Monday, 25 March 2013

Is the World Bank's grip in Africa slipping?

Rift Valley Railways: Frustrated by
IFC's last minute withdrawal
THE WORLD BANK's star in Africa is waning. And if the Bank does not re-discover and reinvent itself soon, it will fade into oblivion. Its place is being assumed by a number of players such as the domestic capital markets, the African development Bank, Chinese and Japanese DFIs.  

The World Bank, as a development Finance institution, is conspicuously absent in the high profile sectors in east Africa such as transport and energy infrastructure. And where it is present, there are loud complaints that its drags progress.

Africa’s major development bottlenecks include transport and energy infrastructure. Given their multiplier effect on economic progress, Africa has prioritized investment in infrastructure which has been wanting for years. Now there is a backlog that has to be produced before we even begin to talk of meeting future demand.

Bujjagali:Funded by WB after Uganda
threatened to go it alone
The backlog is partly blamed on the West which for years tried to make “Africa the biggest charity project in the world,” says the Foreign policy Journal. Consequently, Western aid to Africa was for years, just promises with momentary flickers of real investment. Now Africa is in a hurry to expand and modernise her Sea Ports; Airports, roads, Railways and power generation capacity- in most cases, large projects are needed.

For instance to open up the Northern region and link with her northern neighbouring countries, Kenya must build a second transport corridor from Lamu Port to Ethiopia, South Sudan and even further to D R Congo. That corridor requires huge investment (US$23 billion) to build a 32-beth harbour, a railway line extending more than 2,000KM and, a highway and an oil pipeline. See also http://eaers.blogspot.com/2012/07/lapsset-biggest-business-venture-in.html

In addition, the country needs to expand its power generation capacity and build other roads inland, expand the Mombasa Port and upgrade the Northern transport Corridor. These are huge demands that would put immense pressure on anyone, making them impatient with laggards.

The World Bank is one such laggard for there is wide chasm between its procedures and Africa’s development ambitions. While Africa is in a hurry to invest in infrastructure to meet pent-up demand, the World Bank is still talking small projects- a few Kilometres of tarmac roads, go slow on railways, build small power generation plants ad infinitum.

And Africans are pissed off. Consequently, many high profile borrowers look elsewhere for funds conveniently ignoring the World Bank. They seek for funding either in the east or look inwards in the domestic capital markets or even the African Development Bank. A number prefer a mix of all sources of finance.

Take Kenya’s energy sector for example, for a period of 35 years, between 1978 and 2013, the World Bank has spent US$300 million to generate 150 MW of geothermal power in Kenya. To meet the demands of Vision 2030 and jump to be a middle income country, Kenya will need to build a power generation capacity exceeding 10,000MW by 2030. At World Bank’s pace, this will take more than 2000 years.

To meet their targets, Kenya’s power generation companies, KenGen and the Geothermal Development Company,GDC, have found other options. Among these are PPPs, joint-ventures, budgetary allocations and capital market instruments. The government of Kenya, for instance, together with AfDB and other financiers, has financed GDC to the tune of US$500 million to develop 400 MW(equivalent of 26 per cent of current output) of geothermal power at Menengai by 2016.

GDC is preparing to start phase two of its Menengai wells to produce another 1500 MW. The company plans to produce 3000 MW of geothermal power by 2020, just seven years down the road. The Africa development Bank is ready to finance the second phase. In fact, sources say, it is studying the application  for funds.

AfDB is  exploiting the knowledge acquired financing the Kenyan model to craft similar models for geothermal development in Tanzania and Mauritius.

 For its part, Ken Gen, the leading power generator in Kenya, which inherited the 150 MW Olkaria geothermal power plant funded by the World Bank, is looking east for US$5 billion over the next  to five years to generate an additional 1500 MW of geothermal power. The company plans to raise its generating capacity to 3000 MW by 2018 from the current 1286 MW.  It will commission an additional 280 MW of geothermal power later this year. funded by a mix of sources. KenGen also borrows from the local capital markets by issuing corporate bonds. She has a US$250 million bond in the market and will soon float an asset backed bond worth US$350 million.

The World Bank, on the other hand, is busy funding expensive power sources in Kenya, such as the 80 MW thermal plant near Nairobi worth an estimated US$50 million. It has also funded a 50 MW wind power unit at Thika on the Northern outskirts of Nairobi.

