Rising Chinese Investment In EAC Ports


China is strengthening its geopolitical position in the Indian Ocean through its involvement with a number of key port developments in East Africa. BMI believes the involvement will not only strengthen Chinese trade with the region, providing the Asian dragon with access to raw materials and new markets for its manufactured goods, but could also provide the Chinese navy with refuelling stations, further fuelling speculation that China is following a 'string of pearls' policy in the region, developing ports in key locations.

The benefits are far from one-sided, however. The East African ports sector has been woefully underdeveloped, and the resulting congestion at its maritime facilities weigh heavily on the region's competitiveness. The East African Community (EAC), the common market trading bloc made up of Burundi, Kenya, Rwanda, Tanzania and Uganda, is overly reliant on just two primary ports, the Kenyan facility of Mombasa and Dar es Salaam in Tanzania, both of which have been plagued by delays.

Chinese Involved In East African Mega Ports

China is going to invest in building what will become the largest port in Africa at the Tanzanian city of Bagamoyo, situated to the north of the commercial capital, Dar es Salaam, the country's current primary maritime facility. The Tanzanian president, Jakaya Kikwete, and his Chinese counterpart, Xi Jinping, signed a number of agreements during the Chinese premier's state visit to the East African country in March 2013. These paved the way for the construction of the new port, which will be developed at a cost of US$10bn.

According to Tanzania's ambassador to China, Philip Marmo, the new port will be able to handle 20mn containers a year, far surpassing the current top port in Africa, Durban in South Africa. Durban has a current handling capacity of around 3mn twenty-foot equivalent units (TEUs) per annum, and although it is undergoing significant expansion works it will still be eclipsed by the new Tanzanian development.

As well as investing in ports, China will also invest heavily in key infrastructure that will link to the port, such as new highways and railway line extensions, industrial and agricultural zones, and aid packages for hospitals and Chinese cultural centres, furthering Chinese soft power.

Of Increasing Interest To China
EAC Member States

Tanzania is not the only East African country in which China is involved in major port development. Chinese state-owned enterprises are already heavily involved in port developments to the north of Tanzania, in Kenya. The Chinese Communications Construction Company (CCCC) and related companies are participating in the development not only of the current primary port of Mombasa, but also in the Lamu mega project to the north.

In 2011 CCCC, through its China Road and Bridge Corporation subsidiary, signed a deal to build a new container terminal at Mombasa for US$66.7mn. Furthermore, it was announced in mid-April 2013 that CCCC had won a tender to build the first three berths at Kenya's mega port project, at Lamu, for US$484mn. The new facility, which will cost US$5.3bn, will cover 700 acres and will include a 10-berth container terminal, three bulk cargo terminals and an oil terminal. There have been reports that it will have as many as 32 berths once fully completed in 2030. The port will serve as the maritime entry point to the Lamu Port-Southern Sudan-Ethiopia Transport (LAPSSET) Corridor, which will include rail, road, oil pipeline and fibreoptic cable connections with South Sudan and Ethiopia.

Price estimates for the multi-modal project range from US$16bn to US$23bn, which has led BMI's Infrastructure desk to speculate as to whether funding will be achieved for the whole project. According to Silvester Kasuku, chief executive of LAPSSET, it is hoped that the first three berths, to be constructed by CCCC, will attract others to the project: 'We are doing the seed investment by constructing the first three berths just to break the ground and put government commitment and investment and provide incentives for private sector investors to come on board.'

Benefits To The EAC

The benefits to the EAC trading bloc of the new port developments and the inland projects also being undertaken by China will be huge. The five member states, and landlocked states beyond, namely Malawi, the Democratic Republic of the Congo, Zambia, South Sudan and Ethiopia, are hugely reliant on the ports of Mombasa and Dar es Salaam, both of which are lagging behind in terms of development and are ill-equipped to cope with the demands placed upon them.

Growth in TEU throughput at Mombasa has averaged 13.5% over the past three years, with an expansion of 17.2% in 2012 taking the facility's handling figure to 903,443TEUs, far exceeding the port's nominal handling capacity. Mombasa has been plagued by extended dwell times for years, with shipping lines regularly introducing congestion surcharges per TEU bound for the port when delays get worse.

Busy Ports
Dar Es Salaam And Mombasa Throughput, 2008-2011 (TEUs)

Nor has Dar es Salaam been spared from congestion. Between 2010 and 2011 growth averaged 11.2%, climbing 14.5% to 475,000TEUs in 2011 (last available data). Expansion works have been similarly lagging, though the establishment of two new inland container depots in the past two years has eased delays.

The new capacity being added to the EAC's ports sector, through the two new mega projects in Lamu and Bagamoyo and the expansions to the existing facilities, will help alleviate the bloc's infrastructure deficit.

Emmanuel Mallya, chairman of the Tanzania Shipping Agents Association, said that the new port must be able to handle vessels of 6,000TEU and 10,000TEU simultaneously, and that it must be a cut above the current facility at Dar es Salaam: 'We should not build another Dar es Salaam Port in Bagamoyo with similar limitations. There should be more channels with fewer restrictions on basin. Ships should not be restricted with depth of port.'

