Tuesday, 25 March 2014

Africa’s largest Wind power Project ready to rollout

 Smiles at last: Following 9 years of blood, sweat and tears
 FINALLY! AFRICA’S LARGEST Wind Power project, the Lake Turkana wind power project has been placed on the runway ready for take-off. The firm signed the financial closure for US$687million on March 24th. This marks the end of “Nine years of studies, negotiations, doubts and hope,” said Kenya’s Principal Secretary for energy, Eng. Joseph Njoroge.

 The ground breaking ceremony will be in six weeks’ time during which time the firm expects to have formalized all funding issues and then take off.  According to the PS Energy Mr.Joe Njoroge, the firm should produce the 150MW in 2016.

Lake Turkana wind power project is the largest wind power project in Africa. It will generate some 300 MW for Kenya’s national grid. This is 20 per cent of Kenya’s e current electricity output which is growing at a rate of 80 MW every year. The US$763 million project is the largest private sector investment in the country’s history. It is funded by both Debt and equity.

 The deal to finance the project was “the most complex financial deal in Africa today” said the AfDB regional director, Gabriel Negatu .  The African Development Bank (AfDB) is the lead arranger and has invested US$240.9 million in the Project, Africa’s largest wind power farm. 

 Other arrangers include are; Standard Bank of South Africa and Nedbank Capital of South Africa. Other investor who signed the deal yesterday include; Proparco, East Africa Development Bank, European investment Bank which has invested $276million, FMO, PTA Bank, Triodos, EKF, DEG and OPIC Apart from the debt financiers there are also equity financiers including by Aldywich International which owns a 51 per cent stake, South Africa’s IDB (25 per cent), Pan Africa Investment Development Fund and Vestas— the leading Danish manufacturer of wind turbines (12.5 per cent) and the six co-founders (6.5 per cent).

Already the special purpose vehicle, which will generate the power, Lake Turkana wind power limited, has signed a 20-year Power Purchase agreement (PPA) at a fixed price of $0.12 per KWh with Kenya Power and Lighting Company (KPLC). KPLC is the sole distributor of electric power in Kenya.  

Although demand for power is estimated to grow a 8 per cent per year, that figure is misleading as there a huge latent demand for power that is yet to  be met. The eight per cent growth, analysts say, is probably what the power companies are able to meet per year. Kenya expects to increase its power generation Capacity 5513MW by 2017. Some ^30MW will come from wind and LTWP will provide the bulk of these. Other sources include, Ngong, Wajir and Oltepesi. Consequently there is currently a heightened activity in this sector. Go to http://eaers.blogspot.com/2013/04/kenyas-electricity-generation-hot.html

Based in Loiyangalani in Samburu County, the Lake Turkana wind power project includes installation of 385 wind Turbines on a 40,000 hectare piece of land, the associated overhead electric grid collection system and a high voltage substation.

The Project also includes upgrading of the existing 204km road from Laisamis to the wind farm site, as well as an access road network in and around the162Km2 site for construction, operations and maintenance.  Already the first 31million (ksh3.2 billion) contract for the construction and upgrading of more than 300KM of was awarded to Civicon Kenya. See http://eaerb.blogspot.com/2012/07/lake-turkana-wind-power-laying-first.html

The Kenya Electricity Transmission Company Ltd (Ketraco) is constructing a double circuit 400kv, 428km transmission line to deliver the LTWP electricity to the national grid.  The line will also be used to transport the proposed power import from Ethiopia. The firm announced that it will give a "proceed to construction Notice" to its contractor next week. The line will be complete in 23 months time.

Wind power, coupled with geothermal and  hydro-electric power that already accounts for more than 70 per cent of Kenya’s electricity supply, will  make Kenya nearly 100 per cent dependent on environmentally-friendly energy sources and eliminate power  fluctuation. Currently, it uses Thermal power to smooth out fluctuations. See http://eaers.blogspot.com/2012/01/africas-largest-wind-power-farm-set-to.html

The Turkana project will engender a lot of benefits to the country in its 20-year life span, company officials say. Among these is cheap power at US$0.12 cents per Kwh. Further, being a green energy project, Lake Turkana wind power will enhance energy diversification and save 16million tons of CO2 emissions compared to a fossil fuel fired power plant. It will earn carbon credits at a rate of €10 million (US$130 million) a year for a total of€200 million ($262milion) over the life of the project.  The income is to be shared with the government and invested in the community.

