Tuesday, 27 August 2013

Kenyans need not fret over the US$5 billion Chinese loan

Investment in Infrastructure is beneficial
to the country
RESPONSE TO THE KENYA-China deal in which the former agreed lend to the latter US$5 billion for infrastructure development was surprisingly, hostile in Kenya.  Critics were allover punching holes into what is arguably the largest financial support in Kenya’s history. The gist of the criticism was simply this; this is a huge chunk of Money that raises Kenya’s public debt inordinately making debt servicing a nightmare.

From a layman’s standpoint, this is a valid concern. The world is awash with countries that bit more debts than they could chew and are now chocking on it. The financial crisis facing Greece, Portugal and Spain easily come to mind.

However, beyond this point, the illiteracy of the critics comes to the fore. They ignore a lot of facts in the public domain. Let’s start with Kenya’s blue print for long term development, Vision 2030. It aims to turn Kenya into a middle income industrializing country in 17 years’ time-by 2030. Vision 2030 therefore envisions an economy that is growing at double digits for nearly 20 years.

To grow at double digits many bottlenecks have to be removed.  Among these is low productivity, small markets, expensive power, unreliable transport systems and lack of water. Removing such bottle necks requires massive investment in water, energy, efficient transport systems, a robust and diverse economy, skilled labour force and markets.

We are talking about large investments in: Physical infrastructure –roads, rail roads, power generation and distribution capacity, Sea Ports, water, food security and new specialized cities.  Since our taxes cannot finance this ambitious blue-print, Kenya has to craft a number of financing models, among them loans from friendly foreigners.

A prototype of Lapsset Railway line: Fast
transport of people and goods
For the country to reach vision 2030 goals, it needs to expand its power output to 17,000MW by 2030 from the current 1370MW. Such growth will require US$42 billion in investment over the next 17 years. Such output will require a mix of cheap and renewable sources of energy such as solar, wind and geothermal power in addition to hydro generated power sources. This mix will reduce the cost of energy to all consumers by more than 50 per cent to US$0.06 per Kwh from the current $0.14 per kWh.

Another flagship project of  vision 2030 is the US$25 billion Lamu-South Sudan Ethiopia Transport corridor. This corridor involves the construction of a 32 berth Port at Lamu, two international airports, a 2000KM crude oil Pipeline from Juba in South Sudan to Lamu, a high speed Railway Line to Juba from Lamu with a possible extension to Addis Ababa in Ethiopia and a 1800Km highway.

The programme also includes the construction of a 165Km long High Falls dam that will hold 5.6 billion cubic metres of water. The, dam expected to cost US$1.25 billion will generate 700 megawatts of electricity and provide water to irrigate over 250,000 acres of land. It will also supply water to the Lamu resort city and port and help check perennial flooding in the Tana delta.

 Further south from Lamu is the Mombasa Port, the largest sea Port in east Africa. The Port itself is being upgraded to a mega Port at a cost of nearly US$500million. At the end of the expansion programme, the Port will have a capacity of handling 1.75 million TEUs. Developments completed so far have enabled the Port to handle post-panamax vessels.

The expansion will be chocked by lack of supporting infrastructure such as roads and a reliable Railway line. Consequently the major users of the Port namely, Kenya, Uganda and Rwanda have agreed to build a 2937 km standard gauge railway line from Mombasa to Kigali in Rwanda. The entire project will cost the region an estimated US$11.5 billion. Of these Kenya will fork out US$2.4 billion. The Chinese government has agreed to finance the entire project as part of the US$5 billion deal between the Chinese and Kenyan government this last week.

These are expensive projects whose benefits need to be assessed carefully and diligently.  We have not seen the feasibility study for the Northern Corridor Railway line from Mombasa to Kigali. However, the feasibility study for the LAPPSET corridor shows that the Railway line has an economic rate of return of 17.5 per cent. It is expected that the Railway line on the Northern corridor has a similar return or better given that the economic activity on the corridor is well developed compared to the lapsset corridor.

Given their positive return, any sensible government will need to invest in the projects in order to boost growth prospects. Since our tax revenue is consumed largely on recurrent expenditure, they cannot sustain an investment programme that will cost US$100 million. This leaves the government with an option of crafting a mix of financing options such as private public partnerships (PPPs), debt paper such as government bonds, or aid multi-lateral and bilateral aid.

 In the Kenyan case, development of infrastructure is funded by debt from multilateral agencies such Africa Development Bank, and bilateral agencies such as JICA and the Chinese through Exim bank. There has also been borrowing from the domestic market through infrastructure bonds. The result is an increase in debt to GDP ratio to what some see as a dangerous trend.
Mombasa Port : Being upgraded to a mega port

However, it may be asked; when is a debt bad? The answer is: When it is used to finance current consumption. In other words debts that do not enhance a country’s productive capacity are dangerous. Our large debt has been invested in Infrastructure thus enhancing the productive capacity of economic players.

