East Africa: O&G discoveries a catalyst for investment into trade & logistics

The East African region has an economic growth rate projected at 5.5% for 2015 and an estimated 6-7% for 2016. Over the past 10 years O&G discoveries in East Africa have ensured the emergence of the region as one of the most prolific for O&G exploration in the world. Over this period, O&G exploration unveiled discoveries within 7 countries totalling billions of barrels of oil and trillions of cubic feet of gas. Significant finds include more than 600 million barrels in Kenya, 3.5 billion barrels of commercially viable oil reserves in Uganda, 125 and 7 trillion cubic feet of gas in Mozambique and Tanzania; respectively, as well as 60 billion cubic meters of methane gas in Rwanda. In addition to these findings, reserves have been uncovered in South Sudan and Ethiopia.

These regions have been overlooked historically; however, O&G companies are now starting to realise the untapped potential. With O&G investments on the rise in East Africa, international energy companies, in turn, are exploring the logistical hurdles that mark the path towards setup and management of large scale operations. To meet demand, global and local logistics service providers will need to develop flexible end-to-end solutions with a focus on developing local skills to service construction and exploration work prompted by the new discoveries.

Riding on Infrastructure Projects

The public sector is investing heavily in major projects such as the US$3.8 billion Mombasa-Nairobi standard gauge rail (SGR) in Kenya. The Mombasa-Nairobi rail aims to connect Kenya, Uganda, Rwanda, and South Sudan, which will facilitate exports in landlocked countries. This project alone is expected to raise Kenya's gross domestic product (GDP) by 1.5%, enabling an estimated annual growth rate of 8%. Similar projects include the 2,935 km Mombasa-Kigali railway that will drive the export of coffee, tea, agricultural goods, minerals, and machinery from Rwanda.

Closer to the ocean, the Lamu Port in Kenya and the Bagamoyo Port in Tanzania are preparing for the ever-growing port capacity needs of the region. The Bagamoyo Port alone will become the biggest container terminal in Africa, with a cargo capacity of 20 million twenty-foot equivalent unit  (TEU) a year, which is 20 times larger than the port of Dar-es-Salaam that is also set to be upgraded. Moreover, the Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) corridor project includes oil pipelines to South Sudan and a railway to Ethiopia and Uganda. It should be noted that these ports will also facilitate logistics parks, which will aim to address the growing trade volumes with the transport capacity and networks designed to meet logistics needs for the port. Apart from these noted projects, vast numbers of ports throughout East Africa are either being constructed or upgraded.

These infrastructure projects are particularly important because they will enable logistics companies to deliver equipment on-site to construction and O&G companies. It is estimated that once completed by 2017, these projects will enable East African countries to generate an estimated US$ 2.6 billion per year from incoming traffic, as a result of reduced transport costs along the North-South and Dar-es-Salaam Corridors.

Projects, such as LAPSSET, highlight the unity of the East African countries (EAC) in its vision to increase connectedness and the ease of doing business between EAC, which symbolises a drive for regional rather than country-specific growth. These are a few flagship projects in East Africa that will simplify transport operations across borders through intermodal solutions for logistics companies as well as benefit the economies with a smooth flow of goods between countries. Ultimately, these projects indicate a unique opportunity for global and local logistics companies to partner and participate as a way to close the gap in the supply chain that many logistics providers will need in order to meet the demand of industry sectors.

Red Tape Barriers 'Unchained'

With complex supply chains and logistics challenges, transport costs in East Africa can amount to 30% to 50% of the export value and, in some cases, up to 75% in land-locked countries. Delays are known to add additional costs estimated at between US$400-US$500 per trip for freight forwarders crossing borders. Moreover, bureaucracy impedes logistics operations with non-tariff barriers (NTBs) presenting unexpected delays. NTBs include customs clearance and multiple weighbridges and checks along main routes, most notably the Mombasa-Kampala-Kigali highway. However, corruption is on the decline with bribes for trucks in transit falling gradually to US$ 847 in 2013.

