Railway bad for Kenya’s soaring debt

China Road and Bridge Corporation workers proceed with the construction of an overpass for the standard gauge railway, on May 25, 2016, in Taru. About 60 per cent of the Mombasa to Nairobi leg has been constructed and the rest should be completed within the coming year. PHOTO | KEVIN ODIT | NATION MEDIA GROUP

What you need to know:

  • Plans are well under way for the 120-kilometre leg to Naivasha at a projected cost of Sh153 billion, again largely through externally borrowed soft loans.
  • This project is being built largely courtesy of a Chinese soft loan and the enormity of it is helping to push our debt servicing ratio up in uncomfortably generous leaps and bounds.
  • Another is the question of road versus rail. Currently over 90 per cent of cargo is transported by road. This is because it is more convenient, practical, and competitive.

One piece of information from the budget presentation worth honing in on was the update on the cost and progress of the very expensive standard gauge railway (SGR) from Mombasa to Nairobi and then on to Naivasha and the Ugandan border.

About 60 per cent of the Mombasa to Nairobi leg has been constructed and the rest should be completed within the coming year.

In the next fiscal year, Sh154.4 billion has been allocated for it, of which 77 per cent will be funded through external soft loans and the rest domestically.

The overall projected cost of the Mombasa-Nairobi leg is in the region of a whopping Sh440 billion, again much of it borrowed.

Plans are well under way for the 120-kilometre leg to Naivasha at a projected cost of Sh153 billion, again largely through externally borrowed soft loans.

As a matter of interest, the Addis Ababa to Djibouti railway is around the same distance and will cost half that amount.

Before going into the cost benefit side of the project, it is worth taking a snapshot of our fast-growing public debt, which now stands at 50 per cent of our GDP.

Whilst this figure may appear sustainable to some, the worrying aspect of it, for me, is how it is rising uncomfortably fast.

It is fair to say the SGR project has been largely responsible for it shooting up to and past the 50 per cent mark.

There is a symbiotic linkage between the cost of the SGR and our rising debt. The standard gauge railway to the Ugandan border is going to cost the country around Sh900 billion plus.

This project is being built largely courtesy of a Chinese soft loan and the enormity of it is helping to push our debt servicing ratio up in uncomfortably generous leaps and bounds.

The government needs to allocate up to a third of revenue collected for the repayment of debt alone. One way to look at it is that in net terms, that is less money for goods, services, and development for the country and its people.

The SGR raises a number of other pressing and pertinent issues. One is that even though infrastructure-led development is regarded as a necessary tool, it should not be at any cost.

Does the burdensome cost of the SGR outweigh the benefit? Many would argue that it does, or certainly goes in that direction. Conversely, there is a strong argument for it costing much less.

Another is the question of road versus rail. Currently over 90 per cent of cargo is transported by road. This is because it is more convenient, practical, and competitive.

WHO WILL RUN IT

If one adds on the fact that any cargo going to, say, upcountry or Uganda via SGR will have to be transshipped on to road transport in Nairobi, then that makes the SGR mode less attractive.

The decision by both Uganda and Rwanda to keep their route options open by also making agreements with Tanzania is a wake-up call for Kenya. It shows that they do not want to keep all their eggs in the Kenyan basket.

Another big negative is that the whole project was negotiated on a government-to-government basis and not subjected to any competitive tendering process.

How do we know that we are getting value for money or the most competitive rate available?

To make it worse, the Chinese company that did the design, feasibility, and costing was also the one that was awarded the construction contract.

That runs contrary to current governance and commercial practices that dictate that they should not be the same.

Then there is the issue of running it. As the Economist magazine of London succinctly put it: “Although only a year remains before completion, not only are tariffs and rates undecided, but it is not even clear who will run the railway”. How it is going to be run is arguably as or more important than its construction.

If 90 per cent of goods currently go by road and bearing in mind its construction cost and potential running cost, will it possibly be able to compete unless of course it is subsidised — at the taxpayer’s expense?

Last but not least, we should remember that we are only getting a single track railway, so the inevitable waiting for trains to pass in the other direction will still be with us.

The ongoing SGR project begs many uncomfortable questions.

Mr Shaw is a public policy and economic analyst.robshaw298@gmail.