The three-day visit of Kenyan President Uhuru Kenyatta to his counterpart in Uganda, President Yoweri Museveni, has led the two countries to agree on a number of trade and oil deals that have sparked controversy in Kenya.
One of the most significant agreements involves the ambitious construction of a 1500km-long pipeline which could turn East Africa into a significant oil exporting region.
The pipeline’s path had been disputed for a year, but it has now been agreed to include Kenya, Uganda, South Sudan, and potentially Ethiopia, and will be part of the bigger Lamu Port Southern Sudan-Ethiopia Transport Corridor. As a condition to the path’s agreement, Kenya has had to take on the project’s financing and securities guarantees, due to the uncertainty of the project’s results and concerns over Al-Shabaab’s terrorist activities in northern Kenya. “The pipeline route was not Uganda’s preferred route. The agreed route is longer and untested against the southern route that would have followed an existing pipeline route,” says Jubril Adedayo Kareem, energy research analyst at Ecobank.
“The waxy nature of tested crude from Kenya means the pipeline will have to be heated above 40 degrees Celsius. This specific requirement further complicates the project as a heated pipeline of such length has never been attempted in the world, which means the Kenya section of the pipeline will be longer, much more complicated and more expensive. Uganda is only trying to protect itself by requesting for such guarantees,” he explains.
It remains unclear which companies will become involved in the project. “There is high chance that the selected company for the project will be an international company,” says Kareem. “A Lebanese company, Zakhem International, is currently working on the Mombasa Nairobi product pipeline, financed partly by local banks, and the company could also be interested. There is also a possibility of different companies working on the Uganda and Kenya section of the pipeline. Toyota Tusho was the consultant which carried out the feasibility studies of the two routes and the company could also be interested,” he adds.
Another much discussed part of the deals involves easing import tariffs on Ugandan sugar in exchange for improved access for Kenya’s dairy and meat exports. Despite being the East African Community’s largest sugar producer, Kenya’s annual sugar production falls short of demand. With its cheap surplus of sugar, “Uganda is the natural partner to help close Kenya’s sugar deficit,” Ecobank’s head of group research Edward George tells GTR.
Kenyan sugar producers have however strongly opposed the deal as they won’t be able to compete against the cheaper imports, mostly due to inefficiency in the Kenyan sugar sector, whose mills only run at 50% of the installed capacity. “Kenya’s sugar sector is hobbled by the dominance of Kenya’s smallholders, whose lack of scale increases collection and transportation costs, and low sucrose yields, owing to poor irrigation and use of inputs,” explains George.
The Kenyan government is attempting to reform the sugar sector through a tender for majority stakes in five sugar mills, with an aim of concluding the sales by February 2016, but the plan faces pressures from the low price of sugar, which is at an eight-year low. According to George, this is propelling other sugar producers such as Uganda and India to dump their products on the East African markets, putting further pressure on Kenya’s embattled sugar sector and increasing opposition to the Uganda deal.