Why Kenya’s big projects have failed to stir economic growth

Tuesday, March 10th, 2020 00:00 |
Galana Kulalu irrigation project. Increased appetite for mega projects has seen the country’s debt hit the Sh6 trillion mark.

Taxpayers have been exposed to financial risks as debt hits the Sh6 trillion mark with investments such as ambitious mega projects and infrastructure development fail to stir growth to cushion the economy.

With fiscal gaps and consistent failure of Kenya Revenue Authority (KRA) to meet the National Treasury’s lofty revenue collection targets, the exchequer is forced into the market for more loans at the expense of taxpayers.

Recent government data estimated gross public debt to have increased over the past two decades from Sh502.3 billion in December 1999 to Sh6.05 trillion by 2019.

Experts say while the taxman and the economy is unable to raise enough cash as projected, money set aside for projects has been siphoned through ill-conceived contracts, inflated costs and surcharges.

Churchill Ogutu, senior research analyst at Genghis Capital, says mega projects are not intended to operate in a vacuum.

“There is the argument that mega projects are meant to catalyse growth but that is only one side of the coin, more technically the supply side, but if you look at the demand side, you find that the environment is fragile,” he said.

Private sector consumption is weak. If one pays attention to the news flow, they will notice that it is awash with layoffs by firms and auctions of private property.

The negative outturn in revenue also signal that the rate of return of the mega projects may be punching below its weight.

“It’s clear we are already trimming our cloth and therefore, I think we need to look aggressively at the entire mega projects suite and focus on those with the biggest return on investment (ROI), the speed to the ROI inflexion point and the sunk cost component,” said Aly Khan Satchu.

“We are obviously looking at the debt portfolio as well,” he said.

But questions abound on the viability of some of these development ventures after it emerged the flagship Standard Gauge Railway (SGR) is raking in suboptimal returns from its passenger and freight business contrary to initial projections.

Whether it is construction of dams, an oil pipeline or procurement of power generators, the heist narrative takes precedence.

Beneath the façade of Kenya’s landscape, which is dotted with projects, lay the stolen dreams of the nation in form of abandoned projects, those shoddily done and those whose cost were inflated.

In all, economic experts argue corruption is the single greatest obstacle preventing Kenya from achieving its enormous potential.

It drains billions of shillings each year from the country’s economy, stymies development and weakens the social contract between the government and its people.

Social contract

As a result, a number of mega projects are stalling while others have stalled already, leaving taxpayers to absorb billions of shillings in losses with legal remedies proving equally costly.

In his report published in July 2019, the retired Auditor General Edward Ouko revealed that the government could not account for about 65 per cent of Sh2 trillion spent by State departments during the 2016/17 financial year.

Apparently, only 35 per cent of State ministries, agencies and departments were given a clean bill of financial health.

The audit revealed that of the accounts examined, only 46 per cent (below average) had a qualified audit opinion, 10 per cent an adverse opinion, while no conclusion could be reached for eight per cent.

Ouko’s dossier further revealed that President Uhuru Kenyatta’s administration may have lost Sh381 billion in suspected irregularities of commission and omission.

He decried then that most national government entities have continued to report huge unsupported and unanalysed cashbook balances in a clear case of mischief.

Despite calls to apprehend the culprits and recover lost cash, the executive has only paid lip service with the Directorate of Criminal Investigations (DCI) and the prosecution being accused of conducting shoddy investigations.

Cases submitted by the Office of the Directorate of Public Prosecutions (ODPP) have either collapsed, were withdrawn or dismissed by courts leaving taxpayers without recourse.

As blame game ensues, the exchequer is hemorrhaging billions of shillings, funds that would be used to catalyse jobs creation and enable developments for economic growth.

Just last year alone, Italian firm CMC di Ravenna, India’s IVRCL and Spanish infrastructure firm Isolux Corsán collapsed after gobbling up billions of shillings from the exchequer.

CMC di Ravenna was paid Sh18 billion to build the Arror and Kimwarer dams but it was soon discovered to have declared bankruptcy, with only 26 per cent of work completed.

Production forcast

Isolux on the other hand was paid Sh11.96 billion of the Sh28.9 billion for the construction of the 435-kilometre Loiyangalani-Suswa transmission line, before its contract was terminated – having completed 57 per cent of work.

India’s IVRCL, hired to complete construction of the Bura Irrigation Scheme also sunk with taxpayers’ money even as Kenya Commercial Bank (KCB) and the National Irrigation Board (NIB) wanted to cash in on Sh1.1 billion guarantees obtained by the contractor.

At the same time, shares in Tullow Oil plunged to a 16-year low after the firm surprised investors by slashing its production forecast, scrapping its dividend and announcing that its chief executive and exploration director had left.

Additionally, construction of JKIA Greenfield Terminal, Galana Kulalu Irrigation scheme, the laptops project and the Medical Equipment Scheme are other projects that have suffered at the hands of contractors amid viability questions.

Liquidate firm assets

But graft is not just on projects, State assets have also been disposed off at throw- away prices.

In the same report last year, Ouko revealed that some 17 vehicles were irregularly disposed off by the Labour ministry, some selling for as little as Sh10,000.

And when a firm like CMC di Ravenna sinks, a trustee is often appointed to liquidate the company’s assets and the money is used to pay off the debt, which may include debts to creditors and investors.

For recovery of government funds, however, the process is complicated and the funds can be lost completely.

In 2019 alone, the government terminated 170 contracts in the second quarter in what also exposed taxpayers to the loss of billions of shillings in arising lawsuits.

According to the Public Procurement Regulatory Authority (PPRA), 19 county governments and five county assemblies had in the quarter to June also cancelled tenders with different contractors.

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