Kenya_Country Strategy Paper_Africa Development Bank_Timothy Mahea

8/2/2019 Kenya_Country Strategy Paper_Africa Development Bank_Timothy Mahea

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African Development BankAfrican Development Fund

KENYA

2008-2012

Country Strategy Paper

Country and Regional Department - East A (OREA)November 2008


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TABLE OF CONTENTS

I. INTRODUCTION

II. COUNTRY CONTEXT AND PROSPECTS

2.1 Political, Economic and Social Context

2.2 Strategic Options

2.2.1 Country Strategic Framework2.2.2 Challenges and Weaknesses2.2.3 Strengths and Opportunities

2.3 Developments in Aid Coordinationand ADB Positioning

III. BANK GROUP STRATEGY FOR KENYA

3.1 Rationale for Bank Group Intervention3.2 Deliverables and Targets3.3 Monitoring and Evaluation of the CSP3.4 Country Dialogue Issues3.5 Potential Risks and Mitigation Measures

IV. CONCLUSION AND RECOMMENDATION

ANNEXES

BIBLIOGRAPHY

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Questions on this document can be referred to:

Mr. Aloysius Ordu Director OREA Ext. 2064

Mr. Steve Kayizzi-Mugerwa Lead Economist OREA Ext. 2176

Mrs Domina Buzingo Resident Representative KEFO Ext. 6231

Mr. James Opio-Omoding CPO KEFO Ext. 6230

Mr. Walter Odero Macroeconomist KEFO Ext. 6230


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List of Abbreviations

ADF - African Development FundAGOA - Africa Growth Opportunity ActAPRM - African Peer Review MechanismASAL - Arid and Semi Arid LandsCOMESA - Common Market for Eastern and Southern Africa

CSP - Country Strategy PaperDCG - Donor Coordination GroupDFID - Department for International DevelopmentDRC - Democratic Republic of the CongoEAC - East African CommunityEASSy - Eastern and Southern Africa Submarine Cable SystemEPA - Economic Partnership AgreementESW - Economic Sector WorkEU - European UnionFDI - Foreign Direct InvestmentGCG - Grand Coalition GovernmentGDP - Gross Domestic ProductGNI - Gross Net IncomeGOK - Government of KenyaHAC - Harmonization, Alignment and Coordination

HDI - Human Development IndexHIV/AIDS - Human Immunodeficiency Virus/Acquired Immunodeficiency SyndromeICT - Information Communication TechnologyIMF - International Monetary FundIGAD - Intergovernmental Authority for DevelopmentIPO - Initial Public OfferKANU - Kenya African National UnionKEFO - Kenya Field OfficeKJAS - Kenya Joint Assistance StrategyMDG - Millennium Development GoalMTEF - Medium Term Expenditure FrameworkMTP - Medium Term PlanNIMES - National Integrated Monitoring and Evaluation SystemODA - Overseas Development AssistanceODM - Orange Democratic Movement

OECD - Organization for Economic Cooperation and DevelopmentPAC - Parliamentary Accounts CommitteePBA - Performance Based AllocationPEFA - Public Expenditure and Financial AccountabilityPFM - Public Financial ManagementPIU - Project Implementation UnitPNU - Party of National UnityPPOA - Public Procurement Oversight AuthorityPPP - Public Private PartnershipPSDS - Private Sector Development StrategyROSC - Report on the Observance of Standards and CodesSADC - Southern African Development CommunitySME - Small and Medium EnterpriseSSA - Sub Saharan Africa

SWAP - Sector Wide ApproachTEAMs - The East African Marine SystemsTIVET - Technical, Industrial and Vocational Entrepreneurship TrainingUA - Unit of AccountVAT - Value Added TaxWTO - World Trade Organization


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Political Stability

Civil LibertyPolitical Rights

Kenya Sub Saharan Africa

I. INTRODUCTION

1.1 The previous Bank Groups CSP for Kenyaended in 2007. The plan, moving forward, wasto replace it with the Kenya Joint AssistanceStrategy (KJAS) drafted by the Government and

development partners with a view to greaterharmonization, alignment and coordination ofdevelopment assistance. Its pillars arethreefold: (i) encouraging economic growth; (ii)investing in people and reducing poverty; and(iii) strengthening institutions and improvinggovernance.

1.2 The Bank Group and other developmentpartners committed to fully adopt the KJASframework as their common country strategy by2008 and the Bank made plans to draft amemorandum to accompany the KJAS to theBoard in the first quarter of 2008. Kenyas post-election crisis in early 2008 meant that theKJAS could not be adopted as planned.

1.3 In June 2008, the Government formallylaunched the long-term development strategy,Vision 2030, and its first five-year Medium TermPlan (MTP) for 2008-2012. Since the KJASrequires revision to align it with the MTP, theGovernment requested the Bank Group toprepare a full country strategy.

1.4 This Country Strategy Paper (2008-2012) isa result of discussions with the Government,development partners and other stakeholders

during visits to Kenya in July and September2008. It is aligned with the MTP, focusing oneconomic growth and employment creation asthe basis for poverty reduction and sharedprosperity. It also considers the lessons of thepost-election crisis of 2008 to be important: (i)economic growth, such as that generatedduring the past five years, could unravel if notaccompanied by measures to address incomedisparities among households and regions, and(ii) good governance and institutionalstrengthening are crucial for policysustainability.

1.5 The Bank Group will continue to work withthe Government and development partners torevise the KJAS. On completion, the revisedKJAS will be presented to the Board as theBanks country strategy for Kenya.

II. COUNTRY CONTEXT ANDPROSPECTS

2.1 Political, Economic and SocialContext

PoliticalContext

2.1.1 Since independence in 1963, Kenya hasremained reasonably stable despite politicaland economic turmoil in the region. The party ofIndependence, the Kenya African NationalUnion (KANU), came under increasing pressureover the decades to introduce more pluralisticnational politics. The reintroduction of multipartydemocracy in the early 1990s heightenedpolitical competition, with a dozen political

parties represented in Parliament, beginningwith the 1992 elections.

2.1.2 In 2002, Mwai Kibaki became the thirdpresident of Kenya in close to 40 years ofIndependence. The change strengthenedeffectiveness of government and widenedpolitical space for the media and civil society.Although previous Governments had initiatedsome constitutional reforms, it was underKibakis first term of office that the nationalconference called to debate a new constitutionwas concluded. The resulting draft constitution,the so-called Bomas draft, was, however,

subjected to further, and largely controversial,review by Parliament. The draft that emergedfrom this process was put to a referendum in2005 and defeated. This presaged the politicalacrimony of the years to come (Graph 1).

Graph 1: Political Context

Source: Compiled by AfDB Statistics Department, 2008


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2.1.3 The contested results of the 2007general elections brought the country to thebrink of civil war, starkly illustrating its economicand political fragility. High-level internationalmediation led to the formation of a Grand

Coalition Government (GCG) in early 2008 (seeBox 1). This helped halt the slide toward furtherfractionalization and presented an opportunityfor the Government to forge ahead on a numberof national issues. High expectations have beenvested in the GCG. It is expected to deliverstability, a new constitution, land reforms, peaceand security and national reconciliation.Coalitions call for much perseverance,especially in view of the fractious politics of thepast. A collapse of the coalition wouldcomplicate Kenyas political future and hamperthe implementation of the MTP and Vision

2030. However, the absence of parliamentaryopposition might weaken policy implementation.Kenya is the gateway to East Africa. Its politicalstability and economic prosperity haveimportant implications for its neighbors. Kenyaspost-election crisis had debilitating impacts onregional transport, trade and tourism, andeconomies more generally.

Economic Context

2.1.4 Kenyas economy is one of the largest inthe region, and the rest of Sub-Saharan Africa(SSA). Economic growth increased in the

2000s, despite external shocks and publicsector inefficiency (Graph 2). The privatesectors ability to identify and exploit newniches, such as horticulture and ICT, has beenimportant for the performance of the economy.However, Government has emphasized thatpublic-private partnerships will be required toimplement Vision 2030 and the MTP, includingthe planned infrastructure projects to transformKenya into a middle income economy.

Graph 2: Macroeconomic Trends

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2003 2004 2005 2006 2007e 2008p 2009p

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Kenya : Current Account Ba lance (% GDP) (left sca le)

Kenya : Inflation (%) (left sca le)

Kenya : Fiscal Balance a fter grants (% GDP) (left scale)

Kenya : Gros s international reserves (US$ mn) (right sc ale)

Kenya : GDP Growth (%) (left scale) Source: AfDB Statistics Department, African Economic Outlook, 2008

Growth and Growth Drivers

2.1.5 Investment has averaged about 20percent of GDP per year in the 2000s, which isabout the average for SSA but lower than forMiddle Income Countries, whose investment is3 points higher. Kenyas position as the mostimportant FDI destination in East Africa waseroded by slow structural and regulatoryreforms. Its neighbors, Tanzania and Uganda,

have surpassed it in attracting foreigninvestmentmuch of it from Kenyain recentyears. Aid is an important factor, but flows inper capita terms were much lower (Graph 3)than for its neighbors for much of the pastdecade. Although aid to Kenya finances onlyabout 6 percent of the total budget, it accountsfor more than half of the development budget.Remittances have increased in importance, nowabove US$1 billion per year.

