The transport sector plays a significant role in both developed and developing economies. Over the last century, increased investment and improvement of transport technology have caused a reduction in transport costs (Berg et al., 2017). Considering the immense contribution of transport in economic growth, a reduction in transport cost is expected to spur economic growth and create a favorable business environment for Small and Medium Enterprises (SMEs). Globally, economic development is significantly depended on the transport system, and most countries in the world formulate policies that facilitate the development of the transport sector. Studies show that most countries focus on the development of their transport system as an economic development strategy. Developed countries such as the US and European countries have made significant investments in transport (Berg et al., 2017). Besides the use of improved transport technologies has a reduction in the cost of transport and made the transport business more profitable.

African countries, on the other hand, lag in transport policy implementation to improve transport systems. Some African countries such as Ethiopia, Nigeria, South Africa, and Ghana have moved to implement transport policies that enhance the investment of more resources in the transport systems (Cheteni, 2013). Ethiopia has made important progress by investing in the development of rail transport. The country has built a more than 750km od railway costing about 4 billion US dollars (Cheteni, 2013). With most African countries re-aligning their transport policies to improve investments in transport, there is hope for the improvement of the economy Africa (Cheteni, 2013).

In Kenya, the largest means of transport in Kenya is road transport that accounts for 93% of all passenger and freight traffic (Ministry of transportation and communication, 2012). Kenya just completed the building of Standard Gauge Railway (SGR) from Mombasa the coastal town to Nairobi. The railway is expected to spur economic development and in the country and encourage more investments in the transport sector (Chege et al., 2019). Road transport in Nairobi city county is characterized by passenger exploitation, traffic congestions, lack of scheduling, small capacity carriers, and breaking of road safety rules (Muturia, 2013). These factors act in synergy to increases cases of traffic accidents (Kadi et al., 2012). Historically, the Kenya Bus Service (KBS), which was partly owned by the Nairobi City Council, was the primary provider of road transport services in Nairobi city. The rapidly increasing Nairobi population overwhelmed the transport infrastructure, hence allowing private investors to venture into road transport within the Nairobi city council (Nzuve & Mbugua, 2012).

With the increased participation of private players in the transport business, both the national and county governments focused on the regulation of the road transport business in the city. For instance, in 2013, the Minister for transport infrastructure ratified the National Transport and Safety Authority (Operation of Public Service Vehicles) Regulations 2018. The measures were effected to improve the transport services in the city by increasing road safety and protect passengers from exploitation (NTSA, 2013). Transport regulation policies enacted by the Nairobi county government affect different aspects of the transport business, such as infrastructure investments. Within the Nairobi county, most of the road infrastructure is managed and maintained by the county government. The county government is responsible for building a new road and parking infrastructure and improving transport services within the county. The second aspect that is regulated by the county government is the price instrument. The determinant of price instrument in transport business in include taxes, subsidies, and bureaucracy (Wambui, 2012). This study proposes to evaluate the effects of county government policies on the transport business in Nairobi county.

1.2 Statement of the problem

The operation of the transport business in Kenya is regulated by both the National and county government (Kadi et al., 2012). However, research has shown that the transport sector flourished well with minimal interference from the government. The county government of Nairobi forms policies to regulate the transport business ranging from licensing of private investors, drivers to the determination of business tax rate. Moreover, county transport infrastructure is maintained by the county government. In most cases, the government does not provide the necessary support promptly and delays in the upgrading of roads and other transport facilities (Hidalgo & Carrigan, 2010). Such delays affect the development of the transport industry. Besides, the tax regulation of the transport business by the county government has led to the imposition of city parking charges and taxes straining investors in the business. These policies have made the transport business environment to be less friendly to many. This study investigated the impact of the Nairobi county government regulation of the transport business and how the policies enacted by the county government affect private sector investment in the business.

1.3 Objectives of the study

To analyze the effects of county policies on infrastructure investment on the performance of the transport business in Nairobi county
The evaluate the impact of price instrument regulation by Nairobi County government on transport business
To explore the effects of county government regulation of license procedures, and driving restriction of the transport industry

1.4 Research question

Do the Nairobi county policies on infrastructure investments affect the performance of the transport business in Nairobi county?
How does the price instrument regulation by the Nairobi county government affect the performance of the transport business in Nairobi?
Does the regulation of licensing of transport business affect the performance of the transport business in Nairobi county?