It is notable that the Bank refused to provide sovereign guarantees for the US$650 million Lake Turkana Wind power project. The project is expected to generate 300MW of wind power. The AfDB, which is the lead arranger for the project, is said pressing the government of Kenya to provide such guarantees in order to unlock the funds. Both the government and AfDB rejected World Bank’s reasons for refusing to guarantee the project.  

It is not just in Kenya where the World Bank is an irritant. In Uganda, the government rejected the Bank’s advice to reduce the Karuma hydro project from 750MW to 400-450MW choosing instead to finance the project from own resources. Uganda has good reason to reject World Bank’s advice; in 2005 she rejected a similar advice on the 250MW Bujagali hydro project. The Bank only relented when Uganda also chose to go it alone. Bujagali is now on stream, but demand for power in Uganda has more than doubled necessitating the construction of another large source.

In the late 1990s, Tanzania proposed to build a second hydro dam at Kihanzi which the World Bank shot down owing to protests over the potential demise of Kihanzi toads. To date, Tanzania still suffers power outages due to rationing. Industrialization in Tanzania has stalled due to lack of power.

On transport infrastructure, the World Bank is wholly absent in Africa. Perhaps because it still wants to do micro-project while Africa is looking at mega projects. Here is where the African development Bank and other DFI’s from the east such as JICA - the Japan international co-operation agency, come in.  In fact, AfDB and JICA are in what may be called a healthy competition in Africa. These two have teamed with African governments to build thousands of kilometres of roads running into hundreds of millions of US dollars in just about a decade. 

Some of the projects such as the Iringa- Arusha-Nairobi -Addis-A-baba road link several countries. It is also funding a number of roads in Kenya and Tanzania including the magnificent Thika superhighway in Kenya. Where they do not act jointly, they invest in complementary projects. http://eaers.blogspot.com/2012/04/roads-upgrade-open-up-tanzania.html

The World Bank is also blamed for stalling the privatisation of Kenya-Uganda Railway. Although IFC, the bank’s private sector lending arm was the lead advisor on the project, she refused to inject her investment in the project 2006 almost killing it. To date the concessionaire, Rift Valley Railways, is still grappling with teething problems.

Of course, the World Bank is financing infrastructure projects in Kenya such the building of unit 4 of Terminal 1 at Jomo Kenyatta international Airport, but the Bank is accused of delaying the completion of the project due to delays in approving and releasing the funds.

This seems to be the case with the 1068KM Kenya –Ethiopia high Voltage direct current (HVDC) electricity highway. The US$ 1.26 billion project is co-financed by the World Bank, the African development Bank, the French Development agency and the governments of Kenya and Ethiopia. AfDB has already approved a US$337.5 million, other financiers and the respective governments have funds ready, but the World Bank is yet to approve US$ 684 million.

The proposed Nairobi Over pass. Another Berlin wall?

To its credit, the Bank appears to have woken up to the reality that there are alternatives to its funding and upped its act. It set a record of sorts when it approved the double decker road in Nairobi in a record two months.  However, the highway’s economic value is not clear since the Nairobi Southern by-pass serving the same populations is under construction. Analysts in the construction industry have dismissed this project as a white elephant.
 See also http://eaers.blogspot.com/2012/10/is-nairobis-double-decker-road.html

Monday, 18 March 2013

Kenya's oil deposits can run her for 300 years

An oil Rig: Drilling to cost more 
JUST HOW MUCH oil deposits could there be in Kenya ? 

According to an analysis by the prospecting companies- Tullow oil and Africa oil of Canada- perhaps enough to run the country for 300 years. Or enough to run the US for 18 months.

Bloomberg reported that the two oil drillers, who first discovered oil in Kenya's rift valley basin only last year, now say the 450 KM long basin could hold 10 billion barrels- enough to run Kenya for 300 years!
Consequently, the oil drillers are planning to drill 11 test wells in Kenya this year. And remember they are also drilling wells in Ethiopia. Like Kenya, Ethiopia was deemed a barren land as far oil production is concerned. However, now that outlook is changing with discovery of oil in Kenya’s rift valley.

