Business Case and Intervention Summary

Intervention SummaryTitle: Kenya Strengthening Regional Economic Integration What support will the UK provide?

The UK will provide an additional 27.7 million for infrastructure and advice to strengthen regional integration and improve trade competitiveness in Kenya, to be implemented primarily by TradeMark East Africa (TMEA). This will bring our total commitment to regional economic integration in Kenya to 31.45 million. The new resources will be used to address inefficiencies and improve capacity at East Africas largest port, Mombasa, and in associated policy changes, setting up future work on longer term improvements in port operations. This support was foreseen in the DFID Kenya Operational Plan published in April 2011.

Why is UK support required?

Few countries have grown, reduced poverty, and increased job creation, without expansion of trade. In East Africa, trade has been constrained by market size, and by problems that have made the costs of trade high, including inefficiencies at borders. The East Africa Community (EAC) was established in 1999, in part as an economic partnership to tackle common constraints to trade and to strengthen East Africas trading with other regions. DFID took the lead in 2010 in responding by creating TradeMark East Africa (TMEA). TMEA works with the EAC and member states to strengthen economic integration and trade competitiveness. In Kenya, DFID funding - with assistance from Denmark (15%) and others (5%) - is supporting integration and competitiveness via TMEA. UK aid reduces trade costs along the transport corridor from the coast, improves standards of Kenyan goods, helps government meet its integration commitments, and supports the private sector/civil society to influence trade costs.

Poor port infrastructure, cargo clearance and customs procedures at Mombasa port contribute as much as 40% to the cost of trade along the transport corridor to central Africa. A set of priority interventions to reduce costs has been agreed with the Ministries of Transport and Trade, and the Kenya Ports Authority. This will also provide a basis for agreement on longer term improvements. The Kenyan Government is not responding in the face of multiple market and governance failures. UK support is needed to allow this programme to go ahead. Increased funding will be part of a wider expansion of DFID support for TMEA regionally, recognising progress it has already made and opportunities to build momentum.

What are the expected results?

Investment in the port, alongside TMEAs existing programme, will reduce transport times along the northern corridor by 15% and increase Kenyas exports by 10%. There will be benefits for Uganda, Burundi, and Rwanda. Specific results by 2016 will include:

An increase of $750-800 million in Kenyas exports in sectors that will impact the poor. A reduction of up to 1.5 days to clear imported goods through Mombasa Port.

A reduction of up to 4 days in the time it takes to move a container into/out of Kenya.The programme will have an indirect effect on regional economic growth, jobs and incomes.

Business Case

Strategic Case

A. Context and need for a DFID intervention

1. The aim of this programme is to increase growth and reduce poverty in Kenya, through greater regional economic integration and improved trade competitiveness.

East African regional economic integration

2. There has been significant growth in East Africas exports in recent years but the regions share of world exports still remains below 0.1%. Small markets mean firms cannot benefit from economies of scale and export costs are high it costs East African countries twice as much to trade than East Asia and developed countries. Transport costs in particular are excessive freight costs per kilometre in East Africa are more than 50% higher than in the United States and Europe and add nearly 75% to the price of exports from Uganda, Burundi and Rwanda. The problem is not just one of distances inefficient customs processes, excessive bureaucracy and poor infrastructure all impose substantial transport delays and significantly increase costs.

3. Table 1 from the World Banks 2012 Doing Business Report illustrates the extent of the challenge which affects imports as well as exports. East African countries appear very close to the bottom of international rankings both in terms of the particular challenge of trading across borders as well as the more general ease of doing business.

Table 1Doing Business 2012 reportBurundi

Kenya

Rwanda

Tanzania

Uganda

Ease of Doing Business Rank

169

109

45

127

123

Trading Across Borders Rank

174

141

155

92

158

Documents to export (number)

9

8

8

6

7

Time to export (days)

35

26

29

18

37

Cost to export (US$ per container)

2,965

2,055

3,275

1,255

2,880

Documents to import (number)

10

7

8

6

9

Time to import (days)

54

24

31

24

34

Cost to import (US$ per container)

4,855

2,190

4,990

1,430

3,015

4. The East African Community (EAC) was established in 1999 by Kenya, Tanzania and Uganda to increase trade by overcoming the challenges of small market size, and to strengthen regional political cohesion. Burundi and Rwanda subsequently joined in 2009. South Sudan announced its intention to join in mid-2011. Together the EAC grouping of states have a total population of around 130 million and GDP of $79.5 billion. They share similar resources and trade profiles and in many respects also share a common history. 5. Protocols have been signed to establish both a customs union (2004) and common market (2010) to transform East Africa into a single, larger economy. The customs union is moving close to full implementation only a few exemptions from the common external tariff are still in place, although considerable work remains to remove non-tariff barriers and implement a revenue sharing arrangement. The common market is scheduled to be fully implemented in 2014, although this timing is likely to slip. The creation of a larger market will allow producers and traders across the region to exploit economies of scale, increase investment and accelerate the introduction of new technologies. It is also expected to increase political stability and provide a focus for shared legislative and regulatory reform.

6. Since the customs union protocol was signed, intra-EAC trade has increased significantly - between 2006 and 2010 total intra-EAC trade grew by 135% as many of the internal tariffs between EAC member states were removed. Total trade grew by 62% in the same period and intra-EAC trade as a share of total trade grew by 7.8% to 11.38%. Partner states have grown faster on average than the rest of sub-Saharan Africa - annual per capita growth averaged 6.3% between 2005 and 2010. But this average growth rate is insufficient to unlock the necessary higher jobs and incomes growth needed to address the jobs gap, which in Kenya alone, according to the World Banks Kenya Economic Update of December 2011, exceeds half a million new entrants to the labour market each year.7. Evidence from a range of studies points to improvements in the business environment associated with trade competitiveness leading to improved growth, jobs, incomes and social effects. The relationship between trade, growth and poverty reduction is complex and the evidence is difficult to interpret however. This recent East African experience illustrates the general point that very few countries have grown over long periods of time or secured a sustained reduction in poverty without a significant change in competitiveness and a large expansion of their trade. Poverty reduction in broad terms has followed as a consequence of increases in income, employment and government social expenditures. There are risks and opportunities, however, for particular poor groups (and regions) as increased trade changes the profile of livelihood possibilities. There are also different gender effects women may benefit less from increases in formal employment but benefit more from improved management of the informal economy and informal trade where they predominate. Whilst increased trade may be a necessary condition for economic development it is not always sufficient.Kenya and the EAC

8. There is strong political support for East African integration in Kenya, with leaders anxious to avoid the problems that led to the collapse of the original EAC in the late 1970s. Kenya has so far set an example in a number of respects in implementing regional agreements Building on this commitment is central to the challenge of accelerating integration and increasing trade across the region. Kenya is by a significant margin the largest economy in the EAC and accounts for nearly half of all its economic activity. It provides a potentially large market for other countries and crucially is the geographical link to markets outside the region for Uganda, Rwanda and Burundi - 95% of all trade to and from Uganda, Rwanda and Burundi passes through the Northern Corridor which starts at Mombasa Port and runs for 55% of its total distance across Kenyan soil.

9. Like other EAC countries Kenyas trade with member states has grown significantly since the agreement of the customs union protocol exports to EAC countries increased by an annual average of 13.5% between 2004 and 2008 and imports from EAC countries (although from a small base) quadrupled over the same period.

