In the national budget presentation last month, the CS gave a handsome amount on SGR.

Explain how
this will influence IBM and accounting in the region 20mks. Due date 12-4-17

THE BUDGETARY ALLOCATION ON THE SGR-INFLUENCE

ON IBM AND ACCOUNTING
Owing to the upcoming elections, the Cabinet Secretary for National Treasury, Mr Henry Rotich,
presented Kenyas budget of KES 2.6 Trillion on 30 March 2017. As has become the trend year after year,
it was the largest ever budget, yet. As is normal with an election budget, the CS introduced minimal tax
increases despite the governments ambitious revenue target of over KES 1.7 Trillion for the 2017/18 fiscal
year. However, the government plans to borrow more than KES 800 Billion. This is the first effect the
budget has in the import export balance in terms of international trade. The government will have
pressure to boost exports so as to generate more revenue to tilt the balance to get more foreign exchange
funds to repay its debt. This is also important to keep its currency in value so as to avoid further debt due
to currency devaluation.

With the construction of the estimated 485 kilometer standard gauge railway from Mombasa to Nairobi in
final phase ahead of commissioning in June 2017, the CS presented a budget that shifted focus to the
second phase from Nairobi to Naivasha. The Treasury has allocated Sh59.6 billion for the 120km Nairobi-
Naivasha SGR line whose total construction cost is estimated at Sh153 billion. The total railway (SGR)
budget for the 2017-18 has been halved to Sh75.5 billion from Sh155.5 billion estimates in the 2016-17
financial year.

Over the last three years, Kenyas ranking in the World Banks Ease of Doing Business index has improved
by 44 places and in 2016 Kenya was among the best reformers globally. The rise in ranking is attributable
to reforms such as this investment in railway and road infrastructure that increases mobility, promoting
trade and ease access to credit, making it easy to start businesses due to reduced costs and increased
accessibility. Moving around gets faster with the SGR and as the government completes Phase 1 of the
SGR and commences Phase II, which will connect the seaport of Mombasa to the proposed inland
container depot and industrial park at Naivasha, accessibility and mobility is further improved.

The increased borrowing pressure on the government to meet the financial requirements of its
development plans presses hard on the population from a tax perspective. This in turn increases the cost
of living, demand for high salaries and wages increasing labor costs that translate to high costs of
production, more expensive exports that do not compete favorably with those in other regions of the
world. Thus the government will not be in a favorable position to cover its b=debts due to the poor
balance of payments-imports and exports.

From an accounting perspective, as the project comes to completion, now that it is a work in
progress, the government will now capitalize it in June once it is launched. All manned railway crossings,
stations and terminals now will start incurring costs that will no longer be capitalized in government
books. These will now be expensed. There will be higher operating and administration expenses in terms
of salaries and safety preparedness and prevalent maintenance practices.

After commissioning, the railway public sector will be placed in the hands of a parastatal that will require
a budgetary allocation to run yearly. As part of accounting reforms, accrual based financial statements to
be rolled out beginning June 2017 for the parastatal manning the SGR other than the cash based
capitalization that had been done before. Other key items will include accrual of interest on foreign loans
and bonds that had been taken to develop the railway as the grace period for some of these facilities will
be ending soon.

THE SGR-INFLUENCE ON IBM AND ACCOUNTING

We now look at how and to what extent investment in the SGR transport system can contribute to IBM
economic development, at both national and regional levels, as well as its impact on accounting. We know
that the transport modes and connections can have a bearing on the pattern of regional and international
business. As a contributor to economic development, transport infrastructure by its very nature has
important spatial impacts, for example on intra-regional and inter-regional transport time and costs, and
thus potentially on the location of households and businesses. Businesses will have the flexibility of
transporting products to the coast and exporting them via sea or importing products from other countries
to their places of business.