Box 1: December 2007 Elections and Aftermath

The Party of National Unity (PNU) and the OrangeDemocratic Movement (ODM) were the maincontestants of the elections. The unclear result ledto widespread violence, with about 1,000 deathsand over 300,000 people displaced.

The crisis disrupted economic activity and erodedbusiness confidence. Tourism, a major source offoreign exchange and employment, declinedsharply. In February 2008, Kenyas sovereign creditrating was downgraded by the major ratingagencies from B+ to B.

Following a national accord, a Grand CoalitionGovernment, with Mwai Kibaki as the President andRaila Odinga as Prime Minister, was formed in April2008.

The GCG has resumed institutional reforms andcommissions have been set up to investigate theelection malpractices, post-election violence and toaddress truth, justice and reconciliation. Dialoguewith development partners has resumed in earnest.

Thanks to a quick political resolution, the damage tothe economy was less than feared. Economicactivity has rebounded in recent months with thereturn of business confidence, also a reflection ofthe resilience of Kenyas private sector.


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Graph 3: Key Growth Drivers, 2007

Annual Export Growth

Aid per CapitaFDI%GFCF

Kenya Africa

Source: AfDB Statistics Department, 2008.

2.1.6 Exports to the region have increased withthe recovery of regional economies. They have

become the fastest growing component ofdomestic demand, 8 percent per year during the2000s.

2.1.7 With regard to sectors, Kenya is morediversified than other economies in the region.Agriculture, accounted for 27 percent of theGDP (see Graph 4) in 2007. It grew by 4percent on average during 2003-2007.Significant factors are the Governmentssupport to the coffee, dairy, and livestocksectors through the elimination of VAT on farmmachinery and inputs for mainly commercialproducers, and the re-opening of the Kenya

Meat Commission.

Graph 4: GDP by Sector, 2007

Other services

13.9%

Other Industry

6.8%

Trade, hotels

and

restaurants

14.5%

Financial

services and

real estate

9.8% Manufacturing

11.5%

Transport and

communications

11.0%

Government

services

4.9%

Mining and

quarrying

0.6%

Agriculture

27.1%

Source: AfDB Statistics Department, African Economic Outlook,2008.

2.1.8 The manufacturing sectors share of GDPis about 11.5 percent. The sector is segmented,comprising large multinationals on the upperend and SMEs and informal manufacturingactivities on the other. The range of products

has increased markedly in past decades but thefood and metals sub-sectors remain the mostimportant.

2.1.9 Services, including banking and finance,tourism, transport and communications, accountfor over 50 percent of GDP. They are mainlyproduced by the private sector and employ alarge segment of the urban population. TheGovernments plan to expand economicinfrastructure is partly aimed at boosting privatesector service production further.

2.1.10 The Government projects that by 2012,total investment will have risen to over 30percent of GDP, buttressed by a substantialinflow of FDI. By then, growth will be in doubledigits, with services and industry as the mostsignificant contributors. These scenarios aresimilar to those pursued earlier by the AsianTigers and will equally require relentless policyoversight and attention to detail.

Macroeconomic Management

2.1.11 In recent years, macroeconomic policieshave been prudent, geared at supportinggrowth. Tax revenues have been consistently

over 20 percent of GDP for decades, animportant factor in Kenyas relatively lowdependence on aid. Budget deficits after grantsaveraged 2 percent of GDP over 2003-2006(Graph 5). However, relative to the size of theeconomy, the development budget remainssmall, less than 10 percent of the total budget.In 2007, Kenya embarked on plans to issue aglobal bond for US$514 million to financedevelopment projects. However due to ratingdowngrades in early 2008 and the subsequentturmoil in the international financial markets,issuance has been postponed.

2.1.12 Domestic inflation has risen recently,reaching 30 percent in early 2008, in responseto higher food and fuel prices and to domesticpolitical uncertainties. However, underlyinginflation has remained at about 5 percent formuch of the past five years. The currentaccount deficit has been about 1 percent ofGDP in recent years, compared to inflows of


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remittances of close to $1.3 billion, about 5percent of GDP, in 2007.1

Graph 5: Macroeconomic Management

Fiscal Balance after grants(% GDP)

Debt/GDP (%)

Inflation (%)

Current Account Balance (%

GDP)

Kenya Africa

Source: African Economic Outlook, ADB-OECD 2006/2007; ADB Statistics

2.1.13 Public debt, both domestic and external,has been well managed. The IMF estimatedthat the countrys debt will remain sustainableup to the end of the Vision 2030 period. This issignificant considering that the country has notbenefited from the multilateral debt reductionoperations of recent years.

2.1.14 In a recent assessment (July 2008), theIMF noted that the Kenyan economy hadregained its footing and is expected to grow byabout 4 percent in 2008, a sharp decline fromthe 7 percent registered in 2007, but muchhigher than expected post crisis.

Governance

2.1.15 Kenyas record on institutional reformsand governance remains below the SSAaverage (see Graph 6). The TransparencyInternational Report for 2008 ranks Kenya 147out of 180 countries. This is an improvement onearlier performance, when Kenya was rankedamong the bottom twenty. However, recentassessments2, including jointly with theGovernment, attest to the erosion of theintegrity of public institutions and governance,which poses serious fiduciary and investmentrisks for the country.

2.1.16 The Government has embarked onlegislation in a range of areas including publicofficer ethics, anti-corruption and economiccrimes, government financial management,public procurement and audit, privatization and

1See the Migration and Remittances Fact Book 2008.

2 These include the Bank Groups Governance Profile and the PublicFinancial Management and Accountability review done jointly bydevelopment partners and the Government.

statistics. Numerous other measures havefollowed, including a ministerial code ofconduct, and reforms of the judiciary and thepolice force.

Graph 6: Governance (Ranking)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Government

Effectiveness

Voice and

Accountability

Corruption Perception

Rule of Law

Kenya Sub Sahara Highest Africa

Source: AfDB Statistics Department using data from Doing BusinessDatabases, World Bank, 2008

2.1.17 To streamline procurement, one of themain sources of irregularities in Government, aPublic Procurement Oversight Authority (PPOA)has been established. The transparency of thebudget has improved and it is generallyacknowledged by the donor community thatrecent budgets have been more pro-poor andthat there has been some improvement in thedelivery and quality of public services.

2.1.18 However, the implementation of

governance reforms has been largelyinadequate. The road ahead promises to beeven more challenging as the appetite fordifficult governance reforms might havediminished with the formation of the GCG.However, leaders of the coalition are adamantthat governance reforms will continue and thatthe timetable for the introduction of a newconstitution is on track.

2.1.19 The recent report on the Observance ofStandards and Codes (Fiscal TransparencyModule, 2008) by the IMF notes improvement indata and reporting on budgetary and relatedissues in Kenya. On the other hand theGovernment has strengthened the capacity ofthe National Bureau of Statistics to generateand disseminate data.

Business Environment and Competitiveness

2.1.20 Kenya was ranked 72 of 178 countries inthe 2008 World Bank Ease of Doing BusinessIndex. It was also identified as the 10 th mostimportant reformer of the business environment.


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In both respects, it was well ahead of other SSAcountries (Table 1). In particular, Kenya scoredhighly in terms of dealing with licenses andgetting credit.

Table 1: 2008 Doing Business Rankings

Kenya SSA Africa HighestAfrica

Ease of DoingBusiness

72 136 134 27

Starting a business 112 126 122 8

Dealing withlicenses

9 112 112 9

Employing Workers 66 117 117 11

Registering property 114 121 122 26

Getting credit 13 114 114 13

Protecting investors 83 112 112 9

Paying taxes 154 104 108 11

Trading acrossborders

148 130 124 17

Enforcing contracts 107 116 116 33Closing a business 76 121 117 26

Source: World Bank, Ease of Doing Business, 2008

2.1.21 Kenya ranked 148 on trading acrossborders, partly a reflection of the inefficiency atthe port of Mombasa. The port requires majorinvestments, especially upgrading the containerterminal. The Government has embarked on thereform of this port, which will now operate on a24 hour basis. Further investments inequipment and structures, are planned with a

view to expanding services to countries in theregion.

2.1.22 The Government completed a PrivateSector Development Strategy in 2007 focusedon enhancing the business environment. Itsaction plan includes strengtheninginfrastructure, combating crime and insecurity,implementing anti-corruption measures, andremoving regulatory and administrative barriersto doing business. Crucially, the Governmentaims to undertake a constant dialogue onimpediments to private sector activities.

2.1.23 Kenya was ranked 10th out of 29 Africancountries in overall competitiveness in 2007 bythe World Economic Forum (Graph 7). Whilethe country retains characteristics of a factor-driven economy, with high dependence oncommodity prices and world economic cycles, itis transforming into an innovation- driveneconomy in two respects: first, skilled labor isplaying a greater role in the economy than

previously and second, the financial sector isincreasingly innovative.

Graph 7: Global Competitiveness Index

Institutions

Infrastructure

Macroeconomic stability

Health and primary education

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market sophistication

Technological readiness

Market size

Business sop histication

Innovation

Kenya

Factor-driven economies

Africa

Source: World Economic Forum, 2008

2.1.24 Thanks to Kenyas early focus on highereducation and training, it now has animpressive skills mix and a human resourcebase which are above the African average, butwhich still require expansion if Kenya is toachieve its ambitious development goals. Theprivate sector has increased its ability toharness the benefits of existing technologies,an important feature in the transition to aninnovation-driven economy.

