Kenya’s construction sector experienced slower growth in 2017 than in previous years, owing in part to uncertainty surrounding the contested August general elections, which translated to no major government-led infrastructure projects being announced in the second half of the year. However, while the construction sector grew by less than the 9.8% recorded in 2016, healthy expansion of 8.6% was seen in 2017 for the sector to constitute 6.4% of that year’s GDP, according to the “Economic Survey 2018” report published by the Kenya National Bureau of Statistics in April 2018.
State expenditure has long been the most significant driver of building activity in the country, given the high cost of large-scale infrastructure works, which have included road, rail, and power and utility projects. Steady tendering activity is continuing, particularly for irrigation, transport and housing projects that are outlined in Kenya Vision 2030, the government’s long-term strategic planning document.
Regulation & Oversight
The construction industry is overseen by the National Construction Authority (NCA), a government agency established under Act No. 41 of 2011 that coordinates development projects at the national and county levels. The NCA carries out 14 functions across its three core mandates of regulation, capacity building and advisory services. Licensing of all companies in the construction industry is the primary regulatory task, and there are different registration requirements for local and foreign contractors wishing to work in Kenya. The capacity building area includes training and accrediting professionals, conducting research, and collecting and publishing data. The advisory arm of the NCA, for its part, advises the government on industry trends, conclusions drawn from data collection and relevant policy decisions.
Engines of Activity
A recent development expected to influence the sector came in December 2017 when re-elected President Uhuru Kenyatta announced his Big Four agenda, a list of development areas that will shape his second term in office from mid-2017 to the summer of 2022. The components are affordable housing, food security and nutrition, manufacturing growth and universal health care. Of particular importance to the construction sector are affordable housing and manufacturing activity. Under the former, the Kenyatta administration has committed to building 500,000 low-cost homes over the five years of his term. In an environment where real estate developers tend to align with government priorities and incentives, it is expected that the construction sector and related activity will certainly benefit from this goal. With relation to the manufacturing agenda, building is forecast to be supported by demand for new or larger factories and warehouses.
Another driver of activity is commercial real estate development, which attracts both foreign and domestic investors. This investment has spurred the construction of large multi-use spaces that bring offices, supermarkets and additional residential units to Nairobi’s fast-growing neighbourhoods. Examples include the KSh54bn ($529.1m) Garden City Business Park along the Nairobi-Thika highway, on which construction started in March 2018. This complements the 50,000-sq-metre Garden City Mall that opened in May 2015. The KSh25bn ($244.9m) Two Rivers development, meanwhile, is situated in the upmarket Runda suburb. In February 2017 the Two Rivers Mall opened with 65,000 sq metres of retail area, making it Kenya’s largest shopping mall. Centum, an investment firm responsible for the space, is planning to add apartment units near the end of 2018.
Indeed, the residential component of the real estate sector is also a key source of building activity. Dominated by large developers, this segment tends to focus investment in the middle and high-end housing markets. Recent developments include Palm Valley, a gated community of 88 luxury homes in north Nairobi near the border with Kiambu County, and Deerpark Karen, a cluster of villas in the capital’s western Karen suburb.
While private developers certainly influence construction activity from a real estate point of view, government spending delivers the large-scale infrastructure projects that benefit a greater share of the population. The FY 2018/19 budget announced in June 2018 allocated KSh273.8bn ($2.7bn) to projects spanning the Standard-Gauge Railway (SGR), upgrades at Mombasa Port, airport expansions, energy ventures and road works. This is double the KSh134.9bn ($1.3bn) set aside for infrastructure works in FY 2017/18. Affordable housing is also central to construction plans under the 2018/19 budget, in line with the Big Four agenda. The allocation for such units is KSh3bn ($29.4m) for the fiscal year, slightly more than the KSh2.7bn ($26.5) that was spent on affordable housing in 2017, according to the Economic Survey 2018.
