Kenya Plans Giant New Transportation Construction Project

Kenya Seeks To Solidify Position with Energy and Transport Project August 2, 2011 | 1221 GMT YASUYOSHI CHIBA/AFP/Getty Images People walk along a rail line in Nairobi, Kenya Summary Kenya plans to host a regional conference to attract funding for its proposed $22.2 billion Lamu Port-South Sudan-Ethiopia (LAPSSET) Transport Corridor project in September. The project, which would expand Kenya’s Lamu port and build an oil pipeline from the port to South Sudan’s oil fields, among other things, has attracted interest from several potential donors and investors. But LAPSSET is still in its infancy, and one portion of the project could be threatened by negotiations between Sudan and South Sudan. Analysis Kenya will hold a regional conference in September to attract funding for its proposed $22.2 billion Lamu Port-South Sudan-Ethiopia (LAPSSET) Transport Corridor project. Kenya, through its port in Mombasa, has a reputation as a regional hub for the import and export of East African trade goods. But it has suffered disruptions, most recently when a monthslong wave of protests following national elections in late 2008 shut down many of the country’s roads and railway lines not only internally, but also those leading to the Great Lakes region of Africa. LAPSSET is Nairobi’s plan to improve and expand its transportation infrastructure linking East Africa in order to avoid future disruptions and other impediments to economy growth, both for Kenya and in the wider region. The Kenyan government first proposed the LAPSSET project in 2010, though the overall concept behind it has been pushed by Kenyan governments going back to 1975. While it would certainly benefit trade in the area, LAPSSET has not yet been approved and is still at a preliminary stage. Even if Kenya is able to find funding for LAPSSET, completion would still be many years away. Despite that fact, one portion of the project — the construction of a pipeline from South Sudan’s oil fields to the Kenyan port of Lamu — has set Sudan on edge and could trigger a broader dispute over South Sudanese oil. Details of LAPSSET The largest portion of LAPSSET’s funding, $7.1 billion, would be used to improve existing railway lines and build new ones, including to the Ethiopian and South Sudanese capitals. Roads and rails also would be rehabilitated or improved to Uganda, and from there to South Sudan as well as to Kisangani in the mineral-rich eastern part of the Democratic Republic of the Congo. Another $1.4 billion would be set aside to improve existing highways and construct new ones, and $1.2 billion would be put toward the construction of international economic zones with resorts and an international airport in the Kenyan cities of Lokichoggio, Isiolo and Lamu. The most important proposals in the project are the expansion of the Lamu port to 20 berths (estimated to cost $3.5 billion), the construction of a $4 billion oil pipeline from Lamu Port to South Sudanese oil fields, and the construction of a 120,000-barrel per day oil refinery projected to cost $2.5 billion in Lamu, all helping to create the first alternative export line for oil-rich South Sudan. The construction or improvement of additional support infrastructure would require an additional $2.5 billion. Kenya cannot finance LAPSSET by itself, but there are several countries that have expressed interest in participating in the project, namely China, Japan, Germany and Qatar. Some type of multilateral financing component, probably facilitated by the World Bank, is also a possibility. China is particularly interested in using the project to tap into East African natural resources, such as South Sudanese oil, of which China already is the predominant consumer. Helping to fund LAPSSET also would reinforce Chinese influence over the region’s natural resources. China has developed a strategy of building ports in foreign countries in order to increase its regional influence, and if it financed Lamu, Beijing would hold a strong position in a key part of East Africa. Obstacles The Kenyan government hopes to have the project completed by 2030 as a way to cement the country’s position as the economic and trade hub for all of East Africa. Additionally, Kenyan President Mwai Kibaki wants to have financing and construction agreements signed, at least on the Lamu Port component, before the country’s next elections at the end of 2012. However, apart from making improvements to the existing road network between Nairobi and the northern border town of Moyale that links to Ethiopia, little of the overall project has yet received financing. In fact, the exact lines for the proposed pipeline and railway lines to South Sudan and Ethiopia have yet to be drawn out on a grid — current plans depict only a straight line from Lamu to Juba and then to the oil fields in South Sudan for the pipeline, and straight lines from the Kenyan junction town of Garissa to Addis Ababa and Juba for the railway lines. In addition to questions about funding and executing the plan, tensions between Sudan and South Sudan could pose a challenge to LAPSSET. Before  South Sudan became independent last month, it accounted for the vast majority (nearly 490,000 barrels per day) of Sudan’s oil production. Having lost sovereignty over South Sudan’s oil, Khartoum compensated by enacting transit fees for the use of the oil pipeline that runs through Sudanese territory to Port Sudan as well as various taxes at the port. The proposed pipeline under LAPSSET would serve as an alternate route for South Sudanese oil supplies to reach market. The South Sudanese know that without an alternative pipeline infrastructure, they are essentially dependent on cooperation with Khartoum to get their oil to market. However, since the pipeline is several years away at best, Khartoum has time to influence the project through negotiations with Juba. For example, Sudan could reduce the transit fees it charges Juba to use its oil pipeline, thereby making the $4 billion LAPSSET pipeline uneconomical — or at least less so. The dependency is not one-sided, however. Prior to South Sudan’s independence, oil revenues formed about half of Khartoum’s budget. Sudan is still hoping to compensate for its loss of the South’s oil through transit fees and other taxes. One other element to the Khartoum-Juba negotiations is that China, as a majority stakeholder in all producing oil blocks within South Sudan through Sudanese state-run oil company Sudapet and as a potential investor in the Lamu infrastructure, holds a unique position in being able to manipulate both sides to its advantage. Under a best-case scenario, completion of LAPSSET is several years away. Many details of the proposals have yet to be worked out, financing and contracting is absent, and construction of the larger elements, such as the oil pipeline, would take quite some time. In the case of the South Sudanese oil pipeline, the South Sudanese are still considering what proposed pipeline route best suits their interests. Officials in Juba recently have even talked about Djibouti and Mombasa as alternative pipeline routes. But if the project overcomes these obstacles and is completed, it would ensure Kenya’s position as an economic and trade hub for East Africa. 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