Are mega projects worth billions spent?

Friday February 10 2017

Locomotives and passenger coaches for the standard gauge railway on February 2, 2017. PHOTO | LABAN WALLOGA | NATION MEDIA GROUP

Locomotives and passenger coaches for the standard gauge railway on February 2, 2017. PHOTO | LABAN WALLOGA | NATION MEDIA GROUP 

By DAVID NDII
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As mega projects go, the 5,000MW initiative is the ultimate “if you build, they will come” project.

The argument was that there were many investors who were put off by our puny electricity numbers. To attract them, we needed to demonstrate that we could scale up electricity generation very dramatically. In reality, there are few industries that will start off with such huge power demand at once. Those that do, such as mining (that is, smelting the metal ores), have a long gestation themselves such that electricity plants can be built alongside the mine development itself.

But this is now water under the bridge. The initiative has been abandoned. Reason? Lack of demand. Installed capacity now stands at 2300MW, against a requirement of 1600MW. As I observed in a previous article, electricity demand grows at the same rate as the economy. At current economic growth rate and allowing for a 15 per cent reserve margin, we will need 3000MW in a decade, best case scenario is seven years if the economy accelerates as we hope it will to a seven per cent per year average.

GOOD GUIDE

But the past is not always a good guide to the future and with electricity never more so than now. The electricity industry is on the cusp of a major technology disruption, driven by rapidly falling costs of renewable power and large-scale power storage technology. Industrial scale solar installations are now commercially viable even here in Kenya. I read in the papers recently that consumer goods manufacturer Bidco is installing a 1MW solar plant at their Thika factory. Strathmore University campus also has a large-scale solar installation that feeds power to the grid, and I have heard that the UN complex is self-sufficient and feeds power to the grid on weekends for free.

But it’s not just solar that is taking customers off grid. Gorge Farm, a horticulture operation in Naivasha owned by Vegpro Group, has been in the news lately for commissioning Africa’s first biogas power plant that uses horticultural waste to generate both electricity and heat for the greenhouses, and a surplus that it puts to the grid. The Kenya Tea Development Agency (KTDA), the country’s largest manufacturer (yes, KTDA’s 60 plus tea processing plants make it by far Kenya’s largest manufacturer), is investing in mini hydro power plants to reduce its dependence on grid power.

POWER SUPPLIERS

Instead of being the captive buyers they’ve been in the past, large consumers of grid power are becoming power suppliers.

I drove by the Konza Technopolis site recently. It is still a field of dreams.

Two decades ago at the peak of its economic boom, Malaysia set its sights on becoming Asia’s information technology powerhouse. The government embarked on building Cyberjaya, a brand new technopolis envisaged as the heart of a Multimedia Super Corridor—the Palo Alto of Malaysia’s would be Silicon Valley. Today, Cyberjaya is an impressive mini city, and there is indeed a number of big technology companies located but Malaysia is nowhere near becoming the Silicon Valley of the East.

That crown went to an unheralded Bengaluru, better known as Bangalore. No one is sure how Bangalore became the Silicon Valley of India. Some attribute it to the presence of the Indian Institute of Science, the country’s premier scientific research centre, the Karnataka State government’s promotion of private tertiary education, the abundance of “bandwidth” due to the convergence of India’s three undersea fibre-optic cables there, mild climate, among other reasons.

INTERESTING TIDBIT

Whatever it is, it attracted Texas Instruments to set up shop there, founders of Infosys and Wipro to move their startups there in the mid-80s. Swanky infrastructure was not part of the pull. One of the interesting tidbits I came across while researching the subject, was a photograph of Texas Instrument’s equipment being loaded onto bullock carts. It’s not the only one. Bangalore was the first city in India to have electricity (in 1906), and the Bangalore Institute of Technology the first college to offer computer science as a separate branch of engineering. The long and short of it is the story of Bangalore is similar to that of Silicon Valley—organic development. It is not peculiar to technology hubs. It applies to all industry clusters. They cannot be contrived.

In 1946, as war-ravaged Britain is stoically surviving a crippling shortage of everything, Clement Atlee’s Labour government hit on the clever idea of alleviating the shortage of cooking oil by growing groundnuts in Tanganyika. A mission quickly dispatched there brought back a favourable report. A total of £25 million (Sh3.2 billion) was rustled up to cultivate groundnuts on 150,000 acres. After five years of battling “droughts, floods, beasts, vermin and natives”, the Groundnut Scheme was abandoned, having cost the British taxpayer the equivalent of US$2 billion (Sh258.2 billion) in today’s money.

MEGA FARM

The allure of mega farms in the tropics as solutions to food security persists, as evidenced by the frenzy of land acquisitions triggered by a global food price spike a few years ago. You can count on a few groundnut schemes in the making, and our own is looking like a prime candidate.