In 2017 the sector saw concrete progress on the SGR, a passenger and commercial rail line that aims to connect Kenyan ports at Mombasa, Lamu and Kisumu with major cities in Kenya, Uganda, Rwanda and South Sudan. Construction of the SGR will occur in phases along two corridors: the Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) corridor and the Northern Corridor extending from Mombasa through Nairobi and Kisumu into Uganda. Phase 1 of construction on the Northern Corridor was completed in May 2017, connecting the port of Mombasa to Nairobi with 492km of track. Construction on the 120-km phase 2A that runs from Nairobi to Naivasha began in September 2017 and is expected to be completed in mid-2019.
There has been strong activity in road construction as well, with the Kenya National Highway Authority reporting that 11 projects were completed in 2017, including the KSh8.4bn ($82.3m), 90-km Mwatate-Taveta road that was opened in July of that year. The 39-km Miritini-Mwache Kipevu Link Road, meanwhile, was completed in June 2018 to help decongest Mombasa.
Not all projects are moving ahead as planned, however, such as the KSh34bn ($337m) Italian government-funded Itare Dam in Nakuru County. The dam is envisioned to stand 57 metres high and provide water for 800,000 people, yet the project has met local resistance and was stalled pending judicial review as of August 2018. Rail and port construction linked to the SGR is expected to continue, though, with the government announcing an allocation of $88.4m in July 2018 to speed up work at the Lamu Port. Construction of phase 2B of the SGR’s Northern Corridor, which will extend the rail line by 262km from Naivasha to Kisumu, remains on the docket for the near term, and the second phase will conclude with section 2C running 107 km from Kisumu to Malaba.
In addition to state budget allocations, Kenya’s infrastructure project pipeline is being supported by funding commitments from foreign investors, including the US-Kenya partnership for the expansion of the Mombasa-Nairobi Highway, among other projects.
The Chinese government has been another notable partner. The Export-Import Bank of China financed phase 1 of the SGR’s Northern Corridor with loans totalling $3.2bn in May 2014, and officials secured KSh155.5bn ($1.5bn) from the bank to implement phase 2A in May 2017. In September 2018 another agreement was signed with the institution for KSh380bn ($3.7bn) to begin phase 2B. The SGR is being built by the China Road and Bridge Corporation.
European players are also showing a growing interest in the country. In March 2018 a delegation of French officials and business leaders visited Kenya, where private firms committed to invest $10bn in the country through road, energy and manufacturing projects, although no time frame was specified for the investments. Among the companies that sent representatives to Kenya were energy giant Total, car manufacturer Peugeot, Schneider Electric, industrial gas provider Air Liquide and transport firm Bollore.
When it comes to challenges in implementing large-scale projects, the high cost of land and the legal barriers to securing it top the list. The SGR is one example of a project that has struggled with securing land. Kenya Railways Corporation spent KSh30bn ($293.9m) – or 9.2% of the total cost of KSh327bn ($3.2bn) – to acquire some 4500 ha for laying phase 1 of the line. The logistics of the land purchase were challenging as well, and the process took longer than anticipated to complete. Legal delays pertaining to land use are also impacting the construction of the second phase.
Another major project affected by similar land hurdles is the KSh7.3bn ($71.5m) Galana-Kulalu Irrigation Project. Launched under former President Mwai Kibaki’s 2009 Agricultural Sector Development Strategy, Galana-Kulalu is a multi-phased project that plans to bring 405,000 ha under irrigation in Kilifi and Tana counties. In March 2018 local media reported that members of the County Assembly in Kilifi had circulated a motion to stop further work on the project, citing that it interfered with farming activities. As of January 2018 only 2230 ha of land had been irrigated, according to local press, and the land was handed over to the Agricultural Development Corporation for commercial production. As a major landowner, the government is doing its part to release parcels to allow for the construction of development projects. Notably, under the Big Four agenda, the government has announced its intention to establish three industrial parks to develop the local tanning industry, as Kenya continues to import leather items despite having a large amount of cattle. To enable construction of these parks, the Ministry of Lands is expected to release a total of 2240 ha.
