China keeps Uganda, Kenya guessing on SGR loan

Sunday June 23 2019

The launch. South Sudan president Salva Kiir

The launch. South Sudan president Salva Kiir (3rd left), Rwanda’s Paul Kagame (2nd right) and President Museveni (right) and other officials launch the SGR project in Kampala. FILE Photo.  

By Frederic Musisi

The China-Africa Cooperation (FOCAC) ministerial summit, dubbed the ‘coordinators’ meeting’, kicks off tomorrow (Monday) in the Chinese capital, Beijing. According to the Chinese Foreign Affairs ministry, officials from 53 African countries, including Uganda, have confirmed attendance.
President Museveni, diplomatic sources told Sunday Monitor, was invited to Beijing for the occasion. The Ugandan delegation also comprises Foreign Affairs minister Sam Kutesa, Works minister Monica Azuba, officials from Ministry of Finance, Attorney General, and others.
The meeting, according to the Chinese Foreign Affairs ministry, is aimed “at discussing an implementation” plan of last year’s heads of state FOCAC summit agenda on security, trade and development, and specifically the $60b (about Shs224 trillion) in new funding that President Xi Jinping announced for friendly African countries.

The Shs224 trillion, which was announced last September, will be provided in form of Shs56 trillion ($15b) in grants, interest-free loans and concessional loans, Shs74 trillion ($20b) in credit facilities, Shs37 trillion ($10b) for setting up of a special fund for development financing, and Shs18 trillion ($5b) for a special fund for financing imports from Africa.

Of specific interest to Uganda and its neighbour Kenya, is to further discussions and possibly reach financial closure for a new shiny railway line— the SGR—which was conceived a decade ago as a flagship regional infrastructure project, with the line stretching from Mombasa port to Kampala, then link to Kigali (Rwanda) and Juba (South Sudan).
Currently, 90 per cent of Ugandan bound cargo goes through Mombasa port. Some of the cargo is, however, destined for Kigali—the recent border closure notwithstanding— and to Juba, and eastern DR Congo.
Available statistics from the Kenya Ports Authority show that Uganda-bound containers recorded 3,825 20-foot equivalent unit (TEUs), out of the 4,873 TEUs handled as of February 2018, making it the biggest customer.
It takes a trailer truck an average of five to seven days to move from Mombasa to Kampala, a 20 feet [32-tonne] container costing about $3,000 (Shs12m).

The initial idea of the SGR, therefore, was for a line that would transport both cargo and passengers from Mombasa to Kampala, with links to Kigali and Juba; South Sudan has been mostly at war, while Rwanda has for the most part shown little interest.
Works and Transport minister Monica Azuba-Ntege, however, said “Rwanda should not be judged too quickly” because the proposed line to Kigali is premised to how soon the line extends to Kampala from Kenya.
“Rwanda is dependent on us like we are dependent on Kenya,” Ms Azuba told Sunday Monitor in an interview at her offices in Kampala. “What is, however, not in doubt is that we have a lot of cargo coming through Uganda but it is going out.”

Uganda’s long wait
The first phase of Kenya’s SGR running from Mombasa to the capital Nairobi, that cost $3.8b (Shs13 trillion), was commissioned in June 2017 and is operational, albeit with dreary project returns.
Kenya is currently finalising construction of the 120km line from Nairobi to Naivasha at a cost of $1.7b (Shs6 trillion). This was supposed to be followed by the 266km line from Naivasha to Kisumu port at a cost of $3.6b (Shs13 trillion), and later the 107km line connecting to Malaba expected to cost $1.7b (Shs6 trillion).
When a Kenyan government delegation led by President Uhuru Kenyatta travelled to Beijing late in April, it was expected they would close financing agreement for Naivasha-Kisumu and Kisumu-Malaba sections, or at least one of them, but they returned “empty handed”.

Kenya snubbed
Kenyan media, quoting technocrats who travelled to Beijing, reported that China had put financing on hold and instead, Transport cabinet secretary James Macharia told state broadcaster—KBC—that China had offered Kenya Shs1.4 trillion to renovate the existing meter gauge railway line from Naivasha to Malaba, which once completed, would be linked to the Naivasha and Nairobi SGR section.
The back-to-back screaming headlines of President Kenyatta, who was accompanied by opposition leader Raila Odinga, who was last year named African Union special envoy for infrastructure, returning empty handed, were quickly deflated by Kenyan authorities but the message had reverberated as far as Uganda.


Ms Azuba said the Kenyan government, at the highest level, remains committed to the project “and as we agreed with China’s EXIM Bank, the plan is for a seamless running train from Mombasa to Kampala.”
“I don’t know what happened in Beijing when the Kenyan team visited, so I cannot comment on the basis of what I read in the papers,” Ms Azuba noted. “What, however, we have discussed with the Kenyan team is the likely long delay before we secure funding for the remaining sections but we both remain committed.”

According to earlier plans, once Kenya embarked on the last Kisumu—Malaba section, Uganda was to receive the first financing to commence civil works on its project. With dark clouds hovering over credit facility for the remaining sections, Uganda’s hopes remain in limbo.
SGR is a classification of modern railway agreed upon under the African Union, to upgrade and link the continent’s railway system to facilitate continental integration.
Uganda and Kenya first agreed to construct the SGR in 2008, but the arrangement was not concretised until 2012. By then, Kenya was in the last stages of negotiations with China for the Mombasa-Nairobi SGR line, whose loan was released in 2014. Uganda’s SGR was launched in 2014.

Done. Kenya President Uhuru Kenyatta flags off
Done. Kenya President Uhuru Kenyatta flags off the maiden freight and passenger trains on the 472.3km SGR from Nairobi to Mombasa June 2017.

