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.

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