Kenyan authorities push to raise standards on construction projects

Following on from decades of positive gains, Kenya’s construction sector continues to see robust growth and remains a central component of the country’s immediate and longer-term economic growth agenda. The industry’s GDP contribution in 2014 totalled KSh259.6bn ($2.86bn), up 13.1% on 2013, according to the Kenya National Bureau of Statistics (KNBS). This growth pushed the construction sector’s share of the economy up by a third of a percentage point to reach 4.8% of GDP. Momentum in the construction sector is due to a comprehensive investment effort forged between the government and the private sector. Major infrastructure upgrades and mega-projects – driven by the country’s Vision 2030 national development plan – span a wide range of areas, from new housing complexes to road rehabilitation to installation of new infrastructure for telecoms and energy, among other areas. Estimates from Frost & Sullivan, a consultancy, put the total planned investment in infrastructure at $55.6bn, much of this for telecoms and electricity generation projects. Chief among such plans is the $24.5bn Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) Corridor project, which aims to boost connectivity between Kenya and its neighbours Ethiopia, South Sudan and Uganda, with the goal of making Kenya the “continental gateway” of East Africa. The mega-project includes new roads, railways and an oil pipeline, along with new coastal port infrastructure and inland dry port improvements, three international airports and three resort cities. A key component of Vision 2030 currently under way is the KSh345bn ($3.8bn) standard gauge railway being built between Nairobi and the port city of Mombasa. Jointly funded by the China Exim Bank (90%) and the Kenyan government (10%), the 472-km rail line is scheduled for completion in June 2017, with plans to extend this ultimately to Malaba on the country’s western border with Uganda. The first leg of this progressed in September 2015, when a deal to extend the Mombasa-Nairobi line to Naivasha, 120 km north-west of the capital, was signed by China Road and Bridge Corporation and Kenya Railways, a link that will connect the main rail line to planned special economic zones in Olkaria.


The construction industry’s substantial jump in 2014 made it the best-performing sector that year, owing primarily to an injection of funds for major road works, railway projects and road rehabilitation, according to the KNBS’s “Economic Survey 2015”. Commercial credit extended to the construction sector rose from KSh70.8bn ($778.8m) in 2013 to KSh80.4bn ($884.4m) in 2014, an increase of 13.6%, according to the KNBS. Similarly, the value of approved building plans in the private sector rose by 7.8%, from KSh190.6bn ($2.1bn) in 2013 to KSh205bn ($2.26bn) in 2014. Cement consumption, a useful indicator for construction activity, grew by 21.8% in 2014 to reach 5.2m tonnes, according to the KNBS – more than double the growth rate four years earlier – and Standard Investment Bank expects this to reach 6.3m tonnes in 2015 and 6.7m in 2016.

Construction Costs

Analysis carried out in 2013 by the African Development Bank (AfDB) showed that typical costs for a single housing unit – whether a standalone or part of a high-rise – broke down to 60% for construction (split 70-30 between materials and labour), 10% each for infrastructure, land and professional fees (architects, engineers, permits and the like), and 5% each for financing and contingencies. The high proportions of building costs that go to materials presents a challenge for private firms to provide cost-effective housing. Indeed, such costs have risen in recent years. Between 2007 and 2009 alone the cost of building materials rose by 40%, according to the KNBS.

One option for curbing this is use of alternative materials, which is gaining traction in Kenya. For example, using expanded polystyrene panels as a substitute for brick and timber can cut unit building costs by about half, according to Wachira Njuguna, former managing director of the National Housing Corporation. Meanwhile, the most recent “National Housing Survey”, covering 2012-13, highlights the increased use of stabilised soil blocks (SSBs), reinforced concrete panels and prefabricated panels, noting that 41% of 450 industry professionals surveyed advocated the use of SSBs. The alternative technologies most often advocated by survey respondents were solar and biogas systems (35.7% and 31.4%, respectively). To reduce housing construction costs, 40% of respondents urged use of affordable construction materials, and there was also strong support for incentives and tax concessions for low-cost housing builds.


