China Exim sets terms for financing Uganda’s standard gauge railway

Saturday May 28 2016

A section of the Standard Gauge Railway running through Makueni County, Kenya. FILE PHOTO | SALATON NJAU

A section of the Standard Gauge Railway running through Makueni County, Kenya. FILE PHOTO | SALATON NJAU 

By DICTA ASIIMWE

The Malaba-Kampala section of the standard gauge railway will take a while longer to be completed after China’s Export Import Bank set new loan preconditions for Uganda.

A document prepared by officials from Uganda’s Ministry of Finance, Planning and Economic Development and seen by this paper shows that a key demand by the Chinese is that Uganda secure guarantees from Kenya that it is still interested in and will source financing for the Naivasha-Malaba section of the standard gauge railway (SGR).

It also wants guarantees on compensation for those people affected by the project and a new feasibility and bankability study showing that construction of the SGR makes business sense.

Kampala has now been forced to revise the completion date for the construction of the SGR from the Northern Corridor’s target of March 2018, to sometime around 2020, The EastAfrican has learnt.

While the Ugandan government attributes the potential delay to China’s desire to take on a bigger portion of the financing responsibility in the wake of the agreement that the lender will run operations for 10 years in order to recoup its investment, sources say Beijing is concerned about Uganda’s ability to meet its repayment obligations.  

Minister of Works and Transport John Byabagambi confirmed in an interview in Kampala that there will be delays, setting the new expected date of completion of only the Malaba-Kampala section to 2020. The target set by the Presidents of Rwanda, Kenya and Uganda was for the first train to be flagged off from Mombasa to Kigali in March 2018.

Statements by officials in Kigali and Nairobi following the Heads of State summit held in Kampala last month, suggested that the Kenya, Uganda and Rwanda coalition, which was supposed to build the SGR was crumbling.

But different ministers including Rwanda’s Finance Minister Claver Gatete and Mr Byabagambi say the project will continue. Mr Byabagambi now says that the only challenge is Uganda will miss the 2018 deadline because the Ministry of Finance, Planning and Economic Development hasn’t yet raised money for compensation for those affected by the project.

Exim Bank wants Uganda to first compensate all those whose land is on the Malaba-Kampala SGR route before a financing agreement can be reached.

Mr Byabagambi said compensation was moving on smoothly noting that the only concerns will emerge as they move towards the more built-up areas.

The Ministry has so far paid out Ush20 billion ($5.8 million) to project affected persons. And the same amount is to be paid out this week, but that’s way below the required compensation amount of over Ush300 billion ($87.7 million) for the Malaba-Kampala section of the SGR.

Mr Byabagambi said that in the 2016/17 financial year, another Ush110 billion ($32.1 million) has been allocated for compensation. This means that the process of compensation could be completed in the 2017/18 financial year.

This newspaper understands that a new application providing answers to the questions was submitted to the Chinese this month.

On Kenya’s part, Transport Cabinet Secretary James Macharia reportedly said Nairobi could terminate the SGR at either Naivasha or Kisumu. The Chinese are financing the Kenya leg of the SGR as well and have already agreed to do so up to Naivasha.

Secretary to the Treasury Keith Muhakanizi who was part of the delegation that went to China to negotiate the terms of the loan, however, said that he has made progress and will soon get Kenya to provide the necessary assurances, so that Uganda can get the financing for the SGR.

President Yoweri Museveni had praised China as a genuine development partner that doesn’t set conditions before lending, like the West, but the country now wants Uganda to prove that construction of the standard gauge railway makes business sense, before a $2 billion loan is provided, and that once the project is completed, it will generate enough money to repay the loan.

In a 2014 interview with the Financial Times, President Museveni said China would be the source of funding of about $10 billion for Uganda’s infrastructure.

The SGR is a pet project that came into being following a 2013 pronouncement by Presidents Paul Kagame of Rwanda, Kenya’s Uhuru Kenyatta and Uganda’s Yoweri Museveni.

As a result, the project was never tested as a business, but experts like Dr Fred Muhumuza, an economist at Makerere University says that the SGR could become a white elephant and that it will add little value to the Northern Corridor, since not enough exports are coming out of the region. The region is building an SGR to ease importation of goods.

Dr Muhumuza said that imports don’t create jobs and therefore the country will have difficulty in generating revenue to pay back the several infrastructure loans.

Government officials on the other hand say building the SGR would take pressure away from the roads, and that’s the business value of building the SGR. 

Uganda had done feasibility and studies for the railway, but the Chinese rejected these documents for being insufficient in stating the business case for funding the SGR project.

Having borrowed at least $3.3 billion from the Exim Bank to construct several projects including the Karuma and Isimba electricity dams, the Kampala Entebbe Expressway and other projects, Ugandan public officials are familiar with the processes of acquiring money from this bank. As a result, Uganda gave the contract for construction of the SGR to a Chinese company, a precondition for acquiring the loan.

But the rules appear to be changing with sources in the Ministry of Finance, Planning and Economic Development telling The EastAfrican that the Chinese are waiting for 2018, to see if Uganda can complete the hydroelectricity projects so that there is revenue to pay back some of the loans.

Mr Muhakanizi, however, disputed this analysis arguing that China is still comfortable lending to Uganda. Uganda has a 40 per cent debt-to-GDP ratio.

Mr Muhakanizi said this means Kampala’s debt is sustainable since it is below the 50 per cent threshold set by the East African Community Monetary Union committee.

But with a fiscal balance of over 6.4 per cent and a tax to GDP ratio of less than 13 per cent, Uganda is missing the other monetary union targets that would show the country’s capacity to pay back loans.