Japan and China are competing for control of East Africa’s economic landscape, which has seen each country roll out big projects in the region.

Last week, Japan moved to strengthen its position as a top investment partner by providing a Ksh28.9 billion ($340.6 million) loan to the Kenya government for building a bypass in Mombasa to ease traffic from the port.

The new rivalry is informed by the fact that the region’s prospects look much brighter after the oil and gas finds of the past two years in Kenya, Uganda and Tanzania.

(Read: Give China all the roads; traditional donors have moved on to other projects)

The day after Japan announced the loan on Tuesday, China, announced a $100 million (Ksh8.5 billion) grant to the Kenyan government for the installation of closed circuit television cameras in major cities and towns to monitor terror activities.

The $100 million grant pales in comparison with the other larger investments that China has made, especially in infrastructure and energy sectors. However, the significance of the grant is that it shows the Asian nation is attuned to Kenya’s most pressing problems.

According to a report by audit firm Ernst and Young, released earlier this month, China has fared much better than Japan in terms of job creation and investments in the region. This is important because of the region’s high population growth rate.

Japan is lagging behind but is keen on expanding its influence in the East African region. It gave Uganda Ush35.7 billion ($14.5 million) in February, to fund schools and health care centres in northern Uganda.  The social sector has been the biggest beneficiary of Japan’s investment as Chinese firms eye the oil find in Uganda. 

Japan is also keen on funding geothermal projects in Rwanda. The latter is looking to raise Rwf 600 billion ($1 billion) to boost its electricity production. Rwanda said it hopes to produce 300MW of geothermal power by 2017 and some European firms and China have shown interest in funding the project.

There has been a shift in the balance of trade, with the Chinese having the upper hand compared with the Japanese.

Also, while both countries were at par on the value of imports into Kenya five years ago, the Chinese have raced far ahead. Kenya’s imports from China reached Ksh144 billion ($1.69 billion) compared with Japan’s Ksh58.6 billion ($690 million) in 2011, according to the recently released Economic Survey 2012.

This is why Japan has been keen on playing catch up by pumping more money into regional economies. The Japan International Co-operation Agency (JICA) increased its grants to Kenya from ¥1.75 billion (Ksh1.8 billion) in 2008 to ¥2.8 billion (Ksh3.05 billion) in 2011, according to the annual report. But its official development assistance has been declining, falling to ¥1.2 billion (Ksh1.29 billion) from ¥1.6 billion (Ksh1.71 billion) in 2008. The Japanese are mostly lending to infrastructure and energy projects.

“The development of the port is considered a commercial project,” said Matasura Hiroshi, head of economic co-operation at the Japanese embassy in Nairobi.

This means that a company like Toyota, which plans to import and retail secondhand cars, will benefit from the improvement of the port through faster clearance of goods.  “As a government, we want to push more Japanese companies to invest in Kenya and Africa,” said Mr Hiroshi.

Toyota Tsusho Corp, a Japanese firm, won the bid to build new geothermal plants worth Ksh40 billion ($481 million), cementing Japan’s involvement in Kenya’s geothermal power generation. The same Japanese firm has already completed a feasibility study of Kenya’s Lamu port and is expected to make a financial proposal. The Lamu port appears to be the most attractive alternate route for South Sudan’s oil at this time.

Other Japanese firms are also making inroads into the consumer markets. Toyota, the auto maker, earlier this month through its subsidiary Toyotsu, opened a Ksh500 million ($5.88 million) showroom in Nairobi and a spare parts shop that would allow it to scale up imports of brands such as Subaru, Daihatsu, Hino trucks and buses.

“Japan and China are large economies and they are looking for markets where they can deploy their capital,” said Samuel Nyandemo, a senior lecturer in economics at the University of Nairobi. “Japan wants to show China that it can also flex its muscle and establish its presence here. It is good for Kenya to have the two competing. But the question we need to ask ourselves is how efficiently we can use their money,” said Dr Nyandemo.

China promised South Sudan $8 billion in new investments earlier this month. The loan will fund roads, bridges, hydropower, agriculture, and telecommunications projects over the next two years in Africa’s newest state.

“China’s primary focus seems to be on the oil. Everything that they are doing seems targeted at finding ways of getting the oil faster to China,” said Gitau Githongo, an economist based in Nairobi. The Chinese constructed Kenya’s first super highway, the Thika Road, and have also won contracts to construct other bypass roads in Nairobi. 

But the analysts are concerned that the two nations are not building local capacity.