2.1.25 The country enjoys a high level offinancial market sophistication (Graph 8), whichin turn translates into business sophistication,and goods and labor market efficiency that areabove the African average. It fares less well incomparison to the average for factor-driveneconomies in terms of market size andinfrastructurewhich are closer to the Africanaverages.

Graph 8: Financial Sector 2008

Financial market

sophistication

Ease of access to loans

Venture capital availabilitySoundness of banks

Financing through local

equity market


Source: World Economic Forum, 2008


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Regional Integration

2.1.26 The history of East Africas economicintegration goes back to 1917, when anorganization for coordinating common services

for Kenya and Uganda (joined a decade later byTanganyika) was set up by the colonialgovernment, with headquarters in Nairobi.Kenya has since continued to play a leadingrole in the region (i) due to its strategic locationon the East African coastfor centuries one ofthe most important outposts for thetranscontinental trade between Europe, theArab world, the Indian sub-continent and theFar East; and (ii) as the gateway for manycountries in the hinterland. Kenyas regionalimportance was buttressed by the size of itseconomy, based to a larger extent on privateenterprise. The institutional legacy and

diversified economic structure inherited atindependence were also significant factors.

2.1.27 Kenya attracted substantially moreforeign direct investment than Uganda andTanzania. Nairobi became the logical regionalheadquarters for multinational firms and banks.Kenyas neighbors saw these as threats to theirnascent industrialization efforts. Associatedpolitical pressures eventually led to the collapseof the East African Community (EAC) in 1977.

2.1.28 In 2003, Kenya, Uganda and Tanzania

resumed fully-fledged economic collaborationunder the auspices of a revamped EAC andwere joined by Rwanda and Burundi as fullmembers in 2007. EAC collaboration resumedwhen the economic and political situation of theregion had greatly changed. Economies hadbeen liberalized and more representativepolitics were being promoted in East Africa. In2004, Kenya, Uganda and Tanzania signed aProtocol establishing the East African CustomsUnion and setting up a common external tariff,with timing provisions to protect economicallyweaker Uganda and Tanzania.

2.1.29 The Governments Ministry for RegionalIntegration has analyzed Kenyas strengths,opportunities and challenges in the regionalcontext. They include the promise of a largeregional market of over 200 million, strategiclocation, relatively well developed transportinfrastructure, and a large and regionallyinfluential private sector. The challenges includeoverlapping regional memberships and anabsence of focus on regional integration innational policy documents.

Mombasa is the second most importantharbor in the region after South Africas Durban,with 17 international shipping lines callingregularly and handling 14 million tones of cargoeach year, a quarter of which is transit cargo to

the region.

3

In recent decades, the lack ofinvestment in modern cargo handlinginfrastructure and technology has seriouslyundermined the ports efficiency, causing longdelays. Business surveys indicate thatinadequate port services bear some of theblame for the escalating cost of doing businessin the region. During 2008, the Governmenttransformed Mombasa into a 24-hour operationto reduce the backlog. To reach and maintaininternational standards at the port will requiremore investment in cargo handling andcomplementary services. The Governmentplans to relinquish the former to the privatesector.

Kenya is the transport hub of East Africa andgreater regional integration will furtherstrengthen its position. Nairobi is the base foran extensive regional trucking business,airfreight services and international airlines. TheGovernment has argued, however, that thecountrys transport infrastructure requiressubstantial private and public investment tocope with the rising regional trade volumes.Recent initiatives to alleviate regionalinfrastructure bottlenecks include plans to

develop a modern railway system and toconstruct major highways as part of theNorthern Corridorthe main transport link tothe sea for countries in the hinterland.

Kenyas private sector plays a leading role inthe region. Kenyan companies are among themost important foreign investors in Uganda andRwanda and a number are cross-listed on theregional bourses. The Nairobi Stock Exchangehas mentored the Kampala, Dar-es-Salaam andKigali stock exchanges in recent years. TheKenya Commercial Bank has established

branches in Kampala, Dar-es-Salaam andJubafrom which it hopes to expand further afieldand has been important in Kenyasexpanding trade to the region. Although thereach and competitiveness of Kenyas privatesector have caused apprehension in parts ofEast Africa, businesses from the other countries

3 The port also serves Uganda, Rwanda, the DemocraticRepublic of the Congo, Burundi, Ethiopia, Southern Sudan,

Somalia and Northern Tanzania.


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have discovered profitable nichesrangingfrom food products to timberin their trade withKenya.

2.1.30 The challenges to Kenyas integration

aspirations are twofold:

First, the Government sees its multiplememberships of regional blocsincludingCOMESA, IGAD, Nile Bain Initiative, andWTOas, besides being expensive in terms ofmembership fees and other commitments,impairing policy coherence. In October 2008 theheads of state and government from the EAC,SADC and COMESA signed a memorandum ofunderstanding in Kampala with the goal ofunifying the three entities into a single free tradearea of over 500 million and a GDP of close to$600 billion. This is an important step in the

right direction.

Second, the Government also sees the poorregional infrastructure as a key impediment togreater integration. The Government plans keydevelopments in regional infrastructurenotably a transport link from the port of Lamu toIsiolo with connections to Ethiopia and SouthernSudan as well as power interconnectionbetween power producers in Ethiopia and therest of East Africa. The Ministry of RegionalIntegration has an elaborate East AfricanStrategy which emphasizes infrastructure

development.

Graph 9: Regional Integration and Trade

-30

20

70

120

170

Trading across

Borders - Rank

(148)

Trade Freedom

Index

Diversification

Index (in 2006)


Source: World Bank, 2008, ADB-OECD 2006/2007

2.1.31 Under this CSP, the Government has setaside ADF resources for the implementation ofimportant regional projects, including powertransmission and road transport. In doing thisKenya gets from the Banks regional window,an additional 2 UA for each UA so committed.This provides a powerful incentive for Kenyaand its neighbors to embark on similar regional

initiatives with support from the Bank. The BankGroup is also planning important joint analyticalwork on regional integration in East Africa withfocus on the role of infrastructure. Goingforward the Bank will continue to emphasize the

importance of incorporating regional integrationin Kenyas policy priorities and nationalstrategies, including in the implementation ofVision 2030 and the MTP.

Trade

2.1.32 There has been an important structuralshift in Kenyas trade in recent years, both interms of direction and content. For much of thepost-independence years, Kenyas trade wasdirected towards Europe. However, followingtrade liberalization among regional economiesin the past decade, including free exchange rate

markets and lower tariffs within blocs, Kenyastrade has switched exceedingly to the region. In2007, about 70 percent of exports (aboutUS$2.8 billion), mostly manufactures, went toCOMESA countries. In 2007, over 12 percent ofKenyan exports went to Uganda, about 8percent to Tanzania and 2.1 percent to Rwandaand 4 percent to Sudan. Burundi and DRC havealso become important trade partners forKenya, with the return of peace and increasedeconomic activity.

2.1.33 Kenyas trade is more diversified than

the SSA average, but in comparison to Africasbest performers, it still has some way to go indiversifying the direction of its trade (Graph 9).In this context though, Kenya shows majorchange. It now exports more manufactures,horticulture and fish than its traditional exportscoffee and tea, the latter two accounted for lessthan 30 percent of total export revenue in 2006.However, Europe is still an important tradepartner and Kenya has been a major regionalnegotiator in the process leading to anEconomic Partnership Agreement (EPA) for theEastern and Southern Africa bloc of countries.However, Asia is the most important source ofimports, over 50 percent in 2007. With respectto the US sponsored Africa Growth OpportunityAct (AGOA), following rapid expansion,production of apparel targeted to the USA hasdeclined in recent years with the lifting ofinternational quotas on exports of apparel in2005.


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Social Context and the Environment

Social Inclusion and Equity

2.1.34 Kenya has a rapidly expanding middle

class, and its human development index (HDI)is above the sub-Saharan African average(Graph 10). It is still characterized by wideregional economic disparities. The richest 10percent of households own about 36 percent oftotal wealth and the poorest 10 percent ownless than 2 percent.

Graph 10 : Human Development

Kenya

Sub Sahar a

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

1999 2000 2001 2002 2003 2004 2005

Kenya Sub Sahara

Source: AfDB Statistics Department, 2008.

2.1.35 Kenyas Gini coefficient of 0.51 in2005/06 (up from 0.45 in 1994) is only lowerthan that of South Africa and Namibia in theregion (Graph 11). In rural areas, poverty andinequality are marked, and land scarcityundermines livelihoods. Recent growth has,however, helped reduce absolute poverty from52 percent in 1997 to 45.9 percent in2005/2006.

