Why neighbours’ cold shoulder may wreck Kenya’s grand infrastructure dream

NAIROBI: President Paul Kagame paused and then rested his chin on his left hand when asked what appeared to be a simple question.

“Resources are scarce,” he said to the question on which way Rwanda would go in the development of the Standard Gauge Railway (SGR).

The line was originally planned to run from Mombasa in Kenya, through Uganda’s Kampala before terminating in his capital city, Kigali.

“We will take the shorter route,” he said, confirming that Rwanda would tap into the alternate railway project planned by Tanzania. He was speaking at the World Economic Forum on Africa earlier this month.

For years, whenever Kenya has coughed, its neighbours have caught a cold. But it now appears that these neighbours have hatched a plan to simply turn their backs to avoid the cold.

From Dar es Salaam in Tanzania through Kigali in Rwanda, to Kampala in Uganda, and finally to Addis Ababa in Ethiopia, something new is brewing, and Kenya is losing.

Even South Sudan, the newest entrant into the East African Community (EAC), seems to be on the fence. Burundi is indifferent, but the nation is limping, making any major investments at this time unlikely.

Kenya is East Africa’s largest economy. It has been the hub for trade, business and investment.

In fact, according to European Union Head of Delegation to Kenya Stefano Dejak, the country features whenever South Africa and Nigeria — Africa’s largest economies — are mentioned.

Yet, before Kenya can fully enjoy this bloom, gloom appears to be fast approaching, and its East African neighbours have something to do with it. Recent developments in policy and projects in neighbouring countries are putting the ‘regional powerhouse’ tag to the test.

And this is happening just 14 years to the deadline to achieve Vision 2030 projects, and when the country is still celebrating the discovery of oil wells in the north.

The twist in the region’s friendship also finds Kenya in the middle of executing huge infrastructure projects. Top on the list are the Sh327 billion SGR, which is the first railway project since independence, and a pipeline that could see Kenya become an oil exporter by 2022

President Yoweri Museveni, now the longest-serving president in Eastern Africa (25 years), has been a close ally. His country has co-operated with Kenya on infrastructure, security, agriculture and energy.

But this close ally has turned his back on an August 2015 memorandum of understanding with Kenya, choosing instead to build an oil pipeline with Tanzania.

BEST HUNTER

He relied on a Ugandan proverb to support his decision.

“If puppies are young, you don’t know which one will be a better hunter, so you feed all of them, and when they grow, you see which one emerges the best hunter,” Mr Museveni was quoted as saying by Ugandan press after the decision.

In June 2014, Kenya, Uganda and Rwanda had jointly awarded Japan’s Toyota Tsusho a contract to oversee a feasibility study and initial design for the construction of a 1,300-kilometre pipeline.

The Sh450 billion joint pipeline project was to run from the oil-rich Kaiso-Tonya area in western Uganda to Kenya’s Lokichar town in Turkana and end in Lamu.

In August 2014, Tullow Company had said that achieving the project would be dependent on many technological, legal, social and financial factors, including land acquisition for the pipeline and securing an investor.

Despite President Uhuru Kenyatta and Museveni meeting in Nairobi to conduct talks on the pipeline, whose outcome was described as “fruitful”, Uganda ditched Kenya.

Uganda relied on a team of experts’ report that saw Kenya lose the deal to Tanzania on the grounds that the latter country’s route was cheaper. According to Tanzania’s President John Magufuli, its 1,403-kilometre pipeline will cost $4 billion (Sh400 billion) — Sh50 billion less than the Kenyan option.

High costs of compensation in Kenya compared to Tanzania, where all land belongs to the state, and the threat of attacks from Al-Shabaab militants in Lamu conspired against Kenya. Also, experts argued that the Hoima-Lamu terrain was rockier than the flatter route proposed in Tanzania.

The Parliamentary Budget Office (PBO), which comprises economists and fiscal analysts who advise Parliament on the Budget and economy, has told lawmakers that Kenya is slowly losing its comparative advantage due to poor Government policies.

The numbers are already supporting this story. For instance, exports to Uganda, which has long been the leading destination for Kenyan goods, are shrinking.

Data from the Kenya National Bureau of Statistics (KNBS) shows that over half (54 per cent) of the exports to the EAC were consumed by Uganda. However, the value of these goods has shrunk from a high of Sh75.9 billion in 2011 to Sh68.5 billion last year.

The country is not faring much better in Tanzania, where KNBS data shows exports have dropped 27 per cent from a high of Sh46 billion in 2012 to Sh33.6 billion last year.

DOMINANT ECONOMY

Now, losing the pipeline deal means Kenya will have to embark on finding its own financiers and contractors. In neighbouring Tanzania, Mr Magufuli has said his country will begin construction of its pipeline next year.

And there is plenty Kenya has lost in the deal. Uganda is estimated to have more than 6.5 million barrels of oil — about 10 times more than what Kenya has. If this resource is well managed, Uganda could well unseat Kenya as the dominant economy in the region.

Further, Tanzania’s line will emerge as a strong competitor to Kenya’s in winning oil exports from other Great Lakes countries, such as South Sudan and Eastern DRC.

In an opinion piece published in local media, petroleum and energy consultant George Wachira said Kenya will feel the investment impact of the Tanzania-Uganda pact.