1.5 Study justification

According to Kadi et al. (2012), inadequate transport policies significantly affect business in the transport industry resulting in undesirable outcomes. For instance, traffic congestions and the poor status of roads in Nairobi county can be attributed to poor policing by the county government. It is worth noting that the most significant majority of the population of the Nairobi population do not own personal means of transport and depend on public transport. This reflects the more substantial majority of the city residents who are directly or indirectly affected by the Nairobi county government policies in the transport business. In light of these challenges posed by the transport system in the city, this study sets to investigate the impact of Nairobi county policies on the transport business. The study will provide information to inform the transport policy formulation to strike a balance between the regulation of the transport sector and its profitability. The study will produce findings that will be useful to the ministry of transport in Nairobi County to optimize its regulatory function without interfering with the performance of the business.

Chapter two: Literature review

2.0 Introduction

This section discusses the theoretical basis in terms of the theories that explain both the independent and dependent variables of the study. The conceptual framework and the summary of the empirical literature. The subsections considered in the review of literature are aligned to the elements within the conceptual framework.

2.1 Theoretical framework

The theoretical framework section presents concepts and models relevant to the study and explains the different variables of the research in the context of previous studies and theoretical underpinning. The existing body of knowledge to help explain things as they exist in real life. The theoretical foundation enables researchers to create a link between the research work and real-life concepts (Labaree, 2009). The current research applies two theories to explain the theoretical framework within which the study is centered. The first theory is the infrastructure-led development theory proposed by Agénor (2010). This theory explores the contribution of infrastructure to business development and how government investment in transport infrastructure can help to transform the transport industry (Agénor, 2010). The second theory considered in this study is the motivation crowding theory. This theory is concerned with the impact of government involvement in the business by way of controlling price instruments and policy regulations. Both the control of price instruments and such as taxes and subsidies, as well as policy regulations, can work to enhance business performance or work against the business. The outcome is dependent on the directions taken by the government.

2.1.1 Pierre-Richard Agenor theory (Infrastructure-led development)

Agénor (2010) proposed that infrastructure is the core of any business. According to Agénor (2010), the status of infrastructure determines the success of the business, and the players in the industry must invest in both the existing and new infrastructure to ensure the business thrives. The Government is a critical player in the transport industry through regulation of the industry as well as the provision of enabling environment, including primary infrastructure such as road, air transport, and water transport facilities. The Pierre-Richard Agenor theory is based on the elements of the business that promote profitability (Agénor, 2010). The status of infrastructure has been proposed as the number one element that influences business performance in any city. The availability of proper foundation is likely to enable the businesses to run smoothly and reduce operating costs. Eventually, good infrastructure guarantees increased profitability. The reverse is true; unfortunate infrastructure results in poor business performance as a result of unintended expenses arising from the lack of efficient support (Agénor, 2010).

The theory of infrastructure-led development, as proposed by Agénor (2010), applies to the case of the transport business in Nairobi county. The founder of this theory based the theory on the assumption that the government is responsible for the provision of public infrastructure required in business development. The business owners, in return, pay taxes to the government. The government is required to use the taxes collected to provide and maintain the existing infrastructure. The order of events in the model is a form of a vicious cycle in which if one element fails, the entire system fails (Agénor, 2010).

In the context of the transport industry in Nairobi county, the county government bears the responsibility of developing and maintaining the existing transport infrastructure. Therefore, the government must invest in infrastructure for the transport business to increase profitability. The county government of the Nairobi county has been assigned specific road networks and other transport facilities such as bus termini (Khadaroo & Seetanah, 2010). The government collects taxes and is expected to use the proceeds from taxation to invest in transport infrastructure, including the construction of new transport infrastructure such as roads, upgrade of existing road links, and improving transport infrastructure. Investment in transport infrastructure is expected to increase the efficiency of the transport system hence reducing operating costs and increasing profit margin. Cases of vehicle breakdown will decrease due to the improved road system, and commuters will take a shorter time to reach the destination, make more trips due to the improved road networks, and the consequent reduction in traffic congestion (Crescenzi, Di Cataldo, & Rodríguez‐Pose, 2016).

2.1.2 Motivation crowding theory

The motivation crowding theory acknowledges the impact of external business forces on internal motivation. The approach explores the effect of external forces on business performance, particularly government interferences (Graafland & Bovenberg, 2020). The theorist recognized that the government might get involved in business through policy implementation and tax regulations. The motivation theory applies best in a government-regulated economy where prices and costs are determined by the government (Graafland & Bovenberg, 2020). Research shows that government interference in business affairs may eventually result in crowding out of intrinsic motivations; hence, canceling the positive impact that could be gained through government involvement. For instance, government market incentives such as tax down regulations and provision of transport infrastructure may result in the motivation of business and profitability. The theory of motivation crowding considers the impact of government participation in business (Graafland & Bovenberg, 2020). More often than not, the intention of government participation in business is meant to improve performance. However, some regulatory measures put in place may result in adverse impacts. The government involvement in business through control of price instruments such as taxes and provision of subsidies have previously been shown to produce mixed outcomes, with business owner complaining of high fees. In some cases, the government provides subsidies to businesses helping to reduce the cost of production. On the contrary, policy regulations such as driving restrictions, licensing, and duration of license validity may impact negatively on the performance of the business (Levi-Faur, 2011).

