Wednesday, 28 March 2012

Eastern Africa coast: An emerging fossil fuels giant


An oil rig. These monsters discover oil from the earth's bowels
THE ENTIRE EASTERN Africa coast is emerging as a fossil fuels giant. A flurry of finds of commercially viable deposits of oil and natural gas has spawned intense activity in exploration of these resources.

In the last decade or so, commercially viable oil deposits were found in South Sudan and Uganda. Natural gas has been found in Tanzania  while in Kenya an oil find announced this week, is awaiting commercial verification. There are reports of viable oil deposits in lawless Somalia.

Since it takes about three years or so to verify commercial viability, the implication here is by 2016/17, this region of an estimated population of 200 million people will be a major player in the world’s energy market. An exploration mapping high potential areas in Kenya, indicates that eastern Africa could rival some middle east oil producers.

The frequent discoveries raise confidence on the potential of the region’s fossil oil’s exploration. This is expected to attract more investments into exploration in eastern Africa. So far an estimated US$8 billion has been sunk in oil exploration since 2006. However, this figure is expected to rise as more explorers seek licenses to explore for oil and gas deposits.

 Tanzania  for example, will hold an oil exploration licensing round for 16 offshore blocks starting in September this year, reported Reuters. Some firms spend an estimated US$2 million a day in oil exploration in east Africa, say sources in the energy sector.   Tullow oil Plc, which discovered oil in Uganda, Kenya and Ghana is said to have sunk an estimated US$800 million in Uganda.

 It is not clear how much has sunk in Kenya where it has struck oil at the first well. The find, what they describe as 20 metres of net oil, was struck at 1,041 metres way below the expected depth of 2,700 metres. The company says it will still drill up to 2,700 metres.


Apart from spending on exploration, more investment is expected in construction of infrastructure, Including Refineries, Oil Pipeline, railroads, roads and other related infrastructure. See http://eaers.blogspot.com/2012/03/africa-high-return-ppp-market-of.html  .  In Uganda, reported the East African, the consortium led by Tullow oil Plc will sink another US$10 billion to build such infrastructure. Tanzania will invest some US$1.1 billion to build a gas transportation pipeline from Songo  Songo wells to Dar-Es-salaam, the capital city.


 South Sudan will invest a total of US$4.2 billion to construct a 2400KM pipeline from South Sudanese Oil wells to the Port of Lamu in Kenya. Kenya on the other hand will invest US$8.1 billion to construct  a standard gauge Railway line from the Port of Lamu to Juba in South Sudan. http://eaers.blogspot.com/2012/02/kenya-to-begin-construction-of-gateway.html . Although South Sudan was to bear the cost of the pipeline alone, now with  the new developments, it looks  likely that the MOU signed  just about  month ago, will be reviewed as Kenya must now bear some of the cost of the pipeline. Turkana county, where oil in Kenya was discovered is on the border with South Sudan and thus also on the pipeline.s path.
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It is not clear how much of the precious commodities are available in the region given that new discoveries are made frequently-almost on an annual basis.  Therefore even their production capacity is not clear. Only South Sudan has a definite capacity of 350,000 barrel of crude per day (bpd).  

Uganda is still grappling with this issue and has settled on an initial output of 20,000bpd at the end of this year to be raised to 60,000bpd in 2016 and 180,000bpd later. The production conglomerate, led by Tullow PLc and which includes the French firm Total and Chinese company, CNOOC is gunning for 200,000bpd. Kenya is quite green on this score.


In Tanzania where natural gas (LNG) predominate, the confirmed  quantity changes almost every quarter and now stands at more than 10 trillion cubic feet or about 1.6 billion barrels of oil  equivalent. In 2009, she produced an estimate 560.7 million cubic meters of LNG.


These discoveries have spawned excitement among the population in this region. Optimists say that economic development and poverty alleviation will pick up speed come 2020. They have reason for optimism: the region has posted persistent and significant economic growth (average 5.6 per cent) between 2001 and 2010. The growth projectile has yet to ease despite the fact the drivers of growth are agriculture, tourism and basic manufacturing.