10. But as Table 1 highlights (and as elsewhere in the region) a set of problems captured under the broad headings of poor infrastructure and excessive red tape mean that Kenya remains a difficult environment in which to do business and from which to trade with other countries - in 2012 109 out of 183 countries on ease of doing business, and 141 on trading across borders. Addressing the continuing challenges that underlie these rankings is central to the development of closer regional partnership and the growth of trade in both Kenya and other EAC countries.Transport infrastructure and inefficiency at Mombasa port

11. The poor state of transport infrastructure within Kenya ensures that freight costs are high and competitiveness is reduced. Road and rail networks are both in bad condition. But the single biggest contributor to the cost of transporting along the northern corridor (40%) is fixed port charges and time delays at Mombasa port as a consequence of the inadequacies of port infrastructure, and burdensome documentation, cargo clearance and customs procedures. In total more than 90% of all delays along the northern corridor are estimated to be at the port. Administratively these areas fall under the Kenya Port Authority, an agency connected to the Ministry of Transport, and the Kenya Revenue Authority, an agency connected to the Ministry of Finance.12. The port has already exceeded its design limits, but as trade grows is expected to handle increasing volumes of imports and exports - traffic is forecast to grow by up to 400% in the period to 2030. The port development programme set out in a port master plan is at least 10 years behind schedule, and the master plan itself is outdated and takes no account of wider sub-regional development issues (discussed below). High berth occupancy rates and periodic episodes of extreme congestion illustrate that the port is already stretched to beyond maximum capacity. Major improvements in efficiency alongside new investment are essential to prevent further large increases in vessel delays, port congestion surcharges and customer costs, and continued knock on effects on regional competitiveness and economic growth .13. A major investment in a new container terminal at Kipevu West is underway, funded by Japan, which is due for completion in 2015. Officially gazetted plans to privatise port operations through a landlord port authority are in place, enabling port and maritime regulatory functions to be separated from port management and operations (which can then be outsourced). These are not likely to proceed ahead of Kenyas elections in 2013. There are a number of interventions that in the short term can improve the ports capacity to both service ships at the quayside (reducing ship waiting delays) and move cargo more effectively in and out of the port gates - with significant regional economic effects.

14. These improvements need to take place in an environment that has been historically difficult to reform as result of a complex set of economic, political and regional interests in port operations. In particular

Kenya Port Authoritys role as an employer together with its resources have made it extremely susceptible to political interference (at both board and management levels); Kenya Revenue Authority and its management of the administrative procedures applying to movement of goods are perceived to be dependent on uninterested and distant administrators;

Plans to improve efficiency, including through privatisation and the mechanism of a landlord authority, have been opposed by groups including the Dockworkers Union, coastal politicians and indigenous coastal residents because of concerns it will allow elite groups to acquire port assets and businesses, in a way that further marginalises coastal communities .

Those who benefit from inefficiency and delay (through legal services and charges as well as corruption) have a vested interest in blocking change.

15. Over time, however, change is becoming more difficult to resist. Increasingly pressure for port reform is building from a combination of external and internal forces that include: an improved governance environment partly a consequence of the new constitution;

high level political lobbying by the Presidents of both Rwanda and Uganda about the impact of inefficiency on their economies and wider regional integration;

increased competition from neighbouring ports;

lobbying by the business community on the impact of inefficiency on growth, incomes and employment;

pressure from global terminal operators; and

the increasing recognition of the scale of the problem as regional economic output increases and traffic levels grow.

Weaknesses and delays in customs and clearance processes

16. Delays faced by importers and exporters at Mombasa Port because of capacity constraints are compounded by inefficient customs processes - which in many cases are linked to entrenched corrupt practices. The problem extends to customs operations at Kenyas land borders. Traders are frequently unable to obtain and submit documents ahead of arrival at border crossings. Requirements on either side of borders are often duplicated (including the need to arrange transit bonds). There is little coordination between national agencies and little sharing of information. Customs checks are onerous and do not take sufficient account of risk.

Non-tariff barriers and product standards

17. In addition to the problems caused by inefficiencies in Mombasa port and in its direct customs and clearance processes:

Kenyan traders spend substantial time visiting a large number of agencies fulfilling requirements related to regulatory information permits and trade licenses as well as certificates related to product standards.

Excessive numbers of police checks and weighbridges (often linked to corruption and the payment of petty bribes) add to delays and costs for both Kenyan traders and traders from other EAC countries using the northern corridor. Between Mombasa port and Malaba on the border with Uganda there are seven separate weighbridges.

Exporters face major challenges in understanding and meeting the product standards required to trade with other countries. Within the EAC, standards frequently vary so that, for example, those trading with or through Kenya must meet the costs of complying with different standards and securing multiple certificates. (Kenya, for instance, does not recognise the health and safety certificates issued in other countries.) The institutional structure for addressing standards issues in Kenya is often criticised for preventing Kenyan businesses exporting efficiently, with the specific responsibilities of the Kenya Bureau of Standards and other parts of government poorly defined and often overlapping.

18. A mechanism for monitoring and eliminating these types of non-tariff barriers to trade has been established by the EAC, but there are currently no sanctions in place to support its enforcement

Private sector and civil society engagement

19. Kenyas private sector and civil society is the largest and most vibrant in the region, but is not always effectively engaged in national decision-making related to regional integration and the expansion of trade, or local decision making and dialogue in Mombasa. There are concerns as a consequence that policies do not always reflect the interests of the private sector, and both individuals and businesses do not appreciate and are not prepared for new regional trading opportunities. Past approaches to addressing the problems of Mombasa port represent a particular example of the neglect of private sector interests. Within Mombasa, limited engagement with the wider stakeholders of the port, including private employers, labour unions, the education sector and other stakeholder groups has led to a perception of disenfranchisement from policy related to the port and associated wealth creation mechanisms. In Mombasa, with its particular coastal culture and sporadic community violence, this represents a risk to competitiveness, economic growth and development.Kenya Government capacity to implement regional integration agreements

20. The EAC agenda is broad and complex, involving a large number of government departments and requiring member states to engage extensively with the EAC secretariat and with both private sector and civil society. EAC negotiations, the implementation of agreements, and consultation and monitoring processes place significant strain on the limited resources available within the Kenya administration. The Ministry of the East African Community (MEAC), which takes the lead in managing and co-ordinating Kenyas response, requires substantial support to develop its capacity, alongside other Ministries involved in formulating policy that will enable Kenya to maximise the benefits from regional integration. UK Policy21. Support for regional integration in Africa is a priority for UK policy. The 2011 White Paper on trade identifies support for African trade and regional integration as essential to promote growth and poverty reduction. The DFID 2011-2015 Business Plan has commitments on regional trade, including a target to cut by 30% the average time taken for goods to cross international borders in at least five locations in Eastern and Southern Africa. 22. The UKs strong support for integration in the Africa region is captured in the Africa Free Trade Initiative (AFTi), which was launched by the Secretary of State for International Development in February 2011. This initiative aims to build on the political momentum for economic integration in Africa and to help create a coalition of public and private investors to overcome trade barriers. Major commitments have been made to help cut the red tape that hinders trade, to improve regional infrastructure, and to support the reduction of tariffs through the negotiation of a Free Trade Area covering the EAC, and two other African regional economic communities, the Common Market fort East and Southern Africa (COMESA) and the Southern African Development Community (SADC).

Support for integration and trade competitiveness through TradeMark East Africa

23. In this context DFID financial support for regional integration in East Africa has grown substantially in recent years. TradeMark East Africa (TMEA), was launched by the UK Parliamentary Under-Secretary of State for International Development in February 2011, with Kenyas Prime Minister Odinga, the President of Burundi, the EAC Secretary General, representatives of the other EAC community states, and the Head of DFID Kenya, as a mechanism though which much of this support has been provided.24. TMEA is a company limited by guarantee that has been created to design and implement programmes to address obstacles to accelerating economic integration and increasing East African trade. DFID played the lead role in TMEAs establishment. It has its headquarters in Nairobi with other offices in Arusha, Bujumbura, Dar es Salaam, Juba, Kampala, and Kigali.

25. TMEAs focus is on interventions to improve regional infrastructure, transport and trade facilitation (including customs processing), the effectiveness of national and regional institutions, and private sector and civil society engagement in regional integration. 26. TMEAs strength lies in its single dedicated focus, multi-donor funding and nimbleness in response to need. It offers a unique mechanism for coordinated programming across regional and country programmes.

27. Its operational strengths, based on this sharp focus, are that it can:

promote a regional perspective in decisions about national investments and bring national efforts together to secure shared gains (for example by sharing facilities and systems at border posts); promote regional interventions to replace separate inefficient national systems (for example in the management of customs bonds for transit traffic); help design mechanisms that can be effective in enforcing EAC decisions and develop common systems for monitoring implementation that can be easily aggregated;

ensure a consistent approach to building regional and national capacity (that reflects the challenges in formulating and implementing EAC decisions); pool finance from a number of donors based on the single mission focus.28. DFID has so far committed a total of 85.44 million from regional and country aid allocations for TMEAs programmes. At the same time TMEA has also successfully attracted almost exactly the same level of funding ($131.4 million) from other donors Denmark, Sweden, Netherlands and Belgium. DFIDs support currently includes an allocation of 3.75 million for TMEAs Kenya country programme, alongside $10.56 million from Denmark. Expanding DFID Kenyas programme support to regional integration29. In the initial period following its establishment TMEA has maintained a strong focus on creating the institutional framework required to implement programmes including management and expert staffing, accountable governance arrangements and appropriate systems for planning, monitoring and evaluation. Essential networks and partnerships have been created with national and regional stakeholders in the integration process.