The motivation crowding theory can be applied in the context of the transport business in Nairobi county to address the outcome of government-business interactions through the conceptual framework elements (price instrument and policy regulations). In the current research, price instruments, including taxes, subsidies, and bureaucratic procedures, act as the point of contact between the county government and the transport business in Nairobi. Players in the transport system, mainly business persons, pay tax to the county government, and in return, the county provides the requirements to facilitate transportation in the city. However, there comes a time when the county government revises the taxes remitted to the county by the players in the transport sector. The taxes can be revised either upwards or downwards. Based on the action taken by the county government, the transport business can be improved or made less profitable. Subsidies, on the other hand, help to improve business by reducing the cost of resources required to run the transport businesses (Gond, Kang, & Moon, 2011). The reduction of bureaucratic procedures has been associated with a positive impact on transport business performance.

The county government of Nairobi is also responsible for undertaking a regulatory role in terms of policy implementation such as driving restrictions, licensing of drivers, and public service vehicles as well as determining the duration of license validity. All these regulatory functions of the county government work synergistically to improve the performance of the transport biasness in Nairobi city. However, the outcome of policy implementation may be dependent on the action taken by the government and how the response of private investors in the transport sector.

2.2 Empirical literature

2.2.1 Infrastructure investment and performance of transport business

Investment in transport infrastructure entails allocating financial resources to develop transport infrastructure within the Nairobi county to improve the transport business. The current study considers three critical aspects of the transport infrastructure, including developing new infrastructure, upgrading the existing infrastructure, and improving overall transport services within the county Agénor (2010) noted that globally, the transport business faces an imminent challenge of inadequate infrastructure hindering development in this industry. One of the recommendations by Agénor (2010) was for countries to embark on the transformation of transport infrastructure for positive gains to be recorded in the transport industry.

A case scenario of Ethiopia’s excellent transport system showed that the government achieved a significant milestone in improving the transport sector through funding development od road systems while upgrading the existing roads (Shiferaw, Söderbom, Siba, & Alemu, 2015). In sub-Saharan Africa, the situation of the transport system is inefficient, underscoring the need to refocus resources allocation in the transport sector (Agénor, 2010). Nairobi city plays a vital role in the transport hub for the East Africa community, where most countries, including Uganda, Tanzania, Rwanda, and Burundi, receive their imports through Nairobi. Additionally, these countries export their produce via Nairobi. This situation places Nairobi at the heart of East Africa in terms of transportation. Thus it is expected the city host a well-established transport system to leverage the business opportunities presented to the city by the East Africa member state as well as local travels. This is, however, not the case (Klopp & Cavoli, 2017).

To take advantage of the transport business opportunity, the county council must embark on a rebuilding of the Nairobi transport system as suggested by (Wahome, 2013). Wahome (2013) explored the various factors affecting the transport business in Nairobi and demonstrated the need for the county government to invest more resources in the transport infrastructure. The findings presented by Wahome (2013) were also in line with the proposal by our proposed study, where we propose to leverage infrastructure investment to achieve improved performance of the transport business in terms of profit maximization, increased satisfaction of customers, and increased assets (Wahome, 2013).

In Kenya, the road transport system plays a core role in the movement of people and goods. Moreover, it helps to interconnect with other transportation networks. More than 90% of the cargo movement in Kenya is transported through road transport underscoring the need for both the national and county governments to invest more resources in road transport infrastructure (Mugambi, 2016). In 2018, the ministry of finance allocated $2.1 billion in the 2018/2019 financial year. Out of the $ 2.1 billion, $1.15 billion was allocated to the upgrading of the existing road and building of new road infrastructure. The urban road upgrading in Nairobi has increased road transport investments (Mugambi, 2016). Investment in road transport infrastructure has enabled the county government of Nairobi to facilitate more affordable road transport within the city. Statistics show that the road transport business in Nairobi city is gradually increasing with new transport SACCOS joining the expanding industry (Kenya Road Transport, 2016). The influx of more “Matatu” transport investors in the transport industry has been facilitated by expanding investment in the building of new roads as well as upgrading of the existing road infrastructure.