It will save the country €120 million ($157 million ) a year in fossil fuel imports  as it will cut demand for  fossil fuel used in power generation. Other benefits include tax-revenue estimated at €22.7 million ($30 million) per year or €450 million ($589 million) over the life of the investment.

Thursday, 20 March 2014

Why Kenyan Tobacco Manufacturers smile all the way to the bank

A smoker
AVARRICIOUS AND DECEITFUL Anti-tobacco activists have Kenyan tobacco manufacturers laughing all the way to the bank. Their Campaigns are dishonest and hypocritical hence the number of smokers in Kenya has risen if the numbers of sticks manufactured is anything to go by.

According to a report titled Exposing the tactics, between 2003 and 2008, cigarette production in Kenya rose 156 per cent to 12 billion sticks from 4.8 billion in 2003. Some estimates place the figure in the upwards of 15 billion sticks. This means that the number of smokers in the country has risen rather declined.

 This is despite the punitive regulatory measures in place to tame smoking. Tobacco advertising is banned nor can the manufacturers participate in Community Social responsibility events. Taxes have almost trebled retail prices yet more people light up. And the manufacturers are laughing all the way to the bank. Why? According to the report cited above, the cigarette manufacturers intimidate the government into not passing punitive legislation including discouraging tobacco farming.
However, their false reports have emboldened the manufacturers and smokers alike.  They shrug off such reports as alarmist. The government is left helpless as it cannot act on fake reports.  The result; profits among the tobacco manufacturers have increased. Why? They don’t advertise nor do they give back to society in the form of CSR. Consumption of cigarettes too is growing.  All the money goes to line up the pockets of the manufacturers. Its campaign has produced the unintended results.
Tobacco in Kenya is grown by an estimated 40,000 small scale farmers on an estimated 20,000 hectares of land. The farmers produce an estimated 25,000 tones (25 million Kilos) a year of tobacco leaf worth US$50 million at the farm gate price. The average yield per hectare is estimated at 1250 Kilograms.
 The entire crop is sold to three local manufacturers led by BAT Kenya who churn out an estimated 15 billion cigarette sticks a year. Tobacco leaf sales at US$2.00 per kilo. This means that the 40,000 farmers produce crop worth US$50 million. At an average output of 1250Kilograms per hectare farmers earn an estimated US$2500 per hectare per year. At this level of earnings, tobacco compares favourably with tea, Kenya’s leading cash crop.
Estimates show that tobacco in 2011 contributed US$124million to the exchequer in taxes.  The same estimates also show that the tobacco industry contributes an estimated 7 per cent of the GDP per year. The rates have increased since then, some reports indicate. Going by these figures, one would expect that the industry is treated with some respect and dignity.
 That was the ideal situation before the birth of anti-tobacco lobbyists, led by the World Health organization, WHO. The lobbyists’ main agenda is the herculean task of eliminating tobacco use and farming.
The aim is to persuade smokers to kick the habit and farmers to abandon tobacco farming. It is the strategy that is wrong for it has attracted quarks and charlatans all chasing the money involved. Many of the characters are just lining their pockets. And all they have to show for it are fake research results and rhetoric. The lobby protests that tobacco is a killer crop-one that condemns farmers to poverty, poor health and starvation.
On this score that the anti-tobacco lobbies shot itself on the foot. Fake researchers thoughtlessly churn out fake reports, which convince no-one. Their alleged research findings are false designed to intimidate governments and smokers alike.  Though couched in scientific jargon because the researches are carried by university Lecturers, the findings are not convincing- not even to laymen. 
Take one study conducted by an outfit called Tobacco to Bamboo based in Maseno University, Kenya and published by the African Journal of Agricultural Research, in 2009. It appears that the results were decided before the research was carried out. In fact the result and the data analyzed tell two different stories.  The data was not allowed to dictate the findings. Instead the findings were imposed on the data leading to the question: which came first, the findings or data collection.
