Document of The World Bank Report No. 26444-KE KENYA TRANSPORT SECTOR MEMORANDUM VOLUME I KENYA TRANSPORT SECTOR MEMORANDUM Volume 1 STRATEGY January, 2003 2 KENYA: TRANSPORT SECTOR MEMORANDUM Volume 1 Index 1. Introduction and Structure I 2. The Transport Sector 1 3. The Roles of the Public and Private Sectors 2 4. Taking Stock of the Transport Sector 5 5. A Transport Network for Kenya 9 (a) Connecting to the Outside World 10 (b) Connecting within Kenya 11 6. A Transport Strategy for Kenya 12 (a) Financing 12 (b) Management 13 (c) Regulation 17 7. An Agenda for Action 19 This Transport Sector Memorandum was prepared on the basis of missions in November, 2001 and mid-2002, by Mr. Simon Thomas (Senior Transport Economist) in collaboration with Mr. Josphat Sasia (Operations Officer, AFTTR), Mr. David Rudge (Senior Road Engineer, AFTTR), Mr. Yash Pal Kedia (Principal Railways Engineer, AF1TR), Mr. John King (Aviation Consultant) and Mr; Paul Thompson (Port Consultant). The Road Sector Review was undertaken with the active participation and support of the DFID, EU, KfW and SIDA. The views and recommendations contained in the Transport Sector Memorandum are those of the review team and are not necessarily endorsed by the Management of the World Bank. 3 KENYA: TRANSPORT SECTOR MEMORANDUM 1. Introduction and Structure This Memorandum is not a transport master plan; it does not include long lists of priority projects, nor does it provide detailed policy prescriptions. Investment priorities and detailed policies will undoubtedly be necessary, if major improvements are to be made in Kenya's internal and'external transport systems. However, such interventions are unlikely to be sustainable in the longer-term, unless there is a clear strategy which underpins,the investments and the direction for policy. The Memorandum is intended, to initiate -discussion regarding the appropriate infrastructure.strategy and policy, direction which will lead to a sustainable transport sector which provides access for people and goods,within Kenya and,.integrates Kenya.into the -global economy. Unless these two. objectives are -achieved, the prospects 'for substantial. and continuing social' and economic development in Kenya are limited.. Large.segments of Kenya's population will remain isolated in the rural areas, and the economy will continue as..a producer of primary commodities and basic manufactures for domestic and perhaps regional consumption. The Memorandum is short and strategic,'focusing on the broad' issues.'bThe'conclusions are supported ;by more in-depth analysis in, the sector papers, which are included in the Annex to the Memorandum. The Memorandum is'based on an an'alysis of the present status and trends in the transport sector, a diagnosis of the 'factors underlying the present situation, and the identification of what has succeeded and what has :failed. It then attempts to build the outline of a strategy, based,.on spreading the 'successes and progressively eliminating the failures. The Memorandum looks forward rather thanb'wckwards to' some "golden age"; it is impossible to recreate the past and it is really unclear whether there evervwas a golden age. To implement the strategy, there will need to be major change but, in the present'circumstances, continuing with the status quo is the option of continuing decline. 2. The Transport Sector In comparison with many countries,*the..transport sector in' Kenya is relatively well developed in terms.of both infrastructure and services: * The 'road sector is large and provides a dense network of roads ''in the highly populated parts of the country and some level. of access throughout the country. Unlike Ethiopia, for instance,'there can be very few people more than half a day's walk'from the nearest road. Unlike Tanzania, ,for example,''a map of the all-weather road network 'shows no major areas without any provision. 'The problem for Kenya is not the network but its standard and maintenance; it is primarily a quality rather then quantity issue. * The road transport industry is large and well-equipped. There is a wide spectrum of enterprises from large companies through to the individual owner-operators. It is highly competitive and responds to changes in demand, road conditions and regulations. Rates are set by market competition rather government or syndicates. Traffic is distributed between enterprises by the market on the basis of freight rates, availability, and service rather than queuing or administrative allocation. * Kenya's rail system may be skeletal but links the major population and production centers, and provides access to the port of Mombasa for both Kenya and much of East Africa. The mainline has relatively heavy track, allowing the use of standard locomotives with 18 tonne axle-loads. The problem of railways in Kenya is not the size or scale of the 4 infrastructure (there is not the traffic configuration for a denser network) but its maintenance and management. From being a major economic asset, Kenya Railways (KR) has become a severe financial liability to the Government. Thirty years ago, Kenya Railways carried the overwhelming proportion of the long distance freight traffic along the Northern Corridor (linking Mombasa, Nairobi and the Ugandan Border). Now Kenya Railways could close with hardly a ripple in the economy. Kenya has only one major seaport, Mombasa, handling about 10 million tonnes/year. The port should have adequate capacity for the foreseeable future. In addition to conventional and bulk liquid berths, it has a dedicated container terminal with 600 meter berth length. Mombasa will never become a world hub for global 'shipping services, but it should provide international quality services' for East Africa and rapid transfers to/from the global shipping services:"'Instead of which, Mombasa is probably the single lirgest' infiastructure con'straint 'to economic progress in Kenya. While there have been'-some improvement recently, a legacy of poor management and poorinvestments still 'combine with time-consuming, cumbersome and redundant procedures to produce unnecessary congestion, high charges and slow services; * Air transport has becoming increasingly important to the economy of Kenya. It provides Kenya's only first class, connection to the global economy. Air transport sustains the tourist industry and has been rinstrumental in facilitating Kenya's entry into the fresh flower and horticulture markets. Kenya, with its fresh produce exports, has shown that it can develop world-class logistic chains, the delivery of produce from field to European market in 24 hours, if given the opportunity and incentives. Kenya Airways has become a market leader in Africa, and Air Kenya is developing an domestic scheduled network and has launched a regional schedule. However, the civil aviation infrastructure has not kept pace with the quality of the air transport services. It is again not a problem of quantity, Kenya has three international airports, but of service quality and the financial structure of the sector. However, passenger terminals at Nairobi will probably require major investment to meet forecast demand and post-September 11 security requirements. The transport sector in Kenya combines international quality operators and services, run down infrastructure and inefficient and ineffective institutions. Transport policies have similar dichotomies: Kenya, on paper at least, is almost a starof 'road'reform. The Government has established an executive Road's Board to act as the custodian of the sector and allocate fimds to the road implementing agencies. The Fuel Levy generates significantly more than the equivalent of US$100 million a year, funds which flow without interruption to the road' sector. Attempts are being made to control axle-loads on the major corridors, with some success in eliminating the gross axle-loads prevalent in the past. But, despite this policy and funding framework, the road sector remains in poor condition, with frequent allegations of corruption, inefficiency and waste. 