30. Progress has also been made in undertaking research and gathering evidence on the impact of the programme, including relationships between trade, growth and poverty reduction. All TMEA funding partners are committed to contributing to economic inclusion and poverty reduction, and the TMEA programme will affect people across Kenya and East Africa. 31. Already in its Kenya country programme TMEA has: developed bills to align Kenyan laws to EAC commitments and modernize Kenyas trade policy;

developed new information systems that allows customs clearance documentation to be obtained and submitted online before reaching borders; strengthened implementation of EAC regional integration policies through support to the Ministry of East African Community;.

started to support private sector organisations (PSOs) in complying with national and regional product standards, including Kenyan tea growers;

started to support PSOs in advocating for policy change including an advocacy campaign by Kenya Shippers Council that has led to both a new approach to axle load harmonisation and important changes in Mombasa port.

32. The first eighteen months of operation have highlighted the potential TMEA has to make an impact on regional integration and growth in East Africa the 2011 annual joint donor review reached favourable conclusions about performance compared to other regional trade and integration programmes. Planning based on detailed appraisal of needs and priorities at both regional and national level has highlighted the need for higher levels and greater certainty of funding to build on the momentum that has been created and make the investments that analysis highlights are essential in the medium term.

33. Donor partners have endorsed TMEAs approach and strategy through the TMEA Programme Investment Committee (PIC), which has agreed to a scaled up programme for which the total operational budget has at present been set at $465 million over the period 2010-2016, compared to funding of $264 million that is currently committed. In taking this view, donors and the PIC have focused on the need and opportunity to increase the scale of interventions to achieve high level targets for reducing the costs and increasing the volume of East Africa trade. This has also taken into account provisional indications of the availability of extra funds from DFID (see below). Table 2 shows the approved budget disaggregated by country and regional programme and highlights funding gaps. Further financial commitments are particularly required for Kenya, Uganda, Burundi and regional programmes affecting inter alia investments in: Mombasa port; border posts between Uganda/South Sudan and Burundi/Tanzania; and other regional infrastructure. Table 2: TMEA budget and funding commitments 2010-2016

ProgrammeCurrent commitment

($ million)

Operational budget

($ million)

Funding gap

($ million)

Kenya16.52

57.94

41.42

Uganda

21.66

63.55

41.89

Tanzania

36.74

49.15

12.41

Rwanda

25.25

33.01

7.76

Burundi

29.64

49.81

20.17

South Sudan

20.28

20.28

0

Regional infrastructure (including border posts)

46.74

85.53

38.78

Other core regional funding

66.97

105.75

38.78

Total

263.8

465.02

201.21

34. DFID anticipated the strong case for scaling up support to regional integration in the bilateral aid review. Additional funding has been set aside in both country and regional operational plans as part of this process. Table 3 shows this pipeline finance by programme alongside existing commitments. In total the additional resources provisionally set aside will increase DFIDs commitments to TMEA over the period 2010-2016 from 85.44 million to 215.44 million. This will be sufficient to close funding gaps. It will increase DFIDs share of total donor funding commitments to TMEA sharply Table 3: TMEA DFID Funding

TMEA programme

DFID committed funding

( million)

Provisional additional DFID funding

( million)

Kenya

3.75

26.7

Uganda

7.5

27.0Tanzania

16.6

8.0

Rwanda

8.0

5.0

Burundi

6.5

13.0

South Sudan

6.59

0

Regional infrastructure (including the border post focused East African Transit Improvement Programme)

30.0

25.0

Other core regional funding

6.5

25.0

Total

85.44

129.7

35. The commitment of additional DFID funds requires approval of a number of separate business cases. This business case covers proposed additional funding for the Kenya country programme which will increase commitments to regional integration, mainly through TMEA (who will receive 26.7m of the new 27.7m), from 3.75 million to a total of 31.45 million and the current share of TMEA Kenya funding from 35% to 81%. Other donors are continuing to commit funds, including for example a recent commitment of an additional $9m, but this is not specifically ring fenced for Kenya (although it is currently planned for Kenya) so is not included in the calculation of share. 36. It is anticipated that as implementation proceeds, further proposed interventions will arise directly related to the current project; for example in further work on rail and other physical improvements, on technical ports management advice, on Customs processes, and on longer term reform. In all cases additional resource allocation will be subject to approval through a separate submission. Longer Term Port Reform and Mombasa Political Economy37. Mombasas port and nodal characteristics have made it a centre for the logistics industry. Despite it being the largest port on the East African coast, Mombasa civil society groups indicate that there is a local perception of disenfranchisement from economic benefits - and from decision taking over the port and economy of Mombasa. Exacerbating this, perception is the predominance of non-coastal appointees and absence of maritime skills and knowledge on the Boards of Kenya Ports Authority, Kenya Maritime Authority, and Kenya Revenue Authority (who manage the port customs system).

38. It is recognised that over a long period of time a combination of forces with different interests has worked to undermine the pace and scale of reforms at Mombasa port. As part of a wider approach of ensuring that programme strategies reflect a sound understanding of their socio-economic and political setting, TMEAs approach in Mombasa has been based on an initial analysis of political economy issues, engagement on socio-economic and political economy issues within the donor community, and with stakeholders in Mombasa and elsewhere, all of which will be a continuing feature of the programme.

39. TMEA has opted for an operational strategy of incremental engagement to help address capacity and efficiency challenges and support the processes of institutional and regulatory reform. The programme that has been discussed with KPA is judged to be uncontroversial, to provide a basis for effective intervention that will produce real benefits but does not depend upon other change. At the same time the programme can build positive momentum, trust, and relationships which coupled with both external and internal pressure can help lead to more transformative reform especially KPAs conversion to a landlord authority.

40. As discussed previously the external forces pushing the port towards modernisation include Presidential level attention shown by Rwanda and Uganda, sustained lobbying by development partners, competition from neighbouring ports, and the continuing rise in regional trade. Strong Internal pressure is being applied by the business community through business membership organisations. 41. There is an expectation that after the election, now scheduled for March 2013, the improving governance environment made possible by Kenyas new constitution can provide a framework in which this pressure will substantially increase and the modernisation agenda move forward.

42. The current approach at a regional, national and local level includes:

Regional:

engaging in Arusha and in national capitals in the region, with Presidencies, relevant Ministries, and private sector stakeholders, to build a coalition for change at the EAC level; already resulting in Uganda and Rwanda pressuring Kenya; working closely with the regional private sector to support their campaigns to improve port performance, for example with the East Africa Business Council (successful in getting high level attention on port problems; already lobbying in tripartite meetings; working with the international community to lobby for formal engagement on the port and non-tariff barriers (NTBs); .National:

maintaining relationships with politicians, officials and Ministers in Kenya (especially in the Ministry of Finance and Ministry of Transport) while allowing other official partners, especially JICA and the World Bank, to manage more formal policy dialogue; Mombasa is now one of the main medium term policy (MTP) dialogue points; the development of a strong working relationship with KPA (and Kenya Revenue Authority (KRA)) delivering support that is jointly agreed and managed; this has led to agreement on a joint programme implementation management structure; developing support through the private sector, with for example the Kenya Manufacturers Association and the Kenya Private Sector Alliance which take a lead in public-private dialogue in Kenya; that has already secured 24 hour port working;

partnering in the formation of a donor co-ordination group for Mombasa port with selected partners (Japan, World Bank and others, which will form the core of a planning group for the post 2013 elections; which has now met under a DFID Chair; opening a broader dialogue with Kenya Revenue Authority (KRA) to explore support to impact inefficient customs and clearance processes (linked closely to corruption) which account for the largest proportion of cargo dwell time at the port; on which several meetings have been held, and KRA have made an early positive response;Local:

closer engagement with the local business community and local civil society in Mombasa, and businesses including shippers, transport companies, including establishing a Mombasa stakeholder forum; on which a first workshop has been held; regular dialogue in Mombasa by TMEA senior management, particularly as the new devolved governance system comes into play; the TMEA CEO and Country Director have now held a series of meetings in Mombasa;Overall:

collaborate with the other members of the Kenya international community on a political economy and reform strategy approach; and extend political economy analysis to reflect devolution and other changes in 2013 and beyond.43. The recent history of private engagement in Mombasa and market distortions caused by lack of reform and political interests, coupled with problems of public ownership and land rights, mean that the private sector will not engage in funding this kind of investment linked to a public body. PPP legislation and policy may change these circumstances in some five or more years, enabling other critical infrastructure to proceed. Public bodies are constrained by perverse political economy issues, and by the stasis induced by coalition government and post-2007 election circumstances. Designing and budgeting for reform work in KPA, a non-departmental public body controlled through the Transport Ministry, is characterised by the fact that no major physical changes have taken place at the port in recent years (other than those externally funded), and no systematic changes since the 1960s.

