Infrastructure and economic development: High potential in East Africa

While many regions around the world are now experiencing slow or stagnant economic growth, Africa stands out as a land of significant untapped opportunity. The continent boasts the highest levels of resource reserves in the world, gross domestic product (GDP) is growing at around 5% per year and populations are set to double by 2050.

At the same time, the continent is quickly burying some of the ghosts of its past. Across most of Africa, state-owned enterprises have been privatised or are planning privatisation, trade borders have been opened, corporate taxes have been lowered, and regulatory and legal systems have been strengthened.

The cost of poor infrastructure

Outside of South Africa, the continent is being held back from reaching its full potential by a lack of adequate infrastructure. Transport prices are estimated to be anywhere from 50% to 175% higher in Africa than global averages and eats up more than 20% of foreign export earnings; ports and rail links are overcrowded; and in some countries roads are impassable. All told, the lack of adequate infrastructure is estimated to cut productivity across the continent by as much as 40%.

That said, there have been a number of rather exciting infrastructure opportunities coming to the market, particularly in East Africa, many of which hold a strong promise of curing some of the ills that plague the region.

Opportunities abound

Take, for example, the Lamu port project in Kenya which aims to exponentially increase regional trade and export potential for Kenya, South Sudan and Ethiopia. The project brings together a range of infrastructure developments including a 32 berth deep-water port; 1,300 kilometres of crude oil pipelines; more than 1,700 kilometres of new highways and almost as many kilometres of new railway; new airports and an oil refinery. The project, which is expected to take about two decades to complete, will require some US$25 billion in project funding, representing more than 80% of Kenya’s annual GDP.

At the same time, the Kenya Electricity Generating Company Limited (KenGen) is seeking $5 billion in project funding to increase power capacity by some 3,000 megawatts (MW) by 2018. KenGen already boasts an installed capacity of 1,183 MW (64% of which is derived from hydro power) and provides 74% of the national capacity. But with demand growth currently estimated at 8% per annum, the additional capacity will be sorely needed to ensure the country can maintain its economic growth trajectory. South Sudan, the world’s newest sovereign nation, offers another strong case in point.

With almost all of the fledgling country’s GDP coming from its abundant oil reserves (some 385,000 barrels per day) it is particularly dependent on pipelines to ensure continued political and economic stability. But with little commercial agriculture and no real manufacturing operations to speak of, the landlocked country also relies on overland transport from ports in Kenya which often adds upwards of $9,000 in transportation costs for a single standard container. In response, a number of innovative initiatives are now underway to improve overland connections and create new pipeline routes to more efficiently bring goods into and out of the country.

Facing the challenge ahead

While East Africa clearly has no lack of viable and effective infrastructure strategies, progress has been depressingly slow on many fronts. Part of the challenge, of course, relates to funding. Many of East Africa’s nations are largely dependent on development aid for capital investments, but donations are either insufficient or too overly-restrictive to close the infrastructure gap.

What is needed is greater cooperation between national governments, donors, regional trade associations and the private sector. Yet in most cases, activity has been undertaken on a unilateral basis, with little coordination even within the region itself.

This is a shame. The reality is that East Africa offers the potential for strong and stable returns for infrastructure investors and – if properly planned and executed – will almost certainly create new opportunities for investment across the region. Indeed, investors would be well advised to take a long and hard look at the bevy of new opportunities now emerging from the region. The returns – both economic and social – could be significant.

Klaus Findt is the COO of Global Infrastructure Africa at KPMG