NS4301 Summer Term 2015

East Africa Railroads

Overview

• Oxford Analytica, East Africa: Ambitious Railway Faces Project Risks,” July 10, 2015

• June 26, 2015 construction began on Uganda’s branch of the East African standard-gauge railway

• Region’s largest ever transport infrastructure venture

• Project at heart of regional integration plans

• Seeks to link up all major urban centers

• Mombasa and Nairobi in Kenya to

• Kampala in Uganda

• Kigali in Rwanda and

• Bujumbura in Burundi

• Also branch lines to South Sudan and the DRC

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Map

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Project Details I

• Project’s goals – seek to improve efficiency of freight transport by reducing

• Cost – Mombasa’s outbound freight price would decrease from $0.16 per ton/km to around $0.5

• Time – transit length from Mombasa to Ugandan border reduced from 18 days to as little as 1.5 days

• Chinese loans main source of funding

• Project has long been championed by World Bank and African Development Bank

• WB offered a $1.2 billion dollar loan for longer-term operations and maintenance

• However neither institution is playing a leading role in funding construction

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Project Details II

Kenya

•Chinese government is financing 90% of the costs for the Mombasa to Nairobi track

• Construction began in early 2015

• Expected to be completed by mid-2017

• Agreement finalized May 2014 including a $1.6 billion commercial loan and $1.63 concessionary loan from the Export-Import (EXIM) bank of China

•Costs of extending line to Uganda (rough terrain) may be 60% higher

•Current price tag for Kenya’s railway plans including upgrades to the colonial-era line are $5.6 billion or 15% of Kenya’s 2013 GDP.

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Project Details III

Uganda and Rwanda

•Uganda President announced in March 2015 government borrowing $3.2 billion from EXIM Bank of China to fund first construction phase

•Over longer term estimated that country will accrue debt of $13.8 billion to fund its portion alone

•Country also borrowed over $500 million for Isimba Dam and $1.45 billion for the Karuma dam

•Rwanda is also expected to seek Chinese financing for its part with construction to start in 2018

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Uganda Case Study I

• Robert Looney, “In Uganda It’s Bust Before Boom,” Foreign Policy February 2, 1015

• On surface economy seems to be doing well

• Growth averaged 6% per year last 10 years

• Between 2004 and 2008 debt declined dramatically

• Benefited from debt relief initiatives organized by IMF and World Bank

• Since 2008 (and the discovery of oil) however government borrowing against unrealized oil revenues turned country into one of most heavily indebted countries in world.

• Even before drop in oil prices 2014 concern that the government was mortgaging country’s future on unrealistic long-run expectations 7

Uganda Case Study II

• Uganda government borrowing against future oil revenues has focused on grand infrastructure schemes built and funded by the Chinese

• In 2014 alone deals with the Chinese for two hydropower dams worth $2.2 billion

• Standard gauge railway that could cost up to $8 billion

• Fertilizer plant $600 million

• Additional projects include a $2 billion oil field being developed by state-owned China National Offshore Oil Corporation

• $350 million road between Kampala and Entebbe International Airport

• Rumor that a Chinese bank may bail out Ugandan parliamentarians in danger of going to jail for their debts.

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Uganda Case Study III

• Ugandan government contends loans from China preferable to those from West

• Offer lower rates

• Greater flexibility

• Don’t require prompt or advance payment.

• Ugandan opposition contend grand infrastructure projects nothing more than schemes to divert funds for personal and political gain

• Contend the President has promoted allies to leadership positions in agencies responsible for these projects

• National Roads Authority and

• Ministries of Finance, Transport and Energy.

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Uganda Case Study III

• Such arrangements provide opportunity to siphon funds from these projects

• Their rapidly rising budgets lend additional credibility of charges of corruption

• Cost for the Ugandan section of the East African Standard Gauge Railway out of control

• Project had an initial price tag of $4.5 billion for Ugandan side of railway compared to $3.8 billion for the Kenyan side.

• Estimated costs in Uganda shot up first to $8 billion then $11 billion

• Opposition groups now label Chinese loans as odious – contracted by President for personal gain and not binding on the country

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Issues With Chinese Loans I

Africa Confidential, “From East to East,” July 30, 2015

•Questions are multiplying about costs and sustainability of China’s loans for the region’s grand projects

•For East Africans, Chinese loans offer a chance to overhaul neglected infrastructure and stimulate growth

•For China, funding part of a $1 trillion EXIM Bank of China package focused on Africa over next ten years

•Comes with lucrative contracts and jobs for its companies

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Issues With Chinese Loans II

• Corruption allegations have been made about both the Railway and hydropower projects in Kenya and Uganda

• Companies that are not from China say they can’t compete with Chinese concerns on price and political access

• According to one industry estimates 90% of engineering contractors in Tanzania are Chinese

• Chinese companies have won 80% of road construction contracts

• Beijing hopes Chinese companies will make 100 new investments in Tanzania alone by 2016

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Issues With Chinese Loans III

• Academics, policy makers and diplomats debate merit of these deals

• Many are shrouded in secrecy making it difficult to assess their impact

• Details of precise terms hard to access because based on off-take or countertrade agreements

• Western bankers argue China’s loans may be arranced quicker but more costly than reported.

• China’ key lending institutions EXIM bank and China Development Bank (CDB) provide a tiny portion of their lending at concessional rates – perhaps 3%

• As Ugandan President said “Chinese don’t ask questions about things like structural adjustment.”

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Issues With Chinese Loans IV

• Chinese try to structure deals based on revenue shares

• Loans for Ethiopia-Djibouti railway secured with future sales of seasame seed – Ethioopia a major exporter

• Another area of mystery is what the contractural consequences are should exorts fall belwo anticipated levesl or prices of commodity in question change significantly

• In short term major risk to economic stability of countries in region is from commercial debt and sovereign bonds many are issuing to keep projects on track

• Could easily get out of control especially as the projects do not show a clear commercial rate of return which can sustain the repayments.

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