5 569.2Nairobi 0.5 5.9 16.1 27.9 18.0 15.4 8.5 7.8 49.7 610.0North1.0 11.1 17.2 23.5 17.1 13.2 7.5 9.3 47.1 600.2EasternNyanza 0.2 10.0 26.0 36.6 16.4 8.5 1.5 0.7 27.1 555.0Rift Valley 0.5 10.8 29.7 33.0 14.8 8.7 2.1 0.5 26.1 549.2Western 1.2 22.6 33.9 26.8 10.1 5.3 0.1 0.0 15.5 516.1National 0.6 10.6 27.1 32.1 15.5 10.1 2.5 1.4 29.5 557.0Source: Hungi et al. (2010)Cross- analysis shows that Kenyan Standard 6 pupilsperform better than their peers from SACMEQcountries in reading and numeracy competencytests. The results from the SACMEQ (2007) surveyshow that Kenyan Standard 6 learners performrelatively well on both reading and Mathematicstests. Kenya (20.1%) ranked 4 th after Mauritius,Seychelles and Tanzania on reading competency,measured as the percentage of Standard 6 pupilsreaching satisfactory reading competency levels 5-8,described in Table 6.14. Similarly, Kenya (3.9%)ranked 2 nd after Mauritius in terms of percentageof Standard 6 pupils reaching Mathematicscompetency levels of 5-8.6.5.4 Learning outcomes at secondaryschool levelKCSE candidature increased from 333,516 in2009 to 410,586 in 2011. However, about 70 percent of these candidates do not achieve minimumgrades considered desirable for admission into theuniversity or other middle-level colleges, notablygrade C+ and above for university education. Only6.7 per cent attained B+ and above in 2011. Themean score is particularly low for female candidates.County-level analysis shows that most counties’performance index was below 40 out of a maximumof 84 (assuming a student attained an A gradeof 12 points in the best 7 subjects). SamburuCounty recorded the highest performance indexof 38.2 followed by West Pokot (37.4) while TanaRiver recorded a low of 19.7 next to ManderaCounty (20.7). Only 10 counties recorded amean performance index of 35 and above, whichis equivalent to a mean grade of C-. Clearly,performance in KCSE is low across the countryand contributes to the low progression rates fromsecondary school to the university.6.5.5 Transition from secondaryschool to universityAlthough the transition rate from secondaryschool to the university has slightly improved dueto increased enrolment of module II students,it is still below 40 per cent. A total of 62,853students qualified for admission to universities inthe academic year 2008/09, out of which 16,134(25.7%) were admitted. Admissions for the 2008/09academic year increased to 16,134, constituting a50 per cent increase compared to 10,218 admittedin 2007/08. This translates to 25.7 per cent of the62,853 students who had qualified for admission,68 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etTable 6.14: Cross-country analysis of learning achievementsCross-Country Pupil ReadingScorePupilNumeracyScorePercentage ofPupils with Level7 and 8 ReadingCompetenciesPercentage ofPupils with Level7 and 8 NumeracyCompetenciesBotswana 534.6 520.5 19.5 1.3Kenya 543.1 557.0 20.1 3.9Lesotho 467.9 476.9 3.4 0.1Malawi 433.5 447.0 0.61 0.0Mauritius 573.5 623.3 37.7 22.8Mozambique 476 483.8 3.0 0.3Namibia 496.9 471.0 9.3 0.6Seychelles 575.1 550.7 37.2 3.7South Africa 494.9 494.8 16.8 2.5Swaziland 549.4 540.8 11.9 0.3Tanzania 577.8 552.7 33 3.5Uganda 478.7 481.9 4.6 0.2Zambia 434.4 435.2 2.7 0.1Zanzibar 536.8 489.9 20.4 0.1Zimbabwe 507.7 519.8 16.2 3.5SACMEQ III 512 509.7 15.9 2.9Source: Hungi et al. (2010)Figure 6.5: KCSE performance index by county, 2012Performance Index45403530252015105020 21 22 23 2324 24 26 27 28 28 29 29 30 30 30 30 31 31 31 31 31 32 32 32 32 32 3333 33 33 33 34 34 34 3435 35 35 35 36 36 36 37 37 3738Tana RiverManderaLamuGarissaWajirKwaleIsioloMombasaNarokKiambuTaita TavetaMachakosMarsabitMuran’gaKisiiKituiNyeriKajiadoKirinyagaMakueniMeruTurkanaBungomaNyandaruaNyamiraLaikipiaNakuruBaringoCountyKakamegaNairobiBusiaHoma BayMigoriVihigaKerichoKisumuUasin GishuNandiBometTrans NzoiaEmbuSiayaElgeyo MarakwetWest PokotSamburuSource: Kenya National Examinations Council (2013)kenya economic report 2013 69

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eTable 6.15: Performance in KCSE, 2009-2011KCSE Grade 2009 2010 20112012Male Female Total Male Female Total Male Female Total Male Female TotalA 629 301 930 934 632 1,566 1,315 615 1,930 1,277 698 1,975A- 3,035 1,387 4,422 4,425 2,140 6,565 6,322 2,741 9,063 5,947 3,288 9,235B+ 6,361 2,979 9,340 8,620 4,117 12,737 11,150 5,240 16,390 11,753 5,977 17,730B 9,601 5,359 14,960 11,616 6,557 18,173 14,793 8,151 22,944 15,962 9,221 25,183B- 13,312 8,511 21,823 15,103 9,624 24,727 18,344 11,771 30,115 18,936 12,174 31,110C+ 17,171 12,402 29,573 19,502 13,864 33,366 22,474 16,742 39,216 22,180 16,291 38,471C 22,327 17,418 39,745 24,329 19,440 43,769 27,631 22,334 49,965 27,134 21,771 48,905C- 27,067 22,669 49,736 28,178 24,232 52,410 31,955 26,890 58,845 31,582 27,166 58,748D+ 30,133 25,943 56,076 30,497 26,265 56,762 34,093 29,760 63,853 35,655 31,548 67,203D+ 29,846 29,173 59,019 29,532 27,329 56,861 32,995 31,397 64,392 37,694 35,872 73,566D- 19,656 22,318 41,974 20,245 20,962 41,207 23,741 23,532 47,273 26,436 25,997 52,433E 3,037 2,881 5,918 3,227 2,971 6,198 3,684 2,916 6,600 4,263 3,621 7,884Total 182,175 151,341 333,516 196,208 158,133 354,341 228,497 182,089 410,586 238,819 193,624 432,443% B+ and above 5.5 3.1 4.4 7.1 4.4 5.9 8.2 4.7 6.7 7.9 5.2 6.7% C+ and above 27.5 20.4 24.3 30.7 23.4 27.4 32.6 24.9 29.1 31.8 24.6 28.6Source: Government of Kenya (2013)70 kenya economic report 2013

E d u c aM ta i oc rn oa enc d o nS ok im l li c s PD erv fe ol ro mp ma ne nc etan improved percentage compared to the previousfive years as shown in the Table 6.16. The smallpercentages admitted to universities every yearindicate the huge wastage that needs to be addressedby expanding access in both public and privateuniversities.Table 6.16: Admission trends to public universities,2006/07-2010/11AcademicYearNumberQualified(C+ andAbove)Joint BoardAdmissionsPercentageAdmitted2006/07 58,239 10.218 17.52007/08 68,040 12,261 18.02008/09 62,853 16,134 25.72009/10 72,590 20,073 27.12010/11 81,000 24,216 33.4Source: Joint Admissions Board(iii)resources to help improve service delivery atlocal levels. Disparities in education outcomesat county level are further aggravated byinefficient utilization of available resources,manifested through teacher absenteeism andlimited emphasis on monitoring of actualteaching and learning at school and classroomlevels.The Integrated Public Financial ManagementSystem in the education sector is weak and/or non-existent, especially at sub-nationallevels, resulting in under-reporting of totaleducation expenditures.6.6.2 Policy Options(i)Implement a policy on automatic promotionfrom pre-primary education to primaryeducation and to secondary education.6.6 Conclusions and PolicyOptions6.6.1 Conclusions(i) Although there has been a substantialincrease in participation rates at all levels ofeducation, there are disparities across regionsand counties. The participation rates areparticularly low across counties in arid andsemi-arid lands, and those with high povertylevels. Primary school education recorded thehighest participation rate while access rates atECDE, secondary and tertiary education arestill low. Literacy levels are still low in somecounties, calling for the need to strengthenadult education programmes in the affectedareas.(ii)Education spending is highly decentralized,but there is an uneven degree in attainmentof education outcomes and policy targets. Asa result, households are spending substantial(ii)(iii)Link all sources of spending to educationoutcomes. Efforts should be initiatedto capture all on-budget and off-budgeteducation spending at programme andfacility levels. Clear expenditure roles forcounties and the national government shouldbe developed and appropriate resourcesmobilized. Education spending should alsobe linked to resource needs (both humanand capital) both at sub-national and facilitylevels. Further, expansion of schools shouldbe linked to demand for schooling or schoolagepopulation density and budgetaryresource availability, especially teachers’salaries. Access to social amenities such aswater, transport, security and housing, amongothers, would enhance teacher retention incounties with teacher shortages.The education sector annual plans andbudgets should undergo a two-way bottomupsynchronized process with the districts/county education offices and respectivecounty governments developing thekenya economic report 2013 71

M A C R O a n d s o c i o - e c o n o m i c P e r F o r m a n c eeducation budget and plans at local level onthe basis of a standard funding formulae andper capita unit costs. These county plans andbudgets should then be used to prepare thenational education budget and the associatedimplementation framework and plans.(iv) A user-friendly and efficient financialmanagement system such as the IntegratedFinancial Management Information System(IFMIS) should be institutionalized in alllearning institutions, districts and counties.This should capture both on- and off-budgetrevenues and expenditures in learninginstitutions. The system should also be linkedwith the EMIS, which should be strengthenedto capture regular, and up-to-date educationindicators at institutional, district, county andnational levels.(v)(vi)(vii)With the development of county structures,the Ministry of Education should develop aclear and objective instrument for monitoringschool and county education performance inrelation to national targets. This can take theform of a scorecard. The instrument shouldcapture set education indicators, amountof resources received by source and area ofspending and outcomes. The monitoringmechanism should indicate how the reportsshould be processed and disseminatedin order to inform the overall educationplanning, monitoring and evaluation processat national, county, district and facility levels.There is need to strengthen the qualityassurance and monitoring systems in theeducation sector, including capacity buildingat sub-national level.The government should enhance and/ordevelop the capacity of counties, districts,schools, and managers of education andlearning institutions with regard to planning,and monitoring of education performancetargets. The government, through eitherthe central government and/or the countygovernments, should allocate adequateresources at sub-national levels for educationplanning, monitoring and evaluationactivities, which include initiatives such asdata collection and analysis.(viii) More tertiary (technical and university)education institutions should be establishedto cater for the increased demand for tertiaryeducation. In addition, the governmentshould mobilize resources from otherstakeholders to assist in equipping tertiaryeducation institutions.(ix)(x)(xi)At least one boarding primary school anda mobile school should be established ineach constituency in the ASAL districts toaddress the infrastructure challenge, and inorder to reduce regional and gender disparityand demand for education among migratorypastoralist communities.In order to expand access and improveAdult and Continuing Education (ACE),there is need to construct additional centresand create conducive learning and teachingenvironments and provide appropriatefurniture in ACE centres to respond to theneeds of the youth and adult learners.Build and equip a curriculum resource centre,which will include laboratories for scienceand languages and material developmentworkshops.(xii) To achieve equitable distribution ofteachers, the government should facilitatethe implementation of the recommendationof the staffing norms. This will allow for thedistribution of teachers across regions basedon the recommended Pupil Teacher Ratio(PTR) of 45:1 for high potential areas and25:1 for low density ASAL regions.72 kenya economic report 2013

m a n u f a c t u r i n gPART IISELECTEDSECTORPERFORMANCEkenya economic report 2013 73

S E C T o r a l P e r F o r m a n c eChapter7Agriculture7.1 IntroductionKenya’s economy is dependent on agriculture, whichcontributes to rural employment, food production,foreign exchange earnings and rural incomes. Theagricultural sector directly accounts for about 26per cent of Kenya’s Gross Domestic Product (GDP)and 27 per cent indirectly through linkages withmanufacturing, distribution and other servicerelatedsectors. The sector accounts for 65 per cent ofKenya’s total exports, 18 per cent and 60 per cent ofthe formal and total employment, respectively. Theagriculture sector has been a key driver of economicgrowth in Kenya for the last four decades and is themain source of livelihood for almost 80 per centof Kenya’s population living in rural areas. The keypolicy goals of the sector are in line with KenyaVision 2030, and are guided by the AgricultureSector Development Strategy (Government ofKenya, 2003) framework, which emanated from arevision of the Strategy for Revitalizing Agriculture(Government of Kenya, 2003). Overall, the sector iscritical in realizing the various targets that are set outin the Millennium Development Goals (MDGs),especially that of reducing hunger and poverty.7.2 Performance of the SectorThe sector’s performance was adversely affected atthe beginning of 2012 when severe frost dealt a blowto tea production, and the delay in the onset of thelong rains led to suppressed agricultural activities.However, the sector improved substantially to growat 6.9 per cent in the third quarter of 2012, largelysupported by improved and widespread rains duringthe second and third quarters of the year. In the sameperiod, inflation had risen to 20 per cent from 4 percent the previous year, and the currency volatilitysaw the exchange rate depreciate to a record lowof 106.75 to the dollar. This directly affected themajority of exported commodities such as tea,coffee and horticulture. Figure 7.1 shows trends inpercentage change in GDP growth in agriculture forthe period 2006-2011.In addition, most parts of the country, especiallyNorth Eastern Kenya and the Coastal strip, recordedhighly depressed rainfall during the June-August2012 “long-rains”. This impacted negatively onagriculture and livestock sectors. Counties inWestern and Central Kenya recorded heavy andshort-lived rainfall that resulted in flash floods thatclaimed some human and animal lives. Despite thelethal maize necrosis disease that affected 60,000hectares of maize nationally, with production lossesranging from 10 per cent to 60 per cent, a bumpermaize harvest was realized especially in Trans NzoiaCounty, which produced 4.6 million bags of maizevalued at Ksh 13.8 billion. A taskforce has been74 kenya economic report 2013

A G R I C U L T um ra enu f a c t u r i n gappointed to provide a long-term solution to themaize disease.Figure 7.1: Percentage change in GDP growth inagriculture% change in GDP growth rates1050-5-10-152006 2007 2008YearGrowing of crops and horticultureAgricultural and animal husbandry servicesFishing2009 2010 2011Farming of animalsForestry and loggingSource: Kenya National Bureau of Statistics (2012), Statistical AbstractFarming of animals and fishing improved in the sameperiod due to enhanced rainfall, which improvedfoliage and pasture conditions in the pastoral areasas well as stratification of both ocean and lake waters,such that nutrients from land, a source of food forthe fish, would remain on the top layer of the watersurface, thus improving fish catches. Therefore,there is need to improve animal production throughimplementation of sustainable water harvestingand storage facilities. In addition, there is need toenhance animal production and health strategies,projects and programmes founded on soundanimal disease risk management principles, andprovision of veterinary health through appropriateinterventions such as fast-tracking the establishmentof disease-free zones.7.3 Public ExpenditureFigure 7.2 shows the average annual expenditurein the agriculture sector between 2007/08 and2009/10. The total expenditure in the sectorincreased in 2010/11 to 27.2 billion from 23.9billion in the previous year. The amount of budgetaryresources allocated to the sector has averaged about4 per cent per annum of the national budget duringthe last four years. This, therefore, calls for strategicresource mobilization both from the governmentand development partners in order to increase theresource allocation towards the Maputo Declarationof 10 per cent to agricultural development so as toincrease agricultural productivity by at least 6 percent, hence reducing poverty, unemployment andfood insecurity in the country.Figure 7.2: Average annual spending on theagriculture sector, 2007/08 – 2009/10Ministry ofFisheries 6%Ministry ofLands 19%Ministry ofLivestockDevelopment 19%Ministry of Co-operativesand MarketingDevelopment 4%Source: Government of Kenya (2011 )Ministry ofAgriculture 52%The livestock development sub-sector contributesto about 42 per cent of agricultural GDP and about10 per cent directly to the overall GDP. It alsoaccounts for about 30 per cent of total agriculturalproducts, which earn the country foreign exchangethrough the export of live animals, dairy products,hides and skins. There is need to take advantage ofthe poverty-reducing potential of the livestock subsector,which remains largely unexploited in Kenya,by increasing budgetary allocation for the expansionof production.7.4 Public-Private PartnershipsPublic-Private Partnerships (PPPs) hold a greatpromise for the achievement of agriculturaldevelopment in developing countries. This has beennecessitated by the inability of a single institutionby itself to achieve the task of improving farmers’livelihoods and the economy as a whole. It is,therefore, imperative that partners working acrossdifferent agricultural value chains be mobilized andkenya economic report 2013 75

S e c t o r a l P e r f o r m a n c eS E C T o r a l P e r F o r m a n c eorganized to provide synergy and sustainability ofdeployed innovations on agricultural productionareas. Consequently, there is an increase ininstitutional alliances that strive to unite a widevariety of public and private sector organizationsaround shared research and developmentobjectives. There is need for the government toinvest in the understanding of what it takes toencourage the creation of PPPs and in unlockingtheir latent potential for the good of society. Thispartnership may come through: provision of coldchain infrastructure; ICT in collecting, storing,processing, and disseminating information aboutrisk; development of cottage industries (valueaddition) and skills development.7.5 Reduction of Migration ofYouth from Rural AreasThe objective of the Strategy for RevitalizingAgriculture (SRA) 2004-2014 was to achievea progressive reduction in unemployment andpoverty through agricultural transformation fromsubsistence to commercial. Excessive rural-urbanmigration in Kenya poses a serious problem of risingurban unemployment, under-employment andpoor rural economic and social opportunities. Ruralareas tend to be less densely populated. Therefore,there are many open spaces. The primary economicactivities include farming, lumbering, fishing andquarrying, etc. Most industries are now beingconcentrated in the urban centres. In addition, theseasonality of the primary jobs (or the agriculturalactivity they are engaged in) results to seasonalunemployment, and the small-scale businessindustries are being wiped out by the demand fortechnological products from urban centres, thuscausing structural unemployment. This leaves manypeople in the rural areas unemployed for the mostpart of the year, and thus characterized by chronicfood insecurity. There is also limited access tobasic social services such as safe water, and roadsthat are accessible all-year round, and electricityand telephone services. Recently, the governmentthrough the Ministry of Youth Affairs collaboratedwith Amiran Kenya to construct greenhouses inevery district. This has helped to engage more youths,hence curbing rural-urban migration. Therefore,it is necessary to prioritize the implementation ofpolicies that will ensure the balancing of both socialand economic opportunities available to the urbandweller and his/her counterpart in the rural areas,such as providing basic social amenities, improvingthe quality of education, creation of credit and loanschemes, industrial modernization, technologicalsophistication and entrepreneurship policies. Ifthese economic and social opportunities are sharedequally between rural and urban areas, which willlead to proper balance between the two, it will helpcurb urban unemployment and under-development,which has caused rural-urban migration problems.7.6 Promotion/Availability ofDomestic (Local) and Inter-County MarketsKenya’s Vision 2030 aims to transform the countryinto a globally competitive and prosperous countrywith high quality of life. It is within this frameworkthat county governments should be operating inorder to enhance their inter-relationship in terms oftrade based on their comparative advantages. Therehas been a move to have a tripartite collaborationbetween the government through the KenyaNational Bureau of Statistics (KNBS) and theCentre for Training and Integrated Research forASAL Development (CETRAD) with the Centrefor Development and Environment (CDE),University of Berne, to undertake a project thatcan produce a high resolution National Socio-Economic and Poverty Atlas for Kenya. This isaimed at promoting evidence-based planning atboth national and devolved levels. Therefore, it isnecessary to prioritize those policies that are gearedtowards promoting competitiveness at all levels ofadministration.76 kenya economic report 2013

m a n u f a c t u r i n gChapter8Manufacturing8.1 IntroductionThe manufacturing sector in Kenya constitutes70 per cent of the industrial sector contributionto GDP, with building, construction, mining andquarrying cumulatively contributing the remaining30 per cent. Kenya Vision 2030 identifies themanufacturing sector as one of the key drivers forrealizing a sustained annual GDP growth of 10per cent. The manufacturing sector has high, yetuntapped potential to contribute to employmentand GDP growth. For example, compared to theagriculture sector, which is greatly limited by landsize, the manufacturing sector has high potential inemployment creation and poverty alleviation sinceit is less affected by land size (Bigsten et al., 2010).The contribution of the manufacturing sector toGDP has continued to stagnate at about 10 percent, with contribution to wage employment on adeclining trend.The first Medium Term Plan (MTP) 2008-2012targets for realizing Vision 2030 remain largelyunachieved in terms of contribution of the sectorto GDP and implementation of flagship projects.Vision 2030 envisages a robust, diversified andcompetitive manufacturing sector capable ofaccelerating employment and economic growth.8.2 Recent PerformanceThe performance of the manufacturing sector isreflected in the trends in contribution to GDP,employment, value added and export trends in lightof Vision 2030 targets and selected aspirator andpeer economies.8.2.1 Sector growth and contributionto GDPThe manufacturing sector contribution to GDPworsened from 9.6 per cent in 2011 to 9.2 percent in 2012, while the growth rate deterioratedfrom 3.4 per cent in 2011 to 3.1 per cent in 2012.These adverse changes are attributed to high costsof production, stiff competition from importedgoods, highs costs of credit, drought incidencesduring the first quarter of 2012, and uncertaintiesdue to the 2013 general elections (Kenya NationalBureau of Statistics, 2013). Influx of counterfeitsand volatility in international oil prices continuedto affect the performance of the sector. In 2012,the sector’s growth continued improving acrossthe three subsequent quarters compared to the firstquarter. The food sub-sector recorded a decline of0.3 per cent during 2012. Sub-sectors that recordedimpressive growth performance in 2012 includemotor vehicles (16.9%), beverages and tobacco(3.8%), rubber and plastic products (7.0%), paperkenya economic report 2013 77

S E C T o r a l P e r F o r m a n c eand paper products (11.9%), electrical equipment(8.6%) and textiles (10.0%) (Kenya NationalBureau of Statistics, 2013). Figure 8.1 illustratescomparative quarterly and annual manufacturingsector growth rates during the period 2009-2012.The fluctuations in quarterly growth patterns couldbe attributed to weather changes and agriculturalseasonality, since the sector is heavily reliant onagro-based processing. Successive decline in growthrates during the second and third quarters of 2009was attributed to prolonged drought, which resultedto decline in the food and beverages sub-sectorproduction.Figure 8.1: Manufacturing sector growth rates,2009-2012Percentage growth rates7.06.05.04.03.02.0-1.00.0-1.0-2.01.3Quarter 14.53.43.12.62.12010 2011 2012*YearQuarter 2 Quarter 3Quarter 4Source: Kenya National Bureau of Statistics (2013), Economic Survey;*KNBS Provisional1.46.1Annual GrowthThe stagnation of the manufacturing sector’scontribution to GDP at about 10 per cent isattributed to similar growth patterns of the sectorand GDP. Figure 8.2 illustrates these patterns duringthe period 2000-2012.Figure 8.2: Growth patterns of GDP and themanufacturing sector in KenyaPercent age121086420200010.1 9.9 9.7 9.711.6200120024.50.12003Contribution to GDP (%)10.9 10.5 10.3 10.4 10.84.7 4.7200420056.3200620076.320083.5YearManufactring Sector Growth (%)9.9 9.9 9.620091.34.520103.420119.23.1GDP Growth(%)Source: Kenya National Bureau of Statistics (Various), Economic Surveys ; *Provisional KNBS Estimates2012*8.2.2 Value added and structure of themanufacturing sectorThe sector value added increased by 8.3 per centfrom Ksh 292.4 billion in 2011 to Ksh 316.7 billionin 2012. Despite this improvement, contributionto GDP declined from 9.6 per cent in 2011 to 9.2per cent in 2012. Figure 8.3 shows the sector valueadded vis-à-vis contribution to GDP during theperiod 2007-2012. Kenya’s manufacturing sectoris largely agro-processing, and its performance isdependent on weather patterns. As mentionedearlier, incidences of drought during the first quarterof 2012, high costs of production, stiff competitionfrom imported goods, high costs of credit, andpolitical uncertainty due to the 2013 generalelections are among the key factors that contributedto the decline in sector contribution to GDP in2012.Figure 8.3: Manufacturing sector value added andcontribution to GDPValue added (Ksh millions)350,000300,000250,000200,000150,000100,00050,000-10.4190,464200710.8228,304 234,5569.9 9.9252,122292,4019.6316,683YearValue added (Ksh. millions) Contribution to GDP (%)9.22008 2009 2010 2011 2012*Source: Kenya National Bureau of Statistics (2013), Economic Survey;*Provisional KNBS estimates8.2.3 Sector diversification11.010.510.09.59.08.58.0Limited diversification into high-value sub-sectorssuch as electronics and chemicals has remained akey challenge in terms of manufacturing sector valueadded. Figure 8.4 shows the structure of Kenya’smanufacturing sector in comparison with that ofSub-Saharan Africa (SSA) and Newly-IndustrializedCountries (NICs). The ‘other’ category comprisesbasic metals, computing machines, medicalequipment, and radio and telecommunicationequipment. The manufacturing sectors in Kenyaand SSA are largely food and tobacco manufacturingContribution to GDP (%)78 kenya economic report 2013

m a n u f a c t u r i n g(accounting for more than 30% of sector valueadded) while those in NICs are more diversifiedinto high-value chemical, machinery and electronicequipment. The differences in the manufacturingsector structure are attributed to active policyincentives employed by NICs to encouragediversification into high-value sub-sectors (Page,2012; Yean and Heng, 2011).Figure 8.4: Comparative structure of 2009manufacturing sector value added (% share at2000 constant prices)100%90%Figure 8.5: Manufacturing wage employment visà-viscontribution to wage employmentWage Employment (’000 Employees)280.0275.0270.0265.0260.0255.013.86264.813.60265.413.41267.913.03276.9277.912.9320082009 2010 2011 2012*YearWage employment ‘000Contribution to wage Employment (%)Source: Kenya National Bureau of Statistics (2013), Economic Survey14.0013.8013.6013.4013.2013.0012.8012.6012.60Contribution to Wage Employment (%)80%Percentage70%60%50%40%30%20%10%0%KenyaFood, beverages & tobacco30.21 38.91Coke & petroleum productsNon - metallic mineral productsElectricalsSource: UNIDO (2012)SSATextiles & leatherChemicalsFabricated metal productsOthers8.2.4 Contribution to wageemployment16.39NICsWood, paper & publishingRubber & plastic productsMachinery & equipmentThe numbers of wage employment in the sectorincreased from 276,900 employees in 2011to 277,900 employees in 2012, a 0.4 per centimprovement. This compares unfavourably with3.4 per cent employment growth between 2010and 2011. The sector contribution to total wageemployment has gradually worsened from 13.9per cent in 2008 to 12.9 per cent in 2012. Whilethe declining trend largely reflects stagnation ofthe sector’s growth, this could also be due to thepossibility of firms becoming more capital intensive,or a shift to use of casual labour to minimize labourcosts (KIPPRA, 2012). Figure 8.5 illustrates trendsin wage employment and sector contribution towage employment.8.3 Exports8.3.1 Global exportsKenya’s share of manufacturing exports to theglobal market is about 0.02 per cent. While thiscompares favourably with neighbouring Ugandaand Tanzania, the performance is unimpressivecompared with South Africa, Singapore, Chinaand Malaysia. For example, South Africa’s globalshare of manufacturing exports is about 0.3 percent, while that of Singapore and Malaysia areabout 2.4 per cent and 1.3 per cent, respectively.Table 8.1 shows comparative global manufacturingexport trends between 2007 and 2011. Low valueaddition and high costs of production impedecompetitiveness of Kenya’s manufactured productsin the global market. Further, limited diversificationwith high concentration in food manufacturingconstrains opportunities to exploit the globalmarket. Countries such as Singapore and Malaysiathat have shifted from traditional industries tohigh technology-based manufacturing have highershare of global manufacturing exports, driven bydiversification into high value added manufacturingsuch as chemicals and electronics.8.3. 2 Exports under AGOAIn 2001, the US government enacted the AfricanGrowth and Opportunities Act (AGOA), whichkenya economic report 2013 79

S E C T o r a l P e r F o r m a n c eTable 8.1: Comparative world share of manufacturing exports (%)Country 2007 2008 2009 2010 2011Kenya 0.016 0.018 0.019 0.017 0.018Singapore 2.391 2.271 2.370 2.542 2.429China 11.964 12.766 13.458 14.763 15.393Malaysia 1.314 1.245 1.309 1.332 1.223Tanzania 0.005 0.007 0.006 0.008 0.007Uganda 0.004 0.006 0.006 0.005 0.006South Africa 0.342 0.365 0.302 0.328 0.321Source: World Trade Organization (2012)allowed African countries to export textiles andgarments duty-free and without import quotarestrictions. The share of Kenya’s exports underAGOA improved from 0.51 per cent in 2010 to0.54 per cent in 2011. During the period January toSeptember 2012, Kenya’s share under AGOA was0.79 per cent. While Kenya is doing well comparedto neighbouring countries, including Ethiopia,Tanzania and Uganda – each individually havinga share of less than 0.3 per cent – the performanceis unfavourable compared to Southern Africancountries such as Angola and South Africa. Figure8.6 shows a comparative share of exports underAGOA for selected countries.Figure 8.6: Exports to AGOA (% of total Sub-Saharan exports under AGOA)Percent age25.0020.0015.0010.005.000.00Angola21.6417.89South Africa0.79 0.29 0.28 0.08Kenya Ethiopia Tanzania UgandaCountry20102011 2012*Source: United States International Trade Commission (2012);*January-September 20128.3.3 EPZ performanceTable 8.2 shows EPZ performance indicators interms of gazetted zones, employment, export sales,investments and contribution to GDP. The numberof gazetted zones increased from 45 in 2011 to 47in 2012. The number of firms operating in EPZimproved from 79 in 2011 to 82 in 2012. This yieldsan average number of 2 firms per gazetted zone. Thisis unimpressive in terms of potential benefits arisingfrom agglomeration economies.Most of the firms within EPZ are in the garmentsector (26.83%), followed by agro-processing(21.95%). These sub-sectors also have the highestlevels of investments, employment, sales and exportsas shown in Table 8.3. The minerals/metals subsector,though constituting only 4.9 per cent of firmsin EPZ, contributes to 20.3 per cent of investments,a reflection that it is a rapidly growing sub-sectordue to recent mineral discoveries such as coal, andthe expansion of the cement industry driven by thebooming construction sector.8.4 Highlights of PolicyDevelopments and First MTP2008-2012 Progress8.4.1 Special Economic ZonesThe government is in the process of establishingthree Special Economic Zones (SEZs) in Mombasa,Kisumu and Lamu. Land covering 2,000 and 700square kilometres has already been identified inMombasa and Lamu, respectively (Governmentof Kenya, 2013). The SEZ Bill 2012 is expected torepeal the Export Processing Zones Act to providefor the establishment of Special Economic Zones80 kenya economic report 2013

m a n u f a c t u r i n gTable 8.2: EPZ performance indicators, 2007-2011Year 2008 2009 2010 2011 2012*No. of gazette zones 38 41 42 45 47No. of firms 77 83 75 79 82No. of employees 30,658 30,623 31,502 32,464 35,929Accumulated investments (Ksh millions) 21,701 21,507 23,563 26,468 38,535Total output EPZ (Ksh millions) 31,262 26,798 32,348 42,442 44,273EPZ contribution to total Kenyan exports (%) 8.14 6.94 7.08 7.64 7.72EPZ contribution to manufacturing sector value of 4.36 3.63 3.76 4.21 4.25output (%)EPZ contribution to manufacturing sector11.43 11.54 11.75 11.80 12.77employment (%)EPZ contribution to GDP (%) 2.29 1.92 2.20 2.76 2.75Source: Export Processing Zone Authority (2013)Table 8.3: Structure of EPZ sub-sectors: Share in total EPZ, 2012SectorProportion Local jobs Exports Total sales Investmentof firmsAgro-processing 21.95 10.97 15.87 14.67 16.09Beverage/spirits 3.66 0.55 0.91 0.82 0.64Chemicals 1.22 0.21 0.13 0.12 2.93Dartboard 1.22 0.76 1.50 1.36 1.84Electricals 3.66 0.05 6.93 6.25 1.23Food processing 3.66 0.86 1.00 1.52 5.55Garments 26.83 79.71 53.07 48.94 27.85Garments support services 6.10 0.07 0.00 0.09 0.20Minerals/metals/gemstones 4.88 1.17 8.17 7.54 20.32Pharmaceuticals & medical supplies 2.44 0.75 0.98 1.44 2.73Plastics 6.10 1.30 1.04 1.27 3.06Printing 1.22 0.73 1.47 7.45 6.21Relief supplies 2.44 0.32 2.54 2.51 1.35Services 12.20 2.54 6.39 6.01 9.98Other 2.44 0.02 0.01 0.01 0.01Total 100.00 100.00 100.00 100.00 100.00Source: Export Processing Zone Authority (2013)and provide enabling policy environment forinvestments. The SEZ Bill has gone through the firstreading and a Sessional Paper has been prepared fortabling in Parliament.8.4.2 MTP (2008-2012)The first MTP 2008-2012, which forms thefoundation for the first phase of implementingVision 2030 development projects, came to anend in 2012. In the medium term, the sector’skenya economic report 2013 81

S E C T o r a l P e r F o r m a n c egoal was to increase its contribution to GDP byat least 10 per cent per annum. To achieve thisdesired growth rate, the following objectives wereidentified: strengthening production capacity andlocal content of domestically-manufactured goods;increasing generation and utilization of researchand development results; increasing the share ofproducts in the regional market to 15 per cent; anddeveloping niche products for existing and newmarkets.The prioritized flagship projects for 2008-2012included development of at least two SpecialEconomic Zones (SEZs), and the development andcreation of at least five SME industrial parks. Table8.4 shows the sector’s first MTP 2008-2012 targetsand the status of progress.Table 8.4: Status of 2008-2012 MTP targets andobjectivesMTP2008-2012Objective/TargetIncreasemanufacturingsectorcontributionto GDPby at least10% per annumStatusFive-year (2008-2012) averagegrowth rate was 3.16%The sector’s growth during the first MTP waserratic, and contribution to GDP continued todecline marginally. This calls for re-evaluation ofpolicies and strategies to realize the contribution ofthe sector to the achievement of Vision 2030.MTP2008-2012Objective/TargetDevelopmentof atleast twoSEZsDevelopmentof fiveSME parksStatusThe SEZ Bill has gone through firstreading and a Sessional Paper hasbeen prepared for tabling in ParliamentLand has been earmarked inMombasa (2,000 sq. Km) andLamu (700 sq. Km). Surveying andprofiling of Kisumu SEZ is ongoing135 and 20 acres of land has beenidentified in Eldoret and TaitaTaveta, respectivelyIdentification of land in othercounties is ongoingDevelopment of master plans is inprogress8.4.3 Constitution of Kenya (2010)The Constitution of Kenya (2010) is a boon forprivate sector investment as it fosters enhancedgovernance and property rights that are thefoundation of a favourable investment climate.The right to own property, either individually or inassociation with others, is enshrined in Article 40 ofthe Constitution (Protection of right to property).Article 40(2) prohibits Parliament from enactinglegislation that deprives a person of property orenjoyment of property right. The Constitutionhas devolved structures that provide incentives forindustrial dispersion across the country.8.4.4 National Industrialization Bill2012The draft National Industrialization Bill 2012provides for establishment of the National IndustrialDevelopment Commission to coordinate industrialdevelopment activities in the country.82 kenya economic report 2013

m a n u f a c t u r i n g8.4.5 National Industrialization PolicyFrameworkSessional Paper No. 9 on the NationalIndustrialization Policy Framework for Kenya wasapproved during the last quarter of 2012. The policycreates incentives for manufacturing sector valueaddition, sub-sector linkages and investments. Thisis a vital ingredient for addressing the key challengesfacing the sector.8.5 Challenges and Lessons fromSingapore, Malaysia and SouthAfricaDespite the shift from the import substitutionstrategy adopted immediately after Independenceto export-oriented manufacturing in the mid-1980s, Kenya’s manufacturing sector contributionto GDP has stagnated at about 10 per cent. Lowvalue addition, limited diversification, highenergy costs, poor infrastructure, the influx ofcounterfeits and limited availability of skilledlabour are the key challenges facing the sector.Heavy reliance on food manufacturing, which isoften affected by unfavourable weather patterns,further constrains the performance of the sector.The Newly-Industrialized Countries (NICs) of EastTable 8.5: Comparative structure of manufacturingAsia followed similar paths in shifting from importsubstitution to export-oriented manufacturing, buthave managed to transform the sector to be the keydriver of their economies.Experiences from Singapore and Malaysia indicatethat developing countries can industrialize andenhance the contribution of the manufacturingsector to GDP. As illustrated in Table 8.5,manufacturing value added as a percentage of GDPfor Singapore is more than double that of Kenya,while that of South Africa is more than one andhalf that of Kenya. In Singapore, the manufactureof machinery and chemicals accounted for 75 percent of total manufactures in 2008. In Kenya, themanufacture of food and beverages is the singlemajor component of manufacturing, accountingfor 28 per cent and 30 per cent in 2000 and 2008,respectively. Data from the KNBS show that as of2011, the share of food, beverages and tobacco intotal manufacturing value added for Kenya hadincreased to 34 per cent. The ‘others’ categoryincludes wood, paper, petroleum, basic metals andminerals, and fabricated metal products.Kenya’s manufacturing exports as a percentage oftotal exports compare unfavourably with thoseof Singapore, Malaysia and South Africa. Theimpressive performance of East Asian economiesA B C D E F GValue Added(US$ billions)Food, Tobacco& Beverages(% of total)Textile & Clothing(% of total)Machinery(% of total)Chemicals (%of total)Others (% oftotal)ValueAdded(% ofGDP)Year 2000 2010 2000 2008 2000 2008 2000 2008 2000 2008 2000 2008 2011Kenya 1.31 3.02 29 30 8 4 2 2 5 4 55 62 9Singapore24 43.63 3 3 1 1 52 54 14 21 25 21 19Malaysia28.95 62.1 8 9 4 2 38 30 8 12 42 47 25SouthAfrica22.93 38.85 15 19 5 3 14 13 7 6 59 58 15Source: Columns A-F: World Bank (2012); Column G: World Economic Forum (2011)kenya economic report 2013 83

S E C T o r a l P e r F o r m a n c esuch as Singapore is mainly due to improveddiversification and sophistication of manufacturingproducts (Page, 2012). Figure 8.7 showscomparative manufacturing exports as a share oftotal merchandise exports for Kenya and selectedaspirator countries. Kenya’s share of manufacturingin total merchandise exports is only 35 per cent,compared to South Africa (47%), Malaysia (67%),and Singapore (73%). This indicates ampleopportunities for Kenya to increase her share ofmanufacturing exports.Figure 8.7: Manufacturing exports as a share ofmerchandise exports (%)Percent (%)80.070.060.050.040.030.020.010.00.073.0 67.0SingaporeSource: World Bank (2012)Malaysia47.0South AfricaCountry35.0KenyaIncentive-based policies aimed at value additionand linkages of large firms with small ones areimperative. For example, Malaysia used a mix oftrade and incentive policies to shift from commodityproduction to value-added manufacturingproduction. Consequently, the contribution ofmanufacturing to GDP improved from 11 per cent in1970 to 27 per cent in 2009, while the share of totalemployment during the same period increased from9 per cent to 29 per cent (Yean and Heng, 2011).The import substitution strategy used until the1980s was replaced with export promotion thougha mix of policy incentives aimed at producing highvalue production, with the potential to competein international markets. The main incentives usedare based on priorities such as level of value added,technology used and industrial linkages.Experiences from Singapore demonstrate multifacetedstrategies ranging from fixing the investmentclimate (tax and non-tax), strengthening FDI-SME linkages, research and development funding,and knowledge support. Singapore’s successfulindustrialization is attributed to active policies toenhance the inflow of FDI in skill-intensive activitiessuch as electronics and chemicals, a competitiveinvestment climate supported by strong institutions,infrastructure, and research and developmentsupport (United Nations, 2011).SMEs constitute over 70 per cent of manufacturingfirms in Kenya. However, small sizes hinder accessto finance, human capital and technology. Malaysiaand Singapore, from the early 1970s to 1980s,created a thriving environment that facilitatedSMEs to overcome these challenges. Policy reformsin Malaysia, such as the Investment Incentives Act1968, establishment of the Free Trade Zones in1970, and the promotion of export incentives laidthe foundation for acceleration of FDI in the sector(United Nations, 2011). Widespread informality,weak inter-firm linkages and lack of innovation andexport competitiveness are the major challengesimpeding Sub-Saharan Africa’s industrialization(UNIDO, 2008). To promote industrial upgrading,in the 1990s, the Malaysian government launchedthe National Action Plan for Industrial TechnologyDevelopment and establishment of technologyorientedresearch institutions to prioritize scienceand technology as a national priority (Yeanand Heng, 2011). Consequently, the Small andMedium Industries Development Corporationwas established in 1996 to boost development ofSMEs in the country. However, lack of monitoringmechanisms and shortage of qualified engineers andscientists, and leaders to drive the new institutionscurtailed full benefits of the efforts (Rasiah, 2010).Singapore developed policies and incentives thatspecifically targeted SMEs through establishment ofR&D funding, training, and implementing policiesthat actively targeted FDI-SME linkages.Protection of intellectual property is also a keydriver of industrial innovation. Kenya comparesunfavourably in terms of industrial property andpatent registration as shown in Table 8.6. As of84 kenya economic report 2013

m a n u f a c t u r i n g2007, there were 19 industrial property and 3,745trademark registrations.Table 8.6: Comparative industrial property andpatent registrationNo. of industrialproperty(Year: 2007for Kenya,2010 for others)registrationsTrademarkregistrations(Year 2010)KenyaSource: World Trade Organization (2012)SingaporeMalaysiaS. Africa19 4,442 2,177 5,1333,745 13,694 14,044 65,350The cost of doing business is a major concern formanufacturing firms in developing countries, andhas hitherto continued to dominate policy debatesdue to its adverse consequences on investmentsand profitability of firms. Costs of doing business inAfrica exceed those of other developing countriesby 20-40 per cent (Page, 2012). Thus, fixing theinvestment climate (regulatory, institutional andphysical environment within which firms operate)is central for competitive production. Table 8.7shows comparative World Bank investment climaterankings for Kenya and selected economies. Kenyascores unfavourably on critical indicators such asproperty rights registration, investor protectionand contract enforcement, compared to Singapore,Malaysia and South Africa.8.6 Conclusion and PolicyRecommendationsThe performance of the manufacturing sector interms of contribution to GDP has remained belowthe first MTP and Vision 2030 targets. The sector’scontribution to GDP during the first MTP 2008deteriorated from 10.8 per cent in 2008 to 9.2 percent in 2012. Sector annual growth rate averaged3.16 per cent during the period, oscillating between1.3 per cent and 4.5 per cent. The key challengesfacing the sector include low value addition, limiteddiversification, high costs of production and influx ofcounterfeits. South Africa and East Asian countrieswith success stories of manufacturing experiencessuch as Singapore and Malaysia score impressivelyon the investment climate indicators. In comparisonwith aspirator countries, Kenya’s manufacturingsector performance has continued to lag behind interms of value addition and contribution to exports.The sector is characterized by a small share in totalexports, and a large share of food manufacturing thatis frequently adversely affected by erratic weatherpatterns.In light of the recent sector performance, constraintshighlighted and lessons drawn from aspiratorTable 8.7: Comparative World Bank investment climate indicator rankingsGlobal Performance (Economies are ranked from 1-185. Rank 1 means business environment is moreconducive)Economy Global rank RegisteringpropertyGetting creditProtectinginvestorsEnforcingcontractsStarting abusinessKenya 121 161 12 100 149 126Singapore 1 36 12 2 12 4Malaysia 12 33 1 4 33 54South Africa 39 79 1 10 82 53Source: World Bank (2013)kenya economic report 2013 85

S E C T o r a l P e r F o r m a n c ecountries, the following policy recommendationsare made:(i)Because the sector is predominantly agroprocessingand characterized by lowvalue addition as evidenced by stagnatedcontribution to GDP, there is need forpolicy incentives for value addition anddiversification, for example, targetingmanufacture of chemicals and electronics.In Malaysia, for example, manufacturingcompanies engaging in high-technologymanufacturing in electronics andbiotechnology qualify for 100 per cent taxexemption and investment tax allowance of upto 100 per cent for five years.in addition to increasing public awarenesson counterfeits, and reporting procedures.Enhanced financial and human resources forthe Kenya Anti-Counterfeit Agency should beconsidered.(iv) Kenya scores poorly on costs of doing business.There is, therefore, need to mitigate costs ofproduction through reduced energy costs andcontinued efforts to reduce congestion at theport of Mombasa. The cost of electricity inKenya is also high and volatile depending onchanges in international oil prices. Enhancedinvestments in alternative energy sources,including geothermal, wind and solar energy isvital in addressing energy costs.(ii) Policy incentives to promote inter-firmlinkages (large manufacturing firms andSMEs) and FDIs would enhance progressionof SMEs to large-scale competitive firms.For example, Singapore pursued policies toencourage FDI inflows in higher value addedareas such as production of chemicals andelectronics through tax and non-tax incentives,including concessionary corporate tax ratesof between 5 and 15 per cent, grants for highvalue added sectors, and establishment of theSingapore Science Park to provide targetedresearch and development services to smalland medium enterprises. Such incentives actas a catalyst for industrial transformation.(iii) Reducing the influx of counterfeit goodsand promoting domestic innovations is animportant intervention. However, East Africancountries lack harmonized laws to fightcounterfeit goods, and this is a key challenge.Therefore, efforts to establish harmonizedanti-counterfeit laws should be expedited,(v)Kenya’s share of manufacturing exports inher total merchandise exports is low (only35%) compared to aspirator countries suchas South Africa (47%), Malaysia (67%) andSingapore (73%). The shift from low-valueexports, mainly commodities, to high-valuemanufactures is imperative not only for theperformance of the sector but also for reducingthe burgeoning current account deficit thatis currently in excess of 10 per cent of GDP.Enhanced value addition of manufacturedproducts to compete in international marketsand boost exports, coupled with sectordiversification is imperative. These can beachieved by addressing costs of productionsuch as electricity through use of alternativeenergy sources such as wind, and expeditingefforts to reduce congestion at the port ofMombasa. Additionally, fiscal incentivesshould be tied to value addition and inter-firmlinkages to facilitate progression of SMEs tolarge competitive firms.86 kenya economic report 2013

m a n u f a c t u r i n gChapter9Trade and Foreign Policy9.1 IntroductionTrade is one of the key drivers towards theachievement of Kenya Vision 2030. Trade is definedas the exchange of goods, values or services formoney or other goods and services, and plays asignificant role in growth and development throughlinkages with other sectors of the economy bycreating markets through which goods and servicesreach the consumer. Its role in employment,alleviating poverty and achieving desired economicgrowth is among the most promising paths ofindustrial development (KIPPRA, 2010). Moreover,trade plays a crucial role towards attainment ofnational development objectives, particularly thoseenvisaged in Vision 2030, and the MillenniumDevelopment Goals (MDGs) one and eight oneradication of Extreme Poverty and DevelopingGlobal Partnership for Development throughimproved market access, respectively.The exchange of goods and services can generallybe understood at two levels: the nation and theworld, that is domestic trade, and internationaltrade, respectively. The trade sector in Kenya hasfive components, namely: wholesale and retail,distribution; trade in services; electronic trade;informal trade; and international trade. Domestictrade is trade that takes place within Kenya and itencompasses mainly wholesale and retail trade.International trade, on the other hand, relates totrade that takes place between Kenya and the restof the world and includes trade within the regionaleconomic communities (RECs).A sound foreign policy is crucial in expandinginternational trade. This is why the Constitutionof Kenya (2010), in underscoring the importanceof foreign policy in driving international trade,transferred external trade to the Ministry of ForeignAffairs.9.2 Domestic TradeIn Kenya, wholesale and retail trade form the largestcomponent of domestic trade and provide moreopportunities for employment. The wholesale andretail trade has continued to play an importantrole in the growth and development of the Kenyaneconomy. Wholesale trade firms are essential tothe economy as they buy goods in large quantities,usually from manufacturers, and sell them in smallerquantities to businesses and consumers. Theysimplify product, payment, and information flows byacting as intermediaries between the manufacturerand the final customer. They also store goods thatneither manufacturers nor retailers can store untilkenya economic report 2013 87

S E C T o r a l P e r F o r m a n c econsumers require them, and in so doing they serveseveral roles in the economy. As such, they act as themain interface between producers and consumers,and prices of most consumer products are ultimatelyset in these sectors.Wholesalers may buy from other tertiary sectorbusinesses, such as importers, instead of primarysector manufacturers. In economics, wholesale tradecan be categorized as a form of specialization in thetertiary sector. In some areas, there is continuedgrowth in the distribution stage of the supply chain,but large retail stores are becoming increasinglypopular and offer wholesale prices for many goods.The size and scope of firms in the wholesale andretail trade vary considerably across counties inKenya.As Kenya embarks on the implementation of theConstitution, especially the devolution to countygovernments, inter-county trade will be criticalin terms of promoting sustainable development,employment and investment. Counties will haveto utilize their comparative advantages in order totrade with other counties and to attract investment.9.3 Performance of DomesticTradeDomestic trade, comprising wholesale and retailtrade, accounted for about a tenth of the GDP in2012. This sector will, therefore, form a good basisof inter-county trade when devolution is finallyimplemented.In the last five years, the wholesale and retailtrade has maintained an average of 10.2 per centcontribution to GDP. The contribution to GDPwas 10.2 per cent in 2008, went up to 10.5 percent in 2011 and was back to 10.2 per cent in 2012(Figure 9.1). The annual growth rate of this sectorincreased from 4.8 per cent in 2008 to 6.4 per centin 2012 (Kenya National Bureau of Statistics, 2013).Wholesale and retail trade activities tend to bedistributed across the country, and their operationsvary across counties. In addition to growth, thesector contributes significantly in terms of formaland informal employment. The sector also hasmost of the small and medium enterprises, whicharguably form the basis of Kenya’s growth.Figure 9.1: Contribution of wholesale and retailtrade to GDP% Contribution to GDP10.610.410.210.09.89.69.420082009 2010YearsSource: Kenya National Bureau of Statistics (2013)2011 2012In terms of employment, the wholesale and retailtrade accounted for 196,000 jobs and 4.4 million inthe formal and informal sectors in 2007, respectively.Employment in the wholesale and retail tradeincreased to 238,000 (formal) and 4.5 million(informal) in 2011. Most of the formal employmentjobs in the private sector are within supermarkets.Within the devolved government system, countieswill compete for investment by supermarkets,especially by attracting supermarket branches atthe county level. Establishment of supermarketswill boost investments, enhance distributionof commodities and, more importantly, createemployment at county levels. The key issue then iswhat kind of incentives the counties could offer inorder to attract these types of investments.9.3.1 Rise of supermarkets in wholesaleand retail tradeDuring the last few years, the role of supermarketsin wholesale, retail and distribution in Kenya hasincreased. Between 2000 and 2010, the growthof supermarkets was estimated to be 32 per cent88 kenya economic report 2013

