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LAPSSET Transport Corridor: Transit and Oil Infrastructure in East Africa

Comprehensive Information on Complex Issues

September 2013 Even Kvelland Assistant Desk Officer cfcpublications@cimicweb.org

Foard Copeland Desk Officer foard.copeland@cimicweb.org

This report addresses a multinational infrastructure project devised by the governments of Kenya, Ethiopia and South Sudan. The project, the Lamu Port and South Sudan-Ethiopia Transport Corridor (LAPSSET), will connect eastern Kenya with an oil pipeline and transportation corridor that stretches to Juba and Addis Ababa. Master plans include the construction of three resort cities, a new harbour, railway lines, highways and an oil refinery. This report examines major project components and addresses the pipelines economic and geostrategic significance. Related information is available at www.cimicweb.org. Hyperlinks to source material are highlighted in blue and underlined in the text.
Introduction Ethiopia, Kenya, and South Sudan hope to lead east African modernisation with an ambitious oil and transport project that will transform maritime trade and land routes, opening the region to extensive trade and interstate commerce opportunities. The Lamu Port and South Sudan-Ethiopia Transport Corridor (LAPSSET) encompasses sweeping infrastructure enhancements across the three countries and future plans show expansion into Uganda, Democratic Republic of the Congo and even as far as Cameroon. The project will include the construction of a 32-berth deep-water mega port in Lamus Manda Bay on Kenyas northeastern coastline; a railway line to South Sudan and Ethiopia; oil pipelines connecting the countries; three airports; and three resort cities in Isiolo, Lamu and on Lake Turkana. Projected cost s have fluctuated between USD 23 and 30 billion. The UN Commission on Trade and Development (UNCTAD) reports the flagship project is expected to transform regional economies through increased trade, integration and interconnectivity spanning South Sudan and Ethiopia with a first time land bridge across the middle of Africa from Lamu, all the way to Doula, Cameroon on the coast of the Atlantic Ocean. Background Poor infrastructure and underdeveloped transit logistics have long impeded trade relations and economic growth in east Africa. To mitigate the effects of limited infrastructure on business and development, cooperative economic agreements have been negotiated in the previous two decades throughout the region. For example, the East African Community (EAC) abolished tariff and non-tariff barriers in 2004 with a Customs Union Protocol. Since 2010, the European Union (EU) has courted the East African Business Council (EABC) and the EAC to sign onto a free trade Economic Partnership Agreement (EPA). In 2013, the EAC moved closer to finalising the arrangement, citing the need to negotiate as a single block for maximum gains. According to EU officials, the deal would liberalise taxes paid on export goods and likely increase trade volumes. Despite these landmark multilateral economic agreements, a report by the African Development Fund points out that such regional c ooperation will have only limited impacts on economic competitiveness and modernisation without substantial improvements to transport infrastructure. Mombasa, located on Kenyas southeastern coastline is home to one of the most congested ports in Africa. It exports approximately 22 million tonnes per year. However, its capacity is limited. Even as port managers sought to increase trade volumes by 24 per cent in 2012, the harbour has been outpaced by demand for years. Additionally, the transaction costs are exorbitant. New rail lines are needed to expedite deliveries and decrease the cost of transporting cargo supplies throughout the regions over-burdened and out-dated railway system. According to Global Post, it costs less to ship
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cargo from Tokyo to Mombasa than it does to transport the same cargo from Mombasa to Kampala, the nearby capital of Uganda and a major trading partner with Kenya. Both South Sudan and Ethiopia are landlocked, and port access through Kenya would be more propitious than the countries current trading routes through Sudan and Djibouti, notes BBC. All three countries would see economic growth from the project, an increasing necessity for impoverished Ethiopia and South Sudan. Ethiopia ranked 173 out of 187 countries appearing in the 2013 Human Development Index (HDI 1) and South Sudan did not appear at all. Kenya, long the emerging east African economic power, would increase its stature if the LAPSSET project succeeds in opening the region to economic prosperity. Indeed, LAPSSET is a centrepiece of Kenyas Vision 2030 , a strategy with the primary goal of lifting Kenya to the status of a Middle Income Country (MIC) by 2030. Despite the opportunities for success, critics cite concerns. First, the size and scope of the project is immense and detractors have repeatedly questioned the feasibility of the 20 to 30 year project. Second, although Kenya is increasingly attractive to foreign investors, financing for the USD 30 billion project has not been secured. Third, the Lamu Port, a keystone of the originators vision for LAPSSET, sits on a World Heritage Site 2 and contains a small but increasingly vocal population that might not be willing to relocate. Preservationists and environmentalists worry that cultural heritage and environmental destruction will accompany construction. Additionally, the possibility of relocating indigenous communities creates poor public relations and is an issue that has not been resolved. Many critics of the project, including international human rights lawyers and activists, admonish that forced, illegal relocation could result from land dispossession if the process is not properly managed and due compensation is not provided for property and land tenures. Finally, extractive industries could exploit millions of communities by disrupting social norms, altering ecosystems, and commandeering natural resources. LAPSSET-Infrastructure Plans The LAPSSET project was officially launched on 02 March 2012 with the participation of President Mwai Kibaki of Kenya, President Salva Kiir of South Sudan and late Ethiopian Prime Minister Meles Zenawi. Kenya steered the direction as most of the construction plans rely first and foremost on the new Indian Ocean port at Lamu, with Ethiopia and South Sudan playing an integral supporting role. By the time the heads of state met for the project launch, the estimated budget had risen from an initial USD 23 billion to USD 29.24 billion. One year later, on 01 April 2013, Kenya established the LAPSSET Development Authority (LDA), an autonomous agency, to manage implementation of the various project components, most of which have multi-year time frames and multi-billion dollar price tags. Headquartered in Nairobi, the LDA has, or will periodically maintain, field offices in Lamu, Isiolo, Lokichoggio, Marsabit and Moyale. President Kibaki appointed a chairman and an 11-member board, consisting of five government and five private sector representatives, plus a director-general responsible for the project and answerable to the board. Silvester Kasuku, former Infrastructure Secretary, currently serves as chief executive officer of the LDA. The peak construction period of the project was slated to occur between 2013 and 2018. However, the project has been
1