Graph 11: Policies for Social Inclusion

Gini Index

Life Expetancy

Education Index

Human Pov erty Index

(HPI)

Kenya Africa Highest Africa

Source: AfDB Statistics Department using data from the UNDPDatabases, 2008

2.1.36 Social indicators have improved inrecent years. Maternal mortality was reduced by140 to 414 per 100,000 live births between

1998-2003. Child immunization rose by 50percent in three years to 72 percent by 2006/07and the attendance by pregnant women atantenatal clinics increased from 42 to 56percent over the same period. The mortality of

in-patients with malaria was halved to 17percent (2006/07). It is estimated that theproportion of adults aged 15-49 with HIV/AIDSdeclined from 6.7 percent in 2003 to 5.1 percentin 2006.

2.1.37 In education, the introduction of freeuniversal primary education in 2003 led to asharp increase in school attendance. About 8.2million children attended primary school in 2007compared to 5.9 million in 2000. The rate oftransition from primary to secondary level rosefrom 41.7 percent in 2002 to 60 percent in2005.

2.1.38 In terms of MDGs (see Annex X) Kenyahas already achieved MDG 2 (universal primaryeducation) and achieving MDG 6 (progress incombating HIV/AIDS) is likely. The promotion ofgender equality, MDG 3, has received moreattention in recent years, and will likely beachieved. However, while progress has beenmade, MDG 1 (eradicate extreme poverty andhunger); MDG 4 (reduce child mortality); andMDG 5 (reduce maternal mortality) will oncurrent trends not have been met by 2015. Withrespect to MDG 7 (ensure environmental

sustainability) and MDG 8 (global partnerships)the progress achieved is inconclusive.

Gender Issues

2.1.39 Both the Vision 2030 and the MTPenvision a critical role for women in the socio-economic development of Kenya. Gender parityhas been achieved in primary education, about4 million girls attended school in 2007, throughthe introduction of free universal primaryeducation. Even more important, the number ofgirls attending secondary school had increasedto about half a million, 44 percent of the total, by2007. The percentage of females in tertiaryeducation has also improved markedly in recentyears, with attendance rates of over 40 percent.

2.1.40 With respect to leadership withingovernment and politics, recent years haveseen more female representation. In the GCGabout 15 percent of the over 90 cabinet anddeputy ministers are female, but only about 10percent of the 222 MPs. Women comprisebetween 20-30 percent of high court judges,


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ambassadors and heads of state corporationsand agencies. This is an improvement on adecade earlier when female politicians and topgovernment officials were rare.

2.1.41 The Bank Groups Gender Profile forKenya, completed in 2007, observed that inspite of political and social inroads, a number ofgender gaps remain, especially in incomegeneration. Womens access to credit andproductive assets such as land continues to bepoor, since traditional practices still precludewomen from inheriting property. Women inbusiness still find it difficult to graduate to formallending institutions because they often havelittle or no collateral.

2.1.42 Recent household surveys indicatehigher incidence of poverty among female

headed households, in both rural and urbanareas. Besides poorer access to healthcare,credit and employment, female-headedhouseholds experience domestic violence morefrequently than others. The Government plans anumber of initiatives, some in the form ofaffirmative action, to address gender disparities.They include (i) increasing femalerepresentation in parliament, where the countrylags behind its neighbors, (ii) raising femaleaccess to public sector jobs and enhancing theircareer prospects therein, and (iii) improvingfemale access to family planning and the quality

of antenatal care.

Environment and Climate Change

2.1.43 Kenya is a relatively large country, butthe land amenable to agriculture is less than aquarter of the land mass. The rest of thecountry receives only sporadic rainfall and couldnot sustain agriculture without irrigation. Highpopulation growth has put considerablepressure on natural resources. Up to 80 percentof the population uses fuel wood or charcoaland deforestation and soil degradation aresignificant problems. Closed forests stand at 1.7

percent of land against the recommended levelof 10 percent. Climate change has aggravatedthe situation.

2.1.44 Kenya has experienced unprecedentedout of season flooding and droughts withserious impacts on farming and rurallivelihoods. Incidence of vector and water-bornediseases during periods of heavy rains andflooding are interspersed by famine andmalnutrition during droughts. To escape the

threat of famine or unemployment rural dwellersare migrating in large numbers to the cities. Therecent increases in food prices have aggravatedthe situation (see Box 2).

2.1.45 Among the policy initiatives introducedby the GCG is the protection of Kenyas forestsand water resources, including a master plan torestore and rehabilitate the Nairobi River Basin.

Box 2: Bank Groups Response to KenyasFood Crisis

Kenya has become increasingly food insecure dueto climatic changes, and despite its impressiveeconomic growth in the last five years. Agricultureis primarily rain fed and fertilizer use is crucial toboosting output. Low rainfall and severe droughtshave been exacerbated by the shortage of

affordable fertilizers caused by over 50 percentincrease in import prices. Food productiondeclined in 2007 and UNICEF estimates that 1.3million people have become food insecure, withthe majority resident in the arid and semiarid northof the country. In August, the Governmentrequested for assistance from the donorcommunity and the Bank Group to purchasefertilizer.

The Bank Group responded expeditiously to theGovernments request and reallocated aboutUS$11.5 million from existing projects to help thecountry to purchase fertilizer under the BanksAfrica Food Crisis Response program. Thefertilizer is expected to be available to farmersprior to the onset of the short rains (November-

December) this cropping season. This will helpboost food production and ameliorate the impactof the food crisis in Kenya.


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2.2 Strategic Options

2.2.1 Country Strategic Framework

2.2.1.1 Kenyas Vision 2030 was formallylaunched in 2008 (Box 3). It projects Kenya atthe end of two and a half decades ofimplementation as: (i) globally competitive; (ii)a prosperous nation; and (iii) with citizensenjoying a high quality of life. Achieving thesethree interrelated goals has influenced the focusof the first comprehensive medium-term plan(MTP 2008-2012) also launched in 2008.

2.2.1.2 The MTP recognizes the importanceof well developed economic infrastructure intransforming Kenya into a globally competitiveeconomy. Competitiveness includes being welllinked to neighboring countries to boost trade.The MTP also underlines the importance ofdelivering modern infrastructure services torural areas to boost incomes and social welfare.

2.2.1.3 During 2008-2012, initiatives intransport will include presentation of a NationalIntegrated Transport Master Plan, developmentof a new transport corridor to Southern Sudanand Ethiopia, and maintenance of existingroads, including rural roads. A Roads Actenacted in 2007 will guide policies andinstitutions. The Kenya-Uganda Railway

concession is being revamped and this willfacilitate greater economic integration.

2.2.1.4 In the area of electricity generation,the Government will complete a National

Electricity Supply Master Plan, which will alsoreflect on the work of the Rural ElectrificationAuthority. An Energy Access Scale-up programwill complement this overall effort towardimprovement of power supply. Intelecommunications the under sea fiber opticcable and a national fiber optic network arebeing constructed. Strengthening the water andsanitation sector is also a priority.

2.2.1.5 Agriculture, and rural developmentmore generally, is key to the achievement of thegoals of the MTP. Focus is on building aninnovative, commercially-oriented and modern

farm and livestock sector, through support tosmallholders, and creation of off-farm activitiesin the rural economy. Irrigation infrastructure forcrop and livestock farming (especially inASALs) and the establishment of disease freelivestock zones are priorities. A food securityand nutrition policy incorporates the expansionof the strategic grain reserve.

2.2.1.6 In the social sector, the aim is toprovide an efficient health infrastructurenetwork, raising the quality of health caredelivery to international standards, and creating

a mandatory national health insurance scheme.In education the main goals are to raisetransition rates in basic education, improveeducation quality, and address regionalinequalities by improving access in the poorerregions of the country.

2.2.1.7 To reach its goals, the Governmentaims to use the budget to target spending onthe priority sectors. These will account for 62percent of expenditure by 2010/11, an increasefrom 57 percent in 2007/08.

2.2.2 Challenges and Weaknesses

2.2.2.1 Kenya is faced with a number ofweaknesses and, as a result, challenges, sevenof which are outlined below:

(i) Maintenance of political stability. The rapiddisintegration of Kenyas social and politicalfabric in a matter of months following the post-election crisis pointed to the need to emphasizeequitable development. The quick resolution ofthe post-election crisis was a positive step, but

Box 3: Thrust and Targets of Kenyas Vision 2030

Strategic Objectives(i) Maintain an average growth rate of 10 percent perannum over the next 25 years; (ii) Create a just andcohesive society enjoying equitable social development

in a clean and secure environment; and (iii) Realize anissues-based, people-centered, results-oriented andaccountable democratic system.

Foundations(i) Macroeconomic stability; (ii) Continued governancereforms; (iii) Enhanced equity and wealth creation; (iv)Expansion of economic infrastructure; (v) Science,technology and innovation; (vi) Land reform; and (vii)Security and public sector reforms.

Pillars(i) Economic: Tourism, Agriculture, Manufacturing,Wholesale and Retail Trade, Business ProcessingOutsourcing (BPOs), and Financial Services; (ii) Social :Education, Health, Water and Sanitation, Environment,Housing and urban services, and Gender, Youth andVulnerable Groups; and (iii) Political: Rule of Law,Electoral and Political process, Democracy and PublicService delivery, Transparency and accountability,Public administration, Security, Peace building andConflict management.

Source: Government of Kenya, 2008


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sustainability will require political will to ensurethat the coalition Government remains intactand delivers on its agenda of addressing thesocio-economic fragility of the country.

