Contractors build a section of the Taveta- Mwatate road last week.
Infrastructure investments are expensive and returns take a long period
of time to be realised. PHOTO | KEVIN ODIT | NATION
By CANUTE WASWA
In Summary
Very few people earn enough money to pay cash for life’s most important purchases: a home, a car...
Every Kenyan child born in 2016 will have to shoulder
a debt of Sh75,000. This is after the Treasury warned that Kenya’s
public debt will rise by close to Sh1 trillion over the next two years.
It will stand at Sh3 trillion in 2016 from the current Sh2.2 trillion.
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The meteoric rise in debt will partly be due to heavy
borrowing for mega infrastructure projects, with China as the main
financier. It sounds scary. But should we really be scared? We can
easily answer this question by looking at good debt and bad debt.
While it’s possible to live debt-free, it’s not
necessarily smart. Very few people earn enough money to pay cash for
life’s most important purchases: a home, a car or a college education.
The most important consideration when buying on
credit or taking out a loan is whether the debt incurred is good debt or
bad debt. Good debt is an investment that will grow in value or
generate long-term income.
Taking a loan to pay for college education is the
perfect example of good debt. First of all, student loans typically have
a low interest rate compared to other types of debt. Secondly, a
college education increases your value as an employee and raises your
potential future income.
Taking out a mortgage to buy a home is considered a
good debt as well. Home mortgages generally have lower interest rates
than other debt. The ideal situation would be that your home increases
in market value over time, enough to cancel out the interest you have
paid over that same period.
Bad debt is one incurred to buy things that quickly
lose value and do not generate long-term income. Bad debt is also one
that carries a high interest rate, like credit card debt. The general
rule to avoid bad debt is: If you can’t afford it and you don’t need it,
don’t buy it.
At the country level, infrastructure development is
vital for rapid economic development. Poor infrastructure is a
constraint on economic development.
The development of highways, ports, bridges,
railways, telecommunications, fisheries, harbours and irrigation are
important for an economy’s rapid growth. These constitute essential
economic infrastructure whose development is vital.
However, the means of financing expensive
investments in infrastructure have important economic repercussions.
Infrastructure investments are expensive and their returns take a long
time to be realised.
Precise benefits
In many cases, it is difficult to determine precise
benefits of infrastructure investment. Therefore, the manner of
financing infrastructure investment is significant. Investment in energy
would no doubt increase production capacity and help export industries.
In the case of roads and bridges, some highways
would be economically more beneficial than others. Similarly, the
development of ports and other transport infrastructure has a range of
cost-benefit ratios. Therefore, prioritisation of infrastructure on the
basis of costs and benefits is important. Import costs, export earnings
and the impact of financing on public finances and debt servicing costs
should be considerations in infrastructure investment.
Kenya’s debt has thus far been well managed and the
country has in the last decade implemented wise fiscal policies and
sound budget management. The fact that we still hold a good credit
rating and lenders continue to lend us money is an indication that they
not only don’t believe the government is broke, but also don’t see
bankruptcy anywhere on the horizon.
The critical question is; which project will benefit future generations the most?
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