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Kenya: Financing and security concerns threaten to delay LAPSSET infrastructure projects

2015-09-10 Protection Group International Ltd Kenya: Financing and security concerns threaten to delay LAPSSET infrastructure projects

The agreement on the route for the Uganda-Kenya crude export pipeline in August was hoped to kick-start Kenya’s ambitious LAPSSET infrastructure corridor programme. However, long-running debates around financing, security and labour disputes have placed several projects in doubt. Delays will undermine oil development in Uganda and northwest Kenya, as well as efforts to improve regional trade integration.

The Lamu Port and Lamu-Southern Sudan-Ethiopia Transport Corridor (LAPSSET) is one of the Kenyan government’s flagship infrastructure programmes and forms a central tenet of the government’s Vision 2030 development plan. LAPSSET includes multiple capital intensive projects, including a 32-berth port, international airport and 981.5 MW thermal power plant in Lamu, as well as rail and highway links from the port to western Kenya and a pipeline to South Sudan and Uganda. Although there are doubts over whether all of these projects will be completed, even a select few could have transformative economic effects on Kenya’s poor northern region and the national economy, while spurring regional trade with the landlocked countries of Uganda, South Sudan and Ethiopia. Should the LAPSSET project be completed it is expected to increase annual growth by around 2 percent in Kenya.

The agreement on the pipeline route in particular is seen as vital to realising these ambitions. Kenya’s President Uhuru Kenyatta signed a memorandum of understanding with his Ugandan counterpart Yoweri Museveni on 10 August that stipulated the pipeline will run from Uganda’s oil fields in Lake Albert to Lamu via Kenya’s oil finds around the Lokichar Basin. The choice of the route has been the subject of intense debate for many years, with Uganda previously favouring a route that went to an existing deepwater port at Mombasa. Kampala said this route would be cheaper and at less risk of attack from Somalia’s al-Shabaab militant group. Kenyatta’s insistence on the northern route will ensure future pipeline access to the oil fields in the Lokichar Basin.

The agreement of the pipeline route is just a preliminary stage in the process, however, and may be subject to further delays. Negotiations between Kenya and Uganda over financing only began in Nairobi on 26 August and remain subject to dispute. The Kenyan government estimates the project will cost around USD 4 bn to complete, for which private foreign donors are expected to provide the majority of the funding. However, the governments may struggle to secure financing at a time when oil prices are low and there are no firm guarantees if and when oil fields in either country will be developed. Although upstream companies in both Kenya and Uganda have said they are committed to their discoveries, they have still not announced final investment decisions amid ongoing disputes with both governments over taxes. Chinese donors may also be reluctant to provide the capital at a time when a slowdown in the Chinese economy has raised questions over a number of infrastructure projects in Africa receiving assistance from Beijing.

Security concerns cast further doubt over financing for both the pipeline and other LAPSSET projects. Lamu County in particular has seen an upsurge in attacks since mid-2014 linked to al-Shabaab. A Kenyan faction loyal to al-Shabaab called Jeysh Ayman is now operating out of the Boni Forest wildlife reserve, according to Kenyan officials, and have carried out multiple attacks on poorly defended military and police installations and civilian targets, including an IED on 21 June that killed three Kenyan soldiers. The Kenyan military announced on 7 September it was assembling forces around Boni Forest to launch an offensive against the militants, but have had little success in such close proximity to the porous Somali border. The construction of such a prized asset within striking distance of al-Shabaab affiliated groups could place construction workers at risk of kidnap and attack, increasing security costs and raising the prospect of delays.

Industrial action presents a further obstacle to developments in the region. Many of the construction projects taking place in and around LAPSSET are led by Chinese companies that have encountered increasing numbers of labour disputes over conditions and employee contracting in Kenya in recent years. On 3 September it was reported workers of China Jiangxi International Kenya launched a strike at the Murunyi-Siyoi dam in Pikot due to poor working conditions. Earlier stoppages were reported at the same site in August, raising concerns over the lack of adherence by Chinese contractors to local labour laws. As more infrastructure projects get underway around LAPSSET over the next two years there is a serious risk of delays.

The interdependent nature of LAPSSET corridor projects mean that delays to the pipelines will have knock-on effects on other projects. The success of the port and airport are dependent on the construction of pipelines, road and rail links. Evidence of this has already been seen at the Lamu port project, where a USD 450 mn contract was awarded to China Communications Construction Co in 2013 to construct the first three of 32 berths, but progress has since been slow. Delays on such pivotal programmes will have far-reaching consequences, undermining plans to provide better cargo channels to landlocked countries in the region and to begin Ugandan oil exports. There will also be implications for the East African Community’s (EAC) regional integration initiatives and its efforts to introduce a single currency to East Africa by 2024. If regional governments are unable to secure financing for the crude pipeline, the pace of regional integration, as well as investor confidence in the wider LAPSSET initiative, will suffer.

 

Protection Group International Ltd

Kenya: Financing and security concerns threaten to delay LAPSSET infrastructure projects - Protection Group International Ltd
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