Inputs & Supplies
Beyond securing land, another hurdle is ensuring supplies reach the building site in a timely manner. Transportation accounts for a significant proportion of the costs of major infrastructure projects, especially those built in more remote parts of the country. For projects constructed inland, materials must be brought by road, costing time as well as financial resources. While the government is continuously working to maintain and pave roads, the SGR will likely be a significant enabler of moving construction materials around the country once completed.
Concrete, of which cement is a major input, is among the most highly demanded construction materials in Kenya. Between mid-2017 and mid-2018 the price of cement in Kenya sat at around KSh600 ($5.88) per 50-kg bag, compared to KSh750 ($7.35) per bag in 2008 and 2009. This decrease has been largely driven by oversupply of the material due to domestic production coupled with inexpensive imports from both neighbouring countries and Asian markets, leading to price competition. Dangote Cement of Nigeria began operating a factory in Ethiopia in May 2015 and a factory in Tanzania in December 2015. This has resulted in stiff competition locally – as the company supplies the Kenyan market from its factory in Ethiopia – and with Kenyan cement exporters losing market share in Tanzania. The fall in prices as a result of imports from abroad, together with local production from seven different cement manufacturers, is squeezing company margins but benefitting customers.
Another factor influencing the local cement industry is the high cost of electricity at factories, meaning that in some cases it is cheaper to import cement rather than produce it domestically and adjust the price for a high utility bill. Similarly for steel – particularly when it comes to large-scale infrastructure projects – finished products are often less expensive and more readily available than their locally produced counterparts.
Challenges related to building materials and electricity are addressed under the pillar of Enhancing Manufacturing in the Big Four agenda. This tenet of the roadmap targets industries such as textiles and cotton; leather; agro-processing; construction materials; oil, mining and gas; iron and steel; ICT; and fish processing. Under the construction materials category, targets for 2022 include increasing the value of the industry from $470m in 2017 to $1bn and creating 10,000 new jobs. Priority 2018 initiatives include implementing a Buy Kenya policy, where firms are encouraged to secure 70% of their materials for housing projects from local suppliers.
According to a June 2018 presentation by the Kenya Association of Manufacturers titled “The Big Four Agenda: Investment Opportunities in the Manufacturing Sector”, targeted interventions for the construction materials industry include implementing local content guidelines and working to lower electricity costs from $0.15 per KWh to $0.09. The presentation also shows how manufacturing can support the other pillars of the agenda, namely food and nutrition security, universal health care and affordable housing. The construction sector, in particular, can benefit from the push to establish local agro-processing factories and spaces in which to manufacture pharmaceuticals, and provide materials and labour to low-cost housing initiatives.
With all the infrastructure projects and development plans that are lined up, manpower in the construction sector needs to keep pace. The National Bureau of Statistics reports that 148,022 contractors were employed in Kenya’s construction industry in 2016, earning collective wages of KSh16.87bn ($165.3m) during the year. This is nearly double the Ksh8.84bn ($86.6m) paid to construction workers in 2012. The industry wage bill has indeed been growing steadily in recent years, with the minimum wage for urban workers rising by 12% in May 2015, 18% in May 2017 and 5% in May 2018. The 2017 ruling lifted the minimum wage to KSh12,926 ($127) per month, while the 2018 decision saw wages rise by between KSh320 ($3.14) and KSh1458 ($14.28) in Nairobi, Mombasa and Kisumu counties, according to local media.
Kenya has a young and growing population, with high youth unemployment of 26% in 2017, thus there is no shortage of unskilled labour to work on construction projects. What is in limited supply, however, are degree-holding professionals for specialised infrastructure projects. Railway engineers for transport work and water engineers for irrigation initiatives, for example, typically must be contracted from abroad, further increasing the wage bill and overall cost of construction. Growing the pool of electricians, plumbers and skilled masons, meanwhile, could be addressed through the government’s efforts to promote technical and vocational training (see Education chapter).
The outlook for Kenya’s construction sector is strong, with growth to be driven by a number of major ongoing projects in transport and urban development. Activity is also expected to be supported over the medium term by capital inflows from private and foreign investors. However, for the project pipeline to remain viable, factors such as easing access to land and upskilling the local workforce must be addressed.
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