Saturday, 23 June 2018

Contraband sugar: Economic terrorism?

Contraband Sugar Being
 destroyed at Mombasa
 The bulk of the contraband sugar being impounded in the country is smuggled through the Somalia border, we can report. According to a June 2017 FDD report, Kenya imports US$1.2 billion worth of Sugar from Somalia. The report cites an International Business Times report on the same dated June 4, 2014. That, from a country that does not own a single sugar mill!  
At the current world Market prices of $349 per ton, that is 3.45 million tons of sugar. However, at the current domestic price of KES 76,000 a ton, we import 1.58 million tons of sugar a year from Somalia!
 Local analysts doubt whether Kenya can absorb all this sugar. The demand for sugar in the country is about one million tons a year. The analysts however, say that this could be the total value of all contraband from Somalia including low-volume but high- value goods such as electronics, apparel and textiles.
Sugar could form perhaps, 10 to 20 per cent of the contraband which will come 50,000 to 100,000 tons. “If all contraband from Somalia was sugar only, then all other importers will have closed shop,” said the source. “The Millers would also have closed,” they add.
Regardless of the quantity smuggled into the country, the sugar and other contraband goods are not taxed and do not originate from the preferential countries. The sugar for instance originates from Brazil and is transshipped from Dubai into the port of Kismayo and other ports in Al- shabaab controlled areas in Somalia, reports say.
The contraband, including sugar is the loaded onto Kenya Registered trucks (or so they appear) and smuggled into Kenya through Dadaab refugee camp. The report, an analysis of Al- shabaab’s sources of finance says that contraband exports, including sugar, is the major source of finance for the terror group.
The international News agency, Reuters, in a June 2015 report says that 35 trucks laden with Sugar and rice among other contraband enter the Dadaab Refugee camp every week- an average of five trucks daily. An unknown number also enter Wajir every week, said the Reuters report. The trucks are taxed at $1025 per truck by Al- shabaab. Corrupt Kenyan Police Officers ask for $600 per truck to allow it to enter Kenya.
Since the Kenya - Somalia border is officially closed to freight and passenger traffic, there are no Customs checks. The contraband, therefore, finds its way into the market without being taxed in Kenya or even being inspected.
This explains why, the bulk of the sugar so far impounded by the government agencies is concentrated in areas near the border with Somalia such as Isiolo, Kitui, Meru and Eastleigh in Nairobi, “the little Mogadishu.”
The UN estimates that Al-shabaab makes anything up to $18 million a year from contraband taxes. At a rate of US$1,500 a truck, we are talking about 122,000 truck -trips a year. This works to 334 truck -trips a day. Of course, all the contraband does not find its way to Kenya. Some of it is sold in Somalia.
If we work with ten truck trips a day, the smugglers make 3,640 trips a year. At $600 a truck, the corrupt cops make $2.184 million or KES218.4 million a year to endanger Kenyans’ lives!
 According to Health sources, sugar never expires although it is good to use within two years of production.
 However, unhygienic handling and storage could contaminate it. The sugar in the country is alleged to be contaminated with Mercury and Copper. This is as a result of poor handling and storage, especially during transport and re-packaging.  The Sugar is loaded in Dhows in Dubai and shipped to Somalia Ports. It is then loaded onto open trucks for transportation into Kenya.  These vessels carry anything and everything, raising the probability of contamination to almost 100 percent.

Dirty Sugar is increasingly finding its way into the market, suggesting poor handling at the re-packaging stage. For the avoidance of doubt, the sugar samples should be taken elsewhere for testing to confirm the level of contamination and the contaminants.

