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Mystery of Sh1b monthly bill taxpayer gives firm to run SGR

By Paul Wafula | July 8th 2018
By Paul Wafula | July 8th 2018
The operator earns Sh31.5 million per day to run the railway before adding the variable costs. [Courtesy]

Kenya is paying Sh1 billion every month to the Chinese to run the Standard Gauge Railway, a project initially meant to evoke pride and nationhood for citizens.

The Sunday Standard has gained exclusive access to the contract between China Road and Bridge Corporation (CRBC) and the Kenyan Government, that has condemned Kenyans to paying Sh31 million every day for the running of the Madaraka Express.

An insider who was part of team that drafted the Operations and Maintenance Contract says that initially Kenya Railways (KR) had wanted to pay CRBC a management fee for operating the railway and then reimburse them at the end of every quarter the costs involved in running the railway.

The contract also required KR to make an interest-free advance payment of Sh3.5 billion to CRBC before the start of operations. 

“The Advance Payment shall be due and payable by KR to the Operator upon receipt from the Operator of the Advance Payment Bond,” the highly guarded report adds.

Fixed deductions

The operator would have repaid this advance payment through fixed deductions of 1,093,750 dollars, which translates to about Sh100 million every four months.

Insiders also warn that KR took the demand risk in what made the operator a mere driver and mechanic.

“The role of CRBC was only to ensure the train was available when required,” our source said.

There are other costs of Sh1.3 billion that were to be incurred before the start of operations known as Pre-Operations Phase Services Payment.

Here, the Chinese operator was entitled to payment from KR in respect of all agreed activities before operations began.

“For the period up to and including the Planned Start-up Operations Date the agreed amount due to the Operator shall be 13,015,791 dollars which sum shall be paid by KR to the Operator prior to the Start-up Operations Date and interest thereon shall accrue (notwithstanding any other provision of this Agreement) at the rates provided for in Clause 26.12 from 1 July 2017,” the contract says.

The contract had also ring-fenced the Chinese to continue making money in case of delays in starting the operations. The contract says that from the day the planned operations were scheduled to start to the actual date the train started operations, the operator was to be paid 242,515.24 dollars or Sh24million per day.

Switching to higher fees

“In the event that the Start-up Operations Date is more than one (1) month after the Planned Start-up Operations Date the Operator shall be entitled to submit monthly invoices until the Start-up Operations Date and such amount shall be due and payable by KR to the Operator within twenty eight (28) days of submission of the invoice to KR,” the contract adds.

Upon starting the actual operations, KR was to now pay what is described as Start-up Operations Phase Services Payment.

This amount was to be paid in two installments. The first installment of Sh3.8 billion was to be paid at the contract execution date while the second installment of Sh2.8 billion was due at the end of the first six months.

This means that China Road was earning Sh1 billion per month for the first six months before switching to higher fees.

Per day, the operator earns Sh31.5million to run the railway which translates to about Sh945 million every month, before adding variable costs.

To protect their interests, the money generated from the ticket sales were to be deposited into a reserve bank account as well as all payments from Kenya Railways.

“The parties agree that they shall enter into the Reserve Account Bank Agreement as soon as practicable after the Execution Date. One of the key functions of the Reserve Account shall be to ensure that payments due to the Operator ... are made when due and payable by KR to the Operator,” the contract reads.

There is also a minimum amount that should be kept in the reserve account.

Though the Chinese operator is responsible for the repair and reinstatement of any minor damages to the trains and other assets.  

In the event that the aggregate cost of undertaking such repair and reinstatement exceeds Sh5 million (50,000 dollars) in any calendar year, the excess shall be reimbursed by KR to the operator upon demand.

China Road is also to manage the fares ticketing system and associated software and hardware as well as collect fares associated with passenger travel on the SGR.

“The Operator shall also, as agent of KR, manage a system for collection of non-cash revenue, including payment utilising the M-pesa cash transfer platform,” the contract adds.

Kenya Railways job was to ensure that all necessary laws allowing the operator to collect the fares are in place.

Our official inquiries on how much it costs the country to run the railway per day, month or even for the last one year to the people tasked with spending public money has at best been evaded, ignored or dismissed by officials in charge. 

Treasury Cabinet Secretary Henry Rotich asked us to seek answers from KR.

“Kenya Railways is better placed to answer you,” Mr Rotich said in a text message. We placed the same question to Kenya Railways and the Ministry of Transport.

“How much we are spending each day? You know even if I ask you at the Standard Group how much you are spending each day, you cannot tell because it varies,” Kenya Railways MD Atanas K Maina said.

“You see things keep changing like we have been doing six freight trains and this month we will be doing seven,” he added.

When we asked him what is the gap between revenues and expenses, Mr Maina said the train has barely been in operation for a year and it is too early to have that figure.

Transport Cabinet Secretary James Macharia also did not respond to our text messages on the matter.

The only information that the railway authorities are willing to share is when they hope to break even.

“We are targeting to break even in three years and by the fifth year we should be in surplus,” Maina said.

But the contract shows that KR boss should know how much it costs to run the trains given that part of the provisions of the contract required the Chinese firm to submit periodic returns.

“The Operator shall maintain and furnish to KR, in written and in electronic format, the required progressive reports set forth,” the contract reads.

Treasury continues to pump billions of taxpayers’ money into the SGR every year, yet the contracts, costs and revenues coming out remain a top secret. Not even internal auditors at KR have been allowed access to the SGR revenue records.

In his budget statement this year, Rotich said after completion of phase 1 of the SGR last year, Kenyans are now enjoying cheaper and faster travels between Mombasa and Nairobi using Madaraka Express.

He said the other milestone has been the launch of the SGR freight service in January 2018, which has facilitated cheaper movement of goods.

Monthly loads have been increasing steadily from the initial 22,345 metric tonnes to 213,559, a ten-fold increase, he said.

This year, the Government has allocated Sh74.7 billion for the line to Naivasha.

A total of Sh75.6 billion was pumped into the SGR in 2017, of which Sh15.5 billion was used to complete Phase 1. The remaining Sh59.1 billion was used to kick start the second phase, meaning that by the end of this financial year, the line to Naivasha will have consumed a total of Sh133.8 billion. Another Sh400 million was spent on relocation of families along the railway lines.

In 2016, Rotich allocated Sh154.4 billion to the SGR of which Sh118.2 billion was external financing from China and the remaining Sh36.2 billion was the contribution from Kenya.

In 2015, the SGR consumed Sh118.1 billion from a Chinese loan. Another Sh25.7billion financing came from the Railway Development Levy Fund, in what saw a total of Sh143.8billion spent.

In total, Kenya will have spent at least Sh448.9 billion on the SGR by the end of this financial year. Other costs incurred before 2015 as well as the land compensation fees will push this cost beyond Sh500billion, which is nearly half of what the taxman collects in annually.


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