Wheels come off SGR dream as Sh35 billion loan comes due

“It is not uncommon for a country to create a railway, but it is uncommon for a railway to create a country.”

These words of British colonial administrator Sir Charles Norton Edgecumbe Eliot on East Africa’s first railway line, the Lunatic Express, will perhaps appear alongside Eliud Kipchoge’s feat of completing a marathon in less than two hours in the annals of Kenya’s history.

But there is a new railway line running parallel to the abandoned track - the Standard Gauge Railway (SGR).

The original idea was for the new line to reach the lakeside city of Kisumu before slithering into Kampala, Uganda.  But currently, it runs from the coastal town of Mombasa to just as far as Nairobi (with the completed Naivasha section yet to open).

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And true to Eliot’s words, this is because it cannot create a new country; it only appears to have succeeded in destroying an old town.

More than 100 years ago, the British government is reported to have conscripted Africans to work on the construction of the old railway, but today, the government of an independent Kenya is forcing its citizens to do business with the new railway.

This is why residents of Mombasa County are incensed. The SGR is stripping Mombasa of its economic vitality, turning it into a ghost town.

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They would have cursed their gods if the whole thing would have been organic; if it was the inescapable power of the free market, with consumers freely opting for the new mode of transport.

But it is not a pendulum of consumer choice that is knocking down Container Freight Stations (CFS) and leaving scores of Mombasa residents without jobs, it is the hideous hand of State intervention that is bringing the coastal town to its knees.

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Traders, 95 per cent of whom had been using trucks before the much-hyped SGR came into place, are being forced onto the SGR.

This explains why in the last few days, truck owners and drivers have barely left the streets. They have been protesting Kenya Port Authority’s (KPA) directive in March that every cargo destined to Nairobi and beyond be ferried on SGR.

KPA cancelled an earlier notice that had allowed importers of nine commodities to use CFSs of their choice.

That the Government is acting like the proverbial drowning man who clutches at straws was evident in a recent directive by Kenya Railways Corporation (KRC), prohibiting passengers from entering the coaches with food.

The sheer knee-jerk reaction from the Government, the Financial Standard has established, is the fact that the first principal payment for the SGR loan, about Sh35 billion, is due in January next year, according to Treasury data. The State is desperate for cash and is hoping that the SGR can generate money to help it supplement its depleted coffers.

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The suspended Treasury Cabinet Secretary Henry Rotich said the payment would be done bi-annually.

The Jubilee administration, which chose to ignore dissenting voices concerning the bloated cost of the SGR, is finally coming to terms with the brutal reality, having not figured out how it will repay the close to Sh400 billion it borrowed from China for the colossal infrastructure.

Transport Cabinet Secretary James Macharia had not responded to our queries by the time of going to press regarding the loan repayment and the executive order that has seen truckers run out of business. KRC Managing Director Philip Mainga also did not respond to our queris.

Even the abandoned Lunatic Express, which some derided as going nowhere, had to spread its tentacles to the region to be viable. At its zenith, it went through Kenya and Uganda. 

In similar wisdom, mostly to prop up its Belt and Road initiative that will ensure the Chinese economy is constantly fed with vital resources even as it deploys its excess exports and investments, China also wanted the SGR to be connected to Kenya, Uganda, Rwanda and South Sudan. 

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Kenya alone has no capacity to sustain the SGR. The country’s exports that can be transported on rail are so meagre that if they alone were to be evacuated on the line, the job would be done in less than a week.

If you add this to the entire volume of imports last year eligible for railway transportation - about 11 million tonnes - you have a traffic of under 15 million. 

Yet, a 2013 World Bank report showed that for the SGR, with an investment of Sh325 million per kilometre, to be financially and economically viable it had to have a carrying capacity of 60 million tonnes and attract traffic of 55.2 million tonnes per year.

The scramble for the tiny quantity of imports is already too vicious. The truckers, as predicted, will do just anything in their power to beat the SGR. There is still the pipeline to transport petroleum. 

A government study done early this year on the cost of using the railway showed that the SGR was more expensive than road due to port handling charges such as re-marshalling, storage and demurrage.