A distinguishing feature of the transport sector is that its function is primarily as an input into many other
activities. Firms transport products to distribution centers and retail outlets; businesses send their
employees to meet with customers, suppliers, regulators and co-workers; people travel to work and for
leisure pursuits. Activities like tourism will be facilitated through transport networks, enabling foreigners
to travel around the country and locals to go abroad.

When done, the economic fundamentals of this trans-Kenyan rail service will be sound: these trains will
allow manufacturers and freight forwarders to get their products between inland Naivasha and coastal
Mombasa in less than half the time of shipping by road at a fraction of the cost of shipping by air. While
these trains are not a viable form of transport for all types of products, they fill a void in the market for
high-value products that need to be transported as quickly as possible, such as electronics, fashion items,
car parts, heavy machinery, premium agricultural goods, and fresh meat thus enhancing market
availability of these items in the local and international markets.

With the EAC looking for new ways to boost their international relevance as well as promote their ailing
economies, transport across Kenya, Uganda and Tanzania will become one of the biggest infrastructural,
economic, and political developments happening in this part of Africa. Oil being drilled in Turkana will
find a trade route whose impact will extend far beyond merely being an export, it will also reduce the
imports of crude oil thus improving balance of payments for Kenya internationally.

In any case, spending public money in the construction of SGR lines has been defended as a socially
desirable public investment which produces several types of benefits such as passenger time savings,
increase in comfort, generation of new trips, reduction in congestion and delays in roads and airports,
reduction in accidents, reduction in environmental externalities, release of needed capacity in airports
and conventional rail lines, and wider economic benefits including the development of the less developed
regions. All these have an impact of net growth in economy, something really needed to sustain
productivity, sustenance of the tax burden to pay back debts and grow Kenya as an investment hub.

SGR is quite effective in deviating passengers from other modes of transport but the relevant question is
whether the sum of the discounted net social benefits during the life of the infrastructure justifies the
investment cost.

Investing in SGR infrastructure is associated with lower total travel time, higher comfort and reliability,
reduction in the probability of accident, and in some cases the release of extra capacity which helps to
alleviate congestion in other modes of transport. Last but not least, it has been argued that SGR
investment reduces the net environmental impact of transport and boosts regional development.

Benefits also come from generated traffic. The conventional approach for the measurement of the benefit
of new traffic is to consider that the benefit of the inframarginal user is equal to the difference in the
generalized cost of travel without and with SGR. Where the conventional rail network is congested or the
airports affected are working close to maximum capacity, the construction of a new SGR line has the
benefit of relieving capacity for suburban or regional passenger services or freight. In the case of Moi
International airport, the additional capacity of the SGR can be used to reduce congestion or scarcity
hence enhance trade and international travel convenience. In any case, the introduction of SGR would
produce thus reduce congestion at airports, enhance international travel and trade.

SGR and its effects on regional inequalities

The reason is that freight transport does not benefit from high speed and therefore the location of the
industry is not going to be affected by this type of technology. Moreover, in the case of the service industry
SGR may lead to the concentration of economic activity in the core urban centers. Agglomeration benefits
in sectors such as financial services may be greater than in manufacturing. This is relevant to the urban
commuting case but arguably is important for trade in such areas as they grow much faster, become trade
hubs, open up opportunities for international business to match other areas. One day, Naivasha as a trade
hub, due to the SGR, will develops to levels of other large towns. Investment in SGR infrastructures is a
way to reduce regional inequalities.
Firms producing in locations with relatively many firms face stronger competition in the local product and
factor markets. This tends to make activities dispersed in space. However, the combination of increasing
returns to scale and trade costs encourages firms to locate close to large markets, which in turn are those
with relatively many firms. This creates pecuniary externalities which favor the agglomeration of
economic activities.