2.2.2. Price instruments and performance of transport business

Factors that determine the price in the transport industry include taxes, subsidies, and bureaucratic procedures. These price instruments are controlled by either the federal or county governments (Dolewka, 2017). Previous studies have reported the outcome of the control of individual price instruments is determined by the direction of the control. For instance, if the government increases taxes, the transport business becomes less favorable; hence its profitability is reduced (Dolewka, 2017). Subsidies of items such as fuel may help to reduce the cost of transport services with a consequent profitability record.

Similarly, the reduction of bureaucratic procedures may ease the process of acquiring licenses and other legal requirements making the business environment more friendly (Dolewka, 2017). The control of price instruments by the Nairobi county government can, therefore, help to regulate business and put the players in the sector on track (McCormick, Mitullah, & Chitere, 2015). The Matatu business in Nairobi complains of the unfavorable business environment brought about by the strict measures implemented by the county government, as demonstrated by (McCormick et al., 2015). High taxes for the public transport vehicles and high parking fees for the taxis have been an issue with the county government for a prolonged period. The findings presented by McCormick et al. (2015) reflect the frustrations of the Matatu business owners in the city. To realize a maximum gain in the transport business, there is a need for the county government of Nairobi to consult the transport business owners before the formulation of price instrument control policies.

Collaboration between the Nairobi county government transports is a key strategy that can be used by the stakeholders in the transport to expand the business. A previous study suggested that poor management of price instruments including taxes is the Cause of deteriorating investment in the transport business (ref). High taxes and the lack of tax regulation in the transport sector is a major cause of the withdrawal of most investors in the business industry. High taxes make the business environment unfavorable for many businesses, particularly the small businesses (Barcik, Czech, Sierpiński, Celiński, & Staniek, 2015). On the contrary, other price instruments such as subsidies, have a positive impact on transport business investments. Subsidies include the provision of financial support to reduce the cost of running the business. For instance, subsidizing fuel is one of the strategies that can be used to reduce the cost of running a transport business. The county government of Nairobi can provide such support to the transport business to reduce the cost of operation and consequently result in reduced transport costs (Barcik et al., 2015).

2.2.3 Regulations and performance of transport business

Government involvement in the business is not only restricted to price regulations but includes policy regulation, including licensing of business, driving restrictions, and determination of business license validity. These regulations have a significant impact on business performance; they determine business profitability and asset availability. In China, the regulation of public transport by the government, particularly in urban areas, require more stringent reforms (XIE & XIAO, 2011). Similarly, the rules of the transport business in Nairobi require more tight regulations to fish out illegal players in the business. Licensing of drivers and SACCOs within the transport business is a critical component of the business that will help to clean up th sector and make the business environment more transparent and favorable as suggested by (McCormick et al., 2015). The county government should carry out registration of business and licensing to ensure that illegal businesses with road unworthy vehicles are fished out from the business to restore some level of sanity in the Matatu industry. This move will also help to reduce traffic congestions recorded on Nairobi roads as well as ensure the smooth running of the business (McCormick et al., 2015).

Policy regulations play a critical role in distinguishing between legitimate and illegitimate businesses (Berg, Deichmann, Liu, & Selod, 2017). The policy regulations commonly applied by the Nairobi county government include licensing of the transport business, driving restrictions, and determination of business license validity. These regulatory processes are meant to streamline the transport business and ensure order in the transport sector. However, polices such as licensing of drivers, and the imposition of driving restrictions have caused a major slow down development of the transport business. Transport market with more restrictions may scare away investors hence only a few people are willing to invest in the over-restricted business sector (Berg et al., 2017). On the other hand, proper policy regulations are crucial for creating a professional business environment attractive to investors. Business professionalism is an essential element of business in the transport industry. Investors are more likely to invest in a market with professionalism and order (Berg et al., 2017).

2.3 Summary of empirical data

Empirical literature data demonstrate the essential role played by infrastructure investments, price instrument control, and policy regulations in improving the performance of the transport business in Nairobi County. When implemented correctly in the transport business in the presence of proper management, these factors have the potential of promoting the performance of the transport business in the county.

2.4 Conceptual framework

The figure below shows a conceptual framework with the performance of transport businesses in Nairobi county being the dependent variable. The independent variables are infrastructure investments, price instruments, and regulations, which are the policies in the transport sector. Good infrastructural developments such as upgrading existing links and technology, building new transport infrastructure, or improving transport services affect the performance of transport businesses. Further, price instruments, as well as regulations in the transport sector, affect the performance of transport businesses.

Independent variables Dependent variable

References

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County Government Policies and their effects on Transport Business: Case Study Nairobi County

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Chapter one: Introduction

1.1 Background information