Dreams deferred?
The first section of Uganda’s SGR is expected to run 273km from Malaba to Kampala. The government, in 2015, signed the Engineering, Procurement and Construction (EPC) contract with Chinese contractor, China Harbour Engineering Company (CHEC), for the section at a cost of Shs8.5 trillion ($2.3b).
Between 2017 and 2018, ‘government led by President Museveni and CHEC were locked in bitter fights over the $2.3b contract price, which was deemed both “high” and “inflated” and was subsequently reduced by Shs450b ($120m) to $2.1b. An addendum to the earlier EPC has since been signed.

The reduction in cost was as a result of numerous technical changes that were made; for example, according to earlier designs, the train was going through several tunnels, which were scrapped; through forests and swamps which necessitated tonnes of concrete, which will now be bypassed, and a linkage to the proposed Bukasa port in Wakiso District, which had been omitted, has been added.
“We also looked at some of the clauses which we felt were not benefiting the country, and we are able to change them. For example, in the earlier contract, we would go to South African for arbitration, but in the revised contract, we brought it closer to Tanzania,” Ms Azuba said.
“I think these last negotiations with the contractor enabled us to reach quite a lot,” she added.

Change in plan
As of last year, Ms Azuba said EXIM Bank’s main concerns were two; the seamlessness of the railway; initially it was supposed to link four countries for the project economics to make more sense but now it is ideally one; fiscal analysis about the project forecasts, economics, and loan repayment plans.
“We have done the fiscal analysis and this will be presented to them when we go to Beijing.”

In Beijing next week, Ms Azuba said they expect to hold joint discussions with the visiting Kenyan delegation and Chinese officials on the way forward.
Whist there is no guarantee of securing financing, Ms Azuba downplayed reports that China was likely to pull the plug on the project, arguing that “a bankability feasibility study was done in 2014; if it wasn’t bankable, I don’t even think we would have reached this far, and China would not have financed the first sections in Kenya.”

Why china is dragging its feet

According to sources, at the heart of the matter—why China has seemingly developed cold feet—is the issue of Kenya and Uganda’s capacity to pay back the loans given their respective debt stock.
Kenya’s public debt stock is expected to hit Shs223 trillion by 2020 if loan requests already in the pipeline are approved, while that of Uganda stands at Shs41 trillion. Both Nairobi and Kampala have maintained that their debt stocks are within sustainable levels despite warnings from civil society actors.
For Uganda, already, a significant amount of the coming financial year’s budget will go to debt and interest rate servicing.

Uganda plans to pay back the SGR loan using railway levy and import/export duties, to be supplemented by money from the Consolidated Fund/budgetary allocation; which repayment plan is not convincing.
With the option of the Consolidated Fund, the government was looking at the windfall from the expected oil revenues when commercial production starts in the next five years. The other concern is the project viability and business case, which have not been made widely available.
The concern is that Uganda averagely imports more and exports less, thus government will have to charge more fees on imports to offset the cost of exporting.

Uganda imports goods worth about $4b (Shs15 trillion) and exports just about less than half of that.
In a very long time, Uganda scored its first trade surplus last year, with exports of Shs2.6 trillion ($628.47m) against imports of Shs2.1 trillion ($505.70m).

The government, however, insists the SGR is sustainable and will generate enough revenue to pay for itself.
Some experts cited the low project returns on the Mombasa-Nairobi section as a contributing factor to China’s second-guessing of the remaining sections of the SGR. This means the project is not generating enough revenue to cover its operational costs and repay the loan.
The East African reported on Wednesday that during the first year of operation, the SGR recorded a loss of $100b (Shs367 trillion), and, in an attempt to generate traffic, the government directed that all imports through Mombasa port use the railway.

Failure to generate enough revenue prompted the China Road and Bridge Corporation, the operator of the SGR, to increase freight charges and double the fares for children. However, importers and exporters have been reluctant to use the SGR because of its high freight charges.
Asked about the bleak project returns, Ms Azuba said it is prudent that both governments and the private sector continue working towards augmenting traffic volumes via the SGR.
“We have looked at the growth of cargo and we have forecasted but as you know, the way you plan for numbers today is not the way they turn out after one year,” she said.
“So, it is true in Kenya they have not managed to get all their cargo on SGR—as some still goes on road—but I am not worried for as long as we construct the railway.”

Exploring alternatives

Last year, the government acquired a €21.5m (Shs96b) grant from the European Union (EU) for renovation of the meter gauge railway line from Tororo through the districts of Mbale, Kumi, Soroti, Lira to Gulu to contribute development of the private sector in Northern Uganda.
Ms Azuba said a financing agreement with the EU has since been signed, a detailed design conducted, procurement of a contractor is ongoing, and a resettlement action plan being worked out.
“We are on track, and are going to rehabilitate the entire line; we got a grant from EU but that is like 60 per cent of what we need. The government has also committed some money to the project, which will be available in the first quarter of the next financial year (starting July).”

The government estimates that if it upgraded the metre gauge railway line, it would boost monthly freight capacity to 120,000 tonnes from the current 20,000 tonnes by 2026, further casting doubts on the future of SGR.
Similarly, the Kenyan government has started plans to refurbish its metre gauge railway from Naivasha to Malaba; a tell-tale sign of a dreams likely to be deferred until China makes up its mind.

Modern. SGR is a classification of modern railway agreed upon under the African Union, to upgrade and link the continent’s railway system to facilitate continental integration.
Uganda and Kenya first agreed to construct the SGR in 2008, but the arrangement was not concretised until 2012. By then, Kenya was in the last stages of negotiations with China for the Mombasa-Nairobi SGR line, whose loan was released in 2014. Uganda’s SGR was launched in 2014.