Food insecurity is seldom ever a production problem. Food security is defined as availability, accessibility, adequacy and acceptability of food. Each of these requirements is important for example, pork, beef and meat do not meet acceptability criteria for Muslims, Hindus and vegetarians respectively. We have two types of food insecurity in Kenya, chronic and episodic. What we are experiencing now is the episodic type but ordinary times, close to half of Kenyans are undernourished, and a quarter would not afford to meet the daily calorific requirements at all times. The vast majority of our food insecure are poor rural households, that is, food producers. Even now, we have not heard of urban poor being fed. In essence then, our food insecurity problem is a poverty problem.

The Galana-Kulalu project cost at Sh260 billion, which, at current exchange rates is in the original groundnut scheme ballpark. The number of chronically hungry Kenyan households is in the order of 2.5 million. The Galana-Kulalu project works out to Sh110,000 per household. Invested at the household and community level, that is more than enough money to get each and every one of this households out of food insecurity.

ALSO REPORTED

Tanzania has signed a deal to build a 200km railway between Dar es Salaam and Morogoro for US$1.2 billion (Sh124.3 billion). It has also been reported that the same consortium will build the first 400km phase of the new central line connecting Dar es Salaam to Rwanda and Burundi known as the DIKKM line.

The combined projects work out to 600km of rail for US$2.3 billion (Sh238.2 billion), less than half (43 per cent) of the cost of our standard gauge railway from Mombasa to Naivasha, which is about the same distance. However, the Dar-Morogoro line is more expensive as it is an electrified commuter rail with many stations, and built for a top speed of 160km per hour. The cost of the long haul DIKKM line works out to US$2.75 million (Sh284 million) per km, which is on the lower end of the global range of US$2.5 - 4 per km. At US$8 million (Sh828.6 million) per km, ours is way way out. Ethiopia’s electrified one cost US$4.6 million (Sh476.4 million) per km. At the Tanzania’s DIKKM line, the Mombasa-Nairobi line should have cost us US$1.5 billion (Sh155.4 billion), not US$4 billion (Sh414.3 billion).

CHINESE DEAL

Tanzania had signed a US$7.6 billion (Sh787.1 billion) Chinese deal to build the 2200 km DIKKM project. This still works out to a realistic US$3.45 million (Sh357.3 million) per km, but President John Magufuli thought it too expensive and went shopping. If the whole project is built at the quoted costs, it will cost US$6 billion (Sh621.4 billion) saving Tanzania US$1.5 billion (Sh155.4 billion). It is also noteworthy that the Dar es Salaam—Morogoro was tendered in September last year with a December deadline, the contract was awarded this month, and the project is to start in March. That is record time for a project of this magnitude. A year ago, this column opined that “whether by design or happenstance, Magufuli’s crusade is signalling zero corruption tolerance (and) investors can come to Tanzania with the confidence that when they encounter corruption and bureaucratic obstacles, the man at the helm can be relied on to deal with it”. It is paying off in spades.

For many Kenyans, the scale of the SGR scam did not hit home until the trains arrived. Seemingly, many people actually believed they would be whizzing across the country in the state of the art bullet trains depicted in Jubilee’s campaign images. Until they saw the vintage hand-me-down locomotives rolling off the ship, they would not let the facts that this was primarily an 80kph diesel locomotive freight railway get in the way of their imagination. The bubble now well and truly bust, it is worth revisiting the case against the SGR. My case against the SGR is built on three grounds.

BUSINESS ONE

First, the failure of the current railway line is not infrastructure failure, but rather a business failure, specifically, mismanagement of Kenya Railways, in part because of powerful people’s interests in trucking. This has not changed. We’ve seen the government decide to truck crude oil from Turkana to Mombasa, even though the “early oil” transportation proposal was made to them by Rift Valley Railways.

Second, the SGR is not a significant improvement in either capacity or cost. To start with, railway freight does not need to move quickly. Improving speed from 60kph to 80kph is inconsequential.

Third, it is not financially viable. There is no competitive tariff that a railway that has cost US$4b from Mombasa to Nairobi can charge to pay for itself. Using the trucking tariff of US$.085 per km/tonne, the debt service alone works out to equivalent of 7.5 million tonnes of freight per year, which roughly means that it would have to carry at least three times that, 22.5 million a year, to break even.

It has been my contention from the outset that Lamu port Southern Sudan Ethiopia Transport corridor could have been the priority for a new railway line, but even then, the railway should have run from Lamu to Thika and onwards to Nanyuki, as opposed to the northern route.

This is not to reinforce the marginalisation of northern Kenya—what northern Kenya needs is infrastructure connecting it to southern Kenya, not infrastructure passing through it going elsewhere. But as economics Nobel Laureate and New York Times columnist Paul Krugman once quipped, bad ideas are like cockroaches. No matter how often you flush them down the toilet, they keep coming back.

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@DavidNdii