Industry

Fix manufacturing and upgrade ports for high growth

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The Kenyan economy is running on one engine — domestic consumption — which accounts for 90 per cent of GDP. Photo/FILE

Kenya has entered the new decade with renewed momentum for strong and sustained growth.

The World Bank is expecting 4.0 per cent growth for Kenya in 2010, and projects 4.9 per cent for 2011.

This would bring Kenya back into the range of the high growth experienced between 2003 and 2007.

Kenya’s economic recovery is good news. After two years of low growth, most Kenyans will again experience an improvement in their living conditions.

And they can hope for even better years ahead.

In the past, Kenya’s high hopes for strong growth and poverty reduction have often been disappointed.

Domestic shocks, such as the 2008 post-election violence and the 2009 drought, took a toll.

Steering clear of these shocks is vital to Kenya’s prospects.

A peaceful and orderly referendum on Kenya’s new constitution would send an important signal and help secure good economic results this year and next.

But even if Kenya avoids further shocks, it will be difficult for the country to sustain high growth over an extended period if it does not expand exports.

The Kenyan economy is running on one engine — domestic consumption — which accounts for 90 per cent of GDP.

Export is weak and declining over time. At independence, exports represented 40 per cent of GDP.

By the mid-1980s, the share had dropped to 20 per cent, before it recovered to 27 per cent today.

This decline in exports is also reflected in the country’s global loss in competitiveness.

In 1970, Kenya’s share of global exports was 0.12 per cent.

By 2008, though Kenya population was four times as large, its export share had slipped to just 0.04 per cent, despite some recovery in service exports.

The economic factors causing the imbalance in Kenya’s external sector can also be seen in sectoral growth trends.

Sectors that produce goods for the domestic market (“non-tradeables”) have been doing well, especially the service segment.

Sectors that produce export goods (“tradeables”) have been doing poorly in aggregate, even though some sub-sectors and strong companies have defied the trend, such as the horticulture industry.

The sector that has underperformed the most over the last decade is manufacturing.

In emerging economies, a high performing manufacturing sector is associated with a strong export performance.

In 2000, manufacturing was Kenya’s second largest economic sector, after agriculture.

By 2009, manufacturing had slipped to fourth place.

While the share of manufacturing in the economy remained stable at 11 percent over the intervening nine years, services expanded, and two service sectors overtook manufacturing.

In 2004, transport and telecommunications became Kenya’s second largest sector; and in 2007, wholesale and retail trade also surpassed manufacturing as a percentage of GDP

One of the main reasons for manufacturing’s poor performance is continuing infrastructure deficit.

The port of Mombasa is probably East Africa’s most important infrastructure asset, and a prime example of Kenya’s infrastructure deficit.

Mombasa is a small port, handling about 616,000 TEUs (Twenty-Foot equivalent units) in 2008: this is double the volume of Dar es Salaam, but less than a quarter of Durban and only 2.0 to 2.5 percent of the volumes of Singapore and Hong Kong, the best ports in the world.

The good thing is that import volume into Mombasa continues to grow, and without significant reform, it will soon reach the limits of its capacity, with the result that shippers will move their business elsewhere.

It is still much more expensive and time-consuming to move a container from Mombasa to Nairobi than it is move the same container from Singapore to Mombasa.

After recent improvements, the average dwell time at the port of Mombasa is still 5.7 days — about 3.7 days for Kenyan goods, 7.5 days for transit goods — compared to an international standard of one to three days.

However, it still takes an average 20 days to get a container to Nairobi, mainly due to slow processing after goods leave the port and enter Container Freight Services.

The solution is not to build a new port at Lamu — at least not yet.

A lot can be done to improve the efficiency at Mombasa, at a fraction of the cost of building a new port.

Reforms at other ports have shown the way.

The adoption of a landlord model in Lagos in 2006 significantly improved cargo handling and turnaround times, reduced congestion surcharges, made the Ports Authority self-financing, and has generated billions of dollars in rental and royalty fees paid to the government.

In Aqaba, concessioning of the container terminal and the introduction of an electronic truck control system to coordinate truck movements (introduced in just three months) brought inland transport costs down by 25 percent.

Bold moves

Similar bold moves are required and possible in Mombasa.

The Government needs to act on its commitment to transform Mombasa to a landlord port and to concession berths 11 to 14.

Incentives need to be established to enable full 24-hour port operations.

Information technologies need urgently to be upgraded—not in years, but in months.

Moreover, to cope with congestion around the port, the Government needs to decide a route and develop the Mombasa bypass as well as a link road from the port.

If Kenya moves aggressively in these ways, the port of Mombasa will thrive and be able to handle larger quantities of imports than it does today to help thriving private sector to prosper.

If it does not, importers and exporters will increasingly take their business elsewhere, and Kenya will have lost an opportunity to become the main transport hub for East Africa.

This is an opportunity Kenya cannot afford to miss.

Mr Fengler is the lead economist and Mr Zutt is the Country Director for the World Bank in Kenya.