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Table 1: Perceived Extent to Which Macro-Economic Factors Influence the Project’s Financing
Regarding debt ratio, the results show that 82 (23.6%) participants reported that the indicator had a ‘very strong’ influence on the project’s financing, while 139 (39.9%) described the indicators’ influence as ‘strong’. Contrastingly, 29 (8.3%) participants stated that the debt ratio had a ‘very weak’ influence, while 33 (9.5%) felt that the indicator’s influence on the project’s financing was ‘weak’. Again, the analysis revealed lack of a significant variation in perceptions regarding the influence of debt ratio on the project’s financing (χ2 = 7.592, df = 12 & ρ-value = 0.129). In addition, nearly one-half of participants, 166 (47.8%) described the influence of taxation burden on the project’s financing as ‘very strong’, while 111 (31.9%) felt that the indicator had a ‘strong’ influence on. However, 12 (3.4%) participants perceived that the influence of taxation burden was ‘very weak’, while 15 (4.3%) felt that the indicator had a ‘weak’ influence on the project’s financing. Based on this, the results show lack of a significant variation in perceptions regarding the influence of taxation burden on financing of the concession project (χ2 = 13.499, df = 12 & ρ-value = 0.334).
Relative Importance of Macro-Economic Factors Influencing the Project’s Financing
The results in Table 2 show that inflation rate was the most important macro-economic factor influencing financing of the concession project. The indicator scored a relative importance index of 0.774 (≈0.8). In Kenya, inflation rates averaged 7.8% during the concession period (2007 to 2014). The economy experienced the lowest rates of 4.8% in 2007, while the highest rates (14.3%) occurred in 2012 (Kenya National Bureau of Statistics, 2015). Participants noted that high inflation influenced the project’s financing by increasing the cost of essential supplies such as fuel, electricity, water and labour. Some participants associated high inflation rates with a high cost of hiring and maintaining technical labour. Due to high inflation rates, the concessionaire experienced increasing demands for higher wages from its workers to keep-up with escalating consumer prices. Not only did the challenge undermine RVR’s ability to meet its concessional obligations, but also transmitted negative signals to external financiers. In addition, participants reported that high inflation rates weakened the confidence of existing and potential financiers.
Table 2: Relative Importance Index of Macro-Economic Factors
Next in the order of importance was interest rate (0.7). Participants noted that the rising interest rates affected the project’s financing. A review of Central Bank of Kenya (CBK) data reveals that commercial banks’ lending interest rates averaged at 15.6% between 2007 and 2014 (CBK, 2015a). Participants pointed out that escalating interest rates ate into revenues, which constrained the ability of RVR partners plough back sufficient resources. Besides, rising interest rates made local credit too expensive for partners focusing on the local market; thus, discouraging or delaying further borrowing. Ranking third was debt ratio, with an RII of 0.6. Over the concession period Kenya’s debt to Gross Domestic Products (GDP) ratio average at 46.2% (CBK, 2015b). In view of this, participants indicated that high debt ratio indirectly influenced the project’s financing, by triggering domestic borrowing by the Government, thereby, heightening the risk of inflation and high interest rates. Rising debt ratio interrupted the financial market, making lending terms too expensive for RVR partners.
Taxation burden also scored an RII of 0.6. Participants reported that taxation burden negatively influenced the project’s financing by increasing overhead costs as well as reducing revenues. Of the greatest concern to participants was the fuel levy tax, which RVR paid through the purchase of diesel to power locomotive engines. Participants felt that fuel levy disadvantaged RVR economically, while favoring competitors.
Fuel levy is one of the factors that rendered RVR’s tariffs uncompetitive. In addition, import duty and excise tax on imported hardware affected the project’s financing by increasing the burden and reducing revenues.
Concordance of Perceptions on the Influence of Macro-Economic Factors on the Project’s Financing The results in Table 3 confirms show the mean rank of each macro-economic factor, where inflation rates ranked first, with a mean rank of 2.68; interest rates scored a mean rank of 2.64, followed by debt ratio with
2.53 and taxation burden with 2.16. Furthermore, the analysis obtained a strong level of concordance in
the ranking of macro-economic factors influencing the project’s financing, which was also statistically significant at 0.01 error margin (W = 0.833, χ2 = 41.8223, df = 3 & ρ-value = 0.000).
