FROM MAGAZINE: Kenya fuelling its engine of growth

The World Bank's Logistics Performance Index shows Kenya’s best performance was in timeliness. In other words, frequency with which shipments reach consignees within scheduled or expected delivery times is almost always guaranteed. However, Kenya’s ranking has dropped to 63, down from 42 in 2016, as other parameters are yet to be met. The report notes that Kenya’s transport network “is fair” but needs to improve if the country is to measure up to its peers in the low-middle income category globally, Shreya Bhattacharya reports.

In 2018, Kenya’s real GDP grew an estimated 5.9 percent, from 4.9 percent in 2017, supported by good weather, eased political uncertainties, improved business confidence, and strong private consumption, according to a report by African Development Bank Group on the country’s economic outlook.

On the supply side, services accounted for 52.5 percent of the growth, agriculture for 23.7 percent, and industry for 23.8 percent. On the demand side, private consumption was the key driver of growth, the report elaborates.

Meanwhile, in another report by Jumia Business Intelligence and GSMA Mobile, it is manifested that Kenya is leading Africa in internet penetration with over 30 million having access to the internet. In other words, it means that two in every three Kenyans have access to the internet, which is way better than the average African internet penetration where only 18 percent of the total African population is defined as internet users. Without a doubt a huge credit goes to the cheaper smartphones.

Now, if these two reports are linked, it wouldn’t be incorrect to say that the rise in demand has a lot to do with the growing ecommerce trend in the country that has come with the advent of the smartphones. And while the internet access has enabled Kenya to leapfrog to do online transactions, the logistics industry which is the key enabler of ecommerce is yet to meet the pace with which ecommerce is growing, not to be forgotten ecommerce is yet to explore the B2B segment in full fledged manner.

Among the downsides, Kenya continues to face the challenges of inadequate infrastructure, a major deterrence in the path of growth. This can be seen in the underfunding of road maintenance, lack of improvement in the efficiency of operations at the Port of Mombasa and the loss making national airline. However, efforts are on to bring a change.

Kenya once exhibited a fine example of a successful public-private partnership in air transport that made Kenya's airline a top carrier in the region and its international airport a key gateway to Africa. With Kenya being a major exporter of perishables, especially the flowers, the country’s air cargo industry saw immense growth at one point of time. Alliances were established by foreign players like the Holland Flower Alliance — a coalition between KLM Cargo, Royal FloraHolland and Amsterdam Airport Schiphol — to tap the growing flower exports from Kenya and other east African countries like Ethiopia to optimise the floral logistics chain.

However, the growth trajectory took a plunge when Kenya Airways’ operational results for fiscal years 2015 and 2016 showed substantial loss. The rapid expansion of the fleet size and routes was cited as primary cause of the downturn. Fuel price hedging took secondary blame.

As per the latest figures, Kenya Airways has narrowed its net losses by 28.8 percent to Sh4 billion in the half year ended June 2018, on the back of cost-cutting measures and revenue growth. The airline had made a net loss of Sh5.6 billion the year before. The company’s revenue rose 3.1 percent to Sh52.1 billion while “other costs” fell 41.3 percent to Sh2.9 billion.

“Although reporting improved performance, fuel price volatility continues to be a major challenge for the airline,” KQ said in a statement.

The airline is also losing its freight to its growing competitor Ethiopian. According to reports, high costs and long cargo dwell times are hampering Kenya’s competitiveness in the air cargo sector in the region. It is a bit strange that despite Kenya being a major exporter of perishables, its flag carrier has not really been able to take an advantage of the same. There is a dominance of foreign, especially middle east carriers, calling on Nairobi for freight.

“Our main focus is the flower industry. We move about 750 tonnes of flowers a week from Kenya to Europe. We have been in this market for more than 20 years and we are continuing to invest in equipments and solutions. We are very much committed to the market,” says Omar Hariri, CEO, Saudia Cargo, reiterating his inclination towards the flower business coming in from Kenya.

Evans Michoma, commercial manager-cargo, Kenya Airports Authority (KAA) explains the situation. “In Kenya, most of the African freighters depend on belly and the capacities of belly are very minimal. There is no enough capacity for these African airlines’ to carry. Kenya Airways have cargo freighters but these are for short distances but for the non African carriers, they have bigger wide bodied aircrafts and therefore they have dominated the market. We have no capacity as African airlines to compete with Non African airlines. So African Airlines have a challenge in uplifting cargo from Nairobi,” he says.

