WE MUST RETHINK OUR MODEL FOR INFRASTRUCTURE DEVELOPMENT
Have you ever been paid in US Dollars? How would it make you feel if your salary was to be paid in US Dollars?
Now it is not unimaginable that you could be paid in US Dollars, matter of fact there are thousands of Kenyans today who are paid in US Dollars — only they don’t know of it. These are not high-ranking corporate executives or government honchos with a plum corner office on the 23rd floor of a sky scrapper in some corner of Nairobi! On the contrary these are your everyday hustlers who are shoving dirt, digging trenches, laying bricks and serving tea all in the name of laying down Kenya’s infrastructural backbone. Nooo! I can hear your screaming; how can that be?
You see over the last 10 or so years Kenya has borrowed a lot internationally to support development expenditures which in many corridors only mean one thing - growth in physical infrastructure, from the irritating mega road projects in Nairobi to the swanky new roads snaking through your village, from the Ksh 500 billion “high speed” SGR to the collapsed Ksh 1.2 billion Sigiri Bridge in Budalangi, not to mention the various ostentatious gates like the Ksh 86 million one at Nyamira County and Referral Hospital, my home town. You see Kenya has not balanced its books for a very long time with the recurrent budget (read as Teas, Flowers, travel allowances, stationary and then salaries and loan repayments) gobble up all government revenues and Kenya has to resort to borrowing to finance development. Consequently, Kenya’s external debts as grown five-fold from US$ 7 billion at start of 2011 to over US$ 36 billion as at end of September 2020. At the same time the number of international construction firms (mainly Chinese) undertaking the infrastructure has grown exponential across many nooks of the country. Since these contractors and external lenders cannot be paid in shillings but rather in US Dollars, by inference then all persons under they employ is essentially paid in USD! Now you start to get the picture how the lady serving tea at some construction site in Kitui is paid in Dollars and you are not! Don’t get angry yet!
The key question Kenya and indeed other developing nations must ask is whether this model for infrastructure development is sustainable? As it stands many developing nations are facing the ever-constricting vice of the foreign debt trap with many on the default watch list and some like Zambia, Sri Lanka and Djibouti already defaulting and handing over crucial assets to the Chinese. Here in Kenya the debt crisis noises have been going up but not enough to get treasury mandarins to sit up!
We have all heard the advice — don’t borrow to buy consumables or go on holiday or better still wed! The same analogy should apply for infrastructure borrowing. A country should never borrow in US Dollars or Yuan or Euro to pay for things it can pay for in local currency. Assuming we want to build the 67km road connecting Ngong town to Suswa town, there are five key inputs for this project 1) heavy earth moving machinery, 2) lots of soil, sand, gravel and stones, 3) Labour — lots of young men and some engineers, 4) cement for the culverts, drainage, bridges and road pacing, 5) Steel and Tar. Of these inputs only one is not available and cannot availed quickly in Kenya — heavy earth moving machinery and in some cases others like Engineering skills, Fuel Oil and Steel may need to be imported, however there will always be a fraction of the full project budget! You can therefore identify with my argument that Kenya should only borrow in US Dollar to pay those things we can’t avail locally instead of paying the quarry owner, the young ‘mtu wa mjengo’, the tea lady and the truck driver in US Dollars.
RETHINK INFRASTRUCTURE FINANCING
Does this work anywhere you might ask? But of course!! When the Chinese want to build roads do, they borrow in US Dollar or do they print money to pay for those contracts? What about the Japanese or the Europeans? Therefore, the first element we must rethinking about our infrastructure development model is the FINANCING element. Must we borrow in US Dollar to pay for what is available in abundance locally or rather pay for them in Kenyan Shilling through a hybrid financing and better still hybrid construction contracts. We can extend this further to ask should we even borrow in Ksh to pay for these or should we print a ‘little more money’ to finance infrastructure development. Monetary purists would rather have me dragged and whipped publicly for suggesting such a thing as print money to finance government expenditure but I would argue that maybe its time to rethink money supply in an economy saddled with relatively high interest rates and government overcrowding of private consumption in the GDP growth equation.