(ii) High levels of corruption and weak

governance. Corruption, weak governance (seeprevious discussion on governance) andinsecurity are major impediments to investment.Maintaining the pace of reforms will be required.This includes strengthening the role of anti-corruption, oversight and law enforcementagencies.

(iii) High cost of doing business. Kenya isaspiring to become a middle income country. Asdiscussed in the Business environment sectionthe cost of doing business is a major hindranceand its competitiveness is correspondinglymuch lower.

(iv) High unemployment and inequality. Highunemployment and income inequality persist;with significant geographical variation andincidence amongst the youth. Allied to this isthe inequitable distribution of, and poor accessto, land. These issues were identified as keydrivers of the post election crisis and will requirea concerted effort to address. Furthermore,although Kenya has a high level of skills at oneend of the labour market, there is a lack ofvocational skills at the other end. In addition,access to credit and technology is difficult for

SMEs and informal traders.(v) Enhancing regional and international trade.Although Kenya has had an expansion in tradewith EAC and COMESA countries in recentyears, transport and other infrastructure stillinhibit the movement of goods and serviceswithin the region. In addition, the new EconomicPartnership Agreement between the EastAfrican region and EU will reduce Kenyaspreviously privileged access to EU markets.Similarly, the pace of regional integration,especially within the EAC and COMESA hasbeen slow. The key challenge to enhance trade

and integration is to ensure coordinatedinvestments in regional infrastructure andconcerted capacity building for national andregional institutions.

(vi) Improving economic and socialinfrastructure. The MTP identifies the absenceand poor quality of infrastructure, broadlydefined to encompass economic, productiveand social sectors, as a major impediment tosustained pro-poor growth. Kenyas transport(Graph 12) and energy infrastructure, for

example, are overloaded and require bothmodernization and expansion. Infrastructure inother sectors (e.g. agriculture, water, health,education and the environment) is alsoinadequate. A major challenge is to raise the

resources required for investments ininfrastructure to support Kenyas growth.

(vii) Environmental degradation. Kenya hasseen a substantial destruction of its forests inthe past decades owing to population pressure,notably household demand for charcoal andwood fuel (see the Environment and Climatechange section) and illegal logging activities.The countrys vulnerability to climate changehas increased as a result.

Graph 12: Transport Infrastructure 2008

Overall infrastructure

Road infrastructure

Railroad infrastructurePort infrastructure

Air transport

infrastructure


Source: AfDB Statistics Department using data from the WEF, 2008

2.2.2.2 Kenyas CPIA ratings have beenabove average and rising since 2005 (Annex

VII). It has performed very well in the areas ofeconomic management and structuralreformsnotably its reform of the financialsector. Kenyas scores in the area of socialinclusion and equity have not improved much,with its scores on gender equality, and theenvironment being below average. The countryreceives high scores in public management, inthe specific areas of revenue mobilization andquality of public administration, but with lowscores on property rights and corruption in thepublic sector.

Box 4: Key development weaknesses andchallenges

Maintenance of political stability High levels of corruption and weak governance High cost of doing business High unemployment and inequality Enhancing regional and international trade Improving economic and social infrastructure Environmental distress


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2.2.3 Strengths and opportunities

2.2.3.1 Kenyas strategic location, with accessto the sea and its transport network serving anumber of landlocked countries and regions,

make it the premier business andcommunications hub in the region. The countrycould significantly strengthen this positionthrough planned upgrading of the road and railnetwork, investments in a submarine cable andmarine systems, and in broadening the financialmarket.

2.2.3.2 In spite of corruption and, generally,poor governance, Kenyas macroeconomicpolicy is sound and, compared to itsneighbours, Kenya has done well in domesticrevenue mobilisation. This has resulted in lowlevels of debt and a low reliance on external

funds4. There is still a need, however, forincreased access to international private capital,which would require an improvement in thebusiness environment and current perceptionsof difficulties in paying taxes, registeringproperty, starting a business and enforcingbusiness contracts.

2.2.3.3 With over 20 public and privateuniversities, offering both technical andprofessional education, Kenya has a stronghuman resource base. It also has a number ofother institutions providing specialised training

in management, science and technology. Incombination with the large number ofmultinational companies and internationalbanks basing their regional headquarters inNairobi, this has led to the growth of a strongmanagerial cadre. Tapping the potential of thisexisting human capital to move the economyfrom factor driven to increasingly service driven(with greater efficiency and innovation) is anopportunity that needs to be exploited.

2.2.3.4 Kenya is one of the most importanttourist destinations in Sub-Saharan Africa. In2007, more than 1 million tourists visited the

country, spending close to US$0.9 billion. Thesector has contributed to economicdiversification and created employment in urbanand rural areas. It has also contributed to thesuccess of the countrys branding of its coffeeand tea. However, population pressure andclimate change are threats to animal and plant

4 As reported by the OECD (2006), Kenyas net ODA/GNI was 4.5%.This compares to Tanzania (14.5%), Uganda (16.9%) and Rwanda(23.6%).

fauna and innovative approaches will berequired to protect the countrys unique nature.

2.2.3.5 Despite the numerous weaknessesidentified in the discussion on the business

environment and competitiveness (e.g. poorinfrastructure), combined with over regulationand the high cost of finance, the private sectorhas been a solid performer in the Kenyaneconomy. The private sectors use of moderntechnology gives Kenya an edge in exportinggoods and services, it has shown resilience intimes of crisis, and the vibrancy of its financialand capital markets is driving both domesticand regional growth. Now is the time to build onthis strength and harness the role of the privatesector in ensuring the successfulimplementation of the MTP.

2.2.3.6 The implementation of the MTP willrequire significant financial and humanresources, as well as strong planning andprioritization. The government has identified theprivate sector as a key partner in this regard.The challenge, however, is to expedite the paceof institutional, legal and regulatory reforms toenhance the role of the private sector andensure that public private partnerships (PPPs)become a viable vehicle for increasedinvestments.

2.2.3.7 It should be borne in mind, however,

that the private sector also incorporates thoseat the lowest ranksthe informal sector (juakali) in urban areas and smallholder farmers inthe countryside. These groups are even moreconstrained than their formal sectorcounterparts in access to credit and moderninfrastructure services. A large swathe of thepopulation is hindered from meaningful incomegenerating activities but could well form a majorpart of the economy if given adequateassistance.


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2.3 Developments in Aid Coordinationand AfDB Positioning

Aid Coordination and Harmonization

2.3.1 Aid to Kenya has increased since 2002(Graph 13), as a result of the change inGovernment and commitments to moredemocratic governance. The Government anddonors convened their first Consultative Groupmeeting in November 2003, and re-affirmed theimportance of aid coordination principles.Following the Paris Declaration in 2005,Development Partners in Kenya have organizedthemselves in coordination groups namely: theDonor Co-ordination Group (DCG), theHarmonization, Alignment and CoordinationGroup (HAC) and the sector donor groups.

Graph 13 ODA per Capita (US dollars)

Kenya

East Africa

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006

Kenya East Africa

Source: OECD, Africa Strategic Outlook, 2004-2005

2.3.2 The formulation and signing of theKJASs partnership principles in 2007 betweenthe Government and 17 development partners(including the Bank), accounting for 90 percentof ODA to Kenya, is one of the major results ofthis wide coordination. The principles setstandards for effective management ofdevelopment assistance through jointprogramming, use of country systems, jointanalytical work and dialogue, and joint reviewsof program implementation.

2.3.3 Kenya received about US$1 billion insupport during 2007, about US $27 per capita.Among multilateral donors, the share in totalsupport was: World Bank (41 percent)European Commission (18 percent), and theAfrican Development Bank (16 percent). Amongbilaterals, Chinas support was 14 percent, andKfW of Germany and AFD of France,

contributed 13 percent each. Other majordonors include the members of KJAS.

2.3.4 The current results framework of theKJAS gives a prospective distribution by sector

among active partners (Annex VI). The WorldBank is mainly present in infrastructure, socialservices, public sector reforms and privatesector development. The EuropeanCommission, while also investing ininfrastructure and public finance management,has emphasized decentralization, governanceand rural development. The Bank Groupconcentrates on roads and transport, energy,agriculture and social sectors. Bilateral partnersextend their support mainly to social sectorsand governance reforms.

2.3.5 Despite the progress achieved in

harmonization, the 2008 OECD survey on aideffectiveness indicates that much remains to bedone to reach the targets of the ParisDeclaration on Aid Effectiveness (Annex II).Many development agencies, while recognizingthe potential benefits of harmonization, have notyet fully complied with the agenda. They rarelyshare information on analytical work norcoordinate their missions to the country.Development partners have also been unwillingto provide general budget support, citing poorgovernance. Donor funding to Kenya is subjectto a high degree of unpredictability as a result.

2.3.6 The post-election crisis also underminedprogress towards greater coordination andharmonization demonstrated for example, bythe declaration of no business as usual bysome Development Partners. The situation,however, improved after the formation of thecoalition Government. In May and September2008, the Government convened ConsultativeGroup meetings aimed at mending relationswith donors. Development Partners reiteratedtheir commitment to engage with theGovernment on development issues.

