Wednesday, 26 February 2014

A Jacob-Esau type rivalry in east Africa

Presidents of Kenya, Rwanda and Uganda.
These three think on their feet
SIBLING RIVALRY is at the heart of Tanzania’s laggard attitude towards EAC integration, we can report. Tanzania, the second largest economy in the region harbours ambitions of being a super power in the region.
Kenya, the largest economy in the bloc holds that position.  For Tanzania overtaking Kenya is an uphill task for it requires huge investments in infrastructure, diversification of the economy and investment in personnel. That cannot be attained in a year or so. It needs decades. 
Although at some point, Tanzania appeared set for the target when she discovered natural gas. But that advantage was quickly erased when Kenya also discovered oil. Now, it seems, the battle for supremacy will be won or lost on transport infrastructure.And to win the battle on this front needs decisive and firm action.

 Kenya is the hub of economic activity in east Africa. Consequently, its transport infrastructure is relatively efficient. Kenya is the gateway to the world market for her neighbours to wit; D.R Congo, Uganda, Rwanda and south Sudan through the Northern Corridor. Four of these neighbours namely D.R. Congo Rwanda, Uganda and Burundi can also in theory access the world Market through the central Corridor, which ends at the Dar-Es-Salaam port in Tanzania.

The central transport corridor traverses Tanzania linking her to Burundi, Rwanda, D.R. Congo and Uganda.  On the other hand, the northern Corridor traverses Kenya, from the Mombasa Port also to Burundi through Uganda and Rwanda.
However, Northern corridor is more efficient and reliable and attracts more business attracting all neighbours to use it as a transit route. The northern corridor is the busiest and most competitive route in east Africa, says State of East African Infrastructure, a publication of Africa Development Bank
The Mombasa Port handled some 20 million tons of freight last year about 60 per cent of this tonnage was destined for the neighbouring countries. According to Kenyan officials, transit cargo via Kenya to her neighbours grows by 10 per cent a year.  
Tanzanian President Jakaya Kikwete

Kenya, Rwanda and Uganda have agreed to remove Non-tariff barriers which immediately improved efficiency at the Mombasa Port. As recently as August last year before the administrative measures were put in place, Imports to Kampala through the Mombasa Port took 15 days to reach Kampala and 22 days to reach Rwanda. Now it takes 4 days to Kampala and five days to Kigali, a 400 per cent improvement.
According to the AFDB report, inefficiency at the Central corridor forces traders in Burundi and D.R Congo to use the efficient Northern corridor. The report says that imports to Burundi through Dar-Es Salaam take 33 days to reach their destination.  They take 29 days to travel through the Port of Mombasa. Of the 33 days, clearing through the Port of Dar-Es-Salaam takes 25 days, it takes 21 days to clear through the Mombasa Port. 
That was before the Northern corridor agreement which improved efficiency.
 The agreement involved allowing Rwanda’s and Uganda’s to open customs office in Mombasa Port and collect their taxes from there.  That eliminated the border checks in Malaba on the Kenya Uganda border and also on the border with Rwanda. To add to the efficiency of the Northern corridor, last August, the Mombasa Port launched the 200,000TEUs berth 19. Mombasa is being upgraded into mega port whose cargo handling capacity will rise to 2.1 million TEUs in 2016.

 The central Corridor which originates from Dar-Es-salaam Port is an alternative route to the Northern Transport Corridor. However, to compete with its rival, the corridor needs massive investment.

A report released in April 2013 by the Africa Development Bank shows that the central corridor is scantly used due to the fact poor state of the road. Consequently, average annual daily traffic on large sections of this corridor is less than 1000 vehicles. Only 40 per cent of the corridor boasts of an AADT of more than 1000 vehicles.

By Comparison on the Northern Corridor, AADT is more than 1000 vehicles in more than 80 per cent of the route. The implication is that investment is needed on the central corridor to make it a viable route. It is not clear how much is needed to build the corridor into a viable alternative to the Northern Corridor. However, this much is certain it needs a lot investment in Money, effort and time. That could take years to achieve.
 To add to Tanzania's disadvantage, the Northern corridor coalition is moving fast to build a standard Gauge Railway line from Mombasa to Kigali. The Railway will cut cost of freight by 60 per cent and reduce travel time to two days from Mombasa to Kampala and three days to Kigali. Such speeds will not escape notice of businessmen in Burundi, and D R Congo.

