88940 v1 KENYA COUNTRY PARTNERSHIP STRATEGY FY2014-2018 Photo: KPLC Executive summary 1 Kenya can be one of Africa’s success stories. It holds great potential including from its growing and youthful population; dynamic fell from 47 percent in 2005 to 39 percent based on best estimates in 2012. Some social indicators have improved notably, yet inequality is high private sector; a platform for change laid down (Gini of 47.4); there are significant differences in by the new Constitution and recent peaceful opportunities and outcomes between women elections; and its pivotal role within East Africa and men, for those living in the remote and most and further afield. Yet poverty remains high with underdeveloped regions, and ethnicity remains 4 out of 10 Kenyans living in poverty and the an important factor in societal development. richest 10 percent of the population receiving Looking ahead, ending extreme poverty by 40 percent of the nation’s income. Governance 2030 would imply a cut in the poverty rate of 2 concerns persist; and growth, while solid, has percentage points each year, likely requiring the been constrained by low investment and low economic growth rate to double and inequality firm-level productivity and has yet to take off at to halve. To unlock rapid and uninterrupted the rapid, sustained rates needed to transform growth that is sustainable and inclusive, Kenya the lives of ordinary citizens. must address the key binding constraints of low investment and low firm-level productivity. Progress and prospects: Diagnostic review of Faster growth needs significant policy reform the country context and development agenda to redirect public spending to meet growing 2 This strategy is based on a systematic review of evidence to identify the key challenges and opportunities for Kenya to accelerate infrastructure needs. It also needs an improved business environment that encourages private sector expansion and carefully manages the tax progress toward the twin goals. The poverty rate burden on business. Partnership for Shared Growth and Prosperity iii Vision: Government priorities and (WBG) analytical work. Much of this change medium-term strategy agenda will only be possible when relevant, accurate, and timely statistics are produced to 3 Kenya wants to be a globally competitive and prosperous nation with a high quality of life. “Vision 2030”, a broad-based agenda straddling inform policies and help evaluate programs. the current and previous administration, rests on three pillars: economic, social, and political. 5 Placing a premium on human development is essential from several vantage points. Growth must be inclusive so that prosperity can The economic pillar envisages moving up the be shared by all. From an equity perspective value chain in key areas, including agriculture it cannot be right that maternal mortality and financial services, to consistently deliver 10 percent annual growth. The social pillar focuses is among Africa’s highest at 488 deaths per on investing in people, including in education, 100,000 live births; and many lack access to health, and housing, and with a focus on food security, clean water, good healthcare, and women, youth, and vulnerable communities. proper housing. Youth unemployment at 21 The political pillar seeks to “move to the future as percent is double the adult average. Equipping one nation,” including improving the rule of law, young people with a modern education and transparency, and accountability. Vision 2030 is job opportunities is essential to make the most operationalized by the second Medium-Term of their talents. Cities must not only generate Plan (MTP2, 2013-17), and this national agenda is economic activity but also provide basic entirely consistent with the Bank Group’s global services for those who dwell in them. And timeline targeting an end to extreme poverty. the cohesiveness of Kenyan society calls for This, together with stakeholder input gathered in renewed efforts to include the marginalized extensive consultations, provides a good anchor and disadvantaged. To curb poverty, growth for this Country Partnership Strategy (CPS). must take place in sectors where the majority of the poor live. Investment must be redirected to Development challenges and opportunities projects closer to the poor, including improving 4 Against this backdrop, achieving rapid agricultural productivity in rural areas, expanding and uninterrupted growth over a decade and targeting unified social protection programs or more is the foundational challenge. The that keep people from slipping into poverty, Government’s second Medium-Term Plan attracting private sector investment and calls for huge investments in infrastructure. participation into education, and improving A key opportunity here is to leverage private service delivery in health at the local level. sector resources through innovative public- private partnerships (PPPs), which are currently underdeveloped. To underpin a sound macroeconomic framework, a renewed effort is 6 The changing institutional landscape is undergoing a tectonic shift with powers and 30 percent of government revenues merited to help stabilize the wage bill. A more moving from the national government to forceful initiative is needed to improve the the 47 new county administrations. This business