The Economist

The HDI is a tool developed by the UN to rank the livelihoods of citizens and the development of countries based on three primary criteria: life expectancy, education, and gross national income. 2 World Heritage Sites are designated by the United Nations Educational, Scientific and Cultural Organization (UNESCO) to possess or exhibit outstanding universal value. UNESCO has identified and catalogued 981 properties to date. Only seven UN member states have declined to ratify the Convention.

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beset by delays. Construction of the Lamu Port, oil refinery and standard gauge railway are behind schedule. The oil refinery was originally slated to produce 120,000 barrels per day by 2015, but construction has yet to commence. In February 2013, The Star reported that South Sudan will consider Djiboutis port an alternate export facility if the project fails to progress. Additional pressure from South Sudan hastened work on the Lamu Port, slated to house 32 berths, according to The East African. The Kenyan government has contracted with a Chinese corporation to begin work on the ports initial three berths. Delays in the Lamu Port construction have secondary effects that will cause setbacks in the construction of additional LAPSSET components. According to UNCTAD, Kenya depends on the operational capacity of additional port space to import materials necessary to initiate other components of the LAPSSET project. In total, Kenyas Vision 2030 foresees completion of the following LAPSSET components: Construction of Lamu mega-port: 6km of berthing expansion to include 32 berths 1,710km of railway lines 2,240km of pipelines 880km of highways Construction of oil refinery Construction of 3 resort cities (Lamu, Isiolo, Lake Turkana) Construction of 3 airports (Lamu, Isiolo, Lokichoggio)

Long-term goals for the project predict the delivery of dry cargo through Lamu to exceed that of Mombasa at 23.9 million tonnes per annum by 2030, if not sooner. Similarly, railway transport will increase to import 3 million tonnes and export 4.7 million tonnes by 2020. In 2030, the figures should increase to 5.1 million tonnes of imports and 9.3 million tonnes of exports, according to an estimate provided by Japan Port Consultants Ltd., a firm hired to perform a LAPSSET feasibility study. Despite the speculation over a trans-continental connection to the Atlantic Ocean, current construction plans are restricted to Kenya, Ethiopia and South Sudan. Cost and Finance Structure Kenya served as the leading organiser among LAPSSET countries, arranging a syndicated financing3 scheme with World Bank worth USD one billion, according to Africa Review. Public-private partnerships (PPPs) will forge the backbone of anticipated funding. Kenya will also invest approximately six per cent of its annual Gross Domestic Product (GDP) during the first five or more years of development, a figure that is then expected to decrease to between three and four per cent of annual GDP. Kenyas legislature passed a law in 2012 designed to attract more PPPs to the country by improving transparency regarding its handling of contracts. Parliamentarians believe it will boost confidence among investors, according to Business Daily. Kenyas Treasury says the country needs to spend USD 60 billion between 2013 and 2021 to deliver on LAPSSET goals. As of March 2013, only USD 25 billion had been budgeted for the project and far less had been secured by investors or donors. According to Tristan Coloma of Le Monde Diplomatique, China has offered low-cost loans to finance the deep-water port and kick-start construction. Furthermore, some foreign government agencies and international development banks are weighing options to invest in the infrastructure. The highway linking Juba to Eldorat in western Kenya is particularly dilapidated, according to Africa Review. Overuse by humanitarian agencies delivering emergency supplies from Mombasa to South Sudan and inconsistent repairs have contributed to the roads state of disrepair. The journal suggests that development agencies have targeted this component of LAPSSET as especially useful to donors, which could help secure funding from donor governments who may characterise LAPSSET a humanitarian or development project. Additionally, the United States Agency for International Development (USAID) has promoted locally-led initiatives that would capitalise on trade opportunities that accompany a new road, and there is speculation among consulting firms like African Building that the Development Bank of Southern Africa (DSBA) or the AfDB could provide further support to the development of infrastructure. Finally, there is the prospect that more regional partners could sign on to the project and pool capital. In June 2013, Uganda announced a second round of talks with Juba after initial attempts to establish a connection to the Lamu transport corridor failed. Uganda envisions a connection to the refinery it is currently constructing in Hoima, but fundA syndicated loan pools a group of lenders. It is structured and administered by a commercial or investment bank known as an arranger. By providing capital, a pool of investors allow for the full recapitalization of
3