The findings are an insult to our intelligence. The alleged study’s design, sampling size and methodology are suspect. Although the sample size comprised of 440 households, the population of non-tobacco farming households was higher than the tobacco farmer’s households by 30. This, it seems, was to ensure that the result was skewed towards anti-tobacco growing.
While the study claims that tobacco farmers are poor, analyses in the same report paint the opposite picture. Tobacco farmers appear as relatively wealthy: they are polygamous; their marriages are relatively stable. Divorce rate is 0.5 per cent compared to divorce rate among non-tobacco farmers (0.9%). Marriage in tobacco growing farms is 91.8 per cent compared to non-tobacco farming households where the rate is 82.9 per cent.
 These findings were backed a similar study carried by the Tobacco Research Foundation of Tanzania. The study, carried out by government officials, found that Tobacco farmer are well- off because the crop is bought by Kenyan companies that pay them well. The report says that, in focused groups discussions, women were full of praise for tobacco growing which enabled their “men to marry other wives because the can support them. It also enabled them to send their children to schools in Kenya.”  The Tanzania farmers, the report says, were introduced to Tobacco farming by their “Cousins in Kenya.” It is noteworthy that these Kenyan cousins are the same people the Kenyan study alleges are poor.
The Kenyan study also bucks the myth that tobacco farmers die early owing to health complications arising from “tobacco contamination.” The study shows that, the rate of widowed households among tobacco farmers is 2.9% while it was 12.7 per cent among the non-tobacco farmers.  In fact, this result even calls to question the allegation that smokers and tobacco farmers die prematurely due to tobacco contamination. In fact no health data was collected and collated.
The study also say that non tobacco farmers are dependents that live on handouts christened remittances from relatives working in urban areas.  The study also found that, Five per cent of the tobacco farming households has access to bank loans while none in the non-tobacco farming households enjoy such privilege. 
This is just a sample of the kind of nonsense the anti-tobacco lobby produces. For instance another “study” says that tobacco related illnesses are a greatest killer in Kenya yet the Ministry of health statistics shows that Malaria is the leading Killer in Kenya.
While one report complains that tobacco is grown at the expense of food crops, the latest edition of a document called Tobacco industry interference published with input from the government says that Tobacco is grown simultaneously with other crops. The acreage under Tobacco represents an average of 2% of a farmers’ field while maize occupies 47%; sugarcane 16%, coffee 4% and the rest 31%. Kibwage et al, who authored the report in African Journal of Agricultural Research, also found that tobacco farmers allocate 50 per cent of their holding to food crops compared to 40 per cent in the non-tobacco growing households.
Smoking is a function of a consumer’s financial well-being. In the 1990s when the Kenyan economy was in doldrums, cigarette manufacture and consumption shrunk from 8.5 billion sticks in 1997 to 4.8 billion sticks in 2003. Kenya’s economy turned round from 2003 onwards and cigarette manufacturing and consumption rose 156 per cent. 
The conclusion: for as long as consumers have money in their pockets, smoking will continue. Therefore the anti-smoking lobby must come up with honest and persuasive reasons to quit smoking. Their lacklustre campaigns endanger the lives of Kenyans.

Friday, 14 March 2014

What is DDI’s impact on economic development?

Vimal Shah: an economics hero in Kenya
DOES DOMESTIC DIRECT investment (DDI) drive economic development? What is the impact of domestic investment in the development of a country?  Is the impact greater than, equal to or less than the impact of FDI? There are several advantages of encouraging domestic investment.

Among these is that domestic investment is neutral on a country’s balance of Payments.  Local firms do not repatriate their profits to foreign owners. And since they do not have affiliates overseas, they do not engage in transfer pricing thus cheating government out of tax revenue. Some reports have it that Africa loses US$4 billion in legitimate taxes through this form of tax-cheating.