We are running out of metaphors. Now try to figure out where the oil production in Uganda; South Sudan and Ethiopia would place Kenya. According to analysts, right in the centre of the action! In 10 to 15 years, Kenya will be "the oil hub of eastern Africa,” they say.
Why? Figure this: Uganda will soon begin production of its 1 billion barrels of oil in Lake Albert; South Sudan wants to shift her 350,000 bpd out away from Sudan and what if Ethiopia also found some oil? It will all be transported to the world through Kenya, perhaps through Lamu.

 Bloomberg reported that Uganda is considering an Oil pipeline from its wells in Lake Albert in Western Uganda to a Kenya port.  D.R. Congo is also said to be considering going east to export their oil through Kenya. This makes the Lapsset Corridor in Kenya, which was a mouth- watering prospect just a few months ago, a staggering one.

Toyota Tsusho, the investment arm of Toyota Motor Corporation has placed its US$5 billion bid to build an oil Pipeline from Lamu Port in Kenya to The oil wells in south Sudan with a possible extension to Uganda and Ethiopia. Read http://eaers.blogspot.com/2012/08/toyota-bids-for-africas-largest-ppp_20.html.
The proposed Lamu Port:the future
 oil hub of East Africa?

And Kenya would become the energy hub of Eastern Africa. Nearly a year ago, we published an analysis on the prospect of an oil and Gas discovery in east Africa.  We were upbeat then and still-for lack of better word- are. We stand by that analysis but we lack the tools to explain the exponential prospects of finding 10 billion barrels of oil in Kenya.  No one has for now.  Read http://eaers.blogspot.com/2012/04/oil-and-gas-wealth-in-east-africa-boon.html

A month ago, we termed the news that the oil find was commercially viable" a game changer for Kenya." Yet we were only talking about 2850 bpd - a drop in the ocean? May be smaller.

Apart from the potential macro-economic gains, the news has immense development benefits in Kenya. Among these gains are potential forex savings, low general prices and larger profits for the business sector.

According official sources, in the year to November 2012, Kenya spend a staggering US$2.105 billion importing 21.7 million barrels of crude oil. Although the commercially viable output is still a drop in the ocean, the prospect of cutting this this bill significantly is exciting to Kenyans.

In January, the Oil industry intelligence publication; oil.com, www.oil.com branded Kenya a hot spot for oil exploration. It seems now the spot will get fiery as more aggressive drilling activity sets in in the near future. 

 The gains of oil will begin long before Kenya produces the first barrel, three years down the road. A local business publication reported last November that oil and Gas exploration brought in US$1.2 billion in FDI. This figure is expected to rise as more players are expected to bid for a piece of the action. Nineteen exploration blocks are said on the table for auctioning this year.

The rules of the game too have changed as Kenya plans to gains more from oil exploration activities. To qualify for award of exploration rights, firms applying for new acreage from this month will be required to commit to spending $28.2 million in the initial two years onshore and $31.2 million offshore in the first three years.

A new term sheet by the Ministry of Energy details the minimum work and exploration obligations, the mechanism for firms to recover money spent on exploration if commercial oil discoveries are made and profit sharing with the government.

Energy Permanent Secretary Patrick Nyoike said production-sharing contracts (PSCs) will be signed with firms that agree to pay $1 million as one-off commitment fee for an exploration area.

In addition to savings and FDI generation, the oil prospect raises the potential of some projects that were treated with muted pessimism. The greatest beneficiary of this development will definitely be LAPSSET corridor.

The US$23 billion Lamu Fort - South Sudan- Ethiopia Transport Corridor (Lapsset), is the biggest business venture ever to be undertaken in east Africa and probably beyond. It is a combination of five ventures that were juicy even before the discovery of Oil in the project’s path. Now they will be mouthwatering as the returns are attractive ranging between 14 per cent and 24 per cent for some of the projects.

Lapsset was meant to serve an estimated 100 million People in Northern Kenya, Ethiopia and South Sudan comprises of: 1,710 KM of standard Gauge railway line; 880 KM of a standard highway, 1260 KM of crude oil pipeline, 980KM of white oils pipeline, a 120,000 bpd refinery and a 32 berths sea port and two international airports. But it appears set to extend beyond its current borders- at least, the railway line and the oil pipeline.