44. For these reasons, and given 90% of constraints are at the port, DFID financial support is essential in the short term to make progress delivering UK regional integration objectives. In the longer term, policy and budgetary reform will be needed after the election.

B. Impact and Outcome that we expect to achieveImpact statementGrowth of Kenyan exports in sectors that will impact the poorOutcome Statement Increased trade competitiveness in Kenya Principal results by 2016 include:

Increase in total value of exports from Kenya to the rest of the world of more than $789 million

Up to 1.5 day reduction in the average time it takes for imported goods to be cleared from Mombasa port Up to 4 day reduction in the time it takes to move a container into/out of Kenya

70% of Kenyas EAC common market commitments implemented. 45. The elements of the results chain (or intervention logic) that will deliver the expected outcome and impact are presented below. Results will be delivered through interventions that (a) reduce transport and trade-related costs along the northern transport corridor, including at Mombasa port; (b) support increased implementation of Kenyas regional integration commitments; (c) facilitate greater standards recognition, harmonisation and compliance; and (d) support the private sector and civil society to positively influence regional integration policies and practices that facilitate increased trade.

Appraisal CaseA. What are the feasible options that address the need set out in the Strategic case?46. There are three options, detailed below. The process leading to the three detailed options extends back to the 2008 post-election period prior to the formation of TMEA. The results of the initial appraisal were discussed and included in DFID bilateral aid review bids, and then in the approved Operational Plan for DFID Kenya. Work on these options was continued jointly with Africa Regional Division and through TMEA. It has involved review of previous work in Mombasa and on wider regional trade facilitation, detailed analysis with a range of donor and Government stakeholders, and discussion with the regional private sector. 47. Alongside the three options noted below, a number of options have been considered and discarded. The discarded options are:

Providing further resources toward roads improvement within Kenya. This option was considered but discarded because the sums involved to make roads improvements viable alternatives in achieving the intended impact would be excessive compared to the resources proposed below at Mombasa, where 90% of the physical constraints lie. The option to raise PPP funds for roads is however being appraised and tested over the next five years through the World Bank/IFC, in a wider PPP programme, that DFID supports. On a proposal to support border crossings, TMEA is already working on the strategic border crossings and it has been agreed that the results of this work will be tested prior to any further round of border crossings in Kenya to avoid diminishing marginal returns.

The option of doing nothing further. This would involve no further release of funds. This would be inconsistent with investments made in establishing TMEAs institutional capacity, potentially undermine support it receives from other donors, and suggest concerns about TMEAs performance. It would also contradict the importance DFID attaches to regional integration. Critically, since 90% of constraints lie in Mombasa, it would constrain achievement of agreed regional goals.

The option of providing support for regional integration through implementation mechanisms other than TMEA. This option would be inconsistent with the decisions that have already been made to use TMEA as the conduit for DFID support for regional integration in East Africa. It would fail to take advantage of the institutional capacity which has already been established and the understanding of issues and the influence to address them, representing worse value for money outcomes. Critically, the independent focus, flexibility and responsiveness that is the TMEA core offer would be put at risk, and this would slow up the rapid implementation process that TMEA offers.48. Detailed appraisal and negotiation has taken place with Ministries, KPA and others, based on the options outlined below. Negotiations with KPA have led to both a conditional MoU between KPA and TMEA, and the recent inclusion of TMEA staff in management discussions at the port. Option 1: Maintain support for TMEAs Kenya programme at the levels agreed in 2009 when DFID Kenyas PRIME programme, including core TMEA funding, was approved 49. This option will concentrate funding on interventions that will:

improve quality and reliability of transport data for the northern corridor - contributing to better policymaking and improved corridor performance; improve processes for managing border traffic to complement regional investment in border posts (integrated border management and customs risk management); ensure Kenyan policy on standards is consistent with regional agreements, and introduce equipment to improve testing of products; help exporters meet standards that have been agreed across the region; improve the governments trade policy capacity to implement EAC commitments, especially on the customs union and common market; increase support for regional integration through private sector and civil society advocacy;

increase capacity of private sector organisations to help members manage trade processes and improve product standards. 50. The beneficiaries and implementing agencies are the Ministry of Trade, Ministry of Transport, Ministry of East African Community, Kenya Bureau of Standards (KEBS), and private sector and civil society organisations (PSOs and CSOs) such as the Kenya Association of Manufacturers (KAM), Kenya Private Sector Alliance (KEPSA), the Kenya Shippers Council (KSC) and the Fresh Produce Exporters Association (FPEAK).51. TMEA Kenya predicts that the combined impact of the above interventions will enable them to achieve a 7% reduction in transport times and a 5% increase in export growth in Kenya (as well as make a significant contribution to similar results in other EAC member states).Option 2: Significantly increase DFID support to allow TMEA to make strategic investments in Mombasa port that will reduce port congestion and transit delays 52. This option will maintain funding for the activities TMEA is planning under option 1 and at the same time provide additional finance for investments in physical improvements at Mombasa port that individually reinforce each other to create a significant enhancement in the port logistics chain. This option recognizes 90% of delays along the northern corridor are at the port of Mombasa, and these delays significantly reduce trade competitiveness in Kenya and across the region. TMEA proposes to work with Kenya Ports Authority in particular to make investments in: improvement of rail infrastructure within the port, including for shunting and access for mainline trains; thus shifting traffic from road to rail; improving yard facilities, including by investment in equipment and making berth repairs; upgrading port roads and port gates and improving traffic flow arrangements within the port; upgrading urban roads and truck waiting areas in the urban area; port-wide productivity improvement (through assessment of actions to address issues); building institutional capacity of port authorities including specific TA and coordination to programme management of port improvements.53. TMEA estimates that investments at Mombasa port will enable them to achieve a 15% reduction in transport times and a 10% increase in export growth. This additional impact will be achieved by interventions that make the best use of existing facilities and work within the current organisational framework to increase capacity and improve efficiency (discounting the possibility of privatisation in the short term). This option will also facilitate engagement and relationships in Mombasa, and with the Port stakeholders, facilitating the feasibility of longer term improvements.Option 3: This option will provide further flexible funds to TMEA in the immediate short term to enable them to react to new and emerging need in the next year.54. This option will maintain funding proposed under option 2, but will facilitate the early engagement of TMEA on: additional physical infrastructure works at the port and immediately outside the port; and early technical assistance to KRA on customs. This option recognises the urgent need for increased focus on moving from road to rail, and will involve early realisation of potential investment plans in:

further redesign and rerouting of train track around the main rail access and egress points to the port; detailed design and costing of works with KRA on customs systems and operations; initiating full technical assistance work on improved customs systems in advance of and in anticipation of selection and procurement of new IT systems; procurement and installation of new customs IT systems compatible with international standards and best practice.55. The proposed interventions have not yet passed concept stage and impact has not yet been appraised. The benefit that this option offers is in the pre-commitment through TMEA to partners that will enable TMEA to maintain the momentum of change at the port and to make full or partial commitments as each element of the above proposed next steps comes into play (likely over the next six months). These interventions would be in line with the improvement programme that KPA strategy envisages, the agreement with KPA, and reflect current discussions with the KRA.56. Under option 2, and 3, TMEA is committed to: work on closer engagement with the broad stakeholder community in Mombasa to ensure that the do no harm principle is addressed; work on TMEA private sector and civil society dialogue directed specifically toward engaging Mombasa-based business and civil society partners; TMEA is also committed to work with partners, including the Dockworkers Union, on establishing workers perceptions of benefits of reform at the port, enabling engagement on future improvements to function more effectively. TMEA is committed to supporting development of a coalition of interest to lever longer term improvements at the port. 57. Under these three options TMEA Kenyas proposed investments will be closely co-ordinated with TMEA investments regionally and in other countries to maximise their impact as part of TMEAs wider efforts. TMEAs programmes will also be closely co-ordinated with other initiatives including Japanese, Danish and other donor support. Investment in Mombasa port under Option 2 and 3, in particular, will complement the construction of the new Kipevu West container terminal, supported by Japan.