Compared to the oil producers in the Middle East, the region has a high probability of diversifying its economy due to natural advantages. Therefore fossil fuel finds are expected to fuel further growth through increased employment and consumption. The optimists therefore say that by 2040, the region will have emerged as a developed region.


Kenya, the most ambitious of the 11 nation region, plans to be an economic tiger by 2030. She has already laid the foundations for such take off and an oil find would quicken the pace of development and ensure the vision 2030 is achieved.

 Even without, an oil find, Kenya had identified the Pillars of future growth to include ICT and Tourism. For this reason she is promoting an ICT city at Konza near Nairobi. See   http://eaers.blogspot.com/2012/02/kenya-rearing-to-launch-ict-city.html . She is also planning to build   four resort cities to enhance and diversify  tourism products. The resort cities will be build  in Isiolo in Central Kenya, another  on the shores of Lake Turkana and another two at the coast.  With the find of oil in Turkana county, the development of Turkana Resort city, which was expected to take a little longer , is now expected to be prioritised.

There  are  pessimists who fear that the discovery of oil in the region could destabilise the region and open it to civil-strive. In short they fear that the discovery of oil will be a curse rather than a blessing.  Enough said.

Thursday, 22 March 2012

The battle for domination Africa’s Skies hots up


 KENYA AIRWAYS, Africa's youngest and third largest Airline has jolted the African aviation industry.

Her  cash call by way of a rights issue worth US$250.2 million was approved by Kenya's capital markets Authority two weeks ago.
Top: SAA, Middle ET and KQ: The upstart rocking
the African Aviation sector

The money, said the airline,
 was to replenish its war chest. It plans buy 76 new aircraft by 2021.It also plans to expand to 60 new destinations over the same period. 

In terms of averages, Kenya airways will acquire 8 new aircraft a year between now and 2021. It will also expand to six new destinations every year over the same period. At the end of that period, the airline will have total fleet of 107 aircraft from the current 36( see www.Kenya-irways.com)

The battle for domination of African skies has been driven a notch up. By floating the rights issue, the airline declared its intention to either dominate or increase its presence in the Africa airspace.

Kenya Airways is the only successful privatised airline in Africa- and perhaps in the world. It is the youngest airline in Africa being only 36 years old but it is a major player in African aviation industry. It is owned 26 per cent by Air-France-KLM, 22 per cent by the Kenya Government and the rest by private investors. It competes for domination of the African skies with Ethiopian Airlines (ET) and South African Airways, SAA. Both SAA and ET are the oldest airlines in Africa. In fact SAA is among the oldest airlines in the world being 77 years old. ET is 65.

South African Airways (SAA) is the largest airline in Africa boasting of 53 aircraft. In the year 2010/11 it ferried some 8.5 million passengers compared to her competition in Africa. Ethiopian Airlines ferried 3.15 million while Kenya Airways ferried 3.13 million passengers over the same period (see www.flysaa.com). 

                                                               
ET is the second largest airline in Africa boasting of 48 aircraft but could soon be neck-on-neck with SAA for she has a firm order of another 35 aircraft.  This would raise ET’s fleet to 83 in the next decade or so. Hot on the heels and even the most dramatic expansion is KQ’s who plans to increase its fleet from 34 to 107 in ten years. This means that KQ, as Kenya Airways in known, will be competing neck-and neck with ET on fleet expansion.(see www.flyethiopian.com)

 SAA boasts of 53 long haul passenger aircraft including 21 B737-800, 6 A340-300, 9 A340-600, 11 A319-100 and 6 A340-200.The Ethiopian boasts of;:5 B777-200LR;11 B767-300ER,& B757-200ER;5 B737-700 and 6B737-800ER. She also owns six are cargo freighters and another eight   Short Range aircraft meant for domestic and short range aircraft. Effectively then the Ethiopian has just about 34 long range passenger aircraft. However, she has another 35 aircraft on order including including10 ultra modern Boeing 777-800 Dream liners and other top of the range long range aircraft from both Airbus and Boeing.