environment, including tackling some of transition is truly historic and few countries the deficiencies pinpointed in World Bank Group have attempted anything on this scale. The iv F Y 2 0 1 4 - 2 0 1 8 • country partnership strategy for K enya forthcoming challenge is to deliver a “devolution maximize the prospects of success: (a) confirming dividend” through greater citizen engagement, a credible line of sight to make a sustainable direction, and oversight of public authorities to impact on poverty and prosperity; (b) critically fundamentally deliver better services to ordinary reviewing WBG capability and comparative people; building new local governmental advantage, including assessing opportunities structures that are responsive and responsible; for WBG collaboration; (c) cementing client and fresh inter-governmental relationships, ownership; and (d) calibrating client capacity and including resource transfers that translate policy accompanying project design. The selectivity priorities into meaningful on-the-ground services. test is used in a cascading fashion to establish the three domains of engagement, the sectors 7 All of these opportunities would be amplified by improved governance and reduced corruption, or undermined by any within each of the domains, and to make trade- offs between particular operations and analytical advisory activities (AAA). deterioration in the prevailing environment. In moving forward the WBG will be firm in its intolerance for corruption and desire for impunity to end, while setting expectations 9 The first domain of engagement is competitiveness and sustainability. Improving infrastructure and the business sensibly to make step-by-step progress. There environment, while being responsive to are opportunities to continue improving public environmental pressures, is the backbone financial management, corporate governance of long-term growth. WBG policy advice will standards, openness, transparency, and help the authorities create a well-functioning accountability in government; and to maintain and properly regulated energy market; IDA robust safeguards. Such an “institution-building” financing will be used for some publicly merited approach will protect not only the integrity investments; and IFC and MIGA instruments of WBG resources but also Kenya’s internally will help leverage more private resources. More generated resources that contribute to 90 broadly, the Bank Group will redouble its support percent of all public spending. to public-private partnerships, especially in the water and transport sectors where there is Strategic options to make the most medium-term potential. On transport, the focus of the WBG assets of new IDA lending will be on significant rural feeder roads within and between counties to 8 To help Kenya address these challenges, this CPS draws on a fruitful country relationship established over several decades and sets out connect communities to emerging economic opportunities. Competitiveness can also be enhanced through improving the business how the combined resources of the Bank, environment, unleashing the potential of IFC, and MIGA can best help Kenya fulfill its specific sectors and geographic locations, ambitions of becoming a modern economy and ramping up financing sector and capital in which growing prosperity is shared across market development. The Bank will support the all communities. The Bank will use a “selectivity Government’s oversight of the rapidly emerging test” that deploys a four-pronged benchmark oil and gas sector. Both IFC and Bank resources to guide the deployment of scarce resources to will be deployed to help create private sector Partnership for Shared Growth and Prosperity v jobs and try to make cities livable and sustainable, development will be buttressed by deepening with a special focus on secondary cities where regional integration with its neighbors; and poverty is proving most stubborn. WBG investments will be made in multi-country projects, including in energy and transport. 10 The second domain of engagement is to protect the vulnerable and help them develop their potential, which is critical to 12 Individually and collectively achievement of sustainable development the sharing in prosperity. Social protection plays results will only be possible if they are bound a pivotal role—the Bank’s strong engagement together through a connecting platform of will be maintained. Health is also a pressing garnering good governance, which in some priority; in this sector the combined resources ways has been an Achilles heel in the past. of IDA and IFC, alongside global funds and The WBG support has at its heart supply-side other partners, will be scaled up. Another key capacity building to strengthen oversight to help target support for the poor is to focus institutions, including support for better public on agriculture, a high priority since it has such financial management and for more effective a direct link with helping families in rural areas institutions of accountability, combined with where a majority of Kenyans live. Potential IFC demand-side accountability such as the use investments in infrastructure, agro processing, of open community meetings for beneficiary and financial institutions further support the engagement. The Bank will continuously goal. The burgeoning youth population