A Cheer for East Africa’s investment strategy

A new Highway

 A Review of a number of reports published here gives a cause to cheer East Africa’s investment strategy. The region has focused heavily on developing transport and energy infrastructure to create an enabling environment for future economic growth.  By 2018, billions of US dollars had been sunk into infrastructure - Roads, Railways, Airports, Seaports, and electricity generation.

Consequently, the stock of roads has increased to hundreds of thousands of Kilometers from tens of thousands in the 1990s; paved roads have risen from a few thousands to tens of thousands of Kilometers. We are seeing expressways, elevated roads, and interchanges.

Power generation capacity has expanded as has the sources and for the first time, some countries are self-sufficient in green power capacity. Power is being generated from wind, Solar, and Geothermal sources in addition to the traditional Hydro sources.

As the stock of enabling infrastructure is increasing, East Africa is expanding its domestic markets for domestic goods and Imports, and opening up opportunities for investment by both domestic and foreign investors. The business climate is easing as more Non-tariff Barriers are eliminated.

One of the leading non-tariff barriers is; land transport. The stock of roads is increasing to ease market access Distances from all-weather roads is declining as more paved roads are commissioned. In Kenya for instance, the paved roads network has risen from 4000KM in 2000 to 17,650 KM in 2019 giving an average ratio of one kilometer of paved road for every 33KM², In Tanzania, the stock of paved roads has risen to 9951 KM giving a ratio of 1 Kilometer per 100KM^2. Ethiopia is the star player in East Africa with 121,000 KM of paved roads giving a ratio of one Kilometer of paved road for every 10KM^{2. IN} Uganda, the ratio is one kilometer for 34Km²

In addition to roads, there is massive investment in energy projects. In 2017, five mega-projects worth $10.7 billion were under construction. Ethiopia led the pack with two hydro projects worth $6.9 billion. Uganda came in second with Karuma hydro dam that cost $1.6 billion. Tanzania came third with Mtwara Gas project worth US$1.3 billion.

Kenya did not have a mega hydro project. Kenya, the largest economy in the region has already hit the 2.7GW level with a peak demand estimated at 1.9GW. That is why it is now working to connect the Northern Corridor Standard Gauge Railway to electricity.  Experts say that the line will require 1000MW to run the trains.

While Ethiopia is the runaway leader in Hydro sources, with a potential of 45GW, Kenya is the leader in Africa on geothermal power. Already geothermal power has displaced Hydro as the base power. Kenya’s potential is estimated at 10GW of geothermal power energy.  She so far is just scratching the surface, generating 1140 MW from geothermal.

Kenya has already leap-frogged Ethiopia in wind power generation with the entry of 310MW Lake Turkana Wind Power into the national grid. Ethiopia's capacity stands at 176 MW while Kenya is 336 MW.

An N SGR Line 

Further, the region has pioneered Africa in high-speed Railway development. This far, the region boasts of more than 1600Km of Standard Gauge Railway. Some 1300km of these are operational in Ethiopia and Kenya. Tanzania is likely to join the club anytime this year when the Dar es salaam-Morogoro line is complete. Of the three, only the Kenya line, which is part of The Northern Corridor network, is operating according to design standards.  The Ethio-Djibouti line has significant energy and security issues that have forced it to operate below par.

The obsession with infrastructure development is not an accident.  Poor infrastructure shaves off 4 to 5 percent of GDP. Therefore investing in infrastructure is a catalyst for economic growth.  East Africa is determined to eliminate this loss and turn it to prosperity for the region. The result is robust economic growth for two decades. Growth was stymied by Corona Virus last year and is likely to be stifled by uncertainties regarding the pandemic. However, the conditions for a rapid turnaround are in place if the virus does not extend for too long.

 In addition, in support of the theory that reliable infrastructure enhances a country's productivity, makes firms more competitive, and attracts investment and trade, GDP per capita has grown fourfold in the past two decades. Both Kenya and Tanzania are already Low Middle-income countries with a per capita GDP above $1087.  Kenya became a middle-income country back in 2014. Her per capita GDP was approaching $2000 before the pandemic that has set it back. Tanzania joined the Low Middle-income club last year but could also be slowed down by the pandemic.  Ethiopia is not far away, and it could enter the club in the not too distant future.

This expansion in the stock of enabling infrastructure has not come without a cost. The national debt has risen to more than 60 percent of GDP in both Kenya and Ethiopia, the most aggressive investors in infrastructure leading to fears of a “debt pandemic.” 

Although Tanzania is in the rank of aggressive investors, it claims its debt to GDP ratio is less than 50 percent. This figure, however, must be taken with a pinch of salt because Tanzania is not generous with data- not even data on the COVID-19 pandemic. Its large investments in Infrastructure belie this position.  The Standard Gauge Railway has already cost an estimated $3.2 billion part of which is a commercial debt.  This cost excludes the Locomotives and the rolling stock. It is also investing $3.5 billion on a hydro project on River Rufiji.

Commercial debt, which is easily accessible, is a great cause for concern since it is expensive to restructure if it is ever restructured.

However, there is a growing body of evidence that debt sunk into enabling infrastructure leads to rapid economic growth enabling debt payment. The pay-off is worth the risk, evidence suggests. The great focus on the risk of Debt, evidence suggests, is the quality of the investment: Does it satisfy a felt national need? Does it produce the desire results, among them enabling economic activity? If the answers are positive, then debt the resulting benefits are worth the risk else we shall bequeath poverty on future generations.