Among the taxes relevant to the construction sector is value-added tax (VAT), which is set at 16% of all taxable goods and services, including imports of equipment and rent on non-residential buildings. The levy, chargeable under the VAT Act of 2013, came into effect in September of that year. Significantly, in October 2014 the government also reintroduced a long-dormant capital gains tax (CGT), setting a standard 5% rate effective January 1, 2015, via an amendment to the 2014 Finance Act. Until then, the CGT had been suspended since 1985 and the government had made previous attempts to reinstate the tax in recent years to shore up public finances in light of spending increases, according to EY, a consultancy. The tax applies to gains realised on property “whether or not the property was acquired before January 1, 2015” – in effect, rendering taxable any capital gains accrued since the CGT’s suspension 30 years ago. Though the Finance Act does not detail how the CGT on property transfers will be paid, EY expects that it will be payable similarly to stamp duties, which means that evidence of payment would be required in order to register any transfer of property.

Informal Housing

The government has long been working to tackle the challenges of rapid urbanisation, and current efforts in this vein present many opportunities for the construction sector. One major initiative is the Kenya Informal Settlements Improvements Project (KISIP), launched in 2011 to improve living conditions in existing slums by investing in roads, street lights, water and sanitation facilities, stormwater drains and footpaths. Co-financed by the World Bank’s International Development Association, the Swedish International Development Cooperation Agency and the French Development Agency, the project will have an estimated total cost of $110m. It will also help plan for future urban growth so as to prevent new slums from emerging, according to the World Bank.

So far, KISIP has civil works under way at 19 settlements in six urban centres: Nairobi (the largest), Mombasa, Machakos, Naivasha, Nakuru and Eldoret. As of April 2015 some $35m had been disbursed, with another $47m committed. In May the World Bank submitted a proposal to disburse another $8.3m tranche for upgrades at four additional settlements in Kitui, Kericho, Kisumu and Embu; work is scheduled to start in late 2015. Much of the work involved is being carried out by the construction industry: the World Bank reports that 13 contracts have recently been awarded under KISIP for infrastructure works worth a total of $45m.


Despite the rise in lending to the private construction sector, financing projects is not without challenges. Lack of awareness about financing options among the country’s smaller businesses, for example, means they are often deprived of potential sources of capital, a situation that favours larger firms and reduces competition. “Fundraising through capital markets continues to be under-utilised by many of the small and medium-sized developers, as these companies simply do not know how to access the markets for financing. Only the large developers have been able to tap into this resource,” Chetan Hayer, director of Nirbauh Gulshan Ventures, told OBG. Another challenge is non-performing loans (NPLs). Setbacks in 2015 from NPLs have constrained Kenya’s development potential. According to the Central Bank of Kenya (CBK), between January and March 2015 the highest increases in NPLs were found in building and construction, with a 27.5% rise, and real estate, at 20.5%. The construction sector was hit by a rise in bad loans from $103m to $134m in the first quarter of 2015, while the real estate sector’s NPLs rose from $129m to $155m. The CBK attributed this to the high interest rates set by commercial banks, which average around 16%, but others cited factors such as political uncertainty, the recent tourism slump resulting from security incidents, a decline in agriculture exports and delayed government payments to contractors. “The spill-over effects of high lending interest rates and challenges in the business environment in the first quarter added to the increased NPLs,” the CBK said in a statement. “However, banks continue to deploy enhanced credit appraisal standards to mitigate credit risk.”

Regulatory Context

Established by the NCA Act No. 41 of 2011 and formally set up in 2012, the National Construction Authority (NCA) oversees the construction sector in Kenya. Previously, the sector had been without a regulatory body since 1988. The need for a new regulator was evident from a number of long-standing issues. Poor building standards, for example, have seen a number of buildings collapse in Nairobi, most recently a five-storey residential structure in December 2014 and two others in January and April of 2015. To prevent such incidents and raise standards, the NCA has been mandated to ensure greater compliance, overhaul regulations and streamline the sector.

The undertaking will come with some difficulties. In a study published in March 2015 by Esther Gacheru and Stephen Diang’a of Jomo Kenyatta University of Agriculture and Technology, the authors surveyed 50 local contractors and concluded that the main challenges in Kenya’s construction industry are low participation rates in contractor training programmes, non-compliance with standards, corruption and the high contract fees that encourage graft; the NCA charges a 0.05% levy on any project costing more than KSh5m ($55,000). Nearly all of those surveyed – 91% of large contractors and 94% of smaller ones – listed curbing corruption as a way the NCA can improve the regulatory system.