The Sugar may not even be toxic to humans, although some reports suggest that weapons could also be hidden in the Sugar bags thus contaminating it. But it is toxic to the economy in three ways; the smugglers do not pay taxes and two, it kills our sugar sector and three, it funds enemy fighters. This is commodity terrorism!
 The report, Al- shabaab Financial Assessment, by the Foundation for the Defense of Democracy (FDD), a US-based think-tank blames Kenya’s high tariff on imported sugar for the rampant smuggling. The high tariffs are a magnet for smugglers who make a killing. The world Market price per ton of sugar is US$349 a ton while the local ex-factory price is US$760. This gap is an incentive for smugglers to cash in.
 Without credible border controls and with alleged complicity of KDF in the vice and alleged involvement of powerful individuals in the government, smuggling of contraband will remain a thorn in the flesh for Kenya.  And, Al-Shabaab will not be effectively neutralized. 
That is why, Al shabaab, which relies heavily on sugar taxes to finance its operations, has Kenya as its dumping ground.  Charcoal, its former lifeline has been drained by restrictions especially by the interim authorities in jubbaland, Southern Somalia.
Contraband barons, linked to Al- shabaab, says the FDD report, are exempt from paying the tax. But they also finance the terror group by sharing profits which are transferred to through the hawala system. This system leaves no paper trail to identify sources or destination or even the amounts transferred.
 Most of the barons, reports say, are based in Kenya among the Somali diaspora. Kenya has thus become the lifeline for Al- shabaab, a terror group it is fighting to neutralize in Somalia. The report calls for tough action against the smugglers regardless of their status. Making smuggling expensive in the same way drug trafficking was destroyed is one way of dealing with the vice. And it’s urgent, Kenyans say.

Tuesday, 19 June 2018

Did Ndogo Kundu By- pass cost $100M a kilometer?

Ndogo Kundu By-pass: an Aerial view:
Courtesy Kenha
 That would make it the most expensive road project in the world, beating Uganda’s Entebbe expressway by Kshs 100 million (US$1 million).  The Expressway was branded the most expensive road in the world by Uganda’s Parliamentary Committee on State Enterprises. The committee protested that “a kilometer of road cost an alleged $9.3 million.”

Of course, the politicians were wrong –either innocently or by design but mainly by design. It turned out that they wanted “to fix” a PS who refused to approve a two week “bench-marking trip” for them. The Highway cost roughly $2.325 million per kilometer.

Back to Ndogo Kundu. Did a kilometer of road cost shs 1 billion?  Yes and No. Here is why: we are accustomed to counting the heads of cows to know how rich we are. Roads engineers count the legs to cost a road. So they come up with more legs than the heads. There is more tarmacked road (the legs) than the distance (the cow).To that extent the answer is No, the road did not cost that much per Kilometre lane, that is, a cow’s leg. But it cost KES 1 billion if we add all the legs together.

Let’s leave the cows and legs analogy aside. Engineers cost roads in terms of Kilometre lanes. Well, you know it, there are very few one-lane- say one way- roads in the country. Many roads are a two- way one lane going in one direction and the other going in the opposite direction. Those are cost as two Kilometre lanes where you see one road. Treat the yellow line in between as the boundary of each road.