5 3. The Roles of the Public and Private Sectors The respective roles or the public and private' sectors in Kenya's transport sector can be charaeterized broadly as: * The public sector owns, maintains and manages the infrastructure and provides a limited range of transport services (port and rail); * The private sector provides most transport services (road passenger transport, road freight transport, urban transport, air transport services, and some bulk cargo port services) Since Independence, there has been a-trend toward greater participation by the private sector. This has come partly from government decisionsosto withdraw from active participation in some areas, and partly from'the failure of the public sector to perform. Road Transport o Deregulation'of the road transport industry, removal of rate fixing and effective abolition of quantity licensing: This deregulation, combined with the paving of the main arterial roads, substantially increased competition within the sector and, by allowing the use of' larger vehicles,' improved road transport's competitive position vis-a-vis the railways; o Collapse of Kenya -Railways. share of the -passenger and freight markets: In the early 1980's, KR carried 4.2 million tones annually, it now carries about <2.5 million despite the growth in the overall market. Road transport has become the dominant transport mode. o Withdr.awal from the provision of urban bus services: The public sector, through the local authorities, used to have partial ownership of bus services in both Nairobi and Mombasa. This participation has now-ceased, and the.Nyayo Bus Service, oper.ated by the National Service, has been liquidated. CivilAviation o' Withdrawal of intervention in the air transport sector: the flower and horticulture sectors 'took off' when GoK stopped trying to control freight rates and simply 'allowed the market to work. There followed a major expansion in charter freight services. From a bureaucratic allocation of scarce capacity, the flower and horticulture firms now make commercial decisions on what to fly, where to fly it and with whom to fly it. The public sector retains, however, the, ownership and management of the airports and control of air traffic control and navigation. o Privatization of Kenya Airways: Kenya Airways was a parastatal, requiring continual infusions of' public funds. It is now profitable with an 'expanding regional and inte'rnational network, moving from point-to-point' operations 'to hub operations for Africa, using Jomo Kenyatta International Airport (JKIA) in Nairobi as its hub. It has become one-of the market leaders in Africa, challenging Ethiopian Airlines'.previous dominance of intra-Africa connections: Railways o Establishment of Magadi Railways: KR's failure to deliver adequate services led Magadi Soda to take back responsibility for its branch line (an exceptions to public ownership of infrastructure) and operate its own rail services to Mombasa. The example shows that an efficient, low cost rail operation is quite possible if managed appropriately. 6 o In the mid-1990s, KR entered'into a number of financial arrangements with private freight forwarders and other private customers for the funding of wagon and shunting locomotive rehabilitation, in return for discounted freight rates and dedicated use of the wagons. There was almost a de facto transition to open access. However, the lack.o.f a coherent policy resulted in operational constraints and the arrangements were terminated. Port Services o Expansion of private bulk handling facilities at the port of Mombasa: Bamburi Cement and Magadi Soda have traditionally handled their own commodities at Mombasa, and Bamburi Cement constructed its qown4-.port facilities (another .exception, to. public infrastructure), but the Kenya Ports. Authority (KPA) provided all the "for hire" services. This changed with the opening of a bulk handling facility by Bulk Grain Handlers, Ltd., combining silos outside the port and an unloading facility in the port. KPA has effectively taken its first step towards becoming a Landlord Port o Unlike some governments in the neighboring countries, GoK has. allowed the private sector.to operate freely in the freight forwarding and ships, agency sectors; there have been no attempts at imposing .a monopoly freight forwarder (as in Uganda) or monopoly shipping agency (as in Tanzania), nor control of cargo rates and cargo allocation (as in Tanzania). A national shipping line (though not vessel owner) was established to try and take advantage of the UNCTAD Liner Code (the 40:40:20 rule). The Road Infrastructure The public sector retains a monopoly of control and management of the road network, although representatives of private stakeholder groups have majority representation on the newly created Kenya Roads Board.'There are no private toll roads in' Kenya, nor management of roads by the private sector. Despite its retention of ownership and management, the public sector is playing a diminishing role in the execution of road works: * Road construction and improvement works are entirely undertaken by the private sector, * Major maintenance works (resealing, recarpeting and regraveling) are almost entirely undertaken by the private sector; * Off-pavement maintenance and. small drainage works on unpaved roads are increasingly being undertaken by small local contractors; * Much of the maintenance plant and equipment used by the District Roads Engineers is now hired from the' private sector, rather than provided by the Mechanical and Transport Departnent (MTD) of the Ministry of Roads and Public Works (MORPW); Major construction works are generally designed and supervised by priyate sector engineers.oHowever, almost all Fuel Levy funded contracts are designed and supervised by MORPW engineers. The nationwide force account maintenance and works system, with permanent laborers and road camps, collapsed in the late 1980s and earlyl990s, but has still 'not been replaced by an alternative system. Despite the substantially increased maintenance funding, there is still no coherent routine road maintenance program, rather there are emergency responses on failed roads. When the public sector does undertake maintenance work, it. is largely through .the employment of day labor, organized and supervised by Ministry foreman and technicians, though there a few permanent resealing units patching the paved roads. 7 Overall responsibilities for the road network are changing, at least on paper. The creation of the Kenya Roads Board and the District Roads Committees have introduced new players (excluding the Ministry of.Local Government), outside the traditional public sector, into the decision making process. Previously, the Roads Department of MORPW'was 'responsible for the entire classified neitwork: developing the work programis,;determining the 'allocation of funds between' different parts' of the network, and then undertaking the works. The'Roads Department 'is now one of a number of road.implementing agencies, responsible only'for the main road network (the' A, B and C roads); the DRCs, composed of the district MPs, mayors and chairmen of the County Councils, set the work program for the other roads. The. KRB Act specified the allocation of funds, and the KRB must approve the work programs and then ensure that the work programs are followed and the works undertaken. The new system has the potential for a much greater degree of,transparency and accountability in the managementi of the road network. But, the 'system is new, is yet to be fully operational and consequently is:untested. During a transitional phase, a significant proportion of funding from the Fuel tl1evy is going to resolve the:legacy' of contractual .over-commitments. which :took <-place before the creation of the KRB. The real test of the new'system will be whether it introduces a much, more business approach to the development and maintenance of the road sector, setting priorities and basing decisions on clear and''objective economic and social criteria, rather than responding to political expediency. 4. Taking,Stock of the Transpoit Sector The ppor, state ofinfrastructure in general, and.transport infrastructure in particular, is commonly rated as a major,:constraint by investors in Africa (often one of the top three constraints). Roads are also rated as one of the major.problems by the.ordinary. .citizen, particularly those residing in the ruial areas; the rural population feels.isolated from economic opportunities as well as health, education and other social services. Survey results in Keny,a demonstrate ,exactly these responses; infrastructure is rated a major constraint both in business. surveys and in the .Poverty Reduction Strategy Paper, consultations. The ]Keyan,press abounds. with complaints regarding the state of the infrastructure, roads in particular, -although the railways and the port of Mombasa.are also subject to frequent criticism. The. complaints, are raised by .politicians as.well as.civil society and business interests., However, the complaints are not simply directed toward the infrastr.ucture but also the misuse of resources, the corruption in the award of contracts, the corruption. in the enforcement of axle-load controls, the poor work of contractors undertaking the works, etc. The Fuel Levy generates substantial funding but,there is a general feeling that road 'users have not received value for money. Untortunateiy, while domestic resource mobilization for the maintenance of the road sector has increased substantially, over the last 10 years, this increase was largely offset by a reduction in donor funding. 