The NCA acknowledged these challenges in a statement made at the 2014 release of its new Code of Conduct and Ethics for the Construction Industry: “Due to the easy entry into the industry, it has normally attracted the activity of the non-qualified and unprofessional practitioners in all its subsectors, leading to under-performance, poor service delivery, unethical practices, and poor facilities and infrastructure development.” The new code of conduct – drafted together with the Office of the Attorney General, the Kenya Federation of Master Builders, and the Ministry of Land, Housing and Urban Development – represents a direct response to such issues, with the NCA calling it a “significant tool to facilitate synergy, professionalism and accountability necessary for high-value service delivery in the construction industry”.

Other industry players are similarly ramping up efforts to raise standards. In Nairobi, for example, local associations are conducting a public awareness campaign on the issue of poor construction, and in early 2015 the county assembly passed a new law making it easier to condemn and demolish buildings in breach of regulations (see analysis). The private sector is also playing a role. For example, Bamburi Cement, a local firm majority-owned by France’s Lafarge, launched free training seminars in August 2015 from which more than 1600 masons are to benefit – part of its “Builders Academy” initiative to enhance masons’ skills through formal training in a bid to ensure safer construction. Bamburi reportedly plans to partner with the NCA to further develop the training scheme.

Strategic Plan

After several years of strong growth in the construction sector, the NCA further sharpened its focus in May 2015 with the release of its Strategic Plan 2015-20, whose five main aims are to improve regulations, boost capacity, ensure quality, enhance research and development, and develop the NCA itself into a more efficient agency. The document identifies the persistent challenges that the NCA aims to tackle, including low completion rates, lengthy procurement procedures, limited access to affordable financing, legal conflicts, low technical uptake, unethical practices, unfair competition and insufficient workforce skills. Under the previous plan, the NCA says it built its registry to include 14,000 construction firms and 22,278 “classes of works”, and that it accredited 3000 construction workers and supervisors. Among the new tools for improved oversight are monthly and quarterly progress reports by department heads, detailed annual work plans and an “action plan matrix” to identify any deviations from goals. The NCA also provided regional training to 18,000 industry delegates from across the country, set up 10 regional offices and carried out quality assurance exercises at 264 sites nationwide.


One issue the industry raised in 2015 was the cost of permits. After an NCA decision in June 2014 to introduce the 0.05% levy on building contracts, industry players began calling for this rate to be reduced, culminating in a request by the acting lands and housing cabinet secretary, Fred Matiang’i, that the NCA produce a proposal for lowering its fees. “I met with the board and I am calling on the NCA chairman to implement the reviews as soon as possible,” he told a stakeholder conference in September 2015. The NCA levy comes on top of a recent rise in fees from the National Environment Management Authority, which now charges 0.1% of project cost, or a minimum of KSh10,000 ($110), for an environmental impact assessment. The county government in Nairobi, the country’s biggest real estate market, raised its own permit fees in 2013 from a range of 0.001-0.006% to a flat 1.25% of project cost, boosting its revenues from this source to KSh1.3bn ($14.3m) in the year to June 2015, more than double the previous year’s total. According to local news site The Daily Nation, the combined value of all permitting fees amounts to about 2% of construction costs.

One useful initiative that could have wide implications for sector regulation is an automated permit system, launched in September 2014 by the Nairobi city council and backed by the World Bank. The second of its kind in sub-Saharan Africa after South Africa, the scheme aims to reduce the number of meetings that occur between applicants and the regulator, thus speeding up the approval process for housing, infrastructure and other building projects. It will also improve the inspection process, according to the World Bank, by allowing officers to create risk profiles of construction projects and update them at different stages of building. This could help foster best practices among architects. With a successful launch in Nairobi, the plan is now to replicate this system in other localities, such as Mombasa and potentially Kisumu.