B. Assessing the strength of the evidence base for each feasible option58. In response to discussions on the evidence base, it was agreed that TMEA commission an on-going review of evidence with the first report to be finalised in January 2013. This work has been undertaken for TMEA by the Institute of Development Studies (IDS), and has resulted in new draft evidence review papers. Information includes: evidence on individual interventions in trade facilitation and regional integration; evidence on growth effects of regional integration and trade; links between trade, growth, and poverty. 59. The evidence review provides a significant uplift in the base on which to assess the likely impact of TMEA interventions. Overall the review confirms that, as has been discussed, trade facilitation programmes are necessary, but may not be sufficient, to address poverty. The review concludes that the extent of poverty and inclusion impact may depend on the extent to which sectors that benefit from changes engage the poor; the impact they have in a local context ie the way in which a local supply chain is integrated into the sectors that will benefit from change; the propensity for the changes to reduce consumer prices and/or increase exports; and on the effects in the local labour market do earnings and jobs numbers rise in the locality? 60. A question in the context of Mombasa is thus: is the East Africa transport sector structured in such a way as to pass benefits through to the poor, or are they likely to be captured by cartels? Some evidence on these issues is available from three studies: a World Bank supported study on East African maize marketing costs in 2009; a 2012 TMEA port strategy document; and an IBRD transport prices diagnostic study published 2009. Important conclusions from these studies are that: the transport sector has a broader structure and is competitive compared to West and Southern Africa (where cartels control trade movement), with 60% of Mombasa container traffic belonging to small traders that contract with a range of local transport companies; that a reduction in transport costs will lead to a reduction in transport prices to third parties, and that in the maize study 76% of maize marketing costs were transport costs. It is thus possible to conclude, as the three studies do, that savings in time and costs are likely to be passed on - lower marketing costs could be expected to benefit poor people through lower prices. 61. The recent TMEA/IDS review papers conclude that evidence is ambiguous on some interventions and dependent on local circumstances. But TMEA has embarked on the process of testing the evidence base, and is committed to bringing further evidence to bear on assessment of the impact of its work. Further detail on TMEA plans is provided in the monitoring and evaluation section at the end of this business case.62. In Table 4 below the quality of evidence for each option is rated as strong, medium or limited. The evidence is provided for each of the projects that TMEA Kenya is planning to implement under each option and indicates the probability that each activity will achieve the desired output. Table 4: Quality of EvidenceOption

Evidence rating

Justification

Option 1StrongMedium

Low/MediumLow

Medium

LimitedStrong

LimitedLimited

Regional integration and trade

The evidence linking regional integration with increased trade is strong. According to an overview of the literature conducted by IFPRI in 2009, empirical models overwhelmingly show that in regional trade areas aggregate trade creation dominates trade diversion. The models also indicate that welfare for all members both current and potential increases when regional trade areas expand. There are even bigger welfare gains when models incorporate aspects of new trade theory such as increasing returns, technology transfers, trade externalities, and dynamic effects such as links between trade liberalization, total factor productivity growth, and capital stock accumulation.Studies also suggest that regional trade has a better poverty focus than other trade i.e. it comprises products that involve the poor more directly.Trade and growthA number of studies support a correlation between openness to trade, levels of trade and growth.

It is also argued that trade is associated with productivity gains and increased long-term growth as a result of technology transfer and the impact of competition on incentives for learning and innovation.

However systematic analysis of the relationship between trade liberalisation and growth is difficult because of the problems of identifying causality and isolating impacts (for example in growth regressions).

Trade growth and poverty

Systematic empirical analysis of the link between regional integration trade, and poverty is also difficult in practice, particularly as translating the benefits of trade into poverty reduction often depends upon complementary conditions such as education and healthcare provision. However trade liberalisation has been observed to be accompanied by reduced income inequality in low-income countries.And very few countries have grown over long periods of time or experienced a sustained reduction in poverty without experiencing a large expansion of their trade.The Society of International Development (SID) (2010) has calculated that in Kenya a 1% increase in national income translates into a 0.59 % increase in rural employment over the long-term, demonstrating that growth benefits the poorest groups.

Transport ObservatoriesThere are a number of studies that support the importance of transport data collection for policy-making and the development of tools for road management. Design of the transport observatory project for the Northern Corridor is informed by the evaluation of previous monitoring arrangements along the corridor based on annual surveys. This assessment identified a number of shortcomings with the survey approach, including the problems of adherence to agreed schedules and formats for data collection and submission, and the difficulties of ensuring data quality. The transport observatory design replicates a model used successfully elsewhere. The 2008 evaluation of the South-East Europe Transport Observatory project for example concluded that the observatory had successfully contributed to the socio-economic development of the region. Integrated Border Management

TMEA plans to establish One Stop Border Posts (OSBP) throughout the East African region. Kenya will benefit from OSBPs at the Kenya-Tanzania border at Taveta, and the Kenya-Uganda border at Busia. OSBPs are developed within the context of a regional Integrated Border Management (IBM) system, as the OSBP infrastructure is not a solution to more efficient border crossing in isolation. The development and implementation of a national IBM system involves integration of border agency systems and as much processing behind the border as possible.

The OSBP established at the Zambia-Zimbabwe border at Chirundi is the first and only operating OSBP in Africa and operates within an IBM framework. The streamlining and harmonisation of border procedures has reduced the average time to cross the border from 67 hours in 2007 to 10.5 hours in 2011. Traffic volume has increased by 48.7% during the same period and average monthly revenue collections have increased from ZMK102 billion to ZMK 133 billion. Research on Integrated Border Management (IBM) alone highlights the impact a well-implemented system can make in reducing clearance delays and costs. The IBM system in Mauritius for example has: reduced the processing time of customs declarations from an average of four hours to about 15 minutes; resulted in greater transparency of procedures, elimination of paper returns, and improved productivity; and offered significant improvements in financial efficiency and profits..

In the US better integrated border management activities have similarly reduced costs for both the government and the trade community through more simple, accurate, efficient, and predictable processes. Government processing of international trade data has also significantly improved. Dynamic Customs Risk Management systems

Evidence on the impact of dynamic customs risk management systems show significant returns for both government and traders (in diverse contexts e.g. New Zealand and Cameroon). The benefits for government have included improved governance based on objective criteria rather than arbitrary controls: increased revenue through greater efficiency; and improved performance monitoring of customs officers and services. Benefits for traders have included reduction in the time and costs associated with processing consignments and improved predictability in the nature and level of controls associated with particular consignments.Harmonisation of standards and standards testingThere is strong evidence on the benefits from harmonising regional product standards. A 2012 World Bank study advocates the harmonisation of regional dairy standards in East Africa as a method of increasing regional trade in dairy products, improving technological capacity, and improving the quality of products based on experience elsewhere. Within Mercosur, for example, intra-regional exports in dairy products grew by 13.9% between 1999 and 2000 as a result of a reduction in costs when standards were harmonised. Harmonisation of standards had a similar effect on intra-regional trade in a number of other areas including cars and trucks, the food industry and cosmetics.

Support to national government

Technical assistance provided by DFID to the Kenyan Ministry of East African Community between May 2009 and August 2010 led to the strengthening of its organisational structure, HR systems and strategy and policy functions (TMEA 2012 review). Elsewhere in the region experience also shows that capacity building support to EAC ministries has enabled them to play a critical role in coordinating a wide regional integration agenda. In Uganda prior to TMEA support being provided in 2010, the EAC ministry secured a score of 71% against achievement of targets in a government wide performance review. Following TMEA interventions this score increased to 80% when a repeat survey was conducted at the end of 2011. Support to PSOs and CSOs

Evidence demonstrating the impact of support to PSOs and CSOs in the region is limited.