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ing for the construction of a transport corridor that includes Uganda has not been finalised. Many outsiders doubt that it will, pointing to the difficulty the current three partnering countries have faced when trying to accomplish LAPSSET goals inside designated timelines, and noting that incorporating a fourth country poses even further challenges. Key Components of LAPSSET Infrastructure Lamu Port Kenyas Mombasa port ranks among the most congested in the world. In June 2013, the World Bank warned Kenya that it was losing millions of US dollars in revenue due to the congestion. According to The East African, the crowded port, which has seen traffic increases of 7.4 per cent per annum since 2000, hampers economic growth of the entire EAC bloc. Originally designed to manage 250,000 container units (TEUs) per year, it imported 695,000 TEUs in 2010, according to Today Financial News. As a result, the port maintains a constant backlog and productivity is low even as operation costs rise. The congestion restricts the ability of port operators to off-load cargo, incurring expensive demurrage penalties. As made clear by Wolfgang Fengler, the World Banks Lead Economist in Nairobi, Kenya needs to dra stically expand its port access in order to modernise its economy, and construction of a port on the Lamu Archipelago remains a centrepiece of the greater LAPSSET vision. Kenya decided on port construction at Lamu, rather than at an alternate location or performing renovations to the Mombasa port, for several reasons. Overreliance on Mombasa burdens the capacity of that port to manage international cargo. The roads extending from Mombasa to Nairobi are also in disrepair due to overuse. A road in the north connects the country to neighbours and also allows Nairobi to exploit the vast resources of northern Kenya. Additionally, the Mombasa port was deepened to 15 metres in 2011 and subsequently dredged in 2012, according to the Kenya Ports Authority. However, the expansions were a stopgap measure rather than an alternative to opening another port along its northeastern coastline. The question that remains unanswered is what will be Lamu ports total capacity. The master plan calls for a 32-berth facility, but to date, financing for construction has been limited to just three berths. In April 2013, Reuters reported that a Chinese firm, China Communications Construction Company, won a bid to construct the first three berths at Lamu port. The contract is worth almost USD 500 million and completion is expected in 2016. The master plan calls for an expansion to 32 berths but tenders for the remaining bids have yet to be released. According to UNCTAD, the ability of Kenya to import additional materials, required to initiate future components of the LAPSSET project, are largely dependent on the operational capacity of additional port space. Total costs of a 32berth port are estimated at USD 5.3 billion. CEO Kasuku hopes the three initial berths will spur private investors to spearhead the other 29 berths. By breaking ground on the port, the government intends to demonstrate its commitment to the project, despite concerns from environmental and human rights groups about the projects impact. Oil Exploration, Production and Transport The LAPSSET oil pipeline plans originally coincided with a rapidly expanding energy market in east Africa, primarily South Sudan, with the intention of refining and transporting newly discovered petroleum from Ethiopia, Kenya, and South Sudan to Lamu Port for export. Recent revelations about additional reserves are changing initial projections. Until 2012, no significant petroleum discoveries had been made in Kenya, but the British Tullow Oil firm discovered deposits in Kenyas northwest Turkana region in late 2012 and early 2013. Tullow estimates the newly discovered fields could produce over 250 million barrels. More recently, the firm announced hydrocarbons were present in the region. The findings are quickly altering the energy sector in east Africa, according to Business Daily. In July 2013, Kenya added mining and petroleum as a pillar to its Vision 2030 strategy for emerging as a middle-income economy. Still, the deposits discovered by Tullow Oil are not yet commercially viable. The oil company and its subcontractors who would assist with extraction await additional infrastructure development before expanding. The largely rural, pastoralist Turkana region would depend entirely on the LAPSSET corridor to export oil from the deposits as no such infrastructure currently exists. Officials estimate that it could take years before infrastructure is in place to enable international export of Turkana crude. Since 2012, local civil society organisations have raised awareness of threats posed by extractive industries in Angola and the Democratic Republic of the Congo, where conflict and resource exploitation accompanied the discovery of resource wealth. They hope these warning will benefit local Turkana populations and prevent similar abuses from occurring in Kenya. While a final blueprint remains elusive, the proposed pipeline will almost certainly span from Lamu Port to Isiolo, an Eastern Province town 275 km northeast of Nairobi. From Isiolo, a westbound pipe will extend through the Turkana
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region to Juba. A northern pipeline will deliver oil through Marsabit and Moyale in northern Kenya, linking the South Omo Block and Rift Valley Study Block in Ethiopia to the LAPSSET pipeline. Ethiopian oil is in a similarly initial phase of development. International companies are currently exploring the oil reserves located in southern Ethiopias Rift Valley. The size of the reserves is unclear, but Times Oman noted that the Kenya-Ethiopian Tertiary Rift could be compared to the North Seas deposits of around 10 billion barrels. A total of nine companies are investing USD 2.4 billion in surveying the country for oil, according to Tigrai Online. However, Ethiopian Prime Minister Hailemariam Desalegn urged the country not to get excited, but wait for further analysis. The Times Oman reported the Tertiary Rift yielded only 11 wells to date, compared to the 2,400 wells in the North Sea. Nevertheless, Tullow Oil estimates that it will produce at least 140 million barrels of oil. Meanwhile, Nomura Holdings Inc., a Japanese conglomerate, suggests the entire Tertiary Rift region, which spans across Ethiopia, Kenya and Uganda, could produce as many as 10 billion barrels. Of the countries involved, South Sudan would likely benefit most from the pipeline. After several decades of internal strife and conflict with the government of Khartoum, South Sudan possesses few natural resources and ranks amongst the least developed countries in the world. Prospects for oil were considered a primary factor for economic success when the country gained independence in July 2011. According to Jason Hickel of the London School of Economics, at the time of South Sudans independence, Sudan exported 500,000 barrels per day (bpd), of which 75 per cent was extracted from the new South Sudan state. Disagreement over oil transit fees erupted shortly after independence when Khartoum sought a fee more than thirty times greater than international standards. The contentious relationship over transit fees led to a temporary shutdown of the oil production in December 2011. The LAPSSET pipeline, expected to allow for transport of 700,000 bpd through Kenyas Lamu port, will end South Sudans reliance on Sudan for oil transit. Upon resuming production after the temporary shutdown, the South Sudanese output was approximately 160,000 bpd in April of 2013, less than 40 per cent of projected output. However the countrys petroleum minister, Stephen Dhieu Dau, announced in July that Juba would reduce its production by almost half amid fears that Sudan would either halt South Sudanese trade or continue to levy extortionist fees. South Sudan ranks amongst the top 25 countries with the highest proven oil reserves, with an estimated seven billion barrels.

