The Auditor General in a 2018 report indicated that the government had used the Port of Mombasa as security for the Chinese loan used in the construction of the railway line.
Kenya borrowed $3.2 billion (Sh384 billion at today’s exchange rate) for the construction of the Mombasa-Nairobi line and $1.5 billion (Sh180 billion) for the Nairobi-Naivasha phase.
According to the audit report, the Exim Bank of China would take over the port and become the principal shareholder of KPA.
“KPA assets are exposed since it signed the agreement where it has been referred to as a borrower under clause 17.5, and any proceedings against its assets by the lender would not be protected since the government waived immunity on the KPA assets by signing the agreement,” said the Auditor General in the report.
A recent paper by scholars from Johns Hopkins University, however said the Auditor General may have been wrong in interpreting the SGR loan agreements between the government and the Chinese lenders and that the Port of Mombasa was not used as collateral.
The authors of the paper argued that instead of serving as collateral or security for the loans, the profitable Mombasa port was linked to the SGR project as its major customer.
“The port’s only role was to help Kenya Port Authority (KPA), its owner, ensure that a set level of cargo would be transported between Mombasa and Kenya’s inland capital of Nairobi. If cargo levels dropped below that level, KPA agreed to draw on its own revenues to make up the difference,” reads the report in part, which is titled “How Africa Borrows From China: And Why Mombasa Port is Not Collateral for Kenya’s Standard Gauge Railway.”
The report goes on to say, “the SGR project was carefully and creatively constructed to reduce the risks of a sovereign default and enhance the bankability of a project with significant benefits to Kenyans, now and in the future.”
Opaque details of the SGR contract
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Former President Uhuru Kenyatta had promised to make the SGR contract public, while speaking on live TV. He however did not live up to the promise and left office last month with the contents of the contract still unknown to the public.
State House would later note that the president had been advised by the Attorney General against making public the document, noting that the institutions that signed the agreement are bound by confidentiality and disclosure of the content must be guided by certain processes.
The promise of making public the contract is spilling into President William Ruto’s administration.
Transport Cabinet Secretary Kipchumba Murkomen last week told Parliament’s committee on vetting that he would make public the SGR contract if he was approved.
“If approved, I will look for the SGR agreement and make it available to the public because no one knows the contents of that agreement,” Mr Murkomen told the National Assembly Speaker Moses Wetang’ula-led Committee on Appointments, which vets Cabinet Secretaries.
Forced to use SGR
Cargo importers have for more than four years been forced to use the railway, even in instances when it was more expensive and inconvenient than other forms of transport.
The freight service, which started operations in January 2018, struggled to attract business and to give it a boost, the government in June 2018 issued directives requiring cargo importers to use SGR.
Cargo destined for Mombasa required KPA’s prior approval for it to be cleared at the port Mombasa otherwise all other cargo would be moved by train to the Inland Container Depots in Nairobi or Naivasha. The directives were challenged in court, which declared them illegal, but the government appealed the ruling at the time.
Coast-based businesses had been fighting the directive, noting that the economy of the coastal city deteriorated on account of the directives as it heavily relied on the port.
The directive has however been vacated following the order by President William Ruto that all port operations revert to the Port in Mombasa.
The move could be detrimental to SGR, which has relied on cargo owners being forced to use the railway to grow its earnings to Sh15.2 billion last year, from zero five years ago when it started operations.
Did Kenya get value for money?
It is always in question whether Kenya got the best possible deal in SGR. Kenya constructed its 472 kilometre Mombasa-Nairobi line at $3.2 billion (Sh384 billion at current exchange rates), which is in comparison to the 756 kilometre Addis Ababa-Djibouti railway line that was build at a cost of $3.4 billion (Sh408 billion). While the government has defended the Kenya line as having had its unique challenges and features, many have seen Kenya’s spending as having been inflated.
The critics include Jimi Wanjigi, who said he is among those who mooted the SGR during former President Mwai Kibaki’s last term in office.
Wanjigi criticised how the project was implemented. He noted that the initial plan was to use private capital and have the railway run from Mombasa to Malaba.
He also noted that the cost was inflated by over 10 times.