ADBs Positioning

2.3.7 The Bank Group portfolio in Kenyacurrently comprises 18 ongoing public sectoroperations amounting to UA481 million (ofwhich UA54 million or 11.3% had beendisbursed by end-September 2008). By sector,infrastructure, including transport (mainlyroads), water and sanitation accounts for thelargest share (60 percent) and this is consistentwith the Governments and Bank Groups


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expressed priorities. This is followed byagriculture and natural resources, 22 percent;and the social sector 17 percent.

2.3.8 The Bank Groups Private Sector

portfolio comprises 3 operations, totaling US$13million, concentrated in the financial sector.This amount is negligible relative to thepotential. Consultations with private sectorrepresentatives in August 2008, showed astrong desire for the Bank Group to deepen itsengagement in this sector and the Bank isscaling up its intervention under this CSP.

2.3.9 Annex IX shows that the social sectorportfolio has been problematic with overallimplementation progress rating of 1.69. Theloan signing of the Community Empowermentand Institutional Support project (Approved by

the Board on December 2007) was alsodelayed. Following the post election crisis, theGovernment requested the Bank to modify thecoverage of its proposed intervention. Theproject development objectives remainunchanged and the modified project is expectedto be signed shortly. In the infrastructuresector, the Roads 2000 District Rural RoadsRehabilitation project will close in December2008 and the unused loan balance has beenused to purchase fertilizer as part of the foodcrisis responsesee Box 2.

Results of the Previous CSP

2.3.10 In preparing the CSP, the KenyaCountry Team noted that the focus of theprevious CSP 2005-2007 on infrastructure andrural development and the instruments usedwere appropriate. Progress was made in anumber of areassee Table 2. The averageage of the portfolio improved (2.6 years in2007), reflecting the fact that about 42 percentof the projects were approved in the last quarterof 2007.

2.3.11 The average project size increased from

UA27.6 million in 2005 to UA41.1 million in2007 and this is consistent with the Banksinstitutional preference for larger sizedoperations. Projects at risk declined from 40percent in 2005 to 21 percent in 2007.However, at 8.4 percent, the 2007disbursement was lower than the already lowlevel of 12.25 percent for 2005 and significantlybelow Bank Groups average.

2.3.12 The Kenya Field Office (KEFO) wasestablished in 2007. It has been staffedrelatively quickly with nationally andinternationally recruited staff. KEFO is playingan increased role in country dialogue and

portfolio management and a number of tasksare currently task managed from the field aspart of an effort to improve implementationprogress. The improved field presence hasmeant increased aid coordination andharmonization with KEFO currently chairing theRoads and Transportation Donor GroupSeeAnnex VI. It also actively participates in thedonor coordinating group (DCG) and in theharmonization, alignment and coordination(HAC) group. KEFO has developed a goodnetwork with Kenyas Private Sector and it hasbuilt strong constituencies with line Ministriesand project executing agencies.

2.3.13 The Bank Groups interventions duringthe 2005-2007 CSP also supported theGovernments development objectives throughincreased irrigation infrastructure to boost smallholder agricultural productivity and reduce thevulnerability of farmers. A large share of theinterventions focused on transportationinfrastructure. The Nairobi-Thika HighwayImprovement Project, part of an internationaltrunk road to the Ethiopian border, and theArusha Namanga Athi River Road weredesigned to improve access, and promote

economic growth and regional integration.

2.3.14 A number of challenges remainespecially slow implementation of projects andvery low disbursements against rapidly growingBank Group commitments. And more could bedone to further improve the degree of candor insupervision reporting and project performanceratings.

Portfolio Improvement Plan

2.3.15 As part of the CSP dialogue, the KenyanGovernments oversight agencies, line

ministries, officials of project executing unitsand the Bank Group assessed theimplementation progress of the portfolio. Anumber of areas were identified for focusedattention. These include the need for theexecuting agencies and the Bank to expediteprocurement and disbursement processing; tostrengthen the capacity of projectimplementation units; and to improve oversightand results monitoring by the Ministry ofFinance.


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Table 2: Trends in Portfolio PerformanceADB Kenya ADB ADB World Bank

2005 Kenya Overall Kenya2007 2007 2007

Implementation Project Cycle from Identification to Effectiveness (days) .. .. 480 665+

and Impact Age (years) 2.75 2.6 4.2 2.6

Disbursement Rate (%) 12.25 8.41+ 25 9.1

Average Project Size (US$ M) 27.6 41.1 18.3 58.2Projects at Risk (%) 40 21 45.4 14

Harmonization % Support relying on RMCs PFM and Proc. Systems n.a. 0* 10 52*

and Alignment % Aid provided as Programme-Based Approaches n.a. 0 n.a. 0

Leader of (#) Donor Working Groups in the Field n.a. 1 n.a. 3

Total Number of Joint ESWs 0 0 n.a. 2

Performance Indicators

*Refers to use of procurement systems only; +See also Annex IX

2.3.16 The need for greater preparedness ofprojects for implementation at entry wasparticularly highlighted as a major cause of

delay during implementation and the evidentlylower disbursement than originally envisaged.It was recognized that lack of project readinessat entry is expensive for Kenya in terms ofdelayed development benefits to beneficiariesand costly for the Bank in terms of missedopportunities to strengthen the pipeline oflending and analytical work.

2.3.17 For these reasons, the Government andthe Bank agreed on a four-point portfolioimprovement plan for this CSP. First, the Bankcommitted to further strengthen KEFO staffingto enhance project execution. Second, the

Government requested Bank support forinstitutional strengthening of the capacity of theMinistry of Finance to monitor the results ofoverall development assistance. Third, targetedtraining on procurement and disbursement forproject executing agencies and annual countryportfolio reviews will be carried out, jointly withthe Government and other developmentpartners. Fourth, the Government adopted aproject readiness filter for enhanced quality atentry with the following key elements:

Ensure that project implementation plan is

ready Counterpart funds are available for the

first year Designated project staff are identified by

appraisal, including the project manager,procurement expert, an M&E specialistand a financial management specialist

Compliance with environmental, social,financial management and procurementpolicies

Bidding documents for the first year areready by Board approval

Ensure that projects are designed with

appropriate indicators for trackingresults.

Graph 14 below shows the disbursement profilethat is likely to be associated with the proposedfilter. It will ensure timely project start-up andexpeditious disbursements.

Lessons Learnt

2.3.18 Although the focus of the previous CSP

(2005-2007) and the instruments wereappropriate, the following are key lessons: First,in the face of limited resources, it pays to befocused both with respect to choice of sectorsfor intervention, and within those on specificareas where the Bank Group has comparativeadvantage. There was an evident shift inlending toward infrastructure, during theprevious CSP period and, this trend is expectedto continue in line with Governmentspreference and Bank Groups priorities.

Graph 14: Impact of Readiness Filter onDisbursements

10

40

15

35

45

5

5

15

30

0

5

10

15

20

25

30

35

40

45

50

1 2 3 4 5

Years

UAM

illions

Normal

with Filter

Source: African Development Bank, Country and Regional Programs EastA (OREA), 2008.


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2.3.19 Second, the Government cherisheslong-term engagement that does not swing tooradically in the face of changed politicalconditions. The Bank Groups clear expressionof support and sustained engagement with

Kenya during difficult times has helped to buildstrong constituencies with the Government andKenyans in general.

2.3.20 Third, it is evident that lending alone isnot always the most effective response toKenyas development challenges andopportunities. Much can be accomplishedthrough targeted policy notes, analytical work,advisory services and institutional strengtheningto assist Government in making its policychoices.

2.3.21 Fourth, partnering with other donors in

delivering support to Kenya within the scope ofKJAS is crucial in augmenting available BankGroup financing.

2.3.22 Fifth, in spite of the Bank Groupsemphasis on Private Sector development, notmuch lending was done in this area during theprevious CSP. The development needs ofKenya are huge, and with considerablepotential for private sector lending, particularlythrough public private participation in nationaland regional infrastructure operations. Duringthe new CSP, financing from the Banks private

sector window will be an important complementto public sector projects.

III. BANK GROUP STRATEGYFOR KENYA

3.1 Rationale for Bank Group Intervention

3.1.1 The rationale for Bank Group support toKenya is threefold. First during the CSPpreparation mission in July 2008, theGovernment expressed a strong wish tocontinue to partner with the Bank Group in

implementing the MTP and Vision 2030. TheGovernment appreciated the measured toneadopted by the Bank during the countrys recentpolitical crisis and the speed with which itresponded to requests for assistance. It alsonoted the importance that the Bank attaches tosustained engagement with its membercountries.

3.1.2 Second, the Government plans toimplement the MTP and Vision 2030 with activeprivate sector participation. Many of the projects

envisaged, notably those in transport, energyand water will require public-privatepartnerships. The Bank Group has accumulatedexperience, including from neighboringcountries, in engaging in such partnerships.

3.1.3 Third, the prosperity of the Kenyaneconomy has positive impacts on regionaleconomies. Supporting regional economicintegration is a strategic pillar for Bank Groupoperations, and a strong and continuedpresence in Kenya would contribute to theregions further integration. Already the BankGroup is supporting regional interventions intransport and communications, and plans to joinother development partners in studying regionalintegration.