'Consequently, the overall total flow of funds to the road sector has not increased substantially,' there was merely 'a shift in the funding source.'It is also doubtful whether the Fuel Levy pwas well use-d: o Funds. -w,ere. not allocated primarily to the maintenance of the most heavily trafficked network,, much went -to., unpaved secondary roads While a certain level of cross- subsidization of roads might be expected, road users on.the heavily trafficked ro'ads could legitimately expect that these roads would be maintained as they generate the funding; o Contractor and supervision performance can, at best, be described as variable. Almost every assessment of the works undertaken with Fuel Levy funids, whether by the Controller and Auditor General,, taskforces of the MORPW, or independent consultants 8 raise major questions regarding the quality control and cost-effectiveness of the works undertaken; o Huge waste of resources from the over-commitment of the resources available. Contracts were awarded far in excess of the available.. funding. As a consequence, contractors were not paid, or were ordered to slow or stop construction, all giving rise to large interest penalties..and .claims for the immobilization of equipment There was, in. effect, a total lack of financial control within.the public sector and the hangover is still being felt In taking stock of the sector, there is-'some need;to specify a basis of comparison; whether that comparison is: *: Historical - is the transport sector improving/declining relative to past performance? *: Regional - how. does. the transport sector in, Kenya compare with the sectors in neighboring countries?' 4* Intermational - does the transport sector provide -international class facilities and services, where necessary, in order for Kenya to compete in the world market All three bases have some value,'depending upon the context, but perhaps the historical and international comparisons are the most relevant. Historical Performance If the present state of the transport sector is compared with 1990, there have been very definite improvements in some areas, deterioration in others, and little change in much of the sector. Air transport: there have been 'some major improvements, particularly 'with respect to the availability of 'air 'freight services and the performance of Kenyan- 'based carriers. Privatization and liberalization in the sector has paid major dividends.'There has been improvement 'm the infrastructure at Mombasa. Nairobi has seen rehabilitation of the runway, but increasing.'congestion in th'e passenger terminal. Domestic resources were wasted with'the'co'nstruction of Eldoret. ' Railways: a collapse in the financial and operational performance of Kenya Railways (KR). Traffic hasirecovered from 1.6; million tonnes (EY 1996) but at 2.4 million tonnes (FY2002) it is.still'only two-thirds the level of FY :1990. Staff numbers have been cut dramatially and -tariffs raised to levels' approaching those of road'transport but the financial position is untenable. KR is bankrupt and continued operations 'are now dependent upon'GoK subvention. Road Transport little change in the road freight industry, except. some .reduction (but not elimination) in vehicle overloading, more axles and a higher GVW. Public sector participation in the road passenger market'ended. Road Infrastructure: based on limited. data that there has not been a. major change in overall service conditions on either the pav,ed.or mural roads. On the. paved road network, some sections have deteriorated, but other sections have been reconstructed; a program. of pothole pat,ching has improved service (though not structural) condition, very significantly in the. last couple of years. On the'unpaved network, major donor fundig of rural roads declined1,' but recently the "constituency funds" from the Fuel Levy are reported to be having a positive impact on minor roads. XIt should be remembered that the Roads 2000 strategy. was developed in the early 1990s to address failure of the previous policies under which some high-quality rural access roads were provided by donors within a rural road network in which the secondary roads were ceasing tO provide all-weather access. 9. Road Institutions: there have been substantial changes in the institutional structure of the sector with the creation of the.KRB and DRCs and exclusion of the local,authorities from the road sector. In the opinion of many, there has been a marked reduction, during the 1990s, in the effectivene'ss'of -the MORPW's'Roads Department.'The'MORPW and Roads Department have''suffered frtmitoo many changes in management, too much internal friction and mistrust, and too much actual or alleged corruption, as well as a decline in real salary levels in relation to the private sector. Road Financing: a major. improvement in the level of domestic. funding for road maintenance, through the Fuel Levy which should now provide a large. and stable financial base for the maintenance of.the network. A major reduction in the level.of extemal.funding, mainly reflecting the overall reduction in donor funding but also, on occasion, the failure of the MORPW to take advantage of'he opportunities available. Port Services: there has probably, been a.modest improyement in the level of port services since 1990. Container handling rates declined in the mid-1990s but have since increased and are now significantly above thedlevels at which the shipping lines nmpose surcharges. More recently, a.mec,hanized bulk handling.facility.has been opened by the private sector. There are no major berthinmg' delays .although the' container terminal is operating at the margin of congestion because of the av'erage dwell time'(over 10 days). Taking a sector-wide perspective, the transport situation..in.2002 is.not dramatically worse than in 1990. But, neither have there been major improvements except in air transport. Regional Perspective. Benchmarking may be.a useful exercise, if the.appropriate standards are selected. Being one from the bottom of Division Three is not very useful, when the need is to be in Division One. Air Transporti K'enya's "air transport services have easily outstripped-those in Uganda, Tanzania and, in- relative tfrms, Ethiopia. Nairobi relmains the major hub for East Africa and with KA's expansion is rivaling the services provided by Ethiopian Airlines at Addis Ababa. Air 'freight is not a constraint to 'the export: of "fresh- produce'found in neighboring countries. Hlowever, Ethiopian Airlines makes direct flights to the US as Bole' Airport has FAA Category I security clearance and the Ethiopian Civil Aviation Authority is categorized as satisfactory. Dar es Salaam International Airport is also close to achieving this security clearance. ,.Though the new Kenyan..Civil Aviation Authority will probably achieve compliance with international.requirement by mid year 2003, JKIA is still far from,meeting category-1lsecurity-requirements. Railways: KR's-traffic has fallen significantly since.1:990, while record levels iof traffic are being carried over the Tanzania R'ailways' Corporation's' (TRC system. In terms of ton-kms, the Tanzanian system is now moving the same level of traffic as KR, while in 1990. it was moving less than 50%."TRC makes a,-small- operating surplus, on historic cost,. operates without overdraft, and pays 'staff on tinie2. Freight traffic on Uganda Railways has also increased substantially (but from a very low base). All three countries have initiated concess,ioningand -bidding documents. hav already been issued for TRC.; Unfortunately, te demad for railway concessions.in.Africa is very limited. Road Sector: Both'Tanzania and Uganda allowed their'road networks to collapse in the 1970s and 1980s, and virtually their' entire- main networks have had to be reconstructed. Kenya 2TRC is not a financially viable enterprise, however;It is not generating the surpluses required to service its debts or renew its assets; 10 performed much better, and there has been a much more gradual de'cline in conditions but major funding is now needed to bring the network back to a fully maintainable condition. Kenya and Uganda have made great efforts::to mobilize local resources for road maintenance: Kenya through the Fuel Levy and Uganda through the regular budget. Tanzania has a fuel levy. but.it is generating less than a third of the maintenance funding required. Kenya has moved forward with an executive Road Board but is still depends upon the Roads Department for implementation of the road program. Tanzania has ' established a road agency, TANROADS, while Uganda has started on the same process wi,th' RAFU (Road ''Agency Formation Unit) 'which' is a contract procurement and management unit for road construction but is now extending its activities to maintenance. It is a mixed picture. Road -conditions in Kenya are, at best, stable, while they are improving in the neighboring countries. However, these improvements are dependent on donor funding, and long-term sustainability is not assured, especially in Tanzania. Ports .Services . During the. late 1970s and early 1980s, Dar es- Salaam (DSM) was almost notorious for poor.service and shippers, with a choice, preferred Mombasa. This situation began to change- in the late..1980s, with,impr,ovements at DSM and deteriorating services at Mombasa. The improvement. at DSM has continued, especially,since the leasing of the container terminal to the private sector. Mombasa still has third world productivity at its container terminal,-'whiie DSM has' a containerterminal 'approaching international standards of service,'with the highest productivity in'Africani and at least 50% higher than Mombasa. With the exception of air transport services,,the physical condition of the transport sector and the standard of transport services -in Kenya have rema'ined static or 'decli.ned in comparison- to its neighbors. There has been little overall chan'ge in' road conditions,'but a 'marked decline in riil services with a consequent loss in market.share to road. However, Kenya,has,introduced some changes in the 'institutional changes in the road sector which. could, if buil,t upon, provide the basis for major improvements in the future. However, there is,also a substantial risk. that Kenya will not capitalize .on these changes and will allow, de facto, the present distr.ibution , of. power and responsibilities to continue. Internaidonal Perspective: Quite clearly,. with the examples of the flower and horticulture industries, Kenya can develop and operate a world class logistics system.' But, at the present time, the opportunities for such systems are confined to the air transport sector. Throughout the:'rest' of the transport sdctor, Kenya is laggingi.well behind the.:developed.world.and many.