Kenya fails to secure $3.6b from China for third phase of SGR line to Kisumu

Saturday April 27 2019

Nairobi naivasha sgr

A section of the Nairobi-Naivasha standard gauge railway track under construction. China’s reluctance to fund the third phase of Kenya’s SGR project is seen as arising from poor performance of the cargo business on the initial Nairobi-Mombasa section, which began operation in July 2017. PHOTO | AFP 

ALLAN OLINGO
By ALLAN OLINGO
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Kenyan President Uhuru Kenyatta returned from China without funding for the third phase of his signature standard gauge railway (SGR)— a critical segment of the Northern Corridor project that is supposed to link the port of Mombasa with the Great Lakes Region’s landlocked states.

Instead, Kenya bagged some $400 million it says will be used to upgrade its 120-years old metre gauge railway to Malaba on the border with Uganda.

President Kenyatta had hoped to secure $3.68 billion from China—in loans and grant—to take the SGR line from Naivasha in Central Rift Valley to the lakeside town of Kisumu, and on to the Malaba border crossing from where Uganda would take over its construction to Kampala and beyond.

Kenyan officials put up a brave face on their failure to secure funding for this phase of the SGR project but people familiar with the negotiations said the change of fortunes came as a big disappointment for President Kenyatta, who has positioned the multimillion-dollar railway as a key pillar of his legacy.

Transport Cabinet Secretary James Macharia, who spoke to The EastAfrican on phone from Beijing, said Nairobi will henceforth treat upgrade of the Naivasha to Malaba metre gauge railway segment as a priority, even as it pursues funding for the remaining Naivasha-Kisumu-Malaba section of the SGR line.

“We have agreed to work on upgrading the metre gauge railway as a priority so that once construction of the Nairobi-Naivasha section is complete in August, we can evacuate goods to Malaba on time,” Mr Macharia said, adding that the upgrade works will start in two months’ time.

Recalibration of SGR plans

Kenya’s Foreign Affairs Minister Monica Juma, had earlier signalled this recalibration of SGR plans when she told our Beijing correspondent that the Kisumu line was not a priority.

“Another loan for extending the SGR [to Kisumu] is not the most urgent thing. It is still a matter under negotiation, and we have to involve partners like Uganda, because the SGR is a regional project that seeks to link the Indian and the Atlantic oceans,” she said.

“In the meantime, we are talking about the establishment of a special economic zone in Naivasha.”

News of the failure to secure funding for the final phase of Kenya’s SGR project came even as it emerged that President Kenyatta had secured $67.5 billion from China to build a data centre in a technology city currently under construction outside Nairobi and an expressway through the capital.

That the Chinese authorities are willing to pump billions of dollars into new projects but not spend a cent more on the SGR is consistent with the Beijing’s recent concerns about the viability of the mega railway line.

Fresh feasibility study

China last year withheld funding for the final segment of the SGR to the Uganda border and asked Nairobi to work with Kampala in conducting a fresh feasibility study for the project.

Concerns over SGR’s viability arise from the fact that Uganda has shown little enthusiasm for the grand project and has more recently been spending millions of dollars in the refurbishment of its rusty metre gauge railway network.

It is Beijing’s assessment that without Uganda, whose participation is key to connecting South Sudan and Rwanda to the Indian Ocean port of Mombasa, the SGR’s viability is grossly undermined.

Mr Macharia however insisted that taking the SGR to the lakeside city of Kisumu is not off the table.

“We have done a lot on the planned establishment of an inland port at Naivasha, including setting up a new special economic zone and a logistics centre.

Upgrading the metre gauge line offers us a chance to evacuate goods landing in the inland port as we await completion of the Kisumu-Malaba segment,” he said.

This means that goods landing in the Naivasha inland container depot will get evacuated by road to the metre gauge line for onwards transportation to Malaba and into Uganda.

“We shall see the return on investment on this new upgrade and use it to put forward our case for the SGR’s extension to Malaba,” said Mr Macharia.

News that President Kenyatta failed to secure funding for the Naivasha-Kisumu segment of the SGR is expected to be received with great disappointment in western Kenya, where various interests have more recently been taking positions to benefit from the line’s arrival.

Excitement for the SGR hit a new level last week following the announcement that opposition leader Raila Odinga, who is also the African Union special envoy on infrastructure, would accompany President Kenyatta to Beijing for the infrastructure summit.