T r a d e a n d mF ao nr ue if ga n c tP uo rl inc gyin terms of numbers (Kenya National Bureau ofStatistics, 2012; Kamau, 2008; Botha and Schalkwyk,2007). Supermarkets have been spreading veryrapidly in major towns but with some base in thecapital city. Kenya is therefore among the mostadvanced countries in Africa in terms of presence ofsupermarkets, after South Africa. According to theGlobal Agricultural Information Network - GAIN(2008), Kenya had over 494 supermarkets and 22hypermarkets in 2008, a number that could havedoubled by 2012.Although many of the supermarkets are locatedin Nairobi, they have been gradually expanding toother towns. In 2012, the leading supermarkets inKenya included Nakumatt (44 branches), Uchumi(37 branches), Tuskys (36 branches), Naivas(28 branches) and Ukwala (24 branches). Thedrivers of the exponential growth of supermarketsinclude changing consumer lifestyles, increasedurbanization, and economic growth experiencedover the past decade. Kinsey (1999) explainshow households become more heterogeneous,smaller and richer, and more likely to have a femalehousehold member in the labour force, which leadsto expansion of supermarkets.Some of the supermarkets have also expanded intoneighbouring countries within the East Africanregion. For example, Nakumatt and Uchumihave branches in Uganda, Rwanda and Tanzaniain an attempt to broaden their annual turnover.This pattern of first penetrating upper class urbanmarkets and then moving into lower income andrural-town markets shows that there will be a steadyand rapid increase in supermarkets in East Africa,and specifically Kenya.9.3.2 Improving the performance ofdomestic tradeMicro, small and medium enterprises (MSMEs)are the biggest contributors to wholesale and retailtrade, and if the pertinent issues affecting theirexistence and growth can be addressed, they willbe able to transit into the formal sector. The PrivateSector Development Strategy (PSDS) report(Government of Kenya, n.d.) cited lack of access tomarkets and finance as the major constraints facingMSMEs. The other factors were: interference fromlocal authorities, insecurity, lack of physical facilitiesto put up their premises, and lack of access to cleanwater. According to the World Bank Doing BusinessReport 2013, simple business regulatory reformshave had positive outcomes in terms of increasingbusiness and job creation. Based on these findings,the proposed points of intervention to supportgrowth in this sector include:• Provision of adequate good qualityinfrastructure for MSMEs.• Reducing legal, regulatory and administrativebarriers to trade.• Enforcing anti-corruption measures to reduceharassment of MSMEs.9.4 Kenya and the World TradeKenya’s total exports grew by only a meagre oneper cent (1%) from Ksh 512.6 billion (US$ 6.03billion) in 2011 to Ksh 517.8 billion (US$ 6.09billion) in 2012 while total imports grew by 5.7 percent from Ksh 1,300.7 billion (US$ 15.3 billion) in2011 to Ksh 1,374.6 billion (US$ 16.2 billion) in2012 (Kenya National Bureau of Statistics, 2013).This shows that in 2012, the value of imports was2.7 times the value of exports; this has caused aworsening trade balance and exposed the economyto foreign exchange rate risks. The main reasonfor this is that Kenya exports mainly agriculturalproducts such as tea, coffee and horticulture andimports high-value products such as machinery andother capital equipment, fuel and lubricants, andnon-food industrial supplies (Figures 9.2 and 9.3).kenya economic report 2013 89

S E C T o r a l P e r F o r m a n c e9.4.1 Leading exports and exportdestinationsKenyan exports are dominated by agriculturalcommodity exports, with tea, horticulture andcoffee being the leading commodity exports in 2012(Figure 9.2). Kenya also exports significant amountsof clothing and apparel to the United States throughthe African Growth and Opportunity Act (AGOA).In the past few years, there has been considerablerecovery of tea and coffee exports due to improvedgovernance in the bodies running these industriesand improved prices in the international markets.Tea, horticultural and coffee exports have remainedresilient to the global financial crisis, but may beadversely affected if the Eurozone sovereign debtcrisis persists, and if the United States economyfails to recover quickly. The coffee sub-sectorhas also received considerable support from thegovernment in the form of writing off debts owedto the government by cooperative societies; settingup of a Coffee Development Fund; allowing directsales as opposed to auction; training of cooperativesocieties’ staff on good governance; review of theCoffee Act; and reducing the number of licensesthat millers, marketers and go-downs have toacquire. The horticultural sub-sector has also seenconsiderable growth, with leading exports beingflowers, fruits and vegetables. Kenya’s export basehas remained largely the same since Independence,with exports comprising primary commodityexports, thus implying that the country has beenunsuccessful in diversifying the export base.Figure 9.2: Leading Kenyan exports (Ksh million)Ksh millions120,000100,00080,00060,00040,00020,000020082009 2010Year2011 2012Tea HorticultureArticles of apparel and clothing accessoriesTobacco and tobacco manufacturersSource: Kenya National Bureau of Statistics (2013)Figure 9.3 shows that there has been a steady increaseof tea exports from Kenya, with small variations peryear. According to the Tea Board of Kenya 2010/11Annual Report (Tea Board of Kenya, 2012), themain export destinations for Kenyan tea are Egypt(21%), Pakistan (18%), UK (13%), Russia (10%)and Sudan (8%).Figure 9.3: Kenya tea exports, 2002-2012(Quantity in million Kg)Million kg5004504003503002502001501005002002200320042005200620072008YearQuantity (M. Kgs)Source: Tea Board of Kenya: http://www.teaboard.or.ke/statistics/exports.html.The leading export destinations for Kenyan goodsare Uganda, the UK, Tanzania, Netherlands and theUS, in that order (Figure 9.4). In 2012, Tanzaniaovertook the UK as the second leading exportdestination for Kenya. The fact that Uganda andTanzania (East African Community members) arethe leading export destinations for Kenyan goodshighlights the importance of regional integrationto Kenya. More exports to the regional market willcushion Kenya when there are disturbances in theworld markets such as Europe and the Americas.Kenya exports mainly manufactured goods toUganda and Tanzania, tea to the UK, horticulturalexports to the Netherlands, and clothing and apparelto the United States.9.4.2 Leading imports and importsourcesEven though Kenya exports mainly low-valueprimary commodity exports, the imports are usuallyhigh value. This can explain the persistent currentaccount deficit that Kenya has been experiencing.200920102011201290 kenya economic report 2013

T r a d e a n d mF ao nr ue if ga n c tP uo rl inc gyThe leading commodity imports by Kenya arenon-food industrial supplies, fuel and lubricants,and other capital equipment (Figure 9.5). Thesecommodities represented 30.4 per cent, 24.1 percent and 18.7 per cent in 2012 of the total value ofimports, respectively.Figure 9.6: Leading sources of Kenyan importsYear2012201120102009Figure 9.4: Leading Kenyan export destinations(% share of total exports)2008050 100150 200Year201220112010Japan South Africa China India United Arab EmiratesSource: Kenya National Bureau of Statistics (2013)200920080 2U.S.A.4 6 8 10 12 14Percentage share of total exportsNetherlands Tanzania United Kingdom UgandaSource: Kenya National Bureau of Statistics (2013)Figure 9.5: Leading Kenyan imports by broadeconomic category (% share)Percentage40302010020082009 2010YearFood and BeveragesNon - Food Industrial SuppliesFuel and LubricantsMachinery & Other Capital EquipmentTransport EquipmentSource: Kenya National Bureau of Statistics (2013)2011 2012Kenya’s imports originate from the United ArabEmirates (UAE), India, China, South Africaand Japan (Figure 9.6). The largest componentof imports from the UAE includes petroleumproducts, household items and electronic products.Kenya also imports chemicals, pharmaceuticals, andclothing and fabrics from China, while petroleumoils and oils from bituminous minerals, chemicals,clothing and fibres are imported from India. Exportsto Kenya by South Africa include electronics,pharmaceuticals and machinery, while importsfrom Japan comprise motor vehicles, machinery andcapital equipment.9.4.3 African Growth Opportunity Act(AGOA) exportsThere has been a tremendous increase of Kenyanexports to the United States ever since the AGOAcame into force in the year 2000. Kenya is one of thefirst Sub-Saharan African (SSA) countries to qualifyfor the AGOA ‘Wearing Apparel’ provision of 18 thJuly 2001. There are only two commodities thatKenya has been able to export to the United Statesunder the AGOA framework, that is textiles andapparels, and agricultural products (Table 9.1). Thisis despite the fact that Kenya can export a variety ofexports under AGOA.After ranking all the countries exporting to theUnited States under AGOA, Kenya was in position 9(Table 9.2). Even a landlocked country such as Chadhas been able to export more to the United Statesthan Kenya. This should interest policy makers onwhy that is the case. One can argue that probably itis cheaper to transport goods in Chad than in Kenya.However, World Bank data shows that the cost ofimporting/exporting a 20-foot container (US$) isalmost three times more for Chad than Kenya. Thistherefore implies that this situation can be explainedby other factors other than differences in transportcosts.kenya economic report 2013 91

S E C T o r a l P e r F o r m a n c eTable 9.1: Kenyan exports to the US under AGOA (US$ 1,000)Category 2009 2010 2011 20121. Agricultural products 10,707 22,081 30,721 7,9162. Forest products 607 577 470 3093. Chemicals and related products 51 121 250 1754. Energy-related products 0 0 0 05. Textiles and apparels 194,641 200,471 258,964 111,8916. Footwear 8 47 49 667. Minerals and metals 150 128 128 228. Machinery 27 0 0 169. Transportation equipment 0 0 21 010. Electronic products 16 102 14 6111. Miscellaneous manufactures 1,652 1,965 1,976 1,263Source: US Department of Commerce (Note: Data for 2012 runs from January-June)Table 9.2: Sub-Saharan Africa: US imports under AGOA (selected countries)Country 2010 2011 2012 YTD*1 Nigeria 29,977,131 33,834,588 17,685,6672 Angola 11,778,529 13,756,358 9,143,0713 South Africa 8,199,239 9,473,432 7,921,2834 Chad 2,037,630 3,188,885 2,535,9595 Gabon 2,222,520 4,432,129 1,599,9236 Equatorial Guinea 2,324,360 1,189,911 1,555,4967 Congo (ROC) 3,308,922 2,376,790 1,463,7718 Cote d’ivoire 1,196,499 1,144,783 1,073,2239 Kenya 311,127 380,463 361,54110 Cameroon 298,493 322,219 311,068Source: US International Trade Commission (*Note: YTD denotes year-to-date, January-November)http://reportweb.usitc.gov/africa/total_gsp_agoa_import_suppliers.jsp.9.4.4 Regional integration and tradeperformanceThe general objective of all Regional EconomicCommunities (RECs) has been to enhanceeconomic growth through cooperation in relevantareas of economic activity, such as trade, investmentand infrastructure. Regional integration is seen as arational response to the difficulties faced by countrieswith small national markets, low investments andlow productivity. As such, many countries in Africatoday are in one or several RECs with overlappingmembership. Kenya is an active member of tworegional trade agreements: the East AfricanCommunity (EAC) and the Common Market forEastern and Southern Africa (COMESA). Theleading Kenyan exports to the COMESA and EACmarkets include tea, mostly to Egypt and Sudan,oils and perfumes mainly to Uganda and Tanzania92 kenya economic report 2013

T r a d e a n d mF ao nr ue if ga n c tP uo rl inc gyand cement, mostly to Sudan, Uganda and Tanzania.Other exports in terms of volumes include naturalsodium carbonate, iron and steel bars, articles ofplastics and tobacco manufactures, vegetable oilsand fats. In terms of imports, Kenya largely importsagricultural products from the region in the form ofunmanufactured tobacco from Zimbabwe, sorghumfrom Sudan, maize from Malawi, animal feedsmostly from Uganda and paper and paperboardsmainly from Tanzania.East African Community (EAC)The EAC seeks to transform itself into an integratedeconomic and political entity so as to attainsustainable and equitable growth and development,leading to improved standards of living of its peoplethrough increased competitiveness, value-addedproduction, investment and trade (East AfricanCommunity, 2009). The EAC Treaty entered intoforce in July 2000, signifying renewed interest in theintegration of the East African Community, thencomprising Kenya, Tanzania and Uganda. Burundiand Rwanda acceded to the EAC in 2007. The EACCustoms Union commenced on 1 st January 2005,while the EAC Common Market Protocol wasratified by the partner states in 2010, thereby pavingway for free movement of capital and persons.The EAC is now working towards establishing amonetary union in 2013, and a political federationby 2015.The EAC intra-trade grew from US$ 2.2 billionin 2005 to US$ 4.96 billion in 2011. The region isincreasingly getting engaged in global trade, withthe value of its total trade with the rest of the worldhaving more than doubled from US$ 17.5 billionin 2005 to US$ 45.8 billion in 2011. Nonetheless,intra-EAC trade accounts for only 11 per cent of theregion’s trade performance, compared to 45 per centin the Americas, 60 per cent in the European Unionand 45 per cent in Asia (State of EAC Report, 2012).The EAC countries have continued to be majorexport destinations for Kenya. For example, Kenya’sexports to the EAC in 2012 accounted for 53.8per cent of the country’s total exports to Africaand 26.1 per cent of total exports to the world.In 2012, Uganda continued to be Kenya’s leadingexport destination, absorbing 13.02 per cent of thecountry’s total world exports; Tanzania was second(8.9%) and Rwanda tenth (3.1%). It is, however,important to note the declining share of Kenya’sexports to Uganda in 2012 (Figure 9.7).Figure 9.7: Kenyan exports to the EAC% share of total world exports3025201510502009 2010YearSource: Kenya National Bureau of Statistics (2013)2011 2012BurundiRwandaTanzaniaUgandaTotal worldWithin the EAC, the value of Kenya’s total exportsdeclined from Ksh 137.2 billion (US$ 1.61 billion)in 2011 to Ksh 134.9 billion (US$ 1.59 billion) in2012. Of these exports, Uganda took 50 per cent,followed by Tanzania (34%), Rwanda (12%) andBurundi (4%) (Figure 9.8). During the same period,Kenya’s imports from the region increased by 14.7per cent from Ksh 26.9 billion (US$ 316 million) toKsh 30.9 billion (US$ 363 million) between 2011and 2012 (Kenya National Bureau of Statistics,2013).Figure 9.8: Kenya’s exports to EAC partner states60504030201002008 2009 2010 2011 2012YearSource: Kenya National Bureau of Statistics (2013)% share of total EAC exportsTanzaniaUgandaRwandaBurundikenya economic report 2013 93

S E C T o r a l P e r F o r m a n c eOverall, Kenya’s volume of trade in the region hasgrown tremendously from Ksh 102.7 billion (US$1.2 billion) in 2009 to Ksh 164.6 billion (US$ 1.94billion) in 2012, an increase of 60.3 per cent (KenyaNational Bureau of Statistics, 2013). Despite thisincrease, Kenya’s trade with EAC partner statesconstitutes a small percentage (9%) of her total tradewith the rest of the world. This means that 91 percent of Kenya’s trade is outside the EAC region andhence the need for the country to change its exportbase and take full advantage of the opportunitiesoffered by the integration process to trade more inthe EAC (Figure 9.9).Figure 9.9: Kenya’s EAC trade% share of total world trade3025201510502008 2009 2010Year2011 2012Source: Kenya National Bureau of StatisticsExportImportsTotal TradeKenya continues to dominate regional trade,accounting for about 40 per cent of the total volumeof EAC trade, with Uganda and Tanzania accountingfor 33 per cent and 14 per cent, respectively (EastAfrican Community, 2011). However, Kenya’sexports compared with those of other EAC memberstates have been growing at a slower rate over thepast five years, although the volumes remain higher.It was expected that with the implementation ofthe EAC Customs Union in 2005, Kenya woulddominate regional trade by diversifying its exportsto the EAC market, given its comparative advantageespecially in the manufacturing sector. However, thishas not been the case. This can be attributed to thecountry’s lengthy licensing and customs procedures,red tape, corruption and sluggish commercialdispute settlement process, which reduces hercompetitiveness in the region (East AfricanCommunity, 2012). It is, however, important tonote that although Kenya’s manufacturing sectoris leading in the region, its growth has stagnated ataround 10 per cent since Independence, and hence areason for slow export growth.Common Market for Eastern andSouthern Africa (COMESA)The treaty establishing COMESA was signed on 5 thNovember 1993 in Kampala, Uganda. COMESAcomprises 20 member countries including Burundi,Comoros, DRC Congo, Djibouti, Egypt, Eritrea,Ethiopia, Kenya, Libya, Seychelles, Madagascar,Malawi, Mauritius, Rwanda, Sudan, Swaziland,Uganda, Zambia and Zimbabwe. South Sudan is thelatest member to join COMESA in 2011. COMESAhas a population of over 406 million and a percapita income of US$ 1,811. The COMESA FreeTrade Area (FTA) was launched in 2000, while theCustoms Union (CU) was launched in June 2009in Zimbabwe. COMESA members span a largeportion of the African continent covering an areaof 12,873,957 km 2 , meaning that some countrieshave difficulties in accessing others’ markets due tophysical and geographical reasons.Since the launch of COMESA FTA in 2000, Kenya’strade in the region has increased from Ksh 57billion (US$ 670 million) to Ksh 236.8 billion (US$2.7 billion) by 2012. Through Kenya’s steadfastimplementation of COMESA programmes,COMESA has since become Kenya’s leading exportdestination, accounting for approximately 73 percent of total exports to Africa and 33 per cent oftotal exports to the world (in 2012). Kenya’s exportsto COMESA, however, decreased slightly from US$2.14 billion in 2011 to US$ 2.06 billion in 2012.The main exports to the region include tea andmanufactured products.Uganda is the leading destination for Kenyanexports in the COMESA region, taking 38 per centfollowed by Egypt and Sudan with an average 12per cent share (Figure 9.10). Other destinationsfor Kenyan products in the region include: the94 kenya economic report 2013

T r a d e a n d mF ao nr ue if ga n c tP uo rl inc gyDemocratic Republic of Congo, Zambia, Malawi,Ethiopia and Swaziland (Figure 9.10). Exports toEgypt and Uganda, however, declined in 2012. Ofimportance to note is that of the 12 per cent exportsto Sudan, about two thirds were destined for SouthSudan. This is the country the government needs tofocus on by improving the infrastructure linking thetwo countries. The COMESA region continues tobe a major source of agricultural imports for Kenya.Kenyan imports from COMESA mostly come fromEgypt, Uganda, Swaziland, Zambia and the DRCCongo.Figure 9.10: Kenyan exports to leading COMESAcountriesKsh millions80,00070,00060,00050,00040,00030,00020,00010,00002008200920102011YearSource: Kenya National Bureau of Statistics (Year)2012UgandaRwandaEgyptSudanCongo DRCDespite the importance of the region to Kenya, thetotal COMESA trade as a percentage share of totalKenyan trade remains low at an average of 12 percent (Figure 9.11).Figure 9.11: Share of COMESA trade to totalworld trade% share of COMESA trade to total trade40353025201510502008 2009 20102011 2012% share exports% share imports% share total tradeYearSource: Kenya National Bureau of Statistics (2013), Statistical Abstract9.5 Foreign Policy9.5.1 Prospects of Kenya’s counties asforeign policy actorsThe role of sub-national governments in theinternational arena is not only increasing in politicalfederations but also in quasi-federations anddecentralized unitary states. The rise of sub-nationaldiplomacy (also known as constituent diplomacy/paradiplomacy) has been enhanced by the processesof economic decentralization, globalization, regionalintegration, technological innovation and marketliberalization in recent decades. The evolution ofthe foreign policy process in a number of countriesacross the globe has contributed to the emergenceof a multi-layered foreign policy system. In thiskind of system, the national government remainsthe dominating actor in major foreign policy issuessuch as national security and defence, ratification oftreaties and entering into diplomatic relations withother sovereign states, while sub-national entitiesstrive to raise their profile on the internationalstage, making them foreign policy actors in ‘low’politics areas, including trade, investment, sportsand education exchange programmes (Geldenhuys,1998).9.5.2 Sub-national diplomacyThis is a form of diplomacy in which a sovereignstate’s sub-national units establish ties with subnationalactors of other sovereign states. Subnationalunits could be counties, districts orprovinces in a sovereign state. States within politicalfederations, such as the United States and Nigeria,are also considered as sub-national units or subfederalgovernments. An example of sub-nationaldiplomacy of a federal state is the establishmentof foreign relations between Canadian provinceswith sub-national entities in other countries suchas the United States, Japan, Mexico and China. Onthe other hand, provinces of decentralized unitarystates such as China have established relations withsovereign states or sub-national governments inother countries. For instance, economic relationskenya economic report 2013 95

S E C T o r a l P e r F o r m a n c ebetween Chinese provinces and African states havegrown remarkably over the last decade (Zhiminet al., 2010). While national constitutions rarelyexplicitly recognize the engagement of sub-nationalunits in international relations, the participation ofsub-state entities in foreign relations is becoming atruly global phenomenon.9.5.3 Cross-border cooperationA common form of sub-national diplomacy iscross-border cooperation, in which sub-nationalentities in neighbouring countries collaboratein areas such as trade, investment, tourism,environmental conservation and cultural exchange.The key drivers of cross-border cooperation of subnationalentities include geographical proximity,common language, culture and history. Someexamples of cross-border cooperation include theMaputo Corridor, the Greater Mekong Sub-region(GMS) cooperation and the Central Asia RegionalEconomic Cooperation (CAREC). The MaputoCorridor comprises South African provinces ofGauteng, Mpumalanga, and Limpopo and Maputoin Mozambique. In the GMS cooperation, Chineseborder provinces such as Yunnan and Guangxi havecooperation mechanisms with Cambodia, Laos,Thailand, Myanmar and Vietnam.9.5.4 Sub-national foreign policyactorsChinaChina is a unitary state,consisting of 22 provinces, 5autonomous regions, 4 municipalities and 2 mostlyself-governing special administrative regions. SinceChina began pursuing economic reforms and the‘open door’ policy in the late 1970s, its provinceshave assumed major roles in fostering local socioeconomicdevelopment and providing welfare tocitizens in their respective provinces (Zhimin et al.,2010). One of the fundamental reforms that Chinaundertook was to grant provincial governmentswide-range responsibilities in local affairs, includingthe management of the local economy, education,science and technology, culture, health, sports,urban and rural construction, public security andjudicial administration (Zhimin et al., 2010). China’scoastal provinces took a lead in local economicinternationalization since decentralization began atChina’s coast and were the pioneers in establishingan internationally-oriented development strategy.Today, China’s coastal provinces have a localbureaucratic system of external relations consistingof Foreign Affairs Office (FAO) and Foreign Tradeand Economic Cooperation Commission (FTEC).FAO offices are responsible for implementing thenational foreign policy locally, arranging for thereception of foreign VIPs and for the overseas visitsof local leaders, administering passports and visamatters for local official business travels abroad,organizing and promoting activities with sister citiesand provinces of other countries, administeringconsular affairs and foreign media affairs. FTECoffices are primarily responsible for implementingnational policies, laws and regulations regardingforeign trade, economic cooperation, foreign directinvestment and economic zones.In recent times, Chinese provinces have gainedsubstantive powers to promote local foreigneconomic relations, including the promotion offoreign trade and attraction of foreign investmentprojects locally. Chinese provinces have alsobecome more visible in Africa, especially in trade,investment, infrastructural development and aidprovision. China’s multi-layered foreign policy isquite at work in Africa, as both central and provincialgovernments engage with African countries.CanadaCanada is a federal parliamentary democracy andconstitutional monarchy. It has ten provinces andthree territories. The provinces have responsibilitiesfor social programmes, including education, healthand welfare. Canadian provinces such as Quebec,Alberta, New Brunswick and British Columbia96 kenya economic report 2013

T r a d e a n d mF ao nr ue if ga n c tP uo rl inc gyhave engaged in international relations withsub-national units in the United States, France,Belgium, Mexico, Japan, South Korea, China andthe like. Key areas in which Canadian provincesengage in the international realm include trade,investment, tourism, environmental protection,energy, technological cooperation, governance andeducation and cultural exchange programmes.Though the federal government plays a crucialrole in economic integration processes such assigning the North American Free Trade Agreement(NAFTA), the consent of Canadian provincesis critical for the implementation of such tradeagreements to be effective (de Boer, 2002). Article105 of NAFTA commits the US and Canadianfederal governments to be responsible for actions oftheir states and provinces. Since the beginning of theTokyo Round (seventh round of GATT multilateraltrade negotiations), the Canadian governmenthas often consulted the provinces on internationaltrade initiatives, if issues under discussion arewithin the jurisdiction of the provinces. The federalgovernment is also required to secure the consentof the Canadian provinces if the provisions of thetreaties significantly affect the provinces.9.5.5 Lessons for Kenya’s countiesCounties are expected to play a critical role indevelopment at the grassroots levels. As a result,there are high expectations that the countieswill become engines for economic growth anddevelopment. Moreover, many functions of thenational government will be implemented at thegrassroots through the counties. Therefore, countiesare expected to play a critical role in trade, investment,environmental protection, tourism, health,education and cultural exchange. The establishmentof strong institutions in the counties will be criticalin realizing the objectives of devolution. Thecounties can begin exploring avenues of attractingboth local and foreign investments. One of themeans of promoting trade, investments and tourismcould be establishment of paradiplomatic relationswith sub-national governments in other countries.When the relationships are established, the countieswill engage with their counterparts in the region inthe world at large in several areas.kenya economic report 2013 97

S E C T o r a l P e r F o r m a n c e10ChapterFinancial Services10.1 IntroductionThe financial sector includes banking, capitalmarkets, insurance, pension schemes, Savingsand Credit Cooperative Societies (SACCOs)and informal financial services such as RotatingSavings and Credit Associations (ROSCAs) andAccumulating Savings and Credit Associations(ASCAs). The sector plays a critical role in thedevelopment process. In Vision 2030, for example,the financial sector is expected to drive high levelsof savings and finance Kenya’s investment needs. In2012, the sector’s growth slowed down to 6.5 percent from 7.8 per cent in 2011. Similarly, the sector’scontribution to GDP decreased from 6.3 per centto 5.2 per cent in the same period (Kenya NationalBureau of Statistics, 2013).10.2 Structure of the SectorAs at 2012, the sector comprised 43 commercialbanks, 1 mortgage finance company, 5 representativeoffices of foreign banks, 8 deposit-taking microfinanceinstitutions (DTMs), 112 foreign exchange bureausand 2 credit reference bureaus. In the same period,there were 45 licensed insurance companies and 3locally-incorporated reinsurance companies. Otherinsurance intermediaries and insurance serviceproviders were 154 licensed insurance brokers,23 medical insurance providers (MIPs) and 4,205insurance agents. Other insurance players included126 investigators, 78 motor assessors, 20 lossadjusters, 2 claims settling agents, 10 risk managersand 26 insurance surveyors (Insurance RegulatoryAuthority - IRA, 2013). The pension industry had1,262 retirement benefits schemes with over 1.7million members, 16 registered fund managers, 26administrators and 12 custodians. While the NairobiSecurities Exchange (NSE) continued to be the onlystock market in Kenya, there were 130 Savings andCredit Cooperative Societies (SACCOs) licensedas deposit takers (SACCO Societies RegulatoryAuthority - SASRA, 2013).10.3 Policy ChangesThe sector continued to witness transformationalpolicy changes in 2012. The Central Bank of Kenya(CBK) Act was amended to enhance transparencyin the operations of the Bank. While the governorchaired the Central Bank’s Board in the past,an independent person will now be the chair.The governor and his two deputies will also beappointed by the President through a transparentand competitive process and with the approval98 kenya economic report 2013

F i nma na cn iua fl aS ce tr uv ri ci ne gsof Parliament. The deputy governors will not bemembers of the Bank’s Board of Directors. Further,CBK is now compelled to publish in the KenyaGazette, its website and two national newspapersthe weighted average lending and deposit rates forall institutions it regulates. Further, CBK shall now,on a quarterly basis, make and present to Parliamenta report on key economic and banking sectoraggregates (Government of Kenya, 2012).To enhance the stability of the financial system, theKenya Deposit Insurance Act 2012 was enacted.The Act provides for the establishment of the KenyaDeposit Insurance Corporation. The Corporation isexpected to provide a deposit insurance scheme forcustomers of member institutions and to receive,liquidate and wind up any institution in respect ofwhich the Corporation is appointed receiver orliquidator.As a way of encouraging a savings culture in theeconomy, CBK banned commercial banks fromlevying charges (that is, monthly maintenanceor ledger fees) on savings accounts. To promotefinancial inclusion, the laws allowing deposit-takingmicrofinance institutions to use agents commenced.To improve efficiency in the banking sector, thecheque-clearing cycle was reduced to two fromthree working days. This development is part of thecheque truncation project started in 2011. Further,to provide checks and balances in the commercialbanks’ boards, CBK developed new rules requiringthat independent directors (one who is not adirect or indirect representative of the principalshareholders, has not worked in the bank as anexecutive for the past five years, and has not had anybusiness relationships with the institution in thesame period) should constitute not less than a thirdof the total members of the board.To offer support to banks that have opened regionalsubsidiaries, the East African Bankers Associationconsisting of Kenya, Uganda, Tanzania, Rwandaand Burundi was established to lobby for commoninterest across the region. Further, a multilateralMemorandum of Understanding (MoU) oncooperation in regulation and supervision of theinsurance industry in East Africa was signed. TheMoU is supposed to maintain and promote a stable,efficient, fair and safe insurance market in the region,amongst other objectives.As part of streamlining the insurance sector, theInsurance Regulatory Authority (IRA) releasedthree sets of guidelines: Claims ManagementGuidelines; Market Conduct Guidelines forInsurance Investigators and Motor Assessors andGuidelines on Insurance Products. These guidelinesare expected to enhance the quality and credibilityof insurance products, thereby increasing thepenetration of insurance in the market. To enhanceunderstanding of insurance services and productsand consequently change the attitude towardsinsurance in general, IRA standardized contractdocuments for motor vehicle insurance.In the capital markets, companies listed acrossthe East African region will now require justone regulatory approval to raise money throughcorporate bonds. This will enable the companies tohave access to a larger pool of capital in case theyneed to raise funds. Further, in a radical move to reinin all stockbrokers, the Capital Markets Authoritylaunched a surveillance system that will monitortheir transactions in real-time. The new system willtrack deals brokered by market players, bringing anend to a practice where lack of equal informationon particular stocks led to insider trading. It willalso send alerts on trading activities to investorsand real-time analyses of market data for efficientmonitoring. Finally, the law was amended tocreate a framework for Growth Enterprise MarketSegment (GEMS) within the NSE, targeting Smalland Medium Enterprises (SMEs). SMEs now havethe opportunity to access long-term and relativelycheap capital as well as raising their profiles throughparticipation in the NSE.kenya economic report 2013 99

S E C T o r a l P e r F o r m a n c e10.4 Banking Sector Performance10.4.1 Assets, deposits and profitabilityThe banking sector continued to register growthin assets, deposits and profitability (Central Bankof Kenya, 2013). Banks’ assets expanded by 15.3per cent from Ksh 2.02 trillion in 2011 to Ksh2.33 trillion in 2012. Customer deposits continuedto be the main source of the banks’ funding. Thedeposits increased by 14.8 per cent from Ksh 1.49trillion in 2011 to Ksh 1.71 trillion due to aggressivemobilization of deposits by banks, remittances andreceipts from exports. There was an increase by 20.6per cent of banks’ pre-tax profits to Ksh 107.9 billionin 2012 from Ksh 89.5 billion in 2011. Growthin credit portfolio and investment in governmentsecurities contributed to increased profits (CentralBank of Kenya, 2013).10.4.2 Access to banking servicesBanks maintained their branch network expansion.In 2012, the number of bank branches increased by9.6 per cent to 1,272 from 1,161 in 2011. NairobiCounty, which had the highest increase in branches,dominates the branch network with 41 per cent ofthe total branches. Expansion was also witnessedoutside Kenya. Total branches of subsidiaries for 11Kenyan banks within the East African Community(EAC) partner states and South Sudan were 282 in2012 compared to 223 in 2011. Rwanda registeredthe highest growth in branches from 27 in 2011 to52 in 2012 (Central Bank of Kenya, 2013).Provision of banking services more cost effectivelyto customers, mainly to those who are currentlyunbanked or under-banked, received a major boostwhen remarkable growth was witnessed in theagency banking model. The number of contractedactive agents by 10 banks increased by 68 per centfrom 9,748 in 2011 to 16,333 agents in 2012. Theseagents facilitated over 30 million transactionsvalued at Ksh 152.1 billion. Deposit and withdrawalservices were the major transactions offered by theagents. The Bank also granted approval to one DTMto roll out its agency network.Growth in mobile phone financial services was alsoregistered in 2012. Subscriptions in mobile moneytransfer increased from 18.9 million in 2011 to 21.1million in 2012 (Communications Commission ofKenya, 2013). Four more banks signed partnershipswith mobile phone providers. This increased thenumber of banks facilitating money transfer servicesfor their customers from 13 in 2011 to 17 in 2012.A total of Ksh 1,545 billion was transacted in 2012(Central Bank of Kenya, 2013). The expansion ofthe partnerships between financial institutions andmobile phone providers will create convenience totheir customers and reduce service delivery costs.The use of the Internet as a remote delivery channelfor banking services by commercial banks was alsosustained. As at 2012, 26 compared to 23 banks in2011 were offering various Internet products totheir customers. Also, in enhancing cost-effectivechannels of service provision, banks increased thenumber of ATMs by 8 per cent from 2,205 in 2011to 2,381 in 2012 (Central Bank of Kenya, 2013). Thecontinued embracement of technology by bankscomplements efforts to expand access to financialservices in Kenya.10.4.3 Cost of creditThe average lending rates decreased marginally from20 per cent in 2011 to 18.15 per cent in 2012. Thisis despite the Central Bank Rate (CBR) reducingfrom 18 per cent in 2011 to 11 per cent in 2012.The average deposit rates, however, remained stableat 6.80 per cent from 6.99 per cent in 2011 (Figure10.1).The trend in the interest rates is off the MediumTerm Plan target. The Plan envisioned achievinglower lending rates and higher deposit rates, therebyreducing the interest rate spread to 6 per cent,which currently stands at 11 per cent. The largespread is a serious impediment to the expansion100 kenya economic report 2013

F i nma na cn iua fl aS ce tr uv ri ci ne gsand development of financial intermediationbecause it discourages potential savers with lowreturns on deposits and potential investors withreduced feasible investment opportunities. Indeed,the lending rates and interest rate spread in Kenyacompared to other countries remain high (Figures10.2 and 10.3)Figure 10.1: Lending, deposits rates and theCentral Bank Rate in KenyaPercentage25201510502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YearLending rates Deposit rates CBRSource: Central Bank of Kenya (2013)Figure 10.2: Lending rates (%) for selectedcountriesPercentage30252015105ChileMalaysiaSingaporeKoreaChina0Source: World Bank (2013)IndiaMauritiusSouth AfricaArgentinaEgyptBotswanaCountry2010 2011 2012IndonesiaKenyaTanzaniaUganda10.4.4 Credit to the private sectorDomestic credit growth slowed down from 30.2per cent in 2011 to 11.7 per cent in 2012. The totalprivate sector credit was Ksh 1.3 trillion in 2012compared to Ksh 1.2 trillion in 2011. The growth incredit in 2012 is attributed to increased lending tothe various economic sectors, notably building andconstruction, real estate and manufacturing sectors(Figure 10.4). The banks’ capacity to extend creditwas as a result of increased deposits.Figure 10.3: Interest rate spread (%) acrossselected countriesPercentage14121086420ArgentinaKoreaMalaysiaChileChina2010Source: World Bank (2013)South AfricaEgyptCountryBotswanaIndonesiaTanzaniaKenyaMauritiusSingapore2011 2012Figure 10.4: Private sector credit distribution (%)Percentage181614121086420Finance & insuranceMining & quarryingAgricultureBuilding & ConstructionConsumer durablesSource: Central Bank of Kenya (2013)Real estateTransport & communicationBusiness servicesPrivate householdsManufacturing2010 2011 2012TradeOther activitiesThough Kenya’s commercial banks’ credit to theprivate sector has been on the increase, it comparesunfavourably with middle-income countries suchas Singapore, Malaysia, Thailand and China (Figure10.5). Kenya’s private sector credit averages below50 per cent of GDP.10.4.5 Non-performing loansAs a result of high interest rates in the first half of2012, non-performing loans (NPLs) increased by16.8 per cent from Ksh 53.0 billion in 2011 to Ksh61.9 billion in 2012. This led to an increase in theratio of gross NPLs to gross loans to 4.7 per cent byUgandakenya economic report 2013 101

S E C T o r a l P e r F o r m a n c eDecember 2012 from 4.4 per cent in 2011. Whencompared to other countries, the ratio of NPLs togross loans in Kenya is on the decline, though high(Figure 10.6).Figure 10.5: Domestic credit to the private sector(% of GDP) for selected countriesPercentage200180160140120100806040200BotswanaUgandaTanzaniaArgentinaSource: World Bank(2013)IndonesiaKenyaEgyptIndiaTunisiaSingaporeTanzaniaBrazilMauritiusCountry2010 2011 2012Figure 10.6: Non-performing loans for selectedcountriesRating of NPLs to gross loans181614121086420ChinaSingaporeArgentinaKorea, Rep.UgandaSource: World Bank (2013)IndiaIndonesiaChileBrazilMalaysiaCountryMalaysiaSouth AfricaKenya2010 2011 2012EgyptGhanaThe Credit Information Sharing (CIS) mechanism,which aims to reduce NPLs, recorded significantgrowth. As at 2012, a total of 2.3 million and 28,733credit reports had been requested by banks andcustomers, respectively, from the two licensedCredit Reference Bureaus. While the credit reportsrequested by banks stabilized at 1,015,327, creditreports requested by customers grew by 305 percent from 5,607 in 2011 to 22,692 in 2012 (CentralBank of Kenya, 2013).ChinaSouth Africa10.5 Capital Market PerformanceThe stock market performance improved in 2012.Two more companies, that is Longhorn PublishersLtd and Cooperative Insurance Company werelisted at the NSE by way of introduction. Also,Uganda power distributor, Umeme, was crosslistedon the NSE. These developments increasedthe number of listed companies to 61 in 2012.During the year, suspension of CMC Holdings fromthe bourse continued, pending the resolution ofmanagement-related challenges (Capital MarketsAuthority, 2013). The narrow spectrum of financialinstruments, continued low investors’ confidence,and delayed de-mutualization of NSE as a way ofconforming to international best practices stillremain as challenges in the capital market. Thenarrow spectrum of financial instruments limitsalternatives for firms’ external financing.10.5.1 Stock indicesIn 2012, the NSE 20 Share Index increased by 29 percent to close at 4,133.02 points from 3,205.02 pointsin 2011 (Figure 10.7). This is an indication that themarket recovered after a slump in 2011. Similarly,the Nairobi All Share Index (NASI) increased by39 per cent to close at 94.86 points from 68 pointsin 2011. Both the FTSE NSE Kenya 15 Index andFTSE NSE Kenya 25 Index increased by 39 to closeat 125.75 points and 128.46 points, respectively.Figure 10.7: Nairobi Securities Exchange 20 ShareIndex and NASI6,0005,0004,0003,0002,0001,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Year20 share index NASISource: Kenya National Bureau of Statistics (2013)120100806040200102 kenya economic report 2013

F i nma na cn iua fl aS ce tr uv ri ci ne gs10.5.2 Stock market capitalizationThe market capitalization, which is a measureof stock market development, also recorded anincrease of 46.5 per cent from Ksh 868.2 billionin 2011 to Ksh 1,272 billion in 2012. Kenya’smarket capitalization, however, is still low whencompared to other countries (Figure 10.8). Kenya’smarket capitalization is below 50 per cent of GDP,comparing unfavourably with the Medium TermPlan target of 90 per cent.Figure 10.8: Stock market capitalization (% ofGDP) of selected countriesPercentage of GDP180160140120100806040200GhanaArgentinaTunisiaBotswanaEgyptSource: World Bank (2013)KenyaIndonesiaBrazilMauritiusChinaIndiaKoreaCountry2010 2011 201210.5.3 The Bonds marketChileMalaysiaSingaporeIn the bonds market, 10 new Treasury bonds wereissued in 2012, while in the corporate sector twonew bonds were issued. Consolidated Bank issueda bond worth Ksh 1.7 billion out of a target ofKsh 2 billion. Centum Investment Company alsoissued a Ksh 3.2 billion bond. Total bonds turnoverincreased by 27 per cent from Ksh 445.8 billion in2011 to Ksh 566.5 billion in 2012 (Capital MarketsAuthority, 2013).10.6 Other Financial InstitutionsIn 2012, two more Deposit-Taking MicrofinanceInstitutions (DTMs), that is Century DTM Limitedand SUMAC DTM Limited, were licensed bythe Central Bank of Kenya. This brings the totalnumber of DTMs in the country to 8. This followsthe earlier licensing of five nationwide DTMs andSlouth Africa1 community-based DTM. Growth in DTMs waswitnessed in 2012, with total assets increasing by30.6 per cent from Ksh 24.8 billion in 2011 to Ksh32.4 billion in 2012. Customer deposits also grewby 54 per cent from Ksh 10 billion in 2011 to Ksh15.4 billion in 2012 (Central Bank of Kenya, 2013).A significant amount of the deposits are, however,a part of customers’ loan guarantee funds. Theseare funds that must be contributed by borrowersas a condition for receiving a loan and may bewithdrawn if all outstanding loans have been repaid.This then poses a challenge to DTMs, and hence theneed to develop innovative strategies for depositmobilization. Similarly, as the execution of theMicrofinance Act 2008 continues through licensingof DTMs, regulations for governing the conduct ofthe non-deposit taking microfinance institutions areyet to be put in place.In the cooperative sector, the ministry responsibledeveloped Sharia Compliant Model by-laws totap the high savings potential among the MuslimCommunity through SACCOs. Further, to facilitateremittances in a structured manner, and to raisethe current savings mobilization for investmentpurposes, two SACCOs for Kenyans in theDiaspora were registered. The two are the KenyaUSA Diaspora SACCO in Atlanta, United States ofAmerica, and the Kenya United Kingdom SACCOin London. Efforts towards improving governancein the SACCO sub-sector continued when licenseddeposit-taking SACCOs increased from 122 in2011 to 130 in 2012 (SACCO Societies RegulatoryAuthority, 2013). Nonetheless, 85 deposit-takingSACCOs are yet to be licensed.The performance in the insurance industry alsoimproved, with the industry’s gross writtenpremiums increasing by 11.4 per cent to Ksh 108.61billion compared to Ksh 97.49 billion by the end ofthe same period in 2011. The industry’s assets grewby 24.4 per cent from Ksh 242.87 billion in 2011 toKsh 302.23 billion in 2012. The total investmentsfor the industry in 2012 increased by 23.8 per centto Ksh 235.56 billion. This was a growth of 23 perkenya economic report 2013 103

S E C T o r a l P e r F o r m a n c ecent during the period under review. However, theindustry’s claims increased by 8.24 per cent fromKsh 42.82 billion in 2011 to Ksh 46.35 billion in2012 (Insurance Regulatory Authority, 2013).Insurance penetration, however, is still low at 3.1 percent.Growth was also achieved in the pensions industry.Assets grew by 26 per cent from Ksh 432.8 billion in2011 to Ksh 548.8 billion in 2012. The share of theNational Social Security Fund (NSSF) was Ksh 82.1billion, fund managers held Ksh 436.7 billion, whileschemes not under control of the fund managersheld Ksh 30 billion of the assets. The NSSF’s assetsworth Ksh 39.4 billion were transferred to thefund managers in 2012. Investment in governmentsecurities makes up the largest share of industryassets with 35 per cent of total assets. Quotedequities are second with 24 per cent. The individualmembership to retirement benefits schemes, thoughrelatively new, has achieved remarkable growth overthe years, with membership in individual schemesgrowing by 250 per cent from 25,289 members inJune 2010 to 88,509 members in December 2012.The Mbao SME Pension Scheme targeting theinformal sector has been the source of growth.10.7 Emerging Policy Issues andRecommendations10.7.1 Filling the long-term credit gapKenya’s financial sector has a wide range of products,institutions and markets but there are glaring gapsin long-term credit. Commercial banks have notmanaged to supply long-term capital, and the stockmarket has remained shallow and thin, limitinglong-term resource mobilization by firms. Thus,to boost long-term investment growth, deliberateefforts must be made to adequately developvehicles for mobilizing long-term capital in Kenya.Development Finance Institutions (DFIs), whichthe government created as a deliberate effort to fill adevelopment-financing gap, are still a viable option.Despite their poor performance, the role of DFIsin the development process is still vital. Therefore,restructuring these institutions is important towardsmobilizing long-term capital to finance Vision2030’s targeted investment levels of 30 per cent. Thegovernment, therefore, needs to formulate a strategytowards this end.10.7. Broadening the menu offinancial instrumentsThe capital market offers a limited menu of financialinstruments, mainly equities and bonds. In orderto enhance long-term resource mobilization forinvestment, there is need for diversification offinancial instruments in the capital market. Thiswill not only provide investors with more riskdiversification opportunities, but will also fostercompetition and innovativeness and allow biggerfinancial investments. Such new products in themarket would include derivative securities that arenot currently traded in the capital market.104 kenya economic report 2013

m a n u f a c t u r i n g11ChapterTourism11.1 Global Tourism Performancein 2012In 2012, the global international tourist arrivalsgrew by 4 per cent to reach a new global recordof 1.035 billion tourists. The 1 billion mark is anew historical achievement that demonstrates thegrowth potential for the sector in the coming years.The emerging economies took the lead in terms ofthe high growth rate at 4.1 per cent as comparedto the advanced economies where the growth ratewas 3.6 per cent. Asia and the Pacific showed thestrongest performance in the year. This growthpattern is anticipated to continue in 2013, withUNWTO forecasting a growth rate of between 3 percent and 4 per cent (UNWTO, 2013). A regionaloverview indicates that Asia and the Pacific were thebest performers, growing by 7 per cent.A sub-regional overview indicates that South-EastAsia and North Africa both grew by 9 per cent, andCentral and Eastern Europe by 8 per cent. Over thelong-term (2010-2020), the UNWTO forecastsinternational tourist arrivals to grow by 3.8 per cent ayear on average. The continued growth of the sectorin 2012 is a clear manifestation of the resilienceof the sector. In spite of the prevailing economicvolatility in 2012 around the globe, particularlyin the Euro zone, tourism maintained its growthtempo. Tourism is thus one of the pillars that shouldbe supported by governments around the world aspart of the solution to stimulating economic growth(UNWTO, 2013).According to UNWTO, Africa’s performancebounced back, growing by 6 per cent, recoveringfrom setbacks in 2011 when arrivals declined by 1per cent largely due to the negative results of NorthAfrica’s political turmoil. Arrivals reached a newrecord of 52 million due to the rebound. In NorthAfrica, the arrivals grew by 9 per cent as comparedto a 9 per cent decline in 2011. The rest of the sub-Saharan destinations grew by 5 per cent (UNWTO,2012).11.2 Overview of Kenya’s TourismSector Performance in 201211.2.1 Overall tourist arrivals andreceiptsAccording to the Kenya National Bureau ofStatistics (2013) Economic Survey, the total touristarrivals for 2012 was 1,780,768, which was a declineof 0.3 per cent over the 2011 figure of 1,785,382.Estimated receipts from tourism in 2012 stood atKsh 96.02 billion, a 1.92 per cent drop from thekenya economic report 2013 105

S E C T o r a l P e r F o r m a n c eKsh 97.90 billion realized in 2011. This decline isattributed to the pre-election anxieties in the market,rising cost of flying into Kenya, decreasing passengernumbers, high taxes and negative publicity spread inthe international media about dismal security alongthe Kenyan coast.In the first half of 2012, Italy, Germany, France,Uganda, China, The Netherlands, Switzerland,Spain, Belgium, Denmark, Russia, Austria, the CzechRepublic, Hungary and Brazil showed declines inarrivals compared to the same period last year. Forthe European source markets, this may be attributedto the Eurozone crisis, general and presidentialelections in some countries such as France, and lateholiday bookings due to the uncertainty of the dateof the general elections in Kenya, as well as risinginsecurity.11.2.2 Share of arrivals by point ofentryArrivals at the Jomo Kenyatta International Airport( JKIA), Nairobi, grew by 1.7 per cent while MoiInternational Airport (MIA), Mombasa, declinedby 20 per cent. The growth in JKIA was attributed tonew flights such as Korean Air and Etihad Airways,and Kenya Airways (KQ) beginning direct flightsto New Delhi and China. Meanwhile, the declinein arrivals at the MIA is attributed to withdrawalof some chartered flights such as 1Time of SouthAfrica, and growing perception of Mombasa asa mass market compared to competitors suchas Seychelles, Zanzibar and Mauritius. Thedeteriorating infrastructure and congestion inMombasa is also eroding the destination’s image.A number of airlines that have either withdrawn orreduced the number of flights into Kenya duringthe year include 1Time (withdrew Johannesburg-Mombasa flights); Czech Airlines, Air Berlin andQatar Airways (both not scheduled for the highseason between August and December 2012);Gulf Air; and Virgin Atlantic. Other issues relate todelay in issuing of traffic rights to airlines. The routebetween Kenya and Europe is highly competitiveand could not sustain the same number of carriers,while demand in Europe is reducing due to thedeep economic crisis in the European countries. Inaddition, the exaggerated terrorist threats locallycaused some tourists to change their holidaydestinations, and therefore the decrease in passengernumbers.11.2.3 Performance in regional andemerging marketsA general overview of the market performanceindicates that Europe remained the main sourcemarket for Kenya with a share of 43 per cent,followed by Africa at 24 per cent, the Americas at13 per cent, Asia at 12 per cent, the Middle Eastat 5 per cent and Oceania at 3 per cent. However,there was a decline in the number of visitors frommajor European sources such as the UK, Italy andGermany (Figure 11.1).A notable decline is the Italian market, whichdeclined by 14.6 per cent, a reflection of the effectsof the Eurozone crisis downturn. Similarly, the 2012London Olympics led to a slowdown of outboundtourism from the UK market, yet this is the leadingsource market for Kenya’s tourism.There was, however, an increase in the number ofvisitors from India following the establishment ofdirect flights to New Delhi by Kenya Airways. Inregional and emerging markets, Uganda is Kenya’sbiggest market, recording a 30 per cent growth whileTanzania and South Africa recorded declines of 3per cent and 6 per cent, respectively. China and theMiddle East grew by 10 per cent and 92 per cent,respectively. Aggressive marketing in China and theMiddle East, coupled with improved connectivity bykey airlines (Emirates, Etihad and Kenya Airways)led to this tremendous growth. Other markets suchas Australia and Japan grew positively by 10 per centand 11 per cent, respectively.106 kenya economic report 2013

m a n u f aTc ot u r i sn mgFigure 11.1: Tourist arrivals by region, 2012Middle East5%Asia12%America13%Oceania3%Africa24%Source: Constructed from the Ministry of Tourism (2012)Europe, 43%Holidaying is the major purpose of travelling toKenya, accounting for 75 per cent of all arrivals.Business arrivals stood at 8 per cent, with conferencearrivals taking 3 per cent (Figures 11.2 and 11.3).Several activities engaged in by the industry includethe successful hosting of the African Hotel andInvestment Forum, intensified marketing andpromotion efforts in the region and emergingmarkets in the Far East where commendable growthwas achieved in Korea, Japan (10%), UAE (92%)and China (10%).Figure 11.2: Share of tourist arrivals by purposeTransit 14%Conference 3%Business 8%Source: Constructed from the Ministry of Tourism (2012)Holiday 75%The decline in business travel may be attributedto growing or changing technology, where telepresenceconference calls are becoming morepopular; decrease in business and incentive travelabroad due to increasing flight costs; and increase indeparture taxes (Ministry of Tourism, 2012).In 2012, Kenya was voted as having Africa’s leadingTourist Board during the World Travel Awards(WTA) in the UK. The country was also honouredwith the Best African Tourist Board in Africa Awardat a Safari awards held in London. Improved securitysurveillance at the Coast region as well as the fightagainst terrorism are likely to result in resumption ofcruise tourism.Figure 11.3: Tourist arrivals by purpose, 1995-2012 (‘000)Tourist Arrivals (’000)2000180016001400120010008006004002000199519961997199819992000200120022003200420052006200720082009201020112012Holiday Business Transit Other TotalSource: Constructed from Kenya National Bureau of Statistics data (2007-2012), Economic SurveysAs the competition for tourists intensifies at theglobal level, the government should avail morefunds to the Kenya Tourist Board (KTB) to supportpromotion of Kenya’s tourism to emerging marketssuch as Russia, the Middle East, India and China.11.3 Visitors to Parks and MuseumsDue to the decline in the growth of total arrivalsin 2012 by around 2.3 per cent compared to theprevious year, the number of visitors to museums,snake parks and historical sites reduced by a similarmargin (Figure 11.4).Year1823131917811336kenya economic report 2013 107

