Low development budget hurts Kenya's status as a regional hub

Amid a constrained fiscal space and a huge debt burden that is taking up the largest chunk of the government’s expenditure, of about Sh1.1 trillion in the 2025/2026 financial year, development remains one of the key areas that has been left competing for limited resources.

Additionally, President William Ruto has been vocal that the country cannot continue relying on borrowed funds for its development ventures.

This is the reason investors such as Adani were welcome on a public-private partnership (PPP) deal. The Nakuru-Mau Summit highway and the Nairobi-Mombasa highway are also set to be implemented through PPP.

In the short period when the government had not paid pending bills to contractors, the effect of stalled road projects was evident, until the National Treasury released Sh80 billion, and work resumed.

When such projects stall, real estate feels the heat because residential and commercial real estate tend to follow infrastructure, such as roads, railways or airports.

Mark Dunford, chief executive of Knight Frank Kenya, a real estate consultancy firm, noted that for Kenya to retain its status as the hub of East Africa and possibly grow to become the spoke for sub-Saharan Africa, mega investments need to be made in infrastructure.

“If we look at how megacities were developed - London, Singapore, Hong Kong, Dubai and Nairobi, to a large extent, all have been around airports,” he explained.

He said there is a need to focus on ensuring foreigners can get into the country easily, as well as Kenyans leaving easily. This means going further and working on visa policies with other markets, such as the European Union.

“And that makes the successes of a lot of big cities,” said Mr Dunford.

Absa CIB Head of Commercial Property Finance, Africa Region Sandile Mpanza, while speaking at the sidelines of the recently held East Africa Property Investment (EAPI) summit, noted how Kenya’s infrastructural outlook has changed dramatically since he was in Nairobi eight years ago.

He said real estate, residential and commercial do have a lag effect, that infrastructure precedes, then the developments follow.

“As Absa, we follow our clients. They know the market better than ourselves. I don’t think, from a residential point of view, that we will move into a node that does not have the infrastructure to support people living and working,” he pointed out.

“While infrastructure has slowed down, we have not seen that slow down translate into residential developers’ activity.”

The Budget and Appropriation Committee, in its report on the budget estimates for the upcoming financial year, notes a reduction in development expenditure relative to the earlier released Budget Policy Statement.

It attributed this to a Sh30.8 billion reduction in the gross domestic financing component. “…implying potential delays and scaling down of key development projects,” the report says.

“The committee observed that this could affect the implementation of infrastructure, health, education and other capital-intensive initiatives, ultimately slowing economic growth and undermining the government’s development priorities.”

The report states that while the national government’s recurrent expenditure is projected to increase by 3.4 per cent, an equivalent of Sh59.3 billion, development spending is set to grow by 14.9 per cent, Sh91.7 billion signalling a renewed focus on capital investments.

“However, the committee observed that while the financial year 2025/26 development expenditure is projected to increase, historically, development allocations tend to be front-loaded in the original estimates but are frequently revised downward in supplementary budgets,” the report says.

But for Sakina Hassanali, co-chief executive and creative director of HassConsult, a real estate consultancy firm and developer, the answer to this slowdown lies in developing the nodes around the city.

This is considering that a slowdown in infrastructure means demand for commercial and residential real estate continues to pile up. And this puts more pressure on the already existing infrastructure. “For as we are not creating nodes outside the city that will ease congestion in Nairobi, infrastructure in the city is under a lot of duress,” she said.

She said more of the units coming up in the city are in areas such as Kilimani and Parklands, which are straining the available city infrastructure. “We are also seeing a lot of residents' associations reacting to this,” she said.

“For as long as we are not developing these nodes outside the city, I think, we are at risk, and Nairobi being the East African hub will be an issue because we are not able to provide for everyone within the city.”

National Treasury and Economic Planning Cabinet Secretary John Mbadi, given the caving ceiling reducing the space to borrow for development purposes, pointed out in his maiden budget on Thursday last week that PPPs are the way to go to finance the country’s development agenda.

“Currently, there are 32 PPP projects at various stages which are targeted to mobilise Sh70 billion in the financial year 2025/26 through private investments in priority sectors including energy, water, housing, health and transport,” he said.

And, this is not only for the national government, but also state agencies that wish to undertake capital-intensive projects.

He said to ensure transparency and accountability at all stages of project lifecycle; a circular on mandatory disclosure requirements for all Privately Initiated Proposals was issued.

“This measure is part of our broader effort to strengthen the integrity of the PPP programme and to ensure that private sector participation in public projects fosters public trust,” said the CS.

Additionally, he noted that a report commissioned by the National Treasury on leveraging the capital markets instruments, such as pension funds, on infrastructure projects is complete.

He said the committee of experts recommended the establishment and operationalisation of the PPP Implementation Trust Fund (PPP-ITF) as the central mechanism for enhancing private sector participation in PPPs, particularly through institutional and retail entities.

“The PPP regulations under consideration by Parliament will enhance clarity around the PPP processes, thereby enhancing efficiency and project delivery. This will also unlock a pipeline of county-level specific PPP projects in partnership with development partners,” he said.