East Africa’s Road to Middle Class Status through Infrastructural Development.

East Africa’s infrastructure lags behind that of Southern and Western Africa across a range of indicators. This has not stopped the region from posting faster growth rates than the two regions. However, if East Africa’s infrastructure is improved to the level of the strongest performing country in Africa (Mauritius), regional growth performance would be boosted by six percentage points with power making the strongest contribution. (Africa Infrastructure Country Diagnostic, AICD)

Kenya is placed ahead of the pack with a per capita income of USD 784.0 as at the end of 2011, the other countries averaging USD 550.0, the East African journey to Middle Income status continues. Endowed with fertile arable land, natural resources, huge trade potential and a young vibrant population but all these can only go so far without adequate infrastructure to support growth.

Taking a leaf from the BRICS nations, as of 2008, these countries were expected to spend USD 1.2 trillion on their roads, railways, electricity, telecommunications and other projects. Even though China and India have the two largest populations in the world, China’s larger investment in infrastructure investment can explain China’s much faster growth rate than India. A conclusion can be drawn that there is a positive correlation between infrastructure investment and economic growth.

Infrastructure investment in emerging markets 2008-17 forecast, USD trillion

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Little wonder therefore that even in East Africa, Kenya the country with the most investment in infrastructure is more developed than the regional neighbours. However, even with a big infrastructural gap, East Africa still boasts of some of the continents fastest growing economies on the continent. For instance when the global economy decelerated to 3.9 per cent from 5.3 per cent in 2010, the East African economies performed better registering growth of 6.2 per cent compared to Africa’s 4.9 per cent in the same time period. Global growth was expected to slow further in 2012 to 2.5 globally and 5.5 per cent for East Africa.

The World Bank currently estimates Africa’s cost of bridging the infrastructure gap at USD 75 billion with an annual investment of USD 38 billion and USD 37 billion in maintenance. With this outlay, the funding gap is estimated at USD 35 billion annually. The African Development Bank on the other hand estimates Africa’s infrastructure deficit requiring a USD 93.0 billion investment annually until 2020. The East African region’s deficit is estimated at over USD 6.0 billion

Transport

Transport remains a priority in the region especially for trade purposes particularly increasing intra-regional trade. While a 10.0 per cent increase in transport time and costs reduces trade by 25.0 per cent, a 15.0 per cent reduction in time and costs is expected to increase trade by 37.5 per cent. With the tripartite agreement (EAC, COMESA and SADC) in place, efficient transport routes could not be more relevant.

Currently in East Africa, about 75.0 per cent of the value of exports is due to transport costs resulting from poor road infrastructure, railway lines in bad shape, different axle load measurements and numerous road blocks all contributing to the cost of exports.

Demand on major transport routes (highways, ports and railways) is expected to increase fourfold from 24 million tonnes in 2015 to 100 million tonnes by 2030 at the ports. The roads’ traffic will increase by 80.0 per cent and fourfold by 2030. Railways will have to accommodate 6.5 million tonnes in 2015 and 18.0 million in 2030.

With the congestion at the Mombasa port, the Dar-es-Salaam port is becoming increasingly more relevant to Rwanda and Burundi making the Northern Corridor even more important with Uganda also looking at the Northern corridor as an alternative to the Central corridor given the challenges like non-tariff barriers along the route. Projects for both corridors are estimated at USD 3.4 billion.

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Despite the railway network’s ability to handle up to 70.0 per cent of the port cargo in the region, it currently only handles only a meagre 10.0 per cent with the more expensive road handling over 70.0 per cent of all the cargo. Irony is that railway has the capacity to drop the cost by up to 40.0 per cent of the road transport cost and reduce the lead time by 50.0 per cent and more. It is such realities that are pushing the East African community to spend USD 29.0 billion to construct new and repair old lines to link Rwanda, Burundi, DRC, South Sudan and Ethiopia.

The master plan is expected to grow the rail cargo from 3.7 million tonnes currently to over 16.0 million tonnes by 2030.