-of., its.. developing. country competitors. Invest'ment is needed to raise standairds, but the provision of investment alone will not guarantee the infrastructure and transport :services.required. Investment at Mombasa could install modern cranes. and the potential for faster ship-to-shore. container movements, bu,t tis will not generate high .quality services, 'unless-'Kenya-also introduces-Jinternational quality port and terminal management and a more customer oriented customs system for cargo clearance. In both developed and devel,olping countfies, there has been a major withdrawal of the public sector from running transport services. The public'sectorha's stopped ope'ating tru6king and long distanc'e bus companies; -In;most coiutries,-the-public sector has withdrawn from.r,unning,port services (though mostly retaining the ownership.of.the.port, infrastructur e), and increasingly from running airports (though retaining important safety and security oversight). Many countries have privatized rail operations or, at least, allowed access to private oper,ators. Urban transport remains an important area of public participation, as does the road network although, in both areas, private provision of services (through concessioning) or infrastructure (toll roads) has increased 11 substantially. The road network remains largely under public ownership and control, but increasingly the private sector is undertaking all the actual road works and, in many instances, also taking responsibility for the day-to-day management of the network through long-term, performance based maintenance contracts3. This approach to the management of roads is increa,singly common in developed countries but also in South America and now in both South and West Africa. There are, of course, well-publicized exceptions to these global trends. SNCF runs a world class, high-speed rail passenger service in France: SNCF is publicly owned. The Singapore Port Authority (SPA) runs one of the world's leading container port: SPA is publicly owned. But these are now the exceptions: and, behind each exceptions,. there are factors which maie the 'model implausible for Kenya (SNCF receives massive infrastructure subsidies; the Singapore 'public sector'environment is very different to Kenya's). Major transport organizations remain in the public sector, including the world's three largest railways (China, India and-Russia), but all are in the process of initiating major structural change to adapt to the world of competition. Nor are all experiments with transport sector 'privatization are completely successful. The difficitlties faced by the railways in the UK, since privatization,have 'received wide coverage and are often mentioned as a caution on private sector participation. The infrastructure has faced problems and these have been.caused partly by private ownership. However, previous under- inve*nent, and the skewed rewards under the contract were also major contributing factors as was the very success of privatization itself. The private train op'erating 'companie's have in'creased substantially the. number of passengers, the tonne-kms and the number of trains operated. Unfortunately, at important points on the rail network, the increased demand exceeded the track capacity. Keny' has.started to follow this worldwide trend, but still retains almost complete control in the provisioni andmanagement of the infrastucture (though often contracting out the more important works): Actual Withdrawal of Public Sector nN Air transport services - privatization of Kenya Airways * Bus services - liquidation of Nyayo Bus, and complete privatization of the Kenya Bus Company *.. Increase in private sector participation in the provision of port (Bulk Grain Handlers Ltd) and rail (Magadi Rail) services Annoqnced Withdrawal of.Public Sector L C.oncessioning of.Kenya Railways.(transaction adviser appointed) * Conversion of KPA to a landlord port and privatization of the provision of services (no action taken to initiate process) It is not coincidental that the recent successes in the transport sector are found within the first category. 5.- A Transport Network for Kenya The. transport infrastructure of Kenya is .uncomplicated: * limited network of high traffic, inter-urban roads (~ 6,0001an) 3 The contractor is not paid on the basis of the work performed, but on the standard to which the roads are kept, with penalties if the specified standards are not met 12 * rather larger network of secondary roads (- 9,000krn) * very large network of rural roads (- 1 00,000km) * small urban road network (7 3,000km) * a main line railway-with tbree branch lines * one major sea port * two international airports4, a number of domestic airports and numerous airstrips Kenya does -not need .more infrastructure; indeed, it can be argued that Ken,ya may, already have too many roads in relation to the. funding likely to be available. The issue is whether.the present quality. of infrastructure meets:the needs of Kenya. One way -to assess these needs is to consider transport as part of the production and social processes, broadly 'defined, and consider what level of infrastructure services are required to facilitate economic growth and social developmnent.-Logistics can be considered as 'a continuous chain from the.pointsat, which raw materials. are.produced to the points of final consumption, but at,the strategy level some aggregation is .useful. Transport in Kenya has two basic. functions: (a) connecting Kenykawith the outside world, and. the global economy; and (b) connecting the population and economic activities within Kenya. (a) Ionnecting to the Outsaie World It'is reasonable to assume that, if Kenya is to compete successfully in the global economy, it should have transport connections to the outside world which are, as' far as practicable, the equal of its competitors. Kenya, like most of Africa, suffers from a lack of scale in international trade, an imbalance in international freight flows .and a location off the main, global shipping routes. Th, is w, jill inevitably result.:in higher sea-freight costs (there is not the demand t,o justify the use of the third or fourth generation container vessels) than more favored countries. But, there is no need for Kenya to further disadvantage its competitive position by providing port services to vessels and cargo owners which are below international standard. If 'the' international norzm is 600 mov/esship/day and an average container dwell time of 3 days, then these are the levels of service that Mombasa has also to provide. Similarly, the air transport gateways to Kenya should have the levels of service, safety and security that are now expected'in the'world market. The private sectorthas managed to master the logistcs of air transport for export, but the public sector has :not managed.to master the provision of service, safety and security for passenger travel. Kenya's position in the world's discretionary travelPmarket is fragile - many countries offer beach holidays and "several 'other countries offer comparable safaris. Internal' se'curity incide'nts 'have"already 'adversely affected-the levels of tourism; Kenya-does not need to compound this problem by.an adverse reputation for air safety and security. International class gateways to the global 'economy .are crucial for Kenya-.,TThe gateways themsplves can become growth centers for export oriented processing and manufacturing from imported raw materials or components. However, for the economy and country and economy, the gatew,ays must be linked to the major economic and population centers, through line-haul transiort - whether that be road, rail or a combination of the two. Efficient,.c,ost effective, long- distance, line-haul transport is essential, for Kenya: most of the major production/population centers are located at least 500 lkms from the poirt. Efficient, 'cost-effective:traanspot for transport users is dependent on infrastructure, management, regulation and competition. 