"SGR was a project birthed by me in 2008 with the same company called China Road and Bridge. We birthed it. We spent a lot of money doing feasibility and technical studies. The intention, when we began, was that the rail was going to be a private rail, nothing to do with government. In fact, government was just supposed to provide the land, which we were prepared to lease. It was like a real estate project," said Wanjigi in an interview on Sunday night.
“It was Sh55 billion from Mombasa all the way to Kisumu, in fact Malaba... What we wanted to do was straighten up the line and because we know who carries cargo, get them to invest in the wagons rolling stock and pay us real estate value.”
Another harsh critic of the project has been economist David Ndii, who has recently been appointed President Ruto’s economic advisor.
Before construction works began, Ndii had noted that the country could refurbish the old line – the metre gauge railway – at a fraction of what was to be spent on the new SGR and get more of less the same value that the new railway would offer.
“We could have gotten the same service (we will get from SGR) by upgrading the existing one for a quarter of the money,” he said in the past.
He had also noted that the high cost of the new railway would hamper Kenya’s efforts to borrow externally,
“Our ability to borrow would be significantly compromised and it might mean borrowing at higher interest rates,” he said.
“The consequences of the project will outlive the (Jubilee) Government for many years. The terms of the borrowing, including the interest rate and the currency in which the loan will be issued and the grace period are not clear.”
Kenya railways still not in charge of SGR
It is still in doubt how much skills transfer the operators of the SGR have undertaken to ensure that locals can run the railway.
When the SGR operations were launched, it appeared that Kenyans were in control of the new line and locomotive operations. It later emerged the Chinese were very much in control of the operations including driving the locomotives.
It was expected that Afristar – a subsidiary of CRBC which built the railway – would train and equip Kenyans with knowledge and skills to run the new line. Things appear not to have moved and a plan by Kenya Railways Corporation (KRC) to take over operations from the company by May of this year failed to materialise.
Afristar had a contract to operate the railways for 10 years, but Kenya railways said there were exit clauses that it could exercise half way through the contract. In mid 2021, it said that it had started to take over some of the functions and expected to complete the take over of operations by May 2022, which would coincide with SGR’s fifth anniversary.
This however did not happen and the Chinese firm is still in control of SGR.
KRC and Afristar have had difficult relations which is seen in allegations of fraud in ticketing by senior Afristar officials, claims of Afristar hiding information from KRC and at some point KRC considering terminating the operations and maintenance contract, even seeking a legal opinion from the State Law Office.
Data by the Kenya National Bureau of Statistics (KNBS) shows that that revenue from SGR cargo service went up 24 per cent last year to Sh13 billion, up from Sh10.5 billion in 2020.
Revenues from the passenger service increase to Sh2.2 billion in 2021 from Sh896 million in 2020 – although in 2020 travel was hit by Covid-19. During the year, the passenger service halted operations at some point while passengers generally stayed away.
SGR has been making losses, spending more on operation and maintenance than the revenues. The government however defends it noting that it is an enabler.
How the SGR increased your cost of living
To enable the government keep up with SGR loan repayments, the National Treasury imposed the Railway Development Levy (RDL) on Kenyans in 2013.
The levy, which was initially pegged at 1.5 per cent, was later raised to two per cent in the Finance Act of 2019.
Between Financial Year 2013-2014 and June last year, the taxman had collected at least Sh163.4 billion from the levy. The levy, which was imposed imposed on all imports, has played part in making imports costly and in turn pushed up the cost of living.
Defaulting on SGR loan repayments
There have been reports that the government defaulted on repaying the SGR loans in July and the Exim Bank of China penalised Kenya Sh1.31 billion.
Treasury however denied reports and said that it remained in good standing with other lenders. The loans repayments are made semi-annually on January 21 and July 21,
“We wish to state categorically, that Kenya has never defaulted on its settlement of its debt service obligations to any of its creditors, nor has any creditor filed or reported any claimed of default on debt service payments on facilities extend to the government of Kenya,” said Ukur Yatani cabinet secretary Treasury in an October 13 statement.
“Furthermore, Kenya has noted accumulated any debt arrears in decades to suggest difficult in debt servicing.”
There has been concern about Kenya’s debt sustainability but Treasury has over time tried to allay fears that the country has procured too much debt.
Total public debt stood at Sh8.58 trillion at the end of June this year, according to Central Bank data.