Railway projects will worsen debt woes

That the portion of the standard gauge railway (SGR) line to Naivasha has been dubbed “railroad to nowhere” may not be a joke after all. It could actually come to pass. Clearly, the government will face major challenges in trying to make this part of the railway line economically feasible especially if the Chinese don’t give us the money to extend the line to Malaba.

For now, our only option is to quickly pump money into new investment to achieve the ambition of developing Naivasha into a key regional logistics hub. Fortunately, indications are that some of our regional neighbours appear to have the same ambition of building cargo transit logistics infrastructure in Naivasha.

In March, President Uhuru Kenyatta gifted land to the government of Uganda around Naivasha. Shortly after, President Yoweri Museveni announced that Uganda would construct a dry port on that piece of land to act as a base for its cargo coming out of Mombasa. In July, the Mr Kenyatta followed by announcing – during a visit by President Salva Kiir – that the government had donated 10 acres of land in Naivasha to South Sudan on which they also want to build a dry port.

I understand that the Ugandans are thinking of developing specialised cargo facilities including storage, packing, repair and maintenance facilities, providing cargo handling, bonded and non-bonded storage.

Naivasha surely has the potential of emerging as a major regional logistics hub along the Northern Corridor. It will all depend on whether we have the fiscal space to invest the construction of feeder roads connecting the SGR to the existing metre gauge railway(MGR line). The biggest headache for us remains how to shift traffic from road to rail to ensure that SGR’s market share is expanded. The biggest mistake made by the government was to assume that it was feasible to migrate traffic from road to rail by fiat- by forcibly ordering truckers out of business.

The other day, the Ministry of Transport was forced into a hasty retreat after its decision to force traffic on the SGR was greeted by protracted demonstrations in Mombasa. Influential segments of the political elite have interests in the trucking business. We forget that trucking by road feeds lucrative underground businesses dealing with many things, including contraband.The resistance against migration from road to rail is bound to grow.

Circumstances will force the government to pursue the option of soft regulation. For instance, the government can gradually introduce regulations on truck size, weight and speed limits. Rules and regulations on vehicle driver hours of service, truck emissions standards, removal of customs and administrative barriers for rail, and tinkering with tariffs are also options.

Still, the biggest elephant in the room are the Chinese loans we borrowed for the Naivasha section of the SGR. What are the bare facts about this Chinese loan? I reached into my archives to fish out the actual signed loan agreements with China Exim Bank to get the bare facts on what the loans to build the Naivasha segment of the SGR will cost us. We borrowed $1.6 billion from China Exim Bank for the Nairobi-Naivasha section of the SGR in December 2015.

What are the terms of the loans? First, a fixed term of 15 years, inclusive of a grace period of five years. Second, interest of six months of the London Inter Bank Offered Rate (Libor) plus 360 basis points. Third, a management fee of 0.75 percent payable upfront plus a commitment fee of 0.75 percent of the undisbursed amount. Finally, insurance from the China Export and Credit Insurance Corporation (Sinosure) at a premium of 6.93 percent payable in two instalments.

I keep wondering where we will get the dollars to service these Chinese loans. Mark you, domestic rail-road services are non-tradeable services and don’t earn you the dollar revenues you need to repay the principal and interest on these Chinese loans. And our economy constantly runs a merchandise trade deficit. The little export earnings from coffee, tea, tourism, flowers, and diaspora remittances are what we will have to rely on to pay the Chinese. I see us in future falling into a perpetual game of borrowing from Peter to pay Paul, forever juggling and rushing to international markets to borrow the dollars to repay the principal and interest on the SGR loans as they fall due.