 In the 2016/2017 annual report (PP10), the Kenya National Highways Authority, KENHA, uses the same method to estimate their output in terms of road’s construction progress. They have a column for distance in Kilometres and a column for work done in the financial year in terms of Kilometre lanes.
 For instance, the Rumuruti-Maralal road is 45 kilometres long, yet the Authority shows that it had done 81,5 Kilometre- lanes on the road. What this means simply is they had done a 40.75-kilometre distance of the road and that only 4.25 Kilometres were left and therefore the road was 91 percent done.
Now Ndogo Kundu is a dual carriageway, that is, a four-lane highway. Let’s for a moment forget the “Berlin wall” dividing the four lanes, and any service roads, bridges and interchanges and concentrate on the lanes. There are four lanes, each 11 Kilometres long. How many Kilometres of tarmack road do we find on that section? Eleven Kilometres multiplied by four. That is 44 Kilometres. If we divided Kes 11 billion by 44 you get KES250 million per Kilometer lane or One billion shillings for four- lanes kilometer. Now if we add up the cost of any service roads, bridges, (I am told there is a 630 Metre long bridge) and the interchanges, then the cost per kilometer lane could be lower than Kshs 250 million.
The Entebbe expressway
If in doubt, take the 29 kilometre Southern By-pass in Nairobi and do a two- round trip on both lanes each way to Kikuyu or Mombasa road. Be sure to record the mileage on your dashboard at the start of the trip and record the distance after the two trips then subtract the initial count. See if you will get 29 kilometres or more.  The result will tell you how many kilometers of road, there is on that 29Km distance.
At this point, I must take the roads authorities to task on a poor job in terms of education to the public. They should anticipate the questions that will arise and do a good job of answering them. One way is giving full details of the works, the product and the average cost.
There are Economists and Engineers among the officials in KENHA and KURA, who should give the communications department the right information. The division should also be proactive and advice on the sort of information to be released to the public. That is why it exists- to help in information dissemination not just to send pictures of the completed project.
KENHA and KURA do not exist primarily to tell us how smooth our roads will be and how easy our travel will be on completed roads. We know. That is secondary information. The primary information is how much the road cost, and why it cost that much. The tax payer needs to know how much the services provided by the government cost and why. They want to know if they are getting value for money and if their money is being spent well.
We need to know how many lanes, per road, the cost per kilometer lane, the terrain of the location of the road and how the terrain affects the cost of the road. How many bridges, the elevation of the road, if any.
The moral here is, to audit any engineering project objectively, we must start with the detailed design of the project for that is where the devil is; where costing is done, contract components are defined and justified.

The detailed design also shows the physical features of the project area and what has to be constructed where. For example it shows intersections, bridges, overpasses, service roads, pedestrian paths, culverts, drains, climbing lanes, bus stops, etc. in case of roads. 

Monday, 11 June 2018

AfDB's first for Kenya

A Geothermal Power station in Olkaria, Kenya

The African Development Bank has lent a total of US$50 million to Quantum Power East Africa GT Menengai Ltd. This is the first loan to a private sector player in Kenya without a sovereign guarantee. The firm plans to generate 35 MW of geothermal power from Menengai wells. The loan is in two sets; a senior loan of US $29.5 million and a concessional loan of US $20 million. 

The firm has already signed a Steam Supply Agreement with GDC, the developers of the Menengai geothermal wells. Quantum has also signed a 20 year Power Purchase Agreement with KPLC, the power distributor at US$0.007 per Kwh.
The Geothermal Development Corporation, GDC, is a state-owned corporation whose business is to develop geothermal wells at Menengai. It is currently developing 400 MW-almost 26 percent of the current capacity- of geothermal power from its Menengai fields. 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.
Quantum is one of the three investors that have been contracted to build the generation capacity from these wells and sell to KPLC. The contract is a Build Own and Operate (BOO) models. The generators buy the steam from GDC, generate power and sale it to KPLC on 25 years PPA. The other two are Orppwer22 and Sosian Menengai. All will generate a total of 105Mw of power from the Menengai wells.
Orpower 22 associated with the US-based Ormat Technologies is the most experienced as it operates a 139 MW power generation unit at Ol Karia. Ormat4 is the first independent power producer to operate in the country’s green energy sector.  Quantum becomes the second IPP contracted on the PPP model in the sector and the third is Sosian  Menengai ltd, owned by local tycoon Narendra Raval of the DEVKI group.
 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 is the leader in Africa in Geothermal power Generation with a total of 776MW of installed capacity and counting.  According to Kenya Power and Lighting Company, the power distributor in Kenya, Geothermal forms the 47 percent of its power sources, followed by Hydro at 39 percent. Diesel, despite its huge impact on the cost of power, supplies only 12 percent of power. Wind power, which currently commands only one percent of the power in the country is expected to jump significantly when the 310 MW Lake Turkana wind power comes on stream in September this year.

