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Free for all in E African construction frenzy [African Business]
[August 17, 2014]

Free for all in E African construction frenzy [African Business]

(African Business Via Acquire Media NewsEdge) There is a palpable sense of excitement in the East African economies of Kenya, Uganda and Tanzania as the three prepare to join the international club of oil and gas producing countries.

The exhilaration is centred on key infrastructure projects that will help actualise the dream.

In Kenya, it is all about the Sh2 trillion ($22bn) Lappset corridor with its port, rail, airport and oil refinery components. In Tanzania, it is the $1.23bn China-funded Mtwara gas-pipeline project which covers a distance of 542 km and includes a 150 megawatt power plant. In Uganda, it is the country's first oil refinery, a $2.5bn project that will produce 60,000 barrels a day, and for which the government has received detailed proposals from four international companies as at June.

A plethora of supporting projects surround these infrastructural icons, such as the crossborder $235m Arusha-Holili Highway, the $300m Dar es Saalam-Isaka railway funded by the World Bank, and the construction of a $10bn Bagamoyo port in Tanzania.

In Uganda, projects include a $255m North Eastern Road Corridor, and construction of hydropower projects in Karuma and Isimba.

In Kenya, phase 1 of the expansion and upgrading of Jomo Kenyatta International Airport (JKIA) is set to be completed in December. On completion of all renovations, JKIA will be able to handle 20m passengers a year. Together these projects have improved the international ranking of East African countries, and in a 2013 PricewaterhouseCoopers report, Tanzania was ranked among the top 10 African countries that offer enormous potential for strategic investors in the transportation and logistics industry.

The successful debut of Kenya's $2bn Eurobond in June has also heightened anticipation - more than half of the proceeds are dedicated to projects in energy, transport and agriculture sectors.

These include the expansion of power transmission lines, drilling of geothermal wells, dredging of the first four berths in Lamu, building a commuter rail in Nairobi and basic infrastructure at the 1m acre Galana/Kulalu irrigation scheme. The enthusiastic reception of Kenya's Eurobond has boosted the confidence of Tanzania, which is expected to issue its inaugural Eurobond in the next financial year.

Communal finance But while East African governments - in keeping with June budget promises to prioritise infrastructure development - are concentrating on projects in the energy and transport sectors, construction in commercial and residential real estate in East Africa is being driven by an entirely different source of money, particularly in Kenya.

The exorbitant interest rates being charged by commercial banks - in some cases more than double the Central Bank of Kenya's (CBK) benchmark rate of 8.5% - has encouraged Kenyans to turn to communal investment groups such as chamas and saccos.

A chama, (a Swahili word meaning 'group'), is an investment group into which members pay a certain amount of money every week or month, while a Sacco is a Savings and Credit Cooperative Organisation, often affiliated to a profession.

Both groups offer preferential terms on loans, including lower interest rates and amounts of up to three times savings.

The Kenya Association of Investment Groups estimates that one in three Kenyans is a member of a chama and that there are 300,000 groups in Kenya with an asset base of Sh300bn ($3.4bn). Their success has attracted the attention of commercial banks, deposittaking microfinances and credit unions - such as Chase Bank, K-Rep, Co-operative Bank, Barclays Bank, Kenya Commercial Bank and Bank of Africa - which have tried to woo them into the mainstream financial system.

However, high interest rates from commercial banks are being blamed for stifling Kenya's property market. In its April 2014 report, mortgage brokerage firm, The Mortgage Company, said only a fifth of Kenyans living in urban areas could afford to take a home loan of Sh1,000,000 ($11,000) and above.

Acknowledging this, the CBK in July announced a new loan pricing rule which would allow Kenyans to henceforth pay an interest rate of not more than 12% (instead of between 18% to 25%) on loans.

Often referred to as micro-savings groups, the chamas and Saccos have also been criticised for their inability to transition from savings to investments, but their activities in the last decade, particularly in the property and real estate sector, suggest they have matured as they take on key infrastructural projects in the region. Their involvement in the void left by formal financing models may partly account for the 8.2% increase in the value of residential plans approved in Nairobi County between January and April 2014.

Trans Century is a good example of the success of such micro-savings groups. It started as a chama in 1997, achieved total assets of $247m by 2011 and is now listed on the Nairobi Securities Exchange.

Regional investment group, Home Afrika also began as a chama and in 2013 made earnings of 7.4m. Even more encouraging is that Home Afrika planned to start building 200 homes worth $11.4m in Lagos, Nigeria, in June. This is an early indicator that the concept can profitably cross borders. A myriad of chamas and saccos share similar success stories. Kenya's Cretum Properties, for instance, has worked with over 50 Savings and Credit Cooperative Societies to facilitate individual construction projects within Mavoko Municipality, Thika, Kitengela and Nakuru. It now intends to approach the International Finance Corporation to finance construction of additional houses.

The chamas and Saccos are becoming bolder and some are looking to expand beyond their traditional territory in residential real estate. In early July, Kenyan investment group Fechim Investments said it would build a shopping mall in Ruiru, a town 45 kilometres away from Nairobi. It will be the first of its kind in Ruiru, and will complement other shopping centres cropping up around the Thika Superhighway.

Cement titans The construction projects being initiated by East Africa's private and public sectors have attracted local and international cement manufacturers.

Kenyan cement maker ARM is set to begin construction on a $300m factory in Kitui in October. The plant will be Kenya's biggest, and will produce 8,000 tonnes of cement per day.

ARM is also expanding its regional presence after commissioning a plant in Tanga, Tanzania to produce 1.2m tonnes of cement a year. It has also taken full control of Rwandese company, Kigali Cement, giving the regional cement manufacturer a stronger foothold in East Africa's fourth-largest economy. ARM's expansionist plans are being matched by Nigeria's business magnate Aliko Dangote, who intends to open a $400m plant in Kenya, expected to have a daily capacity of 5,500 tonnes.

International cement manufacturers have also been pulled into the mix. In July, Swissbased global building material and aggregates company, Holcim, said it would acquire control of local cement maker Bamburi Cement, further to the merger between Holcim and French Lafarge SA. Indian conglomerate Sanghi Group has said its cement manufacturing arm, Cemtech, will build a $136m cement factory in West Pokot County, and produce 24m bags annually.

In response to the flurry of activity in East Africa's infrastructure sector, international project managers such as US firm, Hill International, has selected Nairobi for its first office in sub-Saharan Africa. Hill International is listed on the New York Stock Exchange and manages mega construction projects in transport, energy, oil and gas, telecommunications and technology sectors.

Kenya's neighbours have also received their share of attention. Tanzania's construction sector, in particular, is of increasing interests to Turkish investors. Bilateral trade between the two countries has increased threefold over in last three years to $183bn in 2013.

While such an approach to infrastructure development may not have been what the African Union had in mind when it asked member states to embrace public private partnerships, it seems to be working well enough for East Africa's budding infrastructure base.

$22bn In Kenya, it is all about the Sh2 trillion ($22bn) Lappset corridor with its port, rail, airport and oil refinery components (c) 2014 IC Publications Provided by SyndiGate Media Inc. (

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