How Egyptian firm burnt fingers in Rift Valley Railways ‘lunatic’ black hole

photo:courtesy

Rift Valley Railways (RVR) has been like the proverbial black hole where investments are irretrievably lost. Every firm that has put money into the concessionaire has a story to tell of losses that usually run into billions of shillings.

The latest victim is Qalaa Holdings, the Egyptian investment firm that bought a 17 per cent stake in 2009 and increased it to a controlling 51 per cent in 2010 — growing it to 85 per cent in 2014.

Qalaa last week got what could have been the biggest shock in its business life after Kenya Railways (KR) terminated RVR’s concession. While it still has the Uganda bit of the railway, it could soon have nothing to show for its investments with the country reportedly also considering terminating the concession.

According to KR, the firm will walk away with nothing as the termination was due to RVR’s failure to meet the terms of the contract. The concession agreement signed in early 2006 had appeared to shield RVR with non-competition and other clauses that would guarantee a huge payout in case the Government terminated it.

However, going by Kenya Railway’s position, Qalaa Holdings and Bomi Holdings (which holds the other 15 per cent) will not get a cent from the Government.

KR Managing Director Atanas Maina said RVR did not meet many of the conditions of the concession, which were grounds for termination.

“RVR defaulted in its payment of concession fees, rent and other key performance indicators under the concession agreement. The Government will not be paying them anything since they are the ones in default,” said Mr Maina last week.

“We are in the process of verifying and reconciling the assets being handed back to KR to establish the extent of investment by RVR, if any, or the extent of depreciation of the same.”

And from that, Qalaa Holdings joins the list of firms that have burned their fingers after investing in RVR. The firm, operating as Citadel Capital, bought a 17.5 per cent stake in 2009 in RVR following acquisition of a 35 per cent stake in Sheltam Railways, the South African firm that initially owned a 61 per cent stake in RVR at the time the railway was handed over to the concessionaire.

It later that year acquired the entire stake of Sheltam Railways and became the controlling shareholder with a 54 per cent stake. It further bought a 34 per cent stake belonging to investment firm TransCentury in 2014, pushing its shareholding to 85 per cent.

In its 2015 annual report, Qalaa said it spent $287 million (Sh28.7 billion) between 2012 and 2015, in what it called a multi-year programme where it invested in modern rail operating technology, rebuilt the infrastructure, expanded haulage capacity and improved skills of RVR’s workforce.

CONTESTED INVESTMENTS

The investments are contested by KR, which argues that there have been minimal investments and that this was one of the reasons why it terminated the concession.

Local investment firm TransCentury incurred a Sh1 billion loss between 2009, when it acquired a 25 per cent stake, and 2014 when it exited after selling its shareholding that had by then grown to 34 per cent.

The company sold its stake to Citadel Capital at Sh3.79 billion which, according to its books, was Sh1 billion less than the Sh4.79 billion cumulative fair value of the investment it had injected over time.

Centum is the other firm that had regrets buying into RVR where, by the time of exiting, it lost Sh150 million. The firm in 2010 disposed of its 10 per cent shareholding in the railway firm at $4.5 million (Sh450 million), which was taken up by its partners in RVR, considerably lower than the Sh600 million ($6 million) it had over time invested in the company.

Analysts then termed Centum’s investment in RVR as the worst that the firm had ever made.

By the time of the concession’s termination last week, Qalaa and Bomi were the only shareholders in RVR that had been overwhelmed by old debts as well as the cost of the day-to-day running of the railway.

KR was demanding more than Sh400 million from RVR by December 2016 in unpaid concession fees and a further Sh175 million in rent arrears. It was also demanding more than Sh2 billion for assets that reached their end of life while RVR was in charge.

Other factors that led KR to terminate the concession included failure to grow the cargo hauled on the railway as well as little or no investments in the track.

“The concessionaire has failed to achieve the freight volume targets...as per the Joint Railway Commission,” said KR in a March letter to RVR informing the concessionaire of planned termination of the contract.

“The concessionaire has failed to maintain the track in accordance with the good industry practice as per the agreement. The concessionaire has as a result imposed speed restriction on 187.32 kilometres of the main line which is 17.3 per cent of the line,” said the letter.

“Further, the concessionaire has failed to rehabilitate and maintain locomotives, rolling stock and buildings and structures as required by the agreement.”

RVR then moved to court in an attempt to stop the termination but the court ordered the concessionaire and KR to resolve the issue out of court, which led to termination by consent.

In an interview with The Standard in June, RVR Chief Executive Isaiah Okoth said that defaulting on paying Kenya Railways rent and concession fees was necessary to keep the metre-gauge line alive. He said he had the option of keeping the railway going or pay the money owed to KR and shut down operations.

NOT A PRIORITY

“We have prioritised maintaining operations and keeping people on the job as we wait for the coming in of an investor,” he said.

“Our priority was to handle issues that could stop the train from moving. We needed to have fuel, lubricants, consumables, insurance, payroll, cater for operations and this is where the money has been going. If we do not do these, the operations would have to shut down,” he said.

“Paying concession is not part of this priority and anybody could understand. The Government should have understood why we were prioritising these, especially when the main investor was leaving and we are looking for a new one.”

He said non-payment of the concession fees was not intentional but a strategy to ensure the assets did not cease to provide services.

“In the absence of a new investor and exiting investors not injecting funds, we have had to continue with defaulting on concession. If you pull the money out and pay the concession fee, it would mean not paying salaries or fueling the trains,” said Mr Okoth. 

RVR had hoped that the shareholders or a new investor would inject about Sh6 billion, which would enable the operator to stabilise the railway and grow the number of customers.

“The track’s capacity is low. It had not seen any significant investments even before the concession. The neglect started way back and by the time RVR was coming in as a concessionaire, the state of the track was very bad,” said the CEO.

One of the prospective buyers that RVR lost was Emerging Capital Partners, a pan-African private equity firm, which pulled out of negotiations to acquire the railway operations held by Qalaa.

Transport on the century-old line had proved to be tough and loss-making for RVR, raising questions whether any investor would want to put their money in the railway.

COPE WITH COMPETITION

Matters were further complicated when the State ruled out any compensation for the owners of RVR, saying the Standard Gauge Railway (SGR) was not in direct competition with the older line.

Termination of the concession, which had another 10 years before it elapsed, comes two months after the launch of the SGR between Mombasa and Nairobi.

Kenya Railways and RVR were already in agreement that SGR would take over the passenger service from the meter-gauge rail while the new service was expected to increase competition with the old line next year, when it would fully start hauling cargo on the route.

There has been debate on whether the ‘Lunatic Express’ would be able to cope with competition from SGR and the termination of the concession might hasten its death.

Mr Maina, however, said KR would continue operating the old railway as it ponders whether to look for a different operator.

SGR is being operated by China Road and Bridge Corporation, which also built it and has been awarded the contract to extend the rail to Naivasha and later to Kisumu and Malaba.

KR is also evaluating what to do with the more than 2,000 RVR employees, where untangling the employees from the entity could prove a complex process.