Tuesday, 23 April 2013

Lapsset Corridor:US$500million down $23billion to go

 The first three Berths: Contract Out.

THE KENYA GOVERNMENT has shot the first volley in the proposed development of the Lamu Port South Sudan Ethiopia transport corridor, Lapsset. It has awarded the first contract in the US$23 billion project. 

The contract for the construction of the first three berths of the 32-berth Lamu Port will cost US500 million and is fully funded by the Kenya government.
A consortium of Chinese construction companies led by China Communications Construction Company has won the contract.

The work includes; the construction of; one general cargo berth, one bulk cargo and a container berth at Manda Bay, Lamu. Lamu port is designed to be a mega port, receiving any post-panamax vessel. Consequently, all berths will be dredged to a depth of 18.5 Metres.

Other works include construction of; a 113 Ha hard standing yard, internal roads, Administration buildings, slipways and workshops for small crafts and associated infrastructure such as water supply, storage and reticulation; Power and ICT infrastructure.The three-year contract is expected to begin later in the year.

Lappset is the second largest business venture to be undertaken in east Africa.  Read http://eaers.blogspot.com/2012/07/lapsset-biggest-business-venture-in.html. The largest is the US$42.5bn electricity generation project in Kenya. Both projects are pillars of Vision 2030, Kenya's long -term development blue-print and are expected to be fully functional by then.

Oil Pipeline: was first to attract a suitor. It could get sweeter.
The awarding of the contract is seen as a first volley by observers, as it underscores the government's seriousness in the development of the corridor.  On completion, the three berths will be used to transport materials for the construction of other components of the Lamu Port South Sudan- Ethiopia Transport corridor (LAPSSET).

 These include; a 1700 Km long high speed railway line, a 1700 Km long a highway; a 2000KM long crude oil pipeline, a 120,000 bpd refinery, a 32- berth sea port, three resort cities and two international airports. Except for the construction of Isiolo international Airport, which is one of the two international airports on this corridor, other projects are on the design stage.

Although Lappset is a juicy venture with returns ranging between 14 per cent and 24 per cent for some of the projects, doubting Thomasses were waiting for a sign that it is feasible. Now they have a sign.

The Corridor, to be developed on a Private- Public Partnership (PPP) basis had attracted a few suitors but current is expected to spawn renewed interest in the corridor. Among the first suitors on the scene was Toyota Tsusho, the investment arm of Toyota Motor Corporation of Japan, has bid for the construction of the US$3 billion, Juba-Lamu oil Pipeline. Read http://eaers.blogspot.com/2012/08/toyota-bids-for-africas-largest-ppp_20.html .

According to Reuters, The Development Bank of Southern Africa, DBSA is hitching to be the lead arranger for the project. The Bank is said to have dangled an offer of US$1.5 billion to fund the project

 Apart from the completion of the three- berths, another sign of the times is the commercial viability of crude oil discovery in Kenya, also along the same corridor. Read http://eaers.blogspot.com/2013/02/oil-kenyas-game-changer.html. This improves the prospects of the corridor from good to Mouthwatering.

In addition to roads, rails and Pipelines there are also three resort cities on the corridor whose major goal is to increase tourism in the arid but high potential lands.  However, due to the discovery of oil along the corridor, these cities are likely to turn into energy cities. Read http://eaers.blogspot.com/2012/04/awaiting-birth-energy-cities-in-kenyas.html . Regardless of their changed status, the cities will be developed by the Tourism Ministry. 

Although components of the project could be developed on PPP basis, a majority of the components, it seems, will be developed by the government together with its partners. Even the consultant has recommended that the venture would be viable if private sector were to lease the infrastructure from the government, rather than participate in building them.

