How Dangote refinery will reverse manufacturing sector's declining fortunes, prop up Lamu economy

The groundbreaking for the Dangote East Africa Petroleum Refinery in Mokowe, Lamu County. [PCS]

The Dangote-fronted refinery will reverse the declining fortunes of the local manufacturing sector, with the government saying it could nearly double the sector’s contribution to the Gross Domestic Product while also propping up Lamu County’s economy to become among the richest counties.

The manufacturing sector, which has been on a decline for more than a decade, is set to benefit from the complex that will produce petroleum products but also produce materials used in the manufacture of plastics and rubbers.

David Ndii, President Ruto’s economic advisor, said projections show that the refinery could contribute as much as five per cent to the Gross Domestic Product (GDP), which would increase the manufacturing sector’s contribution to GDP to 12 per cent.

The sector’s contribution to GDP has, over the last decade, been on a decline to stand at 7.1 per cent last year from about 12 per cent a decade ago. Contribution by the sector to the economy peaked at 12.8 per cent in 2007.

“If you look at the potential for this refinery alone, it will contribute three per cent of GDP. This will increase the contribution by manufacturing to GDP to 10 per cent. If you look at the petrochemical industry multiplier effect... that is another two percentage points, increasing the sector’s contribution to GDP to 12 per cent," said Ndii.

Over the construction phase, the project is projected to create about 60,000 jobs, with the people engaged in the project expected to earn a combined Sh2 billion a month, according to Ndii, a substantial chunk of which will be spent in the Lamu economy. When it is operationalised, Ndii said the project had the potential to move Lamu from being among the poorest counties in the country to being among the counties with the biggest GDPs.

The county’s economy is largely driven by tourism and fishing, with the recent launch of the Lamu port having resulted in transport and storage starting to emerge as key economic sectors.

“Today, the Lamu economy is about Sh50 billion a year. It is fourth from the bottom. By the time this refinery is finished, it will move Lamu to fifth position. When you add the multiplier effect, in our estimate, it will be the fourth largest county economy in the country in less than a decade after Nairobi, Kiambu and Mombasa,” he said.

While Lamu County's Gross County Product (GCP) is classified among the poorest at Sh50.9 billion and contributing only 0.4 per cent to the Kenyan economy and only ahead of Tana River, Samburu and Isiolo, the GCP per capita is one of the highest at Sh304,000, which is above the national average and ranks Lamu as the fifth richest county per capita in Kenya, largely on account of few residents in the county.

The refinery is expected to import most of the oil it will refine, which has raised concerns that despite the trillions that will be pumped into the facility, it will not shield Kenya and the region from volatility in global markets. Analysts have argued that making use of resources available in the region would have helped the East African region reduce the shocks experienced whenever there are crises in oil-producing regions such as the current war in the Middle East or in instances where the local currencies weaken against major world currencies.

Ndii said in developing the project, both the petroleum resources available in the region as well as imports were considered and, in both instances, the refinery was economically viable and offered significant benefits, including lower prices at the pump and foreign exchange.

“When we list our resources in this region, petroleum comes up. We have the potential to produce with East Africa about 600,000 barrels of oil a day. We consume about 20 million metric tonnes a year, which is about 400,000 barrels a day,” he said, adding that in importing refined petroleum products, the region spends about $10 billion (Sh1.3 trillion) annually, with Kenya alone spending $4 billion (Sh520 billion), which is a significant amount of money.

“We pay about $10 (Sh1,300) per tonne to ship the products here, which translates to $2 billion (Sh260 billion) annually. The investment in the refinery is about $16 billion; if you think about $2 billion and $16 billion, it is an eight-year payback period from the savings on shipping costs only,” he said.

“Investment of this scale makes sense, even if you do not have crude, even if you are bringing crude from the rest of the world and adding value for our regional market, it makes economic sense.”

The Lamu refinery will largely be financed by the Dangote Group, which will have a 70 per cent stake while the balance is expected to be held by the governments in the region. Kenya is expected to have a 10 per cent stake and will invest Sh64.7 billion in the project.

Ndii touted the investment as an instance of getting African solutions to challenges that the continent faces, adding that it is unlikely that the project would have moved ahead with funding from lenders and companies from developed countries, which are bent on ensuring that they continue to gain by Africa importing petroleum products from their refineries.

“It is doubtful that this project would have come to fruition if we had been relying on international investors from the rest of the world because those people are the ones who sell us refined products. They are not too keen to compete with their refineries in other places,” he said.

“If you look at other refinery projects other than in countries where capital comes from, they have not succeeded.”