Mombasa-Nairobi Standard Gauge Railway freight service

Michoma further advises KQ to diversify its business. “We expect that they now diversify their business from mostly passenger towards cargo because cargo is lucrative and that is why you find non African airlines coming to Nairobi. Some making two times on 747s, 777s, others doing nine times a week or seven times a week, wheareas you find none of our African airline challenging them.”

Giving an impression of how much cargo is handled at the airport, Michoma says, “We did about 350,000 tonnes in the year 2018. Our projection is that the market of perishables is growing. We are now looking at the Far East viz. Australia, Japan, China and other areas of Far East where the flowers and perishables are being exported. In other areas, we have started a new flight to New York.”

Further giving details of the cargo, which the airport handled during the peak Valentine’s period, Michoma, says, “Yes, we did quite well in the Valinetine’s Period. Actually it was quite busy. During that period we handled 12 million kilos (12,000 tonnes) of flowers. This is both, to our major destination, which is Amsterdam and from there, distribution takes place. But we did quite a lot of it.”

KQ, as part of its recovery effort is also in talks with KAA to take over its management. The KAA says it has received an application from KQ to manage operations at the Jomo Kenyatta International Airport (JKIA), in a restructuring plan aimed at aiding the airline's recovery and boosting its revenues all while making Nairobi a regional transportation hub.

It would be important to evaluate whether this will be a profitable deal, especially when the airline hasn’t seen an impressive growth rate in the recent past.

This is while President Uhuru Kenyatta has affirmed Kenya’s commitment to improving civil aviation infrastructure, considering the industry’s vital role in economic growth and national development. The president said air transport, together with support services, contributed 0.4 percent to Kenya’s GDP, translating to a turnover of $232.79 million (Sh23.85 billion) in 2017.

Meanwhile, despite several business challenges that include alleged financial irregularities and corruption charges, the Port of Mombasa has managed to show a stable business growth. It was reported in November 2018 that the port is edging closer towards attaining 48 hours’ turnaround time for bigger vessels and enhancing its competitiveness following consistent productivity performances recorded at the facility. Last year, the port established four successive productivity records. According to a Kenya Ports Authority report, empty containers received at the Port of Mombasa by both road and rail transport recorded 9,649 TEUs, registering a growth of 2126 TEUs or 28.29 percent in the week ended 31st October 2018. This has been possible especially due to the enhanced connectivity at the port via rail and road.

Kenya inaugurated a $3.2 billion railway funded by China, linking the capital Nairobi to the port of Mombasa in 2017, which is the country’s biggest infrastructure project since independence more than 50 years ago.

The railway is part of China’s ‘One Belt, One Road’ initiative, a multi-billion dollar series of infrastructure projects upgrading land and maritime trade routes between China and Europe, Asia and Africa.

The line is eventually expected to connect Uganda, Rwanda, Burundi, Democratic Republic of Congo, South Sudan and Ethiopia to Mombasa so the Indian Ocean port can act as a gateway to East Africa for trade with China and other nations. The express is expected to slash the time for the 472 km journey to about four hours from 12 on the line built by British colonialists more than a century ago that stretched from Mombasa to the Ugandan capital.

The Port of Mombasa is the gateway and exit point for cargo belonging to a vast hinterland that include Kenya, Uganda, Rwanda, Burundi, Democratic Republic of Congo, Tanzania, South Sudan, Somalia and Ethiopia. Northern Corridor is the busiest and most important transport route in East and Central Africa, providing a gateway through Kenya to the countries, many of them landlocked economies. It also serves Southern Sudan since it broke away from Khartoum.

The main Northern Corridor transport network includes a road network; railways; rail-lake transport; inland water routes; container terminals etc.

While, Kenya is increasing investment in transport infrastructure, both through direct budgetary allocations and by partnering with the private sector, it needs to pay attention to the last mile challenges as well. Structural challenges like the lack of a national street address system or a large unbanked segment of population, can heavily restrict the growth of ecommerce in the country.

“I have my address but nobody else will find my house except for my friends, because I tell them where it is. That’s one of the stoppers for the real ecommerce. In Kenya, we have delivery points where you can drop but also these have no addresses. So you have to know them,” explains Kenya Airways’ COO, Jan de Vegt.

Speaking on similar lines, Alastair Tempest, CEO, Ecommerce Forum Africa spoke about the way forward saying that if people are introduced to proper address systems, they do intend to start banking as they feel connected, while the banks feel more secured if they have a proper address of their customers.

Kenya has the advantage of a strategic location, a high internet and smartphone penetration rate, burgeoning middle class and a young population, all being perfect ingredients to make it a successful economy. It would be crucial to take advantage of the growing ecommerce trend, especially when the B2B segment is yet to be explored. The tip of the iceberg has been touched, much more remains to be explored!