East African economies need more than $100 billion over the next four years to plug their infrastructure gap, which has kept the cost of doing business in the region high.
According to a Britam report, the investment in rail and energy sectors have the greatest multiplier effect on the region’s economies. Currently, EAC electricity costs average 18-22 US cents per kilowatt hour, much higher than Ethiopia’s of 5 US cents per kwh.
Britam Asset Managers report shows that despite having some of the fastest growing economies in the world, East Africa remains among the least competitive regions globally.
East African economies need more than $100 billion over the next four years to plug their infrastructure gap, which has kept the cost of doing business in the region high.
A report by Britam Asset Managers shows that despite having some of the fastest growing economies in the world, East Africa remains among the least competitive regions globally.
This is mainly due to poor infrastructure that is slowing economic growth by two percentage points every year and reducing productivity by as much as 40 per cent. Kenneth Kaniu, the chief executive officer of Britam Asset Managers, said that the region needs to diversify its sources of finance and give a larger role to the private sector through private-public partnerships (PPP), foreign direct investment flows and more local private financing.
“Traditionally, East Africa relied on a mix of foreign aid and commercial borrowing domestically, abroad and from bilateral partners to fund projects. China only recently became a financier of key energy and transport projects,” Mr Kaniu said.
Leverage funds
The report calls on the region to leverage on the funds available in the financial sector to finance infrastructure projects in the region.
“With East African economies raising approximately $13 billion via traditional sources, it is clear that these countries need to diversify their sources of financing, as foreign aid is expected to be eliminated by 2050 as outlined in the EAC Vision 2050 blueprint. Only then will the region deliver economic growth that is fast, resilient, sustainable and inclusive,” the report says
Currently, the region has 58 active PPP projects worth $7.32 billion.
Mr Kaniu said the investments in railways and energy were prioritised, given that these sectors have the greatest multiplier effect on regional economies.
He added that improving these two could reduce product costs by 10 per cent by easing decongestion.
“Railway transport is the second most important mode of transport after roads and is critical for long distance freight along the main transport corridors.
Moreover, East Africa needs to increase electricity generation from cheap renewable sources of energy in order to support light manufacturing,” Mr Kaniu said.
Funding gaps
Kenya’s funding gap from PPP infrastructure projects alone is estimated at $41 billion over the next three years, while the estimated funding needs for the East African economies are estimated at $35 billion annually over the same period.
Tanzania in its 2017/18 budget planned to increase spending in its budget for its new financial year by 7.3 per cent to $14.21 billion, with a focus on infrastructure. The country is also banking on its second industrialisation plan that will see it increase its development spending to $27.66 billion over the next five years.
Uganda, on the other hand, is expecting expenditure on infrastructure projects to increase 11 per cent to $1.1 billion in this new financial year, accounting for about 13 per cent of overall planned government spending. The county has lined up projects in electricity production, roads, railways and an oil pipeline.
According to the Britam report, the investment in rail and energy sectors have the greatest multiplier effect on the region’s economies. Currently, EAC electricity costs average 18-22 US cents per kilowatt hour, much higher than Ethiopia’s of 5 US cents per kwh.
However, the ongoing regional collaboration, especially through a common power pool has the potential to reduce electricity costs by $2 billion annually. The report also calls on regulators to look at infrastructure-linked projects and securities across the region as a distinct asset class.
“Long-term institutional investors like insurance companies and pension funds have a key role to play in financing regional infrastructure.
Life insurers can apportion part of their $5 billion balance sheets towards infrastructure investments and pension funds can also invest part of their holdings in infrastructure projects,” the analysts said.