S E C T o r a l P e r F o r m a n c eFigure 11.4: Visitors to game parks and reserves,2007-2012Number of Visitors (’000)3,0002,5002,0001,5001,0005,0002,495599 49320071,634Game Parks & Reserves2,3857632,7652,6642,603942 843 8242008 2009 2010 2011 2012YearMuseums, Snake Parks & Historical SitesSource: Constructed from Kenya National Bureau of Statistics data (2012-2017), Economic Surveys11.4 AccommodationThe government undertook the last national hotelclassification exercise in 2002-2003. However, since2003, a number of new hotels have come up whilesome have improved their products and facilities.There is now need to conduct a similar surveyurgently, so that the findings can be used to guidestakeholders in the sector. Kenya has over 9,000town hotel beds, over 13,000 vacation hotel bedsand over 5,000 lodge hotel beds (Table 11.1).Kenya has an estimated hotel bed-night capacity of17.4 million, operating at 40.3 per cent occupancylevel, which is below the optimal level. The Coastregion accounts for 50 per cent of all bed-nights(Table 11.2).Kenya has over 65,000 hotel beds in 1,700 licensedhotels, out of which 140 (or 8.2%) are classified(Table 11.3). This falls below the global standardrequirement of at least 100,000 and could limit theTable 11.1: Hotel star rating comparison, 1991 and 2003Star Rating Town Hotels - Beds Vacation Hotels – Beds Lodges and Tented Camps – Beds1991 2003 % Change 1991 2003 % Change 1991 2003 % ChangeFive 3,111 3,107 -0.1 2,480 869 -65.0 316 774 144.9Four 197 167 -15.2 3,086 2,188 -29.1 1,316 715 -45.7Three 1,673 2,483 48.4 6,275 3,673 -41.5 871 2,489 1,85.8Two 1,785 1,557 -12.8 1,919 6,227 224.5 540 1,282 1,37.4One 1,484 1,579 6.4 646 448 -30.7 154 0 -100.0Total 8,250 8,893 7.8 14,406 13,405 -6.9 3,197 5,260 64.5Source: Kenya Gazette (1991, 2003, 2004)Table 11.2: Distribution of hotel bed-nights by zone, 2004 to 2011Zone 2004 2005 2006 2007 2008 2009 2010 2011 2012Coastal-Beach 1,883.5 2,273.7 3,228.8 3,768.1 1,643.7 3,011.4 3,243.0 3,144.6 3132.6Coastal-Other 29.4 43.5 108.6 153.5 118.1 152.5 151.1 283.8 260.0Coastal-Hinterland52.9 75.1 83.7 210.5 93.9 210.9 119.6 82.3 88.7Nairobi-High 793.7 870.9 946.8 1,028.4 716.2 1,164.1 1,123.6 1,155.7 1145.0classNairobi-Other 194.5 180.5 257.2 302.7 224.5 498.1 410.7 526.2 490.5Central 247.8 265.1 300.3 388.9 255.1 347.5 463.5 683.3 526.0Masailand 272.3 361.9 460.9 519.8 231.8 312.8 472.6 418.6 443.7Nyanza Basin 167.7 196.7 284.1 246.6 185.4 213.2 301.2 301.9 252.1Western 100.8 128.0 167.6 234.4 224.6 319.0 364.1 374.9 464.3108 kenya economic report 2013

m a n u f aTc ot u r i sn mgZone 2004 2005 2006 2007 2008 2009 2010 2011 2012Northern 48.8 81.2 83.7 86.3 5.7 13.3 12.9 43.9 57.8Total Occupied 3,791.4 4,476.6 5,921.7 6,939.2 3,699.0 6,242.8 6,662.3 7,015.2 6860.8(‘000)Total Available 10,030.7 1,084.5 13,003.5 14,711.6 14,233.6 17,125.3 17,161.8 17,419.6 18849.6(‘000)Occupancy Rate(%)37.8 412.8 45.5 47.2 26.0 36.5 38.8 40.3 36.4Source: Kenya National Bureau of Statistics, Economic Surveys (2005–2012)Table 11.3: Comparison of beds in licensed/classified hotels per province in KenyaProvinceNo. oflicensedhotelsNo. ofclassifiedhotelsRatio ofclassifiedhotels tolicensedhotels (%)No. of bedsin licensedhotelsNo. of bedsin classifiedhotelsRatio of classifiedhotel beds tolicensed hotelsbeds (%)Rift Valley 374 24 6.42 11,655 4,214 36.16Nairobi 378 26 6.88 14,534 6,200 42.66Western 46 4 8.70 1,037 233 22.47Central 123 8 6.50 3,548 982 27.68Nyanza 135 4 2.96 2,852 380 13.32Eastern 119 4 3.36 3,016 317 10.51Coast 526 70 13.31 29,236 14,002 47.89Totals 1,701 140 8.23 65,878 26,328 39.96Source: Ministry of Tourism (2007); Government of Kenya (2003-2004), Kenya Gazette; Kenya Tourism Development Corporation (2007)country’s ability to hold major conferences andconventions. The classified hotels supply 39 percent of the total number of beds in licensed hotels.Nairobi alone has over 378 licensed hotels withover 14,500 beds, of which 6,200 are from classifiedhotels (Table 11.3).11.5 Domestic TourismDomestic tourism accounts for over one-third(37%) of all bed-nights occupied in the country.Nairobi high-class hotels account for 1.2 millionbed-nights annually (or 16.4%), while the Coastbeach region accounts for 44.8 per cent (KenyaNational Bureau of Statistics, 2012). There ispotential for growth in domestic tourism throughdevelopment of tourism facilities/infrastructure inthe counties, and products that are affordable andattractive to low-medium income Kenyans.With regard to air travel within the country, localcarriers are also affected by the same challengesfacing international airlines, namely: reduceddemand due to the world economic slowdown,high cost of fuel, intense competition and overcapacity.Although majority of the roads withinthe country have been improved over the last 5-10years, high fuel/transport costs are some of the keydeterrents to growth in domestic travel and tourism.In addition, there is perception among Kenyansthat travel and tourism is a reserve for foreigners.There is, therefore, need for domestic marketing/sensitization by the Kenya Tourist Board (KTB)and other relevant government agencies.kenya economic report 2013 109

S E C T o r a l P e r F o r m a n c e11.6 Average Length of StayIn 2011, Kenya achieved the highest average lengthof stay (13.4 days) in a decade, which was a 2.3 percent improvement over the previous year (KenyaNational Bureau of Statistics, 2012). The projectedaverage length of stay (ALS) for the 2012 periodis 13.0-13.8 days, a growth of around 3 per cent.Although ALS is a key determinant of per capitatourist spending, there is need to develop innovativetourism products that encourage tourists to spendmore. Specifically, tourism product developmentand marketing efforts should target source marketswith high per capita income and from which visitorsstay longer, such as China.11.7 Distribution of TourismInfrastructure in KenyanCountiesKenya is endowed with various attractions,including white sandy beaches, rich culturalheritage, spectacular sceneries and diverse wildlifeprotected in 60 national parks and reserves, whichinclude the world-renowned Maasai Mara and 6UNESCO World Heritage sites. These includethree cultural heritage sites (Fort Jesus in Mombasa,Lamu Old Town and the sacred Miji Kenda Kayaforests); and three natural heritage sites (the KenyaLake System in the Great Rift Valley, Lake TurkanaNational Parks, and Mount Kenya National Park/Natural Forest).The country is rich in cultural diversity, meaning thateach county can market its own cultural heritage,for example, through home-stay tourism. However,some counties are more endowed with tourismresources (fauna, flora, infrastructure, heritage sites,etc.) than others. Some counties are also financiallyweaker than others, hence may require support todevelop own infrastructure and tourism products.Generally, most counties lack tourist-class health/hygiene facilities and hotels. There are over 38gazetted airports/airstrips in the country with fourInternational Airports ( JKIA, Mombasa, Kisumu,and Eldoret) to link to county airports/airstrips.Although almost every county has an airstrip,majority require upgrading to asphalt status.Development of tourism infrastructure in thecounties is crucial in enabling full exploitation ofpotential in their abundant wildlife, spectacularlandscapes, cultural heritage and beautiful beaches.Investments are needed to develop and maintain awide variety of services, including transport, watertreatment and distribution facilities, sanitation,communications services, tourist accommodation,game reserves and other protected areas.The key components of tourism infrastructure, suchas roads, airstrips and lodging are well developed incertain parts of the country, including the highlands,sections of the Indian Ocean Coast, and near popularparks and reserves. Most of the roads leading tothe parks and accommodation facilities locatedinside the parks are in good condition. Severalpopular parks are within a day’s drive of Nairobi,including Lake Nakuru, Hell’s Gate, Lake Naivasha,the Aberdares, and Mount Kenya National Park(Figure 11.5). Counties within the highlands, wheremost of Kenya’s population resides, have a goodnetwork of roads and airstrips serving most majortourist destinations. More distant attractions suchas the Maasai Mara National Reserve, Amboseliand Tsavo National Parks, and coastal destinationsnear Mombasa and Malindi are also quite accessibleby air or road (World Resources Institute, 2007).However, there is need to improve the road leadingto the Maasai Mara National Reserve, whichbecomes impassable during rainy seasons.On the other hand, parks requiring significant traveltime by car and with a less-developed tourisminfrastructure capture only a small share of Kenya’svisitors. This includes Marsabit National Parkand Reserve in the northern rangelands, CentralIsland National Park in Lake Turkana, and MountElgon National Park close to Uganda (WRI, 2007;Ikiara and Okech, 2002). Roads and other physicaltourism infrastructure serving these parks requiresubstantial investments in order to maximize110 kenya economic report 2013

m a n u f aTc ot u r i sn mgrevenue from tourists and ensure counties in whichthey are located receive a share of the nationaltourism cake.11.7.1 Protected areas and distributionof species with high-viewingvalueTourism in Kenya relies on the country’s naturalattractions, including wildlife in its native habitat,as well as fine beaches and other coastal ecosystemassets. It ranges from low-density tourism focusedon a ‘wilderness experience’ in less modifiedecosystems, to high-density beach tourism requiringa relatively limited set of ecosystem services–primarily sand, sea and sun. Viewing wildlife in itsnatural habitat is the primary objective for about 80per cent of the international visitors who come toKenya for holidays, while 70 per cent of the visitorsto Kenya come to see places of natural beauty andengage in nature-based activities (World ResourcesInstitute, 2007).the Mara-Serengeti ecosystem. Declining wildlifenumbers are undermining this, which is oneof Kenya’s principal tourist attractions (WorldResources Institute, 2007).The Coast region contains numerous ecosystemassets that attract tourists, including sandy beaches,coral reefs and wildlife (turtle nesting sites, dolphinsand forests inhabited by rare sable antelope). Touristaccommodation is concentrated around Mombasa,the Diani Beach area and Malindi.Concentrated along the Southern Coast and inthe highland counties are 60 important bird areas,which are prime spots for bird watching and areglobally important for bird conservation. Althoughwildlife is broadly distributed across the counties,particular species with high ‘viewing value’ exhibitspecific patterns of spatial distribution.Figure 11.5: National parks, reserves and othertourism infrastructureKenya has invested in a network of protectedareas to safeguard its natural heritage, supportnature-based tourism, and achieve biodiversity,watershed protection and other environmentalobjectives. More than 80 of Kenya’s top 120 touristdestinations are national parks and wildlife reserves(about 8% of Kenya’s total land area). Beaches andcoastal ecosystems account for a large share oftourism earnings, including more than half of allnights spent by tourists in hotel accommodations.Related activities include snorkelling, diving, deepsea fishing, bird watching (there are over 260 birdspecies in the Arabuko-Sokoke Forest), and wildlifeviewing, for example, in the designated six marinereserves of Kisite, Kiunga, Malindi, Mombasa,Mpunguti and Watamu (Figure 11.5).Giraffe populations are found throughout Kenya’srangeland counties, while rangelands of LaikipiaCounty as well as Amboseli, Marsabit and TsavoNational Parks all have high elephant numbers.The massive annual wildebeest and zebra migrationoccurs in the plains of Kajiado County close toNote: The sites showing tourist accommodations are a rough approximationbased on readily available publications. The paucity of spatially-referenceddata may have resulted in omission of sites. Moreover, a single symbol underrepresentsthe greater number of hotels and bed capacity in certain areassuch as Nairobi and the coastal region, which together captured about 75 percent of total hotel occupancy in 2005 (CBS , 2006).Sources: WRI (2007); cities (SoK and ILRI, 2000), water bodies (FAO, 2000),parks and reserves (IUCN and UNEP/WCMC, 2006), major roads (SoK and ILRI,1997), campsites, tented camps, hotels, and lodges (approx. placed by ILRI/WRI based on MacMillan Education, 1993; UNEP, 1998; RoK, 2003).kenya economic report 2013 111

S E C T o r a l P e r F o r m a n c e11.8 Review of Implementation ofVarious PoliciesWithin the Medium Term Plan 2008-2012, thegovernment has initiated various policy changesincluding preparation of the Tourism Policy, as wellas Wildlife and Heritage policies. The enactment ofthe Tourism Act 2011 into law is set to change themanagement and structure of all the institutionsunder Tourism, while establishing new ones. Mostof the existing institutions will have to undergosome branding and restructuring. The Act, whichis aligned to the Constitution 2010, provides forthe development, management, marketing andregulation of sustainable tourism and tourismrelatedactivities and services. It is a product ofseveral public awareness and participation activities,and the first Tourism Act since Kenya attainedIndependence .The proposed institutions include:• Tourism regulatory, development andmarketing bodies: Kenya Tourism RegulatoryAuthority; and Kenya Tourist Board.• Research institutions: Kenya Tourism ResearchInstitute.• Financial bodies: Kenya Tourism Fund, andKenya Tourism Finance Corporation.• Dispute settlement: Tourism Tribunal.• Institutions to enhance security for tourists:Kenya Tourism Protection Service.Some of these institutions are new and are inthe process of being established, namely: KenyaTourism Regulatory Authority, Kenya TourismProtection Service, Kenya Tourism ResearchInstitute, and Kenya Tourism Fund and TourismTribunal. The already-existing institutions suchas KTDC and KTB are undergoing restructuringin order to become more effective in deliveringservices. In total, the Ministry of East Africa Affairs,Commerce and Tourism will coordinate about 14tourism-related institutions. This will require morebudgetary allocation to enable them to functioneffectively.The Kenya Wildlife Bill 2011 is yet to be passedinto law and will provide for the protection,conservation, sustainable use and management ofwildlife in Kenya. The Bill recognizes that wildlife isan important natural resource and national heritage,a public asset at county, national, regional, andglobal levels and that there is need for an integratedecosystem approach to conserving wildlife resourcesin relation to other forms of land use. It recognizesthat wildlife should be utilized in a manner thatdoes not impinge on cultural values, compromisethe quality and value of the resource, or degrade thecarrying capacity of supporting ecosystems.Once signed into law, the Bill will pave way forthe establishment of three institutions, namely:Directorate of Conservation at the Departmentresponsible for wildlife; Kenya Wildlife RegulatoryAuthority; and Kenya Wildlife Service (KWS).Although KWS already exists, it will undergorestructuring to enhance service delivery. Itsmandate includes:• Conserving and managing national parks,provisional wildlife conservation areas, nationalreserves and sanctuaries under its jurisdiction.• Collaborating with county governments,communities and landowners for purposesof effective conservation and management ofwildlife conservancies and sanctuaries.• Conducting and coordinating all researchactivities in wildlife conservation andmanagement, and ensuring application ofresearch findings in conservation planning,implementation and decision making.112 kenya economic report 2013

m a n u f aTc ot u r i sn mg• Preparing and implementing integratedmanagement plans for national parks,provisional wildlife conservation areas, nationalreserves, and sanctuaries under its jurisdiction.The Bill also provides for establishment of anendowment fund and establishment of wildlifeconservation areas and committees. The latter willbe established at the county level and mandated to:• Facilitate the development and implementationof ecosystem-based management plans withinthe region over which they are appointed.• Inform the Service of projects, programmes,plans, ideas and opinions of the people in theregional wildlife conservation area in all mattersrelating to the protection, conservation andmanagement of wildlife within such an area.• Provide a platform for collaboration betweenthe Service, communities, county governments,landowners and other stakeholders within theregion over which they are appointed.• Facilitate communities and landowners tobenefit from revenues and other rights derivedfrom use of wildlife resources within the regionover which they are appointed.• Identify land to be set aside for the creation ofwildlife conservation areas within the regionover which they are appointed.• Assist counties, communities and land ownersto set aside critical wildlife habitats, corridorsand dispersal areas for the conservation andmanagement of wildlife within the region overwhich they are appointed.• Recommend different forms of wildlife userrights to be licensed within the region overwhich they are appointed, monitor complianceand perform such other functions as the Servicemay require or delegate.Along with the development of a wildlife policy andstrategy, interventions at county level should helpminimize human-wildlife conflict while enablingcommunities to exploit and gain from tourismresource endowment at local level.11.9 Policy Implications andRecommendations1. The economic downturn in the Eurozoneslowed down inbound tourist arrivals toKenya in 2012, since Europe is one of Kenya’smain source markets. To keep up the currentperformance and to mitigate the effects of theeconomic crisis in Europe, the Kenya TouristBoard should continue its marketing effortsto emerging markets including China, India,Russia and Australia and New Zealand. Withregard to traditional markets of the US, Canada,the UK, Germany, Italy and France, productdevelopment and marketing should targethigh-class holiday and business travellers withpotential to stay longer in the country.2. In concurrence with the Tourism Act 2011 andthe Constitution 2010, there is need to devolvetourism institutions to the counties, as a firststep in transforming counties into sustainablecentres of tourism development. Therefore, anumber of county-level tourism institutions maybe considered, including: tourism regulation,development and marketing; tourist police unit;and wildlife/conservation coordination office.3. Develop county tourism infrastructure throughpublic-private partnerships. These include:• Accommodation: Develop at least one 4- or5-star tourist hotel in each county.• Upgrade county recreation, campsites andother ‘get-away’ sites.• Road and rail transport: Upgrade roadsleading to tourist attractions to tarmac status.kenya economic report 2013 113

S E C T o r a l P e r F o r m a n c e• Health, water and sanitation facilities:Develop at least one modern referral hospitalin each county.• ICT: Link all counties with fibre optic cableand other digital communication systems.• MICE facilities: Construct at least onemodern convention centre in each county.4. Enhance access to financial services by tourismrelatedSMEs and MSEs by:• Providing tax and other incentives tomotivate private sector participation.• Generating employment for youths throughtourism SMEs.• Developing a tourism revenue-sharingformula between the counties and thenational government.6. Policy issues: Fast-track the enactment of theKenya Wildlife Bill 2011 so as to promoteprotection, conservation and sustainable useand management of wildlife in the counties.7. National hotels classification: The governmentundertook the last national hotel classificationexercise in the 2002-2003 period. However,after 2003, some new hotels have come upwhile some have improved their products andfacilities. There is need to conduct a similarsurvey urgently, so that the findings can be usedto guide stakeholders in the sector.8. The Kenya Airports Authority should developat least one asphalt-status airstrip in all thecounties. This will open up inaccessible touristdestinations all across the country.9. County tourism branding: Countygovernments, working with Brand Kenya, KTB,etc. should develop their regional brands.5. Distribute Vision 2030 tourism flagshipprojects spatially, and specifically: resort cities,ICT cities, conference/convention centres andpremium parks.114 kenya economic report 2013

m a n u f a c t u r i n g12ChapterMicro and Small Enterprises12.1 IntroductionThe Micro and Small Enterprise (MSE) sector isan important sector especially as a source of goodsand services and employment. In 1999, when thelast comprehensive survey was conducted, thesector was estimated to employ over 50 per centof the working population (accounting for 2.3million people). As much as majority of the MSEsin Kenya operate informally, there are over 35,000formal MSEs that employ over 40 per cent of theworking population. Data on formal (modern)establishments as obtained from the Kenya NationalBureau of Statistics (KNBS) Statistical Abstractsdoes not include data on small non-agriculturalrural establishments and smallholdings that areoutside ‘Scheduled Areas’. It is, therefore, importantto note, at the onset, that the statistics available maynot provide a clear picture of the performance of thesector.The MSE definition applied in this Chapter isenterprises, whether formal or informal, whichemploy 1-50 people.12.2 Recent PerformanceThis Chapter reviews the performance of the MSEsector with respect to employment, number ofestablishments, value added (of the manufacturingsector) and the contribution made by the sector tothe exchequer.12.2.1 Number of establishmentsAs illustrated in Figure 12.1, majority of enterprisesin Kenya have under 50 employees, especially intrade. The figure also indicates that majority offormal MSEs in Kenya operate in the service sector,including trade, construction, finance, real estateand insurance.Figure 12.1: Micro and small enterpriseestablishments, 2011Wholesale & retail trade, restaurants and hotelsCommunity, social services and government servicesInsurance, real estate and business servicesManufacturingAgriculture and forestryTransport and communicationConstructionElectricity and waterMining and quarrying0 4,0008,000 12,000 16,000Micro and small enterprisesMedium and large enterprisesSource: Kenya National Bureau of Statistics (2012), Statistical Abstractkenya economic report 2013 115

S E C T o r a l P e r F o r m a n c e12.2.2 EmploymentAs much as majority of the formal enterprises inKenya are MSEs, large enterprises employ largernumbers of people, as is expected due to their size.This is illustrated in Figure 12.2.Figure 12.2: MSEs employment figures12%5%3%22%58%with respect to the number of establishments, as 67per cent of manufacturing firms are MSEs.Figure 12.4: MSEs manufacturing value addedKsh Millions300,000250,000200,000150,000100,00050,00002007Large enterprises2008 2009 2010 2011YearMicro and small enterprisesSource: Kenya National Bureau of Statistics (2012), Statistical Abstract0-5 employees 5-9 employees 10-19 employees 20-49 employees >49 employeesSource: Kenya National Bureau of Statistics (2012), Statistical AbstractThe number of employees in the MSE sectorincreased between 2010 and 2011, while that ofmedium and large enterprises declined during thesame period as illustrated below.Figure 12.3: MSEs employment trendsNumber of employees1,400,0001,200,0001,000,000800,000600,000400,000200,000020072008 2009 2010 2011YearMedium and large enterprises Micro and small enterprisesSource: Kenya National Bureau of Statistics (2012), Statistical Abstract12.2.3 MSE manufacturing value addedThe manufacturing value added contributionmade by MSEs also increased from 13.6 per centin 2010 to 14.25 per cent in 2011. However, theoverall contribution made by the sector is still low,especially when compared to the contribution made12.2.4 Tax performanceBy Kenya’s tax regime, the tax obligations forsmall enterprises are the same with those of largeenterprises with the expectation of Turnover Tax(TOT), which applies to enterprises with a lowerturnover of between Ksh 500,000 and Ksh 5million. TOT was introduced in 2009 and has beenexperiencing steady growth. TOT is set at 3 per centof turnover; however, loss making businesses areexempt from the tax.Figure 12.5: Turnover Tax (TOT)Ksh (millions)1601401201008060402002007/082008/09 2009/10 2010/11 2011/12YearSource: Author’s construct using data from Kenya Revenue Authority (KRA ),Domestic Tax DepartmentReview of the other tax regimes reveals that Pay AsYou Earn (PAYE) and income tax payments havebeen increasing over the years, while those of ValueAdded Tax (VAT) declined over the years between2008/09 and 2010/11, which is attributable to theintroduction of TOT.116 kenya economic report 2013

M i c r o a n d S m am la l nE un fta ec rt pu r i is ne gsFigure 12.6: Tax performance for small andmedium enterprises*Ksh millions60,00050,00040,00030,00020,00010,00002007/082008/092009/10 2010/11 2011/12YearPAYE Income Tax VATSource: Author’s construct using data from Kenya Revenue Authority (KRA ),Domestic Tax Department* Taxpayers whose turnover is between Ksh 5 million and Ksh 750 million.12.2.5 Business registration andlicensingBusiness registrationAs indicated earlier, MSEs in Kenya operate largelyinformally. This is evidenced by two studies: The1999 MSE National Baseline Survey and the 2008KIPPRA Study on MSEs in Kenya. According to the1999 MSE Survey, 88.6 per cent of MSEs operateinformally. The 2008 KIPPRA Study establishedthat 72 per cent of the over 2,500 firms sampled werenot registered; of those that were registered, only 8per cent of sampled firms were formally registered aslimited companies with the Registrar of Companies.The study also established that the low level ofbusiness registration is due to the many registrationrequirements, the long period it takes, and the longdistance to be covered to register. It is also importantto note that a number of MSEs confused licensingfor registration, thus revealing that they consideredlicensing as sufficient requirement for operating thebusiness.A review of available statistics reveals that thenumber of persons operating informally has beenincreasing over the years as illustrated in Figures12.7 and 12.8.LicensingThe licensing requirements for businesses operatingin Kenya include a Single Business Permit (SBP),which is obtained from the county offices, and othersector-specific licences obtained from the relevantministry and/or licensing authority, including andnot limited to: Ministry of Agriculture; Ministryof Health, Ministry of Education, NationalEnvironment Management Authority (NEMA),Communications Commission of Kenya (CCK),Pharmacy and Poisons Board, Horticultural CropsDevelopment Authority, National Cereals andProduce Board (NCPB) and Pest Control ProductsBoard (PCPB), among others.Figure 12.7: Informal sector employment byactivity, 2007-2011ManufacturingCommunity, Social and Personal ServicesOthersConstructionTransport and Communication0 500,000 1,000,000 1,500,000 2,000,000Source: Kenya National Bureau of Statistics (2011), Economic SurveysFigure 12.8: Employment in the informal andformal sectors in Kenya9080706050403020100Proportion engaged in informal employment Proportion engaged in formal employmentSource: Kenya National Bureau of Statistics (Various), Economic SurveyYear20112010200920082007199119921993199419951996199719981999200020012002200320042005200620072008200920102011kenya economic report 2013 117

S E C T o r a l P e r F o r m a n c eIn 1999, majority (60.7%) of MSEs were operatingwithout a licence. In 2008, the majority (85%) werethose that had a SBP. This improved compliancein licensing is attributable to the reforms that wereintroduced, which saw the introduction of the SBPin the late 1990s, but legally recognized followingthe repeal of the Trade Licensing Act where thetrade licence was eliminated. SBP, however, did notharmonize all licences as professional and sectorspecificlicences are still obtained from the relevantauthorities.Recently, there have been efforts towards improvinglicensing, key amongst them being the introductionof an e-registry to electronically host licenses inKenya. The main challenge experienced in Kenyawith respect to licensing is the multiplicity oflicences issued by different regulatory agencies andministries separately located. This electronic portalshould, therefore, lower transaction costs associatedwith obtaining licences. As at the end of 2012,the Business Regulatory Reforms Unit (BRRU)e-licence portal had details as shown in Table 12.1.Table 12.1: E-licensing (as at December 2012)DescriptionNumberLicences in the system 556Published licences 441Licences prepared 36Licences created 79Licences accessible to the public 441Source: Business Regulatory Reforms Unit (BRRU), Ministry of FinanceThere is, however, limited awareness on theexistence of the e-registry service. Over 30 per centof businesses surveyed in an ICT survey undertakenby the Kenya ICT Board in 2011 indicated that theywere not aware of the service, and majority of thosethat were aware of it had not used the service.Licensing under the devolvedgovernance structureKenya is gearing up for additional licensing changesunder the Constitution of Kenya (2010), whichsplits licensing roles between the national andcounty governments.Activities relating to transport and communication,and protection of the environment and naturalresources, for instance, are under the nationalgovernment, while county governments aremandated with licensing of county health services,cultural activities, county transport and tradelicensing.The Local Government Act (Cap 265), whichprovides for SBP, was repealed and local authoritystaff redeployed under the Urban Areas and CitiesAct. This latter Act provides that licences andpermits issued by local authorities be granted bycities and municipalities as authorized by countygovernments.The County Government Public FinanceManagement Transition Act No. 8 of 2013 providesthat county governments continue imposing ratesand charges previously applied until a new relevantlaw is enacted. The Nairobi County Assembly has,for instance, enacted the “Nairobi City CountyFinance Act 2013”, which provides for the varioustaxes, fees and charges for different businesses,small trade services, public services, communitydevelopment services, sports and cultural activities,market charges, among others. This licensingtransition effort should be made to ensure efficiencyand subsequently compliance among MSEs, whichform majority of enterprises in Kenya.12.3 Regulatory EnvironmentThe Micro and Small Enterprise (MSE) Act No.55 of 2012 was passed by Parliament in late 2012.This will be the first comprehensive legislation thatexclusively addresses the promotion, developmentand regulation of the MSE sector.118 kenya economic report 2013

M i c r o a n d S m am la l nE un fta ec rt pu r i is ne gsThe objectives of the MSE Act include: provisionof an enabling business environment; facilitation ofbusiness development services; formalization andupgrading of informal micro and small enterprises;promoting an entrepreneurial culture; andpromoting representative associations.With the enactment of the MSE Act, therefore,a registrar of Micro and Small Enterprises willbe established to register MSE associations orumbrella organizations. Currently, the MSEsector has numerous MSE associations, which areoften not well organized and, therefore, do noteffectively lobby the government and/or meet theneeds of their members. The requirement for MSEassociations to be registered also assists with respectto governance and, consequently, accountability.The MSE Act also establishes the MSE Authority,whose main function is to coordinate, harmonizeand facilitate activities and plans that relate to thesector. Some of the challenges affecting the sectorinclude poor coordination and implementationof policies. Additionally, different governmentministries and agencies perform different rolestargeted at the same sector. This leads to duplicationof activities, overlaps and wastage of resources, andcontributes to confusion amongst MSEs that maynot know which agency/ministry to approach.The MSE Authority will, therefore, monitor andevaluate the implementation of relevant policiesand collaborate with relevant institutions, andtherefore improve coordination. The Authoritywill also be mandated to facilitate the promotionof MSEs, including development of infrastructureand markets; promoting the use of technology; andfacilitating capacity building and access to finance.Another important undertaking of the MSE Actis the introduction of a tribunal to settle disputeseffectively, and the establishment of the Micro andSmall Enterprise Development Fund to finance thepromotion and development of MSEs, while alsoproviding affordable and accessible credit, whichhas also been an outstanding challenge for MSEs.12.4 Outstanding ChallengesMultiplicity of licensing is still a challenge that is yetto be addressed. The challenge is to ensure that theregulations that deal with businesses at the countylevel do not end up introducing additional licensingbureaucracies. Enterprises operating informallyexperience challenges that hinder their growth,as they have limited access to financial services,infrastructure, inter-firm linkages and the market.Lack of relevant statistics is another key challengethat should be highlighted. The last comprehensivenational survey of the MSE sector in Kenya wasundertaken in 1999. There is need to conductanother survey in order to generate evidence fromwhich the government can develop relative activitiesand policies. Such studies also assist the governmentin monitoring and evaluating the impact of certaininitiatives and/or developments. The governmentshould plan to conduct such studies on a regularbasis, given the importance the MSE sector in theeconomy. The increasing level of informality byMSEs is also of concern, given that such enterprisesare not legally recognized.12.5 Best-Practice LicensingSome lessons on how to improve licensing in Kenyacan be drawn from Indonesia and India, which havereported improvements in licensing procedures.Evidence from India, for instance, indicates thatimproved licensing contributed to an increaseof new firm registrations, increase in output andproductivity and a decrease in informality (WorldBank, 2013; Chari, 2011; Sharma, 2009). Indonesiaprovides a good example, as licensing and otherbusiness-related procedures were devolved tolower governance structures when the countryembarked on a decentralization process. However,this led to an increase in licences and transactioncosts. This was largely attributable to the leewaythe local governments had in the implementationof national laws. Indonesia undertook reforms inlicensing through the introduction of One-StopShops (OSS) for licensing at the local governmentkenya economic report 2013 119

S E C T o r a l P e r F o r m a n c elevel (Steer, 2006). Initial analysis on the reformsundertaken by a study by Asia Foundation revealeda reduction in time and costs of obtaining licenses.The study, however, also realized the further needto address broader regulatory issues and, therefore,recommended the use of regulatory tools suchas Regulatory Impact Assessments (RIA) duringsuch licensing reforms. The study defines RIA as“an analytical tool that helps government identifywhether a regulation (such as a license) is needed,what the costs and benefits of the proposedregulation are, and whether there are alternativesolutions to regulation” (Steer, 2006: 27).According to the Doing Business Report forIndonesia 2012, government reforms were aimedat simplifying licensing requirements and alsosetting statutory time limits on issuance of licencesat the local authority level. These reforms have beensuccessful in ensuring efficiency in licensing withinthe local authorities. The report reveals that someauthorities amalgamated different licences into asingle license. Political goodwill and buy-in is alsocritical, as was evidenced by a ministerial decreeintroduced in 2007 to encourage the establishmentof one-stop shops nationwide in Indonesia,which led to the creation of one-stop shops, thuscontributing to administrative efficiency.12.6 Policy RecommendationsThe government needs to ensure that all licensing,including national and devolved licensing, can beachieved through a single licensing mechanismwhere MSEs can access several different licensingagencies, business registration, and institutions thatadminister other statutory rights at one physicallocation at the county level. This includes licencescentralized in parent ministries. This would reducetransaction costs and may consequently encourageinvestment and contribute to increased licensingdue to the reduced business costs of formalization.As illustrated earlier, the government hascommenced the process of providing e-licensing byhosting over 400 relevant licence applications online.With improvement with respect to e-payments, suchas mobile money transfer platforms, the governmentcan consider fully automating the licensing process.With the decentralization of government servicesin Kenya, some licences are now obtained fromcounty governments as mentioned earlier. Kenyashould, however, ensure that this does not lead to aduplication of licences and an increase in the cost ofdoing business. One way of ensuring this does notoccur is by putting in place institutions that would ina sense ‘regulate regulators’. The government should,therefore, institutionalize Regulatory ImpactAssessments and establish the oversight authorityso as to ensure that licences are not arbitrarilyintroduced without proper objectives, proceduresand guidelines. The recently-enacted StatutoryInstruments Act of 2013 (Cap 23) provides asystematic approach for regulatory agencies tointroduce regulations, but fails to identify anappropriate oversight authority. The one proposedin the Act entails parliament and senate committees,which may not have adequate technical expertise.As evidenced in Indonesia, one-stop shops canimprove licensing efficiency. The one-stop shopmechanism being enacted by the Kenya InvestmentsAuthority should not only promote the one-stopshop concept, but also aim to lower transaction costsfor MSEs, and reduce business start-up proceduresand processing times. To be able to achieve this, theauthority should be facilitated in terms of resources,and also in terms of linkages with other importantagencies such as the Kenya Revenue Authority.Given the lack of credible statistics on the MSEsector, the government should find innovativemechanisms to collect and maintain relevantinformation and statistics on MSEs. Frequentlyschedulednational surveys should also be conductedto provide credible current statistics for effectiveand efficient policy and strategy development andimplementation.120 kenya economic report 2013

m a n u f a c t u r i n g13ChapterInfrastructure and EconomicServices13.1 IntroductionInfrastructure is a basic pillar for globalcompetitiveness and a foundational enabler toKenya Vision 2030. All the six key sectors underthe Economic Pillar of Vision 2030, namely:agriculture, tourism, wholesale and retail trade,Business Process Outsourcing, financial servicesand manufacturing, depend heavily on an efficientnetwork of infrastructure. Factor-driven economies,Kenya included, should emphasize infrastructuredevelopment to reduce the cost of doing businessand enhance efficiency in service delivery toaccelerate development. Competitiveness andsustainability questions at sub-national level mustinterrogate how to stimulate investments in keyinfrastructure for enhanced service delivery andequitable access.Well-networked and efficient infrastructure isessential for inter-county market integration,lowering unit costs of production and transactions,facilitating the flow of materials and information,reducing inequalities and poverty and enhancingeconomic capacity.13.2 Performance in theInfrastructure SectorThe contribution of the infrastructure sector toGDP was 19.1 per cent in 2012 (Table 13.1).Transport and communications sub-sectors madethe highest contribution to GDP over the last threeyears compared to the other infrastructure subsectors.In 2012, transport and storage contributed7.3 per cent to GDP, which marked a decrease of 0.5per cent from 2011. The electricity and water supplysub-sector marked the least contribution to GDP at1.4 per cent in 2012.Development expenditure in the infrastructuresector experienced an overall increase of Ksh 44billion between 2009/10 and 2011/12. This is in linewith the national development agenda that placesemphasis on infrastructure development. However,as shown in Table 13.2, the average absorption rateof funds allocated to the sector has been declining,standing at 75.12 per cent in 2011/12 compared to81.60 per cent in 2009/10. This means that the sectorrecorded decreasing capacity to spend allocatedfunds, which could point to existing inefficiency.kenya economic report 2013 121

S E C T o r a l P e r F o r m a n c eTable 13.1: Infrastructure contribution to GDP (%)2008 2009 2010 2011+ 2012*GDP 1.5 2.7 5.8 4.4 4.6Electricity and water supply 2.1 1.9 1.4 1.1 1.4Electricity supply 1.5 1.2 0.7 0.4 0.7Water supply 0.6 0.6 0.7 0.7 0.7Construction 3.8 4.1 4.3 4.1 4.1Transport and communication 10.3 9.9 10.1 9.9 9.3Transport and storage 7.6 7.3 7.5 7.8 7.3Post and telecommunications 2.7 2.6 2.5 2.2 2.1Real estate-renting and business services 5.1 4.9 4.8 4.4 4.3Real estate dwellings, owner-occupied and rented 2.5 2.5 2.4 2.1 2.0Real estate – renting and business services 2.6 2.5 2.4 2.3 2.3Total infrastructure 21.3 20.8 20.6 19.5 19.1Source: Kenya National Bureau of Statistics (2012), Statistical Abstract+ Revised * ProvisionalTable 13.2: Trends in development expenditure and absorption rates in selected infrastructure portfolios(Ksh millions)SubsectorsApproved Estimates Actual Expenditures Absorption Rate: Actual/Approved%2009/10 2010/11 2011/12 2009/10 2010/11 2011/12 2009/10 2010/11 2011/12 AvgRoads 58,491 66,528 77,111 36,577 47,795 59,682 62.53 71.84 77.40 70.59Transport5,792 6,828 13,906 3,548 3,472 4,178 61.26 50.85 30.04 47.38Public 3,971 4,560 4,961 3,007 4,261 4,142 75.72 93.44 83.49 84.22WorksHousing 2,124 2,082 2,139 2,063 1,931 1,911 97.13 92.75 89.34 93.07Energy 33,118 32,623 55,180 32,510 27,534 51,647 98.16 84.40 93.60 92.05Local 2,375 4,556 3,760 2,056 1,988 2,146 86.57 43.63 57.07 62.43GovernmentNairobi 1,759 1,060 2,044 1,580 1,060 1,939 89.82 100.00 94.86 94.90MetropolitanDevelopmentTotal 107,630 118,237 15,9101 81,341 88,041 125,645 81.60* 76.70* 75.12*Source: Government of Kenya (2012)* Average122 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gsTable 13.3: Trends in recurrent expenditure and absorption rates in selected infrastructure portfolios (Kshmillions)SubsectorsApproved Estimates Actual Expenditures Absorption Rate: Actual/Approved%2009/10 2010/11 2011/12 2009/10 2010/11 2011/12 2009/10 2010/11 2011/12 AvgRoads 21,852 23,691 27,201 20,969 23,606 27,191 95.96 99.64 99.96 98.52Transport 3,389 3,568 3,968 3,286 3,431 3,822 96.96 96.16 96.32 96.48Public1,671 2,085 1,613 1,232 1,721 1,402 73.73 82.54 86.92 81.06WorksHousing 1,837 1,715 1,736 1,515 1,563 1,479 82.47 91.14 85.20 86.27Energy 409 2,283 2,279 362 2,055 2,261 88.51 90.01 99.21 92.58Local 10,547 11,348 18,464 10,285 11,330 18,209 97.52 99.84 98.62 98.66GovernmentNairobi176 118 227 175 118 220 99.43 100.00 96.92 98.78MetropolitanDevelopmentTotal 39,881 44,808 55,488 37,824 43,824 54,584 90.65* 94.19* 94.73*Source: Government of Kenya (2012)* AverageThe Nairobi Metropolitan Development subsectorrecorded the best performance in terms ofdevelopment funds absorption rate at 94.86 per centin 2011/12, while the transport sub-sector had theleast performance with an absorption rate of 30.04per cent in the same period.Recurrent expenditure within the sector alsoincreased by Ksh 16 billion between 2009/10 and2011/12. The sector performed better in terms ofabsorption rates of recurrent funds to record anaverage increase of 4 per cent between 2009/10 and2011/12 as shown in Table 13.3. The roads subsectorrecorded the best performance in terms ofabsorption rate at 99.96 per cent in 2011/12, whilethe housing sub-sector had the least absorption rateof 85.20 per cent in the same period.13.3 Water Sub-SectorInfrastructure reports on Kenya by the World Bankdistinguish the water and sanitation sector as oneof the key sectors with extra-high spending needs,requiring about US$ 2 billion annually to meet theMillennium Development Goals. This spendingis principally made up of capital expenditure,which accounts for 75 per cent of the total. Centralgovernment spending on water and sanitationis, however, a small share of the national income.Utilization of funds through the many channels andgovernment agencies in this sector, low absorptionrates of allocated funds, and alignment of expenditurewith sector priorities are some of the key issues thatcall for greater attention and determination. Kenya’sMinistry of Water and Irrigation allocates funds tosemi-autonomous government agencies (SAGAs),which are catchment-based and not district-basedagencies.kenya economic report 2013 123

S E C T o r a l P e r F o r m a n c eThe sector has also undergone considerableinstitutional reform since 2002. Kenya’s Vision 2030aspiration, under the social pillar, includes access toclean, secure and sustainable water and sanitation.As exposed by the 2009 National Populationand Housing Census, Kenya is still archetypicalof vast regional disparities in access to water andsanitation services. The widespread practice ofopen defecation is a clear indicator of poor hygieneand exposure to health hazards. The growing useof unsafe water sources further portends Kenya’srecession in meeting the Millennium DevelopmentGoals (MDGs) for this sector.Kenya’s water and sanitation sector is also hard-hitby technical challenges. Besides the huge fundinggaps and resultant under-performance, high systemlosses are prevalent. Data challenges are enormous,characterized by incompleteness, being largelyoutdated, and lacking harmonized definitionsand frameworks for data capture and spatialdisaggregation. The definition of urban or ruralareas, for instance, varies across board dependingon the standards set by various bodies such as theKenya National Bureau of Statistics, Ministry ofWater and Irrigation (MWI), the Water ServicesRegulatory Board (WSRB), and the Water ServicesTrust Fund (WSTF). Similarly, the spatial, qualityand quantity parameters used to measure access towater and sanitation services are not uniform, suchthat international standards adopted by the MDGsdiffer greatly from the standards adopted by variousgovernmental agencies. The irrigation sub-sectorperformance is particularly adversely affected, thereason for which it is only marginally discussed inthis review. These challenges of data and integrityin standards are a setback to comprehensivecomparative analysis of sub-national efficiency inthe water and irrigation sector as a whole.Water and Sewerage Services; Water ResourcesManagement; Irrigation, Drainage and WaterStorage; and Land Reclamation. The water servicessub-sector in Kenya has been restructured since2002 to provide definite institutional roles andresponsibilities, as presented in Table 13.4.The institutional framework in the Water Act 2002has, at the apex, the Ministry of Water and Irrigation,charged with the development of legislation,policy and strategy formulation, and overall sectorinvestment planning and resource mobilization.Other institutions include the Water Appeals Board(WAB) for arbitration of disputes and conflicts, theWater Resources Management Authority (WRMA)for catchment and source protection, the KenyaWater Institute (KEWI) for training and research,the National Water Conservation and PipelineCorporation (NWCPC) for construction of damsand drilling of boreholes, and the Water ServicesTrust Fund (WSTF) for financing pro-poor waterservices infrastructure. The water services subsectorcomprises the Water Services RegulatoryBoard (WASREB), Water Services Boards (WSBs)and Water Service Providers (WSPs).The responsibility to plan, develop and expandthe water infrastructure (assets) is entrusted withthe Water Services Boards (WSBs). To ensurestakeholder participation, the Water ServiceProviders (WSPs) were created covering specificurban or rural areas. The WSPs are responsible forthe operation and maintenance of water assets aswell as provision of water supply and sanitationservices and are regulated by Service ProvisionAgreements. Although a water infrastructure index isnot available, the current state of infrastructure doesnot reflect the corresponding rise in investments.The network is generally characterized by low valuefor money and poor impact of investments.13.3.1 Water sub-sector organizationand managementThe functions of the ministry are implementedthrough its four technical departments, namely:124 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gsTable 13.4: Roles and responsibilities of institutionsin Kenya’s water services sub-sectorInstitution1. Ministry ofWater andIrrigation(MWI)2. Water ServicesRegulatoryBoard(WASREB)3. Water ServicesBoards(WSBs)4. Water ServiceProviders(WSPs)Roles and responsibilitiesDevelopment of legislation,policy and strategy formulation,sector coordination andguidance, and monitoringand evaluationOverall sector investmentsplanning and resource mobilizationRegulation and monitoringof service provision (WaterServices Boards and Providers)Issuing of licences to WaterServices BoardsSetting standards for provisionof water servicesDeveloping guidelines (watertariffs, etc)Mechanisms for handlingcomplaintsEfficient and economicalprovision of water servicesDeveloping water and sewerfacilities, investment planningand implementationRehabilitation and replacementof infrastructureApplying regulations on waterservices and tariffsProcuring and leasing waterand sewerage facilitiesContracting Water ServiceProviders (WSPs)Provision of water andsanitation services, ensuringgood customer relationand sensitization, adequatemaintenance of assets andreaching a performance levelset by regulationInstitution5. WaterServicesTrust Fund(WSTF)6. Water AppealsBoard(WAB)7. NationalWater Conservationand PipelineCorporation(NWCPC)8. Water ResourcesManagementAuthority(WRMA)9. Kenya WaterInstitute(KEWI)Roles and responsibilitiesFinancing provision of waterand sanitation to disadvantagedgroups (pro-poor) aswater poverty fundArbitration of water-relateddisputes and conflicts betweeninstitutions and organizationsConstruction of dams anddrilling of boreholesWater catchment and sourceprotectionTraining and researchThere are eight Water Services Boards (WSBs)spread regionally across the country: Athi,Tana, Coast, Tana Athi, Northern, Rift Valley,Lake Victoria South and North WSBs. They aredelineated on the basis of catchments, administrativeboundaries and economic viability. WSPs arecommercial organizations with the sole mandateof operating and maintaining water and sewerageservices as prescribed in the Service ProvisionAgreement (SPA) between WSBs and WSPs. Mostof the current WSPs are owned by local authorities,though set up as independent entities registeredunder the Companies Act, Cap 486 of the Laws ofKenya.kenya economic report 2013 125