Thursday, 18 April 2013

Kenya’s electricity generation: A hot investment spot

A Geothermal Power station: A favourite
 source of electric power in Kenya
KENYA'S ELECTRICITY  generation sector is an investment hot spot.  The country plans to increase its power generating capacity by 17000 MW by the year 2030 when it will transit to an emerging economy status. The capacity currently is less than 1500 MW hence the mad rush to hit targets in just 17 years.  The bulk of this power will come from clean and renewable sources such wind, geothermal and solar sources.

 According to experts in the energy sector, on average, it costs US$2.5 million to produce a MW of electricity. This means that to produce 17,000 MW will cost a massive US$42.5 billion for an average investment of US$2.5 billion a year.

 In terms of the amount of investment needed, electricity generation is way bigger than the Lapsset Corridor. Lapsset is an acronym for Lamu Port, South Sudan Ethiopia transport corridor. It will comprise of 2000 Kilometres of crude Oil Pipeline, 1700 KM of standard gauge Railways line, 1800 of standard single carriage road, a 32 berth sea port at Lamu and 120,000 bpd refinery. It will cost an estimated $25 billion.

To raise the $42.5 billion  the country so far employs a mix of financial models ranging from good old PPA-power Purchase Agreements; to PPP; to joint ventures, and imports, borrowing from DFIs  and mobilising FDI to borrowing from t the local Capital market.

The Major power generators in Kenya are the KENGEN and GDC. Both are State Owned Enterprises (SOEs). However, Kengen is partially privatised and is therefore listed at the Nairobi Securities Exchange. KenGen generates power from all sources including Hydro, Thermal, Geothermal, Wind power and Coal. Being the oldest power generation firm, it is expected to generate 10000 MW of the 17,000 MW needed in 2030.

 The other Public owned generator is Geothermal Development Corporation, GDC. A recent creation DGC specialises in generating geothermal power. It is currently developing 400 MW-almost 26 per cent of the current capacity- of geothermal power from its Menengai fields that will come on grid in 2016. The firm hopes to generate a further 3000 MW of by 2020 from the same fields rising to 5500 MW in 2031.
GDC drills the steam and caps the wells, then contracts Independent Power Producers to build the generation capacity and sell to the electricity distribution company, Kenya Power Company. The IPPs must thus sign a 20-25 years Power Purchase Agreement, PPA, with KPLC.

GDC’s business model is to assume the drilling risk leaving the generation risk to the private sector. This model has a number of benefits; It ensures that geothermal power is the cheapest source of electricity. Two, it releases GDC to concentrate on its core business –drilling of steam wells and capping them. Since the IPPs pay a fee for the steam, the model ensures that GDC can meet some of the drilling costs from internal resources.

Kenya Electricity Generating Company Limited, KenGen, is the leading electric power generation company in Kenya, producing about 80 percent of electricity consumed in the country.  As the oldest company, much is expected from it. By 2030, it must produce some 10000 MW to meet domestic demand. That is an estimated 59 per cent of domestic demand.
A Wind farm: Popular with the Private sector
The company utilises various sources to generate electricity ranging from hydro, geothermal, thermal and wind. Hydro is the leading source, with an installed capacity of 766.88 MW, which is 64.9 per cent of the company’s installed capacity.  But Hydro is slipping down the scale of importance as a source power. Instead, geothermal is slowly edging forward as the leading source. Kengen is therefore ratcheting up its geothermal capacity. By 2016 Kengen’s 3000 MW generating capacity will be dominated by geothermal at 882 MW; Hydro at 820 MW; coal 600 MW; wind 62 MW. KenGen is the leader in geothermal power generation in Africa currently generating some 150 MW from the Olkaria geothermal power fields.

In the second phase of her development plan set to close in 2018, Kengen needs US$5 billion to ratchet up her capacity in geothermal generation to 5000 MW by 2020 from her Ol karia fields.

