Ndii misses it, Kenya has a huge demand for infrastructure

Columnist David Ndii’s article in the Saturday Nation of May 23, “Binge investing: Lessons from KQ and Mumias”, sought to draw parallels from the experience of these two corporate entities and concluded that Kenya’s ongoing investment in major infrastructure projects in the power and transport sectors is not justified due to an absence of demand.

I beg to differ.

Infrastructure, especially in power and transport, creates consumer demand and its absence stifles it. Societies are able to enhance productivity and shift to increasing-return economic activities in sectors such as manufacturing, when they have access to cost-effective power and efficient transport systems.

Further, manufacturing growth has a positive stimulus on the growth of the service sector areas such as logistics, transport, advertising, insurance, marketing and so on. The cost effectiveness and availability of efficient power and transport solutions is perhaps the single greatest driver in the transition from smallholder, subsistence agricultural societies to industrial, service societies.

This is especially so in today’s world where distance is “effectively dead” and the lowest cost producer of manufactured goods in one corner of the world is able to deliver them across the globe in a matter of weeks and at a fraction of the cost, beating higher cost producers in the consumer markets.

To illustrate the point, the cost of shipping a 40-foot container from Guangzhou, China, to Mombasa is Sh340,000 ($3,500) while the cost of transporting it from Mombasa to Nairobi is Sh460,000 ($4,700).

Economic history has shown that societies can only raise incomes and radically improve their citizens’ welfare by transitioning from being producers of raw materials to producers and exporters of manufactured goods. In 1990, both East Asia and Africa had 60 per cent of their populations living below the poverty line. By 2008, the proportion of the population living below the poverty line in East Asia was 14.3 per cent while in Africa it was 48 per cent.

What changed? The East Asians changed professions and shifted economic activity from subsistence agriculture to manufacturing, supported by massive investment in electricity generation and transport. According to the International Energy Agency (IEA), energy consumption in China increased by 111 per cent between 1990 and 2008 while Africa’s was only by 10 per cent.

The structure of our trade deficit, tells the whole story. 

For every dollar of goods we export, we import three dollars worth of goods — primarily, manufactured goods. The shortfall in our exports explains the continuing decline in the shilling. We are an economy that exports a limited amount of raw materials relying on the competitiveness bestowed by nature, and then import a lot of finished goods that rely on the investment, skill and innovativeness of others.  To employ David Ndii’s argument on the importance of demand as a pre-requisite for investment, our appetite for manufactured goods is evidence of demand for infrastructure services.

Importing manufactured goods is equivalent to importing power, transport and skills. There is therefore significant real demand today for infrastructure, masked as demand for manufactured goods. These goods should be manufactured within our borders without the need to send our raw materials 5,000 miles abroad for value addition and then sold back to us at 20 times the price. This is not a ground breaking insight. In 1581, author John Hales wrote: “What grossness of wits be we... that will suffer or own commodities to go and set strangers at work, and then buy again at their hands”.

A comparative analyses using World Bank data on Kenya’s per capita installed electric power vis-à-vis the two African countries that we import most from indicates that Kenya’s per capita power consumption is 9 per cent of Egypt and 3 per cent of South Africa’s.  Some 99.6 per cent of the Egyptian population has access to power, 82.7 per cent in South Africa and 23 per cent in Kenya. This alone explains the need for our country to be in a mad rush to add affordable and reliable power generation capacity.  The lesson from East Asia is clear. A national growth strategy based on educating the population will only succeed when combined with an industrial policy that provides work for educated people. This cannot be achieved without fundamental infrastructure in place.

Coal accounts for approximately 41 per cent of global electricity production and is a major source of the energy mix of some of the leading economies.  Coal accounts for 37 per cent of electricity generation in the US, 45 per cent in Germany, 68 per cent in India, 79 per cent in China and 93 per cent in South Africa. Coal’s importance to the generation mix of these countries is primarily on account of its low cost of generation, reliability and availability, relatively short installation lead time and its role as base load power.

To engage in high return economic activities it is important to have access to low cost electricity. At US cents 7.8, the 960 MW Amu Coal Power project shall be the cheapest Independent Power Producer in Kenya and because of the scale of the generation capacity, it shall play a critical role in reducing the overall cost of power and by extension enhance the competitiveness of industry.

Dr Ndii correctly argued that renewable energy like solar and wind shall play increasingly important roles on account of improvements in technology and cost reduction. This is true to an extent. At Centum, we are committed to renewable power. We are investing in a 2MW solar power plant at Two Rivers, a mixed-use commercial real estate development in Nairobi.

This plant will  be commissioned in December and when complete, shall be the largest single concentration of solar power generation in Kenya.

In addition, we are investors in the 70MW Akiira geothermal power project that begins drilling in a month. As Ndii pointed out, the Achilles heel of renewable energy, especially solar, is its unreliability and high cost of storage technology required to smooth out availability. Cost effective power storage technology is at best decades from realisation explaining why even Germany, a country championing and expending massive amounts of money subsidising green energy, has only about 30 per cent of its power generation capacity from green energy.

A number of global economic factors present Kenya with a window to attract global capital to finance critical infrastructure projects that have the potential to radically transform its productive capacity. These are the slowdown in economic growth in Europe and Asia, the fall of interest rates, decline of inflation globally, the shortage of investment opportunities across the developed world with a positive real return and unprecedented levels of liquidity across the globe.

Public Private Partnerships are especially effective financing arrangements that facilitate efficient, competitive financing of infrastructure using long term private money. 

Eric Reinert, the Norwegian economist defines a colony now and over the past 500 years, as any country that is in the business of exporting raw materials and importing finished goods. An economic strategy based on specialising to be the least cost exporter of raw materials is a strategy destined to lead in the specialisation of remaining poor.

Our past needs not be a continuation of our future and we should resist the temptation to assess our possibilities from the prism of our unfortunate history. Events have converged that allow us to break from this cycle. The question is, shall we rise to the occasion and seize the moment?

Mr Mworia is the Group Chief Executive Officer of Centum Investment Limited.