Kenya Airways for its part boasts of: 4 B777-200ER; 6 B767-300ER; 5 B737-800; 4 B737-700; 6 B737-300; 5 Embraer 170 and 4 Embraer 190. The Embraers are short range while the Boeings are long haul aircraft. The airline has placed a firm order for 6 ultra-modern B787-800DL. It is not clear whether they form part of the 79 strong arsenal or they are a separate kit.

In terms of profitability, the Ethiopian is the leader in profitability having bagged some US$246 million in 2009/10 financial year. South Africa Airways made some US$110 million in the year 2011 while Kenya airways bagged US$4.4 million in the year 2010/1.

SAA, is  yet to recover from its  financial doldrums. It has been on a loss making streak since 2001 when a fuel hedge book went berserk.  The south Africa press reports that the airline has applied for a R5 billion( US$590 million) bailout from the government. In the last decade, the airline has lost R17 billion( $2.005 billion).The aviation industry is said to be livid with the current application. 

Such inability to get out of its own from its owns quagmire puts doubts on the airline's ability to challenge the dormimance of ET and KQ on African airspace. However, profit is a function of the size of the market and the population of the hardware. 
               
Apart from hardware advantages, physical location could also play a major role on determining who has the largest pie. Kenya Airways’ home base is Jomo Kenyatta international Airport in NairobiNairobi is a natural hub of the continent being located, as it were, in the middle of the continent.  Its location makes connections to and from other destinations in Africa convenient. It also makes connections from Africa to the rest of the world seamless. That location could be KQ’s selling point.
The Airport itself is undergoing massive expansion which includes the construction of a green field terminal that will raise its capacity to 20 million passengers. The Greenfield terminal to be developed in two phases will expand JKIA’s capacity by 12 million passengers to more than 20 million passengers a year in Phase I. It will have a parking capacity, including “remote parking” for 60 aircraft bringing the total number of available parking slots over hundred aircraft. 
This could give a larger Kenya Airways advantage over the competition. With these new developments, the aviation industry in Africa will never be the same again. The battle for the control of African skies is headed for quite interesting times. The recovery of the formerly cirrhotic South African Airways will make the battle for African skies a battle royale. 

With the stage looks set for a tough battle for the domination of Africa skies, the question remains: who shall gain the most. Only time will tell who the real winner is-passengers perhaps.


Thursday, 15 March 2012

Coming soon: Railway Cities in Kenya


An artists impression of Nairobi Railway city
KENYA RAILWAYS Corporation, KRC, has been mandated to develop its large holding of real estate country-wide into Railway cities. This will help speed up the growth of some Railway towns into cities. Initially it proposes to develop Railway cities in Nairobi, Kisumu, Mombasa and Voi. The corporation proposes a string of investment plans to attract the private sector into the proposed Railway cities.

A transactions advisor is already on the ground studying the various investment options. Among the proposed options are; PPPs through Build operate Transfer (BOT) land leases, franchises and Joint-Ventures. The advisor is expected to complete his study in six months time  and recommend the investment options-mix suitable for each town.

 A Railway city can be defined as an urban development that grows around a railway station and linked to it. The station is the nerve centre of the city due to ease of transportation of people and goods.

The developments in the proposed cities will  include; ultra modern Railways stations, direct Rail links with the international airport in the host city, commercial buildings, an industrial park, shopping arcades, malls and restaurants among other facilities. The project is designed to complement the facilities in the cities but in some instances the Railway cities will provide the only cities worth writing home about.

 The plan is part of a wider plan by the corporation to develop its real estate holdings in the country into Railway cities. More than 400 acres spread across the country are ear marked for the initial  project, that begins at the Indian ocean coast  and ends at the shores of Lake Victoria..
Mombasa Railway City as conceived by Artists

 Nairobi holds the Lion’s share, some 200 acres ready for development. In Nairobi the corporation proposes to develop a mega city that will become the hub for Commuter, inter city and regional passenger rail traffic.