Pillars for Bank Group Support

In conceptualizing the pillars for the CSP, wemade a distinction between (i) Pillar I, whichfocuses on the medium to long-term concernsof improved infrastructure services forcompetitiveness and enhanced regionalintegration and (ii) Pillar II, which addresses themore immediate and short-term needs of thoseadversely affected by the post-election crisisand similarly vulnerable groups in Kenya, inparticular employment, reconstruction andrestoration of livelihoods.

Pillar I: Supporting InfrastructureDevelopment for Enhanced Growth

3.1.4 The Government has underlined theimportant role that the private sector will play ingenerating growth and creating jobs in both itsVision 2030 and the MTP. However, Kenyanfirms have continued to list erratic electricitysupply, an inadequate road network, andinsufficient water and sewerage services asamong the most important impediments to theircompetitiveness5.

3.1.5 Increasing infrastructure provision in ruralareas has been identified by the MTP as crucialfor addressing regional inequalities and forunlocking Kenyas agricultural potential. Ruralpopulations with access to moderninfrastructure and markets have been able toengage in small-scale commercial agricultureand off-farm income generation, while thosewith limited access, notably the ASALs to thenorth of the country, have few sources of

5 Firm surveys are undertaken periodically by the Kenya Associationof Manufacturers.


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income. Rural electrification reducesdependence on wood fuel and is beneficial forthe environment.

3.1.6 The Government and population ofKenya are keen supporters of regional

integration.6 The countrys landlockedneighbors, Uganda, Rwanda, Burundi andSouthern Sudan, are among its most importantexport markets. As indicated in the section onchallenges and weaknesses, inadequateinfrastructure is eroding Kenyas competitiveedge and reputation as a regional infrastructureand communications hub.

Pillar II: Enhancing EmploymentOpportunities for Poverty Reduction

3.1.7 This pillar focuses on employment

generation, as the most urgent challenge facingKenya in its bid to address the socio-economicpressures and reconstruction needs arisingfrom the post-election crisis of 2008, improvelivelihoods in the poorer regions of the countryand reduce poverty.

3.1.8 Economic and social indicators show thatKenyas youth and other vulnerable groups inurban and rural areas have not benefitedsufficiently from the growth expansion of recentyears. In addition, livelihoods in the poorerregions have deteriorated with adverse impactson security. Part of the problem has been the

lack of skills for employment or self-employment, but for the majority it has beenabsence of employment opportunities.

3.1.9 Out of a population of 35 million, it isestimated by the Government that 75 percentare below 30 years, while the population aged15-35 years comprises 38 percent of the total(about 13 million). Excepting the youthattending school, tertiary institutions and otherforms of training, it is estimated that about 10million are unemployed or underemployed.Thus while sustained economic growth is aprecondition for reaching Vision 2030 targets,

the Government has underlined the importanceof targeted measures designed for rapid jobcreation for the countrys youth and othervulnerable groups.

6A three-person Committee on Fast Tracking the East African

Federation appointed by the EAC secretariat in 2004 to examine theviews of state and non-stake actors found Kenya to be the mostenthusiastic for the Federation project.

Synergies between the Pillars

3.1.10 There are synergies between the pillarsof the CSP, which enhance the potential fordevelopment impact. First, the pillars arefocused on poverty reduction, with emphasis on

growth and employment creation, areas alsohighlighted by the CSP for 2005-2007,indicating not only the persistence of thechallenges but also the continued prioritizationof Bank Groups support.

3.1.11 Second, Pillar I focuses on supportinghard infrastructure to improve access tomarkets and amenities as a key means oflowering the cost of doing business, unlockingagricultural potential and boosting off-farmincome-generating opportunities, and promotingeconomic integration. However, theGovernment also recognizes the importance ofthe soft infrastructure described in Pillar II toensure that there are sufficient capacities andskills to meet the demands of the private sectorand agricultural modernization, and to takeadvantage of regional opportunities. Thetargeted measures for increasing employment(Pillar II) combined with the proposedpublic/private sector interventions ininfrastructure (Pillar I) will help meet some ofthe demands of the youth and other vulnerablegroups for a greater share in Kenyas growthand prosperity.

3.2 Deliverables and Targets

Lending

3.2.1 Kenyas indicative allocation for the ADF-XI period, based on the 2008 PBA exercise, isUA 348.65 million, an increase of 41 percentover ADF-X. Table 3 shows the indicativelending program distributed across sectors andthemes. These are concentrated ininfrastructure (transportation, energy and water)consistent with Pillar 1. Improved infrastructureservices for competitiveness and enhancedregional integration will be a key outcome of theCSP. The on-going Nairobi-Thika HighwayImprovement project approved in 2007 is part ofthe priority road network designed to improveaccess to urban, rural and neighboringcountries. This CSP will scale up the focus onnational transportation and regional operations(Road Sector III, Nairobi Transit System and theMombasa-Nairobi-Addis Corridor). The BankGroup is also playing a key role in the NairobiToll Road Concession, the first such public


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private partnership in the road sector in Kenya.The Kenya-Uganda railway is also beingexplored for possible private sector financing.

3.2.2 In the power sector, the Nairobi-Mombasa transmission line and the Turkana

Wind Power Plant will help to reduce energycosts. Kenya is committed to regionaloperations and the NBI-NELSAP inter-connection project is designed to improve EastAfricas power pool. The prospect for privatesector financing of the Kenya-Uganda oilpipeline extension is being explored. Greateruse of private finance would reduce the burdenon public finance and could potentially releasefunds for use in other sectors. The Governmentalso needs to pay more attention to costrecovery. The CSP will build on on-going Banksupport to the Water Services Boards for

improved services in medium-sized towns andincreased efficiency of water storage.

3.2.3 In line with Pillar II, improved livelihoodsfor those adversely affected by the post electioncrisis and other vulnerable groups in Kenya willbe a key outcome of the CSP. To maximize therestoration of livelihoods and employmentopportunities, the Bank will finance a number ofinterventions that would generate substantialemployment through labor-intensivereconstruction and rehabilitation. Therestoration of the Nairobi River Basin project willstrengthen basin management and urban

upgrading through an integrated labor-intensiveapproach. The two other interventions,reconstruction and restoration and the proposed

livestock project focused on diseaseeradication, are designed to ensure that growthis shared among the wider population,especially in the rural areas of the north (withpoverty levels above 60 percent) that have

lagged behind in recent growth and povertyreduction. Notably, the eradication of livestockdiseases will improve prospects for commercialcattle rearing and beef exports. The technology,vocational education and training project willenhance the skills of the youth and othervulnerable groups for gainful employment.

Analytical Work and Institutional Support

3.2.4 Analytical work, policy advisory servicesand institutional support (see Table 4) will bedone in conjunction with the Government andother partners. The Bank will facilitate economicintegration by working closely with DFID, theEAC Secretariat and the Government inaddressing the constraints to an integrated EastAfrica. This will include an assessment of thealignment of the medium term plan and vision2030 to Kenyas expressed integrationaspirations. Also, in collaboration with theWorld Bank, DFID and the Central Bank ofKenya, the Bank will support a study onKenyas Policies for Prosperity. The study willinclude analyses of the sources, opportunitiesand constraints to growth and provide policyrecommendations. It will also focus on the

enabling environment for private sectorparticipation in economic activities for growthand poverty reduction.

Table 3: Indicative Lending Program (2008-2012)FiscalYear

Amount*(UA m)

Sectors/Themes

Public Sector Window (ADF-XI Resources)

2008 40Energy (UA 15 m)Skills Development (UA 25 m)

2009 225.65

Energy (UA 50 m)Transport (UA 20 m)Water (UA 70 million)

Reconstruction & Restoration (UA 80 m)Institutional Support (UA 5.65 m)

2010 83Livestock (UA 8 m)Transport (UA 75 m)

Total 348.65

Private Sector Window

2008/9 132Infrastructure(Energy/Transport)

and Lines of Credit

See Annex VIII for details. *Financing amounts are indicative.

Table 4: Indicative Non-Lending Program (2008-2012)

2008

1. Portfolio Improvement Plan

2. Private Sector Road Show

2009

3. Country Portfolio Review

4. Economic Integration (with DfID)


6. Policies for Prosperity (with World Bank, DfiD, CBK)

7. CSP Mid-Term Review

2011


9. Domestic Revenue Mobilization.

10. CSP Completion Review


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3.2.5 Grants and other sources of funding willbe sought to finance the proposed non-lendingactivities. The field office will conduct annualCountry Portfolio Reviews in partnership withothers as part of an enhanced focus on results.

3.3 Monitoring and Evaluation of theCSP

3.3.1 As indicated, the Government anddevelopment partners plan to revise the KJAS.As soon as this task is completed, BankManagement will present it with a coverMemorandum to the Board of Directors forconsideration and approval. The KJAS results-based framework will be the basis formonitoring the outcomes of Kenyas overalldevelopment assistance.

3.3.2 Until the revised KJAS is in place, thisCSP will guide Bank interventions in Kenya.The Bank will proceed as follows:

(i) Annex 1 shows the results-based frameworkthat would be used jointly by the Governmentand the Bank to monitor the outcomes of thisCSP. It is based on Kenyas medium term planas a starting point and focuses on the outcomesthat can be influenced by Bank-financedinterventions during the period. The mainobjectives and priority areas of Bank Groupsupport are covered under each pillar. Asindicated, the existing stock of projects in thecurrent portfolio will account for a significantshare of outcomes during this CSP.