Being a listed company at the Securities Exchange, Kengen is also the most creative in crafting debt instruments. It has borrowed from the local Capital market using Infrastructure bonds to borrow US$320 million.
KenGen has also borrowed a leaf from GDC where it drills wells and concessions them to IPPs to generate and sale power to KPLC. This is a model it has applied to develop the 560MW of geothermal power at its Olkaria fields under a public–private partnership deal. The shortlisted companies include Mitsubishi, Toshiba, Korea Electric Power Corporation (Kepco), Daewoo. The entire project will cost US$2 billion and is expected on stream in 2016.

 In addition the firm has crafted a and is now planning to issue an asset backed bond to raise some US$350 million to help finance further drilling.

An asset backed bond is a form of borrowing in which the borrower offers an existing asset with reliable cash-flow as security. Ken Gen has already the drilled the steam wells and capped them.  All she need do is to transfer that steam to a Special Purpose Vehicle (SPV) which will in turn issue the asset backed bond, raise money and give it to KenGen to continue drilling more wells. The SPV will then concession power to IPPs to produce power and pay off the debt.

Although GDC, being a wholly owned government enterprise cannot borrow from the local Capital market .The government issues infrastructure bonds part of whose proceeds goes to GDC. To this extend, GDC also borrows from the local capital market.

 The private sector is also pitching tent in Power generation targeting wind power and solar power generation. These two sources are the least risky and therefore popular with the private sector.  So far, an estimated US$1.7 billion has been committed to the segment of generating power.

Among the Players in this sector is Lake Turkana wind project in northern Kenya. LTWP plans to sink an estimated Euro 586 million to produce some 300 MW. The project has been on the drawing board to nearly 17 years owing to funding issues. The government of Kenya is said to be considering issuing sovereign guarantees to allow the project to raise capital build the plant. The project is the largest FDI in Kenya’s history.

In addition there are other companies owned by Kenyans that also plan to generate wind power.  One of them, Gitson Kenya limited has US $830million war chest to generate some 350 MW of electricity from both wind and solar sources. Blueseas, another outfit seeking to raise funding from the US plans to invest $100 million to generate 107 MW of wind power.

 Any shortfall will in the meantime be met by imports. Kenya has already signed a deal he deal with Ethiopia for the supply Kenya with 2,000 MW of electricity at US$0.0065 per KWh. This will earn Ethiopia some US$400 million a year from 2018 on wards.  The Ethiopian Electricity generator EEPP has signed a 25-year PPA with Kenya power and lighting.

It may look like Kenya will at some point by over -supplied with electricity thus suffer excess capacity. Kenya, is a member of the East African Power Pool (EAPP) incorporating Tanzania, Rwanda, Burundi and DRC.  This means that any excess power will be sold to her neighbours making Kenya an electricity power trade hub in the region.

Thursday, 11 April 2013

Change your Mind set on Africa, West told

Proposed Konza techno city in Kenya:
 There's room for all

THE  WESTERN mind set, say commentators on the previous essay , is predatory, while China’s model is collaborative. In fact one  saw China as the latest “Colonial Power in Africa,” arguing that China is building infrastructure for its own good- “to take all the wealth of Africa to China,” argued Archie McLachlan .

 However, McLachan also agrees that the western business model is predatory, a position supported by Dr. Jerome Terhemba Andohol.  This debate sent me back to essays I have written on Afro-Western economic links. The point is Africa is looking for development and trade partners -not masters. The West being the former Colonial masters, view Africa as a colony still. Consequently, they prefer to give Africa what they want not what the continent needs.

Research has demonstrated that the West does not understand Africa. Mention Africa in the West and images of starving Children in war or drought ravaged populations.  In 2010 for instance, the global accounting firm Ernst and Young www.ey.com published its report dubbed Africa attractiveness 2011. The firm found that   a majority of investors in the west are pessimistic about Africa. 