BBC

A major challenge for the east African countries is the collective bargaining needed to reach an agreement on regional infrastructure projects. While Kenya has long demonstrated its commitment to LAPSSET, the same cannot be said for its neighbours, according to The Economist. Ethiopia and South Sudan, dismayed with delays, continue to hint at the idea of building an alternate pipeline from the oil fields of South Sudan through southern Ethiopia to the port in Djibouti. Uganda, which has occasionally expressed interest in linking to the LAPSSET pipe, is considering two other options, one through Kenya and another through Tanzania. In addition to disputes over pipelines, the countries have competing blueprints for their own refineries. A 2011 study initially recommended a refinery at Lamu capable of 120,000 bpd. South Sudan already has two refineries underway through partnerships with Russian and US companies. Ethiopia intends to build a 100,000 bpd refinery on the border with South Sudan. Uganda, in its infant stages of oil development, is looking to design its own refineries. However, a May 2013 assessment by The Economist recommends that east African states are better served to export crude oil to existing Asian refineries. As the report states, Building refineries makes no sense for east Africa. It would be wasteful and is unlikely to give countries the energy security they seek, as some of the fields will run dry quite soon. The economies of scale in refining are vast. Much appears to revolve around national pride, but greater regional cooperation will produce the most financially lucrative models for exploiting petroleum resources.
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Transportation Corridor Rail The China Road and Bridge Company (CRBC), an international arm of the same company that won the Lamu Port contract, signed a USD 2.66 billion deal with the government of Kenya in 2012. According to Reuters, the contract will include a 479 km standard gauge railway line between Mombasa and Nairobi. A stretch of rail lines between the two cities currently exists, but was constructed in the 20 th century and requires major upgrades. Additionally, the EAC agreed to a 10-year project that should complete most, if not all, of the railway laid out in Kenyas Vision 2030. A ccording to Standard Media, the Isiolo-Nairobi railway will be completed at an estimated cost of USD 4.4 billion with funding from the Indian Trust Fund of the AfDB and the New Partnership for African Development (NEPAD). Additionally, the AfDB agreed to fund segments of the Kenya-Uganda railway, which require significant repairs. According to the Kenya Railways Corporation, the project will consist of a minimum of three railway sections: Lamu Isiolo Nakdok: 1250km planned to extend into Juba, South Sudan Nairobi Isiolo Moyale: 700km planned to extend to Addis Ababa, Ethiopia Mombasa Malaba, Uganda: 1300km planned to extend to Kampala, Uganda

Initial plans called for completion of the railway, a three-year project, by 2016. However, discussions to postpone the South Sudan Isiolo section were underway as early as 2011, and it seems unlikely this segment will be completed by 2016. In July 2013, Capital FM reported that railway construction could be finalised in January 2018. Transportation Corridor Road The African Development Bank (AfDB) agreed in May 2012 to pay USD 12 million to complete an 800km portion of the road project between Lokichoggio, Ethiopia and Lamu, Kenya. According to Sudan Tribune, construction should take 18 months, to be finalised in early 2014. Initial plans for all LAPSSET road construction set a target deadline of five years, but delays were expected in the face of a shortage of investors, materials and extant infrastructure. According to the government of Kenya, road construction is on schedule; however, a third party assessment was not available at the time of publication. Sudan Tribune maintains the AfDB will likely support additional road projects in the EAC, including a link between Kampala, Uganda and Nairobi, Kenya. In total, the Kenya Sudan roadmap will connect the following cities: Lamu Garissa (250km) Garissa Isiolo (280km) Isiolo Maralal (156km) Isiolo Lokichar Nadapal (570km)