On the contrary local firms invest in expansion at home thus setting the stage for further growth and hence development. In the long term they contribute to balance of Payment credit by earning foreign exchange from exports and profit repatriation.

 Some experts hypothesize that a significant proportion of Africa’s robust growth over the last decade and a half is attributable to growth of domestic enterprise. “The growth of highly profitable local enterprises across all sectors reduced profit repatriation, boosted employment, tax revenue collection and domestic investment as they invested in further growth, said the Economist in a 2011 essay on Africa’s growth. 
 This is not farfetched theory. Let’s look at the growth of the cellular phone service in Africa. In the late 1990s to early 2000, Africa was desperately shopping for investors in the cellular phone sector.  Owing to its reputation as a “hopeless Continent,” it was attracting no takers.
Meanwhile small, home brewed, ICT firms were struggling to provide the same service but were not attracting the attention of governments. Then the dotcom meltdown of 2001 came destroying the credibility of big telcos in the developed world.  It emerged that they were steeped in debt and were in no position to invest in Africa. This spawned the robust growth of small homebred ICT companies as government eased conditions for the upstarts to grow. Many are now Mega corps. Today, Africa’s largest cellular phone companies were brewed in Africa.

 The largest of these is South Africa’s MTN which has grown into a Trans-national Corporation, controlling more than 200 million subscribers in Africa, Middle East and East Asia in less than twenty years.  Egypt’s Orascom is second and then in third place is a company that keeps changing hands, now Airtel. Airtel was originally a homebred Company known as Celtel with a foot print in 15 African countries.  Today, Africa competes with the big boys in telecommunications sector.

In the financial market, indigenous banks are thriving- in some instances, elbowing traditional TNC banks, such as Barclays, Standard Chartered and the like out of large segments of the market. And given the rate of expansion of such banks as Ecobank, UBA, Equity Bank Kenya, the TNCs could be headed for hard times. In East Africa, Kenyan commercial banks dominate.
In trade in east Africa, Kenya’s Retail Chains and commercial banks are leading the integration exercise by setting up shop in east Africa. These companies were originally set up to serve felt needs of the local population and have grown into conglomerates that are now spreading their wings to cover the entire east Africa.  
A good example is the local banks which began as small savings and credit societies in the rural areas targeting the relatively poor hardly 40 years ago. As they grew, they expanded operations until they grew into the level of commercial banks.

A Majority of the Retail Chains began as wholesale shops in local towns and then grew organically to the mega Chain stores they are today. As they grew, they employed more people, created more wealth by buying more and more local products.

The local firms have massive linkages with virtually all sectors of the economy. They buy local materials, employ local labour, sale the products in local market which creates more jobs. As local firms grow, they gain critical wisdom about the market and are able to outsmart even existing subsidiaries of TNCs.
Thus economic growth caused the firms to expand and serve more people. In turn, they employed more people and leading to further growth.  A middle class was created and began to expand too .This growth has added another 60 million to Africa’s middle class whose per capita is $3,000. This number is expected to rise to 100 million in 2015, says the Economist.
Local enterprises tend to focus on solving local problems. They are thus in sync with the local population.  This demonstrated by the blunder made by the TNC banks in Kenya in 1996. Since they could make lots of money dealing win 90 day T-bills, the large banks treated customers with contempt. Many small savers moved to the building societies such as Equity and Family. Other moved to struggling indigenous commercial banks as Kenya commercial Bank, Co-operative Bank and National Bank of Kenya. 

The stage was now set for the eventual takeover of the Kenyan and the regional markets by the upstarts. Ten years later, the upstarts began to muscle their way into commercial banking. And hardly ten year later, they dominate the financial market in the region.

 In the mortar and brick industries the growth path was the same. Start small to solve a local problem then expand and grow. This is the path taken by Brookside Diaries, which now has the largest milk processing capacity in Eastern Africa. It started small and grew through acquisition of struggling milk processors to the current level of 1.5 million litres a day.

