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Kenya's $4bn railway gains traction from Chinese policy ambitions
by: David Pilling in Makindu and Emily Feng in Beijing
https://www.skyscrapercity.com/showthread.php?p=139333848
[Highlight] “’We heard that the British gave billions of shillings to build roads but they never got built,” says Lillian Wamuyu, who helps run slum schools in the capital. “But if you see two Chinese working, you know that road will be done in two months.’”
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A few miles outside the town of Makindu on the Nairobi-Mombasa road sits a heavily guarded compound. Only the sign outside, in red Chinese lettering, indicates that this is the project site for “section 9” of a new $4bn Chinese-built railway that will run 300 miles between the Kenyan capital and the Indian Ocean port.
The railway is the centrepiece of an infrastructure splurge by President Uhuru Kenyatta, who faces re-election this year and whose Kenyan government has invested heavily in roads, pipelines, oil development and geothermal power.
It is also one of China’s most important investments in east Africa and follows the opening in January of a $4.2bn, 470-mile line from Djibouti to Addis Ababa, the capital of landlocked Ethiopia, replacing the 100-year-old French-built railway. And contrary to some critics, who have voiced concerns at China’s growing presence in Africa, residents of Makindu are upbeat on the biggest infrastructure project in Kenya since independence 54 years ago.
“It’s very smart,” says Elizabeth Wanjiru Ngima, a housewife, referring to the elevated line and towering new station just outside town. “It’s very quick, very quiet and when you are on it you [will] feel like you are in heaven,” she adds, conceding that she has not yet ridden on the new train, which will be commissioned in June.
Other residents of Makindu, including the barber, counter a common complaint in Africa that Chinese do not hire local people, saying the construction company employs Kenyan labourers, guards and chefs.
In the past 10 years, China has gone from having little presence in Kenya to becoming one of its most important trading and investment partners. Thanks to shipments of rolling stock and other equipment, Kenya’s imports from China ballooned to nearly $5bn in 2016 — a threefold increase from 2010 — against $780m from the US.
Kenya is on the outer reaches of China’s One Belt One Road project, through which Beijing intends to invest almost $1tn in infrastructure on the old Silk Road and as far as Africa’s east coast, in a push to improve trade links, win political influence and deploy the excess capacity of its steel and construction industries.
The Nairobi-Mombasa railway is the first leg of a line intended to go all the way to Kampala in Uganda and, eventually, to Rwanda, knitting together swaths of the east African Community’s emerging trade bloc. It will replace the near-defunct British railway — dubbed the “Lunatic Line” because of the cost in lives and money it took to build — constructed in the late 19th century.
“The entire Africa continent can be connected by Chinese rail, so this Kenya rail is a kind of prototype for all future projects,” says Wang Dehua, a professor at Shanghai Institute for International Studies. “It is a big strategic move for our country.”
China is providing Kenya with financing for roughly 90 per cent of the Nairobi-Mombasa project. The railway is being built by state-owned China Road and Bridge Corporation, which will operate it for the first five years, and financed by China’s Eximbank. Of $3.6bn in financing, $2bn is a 15-year loan at Libor plus 360 basis points. The remaining $1.6bn is on concessional terms of 2 per cent interest, repayable over 20 years, according to the China-Africa Research Initiative at Johns Hopkins University.
The loans, which have pushed Kenya’s debt above 50 per cent of output, have raised concern that Mr Kenyatta’s government might be building a white elephant. Critics say the railway will cost significantly more per mile than equivalent projects in Ethiopia and Morocco, raising suspicion that much has been creamed off by unscrupulous politicians.
Kwame Owino, executive director of the Institute of Economic Affairs, complains over the lack of transparency of a project he says was negotiated in secret.
“It’s clear that Kenya got the short end of the stick,” he says. “This is a very expensive piece of infrastructure whose specifications have been overstated.”
Mr Owino adds that the advertised improvement in speed — just four hours from coast to capital, compared with double that by truck — is not important when it comes to cargo. “The economic benefits for Kenya are exaggerated.”