While the cost then was Sh50,000 to move a 20-foot container from the SGR terminus in Miritini to the Inland Container Depot (ICD) in Nairobi, costs associated with the handling and storage of cargo at the port tend to push up this cost by more than 100 per cent, with the effect being cargo owners paying a total of Sh140,000 ($1,420).

Cargo owners would pay truckers Sh65,000 to have a similar 20-foot container moved from Mombasa to Nairobi. The bigger 40-foot container costs Sh85,000 by road.

Currently, SGR’s annual running capacity is around 22 million tonnes (although there are plans to increase it to 31 million tonnes this year), a clear indication that the modern railway will be used to move goods made outside and not those produced in Kenya. The SGR desperately needs the other East African countries to survive.

But it is struggling to reach Kisumu, leave alone Kigali, Juba and Kampala. Uganda has barely started its own. Rwanda is dithering, at one point suggesting preference for the Tanzanian route while still fawning over Kenya.

As a result, the Chinese are holding their horses. Despite approving an additional Sh369 billion for the extension of the SGR from Naivasha to Kisumu, there have been reports that China refused to release the money.

Although the Government downplayed reports that Kenya was denied funds for Phase 2 of the project - saying that was not part of President Uhuru Kenyatta’s agenda when he visited Beijing in April - the Transport ministry has since announced plans to instead upgrade the metre gauge into an SGR. 

Moreover, after Ethiopia nearly defaulted, China has started being mean with its billions.

Wang Wen of China Export and Credit Insurance Corporation, also known as Sinosure, is reported to have urged Chinese developers and financiers of projects to step up their risk management so as to avoid the Ethiopia scenario.

He cited a major mistake in the Sh400 billion Addis Ababa-Djibouti freight railway project that saw the Asian giant incur losses running into Sh100 billion.

“Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank it was still insufficient,” said Wen, citing underutilisation of major projects that China has deployed, especially railways. 

KRC appears to be holding back on how much the new railway has been earning, with the last update that the corporation gave KNBS being the earnings for February this year. But the truth is that the revenue is not enough.

Over the two months, KRC said that SGR had earned a total of Sh1.2 billion, with the share of cargo being 80 per cent, Sh959 million, while that for passenger service was Sh250 million.

But it appears to be obfuscating or downrightly inflating SGR revenues, inviting even more controversy on a project that some critics have already labelled a white elephant.

In the Economic Survey 2019 that was released to the public in April, the national statistician noted that SGR had earned Sh10.3 billion in revenues from passengers and cargo for the year to December 2018.

However, a month later, in the yet another of its reports, the Leading Economic Indicators for January published in May, KNBS had revised the figures. The revenues for the new railway were Sh5.7 billion over 2018 – a downward revision by nearly half.

Experts who pored over the numbers noted that a 10 per cent difference between provisional numbers in the Economic Survey and the final results of January 2019 was acceptable.

However, a 50 per cent decline raises suspicion over possible cooking of data by the statistics body, experts reckoned.

The difference in the numbers reported could be due to the little degree of control that KRC has on the revenue collection.

Currently, China Road and Bridge Corporation has control of the revenue collection systems as well as the custody of the revenues. KRC has in the past pushed for control of both the collection system and the revenues realised.

China and Kenya had agreed to set up an escrow account where all the revenues from SGR operations would be deposited and help in repaying the loans borrowed for constructing the railway. Assuming revenues of Sh600 million a month, the train service might still not be making enough to cater for its operations, with expenses over last year having been in the region of Sh1 billion per month.

KRC and the operators of SGR now face a huge task of convincing cargo owners to use the railway after the Government withdrew a directive compelling them to use SGR.

This will be a relief to cargo owners, who at times had been inconvenienced, with some of the cargo meant for Mombasa ending up at Nairobi’s Inland Container Depot.

One of the things that were supposed to boost SGR’s capacity were the special economic zones in Naivasha, Kisumu and Mombasa, but they remain a pipe dream thus far.

SGR is part of a proposed wider regional network for the development of railway connecting Kenya, Uganda, Rwanda and South Sudan.  Otherwise, with Kenya alone, the SGR is pretty much a white elephant.

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