Press Room

Africa’s large physical infrastructure deficit is visible to any traveller across the continent.  Massive capital expenditure is needed to adequately address this challenge.

Some countries are realising the benefits of collaborating with their neighbours to plan and execute infrastructure projects.  Others, however, wonder why they should help their competitors?

The infrastructure shortfall is glaringly obvious when one compares Africa’s installed capacity to other emerging countries outside the continent.

In China, for example, there are 250 people per 1MW of installed energy, whereas in Ethiopia the figure is 45,000 people per 1MW and 1,780 in Brazil.

Looking at population per installed railway kilometre, China’s ratio is 3,700 people per 1Km, while in Ethiopia there are 140,000 people per kilometre of railway.

In Ethiopia, 45,000 people per 1MW of installed energy

In Ethiopia, 140,000 people per 1KM of installed railway

Infrastructure investment is a catalyst for economic growth, but to attract large foreign investors, countries need to lower their cost of doing business. Transport and energy costs are critical cost drivers the prices of goods and services.

Given the significant capital outlay and the political risk associated with infrastructure projects, governments are the principal agents of change to improve the current situation. To achieve their intended outcome of attracting investors, some governments have chosen a cooperative approach to infrastructure development.

Why help others?

Some leaders, however, resist this approach.  African voters are demanding more from their elected representatives as they gain more exposure to standards of living enjoyed on other continents. This incentivises leaders to maximise their political mileage locally by implementing infrastructure projects independently. Secondly, the scale of these projects makes it tempting for state officials to profit from the transactions especially if they retain full control. Countries within the continent are also competing internally and aiding competitor countries by reducing their cost of doing business at first glance appears counterproductive.

East Africa collaborates

The East African region, which includes Burundi, Djibouti, Ethiopia, Kenya, Uganda, Rwanda and South Sudan, has been leading the charge in collaborative regional infrastructure planning and execution.

One of the outcomes of the joint cooperative strategies is access to a bigger market. Countries like Nigeria and Ethiopia have 174 and 94 million people respectively, unlike smaller countries like Rwanda and Togo at 11 and 7 million. Larger populations equal bigger potential markets. To compete, smaller nations such as Rwanda have got into bed with neighbours like Kenya and Uganda, harmonising their immigration and infrastructure plans in order to market themselves to investors as an economic hub of some 93 million people.

In addition to market size, cost of power continues to limit East Africa’s attractiveness as a manufacturing base. Competitors from outside the region such as Egypt and South Africa charge users on average US 8 cents and US 9.10 cents per kilowatt hour (kWh) respectively. East African regional powerhouse Kenya on average charges industrial users USD 15 cents per kWh.

To lower electricity costs the region is investing in cross border transmission lines. This will enable countries to sell excess power to neighbours and source cheaper power.  The expected completion of the Kenya-Ethiopia electricity line in 2018 will see the transfer of 2,000 MW of power. This would allow Kenya to reduce its cost of power by sourcing the cheapest form of renewable power, hydroelectric power.

Ethiopia on the other hand will generate much needed foreign exchange and a market for the excess power that will be generated from the Gibe III hydroelectric project, with an installed capacity of 1,870 MW. A similar transmission project to the Kenya-Ethiopia transmission line is planned from Kenya to Rwanda crossing Uganda.

With the capacity to generate 45,000 MW of hydroelectric power, Ethiopia is capable of supplying the entire East Africa Region, which has a total installed capacity of 3,520 MW. The power sold is expected to cost between 3-10 US cents per kWh. If achieved, this will make the region competitive versus other low cost energy producers on the continent.

Another benefit of joint infrastructure projects is the ability to mobilise the funds to bring projects to fruition. The capital requirements for infrastructure projects are prohibitive for most African states to pursue them by themselves.  The Kenya-Ethiopia electricity transmission line is estimated to cost USD 1.2billion, while the standard gauge railway connecting the port city of Mombasa to Kigali through Kampala is projected to cost USD 11 billion, but is widely expected to exceed that figure. The first phase has already begun linking Mombasa to Nairobi and is slated to cost USD 3.8 billion with expectations being that the next leg between Nairobi to Malaba will cost more. The project may cost Kenya approximately USD 8 billion representing close to 60 percent of its external debt.

The high cost of commercial loans, as well as the securities needed, forces governments to seek concessionary loans from either development institutions or developed nations. Given the limited funds available, chances of success are higher if nations band together and lobby as a collective unit. This collaborative approach has enabled Kenya-Ethiopia to secure funding from the African Development Bank for the electricity transmission line and from the Chinese government for the Standard Gauge Railway projects. 

On the African continent, countries that work together will actually give themselves a head start over their competitors by sharing risk and funding requirements. Investors are keenly following developments as they prepare to base their operations in environments that make them more competitive.  

- Brian Maina, Private Equity Analyst, RisCura

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