S E C T o r a l P e r F o r m a n c e13.3.2 Trends in the water andsanitation sub-sectorperformanceThe average annual precipitation in Kenya isestimated at 365.6 km 3 . The country’s water scarcityindex continues to worsen with rapid populationgrowth, and is expected to fall from approximately500 m 3 per capita per year to as low as 359 m 3 percapita per year by 2020 (Salami et al., 2011). Lessthan 20 per cent of the country’s safe yield ofrenewable freshwater resources has been exploited(Salami et al., 2011). The national target is toachieve safe water services coverage of 80 per centby 2015 (WASREB, 2010). However, inefficiencyhas for long been a typical characteristic of Kenya’swater utilities. This fact manifests itself in the sector’sunderperformance, both in terms of quality andspatial coverage of water services. It is evident fromthe business-as-usual scenario that Kenya will notmeet the MDG target for water and sanitation by2015, unless an accelerated push for radical changesis implemented. Uganda is, however, on its way tosurpassing the MDG target for improved watersources, and will only face a big challenge in tryingto meet the target for improved sanitation.Despite major institutional reforms with goodcorporate governance, the sector still faces keychallenges in addressing distribution losses, recentlyestimated at 40 per cent compared to 33 per cent forother low-income African countries. Another keychallenge is under-pricing, a stark irony given thatKenya is a water-scarce country. The performanceof Kenya on key water and sanitation indicatorsin 2009 as compared to other countries is shownin Table 13.5 (based on AICD, 2010). In thesubsequent figures, sub-national performance isshown based on the Kenya Population and HousingCensus of 2009. Lack of common standards in datacategorization and inferences is manifested in thedifferent performance outcomes based on differentinformation sources. Standardization is, therefore,essential to uniform and comparable reporting ofTable 13.5: Benchmarking Kenya’s water and sanitation indicators, 2009UnitLow-incomecountriesKenyaMiddle-incomecountriesAccess to piped water per cent pop. 10.1 17.9 56.4Access to stand posts per cent pop. 16.1 9.4 20.4Access to boreholes/wells per cent pop. 38.3 21.6 6.3Access to surface water per cent pop. 33.8 46.4 13.9Access to septic tanks per cent pop. 5.3 9.0 44.0Access to improved latrines per cent pop. 9.3 8.0 0.9Access to traditional latrines per cent pop. 47.9 64.3 33.0Open defecation per cent pop. 37.1 18.3 15.8Domestic water consumption Litre/capita/day 72.4 63.0 NaUrban water assets in need of rehabilitation per cent 35.5 42.0 25.0Revenue collection per cent sales 96.0 95.0 99.2Distribution lossesper cent33.0 40.0 23.1productionCost recoveryper cent total56.0 58.0 80.6costsTotal hidden costs as per cent of revenue per cent 130.0 173.9 84.9Source: World Bank (2010)126 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gssub-national performance in the sector, and the caseof inferring what qualifies as rural versus urban (andsometimes peri-urban) for disaggregation is a clearexample.Overall, the sector incurs huge hidden costsmainly in terms of under-pricing and unaccountedforwater (AICD, 2010). During 2009/10, forinstance, Non-Revenue Water (NRW) was about162 million cubic meters, an equivalent to Ksh 8.6billion (assuming Ksh 53 per cubic meter). Thiscasts a worrying picture, given that the huge figureaccounted for approximately a third of the annualwater sector development budget for 2009/10 andpotential access for additional 4.6 million people(WASREB, 2010). In 2011, NRW was estimated at63 per cent and 45 per cent for rural and urban areas,respectively. These figures compare unfavourablywith the 25 per cent threshold and are equivalentto Ksh 10.4 billion or one third of the annualdevelopment budget for water supply and sanitationservices.Despite having almost double the rate of accessto piped water compared to low-income Africancountries, Kenya’s rate of access to stand posts andboreholes/wells is about half the level realized inthese low-income countries. The AICD (2010)Country Report for Kenya has rightly ascribedthis outcome to over-concentration of investmentin high-end solutions (piped water) as opposed tomore affordable intermediate modes of access suchas stand posts and boreholes. The 2009 CensusReport indicates that 52.6 per cent of Kenyans inurban areas have access to piped water (Governmentof Kenya, 2010b).The metering rate measures the number ofconnections with operational meters to the totalnumber of connections. Metering water supplyis critical in controlling NRW and for managingper capita water consumption. A higher meteringrate means that consumers are charged accordingto what they actually consume. Urban areas havea higher metering rate of 87 per cent comparedwith 72 per cent in rural areas. Both of these areway below the 95 per cent threshold. This impliesthat the rest of consumers are charged based onestimates, a situation that creates suitable conditionsfor illicit trade in water.The current average revenue collection rate forboth urban and rural areas is 82 per cent (withhigh possibility of inclusion of arrears). Thisrate varies greatly depending on the projections,water production and control in NRW. Revenuecollection efficiency, defined as the amount offunds collected by a water utility compared withthe total amount billed in a given period, depicts itsinstitutional capacity. The indicator further reflectsthe willingness to pay, which may reveal the level ofcustomer satisfaction.13.3.3 Sub-national equity in access towater and sanitationAccess to water supply and sanitation services ismeasured against specific distance, cost, qualityand quantity parameters. Time can be derivedfrom the distance dimension, as it influences traveltime, but it also includes waiting time for a morerigorous approach to calculating “weighted access”.Access in urban areas is usually rated against morerigorous standards than in rural areas. Urban areas,according to the MoWI, WASREB and WSTF,are spatial units (sub-locational entities) with apopulation density in excess of 400 persons per km 2 .The KNBS uses a threshold of 2,000 persons perkm 2 to define urban areas; rural areas are otherwise,with a population density falling below these figuresunder each categorization. The thresholds for theseaccess parameters vary, such that data from differentsources give different impressions of access levelsto water and sanitation. This makes it difficult tocompare performance levels across regions, unless acommon standard is adopted.Improved water sources in rural areas in thisreview are taken to be household pipe connections,kenya economic report 2013 127

S E C T o r a l P e r F o r m a n c epublic standpipes, boreholes, protected dug wells,protected springs, Jabia and rainwater collection.To harmonize national and cross-countrycomparison and monitoring of progress towards theMDGs, the Joint Monitoring Programme ( JMP)has standardized the definition of access to watersupply services as the availability of at least 20 litresper capita per day from an “improved” source withinone kilometre of the user’s dwelling. Nevertheless,for urban areas in Kenya, only the census data fallingunder “piped into dwelling” and “piped” water aretaken to be improved sources under this review asstipulated by the higher national standards adaptedby WASREB.The global standard for improved sanitation includesconnection to public sewers, connection to septicsystems, pour-flush latrines, simple covered pitlatrines and ventilated improved pit (VIP) latrines.The unimproved sanitation category covers bucketlatrines, public latrines and open or uncoveredlatrines. Shared toilets in urban areas are included inthis category of improved sanitation.The graphical analyses in the following sectionsbased on the 2009 Census show that a significant44 per cent of Kenyans rely on unprotected watersources, mainly made up of streams, lakes, ponds,dams, water vendors and unprotected wells andsprings. The contribution of boreholes is significantat 11 per cent nationally, though access to pipedwater (both public pipes and ‘piped into dwelling’)is more pronounced in urban centres (53% in urbanareas; 30% nationally; and 16% in rural areas).According to the same 2009 Census data and goingby this classification of improved sources, only 49per cent of Kenyans had access to improved watersources.13.3.4 Overall access to improvedwater sources in countiesThe observed urban-rural differences in theparameters of measuring access to improved watersources necessitate the computation of a weightedaverage when estimating the overall access toimproved water sources in an entire county (whereessentially both rural and urban areas are found).In the results below, the sizes of rural and urbanhouseholds per county were used to weight themean access to improved water sources in thecounties.In terms of overall access to improved water sourcesat county level by 2009, Nairobi (75.7%), TaitaTaveta (65.5%), Nyeri (65.2%), Garissa (63.3%)and Uasin Gishu (62.8%) are top five. These scoresare higher than the national average of 48.5 per cent.Twenty six (26) counties score below the nationalaverage, with Migori County (15.0%) being the lastas shown in Figure 13.1. Generally, wherever theprincipal source of water is a stream, there is a poorscore on overall access to improved water sources.13.3.5 Access to improved watersources in urban areas by countyIn the urban category, Isiolo County leads in accessto improved water sources with a score of 85.1 percent, followed by Garissa (84.7%), Taita Taveta(84.3%), Meru (82.6%) and Nyeri (79.9%) in thetop five. Twenty eight (28) counties score belowthe urban access average of 53.1 per cent. Wajiris last in this category, with only 2.5 per cent of itsurban households having access to piped water.Underperformance in urban household access topiped water is also prevalent in Migori, Vihiga andKisii counties, each scoring below 10 per cent. Only16 out of the 47 counties had access to improvedwater sources by urban household standards abovethe urban average access of 53.1 per cent by 2009.13.3.6 Access to improved watersources in rural areas by countyIn the rural category, Bungoma County leads inaccess to improved water sources with a score of 69.9per cent, followed by Uasin Gishu (63.8%), Kiambu(63.4%), Nyandarua (61.3%), Trans Nzoia (61.3%)128 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gsFigure 13.1: Overall county household access to improved and non-improved water sourcesPercentage1009080706050403020100NairobiNyeriUasin GishuIsioloLamuBusiaTrans NzoiaAverage access to improved water source48.575.7%65.5%65.2%63.3%62.8%62.1%61.5%61.1%59.6%57.1%56.8%55.0%54.4%54.3%54.1%53.9%52.9%52.2%52.1%51.6%50.0%45.2%43.9%43.0%42.2%42.0%41.1%40.5%40.2%40.0%39.1%38.9%37.8%35.9%33.9%33.4%33.2%31.8%30.6%26.6%25.4%24.7%24.0%22.4%21.3%20.7%15.0%Source: Government of Kenya (2010b)MombasaNakuruEmbuTharaka NithiVihigaCountiesKwaleWajirTurkanaKerichoMakueniMarsabitElgeyo MarakwetBometBaringoWest PokotNarokAverage access to non-improved water sourceFigure 13.2: County urban household access to improved and non-improved water sourcesPercentage100908070605040302010085.1%84.7%84.3%82.6%79.9%85.1%77.0%75.7%69.1%64.8%62.8%61.7%58.4%57.8%53.9%53.5%IsioloGarissaTaita TavetaMeruNyeriLaikipiaNairobiEmbu53.2%52.9%51.8%50.1%46.3%42.1%41.3%40.9%39.6%39.4%34.4%34.4%31.0%28.0%27.3%26.2%25.5%24.6%23.7%21.1%20.0%18.0%16.1%14.9%14.3%12.2%10.5%8.4%7.2%6.9%2.5%LamuUasin GishuKirinyagaTharaka NithiKiambuNakuruTana RiverKenyaMombasaBaringoKajiadoTurkanaSamburuMurang’aKerichoKwaleKisumuElgeyo MarakwetMakueniNarokTrans NzoiaNyandaruaHoma BaySiayaBungomaKakamegaBometWest PokotMachakosBusiaKituiManderaNandiMarsabitNyamiraKisiiVihigaMigoriWajirCountyImproved water sourcesNon -improved water sourcesSource: Government of Kenya (2010b)and Taita Taveta (61.0%) in the top six. Twenty four(24) counties score below the average rural access of45.7 per cent. Narok is last in this category with only19.2 per cent of its rural households having accessto improved water sources by rural standards in theyear 2009.13.3.7 Overall access to sanitation incountiesAccess to improved sanitation Year is very low, especiallyin rural areas with about 21 per cent of the ruralhouseholds using poor faecal disposal methods suchas buckets and bushes. Slightly over 3 per cent ofkenya economic report 2013 129

S E C T o r a l P e r F o r m a n c eurban households use such poor methods, and 14per cent of households nationally (Government ofKenya, 2010b). The figures on access to sanitationshow the proportion of households with access tovarious means of sanitation by county as well as thenational and rural-urban comparisons. The analysispresented has consolidated the 2009 Census datainto improved and unimproved sanitation bycounties and urban-rural divide.Based on the analysis of overall access to adequatesanitation in the counties, Wajir, Turkana, Mandera,Samburu, Tana River, Marsabit, West Pokot, Garissaand Kwale are the counties with very low access toadequate sanitation. Access to improved sanitationin each of these counties in 2009 fell below 35 percent. This is indicative of extremely poor accessrelative to the national average access to improvedsanitation of 65 per cent in 2009. Only 21 out ofthe 47 counties score above the national averageaccess to improved sanitation. Overall, householdconnection rate to the main sewer is highest in thefollowing five counties: Nairobi (47.7%), Mombasa(13.9%), Laikipia (10.1%), Uasin Gishu (8.1%) andNakuru (8.0%). Their performance in connectionrate to the main sewer was above the national averageof 7.7 per cent (Government of Kenya, 2010b).13.3.8 Access to sanitation in urbanareas by countyAt almost 80 per cent, the average access toimproved sanitation in Kenya’s urban areas was in2009 better than the average national access of 65per cent, and far better than the rural average (56%).This means a much lower proportion of urbanhouseholds use poor faecal disposal methods suchas buckets and bushes. The use of non-improvedsanitation methods in urban areas was particularlyhigh (above 50%) in Wajir, Turkana, Mandera andElgeyo Marakwet counties. Again, the NorthernKenya region is most affected by this poor rating,and Nyanza region follows closely. In this urbanhousehold category, much fewer counties, only 14out of 47 had access to improved sanitation of abovethe urban household average of 80 per cent. Theconcentration of urban households in a few urbanareas especially Nairobi and Mombasa–indicativeof urban primacy in the country–explains, in mostpart, this skewed outcome. According to the same2009 Census data, the top four (4) counties in termsof their urban household connection rate to themain sewer were Nairobi at 47.7 per cent, Laikipiaat 34.9 per cent, Uasin Gishu at 16.7 per cent andNyeri at 16.6 per cent. The proportion of urbanhouseholds connected to the main sewer nationallyby 2009 was only 19.5 per cent; Nairobi andLaikipia are, therefore, the only counties that so farhave a connection rate to the main sewer for urbanhouseholds that is above the national urban average.13.3.9 Access to sanitation in ruralareas by countyThe average access rate to adequate sanitation inrural areas in 2009 was at 56 per cent. Among ruralhouseholds, counties that had the lowest access toimproved sanitation (below 30%) were Turkana,Wajir, Mandera, Samburu, Marsabit, Tana River,Isiolo, Garissa, West Pokot and Kwale. It can beseen that most of these are located in the deprivedNorthern Kenya region.Vihiga, Kakamega, Kirinyaga and Meru were ratedas the top four counties in terms of rural householdaccess to improved sanitation, each scoring above76 per cent. The top four (4) counties in terms oftheir rural household connection rate to the mainsewer were Embu (0.54%), Taita Taveta (0.49%),Nyeri (0.43%) and Kiambu (0.42%). At below 1 percent of the rural households, this connection rate isstill extremely low by any standards, and this is alsoreflected in the overall proportion where only 0.18per cent of Kenyan rural households are connectedto the main sewer.The analyses above show that Kenya is still far fromattaining sub-national equity in access to improvedsanitation. Rural areas are especially hard-hit,with high prevalence of poor waste management130 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gsmethods. Connection to the main sewer is dismalat less than 10 per cent nationally, about 20 percent for urban households and less than 1 per centfor rural households. Connection rate to the mainsewer is only concentrated in key urban centres suchas Nairobi, Mombasa, Nakuru and Eldoret. Thiscalls for key policy action to ensure equity in accessto improved sanitation nationally and affordableoptions for improved sanitation in rural areas.13.4 Roads Sub-sector13.4.1 Performance in the roads subsectorThe roads sub-sector recorded good performancein the period 2009/10 – 2011/12. This was markedby successful achievement of intended outputsfrom the various programmes in the sub-sector.Most of the targets were surpassed mainly due tocompletion of projects such as construction of newroads, bridges, rehabilitation of roads and periodicmaintenance. Table 13.6 provides a summary of theperformance in the roads sub-sector.13.4.2 Budget, financial expenditureand requirementsIn 2011/12, the Kenya Roads Board Fund collectedKsh 23.7 billion from the Road Maintenance LevyFund (RMLF), Ksh 350 million from transit tolls,and Ksh 80 million from agricultural cess and othersources.As shown in Table 13.7, there was an increase inthe figures of approved estimates for recurrentexpenditure from Ksh 21 billion in the 2009/10to Ksh 27 billion in 2011/12. Similarly, the actualrecurrent expenditure increased from Ksh 20billion to Ksh 27 billion during the period underreview. Resources for development have been onan increasing trend from Ksh 58 billion in 2009/10to Ksh 77 billion in 2011/12 and Ksh 36 billion in2009/10 to Ksh 59 billion for approved estimatesand actual expenditure, respectively.13.4.3 Sub-national analysis of the roadssub-sectorAnalysis of the roads sub-sector can be undertakenby monitoring the road density. By definition,road density in a county is the ratio of the lengthTable 13.6: Performance in the roads sub-sector 2009/10 – 2011/12Sub-programmeIntendedoutputOutputachievedRemarksConstruction of:Roads 312 386 The target was surpassed due to completion of some of theon-going projectsBridges 8 12 The target was surpassed due to completion of some of theon-going projectsRehabilitation ofroads373 450 The target was surpassed due to completion of some of theon-going projectsPeriodicmaintenance800 821 The target was surpassed due to completion of some of theon-going projectsRoutinemaintenance66,855 71,690 The target was surpassed due to completion of some of theon-going projectsRoads 2000 465 116 Under-achievement due to lack of fundskenya economic report 2013 131

S E C T o r a l P e r F o r m a n c eSub-programmeDesign of roadsand bridgesRehabilitation andmaintenance ofroads in nationalparks and gamereservesCapacity buildingfor roads andbuildingsIntendedoutputOutputachievedRemarks14 14 Target met600 575 Target not met due to procurement issues400 426 The target was surpassed due to more enrolment of studentsSource: Government of Kenya (2012)of the county’s total road network to the county’sland area. Road density gives an indication ofaccessibility within the county, which is the easewith which goods and services and can be reached.Increased accessibility has significant implicationsin enhancing development and spurring economicand social development. Therefore, for thepurpose of interpretation, it can be assumedthat a county with a high road density would behighly competitive because its goods, servicesand economic activities can be easily reachedwith reduced cost of production and better spatialinteraction. Figure 13.3 presents an analysis of theroad network density for all 47 counties. The leadingcounties in road density are Mombasa, Nairobiand Kiambu, while the bottom three counties areMarsabit, Garissa and Tana River. It can be arguedthat the leading counties have attributes of beinghighly urbanized and have developed growthcentres marked by high productivity, while thebottom three counties are classified as marginalizedregions. It is, therefore, imperative that strategicinterventions be put in place to improve the roaddensity in poorly-performing counties in order tospur competitiveness and bolster balanced nationaldevelopment.It is also important to assess the quality andcondition of existing roads within the countiesbecause road conditions have serious implicationson counties’ competitiveness. It can be argued thatwhile a county may have sufficient road density anda large network of roads, it will not necessarily becompetitive if the road conditions are bad. Figure13.4 presents the road conditions in the 47 counties;the conditions presented are based on roads in goodand fair condition as a percentage of the total roadnetwork in a particular county. The analysis revealsthat Isiolo, Nyamira and Elgeyo-Marakwet performTable 13.7: Analysis of roads sub-sector expenditure (Ksh millions)Expenditure Approved Estimates Actual Expenditure2009/10 2010/11 2011/12 2009/10 2010/11 2011/12Recurrent 21,852 23,691 27,201 20,969 23,606 27,191Development 58,491 66,528 77,111 36,577 47,795 59,682Total 80,343 90,219 104,312 57,546 71,401 86,873Source: Government of Kenya (2012)132 kenya economic report 2013

I n f r a s t r u c t u r e a n d E c om nao nm ui fc aS ce tr uv ri ci ne gsFigure 13.3: Road network density by county500Road desnsity (Km/100Km 2 )450400350300250200150100500MombasaNairobiKiambuKirinyagaBusiaVihigaKisumuMurang’aNakuruKakamegaUasin GishuNyamiraNyeriEmbuNyandaruaMigoriHoma BayMachakosMakueniBometKisiiNandiMeruSiayaBungomaTrans NzoiaElgeyo MarakwetKerichoKwaleLaikipiaCountyKituiBaringoKajiadoNarokTaita TavetaWest PokotLamuManderaSamburuIsioloWajirTurkanaTana RiverGarissaMarsabitSource: Authors’ construct from the Kenya Roads Board databest in terms of road conditions, while TharakaNithi, Machakos and Meru have the poorestconditions. It should, however, be noted that theanalysis is influenced by the total road networkwithin the county, whereby a county with fewerroad networks would appear to perform better.13.5 ConclusionKenya’s water, sanitation and irrigation sub-sectorhas realized major policy changes and restructuringthat are geared towards ensuring proper regulationsand adequate service delivery. Inadequate data andnon-uniform standards, however, still pose keychallenges to ensuring harmony and comparabilityof service levels at local levels.Overall, there is a wide rural-urban divide in accessto water and sanitation, with urban areas scoringhigher access levels. This is further testimony to thefact that higher population density tends to favoururban areas in the provision of infrastructure andeconomic services. Irrigation coverage is still fartoo negligible, and the dearth of data appears as akey hindrance to disaggregated analyses. There isneed to upgrade and expand infrastructure in watersupply to reduce non-revenue water. This will alsoimprove access rates and equity.The roads sub-sector has continued to showimprovement, with increased expenditure andabsorption of development funds. However, a lookat the sub-national indicators of road infrastructuredevelopment across counties reveals disparities. Toaddress these disparities, there is need for concertedefforts by the national and county governmentsto increase and attract investment for roadinfrastructure development.kenya economic report 2013 133

S E C T o r a l P e r F o r m a n c eFigure 13.4: Road conditions by county80Roads in good / fair condition (% of total road network)706050403020100IsioloNyamiraElgeyo MarakwetSamburuVihigaTurkanaBusiaKerichoWest PokotMigoriBaringoKakamegaGarissaNandiMakueniUasin GishuSiayaTrans NzoiaTaita TaitaKisiiBungomaLaikipiaMurang’aKirinyagaKiambuAverage per CountyHoma BayTana RiverLamuNarokNyeriKituiBometKwaleKajiadoKisumuMarsabitNyandaruaWajirEmbuMombasaNakuruManderaMeruMachakosTrans NzoiaNairobiCountySource: Authors’ construct from the Kenya Roads Board data134 kenya economic report 2013

m a n u f a c t u r i n g14ChapterEnvironment and NaturalResources14.1 Water Sub-Sector14.1.1 IntroductionWater resources underpin the country’s maineconomic sectors: agriculture, livestock, tourism,manufacturing and energy. The social, economicand environmental aspects of water signifyits importance in the country’s sustainabledevelopment, attainment of Vision 2030 targets andrealization of human rights. Prudent managementof water is essential in minimizing resource-useconflicts within the country and with countriessharing water resources. In 1992, Kenya wascategorized as a water scarce country with per capitarenewable water resources of 647 m 3 (Ministry ofWater and Irrigation and JICA, 1992) comprising20,637 m 3 total renewable resource surface waterand 619 m 3 ground water. About 50 per cent ofthe country’s water resources are trans-boundary.These include Lake Victoria, Lake Turkana, LakeJipe, Mara River, Ewaso Ng’iro South River,and Merti and Kilimanjaro aquifers. There is noformal agreement with any riparian state on themanagement of these resources, with the exceptionof draft cooperative agreements for Lake Turkana-Omo, Mara River Basin, Sio-Malaba-Malakisi anda draft Memorandum of Understanding - MoU forLake Jipe-Challa. The process of securing an MoUfor the sustainable management and developmentof Lake Turkana, River Omo and the Daua Basinwith Ethiopia has been initiated (Government ofKenya, 2012a). Joint management frameworkswill have to be harmonized with national policiestaking into consideration international principlesgoverning trans-boundary waters. Kenya needs tostrengthen her negotiation capacity in regional andinternational water initiatives.Water quantity, quality, storage and demand arethe main indicators used to assess water resources.The country’s surface water is distributed in fivedrainage basins divided into six water resourcemanagement regions, namely: Lake Victoria North,Lake Victoria South, Rift Valley, Athi, Tana andEwaso Ngi’ro North. The water resource is skewedand unevenly distributed, with Tana River, LakeVictoria North and South accounting for an 86 percent of the total water resource. Accurate figures aredifficult to obtain, since only 65 per cent of streamflows are monitored (Water Resources ManagementAuthority, 2011).kenya economic report 2013 135

S E C T o r a l P e r F o r m a n c eFigure 14.1: Distribution of water resources, 1992Quantity (billion cubic meter/Yr)32.521.510.5Lake VictoriaNorthTotal 2.29Surface 2.19Ground 0.1Lake VictoriaSouth2.292.190.10.290.080.21Athi0.360.210.15Tana2.732.480.25Ewaso Ng’iroNorth0.490.250.24The governance framework in the water sectoris based on the reforms initiated a decade agothrough the National Water Policy Sessional PaperNo. 1 of 1999, which were operationalized by theenactment of the Water Act in 2002. The reformsaimed at improving service delivery, communityparticipation and increased investments in thesector. The reforms resulted in the separationof water service delivery and water resourcesmanagement functions under management of twosemi-autonomous agencies: the Water ResourcesManagement Authority (WRMA) and theWater Services Regulatory Board (WASREB),respectively. WRMA is responsible for planning,management, protection and conservation of waterresources; allocation, apportioning and assessmentof resources; issuance of water rights; enforcementof permit conditions; and control of water use. TheCatchment Area Advisory Committees (CAACs)advise WRMA on water resources at catchmentlevel, while the Water Resource Users Associations(WRUAs) have a role in identifying and registeringwater users, collaborating with WRMA in waterallocation and catchment management, andassisting in monitoring and conflict resolution.The reforms adopted an Integrated Water ResourcesManagement approach and intensified activities onforestry, soil conservation, improved land use andwater catchment management.The Water Services Trust Fund (WSTF) providesa mechanism for supporting water and sanitationservices to marginalized groups. Arbitration ofdisputes and conflicts are addressed by the WaterAppeals Board (WAB). The institutional frameworkincludes the National Water Conservation andPipeline Corporation (NWCPC), the Kenya WaterInstitute (KEWI) and the National IrrigationBoard (NIB) as specialized agencies responsiblefor construction of dams and drilling of boreholes,training and research and irrigation development,respectively. Table 14.1 shows the roles andresponsibilities of the various institutions.Table 14.1: Roles and responsibilities of institutionsin the water sectorInstitutionMinistry ofWater andIrrigation(MWI)Water ServicesRegulatoryBoard(WASREB)Water ServicesBoards(WSBs)Roles and responsibilities• Development of legislation, policyand strategy formulation, sectorcoordination and guidance, andmonitoring and evaluation• Overall sector investments planningand resource mobilization• Regulation and monitoring ofservice provision (Water ServicesBoards and Providers)• Issuing of licences to Water ServicesBoards• Setting standards for provision ofwater services• Developing guidelines (water tariffs,etc)• Developing mechanisms forhandling complaints• Efficient and economical provisionof water services• Developing water and sewerfacilities, investment planning andimplementation• Rehabilitation and replacement ofinfrastructure• Applying regulations on waterservices and tariffs• Procuring and leasing water andsewerage facilities• Contracting Water Service Providers(WSPs)136 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grInstitutionWater ServiceProviders(WSPs)Water ServicesTrust Fund(WSTF)Water AppealsBoard(WAB)NationalWater Conservationand PipelineCorporation(NWCPC)Water ResourcesManagementAuthority(WRMA)Kenya WaterInstitute(KEWI)CatchmentAreaAdvisoryCommittees(CAACs)Water ResourceUsersAssociations(WRUAs)Roles and responsibilities• Provision of water and sanitationservices, ensuring good customerrelations and sensitization, adequatemaintenance of assets and reachingthe performance level set byregulation• Financing provision of water andsanitation to disadvantaged groups(pro-poor) as water poverty fund• Arbitration of water-related disputesand conflicts between institutionsand organizations• Construction of dams and drilling ofboreholes• Protection and conservation ofwater resources• Planning , control and monitoringof water resource allocation• Water rights and enforcement ofpermits• Coordination of the IntegratedWater Resource Managementapproach• Training and research• Provide advice to WRMA on waterresources at catchment level• Identification and registration ofwater users• Collaboration in water allocationand catchment management• Support water monitoring and datagathering• Conflict resolutionWater storage is critical in water resourcemanagement. Vision 2030 sets the per capita nationalwater storage capacity target of 8M 3 by 2012. Only5.3M 3 was actually realized, a 34 per cent short fall.During the 2011/12 period, 24.22 million cubicmeters were realized as a result of rehabilitationof Sasumua Dam and completion of Maruba andKiserian dams (Ministry of Forestry, 2012). At thesame time, 198 small dams contributed 4.55 millioncubic meters. Low funding, rapid population growthand slow uptake of rainwater harvesting strategieshampered performance. Disaster management is animportant area in water security. During the period2011/12, a total of 5km dykes were constructed onrivers Nyando and Daua, while a 7.1km drainagechannel was trenched on River Nyando.In 2009, the proportion of rural households withaccess to improved water was 48 per cent, while inurban areas it was 75 per cent. These statistics arevery worrisome since they reflect slow progresstowards the MDG goal of halving, based on the1990 base year, the proportion of the populationwithout access to safe drinking water by 2015. It isimportant to note that the global target was realizedin 2010.The sector has witnessed increased budgetaryallocations in recent years, although huge gapsremain a major challenge. For example, actualexpenditure increased from Ksh 21.748 billion toKsh 30.343 billion in three years between 2009/10and 2010/11, about 40 per cent increase. The trendin both recurrent and development expenditure isshown in Figure 14.2.Figure 14.2: Actual expenditure in the water sector,2009-2012350003000025000200001500010000500002009/10 2010/11YearRecurrent DevelopmentTotal2011/12kenya economic report 2013 137

S E C T o r a l P e r F o r m a n c eThe rise was, however, far below the projectedKsh 86 billion. This frustrated efforts to adoptmeasures on operational efficiency, accountabilityand sustainability, which are essential in improvedsector performance. Although the developmentbudget increased by more than threefold, there arebig differences in allocation to various sub-sectors.In 2010/11, 77 per cent of development funds wereallocated to water supply and sanitation and 20per cent to irrigation, drainage and water storage.Allocation to water resources management was only2 per cent.The responsibility to plan, develop and expandthe water infrastructure (assets) is entrusted tothe Water Services Boards (WSBs). To ensurestakeholder participation, Water Service Providers(WSPs) were created, covering specific urbanor rural areas. The WSPs are responsible for theoperation and maintenance of water assets as wellas provision of water supply and sanitation servicesand are regulated by Service Provision Agreements.Although a water infrastructure index is notavailable, the current state of infrastructure does notreflect the corresponding rise in investments. Thenetwork is generally characterized by low value formoney and poor impact of investments.14.1.2. ChallengesKenya’s surface water is generally described asboth brown and turbid due to contamination frompoint and non-point pollution. During the rainyseason, surface water contains a high concentrationof dissolved and suspended matters, suggesting alink between water pollution and unsustainableland management practices at the water towers.This pollution could be due to municipal sewage,industrial waste, agro-chemicals, agriculturalactivities and sediment load from soil erosion(Government of Kenya, 2012b). The problem ofwater quality is exacerbated by excess abstractionof both surface and ground water. Poor waterquality is a health concern, reduces industrialcapacity through high cost of removing pollutants,destroys ecosystems and affects biodiversity. Inthe period 2011/12, a total of 4,808 km 2 of watercatchments were mapped, targeting the MauComplex, Aberdares, Cherengany and Mt. Kenyawith 3,360,000 and 180,000 seedlings grown in theMau Complex and Nyando catchments, respectively(Ministry of Forestry, 2012).The Non-Revenue Water (NRW) is a big challengein the sector. NRW is water that does not generateany revenue and is mainly caused by water lossesand unbilled authorized use. Water losses can alsooccur where consumption is unauthorized (illegalconnections) or metering devices are inaccurate.Leakages from supply lines, including overflowsat the storage facilities, distribution mains, andstorage tanks as well as at service connections upto the point of customer metering are other causesof NRW. The performance of most institutionsin the sector is poor. The performance of theWater Services Boards is mixed; while the sectorhas benefited from increased investments, thegovernance of these boards is weak, and the benefitsof asset separation have not been realized. TheNWCPC has also exhibited poor governance andaccountability of assets, investments, financial andoperational performance.Although stakeholder participation was a keyprinciple of the reforms, the decision makingprocess is largely centralized. The institutions meantto foster stakeholder participation, particularly theWater Users Associations (WRUAs) and the WaterService Providers, have either not been establishedor are weak. As a result, the water apportionmentand allocation practices are dominated by ministryofficials. For example, by 2010, only 28 per centof potential WRUAs had been established acrossall the catchments, with Rift Valley recording thehighest level at 71 per cent while Tana River hadonly 14 per cent (WRMA, 2011). Low participationof stakeholders contributes to weak enforcementof rules and regulations. Efforts to strengthenparticipation of WRUAs in the Lake Naivasha Basin,for example, have met great resistance from someflower growers. The lake is, therefore, threatened138 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grby over-abstraction to support the horticulture andhotel industry.Degradation of catchment areas, including thecountry’s water towers, reduces the quantity andquality of the discharge to water bodies. Catchmentdegradation is due to population growth anddeforestation, resulting from destruction of naturalvegetation through unsuitable land use practices,poorly environmentally-assessed developmentssuch as infrastructure, forest excision for settlement,wood fuel, illegal logging and human encroachment.14.2 Forestry14.2.1 BackgroundForest ecosystems offer complex dynamic economicnatural resources and are capable of providing awide range of economic, social and environmentalbenefits. They provide various ecosystemservices such as watershed protection, carbonsequestration, habitat protection and aestheticvalue. Environmental services include regulation ofwater flow, soil erosion control, nutrients recycling,and capacity to modify the environment for survivalof other organisms. Forests also act as safe havensfor wildlife during dry periods. They offer differenthabitat regimes for migratory species. Most Kenyanforests provide unique sceneries that are ideal forrecreation, as well as unique settings for medicalresearch and education in environmental issues.They also provide products and services thatcontribute directly to the well-being of people,and are vital to our economies, environment anddaily lives. While forests and woodlands are nowrecognized as essential for human life, their benefitsand services are valued differently by differentpeople and groups. Moreover, the numerous rolesthat forests are expected to play in local, county,national and global development continue to changeover time. The shifting and sometimes conflictingexpectations create difficult policy challengesrelated to both the forestry sector and nationaldevelopment.Despite the immense contribution of forests,their existence is threatened, as evidenced byextensive reduction in forest cover in various forestecosystems in the country over time. However, anyunsustainable management practices of forests willaffect forest structure, catchment functions andcould contribute to the dying of rivers that originatefrom them. Changes in land use from forest to otheruses may result to imbalances in the carbon cycle,resulting in the accumulation of excess carbondioxide in the atmosphere. Forests and trees arerenewable resources which, if managed sustainably,can meet the demand for raw materials for woodbasedindustries, fuel wood and a wide range of nonwoodforest products. However, forest managementhas previously emphasized utilization, with littleregard to sustainability, particularly with regard toindigenous forests.14.2.2 Review of the performance ofthe forestry sub-sectorForest plantation stocking increased from 121.7thousand hectares in 2011 to 127.1 thousandhectares in 2012, mainly due to improved forestguarding and enforcement. A total of 7,400 hectareswere planted with trees in 2012, compared to 8,000hectares in 2011. The area clear felled/loggeddeclined to 2,000 hectares in 2012 compared to3,900 hectares in 2011 (Table 14.2).In Kenya, most forests are either under publicownership (managed by the Kenya Forest Service –KFS and Kenya Wildlife Service–KWS) or owned bylocal communities (managed in trust lands by LocalAuthorities) or private forests. While public andcommunity forestlands have declined in area overthe years, mainly due to excision, private forestryhas increased due to increased private sector interestin commercial planting and expansion of farmforestry (Table 14.3). While the extent and qualityof forest resources have deteriorated, demand forforest products continues to be on the rise, fuelledby rapid population growth, among other factors.One beneficial side effect of the reduced supply ofkenya economic report 2013 139

S E C T o r a l P e r F o r m a n c eTable 14.2: Government forest plantation stocking, 2007-2012Area (‘000 Ha)2007 2008 2009 2010 2011 2012*Previous plantation area^ 105.4 107.2 108.9 112.7 118.8 121.7Area planted 5.5 5.7 3.5 9.6 8.0 7.4Total 110.9 112.9 112.4 122.3 126.8 129.1Area clear felled 2.0 3.0 1.8 2.8 3.9 2.0Planting failure/damages 1.7 1.0 3.0 0.7 1.2 0.0Total area 107.2 108.9 112.7 118.8 121.7 127.1Source: FAO (2010), Kenya National Bureau of Statistics (2013), Economic Survey*Provision^ opening stock at the beginning of the yearTable 14.3: Categories of forest ownership in KenyaForested area (1,000Ha)Categories of ownership1990 2000 2005 2010Public ownership 1,490 1,404 1,364 1,364Private2,218 2,178 2,158 2,103ownership..Individual-owned 1 2 5 10..Private business entities and institution-owned 67 76 78 80…Local community-owned (includes trust 2,150 2,100 2,075 2,013land forests managed by Local Authorities)Total 3,708 3,582 3,522 3,467Source: FAO (2010), Country Report for Kenyaforest products has been the stimulation of farmforestry (Table 14.3).The country has in the recent past witnessedrenewed interest backed by strong political will toaddress challenges facing the forestry sector. KenyaVision 2030, the Forest Policy 2007, the Forest Act2005, the coming into force of the National LandCommission and the drafting of the National LandPolicy as well as the Constitution of Kenya 2010all give prominence to the forestry sector. Despitethese legal frameworks and strong political will,increase in forest cover has not been substantialdue to a multiplicity of factors. The upsurge inpopulation, coupled with poor governance, hasbeen identified as the major drivers of deforestationand degradation of forest resources in Kenya.Population increase results in increased pressure onland for settlement and farming. Poor governance,on the other hand, is attributed to corruption, policyfailures, poor management regimes, low institutionalcapacity, inadequate community empowermentand devolution of power, poor law enforcementmechanisms, among others. While the data may notbe available to reflect recent forest cover changes,Table 14.4 shows the trend in changes in forest coverover the period 1990-2010.Establishment of farm and private forests is one of thepriority areas with the potential to move Kenya fromlow forest cover to the internationally recommendedstandard of 10 per cent. Unfortunately, the countrystill lacks a clear systematic inventory of privateand farm forests. With demand for timber productsbeing on the rise, especially as a result of devolution,forest plantations will be the source of timberproduction for commercial purposes.140 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grTable 14.4: Trend in forest cover, 1990-2010Category of ForestsArea (‘000Ha)1990 2000 2005 2010Indigenous closed canopy 1,240 1,190 1,165 1,140Indigenous mangroves 80 80 80 80Open woodlands 2,150 2,100 2,075 2,050Public plantation forests 170 134 119 107Private plantation forests 68 78 83 90Farms with trees 9,420 10,020 10,320 10,385Total 13,128 13,602 13,842 13,852Source: FAO (2010), Country Report for KenyaFigure 14.3: Financial allocations for the forestrysector (collections) 2002/03-2009/10Financial Allocation (Million US$)403530252015105013.5 14.20.72002/319.916.52003/43.42004/5Recurrent Allocation (Million US$)Total Allocation (Million US$)Source: Constructed from FAO(2010)13.519.4 19.218.415.440.42005/610.62006/729Financial Year21.2122007/833.22008/92009/10Development Allocation (Million US$)2413.337.3241438Due to the prominence given to environmentalconservation by various policy frameworks inKenya, including the Constitution, there shouldbe substantial and increased funding to supportthe forestry sub-sector. Indeed, the allocation hasdoubled since 2002/03 (Figure 14.3). Revenuecollection has more than doubled between 2009and 2010. Table 14.5 shows the revenue collectionfor the sector, the most significant observation beingthat plantation timber (round wood) is the mostimportant source of revenue, and that projectedrevenue (2012) would rise from US$ 12.11 millionto US$ 28.51 million if the logging ban is removed.While the allocation for the sector has increasedover the years, Figure 14.4 shows that 55 per cent ofTable 14.5: Actual and projected revenue collection, 2009-2012 (US$ millions)Source of revenueSale of plantation timber(round wood)Actual collection(US$ millions)Revenue projections withban in force (US$ millionsRevenue projections withban lifted (US$ millions)2009 2010 2011 2012 2011 20123.50 9.20 10.10 11.10 26.20 27.50Power transmission poles 0.20 0.22 0.75 0.82 0.75 0.82Fees collected from0.07 0.06 0.12 0.16 0.12 0.16PELISAnnual licence fees 0.13 0.03 0.03 0.03 0.03 0.03Total 3.90 9.51 11.0 12.11 27.10 28.51Source: FAO (2010)kenya economic report 2013 141

S E C T o r a l P e r F o r m a n c ethe funding was allocated to recurrent expenditurein 2011/12. The general expectation would be thatmore allocation would have been on conservationand management, as well as forest extensionprogrammes, as these would directly contribute toincrease in forest cover.Figure 14.4: Projected budget requirementsfor KFS by programme, 2011/12 (% of totalexpenditure)55%10%Recurrent expenses13%9%13%National conservation and managementIndustrial forest plantationsForest extension services programmeOthers (IT development, administration)Source: Authors’ construct from Kenya Forest Service data (2009)Institutional cultural change from the modusoperandi to the business culture expected in the 2005and 2007 forest legislation may not be achieved withease. Besides, the absence of checks and balances andlack of participation by all stakeholders could derailthe reform process. The country still lacks clearcooperation mechanisms between agencies sharingresponsibilities. There are complexities involvedin participatory forest management. Already,communities are expecting unconstrained access toand use of forest resources, an attitude which mustbe tempered through learning, mechanisms to sharecosts and benefits (World Bank, 2007).14.2.3 Legal framework for the forestrysub-sectorKenya is considered a Low Forest Cover countrywith a total land area classified as forest of less than6 per cent, far much less than the internationallyaccepted minimum requirement of 10 per cent.However, the figure is contested due to thedefinition of forest to include private forest. Whilethe development policies of the Government ofKenya are driven by the objective of achievingVision 2030, the Constitution of Kenya (2010)places the protection of the environment andnatural resources under the national governmentwith a view to establishing a durable and sustainablesystem of development. Specifically, Article 69 (1)(b) obligates the state to maintain a tree cover of notless than 10 per cent. However, the implementationof specific national government policies on naturalresources and environmental conservation,including soil and water conservation and forestry isvested in the county governments.Kenya is a signatory to several internationalcommitments, including the Convention onBiological Diversity (CBD), the United NationsFramework Convention on Climatic Change(UNFCCC), and the United Nations FrameworkConvention on Combating Desertification(UNFCCD). Kenya has also taken part in intergovernmentalforest-related processes, includingthe Intergovernmental Forum on Forests (IFF 4) in2000, where governments reaffirmed their supportfor the Proposals for Action on forests. Most of thesecommitments directly or indirectly involve forests,and thus their inhabitants. They provide a potentialframework for national and local coordination andthe building of synergies among all stakeholders,including indigenous and local communities andother actors. The Forest Act 2005 and the ForestPolicy 2007 emphasize the need to institutionalizethe forestry sector. Key provisions in these142 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grlegislations include the involvement of communitiesthrough community forest associations (CFAs).Kenya’s economic blueprint, Kenya Vision 2030,notes that a sound environmental management thatprevents degradation of natural resources such aswater and forests is the basis for economic growth.In particular, the economic pillar aims to maintain asustained economic growth of 10 per cent per annumover the next 25 years. Forestry is important in thisaspect not only in terms of consumable products butalso in terms of the impact its exploitation has on theenvironment and the productivity of other sectors,especially water and agriculture. The sub-sectoris the backbone for other functional roles, whichinclude protection of watersheds and biodiversityconservation. The sub-sector is also important incontributing to the direct and indirect benefits. Itis estimated that the forestry sub-sector contributesabout US$ 88 million to Kenya’s Gross DomesticProduct (GDP) and stimulates capital formationworth US$ 3 million (FAO, 2004).14.2.4 Forestry sector linkages withother sectors of the economyKenya’s forests comprise a range of differentforest types characterized by marked regionaldifferences, with different forest values andopportunities for exploitation. These conditionsare likely to change over time as a result of factorsincluding new information on forest ecologyand community attitudes; new managementstrategies and techniques under various countygovernments, such as those that incorporatecommunity management principles; and newcommercial and non-commercial opportunities forforest use. These pressures for change affect bothforest conservation and local livelihood strategies.The Forest Policy of 2007 is very clear in terms ofthe involvement of stakeholders and communitiesin forest management. While this alone cannotadequately address these needs, the related nationalpolicies (water, agriculture, land and environment)should provide a framework within which pressuresfor change can be identified and accommodated,so that forests are conserved in the long term andlocal communities derive optimal benefits fromforests and forest resources. Managing Kenya’sforests sustainably is the major challenge, especiallywith the devolved system of governance and,therefore, requires policies that can be adapted toaccommodate varying county conditions, and forestproduct needs over time.Forestry as a sub-sector of the Kenyan economyis important in contributing to direct and indirectbenefits. However, in the past, the forestry subsectorcontribution to GDP has been reflected at adismal constant value over the years (approximately1.3% and 13% of monetary and non-monetaryeconomy, respectively). Notwithstanding thisreflection, it is estimated that the forestry sub-sectorand other associated enterprises and industriessupport approximately 10,000 households throughformal employment, and generate direct financialrevenue to the Kenya Forest Service of about US$3million annually (FAO, 2010). It is estimated thatabout 3 million forest-adjacent people derive cashincome and meet their subsistence needs throughthe use of this resource. However, the associatedvalue of forests is not reflected in national statisticalabstracts. Therefore, there is need for forestresource valuation and mainstreaming of forestryin national accounting systems, and addressingthe issue of inadequate information on the statusof forest resources (quality, quantity, growth andyield trends) for planning forest land use changes(excisions, expansion of cultivated lands).Pressures and demands imposed on forestecosystems and resources are often caused orinfluenced by factors outside the forestry sector.Forests serve as water catchment areas, are sources ofwood fuel, habitats for wildlife, may contain mineraldeposits and impinge on agricultural activities. Forthis reason, the policies in these sectors (Water,Energy, Mining, Lands, Wildlife and Agriculture)should have a clear linkage to the Forest Policy.Further, forests are also found on local authority(now county) lands and are under pressure forkenya economic report 2013 143

S E C T o r a l P e r F o r m a n c esettlement. There is need to create synergiesbetween the policies that govern the counties as wellas land use. Appropriate mechanisms for achievingharmonization of the various sectoral policies thattouch on forestry should urgently be put in place.14.3 Mineral Sub-Sector14.3.1 IntroductionAccording to the Constitution of Kenya (2010),all natural resources (including those below thesurface) belong to the government. In this context,the government owns the resources in trust for thepeople of Kenya, bringing into focus some typeof a principal-agent relationship. However, thesame Constitution gives a significant number ofresponsibilities to the government with regard to itsduty to the citizenry. As such, the government mustremain accountable to its people regarding all itsfunctions and operations and specifically with regardto management of natural resources for the benefitof the country. In development of mineral resources,this can be done by ensuring that the governments’dealings with explorers (and later developers) are inthe interest of the state while attracting activity in themineral sub-sector. In other words, the elements ofthe Production Sharing Agreements (the preferredmode of engaging investors in Kenya) must in noway compromise economic and constitutional goalswhile remaining attractive to investors.Kenya is endowed with a variety of mineralresources including base metals (gold, silver,copper), dimension stones (granite, marbleand limestone), industrial minerals (fluorspar,titanium and limestone), gemstones (ruby,sapphire, rhodolite) and chemical minerals (sodaash, carbon dioxide, salt and hydrocarbons), andrecently, fossil fuels (coal, oil and gas). Mineralsoccur in a variety of locations in Kenya, and someof these areas have limited alternative sources ofeconomic activity. Kenya is under-explored as faras petroleum and natural gas are concerned. Thereare positive indications of hydrocarbon potential inthe form of oil seeps, gas and oil, but only relativelyfew exploration and development wells have beendrilled.14.3.2 Review of the SectorThe biggest discoveries of oil have been the Ngamia1 and Twiga oil wells, the Lamu gas fields, andmost recently the discovery of rare earth metals inKwale County. Kenya is witnessing an increase inexploration activity following the recent discoveryof oil in Turkana County. Because of the petroleumand natural gas wealth find, more than a dozeninternational oil and gas companies are now inoperation in Kenya, including companies fromthe United Kingdom, China, Japan and the UnitedArab Emirates. The oil, gas and coal sector has thepotential to generate significant direct and indirecteconomic benefits for Kenya and, if managedwisely, can contribute to sustainable development.Mining development will also provide an importantopportunity for economic development away fromKenya’s main urban and commercial centres.Table 14.6: Growth rate of GDP by industry(2008-2012) percentage changesIndustry 2008 2009 2010 2011 2012Forestry and 0.5 0.3 0.2 0.2 0.6loggingMining and 0.9 -0.8 0.7 0.7 0.4quarryingElectricity 6.6 -3.3 3.3 -1.7 4.3supplyWater supply 1.1 0.8 0.3 0.4 0.5Construction 16.3 14.9 2.7 3.5 3.7Total 25.4 11.9 7.2 3.1 9.5Source: Kenya National Bureau of Statistics, Economic Surveys, 2011-2013The contribution to GDP from the environmentand natural resources sector, by industry, is shown inTable 14.6, calculated as percentage changes. Fromthe table, it is apparent that the largest contributioncomes from electricity supply and constructionindustries. However, the total contribution to the144 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grGDP has declined by more than half since 2008,with a slight increase to 9.5 per cent in 2012. Thedecline in contribution from forestry and loggingcan be attributed to government policy to reclaimthe Mau forest and other ecosystems.14.3.3 Mineral exploration: Emergingissues and challenges14.3.3.1 Legal, regulatory andinstitutional reformThe policies, laws and institutions that presentlygovern the mineral sector in Kenya need significantreform if the sector is to grow sustainably andcontribute to economic development and povertyreduction in the counties. The highest priority mustbe given to finalizing the Geology, Mining andMineral Bill (2013), which has remained in draftform for some years. Kenyans need a shared visionof how the development of mining will take place atthe counties, building on experiences gained fromTitanium mining in Kwale. The Bill must definethe role and mandate of the state and its publicmining institutions, and make very clear whatpublic institutions at the county level will exercise;what the regulatory roles are and the relationshipsbetween them; how, if at all, decentralizationmight apply to governance of the mineral sector;specify the environmental obligations of operatorsconsistent with internationally recognized safeguardstandards; define arrangements governing provisionfor community development and benefits sharing,including the roles to be played by differentstakeholders; and address the rights of vulnerablegroups that might be impacted adversely bymineral sector development and measures for theirprotection.14.3.3.2 Government revenuecollectionThe development of a productive and profitablemineral sector can provide a new source ofgovernment tax revenues that could be substantialrelative to non-mineral revenue sources. It will beimportant to ensure that Kenya obtains a fair shareof mineral rents but, in doing so, it must strikethe right balance between inducing investmentat the counties and generating tax revenue. Thiscalls for a fiscal regime for the mineral sector thattakes account of the uncertainty, risks and rewardsinherent in mineral operations and recognizes thatKenya, particularly in this early phase of oil and gassector development, competes for investment withcountries that may offer equal or better investmentopportunities within the region.It is well known that natural resource exploitationof oil and gas requires extensive investment beforeit becomes valuable and beneficial to the society.It requires investment in infrastructure, physicalcapital and knowledge. Developed countries suchas the US were built upon natural resources. Forinstance, they invested heavily in the infrastructureof public knowledge and education in the miningsector, and based on an accommodating legalenvironment. Thus, investing in knowledge isa legitimate component of a forward-lookingeconomy that will be an ultimate objective of thegovernment.14.3.3.3 Politics, dispute managementand environmental issuesOil and natural gas development faces political andenvironmental issues. Political issues stem fromthe overlapping and disputed claims of economicsovereignty. Environmental issues pertain to thepreservation of animal and plant species uniqueto the areas where oil, gas or other minerals havebeen discovered, particularly Turkana and Kwale.The environmental impact of oil exploitation is adominant driver for most technology developmentin the industry today. Although much of thiseffort is focused on waste treatment and disposal,a significant amount of waste prevention will becrucial. Development of technologies to displaceless material during mining will result in reducedenvironmental impact. A long-term vision for thekenya economic report 2013 145