According to the East African Revenue Authority, the Single Customs Territory (SCT) regime introduced in 2014 reduced the cost of doing business by 50% in the region and, critically, the time it takes to move cargo between Mombasa and Kampala from 18 days to 3 days, and from 21 to 6 days between Mombasa and Kigali. The SCT enables the clearance of goods and collection of revenue to be done at the first point of entry, therefore facilitating a single market through the free circulation of goods. Also, a fixed rate is applied to minimise incidents of corruption at roadblocks and checkpoints between borders. The SCT is one of several initiatives enhancing regional integration through approved agreements, such as the harmonisation of customs laws and automation of systems to achieve real-time efficiency at borders.

A recent customs reform and modernising programme ratified between South Sudan's Customs Services (SSCS) and Trademark East Africa (TMEA) aims to increase accountability, transparency, and efficiency through improved human resource capacity and reduced bureaucratic red tape. TMEA has committed financial and technical support valued at US$ 10.4 million, which will improve the effectiveness and efficiency of collecting non-oil revenues, while facilitating regional trade.

International logistics companies in East Africa have taken the first-mover advantage in an effort to model a resilient end-to-end supply chain solution that will best deliver cargo across borders and seamlessly reach even the deepest landlocked regions of East Africa. In order for global logistics companies to stay ahead in East Africa, Frost & Sullivan believes that developing strategic relationships with organisations such as the TMEA, who work closely with the East African Community (EAC) to reduce NTBs, is a step closer to a responsive versus a reactive supply chain.

Race to East Africa

According to Frost & Sullivan analysis, there is a race amongst global logistics providers to secure market share either through green investments or, in many cases, through win-win-partnerships with local companies to create inorganic growth. Global logistics companies are strategically investing in infrastructure alongside the new publicly funded infrastructural projects. This move has enabled logistics companies to source prime locations to establish warehousing facilities for storage near borders and ports.

The global logistics company, Agility, a Kuwait-based organisation, has invested in building a multi-purpose transport park known as a distribution park (a multi-purpose transport park) in West Africa, which assists with border related delays and minimises bureaucracy that impedes supply chain efficiency in Africa. The distribution park provides an infrastructure that enables Agility to move goods quickly and efficiently between countries. Contributing to the operation is a speedy customs administration, a safe trucking yard station, and an area for the efficient clearing of goods. Agility's distribution park model is not only a solution in West Africa, but also can be implemented in other regions in Africa where there is great potential in acquiring, developing, and managing industrial, as well as distribution centres within emerging markets. The company's model is an example of a logistics solution into Africa with the aim of connecting the wider continent, thereby taking a firm hold of the rising regional trade and export activity. These modern transport parks are a long-term strategy to facilitate companies active on the continent that require the infrastructure to operate and grow their businesses.

Through local content policies, East African governments are increasing pressure on the private sector to adopt and design upstream development and corporate social responsibility projects tailored to local communities. The objective of these policies is to have companies source the goods and services used in the O&G operations locally. As in the case of Mozambique, regulation requires foreign contractors to contract local companies in the procurement of goods and services. Moreover, East African governments are looking to boost their local enterprises alongside O&G explorations and infrastructure developments through the creation of local policies that facilitate the participation and growth of local companies.

Conclusion

East Africa has taken huge strides to implement solutions that will reduce clearing and permit-related delays which have ultimately improved the ease of doing business. Whether it is capacity constraints or the shortage of skills, global logistics companies should recognise that building local capacity and content is critical to capturing the true size of the East African market. To effectively enter into emerging markets, global companies entering into East Africa should look to partner and collaborate with local companies. This is a powerful strategy that will enable companies to overcome many non-trade barriers, assist in managing local expectations, and, finally, gain a strong local footprint to service logistics needs within the region. Underlying this activity is the opportunity to create local businesses with skilled labour that drive the region's economic advancement and social development. Frost & Sullivan concludes that logistics companies should look to maximise the benefits accruing from current and upcoming projects and invest in East Africa's economic potential to fully capture the grassroots opportunities of a booming region.