BBC

Additionally, the Kenya Ethiopia link road will connect Isiolo and Moyale at a distance of 470km. The length of highway construction under the LAPSSET umbrella should eventually total 1,730km. The Ethiopian government also hopes a budding interest from tourists in the countrys southwest could see a boost in revenue from the LAPSSET corridor. Perhaps a less obvious destination for tourists than Kenya, territory in North and South Omo, as well as the greater Oromia region include verdant landscapes ideal for ecotourism. For example, Finchawa, where subsistence farmers struggle to grow crops, opportunities abound to attract tourists to the largely untouched swathes of wilderness. The Konso Cultural Landscape was recently designated a World Heritage Site. Despite the potential for economic growth, critics have suggested that tourism could be detrimental for local governments and economies. For instance, the International Land Coalition points out that Turkanas indigenous population could suffer from the Lamu Ports transit infrastructure. The tourism industry could create tertiary problems associated with conflicts
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due to the resettlement of populations, loss of resources and economic marginalisation. This is particularly salient amongst pastoralist populations and subsistence farmers where tourism alters material conditions, challenges traditional values and introduces social, economic and political exchanges that undoubtedly transform communities. Economic Impact Economic growth for Africa During the course of construction, the project will create significant economic opportunities across the African continent, even before maximum trade capacity is achieved with the completion of the transit corridor. In May 2013, Kasuku told Global Post, We are talking employment creation, investment, growing the economy. It is going to help us to tap resources, introduce high-value new investments, new technologies and new ways of doing things. The economic stimulus comes at a time when national economies on the continent have been booming and transforming themselves into markets that are more lucrative and transparent for investors. In 2013, the AfDB reported that Africas collective economy makes it the fastest growing continent in the world. The banks report states that both the cost and delays of starting a business have been significantly reduced in recent years. Consequently, the number of people living below the poverty line fell from 51 per cent in 2005 to 39 per cent in 2012. An estimated 350 million Africans are now characterised as middle class, a demographic that is rapidly growing. A collateral benefit of LAPSSET is the impetus for participating east African countries to build a stronger domestic labour capacity to support the monolithic projects various construction components. This essential increase in domestic labour capacity should reduce unemployment rates and, thus, reduce poverty levels. Additionally, foreign investment in Africa increased five-fold since 2000. While most SubSaharan African countries are categorised as low-income countries, many, like Kenya, aspire to reach the World Banks list of middle-income countries. Africas strong growth has been well -received globally. The Economist, labelled it a hopeful continent and the World Trade Organization dubbed it the continent of the century. Infrastructure on the continent is rapidly improving due to ambitious projects initiated by national governments and international investors. For example, Ethiopia, in addition to its commitment to the LAPSSET project, is constructing a new mega-dam to secure power for the countrys expanding population. Named the Grand Ethiopian Renaissance Dam, it will be the largest hydroelectric dam in Africa. Once completed, the dam will generate 6,000 MW for Ethiopia with additional output to neighbouring countries such as Kenya and Sudan. Other African projects include developments in the petroleum and liquefied natural gas (LNG) structures in the Gulf of Guinea, and in the waters off the coasts of Angola and Tanzania. Also, the ambitious O3b Network, a telecommunications company, is seeking to combine fibre optics with satellite coverage. According to the companys mission statement, O3b aims to deliver internet connectivity to the other 3 billon [people] without access. Regional Cooperation East Africa has a long history of regional cooperation resulting in mixed outcomes. Kenya, Ethiopia, and Sudan played integral roles in establishing regional bodies such as the Intergovernmental Authority on Development (IGAD), the Common Market for Eastern and Southern Africa (COMESA), and the EAC, all of which aim to improve interregional trade by lowering tariffs and creating free trade zones. African regional trade bodies have demonstrated measured success in the last two decades, but a dearth of infrastructure remains a barrier to further economic growth, according to the AfDB. LAPSSET introduces a project-based cooperation model rather than a fluid trade agreement. One objective is for regional partners to cooperate in increasing their technical capabilities and creating specialised labour. The Kenya Maritime Authority has already begun training highly skilled port handlers in anticipation of the increase in port capacity. An additional 1,000 youth were re-skilled to boost productivity of the mega project in Lamu. The model of using transformative infrastructure development as a