DFID has a number of regional programmes supporting CSO capacity to advocate for policy change in particular areas. While there is evidence these have improved institutional strength and the organisation of advocacy campaigns there is much less evidence on whether CSO advocacy has resulted in policy change.The evidence base covering the impact of support to strengthen PSO advocacy is a little stronger. An impact assessment of the Business Environment Strengthening in Tanzania programme in 2011 for example concluded that investments in capacity development and research and advocacy had a positive impact on the business environment. There is some evidence that the Business Advocacy Fund in Kenya has secured similar effects. Support TMEA has already provided to the Kenya Shippers Council to work with the governments Rapid Results Initiative in identifying and eliminating causes of congestion at Mombasa port had some limited success but did not result in any significant or permanent changes to improve port productivityThere is only a small amount of evidence that improving the capacity of transporters associations, such as the Kenya Shippers Council, can help improve transport industry business practices more widely. There are for example anecdotal examples of improvements in the levels of professionalism and knowledge of transport agents following a major USAID-funded training programme implemented through the Federation of East African Freight Forwarders Association, but no reliable data has been collected.Option 2As above +

LimitedMombasa port

Improving performance in Mombasa port has been the target of a series of donor-funded programmes, since the establishment of KPA in the wake of the break-up of the original EAC in 1977. The World Bank and DFID (ODA) have been the funders. Short term success has usually been associated with investment in port infrastructure and equipment but long term institutional reform has been much more difficult to achieve in the face of the complex mix of economic, political and regional interests that exist in the ports operations. There have been a number of failed attempts to impose privatisation through conditionality.

TMEAs approach recognises the reasons why past efforts to support reform in Mombasa Port have failed, but there is limited evidence on which to judge its chances of success.

The evidence base for the immediate choice of investment is more substantial. The programme is based on a detailed gap analysis that has identified areas in which to work in the context of existing funding, World Bank recommendations covering dos and donts in port reform and the principals set out in the Eddington Transport Study. A number of studies have examined port reform elsewhere in Africa and provide evidence that increasing productivity through the type of interventions proposed in Mombasa will have high returns. Hummels (2012) estimates that one-day less in delivery times whether associated with waiting time in ports or delays in customson average around the world reduces landed costs of goods by 0.6-2.3 percent.

Looking forward there is recent evidence from both Nigeria and Ghana of the favourable impact the landlord model can have on port investment, operations and efficiency.Option 3As above + limited

Option 3 represents an extended allocation of funds beyond option 2, and is focused on extending the interventions, and effects, as opportunity arises. The evidence thus builds on the evidence for option 2.No detailed assessments have taken place on the individual extended concepts, or on work with KRA.

There is indication from other countries that customs improvements can have impact.

What is the likely impact (positive and negative) on climate change and environment for each feasible option? Categorise as A, high potential risk/opportunity; B, medium/manageable potential risk/opportunity; C, low/no risk/opportunity; or D, core contribution to a multilateral organisation.

Option

Climate change and environment risks and impacts, Category (A, B, C, D)

Climate change and environment opportunities, Category (A, B, C, D)

1

C

C

2

B

B

3BB63. Option 1 presents a low direct risk to the environment and climate change in its implementation. However the expected outcomes of TMEAs interventions may have second-order effects. A reduction in road transport times, for example, will in the first instance reduce carbon emissions. But over a longer period it could also discourage the exploitation of opportunities to use greener fuels and transport alternatives and lock Kenya into a high-emissions growth path. Second order effects like this will be influenced by a large number of factors including market dynamics, technological change and regulatory frameworks. In practice risks are very difficult to determine in advance.64. Option 2 includes some construction at Mombasa Port (e.g. road widening and railway upgrading) and therefore poses a greater direct risk to the environment and climate change (e.g. through noise, water, air pollution). In line with Kenyas national environment policy, TMEA will address this risk by conducting an Environmental Impact Assessment (EIA) prior to commencing infrastructure works. The EIA will include a management plan for risk mitigation65. Both Options 1 and 2 provide opportunities for TMEA to contribute to climate change mitigation in Kenya and to support work to improve the environment and natural resource management especially in its interventions with national and regional bodies to improve policy making. TMEAs engagement in this agenda however is currently significantly weaker than its focus on addressing risks. In response TMEA is in the process of developing a climate change strategy in particular to explore options for reducing carbon emissions along East Africas transport corridors, including the use of climate change finance to promote lower emission transport systems (such as railways) and at the Port. 66. There is scope for this work to be extended to cover a wider agenda which might include for example the potential to: mainstream climate change risks and opportunities in Kenyas policies on regional integration; facilitate climate-smart insurance products and risk management tools for foreign investors; and to promote low carbon and renewable energy technologies.67. The strategy will identify the full scope for TMEA to exploit green procurement opportunities in its programming including the use of recycled or sustainably sourced materials, low carbon technologies and materials which are not harmful to the environment. The DFID Kenya Climate and Environment adviser is engaged in this process.

Table 6: What are the costs and benefits of each option?

(NB costs and benefits relate to existing TMEA commitments and additional TMEA investments)Option 1: To strengthen regional integration and trade competitiveness in Kenya by maintaining support for TMEAs Kenya programme at the levels agreed in 2009 (alongside investments TMEA is making across the East Africa region)

Activities

Output BenefitsOutcome Benefits

Support to facilitate trade ($1.7 million) through:

Establishing a transport observatory along the Northern Corridor

Training freight and transporter operators

Introducing Integrated Border Management at Taveta and Busia border posts

Implementing a customs risk management system for the inspection goods at Kenyas borders

Better information on the causes of transit delays along the Northern Corridor. Freight operators are more efficient and competition is increased. More efficient border processes at Taveta and Busia border posts

60% reduction in customs inspections at borders Improved customs compliance.Increased trade competitiveness in Kenya as a result of:

Faster customs operations at borders;

Better understanding of customs processes by transporters;

Improved policy to address other bottlenecks along the Northern corridor

Cost savings related to reduced transit/transport times;

Better compliance with regional and international standards particularly in agricultural and manufacturing sectors.

Support to improve standards testing and legal framework ($1.3 million) through: Introducing new equipment for standards testing Ensuring Kenyan policy and legislation on standards is consistent with regional agreements on Standardisation, Quality Assurance, Metrology and Testing (SQMT) 2 pieces of new testing equipment installed in Kenya Bureau of Standards

10 staff trained in equipment use

Decrease in average time taken to test products and increase in number of tests that comply with established procedures

New national policy and legislation on standards conforms with the EAC Standards (SQMT) Act (National Quality Policy gazetted, Technical Regulations Act receives assent)

Support to National Government ($6.2 million) for:

i. Ministry of East African Community

Providing staff development and external policy advice

Implementing EAC communications strategy

Monitoring implementation of EAC commitments

Developing and implementing EAC Common Market Implementation Plan

ii. Office of the Prime Minister

Developing a Kenya Regional Integration Strategy

iii. Ministry of Trade

Reviewing legal and institutional reforms required to implement EAC Common Market Protocol Improving capacity for trade policy formulation and analysis MEACs performance in Kenya governments assessment system rated as excellent Increase in awareness campaigns covering the content of EAC integration and the implications/opportunities for Kenya. Greater compliance with detailed actions required by EAC Common Market Protocol at least 70% of the 165 actions that have been identified are implemented on schedule.

Better harmonisation of Kenyan laws and policies with the Common Market Protocol - 27 have been identified as requiring attention Ministries and Departments include regional integration in their strategic plans and budgets

50 % of recommended reforms in Kenya National Trade Policy implemented on time. Improved capacity for trade policy analysis and trade negotiations

Enactment of new trade development legislation Improved government leadership and coordination of regional integration agenda;

Implementation of a comprehensive regional integration policy;

Strong public support for regional integration;

Improved access to regional markets;

Strong private sector understanding of regional trading opportunities;

More effective Kenyan participation in regional and global trade negotiations.