4Eldoret may be classified as an international airport but it hardly meets the functional definition of having intermational flights 13 Outside the peri-urban areas surrounding the major urban areas, traffic flows on the inter-urban road network are well below the.levels requiring dual-carriageways. The present track capacity of the rail network is sufficient.for the foreseeable future and can be expanded substantially before double tracking is necessary. The line haul transport network does not need capacity expansion, but it-does need quality enhancement. * lbhe.main roads provide all weather access, and allow transport operations, but transport rates could be reduced significantly by improving pavement conditions, and perhaps substantiallyeby eliminating the.informal payments at checkpoints, weighbridges, etc. There is' little indication that there. is any shortage of either effective management or competition in the road-transport industry. Enforcement of vehicle and safety regulations is, however, a major shortcoming and competitive pressures force enterprises to the practices which should be considered unacceptable. * The rail track may need spot renewal and enhanced' maintenance, but the crucial constraint to efficient, low cost rail transport is management. High train speeds are irrelevant (and. very 'costly to achieve) when the terminal and en-route delays tare. so extensive and pervasive. There' is no reason why the main road and rail system cannot link Kenya very adequately to the gatew'ay ports and thus the global economy. No new infrastructure is'required,' no expansion 'of the infrastructure is' needed, 'simply rehabilitation, maintenance and, critically, far better management of the infrastiructure that already exists. (b) Connecting within Kenya The line-haul transport system has be complemented by secondary and feeder transport networks to allow produce to reach the,urban/processing centers and to connect the rural population to economic opportunities and social facilities. Kenya has a very extensive road network but much of it provides very poor access for the population, especially during the rainy seasons. Lack of access is always a critical social constraint for the rural population but is also a critical economic con int, especially in those areas where production. peaks during the rainy seasons (for example: milkl,, tea and vegetables). Without reliable all-weather access, some areas are denied their economic potential, and without all-weather access all iareas are denied regular .(if .low quaLitj') public passenger transport Ideally, of course, the rural road network should all be brought to an. all-weather standards, with good pavement conditions. Given the size of the network necessary to provide. a reasonable spatial distribution of road access and the costs of upgrading roads to these standards, this is not a feasible p`roposition in the foreseeable 'future - even a- network of 50,OOOkms of secondary and feeder roa'ds would cost'the equivalent of >US$1 .5' billion.; ' and On most of rural road network, taffic levels are extrenelylow, but the vehicles do provide vital access and the means of social mobility. Motorized access over very bad roads may be expensive, but it is much less costly than no-motorized access5. Tbe 'Roads 2000 strategy was formulated to address this issue:.. Abandoning- the concept of fidl rehabilitation or upgrading of rural roads, and concentrating on partial rehabilitation and spot improvements to bring the network to a maintainable standard and improve the level of access during the rainy season 5Upgiading a road from very bad to good condition may reduce transport costs by a factor of 2; moving from n,o motorized access to motorized access over a very bad road, reduces transport costs generally by a factor of IO. 14 The strategy was formulated in the early 1990s but was never applied as the policy tor ruralroaas (except in a' few donor-supported projects). Rather, the MORPW continued the policy of major rehabilitation and upgrading of a very few' rural roads, and almost total neglect of the rest of the network. Unfortunately, spot gravelling and some additional drainage structures do not generate the same political appeal as'comprehensive rehabilitation or, better still, upgrading to a paved road. It is, ho eyer, the logical 'approach to the access 'crisis faced by much of rural Kenya. Moreover, the types "of roadwork, central to the Roads 2000 Strategy, have the crucial advantage of being adapted' to labor-based technology, giving the; opportunity of both motorized " access and substantial unskilled employment in areas where cash income opportunities are -greatly needed. 6. A Transport Strategy for Kenya Fundamentally, Ken'ya needs i(a) a limited network"of' inter-urban links, connecting to the international gateways at Mombasa and Nairobi. This network of links and gateways must meet international standards of infrastructure condition and management, if Kenya is to compete interntionally. in areas-.oth,er than ,the traditional agricultural sectors; and (b)..a much more extens,ive road network which,provides reliable all-weather (or at least all-season)6 access. To achieve. this network, a coherent,.transport.strategy..has to: be both.formulated and followed.-A integrated strategy which covers financing, management and regulation. In some countries, the ownership of the infrastructure might be considered but, in Kenya, it can reasonably be assumed that the basic transport infrastructure will remain largely under state ownership. (a) Financing The cost of creating even such' a basic 'system of transport for Kenya will be, in the short-term, well 'above 'the possible financial resources of the GoK and the donors, especially as transport is only'one of'ithe pressing prior'ities whichl have 'to'be -addressed. Kenyani road users may be generating sufficient funding for the recurrent needs of a maintainable network,. but the immediate need is for capital"funding to bring`roads to a maintainable condition: Other sources of fuinding'will be necessary, especially funding from the private'sector. Private sector financing will follow the normal criteria for the private sector - investment will go wherever there are the prospects of acceptable profits in relation to the perceived risks. This has resulted'in the following profile of private investment in the transport sector: * Ports: private investment in .ports is .becoming almost universal, in ,both de,veloped and developing countries. Kenya has already has the example of Bulk Grain Han'dlers. O Airports: private investment and management has become increasingly common for major airports and. pessenger term,inals. Few countries have however privatized air traffic control but its.revenue should cover the necessary investment. * Railways: private sector participation in railways has grown substantially.' Generally, investments by the private sector are initially concentrated on communications and 6~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 6 On some parts of the network, it may be acceptable to have brief interruptions (hours rather than weeks) to access, following the heaviest rains. ? Most railways have now been concessioned in South and Central America and many railways in Africa are at some stage in the concessioning process. The railways have been privatized in Australia, New 15 operating assets (locomotives and rolling stock), rather than the basic track infrastructure. Fortunately, this distribution of investment mirrors KR's urgent needs. * Roads: private investment in roads has been more limited and confined to main links with substantial traffic. Tolled roads are found in many countries but they form a very small proportion of the total network. In Kenya, the potential for private investment in roads is similarly small, little more than the Northern Corridor. However, the costs of bringing the Northern Corridor to international standards is 'substantial, and if the private sector takes responsibility for this route, GoK and donor funding can improve other parts of the network which would never attract private funding. In terms of financing invest,ment in Kenya's transport. sector, there. seems relatively little doubt that the private sector would be prepared to make the necessary investments in the international gateways (Mombasa port and JKIA). It.is also very probable. that the private sector would make the necessary investments in KR to turn it into a profltable enterprise (though clearly the private sector would not assume the past legacy of debt). The road network remains the major issue for the public sector - some' private funding rmay be possible, but the state will retain the primary responisibility for funding. (b) Management Airports, Ports-and Railways: There, can surely be no real question about the management of the port, the airports and the railway, given the past performance of the facilities under public management and the experience elsewhere. If Kenya really wants international standard services, then introducing international operators would appear the logical approach. This is a woridwide phenomenon in the transport as well as 'other'utility sectorsg, e.g.: o An Australian company runs port terminals in Africa, India and Malaysia o,:, A