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means of increasing socio-economic growth has been successful in countries like India, Singapore, and Malaysia. Yet, despite the desire for regional harmonisation with regard to the project, there have been severe delays that increased tensions between the three countries, reports Diplomat East Africa. The most significant tension arises from the South Sudanese need to export oil via a neighbouring countrys port. In August 2013, Africa Review reported that officials in Juba were considering ports other than Lamu due to construction delays. Although it produces 300,000 bpd, South Sudan faces sporadic challenges and shutdowns in its trade arrangements with Sudan. The South Sudanese government is now investigating whether reliance on the Port of Djibouti, and construction of a USD 3 billion pipeline to Djibouti city, will be less expensive than utilisation of the Lamu port. The geopolitical significance of LAPSSET to the landlocked countries of Ethiopia and South Sudan is critical. Both states are on poor terms with their respective neighbours to the north. South Sudan remains perennially cash-strapped due to difficulties exporting its oil through its Sudanese neighbour. South Sudan won its independence in 2011 after years of conflict with Sudan. However, independence meant that the country, whose economy is 98 per cent based on petroleum, must negotiate port access with Sudan to export commodities. Much of the original conflict between Sudan and South Sudan was rooted in oil issues. Even post-secession, the countries struggled to agree on oil transit fees, the use of Sudans refinery and shared pipelines. When the government of South Sudan in 2012 decided to shut down its oil production, an already fragile economy was dealt a hard blow. Ethiopia, also landlocked, needs an alternative port to the expensive Port of Djibouti. It lost access to a port, and its coastline, when Eritrea gained its independence in 1991 4. Tensions between Ethiopia and Eritrea remain high, and Ethiopia has largely relied on port access through Djibouti. Experts hope the LAPSSET pipeline and refinery will reduce political tensions between the two countries and alleviate pressures faced by Ethiopia to rely on Djibouti as its sole avenue for export. Beyond smoothing geopolitical relations, the new Lamu port will benefit Ethiopia and South Sudan in other aspects. Ethiopia, with a rapidly growing economy, will have access to two ports to handle its increasing transportation demand. With recent discoveries of oil in southern and south-eastern parts of Ethiopia, the country will also be able to utilise the LAPSSET oil pipeline. South Sudan is yet to experience the same economic growth as its neighbours. However, the pipeline with the proposed refinery in Lamu will solve many challenges for President Salva Kiir, including increased revenue and regional political stability. An alternative port should mitigate tensions between Juba and Khartoum over transit fees for transport of the oil to the Port of Sudan on the Red Sea. This will potentially reduce tensions with Sudan and foster South Sudanese prosperity as an independent state. Stimulating rural economies In addition to funding the actual infrastructure, government, non-government and private sector actors are supporting a range of initiatives enabling LAPSSET infrastructure to spur rural economies. Particularly, the new transit routes should increase trade for rural populations living contiguous to the new transport routes and drastically improve trans-border trade relations. Kenyas Ministry of Transportation says the new lines will also reduce transaction costs, improve agriculture output and even encourage tourism. According to the Black Rhino Group consultancy, the project will spur growth in the agricultural sector of all three countries by improving agricultural efficiency. For example, farmers will spend more time in their fields because improved roads and railway will reduce transport times. Lower input costs borne by farmers will allow them to invest capital in machinery that further increases productivity over time. Trading and stocking systems will become more reliable, providing farmers with greater access to loans and microfinance institutions. Ethiopia is one of east Africas most poverty-stricken countries and has a rapidly growing young population. According to the countrys Red Cross Society, its youth (ages 15-29) accounts for nearly 30 per cent of the total population, which is growing at 2.6 per cent per year. Unemployment rates are high and difficult to address because 84 per cent of Ethiopians live in rural areas. To this end, Ethiopia seeks to increase sugarcane production in the countrys south. According to the International Fund for Agricultural Development (IFAD), sugarcane could revitalise rural regions of the country plagued by under-employment and poverty. Additionally, the region faces food insecurity on a recurring basis due to vulnerable climate conditions. An economic stimulus could provide subsistence farmers with income to purchase staples during dry seasons when food is scarce. Similarly, South Sudan realises the need to curb rural poverty. Half of the coun4

