Museveni clears $2.9b China loan for Malaba-Kampala SGR

Sunday July 23 2017

President Yoweri Museveni

President Yoweri Museveni approval for borrowing $2.9 billion for the construction of the standard gauge railway from the Malaba border with Kenya to Kampala in the clearest signal yet that the regional infrastructure project is back on track. FILE PHOTOS | NMG 

By DICTA ASIIMWE
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President Yoweri Museveni has approved the borrowing of Ush10.3 trillion ($2.9 billion) for the construction of the standard gauge railway from the Malaba border with Kenya to Kampala in the clearest signal yet that the regional infrastructure project is back on track.

Uncertainty had hit the project after Uganda said it was considering building a railway through Tanzania after failing to get assurances from Kenya that it would extend the Mombasa-Nairobi line to Malaba.

Kenya has since committed that its line, whose first phase to Nairobi was competed in June, will be extended in phases to Naivasha, Kisumu and eventually Malaba.

The approval for the borrowing comes amid indications that China had agreed to fund the line only if it was a joint project between governments including Rwanda, the last stop of the Northern Corridor under the East Africa Railway Masterplan. Another line in the Central Corridor from Dar es Salaam to Burundi and Rwanda would complete the circuit meant to boost trade in the region. 

In a letter to parliament last month, President Museveni said the loan, which is Ush2.1 trillion ($600 million) more than the $2.3 billion contained in the feasibility study, should be on condition that concerns over the technical specifications and project costs raised by the Parliamentary Committee on Infrastructure in February would be addressed.

The Treasury said the money included the costs of arranging for the loan from China Exim Bank, such as insurance, even as State Minister for Planning David Bahati suggested the higher amount could be the result of a typing error.

“Are you sure it was $2.9 billion? I seem to remember writing $2.29 billion,” he said.

But Ministry of Finance spokesperson Jim Mugunga said the extra allocation was meant to cover costs associated with borrowing the loan.

“When you go to negotiate with lenders, the bank asks for management and insurance fees,” Mr Mugunga said.

Borrowing costs

Although Mr Mugunga did not disclose the details, typical government concessional loans from China Exim attract interest of two per cent per annum, commitment fees of 0.25 per cent for undrawn amounts and a management fee of 0.25 per cent on the loan amount.

It is also not unusual to find such a loan having a commercial component, which is priced at a premium above an agreed benchmark interest rate such as Libor.

Insurance, depending on the risk of the project, ranges from five per cent to 10 per cent. For the first phase of Kenya’s standard gauge railway project, it was 6.93 per cent.

Uganda has been collecting a 1.5 per cent infrastructure levy on imports since the 2014/15 financial year under an arrangement by East African partner states to support the construction of the railway.

Uganda has previously borrowed money from China Exim without such a notable cost escalation. A report from parliament shows that in the case of Karuma hydropower dam, the project cost was estimated at $1.7 billion and Uganda borrowed $1.4 billion. The rest was counterpart funding. Management and insurance fees for the project were $69.8 million.

Kasingye Kyamugambi, the SGR co-ordinator, said Uganda is expected to provide counterpart funding of 15 per cent or $345 million largely for compensation of people affected by the project. This would take the extra borrowing to $900 million.

Public debt

President Museveni said in the letter that concerns over the steel density and cost per kilometre of the railway needed to be resolved. The Uganda line will cost $8.2 million per kilometre, compared with $5 million per kilometre for Ethiopia and $7.7 million per kilometre for the Mombasa-Nairobi phase in Kenya.

Mr Kyamugambi had said earlier this year that China Harbour Engineering Company would build the 273-kilometre line over a period of 40 months. He said the cost of each project was determined by the terrain.  

In the letter, President Museveni also approved the borrowing of about Ush15.7 trillion ($4.4 billion) for infrastructure projects. However, he rejected 11 loan requests worth Ush2.5 trillion ($714 million). 

President Museveni’s letter to parliament was intended to control Uganda’s rapidly increasing debt and interest payments, which are blamed on lopsided contracts signed by government officials.

For the 2017/18 financial year, Uganda will spend Ush17 trillion ($4.7 billion) in loan and interest payments. This is more than half of the country’s Ush29 trillion budget ($8 billion).

Syda Bbumba, the chairperson of the parliamentary committee in charge of approving government loans, said the president had instructed that in the future he would personally approve government borrowing. Previously, loans went through the Cabinet, before being passed on to Parliament.

Ms Bbumba said the Cabinet is sometimes chaired by the prime minister and as result the president was not always aware of the approved loans. She added that, Uganda will reject new loans for capacity building and workshops, as these are no longer necessary.