Burundi has shot the first volley in this respect by rejoining the Northern corridor “coalition.”  In a heads of state Summit held in Uganda last week, Burundi pleaded to be allowed to join the Northern corridor. She had earlier been roped in by Tanzania on a central corridor “coalition. The message is clear to Tanzania: “Nations have permanent interests, not permanent friends.”

What is Tanzania to do? She has to be decisive and firm. She must work with her partners at EACM bloc at their speed. If the expansion of Mombasa Port into a Mega port and the construction of SGR are completed in 2018 as planned, Dar-Es-Salaam Port could be elbowed out of business.

Unfortunately for Tanzania, the Central Corridor is almost entirely a Tanzanian affair. The country has to bear the cost of developing the Corridor for use by her neighbours, for a fee. An inefficient, central corridor could also stifle activity at the proposed Port at Bagamoyo. The port is billed the largest in Africa, with a capacity to hold 20 million TEUs a year compared to Dar-es-salaam whose capacity is 800,000 containers a year.

At this point, given that gloomy picture, we may ask: Will Tanzania pull out of EACM?  This is unlikely. While she may be slow in adapting to change and moving with the rest Tanzania is quite sensitive to the gains of a greater integration. Consequently, she has not at any point objected to or refused to advance toward the common goals of the East African Community. Likewise, Kenya has made no attempt to exclude its southern confederate.  It cannot be a Jacob-Esau  rift forever.

Thursday, 20 February 2014

Kenya's Eurobond to be oversubscribed-analysts

Railway construction: Will need cash
 KENYA WILL ISSUE A sovereign Bond worth US$2 billion before the end of next month. And analysts expect the bond to be oversubscribed by a wide margin. This is because of improved economic and Political risk which feed on growth prospects for 2014 and beyond.

And ahead of the floatation, visits by a number of high powered delegations of top guns in the financial world show a growing interest in Kenya. The delegations indicated that the bond was on their diary during the visit. Hence analysts in Nairobi are upbeat that the bond will be oversubscribed.

 They have a reason to be positive. Investor confidence in the frontier market is growing as investor move lower down the ladder to Frontier Markets. Investors are shifting funds from the emerging markets to the fast growing frontier markets.

Data available to this publication shows that all sovereign debt issued by African governments in the last two years was oversubscribed. In 2011 and 2012 a number of sub-Saharan African countries issued debt worth more US$2.2 billion-and all of it was oversubscribed.

Initially, the issuers restricted themselves to just about $500 million. Pioneers in sovereign debt issuing- Namibia, Nigeria and Senegal all tested the waters by asking for US$500million in 2011. In 2012,Zambia raised some US$750 million. The debt was subscribed at US11.9 billion forcing the country to up its uptake to $750 million from the initial $500 million.

This is why newer issuers such as Kenya are looking at larger figures. Kenya will issue $2 billion 10-year-Eurobond to finance its infrastructure expansion and pay off some nagging debt borrowed in 2012.  This is arguably the largest  single issue of a sovereign debt in the region and perhaps, the continent. Investors are impressed by Kenya’s infrastructure development programme and would like to fund a piece of the action, said some of the delegates.
Crude Oil Pipeline. Soon to be yawning for cash

Wednesday, 12 February 2014

More infrastructure Money for Tanzania

THE AFRICAN DEVELOPMENT Bank has committed a further US$700 million for transport infrastructure in Tanzania over the period 2014-2016, we can report. Of the amount, improvement of all roads will take the largest chunk of US$400 million, Development of Bagamoyo Port ($10 m), improvement of Port efficiency $150M); improvement of railways ($100m) says an AfDB report.  The report also breaks down the funds to roads as follows: trunk roads $200Million; rural roads S50 million and sustainable urban transport $150 million.