Proposed Turkana resort city: Any takers?
Says the study, only 38 per cent of respondents in North America and 45 per cent in Europe see any prospect for Africa soon.  In contrast, 74 per cent of respondents in the Emerging Markets and 66 per cent in Asia saw better prospects in Africa. The study concluded “that Africa is on an upward trajectory economically, politically and socially.” Read http://eaers.blogspot.com/2012/05/time-for-africa-to-ditch-west.html

This turn of fortunes has placed heavy demands on Africa governments to provide services to a discerning population. Owing to past lethargy, Africa suffers an investment backlog in almost every sector of the economy. Therefore demand for investment in both Physical and social infrastructure is beyond the means available to the governments.

Hence they look for foreign partners. But the continent has no time for laggards because they need the infrastructure like yesterday.  That is why China has penetrated African quickly because it provided the needed Investment in roads, Railway lines, Airports, Sea Ports and electricity generation plants. She does not delay neither does she question Africa’s wisdom in identifying the project or its design. These are determined by Africa’s needs.

 But the west, which still looks at Africa as self-ruling colonies would poke her nose into such areas which must obey the whims of its master. And Africa has responded by diversifying her portfolio of development and trade partners. And since she was not trading to benefit others, things have to be done on her terms.
If it asks for a 1,000MW hydro power dam, that is what it needs and that is what it must get or shop elsewhere. This is how the west has lost Africa. It wants exclusivity Africa wants competition.

To the credit of the west some, including intellectuals, media houses and the private sector have woken up to this reality and are preparing to enter the market. In fact some have openly stated that the growth in Europe will come from its business activity in Africa. Read http://eaers.blogspot.com/2012/12/european-investors-eye-tanzanian-toll.html

Africa is still growing. In fact all indications are that Africa could be the fastest growing region in the next five years posting annual growth rates above 5 per cent. Much of this growth is internally generated which is why the continent is not adversely affected by crises in the west.

Proposed Dar-Chalinze highway in Tanzania:
European contractors salivating over it
For instance, between 2000 and 2008, around a quarter of Africa’s growth came from higher revenues from natural resources.  The other three quarters were internally generated by the growth of local enterprises which reduced profit repatriation.
 This growth of highly profitable local enterprises, spread across all sectors, which boosted employment, tax revenue collection and domestic investment as they invested in further growth. This saw per Capita domestic revenue collection rise to $441 compared to development which shrunk to US$41 per Capita. Consequently, implementation of development programs in Africa became feasible and certain, feeding further growth.

To sum up, Africa has room for investors from any part of the world including the west provided the deals are quickly sealed and implemented to serve developmental needs. Two, Africa will only deal in mutually beneficial partnerships. That is why western explorers and drillers dominated the Oil and Gas exploration sectors and there are signs that they will benefit immensely as Africa also gains.

This means that predatory practises as is common in the west will be shunned. So what do we say?  To the west acquire a new attitude to compete for business in Africa and you are welcome.e

Tuesday, 2 April 2013

How the west can contain Chinese influence in Africa

Thika Superhighway in Kenya: Buildby 
Chinese funded byAfDB
"THE WEST DOES not understand Africa," said a Kenyan economist, Aly Khan Satchu, in an interview with CNC, a Chinese Television Channel. A Sudanese economist concurs. "The Chinese build infrastructure for us in the 1970s and they are still functional." How right these two are!

Both analysts explain the decline of western influence in Africa. 

The rout of the Western Influence in Africa did not begin with the entry of the Chinese.It began early. Even in the private sector, home bred companies are elbowing out TNCs such as Unilever. And these upstarts that are elbowing out TNCs are part of the reason Africa is growing robustly.

