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A Slow Progress in the Right Direction(The Nation (Kenya) Via Thomson Dialog NewsEdge)PRE-BUDGET ANALYSIS: The Government has long recognised the vital role that modern infrastructure - transport, communications, energy and water - play in supporting economic growth. The state of the country's infrastructure impacts every one. Stop and think about how business is affected by reliability of the electricity supply, the ability to move goods around, the time it takes to call suppliers and customers. The better the infrastructure, the easier it is to do business. A study found that if the stocks of telecommunications and power generation infrastructure in Africa had been comparable to those in East Asia, the continent's annual growth rate would have been about 1 percentage point higher during the 1980s and 1990s. Kenya's infrastructure has performed variably over the recent past. Transport and communications have been amongst the fastest growing sub-sectors in recent years, suggesting a bubbling economy. The key drivers for this good performance are investment in mobile telecoms, tourist arrivals, new KQ routes (thus increased port cargo and passenger traffic) and pipeline throughput. Look more deeply, and you see a sharp divergence between the performance of the public sector and that of the private sector. In the transport sector for example, the public sector managed railway has performed poorly, while the partly privately managed road transport sector has done well. In telecoms, there has been a trend of switching from fixed to mobile against a backdrop of under-investment and lack of private sector participation in the fixed sector. Meanwhile, partly privately owned mobile continues to expand its services and attack on the market with both voice and data services. Overall, we are marginally ahead of our East African neighbours on most infrastructure measures. We lag some way behind Egypt and South Africa in all sub-sectors, and Nigeria's paved roads and access to electricity. In the 2005 budget, the minister of Finance recognised the importance of infrastructure. Projected resource allocation to infrastructure was increased from Sh44.6 billion in 2004/05 to Sh82.8 billion in the period to 2007/08. A number of commitments have been made to expand Government support to infrastructure development. They include initiatives to apply concessioning arrangements with the private sector to road development and maintenance and to railway, port and airport; exploit geothermal power potential in order to improve power supply and reliability; explore the potential for Public Private Partnership (PPPs) in the development and management of Kenya's international airports; and convert the port of Mombasa to a landlord port in line with KPA's Master Plan. While these measures seem to take us on the right path, much remains to be done. The Government needs to work in partnership with the private sector to close the gap on those currently ahead of Kenya. In addition to implementation of the types of investments described above, the Government also needs to create an enabling environment - in particular, a level regulatory playing field and a tax regime that encourages the private sector to invest. There are disincentives inherent in the existing tax regime. Notably, punitive tax penalties and interest rates which apply where non-compliance is inadvertent or the tax payer is clearly intent on responsible compliance. More positively, the Government should consider reducing corporate tax rates for approved infrastructure projects. Studies have shown that for each 1 per cent reduction in the corporate income tax rate foreign direct investment increases by about 2 percent. Further, the Government should consider offering investment allowances and accelerated depreciation incentives for approved infrastructure projects. These are offered by a number of countries (Malaysia, India, Thailand) that compete successfully for global investment funds. Equally, providing withholding tax exemption for foreign investment loan funding has been used elsewhere to attract infrastructure investment. In particular, the private sector has the ability to finance, develop, operate and manage Kenya's economically viable infrastructure. It is only through a true partnership between Government and the private sector that the country can take the leap forward in strengthening our infrastructure. Maughfling leads Performance Improvement assignments in East Africa at PricewaterhouseCoopers and Morris Rozario is a Director in Tax at the firm. Distributed by AllAfrica Global Media. (allafrica.com) |