Burden on taxpayers as Treasury starts repayment of SGR loan

Kenya will from Thursday pay billions of shillings to China after a five-year grace period that Beijing had extended to Nairobi for the loans used to build the standard gauge railway (SGR) line ended on Tuesday.

Repayment of the principal loan extended to Kenya for the first phase of the mega railway project kicks off this week, according to an agreement signed with Exim Bank of China on May 11, 2014.

This is expected to add to the growing load on Kenyan taxpayers for costs related to the multi-billion shilling SGR line from Mombasa to Nairobi given that the Treasury has been servicing interest charges on the Chinese debt.

Loan repayments to China’s Exim Bank will jump from the Sh31 billion paid in the year to June to Sh71.4 billion in the current fiscal period, reflecting a 130 percent increase.

Taxpayers have been forced to shoulder the burden of the SGR loans because revenues generated from the passenger and cargo services on the track are not enough to meet the operation costs, which are estimated at Sh1.5 billion a month against average sales of Sh841 million.

Acting Treasury Cabinet Secretary Ukur Yattani on Wednesday confirmed that the government has made arrangements for the transfer of Sh10 billion to China’s Exim Bank.

“We have commenced the process of payment and money will hit their bank account by first week of January. This money has been captured in our budget,” Mr Yattani told the Business Daily.

“The income from railway, both cargo and passenger, will likely break even by next year and ease pressure on RDL (Railway Development Levy) and other budgetary supplements.”

Kenya in May 2014 entered into a deal to borrow $3.233 billion (Sh324.01 billion) from China’s Exim Bank, comprising $1.633 billion commercial loan and $1.6 billion concessional to build the 385km modern railway between Mombasa and Nairobi.

The loan, whose interest is 3.6 percentage points above the six month average of London Inter-Bank Offered Rate (Libor) which serves as an international benchmark, is to be repaid in 15 years with a grace period of five years.

The current one year Libor rate as of December 20, 2019 is two percent, a pointer that the loan comes with an interest rate of 5.6 percent.

This is expensive compared to other concessional loans, especially from the World Bank. Kenya recently agreed a Sh75 billion loan with the World Bank whose interest and other charges stand at two percent annually—matching the Libor rate.

Treasury data tabled in the National Assembly show that loan payments to Exim Bank of China will increase to Sh84.3 billion for the 2020/2021 and Sh111.4 billion in the 2021-22 financial years.

SGR accounts for the largest share of Exim Bank of China loans to Kenya including the Sh150 billion used to build the Nairobi-Naivasha line.

President Uhuru Kenyatta’s administration has largely contracted debt from China since 2014 to build much-needed roads, bridges, power plants and the SGR.

This started after Kenya became a lower middle income economy, locking her out of highly concessional loans from development lenders such as the World Bank Group.

China’s influence on the country’s infrastructure development, however, started in earnest with construction of the Thika Superhighway between January 2009 and November 2012 at a cost of nearly Sh32 billion during the last term of President Mwai Kibaki.

The deal to fund the first phase of the SGR, Kenya’s single largest infrastructure project by cost since independence, saw Beijing overtake Tokyo as Kenya’s largest bilateral lender.

Construction of the Mombasa-Nairobi SGR cost about Sh692 million per kilometre while the $1.5 billion for the extension to Naivasha is estimated at about Sh1.28 billion per km.

The standard gauge railway (SGR) line raked in sales of Sh10.1 billion in its second full year of operations, signalling that the mega project would take longer to break even.

Freight services, which started in January 2018, generated Sh8.4 billion in the year to June, internal performance data from Kenya Railways shows.

The data shows that China Communications Construction Company, the operator, increased sales from the passenger service to Sh1.76 billion, up from Sh1.23 billion a year earlier—reflecting a growth of 43 percent.

Kenya Railways had budgeted to earn some Sh24 billion from the cargo service in the year to June, falling 65.56 percent below target.

Some importers said their transport costs shot up by nearly 50 percent when they used the railway line due to extra fees, more time spent clearing goods at the Nairobi train depot and the need to send a truck to collect the goods from the facility.

Moving a 40-foot container to Nairobi by rail costs nearly Sh80,000 – roughly the same as a truck, says the Kenya Transporters Association.

But importers must also pay at least Sh25,000 for a truck to collect the goods from the Nairobi depot, breaching the Sh100,000 mark.