 This is no accident as Nairobi; the Kenyan Capital is centrally located for rail transport to any part of the country and also across the borders to Uganda and the great Lakes region. .
The fourth largest city in Africa, Nairobi is hosts a string of international companies and organizations such as the headquarters of the United Nations Environment Programme (UNEP) and UN-Habitat. It is also the main coordinating headquarters for the United Nations in Africa and the Middle East.

An artist's impression of Kisumu City
 Nairobi is also the financial, Manufacturing, aviation, diplomatic, educational and health services hub of the East and Central African region. Consequently demand for hotel space and transport infrastructure is high. The railway city will be built within the CBD, which makes it a viable business proposition.

The megacity will be connected to Jomo Kenyatta International Airport, JKIA, by a direct railway line. Other facilities are: a variety of Commercial buildings; a Business park for light manufacturing/assembly; two Hotels with conference facilities for 3000 people; Shopping arcades, malls and restaurants and an entertainment Park; Ultra Modern railway Station and Parking silos. The city, says the corporation, is a viable commercial venture for there is a huge demand for a development that integrates transport, exhibitions, hotels, leisure, conference and commercial facilities “under one roof,” so to speak.


 Mombasa is the country’s only sea port so far and Kenya’s second largest city. KRC proposes to develop its 100 acres piece of in the centre of the city into a railway city. The development will  include a variety of Commercial buildings; business park for Light manufacturing/assembly; three Hotels with conference facilities for 3000 people; Shopping arcade, mall and restaurants; An entertainment Park; Ultra Modern railway Station; Parking silos and an international trade centre. The railway city will also integrate with the central commuter railway station linking the international airport in Mombasa and various other coastal regions. Mombasa is a major coastal tourist destination in Africa and the megacity is welcome addition to tourism in the coast.


Kisumu is the third largest City in Kenya and the second most important after Kampala in the greater Lake Victoria basin. It is within easy reach of Uganda, Rwanda, Burundi, Northern Tanzania and Southern Sudan, making it a natural hub for trade and transport in the East African region.

Kenya Railways has 75 acres of prime land stretching from the Centre of Kisumu City to the shores of Lake Victoria. This is where the Railway city will be built.

The railway city will open up Kisumu city to the world. Apart from the usual Railway services, the city will enhance Kisumu’s status as the transport and commercial hub of the great lakes region.  The development will include; a variety of Commercial buildings; Business park for Light manufacturing/assembly; two Hotels with conference facilities for 2000 people, a shopping arcade, malls and restaurants; a BPO park; an  entertainment Park; Ultra Modern railway Station Parking silos.  The city will make Lake Victoria a base for cruise tourism and international water sports. It will provide a direct railway Link to Kisumu Airport which is ten minutes away.

Tuesday, 6 March 2012

Africa: The high return PPP Market of tomorrow.


A housing estate under construction: Many more of
these are needed to meet growing demand
AFRICA IS SLATED to become bastion of profitable PPP business in the very near future.  In fact, going by the trend of things that future is not very far. In fact, it is just starting.

The continent has fully emerged from the painful yet beneficial structural adjustment programmes, SAPs, prescribed by the IMF.  SAPs implemented between the mid-1980s and much of 1990s involved privatisation of State owned Enterprises, SOEs among other structural reforms. Africa reluctantly adopted this prescription but has emerged from it stronger, wiser, and prosperous.

SAPs had several positive lessons emerged from privatization to wit; disposal of loss making SOEs plugged a hole in government budgets resulting in lower donor dependency. Some of the privatized SOES have turned the corner and are making profits and paying taxes and dividends to the government. The private sector has proved that it is the engine of economic growth creating wealth, jobs and affordable services.
Kenya Airways: Case study at successful privatisation

The telecoms sector is a good example of the benefits of privatization. Africa now boasts of more than 600 million cellular phone handsets. The number is expected to hit 675 million by the end of this year. This is a 67 per cent penetration rate in just about 20 years. Landlines, which were in the public sector, had a penetration rate below 10 per cent.