S E C T o r a l P e r F o r m a n c eindustry would find constructive use for all materialremoved in the oil drilling area.Kenya has a maritime boundary dispute withSomalia, in the Indian Ocean waters. There arealso gazetted oil and gas exploration blocks thatare located in the disputed area offshore the LamuBasin, and resolution of the dispute will be requiredto avoid resource-fuelled disputes, which are evenharder to mediate than others. The disputed Ilemitriangle between South-Sudan and Kenya alsolies in the Tertiary Rift Basin stretching over threeexploration blocks in that region. Although it takestime to resolve sovereign boundary disputes, it isimportant that faster solutions are sought to fosterconfidence with international companies. Therehas not been disagreement between exploringcompanies in Kenya, but the Ugandan scenarioshould be a strong lesson for Kenya in formulatinglaws to govern such partnerships.14.3.3.4 Managing expectationsLike most mineral resources, oil explorationand exploitation takes place in the location ofthe resource and, subsequently, transformations(physical and socio-economic) are bound to occurin the area of discovery as it accommodates thisnew activity. With such transformations, especiallyin remote areas where oil and other minerals are,sensitive issues will arise which, if not addressedbeforehand, may cause unnecessary tension and civilstrife in future. Specifically, different stakeholdershave different expectations regarding the economyof the country and especially those in the locationwhere the resource is located. Turkana County hasthe highest poverty level of about 94 per cent, andis the sixth least densely populated county in Kenya.The county is among the five least developed interms of infrastructure and other supporting socioeconomicfacilities. The burning question in theminds of the locals is what the national governmentwill do to ensure citizens (especially those domicilednext to resource sites) have the correct information,capacity and expectations to avoid unwarrantedanxiety and excitement.Although development of the oil resource willtake a few years to commence, there has not beenany systematic attempt to establish opinions andexpectations of the public, who will be largelyaffected by the projects. There exists a lot ofexpectations at different levels of society withrespect to the resource, and there has not been anyidentification of these expectations and ways tomanage them. This has the potential of breedingnegative sentiments in future, if the unidentifiedexpectations of different groups are not met, and arenot managed early enough.Imperatively, the government must take cognisanceof the fact that, like any other non-renewableresource, oil (in general hydrocarbons) could becompared to a capital asset granted to a countryfor a limited period of time, and it must, therefore,be used for the greatest and sustainable benefitof a country. This brings into focus the relevantissue of the government’s general objectives withrespect to the hydrocarbon sector. The statementof such objectives by the government would help indrafting laws, regulations and setting up institutionsgeared towards achieving the stated objectives.Perhaps because evaluations on the discoveries arestill ongoing in Kenya, there are still uncertaintiesregarding the resource extent, and the governmenthas not stated in any conclusive manner its overallobjectives with respect to the resource. Sinceexploration and development of oil resources arelong-term activities, the state should have veryclear objectives of how to handle both stages beforesigning any contracts with investors. In most cases,a government’s objectives regarding explorationand development of oil resources revolve aroundthe issues of sovereignty, economic growth andenvironmental protection.146 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on gr14.3.3.5 Transparency, rents transferand rent seekingTransparency is key to achieving public acceptanceof a contract. It is a necessary condition to allowcivil society and the public to provide an informalmechanism of checks and balances, where formalmechanisms are not adequate. Transparency isthe only way to dispel the constant concerns ofgreed and corruption often associated with mineralcontracts, and it prevents government officials fromagreeing to the terms that the citizenry may deemunacceptable and subject to constant criticism andattack. Public and private sectors have differentinterests, which overlap with social welfare. Politicalstability is fundamental to government, while theprivate sector is concerned with stable propertyrights. Thus, the government has two competingobjectives, that is to maintain stability and topromote investment to achieve economic growth.Asset redistribution is central for stability in thecounties as devolution takes root.Experiences from other countries show that there isa significant disconnect between mining companiesand the local governance structures in the areas inwhich they are located, resulting in distrust betweenthe local communities and mining companies. Thesecrecy within which many mining agreements aredrafted and signed, and the lack of involvementof the local citizens in decision-making and lackof information regarding the resources has beena major source of mistrust and disgruntlementin the mining sector. Thus, transparency andaccountability are important issues for the industryin Kenya. Transparency includes the disclosure ofthe terms of contracts and the payments due to boththe locals and the state.14.3.3.6 Devolution and land issuesThe ongoing decentralization process thatestablishes a bottom-up development planningsystem is a potential avenue to catalyze developmentof the mineral sector in counties. However, it mustovercome the reluctance of the central governmentto devolve responsibilities and budget to the countyadministrations, which stems from concerns overweak administrative capacity and lack of effectiveaccountability at the counties.Large-scale mining has a big appetite for land.The land currently used or will be used formining was traditionally used for agriculture andpastoralism, both being major factors in sustaininglocal livelihoods, especially those of the Turkanapeople. Many of the people who are likely to beaffected do not know their rights, and the amountof compensation they ought to eventually receive,a fact that the multinational companies maytake advantage of. Sometimes, the companiescompromise or collaborate with governmentadministrations to avoid making payments. There isneed to develop a clear mechanism of engagementby the mining companies and the local peoplewith elaborate guidelines on land acquisition andcompensation.14.3.3.7 Resource curse andinstitutional set-upExisting empirical evidence seems to demonstratewithout exception that countries that have managedto circumvent the resource curse demonstratesuperior organizational settings, with soundinstitutions or good leadership able to insulatewindfalls from political interferences. Weakinstitutions may lead to wasteful spending ordistorted allocations. It is widely recognized that thequality of political and economic institutions, suchas the type of property rights arrangements and thequality of state bureaucracy, determines to a greatdeal whether natural resource rents will be managedto the benefit of the economy and society. This isclearly negatively evidenced by the disappointingcase of Nigeria’s Niger Delta. With natural resourcewealth such as oil, there can be so much wealthfloating around the government that it can be easierto engage in unproductive rent-seeking activitiesthan in creating more wealth. This is the situationKenya should avoid at all costs.kenya economic report 2013 147

S E C T o r a l P e r F o r m a n c eLessons from around the world emphasize thatoil and gas sector growth will need to be managedwisely to avoid mismanagement, inequitable sharingof benefits and disregard of the interests of theenvironment and communities. Economic policiesand public financial management will have to beadapted to take into account the potential magnitudeand volatility of mineral revenue flows and decidehow revenues might be allocated. Reforms shouldtake advantage of the county devolution processto catalyze sustainable development out of mineralsector growth in counties. However, this will requiredevolution of responsibilities and budget to thecounty administrations, coupled with improvedadministrative capacity and effective accountability.14.3.3.8 Regional implicationsThe discovery of oil and gas in Kenya hasimplications and presents new opportunitiesto chart a sustainable growth and developmentpath for Kenya. The first implication is that Kenyawill now have renewed energy to push for thedevelopment of the facilities necessary to transportand export oil, and specifically to build a hugedeep-water port on the resort island of Lamu anda pipeline across Northern Kenya to connect to theport. These projects are already underway for SouthSudan to export its oil without having to go throughSudan. These projects will need to be fast-tracked.Kenya will also be hopeful its oil will give it greaterinfluence in regional and international affairs.For Kenya’s neighbour, Ethiopia, the discovery ofoil in Turkana is of particular interest. The EastAfrican Rift Basin, where the oil was found, isdivided between Kenya and Ethiopia. If there is oilon the Kenyan side, then there is a very good chancethere is oil on the Ethiopian side too. We expectexploratory drilling in Ethiopia to gain momentum.If these explorations are successful, Kenya stillstands to benefit as land-locked Ethiopia, and SouthSudan, may need to use Kenyan pipelines and portsto export their oil.14.3.4 Way ForwardThe recent discoveries of oil, gas and rare earthminerals suggest that these will be potentiallyimportant resources for Kenya going forward. Howthey contribute to the imperative of job creationand ensure inclusive and sustainable developmentwill depend on how the country manages the oiland gas value chain. It must be recognized that oiland gas sectors, from examples in other jurisdictionsin Africa, generally do not create jobs or allowfor inclusive development. They will only do so ifaccompanied by a matrix of policies, programmesand projects that engender transparency and fostereconomic diversification. These must be supportedby an effective, capable, well-capacitated state andhuman resource base at all levels of government.Kenya should develop a comprehensive KenyaNatural Resource Charter based on the Constitutionof Kenya (2010) and, leveraging on good practicesglobally, give it the force of law. It should be adoptedby all the 47 county assemblies and endorsed byParliament to guide the operations of the oil and gassector as well as the rest of the extractive industriesin Kenya. This will help in ensuring that benefitsand costs are shared throughout the whole countryin an acceptable manner, and reduce the tensionsand conflicts that have been the bane of such effortsglobally.While giving prominence to oil exploitation, Kenyashould be cautious given that such resources bringrisks in that too many people become locked in lowskillintensive natural-resource-based industries,and thus fail – through no fault of their own – toadvance their own or their children’s education andearning power. The oil sector directly generates veryfew jobs, the bulk of employment is consequentlyfrom the non-oil economy and the non-oil tradablesector. Therefore, good economic policies willmatter to transform rents into sustained growth forKenya and create value in the extractive value chain,hence job creation and durable poverty reductionespecially in the counties where oil will be minedand given that poverty levels in the region are the148 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grhighest. The capacity of policy formulation andexecution in a coordinated way is thus fundamental.The country context and political economy matter agreat deal, but should not be the main driving forcebehind windfall management, to avoid excessiverent-seeking activities, inefficiency and wastefulspending.14.4 Climate ChangeKenya’s contribution to the causes of climate changeis low. As shown in Figure 14.5, per capita carbondioxide emission for Kenya in 2009 was a paltry 0.31metric tonnes compared with 7.1 metric tonnes forMalaysia, 0.45 for Nigeria, 10.12 for South Africaand 5.77 metric tonnes for China (World Bank,2012). The emission level is expected to increasewith high GDP growth rate as aspired in Vision2030. Paradoxically, just like other countries in Sub-Saharan Africa, Kenya bears the brunt of climatechange and variability. The six leading sources ofGHG emissions are agriculture, forestry, energy,waste, industrial processes and transport. Thesesectors are also central in the national economy andin the attainment of Vision 2030. Per capita emissionfor selected countries is shown in Figure 14.5.Figure 14.5: Per capita CO 2 emissions for selectedcountries, 200912.010.08.06.04.02.001.90BrazilChina5.77Egypt2.710.311.64 1.90GhanaIndiaIndonesiaCountryKenya0.317.10MalaysiaMexico3.98Nigeria0.45 0.75PhilipinesSouth Africa10.12Over the past 50 years, temperatures increased by1 0 C, a warming rate of 1.5 higher than the globalaverage (Christensen et al., 2007), while rainfallis highly variable in most parts of the country.Although there has been general warming in thecountry, the coastal zone has showed a generalcooling trend.Table 14.7: Observed temperature changes, 1960-2006Min. (night) temperatureRegion Trend Range0CMax. (day) temperatureTrend Max (day)temperature0 CWestern Increase 0.8-2.9 Increase 0.5-2.1Northern/Increase 0.7-1.8 Increase 0.1-1.3NorthernEasternCentral Increase 0.8-2.0 Increase 0.1-0.7Southern Increase 0.7-1.0 Increase 0.2-0.6EasternCoastal Decrease 0.3-1.0 Increased 0.2-2.0Source: Government of Kenya (2010)Over two-thirds of the country receives less than500 mm of rainfall per year, and 79 per cent hasless than 700 mm per year (ICPAC, 2007). Climateextremes, notably drought and rainfall, are morefrequent and threaten sustainable developmentand livelihoods dependent on climate-sensitiveresources. Generally, climatic extreme events have asubstantially higher risk in ASALs, which make upabout 80 per cent of the country.The vulnerability of Kenya is explained by thedominance of environmental and natural resourcesectors in the national economy, and low adaptivecapacity. For example, agriculture is largely rainfed,and changes in precipitation either in quantityand/or timing have a great impact on production.In some parts of the country, changes in rainfallpatterns are responsible for a shift in plantingkenya economic report 2013 149

S E C T o r a l P e r F o r m a n c eFigure 14.6: Rainfall trends in Garissa4.000y = -0.007 x + 0.291R 2 = 0.0153.000Standardized Rainfall2.0001.0000.000-1.000-2.000195919611963196519671969197119731975197719791981198319851987198919911993199519971999200120032005200720092011YearFigure 14.7: Rainfall trends in Kakamega-5.000-4.000y = -0.008x + 0.364R 2 = 0.016Standardized Rainfall-3.000-2.000-1.000-0.000-1.000-2.000-3.0001958196019621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012Yearseason and reduction of livestock feed, while highertemperatures are responsible for crop and livestockdiseases and pests in areas their prevalence washitherto unknown. The country has experienceda reduction in the famine cycle from 20 years(1964-1984), to 12 years (1984-1996), to 2 years(2004-2006) and to yearly (2007/2008/2009)(Government of Kenya, 2010). At the same time,drought events are more severe. For example, theimpacts of the 2008-2011 drought is estimatedat Ksh 968.6 billion (US$ 12.16 billion) and wasresponsible for an average 2.8 per cent per annumdecline in GDP (Government of Kenya, 2012).Drought has the greatest effect in Kenya and isprevalent in Eastern, North Eastern, parts of RiftValley and Coast regions. Floods seasonally occuralong the flood plains in Budalangi, Nyando,Rachuonyo and Tana River, while landslides occurduring the long rains season running from Marchto May especially in Murang’a County, parts ofKiambu, Nyeri, Kirinyaga, Nyandarua and otherparts of the Mount Kenya region.150 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grFigure 14.8: Trends in temperature changes in Garissa, 1982-2012Actual Temperature ( 0 c)36.035.535.034.534.033.533.032.532.031.5y = 0.003x + 34.41R 2 = 0.009196019621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012YearFigure 14.9: Trends in temperature changes in Kakamega, 1982-201228.528.027.527.026.526.025.525.0y = 0.040x + 26.71R 2 = 0.56619821984198619881990199219941996199820002002200420062008Actual Temperature ( o C)20102012YearClimate variability is most dramatic in the monthsof March, April and May and slowest in June, July,August and September. The Arid and Semi-AridLands (ASALs) are worst affected, having recordedhigher increases than the rest of the country. Theseareas have also experienced more frequent andsevere droughts, which have negatively impactedthe pastoral way of living. ASALs have fragileenvironments, and climate changes exacerbate otherstresses affecting these areas, such as population riseand land demarcation and land use change.The country has variable climatic zones butinadequate weather stations to cover all zones. In2012, only 33 stations were actually functional,showing a poor network distribution. The rainfalltrends show mixed signals, with some locationsindicating trends towards wetter conditions butkenya economic report 2013 151

S E C T o r a l P e r F o r m a n c emost locations are not showing any significantchanges. The annual rainfall shows either neutral orslightly decreasing trends due to a general declinein the long rains season that extends from Marchto May. The short rains season between Octoberand December, on the other hand, shows a positivetrend in some parts of the country. This positivetrend is a result of the season extending into Januaryand February in recent years. This is probablybecause of more frequent El Niño events, coupledwith relatively warmer sea surface temperatures overthe Western Indian Ocean (along the Coast of EastAfrica) and relatively cooler than average sea surfacetemperatures (SSTs) to the east of the Indian Ocean.Rainfall trends for Garissa and Kakamega are shownin Figures 14.6 and 14.7, respectively.Generally, diurnal temperature ranges havedecreased in the inland but increased towards theCoastal region. Trends in temperature changes forGarissa and Kakamega for the period 1982-2012 areshown in Figures 14.8 and 14.9, respectively.14.4.1 Seasonal PerformanceAnalysis of seasonal performance is based onthe Kenya Meteorological Department (KMD)categorization as shown in Table 14.8. In 2011, theMarch-May seasonal rainfall almost ceased in mostparts of the country. Many parts recorded highlydepressed and poorly distributed rainfall. The areasmost affected were North Eastern and the Coastalstrip, where less than 50 per cent of their seasonalLong-Term Means (LTMs) was received. Therainfall was also characterized by late onset in someparts of the country.Table 14.8: Rainfall performance categorizationSeasonal Total AmountsThresholdsBelow 50% of the long-termmean (LTM)Between 50-75% of LTMBetween 75-125% of LTMCategoryHighly depressedDepressedNear NormalSeasonal Total AmountsThresholdsBetween 125-150% of LTMMore than 150% of LTMCategorySource: Kenya Meteorological Department – KMD (2012)EnhancedHighly enhancedNear-normal category (between 75% and 125% oftheir seasonal LTMs) was received in Kitale, Embu,Machakos, Kisii, Lodwar, Nakuru, Voi, Kericho andKakamega. This was, however, poorly distributedwith a prolonged dry spell in April. In terms ofamounts, Kisii recorded the highest rainfall amountof 594.5 mm, representing 87 per cent of theLTM. Kericho, Kakamega, Embu, Kitale, Kisumu,Msabaha, Meru, Thika, Nakuru, Dagoretti Cornerand Mtwapa, respectively, recorded 532.4 mm(79%), 530.6 mm (78%), 510.6 mm (90%), 431.1mm (97%), 347.2 mm (64%), 292.9 mm (55%),276.4 mm (59%), 274.6 mm (63%), 258.2 mm(84%), 257.0 mm (53%) and 250.3 mm (41%).The poor rainfall performance affected growth inimportant sectors of the economy, and constrainedclimate-dependent livelihoods. Variability in rainfallimpacted negatively on agricultural and pastoralactivities, with a reverberating effect on the entireeconomy. Poor rain distribution and prolongeddry spells reduced agricultural production in partsof Kenya such as Trans Nzoia and Uasin Gishu.However, forage and pasture conditions in thepastoral areas of Northern, North Western andNorth Eastern parts improved slightly during thisperiod. Reduction in forage and water is oftenresponsible for conflicts in pastoral areas. Heavyrainfall in some parts compromised transportthrough destruction of road networks, while urbanareas with poor drainage were heavily affectedby flash floods. The resulting costs were oftentransferred to the road users and reflected in the costof living.Although Kenya is generally vulnerable to climatechange and variability, regional disparities existacross the counties. Coincidently, vulnerablecounties are characterized by high poverty levels152 kenya economic report 2013

E n v i r o n m e n t a n d N a t u r a l R e ms oa un ru cf ea s c St eu cr ti on grFigure 14.10: Climate Change Vulnerability Index by county0.600Climate change variability index0.5000.4000.3000.2000.1000.000SiayaHoma BayIsioloBometGarissaNandiKituiKakamegaBaringoWest PokotTurkanaSource: Government of Kenya and UNDP (2013)CountyMakueniKenyaKajiadoUasin GishuElgeyo MarakwetNairobiTharaka NithiManderaKiambuTaita TavetaNyandaruaNyeriand inadequate social-economic capital to supportcommunity response measures. Figure 14.9 showsthe varying levels of Climate Change VulnerabilityIndex (CCVI) for the counties as well as the nationalaverage.The top five most vulnerable counties are West Pokot(0.527), Kisumu (0.527), Turkana (0.516), Migori(0.509) and Siaya (0.509), while the least vulnerableare Lamu (0.159), Kirinyaga (0.248), Nyandarua(0.277) and Murang’a (0.293). Twenty four (24)counties have a Climate Change Vulnerability Indexgreater than the national average, that is 0.432.This suggests that majority of counties will have toconfront the challenge of climate change throughmeasures to reduce vulnerability and strengthenadaptive capacity.kenya economic report 2013 153

PART IIIMEDIUM TERMPROSPECTSFor 2013, 2014 and 2015, the economy is projectedto grow at 5.5%, 6.3% and 7.0%, respectively. Thekey assumptions are that public investment in theroads and energy sectors will increase capital stock,thus lowering the cost of businesses and improvingprofitability; the political climate, including smoothtransition to the devolved system, will be stable andgrowth-oriented; favourable weather conditionswill continue to sustain the recent improvementsin agricultural output; and, finally, that the globaleconomic environment will be stable.

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct es15ChapterMedium Term Prospects15.1 Recent MacroeconomicPerformanceThe first two quarters of 2012 registered relativelyweak performance in economic growth at 3.4 percent and 3.3 per cent consecutively. Despite the slowgrowth in the two quarters, all the sectors postedpositive growth rates, thus raising expectations fora positive growth trajectory in the medium term. Inthe second quarter, fishing, financial intermediation,wholesale and retail, and electricity and quarryingsub-sectors showed improved growth as comparedto their performance in the first quarter. However,some sectors had very low growth rates, below 2.0per cent, and these were agriculture, construction,mining and quarrying, and hotels and restaurants.The inflation level in 2012 showed a lot ofimprovement as it came down from a high of 18.3 percent in January to a low of 3.2 per cent in December2012. The average for the year was 9.6 per cent. Thiswas a good performance compared to 2011, whichregistered an average 12-month inflation of 14.0 percent. The 2011 poor performance was attributedto delayed and lower than expected rainfall, highoil prices, depreciation of the shilling, and theEurozone crisis.15.1.1 Economic projections for 2013-2015For 2013, 2014 and 2015, the economy is projectedto grow at 5.3 per cent, 6.3 per cent and 7.0 per cent,respectively. The key assumptions for the mediumterm economic prospects are: (a) public investmentin the roads and energy sectors, which are expectedto increase capital stock, thus lowering the cost ofbusinesses and improving profitability; (b) a stablepolitical climate, including smooth transition tothe devolved system, which is assumed will bestable and growth-oriented; (c) favourable weatherconditions, which will continue to sustain the recentimprovements in agricultural output; and (d) stableglobal economic environment.Slow uptake of the Public-Private Partnership (PPP)initiative in the implementation of MTP strategiesmay lead to a slower rate of economic expansionthan envisaged in Vision 2030. In addition, weakimplementation of the budget can adverselyaffect growth in the medium term. The economicprojections in Table 15.2 reflect the downside risks.15.1.2 Alternative scenarioAn alternative scenario is presented in Table15.2 under different assumptions, with a moreconservative growth rate for the economy duekenya economic report 2013 155

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c eTable 15.1: Economic projections for 2013-2015Variable 2009 2010 2011 2012 2013 2014 2015GDP growth 2.7 5.8 4.4 4.6 5.3 6.3 7.0Inflation overall 9.0 4.0 14.0 9.6 5.7 5.3 5.2Private consumption growth 5.0 7.2 2.8 7.0 6.5 7.0 8.0Private investments growth 4.0 5.0 12.0 7.0 7.0 11.0 12.0Government consumption growth 3.8 9.2 10.6 8.0 6.0 7.0 11.0Government investments growth 8.2 5.0 9.0 9.0 8.0 12.0 10.0Exports of goods and services -9.3 17.7 6.7 5.0 6.0 7.0 8.0Imports of goods and services 2.8 6.1 15.6 11.0 10.0 11.0 11.0Public expenditure as % of GDP 31.0 33.4 33.0 31.8 30.4 29.6 28.8Source: KIPPRA estimates using the KIPPRA-Treasury Macro Model (KTMM)to unforeseen circumstances. In case externalshocks arise, it is estimated that the country wouldexperience surges in inflation and the weakening ofthe exchange rate. This would have effects on thegrowth rate, exports and imports, and interest rateswould remain relatively high.15.2 Manufacturing Sector MediumTerm ProspectsIn 2012, the manufacturing sector growth declinedto 3.1 per cent from 3.4 per cent in 2011, mainlydue to high cost of production, competition fromcheap imports and drought during the first quarterof 2012 that adversely affected the food sub-sector.At least 30 per cent of manufacturing sector valueadded comes from food, beverage and tobaccomanufacture. Therefore, the sector’s performance,in addition to external shocks such as oil prices, isprone to erratic weather patterns.The turnaround of the sector in the medium termdepends on timely implementation of Vision2030 manufacturing sector flagship projects. Akey challenge, in addition to drought incidencesand costs of production, is the structure of thesector, which has large concentration in foodmanufacturing and less diversification into highvaluemanufacturing such as chemicals andelectronics.In analyzing the sector’s medium term prospects,past time-series process of the manufacturingoutput through autoregressive modelling, AR (1),Table 15.2: Alternative scenario–Selected economic indicatorsVariable 2009 2010 2011 2012 2013 2014 2015GDP growth 2.7 5.8 4.4 4.6 5.3 5.8 6.3Inflation overall 9.0 4.0 14.0 9.6 6.0 6.2 8.6Private consumption growth 5.0 7.2 2.8 7.0 5.0 6.0 6.0Private investments growth 4.0 5.0 12.0 7.0 5.0 11.0 12.0Government consumption growth 3.8 9.2 10.6 8.0 6.0 7.0 7.0Government investments growth 8.2 5.0 9.0 9.0 12.0 14.0 13.0Exports of goods and services -9.3 17.7 6.7 5.0 5.3 7.0 7.0Imports of goods and services 2.8 6.1 15.6 11.0 10.0 11.0 11.0Public expenditure as % of GDP 31.0 33.4 33.0 31.8 30.3 29.6 28.8Source: KIPPRA estimates using the KIPPRA-Treasury Macro Model (KTMM)156 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct esthe analysis shows that manufacturing sector growthwill marginally increase from 3.1 per cent in 2012and grow at an average of 3.5 per cent during 2013-2015. Figure 15.1 shows the forecasted upwardtrend in manufacturing output at 2001 constantprices. However, through the implementationof MTP policies under an improved economicenvironment, the manufacturing sector would growrelatively faster.Figure 15.1: Manufacturing value added at 2001constant prices (Ksh millions)Ksh millions175000170,000165,000160,000155,000150,000145,000140,000135,000130,0002010 2011 2012Year2013 2014 2015Source: Kenya National Bureau of Statistics (Various), Economic SurveysFigure 15.2: Population projectionsAge group80 +70 - 7460 - 6450 - 5440 - 4430 - 3420 - 2410 - 140 - 480 +70 - 74Kenya(2010 ) - 41 million, 43 % of which arebelow the age of 154000 2000 0 2000 4000Population (in thousands)MaleFemaleKenya 2025 - 58 million, 38 of which are belowthe age of 15MaleFemale15.3 Population ProjectionsKenya’s population is projected to reach 56.6 millionby 2020, 65.9 million by 2030 and 85 million by2050 as presented in Table 15.3 and Figure 15.2.Consequently, as the country moves forward toattaining Vision 2030 goals, it will be important toconsider the implications of the population growth,including sustainable financing and provision ofsocio-economic services.Table 15.3: Population and the labour marketYearPopulation projections2009 38.6*2010 40.52011 41.62020 56.62030 65.92050 85.0Age group60 - 6450 - 5440 - 4430 - 3420 - 2410 - 140 - 46000 4000 2000 0 2000 4000 6000Population (in thousands)kenya economic report 2013 157

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c e80 +70 - 7460 - 64Kenya 2050 - 85 million, 29 % of which arebelow the age of 15MaleFemalewould decline slightly, the number of people livingin poverty is projected to rise from 21.5 million in2013 to 22.2 million in 2015.Figure 15.3: Poverty headcount and the number ofthe poorAge group50 - 5440 - 4430 - 3420 - 2410 - 140 - 46000 4000 2000 0 2000 4000 6000Population (in thousands)Percentage60.050.040.030.020.010.00.0National Rural Urban Number of poor21.5 21.9 22.245.9 17.7 46.1 17.849.5 49.05 48.7933.735.4 35.07 34.9029.749.1 50.5 54.6 54.02 53.672520151050Population inMillions2005/06* 2005/06 2013 2014 201515.4 Poverty Projections andMedium Term ProspectsThe KIHBS 2005/06, which is the most recenthousehold survey data, is used in a povertyprojection model with coefficients borrowed froma study by Ali and Thorbecke (2000) to arrive atpoverty projections. The base data, that is KIHBS2005/06, annual economic growth rates obtainedfrom the KTMM and inequality measures (obtainedfrom the poverty report for 2005/06) are also usedto determine poverty projections for 2013, 2014and 2015. Figure 15.3 compares actual poverty ratesfor 2005/06 and projected poverty rates using thepoverty projection model. Accordingly, the nationalabsolute poverty is estimated at 49.50 per cent,49.05 per cent and 48.79 per cent in 2013, 2014 and2015, respectively.The results show that poverty is highest in ruralareas, with about 55 per cent of the rural populationestimated to be living in absolute poverty in 2013,and this is projected to decline marginally over thenext two years under the “business as usual” scenario.In urban areas, poverty is estimated at about 35 percent over the years. While it is projected that povertyYearNote: *Actual poverty rates from 2005/06 survey dataSource: KIPPRA Poverty Projection ModelThe measures of poverty depth reveal that poverty isindeed severe in rural areas, though the trend seemsto decline over the years. The average income of therural poor is about 20 per cent below the povertyline. In order to reduce this gap, there is need for adeliberate policy that would increase the averageincomes of the poor. Although the urban poor livebelow the poverty line, their incomes are only about14 per cent below the poverty line. This means that itwould take fewer resources to reduce urban povertycompared to rural poverty. The degree of inequalitybetween the poor is high at the national level.Despite the remarkable achievements in Kenyaover the last 10 years, the weak link betweeneconomic growth and poverty reduction depict lackof inclusiveness of Kenya’s growth performance.Promoting inclusiveness in all its facets will ensurethat the benefits of growth reach more people,especially the poorest, thereby aiding povertyreduction. Thus, focusing on a strategy that advocatesfor creation of long-term productive employmentrather than income redistribution per se, andemphasizing equity and equality of opportunities,158 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct eswould especially enhance inclusiveness, therebyaccelerating poverty alleviation.Figure 15.4: Poverty depthpercentage25.020.015.010.05.00.017.518.216.3 15.811.4 11.2National Rural Urban20.4719.3119.55 19.0218.60 18.1814.46 13.94 13.652005/06* 2005/06 2013 2014 2015Source: Authors’ projectionsYearFigure 15.5: Poverty severityPercentage12.010.08.06.04.02.00.08.85.56.96.8National Rural Urban9.669.888.519.187.848.778.1 7.5 10.72 9.79 9.252005/06* 2005/06 2013 2014 2015YearSource: Authors’ projections15.5 Education Sector Projectionsand ProspectsAccording to the 2009 Population Census, theschool-age population for Early ChildhoodDevelopment and Education (ECDE) schooling(4-5 years) was estimated at 2.4 million. This isexpected to rise to 2.8 million in 2012 and 3.08million by 2016, assuming the population growthrate of 2.67 per cent across all school-age populationgroups. Primary school-age population (6-13 years)was 8.5 million in 2009 and is projected to rise to9.3 million in the year 2012 and to 10.99 million bythe year 2016. At secondary school level, the schoolagepopulation (14-17 years) is projected to increasefrom 3.01 million in 2009 to 3.3 million in 2012 andto 3.7 million by 2016. The population aged 18-25years was projected to increase from 6.1 million in2009 to 6.2 million in 2012 and 6.3 million by 2015.Table 15.4 shows enrolment projections at threelevels of schooling for the period 2012 to 2016.At ECDE level, total enrolment will increase from2.0 million in 2012 to 2.5 million in 2016. Atprimary school level, the corresponding figures are9.7 million and 11.4 million for 2012 and 2016,respectively. At secondary school level, enrolmentswere projected at 2.1 million students in 2012and 2.4 million in 2016. Table 15.4 also showscorresponding enrolments in public institutions inpercentages.Thus, the country should be projecting to providebasic education for about 15.8 million children(ECDE, primary and secondary school education)in 2015 and 16.1 million youth by 2016; and tertiaryeducation and skills development programmes forabout 6.3 million youth by 2015 and 6.5 million in2016.These prospects have various implications forresource requirements for both the central andcounty governments. As an example, based onthe public ECDE enrolment projection of three(3) million pupils by 2015, pupil teacher ratio of25:1 and pupil class ratio of 30:1, a total of 62,400teachers and 52,000 public ECDE classrooms willbe required by 2014. Currently, ECDE centresare financed by local communities, and in somecases local authorities, with majority of pre-schoollearning taking place in church compounds, socialhalls and private premises. Since the provisionof pre-primary education is the responsibilityof county governments, priority interventionareas for this sub-sector in the short term shouldinclude improving the quality of infrastructure,and provision of learning materials and humanresources.Total primary school enrolment is expected to growat a stable rate during the period from 9.7 millionin 2012 to 11.4 million (92.78% public) by 2016.kenya economic report 2013 159

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c eTable 15.4: Education projections 2012 to 2016 (millions)2012 2013 2014 2015 2016Boys Girls Total Boys Girls Total Boys Girls Total Boys Girls Total Boys Girls TotalSchoolage1.4 1.4 2.8 1.5 1.4 2.9 1.5 1.5 3.0 1.5 1.5 3.0 1.5 1.5 3.1population 4-5 years6-13 years 4.7 4.6 9.3 4.9 4.8 9.7 5.1 5.1 10.2 5.4 5.3 10.7 5.5 5.4 11.014-17 years 1.6 1.6 3.3 1.7 1.7 3.4 1.7 1.7 3.5 1.8 1.8 3.6 1.8 1.8 3.718-25 years 3.1 3.1 6.2 3.1 3.1 6.2 3.1 3.1 6.3 3.1 3.1 6.3 3.2 3.2 6.5Total Enrolment 7.1 6.7 13.8 7.4 7.0 14.0 7.7 7.3 15.0 8.2 7.5 15.7 8.4 7.7 16.1ECDE 1.0 1.0 2.0 1.0 1.0 2.1 1.1 1.0 2.1 1.3 1.0 2.4 1.3 1.0 2.5Primary 5.0 4.7 9.7 5.3 4.9 10.2 5.5 5.1 10.6 5.7 5.3 11.1 5.9 5.5 11.4Secondary 1.1 1.1 2.1 1.1 1.1 2.2 1.1 1.1 2.3 1.2 1.2 2.3 1.2 1.2 2.4Public EnrolmentECDE 0.8 0.7 1.5 0.8 0.7 1.5 0.8 0.8 1.6 1.1 0.8 1.8 1.1 0.8 1.9Primary 4.7 4.3 9.0 4.9 4.5 9.4 5.1 4.7 9.8 5.3 5.0 10.3 5.5 5.1 10.6Secondary 1.0 1.0 2.0 1.0 1.0 2.1 1.1 1.0 2.1 1.1 1.1 2.2 1.1 1.1 2.2% in Public schoolsECDE 71.4 71.3 71.3 71.4 71.2 71.3 71.4 71.2 71.3 77.0 71.2 74.5 82.3 76.0 76.3Primary 92.4 92.4 92.4 92.5 92.6 92.5 92.7 92.7 92.7 92.8 92.9 92.8 92.7 92.9 92.8Secondary 93.7 92.7 93.2 93.8 92.8 93.3 93.9 92.9 93.4 93.9 92.9 93.4 94.0 93.0 93.5Projected GER (%)ECDE 72.9 72.1 72.5 73.6 72.8 73.2 74.4 73.6 74.0 90.4 72.0 81.4 86.7 66.7 80.0Primary 108.3 101.8 105.1 107.4 100.8 104.2 106.9 100.6 103.8 106.5 100.5 103.5 106.3 100.8 103.6Secondary 62.5 63.4 62.9 63.7 64.0 63.8 63.8 64.0 63.9 63.9 64.1 64.0 65.0 63.9 64.4Source: Education Simulation Model (2012), 2009 Population Census160 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct esAssuming a public primary pupil teacher ratio andclass size norms of 40:1 and 50:1, respectively, atotal of 245,750 teachers and 196,600 classroomswill be required by the year 2014.Aggregate secondary school enrolment is expectedto continue rising due to the recent policy reforms inthe sector. Some of the effects of the reforms includeincrease in primary school enrolment due to freeprimary school education and envisaged increase intransition to secondary school education; expansionof secondary school education infrastructurethrough the Constituency Development Fund;and implementation of the Free Day SecondaryEducation funding towards provision of learningmaterials and operational costs for public secondaryschools across the country. Public secondary schoolenrolment is expected to increase from 2.1 millionin 2012 to 2.4 million by 2016 (93.5% in publicsecondary schools). Assuming a public secondarypupil teacher ratio and class size norms of 35:1 and45:1 respectively, a total of 60,285 teachers and46,889 classrooms will be required at this level ofschooling by the year 2014.15.6 Tourism15.6.1 Forecast assumptionsAccording to UNWTO forecasts early in the year,international tourism would increase by 3-4 per centfor the full year 2012. While the pace of growth isslowing down somewhat, international overnightvisitors remain firmly on track to reach one billionarrivals expected in 2013. The continued strengthof tourism is particularly important in the contextof the current economic uncertainty, and reinforcesthe need for increased political commitment andsupport to the sector. The capacity of tourism to drivegrowth and create jobs needs to be accompanied bystrong supportive public policies. Tourism has beenidentified by the G20 as one of the sectors that canspur the global economic recovery (WTO, 2012).The following medium term forecasts for the tourismsector (in terms of tourist arrivals and earnings) arebased on a number of working assumptions:• Decline in arrivals is expected from Europe dueto the ongoing Eurozone crisis.• Anticipated growth in arrivals from Russia,China, the UAE, India, Oceania (Australia andNew Zealand) and other emerging markets.• Owing to terrorism threats on Kenya thatpersisted throughout 2012 resulting in weakperformance in inbound tourist arrivals inJanuary-December 2012, growth of around4 per cent over the previous year is assumed,similar to UNWTO forecasts.• The peaceful general elections in March 2013and stable macroeconomic conditions. This,coupled with recovery in European markets willlead to higher arrivals and receipts in January-December 2013.15.6.2 Tourist arrivals and earningsGiven the above assumptions, we envisage 4 percent growth in 2013, in both arrivals and receiptsover the previous year, followed by a rebound in2014-2015, with arrivals growing at 11.9 per centand receipts at 16.9 per cent annually. In this regard,arrivals and receipts for 2013 are projected to closeat 1.85 million and Ksh 99.86 billion, respectively(Table 15.5).15.6.3 Major source marketsGoing forward, we envisage a better outlookcompared to 2012, with a rebound in tourist arrivalsfrom traditional markets of the UK, Germany, Italy,France, USA, Canada and Scandinavian countries,and higher growth in arrivals from emergingtourist source markets such as China, India, Russia,Australia and New Zealand.kenya economic report 2013 161

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c eTable 15.5: Projected international tourist arrivals, earnings and value added in hotels and restaurantsTourist Arrivals(‘000)ActualProjected2009 2010 2011 2012 Mean(2009-2012)2013* 2014* 2015*1,490.00 1,609.10 1,822.90 1,710.80 1,675.69 1,852.00 2,071.83 2,317.76Growth (%) 23.80 7.90 18.10 -2.31 11.87 4.00 11.87 11.87Tourist62.50 73.70 98.00 96.02 82.56 99.86 116.71 136.40Receipts (Kshbillion)Growth (%) 18.60 17.90 33.00 -2.02 16.87 4.00 16.87 16.87Source: Authors’ calculations from Kenya National Bureau of Statistics, Economic Surveys (2007-2012), and Ministry of Tourism dataA number of international airlines from emergingsource markets started regular flights into Kenya in2012, including Novair (Sweden), Pegas Touristik(Russia), Air Korea, Southern China Airlines andJordanian Airlines (Ministry of Tourism, 2012a). InApril 2012, Etihad Airways started a daily servicefrom Nairobi to Abu Dhabi, marking its entry intoEast Africa. In May 2012, Kenya Airways (KQ)started scheduled flights to New Delhi, India,making it KQ’s 57 th destination. This followed thelaunch of direct flights to Jeddah, Saudi Arabia inOctober 2011. KQ also has scheduled flights toMumbai, India.These intra-Africa flights, which target businesstravellers, are informed by growing economiclinkages between Africa, the Middle East and Asia.India is a significant trade and tourist source marketto Kenya: trade between the two countries standsat about US$ 2.5 billion annually. Kenya Airwayscurrently flies to 58 destinations; 46 of thembeing African destinations. Through the SkyTeamAlliance, Kenya Airways takes passengers to over926 destinations in 173 countries and 490 loungesglobally. SkyTeam partner airline passengers canaccess the former’s expansive destination networkin Africa through Kenya Airways. In this regard,more arrivals are expected from India (and Asia ingeneral).There are great prospects for growth in arrivals bybusiness travellers from the EAC countries (notablyTanzania and Uganda) due to the increased crossbordertrade. The EAC member countries haveharmonized their immigration procedures, makingit easier for citizens to travel between membercountries. Once the EAC becomes an economicunion, both trade and tourism prospects will beenhanced further.15.6.4 Meetings, Incentives Travel,Conferences and Exhibitions(MICE)In 2012, inbound visitors attending MICE eventscomprised 3 per cent of all tourist arrivals. InSeptember 2012, the Bench Events and the KenyaTourist Development Corporation (KTDC) hostedthe Africa Hotel Investment Forum (AHIF) inNairobi at the Intercontinental Hotel. Over 400global and regional delegates from 35 countriescame together to discuss opportunities, best practiceand issues facing investors. Numerous deals weresigned and more projects were launched and, as anoutcome, at least 5 international hotel groups are setto build hospitality facilities in Kenya over the next5 years.The MICE market has potential to contribute over14 per cent of annual tourism to Kenya and is anarea for significant growth opportunities. In order162 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct esto support this drive and to boost country meetingsin key and emerging markets, Kenya has formed anational MICE Committee and the government isexploring, through feasibility studies, the prospectsof developing additional conventional facilitiesthrough public-private partnership programmes.Given that most of the counties lack modernconvention facilities, there is great opportunity andpotential for investing in MICE tourism facilities atthe county level.15.6.5 AccommodationSince tourism attractions have placed the countryamong the top-ranking tourism destinations, hugeinvestments have been made in the hospitalitysector in the last one decade. For a long time, theluxury hospitality market has been dominated bybig players such as the Holiday Inn, Intercontinental,the Nairobi Hilton, the Norfolk, the Nairobi Serena,Safari Park, Panari, the Stanley and Laico Regency.However, new top-notch international hotel brandssuch as Best Western (to start operations in mid-2013), Radisson Blu (part of the Rezidor Group),Emaar, Kempinski, Marriot, Park Inn and ThreeCities branded hotels are all under construction,and a 200-room Lansmore Hotel, Lonrho’s newbrand, is on the drawing board. A luxury boutiquehotel, Hemingways Nairobi, is set to bring a touchof glamour in the peaceful suburb of Karen whenit opens. The all-suite plantation-style building,which overlooks the Ngong Hills, will feature awellness centre, swimming pool, gym and spa.These developments by global brands signal greaterprospects for the tourism sector in that the countrywill attract super-rich tourists from around theworld, who have a taste for high-class hospitality.This comes at a time when Kenya is positioningherself as the travel, financial as well as the businesshub in the East and Central African region, inaddition to huge investments in transport andcommunication infrastructure. Although Kenyadoes not feature in the top ten African countrieswith the highest number of upcoming hotels andtotal room numbers, it is ranked position 9 in termsof construction status of planned new hotels, whichare currently 74 per cent complete. Although this isexpected to raise the bar in terms of service deliveryin the hospitality industry, it will not necessarilytranslate to cheaper rates.The industry is developing an additional 3,000beds within the medium term and a furtherdevelopment of 65,000 beds by 2030 in order tomeet the growing demand for the Kenyan tourismproduct. Despite the above developments in thehospitality industry, most counties lack tourist-classaccommodation facilities, hence once the devolvedcounty governments are established, this should beconsidered a top investment priority (Box 15.1).Box 15.1: Shortage of hotel rooms frustrates KisumuCountyFollowing the recent upgrading of Kisumu airport tointernational status, there is need to provide more bedcapacity to meet demand from the growing number ofvisitors in the Western Kenya tourism circuit. The Ministryof Tourism endeavours to work closely with hoteliers andrestaurateurs in order to promote both domestic andinternational tourism.Kisumu has more potential given its strategic nature inthe East African Community. Kisumu City, at the moment,has a bed capacity of about 1,000 in classified hotels,which cannot cope with future demand. The city has nofive-star hotel to accommodate high-profile guests (suchas Presidents from the region), forcing the government tohire private residences for them.Some of the major hotels in Kisumu are the ImperialHotel (the only three-star facility), Kisumu Hotel (ownedby Maseno University), Milimani Resort and the GreatLakes Hotel. Others, which provide middle-level services,include Hill View Hotel in the outskirts of the town, and anumber of guesthouses, which have been mushroomingin Kisumu and its environs.According to the Tourism and Heritage Committee,Kisumu Municipal Council, there is need for more policepatrols around hotels and restaurants, since reinforcedsecurity would attract more visitors into the city andregion.Adapted from: http://www.ktdc.co.ke/news-updates/62-shortage-of-hotel-rooms-frustrates-kisumu, accessed on02/11/2012kenya economic report 2013 163

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c e15.7 WaterThe environment, water and sanitation sector isa key pillar of Vision 2030. Implementation ofthe first MTP was aimed at attaining sustainabledevelopment and management through targetedactivities, which include flagship projects.The performance of the water sub-sector impactspositively on all sectors of the economy, includingenergy production, tourism, agricultural andindustrial development, health and sanitation,security, employment creation and povertyreduction.The vision of the sector is to attain sustainable accessto adequate water in a clean and secure environmentfor sustainable national development. This is tobe achieved through conservation, managementand protection of the environment; developmentof water storage; improving access to water andsewerage services; development of irrigation,drainage and reclamation of wastelands; as well ascapacity building for water institutions.The priorities of the sector are outlined in theMedium Term Expenditure Framework (MTEF)of 2013/14-2015/16. The prioritized programmeswere based on issues emanating from countyconsultations carried out in October/November2011 during the budget preparation process andgiven in Table 15.6. This is as per the constitutionalrequirement for public participation and inclusionin resource sharing and guided by the Kenya Vision2030 objectives.Table 15.6: Water sector priorities, 2013-201616 Focus 17 ProgrammeUrban watersupplyRural watersupplySewerageservicesWater policyand managementMediumsizetownsurban watersupplies infrastructureexpandedWater sanitationprojectsconstructedBoreholesdrilled andequippedSewerageschemes rehabilitatedCompletepolicydocumentsincluding theWater Policy,IrrigationPolicy, WaterStoragePolicy, LandReclamationPolicy, WaterAct 2012,Irrigation Actand NationalWater MasterPlan18 Projects/Activities30 urban watersuppliesinfrastructureexpanded450 water andsanitationprojects constructed540 boreholesdrilled andequipped60 sewerageschemes rehabilitatedThe WaterPolicy, IrrigationPolicy,Water StoragePolicy, LandReclamationPolicy developed,WaterAct 2012legislated, IrrigationActlegislated andNational WaterMaster Plancompleted19 ExpectedStatusIncreasedaccessto adequateandreliablewatersupplyIncreasedaccessto sanitationservicesWellcoordinatedwaterand irrigationservicesSource: Government of Kenya (2012), MTEF 2013/14-2015/16164 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct esThe projects prioritized in Table 15.6 are the samethat were initially identified as flagship projectsin the year 2008. They were to be implementedduring the period from 2008-2012 during the firstimplementation phase of Vision 2030. Whereasthere have been various projects carried outthrough this period, the large dam projects werenot successfully implemented. The number initiallytargeted has also been reduced from 24 to only 2. Ithas been reported in various performance reviewdocuments of the Ministry of Water and Irrigationthat the programme was hindered by issues ofinsufficient funding, technical capacity as well aspoor stakeholder support.15.8 RoadsAccording to the MTEF 2013/14-2015/16, roaddevelopment, maintenance and managementhas been ranked as a top priority programme.The objectives set out in the MTEF for the roadssub-sector include expansion, rehabilitation andmaintenance of the road network in addition tobuilding capacity for road construction. The aim isto achieve efficient and economical road transport.The programmes, sub-programmes, expectedoutcomes, outputs and key performance indicators(KPI) for the sector are given in Table 15.7.Table 15.7: Road sub-sector programmes and subprogrammes2013/14-2015/16Programme/Sub-ProgrammeConstruction ofroads , missinglinks and bridgesRehabilitation ofroadsPeriodicmaintenance ofroadsKey Outputs1,480 km of newroads, 45 km ofmissing linksand 15 bridgesconstructed1,900 kmrehabilitated3,600 kmmaintainedKeyPerformanceIndicators(KPIs)No. of km ofnew roads,missing links andno. of bridgesconstructedNo. of kmof roadsrehabilitatedNo. of km ofroads maintainedProgramme/Sub-ProgrammeRoutinemaintenance ofroadsDesign of roadsand bridgesRoads 2000Rehabilitationand maintenanceof national parkroadsCapacity buildingfor roads andbuildingsKey Outputs246,000 km ofroads routinelymaintainedKeyPerformanceIndicators(KPIs)No. of km ofroads maintainedroutinely10 designed No. of designssuccessfullycompleted4,000 km and3,000 jobscreated3,550 km ofroads maintainedand rehabilitated450 studentstrained at KIHBTSource: Government of Kenya (2012), MTEF 2013/14-2015/16No. of km ofroads maintainedand no. of jobscreatedNo. of kilometresrehabilitated andmaintainedNo. of graduatesTable 15.8 shows the recurrent and developmentresource requirements for the period 2013/14-2015/16. It is estimated that Ksh 33 billion willbe required for recurrent expenditure and Ksh 97billion for development spending in the roads subsectorfor the financial year 2014/15. A total of Ksh110 billion will be required to finance both recurrentand development spending within the roads subsectorfor the 2015/16 financial year. The estimatesfurther reveal that approximately 70 per cent of thespending will be allocated to development activitiesunder the various sub-programmes.According to the Kenya Roads Board Fund (KRBF),the collections from the RMLF in 2013/14 willamount to Ksh 25.6 billion, while collections fromtransit tolls are expected to increase to Ksh 450million. The projections further estimate Ksh 100million in collections from agricultural cess andother sources.kenya economic report 2013 165

M AE DC IR UO M aTn ed r sm oPc ri o-se Pc eo cn ToSm i c P e r F o r m a n c eTable 15.8: Roads sub-sector resource requirements (Ksh millions)Resource RequirementsCategoryEstimates2012/13Requirement2013/14Allocation2013/14Projected Estimates2014/15 2015/16Recurrent 28,378 31,035 28,742 33,705 34,000Development 97,027 99,416 99,206 97,585 76,000Total 125,405 130,451 127,948 131,290 110,000Source: MTEF 2013/14-2015/1615.9 Environment Prospects (2013-2015)15.9.1 Water and climate changeA new Water Master Plan is being developed bythe Ministry of Water and Irrigation (MWI) withsupport from JICA. Preliminary results show thatthe country has more water than initially thought. In2010, for example, the country had total renewablewater resources of 76,610 MCM/year or 1,965 m 3per capita (MWI and JICA, 2012). The increaseis attributed to a change in the methodology ofassessing ground water resources that captures theentire ground water recharge as opposed to theapproach used in 1992 that only considered totalactual ground water abstractions. This means thatKenya has huge water resources comparable to herneighbouring countries; Uganda - 1,913 m 3 andTanzania – 2,083 m 3 , but much lower than Malaysia– 20,098 m 3 (FAO, 2012). Figure 15.6 shows trendsand projections in water resources availability forthe period 1992-2050.Figure 15.6: Trends and projections in waterresources availability in Kenya, 1992-2050Renewable Water ResourcesMCM/Year90,00080,00070,00060,00050,00040,00030,00020,00010,0000Surface WaterGround WaterTotal19922010 2030 2050YEARSource: MWI and JICA (2012), based on preliminary results of the NationalWater Master Plan 2030Although only 5 per cent of ground water resourcescan be extracted, the quantity of ground waterresources is generally more than surface water. Thisrevelation will have dramatic effect on the way wateris managed in the country. Yet, the distributionacross the six catchments remains skewed; LakeVictoria North (7%), Lake Victoria South (9%), RiftValley (27%), Athi (8%), Tana (23%) and EwasoNg’iro North (26%). Uneven distribution vis-à-visdemand presents one of the biggest challenges inwater resource management. As shown in Figure15.7, Athi River is already under stress as demandequals available resources. This is because of highwater demand in the cities of Nairobi and Mombasa,both located in the catchment.Figure 15.7: Water balance in the catchmentsQuantity MCM/Year7,0006,0005,0004,0003,0002,0001,0000LakeVictoria NLakeVictoria SRenewable Surface waterCatchmentAthiTanaSurface water demandEwaso NgiroNSource: MWI and JICA (2012), based on preliminary results of the NationalWater Master PlanEven in catchments where demand is currently lowerthan available resources, there are sub-catchmentssuch as Lake Naivasha that are experiencing very166 kenya economic report 2013

