SGR a Trojan horse with sad ending

As Eliud Kipchoge made a historic mark, running 42 kilometres under two hours, no one saw it coming that four days later Kenya would be making history again, launching a railway to nowhere.

On Wednesday, President Uhuru Kenyatta launched Phase 2A of the Standard Gauge Railway (SGR) from Nairobi to Suswa which ends up in section—many kilometres away from Naivasha town. Now, weighty questions have arisen from phase 2A of the project and the tax payer deserves answers.

First, the Sh150 billion debt-financing was secured way before, so why does the railway end up in the wilderness instead of Naivasha? Has the Sh150 billion been exhausted before the project is completed?

Second, in the initial plan, only Phase I which is Mombasa-Nairobi will have both passenger and freight services and Nairobi to Malaba will be freight services, when did this plan change? Third, what is the financial viability of passenger services on Phase 2A to warrant glamorous train stations at Suswa and Mai Mahiu?

There is a stubbornly fallacious understanding that railways lines open up economic potential of underdevelopment rural towns. This thinking is Kenya’s waterloo and it is only a matter of time before we pay heavily for it. If economic development was that simple, Africa would be having many booming urban towns with big economic potential from its colonial days.

To simply put it, the SGR is just a zombie project heavily consuming resources which in this case is heavy sovereign debt when its economic case is yet to be clearly defined for more than five years now.

It is a Trojan horse by the Chinese and the earlier we wake up to that reality and stop it at its tracks, the better. We needed to learn lessons from the infamous Sri Lanka port that was taken over by the Chinese, but we are hellbent on learning from our own tragedy.

The fact is that China’s growth model of exporting labour-intensive manufacturing goods has run its course due to heavy industrialization that has raised the cost labour cost making it uncompetitive.

These labour-intensive industries mainly steel, coal and cement needed to find new markets and the Chinese came up with the brilliant Belt and Road Initiative an ambitious project mainly related to infrastructure development that will open China to global trade routes that will sustain its sluggish economy and put its economic development agenda on course.

One of the centrepieces to the realization of that vision is how China has structured its loans in two forms, concessional loans and preferential buyer’s credit which are expensive than those granted by other international financial institutions. Then China EXIM bank the main financier requires the projects be implemented by Chinese companies with at least 50 percent of equipment, material and services sourced from China.

In 2008, China EXIM bank extended an $8 billion loan to Sri Lanka to build the Hambantota Port without a substantive feasibility study, just like the SGR, at at an interest rate of six percent. Less than 10 years later, Sri Lanka was overwhelmed in servicing the debt and China offered to restructure by Sri Lanka paid a steep price.

The Chinese swapped the debt for equity accompanied by a 99-year lease of the port and an 80 percent stake; 15,000 acres of land around the port to develop an industrial zone for Chinese investors; and another 99-year lease on land reclamation project on the other port, Colombo port.

Back to the SGR, China’s end-game can be foreseen in the contract available in public domain between Kenya and China stating that in the event Kenya defaults on its debt obligation, the Chinese will take over sovereign assets and one of them is the Mombasa port.

This seems to be the reason why Chinese financial institutions have declined to join other multilateral institutions like the World Bank in common practices that relate to debt sustainability, such as lending transparency, procurement standards, and concessionality.