Reductions in trade or transport costs, by affecting the balance between dispersion and agglomeration
forces can decisively affect the spatial location of economic activities and thus impact international trade.
For high trade costs, the need to supply markets locally encourages firms to locate in different regions.
For intermediate values of transport costs, the incentives for self-sufficiency weaken. Pecuniary
externalities then take over, and firms and workers cluster together. However, the price of local factors
and the availability of goods tend to increase wherever agglomeration takes place. If this is the case and
there is enough mobility, as trade costs continue to fall, rising factor prices simply give an additional kick
to agglomeration by inducing immigration. On the other hand, if there is little mobility, for very low
transport costs it may be firms that relocate in response to wage differentials.

Regional policies have the explicit aim of reducing regional inequalities. One of the main instruments for
this is the improvement of transport infrastructure. However, it is not obvious that lower transport costs
facilitate convergence. Railway tracks can be used to travel both ways. A better connection between two
regions with different development levels not only gives firms in a less developed region better access to
the inputs and markets of more developed regions. It also makes it easier for firms in richer regions to
supply poorer regions at a distance, and can thus harm the industrialization prospects of less developed
areas.

Railway accounting
From an accounting perspective, building the SGR infrastructure involves three major types of costs:
planning and land costs, infrastructure building costs and superstructure costs.

Feasibility studies, technical design, land acquisition, legal and administrative fees, licenses, permits, etc.
are included in Planning and land costs, which can reach up to 10% of total infrastructure costs in new
railway lines requiring costly land expropriations. Infrastructure building costs involve terrain
preparation and platform building. Depending on the characteristics of the terrain, the need of ducts,
bridges and tunnels, these costs can range from 15 to 50% of total investment. Finally, the rail specific
elements such as tracks, sidings along the line, signaling systems, catenary, electrification
communications and safety equipment, installations, etc., which are called superstructure costs. Railway
infrastructure also requires the construction of stations. Although sometimes it is considered that the cost
of building rail stations, which are singular buildings with expensive architectonic design are above the
minimum required for technical operation, all these costs are part of the system are thus capitalized
during the construction of the SGR.
Transport accounts of rail transport involve the cost and revenue information provided and allows the
comparison of the total social costs of transport and the corresponding transport charges, taxes and
revenues. On the cost side, the accounts distinguish between infrastructure costs, supplier operating
costs, accident and environmental costs, with a further distinction between internal and external costs.

On the revenue side, the accounts distinguish between user charges and taxes, whether fuel tax should be
considered part of revenues allocated to rail transport or part of general taxation without any transport
relation. Accounting for Infrastructure costs include capital costs (new investment and replacement),
maintenance and operating costs of transport infrastructure. Supplier operating costs include vehicles,
personnel and administration costs incurred by rail transport operators for the provision of transport
services. Accident costs only include the external costs of accidents, so the internal costs of accidents, as
time costs, are user costs and therefore are not included in the accounts. Internal and external accident
costs varied depending on insurance practice, the coverage of their national health systems etc. When
these costs are not paid by the transport user they are included in the accounts, as happen to be the case
with the loss of production due to accidents, the rehabilitation costs of accident victims when these costs
were covered by national health, the costs of police and the costs of material damage to public property
when not covered by insurance companies. Environmental costs include the environmental impacts of
transport, such as air pollution, noise and global warming.

Impairment
Two relevant questions appear here regarding SGR investment and pricing. One affects the optimal prices
to be charged in the already existing SGR lines, the other concerns the prices that should be considered
when commissioning the construction of new lines. Both questions have to be solved together and lead to
the discussion of impairment. In accounting for the old railway line, if the new railway line is doing better
at the same job of transporting passenger such that it is affecting the old one in a way that makes it
redundant or not profitable anymore, then we should consider impairing the old railway line as the
predicted future economic flows from it may be much less than expected. Both intramodal competition
and intermodal competition require a sound and clear pricing policy that allow the transport user to
choose the best option (the one he/she prefers) within a transport mode. It seems clear that for the best
user option to be the best form the social perspective, prices should reflect the opportunity costs of that
choice.