Singaporean company runs port terminals in the Middle East o American companies run railways in Australia and South America o' A Chinese company owns and runs the UK's largest container port o>- American and French companies run railways in the UK o A Filipino company runs ports in, South America of A British company runs airports in the US Private investment and management almost necessarily go, together. GoK.has to seek respected international operators to manage the key gateways though. this can be in. the, form of joint ventuies with local investors. Management responsibility has, to be very clearly defined as the role of the international operator. to avoid a. repetition of the failed management contract for the Mombasa container terminal. GoK should also think very carefully before, proposing a joint venture which includes the asset authority/landlord, whether this be the Kenya. Airports Authority or the Kenya Ports Authority. Such ventures do exist elsewhere, but they raise potential conflicts of interest (the.authority has, in effect, both the: interest of the landlord and the tenant). It may well be preferable to have a complete separation of roles, with clear. lines of responsibility. The public sector agencies that presently run the'facilities will remain in some form but with very different responsibilities. They will no longer manage operations and prov.ide services to users. Zealand and the UK, and in many European counitries private involvement in the railway sector is increasing through open access. s The British consumer drinks water supplied by a French company, and lights his/her house with electricity generated by a French company 16 Rather, they will manage contracts and ensure that the operators are meeting the conditions of the concessions in terms of service delivery, maintenance of the infrastructure, safety standards, etc. They should cease being large employers of labor, and become very small units with a few technical staff and administrative support. The gain Road Network Private sector management of infrastructure, especially in the road sector, is increasingly common withoit necessarily being accompanied by private investment. Governments are finding that integrating the private sector into the day-to-day management-provides substantial benefits when compared with the public sector alternative. In many countries, private contractors and engineering consultants ar,e managing public roads. If GoK is serious, about establishing a main road ,network wiihich can support the country's international competitiveness, then it has seriously to consider much greater involvement of,the private sector in road managemrent. It is difficult to en,visage public sector road management recovering from its present malaise. Unfortunately the reputation of road contractors in Kenya is not good and they are frequently accused of poor work. The present contract arrangements make it very easy for the unscrupulous contractor. the contractor has to take very little responsibility for the quality of their work, beyond the standard 12 month defect liability period. It is often difficult to demonstrate conclusively that the failure of a road was the responsibilit of poor materials or poor co,nstruction as inadequate designs may often play a significant role . Moreover, it has often been alleged that contractors, who iindertakle poor work, continue to receive contracts because, in one way or another, they are 'connected'. A possible response is, to make. contractors.. responsible for the roads. well beyond the, initial construction, reconstruction or rehabilitation period. Under such. arrangements, the contractor becomes responsible for both the capital works and then the continuing maintenance. Deficiencies in the capital phase will have to remedied by the' samne contractor during the subsequent maintenance phase.- To ensure full responsibility 'the contractor needs also to be involv,ed in the design of the road, so that failures :cannot be ascribed, at a later stage, to poor desig. Under such arrangements, contractorsare, n,,ot paid according to the work that they perflrm, beyond perhaps the initial capital phase, but rather by the results that they achieve or, rather, they are paid to provide specified road standards and are penalized (payments are subject to deductions) if these standards are not achieved and 'maintained; Such performance contracting can be established under either: Maintnance concessions: the contractor bids for an initial capital payment'for the reconstruction or rehabilitation and 'is then'paid a 'shadow io`o'on the basis of the traffic using the road. In the case of Kenya, such shadow tolls c'ould' be financed from the Fuel Levy. Road maintenance varies with the level''of traffic`(though:there is also a significant fixed'cost'element), so this. arangemnent provides additional funding in case of unexpected increases in traffic. It also means that the contractor takes some share of the riski. Maintenance concessionis differ from full'toll concessions in that the private sector is not raising the' capital -nd is 'not collecting tolls from road users. Such concessions are:`applicable where traffic is'insufficient to justify the costs of toll co,llection,-or.tolling would result,in,undesirable.traffic.redistribution. Long-Term Performance Based Coniracts: similar to concessions, but the contractor is paid an annual fixed fee for maintaining the road, though there may be an adjustment 91 he recent controversy regarding very large variation orders on roads like Sotik - Amala or Kisumu - Yala has been caused by inadequate designs being issued by MORPW. When the work was started, it became clear that total reconstruction was required rather than repair and reseal. .17 mechanism if there are unexpected changes in the level or composition of traffic. Such contracts tend to be for significantly shorter periods than those proposed for maintenance concessions. Under both arrangements, the role of the road agency changes completely.. Instead of preparing the designs, supervising the works, and then planning, managing, supervising and possibly also underqalking the maintenance, the road agency specifies the standards and then monitors the roads to ensure that the contractor is meeting the performance standards. It is immaterial to the road agency how much work the contractor undertakes (either more or less than the estimated.levels), it is only important. that the standards are achieved. This arrangement shifts the onus of responsibility.to the contractor to (a) ensure that works are carried out well;-and (b) to be innovative to minimize costs and increase profits'0. In view of the' different nature of the work and the different skills required to the present Roads Department, the 'best approach to the management of the" main road network 'may be through 'a Highways Agency. A small'agency, staffed'by relatively few engineers who would let and then monitor'the con,cessions 'and contracts. In vi,ewv of the very substantial power of the agency and potential for collusion with contractors, special 'employiment conditions would undoubtedly be eeded, includin g open recruitment, high salaries' and full disclosure and monitoring of personal assets. The on-going PPIAF financed concession study suggests that all the roads' in Kenya with traffic levels'- >500 vehicles/day could be suitable for.maintenance concessions (and roads with signiflcantly 'lower levels'of traffic 'c,ould be' brought un'der performance based contracting). Essen'tially the ';entire main road network could be br'ought under private management, with the road a.gency'letting the contracts and then imonitoring performance and traffic. Indeed, some countries (such as the hUK) have moved'. one stage fur'ther,. by sub-contracting the monitoring functiin to private engmieering consultants. Giveq-that the traditional force account maintenance system has collapsed, and MORPW has been unable to formulate and implement an alternative approach, GoK needs to think outside. the straightjacket of the traditional public sector for developing and maintaining its main roads. E,nh,a4inssg 'the responsibility of the private sector to manage the network, while holding'the co,ntractors strictly accountable for their performance, may.be,the most promising approach. It is cert hte.approach being increasingly adopted .elsewhere. Donor funding, such as from the IDA, could be used to finance the capital element under either maintenance concessions or performance based maintenance contracts. More particularly, partial risk garantees, pro,vi,ded by IDA, could mitigate many of the risks which would be perceived by the prvate sector in enter,ing such long contracts. Mitigating the risks would help to'increase the attract,ivene'ss of athe cont,racts, possibly raise the nu,mber bof bidders and reduce the risk premiums incorporated in the bids. The bcklog of requir,ed capital ,wors will not be removed in the near term. Choices will have to be, e .on, priorities ,in the sector. P,riorities were established under the Strategic Plan for the. Road.'Sector,''and, were then ignored. If standards in the road sector are to rise progressively to international levels, it is essential that a coherent set of priorities is established, on the basis of the expected fundingj and then implemented. To list all the projects which may 'generate a conve,tionalIy acceptable rate of return is no assistance in moving the sector to a more focused business approach, directed at facilitating Kenya's escape from the present poverty trap. The roads 'critical to Kenya's economy have to receive the highest priority. '°Outut based contracting is also possible, under which the contractor is paid for the work performed. It may be an improvement on public sector maintenance but has not the incentive/sanction structure of the performance based methods.. 