Kenya has nearly 7,000 MW of geothermal potential and is expected to be among the leading sources of electricity by 2030 when the country hopes to have a generating capacity of 17Gwh. Experts say it costs US$2.5 million to produce 1Gwh of electricity. With an estimated 15 Gwh to go, Kenya’s green energy is a hot investment. And with the acceptance of a PPP business Model, the sky it seems, is the limit.   Green energy will cut the cost of power in Kenya significantly.

Tuesday, 5 June 2018

Lamu: Gearing to be energy hub in Kenya?

 Lamu city and county are set to become the energy capital of Kenya. With a Port with oil export jetties, a 120,000bpd refinery, two power generators pumping 1150MW into the national grid, the County, and the port city are set for greater things in future. Other things remaining the same, Lamu could in future become the Qatar of Kenya, if not East Africa.
The city will be the destination Port for exports leaving or entering East Africa’s landlocked Northern members- Ethiopia and South Sudan, according to LAPPSET and Vision 2030 goals. Even without the neighbours, it is the gateway for Kenya’s oil exports. And with a refinery to boot, it could soon become a major white oils market.
 Lamu, Isiolo, and Turkana were conceived as “resort cities” in the Vision 2030 package and also the LAPSSET program. Resort cities are mainly tourist attraction sites. However, they have metamorphosed into energy cities due to developments in the energy sector. 
The growth of the energy sector is also expected to support the tourism sector for which the resort cities were designed.
 Two energy generation plants are slated for construction in Lamu. The two are a 100 MW wind power project and a Coal-fired plant which is expected to generate 1050 MW.  The two will add some 1150 MW into the national grid, arguably the largest input from any County in the country so far.
Both projects have faced tumult in the past two years with residents protesting the construction of the Coal-fired plant while the wind power project faced legal hurdles.

The US$ 2.0 billion AMU power firm is yet to get approvals from the Environmental tribunal to get going. However, the entry of GE in the coal plant with its clean coal technology could change things.
An Oil Pipeline
GE entered the deal with the Project promoters, AMU Power to design, construct and maintain the power plant. In the US$500 million deal, GE will bring a cleaner and efficient coal-burning technology, that has excited the local promoters who say they are now good to go.

“Our partnership with GE brings the latest technology in coal power generation that has the highest efficiency ever and has the best in environmental protection. This plant will yield its objective and help us drive down the cost generation in the country,” Amu’s MD, Mr. Francis Njogu, was quoted by the local press as saying.
 GE will also take-up some undisclosed stake in AMU Power apart from doing the actual works.
AMU has a power purchase agreement with the local power distributor, KPLC to sale energy at a fixed tariff of US$0.071 per KWh. This is probably the lowest price for energy in Kenya today.

Also weathering the storm in Lamu energy sector is Kenwind, a wind power project which had stalled due to legal suits.  The Courts have paved the way for it to start by dismissing a legal suit that stalled the project.
Kenwind will generate 100MW in their $210 million wind farm based in Mpeketoni. Kenwind, is the second largest investment in Kenya’s energy sector same as is Kipeto wind power in Kajiado County that will also produce 100MW. The largest is the US$675 million Turkana wind power based in Marsabit County. It will produce 310MW of power and is expected to come on stream in September this year.
A Geothermal Plant
The two firms, if they came to fruition in addition to other on-going green energy projects, will help bring the cost of electricity down by nearly 50 percent as they will decommission expensive diesel-powered generators.
Their combined capacity of 1150 MW will put Lamu ahead of any other power hub in Kenya, although geothermal power will eventually overtake it. Kenya has a potential to produce 10GW of geothermal energy. She is also said to have a potential to generate 3 GW from the wind. With only 0.4 GW down, there’s room for more.

Geothermal development is long and expensive. So far, only 700MW of geothermal power is on the national grid meaning that Kenya, which targets to generate up to 5GW by 2030, has to make do with cheaper and faster alternatives such as wind and Coal to power its development goals. Wind power and solar energy are the best bet. A number of other wind projects and some solar powered farms are in the pipeline elsewhere in the country.