De facto independence gained in 1991, marking the end of the struggle for independence, but it was not until 1993 that Eritrea held its referendum for independence. September 2013 Page 8

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try lives below the international poverty line, the majority in a rural region. A 2011 government strategy paper outlined the importance of improving transportation infrastructure to facilitate growth and lift target populations out of lowincome conditions. According to the Poverty Assessment Southern Sudan, Essential infrastructure, such astransport and communications, is fundamental to poverty reduction as it contributes to a higher quality of life and promotes economic activity and increased incomes. USAID and the Grow Africa Investment Forum have been particularly active in supporting agriculture and livestock growth along the corridor. For instance, USAID, with the support of regional and international donor agencies, established the North Eastern Province Pastoral Development Programme (NEPDP), a multi-year project designed to increase the incomes of east African pastoralists. NEPDP initiated livestock investment opportunity for the Isiolo region in northeastern Kenya. Thirty per cent of Kenyas beef consumption is der ived from illegally imported cattle. As the countrys beef consumption grows an average of four per cent annually, pastoralists who historically provided Kenya with over ninety per cent of its beef cannot keep pace with projected demand. Therefore Kenyas Agricultural Sector Coordination Unit (ASCU) has incentivised outside commercial investors who can raise cattle and process beef more efficiently to enter the market. According to ASCU, earnings could exceed 13 per cent once the target goal of 16,000 heads of cattle raised for consumption is achieved. In addition to improving value chains and food security, the investment strategy also provides valuable economic stimulus to pastoralist communities. To protect environmental concerns, any company bidding on the project through the ASCU will have to establish a partnership with the Ol Pejeta Conservancy and/or the Lewa Conservancy, two leading wildlife organisations, and adhere to standards set by the Northern Rangelands Trust, a non-profit that supports livelihood development of Isiolo pastoralists. Tourism Resort Cities and Airports In addition to trade and oil revenues, the Kenyan government hopes tourism will spike with the construction of three resort cities accompanied by three new airports. These are planned for Lamu, Isiolo and Lake Turkana, with budgets of USD 970 million, USD 200 million and USD 42 million, respectively. The feasibility study conducted by JCP projected 600,000 annual travellers through the Lamu airport by 2030. More significantly, it projected 7 million rail and road passengers between Nairobi and Isiolo. Early conceptual designs for the cities envision themes based on local environments and market the various eco cultures. For example, Isiolo will incorporate elements of Kenyan cultural heritage, featu ring safaris and highlighting archaeological sites. The Lamu city will harken the countrys rich Swahili past, paying homage to its fishing traditions, and incorporate ecological elements unique to the coasts marine life. Grand in scale, funding for the airports and cities has not been finalised. The government reports that city construction is progressing on schedule, but provided only that sensitisation meetings with stakeholders have been held. International Investors The role of international investment is central to the success of the LAPSSET project, although it is by no means a guarantee. Since at least 2009, politicians and government officials from each LAPSSET country have aggressively pursued investors from multi-national corporations, foreign governments and investment banks. To date, the strategy has been effective, at least in kick-starting the project. Having broken ground on the Lamu Port and preliminary segments of the transit infrastructure, Kenya, Ethiopia and South Sudan now hope to attract more investors to complete the remaining project components. Billions more will be needed, and many companies and governments see this as an opportunity, not a liability. China As it has increasingly invested across the continent, China also poured resources into the EAC. Even prior to the LAPSSET transport corridor, the China Road and Bridge Corporation (CRBC), a subsidiary of China Communications Construction Company, won a USD 66 million bid to improve Mombasa port capacity in 2011. Additionally, Reuters notes that CRBC signed a contract totalling USD 2.66 billion in 2012 to construct a 479km railway between Nairobi and Mombasa, suggesting Chinese firms will remain competitive as more components of the LAPSSET project unfold. Most significantly, in April 2013, it won the bid to build out the first three berths at Lamu, a contract worth USD 484 million dollars. According to Reuters, Kenyan officials hope the port construction will attract additional investors to help fund the remainder of the LAPSSET components. China has been less willing to invest in LAPSSET components located in Ethiopia and South Sudan. The Sudan Tribune called Beijings response to South Sudanese entreaties for investment lukewarm. However, a host of other investors are still courting LAPSSET construction options. Japan
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Japan is among the other Asian economies seeking to capitalise on investment opportunities in the east African transit corridor. Japan Port Contractors (JPC) has been aligned to the project since at least 2009. It conducted an early feasibility study, for which it received at least USD 34 million from the Kenyan government, which also provided JPC the opportunity to assess and advise long-term construction plans and LAPSSET investment strategies. More recently, the Japanese conglomerate Toyota expressed interest in building a portion of the oil pipeline and its accompanying fibre optic cable in South Sudan, according to Business Daily Africa. Under the discussed arrangement, designed to finance the project under a build-operate-transfer (BOT) agreement, Toyota would fund the construction and transfer it to the South Sudanese government after twenty years. Business Daily Africa reported in 2012 that Toyotas share of the pip eline would measure 1,400km. However, the East Africa Economic Report published that Toyota placed a bid in August 2012 worth USD 3 billion to fund a 2,000km pipeline to transfer up to one million bpd of crude oil from South Sudan to the Lamu Port. According to that report, the bid would mark the most expensive PPP in Africa to date. Analysts say that Uganda will more likely be brought into the project under a Toyota arrangement. The company already won a contract to build out geothermal plants in the Rift Valley. The geothermal contracts could signal the ease with which the Kenyan government might work with the Japanese firm in the future, according to the LAPSSET Tracker, a journalist-led blogging initiative that promotes transparency about the LAPSSET project. The West and The Rest In July 2011, Business Daily published that LAPSSET had opened competition for bids from Western investors at the behest of World Bank and JPC recommendations to diversify. To date, Germany has provided the most concrete support to the project. Its ILF Consulting Engineers signed onto a feasibility study for South Sudan oil pipelines in July 2013; however, the study will likely include analysis of alternative routes to the proposed LAPSSET pipeline. As previously mentioned, USAID and other Western agencies are contributing funds and development tools to support secondary beneficiaries of the LAPSSET project. Tullow Oil and its competitors will likely remain involved in natural resource extraction and oil exploration as the transit corridor expands. Former President Kibaki met with a South Korean delegation in 2012 before leaving office, soliciting their involvement in infrastructure, potentially in the construction of the resort cities, but also in the design of rail and road infrastructure. According to Le Monde Diplomatique, Kibaki also welcomed additional officials from Asia (including oil-rich Qatar) and countries constituting the BRICS group (Brazil, Russia, India, China and South Africa). Of the BRICS countries, Brazil and South Africa are reportedly most involved in talks to secure additional funding. The Development Bank of Southern Africa (DBSA) could fund as much as USD 1.5 billion, but it is unclear for which components the funds would be earmarked. Controversy and Criticism The LAPSSET project has been a source of controversy since its inception. The master plan has encountered both outright resistance and a measured response from interest groups that seek clarification about potential consequences of such massive industrial development. From the start, logistical concerns have been cited regarding the scope of the transport corridor and the feasibility of the project. Additionally, anxieties abound over environmental degradation and the potential for ecological destruction of largely untouched ecosystems. Finally, the impact on local populations remains a key issue for many critics and the preservation of cultural heritage, including large tracts of Swahili settlements, remains paramount. Although none of the criticisms have halted progress, they raise an array of considerations that should be addressed by government agencies, civil society, NGOs and affected third parties. Environmental Degradation Lamu is a small beach town of 100,000, a UNESCO World Heritage Site, and perhaps the best-preserved example of Swahili traditions on the continent. Dating to at least the fifteenth century, Lamu thrived as city-state along an important Arab trade route. It was subsequently colonised by Portuguese, Ottoman, and British settlers, forging a unique culture that is still evident in the well-preserved cityscape. Critics of the project assert that too little has been done to address effects of a mega construction project on the ports historic architecture and the community of people who inhabit the largely undeveloped environment. The Lamu Archipelago boasts world-famous mangrove forests, important to both the regions fragile ecology and the economic well-being of local communities. Residents have used mangrove wood in construction for centuries. As demand has increased in the last fifty years, it has become a valuable commodity, but also increasingly scarce as many forests were cut down en masse and never replenished. The Lamu Port plans pose a potential threat to the forests as deSeptember 2013 Page 10