China has not been exactly open about the railway. At Makindu, the Financial Times was politely referred to the Chinese embassy in Nairobi, which refused a request for an interview. Still, China Road and Bridge has sought to head off criticism by employing nearly 20,000 local workers. It has also made concessions to environmentalists by building underpasses for wildlife to cross the section of railway that passes through Tsavo National Park.
Aly-Khan Satchu, a Nairobi-based investment consultant, reckons the economic benefits could be higher than sceptics think if the rail makes Kenya a more efficient transport conduit for east African trade.
China, not always known for its soft-power skills, may even be learning a few tricks, he says, for example by training Kenyan women to be train drivers.
Whatever the criticisms about China’s investment drive in other parts of Africa, they are not evident on the streets of Nairobi.
“We heard that the British gave billions of shillings to build roads but they never got built,” says Lillian Wamuyu, who helps run slum schools in the capital. “But if you see two Chinese working, you know that road will be done in two months.”
The Kenya Railways Corporation has terminated Rift Valley Railways’ (RVR) 25-year contract to run the Kenya-Uganda railway, casting dark clouds over the future of the private operator.
The Business Daily has learnt that Kenya Railways terminated the contract last Thursday citing RVR’s failure to meet set operating targets, including payment of concession fees.
RVR, whose ownership is controlled by Egyptian private equity firm Qalaa Holding, was informed of the decision through a letter delivered to its bosses on Thursday morning — a day after the operator moved to court seeking orders to stop it.
The termination process was set in motion in January when Kenya Railways managing director Atanas Maina issued RVR with a notice over unpaid fees amounting to Sh600 million and a string of misses in cargo haulage targets.
RVR’s chief executive, Isaiah Okoth, declined to comment.
The journey to termination picked pace in mid-March when Kenyan officials travelled to Kampala for a meeting with their Ugandan counterparts to assess RVR’s performance.
Qalaa’s head of transportation division, Karim Sadek, who was expected to attend the meeting failed to show up, instead choosing to send a junior officer.
Infuriated govt officials
The snub infuriated the top government officials, who left the meeting having passed a resolution to terminate the contract at the end of the 90-day notice they had issued in January.
Mr Sadek is reported to have got wind of the looming termination and rushed to court for an injunction to stop it.
But the court declined to issue the order and instead asked the rail firm to return to court the next day (March 30) with the defendants for an inter-partes hearing.
Kenya Railways, which was expected in court on Thursday morning, however made a pre-emptive strike by serving RVR with the termination letter that effectively made the impending court appearance irrelevant.
The termination of the contract leaves RVR shareholders, including Qalaa, Uganda’s Bomi Holding, the Kenyan government and the international finance institutions (IFIs) that invested millions of dollars in the rail firm with 180 days to sell it to a strategic investor or return it to Kenya Railways.
Out-of-court settlement
On Friday March 31, RVR obtained an order asking parties to the dispute to seek an out-of-court settlement.
“It is hereby noted that the parties will have 30 days within which to negotiate the matter with a view to settle it out of court,” the court ruled, adding that the validity of the notice to end the contract would be looked into later.
Mr Maina in February told Parliament that he had issued a termination notice to RVR for failing to remit concession fees for the year to December 2016.
In the contract, RVR was to pay concession or leasing fees to the Ugandan and Kenyan governments through Kenya Railways on a quarterly basis.
“Unfortunately, since January last year the concessionaire seems to have experienced financial difficulty and has not paid us fees amounting to Sh600 million for the last one year,” Mr Maina told the National Assembly’s Public Investment Committee.
“We have issued notices to the RVR to terminate concession. The Ministry of Transport of Kenya and that of Uganda are in discussions over this matter.”
Railway transport has continued to lose a share of the cargo business as importers opt for roads.
The firm was gearing up for fresh pressure this year with the start of operations on the new Sh450 billion standard gauge railway from Mombasa to Nairobi, which will ferry heavier and bigger containers faster and relieve pressure on Kenya’s congested roads.
Mr Maina told MPs in February that RVR had informed the government of its need to restructure the concession, bring in new shareholders and inject new capital.
“However, that discussion with the shareholders, lenders and the government on the proposed restructuring of the concession agreement has not started,” he said.
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