The EAC grew by 5.9% in 2017, well above the global and Sub-Saharan (3.6%) averages. Given the region’s high economic growth, large population (160 million) and land area (1.85 million km2) and proximity to the Red Sea Basin (through which over 10% of global trade is transported), the EAC has the potential to be a powerful industrial hub.
Yet the region remains drastically under industrialised, suffocated by low electricity penetration, high and unreliable electricity costs (according to the EIU, electricity prices in the EAC average four times the global average), poor transport infrastructure and consequently high transport costs, a low human capital stock and protectionist policies in some countries. All of the above contribute to expensive, low quality and timely manufacturing that render the EAC’s industries uncompetitive.
Given the high proportion of adults in the EAC that are employed in the unproductive and low salary informal sector (estimated at 72% of the adult population in Tanzania and 83% in Uganda) and prevailing national trade deficits (which vary from -2.4% of GDP in Tanzania to -14.5% of GDP in Rwanda), industrialization is therefore high on Government agendas across the region.
How much progress has the EAC made in scaling up investment in its industrial transformation?
In 2012, the EAC launched the 2012-2032 East African Community Industrialisation Policy, with the intention of supporting employment creation, export revenue and economic growth, but also economic diversification that will provide increased protection against economic shocks. The policy was also intended to create economies of scale and a larger market for industrial goods, to increase technological capacity in the region, develop value chains across the bloc and, through increasing regional capacity and productivity, attract increased foreign direct investment into the region.
However, since the launch of the 2012-2032 East African Community Industrialisation Policy, the contribution of industry to GDP has decreased across all EAC members, with the exception of Tanzania (figure 1).
Figure 1: Industrial development since the EAC Industrialisation Policy
Source: World Bank
Decreasing contributions of industry to economic activity across the region indicates that there has been insufficient investment in industrial transformation.
However, perhaps the EAC are establishing the foundations for industrial transformation. There has been a definite shift in Government priorities to invest in both national and regional infrastructure, in particular for roads, railways, ports and electricity generation and transmission. Works and Transport (essentially infrastructure) is taking up an increasing amount of national budgets; for example in Uganda in 2019/20 works and transport has been allocated 21% of the national budget. Although this risks increasing the debt burden and crowding out investment in the social sectors, if infrastructure investment brings higher long-term potential economic activity then it will still benefit society and support industrialisation.
The EAC have recently reported US$2.5bn was raised in foreign investment for infrastructure in 2018. Whilst this is way below the bloc’s projected infrastructure investment requirement of US$78.7bn per year over the next 10 years, US$2.5bn remains an impressive figure against an extremely ambitious target. The EAC has also attracted many multilateral donors to finance mega-projects, such as the African Development Bank’s pledge to fund US$2bn (that could be scaled up to US$3bn) in joint infrastructure projects in transport, energy, information and communications technology and cross-border water resource management.
Nonetheless, some countries in the region have focused on developing special economic zones, which provide affordable and reliable electricity and ICT and other tax incentives to establish competitive industries.
For example, in Naivasha (Kenya), the Government of Kenya has established a Special Economic Zone next to the Ol Karia geothermal power plants. Geothermal is the least expensive form of electricity in Kenya, and through establishing the SEZ next to a source of geothermal energy; manufacturers will receive discounted and reliable electricity, straight from the source (the Ministry of Trade, Enterprise and Industrialisation report that the cost of electricity in the Naivasha SEZ will be 1/3 of the national price of electricity). In addition, the Standard Gauge Railway is being extended to Naivasha to transport goods more easily straight to Mombasa Port.
EADB funds a number of industrialization projects in the EAC.
EADB’s first mandate was to support the industrialization of its member states, which at the time were Kenya, Tanzania and Uganda. 50 years ago in East Africa, industrialization was also seen as a solution to address growing trade deficits, to increase regional trade and to reduce regional inequalities. Today, EADB still supports industrialisation through financing projects such as CIMERWA, a cement manufacturer in Rwanda that produces 600,000 tonnes of cement per year, and equipment for a new production line for Kayonza Tea Growers in Uganda.
But by the 1980s, EADB recognized that solely supporting industries would be insufficient to achieve industrialization or socio-economic development across East Africa. An industrial revolution must be supported by gains in supportive infrastructure and the development of the agricultural sector (to feed a growing urban population). So in 1980, EADB readjusted its strategy to also focus on agriculture, energy, tourism and infrastructure. EADB prioritised improving access to electricity for the East African population, through lines of finance to Kenya Power and Lighting Company and Tanzania Electricity Supply Company, amongst others.
More recently, our focus on energy generation has shifted towards clean energy and we have contributed towards Lake Turkana Wind Power Project, a massive electricity generating wind power plant that will provide 310MW, or 15% of Kenya’s current installed electricity capacity and Kakira Sugar’s co-generation facility in Uganda that uses leftover sugarcane to create electricity through biogas.
Further, EADB has also invested in the human capital stock of the EAC (another impediment to industrialization) through a series of Corporate Social Responsibility initiatives, such as the STEM Scholarship Programme that provides scholarships to teachers and lecturers in East Africa to undertake a Masters Degree in the STEM fields (Science, Technology, Engineering and Mathematics) so that they may improve the quality of STEM education across East Africa and ultimately contribute towards technical innovation and gains in industrialization.
What steps need to be taken to attract more funding and partnerships for cross-border infrastructure and industrial projects?
Improved regional infrastructure (in particular transport, energy and communications infrastructure) will automatically attract increased investment in industry across the EAC. The development of Special Economic Zones with well thought out incentives, affordable and reliable energy and ICT infrastructure and easy access to markets, such as the Naivasha SEZ described above, will also spur private industry investment into the region.
However, the necessary investments in infrastructure and human capital development to attract private sector led industrialization need to first be made by the public sector. As Government budgets across the EAC are already pushed and public sector debt is rising, the space to borrow more to invest in infrastructure is increasingly limited. Yet there is still an enormous demand for infrastructure (recall the EAC’s calculated US$78.7bn annual requirement over the coming 10 years) and human capital development.
Human capital development is less costly than infrastructure development and could simply involve a relocation of resources, for example within the education budget to increase the productive outcome. For example, dividing the budget for higher education to finance both universities and technical colleges might increase skills for a larger number of the population.
Rwanda have recently announced a US$24m programme (financed by the World Bank) to train 9,000 youth in the manufacturing, energy, transport and logistics industries that operate under the Made in Rwanda campaign. According to the Director General of Workforce Development Authority, Eng. Pascal Gatabazi, the World Bank financed programme is part of a wider 7-year Government programme that hopes to build a competitive workforce and create 1.5 million jobs (in a population of just 12.2 million currently).
Yet infrastructure will remain a crucial area to drive industrialization across the region and will require concessional financing to prevent any economic harm from rising debt burdens. Traditional sources of finance (multilaterals such as the AfDB, WB, EU etc.) will likely respond positively to demonstrated intent to develop competitively and as a region. For example, the AfDB’s US$2-3bn pledge indicated above was premised upon an EAC commitment to financial sector integration, increased trade and structural transformations. Further political coordination and the erosion of protectionist policies (including disputes over traded goods between neighbours) would not only likely attract more inwards financing, but would likely make the available financing more effective.
Indeed, a general improvement in national and regional business environments, driven by increased political cohesion and collaboration is likely to be the biggest catalyst for inwards investment in industrialization. It would further increase the productivity of any inwards investments and is costless to the Governments of the EAC.