We have adjustments to make on spending on projects

Inevitably the pomp and chest-thumping of the launch of the standard gauge railway must give way to the reality of running it, and, of course, paying for its various costs.

It is, therefore, a good time to reflect on a few of the facts and figures regarding the cost and, indeed, the running of the project.

The cost of the construction of the Mombasa to Nairobi SGR line is in the region of some Sh425 billion, which could reach as much as Sh500 billion by the time interest on the loan is factored in.

That is now debt and the repayments are ongoing and will certainly increase as other repayments kick in. Repayments of the various loans will continue until 2034. The country has been paying out some Sh1.6 billion every six months in interest alone since 2014, and will start repaying the principal in four years at Sh14 billion a year until 2034.

It is very clear that the net earnings expected to be made from the railway operation itself will not get anywhere near the sort of money that is needed to clear the loan and its interest.

In short, it would require around 4,000 containers being ferried on the SGR each and every day. First there is arguably no demand for that volume of cargo and secondly, it is physically impossible to manage that quantity.

When pitted against its monumental cost of building and running, the viability of the SGR will be impossible for some years to come, to say the least.

GROSS UNDERSTATEMENT

Some would argue this is a gross understatement and that the operation is going to be a heavy millstone around the taxpayers’ necks for some time to come. This project is in the name of the government, but it is taxes from the population that will go towards paying it.

When it was launched, there were promises that it would cement our regional hub status; it would bring down our high costs of transport and thirdly, that it would be run efficiently and economically.

Regarding the first one, the new railway has the potential to reinforce the country’s important hub position but that will be dependent on both the other two promises being carried out. The acid test will be ensuring that the SGR finds and retains a role as a competitive and efficient transporter. One big if will be whether it will need subsidising?

Certainly the rates it is offering at present do not look as if they will bring in adequate revenue. The government is between a rock and a hard place. If it reduces rates further it will have to subsidise more and if it increases the rates it will find it harder to win over much new business from the road transporters, in particular.

A lot of these questions will be answered in the months to come. The most important lesson from the SGR is that we must evaluate all the public projects meticulously and be very discerning about which ones should go ahead or should not, and which should be pruned accordingly.

PASS TEST

The projects must all pass the litmus test of being thoroughly and independently evaluated and costed. Only the ones that pass this test should be allowed to go ahead. This point was brought home to me in the last two hearings on the proposed Lamu coal-powered power plant.

The cost of wind, gas and solar power has been falling fast and is likely to continue in that direction. It is now way below the cost of coal power, which begs the simple question as to why we are proposing to build the latter in Lamu. When one factors in social costs, coal-produced power is the most expensive in the world.

Clearly, we have some serious and urgent policy adjustments to make before we continue to spend, some say squander, huge quantities of public money, which will only shackle the country.

Robert Shaw is a public policy and economic analyst. [email protected]