18 The ARnal Road Network Performance based contracting can only be realistically applied.to conventionally engineered roads (whether paved or gravel) for which unambiguous standards can be set and monitored. Much of the Kenya's rural road network has not been fully engineered, and many of the roads are little more than trafficked tracks. A rather different approach to the management of this network is required. It may need more public sector involvement in detailed road management and implemientation, but also strong non-public sector participation in deciding priorities and then ensuring that the works are undertaken. If- Kenya seriously implements the Roads 2000 strategy, very many small works, (whether maintenance, partial rehabilitation or.spot imnprovements),will be i,m,pleme,nnted ,over an extensive road networ. Th,e, actual w.o`r,ks can still be undertaken by the private.sector, not by. large contra.ctors, bu,t by small and. m,edium scale enterprises (SME). In plannin gRoad,s 2000, a s,rt,a,ge. of,suitable S contractors w.as. identified.as a possible constraint, but,most-District Road fngineers ha,ve found, .in:rcent years, that there are contracto rsavailable,'and small works are atready being.inereasingly contracted. Beyond.somne. routine operations, such,as yegetation control and culvert cleaning, many of the works may need to be paid on a measured work basis. Such a program,of works cannot be either planned or monitored at the central level, management of ther rural road, network must be, devolved to..a more. appropriate.jlevel, at which the needs and priorities of the. local. economy and population.. are better. understood,., The District Roads Comr#ittees have' been successful in bringing a.more local perspective to. the pnoritizing of road works, and a legitimacy for the work plan11. District Road. Engineers report that the DRCs pay very close attention to the progress and completion of works under the_ work programs. When. the KRB Act was passed, some reservations were raised about the composition. of the DRCs, .but,the general impression has been that they have worked well and the inclusion of the MPs may have very 'positive side-benefits'2. The scale of the"'funding for rural roads, however, remains a problem, as does the organizational responsibilities for organizing and managing the works. The %RB Act specifies.-'that 16% of the fuel levy funds'.will be allocat edequallyamong all constu,en,cies and that.a f,urther 24% will be allocated "equitably" among'the districts. However, only the constituency fuiiding so far has.reached the distric,ts.' uitable funds are still being used to fund works contracted prior to the KRB Act. The constituency'funds are insufficient for mrual roads, but -it would 'be both inefficient and inequitable for all the 'equitable' 'funds to be allocated to rural: roads: Inefficient: the present distribution.o.f the Fuel Levy. ignores the road maintenance needs ofthe urban areas. With relatively small but very densely traffic,k.ed networks, they account for a substantial proportion of the total vehicle-kms. Inequitable: the urban road user pays over half, of the total Fuel Levy but is presently receiving v.ery little b,enefit. It may not be necessary to allocate the entire 24% to urban areas, but it is critical that the urban road networks are' adequately maintained, if road user support for the Fuel Levy is to be retained. The b1nefits.of motorized access cannot simply be measured in terms of vehicle-kms, but in the. ecohoinic and social opportunities that it allows. There is a very strong argument in- favor of increa'sing the level of 'rural 'road funding from sources other than the Fuel Levy. Already crop UMPscan and do get thrown out at elections 12In several countries, governments have borrowed'funds from the Road Funds for other purposes, especially when facing severe financial constraints. This has not occurred in Kenya, and the direct interest of the MPs (roads are important politically) in the level of district funding may have contnbuted. 19 cess% are used to maintain roads (in tea areas, for example) but these activities are not integrated into 1the works undertaken under the DRCs. There may thus be a need to revise the DRCs to include those responsible for the distribution of other road funding to ensure an integrated approach to the district rural road needs. District road works implemented under the work plans of the DRCs are currently managed by the DREs; who are part of the Roads Department, MORPW. There has been discussion of the establishment of separate works organizations under each of the DRCs, but this raises the potenitial of massive overheads in relation to'the available funding, and an unattractive professional structure for the technical staff. Rural.roads have been the poor..relation n ithe Roads Department for several years. Priority has been given to the major road network, which has received the funding, and'which may provide greater professional satisfaction for the engineers'3. Removing responsibility for the main road network to a separate Highway Agency could allow a greater focus on rural roads. 'However, a separate road.agency with specific technical responsibilities for the rural, and possibly small town, roads would provide a more appropriate framework for technical and professional overstight; The -DREs would be transferred to the new agency, (c) Regulation The dtrecions o'f the s,trtegy suggested are to: (i) reduce' the role of the public sector in the day- to-day' mana'gement of Kenya's primary transport network; (ii) increase the resource flow to the sector by encouraging private investment; and (iii) emnpower the private sector to manage the network. The pu.Public sector retains core functions for'all modes but' rather different functions to those presently exercised: Public fiding the need for public funding in the transport sector will remain critically important, and a substantial increase in funding will be needed if the main' road network is to be ,brought.back to competitive standards Contact management, the public sector already awards many contracts in the transport sector but, particularly in the road sector, the contracts will be very different,to those traditionally awarded, and will require management over a very much longer period. Concession monitoring- the public sector will retain ownership of all 'the infrastructure, assets, even under concession arrangements. The public sector will need to ensure that the terms of the agreement are being followed, to monitor the maintenance of the public assets, to make certain that 'safetyF standards are being kept,. and assess whether the specified performance targets are being reached. All these functions are critical to the success of the transport sector, but they do not involve the provis'ion of services, or the employment of large numbers of workers or the marketing roles of a transport'enterprise. These functions can be left to the private sector. The imJpetus for moving to the private sector'is to achieve higher service standards, at lower cost, through more effective management and the better use 'ofresources. The motivation of the private sectoiyis profit. Unless the private sector can generate adequate profits, it will not be intere'sted in taking concessions or long term maintenance contracts. Profits may eventually. be substantial as the risks of running a railway concession are high and considerable up-front investment may be 13 A large program of culvert construction may wel! be rather less interesting than reconstructing the Northem Corridor. 20 neces§ary 4. All the 'likely concessions are mnonopolies and the concessionaires will enjoy some degree of monopoly power: o KR: A vertically integrated railway concession, without open access is proposed, buttlhe monopoly power of the railway is low as road transport is a strong competitor. However, there may be traffics which are effectively captive to the railways. oi KAA: JKIA has an effective monopoly as neither Eldoret or Mombasa are adequate substitutes. A concessionaire could exploit this monopoly and raise airport charges, for both freight and passengers. o KPA: It is probable that.the container terminal will. have a monopoly, especially if GoK wants private investment to expand the facility. Dar es Salaam is a competitor for some transit traffics'but not for Kenyan trade. The marine services company wi}l have. a monopoly of tugs, and the oil. jetty company will have a monopoly, for .oil movement through the port.. o Northem Corridor Road Concession: On the Nairobi-Mombasa section, alternative routes require a substantial detour and the concessionaire will have significant monopoly-power. There are closer substitutes from Nairobi to the Uganda Border, but GoK may wish heavy freight vehicles to be concentrated on a single route. Concession contracts. themselves. can include initial rates/tariffs and specify. the mechanism to adjust charges.