Kenya’s money supply increased by Ksh 250 billion in the year of the lord 2020 and boy what a year it was. This equated to approximately half of the annual development budget of Ksh 500 billion a year. I argue that expanding money supply by printing half of that budget or close to Ksh. 250 billion will have more positive multiplier consequences than negatives ones. Let us go back to our Ngong-Suswa road, when the local suppliers of labour and raw materials receive the printed money they will increase their demand for basics — food, clothing, shelter, education and health. This will in turn force producers to produce more bread, school uniforms, farm inputs, water tanks, single room housing etc and this fuels a virtuous cycle that will accelerate economic growth. As I understand Kenya’s inflation is driven primary by imported inflation mainly through Oil and Food inflation. Lately the food component has stabilized at lower levels while the gods of Oil have been smiling at us for a season. The oil component is linked in a great way to all the borrowing we are doing and its impact on the exchange hence the more reason we should check on our US Dollar borrowing to pay for sand, stones, teas and mandazi. (Ok time to stop my lay economics lesson before I get into more trouble!).
HOW DID WE GET HERE?
How did we get to a point where we are borrowing in US Dollar to pay for sand, stones, teas and mandazi? I have but three theories to offer on how we go here
The foremost reason we are here is the government’s failure to enforce quality standards and as a result it has outsourced this critical function but at a very punitive price. Twenty years ago, infrastructure projects were dominated by local and regional companies (this is Kenya we don’t name names), these companies and their unsavory management were characterized by shoddy jobs. We all know of a project somewhere in Kenya which fell part soon after being commissioned by none other than the president of the republic amidst much pomp and colour — I recently used the Mariakani-Kilifi by-pass and it is such poor state for a 5 year old road — forget how long it was under construction. This was a direct consequence of the government’s failure to enforce engineering standards by commission and omission. Further-more because we kept rebuilding and repairing the same pieces of infrastructure multiple times over to hide this failure, we created a huge infrastructure gap and as a result we have resorted to frenzied borrowing to close that gap. Since the advent of KENHA we have seen the standard of road infrastructure improve by leaps and bounds, there is need to fortress the enforcement of these standards as part of the framework of onshoring (bringing back home) infrastructure projects.
Secondly, another failure by Serikal (government)! As a country we have not invested enough in capacity building for infrastructure research and development. I remember fondly how we were all awed by the building technologies and methods the Chinese introduced as they built Thika road — that pioneer mega project. From the precast road sections to compacted bridges to fly overs — things unheralded in road construction hitherto. Arguably these methods were not new to infrastructure development worldwide nor were they new engineering concepts. Had the government (and attendant to that our engineering colleges) invested adequately in civil engineering research and development, such technologies could have been staple to local contractors and could be bought in Kenya Shilling and not US Dollar. Fifteen years later, one does not get a sense that the investments are happening. What more we continue to contract Chinese and other foreign contractors in US Dollar under the guise of technology transfer. Did you know that the Kenya Institute of Highways and Building Technologies (KIHBT) was established in 1948 with the mission of ‘Facilitating high quality infrastructure through Training’. It is worth noting it was this same period that the Chinese government, emerging from the civil wars of the 1930s and 1940s, started to invest in infrastructure research and development giving rise to some of the biggest construction companies in the world today. Chinese firms take 7 out of 10 positions in the ranking of largest construction companies in the world with the largest China State Construction Engineering Corporation having annual revenues equivalent TWICE Kenya’s GDP, yes you read that right TWO Kenyas!!.
Thirdly, we are here because of the corruption. It is estimated that we lose close to Ksh 600 billion annually to corruption (or 7.5% of GDP) — this is more than our annual infrastructure budget. The issue of corruption is well documented elsewhere but I want to highlight one thing. Ours is planned corruption i.e. people do not happen by opportunities (except that guys who was walking outside KEMSA and was awarded a tender) but rather it is systematically planned years in advance, where we are fed figures and numbed into accept these big numbers just like other numbers — there is a big difference between a hundred, a thousand and a billion.