The report, Tanzania Transport Sector Review states that AfDB will focus on transport infrastructure as an enabling sector of the economy. The Tanzania transport sector faces a myriad of hurdles, chief among them poor infrastructure, which then becomes a bottleneck to economic growth and integration.  For instance, of the 12,786 KM of trunk roads, only about 4000KM of 32 per cent, are bitumen standard. And of these, 409 Km are in poor state, says the report.  Large sections of the country have no Bitumen standard roads, making access to the market for products from certain regions, difficult.

 Consequently, says AfDB, there is need for large investments in roads transport sector. The bank has also funded other roads in the country.  For instance, by the end of February 2012, said another report, the banks was financing 15 road upgrade projects totalling 1371kilometers. The projects said the bank, are at various stages of completion. A majority are at more than 50 per cent completion. Such investment has seen bitumen road ratio from 4.2 kilometres per 1000KM2 to 6.7 km per 1000km2 and is slated to reach 8.9 km by 2016 easing road transport, not only in the country, but also the region.

The new loans comes hot on the heels of a  US$360million jointly funded by the Bank, JICA, the Japanese development agency 29 per cent ($105 million) and the government of Tanzania ($18 million).

The money was to tarmac 391 KM of road in the Tanzanian network namely: the 188 KM Dodoma -Babati and the 202KM Tunduru-Mangaka-Mtambaswala roads. Both are roads are missing links on the national and regional network. 

The Tunduru-Mangaka-Mtambaswala lies in the Mtwara corridor, the transport hub originating from the Mtwara Port in the South of Tanzania. This corridor is a vital import/export route for southern Tanzania and the neighbouring countries- Mozambique, Malawi and Zambia. The corridor is part of the SADC Regional Spatial Development Initiative (SDI) whose goal is to “attract private sector investment through adequate, reliable, cost-effective, efficient and seamless transport systems to reduce the cost of doing business,” says the evaluation report.

 Up in central Tanzania, the Dodoma-Babati road is a section of the trans-Africa highway that links several regions in the country and also links it with her neighbours in the north including Kenya and Ethiopia all the way to Cairo and also the South right up to Cape Town in South Africa.

Road upgrading, says the Review, opens up isolated areas by linking them to centres of economic activity such as markets thus enabling trade which results in poverty reduction. The Tanzanian government also recognises the importance of roads in poverty alleviation in its long term development blue-print-vision 2025.

In addition to developmental benefits, there are also benefits accruing to Motorists and travellers.
Travel time between destinations. For instance the journey between Dodoma and Babati will be cut by 40 per cent from 5 hours to three hours. Vehicle operating costs on the same road are expected to shrink by 33 per cent from $0.824 per vehicle kilometre to $0.555.

On Tunduru- Mangaka road travel time is expected to shrink to two and a half hour from three and a half hours a 30 per cent reduction. Vehicle operating costs on the same road are expected to shrink by 41 per cent from $0.877 per vehicle kilometre to $0.516. Travel time between Tunduru and Mtambaswala is expected to shrink by 33 per cent to one hour from one and a half hours while vehicle operating costs will be cut by 43 per cent to $0.54 from $0.949. Apparently, this section is one of the most expensive sections to operate a vehicle in Tanzania.

 Further, poor roads are part of the causes for the high cost of goods in Tanzania. It is also a non-tariff barrier for Tanzania goods in the regional markets. In addition improvement in transport infrastructure is necessary to ease congestion at the Port of Dar-es-Salaam and ensure the proposed Bagamoyo Port does not turn into a white elephant.

Wednesday, 5 February 2014

Why EA should craft diaspora bonds

An Hydro Dam: Investors wary of the construction risk
ALTHOUGH ALL DATA available is not comparable, there are indications that the East Africans in the diaspora remit  home an estimated US$3 billion a year. 

Kenyans lead the pack remitting home US$1.3 billion last year, Ugandans came second remitting up to US$800 million last year. Although the numbers are uncertain, Tanzania remit an estimated US300-400million a year or thereabouts.