The start- ups successfully competed and elbowed out transnational corporations in Kenya because the latter grew fat and lazy, thus losing their grip on the market. The same argument was repeated in the financial sector. I wanted to find out how indigenous banks - some as young as six or seven years old competed with, out grew, and now are elbowing Western TNC banks out of the African market.
  "Wrong decisions born of a slow decision making process." That is the culprit.  And it also plagues western governments and their institutions.  Read http://eaers.blogspot.com/2011/12/how-west-lost-africa-to-china.html
Speaking on the demise of western private sector in Africa, Industrialist Vimal shah said; "They slept on the job and became lunch for somebody else." Mr. Shah owns Bidco industries, a large manufacturer of consumer goods.  His company, born in the mid 1980s, now operates in 15 African countries, significantly eating into the market of Unilever Group in eastern Africa.

Africa is on its feet, and is dealing with only those who make their decisions of their feet. It is no longer keen on the traditional "Board room decision makers," much less anyone who pretends to understand Africa better than Africans themselves. On condescending attitude, the West excells- and this is their undoing.

Kigamboni Bridge in Tanzania:
Build by Chinese funded by Tanzania
The truth is Africa is on the second decade of persistent economic growth, averaging 5.6 per cent a year. Experts, such as the World Bank project that in the next five years, the continent will be the fastest growing region in the world.  And according to the UN Economic Commission or Africa, UNECA, the continent is a potential economic growth pole of the world. A growth pole is a region whose economic growth causes other parts of the world to grow too.  Businessmen in Europe have bought this view and are positioning themselves to get a slice of the African action before the Chinese and other easterners take it all. Please read http://eaers.blogspot.com/2013/01/the-second-scramble-for-africa.html

Much of the  growth is Africa’s own doing.  The growth in Africa is driven by the growth of domestic sectors which has seen per capita domestic revenue mobilization rise to U$441 compared to aid which has shrunk to $41 per capita. Good Commodity prices have also had their share I Africa’s good tidings.

 Consequently, the continent is lifting an estimated 15 million people out of poverty a year. This means that so far an estimated 90 million have been lifted out of poverty. At this rate of growth, an estimated 120 million people will join the middle class by 2017.

The growth of the private sector has spawned intense pressure on Infrastructure: They need plenty of electricity in order to cut production costs and be competitive internationally; they want to reach wider markets in region.

Such increased demand on infrastructure service s has clearly defined the developmental priorities in Africa. Infrastructure, infrastructure and more infrastructure. That is what government in Africa are to develop to enable the private sector to thrive. Estimates show that Africa needs some US$80 billion are years over the next 30 years to build roads, railway lines, sea ports, Hydro dams, geothermal wells and airports in order to meet the latent demand in infrastructure. The continent on its own can afford an estimated $30-40 billion of these.

 Therefore the continent is not ready to deal with laggards. China understands this very well because she needs the resources in Africa but is handicapped by the paucity for infrastructure. Consequently, infrastructure in Africa is also her priority.

Lamu Port in Kenya: Any takers?
This synergy is drawing China to Africa. It is also drawing Africa to China. And Africa is gaining from this she's getting quality infrastructure at affordable rates. The Chinese work long hours to deliver their projects on time.

One factor that western analysts ignore is the growing prosperity in Africa has made the continent more independent from the west. The continent is relying less on aid and financing its own projects. Some estimates show that by 2012, Chinese Engineering firms were working on contracts worth US$45 billion much of which was funded by African governments.

To its credit, western private sector-especially in oil exploration- Africa sectors is growing. This is a clear indication that Africa chooses its partners according to its needs. The western private sector has a lot to offer to Africa. First it has the Technology and the financial muscle to help Africa develop its resources. Therefore it is an indispensable partner in Africa's resources development. A word of caution though, given that Africa's especially the eastern coast is now a confirmed fossil fuels producer in the future.

We expect intense competition for futures exploration licenses. We also expect an upsurge in M&As in in this sector. Here western companies have to be decisive and quick in their decision making lest they also lose Africa to China.

 These are the players that will help hold back  Chinese influence in Africa. But even the bold and daring will have to take Africa serious because it can look elsewhere. Just ask the giant international telecoms, such as Orange and Dutch Shell and BP. Getting into Africa late is very expensive.