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velopers are likely to raze mangrove lands without suitable time for regrowth. Additionally, even if large tracts of mangrove forest are preserved, plans for the port could still undermine their existence with the introduction of hazardous byproducts from the shipping industry. According to the Kenya Marine and Fisheries Research Institute, mangroves surrounding the Port of Mombasa were compromised by 680 tonnes of leaked oil from container vessels between 1983 and 1993. In addition to mangrove tracts, aquatic life in the region is similarly delicate and important to residents, but exposed to significant risks from the LAPSSET project. According to the Integrated Regional Information Networks (IRIN), artisanal fishing provides at least partial income for 90 per cent of Lamus 100,000 residents. Environmentalists have already observed the erosion of sand dunes that were critical to maintaining Lamus rich water sources. Ecologists worry that construction of the port facilities will rapidly destroy more of them. As local activist Mohammed Ali Baddi told Diplomat East African, The sand dunes supply our islands with fresh water. Any development on the dunes is a threat to all island life. The destruction of sand dunes would likely impact the quality of fishing as well. The proposed port will mean we have to shift to other areas for fish and put more pressure on our sand dunes, said Baddi. The future port will annihilate the mangroves which are the best fish breeding and spawning grounds denying us our source of livelihood and diminish our little fresh water resource. Although a spokesperson for the Kenyan Prime Ministers office stated in February 2012 that historical sites and fragile ecosystems will not be affected by the construction, saying that concerns were based on misconceptions, subsequent statements released by the government of Kenyan showed that environmental impacts cannot be overcome entirely. Indigenous Communities Controversy has also arisen around the responsibility of the Kenyan government to engage the public in implementing LAPSSET components. This issue has been especially contentious in the Lamu region where critics claim the government has not protected the economic and social interests of indigenous populations, that it has ignored constitutional requirements to transparently engage the public, and that existing plans for infrastructure development would cause significant harm to local communities. More recently, the discovery of oil in the Turkana region in northwest Kenya introduced a flurry of development initiatives that experts say could marginalise the economic and political interests of local populations. Civil society organisations (CSOs) in Turkana, with the support of the Kenya National Commission on Human Rights, are responding to the discoveries by pointing to similar examples of sudden resource wealth on the African continent, such as Angola and the Democratic Republic of the Congo. The CSOs plan to educate and train local communities to better engage with politicians, as well as to recognise when they are most likely to realise economic improvements from oil extraction and when they are more likely to succumb to the exploitation of multi-national interests without receiving community-wide economic benefits. Land dispossession remains another contentious subject. The Kenyan Constitution accords land rights to individuals and pays some recognition to community-managed lands. The historic city of Lamu and surrounding territory that will be developed for road, refinery or pipeline construction includes both individually-owned plats of land and communitymanaged territory. In 2012, IFAD undertook a technical assessment of indigenous populations in Kenya, finding ethnic communities and pastoralists particularly vulnerable in Lamu. The assessment, the Country Technical Note, reviewed the current status of indigenous populations and identified challenges faced by 25 distinct ethnic groups in Kenya. As the report points out, the government of Kenya recognises marginalised communities but does not officially acknowledge indigenous communities. These populations consist largely of gatherer-hunters and pastoralists, they remain among the poorest of the poor and they have been repeated victims of land dispossession. The Technical Note raises acute concerns that land dispossession could continue with development of the Lamu Port and accompanying infrastructure. Of special concern is the Lamu Port and Lamu Southern Sudan Ethiopia Transport Corridor (LAPSSET), which will strongly affect not only the indigenous peoples living on the coast but also indigenous pastoralists using rangelands along the corridor as the project is expected to involve the use of large tracts of land, according to the IFAD assessment. The IFAD Country Note makes clear that pastoralists, subsistence farmers and a host of marginalised communities will undoubtedly realise affects from the LAPSSET project. At the very least, affected groups will include the Aweer (or Boni) tribes in Lamu, the Dahalo in the Tana Delta and various Kalenjin tribes in the Turkana region, but many more will likely be shaped by the modernisation initiative. IFAD raises the point that development could favour communities if stakeholders benefit from long-term economic gains and are appropriately incorporated into the process. An inclusive strategy would provide opportunities for socio-economic mobility and greater participation in the political sphere. ConSeptember 2013 Page 11

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versely, development could further marginalise communities, stripping them of land, exploiting natural resources and eroding community salience. The infrastructure will almost certainly require resettlement for some of the regions pop ulation. Unfortunately, allegations of involuntary displacement are already mounting. A 2012 study by Cornell University found that over 100,000 hectares of land had already been purchased by land speculators for the LAPSSET project. The study states that over 70 per cent of land occupied by the Boni tribe would eventually be taken up by the new port, and that elites were engaging in land grabs. Projects like Save Lamu have developed in response to illegitimate acquisition of land, and in recent years local residents have become more vocal in their claims that the federal government in Nairobi ignored grievances over land rights. However, it remains to be seen whether indigenous communities, and their environments, are the beneficiaries or the victims of LAPSSET development projects. Conclusion As the World Bank points out, economists generally agree that large-scale infrastructure will be necessary to spur the growth of east African economies. To this end, the LAPSSET transport corridor undertaken by Ethiopia, Kenya and South Sudan seeks to integrate regional transport infrastructure and Kenyas maritime shipping industry. The ambitious plans will require participating countries to attract considerable foreign investment. China was the first to enter the foray of PPPs, but others, including Japan, South Africa and South Korea seem poised to follow. Oil and LNG exploration could quickly introduce multinational companies from the UK and US, among others. If government officials are successful in attracting enough capital for the LAPSSET project, additional hurdles still remain. Particularly significant are a range of environmental concerns, the protection of cultural heritage and the rights of property owners in territories affected by the development. Each of these issues poses a unique challenge to the success of LAPSSET. However, the opportunities presented by the infrastructure improvements are promising: new trade routes with international partners in the Middle East and Asia; regional stability achieved by a secure export corridor for Ethiopia and South Sudan; and the potential to lift millions from poverty through jobs and economic stimulus from the infrastructure development.

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