China and Africa’s Infrastructure Developments

Excerpts from a piece by Andrew Alli, the former Africa Finance Corp (AFC) CEO, in his debut column for Quartz Africa on separating myths and realities of the role of China in Africa’s infrastructure developments.

China firms funded, built and operate Kenya’s new railway.

  • China’s was the fourth largest foreign investor in Africa spending about $40 billion in 2016, according to UNCTAD’s World Investment 2018 report, behind the US ($57 billion), the UK ($55 billion), and France ($49 billion).
  • Construction contracts are backed by Chinese financial institutions—like China Export -Import Bank and Sinosure – looking to support the exports or sales of Chinese products and services. The mission of these financing entities is to support jobs and income generation in China, as well as to support more strategic objectives of the Chinese government.
  • Chinese companies are surprisingly risk-averse when it comes to Africa – most Chinese financiers will not consider a project without insurance from Sinosure, the Chinese government-owned political risk insurer, or other similar institutions. In turn, Sinosure often requires a guarantee from the government of the country in which the project is located. (e.g. – with Kenya’s Standard Gauge Railway construction, the contracts specify that there will be insurance cover of 6.93% of the commercial loan – done by a Chinese firm, SinoSure, to take care of nonpayment). Sinosure insurance and other financing costs do not come cheap, which leads to the point that Chinese firms are not necessarily cheaper than firms from other countries – and while the bare construction costs of certain projects may seem cheaper, even after equalizing for quality, there are other costs that may apply including the insurance and other financing costs mentioned before, and costs associated with local content. 
  • It is true Chinese firms prefer to use all-Chinese inputs. If you want local workers and contractors, you will have to make that a negotiating point.
  • While some work done by Chinese firms can indeed be shoddy,  this doesn’t have to be the case.  For example, while a Western firm may tell you a bridge will cost you, say, $300 million. A Chinese firm may tell you that you can have a $300 million bridge, or a $250 million one.- and things that may be taken for granted in other parts of the world can be negotiable when dealing with a Chinese firm. You have to be careful to specify the quality that you want and the standards that you would like the project to be built to. You also need to be very specific about the environmental and social standards you want the project to adhere to.
  • For too long the number of firms willing to engage in, and finance, projects in Africa has been very limited, meaning that competition has also been limited leading to high prices and a lack of innovation. The increase in interest by Chinese firms has increased the amount of competition, forcing prices down overall and improving quality. The bleating of companies being forced out of cozy monopolies is probably one cause of the constant refrain we hear about the “dangers” of Chinese interest in Africa. We shaved the costs of that project in Ghana by over 20% from initial quotes by running a competitive process involving a Chinese firm.
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Embraer Woos Africa

Fresh from the Farnborough air show, Embraer embarked on an African tour to showcase their planes in what they see as an under-served air market on the African continent.

The company flew an Embraer E190 E2 jet with a unique shark-nose look (nick-named “profit-hunter”) to Algiers (home of Air Algerie)  and Casablanca (Royal Air Maroc), then on to Accra and NairobiKenya Airways (KQ), which is the largest Embraer E-jet operator in Africa and also hosts one of the few approved E190 services centres in Africa, staged an event that featured local aviation officials, KQ customers and the Brazilian Ambassador to Kenya that ended with demonstration flight that over Mt. Kilimanjaro, Africa’s highest point. 

Embraer were keen to showcase the quiet-ness and efficiency of the E190 which they bill as the best single-aisle aircraft. They view Africa as an under-served aviation market in which 95% of flights have less than 150 passengers and 61% of routes have less than one flight per day, with many potential new routes being 4-5 hour flights, that are beyond the operational reach of propeller planes and with their E-jets as just the right size for African airlines. 

Kenya Airways has been flying Embraer’s since 2006. They stared with the smaller E170 and upgraded to the E190’s which now form a third of their lean fleet; they have 15 of them – 10 are owned, 5 on lease  – and they seat 12 passengers in business class and 84 in economy. But it is unlikely that Kenya Airways that is emerging from a long restructuring process will be buying any more planes soon, but other things are happening and at Farnborough, Embraer and KQ announced a new spare parts supply deal.

After Nairobi, the E2 jet flew on to Mauritius where Air Mauritius is tipped to be a potential customer and they planned to continue on to South Africa where Embraer has a training centre and a regional office for Middle-East and Africa.

EABL: Beer, Taxes, Innovations, Tanzania.

EABL released their financial results for their 2018 year to June this week. It was a tale of two halves with flat growth in the first half of the year which coincided with Kenya ’s prolonged electioneering period and which affected sales of its products such as Senator lager, an affordable beer brand.  But the second half of the year (January to June 2018) saw a more business-friendly environment and more money in consumers pockets.

EABL ended the year with 5% revenue growth to Kshs 73.5 billion and the star of the show for the company in 2017 was Tanzania which saw 41% growth, mainly driven by Serengeti Lite beer. Also, special innovations that contributed 22% to the results is one of the best performances in the world. At EABL, Tanzania’ grew to account for 11% of revenue while Kenya’s was 73%, and Uganda was at 16%.  Capital expenditure was Kshs 13 billion, up from the 5 billion the year before and Kshs 7.8 billion was due to the Kisumu plant which is expected to be opened later in 2018. While overall profit before tax for EABL was Kshs 11.7 billion, a decline of 12% from the year, the company will pay out the same Kshs 7.50 per share dividend to shareholders.

