European and American firms have maintained a firm grip on the construction of large infrastructure projects in East Africa, keeping China at bay in the battle for control of the region’s economic landscape, new data shows.

However, China leads the Western economies in financing of these projects, statistics released by consulting firm Deloitte on Wednesday show.

East Africa is now the biggest beneficiary of funds and technical capacity in Africa, after Southern Africa. As the global financiers increase their influence in Ethiopia, Kenya, Uganda, Rwanda, South Sudan, Burundi and Tanzania, the region is expected to receive heightened interest especially as it seeks cross-border infrastructure partnerships.

Construction firms from the West are responsible for the highest number of projects (37 per cent), while Chinese firms are building 19 per cent. 

International financial institutions such as the World Bank are funding 24 per cent of key infrastructure projects in the region, while China is funding 17 per cent.

Some 13 per cent of projects are under European and US funding, while the African Development Bank (AfDB) funds 11 per cent of projects, and other foreign investors finance nine per cent.

The data highlights the preference for international monies by EAC governments, a trend that researchers at Deloitte said will grow in coming years. The region can now close its funding gap while raising serious debt management questions as countries take on big loans for infrastructure projects.

Saddled with huge recurrent expenditures, a narrow tax base and poorly developed capital markets, regional states have resorted to scouring international debt markets as well as negotiating for concessionary loans from friendly countries — with a focus on China, Japan, Brazil and India.

“There has been a significant increase in large infrastructure projects for most of East Africa. Due to the huge capital investment, there is need for private financing.  Government funding will not meet the demand for the large scale investment that is needed in our ports, rail and pipeline projects,” said Mark Smith, head of capital projects at Deloitte East Africa.

Despite the complexity in developing regional assets, with some projects being cross-border ones, there is collaboration and strategic integration in the region, Deloitte said in the survey that polled 94 East African projects mainly in transport and energy. 

The survey says Southern Africa leads with 38 per cent of projects, followed by East Africa with 29 per cent. West Africa has 21 per cent while North Africa and Central Africa are at seven per cent and five per cent respectively.

The largest project — Mombasa to Malaba standard gauge railway — is getting the most funding in the region at $14 billion.

Tanzania’s Bagamoyo port comes second at $11 billion. Other large projects are the Ethiopian Renaissance Dam (4.2 billion), Addis Ababa-Djibouti Railway ($3.3 billion), Lamu Port-South Sudan-Ethiopia Transport Corridor project ($3.3 billion) and the Ugandan Farm-down Geothermal Plant ($2.9 billion).

Chinese firms have been targeting the expected growth of the region’s telecoms, mineral extraction, engineering and consumer goods sectors, fields previously dominated by Western firms.

Whereas Western countries demand environment and social impact assessment reports before funding projects, Beijing is known to ignore such requirements, with its main condition being that the contracts be given to Chinese companies.

Market watchers said while the need for infrastructure is undisputable, the huge appetite for foreign loans, if not checked, could serious compromise the region’s capacity to repay the loans, considering that GDP growth is lagging behind debt expansion.

“The EAC countries are taking on loads of debt and guaranteeing even more. Kenya has, for example, broken its own debt ceiling,” said Samuel Nyandemo, a lecturer in economics at the University of Nairobi.

Kenya currently has a debt to GDP ratio of 54 per cent, which is higher than its own and IMF recommended targets for developing countries of under 50 per cent. Tanzania currently has a debt to GDP ratio of 45 per cent.

According to the survey, 71 per cent of projects are publicly funded, 28 per cent privately funded and one per cent are being funded through private public partnerships (PPPs). Jointly, the transport and power sectors take up 80 per cent of the $70 billion infrastructure projects currently underway in the region.

The international bond market has also proved an important avenue for raising development cash. Rwanda issued its debut $400 million Eurobond in April at a yield of 6.875 per cent, which is cheaper than borrowing from the local market.

Kenya is a planning to issue a $1.2 billion Eurobond next year, while Tanzania is planning a $1 billion international bond.

Considering that Kenya plans as much as $15 billion worth of power projects over the next five years — with much of the  funding expected to be in the form of debt — and the country’s slow GDP growth, analysts say the rise in debt could cause serious challenges in the future.

They say the region needs to come up with innovative ways of funding infrastructure projects to reduce dependence on debt. Currently, less than one per cent of the large infrastructure projects in the region are funded through PPPs.

Kenya passed a PPP Act as well as entering into a project with the World Bank to identify its PPP pipeline, and it has also established a central PPP Unit to help push for these projects. Uganda, through its PPP Unit, is looking at developing police and correctional facilities.

PPPs could become even more important as the region moves towards commercialising its oil and gas sector, with projects like the planned refinery in Uganda.

The Ugandan government said it will invite private investors to take up a 60 per cent share in the planned refinery, with the rest of the shareholding expected to be taken up by East African governments.

The governments, experts say, must streamline its tax and investment laws to become incentives rather than impediments.

The growth in international borrowing has influenced government foreign policy, with China now seen as a favourite due to its willingness to fund projects.

Over the past three years, Kenya’s debt to China has risen by nearly 50 per cent; China has overtaken France and is now the second largest lender to Kenya, behind Japan.

Data from the Central Bank of Kenya shows that Kenya’s debt to Beijing rose by 50 per cent to $750 million in the year ended June 2013, from $500 million in fiscal year 2011-2012.

In the year ended June 2013, Kenya’s external debt rose by Ksh79 billion ($908 million) to stand at Ksh843.6 billion ($9.68 billion).