Support to the Private Sector and Civil Society ($5m) for:

Technical assistance to improve standards of small-scale horticultural production (through Fresh Produce Exporters Association of Kenya)

Technical assistance to improve standards of tea production (through East Africa Tea Traders Association - EATTA)

Advocacy training

Advocacy research and campaigns on issues including:

Reducing the cost of tax compliance;

Reducing the cost of quality compliance;

The role of regulatory bodies for manufacturing;

Investment Climate reform

Efficiency of regional transport systems

Knowledge sharing and collaboration between PSOs and CSOs on shared interests (including at regional level)

Establishing Kenya Shippers Council as a one stop information centre for transport, logistics and trade-related information.

10 groups of Kenyan small-scale horticultural growers certified compliant with East Africa Good Agricultural Practice Standards (EAGAP)

400 growers trained in EAGAP

140 internal auditors/country trainers certified in EAGAP

20 auditors/lead trainers receiving certification in EAGAP 3000 farmers reached with good agricultural practice training 10 research papers on specific EAC issues published by PSO/CSO organisations

500 PSO/CSO staff and association members trained in regional integration and advocacy

5 PSO/CSO advocacy campaigns conducted

Increase in access to trade facilitation information containing up-to-date and accurate trade facilitation information. Increased awareness of policymakers of challenges facing private sector

Greater engagement of Kenyan civil society at a regional level (through establishment of a Kenyan chapter of the East African Civil Society Forum)

Stronger accountability of Kenyan government to its citizens on the impact of regional integration 10% increase in volumes of tea sold by EATTA

US $2 increase in average price of tea auctioned at Mombasa tea auction

Shippers are able to transport goods more efficiently

Option 2: Significantly increase DFID support to allow TMEA to make strategic investments in Mombasa port that will reduce port congestion and transit delays

ActivitiesOutput BenefitsOutcome Benefits

All activities under option 1 plus interventions at Mombasa port

Support to Mombasa port ($43.8m) for:

Investment in rail infrastructure within the port, gates (including for shunting and mainline access)

Upgrading port roads and port gates;

Improving traffic flow arrangements within the port;

Upgrading urban road linkages;

Upgrading truck waiting areas;

Improving yard facilities ( including by investment in equipment); Institutional capacity building focused in particular on implementing the recommendations of a port-wide productivity improvement study and on labour force training. Improving laws and regulations governing port operations; and. Developing Public-Private Partnerships (PPPs) for infrastructure investment 3000 metres of new rail lines in Kipevu port area (container traffic);

1500 metres of new rail lines in Kilindini port area (general cargo);

Improved gates for rail access and associated facilities in both Kipevu and Kilindini;

Rehabilitation/widening of 1.3 km of the Kipevu access road;

Rehabilitation/widening of 3.4 km of the Shimanzi access road

Improved truck waiting areas/parking for Kipevu and Shimanzi access roads;

Improved Port gates for access on Kipevu and Shimanzi roads;

30,000 sq metres of yard repairs/resurfacing in berths 11-14 (Kipevu container area)

740 metres of repairs to fenders, bollards and other facilities in berths 11-14Improved road and rail access and improved productivity will together significantly reduce traffic transit times through the Port. TMEA estimates that the specific investments it will finance will reduce delays by up to 34 hours per tonne. These savings comprise:

12 hours from improved rail linkages and space rationalisation

3.7 hours from improving port road access

6.5 hours as a result of improving and expanding yard facilities and stacking areas

12 hours as a result of institutional capacity building

1000 metres of repair to quays and stone revetments in port section G (general cargo)

20,0000 sq metres of repair of aprons (light paving) in port section G

Detailed feasibility assessment and design of a dry port facility at Miritini rail marshalling yard.

Land use mapping report

New regulations for Kenya Ports Authority

Development of PPP strategiesIn addition funding for design work will provide a base from which additional time savings can be secured in future.

Option 3: This option will provide further flexible funds to TMEA in the immediate short term to enable them to react to new and emerging need in the next year.

ActivitiesOutput BenefitsOutcome Benefits

All activities under option 1 and 2 plus further design and development of interventions at Mombasa port and with KRA

Support to Mombasa port and KRA ($62.2m) for:

As option 2 above, plus:

redesign and rerouting of train track around the main rail access and egress points to the port (inside port);

detailed design and costing of works with KRA on customs systems and operations;

initiating full technical assistance work on improved customs systems in advance of and in anticipation of selection and procurement of new IT systems

installation of new customs IT systems compatible with international standards and best practice Additional 1000m of new track Design and specification of new customs IT systems, systems analysis and paperflow, and bridge to international systems

full engagement on technical assistance in transition management and training on systems

procurement of full IT systems and support and associated works for customs systemImproved rail access will increase rail productivity enhancing work under option 2, and improved Customs productivity will significantly reduce traffic transit times through the port. Estimates of time saved and impact are at an early stage, but would be anticipated to have a reinforcing and significant impact of a similar scale to the improvements under option 2 above, when implemented in conjunction with the proposed physical improvements

Balance of costs and benefits

Cost of Options

68. DFIDs options are to fund different proportions of TMEAs budget for 2012-16. TMEASs overall expenditure would respond to different levels of funding. TMEAs budget is predicated on DFID funding broadly in line with that in the Operational Plan. Most other donors do not earmark their resources to specific country windows or the regional window, as DFID does.

69. TMEAs budget for 2012-16 is presented below.

Table 7: TMEA Kenyas Programme Budget, 2012-2016 ($000s) (see Financial Case)Calendar Year

2012

2013

2014

2015

2016

Total

Improved infrastructure and institutional capacity at Mombasa Port

3,55018,43315,6857,3501,10046,118Better Trade Facilitation

1,0001,075180138852,478Improved Kenyan implementation of the regional integration agenda

9464202902952252,176Improved regulation of product standards

1,200150

10050501,550Strengthened role of Kenyas PSOs and CSOs

1,3359004253382003,198Programme Management

6613022154242581,860Central Overheads

8392,3332,4721,4051877,236Monitoring and Evaluation

133

268

372

181

53

1,007

Total

9,66423,88119,73910,1812,15865,62370. Under Option 1, DFID funding would become a smaller share of a reduced budget. Under Option 3, funding would be a larger share of an increased budget. The actual changes to the Kenya programme would depend on how TMEA reallocates resources, as other sources of funding are fungible to a degree across windows. Indicative discussions are underway with other donors, and it is likely that the proportionate support from DFID will reduce as and when other donor funding is agreed.Benefits of TMEA interventions71. An assessment of impact of trade facilitation interventions found that while generally evidence of impact was low this was due in part to the lack of studies actually assessing impact and the quality of those undertaken. But the existing evidence is of positive impacts of trade facilitation instruments on reducing trade costs and trade flows.72. TMEAs Kenya programme comprises (figures include DFID contributions to programme management, central overheads, M&E): Mombasa infrastructure and institutional capacity Trade facilitation e.g. customs risk management, transport observatory GOK capacity in regional integration e.g. reforms to implement EAC Protocol Support to improve standards testing and legal framework Support to private sector and civil society

73. The following two sections look at Mombasa port and then other interventions.Indicative cost-benefit analysis of Mombasa port74. With respect to port reform the type of impacts expected and seen in the studies are summarised below:Type of Study

Impact

Robustness

Study 1

Ex post evaluations on impact of port efficiency

Positive impact on shipping costs and trade costs

High

Study 2

Ex post evaluations on impact of port reform programmes

Positive impact on port efficiency

High

Study 3

Ex ante simulation of increasing port efficiency

Positive impact on trade flows

Not applicable, ex ante simulation without verification of main assumptions

75. TMEAs technical work with the Mombasa Port Authority to identify priority interventions has implicitly constituted a cost effectiveness analysis (finding the least cost to achieve programme objectives). These prioritised activities are presented in the table on activities, outputs and outcomes above. The brief analysis that follows is an indicative cost-benefit analysis. Cost-benefit analyses of ports look at: (i) time savings and reductions in operating costs; and (ii) trade induced, the impact on prices and the extent to which these are due to changes in costs related to port interventions.

76. For Mombasa port, an estimate of the value of incremental benefits of the investment can be disaggregated in to two parts: firstly, the economic value of time saved on current traffic through the port; secondly, the producer surplus or profit on induced trade due to the interventions.