The EABL managers spoke of innovating to reach the 1 million consumers who attain the legal drinking age (18) every year in Kenya – and investment in existing brands, and rolling out new brands to win over changing customers tastes. They also made some excise tax savings in Uganda by moving some  Tusker and Guinness production there while in Kenya, EABL’s profit was weighed down by a Kshs 2 billion one-off provision for taxes that significantly reduced their final result. They said a stable tax environment would enable the company to generate more taxes for governments without causing consumers to pay more.  

Also that by doing more local production of beer and spirits at Ruaraka in Nairobi, at Tanzania, Uganda and soon at the new line at Kisumu has allowed them to bring global brands into countries and produce and offer them at local prices. In the 2019 financial year, they will commercialise the Kisumu brewery which will also benefit 15,000 farmers and generate over 100,000 direct and indirect jobs in the production and distribution chain of Senator beer from Kisumu.

Urban Inflation Index July 2018

The running urban inflation Index compares prices of common goods In Nairobi to what they cost one year ago, five years and ten years ago when the index started.
The  July 2018 index comes at a time when there are sensational headlines about quality and counterfeits that was triggered by the drought of 2017 and subsequent importation of foods including sugar late last year.

It has also tricked into crackdowns, indictments, arrests, and parallel investigations by the Police, tax authorities,  parliamentary committees and food safety regulators that has seen queries about tons of goods including sugar, fertilizer, animal feed, building materials, alcoholic spirits, (refilled) LPG gas, auto spares, and sports shoes among other common items – with confiscations at the Mombasa Port, airports like Eldoret and bazaars and shops in Nairobi which have resulted in some demonstrations by business traders.

On to the index.

More expensive

Staple Food: A 2 Kg pack of Unga is Kshs 98 today. Last year, it was at a government-subsidized price of Kshs 90. In 2013 it was 104, and ten years ago, an Unga pack was Kshs 73.

Beer/Entertainment: A bottle of Tusker beer is Kshs 230 at the local pub. Five years ago a beer was 200, and ten years ago a beer was Kshs 130. Just a few months ago, during a tour of Kenya Breweries, the managers said that, based on the recommended retail price of Kshs 140 for a bottle of Tusker, Kshs 84 was tax, Kshs 23 goes to the distribution chain and just Kshs 33 was for them as a company to produce the beer at profit and to pay its shareholders.

Domestic electricity pricing over ten years of the inflation index.

Electricity: A chart of domestic prepaid electricity purchases shows that electricity was at its lowest in May 2015, and its highest in July 2015 and now in July 2018. One observation is that pre-paid power purchases no longer fluctuate. At the beginning of the month, one used to get 40 or even 50 units for Kshs 500 ($5), but now that amount only realizes 22 units and the pre-paid meters issue a (low-token )beep warning the whole month – and power tokens seems to exhaust a lot faster (because the units are less initially)

Other Food Item: Mumias, which used to be part of the index, was Kenya’s sugar industry bellwether – a diversified company that also produced ethanol and electricity and whose shares were once offered to the new investors at Kshs 49 per share. but which now trades at less than a shilling (Kshs 0.70) today. But Mumias now has no stocks on supermarket shelves as production was halted due to a lack of cane and long pending bills owed to farmers. A  2 kg pack of Mara, a competing sugar brand, is Kshs 298. A year ago, a bag of Chemelil sugar was 290, and five years ago Mumias sugar was 250, while ten years ago, a Mumias pack cost Kshs 145.

About the same

Fuel: Earlier this month, the ERC raised the price of petrol by 3 shillings – so in Nairobi a litre of petrol now costs Kshs 112.2 (approximately $5 per gallon). Last year a litre of petrol was Kshs 97.1, five years ago it was Kshs 109.52, and ten years ago it was Kshs 101.50 per litre. But from September 1 2018, Value Added Tax (VAT) which is 16% is expected to be added back to the cost of fuel.

Finance: Bank loans are 14.%, and have remained so ever since the introduction of interest capping in 2016. But the law is set to be adjusted this year by the government, in spite of opposition from parliamentarians who had passed the cap law. Also, average bank rates were 17% in July 2013.

Communication: Not much has changed in terms of phone rates over the last few years. At Safaricom which had (March) 2018 revenue of Kshs 224 billion, 40% of that was from voice, 28% from payments (such as M-Pesa), and 16% from data while SMS accounted for 8% of revenue. The cost of making mobile payments went up slightly in this year’s budget with a tweak in the excise tax on money transfers, and a charge on large bank transfers that has since been temporarily suspended by a Court.

Foreign Exchange: 1 US $ equals Kshs 100,75, while a year ago it was Kshs. 103.9. Five years ago it was 87.15 and ten years ago the dollar exchanged at Kshs 67.4. Also ten years ago the Euro was at 101, the Rand 8.9 and the Sterling Pound 125, while today the Euro is at Kshs 117, the Rand at Kshs 7.4 and the Pound at Kshs 133.

Other Energy Source: An LPG gas cylinder at Kenol is Kshs 2,250 this month. A year ago (in March) it was 2,030 and six years ago (2012) it was 3,000.

Less Expensive

Nothing really

Share this inflation index if you agree with the perceptions about what has become more or less expensive over the years.

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