Our industries operate at around 30-40 per cent capacity due to market and energy bottlenecks. Increased power supply at a lower cost will unleash the productive capacity of our Manufacturing sector. If backed by efficient transport systems into all parts of the country and the neighbouring countries then expansion and more employment opportunities open up.

As more people get engaged in gainful employment, the number- of- tax-payers increase, thus ensuring that there are more people to pay taxes that will be used to pay off the debts we incur now to invest in productive activities.
Wind power: Increases supply of cheap power

A part from the growing number of tax-payers, some of the infrastructure could be leased to ensure that funds are available to service their own debts. The Geothermal Development Corporation is one such example.  It will lease the 400MW steam wells it is developing at Menengai to the private sector to build power plants. The private sector will then pay GDC. KenGEn the leading electricity generator in the country is crafting an asset backed bond in order to raise funds from its current geothermal sources to finance further development.

Since each form of financing has a different impact on future debt servicing. Kenyans need to ensure the funds borrowed are invested to enhance her productive capacity. Since the loans so far are invested in productive activities, we need not worry.

Monday, 12 August 2013

Uganda set to be the Hydro power giant in EAC

Proposed Karuma Hydro Dam: the largest in EAC
UGANDA IS SET TO BECOME the hydro power giant in east Africa. It has already awarded contracts to triple its hydro power generation by 2020. The country has in the past three months awarded three contracts for the construction of three hydro dams that will raise her generation capacity by 1400MW.

The projects include the controversial Karuma Hydro-project with a capacity of 600MW, a less controversial, Ayago Hydro dam also with a capacity of 600MW and Isimba dam with a capacity of 188MW. All projects will cost a whopping US$4.2 billion.  On the completion of the projects in seven years’ time, Uganda will emerge as the giant hydro power producer in the east African common Market bloc.  Her current capacity is 700MW which will rise to 2100MW by 2020.

The two projects awarded in the last one month, will be built by Chinese contractors while the US$1.9 billion Ayago Hydroelectric dam will be constructed by a Turkish firm.

 Among these is the controversial Karuma hydroelectric dam which has been on the table since 2009. But it was dogged by controversies with development partners (Read the West) saying that the project was too large for Uganda.

Many called for the project to be scaled down. However the Uganda government, decided to fund the project from internal sources. Even then allegations of corruption in the procurement process delayed the project by another two years until early this year when President Yoweri Museveni took over the procurement process.

Bujagali hydro dam: also faced opposition
 President Museveni has in the past ignored”advice” from “development partners” in the development of Bujjagali Hydro dam which was also dogged by controversy. Since 2005 Uganda   has successfully ignored advice that says scale down a project, opting instead to go it alone.  During the BRICS meeting in March this year, President Museveni carried the project with him to Durban, where he discussed it with the Chinese President Xi Pin.
 Three months later, the contract was awarded to China's Sino hydro Group Ltd. The US $1.65 billion, project will be partly funded by a $500 million Chinese loan. Uganda had already ring-fenced US$600 million for the project. But sources indicate, this amount could be used on budget support as donors have become tight fisted. Reports indicate that work has already began on the Karuma dam.
The ayago project awarded in April is worth US$1.9 billion. It is a 600 MW hydroelectric power plant that will be constructed on the Victoria Nile, downstream of Karuma Power Station, but upstream of Murchison Falls.
The project will be developed in two simultaneous phases, known as Ayago North (estimated capacity:350MW) and Ayago South (estimated capacity:250MW).[ The project was awarded to Turkish  firm, Mapa Construction and Trade Company.
A month later, Isimba hydroelectric project also on the River Nile, was awarded to China International Water & Electric Corporation (CWEC) which hotly contested for the Karuma project with Sino hydro Group
Uganda’s  current power generating capacity stands 700MW while demand is estimated at around 590MW. A huge proportion of this output is consumed by just about three large consumers, including the government, this leaves very little for consumption by the manufacturing sector. Consequently, electricity supply, whose demand grows at 10 per cent a years could stumble economic growth in the country. The government targets a double digit growth in over the decade to 2023. Electricity consumption is expected to exceed 1200MW in 2013.

With the completion of the projects, Uganda will be second only to Ethiopia whose hydro power generation capacity will exceed 6000MW once the Great renaissance dam is completed. This will increase the supply of hydro power in eastern Africa by 8000MW part of which  will be exported to the East Africa neighbours. Already Kenya has signed a contract to import 2000MW from Ethiopia at an estimated annual revenue of US$465 million.