BMI has long noted that poor freight transport infrastructure in the EAC is a major impediment to growth for the five member states. In 2013 we forecast that growth in the countries will average 6.0%. Rwanda and Tanzania will be the outperformers, with growth of 7.4% and 7.1%, respectively, but this could be improved greatly if transport links between the states and port facilities were better. This is part of a wider issue in Sub-Saharan Africa ( see 'How Is Africa's Infrastructure Deficit Harming Development?', September 21 2012).

The new port developments could reduce the costs of shippers importing goods into the region. Some 75% of boxes handled at Mombasa are carrying imports, with the region very much geared towards the export of commodities and the import of finished goods, key for the Chinese economy. According to data from the World Bank, in 2012 the average cost in levies, across 184 countries, of importing a TEU was US$1,747. This includes all fees associated with import of boxes, such as documents, administrative fees for customs clearance, terminal handling charges and inland transport.

An Expensive Region
EAC Costs To Import Per TEU And Global Average (US$)

For the five counties of the EAC, the average cost in 2012 was US$3,425, far greater than the global average. Only Tanzania came in below average, at US$1,565. While there are other considerations aside from just poor port infrastructure, namely roads, and tolls and bribes needed to move goods in a timely fashion, investment in ports will surely reduce this figure, helping the region's shippers and its economic development as a whole.

What's In It For China?

China is not simply investing in the region's ports for the good of the East African economy. The country stands to benefit hugely from an improvement in the region's infrastructure, as it is of growing importance to its trade. Chinese imports of cobalt, copper, coal and other minerals from Africa are increasingly important to the country's continued growth. Through the investment in the EAC's ports sector and its connecting roads and rail networks, it not only improves the accessibility of commodities, but can also hope to gain favourable trade concessions from African governments. The increasing trend of China growing wheat in East Africa, in particular Ethiopia, will further support trade growth. Chinese imports from the EAC rose from US$11mn in 2001 to US$606mn in 2011, a 55-fold increase over the decade, and we forecast this growth to continue at a robust rate.

Increasingly Important To Chinese Exports
EAC Imports From/Exports To China, 2002-2011 (US$mn)

While the percentage rise in Chinese exports to the EAC has not been of quite the same magnitude (a 30-fold increase over the 10-year period) the figures dwarf those travelling in the other direction. In 2002 the EAC member states imported US$167mn from China, and by 2011 this had risen to US$4.94bn. This has risen in line with the rise of the consumer in Africa, as East Africans have steadily had more disposable income to spend on manufactured goods.

With its traditional export markets in the US and Europe stagnating or at best growing slowly and a domestic rebalancing to a consumption-led economy far from being realised, emerging markets such as those of the EAC will be increasingly important to China. Given our outlook for the region, it is little wonder China is prepared to invest so heavily in making its route to market that much easier. We have already mentioned the strong GDP growth outlook for 2013, and we project that this will continue over our medium-term forecast period, averaging 6.3% across the bloc to 2017.

A Growth Region
EAC Member States Real GDP Growth

Growth in Chinese exports to the EAC will be supported by the region's population growth, forecast by BMI to rise by 12.2% over the five years to 2017, from 150.4mn in 2013 to 168.7mn. Private final consumption, a key driver of box imports, is set to average medium-term annual growth of 5.6% in Kenya, the largest population in the bloc, and 6.1% in Tanzania, the second largest. Our growth forecast for box throughput at the port of Mombasa, a medium-term average of 13.0%, is indicative of the opportunities.

These export opportunities will not only benefit Chinese manufacturers but also Chinese shipping companies such as COSCO and China Shipping Container Lines (CSCL), the fourth and ninth largest container shipping companies in the world. In April 2013 CSCL opened a new office in South Africa, showing its commitment to the continent.

String of Pearls

We note here that the potential benefits to China of the investment in Bagamoyo and its involvement at Lamu and Mombasa may not be solely trade-related, especially at the new Tanzanian port. It has been speculated that China is pursuing a policy of developing ports in the Indian Ocean in a bid to increase its naval power and protect its trade interests. While the country is the world's second largest economy, it lacks an effective naval force, especially when compared to the global superpower of the US.

Extending Influence
The Indian Ocean

In recent years China has developed Indian Ocean ports in Sri Lanka (Hambantota) and Pakistan (Gwadar), and has been reported as interested in setting up a permanent military presence in Seychelles, in addition to developing facilities in Myanmar and Bangladesh. China insists that these facilities are purely for civilian purposes, but concerns about their possible military uses persist in New Delhi and other capitals.

China has made it clear that the new port at Bagamoyo will not be used by the Chinese navy, yet with the port being built, developed and operated by Chinese companies, we believe it is feasible that the facility could be used to resupply naval ships as the country extends its presence in the Indian Ocean.

This article is tagged to:
Sector: Freight Transport, Shipping
Geography: Africa, Burundi, China, Kenya, Rwanda, Tanzania, Uganda