“The Total [the French oil investor in Uganda] factor is likely to play out prominently in the Great Lakes petroleum infrastructure. Across Lake Albert in DRC, Total owns controlling interests in the new oil discoveries, which are essentially an extension of Ugandan oil basins,” he said.

Mr Wachira added that Total’s influence in the region is likely to lead to consignments of oil from most neighbouring countries going through the Tanzanian pipeline.

That means, Kenya’s pipeline may not be fully utilised, which will defeat its initial objective.

The pipeline was seen as an anchor of the Lamu Port-South Sudan-Ethiopia Transport (Lapsset) Corridor project.

The other objective of the Lapsset project was to build a Sh330 billion ($3.3 billion) port in Lamu. Kenya was hoping to use this to entice landlocked countries to import and export their goods through the country.

The designs for three of 29 berths at Lamu Port are complete, and construction is set to begin next year, but the apparent shift in regional power may create some hurdles.

Kenya’s prospects for creating additional jobs and collecting more revenues from transit fees have begun to dim, even though the country has already embarked on a project to expand its port facilities through a Sh25 billion loan.

Tanzania is making even bigger investments. The country is currently constructing a $10 billion (Sh1 trillion) Bagamoyo port and special economic zone to transform Tanzania into a regional trade and transport hub.

On completion, the port is projected to have the capacity to handle 20 million containers a year, in addition to Dar’s 500,000 containers.

Kenya’s revamped port cannot handle more than three million containers.

According to economist Kariithi Murimi, Kenya cannot carry the Lapsset vision by itself.

“We need to be clear that Kenya cannot go it alone because we need enough return volume to justify the economics of the investments in the pipeline, and also the expansion of Lamu as a port,” he said.

COALITION OF THE WILLING

The SGR, another project within Lapsset, received its latest blow when Rwanda divorced the Kenyan route and tied the knot with Tanzania.

In 2013, President Kenyatta had marshalled Uganda and Rwanda into a so-called coalition of the willing that saw the countries initiate a raft of projects in East Africa’s Northern Corridor.

However, this grand plan, which had sidelined Tanzania and Burundi, has now come to haunt Kenya. Rwanda has pulled the plug on the alliance, choosing Tanzania and Burundi for access to the sea through Dar es Salaam.

According to Rwanda’s minister of finance and economic planning, Claver Gatete, the landlocked country plans to develop rail links to Indian Ocean ports through Tanzania because it is cheaper and shorter than through Kenya.

“We opted for the route transiting to Tanzania during the construction of our railway line because the Kenyan route would be expensive and time consuming,” Mr Gatete told Mail & Guardian Africa.

A report from Rwanda’s ministry of East African Community affairs showed that by opting for Tanzania, Rwanda would save its taxpayers money. The route will cost between $800 million (Sh80 billion) and $900 million (Sh90 billion), compared to Kenya’s $1 billion (Sh100 billion).

Rwanda, Tanzania and Burundi will now jointly construct a railway.

INITIAL AGREEMENT

There are also reports that a new railway is being built from Isaka in Tanzania to Kigali, with a branch to Musongati in neighbouring Burundi. There is also the planned upgrading of the Dar es Salaam-Isaka railway.

Kenya, meanwhile, has spent Sh327 million on the Mombasa to Nairobi part of the SGR, using money borrowed from China’s Exim Bank. All this time, Uganda and Rwanda had not secured any funding for their respective lines as per the initial agreement, so they face no financial fall-out.

In 2013, Kenya, Rwanda and Uganda had agreed to link to the Mombasa Port along the SGR at a cost of about $13 billion (Sh1.3 trillion).

However, Kenya Railways Managing Director Atanus Maina has downplayed Rwanda’s decision to change route, saying it is in line with the East African Railways master plan, and that Rwanda had both Kenya and Tanzania to pick from.

The initial plan was to have the railway stem from the Kenyan coast and extend up to South Sudan (Juba) and Ethiopia (Addis Ababa).

However, Ethiopia has decided to turn to Djibouti, while South Sudan has said it will consider if Tanzania is cheaper.

Ethiopia is considering setting up a 550km line to transport diesel, gasoline and jet fuel from Djibouti to central Ethiopia at a cost of ($1.55 billion) Sh155 billion.

Its completion could weaken the attractiveness of the Lapsset project, as Kenya’s feasibility study of the project was premised on Ethiopia being fully on board. South Sudan’s non-commitment is also a threat to the planned oil refinery at Lamu.

“In view of start of operations of the Corridor, co-operation with the Southern Sudanese government and the Kenyan government is very essential in creating sustained demand and supply, as well as constructing and completing the transport corridor in the both countries,” said the Lapsset Corridor Development Authority in its feasibility study.

Kenya’s oil in Turkana is mainly planned for export in crude form, and its quantity cannot guarantee economies of scale if it were to be refined in Lamu.

Therefore, oil rich-South Sudan would be an essential source of oil. If South Sudan turns its back on Kenya, the practicality of a refinery would fade.

Apart from its large crude reserves, South Sudan would also be the perfect partner for Kenya in a joint pipeline project because of its long-running woes transporting its oil through Sudan.

But to keep its infrastructure dreams alive and retain its pole position in the region, Kenya needs to address the suspicions growing between it and its neighbours, according to Mr Murimi.

“We need to go back to the table and remove the fear of Ethiopia, Uganda and Tanzania in terms of our bid and the cost of our investment. There is a silent question mark on whether we have over priced our projects,” he said.

palushula@standardmedia.co.ke