East Africa’s Rail Network (2010) Infra 3

Ports

The Dar es Salaam and Nairobi ports have experienced an annual average growth rate of 8.8 per cent in the cargo handled thanks to regional trade. The independence of South Sudan as well as the tripartite agreement between COMESA -EAC- SADC with more than 527 million inhabitants and a GDP of approximately USD 624.0 billion points to increased regional trade and should significantly increase the throughput handled by the region’s ports. Currently imports constitute over 75.0 per cent of the regional trade while exports constitute a little over 20.0 per cent. Considering that majority of trade in imports in the region is with overseas trade partners like China, India, UAE, Europe etc. the relevance of ports cannot be downplayed. Traffic is expected to increase fourfold from 24 million tonnes in 2015 to 100 million tonnes by 2030 at the ports.

The growth rate has caused congestion at the Mombasa port whose capacity stands at 771,000 containers forcing some port users to resort to Dar es Salaam port. The road improvement in Tanzania brought about a 16.0 per cent increase in cargo handled to 475,000 20-foot containers from 415,000 in 2010. The Kenya Ports Authority on the other hand reported a 20.0 per cent decline in cargo (552,000 tonnes) destined for northern Tanzania, Rwanda, Burundi, Uganda and the DRC. The projected growth rates in imported goods to the year 2030 makes investment in East Africa’s port facilities inevitable and completely relevant to the region’s growth.

 Import growth rates for East African countries, (2005-09; 2009-30 projections)

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Clearing goods at Mombasa takes between 7-14 days compared to a maximum of 9 days at the Dar es Salaam. Plans are now underway to construct a USD 327.0 million terminal expected to increase capacity from 771,000 containers to 1.2 million containers. Reducing delays at the ports could reduce between USD 70.0-100.0 from the cost of moving a tonne of imports.

The LAMU port along with the refinery, railway line and pipeline, highway and airports linking Kenya to South Sudan is expected to cost USD 23.4 billion. Tanzania is also chasing after Mwambani Port and Railway Corridor and it is expected to link Tanzania from the Indian Ocean to Uganda and the DRC. The project is estimated at USD 3.0 billion. The railway line is expected to be 880.0 kms long.

Electricity

According to Goldman Sachs research estimates, a 1.0 per cent increase in the share of people living in cities leads to a 1.8 per cent increase in the installed capacity; a 1.0 per cent rise in income per head leads to a 0.5 per cent increase in demand. (The Economist)

East Africa’s high rate of urbanisation at about 4.5 per cent and the push for industrialisation and value addition clearly points to an increasing demand for electricity hence the need to increase the installed capacity.

In Africa, over 40.0 per cent of the infrastructure expenditure required is in the power sector which must install 7,000 MW of new generation capacity annually to keep pace with the growing demand.

As of 2008, only about 38.0 per cent of Africans had access to electricity compared to an average of 68.0 per cent  for all developing countries, 53.0 per cent for South Asia and 80.0 -90.0 per cent for Latin America.  (AFDB, 2010)

In East Africa, Electricity supply is still very limited with only 15.0 per cent of households in the region connected to national grids. The increasing middle class and urbanisation are expected to increase pressure on demand for the utility.

Electricity Capacity and Consumption in East Africa (2003-2009)

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As of 2009, Kenya accounted for 51.0 per cent of the installed capacity with Tanzania at 29.0 per cent, Uganda at 16.0 per cent.  Rwanda and Burundi accounted for 2.0 per cent each.

The region’s generation capacity was 13.9 billion (KWh) in 2009 with Kenya, Tanzania, Uganda, Burundi and Rwanda accounting for 47.0 per cent, 32.0 per cent, 18.0 per cent, 2.0 and 1.0 per cent respectively.

The role of efficient electricity supply is evident going by two countries with enormous manufacturing potential in India and China. While both have skilled populations and growing technology, India’s electricity supply ranks so lowly at 110 compared to China at 59 out of 144 countries behind Mali and ahead of Ethiopia according to World Economic Forum’s Global Competitiveness Report 2012-13.  This definitely has a huge bearing on why China produces much cheaper goods than the former. For East African industries to grow, electricity supply must be reliable and a lot cheaper.

