Is East Africa investing excess capacity, white elephants?

 A Railway Line under construction in East Africa

 East Africa is racing to improve its socio-economic infrastructure- Roads, Sea Ports, Railway lines, Power generation plants, Telecommunications, you name it.  This effort has generated a lot of negative comments.

A common thread is emerging that suggests that the investments are unnecessary, burdening the current and future generations of East Africans with debts. The thread suggests that the region is investing in an excess capacity that will become “White Elephants.”

The flipside of this thread of thought is that the current state of infrastructure, especially Seaports and Railroads is sufficient. 

This line of thought is not new. We have heard it before in relation to investments in the electricity generation sector. The governments, despite opposition, implemented the projects that are now operational - delivering on the expected outcomes. They are anything but white elephants.

  Apparently, the critics have yet to learn from their past errors.  It is our view that they again have missed the point

 Criticism of the development trajectory suggests that East Africa is already at its optimal level of development or will never grow at all. This is hogwash. East Africa is nowhere near optimum development level neither is it static. In fact, going by the Pareto theory, which seems to be the basis for this thread of thought, East Africa is still at the Pareto improvement curve where gains by one entity do not lead to loss by the competing entity.

East Africa is the fastest-growing region in the continent, posting rates above 5 percent for more than a decade. This is robust economic growth by any standards. In fact, two of the three largest economies in the region have entered the Lower middle-income status. Kenya crossed that line in 2012 while Tanzania crossed last year.

This robust growth is testimony that the region is yet to approach, let alone reach, Pareto Optimality. Consequently, as the region’s economy grows, demand for logistics, among other services, will grow in tandem. 

Robust economic growth has a bad habit of expanding the consumption base translating into a larger demand for goods and services - such things as travel, communications, electricity, and similar fancy things in addition to the basic needs. That is what economists call effective demand. Increased demand calls for an increased supply of goods and services and distribution networks.

Put simply, there is a positive correlation between sustained robust growth and heightened investment in infrastructure. They feed on each other; growth creates demand for infrastructure and infrastructure creates the environment for further growth. To maintain its growth trajectory, East Africa must invest in enabling infrastructure.

In Economics theory, there is an animal called the “multiplier effect.” It goes something like this: government investment has larger than the expected outcomes.  This is a proven economic fact: A new road for instance, in addition to connecting two destinations, cuts travel time and cost, and triggers economic activity along the road and between the destinations. Motorists on the road spend less on spare parts and fuel translating into better foreign trade balances. These must be factored in, in evaluating a project’s usefulness. 

This is to say that infrastructure projects do not necessarily make profits in the commercial sense, and if they do, it is years down the road. However, they create a host of other benefits that fit the definition of economic benefits. Among these benefits is enabling the private sector to make profits in the commercial sense.

 A recent review by the African Development Bank of the Nairobi -Addis Abeba highway, reported that certain parts of Northern Kenya can now buy fresh bread and Fresh milk made in Nairobi, several hundred kilometres away. It also quoted market women praising the road for eliminating their losses. Now, said the women they sell fresh fruits and vegetables from other parts of Kenya because the trip takes just a few hours down from a few days previously.

To be sure, the projects are pricey and debts due to funds borrowed to build them are piling. Both Kenya and Ethiopia’s debt to GDP ratios are above 60 percent. Tanzania tried to suppress hers to about 40 percent, but new investment in Pricey infrastructure will need more borrowed money. There are two choices here: incur debt to finance development projects or avoid debt and stymie economic growth. In any case, the projects being long-term projects with a lifespan longer than 50 years will outlive the debts incurred to put them up. This means that their importance in our economic future will grow with time.

The second reason why critics miss the point is the driver of the intense investment in Seaports and high-speed Railways. The rush to build mega Ports in East Africa is in response to the growing size of freighters. Most ships are Post-Panamax vessels with a carrying capacity of 6,000 TEUs and over. These monsters need deep seas with depths of more than 15 meters. That is why Ports are dredging to increase depths to nearly 18 meters and expand their berths to accommodate larger ships to remain in business.  It is a battle for survival by East African Seaports!

The Equatorial Bridge: From Lamu to Douala

Modern Sea Ports need modern supporting infrastructure such as high-speed Railroads and wider and fast highways.  That is why the developments are simultaneous. However, while high-speed railways and faster highways reduce delivery time, they do not change the physical distances.  The variable here is speed. Distance remains constant. This means that some Ports will remain low priority Ports for some destinations, other things being equal.

Let start with the Size of the countries in the region. Ethiopia and Tanzania are the largest countries. Tanzania is larger than Kenya, Uganda and Rwanda combined. Similarly, Ethiopia’s landmass is equal to 61 percent the size of the East African Common market combined.  It goes without saying that the two giants in East Africa needs more logistics infrastructure especially ports than say Kenya, Uganda, and Rwanda.

Those ports, however many, will not compete with each other out of business if they are equally efficient. Take the port of Mtwara in Southern Tanzania for example. That Port is only a priority trade route for Southern Tanzania,  Zambia, Malawi, South East DRC, and probably Zimbabwe. It is a low priority Port for Tanzanians in Mwanza to the North. So is the Bagamoyo Port. It is a high-priority port in areas served by the Central Corridor. If anything, Bagamoyo could be a threat to Dar-es-salaam Port, also in Tanzania. It cannot rival Mombasa or even the Lamu port which is proposed to be the overland link between the Indian Ocean and the Atlantic Ocean at the Port of Douala in Cameroon.

Kenya's High-speed train in action

Ethiopia, given its size, needs more than one trade route. For instance, the port of Berbera in Somaliland can only serve as a trade route for eastern Ethiopia. It will not be a priority for other regions because of distances. The Port of Dolareh in Djibouti is a more efficient trade route for Addis Ababa and central Ethiopia while the North of Ethiopia is best served through Eritrea and
South Ethiopia through Lamu Port in Kenya. 

On Railways, the Central Corridor cannot be a priority route for Uganda because the 380 KM distance across Lake Victoria, between the Port of Mwanza in Tanzania and Port Bell in Uganda, is a bottleneck for Uganda’s trade. That leaves the Northern Corridor as the priority route for Uganda.

The rush to modernize ports in East Africa is therefore not a zero-sum situation. It is in fact, a no-zero sum situation with all players gaining in terms of development for the growth of ports will require the development of roads, and Railroads to transport freight to and from the hinterlands.