Lastly, we are here because of the morbid failure of Kenyans to demand for transparency and accountability of those in government. This lackluster attitude means that the three ills highlighted above (lack of enforcement of standards, poor capacity building and corruption) continue to perpetuate even today. A vivid example to illustrate this is the recent pronouncement by the PS Interior one Karanja Kibicho that the Ks 1.7 billion Likoni floating bridge will be replaced by a Ksh 225 billion cable suspension bridge in 2025. There has been wholesale silence in questioning the rationale and cost of such an investment when we have a (soon to be) perfectly working and costs effective solution. What caught my attention was the eye-popping pronouncement of the cost — a whooping Ksh 225 billion for a 500 meter suspension bridge. Compare this with the costs of the world’s longest double decked suspension cable bridge — the Yangsigang Yangtze River Bridge which opened in 2019 in Wuhan-China, spans 1,700 meters long (THRICE the Likoni channel bridge) and costs USD 1.27 billion (Ksh 127 billion). At a latter time we can discuss the cost of the Kenya SGR vs. the Ethiopia vs. the Tanzania SGR projects the latter two which are electrified. As I argued above ours is planned corruption and the citizenry must remain vigilant.
HOW THEN SHOULD WE MOVE FORWARD?
“Can we be redeemed?” I hear you asking. In the words of our son of the soil abroad President Barrack Obama YES WE CAN!! I will proffer options that in my opinion we should consider getting out of our quagmire.
Firstly, we need to rethink our definition of development. To my mind physical infrastructure should be a subset of our definition of development and not development itself. Our should be wholesome Social Economic development that encompasses the improvement of both physical and human capital with the sole aim of improving our economic standards of living. We must drop our obsession with physical infrastructure as the measure of development and with it the empty promises we extract from our politicians every 5 years (remember the stadiums of 2013). In its place we must demand for balanced investments in physical and social development, . We have seen investments in white elephant projects (it started with Turkwell Dam which only filled this year in the 30 years since it was constructed) especially swanky roads in villages where people don’t have cars to drive on them and would be better serviced by motorable all weather roads. A good example here is the fact that the great Gusii highlands have been producing and exporting tea for decades despite the lack of tarmacked roads, there is a lot to be learnt from their network of low-cost all-weather roads. Don’t get me wrong we must upgrade our physical infrastructure but there must be a clear cost benefit analysis to support each investment and accompanying social-economic investments to accelerate the multiplier impact of these physical assets.
Secondly, the government must take the lead role in execution of infrastructure projects through the incorporation of a State-Owned Enterprise (SOE) in charge of the infrastructure development. I can hear the conservatives and neo-liberalists screaming of how I should be publicly whipped (again!) but there are multiple advantages of moving in this direction. ONE, such a SOE will be key in transforming our approach from US Dollar contracts into Kenya Shilling contracts — my earlier thesis against paying for sand, stones, teas and mandazi in USD and this will have a knock on effect in our debt management and forex reserves. TWO, such an enterprise will introduce several efficiencies into the procurement process for infrastructure projects — look at the speedy and cost effective ways we found to revamp the Kisumu Port, the Nairobi-Nanyuki Railway and re-carpet roads in Nairobi County. THREE, such an SEO would offer the government an opportunity to diversify its sources of revenue and in-fact could be spun off in future on the capital markets to both deepen our capital markets and raise revenues for the government. Indeed, this is the model employed by the Chinese government in building massive construction companies that generate trillions of US Dollars in revenue and parts of which have been privatized over the last 10–20 years. FOURTH, under the SOE the government can effectively tap international talent for technology and skills transfers through management contracts (something we did with KQ and Mumias Sugar in the 1990s). With the right vision such an enterprise can be built into a regional center of excellence and an exporter of construction services competing for construction contracts in the region with other international firms. If you have travelled across Africa and observed the state of electricity grids and compare with our Kenya Power grid you know this idea is not far-fetched (take a moment to look around next time you travel).
I want to extend this same idea to the fledgling county governments; these devolved units must think about establishing their own parastatals for undertaking infrastructure projects. Besides the benefits listed above there is a protectionists element where the devolved funds will be spent locally as you eliminate competition from construction companies from Nairobi companies that siphon monies back to Nairobi.
Thirdly, the citizens must be WOKE! Unless the people stay woke and skeptical about the big infrastructure projects we will continue to be eaten by the dragon of corruption. The conversation of roles of the citizens started under the auspices of BBI debate must extend to the role of the citizens in slaying the monster of corruption.
In summary as the Chinese say, ‘There are two best times to plant a tree, Then and Now’ and as they say don’t waste a crisis, we must NOW seize the unfolding debt crisis to rethinking our model of infrastructure development. We must rethink how we finance infrastructure, how we execute infrastructure and how we evaluate the cost benefit of infrastructure.