Other firms that grew in the same pattern include; BIDCO the largest consumer goods manufacturers in east Africa.  ARM cement, which is now the third largest cement producer in Kenya began as a chemical processing firm in 1970s. It has expanded from local recourses including listing in the Nairobi securities exchange.  The firm is now planning to expand capacity one million tons of clinker a year.

So how did the SMES grow so fast? Three things: The companies are run by aggressive and creative entrepreneurs who make their decisions standing. Two Liberalization of the Kenyan economy in the mid-1980s gave them an elbow room in the market, while the re-birth of the east African community broadened their horizons, our study established. These factors combined catalyzed the rapid growth of SMES into giants.

According to Vimal Shah, the CEO of Bidco-one of the upstarts that has grown into a regional TNC- the TNCs that existed in Kenya then were used to protection. “Consequently, they were not creative.  The Local upstarts then exploited the weaknesses among TNCs to curve a niche for themselves and eventually elbow them out. In the process the upstarts grew into TNCs themselves.

Wednesday, 5 March 2014

Development: Why FDI perse is not a sufficient catalyst

KQ: Acquisition by KLM was a lifeline. 
It survived and prospered
 WHY IS IT THAT Air Tanzania Corporation was acquired by SAA and collapsed, while Kenya Airways acquired Precision air and it survives? In turn, Kenya Airways itself is partially owned by KLM and has thrived. Why is it that the developmental impact of cellular phone service is bigger in Kenya than in Tanzania and Uganda although the former were the first to roll out mobile phone services?

These questions point to an important fact: That Foreign Direct Investment (FDI) per se is not a sufficient catalyst for economic development.  Other economic variables also have a positive causality to economic development.  These variables include the availability of skilled manpower, level of education, per capita income, market size and perhaps the capitalist culture.

 Granted, Foreign Direct Investment (FDI) has a strong positive relationship with economic growth. The question; what is the impact of FDI on a country’s economic development? What is the Impact of Direct Domestic Investment (DDI)? Can FDI per se cause economic development? If for instance, economic developments were one (1) what would be the correlation co-efficient for Direct Foreign Investment (FDI) and what would be the correlation co-efficient for direct Domestic Investment (DDI)?

What about other factors that contribute to development such as the market size, skilled manpower, per capita income, internal efficiencies and the reliability of physical infrastructure? Economists are still grappling with these questions. However, such proportions need to be developed in order to help in policy formulation.
 There is a growing school of thought which holds that domestic variables have a greater impact on growth than FDI. Such view is gaining currency because FDI has contributed to development as previously projected.

FDI in some sectors produces spectacular growth amidst stagnation in other sectors. For instance, oil driven growth in Angola and Mozambique. But high growth has resulted in high inflation as demand for goods and services exceed supply.  The existing economic structure is such that it cannot respond quickly to demand. In some instances the opportunities created by high inflation could take years to translate in goods and services. So should FDI be granted a higher weighted index or should DDI be granted a higher weighted index in a country’s development?

In Kenya,a mobile Phone is a Visa Card
 a western Union  rolled into one
That foreign direct investment increases the productivity of the concerned sectors is beyond doubt.  The question is what else is needed for FDI or DDI to catalyze economic growth and development.  We go back to the questions we asked at the outset. This story is case study of the impact of FDI in the airlines, telecommunications in east Africa. We will also attempt a shot at other factors that led to success since the success of these other factors seem to play a major role in the growth impact of FDI.

Why did the acquisition of a 26 per cent stake in Kenya Airways by KLM save KQ from collapse?  Now Kenya Airways is one of the three prominent Airlines in sub-Saharan Africa. The others are Ethiopian Airlines and South African Airways.  But Kenya Airways is the only successful privatized airline in Africa. Yet less than 20 years ago, it was living on government life support.

in 1996, KLM, the Dutch airline bought a 26 percent stake in the airline  at the same time a 25 percent stake was floated at the Nairobi Securities exchange , reducing the government’s stake in the airline to 49 per cent. Although the airline was deep in debt, it had begun turning in some profit by the time KLM acquired the stake in it. So why was KLM invited?  The airline needed some little cash, we posit, but most important, a management free from political meddling.