We are talking about an estimated US$2.5 billion or more flowing into the region mainly for subsistence consumption. The east African diaspora comprises of highly paid, highly skilled manpower living and working abroad. If we assume that the remittance level forms 10 per cent of their total earnings, then the diaspora earning are nearly as large as Tanzania’s GDP in 2012. Tanzania’s GDP in 2012 stood at US$28 billion.
This means that the diaspora is potentially a large source of sustainable finance for the regional infrastructure. All it needs is ways to tap into it. Several attempts have been made to mobilise funds from this sources with little success. Kenya’s National Housing Corporation has on several occasions tried to attract the Kenyan diaspora to buy houses through it. Also Tanzania Investment Centre has tried to attract the Tanzanian diaspora to invest in Tanzania, also with little success.

This suggests lack of creativity in developing investment instruments that are dependable, convenient and easy for the diaspora. Not all want land, houses or can set up factories in east Africa. It is other institutions that need these assets. Their business should therefore be to mobilise the funds from the diaspora to invest in these assets. Investment in real assets will mean additional administrative costs that the diaspora may not be keen on.

In this respect, Ethiopia has blazed the trail. She developed a US$4 billion long term infrastructure bond to build the Grand Renaissance dam, GERD. The dam will generate some 6,000MW of power some of which will be sold to her neighbours, Kenya, Sudan and she is also said to be targeting Yemen to the east. In other words, Ethiopians in the diaspora are helping their country create a future export service in addition to increasing power supply at home. Increased power supply is a catalyst for further industrialization in their country.

 East Africans too are in dire need of infrastructure that will pave the way for further development of their country.  In the next 17 years, Kenya needs to invest at least US$1 billion a year in enhancing power generation capacity. Tanzania, estimates show will need to invest at least US$3 billion a year over the next 10 years also to enhance power generating capacity. A more or less similar amount is needed to finance energy production in Uganda over the next decade. We are talking about US$70 billion to be invested in the energy sector only.

This is besides investment in; paved roads, airports, railway lines, sea ports, schools and health and hygiene infrastructure. The demand for investment is colossal and calls for creative thinking.

 East Africa should develop infrastructure bonds for the diaspora to finance infrastructure bonds for projects that sale their products/services at the market prices. One such area is the energy sector. Energy, especially electric energy, is a major bottleneck to east Africa’s development. Tanzania for instance needs to invest some US$3 billion a year over the next ten years just to match demand for the commodity. Kenya and Uganda too need huge chunks of money to generate more power to keep their economies rolling. And power is sold to consumers at the market price which means that the money raised from the sale of electricity can be used to service the bond and eventually retire it.

An Airport terminal: Such self financing projects
 suitable for  Diaspora bonds
 KenGen, Kenya’s power generation giants need to raises US$1 billion every year to develop generating capacity of 17,000MW by 2030. It has even proposed an asset backed bond to raise the debt finance needed to generate electricity.  Since the firm will need to borrow regularly, perhaps it should consider an asset backed bond programme rather than a project.

The conditions are favourable for such a move and the infrastructure is in place. First the bonds are listed at the local capital markets. This gives any investor an exit route should the need arise. Two, the Capital market in east Africa is vibrant and modern it even has listed and trades in long term bonds. The yield curve is attractive too averaging 13-14 per cent for long term bonds. This kind of yield is not available elsewhere. Further, the investment is secure as registration of one’s certificate is electronic meaning that no one can disappear with an investment certificate.

As in the case of Ethiopia, the diaspora in east Africa could be tapped for funds into risks which other investors are unwilling to finance. The dam building risk in Ethiopia was such that other investors may were averse.

The same applies to other countries in the region, investors are not ready to stomach the drilling risk in geothermal development for instance, but they are willing to stomach the generating risk. The diaspora, together with local institutions with deep pockets can be mobilized to fund these risks in order to hasten development in their mother land.

Mobilising diaspora funds through a bond will release tax-payer’s money to finance other developmental needs such as expanding schools, health and hygiene infrastructure where the rate of return is unattractive to investors. This will ensure that social economic infrastructure, which promote social-well being are also in place. 

India and Israel have made great developmental strides because exploiting their diaspora's resources. East Africa should jump on the train.