Tuesday, 12 March 2013

Bulls unleashed on Kenya's economy?

Kenya shilling: Gaining some muscle
AFTER A SLIGHT interruption by election petitions, the bulls are back and snorting. The rapid barometers of economic sentiment i.e. the NSE index and the shilling's exchange rate are galloping upwards. 

And analysts are reviewing Kenya's GDP growth year upwards to 7-8 per cent from the projected 6 per cent ceteris paribus.

The NSE index has hit a 57 month high of 5030  and has held above 5000 points. The shilling has also pushed past Kshs/USD rate of 85. It is now trading at Kshs 84.50 to the USD and is expected to make further gains going forward.

Analysts predict that the bulls will still be snorting for another few days before they find their level. One thing is certain though, all analysts say, the bullish sentiment is likely to be around for a while. 

The bulls did not begin yesterday. No. The country was bullish for much of last year. However, the uncertainties associated with the just concluded elections, put a damper on it. But with the election  and the  presidential petition a out of the way, the bull is  fully unleashed.

 The Kenyan economy, analysts say, is likely to outdo itself this year. Projections by the World Bank showed that the economy will grow by 5.2 per cent if the last elections are peaceful. Now analysts say that the  US$40 billion economy will grow by more than 6 per cent this year. Now analysts are reviewing their projections upwards.

At the securities market, equity prices hare siring by proportions uncommon in our market. Some have even breached the 10 per cent rise per day level. The NSE normally raises the red flag when a script’s price surges 10 per cent in a day. In the last two days, two scripts have surged to this level. Although CFC Stanbic retreated more than three per cent yesterday, it was still on the positive range.

Generally price surges ranged 0.93 to 9.92 per cent.  Even some sickly scripts such as Sameer Africa, makers of Motor tyres  surged past the Kshs 2.00 mark. Safaricom is now past its four high trading at kshs 6.25.  if this rise continues, we see several share splits in the exchange before the end of the year or early 2014. Possible candidates include such blue chips as East African Breweries which is now trading at kshs 320.00 and BAT which stands at Kshs 539.00. Other potential candidates would be nation media group and Jubilee insurance.

In the financial market, the shilling opened trade at a shilling higher to the US dollar, as importers and other currency speculators liquidated the dollar positions. The shilling is expected to continue stronger this week as more importers and currency speculators play safe and liquidate their dollar positions.

The Monetary committee has left Central Bank rates unchanged at 9.35 in bid to push lending rates down. The idea is to buoy domestic consumption. Also adding to the confidence was an announcement by the Ministry of Finance that Kenya will float a US$1 billion sovereign bond to finance infrastructure development in the country. The bond will be issued in September. There is a high demand for African sovereign debt in the international capital market is growing.  All African sovereign bonds issued over the last two years have been over-subscribed. In some instances the issues had to accept more. Kenya’s is likely to suffer the same fate. In fact finance ministry officials said that it is now opportune to issue the bond.

Nairobi Securities exchange:

The Bulls  are surging
So why the bullish capital market?  Kenya’s largest market, the COMESA/ EACM region, has already cheered the peaceful elections.  That means investors are expect a profitable  years this year and are therefore ready to back the risk. Uganda, Tanzania, Rwanda, Burundi Ethiopia, South Sudan and Somalia have pledged to work with the new government. These countries form Kenya’s largest export market for manufactured goods. In fact Uganda is the largest market for Kenyan goods, importing more than UK and US combined in 2011. Available data shows that even by June 2012, Uganda was still ahead of Britain and US combined.

Tanzania is the third largest destination for Kenyan exports but appears set to dethrone Britain from the second slot this year.  In 2011, Somalia, with all its chaos, imported twice what German-the largest economy in Europe- imported from Kenya. Rwanda too imported more than German.

The barometers of the Kenya economy - just like the electorate- have shrugged off threats by the Western to impose trade sanctions. And the west itself has confirmed that no such a thing was on the cards.  In fact the surge in the markets is pointer to the significance of the West to the Kenyan economy. The west is truly insignificant in Africa. Its imports are tiny  and even its financial muscle is weak.   Kenya finances 96 per cent of her budget from domestic taxes , leaving a tiny 4 per cent to be funded by donors. This has left the country fully in charge of its affairs.