M a c r oMe ce od ni uo m iT c e rP m e rPf ro or sm pa enc ct eshigh water demand due to irrigation activities. TheKenya Vision 2030 seeks to expand irrigable landby 21,000 hectares in 5 years. This calls for effortstowards increasing the country’s overall capacity tomanage water resources through storage facilities.Demands from domestic, livestock and industrialactivities are also expected to rise in tandem withpopulation growth, as well as implementation ofVision 2030 flagship projects.The past decade has witnessed a steady rise inwater demand. Between 1990 and 2010, totalannual demand increased by 181 per cent from2,073 million m 3 to 5,817 million m 3 . Increasingwater demand is driven by irrigation, domesticand industrial water use. Demand for livestockand inland fisheries also contributed to the rise,although to a lesser degree. Future demand willresult from irrigation and will be greatest in Tanaand Ewaso Ng’iro catchments. Generally, waterresource prospects for 2017 are contingent oneffective rehabilitation of the country’s water towersand successful operationalization of policies at subcatchmentlevel. Finally, the results of the NationalWater Master Plan 2030 will inform investmentdecisions on water resource management in thecoming years.The problem of water availability is exacerbated byclimate change and variability. Floods and droughtsof varying magnitudes and other disasters such aslandslides and water pollution cause significanteconomic and human losses in fragile environments.The country lacks the capacity to deal with suchshocks, and thus efforts should aim at developingthe necessary capacity to deal with these disasters.The Department of Water Resources spearheadedthe formulation of the National Water QualityManagement Strategy 2012-2016, with the objectiveof curbing pollution and enhancing monitoring(Government of Kenya, 2012). Full implementationof this strategy is expected to ameliorate the currentproblem of water quality.The ministry formulated a Draft National WaterPolicy, 2012; the National Water ResourcesManagement Strategy, 2010-2016; and theDraft Water Bill, 2012, as instruments for waterresource governance. The Constitution has shiftedthe functions of water services to the countygovernments, thus necessitating policy review.The revised Water Act will address management ofwater resources in a devolved system of governmentand consolidate the gains made in previousreforms. Great effort will go to strengthening localinstitutions, addressing data gaps, and finalizing andimplementing frameworks on trans-boundary waterresources.kenya economic report 2013 167

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sPART IVCREATINGAN ENABLINGENVIRONMENTFOR STIMULATINGINVESTMENT FORCOMPETITIVE ANDSUSTAINABLECOUNTIES168 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice es16ChapterAn Enabling Environment forStimulating Investment forCompetitive and SustainableCounties16.1 IntroductionThe theme of this Kenya Economic Report 2013is creating an enabling environment for stimulatinginvestment for competitive and sustainable counties.There are three considerations that inform thistheme. One, the Constitution and the CountyGovernments Act No. 17 of 2012 envisagesthat Kenya’s development is to be anchored ondevolved governance structures comprising 47county governments. Two, a sound investmentenvironment is pivotal to the achievement ofhigh levels of investment and savings to supporthigh economic growth as envisioned in Vision2030 and the Medium Term Plan. Public andprivate investment is critical for growth of countyeconomies. Public investment can promote growthdirectly and indirectly by providing various publicgoods such as infrastructure, social services, peaceand stability, and also by creating an environmentwhere risks, barriers and costs to private investmentare minimized. Three, there are wide disparitiesin economic prosperity across counties, whichpartly emanate from differences in developmentand access to infrastructure and socio-economicservices across the country. Moreover, there arevarious challenges to be overcome, which include:poverty, unemployment, lack of access to socialservices, infrastructure deficits and weak economicbase in some counties, which would benefit from anenabling economic environment.The various approaches to creating the enablingenvironment suggests the need for concertedefforts, collaboration and effective coordinationbetween the national and county governments.The first approach emphasizes the need toreduce administrative and regulatory costs ofdoing business. Thse second approach, which iskenya economic report 2013 169

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e soutlined in the World Development Report 2005by the World Bank, dubbed ‘A Better InvestmentClimate for Everyone’, emphasizes improvingthe fundamental elements, namely: stability andsecurity, taxation and regulation, finance andinfrastructure, and workers and labour markets.The third approach is associated with the WorldEconomic Forum (WEF) and focuses on twelve(12) pillars of competitiveness that are publishedannually for several countries. These pillars include:institutions, infrastructure, a stable macroeconomicenvironment, health and primary education, highereducation and training, goods market efficiency,financial market development, labour marketefficiency, technological readiness, market size,business sophistication and innovation.Based on these approaches as outlined in Table 16.1,this part of the report analyzes selected key issuesthat are considered critical in creating an enablingenvironment for competitive and sustainablecounties. Given the current transitions, the needfor capable and effective county governments isconsidered a priority. In this regard, we analyze thePublic Financial Management systems consideredkey to effective management of public resourcesand service delivery at the county level. In addition,the report explores how county governments canleverage limited capacity through public-privatepartnerships (PPPs) with businesses, communityorganizations and knowledge institutions indelivering their mandates, especially with regardto infrastructure, agriculture and tourism. Otherimportant areas discussed are human resourcedevelopment, land adjudication, investment incounty infrastructure (particularly water and roads),creating an enabling environment for micro andsmall enterprises, development of wholesale andretail trade and investment in natural resources.Table 16.1: Approaches to creating an enablingenvironmentWorld Bank – DoingBusiness (AdministrativeandRegulatory Costsof Doing Business)1. Starting abusiness2. Dealing withconstructionpermits3. Registeringproperty4. Getting credit5. Protectinginvestors6. Paying taxes7. Trading acrossborders8. Enforcing contracts9. Closing a businessWorld Bank – InvestmentClimate1.Stability and security(peace,security, macroeconomicstability, securityof propertyrights)2.Regulations andtaxes (improvingbusinessregulation andtaxation)3. Finance andinfrastructure(address inadequaciesinfinance andinfrastructure)4. Workers andlabour markets(fostering askilled workforce;interveningto benefitall workers)World EconomicForum –12 Pillars of Competitiveness1. Institutions2. Infrastructure3. Macroeconomicenvironment4. Health andprimary education5. Higher educationand training6. Goods marketefficiency7. Labour marketefficiency8. Financialmarket development9. Technologicalreadiness10. Market size11. Higher educationand training12. Business sophistication13. Innovation16.2 County Level Public FinancialManagement SystemsThe Constitution of Kenya and the CountyGovernments Act 2012 outline the role of thecounty governments in service delivery. Devolvedgovernments are expected to provide public servicesthat are critical for economic growth and prosperity170 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esas well as contribute to the creation of an enablingenvironment for sustainable development andcompetitiveness. According to the 4 th Schedule ofthe Constitution, these services include agriculture,county health services, transport, planning anddevelopment, trade development and regulation,and specific national government policies on naturalresources and environmental conservation, andcounty public works and services.The Constitution stipulates that not less than 15per cent of all revenue collected by the nationalgovernment should be allocated to countygovernments. However, increased control overresources by county governments will notautomatically translate into service delivery(World Bank, 2012a). Previous experience pointsto the need to avoid overspending on salaries andadministrative overheads at the expense of servicedelivery and infrastructure investment. Thus, thecapacity and effectiveness of counties in terms offinancial management and service delivery will be akey determining factor in sustaining and attractingnew investments. Therefore, the national and countygovernments have important tasks in planning,budgeting and implementing national and countyprogrammes, and ensuring that there is overall fiscaldiscipline, transparency and accountability, efficientallocation of public resources according to nationaland county priorities and ensuring ‘value for money’.An institutional framework for Public FinancialManagement (PFM) that supports transparency,accountability, predictability and participation isan important foundation for establishing capableand effective counties. Such a framework is essentialfor the realization of the goals of public expendituremanagement, namely: overall fiscal discipline,strategic allocation of public resources, and efficientand cost-effective service delivery.16.2.1 Analytical framework for publicfinancial management in KenyaThe analytical framework of public financialmanagement (PFM) systems is informed by thePublic Expenditure and Financial Accountability(PEFA) assessment framework (Figure 16.1). ThePEFA framework is an internationally widely usedtool for assessing the performance of PFM systemsin key performance areas, namely:• Credibility of the budget–Whether the budgetis realistic and implementation is linked toplans, both at the aggregate and sub-aggregatelevel;• Comprehensiveness and transparency–Whether budget information is accessibleto the public, and the PFM system supportstransparent classification, and fiscal riskoversight;• Policy-based budgeting–Whether there is a linkbetween the budget and government policy,especially linking to multi-year planning andbudgeting;• Predictability and control in budget execution–Whether the budget can be implemented in anorderly and predictable manner and there areproper systems of expenditure control;• Accounting, recording and reporting–Whetheradequate records and information is kept,produced, monitored and disseminated fordecision-making purposes;• External scrutiny and audit–Whether adequatearrangements are in place for external scrutinyof public finances and follow-up on audit issues;and• Donor practices–Whether donor supportis predictable and information is accessible,and the extent to which donors use nationalPFM systems. This is consistent with donorcommitments on harmonization, alignmentand coordination (HAC).kenya economic report 2013 171

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sFigure 16.1: Framework for linking Public Financial Management (PFM) to service delivery at county levelNational government planning and budgetingCounty government planning with decentralized functionsPublic Financial ManagementCredibility of the budgetComprehensiveness and transparency –intergovernmental fiscal relationsPredictability and control in budgetexecutionAccounting, recording and reportingPolicy-based budgetingExternal scrutiny and auditAggregate fiscaldisciplineStrategic allocation ofresourcesEfficient service deliveryCompetitive and fiscally-sustainable counties with ability to attract investmentsKenya’s strategy for reforming public financialmanagement 2013-2018 is informed by thePEFA framework. Each stage in budget planningis important, and it is expected that national andcounty governments will adhere to the process.An open, participatory and accountable budgetarysystem consistent with the principles of publicfinance in the Constitution is critical for servicedelivery.Recent reforms in the planning and budgetingprocess have resulted in the adoption of theMedium Term Expenditure Framework (MTEF)to help link policy, planning and budgeting througha coherent framework. This is one of the importantsteps the government undertook in 2000/01 as partof budgetary reforms. However, while the MTEFprocess has been applied at the national level formore than a decade, the same is not true for subnationalgovernments.16.2.1 Planning and budgeting atnational and county governmentlevelsPlanning and budgeting at both national and countylevels have their foundation in the Constitution,County Governments Act 2012 and the PublicFinancial Management (PFM) Act of 2012. ThePublic Financial Management Act 2012 defines thelegal framework for PFM in Kenya. The Act outlinesthe roles and responsibilities of different playersin public expenditure management, the budgetcycle, reporting and accounting framework and theoversight framework. The key steps in the budgetingprocess at the national and county levels as172 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esarticulated in the PFM Act (2012) are summarizedin Table 16.2.Table 16.2: Planning and budgeting process innational and county governmentsNational Government [PFMAct, Article 35(1)]Integrated developmentplanning process, whichincludes both long-term andmedium-term planningPlanning and determinationof financial and economicpolicies and priorities atthe national level over themedium termPreparation of overallestimates of nationalgovernment revenues andexpenditures, which arepresented in a Budget PolicyStatementPreparation of national budgetestimates and submission tothe National Assembly forapprovalEnactment of theAppropriation Bill andany other Bills required toimplement the nationalgovernment’s budgetaryproposalsImplementation, evaluationand accounting for thenational government’sbudgeted revenues andexpendituresPreparation of the NationalBudget Review Outlook PaperCounty Government [PFMAct, Article 125(1)]Integrated developmentplanning process, whichincludes both long-term andmedium-term planningPlanning and determinationof financial and economicpolicies and priorities at thecounty level over the mediumtermPreparation of overallestimates of countygovernment revenues andexpenditures, which arepresented in a County FiscalStrategy PaperPreparation of county budgetestimates and submission tocounty assemblies for approvalEnactment of theAppropriation Bill andany other Bills requiredto implement the countygovernments’ budgetaryproposalsImplementation, evaluationand accounting for the countygovernment’s budgetedrevenues and expendituresPreparation of the CountyBudget Review Outlook Paper16.2.2 Public financial managementat county level: An overview oflegal provisionsThe key pieces of legislation relevant for publicfinancial management at the county level are:the Public Financial Management Act 2012; theCities and Urban Centres Act and the CountyGovernments Act 2012. The PFM Act 2012 presentsguidelines on the budget process at both nationaland county levels (Table 16.2). There are provisionsthat, if well implemented, will ensure a close linkbetween policy, planning and budget. This is ensuredthrough a Medium Term Expenditure Frameworkanchored on the Budget Policy Statement that isinformed by the development planning process atthe county. At the county level, the County Treasuryis mandated with the preparation of the CountyFiscal Strategy Paper, which should be aligned tothe national objectives as stipulated in the NationalBudget Policy Statement (PFM Act, Article 117)as well as reflect county priorities. In preparing theCounty Fiscal Strategy Paper, the County Treasuryis expected to specify the broad strategic prioritiesand policy goals that are supposed to guide thecounty government in preparing its budget for thecoming financial year and over the medium term.With regard to financial accounting and reporting,the Act stipulates that financial statements shouldbe prepared in a clear and comprehensible mannerusing the prescribed formats (Article 80 & 163).Adherence to this should promote openness andtransparency in county fiscal affairs. Under the PFMAct, Article 26, the National Treasury is mandatedwith preparation of the Budget Review and OutlookPaper, which should include a review of actualfiscal performance in the previous financial yearcompared to the budget appropriation for that yearand the reasons for any deviation from the financialobjectives together with proposals and the timerequired to address the deviations. Similarly, theCounty Treasury is expected to prepare and submitthe County Budget Review and Outlook Paper tothe County Executive Committee, with details ofa comparison between actual fiscal performanceand budget appropriation, and also the reasons forany deviation from the financial objectives togetherwith proposals and the time required to address thedeviations (PFM Act, Article 118).There are provisions for oversight at bothnational and county government levels involvingkenya economic report 2013 173

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sParliament and County assemblies. The financialreporting framework is also clearly articulated inthe law. However, there is need to fast-track thefull implementation of the PFM Act especiallywith regard to the development of the regulatoryregime for fiscal responsibility principles, publicsector accounting standards, debt guarantees andestablishment of Treasury Single Accounts.16.2.3 PFM systems: Learning from pastexperiencesTo de-concentrate service delivery, local authoritiesin Kenya were mandated with a wide range ofresponsibilities such as housing, sewerage anddrainage, water supply, works relating to supply ofelectricity, road building and maintenance, amongothers (Local Government Act Cap 265 Rev. 2010).Over time, it became clear that the resources thelocal authorities were able to generate on their ownwere not adequate to deliver the required services.Consequently, the Local Authorities TransferFund (LATF) Act 1998 was enacted with the aimof establishing a fund whose main purpose wasto provide support from the central governmentto local authorities. In addition to legislativelyallowing for the transfer of funds between thecentral government and local authorities, LATFwas also expected to help improve service delivery,financial management and accountability, andenable councils to pay their debts. To qualify forLATF, each council was required to develop a LocalAuthority Service Delivery Action Plan (LASDAP).Theoretically, therefore, there have been numeroussystems and structures in place to support theundertaking of service delivery by local authorities,despite the numerous challenges.At the national level, the PEFA assessment(European Union, 2009) on budget credibilityshowed that actual expenditure was lower than thebudgeted expenditure over the reference periods(2004/05-2006/07) even though there was aslight improvement in the indicators as comparedto the performance in 2006. For all the threeyears, the budget outturn showed that there wasunderutilization of the originally approved budget.On the revenue side, the analysis of budgeted andactual revenue revealed that, overall, the budget wassuccessful in forecasting revenue trends. In addition,revenue as a share of GDP was found to be stableover time. Five out of nine of the set benchmarkswere met, indicating that there was room forimprovement. On inter-governmental relations,analysis using LATF allocations reveal that therewas transparency and objectivity in the horizontalallocations amongst sub-national governments.There was also timeliness and reliable informationto sub-national governments on their allocations.However, fiscal information on local authoritieswas not collected and consolidated according tosectoral categories. For policy-based budgeting, theassessment reveals that even though a fixed budgetcalendar existed, with adequate guidance on thepreparation of the budget, ministries were giveninadequate time (only 11 days) to submit theirbudget proposals. In addition, budget approvalsover the reference period were not timely. In termsof budget predictability, the availability of funds forcommitment of expenditure was predictable.At sub-national level, there has been limitedassessment of PFM systems in local authorities.However, the LATF gives us a good comparisonof inter-governmental transfers that have bothconditional and unconditional components.Following the experience with LATF, we candraw several lessons that can inform county PFMpractices. Firstly, LATF requirements promotedaccountability to the central government throughthe LASDAP requirements, which entailed timelysubmission of plans and financial reports and alsorequired participation of citizens in the preparationof the plans. This was mainly achieved by awardingpart of the LATF as a conditional grant. Conditionalgrants can provide the required performancemonitoring system in county governments, while atthe same time address service delivery bottlenecks(World Bank, 2012). However, an earlier review(World Bank, 2008) of local authorities within174 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esKenya’s main cities (i.e. Nairobi, Mombasa,Nakuru, Kisumu and Eldoret) showed that therewas limited downward accountability becausethe LASDAP management process was largelyinfluenced by political pressure. The setting ofexpenditure priorities was highly politicized, withthe aim of achieving short-term political gain,which led to a thin allocation of resources acrossmany local competing needs, thus underminingthe effectiveness of the process. Even though thereis legal provision for ensuring accountability withregard to county level public financial management,there is need to ensure that these provisions areimplemented, unlike the case of LASDAP.Second, the experience with local authorities revealsthat most local authorities relied heavily on externaltransfers. By grouping local authorities into theirrespective counties, more than half of the countieshave been relying on external transfers (in this caseLATF), which accounted for 82 per cent in Nyamira,79 per cent in Garissa, 78 per cent in Turkana and76 per cent in Wajir (Figure 16.2).Using data on revenue allocation by county (CRA,2012) and information on own county levelrevenue for 2008/09, we find that there will behigh dependence on transfers from the nationalgovernment (Figure 16.3). There are indicationsthat 43 out of the 47 counties will have transfersaccounting for over 90 per cent of their revenue.This calls for the need to maximize the potential ofcounties to raise their own revenue, even though theConstitution grants them limited powers of raisingrevenue. For counties to be able to raise revenue,there is need to put in place necessary legislation andalso build their capacity to administer the requiredtaxes and levies.Third, despite having some limited power to collectrevenues, most local authorities have also beenplagued by low compliance rates, which have ledto accumulation of arrears. Some counties such asNairobi, Mombasa and Thika have accumulatedarrears averaging about Ksh 10 billion which, ifnot properly recorded, might be lost during thetransition to county governance. Specific effortsshould be made to understand the reasons for noncompliancein a bid to address the problem. Forinstance, there is need for adequate enforcementmeasures, including but not limited to higherpenalties for non-compliance, seizure of propertiesand legal redress.Figure 16.2: Revenue sources for counties (LATF)Percentage100806040200Source: Authors’ compilationNarokIsioloSamburuNairobiLaikipiaKiambuMachakosTaita TavetaEmbuUasin GishuNyeriMombasaKajiadoKerichoMurang’aKirinyagaNakuruNyandaruaMarsabitBusiaLamuKisumuKwaleMeruKituiBaringoTransfersCountyOwn revenueMarakwetTrans NzoiaMigoriBungomaBometKakamegaKisiiTana RiverNandiVihigaSiayaHoma BayMakueniManderaPokotWajirTurkanaGarisaNyamirakenya economic report 2013 175

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sFigure 16.3: Revenue sources for counties (revenue allocation by county)Percentage1009080706050403020100TurkanaWajirManderaGarisaNyamiraPokotTana RiverHoma BayMarsabitMakueniBometLamuMarakwetNandiVihigaBaringoSiayaKituiBungomaKwaleKisiiKakamegaTrans NzoiaMigoriNyandaruaMeruBusiaIsioloSamburuEmbuKirinyagaTaita TavetaMurang’aKajiadoKerichoNyeriKisumuMachakosLaikipiaNakuruUasin GishuKiambuNarokMombasaNairobiCountyEquitable shareOwn revenue shareSource: Authors’ compilationFourth, most local authorities have beencharacterized by poor planning and poor financialmanagement. One of the common features acrossmost local authorities is the tendency to rundeficits, which can either be attributed to poorforecasting of revenue or overspending. A KIPPRAstudy (KIPPRA, 2012) on sub-national publicfinancial management in Nairobi, Mombasa andNarok revealed that all the three local authoritieshad positive expenditure deviations (actualexceeding budgeted) in all the three years, withthe highest being 56 per cent for Mombasa in2010/11 (Table 16.3). In addition, the Councils hadpayment arrears averaging over 10 per cent of totalexpenditure, which led to accumulation of Councildebts. Deviations between actual and budgetedrevenue were also broad, with Narok recordingthe highest deviation of 136 per cent in 2010/11.Because of the large variations between actualrevenue and expenditure, some local authoritieshave accumulated debts, which have to be put intoconsideration during the transition into countygovernments. This indicates that local authoritieswere faced with budget credibility issues. To avoidcounty governments facing the same challenges,there is need to ensure that relevant provisionsthat promore budget credibility are adhered to. Ofparticular importance is the PFM Act (Article 142),which puts a limit on short-term borrowing forcash management that is pegged at 5 per cent of theTable 16.3: Budget performance in selected local authoritiesLocal Authority Expenditure (% deviation) Revenue Performance (Actual/Budgeted)2008/09 2009/10 2010/11 2008/09 2009/10 2010/11Nairobi 4 3 12 127 91 71Narok 5 9 22 83 125 136Mombasa 11 21 56 101 97 98Source: KIPPRA (2012)176 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esmost recent audited revenues, with a condition thatit is repaid within a year. Impleementation of fiscalresponsibility principles will also support budgetcredibility.Fifth, local authorities have also been characterizedby improper financial recording and reporting. TheLocal Authority Integrated Financial OperationsManagement System (LAIFOMS), which is acomputerized system that aims at improving andharmonizing the process of budget preparation andexecution, was launched as part of local governmentreforms. Despite the introduction of LAIFOMS,many local authorities were not computerized.This makes it difficult to ascertain the value of theauthorities’ assets and liabilities, which is importantduring the transition period.Sixth, results from KIPPRA (2012) indicate thatinter-governmental transfers were fairly predictable,with all the selected Councils recording deviationsbetween estimated and actual transfers of less than10 per cent, especially with regard to LATF. Interms of comprehensiveness of the budget, only fourout of the nine set benchmarks were met, whichindicates room for improvement on policy-basedbudgeting, the analysis showed that local authoritieshad a fixed budget calendar with proper guidelinesissued by the Ministry of Local Government, whichthey adhered to. In addition, budget approvals weredone on time. However, the local authorities didnot have a multi-year forecasting framework which,at the national level, was being done through theMedium Term Expenditure Framework (MTEF).However, this does not pose a big challenge to thetransition into county governance as the PFM Act2012 provides for medium-term and long-termplanning within county governments.Lastly, the linkage between planning and budgetingin local authorities has been poor, which has led tolack of prioritization. This has resulted into mostlocal authorities spending heavily on recurrentexpenditure, especially wages and salaries, with littleemphasis on capital projects, thus underminingservice delivery.16.2.4 Service deliveryThere is a huge expectation that devolution willresult into more equitable development, with moremarginalized areas greatly benefiting from thetransfer of resources. There are disparities in accessto services such as water and sanitation, roads,education and health services across counties.However, whether expectations about improvedservice delivery will translate into reality greatlydepends on whether counties will have adequateresources and capacity to meet the much-neededservices.For instance, there are wide regional disparitiesin the proportion of paved roads by county, withthe poorest performers being Mandera, Marsabit,Wajir and Isiolo and best performers being Nairobi,Mombasa, Kiambu, Baringo and Kisumu. Giventhe mode of devolution, the question is whetherthe poorly performing counties will be able toconsiderably improve on their service deliveryindicators, especially for decentralized functionssuch as infrastructure and health. To shed somelight on the relationship between resource needsand the outcome indicators, we carry out a simplecorrelation analysis of the relationship between theproportion of paved roads, total county revenueand funding per capita (for LATF) using a scatterdiagram (Figures 16.4 and 16.5).Figure 16.4: Correlation between total countyrevenues and percentage of paved roads in thecountyPercentage of paved roads353025201510500200Source: Authors’ compilation400 600 800 1000 1200 1400 1600Total Revenue (Ksh million)kenya economic report 2013 177

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sFigure 16.5: Correlation between funding percapita and percentage of paved roads in the country• The implementation of principles of fiscalresponsibility needs to be fast-tracked throughenabling regulations;Proportion of paved roads (%)353025201510500 100 200 300 400 500 600 700• There is need to build capacity for countiesespecially in terms of budget preparation andexecution, and other aspects of PFM such asimplementation of the Treasury Single Account,participation, and reporting, and accountingstandards;Source: Authors’ compilationFunding per capita (LATF) in KshThe results reveal a positive correlation betweenthe amount of revenue a county had at its disposal(also funding per capita) and the percentage ofroads that are paved (Figure 16.5). This couldimply that lack of adequate financial resources canbe a major impediment to service delivery at thecounty level. Thus, to bridge regional inequalities,counties with poor service delivery indicators (suchas infrastructure, health, etc.) might require morefunds than those with better indicators to be able toimprove on their outcomes.• Given the existing regional disparities in accessto services, future revisions to the revenuesharingformula should consider incorporationof an index of deprivation in terms of accessto services. Use of conditional grants may alsobe considered to ensure that more deprivedcounties have adequate resources to improveaccess to services, which would reduce regionaldisparities; and• There is need for a strategy to address theproblems that counties inherit from localauthorities, including institutional and humanresource capacity gaps.16.2.5 Key recommendationsSound financial management is required if countiesare to meet their service delivery goals. Thus, toinform the devolution process, we recommend that:• There is need to enhance the counties’ ability togenerate more revenue, given that most countiesare likely to rely more on transfers. This canbe achieved by enhancing the capacity of thecounties to administer the levies/taxes that areallowed under the law;• There is need to ensure downward and upwardaccountability through enhanced publicparticipation and publication of county budgetsand records. Efforts should be made to reducethe possibility of political/elite capture of theprocess;16.3 Role of Public-PrivatePartnerships for Competitiveand Sustainable Counties16.3.1 IntroductionGovernments have historically financeddevelopment projects through budgetaryallocations. However, as the demand and scale ofprojects grow and access to resources becomeslimited, the public sector has increasingly lookedto the private sector to provide financial resources,innovation and technical expertise. Thoughworking relationships between the public and theprivate sector are not new, the term ‘public-privatepartnership (PPP)’ is a relatively recent developmentterminology. According to UNESCAP (2004), PPPsare a “cooperative venture between the public andprivate sectors, built on the expertise of each partner178 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esFigure16.6: Framework for public-private partnershipsGovernmentFinanciersExpertisePrivate and / orPublic SponsorsEngineerDebtServicePaymentsDebt FinanciersEquity FinanciersProjectCompany(SPV)ContractorOperatorMultilateralInstitutionsOther –InsurersEscrow AgentRevenueCustomers / CommunitySource: Adapted from UNESCAP (2004*)that best meets clearly-defined public needs throughthe appropriate allocation of resources, risks andrewards”. Given the limited resources available tocounty governments, this section explores howPPPs can be leveraged to improve service deliveryand infrastructure development.16.3.2 Concept of public-privatepartnershipsProjects based on PPP can be quite complex,involving many different participants, includinggovernment, private sector experts, financiers andcustomers, each having different perspectives andinterests, which may not always be fully understoodby the other participants. Figure 16.6 shows theframework of PPPs. PPPs are normally deployedbased on models that vary by ownership of capitalassets, responsibility for investment, assumption ofrisks and the duration of contract.PPPs can contribute to achieving countydevelopment objectives by building on longtermcontractual agreements covering the design,construction, financing and ongoing operation ofdevelopment projects. Many PPPs use the ‘projectfinance model’, whereby lenders take project risksand rely principally on the cash flows generatedby the project for the repayment of loans. This isin contrast to the ‘corporate finance model’ wherethe general creditworthiness of the private sectorborrower is paramount. Therefore, PPPs couldstart with public-private strategies followed by jointproposals of regulations, and growing a businesstogether (Grigorescu, 2008).In PPPs, an escrow account is set up, usually at therequest of financiers, and managed by a third party inorder to safeguard project revenues for the purposeof ensuring that debt service obligations are met. A“Special Purpose Vehicle” (SPV), on the other hand,is a separate commercial venture set up to undertakekenya economic report 2013 179

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sthe project and all contractual agreements betweenthe various parties involved.16.3.3 Current policy frameworkThe Public Private Partnership Act (No.15 of2013) provides the necessary legal instrumentsto support private capital investments towardspublic infrastructure development. Through KenyaVision 2030, the government has already identifiedkey development areas to be deployed under thePPP framework across the country. The policyenvironment thus makes PPPs a viable optionfor promoting investments especially in capitalintensiveprojects. The logic behind this shift inpolicy is the realization that significant publicfinance and resources previously allocated to thesector will now be diverted to other sectors, andresources are inadequate.Public-private partnerships should be encouragedthrough mechanisms and instruments such as taxincentives, enabling regulatory environment that isfriendly to participation by the private sector anddevelopment partners, and financing models withpolicies that facilitate concessions and ownership.The Second Schedule, Section 19 of the PPP Act,2013, provides for the following PPP arrangements:• Management contracts• Output-performance-based contracts• Lease of public property• Concessions• Build-Own-Operate-Transfer• Build-Own-Operate• Build-Operate-and Transfer• Build-Lease-and Transfer• Build-Transfer- and Operate• Develop-Operate-and-Transfer• Rehabilitate-Operate-and-Transfer• Rehabilitate-Own-and-Operate• Land SwapWith this framework in place, it is clear that theaspect of PPPs is quite extensive and applies nearlyin every sector with scope for innovative adaptationsto make it attractive and worthwhile for national andcounty governments.16.3.4 Implementing infrastructureprojects in the counties throughPPPsPublic-private partnership (PPP) in infrastructure isrelatively new in most developing countries, Kenyaincluded, and will be a newer concept for countygovernments. Although governments have takensteps to promote PPPs, lack of capacity in the publicsector remains the major problem in implementingPPP projects. Other issues include institutionalarrangements and development of manuals andresource materials in support of PPP development.In the absence of the requirements aforementioned,county officials will face difficulties in projectdevelopment and implementation, and the generalpublic will have many misunderstandings aboutPPP projects.The county governments will face challenges ofgrowing demand for new and better infrastructureservices, as available funding from the traditionalsources and capacity in the public sector toimplement projects remain limited. Partnershipwith the private sector is an attractive alternative toincrease and improve the supply of infrastructureservices. County governments could partner inPPPs through legally-binding contracts, agree toshare responsibilities related to the implementation180 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esand/or operation and management of infrastructureprojects. This partnership should be built on theexpertise that each partner meets, and definedpublic needs through appropriate allocation ofresources, risks, responsibilities and rewards.PPP arrangements can be pursued betweencounty governments and private entities in theinfrastructure sector for the following reasons:(i)(ii)Increased efficiency in project delivery,operation and management;Availability of additional resources to meetthe growing needs of investment;the fact that not all projects are feasible for PPP.This means that the county governments will needto clearly appraise the projects to determine theviability of PPP before committing to contracts.Secondly, the private sector may not be interested ina particular PPP and it will, therefore, be the primaryresponsibility of the county government to createinterest and awareness in attracting private capital.Thirdly, it should be noted that change in operationand management may not improve economicperformance, especially if there are weaknesses ingovernance.PPPs in infrastructure projects are viable if:(iii)(iv)Access to advanced technology; andProper planning and development ofprojects.(i)They are different from conventional projectsin terms of project development, approval,implementation, administration andmanagement;Lack of funding should not be the sole reason fordeciding on PPP options, as additional costs forPPP projects could make them more expensive.These additional costs include: costs of borrowingmoney, administrative costs for managementof PPP contracts, transaction costs, and explicitand implicit liabilities imposed on governments.Therefore, county governments should notimplement PPP projects unless efficiency gainsfrom improved project delivery, operation andmanagement, and access to advanced technologycan offset the additional costs. Value for moneyshould be the main criterion in judging the PPPoption of a project. PPPs can also be attractive tocounty governments as an off-budget mechanismfor infrastructure development, as they enhance thesupply of infrastructure services, provide relief fromthe burden of the costs of design and construction,allow transfer of project risks to the private sector,and promise better design, technology, construction,operation and service delivery.It is also important to note that there are variouslimitations attributed to PPPs that countygovernments should take into account, such as(ii)(iii)(iv)(v)A robust business model can be developed;The focus is on delivering specified servicesat defined quantities and levels;The risk allocation between partners is partof the PPP contract design; andBoth partners understand the risks involvedand the allocation of risks between them.According to the current national Water MasterPlan, the country’s water demand is projected torise at least six times as Vision 2030 programmesare implemented, thus requiring about 600 percent increase of infrastructure capacity. Avenuesthat entrepreneurs can utilize are the opportunitiesfor innovative financing of the Water ServicesSector (WSS) through stakeholder participation,efficiency promotion to enhance cost recovery andeven implementation of public-private partnerships(PPPs) wherever applicable. Other opportunitiesinclude:kenya economic report 2013 181

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e s• The high-priority water uses that are importantto each region when identified can enhanceaccurate allocation of water rights and therequisite payments regime;• Adaptation and mitigation strategies, includingconstruction of storage structures such asdams and flood control dykes in strategiclocations to reduce vulnerability of the poor andmarginalized communities; and• Stakeholder participation in the required selfregulatingtrans-boundary institutions for intercountywater.There is need to rethink and re-order investmentpriorities in this sector for effective service deliveryand spatial coverage. Regressive subsidy policiesthat continue to favour the richest quintile in pipedwater services and similar infrastructure servicesshould be reviewed. Low-cost technologies canhelp address the concomitant water infrastructurefunding gaps.16.3.5 Public-private partnerships inthe agriculture sectorPublic-Private Partnerships (PPPs) hold agreat promise for achievement of agriculturaldevelopment in the country. Partnerships acrossdifferent agricultural value chains can be mobilizedand organized to provide synergy and sustainabilityfor the purpose of increasing farm production andimproved livelihoods. There is unexploited potentialfor PPPs in the following areas:Provision of cold chain infrastructureWith the demand for better quality food at affordableprices and at the right time by consumers, there isneed to invest in cold chain services especially forthe highly perishable commodities in fisheries,horticulture and dairy. This will reduce the losses,which the producers are faced with, and encourageintensive production. The success of implementingcold chain infrastructure involves proper networkoptimization of warehouses, facility planning, themonitoring of product quality throughout the coldchain and having a corrective action plan to counterany gaps. Further, the high cost associated withoperating cold chains needs the adoption of PPPsstrategy in establishing the cold chain infrastructure.This will enable service providers to understand theimportance of capacity utilization, productivity,inventory, cost, and waste, error and theft (WET)management, along with the ability to track andtrace these parameters. It is necessary that the policyon investment in cold chain infrastructure be giventhe priority and budgetary commitment it deserves.ICT and agricultureOne of the central objectives of the agriculture sectoris to produce enough food to feed the populationand minimize food import. Risk and uncertaintythat include uncertain weather, pests and diseases,volatile market conditions and commodityprices in agriculture are varied and ubiquitous.Their management is of particular importance tosmallholders because they lack resources to mitigate,transfer and cope with risk. Production, marketingand enabling environmental risks have been limitingagriculture sector investment, especially fromexternal parties due to lack of timely information,which is an essential factor in managing risk.Information communication technologies (ICTs)have recently been proven to be highly cost-effectiveinstruments for collecting, storing, processing,and disseminating information about risk. Earlywarnings on severe weather conditions, marketmovements, and pest and disease outbreaks aredirected to farmers using information services suchas mobile phones and radios, and hence limitingpotential losses.Farmers can also access advisory services remotelyto support their decisions related to risk-mitigatingactivities or to choose the most appropriate actionin response to an early warning. Therefore, thesedecision support systems are critical for transforming182 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esinformation into risk-mitigating action. In a fewinstances, ICT applications have been used inKenya to facilitate the design and delivery of indexinsurance where it has enabled the innovative IndexbasedLivestock Insurance in Kenya and KilimoSalama Index-based Input Insurance. However,the application of ICTs to transfer agricultural riskthrough instruments such as insurance and futurescontracts in Kenya is still quite limited. This couldbe due to low levels of institutional development,high costs, inability to customize products to meetsmallholders’ requirements, and poor financialliteracy rather than by the information constraintsthat ICTs can address. There is need to invest andenhance the provision of these ICT services inthe country through PPPs in order to increase theproductivity, hence food security and povertyalleviation.Development of cottage industries(Value addition)The government strategy for the development andtransformation of the agriculture sector is outlinedin Vision 2030 with a key policy of value addition ofproducts before they reach the market. Developmentof competitive agro-industries is crucial forgenerating employment and income opportunities.It has the potential to provide employment for therural population not only in farming, but also inoff-farm activities such as handling, packaging,processing, transporting and marketing of food andagricultural products. Agro-industries also enhancethe quality of, and the demand for, farm products.There are clear indications that agro-industriesare having a significant impact on economicdevelopment and poverty reduction, in both urbanand rural communities.Further, value addition negates the perishability ofprimary/raw goods through processing, and finallyvalued-added goods value more in the internationalmarket than raw materials. Countries such asThailand, Malaysia, Singapore, and other developedcountries, which less than half a century ago wereclassified as developing countries with Kenya,experienced their rapid economic growths throughthe processing of natural resources into highervalue-added products. In addition, value additionenhances food security and also offers numerousopportunities for livelihood sustainability.Therefore, in order to ensure that this process issuccessful, an atmosphere of transparency, probity,accountability, fairness, morality, good governanceand integrity is needed.Youth population dynamics and skilldevelopmentYouth unemployment is a growing problem, asit constitutes 70 per cent of total unemploymentin Kenya. The population of youths in Africa isestimated at 200 million with an approximately30 per cent of the population (age between 18-35years) in Kenya (World Bank, 2009). The youthsare faced with insufficient vocational skills, socialcapital and limited understanding of marketdynamics. An estimated 67 per cent of Kenyanyouths lack vocational skills after dropping out ofsecondary school education, and this has led tohigh youth unemployment that is posing a seriousthreat to Kenya’s social and political fabric. This hasjeopardized equitable economic growth and socialcohesion by denying the country a chance to reapfrom the potential benefits of her growing youthpopulation.A critical proportion of Kenyan youths haveenrolled in universities and colleges, yet cannot fitin the formal job market due to skills mismatch andirrelevance of their courses. Availablr data indicatesthat 2.1 million Kenyans were in formal employmentwhile 9.3 million people were self-employed by2011. The government, through PPPs, couldencourage youths to put more focus on agricultureand information and communication technologies(ICTs) since they have a high potential for growthin the country. It is, therefore, necessary for a policyto create robust linkages between universities andkenya economic report 2013 183

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sindustry, which will support skills developmentconsistent with our development needs.16.3.6 Stimulating tourism publicprivatepartnerships at countylevelIn all counties, there is potential for use of PPPs toaccelerate development of tourism infrastructure,including upgrading airstrips to asphalt status,constructing tourism-class accommodationfacilities, health centres, water and sanitationfacilities and recreational facilities. A few lessonsmay be learnt from France’s model given below (Box16.2)Box 16.1: Stimulating tourism development in ruralFranceFrance is the world’s fifth largest economy by nominal GDPfigures and the ninth largest by Purchasing Power Parityfigures. Out of the US$ 2.216 trillion GDP (PurchasingPower Parity) in 2010/11, tourism contributed 6 percent (or US$ 132.96 billion). France is a leading touristdestination, with nearly 80 million business and leisuretravellers annually.France offers mountain ranges, coastlines such as inBrittany or along the Mediterranean Sea, cities witha rich cultural heritage, châteaux (castles) such asVersailles and vineyards. France has 37 sites inscribed inUNESCO’s World Heritage List. Other attractions includeseaside resorts, ski resorts, annual cycle race (the Tour deFrance); beautiful rural regions (green tourism); mountaincampsites; luxurious cuisine; and small picturesqueFrench villages. Majority of inbound visitors come fromthe US, Britain and Germany.The public sector ensures the legislative and regulatoryframework in the tourism sector sets the standards inthe industry, encourages research and developmentin leisure products, sports products, agro-foods andprovides natural and cultural resources. Income taxcollected from enterprises in national parks and othersensitive areas that are open to the public is used todevelop and rehabilitate, maintain and manage theseareas. The classification of tourist resorts, hotels, holidayrentals and campsites has been decentralized to touristoffices in territories (or communes).The regional governments prepare regional tourismdevelopment and implementation plans. The Stateand territorial authorities are directly involved in theconstruction and maintenance of transport infrastructure(ports and inland waterways, high-speed railwaynetwork, airports, roads and motorway network),winter sports facilities/resorts (a key tourist attractionto France); and provision of basic public services such aswater and sanitation, energy, communications (post andtelecommunications) to domestic and inbound tourists.As an incentive to private sector investors within thetourist ‘Rural Revitalization Zones’, tax benefits are grantedto owners and operators of tourist accommodationfacilities and other enterprises in the zones. Since thetourism sector in France provides approximately 1 millionjobs in around 200,000 firms, the government provideshuge incentives to these firms too. Although employmentin the tourism sector is seasonal, the central governmenthas legislated creation of contract employment tailoredto periods of seasonal work, development of employers’groups, better access to training and recognition ofacquired skills, changes to occupational medicine,and access to various allocations, particularly housingbenefits.Professional assistance is provided through a network of159 chambers of commerce and industry, as well as 20regional chambers. These bodies are grouped togetherin the Assembly of French Chambers of Commerce andIndustry (ACFCI). The chambers are vital resources fordevelopment of hotels and restaurants, and supply ofleisure or tourism services. Various semi-public agenciesare run by tourist offices and committees operated bycommunes. Some of these agencies implement projectsthrough Public-Private Partnerships.The French Agency for Tourism Engineering (AFIT) isa national public agency administered by the StateSecretariat for Tourism. Its key tasks include tourismmarket research and product development, which itdoes in close partnership with all stakeholders in theindustry. The AFIT helps to develop the national supplyof tourism goods and services and to match that supplyto requirements. It provides expert advice to the sector.Source: André-Jean Guerin, 2004; The French Initiative forInnovation in Tourism; OECD; and various websites16.4 Investing in Human ResourceDevelopment for Competitiveand Sustainable Counties16.4.1 IntroductionThe World Economic Forum (WEF) 2011 reporton competitiveness identifies human capital asan important driver of national competitiveness.The report notes that as a country becomes more184 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esdeveloped, the importance of human capitalincreases and gets as much as 24.2 per cent (at theinnovation stage) of the final score that measuresnational economic competitiveness from 18.7per cent of the score at the efficiency-driven stage.Research (e.g. Barro 2000) shows that humancapital contributes positively to economic growth.The challenge facing the country currently interms of low levels of human capital is traced inthe regional disparities in access to health andeducation. These disparities are not isolated but cutacross the different regions in the country, basicallybecause health and education sectors (whichare the measures of human capital and humandevelopment) have been facing challenges for a longtime.For instance, health care provision within thedevolved system of government is likely to faceseveral challenges, key among them being uneveninter-county levels of development – unequaldistribution of health, infrastructure and resources,especially the distribution of health facilities,human resources and transport and communicationinfrastructure. According to the 2009 Populationand Housing Census (Government of Kenya, 2010),67.7 per cent of Kenya’s population live in ruralareas where the infrastructure for communicationand health services is poorly developed.Current issues in education and training in Kenyaare many and range from policy and regulatoryproblems to ensuring compliance with theEducation Act. The broader objective that thenational and county governments have to pursue,as envisaged in Kenya Vision 2030 is to achieve100 per cent net enrolment ratio (NER) in primaryschools and reduce the disparities in access, genderand quality of education.As the country moves to devolve, the status ofhuman capital indicators in the 47 counties warrantsindepth analysis. For instance, it is importantto understand whether the level of health andeducation is significantly different in the counties.This would inform public policy on the extent towhich national government resources can be sharedto uplift those that already lag behind.16.4.2 Importance of human capital indevelopmentThe major components of human capital are healthand education. However, health and nutritionare some of the initial factors that come into playin human capital development. People first needhealth before they take in skills. Healthier peoplecan transform their energy into productivity, bothmental and physical, more efficiently than ill andundernourished people can. An efficient use ofpeople’s productivity turns into more economicoutput, higher income and economic development.Increased income and reduced poverty makepeople afford better diets, improved health care andhealthier living conditions.The first thing that an individual gets upon birth ishealth. This implies that human capital developmentshould start at childhood. Specifically, poor healthin childhood might depress the formation of humancapital because much of a person’s physiological andcognitive development happens in childhood, andhence human capital investments should be madeearly in life. This implies that investment in childhoodhuman capital can be the initial foundation to thecounties’ growth and development. Focusing onchildhood human capital today means the countyis developing tomorrow’s talent. Healthy and wellnourishedchildren can definitely achieve higherintelligence and educational attainment. Grira(1998) showed that in Bangladesh, underweightchildren tend to get lower grades than well-fedchildren of the same age.The extent to which human capital would drive acounty will, however, be determined by the qualityof the education system and institutions. It isobvious that education helps in enhancing workers’skills and productivity. While basic educationkenya economic report 2013 185

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sincreases the efficiency of an individual worker,higher education becomes necessary to create apool of well-educated workers who can undertakecomplex tasks. Together with efficiencies in thelabour market, all these factors ensure that there isno shortage of talent necessary to exploit economicresources cost-effectively. Thus, health, educationand labour have been categorized as among thenecessary efficiency enhancers, especially foreconomies that seek to be efficiency-driven.High educational attainment, high literacy levelsand high levels of human capital are likely toimprove the business environment. Possessing suchcharacteristics facilitates the emergence of a highlyskilled labour base that is attractive to business.Empirical evidence shows that it is important forthe domestic population to have sufficient humancapital so as to possess the absorptive capacityto maximize the benefits of business spillovers(Narula and Narin, 2003). Research has also shownthat the availability of local skills is important inattracting FDI and that human capital formationis a prerequisite for benefiting from FDI and byextension business (Nunnenkap, 2002; Miyamoto,2003).Economic transformation requires skills andinnovation, which make the development of humancapital key for county development. Human capitalwill determine the number, quality and availabilityof engineers, for instance. It would also affect thequality and availability of doctors in a county. Thus,a healthy and highly educated county citizenry willguarantee a good catalyst for high productivity ofthe county.16.4.3 Status of human capitaland its implication for counties’competitivenessHuman capital has a major role to play in Kenya’seconomic recovery as stated in Vision 2030. It isabout building the capacity of the people to bemore productive. The acquired capacity is thehuman capital and it emanates from investmentsin people’s education and health. Education andtraining facilitate the acquisition of new skills andknowledge that increase productivity. Healthyindividuals increase their value in the labour market.To accumulate the human capital necessary forsustainable economic growth, therefore, a countyhas to invest in, among other areas, education andhealth.As the country aims to achieve a middle-incomestatus as per Vision 2030, one of the key goals isto improve the human development index fromthe current level to 0.75. The HDI provides acomposite measure of the three dimensions ofhuman development that include life expectancy,being educated (adult literacy and gross enrolmentin education) and having a high standard of living(measured by purchasing power parity income).The HDI ranges between 0 and 1, with zero (0)denoting very low levels of welfare and one (1) highlevels of welfare.The 47 counties are at different levels of humandevelopment. The highest ranking in terms of HDIis Nairobi at 0.653, while the lowest ranking isTurkana at 0.333 (UNDP, 2010).This implies that the effort required to boost Nairobito the country target of 0.75 is less than the effortrequired for Turkana. This will be the situationfor most of the counties whose HDI is far fromthe country’s target of 0.75. This means that a lotof resources would be required for Turkana forhealth (to improve life expectancy); education (forliteracy and skills development); and improvementin productivity in the county (to increase incomesand hence promote high standard of living). Theseare the factors that contribute significantly toenhancement of human capital in a county.The situation from life expectancy numbers showsthat most of the counties with a life expectancy atbirth above 60 years also have a better HDI thanthose whose life expectancy is below 60 years. Life186 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esFigure 16.7: Human Development Index by countyHDI0.70.60.50.40.30.20.10NairobiNyeriUasin GishuKerichoNyamiraEmbuBometLaikipiaNyandaruaKiambuKajiadoKirinyagaMurang’aMachakosElgeyo MarakwetNandiMombasaMeruKenyaMakueniNakuruTharaka NithiTaita TavetaVhigaLamuBungomaKisiiTrans NzoiaSource: Compiled from UNDP (2010)Figure 16.8: Life expectancy by county706050403020100CountyKakamegaKituiNarokKisumuMigoriBaringoKwaleWest PokotSiayaBusiaIsioloHoma BayGarissaSamburuMarsabitWajirTana RiverManderaTurkanaBometKeiyo MarakwetLaikipiaEmbuNyeriBaringoNyandaruaKajiadoMurang’aNyamiraMarsabitKirinyagaMeruWajirNarokManderaSamburuUasin GishuNandiTrans NzoiaKerichoBungomaGarisaMachakosKituiTharakaWest PokotTaita TavetaIsioloMakueniNairobiTurkanaKenyaKiambuLamuKisiiVihigaNakuruKakamegaKilifiTana RiverMombasaKwaleBusiaMigoriSiayaKisumuHoma BaySource: Compiled from UNDP (2010)expectancy at birth reflects the status of the healthcare services in a region. It shows the probability ofa child surviving given the current conditions of thehealth system.For instance, counties such as Nyeri, Uasin Gishuand Kericho have a HDI above 0.6. The lifeexpectancy in these counties is approximately 60years and above. The literacy levels stand at 86.5,82.4 and 82.0, respectively. This implies that suchcounties are likely to have higher productivitythan counties such as Turkana, Mandera andTana River, whose HDI levels are below 0.4 andhence performing poorly in health and educationindicators.Table 16.4 shows that the HDI for Kenya increasedfrom 0.474 in 2006 to 0.509 in 2011, with a rank of143 out of 187 countries. Kenya’s life expectancy atbirth was 53.7 years in 2006 and 57.1 years in 2011(Table 16.5). However, the regional disparitieskenya economic report 2013 187