Private Sector Role

To help achieve its growth targets, the government is looking to public-private partnerships (PPPs) to provide new sources of funding for state projects. With this in mind, it passed the PPP Act in 2013, establishing a special agency within the National Treasury called the PPP Unit (PPPU). Contracts entered into via PPP agreements are also governed by the Government Contracts Act. The government plans to use PPPs to help provide financing worth KSh1.8trn ($19.8bn) for a total of 69 projects covering the transport, energy, education, water and sanitation, and health sectors. Infrastructure spending under the Second Medium Term Plan – the part of Vision 2030 that covers 2013-17 – is calculated at $4bn per year, of which the government will be able to provide only $1bn-2bn, relying on PPPs to make up the rest. “We cannot go back to taxes to finance our infrastructure projects,” the PPPU’s director, Stanley Kamau, told local media in 2015. “It is time to use PPPs to propel growth in Kenya.” In addition to new finance options, the PPP approach includes adopting lower-cost technologies while prioritising infrastructure investment. Along with bringing in private sector expertise and innovation, the offsetting of budgetary risk can reduce the potential for cost overruns with state projects. In January 2015 the government’s budgetary deficit for infrastructure was about $2bn, according to Henry Rotich, the Treasury secretary, and 57 projects had been identified for financing through PPPs, a number that grew to 71 by August 2015.

Infrastructure Projects

Momentum in PPP projects is building, albeit slowly. In the road transport sector, the government recently launched feasibility studies on a range of PPP projects, hiring a Deloitte-led consortium in November 2014 to assess the prospects for building a second bridge linking Mombasa Island with the mainland, and booking PwC in January 2015 to help draw up a viable package of upgrades and maintenance for the 485-km Mombasa-Nairobi Highway. It also engaged Intercontinental Consultants and Technocrats to develop an operation and maintenance (O&M) scheme for the eight-lane Nairobi-Thika superhighway completed in late 2012, as well as an O&M scheme for the Nairobi Southern Bypass, a 28.6-km dual carriageway being built by the China Road and Bridge Corporation. Tendering began in January 2015 to build 10,000 km of roads in three phases over three years. However, as project bids were far higher than expected, the government was moved to revise its strategy and targets accordingly.

In the sea ports sector, the government is currently evaluating a tender to carry out phases two and three of a second container terminal at Port of Mombasa, a project funded by the Japan Bank for International Development that will cover 110 ha and have a capacity of 1.2m twenty-foot equivalent units a year. In February 2015, feasibility studies also began on modernising Kisumu Port, with Rotterdam-based Maritime and Transport Business Solutions serving as a consultant.

In the energy sector, a host of PPPs are planned, perhaps chief among which is a 980-MW coal-fired power plant in Lamu, to be built by a Kenyan-Chinese consortium called Amu Power Company under a build, own, operate, transfer contract for 25 years. The project, which was awarded in 2014 and will cost KSh164bn ($1.8bn), was delayed by negotiations regarding the resettlement process for the site. According to local media, the company expects to be issued with an environmental impact report by the end of November 2015, and to begin construction early the following month.


One notable project that made progress in 2015 is the Two Rivers development, a 41-ha mixed-use complex centred on a mall of 62,000 sq metres – the largest in East Africa – and including medium-density residences, a five-star hotel and office blocks. Of the project’s total estimated cost of KSh25.2bn ($277.2m), the mall portion will cost an estimated KSh16.6bn ($182.6m) and involves one of the largest foreign direct investments made by a Chinese firm in a private enterprise, according to the developer, Kenya’s Centum Investment Group. The main contractor for the mall, Aviation Industry Corporation of China, invested $70m and owns a 38.9% stake, while Kenya’s state-owned Industrial and Commercial Development Corporation, which owns 23% of Centum, invested $5m, with another KSh7.2bn ($79.2m) financed through debt via Co-operative Bank of Kenya. Construction began in 2014 on the mall which will, upon its opening in March 2016, surpass Kenya’s 50,000-sq-metre Garden City Mall, currently the largest in the region. Phase two of Two Rivers, the building of 108 apartments, is set to start in late 2015 and finish by the end of 2016, according to Centum’s CEO, James Mworia.


Kenya’s construction sector is well placed to gain from the government’s long-term infrastructure plans as well as from strength in the property development segment. Efforts to raise construction standards should also help curb perceptions of corruption and level the playing field for competitors, aided by regulators’ enhanced tools to improve oversight and ensure compliance. Given the wide gap between public funds and planned project costs, the government’s push for PPPs to finance public works should open doors for both local and foreign private contractors. The government, the private sector and donors alike recognise how central the construction sector is to realising Kenya’s long-term growth potential and helping to solve poverty and unemployment issues. Industry growth therefore looks set to continue, with support coming from multiple channels.


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The Report: Kenya 2016

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Construction & Real Estate chapter from The Report: Kenya 2016

Construction & Real Estate chapter from The Guide

Construction & Real Estate chapter from Table of Content

The Report: Kenya 2016

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