77. It is important to note that these estimates are highly indicative and depend on a number of parameters. The parameters shown such as delay times are also central estimates within wide ranges that depend on a number of factors. However, the analysis still gives a sense of what amount of change in terms of port efficiency investments need to achieve to be worthwhile.

78. The first type of benefit (valuing time saved) depends on: port traffic, time saved due to interventions, value of time saved. The second (profit on induced trade) depends on: value of trade generated due to reduced trade costs, and the profit on this created trade.

79. The table below shows an indicative cost-benefit analysis of the port. The assumptions are drawn from TMEAs economic appraisal of its work programme. They are informed by TMEAs own analysis of Kenya Ports Authority data and the CPCS Northern Corridor study. A TMEA estimate is that port interventions will collectively lead to a 0.8 day reduction in dwell time. In the base case presented below, half of this value is used.

Notes: Shipments are standardised as Twenty foot container equivalents80. Under the base case, the internal rate of return is 49% when only time saving benefits are included, rising to 61% when profit on induced trade is factored in. Very high economic rates of return can be expected for such projects because (i) port traffic volumes are very large and growing with or without increases in port efficiency; and (ii) current port efficiency is so poor that priority interventions are likely to make some impact on port delay times. It is important to note that these returns can be achieved independent of other actions.81. The most meaningful type of sensitivity analysis is to model the minimum level of reduction in dwell time necessary to break even at the discount rate (10%). Time savings need to be only 0.1 day for this investment to be justified based only on time savings and not induced trade.

Benefits of other interventions82. Some 3% of TMEAs 2012-16 programme will support customs processes. Two ex post evaluations of customs processes in other countries found positive impacts on reductions in customs clearance times, the number of documents used and on trade flows.

83. 7% will be used to support GOKs implementation of Common Market Protocols and 2% on improving regulations of product standards. A review of global evidence on impact of regional integration on trade, economic growth and poverty reduction suggests that measures other than reducing tariffs lead to gains from regional integration. So called deep integration involves measures such as regulatory harmonisation or adopting common policies and institutions that can increase investment and trade between members. Empirically the evidence of impact for South-South RTAs and deep integration is thin although the scope for benefits in East Africa through increased investment and trade in services is wide.

84. The other component of expenditure is support to civil society institutions in advocacy and broadening participation in trade policy making. Despite the growth in these programmes in the last decade there have not been evaluations. A study on trade policy processes by KIPPRA and ODI in 2007 found insufficient coordination between state and non-state actors and information asymmetry between those involved in trade negotiations and other stakeholders. This suggests the need for more advocacy and participation of civil society.85. Gauging the economic benefit of these specific interventions ex ante is not possible. TMEA have laid the groundwork for looking at programme impact with thorough reviews of global evidence of the impact of trade facilitation interventions and regional integration.Choice of Option86. The choice of option needs to be made on the basis of strategic considerations including:

expected effectiveness of TMEA interventions; absorptive capacity of TMEA; DFID share of total funding of the TMEA Kenya programme

87. On expected effectiveness, TMEA interventions are well designed as suggested by project reviews to date. Interventions address known capacity and infrastructure bottlenecks that affect large volumes of traffic. The starting point in terms of regional integration and integration of the EAC with the rest of the world suggests that high returns can be realised by interventions that improve efficiency of institutions that support regional integration and trade. Impact assessments will be required to assess this, and are planned.88. On absorptive capacity, TMEAs rate of implementation is increasing. The scale of contracts will increase as TMEA moves into Mombasa. There is a risk of slow contracting, but also the potential to increase rate of implementation.

89. The DFID share of total funding is high, but this does not affect negatively the strength of engagement of other stakeholders, especially other TMEA donors, in the work programme.

90. The preferred option, Option 2, represents the best option within DFID Kenyas current resource framework. It represents a risk given the limited evidence on impact, particularly on poverty. The risk is worth taking, given UK Ministers commitment to increased trade across Africa. The real benefits that can be derived do not depend on other wider reform or economic changes taking place in parallel. With reform momentum, the benefits could be even greater. Option 3 is viable and may be preferable if DFID wishes to achieve greater impact in this sector and chooses to allocate greater resources to TMEA. But it needs further design and appraisal.

D. What measures can be used to assess Value for Money for the intervention?91. With DFID advice, TMEA is currently refining its approach to assessing and ensuring value for money from its interventions with support from external consultants (see Management Case). Implementation processes have been designed to have a value for money approach at their heart, in particular as a result of:

ensuring wherever possible that contracts are awarded and finance provided on a competitive basis (see Commercial Case); using a wide range of sources to establish benchmarks against which the individual elements of contracts and grants can be assessed and negotiated ; and

ensuring all forms of value that an intervention will deliver are taken into account in decision-making (including implementation speed).

Economy and Efficiency92. The main cost drivers of TMEAs programme in Kenya are the costs of professional consultants engaged in design, advisory and implementation services (both in Mombasa Port and in work with government, the private sector and civil society), the costs of information systems - and the costs of infrastructure work in Mombasa. 93. TMEA undertakes procurement of consultants in line with DFID requirements and OJEU regulations and, following DFID practice, undertakes regular procurements on a framework basis to enable rapid and flexible call down of services as required to meet need. 94. Output benchmark prices have been developed as the basis for budgeting in TMEA intervention areas, based on prior experience elsewhere. These will also form the basis for actual performance to feedback into the budget cycle. Important output prices that have been applied in the Kenya programme are summarised in Table 8.

Table 8: Benchmark output prices applied in the Kenya programmeOutput Area Unit costIntegrated Border Management systems (including hardware, software and training) $500,000 per border postRoad rehabilitation and widening in Mombasa port $2 million per kilometre(total $2.6 million)Replacement rail and improved rail access in Mombasa Port $1 million per kilometre(total $4.5 million)Yard repairs and re-surfacing in Kipevu container terminal at Mombasa port$ 300 per square metre(total $9million) Repair of quays and stone revetments in port Section G $1.5 million per kilometre(total $1.5 million)Repair of aprons in port Section G$50 per square metre(total $1 million)95. TMEA report these estimated output unit costs are based on experience both within East Africa and in other environments (although the source of these estimates has not been verified in detail). They provide a guide for assessing the efficiency with which actual outputs are achieved in practice. But TMEA has emphasised that unit prices are very sensitive to the particular environment in which an investment is made and it is extremely difficult to standardise for a wide range of variables that include timing; location; project scope; and project and contract type. The actual output prices TMEA will pay crucially depend upon detailed design and the quality of the competitive process through which implementation takes place. Efficiency also depends upon the time period in which outputs are delivered. The measures in Table 8 do not include efficiency indicators for TMEAs capacity building programmes with government, the private sector and civil society where outputs are extremely difficult to quantify.96. It is part of TMEAs planned approach to improving its assessment of value for money to consider how to better capture economy and efficiency metrics in the analysis of its contracts and funding agreements, in way that comparisons can be effectively drawn between different parts of its programme and with similar programmes in other environments

Effectiveness97. The cost-benefit analysis presented in Section C above assesses effectiveness in terms of both savings in transport time as a result of TMEA Kenyas interventions and the consequent increase in export trade. These measures provide, ex ante, a strong justification for Option 2 (indicating maximum possible benefits in the analysis of the whole Kenya programme which total $2.2 billion in constant prices through until 2026 - the equivalent of nearly 7% of Kenyas GDP in 2011. Even reduced to 10% these would represent value.).98. It follows that measuring the impact of TMEA Kenyas interventions on transport time in practice and relating these savings to project expenditure (for example in terms of cost per unit of time saved) is essential to be able to judge value for money, especially in Mombasa port. This analysis will also provide a basis for better future investment decisions. TMEA are currently considering how best to collect information to make this assessment possible, including the possibility of surveys of those intended to be the primary beneficiaries. (Later sections deal with measurement and validation related to ultimate beneficiaries.)99. There are, however important TMEA interventions where time savings are not the primary objective and quantification of impact is difficult. This includes in particular TMEAs projects to strengthen the engagement of the private sector and civil society and to build the capacity of government in leading the regional integration agenda. TMEA is also reviewing how best to measure effectiveness in these contexts, although it is not clear there is a model that has been established from similar interventions in other sectors.

E. Summary Value for Money Statement for the