brings review the impact of project-level governance opportunities and challenges for WBG support measures that have been put in place, scaling in education, jobs, and skills. Protecting the up those that have been effective, including poor who are disproportionally impacted by drawing on input from the WBG’s Integrity Vice climate variability will also be an area of support. Presidency (INT) on project safeguards and And across the board the gender focus of WBG institutional support to agencies such as the operations and analytical work will be upgraded, Ethics and Anti-Corruption Commission (EACC). including support for female education, The WBG will deploy “corruption calibration” to entrepreneurship, and rural women’s groups. its lending program—adjusting areas of focus and/or scaling back resources in the event of 11 The third domain of engagement focuses on building consistency and equity. This is a really long-term drive that has devolution issues, which threaten the security of IDA and IFC resource use. at its core. The Bank’s large-scale capacity- Implementing for results building and AAA program will inform a series of IDA operations to help counties and national agencies to make devolution work. Upon 13 The strategy incorporates a results-focus in this CPS and in specific operations and is flexible in responding to new conditions request, the Bank would assemble and manage a Trust Fund framework to maximize donor and information such as updated poverty data coherence in this fluid arena. IDA investments in due course. Targeted outcomes have been will support a more evidence-based approach articulated in a multi-sector fashion, reflecting to policy making, public spending, and public the interdependence of products across the administration reform. The consistency of Kenya’s strategy. The Bank Group’s efforts to manage for vi F Y 2 0 1 4 - 2 0 1 8 • country partnership strategy for K enya results across the country program are built on Managing risks 15 country systems and capabilities for measuring Any instability in the macroeconomic and monitoring progress. Collaboration across environment would probably be the the Bank Group and with other partners will single most damaging factor to overall be purpose driven in specific areas such as poverty prospects. The mitigation strategy business climate, financial sector, public- revolves around the long-term drive to improve private partnerships, energy, and agriculture. competitiveness and exports, combined with a The selectivity test is already pushing the Bank prudent strategy on reserves and international Group to expand in some fields—such as capital access to cope with potential volatility. supporting secondary cities, promoting rural Disasters and insecurity, natural or man- development and devolution—and tapering made, can be expected to occur even though Bank involvement in others such as highways, their timing and severity typically cannot be natural resource management, and legal reform. predicted; and the Bank Group and its partners This process is dynamic, and the assessment will will seek ways to help cope with such risks in the be continuously updated. future. Other strategic risks include unexpected changes in political leadership, policy direction 14 The WBG could be providing over US$1 billion per year to Kenya over the life of this CPS. Careful portfolio management will and ministerial leads in key sectors, funding priorities of other donors, or a loss of appetite of strategic partners for IFC- and MIGA- continue to be an important ingredient of the supported deals. Each of these would require drive for results—with tailored approaches to nimble re-engagement to prevent changes suit the particular circumstances of Bank, IFC, unduly affecting the WBG-supported program. and MIGA investments. IFC is targeting portfolio Finally, operational risks include a worsening of expansion perhaps even beyond the US$785 the governance and corruption environment, million of commitments at mid-FY14 if market including in new county administrations as conditions permit. MIGA’s current total exposure their activities expand. The mitigating measures to Kenya is US$255 million, and international include (a) the thrust of this CPS to help garner investors’ interest in infrastructure, power, and good governance, including as part of the agri-business sectors provides potential for this to devolution process; (b) active cooperation expand further. The Bank’s annual commitments between INT, the Bank, and the authorities in will be governed by the IDA17 settlement, order that preventive measures are built into provisionally assumed at around US$600 million project design, and allegations when received each year. This will build on the IDA portfolio in are handled firmly and decisively; and (c) good Kenya of US$4.3 billion at mid-FY14, covering 23 communication with stakeholders, including national projects (US$3.5 billion) and 7 regional the Board, so due proportionality can be applied projects in which Kenya is a partner (US$0.8 in any strategic response needed by the Bank. billion). It is important to continue to “move to scale” especially in IDA investments, but also in IFC commitments, by focusing on larger projects and the judicious use of additional finance. Partnership for Shared Growth and Prosperity vii