-Present.tariffs might, for example, be the maximrnumnthat the concessionaire. can charge, they could be indexed against either inflation or the.exchange rate, and the contract could also. require an annual %..reduction in the maximum rate in order to share efficiency.gains with the user. However, some form of regulatory;authority will, be required. Concession agreements, however detailed, areunlikely to be,.able to cover every circumstance. Sudden changes' in economic or other factors may necessitate changes. in,the,terms,and c.onditions of the concessions, and a regulator may be needed to help arbitrate between the asset authority and the concessionaire. Techic al and safety regulation will also be needed in some sectors, independent of the asset authority (certainly"this is the case in the railway and 'civil aviation sectors. A number of regulatory'regimes are possible: o6 Modal regulators --a'separate regulator for rail, ports, civil aviation and possibly roads o .Sector regulator - a, single regulator to cover tie entilre transport sector o, Multi-sectorregulator - a regulator that covers the transport sector and some or all of the utility sectors Each alternative has: advantages and 'disadvantages, but scale is likely -to be an important determinant in'the choice. It has to be wondered whether there is a need 'for a specific regulator for one port, another regulator for one railway, a fiurther regulator for one toll road, etc.- Some form of multi-mode or ,ev6en. multi-sector regulator would seem .a much more cost-effective so,luti,n.Technical regulation of civil aviation will reside with the KCAA, though'economic regu$kition might be appropriately handled by.a regulator with wider responsibilities. A regulator is not required in the non-concessioned road sector,, but there is a very definite .need for mnonitoring to ensure' that public funds are being cost-effectively used, priorities followed, contractual terms respected, etc. No new organization is needed to carry out this work, as these activities should be central to the work of the'Kenya Roads Board and its secretariat. The KRB 14 The-profits of the presently concessioned railways in Africa have, so far, been small or negligible. 21 shoW be undertaking both financial and technical audits of the road works funded by the Fuel Levy-to ensure that value-for-money is being:achieved. 7. ' An Agenda for Action It has taken time for Kenya's transport system to move down to its present condition, and the situation will not be easily reversed. While the economy and general population have suffered from the :present arrangements and policies, vested interests have benefited substantially - whether these be suppliers, the purchasers of :surplus land, contractors, civil servants or politic.ians. Such vested interests will develop all manner of arguments to demonstrate that change should not be done, or cannot be done, or will impinge on national sovereignty, etc. But Kenya is not unique, other countries have introduced th,etypes of.change, outlined previously, and have impleinnted the changes successfully. Without major structural change, Kenya is condemning itself to economic mediocrity dependent upon the vagaries of the,world markets for coffee and tea, and the whims of the tourist market and whateyer industry can prosper through air transport. This-As not the economic. scenario for income growth and the generation of employment opportunities. Nor will the present situation be rapidly reversed; it only took 12 months to increase productivity substantially at.the DSM containerte,rminal, but,t,h,eoperator had-reasonable equipments with whicl to workl5. It will take two/three years, at the very least, for a concessionaire to make really substantial improvements on the railways, though there should be some potential to increase traffic on the basis of the existing equipment. Substantial improvements to the main road sector will take even longer to achieve. Contracts must be prepared and bid, detailed designs must be made and then construction would typically take two/three years for a 150 kms section. Moreover, with the. funding constraints,. it might be'five - ten years before the entire main road netiWork is brought up to international standard pavement conditions, and that will depend upon substantially increased funding. It may take as long for the transformation of the ru,ral road netwol*; small local improvements will gradually-aggregate to a comprehensive increase in access. across the network. While it will take time to achieve the overall improvement of the transpbrt system, decisions and/or actions should.be taken immediately. These will either have an impac themselves or will establish the basis for future improvements: Perhaps..the first. and certainly the. most important action .to reverse the. deterioration in the transport sector is a very major change in the philosophic approach of politicians to the sector. They have to start to treat infrastructure as integral to the economic rather than the political process.'Beyond this overarching change in approach, the following should be considered as the steps necessary to implement the strategy Immediate Actions: o Transfer the KAA from the Office 'of the President to the Ministry of Transport and Communications, publish the accounts, and commission an adviser to address the finances of the sector, including the revenues that are directly channeled to the Ministry of Finance,.and to prepare the basis for concessioning the international airports, based on a clear investment plan for JKIA. 6 Commission a transaction adviser to assist with the concessioning of the Mombasa container terminal, the dockyard and marine craft, and the bulk oil terminals. o; Take the decision to transfer management of the main road network to the private sector, monitored by the public sector 15This has not stopped the operator from purchasing new rubber tired gantry cranes (RTG) because the lifting speeds of the leased port RTGs were too slow. 22 o Require the implementation of the existing Ministry of Finance regulation that- all Fuel Levy funded road contracts are supervised by independent project managers/engineers who have professional liability insurance for their activities o Resolve.the pending,bill issue and transfer the legacy of past misma,nagement and excesses from the KRB o Amend the KRB Act to provide adequate funding for the major urban road networks and clarify the respective powers of the KRB and the road implementing agencies. o KRB to prepare and agree with GoK a. Strategy for the Road Sector, including 'a ' prioritized three, year rolling road program and expenditure priorities for developing subsequent revisions, to form the basis foraction by the road impilementing 'agencies., Near Term Actions (1 - 4 years): o& Sell off the plant and equipment 'of the Mechanical and Tr'ansport Department, retrench all the staff, except for those required to advise GCoK on mechanical issues, and find alternative uses for the workshops/land o Complete mhe concessionmg ofKR, .either as a single concession or jointly with Uganda Railways. Prepare plans -to maximfize the value of KR s non-operational land, or land that, in time, could be made,non-oprational'6 o Concession the operational activities at the port of Mombasa .and transform KPA into- a landlord port o Concession,' the international' airports, place the' major domestic airports under management contract, .and transfer responsibilities'for the other airports/airstrips to the Local Authorities or tourist interests. o. Enact legislation and establish. a,regulatory framework for the transport.sector, preferably located under the Ministry of Finance, or perhaps the Office of the President. o Concession the Northern Co idor'as a.privately funded toll road o' Establish a Kenya Highways Agency to manage the main inter-urban road network and a Rural and Small Towns Road Agency'to supervise road activities on the 'rest of the network o. Initiate maintenance concessions and long-term performance based maintenance contracts for the line-haul road network Medium Term Actions (5 - 10 years): o Progressively transfer the management of the entire main road network to private management, supervised by the Kenya Highways Agency o Progressively increase the domestic resource: mobilization for the road sector as conditions improve (to fund the increased'levels/costs of maintenance) saafileO01 M:ARosanary\ANL\T-S-M Vol lApril 2003.doc May 30,2003 2:13 PM l6 The operational activities of KR within the center of Nairobi could be transfenred to the periphery of the city, and the land redeveloped. 23