(ii) The Bank will conduct annual countryportfolio reviews, jointly with developmentpartners, to track progress towards theattainment of the development objectives ofprojects. A mid-term review will be undertakenduring the third quarter of 2010 to assessprogress towards the CSP outcomes. Acompletion report will be prepared in 2011.

3.4 Country Dialogue Issues

3.4.1 The KJAS Partnership Principles remainthe basis for continuing dialogue. The BankGroup and development partners discussedtheir respective business plan priorities duringconsultations in July and September 2008 withthe Government. The need to reducetransaction costs for the Government wasendorsed by all partners. The Government anddonors agreed to revise the KJAS and thedivision of labor matrix. The objective is toensure consistency with the Coalition

Governments medium term plan (2008-2012)and to address the issues identified during the2008 OECD/DAC survey on aid effectiveness.These include the need for joint analytical workand coordination of missions. During the CSP,

the Bank Group will continue to play an activerole as part of our sustained engagement withthe Government in partnership with others. Oncompletion, the revised KJAS will be presentedto the Board as indicated.

3.4.2 More effective governance. Kenyascredibility and development progress could bederailed by failing to address patterns ofcorruption. The Bank will continue to addressgovernance through an active dialogue with theGovernment, by helping to strengthen anti-corruption institutions and through buildingcapacity for improved public sector

management. The Banks Institutional Supportfor Good Governance Project is directedtowards the realisation of these objectives. Thiswill support the wider PFM and Governance,Justice and Law and Order Programmes, whichwill be the main drivers of the governancereform agenda.

3.4.3 Greater focus on portfolio improvementand results. The need for expeditious executionof the existing projects in the portfolio to deliverresults remains a priority. Governmentexpressed a commitment to strengthen the

capacity of the Ministry of Finance to provideeffective oversight of donor-financed projects. Italso adopted the project readiness filter toassist the line ministries, the Bank Group anddonor partners to ensure implementationreadiness of new projects at entry.

3.4.4 Greater Bank Group coordination andfocus on the private sector. In view of theimportance of maximizing Bank Group impacton private sector growth, this CSP wasprepared in close collaboration with the PrivateSector Department (OPSM). This jointapproach will be continued in the delivery of the

proposed Road Show and institutionalstrengthening interventions designed toenhance Bank Groups support to the privatesector for growth and poverty reduction.

3.5 Potential Risks and Mitigation Measures

The following are some of the key risks to theimplementation of the CSP, and proposedmitigation measures:


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3.5.1 Weakening of political resolve. The post-election crisis in early 2008 demonstrated theevident need for concerted efforts to bridge thepolitical, socio-economic and ethnic divides.The GCG has an ambitious mandate including

restoring stability, delivering a new constitutionand restoring investor confidence. Its successdepends on the ability and commitment of thecoalition members to continue working together.A weakening of the political resolve couldundermine the effectiveness of the GCG,setting back both the countrys and the Banksimplementation of development projects. TheBank will continue its sustained engagementand support for the benefit of all Kenyans.

3.5.2 Slow pace of structural reforms.Unemployment, income inequality and unevenpatterns of land ownership were key drivers ofpost-election violence, which exposed deeprooted fissures in society. To address theseproblems requires concerted government effortin accelerating the implementation of structuraland land reforms. A failure to do so will continueto make the implementation of Bank projectschallenging and reduce the effectiveness ofequity enhancing interventions. The Bank willmitigate the political and structural reform risksby continuing an active dialogue with theGovernment to create a stronger system ofchecks and balances. Institutional strengtheningwill be provided to the Office of the Prime

Minister, and other oversight bodies, to developcapacity in this regard.

3.5.3 Exogenous developments. Rising oil andfood prices, combined with the shock of thepost-election crisis has made managing themacroeconomic environment more challenging.It will now take some effort to balance anexpansionary policy, to revive the economy,against the fiscal control needed to curbinflation. High inflation could lead to (i) costover-runs and the stalling of development

projects, and/or (ii) a reduction in rural incomesand further inequality. In addition, Kenyasterms of trade have worsened (and furtherworsening is expected) due to the rise in oilprices, which has weakened the economys

prospects. Finally, Kenyas sovereign creditratings were downgraded by major internationalrating agencies following the crisis, but haverecently been assigned a positive outlook. If theratings are not upgraded soon, this will furtherdelay issuance of a planned international bondby the Government and could hurt publicfinancial management reforms and growth.

IV. CONCLUSION ANDRECOMMENDATION

4.1 This CSP comes at an opportune time with(i) the formation of a coalition government, (ii)

the launching of the Vision 2030 and the first 5year Medium Term Plan (2008-2012), (iii) aninvestor conference with the Government ofKenya expected shortly, and (iv) a significantincrease in the ADF allocation. SeveralDevelopment Partners are also concluding theircountry strategies and business plans at thistime while awaiting the revised KJAS.

4.2 Supporting infrastructure to enhance growth(Pillar I) and addressing the socio-economicpressures arising from the post-election crisisthrough employment generation for povertyreduction (Pillar II) remain key priorities for the

Government and the Bank. Bank Group supporttowards these pillars will improve Kenyasprospects for economic growth and job creationand will enable it to play its rightful role in anintegrated East Africa.

4.3 The Boards of Directors are invited toconsider and approve the proposed CountryStrategy Paper for Kenya for 20082012


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Annex II: Compliance with Paris Declaration

Indicators Comment on Kenyas Recent Experience

OWNERSHIP1. Partners have operationaldevelopment strategies

Yes, Kenya has Vision 2030, MTP, and an MTEF.

2. Reliable country systems2006 PEFA and related assessments indicate that Kenyaspublic financial management systems present significantfiduciary risk.

3. Aid flows are aligned tonational priorities

The Governments submission to OECD-DAC on 2005/6aid flows indicated that the bulk of the flows bypassed thebudget.

4. Strengthen capacity bycoordinated support

Donors have undertaken a variety of capacity buildingefforts, but often with a narrow focus on their own aidflows.

5. Use of country PFM andprocurement systems

Only a limited number of donors use country systems forthe procurement and even then for specific types (such asnational shopping).

6. Strengthen capacity byavoiding parallel projectimplementation structures

PIUs are increasingly integrated into the governmentministry structures.

7. Aid is more predictablePoor governance (including corruption scandals) has led tothe withholding of financing on many occasions.

ALIGNMENT

8. Aid is untied A substantial portion of the aid to Kenya is still tied.

9. Use of commonarrangements or procedures.

Development partners seldom provide general budgetsupport to Kenya.

HARMONIZATION

10. Encourage shared analysis Few donors undertake joint missions, but joint analyses willbecome more frequent under the KJAS.

MANAGING FORRESULTS

11. Results oriented frameworks

The Government is implementing the National IntegratedMonitoring and Evaluation System (NIMES), which isintended to ease access to statistics and to produceperiodic progress reports on the implementation of thenational development strategy.

MUTUALACCOUNTABILITY

12. Mutual AccountabilityThe KJAS contains targets for harmonization, based onthe global targets.

Source: OECD-DAC (2008), Government of Kenya, and Development Partners.


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Annex III: Comparative Economic and Social Indicators (1990-2007)

Year Kenya AfricaDevelo-

pingCountries

Develo-ped

Countries

Basic Indicators

Area ( '000 Km) 580 30 307 80 976 54 658

Total Population (millions) 2007 37.5 963.7 5 448.2 1 223.0

Urban Population (% of Total) 2007 21.4 39.8 43.5 74.2

Population Density (per Km) 2007 63.3 31.8 65.7 23.0

GNI per Capita (US $) 2006 580 1 071 2 000 36 487

Labor Force Participation - Total (%) 2005 50.7 42.3 45.6 54.6

Labor Force Participation - Female (%) 2005 47.1 41.1 39.7 44.9

Gender -Related Development Index Value 2005 0.521 0.486 0.694 0.911

Human Develop. Index (Rank among 174 2005 148 n.a. n.a. n.a.

Popul. Living Below $ 1 a Day (% of Population) 2005 45.9 34.3

Demographic Indicators

Population Growth Rate - Total (%) 2007 2.7 2.3 1.4 0.3

Population Growth Rate - Urban (%) 2007 5.1 3.5 2.6 0.5

Population < 15 years (%) 2007 42.7 41.0 30.2 16.7

Population >= 65 years (%) 2007 2.6 3.5 5.6 16.4

Dependency Ratio (%) 2007 83.2 80.1 56.0 47.7

Sex Ratio (per 100 female) 2007 99.4 99.3 103.2 94.3

Female Population 15-49 years (% of total 2007 24.4 24.2 24.5 31.4

Life Expectancy at Birth - Total (years) 2007 54.1 54.2 65.4 76.5

Life Expectancy at Birth - Female (years) 2007 55.2 55.3 67.2 80.2

Crude Death Rate (per 1,000) 2007 11.8 13.2 8.3 10.4

Infant Mortality Rate (per 1,000) 2007 64.4 85.3 57.3 7.4

Child Mortality Rate (

Documents

Kenya_Country Strategy Paper_Africa Development Bank_Timothy Mahea