Table 3: Concordance of Perceptions the Influence of Macro-Economic Factors
The results imply up to 99% chance that participants were concordant and that the identified macroeconomic factors had a strong influence on the project’s financing. Consequently, regulating inflation and interest rates, as well as managing the level of public debt and waiving fuel levy are crucial interventions that stakeholders may consider to improve the macro-economic environment, as well as cushion the concessionaire against commercial risks.
The purpose of this study was to determine factors influencing financing of the railways concession project in Kenya. The study reveals that all the four factors examined were fairly strong predictors of the project’s financing, with inflation rates ranking highest (0.8); followed by interest rates (0.7), debt ratio (0.6) and taxation burden (0.6). In addition, the study obtained a strong level of concordance in the ranking of macroeconomic factors vis-à-vis their influence on the project’s financing, which was also statistically significant at a high level of precision. Based on the findings, stakeholders should provide a supportive policy environment by formulating appropriate and/or adjusting existing monetary, fiscal, taxation, and domestic borrowing policies. Besides, the Government should also consider appropriate measures to cushion the concessionaire global market shocks, as well as waiving fuel levy to provide room for the concessionaire to meet revenue targets.
We thank University of Nairobi for giving Stephen Okelo Lucas (co-author) the opportunity and a scholarship to pursue his PhD degree in Project Planning and Management. We acknowledge the support of Prof. Joyce Kanini Mbwesa in supervising and guiding Stephen through the process of conducting this study and developing the Thesis. We are also grateful to all the participants who volunteered their time to provide the requisite information. Finally, we thank our colleague, Tom Odhiambo for reviewing the draft manuscript and providing insightful comments.
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Institute of Economic Affairs Kenya (2014). Railway Transportation Policy in Kenya: State of Play and Policy Challenges. Public Forum on Kenya’s Railways Transportation Policy 2014. Nairobi: IEAKenya.
Kenya National Bureau of Statistics (2014). Economic Survey 2014. Nairobi: KNBS.
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BIOGRAPHYCharles M. Rambo is an Associate Professor and Chairman at the Department of Extra Mural Studies, University of Nairobi, Kenya. His academic interests include financial management, Small and Medium Enterprises, small-scale farming and education financing. His previous work appears in journals such as Journal of Continuing, Open and Distance Education, International Journal of Disaster Management and Risk Reduction and the Fountain: Journal of Education Research, African Journal of Business and Management, African Journal of Business and Economics. He is reachable at the University of Nairobi through Telephone Number, +254 020 318 262; Mobile numbers +254 0721 276 663 or + 254 0733 711 255; Channel All Correspondence Regarding this Article to Prof. Rambo.
Stephen Okelo Lucas is a Lecture in the School of Continuing and Distance Education. He is reachable through Telephone Number, +254 725747247.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 335 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1
The Government of Kenya initiated a concessional agreement with Rift Valley Railways (RVR) in 2006, under the build-operate-transfer financing framework, to improve delivery of railway transport services and spur economic growth. However, a decade later, RVR’s performance failed to meet performance targets due to financing constraints, among other factors. This study examined selected concessional factors also perceived to be important predictors of the project’s financing and performance. We sourced primary data from 348 staff of RVR and government authorities. We applied Relative Importance Index to determine relative importance of each factor; while Kendall’s Coefficient of Concordance (W) determined the concordance of participants perceptions regarding the influence of concessional factors on the project’s financing. The study found that lack of stakeholder review forums was the most important predictor of the project’s financing (0.7). Also important were concessionaire’s technical capacity (0.6), concession fees (0.6), concessionaire’s revenue (0.5), tariff adjustment (0.5) and concession period (0.3). The study obtained an average level of concordance in participant’s perceptions, which however, was statistically significant (W = 0.618, χ2 = 17.248, df = 5 & ρ-value = 0.015). Periodical review and improvement of concessional factors is likely to facilitate implementation, financing and performance of concessional projects.
JEL: O16 KEYWORDS: Concession, Financing, Build-Operate-Transfer, Railway Project, Relative Importance, Concordance