Previously a Chief executive could be fired for failing to hold a plane for delayed Cabinet Minister or senior civil servant or their spouses. The airline was losing business because it could not keep time.
The new Management was different.  Appointed by KLM, it managed the airline on commercial lines. The existing staffs were professional but intimidated. With the support of the new management, it was all systems go. Soon the airline was winging its way to profit and prominence.

Although the airline is back in the hands of Kenyan managers and among its passenger are presidents and other senior government officials in the region, all passengers keep time and order. KLM simply introduced discipline, teaching that all passengers are equal. It rescued KQ from the tyranny of in-disciplined local officials.
 Since then the airline has grown on the strength of its balance sheet. Not expecting handouts from the government or KLM and on this basis it mobilized US$200 million from the local capital market through a rights issue in 2012 to replenish its war chest.  The chest will be used to increase its fleet from the current 44 to 107 by 2030. 

 The growth of the airline has also motivated the growth of its base airport, the Jomo Kenyatta International airport. The second terminal which shall handle 12 million passengers a year is under construction.
 Apart from its own organic growth, KQ has also acquired a controlling stake in a Tanzania airline, Precision Air. This acquisition arose after a fiercely contested bid for the acquisition of Tanzania’s national airline, ATC.

The bid was won by South African Airways. However, the marriage collapsed five years later.  Why did FDI fail in this instance?  We go back to our earlier position: FDI need more than investment dollars to succeed.  ATC was acquired by the wrong Partner. SAA itself was on life support, undergoing a management crisis of its own. Therefore it could not support another collapsing airline. Wrong decision making was the culprit here.

This leads to the second thesis:  where the pool of skilled manpower and per capita income are high, FDI will catalyze economic development. This thesis is aptly demonstrated by the telecoms sector in east Africa. The first Mobile telephony company rolled out in Tanzania in 1994, followed by Uganda in 1998.
In Kenya mobile phone roll out began in 2000. In Just about two years, Safaricom overtook even the providers in Tanzania in terms of subscription. To date, Safaricom alone has a larger subscription base than three mobile operators in Tanzania combined. These are: Vodacom, airtel and zantel. All three boast a subscription base of 20,593,870 while Safaricom boasts of 20,820,618 surpassing them by 227,000subscribers.

According Tanzania Communications Regulatory authority, TCRA, the total subscription base is 27,022, 927 as at September 31st 2013. Kenya on the other hand had a subscription base of 31,301,506 as at the same period.  Kenya’s teledensity says the same report is 76 per cent while Tanzania’s teledensity is 60 per cent. We have left out Uganda because of incomparable date.

The uptake of a service such as Mobile subscription is a function of two things: Literacy level and per capita GDP level. In both respects Kenya is ahead of her neighbours by far. Literacy is 83 per cent compared to 67 per cent in Tanzania and more or less the same ratio in Uganda. Second, in terms of per capita income, Kenya is in the range $1025 while Uganda and Tanzania are in the S$600-650 range. This makes Kenya a mass consumer economy.

 Apart from Consumption, Kenya is also quite an innovative market. Kenyans invented the first mobile money transfer service in the world in 2007.  Kenya controls 20 million of the 61 million mobile money account holders in the world.
 Apart from Mobile Money transfer the country has also  launched M-Shwari, a mobile Banking service which is said to have mobilized US$3 billion in savings over the  last two years. M-Shwari enable customers to open bank accounts deposit and withdraw money from their accounts using their Mobile phones.  This account targets the majority low income customers.

Kenyans also pay their utility bills such as electricity and water bills using the M-Pesa.  They even pay their shopping at the local super markets using M-Pesa. These innovation are made by young tech savvy Kenyans who are now making a living out of developing applications for the  cellular phone companies. As a result of world conquering innovation in the cellular phone market, giant cellular makers such as Nokia, Samsung and Huawei have pitched camp is Nairobi. All are targeting the young innovators to develop new cutting edge applications.