The industry has also proven quite adept at innovations that serve Africa’s practical needs. Among these is the Mobile money transfer developed in Kenya. M-Pesa as the service is called became an informal banking service where one could deposit cash their phone accounts and walk around with it rather than carrying cash. The mode is now used to pay utility bills, pay for shopping and transfer funds. The hand set is now business tool for the informal sector as artisans can be reached by their clients on phone anytime.

And should one need cash, there are agents allover including the rural areas, to pay cash. Started in 2007 by Safaricom, East Africa’s largest cellular services provider M-Pesa has spread to other networks and is the largest Cash transfer system in the country.

A wind farm: Brave investors are already on the ground 
This innovation has now been adopted by Commercial Banks, who using the technology have reached a wider customer base. They appoint agents, in most cases the M-Pesa agents to receive and deposit cash into the bank accounts. They also pay cash withdrawals. New customers also open bank accounts through these agents.

The companies churn out large chunks of profits and pay huge chunks in taxes. In fact upstarts, meaning companies that are hardly 15 years old, have become giants in their areas.

In this category are such giants as Kenya Airways and Safaricom. Kenya Airways is the third largest and the only privatized airline in Africa. In fact it is a case study successful privatization. Privatized in 1996, the airline has turned from the sick man of Africa, to the pride of Africa. The airline is now gunning to be the largest airline in Africa. See http://eaerb.blogspot.com/2012/02/kenya-airways-in-largest-rights-issue.html

 Another benefit of privatization is policy reforms. The private sector is now viewed as a serious partner in Africa’s development by the governments. The capital markets have gained from this paradigm shift. Now government securities such as long term bonds are traded in the local securities exchanges.

Even innovative companies can borrow from the local securities exchange using debt instruments such as long term bonds to finance their expansion. Safaricom the local cellular operator was the first company to break the glass ceiling. It was only two years old when it floated a commercial paper, the largest in the market then, to finance its operations.

With a growing Middle class, growing economies and growing demand for such infrastructure as housing, water and sewerage system, roads, airports, sea ports, Railways lines and even new cities, the stage is now set for the private sector to do more in Africa’s development than in the past. See http://eaers.blogspot.com/2012/01/africa-next-big-investment-story.html

The leading economies in the continent are adopting Private-Public-Partnerships, PPPs, as a new development model.Already Nigeria, among the giant economies in Africa, has approved three bridges to be built on PPP basis. South Africa is already a front runner in this area while Kenya and Egypt are not too far behind. 
 Kenya has already slated a number of large infrastructure projects for development on PPP basis. It has awarded a U S$640 million Airport terminal on a Design Finance Build and Operate basis. See http://eaers.blogspot.com/2012/02/authority-awards-640-m-contract-for.html. Other projects in the pipeline using this development model is the Lamu-South Sudan Ethiopia transport Corridor (LAPPSET). See http://eaers.blogspot.com/2012/02/kenya-to-begin-construction-of-gateway , The Konza ICT city, see http://eaers.blogspot.com/2012/02/kenya-rearing-to-launch-ict-city.html. Robust studies show that, in US dollar terms, these projects have an IRR of 18-20 per cent

The trend in Africa is for the weak economies to first let the stronger ones to employ certain models. Once the weak economies see case studies in their neighbourhood, they pick-up. Now that the larger economies have embraced PPP, the rest will soon follow suit.

This far, China, has stood slowed down Africa’s adoption of PPPs as a development model. China, driven by its search for raw materials, has built roads, railways, sea ports, hydro dams in Africa as Public assets.

However, say analysts in Africa, demand for infrastructure in Africa will soon exceed China’s ability to finance. This will open the way for profitable participation in Africa’s development by the Private sector. Already fund managers in the west have indicated that they will take long-term positions in Africa, beginning this year. See http://eaerb.blogspot.com/2012/02/kenya-rated-second-best-investment.html. Since China is also under pressure to reform its house, it will soon tighten its purse strings. Bold investors, who have already read the writing on the wall  are rushing to be on the ground building various projects. 


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