A mega-port project on the north Kenyan coast conceived in the 1970s may finally be gaining traction based on commercial oil finds in Uganda and Kenya, but it needs more financing to compete with a Chinese-backed port in Tanzania and other rivals.

Initial work has started on a mangrove coast near the ancient Arab trading post of Lamu that could in a few years be a bustling container port and crude terminal, creating an export hub for fast-growing east African states and their oil.

But Kenya must shore up regional commitment for the $25.5 billion Lamu Port-South Sudan-Ethiopia Transport (LAPSSET) plan that by 2030 envisages a port, new roads, a railway and pipeline.

It must also overcome environmental worries and make a clearer economic case to avoid creating one more African white elephant.

The prize will be to bolster Kenya's primacy as east Africa's trade gateway and capitalize on a bonanza from one of the world's hottest undeveloped oil provinces, where exports from Uganda and Kenya alone could reach 500,000 barrels per day.

Experts say the Lamu port and transport links are viable, if not on such a huge scale. Some South African banks are watching closely. But emerging markets now face tougher times raising cash and no big donors, such as China, have thrown their full weight behind the plan. Other pitfalls also lurk.

"The big obstacle is really a political one and making sure all the discussions that need to happen, happen," said Clare Allenson, analyst at the Eurasia Group consultancy, referring to a region where rivalries can run deep even within the east African trade bloc.

"This is a very grandiose scheme and there are ample examples of this type of thing never coming off the ground (in Africa)," she said.

Initially predicated on convincing South Sudan to switch its oil exports to Lamu from the regularly disrupted pipeline it now uses via Sudan, the Kenyan scheme has found a new raison d'etre.

First, Uganda agreed to ship its future oil output through a pipeline to Lamu. Then last month, British explorer Tullow Oil increased Kenya's oil reserve estimates and said east Africa's biggest economy could start oil exports by 2016.

"We are now talking about three oil sources, up from one oil source when the studies were previously done," LAPSSET Chief Executive Silvester Kasuku told Reuters.

ECONOMIES OF SCALE

Kenya's virtual monopoly on regional trade through its now-congested Mombasa port, however, has often rankled its neighbors.

South Sudan has suggested that a new pipeline, probably warranted only if it finds more oil to replace mature fields, could run through Ethiopia to a port in Djibouti. Uganda lately backed a Kenyan route, after mulling one via Tanzania.

But Kenya and Uganda may be enough to get the oil terminal going. Nairobi is confident it can make an economic case for a Uganda-Kenya pipeline costing an estimated $2.5 billion to $5 billion, made costlier because Uganda's waxy oil means it must be heated to enable flow. A spur could then go to South Sudan.

"We are talking about economies of scale here ... which gives greater investment credence to the project, raises the project's profitability and de-risks a lot of other factors which were associated with one single oil source," Kasuku said.

The desire swiftly to monetize oil in the ground may also be focusing minds in the region, where many are still in poverty.

"East Africa is getting its act together in terms of starting to realize that if they do things together, they can move faster," oil and gas consultant Mwendia Nyaga said.

A compacted dirt road cut through the mangroves is the first sign of work at the site, where a Chinese firm has a $470 million contract for Lamu port's first three berths.

Those are the first of 32 planned berths at a port estimated to cost $5.5 billion. Further funds will be needed for the planned roads and railway linking South Sudan and Ethiopia, a land-locked nation of 90 million people that is growing swiftly.

But financing is merely trickling in. Battling a big budget deficit, Kenya allocated only about $48 million to the project this fiscal year. China's involvement with Lamu pales against its backing for Tanzania's $10 billion Bagamoyo port plan.

The World Bank, African Development Bank and European Union are funding roads linking Kenya with South Sudan and Ethiopia. Though this could help the Lamu project, these donors and concessionary lenders are not directly funding LAPSSET.

On the international markets, funding has become trickier as the United States looks set to rein in its loose monetary policy, hiking interest rates for emerging market borrowers. Still, some South African banks and others are keeping an eye on the project.

ECONOMIC CASE

"Given the ultimate size of the project, there will be considerable space for all lenders with African debt capacity to play (a role) in the funding," said Mike Peo, head of infrastructure at Nedbank Capital, the investment banking arm of South Africa's fourth-largest bank, Nedbank.

South Africa's Rand Merchant Bank also said it was interested, while London-based emerging markets specialist Standard Chartered said it was watching progress.

The Development Bank of Southern Africa (DBSA) has said it was keen to be a lead arranger for funding. Kasuku said the bank could offer as much as $1.5 billion to LAPSSET.

Fast-expanding regional economies provide a case that could make both Lamu and its Tanzanian rival commercially attractive, as trade increases to meet more demanding populations.

Kenya, Uganda, Ethiopia and others in the region with annual per-capita incomes now in the hundreds of dollars are aiming for middle-income status around $1,430 in the next decade or so.

But Nairobi needs to make a more careful case to secure funding and may need to focus on the oil side of the plans.

"A lot of the elaborate elements of the project are not going to reach fruition," Africa Confidential editor Patrick Smith said. "On the core oil terminals, I think they'll struggle but I think they'll get the money for it."

Some say Kenya must make a clearer case for creating a new container port over expanding and upgrading Mombasa.

"I don't see how container shipment through Lamu port can be the business case for the port," said Steve Felder, east Africa managing director of Danish shipping and oil group A.P. Moller-Maersk.

On the ground, the government faces worries the new port and surrounding development will harm delicate coastal vegetation and marine life, and could overwhelm the popular tourist destination of Lamu, where donkeys are still the main form of transport amid traditional Swahili coastal architecture.

Residents fear a land grab by a wealthy elite as the project gets under way at the expense of locals, a perennial complaint in Kenya. Local officials insist they will not let this happen.

"We have learnt from the Mombasa port experience where everything goes to the central government," Governor Issa Timamy told Reuters at a Lamu meeting where residents complained about seizures. "We are not willing to repeat that mistake in Lamu."

(Additional reporting by Helen Nyambura-Mwaura in Johannesburg; Writing by Drazen Jorgic and Edmund Blair; Editing by Dale Hudson)