Kenya’s rail deal with China’s CRBC a blow to taxpayers

By Morris Kiruga, in Nairobi
Posted on Wednesday, 12 June 2019 13:28

Passengers who arrived in train launched to operate on the Standard Gauge Railway (SGR) line constructed by the China Road and Bridge Corporation (CRBC) and financed by Chinese government are seen outside the Nairobi Terminus in the outskirts of Kenya's capital Nairobi May 31, 2017.

Kenya signed a one-sided deal with the company operating its two-year old railway line that increases its taxpayers burden.

The deal, signed hours before the railway became operational, gave the operating company starting capital and placed nearly all the operational and maintenance risk on Kenya Railways.

The new railway is run by a company called Africa Star Railway Company, which is majority-owned by the China Road and Bridge Corporation (CRBC). Its other shareholders are unknown as their names are missing from the company registry. The deal to run the railway was signed in late May 2017 and has remained secret ever since.

In the contract, reviewed by the Sunday Nation, the government gave the company interest-free capital of Shs. 3.5 billion to run the railway, and also added a cushion loan of Shs. 3 billion.

  • The deal also said that if Kenya did not start running its railway on June 1, 2017, it would have to pay the company a fine of Shs. 24.2 million per day.
  • In the latest fee note sent by the company to Kenya Railways, Shs. 800 million of the total Shs. 30 billion demanded was penalties for late payments. The government agency protested the bill, disputing the amount charged for VIP trains.

While asking only for a performance bond of Shs. 600 million, Kenya Railways freed the company and its majority shareholder from any liabilities, gave it non-exclusive use of its brand, and major financial concessions in future operational and maintenance costs.

The revelations come at a time when the railway line is struggling to meet its costs, and the government is set to start repaying loans on it.

In two reports this year, the Kenya National Bureau of Statistics (KNBS) reported different figures for the line’s revenues in its first year.

  • The initial revenue reports said the railway line had made Shs. 10 billion against running costs of Shs. 12 billion.
  • In its latest Leading Economic Indicators report, released in May, KNBS revised the figure downward by 44 percent. The major difference was in the tonnage and revenues from freight, which is the core source of revenue for the line. The initial report stated that 5.039 million tonnes of cargo was shipped via the railway between January and December 2018, while the second report placed the total figure at 2.898 million tonnes.
  • The statistics body said it got the conflicting figures from Kenya Railways, and the Director General, Zachary Mwangi promised that “in our net release before the end of this month, we should be able to reveal what happened.”

In July last year, Transport Cabinet Secretary James Macharia told a parliamentary committee that the line would break even by June 2019, the second anniversary of the railway. He predicted a profit of Shs. 5.08bn mainly on the back of freight revenue, which has been controversial because it has doubled the costs of moving cargo between Mombasa and Nairobi.

Late last year, the government announced it would be removing the promotional tariff on cargo and the subsidy on passenger fares to increase revenues for the SGR.

  • Cargo charges increased from Shs. 35, 000 to $500 for a 20-foot container, and from Shs. 40, 000 to $700 for a 40-foot container.
  • In January, the government removed subsidies offered to children between the ages of three and 11. They now have to pay adult fares of Shs. 1000 for economy and Shs. 3000 for first class.

Passenger numbers have remained relatively consistent, averaging between 110,000 – 190,000 a month. The highest number – 186,718 – was in December 2018. Freight tonnage has also been increasing steadily, even with conflicting reports on the exact figures, but remains far below the target 9 million tonnes.

  • The Mombasa Port handled 25.5 million import tonnes in 2018, and 4.1 million export tonnes, meaning most traders are still shunning the new line.

Both Kenya and China have been insistent on the ability of the standard gauge railway to pay for itself, but it is becoming increasingly clear that it will take a few more years at best. With loan repayments beginning next month, Kenya’s only option now is to dig from its coffers to pay for and maintain the railway. The Railway Development Levy netted about Shs. 95 billion from 2013 to 2018; it is charged on the total value of imports by traders, and also in fuel costs by consumers.

  • The completion of Phase 2 will ease the transportation complication for cargo handlers moving freight away from Nairobi, where the main issue has been the added costs of moving cargo from the line to the final destination.

The railway line needs to work, not just as an investment, but because the kinds of contracts Kenya signed towards building, operating, and maintaining the new railway line are not favorable to it at all.

Bottom line: The operational deal with Africa Star still has eight years to go, and unless revenue from freight increases drastically, will increase the taxpayer burden drastically.

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