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sTable 16.4: Trends in Human Development Index (HDI) for selected countries, 2006-2011Country 2006 2007 2008 2009 2010 2011 Rank 2011 out of 187Uganda 0.410 0.420 0.430 0.438 0.442 0.446 161Rwanda 0.390 0.401 0.411 0.419 0.425 0.429 166Nigeria 0.438 0.445 0.451 0.456 0.460 0.463 156Ghana 0.494 0.508 0.519 0.527 0.533 0.541 135Kenya 0.474 0.486 0.493 0.499 0.505 0.509 143Malaysia 0.742 0.746 0.750 0.752 0.758 0.761 61South Africa 0.601 0.604 0.608 0.610 0.615 0.619 123Indonesia 0.579 0.591 0.598 0.607 0.613 0.617 124Germany 0.898 0.901 0.902 0.900 0.903 0.905 9Source: UNDP, Human Development Reports (2012)Table 16.5: Trends in life expectancy for selected countries, 2006-2011Country 2006 2007 2008 2009 2010 2011Uganda 51.0 51.8 52.5 53.1 53.7 54.1Rwanda 53.0 53.7 54.3 54.7 55.1 55.4Nigeria 49.0 50.0 50.5 51.0 51.4 51.9Ghana 61.7 62.3 62.9 63.4 63.8 64.2Kenya 53.7 54.4 55.2 55.9 56.6 57.1Malaysia 73.1 73.3 73.5 73.7 74.0 74.2South Africa 51.0 51.1 51.4 51.8 52.2 52.8Indonesia 97.4 67.8 68.1 68.5 68.9 69.4Germany 79.5 79.7 79.9 80.1 80.3 80.4Source: UNDP, Human Development Reports (2012)indicate that some counties’ HDI and life expectancyis substantially low relative to international targets.The human capital development in low HDIcounties implies that such counties would requirehuge investments in health and education sectorsas a first step to creating a pool of skills that shouldact as a catalyst in developing other sectors. Whilethis is happening, the counties with high HDIwould be investing in other productive sectors suchas agriculture, manufacturing, infrastructure, andtechnology as they already have a pool of skilledmanpower given their high levels of literacy andenrolment in education institutions. Thus, suchcounties would emerge better off in terms of highproductivity and competitiveness.A highly skilled population is likely to provide a poolof labour that earns high incomes, and this generatesdemand for goods and services in the county. At thesame time, high incomes may lead to higher savingsand investment as the county moves to satisfy thedemand. On the other hand, a low-skilled countywill only ensure low innovation, high dependencyon (free) public goods and hence high poverty anddependency rates. The county is likely to be a netimporter of goods, services, skills and capital fromother counties. This will be a loss to such a countybecause its competitiveness would be low.188 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esFor the poor in the rural counties, lack of physicalinfrastructure is the largest obstacle to the accessof health services. Distance to health facilitieslimits people’s willingness and ability to seek care,particularly when transport is limited. Currently,there is a heavy urban bias in the distribution ofhealth facilities. Large cities are much better servedby both public and private health infrastructure thanwould be expected from their roles of serving urbanpopulations and providing referral services for thesurrounding population. Wealthier regions also havebetter access to infrastructure. Public investmentsneed to address inequities in the present distributionof health infrastructure.As human capital and hence human developmentemanates from investments in health and education,it is well reflected that the counties with highHDI have greater numbers of health and schoolinfrastructure. For instance, the first four leadingcounties in terms of HDI (i.e. Nairobi, Nyeri,Uasin Gishu and Kericho) have a higher numberof primary and secondary schools compared to thecounties of Turkana, Mandera, Tana River and Wajir,which are ranked last in terms of HDI. Nairobi,Nyeri and Uasin Gishu counties have 197, 467 and391 primary schools, respectively, compared to 188,105 and 82 for Turkana, Mandera and Tana Rivercounties, respectively (Annex Table 16.1). This hasimplication on the growth of skills in these countiesand affects the level of productivity, innovationand competitiveness of the respective region. Insuch counties, the level of human capital would belower compared to counties such as Kiambu andKakamega with 209 and 202 secondary schools,respectively. The number of schools affects accessand availability of education.and quality education and training. The outcome ofthis will, however, depend on how the counties willexploit such an opportunity.There is weak balance between quality (educationoutcomes) and quantity of schooling (accesslevels). There is a high level of wastage across levelsand unsatisfactory progression. The rising cost ofschooling on the part of households has negativelyimpacted on household demand for schooling.Therefore, the extent to which counties will shieldhouseholds from the direct and indirect costs ofschooling will determine the extent of access toschooling in the different counties.16.4.4 Conclusion andRecommendationsThe level of human development varies acrosscounties due to the different levels of achievementin health and skills development. To enhancecompetitiveness, there is need to increase bothhealth and education infrastructure, improvethe quality of the services offered in health andeducation facilities and, above all, improve theroad infrastructure for easier access to the facilities.Thus, counties need to mobilize all children toenrol in schools and strive to improve the qualityof education. In health, promotion of nutrition iskey and should be enhanced through provisionof Vitamin A supplements for children, increasedaccess to vaccination and immunization againstpreventable diseases, and equipping primary healthfacilities (which is one of the key responsibilities ofthe county governments) with the necessary drugsand supplies. These measures will go a long way inpromoting human capital for the counties.The education sector plays a key role in providing therequired knowledge, skills and attitudes necessaryfor the growth and competitiveness of any county.Education sector programmes such as free primaryeducation and free day secondary education havebeen geared towards improving efficiency in the coreservice delivery of providing accessible, equitablekenya economic report 2013 189

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e s16.5 Investing in Infrastructurefor Competitive andSustainable Counties16.5.1 WaterIt is crucial to understand the key policy issues in thissub-sector in order to guide the process, strategiesand criteria for coming up with workable solutions.An overview of the sub-sector has exposed thefollowing key policy issues:• Vast spatial disparity in access to improvedwater and sanitation services, with rural areas(67% of Kenyans) not having any organizedWater Service Providers (WSPs).• Small share of central government spending onthe water and sanitation sector (1% of GDP).• Weak accounting and spending both out of offbudgetfinancing through Semi-AutonomousGovernment Agencies (SAGAs) and the usualbudgetary allocations.• Challenges of financial sustainability facingWater Service Boards and Water ServiceProviders, such that full cost recovery onmanagement, operations and maintenancehas largely been out of reach, with over 70 percent of WSPs not being able to recover theiroperation and maintenance costs. It has beenestablished that underpricing of water servicesis a key concern, exacting a significant financialburden on Kenya of about 0.2 per cent of GDP.The Africa Infrastructure Diagnostic studiesestimate that in Kenya, the average total cost ofproducing utility water is US$ 0.99/cubic meter,but the average effective tariff is only US$ 0.58,such that only operation and maintenance costscan be catered for, but not capital investment.• As a water-scarce nation, Kenya needs toaugment her water storage capacity beyond 124cubic meters per capita (World Bank, 2010).• Cultivated area under irrigation is barely 2 percent or about 1000 km 2 . Studies have suggestedthat it would be economically viable to irrigatea further 550 km 2 , especially if water supplyinfrastructure is extended downstream of damsand small-scale irrigation expanded.Against this background, it is critical to determinewhere and how off-budget funds through SAGAsare utilized, and the extent to which these fundsget absorbed into the system and in line with sectorpriorities.Reforms in the water sector have mainly focused onpromoting rainwater harvesting, drilling boreholes,protecting shallow wells and springs, constructionof dams and pans, rehabilitation and expansion ofutilities, and reduction of unaccounted-for water.16.5.1.1 Institutions management andregulatory measuresto be pursued to ensureefficiency in water and sanitationservice delivery at county levelUnder the Constitution of Kenya 2010, thesector will undergo further reforms once more.Counties will be responsible for storm-watermanagement systems in built-up areas and waterand sanitation services. The national governmentwill be responsible for the use of international waterresources and water resources management. TheConstitution, under economic and social rights,formally recognizes the human right to adequatesanitation and access to water in the right quantity,quality and price – with sustainability. Catchmentprotection and water service delivery will be acollective assignment of the government ministryin charge of water, the Land Commission andcounty governments. The ministry responsiblefor water and irrigation has established a taskforcecharged with aligning the Water Act 2002 with theConstitution and has initiated the preparation of aNational Water Policy (2012).190 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esWater is a strategic resource with important socialand economic qualities useful for production,improved public health as well as a sustainable andresilient environment. However, the increasingand competing demand both in terms of qualityand quantity emphasizes its economic value morethan the social value. Thus, effective water resourcemanagement is required to even out a balancebetween the two. The requisite governance structuremust, therefore, recognize water as a social CommonPool Resource (CPR), and an economic good, inaddition to fulfilling constitutional requirements.Water and sanitation services (WSS) are essentialin sustaining socio-economic growth by openingup opportunities for households and entrepreneurs.Sanitation is closely related to human welfare withserious health implications. Densely populatedinformal settlements, in particular, have poorsanitation facilities as a result of high migrationto urban and peri-urban areas. Water qualityfor domestic use and irrigation is, in addition,compromised due to dumping of waste (bothindustrial and chemical) into rivers and other waterbodies. Potable water must be strategically plannedfor to ensure that no person, regardless of the countyof residence, is deprived. The process is expensivesince WSS infrastructure must be extensive to reachmore people, and is also capital intensive.Kenya is largely food insecure, yet there exists highirrigation potential that is untapped. In the budget2011/12, the government recognized this andallocated Ksh 8 billion to finance irrigation projects.Similarly, financing of basic services, including water,roads and electricity were accorded a first priority inexpending the equalization fund in 2011/12. TheConstituency Development Fund (CDF) has alsobeen used in financing water projects throughoutthe country.Examined broadly, Kenya can gain much frombetter coordination and management of the waterresources shared with neighbouring countries,which constitute more than 50 per cent of her waterresources. The Nile Basin Initiative (NBI) offersone big opportunity for strengthening regionalcoordination and management of trans-boundarywater resources, including flood waters.In order to achieve efficiency gains in the watersub-sector, the following interventions arerecommended:• Taking measures to reduce water distributionlosses that are in excess of 40 per cent for Kenyaagainst 33 per cent for other African low-incomecountries.• Taking measures to improve cost recovery.• Taking measures to increase the share ofbudgeted funds that is actually spent as well asensuring efficient utilization of allocated funds(averting the low capital-budget execution ratetypical of Kenya’s infrastructure projects).In terms of access to improved water sources, thereis real need to prioritize the deprived regions –rural areas in particular. To improve the overallplanning for increased access to improved watersources, an agency dedicated to rural areas, a wellmanagedspatial database, and regular mapping ofservice levels are key requirements. Standards ofreference for measuring access to water supply andsanitation need to be updated and harmonized forcountrywide, urban and rural assessment of servicelevels. The definition of urban and rural areas is oneexample that communicates the urgent need forstandardization in terms of character and populationdensity. Expenditure analysis by administrative unitsis also hampered by the dearth of disaggregated dataand the mode of allocation of funds from the centralgovernment, which is dispatched to catchmentbasedgovernment agencies and not administrativedistricts.Gaps in data and statistics need to be closed byconducting more frequent field surveys and usingthe technical arms of the ministry responsible forkenya economic report 2013 191

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e swater and irrigation to help capture the crucialaspects of quality, quantity, spatial metrics andservice sustainability. These aspects are not coveredin the limited decadal census data. The review showsthat study of access to water supply and sanitationneeds a more rigorous technical approach than iscurrently the case. Time-related factors and howthey affect sustainability of the services need to becaptured in the sector surveys. Equally important isthe mapping of spatial variations in service levels.Bodies that will be responsible for the planning anddelivery of water and sanitation services in countiesunder the Constitution of Kenya (2010) will need toplace greater emphasis on rural access. This calls forinnovative measures that utilize local endowmentssuch as labour abundance, cheap building materialsand spaces that can accommodate improvedcommunal water and sanitation infrastructure.16.5.2 RoadsThe roads sub-sector is experiencing variouschallenges that affect efficient and economicalroad transport. These include political interferencein project implementation as well as mismatchin resource allocation required for a reliableroad network in the country. Nationally, there isserious inequality in terms of road infrastructure.Another challenge has been inadequate plant andequipment under the mechanical and transportfund to meet the ever-increasing demand. Thereduction of maintenance funds for class D, E andother roads to 10 per cent and the eventual equaldistribution of the same to all the constituencieshave led to inadequate funding in the sub-sector.There has also been a huge maintenance backlog ofthe road network, which has reduced the uptake ofnew projects. Attracting private sector funding tosupplement government allocation has also provedchallenging. Other challenges witnessed in the subsectorinclude lack of adequate local constructioncapacity, leading to poor project execution anddependence on foreign firms; encroachment of roadreserves by private developers leading to delays inproject implementation; and poor enforcementof the axle load limits, which has led to increaseddeterioration of road conditions.16.5.2.1 Institutional managementand regulatory measures forefficiency in the roads sub-sectorat county levelThe national and county governments will playimportant roles in the development of the roadssub-sector. The Constitution provides that thenational government is responsible for transportand communications, in particular road traffic; theconstruction and operation of national trunk roadsand setting standards for the construction andmaintenance of other roads by counties. On theother hand, the county governments are responsiblefor county transport, including county roads. Thisbeing the case, it is clearly demonstrated that thenational and county governments will have to worktogether to develop a coherent and well coordinatedframework to ensure efficiency in the roads subsector.Further cooperation will be necessary in:• Securing foreign and domestic funding for roadconstruction.• Integrating national and county road networks.• Revenue collection and disbursement from theroads sub-sector.• Negotiating and contracting under PPParrangements.• Facilitating spatial equity in road networkdevelopment.• Creation of space for roads through nationaland county plans.192 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esInter-county cooperation will also be vital inensuring that uniform and continuous roadnetworks are deployed across the counties. Theobjective will be to ensure that road standards andconditions are similar in neighbouring counties.It is noteworthy that the ministry responsible forroads has already embarked on restructuring theroads sub-sector in line with the Constitution. Theministry has prepared a Draft Policy on Aligningthe Roads Sub-Sector with the Constitution(Government of Kenya, 2012). According to thisPolicy, the current institutional framework willbe restructured leading to the creation of a StateDepartment responsible for policy and settingof standards and specifications within the subsector.It will also be responsible for collection,analysis and forecasting of road traffic data as wellas master planning. The Policy further provides forthe creation of the Kenya National Trunk RoadsAuthority (KENTRA), which shall be a nationalgovernment body responsible for national trunkroads and capacity building and technical assistanceto counties. A roads fund shall be created withthe mandate to source and manage construction,operation and maintenance funds for the subsector,except funds from the exchequer. It shallserve both levels of government. County roads willbe transferred to the county governments and it isenvisaged that county roads’ establishments will becreated to manage these roads.16.6 Land Adjudication andInvestment in Counties16.6.1 BackgroundLand is every nation’s most valuable asset, since itplays a significant role in promoting social, economicand political development. Thus, getting landrights institutions correct is the most compellingpolicy to resolve because property rights affect theway in which other policies will work on land. AsKenya devolves into counties, the land questionremains a major challenge that needs to be tackledto promote investment in the counties. Accordingto the National Land Policy (2009), investmentsin land-related ventures are important avenues forcreating wealth for local communities. The Policyrecommends creation of land banks for investmentin industry and housing programmes, provision ofserviced land for housing development for the poor,establishment of a framework for auditing all landbased on local and foreign investment proposalsto ensure that they are aligned with nationalfood security needs, protection of land rights ofindigenous people and communities, acquisitionof land for strategic public ventures such as seaports, airports, and research facilities for purposesof security and planning, ensuring that land isaccessible to auxiliary developers only through subleases,and compulsorily acquiring all land on whichmineral resources have been discovered beforeallocating such land to interested investors in orderto facilitate fast access to the land and to prevent theexploitation of local communities, environmentaldegradation and ensuring restoration of land afterexploitation.Despite the above recommendations by theNational Land Policy, there is inadequate public landfor investments in the counties, and there are stillchallenges in land management in the country andin the counties that may hinder fast investment. Thechallenges include: a bureaucratic and centralizedland registration process that makes it costly;inequality in land holdings in the counties with largeportions of land being held by a few people, whileothers are landless or hold uneconomical sizes;land grabbing of public land and informally-ownedland that has led to land clashes; gender disparity inland ownership where women are disadvantaged;uncontrolled uneconomical sub-divisions;unplanned rapid urbanization; inadequate land useplanning; unsustainable agricultural production;poor environmental management and inappropriateecosystem protection.According to the World Bank (2012), Kenya isranked number 161 out of 184 economies in thekenya economic report 2013 193

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e ssteps, time and cost involved in registering property.The time taken in registering property in Kenya islonger than in any other East African country, withTanzania, Uganda and Rwanda ranked 137 th , 124 th ,and 63 rd , respectively. In the number of proceduresinvolved, Uganda has the most procedures (12),followed by Kenya (9) and out of the 4 countriesin East Africa, Rwanda is the best with only 5procedures. On the cost of registering land, Ugandacharges 1.9 per cent of the value of the propertyfollowed by Kenya and Tanzania that charge 4.3 percent and 4.4 per cent of the value of the property,respectively. Rwanda charges the highest cost of 5.6per cent.Land registration as a prerequisite for land tenureis, therefore, critical in promoting investment in thecounties. The fact that over 60 per cent of the ruralpopulation in Kenya relies on agriculture for theirlivelihood and income makes land tenure even moreimportant. The recent surges in investor interestin Africa in agriculture, mineral resources andtourism demand for land tenure security mean thatpotential investors need to be sure of reaping the fullbenefits of land deals and investment, while localcommunities need protection and full compensationfor their land rights. The conflicts arising in Turkanawhere oil was discovered, and the ongoing case oftitanium mining in Kwale (the matter is in court overcompensation for environmental pollution) merelyamplify the need for clear land rights. It is againstthese challenges that land registration is assumedto minimize such land conflicts. Land registrationremoves the uncertainty on who is to benefit fromthe use of the land. It also motivates the owner orthe county to conserve the resource if it benefitsthe individual/county and creates incentives for theowners to invest more on the land due to the securityof tenure. Land registration also gives the ownersthe confidence to lease out their land to the bestinvestors, since they are guaranteed their land whenthey are able to utilize it. This is unlike unregisteredland where the leased person can acquire ownershipstatus through registration as the first owner.It is, however, important to note that demand for landregistration may vary among counties/individualssince it depends on how much they value security,which in turn depends on factors such as land use,land scarcity (population density), degree of overalleconomic development and the efficacy of informalland rights systems. This also influences the type ofland registration to be implemented in the counties,whether individual or group registrations but thosethat will promote the appropriate land use in thearea. Past studies have noted that land registration isless important when land is abundant, but becomescritical as demand increases due to populationgrowth, which can affect food production as well asthe social and political fabric of the nation.The ongoing reforms occasioned by theConstitution of Kenya (2010), Vision 2030 andthe National Land Policy (2009) have emphasizedland registration. According to Vision 2030, theland adjudication process has slowed down due topending land and boundary disputes; it emphasizesthe implementation of the National Land Policy toaddress the challenge. The Land Registration Act2012 is one of the statutes that has been formulatedin line with the implementation of the NationalLand Policy. Registration applies to all public land asdeclared by Article 62 of the Constitution; recordingof community interests in land as declared by Article63 of the Constitution; and to all community land asdeclared by Article 64 of the ConstitutionLand adjudication in Kenya, which entailsascertaining and recording rights and interests inland claimed by individuals on customarily-ownedland, has been ongoing for the last 50 years. Itinvolves the replacement of the informal land rightswith formal, legal rights and is applicable to landthat is vested under the local authorities on behalf ofthe community under the Trust Land Act. The landadjudication process is lengthy and costly. Disputeshave arisen based on the criteria of determining thebeneficiaries (Smucker, 2002). Land conflicts havebeen witnessed during adjudication whenever thebeneficiaries have to be moved from the land they194 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice eshad invested in. This has also been a discouragementto those holding the land informally awaitingadjudication to invest largely on the same becausethey are not assured of retaining the same portionof land after adjudication. Informal land ownershipalso leads to low investment due to the fear ofcorruption during adjudication, where land isallocated to the elites and those in power, sometimesin total disregard of the local residents. Examples ofsuch situations were cited in the Ndung’u Reportof the Commission of Inquiry into Illegal/IrregularAllocation of Public Land (Government of Kenya,2004) where chunks of trust land were grabbedby non-residents. They included 61 parcels inEmbu County, 93 in Meru County, 61 in NakuruCounty, and 49 in Kiambu County, among others.A study on the land adjudication process in Tharaka(Smuckers, 2002) also noted that the residentssupported the registration process out of perceivedneed to protect land from expropriations by theelites. Thus, registration creates security of landrights, which creates the incentives to invest.Land registration has also been associated withpoverty. Vision 2030 notes that delay in landadjudication “has contributed to increasingpoverty among some communities”. Kieyahand Nyaga (2010), on their study on effects ofland titling on poverty, found that ownership oftitled land is positively correlated with poverty,where households with titled land have a higherconsumption than those with unregistered land.A comparison of poverty levels in various countiesbased on the date of adjudication revealed someconsistency with high poverty level in areas wheremost of the land is not yet adjudicated compared toareas where land adjudication has been completed.Though land adjudication may not be the only causeof the high poverty levels in these regions, it is asignificant factor that should be addressed to createincentives to land owners and promote economicdevelopment that would reduce the poverty in theareas.Land registration reduces the potential for landconflicts, which are ignited by feelings of landinsecurity whenever residents feel cheated bythe land registration system. Land disputes alsoresult from undefined boundaries. Land conflicts/disputes deter land investments either due to thefear of destruction of the investments during theconflicts or disputes, as witnessed in the Kenyanpost-election conflicts in 2007. Such fear, especiallyduring elections in Kenya, discourages agriculturalinvestments and increases food insecurity in thecountry. In support of the above assumptions, thestudy in Tharaka Constituency on land adjudicationfound that land registration led to increase ininvestment in soil conservation through adoptionof stone bunds, tree and shrub planting, and use ofmanure to increase soil fertility (Smuckers, 2002).In Kajiado, frequent land conflicts were associatedwith informal land ownership, and the studyrecommended land adjudication to minimize theconflicts (Rita, 1980). The land conflicts resultingfrom the discovery of oil in Turkana and tiomin inKwale are also a result of informal land ownership,where residents fear that after dispossession theywill end up with little or no compensation since theirland ownership is not ascertained. Apart from theland disputes, the slow process in land adjudicationhas been associated with costly adjudication process,inadequate technical staff, lengthy legal procedures,lack of political goodwill, and bureaucracy in theland registration process that provides loopholes tocorruption.There is an indication that land registration hasan impact on land investment given that landinsecurity has been associated with low economicdevelopment, poverty and land conflicts/disputesthat lower incentives for residents and investors.The Constitution, the National Land Policy (2009)and the National Land Commission Act 2012 haverecognized land registration as a prerequisite todevelopment, but the question remains on how tofast-track the registration process.kenya economic report 2013 195

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sThe Kenyan government can fast-track the landadjudication/registration process by adopting lowcostmethods of registration and use of unskilledlabour. Ethiopia, Rwanda and Madagascar haveadopted such methods and have registered 20million parcels within three years (2003-2005), 10.5million land parcels in less than five years, and about75,000 parcels of land in 3 years, respectively. Thesemethodologies record evidence of ownership ratherthan a traditional boundary survey; they includeremote sensing and GIS methodologies, recordingsof verbal description of boundary or video ofboundary. These methods are more inclusiveand can be upgraded when appropriate. Themethodologies are likely to be cheaper and fasterforms of survey and registration of land. Kenya canlearn from countries that have managed to carry outland registration cheaply within a short period usingsuch methods, among them Ethiopia, Rwanda andMadagascar. Borrowing from these examples, Kenyacan fast-track the registration process and, in sodoing, create security of tenure and confidence thatwould stimulate investments not only in counties,but also nationwide.Secondly, the land adjudication process needs tobe holistically implemented through involvementof other stakeholders such as planners and serviceproviders. By so doing, land will be provided forpublic utilities and set aside for suitable purposesin the counties. It is during this process thatplanners and other stakeholders can identify theland that can be acquired by the government forhousing developments, and land banked for futureinvestments.Lastly, the Constitution and the National LandPolicy recommendations for devolution of landadministration and management to the countiesneed to be implemented. Unlike the currentcentralized land management system, which islengthy, bureaucratic and costly, management ofland at the counties will promote easy access to landfor investors, since it will reduce land transactioncosts and will be locally available.16.7 Creating an EnablingEnvironment for Investmentin Micro, Small and MediumEnterprises16.7.1 IntroductionMicro, Small and Medium Enterprises (MSMEs),defined as firms employing less than 100 employees,form a large part of private sector enterprises inKenya. It was estimated in the last national surveyof the sector carried out in 1999 that Kenya had atotal of 1.3 million MSMEs employing 2.3 millionpeople. It was further estimated that Small andMedium Enterprises (SMEs), defined as firmsemploying 10-99 employees, accountee for 75 percent of total employment in Kenya but contributedonly 18 per cent of GDP (Government of Kenya,2007). The Constitution of Kenya assigns countygovernments trade development and regulationfunctions, including markets, trade licences, fairtrading practices, local tourism and cooperativesocieties. In conjunction with other devolvedfunctions such as agriculture, county public worksand planning, county governments will play criticalroles in MSME sector growth.Due to the large share of enterprises, MSMEsform the base for private-sector-led growth,and deliberate policy efforts have often targetedthe sector in developing countries as an engineof employment and growth. MSMEs act as acatalyst for entrepreneurial seedbed for industrialtransformation (McPherson, 1996). Kenya Vision2030 recognizes the sector and envisages MSMEs’improved productivity and innovation by enhancingthe investment climate, including access to finance.Policy efforts targeted at the MSME sector areanchored on the premises that MSMEs are theengine of growth, but market imperfections andinstitutional weaknesses impede their growth(Beck and Demirguc-Kunt, 2006). Under thedevolved governance structure, MSMEs are notonly significant in employment creation but alsoin revenue generation for the county governments196 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esin form of service fees. Single business permit feeswill form a significant source of own revenuesfor county governments, which will be used fordelivery of county services. During the 2009/10fiscal year, single business permit fees amounted toKsh 2.9 billion, accounting for 17 per cent of localgovernment own revenues (Government of Kenya,2010).The role of MSMEs can only be maximized bymitigating growth constraints resulting mainly fromadverse investment climate, poor infrastructure,credit constraints, insecurity and regulatory burden.Various empirical studies have established thatan adverse investment climate, including weakproperty rights protection, stringent regulatoryframeworks, poor infrastructure and lack or limitedaccess to credit, constrains MSME investment andgrowth. For example, using cross-country data of 80countries, Ayyagari et al. (2005) found that crimeincidences and political instability negatively affectfirm investment and growth.A study by KIPPRA (KIPPRA and Ernst andYoung, 2008) established that being in an industriallocation, access to electricity, lower incidencesof insecurity, access to bank loans and positiveperceptions of the entrepreneur regarding the courtsin terms of affordability and fairness positivelyaffect firm growth. The study used the MSMECompetitive Project Baseline Survey 2008 datacollected by KIPPRA. The data set comprised of2,590 MSMEs in 19 counties. Figure 16.9 showsaverage investment climate indicators across 19counties. As shown in Figure 16.9, there exists apositive correlation between sales growth and accessto electricity, bank loans and piped water.Figure 16.9: Sales growth vs percentage of MSMEswith access to electricity, bank loans and pipedwaterPercentage250200150100500-50EmbuKituiKwaleMigoriSales growthBusiaMachakosNakuruBaringoKakamegaKisumuElectricityMombasaNyeriCountySource: KIPPRA 2007 MSME Baseline SurveyLaikipiaKiambuElgeyo MarakwetKisiiKajiadoUasin GishuBank LoanGarissaPipe waterFigure 16.10, on the other hand, shows a negativecorrelation between MSME growth and adverseperception of courts in dealing with businessdisputes. Insecurity incidences also show negativecorrelation with MSME growth across the counties.The KIPPRA study also reviewed the factorsaffecting the growth of MSMEs in Kenya byanalyzing sales growth between 2004 and 2007for the sampled firms, as a proxy for firm growth.Controlling for firm and owner characteristics, theregression results show that being in an industriallocation, availability of bank credit and accessto piped water and electricity positively affectMSME growth. Insecurity and increase in negativeperception of the fairness, cost and efficiency ofcourts adversely affect MSME growth.kenya economic report 2013 197

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sFigure 16.10: Average sales growth vs percentageof MSMEs that have not experienced insecurityincidences and average perception of the judicialsystemPercentage250200150100500-50KituiKwaleEmbuMigoriMachakosBusiaNakuruBaringoKakamegaKisumuMombasaNyeriCountyUasin GishuLaikipiaKiambuElgeyo MarakwetKisiiKajiadoGarissaSales growth Experienced insecurity Judiciary indexSource: KIPPRA (2007), MSME Baseline SurveyThese findings suggest that policy efforts aimed atpromoting a conducive investment climate at countylevel are vital for MSME growth. Investment climateindicators, including access to bank credit, pipedwater, electricity, crime incidences and negativeperception of the courts in dealing with businessdisputes vary across counties and positively affectMSME growth. These results are consistent with thelarger literature on the importance of access to bankcredit, quality institutions and infrastructure for firminvestment and growth. The study recommends thatcounty governments should:• Provide adequate funds for upgrading andmaintenance of infrastructure: county roads,piped water and electricity reticulation.Moreover, Schedule Four of the Constitutionassigns the county transport function to countygovernments, including county road transportand other planning and development activitiessuch as housing and electricity reticulation,water and sanitation services.• Complement the national government inenhancing security, for example throughcommunity policing and discouraging activitiesthat may cause ethnic violence. Ethnicviolence can be as a result of unequal resourcedistribution.3.532.521.510.50Judiciary Index score• Foster development of industrial clustering. TheConstitution assigns trade development andregulation, land survey and mapping, countyinfrastructure and public works to countygovernments. County governments can attractprivate investment through infrastructuredevelopment.• Consider creating funds for lending to MSMEsto mitigate credit constraints and boostinvestment and growth. County governmentsmay also consider attracting financialinstitutions by investing in infrastructure andmitigating crime incidences.16.8 Stimulating and SustainingTourism Investments in theCounties16.8.1 Increasing participationin tourism at county andcommunity levelsThe concentration of tourism investment on a fewaccessible parks and reserves and coastal beachesover the years may have lessened the quality andappeal of Kenya’s wildlife tourism product tointernational tourists. Therefore, spatial devolutionof infrastructure development funds to the countiescan help improve access to tourist attraction sitesand protect wildlife and ecosystems from damage bytoo many visitors, while helping to strengthen theeconomic performance of the tourism sector. Thiswould also help to distribute tourism-related costsand benefits more evenly across the country (WRI,2007).Improving spatial diversification of visitors requiresincreased and sustained investments in the transportsystem, safe water supplies, communicationsservices, tourist accommodations, protected areasand targeted marketing efforts. In addition, itrequires greater control and participation of counties198 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esand local communities in wildlife management andtourism enterprises.Below are examples of selected areas within thecounties with tourism potential that could beopened up through the ongoing infrastructuralinvestment projects across the country:The LAPSSET Project: The area surroundingLamu has great tourism potential due to the richattractions such as beautiful beaches, coral reefs,mangrove forests and wildlife viewing–including theendangered sable antelope. The recently-launchedLamu Port-Southern Sudan-Ethiopia Transport(LAPSSET) project, a Vision 2030 flagshipinvestment project, will help this area capture agreater share of the national tourism receipts. Theproject will enhance commerce in all countiesalong the corridor by cutting down transport timeand costs. The proposed Lamu-Lodwar road alsopasses through Isiolo County, where the proposedresort city and an international airport are to beconstructed. These, together with the Isiolo-Moyaleroad, will unlock tourism potential in the northerncounties.Samburu National Park and the surroundingLaikipia ecosystem, including Meru National Parkand the northern slopes of Mount Kenya: Samburuis among the least visited of Kenya’s national parksin spite of the fact that the area contains a greatdiversity of wildlife. It contains the largest elephantpopulation outside of the Tsavo National Parks; halfof Kenya’s rhino population; and the only herd ofJackson’s hartebeest, a threatened antelope (LaikipiaWildlife Forum, 2006). The ongoing upgrading ofthe Isiolo-Marsabit road to tarmac status, togetherwith the proposed development of a tourism resortcity at Isiolo, will open up the Samburu-Laikipiaecosystem as an alternative destination and a leaderin ecotourism and home-stay tourism in Kenya.Overall, there is need to build the capacity ofcounty governments (working with the nationalgovernment) to exploit various tourism resources.The county governments should supportdevelopment of unique tourism products andtourism marketing strategies to promote theirecosystems and other resources both domesticallyand internationally. In all cases, great care shouldbe taken to ensure that development of tourisminfrastructure does not undermine the integrity ofecosystems, and that stakeholders in each area areconsulted to avoid potential resource conflicts.County governments will play a key role inenabling local communities to establish smallscaleenterprises designed to benefit from tourismactivities, resources and facilities (infrastructure)in the county. Cultural home-stays, ecotourism andyouth enterprises could form some of the economicactivities that community groups may benefit fromat county level. A number of counties have suitableresources that can support sustainable ecotourismactivities (ESOK, 2005).16.8.2 Tourism institutions at countylevelConsistent with the Tourism Act 2011 and theKenyan Constitution, there is need to devolvetourism institutions to the counties as a first stepin transforming counties into sustainable centresof tourism development. County-level tourisminstitutions may be considered, including thefollowing:Table 16.6: County-level tourism institutionsProposedInstitution /OfficeTourismregulatory,developmentand marketingProposed Roles• Develop a county tourismstrategic plan, and monitor itsimplementation• Marketing and investmentcoordination with the privatesector• Promotion of domestic/intercountytourismkenya economic report 2013 199

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sCounty touristpolice unitCountywildlife/conservationoffice• Kenya Tourism Protection Services• Ensure security of tourists atcounty level• Conserve and manage nationalgame reserves, provisional wildlifeconservation areas, and sanctuariesunder its jurisdiction• Collaborate with countygovernments, communitiesand landowners for purposesof effective conservationand management of wildlifeconservancies and sanctuaries• Prepare and implement integratedmanagement plans for nationalparks, provisional wildlifeconservation areas, nationalreserves and sanctuaries under itsjurisdiction• Establish wildlife conservationareas and committees• Assist communities and landowners to set aside critical wildlifehabitats, corridors and dispersalareas for the conservation andmanagement of wildlife within thecounty• Manage and minimize humanwildlifeconflict while enablingcommunities to exploit andgain from the tourism resourceendowment at the local level.The tourism research and development functionneed not be devolved to the counties, but canremain the mandate of the proposed TourismResearch Institute, among other functions includingtourism/hospitality training; research, monitoringand evaluation; product development and branding– leveraging existing resources; and establishing atourism information system.In addition, there need not be a specialized tourismfund and/or financial institution at county level, butrather coordination offices affiliated to the proposedKenya Tourism Fund and the Kenya TourismFinance Corporation at the national level. Thecounty-level offices will appraise fund applicants andprovide links to credit to fund tourism enterprises.16.9 Promotion of Wholesale andRetail Trade in CountiesDomestic trade is crucial for development inKenya. Wholesale and retail trade form a significantcomponent of domestic trade and contributes about10 per cent of GDP. It is also a major source offormal and informal employment. Lack of consistentand credible data on wholesale and retail trade inKenya limits analysis of this sub-sector, more so atcounty level. In order to circumvent this problem,we have used the growth of supermarkets as a proxyfor growth in wholesale and retail trade. Availableliterature suggests that supermarkets in Kenya havegrown at a very high rate in the last decade. At thecounty level, the expansion of supermarkets isexpected to stimulate investments in constructionand property development and trade values withinthe county.In order to stimulate investments at the countylevel, wholesale and retail trade must embraceefficiency of supermarkets, distribution channelsand infrastructural support.16.9.1 Efficiency of supermarketsTheoretically, economic efficiency is achieved whenconsumers pay prices that ensure value for money.The fewer the transactions a consumer has to gothrough, the higher the level of efficiency. Wholesaleand retail supermarkets improve efficiency indistribution by encouraging competition, lowerprices, market information and stocking of manygoods compared to ordinary shops. Their rolereduces per unit marketing costs, promotes stablemarkets for local produce, and encourages increasedoutput and productivity. Supermarkets basicallyhave to perform the following three functionscost-effectively: physical exchange of products;standardization of products in terms of weights,measures and quality; and exchange of informationbetween suppliers and buyers.The fundamental objective of wholesale markets isto improve efficiency in the distribution channels200 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice esat county level. By centralizing transactions at asingle location, reducing the period for transactions,and separating wholesale and retail functions inthe distribution system, supermarkets promotegreater transparency and better price formationthrough a clearer interplay of supply and demand.Enhanced storage and handling conditions increasedistribution efficiency in the domestic trade.County governments need to streamline investmentincentives for supermarkets at county levels.16.9.2 Distribution of supermarketsSupermarkets are becoming increasingly importantas distribution channels for final consumer productsin urban centres, sub-urban centres and rural townsin Kenya. It is, however, difficult to ascertain thepercentage market share they command. Theyplay an important role in the economy becausethey are able to establish lasting relationships withactors such as manufacturers, and thus reducethe number of intermediaries between producersand final consumers. By reducing the length ofthe chain, the final buyers can pay relatively lowerprices compared to a situation where there are manyintermediaries in between. The line of differencebetween wholesalers and retailers is very small; thisis because supermarkets also break the bulk, just likethe small shop operators.As is the case in other parts of the world,supermarkets are mainly found in major urbancentres in Kenya such as Nairobi, Mombasa,Kisumu, Eldoret, Nyeri and Nakuru, among otherupcoming towns. This can be anticipated becausein these towns there are a large number of middleincomeearners with requisite purchasing power.There are also instances when these supermarketsare located in areas where the higher income groupsreside. One can easily conclude that the maindeterminant of where they will be located is theincome level, as that will determine the sales theyare likely to make.The trend that supermarkets will most likely belocated in major urban centres and with largepopulations is unlikely to change with the formationof counties. Other important factors that willdetermine where they will be located is the physicalinfrastructure, such as the availability of roads, waterand electricity and ICT. Demand-side and supplysidefactors have been attributed to the rise anddiffusion of supermarkets in developing countries(Reardon and Gulati, 2008). Demand-side factorsinclude: incomes, urbanization, the opportunitycost of women’s time and other enabling conditions.Supply-side factors include: procurement system,modernization and massive retail FDI, as well asmassive competitive domestic retail investment.16.9.3 Infrastructural developmentInfrastructural development is key to attractinginvestment in the counties. As pointed out in Vision2030, the trade sector in Kenya is characterizedby inefficiencies along the supply chain fromproducer to consumer and from importer to thefinal buyer. This is largely due to the poor state ofroads, drainage and water supply, inadequate powersupply, poor transportation and communicationsystem, handling and storage facilities and wastageand waste disposal systems. In addition, there arelimited and poorly-designed markets and lackof housing facilities with enough loading baysand parking spaces. In addressing some of thesechallenges in order to facilitate commerce, tradeand rural enterprise development, the Ministryof Finance in the 2009/10 budget launched theEconomic Stimulus Programme (ESP). Underthis programme, the government through theMinistry of Local Governments was to supportthe construction of markets in the country’s 210constituencies. The success of this project is crucialbecause it opens the opportunity to link producersand consumers in every constituency within acounty. Good infrastructure will also go a long wayin linking the counties with surplus production withthose with scarcity.kenya economic report 2013 201

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e s16.9.4 Business registrationIn order to attract investment in the wholesale andretail trade in the counties, registration of businessesneeds to be made easy. Currently, the licensing of thewholesale and retail business is done by the Ministryof Local Governments through issuance of a SingleBusiness Permit under Section 163 of Cap 265 of theLocal Government Act. The Single Business Permitis issued by local authorities and allows for thedistribution of goods and services within the area oflocal authority. However, the County GovernmentBill 2012 gives powers to the county governmentsto make laws and regulations to give effect to tariffand pricing policies. In addition, the National TradeDevelopment Bill 2012 proposes the establishmentof the Domestic Trade Directorate, which will beresponsible for the formulation and implementationof policies and measures aimed at improving thebusiness environment for the development ofdomestic trade. The Directorate will be responsiblefor the promotion and harmonization of all laws andregulations governing trade licensing and regulation,and coordination of all institutions and agenciesresponsible for trade licensing and regulation. This,in effect, means that the Single Business Permit maybe reviewed with coming into force of the two bills.16.9.5 Business developmentThe Ministry of Trade is responsible for thepromotion of retail and wholesale trade accordingto the Presidential Circular No.1/2008. Theministry is responsible for promotion of businessthrough the Kenya National Trading Corporation(KNTC), Assistance to Micro and Small EnterprisesProgramme (ASMEP) and Joint Loans Board( JLB) among other institutions. The KNTC’smajor objectives are to develop small and microenterprises (SMEs) markets, expand and diversifytrade, and improve and strengthen the supplychain and distribution systems. On the other hand,the JLB seeks to promote small-scale enterprisesthrough provision of affordable credit of betweenKsh 20,000 and Ksh 100,000.16.10 Opportunities for Investing inthe Forestry SectorThe Forest Act 2005 provides for incentives to beoffered to encourage new planting and improvedmanagement for industrial and farm forestry.For example, the Act provides for a person whoestablishes or owns a private forest to apply to therelevant authority for exemption from all or partof the land rents and such other charges as may belevied in respect of the land on which the forest isestablished.Besides the Forest Act 2005, the EnvironmentManagement and Coordination Act (EMCA)1999 under section 57 provides for the Ministerof Finance to put in place government tax andother fiscal incentives, disincentives or fees toinduce or promote the proper management of theenvironment and natural resources or the preventionor abatement of environmental degradation. In thisregard, investment in the forestry sector by sawmillers, which aims to enhance transfer and use ofmodern, efficient and environmentally friendlytechnologies would benefit from such tax and fiscalincentives. Furthermore, EMCA provides for the“User-Pays Principle” as part of national pricingpolicies for natural resources aimed at economizingon the use of resources.It is evident that the forestry sector plays a key role inthe Kenyan economy, since wood fuel and charcoalrepresent more than 75 per cent of domestic energy.Over 90 per cent of rural households use firewoodfor cooking and heating, while 80 per cent of urbanhouseholds depend on charcoal as a primary fuelsource (Energy for Sustainable DevelopmentAfrica - ESDA, 2005). Besides, the regulatingservices of Kenya’s natural ecosystems are importantproduction factors in the agriculture, forestry andfishing sectors, the electricity and water sectors, andin public administration. These sectors, together,contributed between 33 per cent and 39 per centof GDP between 2000 and 2010. In addition, these202 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice essectors have a very significant multiplier effect onthe rest of the economy’s GDP.Given the immense contribution of the sectorto GDP, and the potential for private investors,it is important to put in place measures that willencourage the private sector to invest in forestry,given the incentive-based approaches for forestsconservation that have emerged over the last 10 to15 years. The most high profile of such initiatives isthe Payment for Ecosystem Services (PES), whichpay forest landowners for providing watershedprotection, carbon storage, recreation, biodiversity,etc. There are also Reducing Emissions fromDeforestation and Forest Degradation (REDD)schemes, efforts to create financial value for thecarbon stored in forests, offering incentives fordeveloping countries to reduce emissions fromforested lands and invest in low-carbon paths tosustainable development and “REDD+”, whichgoes beyond deforestation and forest degradation,and includes the role of conservation, sustainablemanagement of forests and enhancement of forestcarbon stocks. Regrettably, due to the public natureof some forest ecosystem services, the private sectorand holders of forested land are not always able toperceive sufficient incentives to make investmentsin forests, even if such investments often involvea positive rate of return for society as a whole.Investment by the public sector will be needed insome cases to provide forest ecosystem servicesdirectly, provide financial incentives to the privatesector to make investment competitive and toprevent unsustainable forest management. Thus,there are promising investment opportunities inthe forest-rich counties, such as certification ofsustainable forest management, targets to increaseprotected areas and the growing momentum of PES.Although acknowledged that not all counties haveforest resources, those counties covered by naturaland man-made forests should take advantage ofavailable investment opportunities that can betargeted by both the public and private sector inreversing the loss of forested area. The privatesector could invest in eco-tourism, as well aspaying landowners to protect watersheds, createprivate nature reserves, improve management ofplanted forests, improve management of agroforestrysystems and extend the area with agroforestrysystems. On the other hand, the publicsector could create new protected areas, improveenforcement of protected areas, buy out loggingconcessions, support establishment of certificationsystems, control illegal logging, provide incentivesfor reforestation/afforestation and pay forestlandholders to conserve forests.Overall, there are great opportunities for the privatesector to invest in the forestry sector in forest-richcounties. Given that various counties have createdthe Department of Environment in their countystructures, protection of the environment will be akey priority, and engagement of the private sectorwill be very crucial in achieving this objective.The incentives exist in different types of forests asillustrated below.16.10.1 Indigenous forestsKenya’s indigenous forests represent some of themost diverse ecosystems found anywhere in theworld. These forests supply important economic,environmental, recreational, scientific, social,cultural and spiritual benefits. However, someof these forests have been subjected to land usechanges, such as conversion to farmlands, ranchesand settlements. This has reduced the abilityof these forests to supply forest products, serveas water catchments, biodiversity conservationreservoirs, wildlife habitats and carbon sinks.Sustainably-managed indigenous forests can supplygoods and services to meet the demand of thegrowing population. Revenues accrued throughcommercial forest activities can be used to supportthe management and conservation of indigenousforests.kenya economic report 2013 203

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sTable 16.7: Summary of existing incentives for investment in the forestry sectorType of incentivePolicy and land/treetenure reformsConcessionsProvision of trainingand extensionservicesFinancial supportPilot technologicalinnovationsBrief description ofthe incentivePFM involving localcommunities in decision-makingandthe management ofpublic forest plantationsDevelopment ofPFM and concessionrulesProviding trainingand tree plantingConstituency DevelopmentFund(CDF)Forest Managementand ConservationFund (FMCF)Tree biotechnologyprogramme providingimproved seedSource and periodForest Act 2005Forest Policy 2007The EMCA 1999ContinuousForest Act 2005Forest Policy 2007KFS Forest ExtensionUnitContinuousGovernment anddevelopment partners,through developmentgovernancemechanismsContinuousKEFRI programmefunded by JICA,2003-2010TargetgroupPrivate sectorand localcommunitiesCommercialtree growersand entrepreneursincludingforeign investorsPrivate sectorand localcommunitiesPrivate sectorand localcommunitiesPrivate sectorand localcommunitiesOutcomes/impacts andshortcomingCommunities have embracedtree planting asdemonstrated by increasingdemand for tree seedlingsand many private and communalplantations documentedall over the countryCommunities have embracedtree planting asdemonstrated by increasingdemand for tree seedlingsand many private and communalplantations documentedall over the countryCommunities have embracedtree planting asdemonstrated by increasingdemand for tree seedlingsand many private and communalplantations documentedall over the countryFinancing of plantationforestry activities by privateand community parties remainsa major constraintFinancing of plantationforestry activities by privateand community parties remainsa major constraintSource: Kenya Forest Service (2010)16.10.2 Farm forestryTrees are an essential part of diversified farmproduction, providing both subsistence productsand incomes while contributing to soil and waterconservation and soil fertility. Products such aswood fuel or fodder from trees, shrubs or grasscontribute significantly to the economies of therural population. Given the growing population,it is not possible to meet all the demands of forestproducts from government forests. The alternativesources of these products are expected to comefrom farmlands. Closer linkages between industryand tree farmers could increase earnings from treeproducts, harvesting, transport and processing. Tree204 kenya economic report 2013

C r e a t i n g a n E n a b l i n g E n v i r o n m e n t f o r s T i m u l a t i n g I n v e s t m e n t f o r c o mM p ea tc i tr iov e ca on d n oS um sit c a iPn ea rb lf e ocr om uan nt ice escover on farms is increasing, especially in denselypopulated high potential areas. This demonstratesthat rural communities and individual farmershave basic skills and willingness to improve theirland-management practices through tree plantingfor their own benefit. The challenge is to promotecommercial forestry, improve farm forestrymanagement, and enhance efficient utilization andmarketing of forestry products.16.10.3 Dry lands forestryThe country’s arid and semi-arid lands (ASALs),which cover about 80 per cent of Kenya’s totalland surface (Government of Kenya, 2007) andhold about 25 per cent of the human population,are unique in nature and require special attentionto strengthen not only the economic base of theinhabitants but also the national economy. Kenya’sdry lands, although rich in biodiversity, are oftenstressed by frequent drought. Livestock keepingis the main economic activity of these dry lands.However, due to population pressure in the high andmedium potential areas, there is migration into thedry land areas resulting in depletion of grazing lands,the forest resource and tree cover degradation.The dry lands have the potential to supplymarketable commodities on a sustainable basis,such as gums and resins, aloe, charcoal, essentialoils, silk, edible oil, commercial juices, frankincense,indigenous fruits, honey and timber. These productscan go a long way towards improving the livelihoodsof Kenyans living in the dry lands and contributingto the national income.16.10.4 Private forestsForests under private ownership play a significantrole in the provision of forest goods and servicessupplementing wood supply from governmentforests. The increasing demand for timber and woodproducts in the domestic and international marketscan be tapped through involvement of the privatesector in industrial wood production and supply.However, in the past, market forces have not beenallowed to play their part in the marketing of timber,leading to a distortion of prices. The Forest Policy(2007) has put in place mechanisms that will ensureforest product markets function in a transparentmanner. It will also endeavour to promote marketforces in pricing of forest products for optimumresource allocation. This will in turn encouragelong-term investment in private forests.16.11 Opportunities for Investingin the Mining Sector in theCountiesThe Constitution is very clear on the protection,preservation and conservation of the environment.While sustainable utilization of minerals and otherextractive resources will be the ultimate goal of thecounties, various opportunities exist at the countiesin the mineral sector such as trading with sand,stones, ballast and other materials between thosecounties that have the resources and those that donot have. In doing so, the county governments willbe required to come up with structures, benchmarks,laws, legislation, guidelines, and standards onenvironmental management in the extraction ofthese resources. They will also be required to setstandards for responsible stewardship of naturalresources at the counties by identifying andresolving ambiguities, contradictions and overlapsin legal, regulatory and institutional frameworksrelating to the mining sector.The pressure to conserve the environmentis expected to increase with the expandingawareness of the benefits of a clean environmentand sustainable use of natural resources as moredevelopment and massive activities are devolved tothe counties. We expect to see increased demand ofbuilding resources such as timber, sand, stones andballast, as counties prepare to accommodate countygovernments. Increased demand for housing,water and pressure on land for construction, sandmining etc will also reduce the land available foragriculture. In this regard, the national governmentwill need to support improvements in socialkenya economic report 2013 205

CM rAe aC tR i nO g a n d E ns ao bc li ion -g e cE on vn ior om ni mc eP ne t rf Fo r rs mT iam nu cl aet i n g I n v e s t m e n t f o r c o m p e t i t i v e a n d S u s t a i n a b l e c o u n t i e sand environmental safeguards by working withindigenous communities in finding strategies formitigating the environmental impact of mining.To ensure the locals are involved, ways of bringingin inclusive business models to increase local,regional and national employment and economicparticipation of youth and women in the sectorwill need to be explored. To maximize economicopportunities and to promote effective use of publicprivatepartnerships, counties will require to explorepossibilities for joint infrastructure planning andfinancing, and collaboration on social responsibilityactivities, skills development and inclusive businessdevelopment.For the areas with minerals such as coal, titanium,natural gas and oil, there is need to kick off thereview of the existing legislation and formulationof new legislations to lay the foundation forexploitation of these resources for the benefit of thecountry in general and the county and communityin particular. For instance, the legislation on oilmining would be expected to define and regulatethe relationship between the government andvarious oil players currently operating in Kenya,and at the same time address the relationshipsamongst various interest groups, from landownersand cultural representatives in the oil-producingareas to members of the private sector. With thenew constitutional dispensation and the adoptionof devolved governance, the local community has abigger say in the management of natural resourceswithin their localities. Local communities will beexpected to participate and have a great influence inthe allocation of coal, oil and gas proceeds.Given various experiences in and outside Africancountries, it is clear that Kenya needs to managethe new-found natural resources–coal, titanium, oiland gas very carefully. The exploitation of coal, oiland gas thus confronts Kenya with daunting risksand great opportunities especially for the countieswhere these resources have been discovered. ForKenya, without experience in commercial mining ofresources such as oil, gas and coal, various questionscome into focus given the experience of the titaniummining in Kwale which, 10 years after its discovery,the mining is yet to take place. It is critical, therefore,to understand the environment in the very beginningand early stages of resources production by assessingthe arrangements in place to govern the exploitationof the resources throughout the entire process.16.12 Harnessing Climate ChangeOpportunitiesAlthough climate change disturbs socio-economicand environmental activities, it can bringopportunities that can be harnessed to transformcounty economies and local livelihoods. Asproposed in the National Climate Change ActionPlan, countries need to embrace a low-carbondevelopment strategy to curb GHGs emissionswhile adapting to the effects of climate change.Because of the huge disparities in climate changerisk across Kenya, county responses will varyconsiderably depending on experiences and capacityto respond. Integrating climate change into CountyIntegrated Plans is, therefore, a priority at thedevolved level. Designing appropriate responses willrequire counties to invest in collection of relevantclimate data and vulnerability studies, particularly toestablish baselines and identify ongoing adaptationstrategies for scaling-up.Sector-specific strategies will be required with afocus on agriculture and food security, water andsanitation, tourism and forestry. Counties shouldalso carefully assess the impact of climate change oninfrastructure, such as roads, to inform their design.In the social sector, climate-induced diseases shouldbe integrated in the health service provision at thedevolved level. The challenge of climate extremesof droughts and floods will require counties toestablish robust early warning systems and disasterresponses as envisaged in the Constitution.206 kenya economic report 2013