Fortunately for East Africa, she has a hydro potential of more than 6000 MW and could meet the entire region’s electricity needs at current peak demand of 2,500 MW. While Africa has 27.0 per cent of the world’s hydro power potential, 93.0 per cent of Africa’s hydropower potential remains unexploited. Even with hydro power production dominating sources of electricity, it could provide up to 79.0 per cent of the region’s new generation capacity. The power of existing hydro power plants could be increased by 5.0-20.0 per cent. Refurbishing and expanding projects may be both more cost friendly and environmentally benign than building new plants.

Telecommunication

Global statistics, (F1 Soft International) reflect 70.0 per cent of the 7.0 billion inhabiting the planet as mobile phone users compared to only 30.0 per cent as bank account holders.  World Bank research shows that East Africa has 69.4 million active mobile phone subscribers compared to 14.5 million bank account holders out of a total population of about 130 million people.

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AFDB findings report that only 20.0 per cent of African families have a bank account. It is no wonder that the Mobile Money transfer platform has grown exponentially in a region of largely cash economies. If M-PESA trends are anything to go by, more dependence on the platform is imminent. As of the first eight months since inception, the platform registered 1.1 million subscribers and USD 87.0 million that grew to 8.5 million subscribers and USD 3.7 billion in transfers in 2009.Transaction value grew to over USD 8.0 billion in 2012. Kenya alone currently controls about 31.5 per cent of the global mobile money market.

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On the African continent, 70.0 per cent have got their first internet experience using their mobile phone according to Global Mobile Statistics. Many users are taking to Facebook, twitter, blogging as well as applications like what’s up and Skype mainly depending on their smart phones and tablets.

The emergence of cloud computing in the region unveiled by both Safaricom in Kenya and MTN in Uganda aimed at reducing the cost of doing business in the region is expected to increase demand for faster data speeds. The platform is expected to aid the education, finance, IT and telecommunications sector as well as Business Process Outsourcing firms that are seeking a platform to provide services without purchasing software and hardware. This trend is expected to continue globally with spending on the platform expected to increase to USD 241.0 billion by 2020 according to a Gartner Special Report.

As of 2011, Safaricom reported that 51.0 per cent of organisations were using cloud computing services for data management, 45.0 per cent for communications while 47.0 per cent used the platform for corporate IT systems.

The ICT sector in Sub Saharan Africa has been a key growth driver and has had a compound annual growth rate averaging 40.0 per cent globally. In East Africa, Kenya’s ICT sector has grown by an average of 20.0 per cent for the last decade. Uganda and Rwanda’s ICT sector are also attracting increasing interest.

Even though government efforts are already in place, country contributions to regional infrastructural projects will be a tall order for most of East Africa’s economies except may be for the large Kenyan economy. This is because the contributions required could be as high as 2.0 per cent of these countries GDPs without the local infrastructural needs. Cognisant of the fact that some individual country projects are largely reliant on aid; the private sector’s role cannot be overstated in the move to bolster the region’s infrastructural needs. It is no wonder that for an economy like India, the private sector contributes up to 30.0 per cent to infrastructure spending. For the required regional infrastructure investment, government efforts alone cannot suffice. Times call for alternative sources like infrastructural bonds; Kenya has issued some, private equity companies to invest in companies like Citadel has done with RVR and Actis in UMEME, investment by pension  funds as well as creation of regional companies to handle some of the projects e.g. RVR. As the region’s economies move towards middle income status dependence on donor aid is bound to reduce. Besides overdependence on aid could have its ramifications if aid is held back by donors as experienced by Rwanda in 2012/13 financial year. If governments can mitigate political risk, economic risks, commercial and financial risks investors should be in perfect position to reap big from high yields in East Africa on her journey to middle income status.

 

1 thought on “East Africa’s Road to Middle Class Status through Infrastructural Development.

  1. Pingback: Exit strategies: one of many thorns in East Africa’s P.E. side | Finance and Investment – East Africa

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