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Ethiopia Courts BRICS for Rail Links to Spur Economic Growth

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May 2 (Bloomberg) -- Ethiopia is negotiating with Brazil, Russia and India to finance and build rail links after agreeing terms last year with Chinese and Turkish companies for other routes, the head of the state rail company said.

Russia’s government may fund a 587-kilometer (365-mile) southern line that will eventually connect with a proposed port at Lamu on Kenya’s northeastern coast, Ethiopian Railways Corp. General Manager Getachew Betru said in an April 26 interview. Brazilian companies could build a 439-kilometer section of a route to oil-rich South Sudan and India is considering export financing for a line to a port in Djibouti, he said.

“They want to come and invest in Ethiopia and get their return,” Getachew said in the capital, Addis Ababa.

Ethiopia, Africa’s second-most populous nation, is building 4,744 kilometers of electrified railway lines at an initial cost of 110.8 billion birr ($5.9 billion) as it seeks to reduce road-transport costs constraining the continent’s fastest growing non-oil producing economy over the past decade. Growth may slow to 6.5 percent this year and next, compared with average growth of 8.7 percent over the past five years, according to International Monetary Fund data.

Ethiopian Railways plans to lay more than 2,000 kilometers of standard-gauge track during a five-year national growth plan that runs until mid-2015. China Civil Engineering Construction Corp. and China Railway Group Ltd. are working on sections costing more than $1 billion each along Ethiopia’s main 656-kilometer trade route from Addis Ababa to Djibouti.

Loan Agreement

Officials from the Export-Import Bank of China will visit Ethiopia “in the coming days” to finalize a $3.3 billion loan for the route to the port, including the section inside Djibouti, Ethiopia’s Foreign Ministry said on its website on April 29.

Huajian Group, a Chinese shoemaker, said last year it plans to invest $2 billion over a decade building a new manufacturing zone on the outskirts of Addis Ababa. The China-Africa Development Fund has invested in Ethiopia Hansom International Glass factory and China-Africa Overseas Leather Products, a $27-million tannery, near the capital.

“Ethiopia is land-locked and Chinese factories near Addis say that transport from Djibouti is one of their biggest headaches,” said Deborah Brautigam, director of the international development program at Johns Hopkins University’s School of Advanced International Studies in Baltimore, Maryland.

Djibouti Route

Freight costs can be as much as three times cheaper by rail than road along the Djibouti route, Getachew said. The link may carry goods worth $1.3 billion a year and “break even” after 5 years of operation, he said.

China Communications Construction Co. and China Railway 18th Bureau Group International Co. are working on other connections in the northeast of the country that has deposits of the fertilizer potash, he said.

Ethiopia operates a state-led economy and is prioritizing investment in infrastructure as it seeks to transform one of the world’s least-developed countries into a middle-income nation by 2025. The decision to use electric trains is because Ethiopia, which has the continent’s second-biggest hydropower potential, generates cheap electricity and spends all of its estimated $3 billion annual export earnings on importing fuel, Getachew said.

“If we are investing in renewable energy it’s possible to use this for other bottlenecks in development like the transport sector,” he said.

Emerging Powers

Brazil, China, Russia and India are part of the emerging BRICS group of nations, which have combined foreign-currency reserves of $4.4 trillion. Ethiopia has been able to attract investment from those countries because of the “political will” of former Prime Minister Meles Zenawi and his successor, Hailemariam Desalegn, according to Getachew.

“The BRICS see in Ethiopia a government that continues to move forward with a vision for its development, despite the death of Meles, widely regarded as the chief architect of this vision,” Brautigam said in an April 29 e-mailed response to questions. Meles died in August after 21 years in power.

Last year, Yapi Merkezi Insaat VE Sanayi AS, the Turkish construction company, signed a $1.7 billion deal to build a railway from the town of Awash, which is on the Djibouti route, to Hara Gebeya. A $600-million steel mill at Kombolcha town being built by Saudi billionaire Mohammed al-Amoudi’s company lies along the route.

Ethiopia will borrow from Turk Eximbank for the project that will take 42 months, said Yapi’s General Manager Murat Hasim Koksal.

Foreign Funding

Foreign investors are granted contracts on condition that 60 percent of the funding is provided by their countries “policy banks” in foreign exchange, Getachew said. Under Chinese and Indian export-import bank terms, contractors have to come from the creditor nation and at least half of the project’s inputs should be sourced there, according to their websites.

While Ethiopia’s external debt of about 23 percent of gross domestic product is “comfortable,” the foreign and domestic credit needed for railways and other projects is a “concern,” Jan Mikkelsen, the International Monetary Fund’s country representative, said in an e-mailed response to questions.

“On domestic financing, this may result in a further crowding out of the private sector” by public enterprises that received 75 percent of commercial bank loans last year, he said.

Major obstacles have been obtaining land concessions for tracks, designing routes through mountainous terrain, and the lack of qualified local professionals, Getachew said.

To contact the reporter on this story: William Davison in Addis Ababa at wdavison3@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

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