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E X e c u T i vR e esf ue rm em nac re ysYean T.S. and Heng, L.W. (2011), “IndustrialDeepening in Malaysia: Policy Lessons forDeveloping Countries”, Asian DevelopmentReview, Vol. 28: 88-109.Chapter 9: Trade and Foreign PolicyBotha L., Schalkwyk H.D. (2007), An Inquiry into theEvolving Supermarket Industry in Africa. PaperSubmitted for Presentation at the InternationalFood and Agribusiness Management Association,17 th Annual World Symposium, Parma, Italy, 23-24 June 2007.De Boer S. (2002), “Canadian Provinces, US Statesand North American Integration: Bench Warmersor Key Players?” in IRPP Vol. 8, No. 4, November2002.East African Community (2012), State of EACReport 2012. Arusha: EAC SecretariatEast African Community (2010), East African TradeReport 2009. Arusha: EAC Secretariat.Geldenhuys D. (1998), Foreign PoliticalEngagement: Remaking States in the Post-ColdWar World. Palgrave Macmillan.Global Agriculture Information Network–GAIN(2008). Kenya Retail Food Sector. Kenya’s RetailSector Update 2008. Global Agriculture ReportNetwork Report -KE8030.Government of Kenya (2010), Constitution ofKenya. Nairobi: Government Printer.Government of Kenya (2007), Kenya Vision2030. Nairobi: Ministry of Planning, NationalDevelopment and Vision 2030.Government of Kenya (n.d.), Private SectorDevelopment Strategy 2006-2010. Nairobi:Ministry of Trade and Industry.Kamau, Felix K. (2008), The Rise of the Supermarket:Changes in the Food Retailing in Sub-SaharanAfrica, Research Report submitted to MaastrichtSchool of Management, June 2008.Kenya National Bureau of Statistics (Various),Economic Survey. Nairobi: Government Printer.Kenya National Bureau of Statistics (Various),Statistical Abstract. Nairobi: Government Printer.Kinsey J. D. (1999). The Big Shift from Food Supplyto a Food Demand Chain. Reviewed Paper. RetailFood Industry Center, University of Minnesota.North American Free Trade Agreement–NAFTA,http://www.worldtradelaw.net/fta/agreements/nafta.pd.Tea Board of Kenya, http://www.teaboard.or.ke/statistics/exports. html.US International Trade Commission, http://reportweb.usitc.gov/africa/total_gsp_agoa_import_suppliers.jsp.World Bank (2008), Transport Prices and Costsin Africa. A Review of the Main InternationalCorridors. Washington DC: World Bank.Zhimin C. (2010), “The Provinces and China’sMultilayered Diplomacy: The Cases of GMS andAfrica”, The Hague Journal, 5, accessed on 24 thOctober 2013 at http://www.cewp.fudan.edu.cn/attachments/article/68/The%20Provinces%20a n d % 2 0 C h i n a s % 2 0 M u l t i - L a y e r e d % 2 0Diplomacy.pdfChapter 10: Financial ServicesCapital Markets Authority–CMA (2013). QuarterlyStatistical Bulletin, Issue 14/2012. Nairobi:Capital Markets Authority.Central Bank of Kenya–CBK (2013), StatisticalBulletin, December 2012. Nairobi: Central Bankof Kenya.Communications Commission of Kenya–CCK(2013), http://www.cck.go.ke/resc/downloads/Sector_statistics_for_Quarter_2_-_2012-2013.pdf.kenya economic report 2013 211

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E X e c u T i vR e esf ue rm em nac re ysChapter 12: Micro and SmallEnterprisesChari, A. (2011), “Identifying the AggregateProductivity Effects of Entry and SizeRestrictions: An Empirical Analysis of LicenseReform in India”, American Economic Journal:Economic Policy, 3: 66-96.Kenya ICT Board (2011), 2011 Kenya ICT Board,Julisha, Monitoring and Evaluation SurveyResults.Kenya National Bureau of Statistics–KNBS(Various), Economic Survey. Nairobi: GovernmentPrinter.Kenya National Bureau of Statistics–KNBS (Various),Statistical Abstract. Nairobi: Government Printer.KIPPRA (2012), Kenya Economic Report 2012:Imperatives for Reducing the Cost of Living. Nairobi:Kenya Institute for Public Policy Research andAnalysis.KIPPRA and Ernst and Young (2008), MSMEsBaseline Survey Report. Nairobi: Kenya Institutefor Public Policy Research and Analysis.Laws of Kenya, Micro and Small Enterprise Act No.55 of 2012, available at http://www.kenyalaw.orgMusau B. (2007), Final Report of the WorkingCommittee on Regulatory Reforms for BusinessActivity in Kenya, Review of Business Licensesand Fees in Kenya. Submitted to the Minister forFinance and the Minister for Trade and Industry,Working Committee on Regulatory Reforms forBusiness Activity in Kenya, March 2007.Sharma, S. (2009), Entry Regulation, Labour Lawsand Informality: Evidence from India, EnterpriseSurvey Working Paper, Enterprise Analysis Unit,Washington DC: World Bank.Steer L. (2006), Business Licensing and One-StopShops in Indonesia, The Asian Foundation.World Bank (2012), Doing Business in Indonesia2012: Doing Business Sub-national. WashingtonDC: World Bank and International FinanceCorporation.World Bank (2013), Doing Business 2013: SmarterRegulation for Small and Medium Size Enterprises.Washington DC: World Bank.Chapter 13: Infrastructure andEconomic ServicesGovernment of Kenya (2012), Energy, Infrastructureand Information Communications TechnologySector MTEF Report. Nairobi: Ministry ofFinance.Government of Kenya (2010a), Public ExpenditureReview: Policy for Prosperity, Ministry of Statefor Planning, National development and Vision2030, http://www.planning.go.keGovernment of Kenya (2010b), Kenya Populationand Housing Census (Socioeconomic Indicators.Nairobi: Government Printer.Government of Kenya (2008), Ministerial StrategicPlan 2009-2012. Nairobi: Ministry of Water andIrrigation.Kenya National Bureau of Statistics–KNBS (2013),Economic Survey. Nairobi: Government Printer.Kenya National Bureau of Statistics–KNBS (2012),Statistical Abstract. Nairobi: Government Printer.Salami A., Stampini M., Kamara A., SullivanC., Namara R. (2011), Development Aidand Access to Water and Sanitation in Sub-Saharan Africa. Working Paper Series No.140, Tunis: African Development Bank.WASREB (2010), IMPACT Report: A PerformanceReport of Kenya’s Water Services Sub-Sector,Issue No. 3.World Bank (2010), Africa Infrastructure CountryDiagnostic 2010, Kenya’s Infrastructure: AContinental Perspective.kenya economic report 2013 213

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E X e c u T i vR e esf ue rm em nac re yssites/pefa.org/files/attachments/PMFEngfinalSZreprint04-12_1.pdf,accessed in February2013.Reardon, T. and Gulati, A. (2008), The Riseof Supermarkets and their DevelopmentImplications.Sabadie J.A. and Johansen J. (2010), “How EconomicCompetitiveness Indices View Human Capital”,European Journal of Education, Vol. 45. No. 2.Smuckers T. (2002). Land Tenure Reform andChanges in Land Use and Land Management inSemi-arid Tharaka, Kenya. Working Paper No. 11-2002. Michigan State University, USA.Standing G. (1978), Labour Force Participation andDevelopment. Geneva: International LabourOrganization.Transport Policy and Tourism Section, availableathttp://www.unescap.org/ttdw/ppp/t r a i n i ngmate r i a l s / P P Ps _ A _ Fi n a n c i e r s _Perspective.pdf, accessed on 20/11/2012.UNDP (2010), Kenya National HumanDevelopment Report 2009, Nairobi: UNDPKenya.Policy and Tourism Section, available at http://www.unescap.org/ttdw/ppp/trainingmaterials/PPPs_A_Financiers_Perspective.pdf, accessedon 20 th November 2012.World Bank (2012), Doing Business Report, availableat http://www.doingbusiness.org/data.World Bank (2012), Kenya Economic Update:Devolution without Disruption: Pathways to aSuccessful New Kenya. Nairobi: World Bank.World Bank and Australian Aid (2012), DevolutionWithout Disruption: Pathways to a SuccessfulNew Kenya. October 2012.World Bank (2008), Cities of Hope: Governance,Economic and Human Challenges of Kenya’s FiveLargest Cities, Report No. 46988.World Economic Forum (2011), The GlobalCompetitiveness Report 2011–2012. Geneva:World Economic Forum.World Resources Institute–WRI (2007), Nature’sBenefits in Kenya: An Atlas of Ecosystemsand Human Well-being, http://www.wri.org/publication/natures-benefits-in-kenya, accessedon 30 th October 2012.UNESCAP (2004), Public Private Partnerships: AFinancier’s Perspective, UNESCAP Transportkenya economic report 2013 217

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m a n u f a c t u r i n gAAnnexAnnex 17.1: County Population, Number of Doctors and Nurses in Place andMinimum Requirementss/NoCounty Population Pop perDoctorPop perNurse*Approxnumberof DoctorsMinimumRequiredMinimumRequired*Approxnumberof Nurses1 Baringo 555,561 278,000 2 56 4,115 592 1352 Bomet 724,186 103,000 7 85 4,210 951 1723 Bungoma 1,630,934 45,000 36 128 3,315 1467 4924 Busia 488,075 31,000 16 70 1,148 793 4255 Elgeyo Marakwet369,998 62,000 6 32 2,434 395 1526 Embu 516,212 13,000 40 54 1,060 551 4877 Garissa 623,060 52,000 12 61 2,316 665 2698 Homa Bay 958,791 44,000 22 92 1,949 1028 4929 Isiolo 143,294 143,000 1 11 3,115 153 4610 Kajiado 687,312 76,000 9 66 7,723 733 8911 Kakamega 1,660,651 69,000 24 159 3,122 1771 53212 Kericho 758,339 15,000 51 58 1,823 630 41613 Kiambu 1,623,282 15,000 108 159 1,466 1785 110714 Kilifi 1,109,735 48,000 23 84 2,655 1184 41815 Kirinyaga 528,054 31,000 17 54 1,100 563 48016 Kisii 1,511,422 378,000 4 119 5,703 1348 26517 Kisumu 968,909 15,000 65 92 1,433 1033 67618 Kitui 1,012,709 26,000 39 96 1,770 1081 57219 Kwale 649,931 46,000 14 63 3,080 693 21120 Laikipia 399,227 21,000 19 35 1,446 426 276kenya economic report 2013 219

SA En Cn Te ox re asl P e r F o r m a n c es/NoCounty Population Pop perDoctorPop perNurse*Approxnumberof DoctorsMinimumRequiredMinimumRequired*Approxnumberof Nurses21 Lamu 101,539 N/A 7 108 N/A22 Machakos 1,098,584 27,000 41 102 1,688 1172 65123 Makueni 884,527 37,000 24 87 1,970 944 44924 Mandera 1,025,756 256,000 4 97 14,051 1094 7325 Marsabit 291,166 321,000 1 26 1,967 311 14826 Meru 1,356,301 38,000 36 126 1,609 1447 84327 Migori 563,033 24,000 23 88 1,478 978 38128 Mombasa 939,370 7,000 134 89 1,381 1002 68029 Muranga 942,581 17,000 55 87 1,609 951 58630 Nairobi 3,138,369 23,000 136 123 2,797 3548 112231 Nakuru 1,603,325 32000 50 153 2,146 1710 74732 Nandi 752,965 94,000 8 72 3,137 803 24033 Narok 850,920 41,000 21 83 3,128 908 27234 Nyamira 598,252 100,000 6 41 2,498 519 23935 Nyandarua 596,268 22,000 27 56 1,117 638 53436 Nyeri 693,558 5,000 139 67 654 740 106037 Samburu 223,947 25,000 9 20 1,037 239 21638 Siaya 842,304 44,000 19 82 1,815 898 46439 Taita Taveta 284,657 71,000 4 26 2,612 304 10940 Tana River 240,075 48,000 5 26 5,108 304 4741 Tharaka-Nithi 365,330 21,000 17 32 1,773 389 20642 Trans Nzoia 818,757 273,000 3 76 6,110 873 13443 Turkana 855,399 285,000 3 83 14,748 912 5844 Uasin Gishu 894,179 4,000 224 86 706 954 126745 Vihiga 554,622 185,000 3 3,990 13946 Wajir 661,941 132,000 5 48 4,163 706 15947 West Pokot 512,690 73,000 7 53 1,979 547 259Source: CRA 2011; *Computed by dividing population with Population per doctor.220 kenya economic report 2013

m a n u f aAc nt un re xi ne gsAnnex 17.2: Number of Health Facilities Listed by CountiesCounties Facilities Listed Population Population per Facility*Baringo 188 555,561 2,955.11Bomet 156 724,186 4,642.22Bungoma 146 1,630,934 11,170.78Busia 84 488,075 5,810.42Elgeyo Marakwet 123 369,998 3,008.11Embu 143 516,212 3,609.87Garissa 108 623,060 5,769.07Homa Bay 189 963,784 5,099.39Isiolo 41 143,294 3,494.98Kajiado 223 687,312 3,082.12Kakamega 219 1,650,651 7,537.22Kericho 153 758,339 4,956.46Kiambu 437 1,623,282 3,714.60Kilifi 233 1,109,735 4,762.81Kirinyaga 242 528,054 2,182.04Kisii 166 1,152,282 6,941.46Kisumu 152 968,909 6,374.40Kitui 296 1,012,709 3,421.31Kwale 98 649,931 6,631.95Laikipia 90 399,227 4,435.86Lamu 43 101,539 2,361.37Machakos 284 1,098,584 3,868.25Makueni 184 884,527 4,807.21Mandera 73 1,025,756 14,051.45Marsabit 95 291,166 3,064.91Meru 348 1,356,301 3,897.42Migori 183 1,028,579 5,620.65Mombasa 357 939,370 2,631.29Murang’a 248 942,581 3,800.73Nairobi 540 3,138,369 5,811.79Nakuru 343 1,603,325 4,674.42Nandi 170 752,965 4,429.21Narok 149 850,920 5,710.87Nyamira 103 598,252 5,808.27Nyandarua 122 596,268 4,887.44Nyeri 388 693,558 1,787.52Samburu 69 223,947 3,245.61Siaya 163 842,304 5,167.51kenya economic report 2013 221

SA En Cn Te ox re asl P e r F o r m a n c eCounties Facilities Listed Population Population per Facility*Taita Taveta 83 284,657 3,429.60Tana River 58 240,075 4,139.22Tharaka Nithi 95 365,330 3,845.58Trans Nzoia 87 818,757 9,411.00Turkana 138 855,399 6,198.54Uasin Gishu 169 894,179 5,291.00Vihiga 79 554,652 7,020.91Wajir 106 661,941 6,244.73West Pokot 86 512,690 5,961.51Total 8250 38,711,526 4,692.31Source of Data: eHealth - Kenya Facilities; TISA 1 *Computation by author1The Institute of Social Accountability - http://www.tisa.or.ke/countdown-to-counties/kenyas-47-counties/222 kenya economic report 2013

m a n u f aAc nt un re xi ne gsAnnex 16.1: Human Development IndicatorsCounty life expncyLiteracy(%)Sch Enrol(%)EducnIndexHDI Fully Immunised< 1 year(%).% PopnpryeducnPop withSec Educ(%)Nairobi 57 88.1 71.3 0.825 0.6533 86.8 50.3 18.1 78.9 91 97.7 197 55Nyeri 63.9 86.5 73 0.8199 0.6342 46.3 61.4 19.8 84 85.1 92.9 467 184Uasin Gishu 60.6 82.4 75.1 0.7999 0.6262 76.2 61.6 13.1 30.1 72.7 81.5 391 95Kericho 59.6 82 78.35 0.808 0.6105 59.1 69.8 11.4 47.3 74 79 478 142Nyamira 63.2 82.1 76.9 0.8039 0.6064 49.8 64 17.7 61.1 88.1 98.8 299 120Embu 64.65 77.05 74.35 0.7618 0.6063 33.4 71.3 15.5 60.4 87.9 92.7 359 122Bomet 66.1 77.7 82.4 0.7931 0.6018 53.2 72.5 11.4 34.8 87.5 74.7 435 93Laikipia 64.9 69 71.2 0.6973 0.6012 75.3 65.3 13.9 29.8 86.9 78.9 175 41Nyandarua 63.7 77.3 74.4 0.7631 0.6006 70.3 67.9 14.2 66.4 88.3 75.4 283 88Kiambu 56 83.9 71.1 0.7965 0.5966 64.8 58.5 17.3 68.9 90 87.4 444 209Kajiado 63.7 65.2 55.9 0.6212 0.5938 30.9 62 12.5 39.7 70.7 55.4 276 38Kirinyaga 62.8 73.1 64.7 0.7032 0.5894 51 68.6 16.1 87.4 92.6 70.4 188 96Muran’ga 63.4 70.1 76.6 0.7227 0.588 46.6 69.5 17.7 54.7 77.5 82.9 362 200Machakos 59 80.8 75 0.7884 0.5868 54.3 69.7 14.6 30.5 81.3 88 785 207Keiyo Marakwet65.9 66.75 75.55 0.692 0.5846 70.8 71.3 10.6 37.1 81 77.6 322 71Nandi 60.2 76.8 77.3 0.7698 0.5828 62.4 67.3 10.7 27.4 80.8 74.5 556 135Mombasa 53.3 79.2 55.5 0.7128 0.5689 72.5 56.9 15.3 68.9 90.3 85.8 92 22Meru 62.75 57.3 71.35 0.6201 0.5622 46.9 72.3 12.6 69.5 65 59.7 898 279Kenya 56.6 71.4 70.5 0.7111 0.5608 64 66.6 12.7 37.5 75 66.4 18095 4702Makueni 57.2 77.6 77.8 0.7767 0.5584 51.3 72.7 14.7 18.2 85 91.4 837 216Nakuru 55.6 76.4 64.7 0.7253 0.5558 72.5 63.4 13.4 51.4 64.3 83.2 574 162Tharaka 58.7 69.65 78.1 0.725 0.5534 53.3 75.1 10.4 29.4 44.9 71.4 148 19Taita Taveta 57.9 66.2 74.3 0.6893 0.5533 51.2 68.7 12.1 40.5 76.6 45.3 178 40Vihiga 55.9 74.8 72 0.7389 0.5516 65 71.2 12.7 26.1 73.2 70.2 336 105Lamu 56 67.5 69 0.68 0.5512 66.6 66.4 9.7 29.6 80.5 73.2 74 11Deliveredina HeathFacilityHad allvaccinationsCanreadandwriteNo. ofpry schNo.of secschkenya economic report 2013 223

S AE nC nT eo xr ea slP e r F o r m a n c eCounty life expncyLiteracy(%)Sch Enrol(%)EducnIndexHDI Fully Immunised< 1 year(%).% PopnpryeducnPop withSec Educ(%)Bungoma 59.45 71.5 77.45 0.7345 0.5509 92.4 72.8 11 18.1 68.3 60.5 746 222Kisii 56 77.5 76.35 0.7711 0.5475 84.6 64.5 17.3 58 64.8 86.5 713 293Trans Nzoia 60.2 65.1 70.9 0.6706 0.5455 35.7 70.9 10.9 21.3 90.6 51.6 295 88Kilifi 53.95 55 67.7 0.5925 0.5395 78 67.5 7.1 13.6 66.4 68.2 389 66Kakamega 54.17 75.1 72.6 0.7402 0.5328 76.8 70.9 11 31.3 69.4 72.7 688 202Kitui 58.9 63.2 72.3 0.6625 0.5268 59.8 74.8 10 27.1 65 63.8 1011 162Narok 61.2 49.5 59.35 0.528 0.5061 71.6 73.5 7.2 19.8 62.2 41.4 502 49Kisumu 40.4 80.3 78.9 0.7894 0.4939 57 62 13 45.6 68.6 65.8 453 151Migori 46.45 69.8 72.25 0.7062 0.4841 78 68 10.3 32.5 51.6 75.2 442 77Baringo 63.8 68.1 79.6 0.7194 0.484 32.7 67.7 11.7 32.9 76.5 67.3 508 73Kwale 53 58.6 66.8 0.6134 0.4771 68.1 70.5 6.3 22.6 92.6 66.5 311 39West Pokot 58.3 49.5 59.1 0.5269 0.4655 54 72 6.2 16.9 56.2 46.9 168 18Siaya 40.55 69.9 72.45 0.7075 0.4589 81.6 70.3 10.8 47.4 64.8 66.2 739 162Busia 47.1 62.7 74.4 0.6662 0.4581 58.1 72.3 9.9 30.7 78.5 56.7 257 53Isiolo 57.6 42.8 60.1 0.4856 0.4581 77.8 65.7 9.7 28 72.2 59.8 76 8Homa Bay 39.8 73 73.47 0.7316 0.4553 50.7 65.6 11.8 39.8 50.3 73.3 831 196Garissa 59.4 38 48.3 0.4142 0.4532 55.8 65 9.6 25.1 74.6 52.4 102 15Samburu 60.7 27 55.9 0.366 0.4118 73.1 63.6 6.5 18.4 85.6 28.9 131 8Marsabit 63 27.2 48.6 0.3435 0.4032 66.3 70.4 8.9 17.9 80.1 26.2 102 11Wajir 61.8 19.6 53.1 0.3077 0.3925 68.8 64.4 9 5.1 72.7 26.2 102 15Tana River 53.8 31.4 49.8 0.3751 0.3892 62.7 67.9 5.5 22.6 85.7 49.8 82 7Mandera 61 13.3 39.8 0.221 0.3592 54.3 65.7 9.6 8.2 47 9.9 105 22Turkana 56.9 16.9 39.3 0.2433 0.3331 30.9 71 9.5 6.9 66.7 18.1 188 15Deliveredina HeathFacilityHad allvaccinationsCanreadandwriteNo. ofpry schNo.of secschData Source: Compiled from UNDP (2010) and Commission on Revenue Allocation (2011)224 kenya economic report 2013

I n d e xIIndex1Time [Airlines] 106AAberdares 138Aberdares National Park 110‘A Better Investment Climate forEveryone’ 170accountability 12Accumulating Savings and CreditAssociations (ASCAs) 98Adult and Continuing Education (ACE)72adult literacy 63Africa Hotel Investment Forum (AHIF)162Africa Infrastructure Diagnostic studies190African Growth and Opportunities Act(AGOA) 79, 80, 90, 91African Hotel and Investment Forum 107Agriculture, Ministry of 117agriculture sector 74cottage industries 183performance 74public expenditure 75public-private partnerships 75skill development 183use of ICT 182Agriculture Sector Development Strategy74AICD 127Air Berlin 106Air Korea 162Alberta 96Ali 158Alpha Fetoprotein (AFP) 38Alternative Dispute ResolutionMechanisms 18Amboseli National Park 110Amiran Kenya 76Angola 80antiretrovirals (ARVs) 37Artemisinin Combination Therapy(ACT) 37Asia Foundation 120Assistance to Micro and Small EnterprisesProgramme (ASMEP) 202Athi water catchment 166Athi water management 135Athi Water Services Board 125autoregressive modelling, AR 156average length of stay (ALS) 110Ayyagari, M. 197Bbanking sector 100Bank of Uganda 4Basic Education Act of 2013 54Be Healthy information program (B-Hip)38Belgium 97Best African Tourist Board in AfricaAward 107best-practice licensing 119Best Western 163B (Hep) vaccination 38birth rate 22Bonds market 103Botswana 14, 26, 65, 69Brand Kenya 114British Columbia 96Budalangi 150Budget Review and Outlook Paper 173Burundi 4, 14, 26, 93, 94, 99Busia County 31business licensing 117business registration 117, 202Business Regulatory Reforms Unit(BRRU) 118CCambodia 96Canada 96cancer 39capital marketperformance 102Capital Markets Authority 99Catchment Area Advisory Committees(CAACs) 136Central Asia Regional EconomicCooperation (CAREC) 96Central Bank of Kenya 7, 99 103Central Bank of Kenya (CBK) Act 98Central Bank Rate (CBR) 7, 100Central Island National Park (LakeTurkana) 110Centre for Development andEnvironment (CDE) 76Centre for Training and IntegratedResearch for ASAL Development(CETRAD) 76Centum Investment Company 103Century DTM Limited 103Chad 91Cherengany Hills 138China 5, 6, 26, 28, 79, 80, 91, 95, 96, 97,101, 106, 107, 110, 113, 144, 149, 161,162, 207, 212Cities and Urban Centres Act 173Claims Management Guidelines 99climate change 149, 166, 206seasonal performance 152Climate Change Vulnerability Index(CCVI) 153CMC Holdings 102Coast Water Services Board 125Coffee Act 90Coffee Development Fund 90cold chain infrastructure 182COMESA Free Trade Area (FTA) 94Common Market for Eastern andSouthern Africa (COMESA) 92, 94kenya economic report 2013 225

I n d e xCommon Pool Resource (CPR) 191Communications Commission of Kenya(CCK) 117community forest associations (CFAs)143Companies Act 125competitiveness, pillars of 170Consolidated Bank 103Constituency Development Fund (CDF)161, 191Constitution of Kenya 2010 1, 9, 10, 11,13, 14, 35, 46, 58, 82, 87, 112, 113, 118,140, 142, 144, 148, 169, 170, 172, 175,190, 192, 194, 196, 198, 199Contingencies Fund 9Control of Corruption 13Convention on Biological Diversity(CBD) 142Cooperative Insurance Company 102counties. See devolved governancestructureCountry Report for Kenya [AICD] 127County Budget Review and OutlookPaper 173County Emergencies Funds Act 9County Fiscal Strategy Paper 173county government. See devolvedgovernance structureCounty Government Bill 2012 202County Government Public FinanceManagement Transition Act 118County Governments Act No. 17 of 20129, 15, 169, 170, 172, 173County Integrated Plans 206county tourism branding 114County Treasury 173Court Fees Calculator 15Court of Appeal 15credit 100, 101Credit Information Sharing (CIS) 102Credit Reference Bureaus 102cross-border cooperation 96cultural heritage sites 110Czech Airlines 106DDaua Basin 135Daua River 137Deforestation and Forest Degradation(REDD) 203Democratic Republic of Congo (DRC)95demographic dividend 23demographic transition 21Department of Environment 203Department of Water Resources 167dependency ratio 25deposit-taking microfinance institutions(DTMs) 98, 100, 103Development Finance Institutions (DFIs)104Development Partners on Health Group48devolved governance structure 9access to sanitation 129business development 202business licensing 118human capital development 185, 188Human Development Index (HDI) 187human resource development 184infrastructural development 201infrastructure investment 190land adjudication 193land investment 193Micro, Small and Medium Enterprises(MSMEs) 196mining investments 205retail trade 200roads provision 192service delivery 177supermarkets distribution 201tourism institutions 199tourism investments 198water and sanitation 127water and sanitation 190water sources 128wholesale trade 200diabetes 39Doing Business Report (Indonesia) 120domestic tourism 109domestic trade 87, 88, 200performance 89Domestic Trade Directorate 202Draft National Water Policy, 2012 167Draft Policy on Aligning the Roads Sub-Sector with the Constitution 193Draft Water Bill, 2012 167dry lands forestry 205EEAC Common Market Protocol 93EAC Customs Union 94Early Childhood Development andEducation (ECDE) 59, 159East Africa Affairs, Commerce andTourism, Ministry of 112East African Bankers Association 99East African Community (EAC) 92, 93,100East African Rift Basin 148economic growth 2Economic Pillar of Vision 2030 121economic services 121Economic Stimulus Programme (ESP)201Education for All (EFA) 54Education, Ministry of 72, 117Education, Science and Technology,Ministry of 54education sector 54access to education 58budgetary allocation 56education outcomes 63Integrated Public Financial ManagementSystem 71investment 55learning achievements 64learning outcomes 68medium term prospects 159participation in education 58performance 58policy options 71primary school completion 61projections 159public education spending 56, 58transition levels 61transition levels 68education services 55Egypt 90Eldoret Polytechnic 55Emaar [Hotel] 163employment 29employment opportunities 29environmentmedium term prospects 166environmental protection 47Environment and Land Court 15Environment Management andCoordination Act (EMCA) 202environment sector 135Ethics and Anti-Corruption Commission(EACC) 17Ethiopia 4, 28, 80, 94, 95, 135, 148, 196,199, 215Etihad Airways 106, 162Ewaso Ng’iro catchment 166, 167Ewaso Ngi’ro North water management135Ewaso Ng’iro South River 135Executive 14, 17expenditure 8export destinations 90Export Processing Zones Act 80External Resources Department (ERD)48Ffaini chap chap 15fairness 12Family Planning Association of Kenya(FPAK) 23farm forestry 204Female Genital Mutilation (FGM) 22fertility rate 23Finance, Ministry of 8, 48, 201Financial Management InformationSystem (IFMIS) 53financial sector 98policy changes 98policy issues 104structure 98financial services 98fiscal deficit 8Fiscal Management Act 2009 9fiscal performance 7fiscal policy 7, 9Fiscal Strategy Paper 173Foreign Affairs Office (FAO), China 96foreign policy 87, 95226 kenya economic report 2013

I n d e xForeign Trade and EconomicCooperation Commission (FTEC),China 96Forest Act of 2005 140, 142, 202, 204Forest Policy of 2007 140, 142, 143, 204,205forestry 139forestry sub-sectorinter-sector linkages 143investments 202legal framework 142performance 139France 97Free Day Secondary Education 161Free Primary Education (FPE) 60FTSE NSE Kenya 15 Index 102FTSE NSE Kenya 25 Index 102GGauteng 96Gender Parity Index 62Geology, Mining and Minerals Bill 2013145Geology, Mining and Minerals Bill 20123Germany 24, 26, 39, 40, 106, 113, 161,184, 188, 213, 217Ghana 9Global Agricultural Information Network- GAIN 89Global Alliance for Vaccine Initiative(GAVI) 38Global Competitiveness Report 2012-2013 14Global Ministerial Forum on Research forHealth 47governance 12performance indicators 12Government Financial Management Act2004 9Grand Regency Hotel 163Greater Mekong Sub-region (GMS) 96Grira 185Gross Enrolment Rate (GER) 59, 61Growth Enterprise Market Segment(GEMS) 99Guangxi 96Gulf Air 106Hharmonization, alignment andcoordination (HAC) 171HDI. See Human Development Indexhealth 35Health Financing Strategy 51Health, Ministry of 117health sectorbudget allocations 53commodity supplies 47expenditure review 49Financial Management InformationSystem (IFMIS) 53financing 47health insurance coverage 52human resources 41performance 35physical infrastructure 42Health Sector Coordinating Committee48Hell’s Gate National Park 110Hemingways Nairobi 163High Court 15Higher Education Loans Board (HELB)57HIV prevalence 38Holiday Inn 163home-stay tourism 110Horticultural Crops DevelopmentAuthority 117Hotel Intercontinental. SeeIntercontinental HotelHousehold Budget Survey 2005/06 31human capital 186Human Development Index (HDI) 186IIlemi triangle 146IMF 4, 8, 207immunization 38import sources 90inactivity 31, 33income inequalities 28Incremental Capital Output Ratio(ICOR) 5Independent Electoral and BoundariesCommission (IEBC) 15Independent Policing OversightAuthority (IPOA) 17Index-based Livestock Insurance in Kenya183India 5, 9, 26, 91, 106, 107, 113, 119, 161,162, 214indigenous forests 203Indonesia 119Industrial Court 15inequality 19infant mortality 37inflation 7infrastructure sectordevelopment expenditure 121performance 121infrastructure services 121Insurance Regulatory Authority (IRA) 99Integrated Financial ManagementInformation System (IFMIS) 72Integrated Water Resources Management136Intercontinental Hotel 162, 163Intergovernmental Forum on Forests(IFF 4) 142Inter-Governmental Relations Act 20129, 15International Atomic Energy Agency 39investment 4Isiolo-Marsabit road 199JJabia 128Jackson’s hartebeest 199Japan 91, 97, 144Japan International Cooperation Agency.See JICAJICA 166Joint Admissions Board ( JAB) 62Joint Loans Board ( JLB) 202Jomo Kenyatta International Airport( JKIA) 106Jordanian Airlines 162Judges and Magistrates Vetting Board 18Judicature Act 15Judicial Service Commission ( JSC) 15,17Judiciary 15, 17Subordinate Courts 15KKajiado County 111Kempinski 163Kenya Airports Authority 114Kenya Airways (KQ) 106, 162Kenya Anti-Counterfeit Agency 86Kenya Demographic and Health Survey(KDHS) 36Kenya Deposit Insurance Act 2012 99Kenya Deposit Insurance Corporation 99Kenya Economic Report 2013 169Kenya Expanded Programme onImmunization (KEPI) 38Kenya Forest Service 143Kenya ICT Board 118Kenya Institute of Public Policy Researchand Analysis. See KIPPRAKenya Investments Authority 120Kenya Medical Research Institute(KEMRI) 48Kenya Medical Supplies Agency(KEMSA) 47Kenya Meteorological Department(KMD) 152Kenya National Bureau of Statistics(KNBS) 28, 29, 76, 105, 115, 124Kenya National Trading Corporation(KNTC) 202Kenya National Trunk Roads Authority(KENTRA) 193Kenya Natural Resource Charter 148Kenya Polytechnic 55Kenya Population and Housing Census of2009 33, 126Kenya Revenue Authority 120Kenya Roads Board Fund (KRBF) 131,165Kenya School of Government 17Kenya Tourism Finance Corporationkenya economic report 2013 227

I n d e x112, 200Kenya Tourism Fund 112, 200Kenya Tourism Protection Service 112Kenya Tourism Regulatory Authority112Kenya Tourism Research Institute 112Kenya Tourist Board (KTB) 107, 112,113, 114Kenya Tourist Development Corporation(KTDC) 162Kenyatta National Hospital (KNH) 38,40Kenya United Kingdom SACCO 103Kenya USA Diaspora SACCO 103Kenya Vision 2030 12, 19, 35, 48, 49, 54,58, 63, 74, 76, 77, 87, 98, 121, 124, 137,140, 142, 143, 149, 156, 164, 165, 167,169, 180, 183, 185, 186, 194Kenya Water Institute (KEWI) 124, 136Kenya Wildlife Bill 2011 112, 114Kenya Wildlife Regulatory Authority 112Kenya Wildlife Service (KWS) 112Kiambu County 150Kieyah 195KIHBS 2005/06 58, 158Kilimanjaro aquifer 135Kilimo Salama Index-based InputInsurance 183Kinsey, J.D. 89KIPPRA 176, 177, 197KIPPRA Study on MSEs in Kenya 2008117Kirinyaga County 150Kiserian Dam 137Kisite Marine Reserve 111Kisumu Polytechnic 55Kiunga Marine Reserve 111Korean Air 106KTB. See Kenya Tourist BoardKwale County 144, 145, 206Llabour market 29Laikipia County 111Laikipia ecosystem 199Lake Jipe 135Lake Jipe-Challa understanding 135Lake Naivasha 166Lake Naivasha Basin 138Lake Naivasha National Park 110Lake Nakuru National Park 110Lake Turkana 135Lake Turkana-Omo agreement 135Lake Victoria 135Lake Victoria North catchment 135, 166Lake Victoria North Water Services Board125Lake Victoria South 135, 166Lake Victoria South Water Services Board125Lamu Basin 146Lamu gas fields 144Lamu-Lodwar road 199Lamu Port-Southern Sudan-EthiopiaTransport project 199. Seealso LAPSSET Projectland adjudication 193land registration 194, 195Land Registration Act 2012 194Lands, Housing and Urban Development,Ministry of 47Lansmore Hotel 163Laos 96LAPSSET Project 199Leadership and Integrity Act 2012 15Legislature 15, 16, 17Lesotho 65life expectancy 23Limpopo 96livestock development 75Local Authorities Transfer Fund (LATF)Act 1998 174Local Authority Integrated FinancialOperations Management System(LAIFOMS) 177Local Authority Service Delivery ActionPlan (LASDAP) 174Local Government Act 118, 202Local Government, Ministry of 177, 201,202London Olympics 2012 106Longhorn Publishers Ltd 102MMaasai Mara 110Maasai Mara National Reserve 110macroeconomic performance 1, 2, 155malaria 36Malawi 28, 65, 69, 93, 94, 95, 215Malaysia 24, 26, 28, 40, 79, 80, 83, 84, 85,86, 101, 149, 166, 183, 188, 210, 211Mali, Government of 47Malindi Marine Reserve 111Mandera County 68manufacturing sector 77AGOA exports 79challenges and lessons 83diversification 78EPZ performance 80global exports 79medium term prospects 156performance 77policy developments 80special economic zones 80Special Economic Zones (SEZs) 82structure 78wage employment 79Maputo 96Maputo Corridor 96Maputo Declaration 75Mara River 135Mara River Basin 135Mara-Serengeti ecosystem 111Market Conduct Guidelines for InsuranceInvestigators 99Marriot 163Marsabit National Park 110Marsabit National Park and Reserve 110Maruba Dam 137maternal mortality 23, 38Maternal Mortality Ratio (MMR) 36, 38Mau Complex 138Mau forest ecosystem 145Mauritius 65, 68, 69, 94, 106medical insurance providers (MIPs) 98Medical Services, Ministry of 49Medium Term Expenditure Framework(MTEF) 172, 173, 177Medium Term Expenditure Framework(MTEF) of 2013/14-2015/16 164Medium Term Plan (MTP) 2008-2012 4,11, 77, 81, 112, 169medium term prospects 154, 155Meetings, Incentives Travel, Conferencesand Exhibitions (MICE) 162Merti aquifer 135Meru National Park 199Mexico 97MICE 162. See also Meetings, IncentiveTravel, Conferences and Exhibitions(MICE)Micro and Small Enterprise DevelopmentFund 119Micro and Small Enterprise (MSE) Act118Micro and Small Enterprises (MSE)sector 115employment 116establishments 115manufacturing value added 116outstanding challenges 119performance 115regulatory environment 118tax performance 116Microfinance Act 2008 103Micro, Small and Medium Enterprises(MSMEs) 196mineral exploration 145mining sub-sector 144devolution 147dispute management 145environmental issues 145institutional set-up 147investments 205land issues 147political issues 145regional implications 148revenue collection 145transparency 147Ministry of Water and Irrigation(MWI) 124, 166. See also Water andIrrigation, Ministry ofmobile fines payment. See faini chap chapMoi International Airport (MIA) 106Mombasa County 31Mombasa Marine Reserve 111Mombasa Polytechnic 55monetary policy 7mortality rate 22mosquito-treated bed nets 37Motor Assessors and Guidelines on228 kenya economic report 2013

I n d e xInsurance Products 99Mount Elgon National Park 110Mt. Kenya 138Mount Kenya National Park 110Mozambique 65Mpumalanga 96Mpunguti Marine Reserve 111MSE. See Micro and Small EnterpriseMSE Authority 119MSE National Baseline Survey 1999 117MSME Competitive Project BaselineSurvey 2008 197Multidimensional Poverty Index 20Murang’a County 150museums visits 107Mwabu, 24Myanmar 96NNairobi All Share Index (NASI) 102Nairobi Cancer Registry (NCR) 40Nairobi City County Finance Act 2013118Nairobi County 63, 100Nairobi County Assembly 118Nairobi Hilton 163Nairobi Metropolitan Development 123Nairobi Securities Exchange (NSE) 98Nairobi Serena 163Naivas 89Nakumatt 89Namibia 65Nandi County 63National Assembly 15National Budget Policy Statement 173National Cereals and Produce Board(NCPB) 117National Climate Change Action Plan206National Cohesion and IntegrationCommission (NCIC) 17National Environment ManagementAuthority (NEMA) 117National Government Loans GuaranteesAct 9national health insurance 52National Health Insurance Fund (NHIF)52National Human Resources for HealthStrategic Plan 2009-2012 52National Industrial DevelopmentCommission 82National Industrialization Bill 2012 82National Irrigation Board (NIB) 136National Land Commission 140National Land Commission Act 2012 15,195National Land Policy 2009 140, 193,194, 195National Police Service Commission(NPSC) 17National Population and Housing Census2009 124, 185National Social Security Fund (NSSF)104National Socio-Economic and PovertyAtlas for Kenya 76National Trade Development Bill 2012202National Treasury 10National Water Conservation andPipeline Corporation (NWCPC) 124,136National Water Master Plan 2030 167National Water Policy 136, 190. Seealso Sessional Paper No. 1 of 1999 onNational Policy on Water Resourcesand DevelopmentNational Water Quality ManagementStrategy 2012-2016 167National Water Resources ManagementStrategy, 2010-2016 167natural heritage sites 110natural resources sector 135Ndung’u Report 195Net Enrolment Rate (NER) 61New Brunswick 96New Delhi 106Ngamia 1 oil well 144Ngong Hills 163Niger Delta 147Nigeria 24, 26, 40, 92, 95, 147, 149, 188Nile Basin Initiative (NBI) 191Non-Communicable Diseases (NCDs)39non-performing loans (NPLs) 101Non-Revenue Water (NRW) 127, 138Norfolk Hotel 163North American Free Trade Agreement(NAFTA) 97Northern Water Services Board 125Novair 162Nyaga 195Nyandarua County 150Nyando 137, 138, 150Nyando River 137Nyeri County 150OOne-Stop Shops (OSS) - Indonesia 119open unemployment 31, 32, 33Open University 62PPact Kenya Cancer Assessment in Africaand Asia 39Pakistan 90Pan African University 62Panari Hotel 163Park Inn 163participation 12Pay As You Earn (PAYE) 116Payment for Ecosystem Services (PES)203Pegas Touristik 162Pest Control Products Board (PCPB)117Pharmacy and Poisons Board 117Pollin, R. 31population growth 19population projections 157poverty 19, 25poverty projections 158Presidential Circular No.1/2008 202Prevention of Mother to ChildTransmission (PMCT) 39primary school education 60, 64private forests 205Private Sector Development Strategy(PSDS) 89Production Sharing Agreements 144public debt 8, 9Public Expenditure and FinancialAccountability (PEFA) 171Public Finance Management (PFM) Act9, 10, 11, 172public financial management (PFM) 171analytical framework 171county level 170, 173Public Financial Management systems170Public Health and Sanitation, Ministryof 39Public Private Partnership Act of 2013180public-private partnerships (PPPs) 75,155, 170, 178, 179, 181agricultural development 182county tourism 184infrastructure projects 180Public Service Commission Act 2012 15QQatar Airways 106Quebec 96RRachuonyo 150Radisson Blu 163“REDD+” 203regional integration 92Registrar of Companies 117regulatory authority 13Regulatory Impact Assessments (RIA)120rent seeking 147rents transfer 147reproductive health 40resource curse 147retail trade 88revenue 8Rift Valley water catchment 166Rift Valley Water Services Board 125,135, 138Road Maintenance Levy Fund (RMLF)kenya economic report 2013 229

I n d e x131roads sector 192key performance indicators (KPI) 165medium term prospects 165performance 131Rotating Savings and Credit Associations(ROSCAs) 98Rule of Law 13rural areasaccess to sanitation 130Russia 90Rwanda 4, 13, 14, 24, 28, 40, 89, 93, 94,99, 100, 188, 194, 196SSACMEQ III Survey of 2007 65, 68Safari Park Hotel 163Salaries and Remuneration Commission(SRC) 15Samburu County 68Samburu National Park 199sanitation 47Sasumua Dam 137savings 4Savings and Credit Cooperative Societies(SACCOs) 98SBP. See Single Business Permit‘Scheduled Areas’ 115secondary education 62, 68semi-autonomous government agencies(SAGAs) 123, 190Senate 15Service Provision Agreements (SPA)[water] 124, 125Sessional Paper No. 1 of 1999 on NationalPolicy on Water Resources andDevelopment 136Sessional Paper No. 9 [of 2012] on theNational Industrialization PolicyFramework for Kenya 83Sessional Paper No. 14 of 2012 onReforming Education and TrainingSectors 54Seychelles 65, 68SEZ. See Special Economic ZoneSEZ Bill 2012 80, 81Sharia Compliant Model 103Singapore 79, 83, 84, 85, 86, 101Singapore Science Park 86Single Business Permit (SBP) 117, 118,202Sio-Malaba-Malakisi agreement 135skills development 54SkyTeam Alliance 162Small and Medium Enterprises (SMEs)196socio-economic performance 1Somalia 146South Africa 13, 65, 80, 83, 84, 85, 89, 91Southern China Airlines 162South Korea 97South Sudan 148“Special Purpose Vehicle” (SPV) 179Special Economic Zones (SEZs) 80Stanley Hotel 163Statutory Instruments Act of 2013 120stock indices 102stock marketcapitalization 103Strategy for Revitalizing Agriculture(SRA) 74, 76sub-national diplomacy 95sub-national foreign policy 96Sudan 90SUMAC DTM Limited 103supermarkets 88, 200, 201Supreme Court of Kenya 15, 17Swaziland 65TTana Athi Water Services Board 125Tana River 150Tana River County 68Tana water catchment 166, 167Tana water management 135Tana Water Services Board 125Tanzania 4, 6, 14, 28, 65, 68, 69, 79, 80,89, 90, 92, 93, 94, 99, 106, 162, 166,194Tea Board of Kenya 2010/11 AnnualReport 90Teachers Service Commission (TSC) 56Technical, Industrial, Vocational,Entrepreneurship Training (TIVET)62Tertiary Rift Basin 146Thailand 96, 101Tharaka Constituency 195Thorbecke 158Three Cities 163Titanium mining 145Tourism Act 2011 112, 113, 199tourism infrastructure 110Tourism Policy 112Tourism Research Institute 200tourism sectoraccommodation 108, 111, 163air travel 109distribution of species 111emerging markets 106forecast 161global tourism performance 105intra-Africa flights 162Kenya’s performance 105parks visits 107policy implementation 112policy implications 113protected areas 111regional markets 106source markets 161tourism infrastructure distribution 110tourism investments 198Vision 2030 flagship projects 114Tourism Tribunal 112tourist arrivals 105, 106, 161tourist earnings 161tourist receipts 105trade 87performance 92Trade Licensing Act 118Trade, Ministry of 202Transition to Devolved Government Actof 2012 9, 15transparency 12Treasury Single Account (TSA) 10, 178Trust Land Act 194Tsavo National Parks 110, 199Turkana County 144, 145, 146Turnover Tax (TOT) 116Tuskys 89Twiga oil well 144UUasin Gishu County 63Uchumi 89Uganda 4, 6, 14, 24, 26, 28, 40, 65, 69, 79,80, 89, 90, 92, 93, 94, 95, 99, 102, 106,110, 126, 162, 166, 188, 194Ukwala 89Umeme 102Under-employment 31under-five mortality 37unemployment 31, 33UNESCO World Heritage sites 110UNFPA 26UNHABITAT 26United Arab Emirates (UAE) 91, 144United Kingdom (UK) 90, 144United Nations Framework Conventionon Climatic Change (UNFCCC) 142United Nations Framework Conventionon Combating Desertification(UNFCCD) 142United States 90, 97university education 62University of Berne 76UNWTO 105, 161urban areasaccess to sanitation 130Urban Areas and Cities Act 2011 9, 118urbanization 25“User-Pays Principle” 202V‘value for money’ 9Value Added Tax (VAT) 116ventilated improved pit (VIP) latrines128Vietnam 96Virgin Atlantic 106Vision 2030. See Kenya Vision 2030Voluntary Counselling and Testing(VCT) 39230 kenya economic report 2013

I n d e xWWASREB. See Water Services RegulatoryBoardwaste, error and theft (WET) 182Watamu Marine Reserve 111water 47Water Act of 2002 124, 136, 167, 190Water and Irrigation, Ministry of 123,124, 127, 165water and sanitation services (WSS) 191Water Appeals Board (WAB) 124, 136Water Master Plan 166, 181Water Resources Management Authority(WRMA) 124, 136Water Resource Users Associations(WRUAs) 136Water Service Providers (WSPs) 124,138, 190Water Services Boards (WSBs) 124, 125,138, 190Water Services Regulatory Board(WASREB) 124, 127, 136Water Services Sector (WSS) 181Water Services Trust Fund (WSTF) 124,127, 136water sub-sector 123, 124, 126, 135catchment degradation 139climate change 166infrastructure investment 190institutional management 190Joint Monitoring Programme ( JMP) 128medium term prospects 164regulatory measures 190sanitation 126Water Users Associations (WRUAs) 138‘‘Wearing Apparel’ provision 91WHO 41wholesale trade 88wildebeest migration 111‘wilderness experience’ 111Wildlife and Heritage policies 112World Bank 12, 85, 91, 123, 170, 193World Bank Doing Business Report 201389World Development Report 2005 170World Economic Forum (WEF) 2011170, 184World Summit 2005 19World Trade 89World Travel Awards (WTA) 107WSTF. See Water Services Trust FundYYouth Affairs, Ministry of 76youth population dynamics 183youth unemployment 31Yunnan 96ZZambia 65Zanzibar 65zebra migration 111Zimbabwe 65, 93kenya economic report 2013 231

I n d e x232 kenya economic report 2013

The Kenya Institute for Public Policy Research and Analysis (KIPPRA) is anautonomous institute whose primary mission is to conduct public policy researchleading to policy advice. KIPPRA’s mission is to produce consistently high-qualityanalysis of key issues of public policy and to contribute to the achievement ofnational long-term development objectives by positively influencing thedecision-making process. These goals are met through effective dissemination ofrecommendations resulting from analysis and by training policy analysts in thepublic sector. KIPPRA therefore produces a body of well-researched anddocumented information on public policy, and in the process assists in formulatinglong-term strategic perspectives. KIPPRA serves as a centralized source from whichthe Government and the private sector may obtain information and advice onpublic policy issues.KIPPRA acknowledges generous support from the Government of Kenya (GoK), theEuropean Union (EU), the African Capacity Building Foundation (ACBF), and theThink-Tank Initiative of IDRC.Our VisionTo be the leading institute in public policyresearch and analysis; an internationalcentre of excellenceOur MissionTo provide quality public policy advice to the Government of Kenya and otherstakeholders by conducting objective research and through capacity buildingin order to contribute to the achievement of national development goalsISBN9789966 058010 1 09 789966 058010 1 0Bishops Garden Towers, Bishops RoadPO Box 56445 00200, Nairobi, Kenyatel: +254 20 2719933/4; fax: +254 20 2719951cell: +254 724 256078, 736 712724email: admin@kippra.or.ke; website: http://www.kippra.org