*The cost appears to be unduly high in compared to the rail construction projects taking place in Ethiopia.
Work has started on a standard-gauge railway from Mombasa to Nairobi, which could transform the logistics environment and bring down freight costs when completed in 2017‑18. However, the KSh330bn (US$3.8bn) project, which is mainly being financed by Chinese loans and built by Chinese contractors, is also arousing controversy because of perceptions that the cost is excessive. This, in turn, is generating suspicions that the deal—agreed between the Kenyan and Chinese governments without open tendering—is tainted by corruption and bribery. Two parliamentary committees (transport and public investment) and the Ethics and Anti-Corruption Commission (EACC) are probing the deal, although transport officials insist that no wrongdoing has taken place. There are also concerns that the terms of the deal, which require about one‑third of port cargo to be carried on the new line, will limit traders’ freedom to choose their onward mode of transportation.
The debate about costs is being party obscured by conflicting information. A figure of KSh1.2trn (US$14bn) has frequently been quoted, but this relates to the potential final cost, if the line were to be extended, as planned, from Nairobi to Uganda’s capital, Kampala, which would add 670 km to the distance. However, the current deal relates solely to the 485‑km segment from Mombasa to Nairobi, and financing for a possible extension has not been settled. Nonetheless, the US$3.8bn outlay for the first section—including US$2.7bn for the line and US$1.1bn for rolling stock and other equipment—still appears to be unduly high in comparison with both international standards and a similarly large rail construction project taking place in Ethiopia. The Nairobi-Mombasa line will cost about US$5.6m/km, for example, whereas the international norm is about US$2m/km and Ethiopia’s cost is about US$4.8m/km. In addition, Ethiopia is laying a more expensive electrified, double-track line, whereas Kenya’s railway will be single-track and rely on diesel locomotives. Moreover, the terrain in Ethiopia is more challenging, and Kenya is also paying far more than Ethiopia for a similar array of rolling stock. Based on these figures, concerns about excessive costs appear to have a legitimate foundation, especially as cost overruns are commonplace in projects of this magnitude.
Chinese loans will cover 85% of the project cost
Under the financing agreement, the Export‑Import Bank of China will provide loans to cover 85% of the cost (US$3.2bn), and Kenya will raise the remaining 15% (US$0.6bn). The local contribution will come from both the general budget and a 1.5% levy imposed on all imports for the domestic market (including those that are not liable for duty). This finally came into effect in October and could raise US$175m in total, but will push up the cost of trade and potentially feed through into higher inflation. Moreover, the Chinese loan will add significantly to Kenya’s external debts (which amounted to US$10.3bn in September, about 23.7% of GDP), although the precise repayment terms and the interest rate charged are not known, underlining the lack of transparency. The work will be carried out by China Road and Bridge Corporation (CRBC), which has undertaken numerous railway projects in China.
Three separate investigations are being carried out
The probes being undertaken will seek answers to a number of important questions. These include why Kenya opted for a single-sourced deal rather than an open tender, which may have proved cheaper, and whether government-to-government deals are exempt from the provisions of public procurement legislation, as claimed by some officials. If such deals are not exempt, then the CRBC contract may have violated the law. The two parliamentary probes are ongoing and numerous state officers will be asked to give evidence, including the transport minister (Michael Kamua), the attorney‑general (Githu Muigai) and the managing director of Kenya Railways (Alfred Matheka). The committees may report back in February, although the timing of the EACC’s probe is less certain (and Kenya’s record of uncovering corruption is poor). It may be too late for Kenya to pull out of the deal without incurring hefty penalties, although the exposure of malpractice could provide grounds for renegotiation.
Forcing importers to use the railway could be counter-productive
Another controversial aspect of the project is the requirement that one‑third of port traffic be carried on the new line, which has aroused the ire of importers, shipping companies, clearing agents and other stakeholders at Mombasa port. The Dockworkers Union is also opposed and launched a court case in November claiming that the contract broke procurement laws. The Shippers Council of Eastern Africa points out that onward transportation is typically at the discretion of the importer and that it would not make sense to use the new railway if tariffs were uncompetitive. However, pricing is unknown at this stage and there is a risk that traders could be locked into a costly tariff regime. This could lead to a much smaller reduction in overall logistics costs than the government is hoping for. Nonetheless, the government is defending the one‑third rule to justify the economics of the project and to finance loan repayments.
Kenya’s need for new transport infrastructure is unquestionable if the country is to achieve a higher growth rate, and a modern railway line could generate significant benefits and greatly reduce transit times. However, overpaying for any works would represent a waste of scarce resources, especially if the deals are also tainted by possible corruption. The outcome of the probes by parliament and the EACC are uncertain, but they could, at the very least, help to improve transparency in other planned infrastructure projects.
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Source: The Economist, January 20, 2014, titled “Controversy surrounds major rail project”.