Many had hoped that the presence of Mr Odinga, once one of the harshest critics of Kenya’s debt binge, in Beijing, would signal to the Chinese that Kenya is united in its resolve to complete the SGR project.

It however emerged that Mr Odinga was in Beijing purely to execute his African Union mandate and did not participate in Kenya’s negotiation for more loans.

Failure to secure funding for SGR also means Kenya’s plan to build a $1.4 billion Kisumu port will remain frozen for now.

Challenges

It has now become apparent that Kenya’s anticipation of the emerging challenges in securing funding for the final phase of SGR project informed President Kenyatta’s March decision to offer Uganda land to build a dry port in Naivasha.

Besides, Kenya’s success in securing funding for the Kisumu segment of the SGR is critical to Kampala’s own quest to close a $2 billion funding for its own Malaba-Kampala section of the new railway line

Kenya’s revamping of the metre gauge railway line could also benefit Uganda, which has been upgrading its own metre gauge line.

Uganda’s Finance Minister Matia Kasaija last October said Kampala had put on hold the SGR plans and would instead invest in revamping the old metre-gauge network.

Big win for Ethiopia

Meanwhile, even as Kenya licked its SGR funding wounds in Beijing, the Ethiopian delegation of Prime Minister Abiy Ahmed, returned home with a bag of goodies—having clinched multibillion dollar deals, including energy development.

There were also reports that Addis had secured a cancellation of the mounting interest on its loans of up to $20 billion.

Dr Abiy on Wednesday met executives of the China Export and Credit Insurance Corporation (Sinosure), one of the key agencies that has insured most of the Chinas financing of African projects.

But no announcement was made after the meeting, save for diplomatic leaks on a possible waiver of accumulated interest on Ethiopia’s debt to Beijing.

The meeting with Sinosure was important, especially for Addis, given that the agency has in the past few months been vocal on the viability of the Chinese projects in Ethiopia, including the Ethio-Djibouti Railway, terming it an example of Beijing’s risky investments in Africa.

Last November, Wang Wen, the chief economist at Sinosure, said the planning behind many of China’s major infrastructure projects abroad had been “downright inadequate,” leading to huge financial losses.

“Chinese developers and financiers of projects in developing nations need to step up their risk management to avoid disaster. We can clearly see the mistake that has happened on the Addis-Djibouti Railway line, which has since cost Sinosure $1 billion,” Mr Wang said.

Guaranteed investments

For Dr Abiy, the trip to China had to come with solid wins, especially on the critical matter of Ethiopia’s indebtedness to China, and guaranteed continued investments, as he seeks to boost his country’s economic growth prospects.

To solve Ethiopia’s power problems, which have hampered progress on the Addis-Djibouti railway line and other projects, Dr Abiy signed a $1.8 billion agreement with the State Grid Corporation of China to finance construction of transmission and distribution lines to cities, 16 industrial parks, and the railway.

Successful completion of the Addis-Djibouti railway line is key to ensuring delivery of the cargo volumes that were used to justify the line’s construction and the project’s ability to repay the debt.

Six months ago, Dr Abiy convinced Beijing to restructure some of Ethiopia's loans, including a $4 billion facility for the Djibouti line.

The loan for the Addis Ababa-Djibouti railway line, which was meant to be paid over 10 years, has now been extended to 30 years, along with its maturity period.

President Kenyatta on the other hand managed to secure critical trade and investment concessions from Beijing.

Besides the multi-billion dollar funding for the data centre in the tech city and the Nairobi expressway, Kenya inked an agreement that opens up the vast Chinese market for its avocado produce.

The deal will see China absorb more than 40 per cent of Kenya’s avocado produce, making it one of the largest importers of the fruit.

Other destinations for Kenyan avocado include Europe and the US.

Kenya National Bureau of Statistics on Thursday released fresh data showing that Kenya’s export of avocados more than doubled in 2018 closing only second to cut flowers in the fresh produce exports segment.

The report also showed Kenya’s economy grew at 6.3 per cent, a figure that creates new headroom for borrowing amid growing concerns over debt-GDP ratio and the ever widening budget deficit.

Release of the data while the Kenyan delegation was putting across its case in Beijing was also seen to have been deliberate.

Public debt

The new Chinese debt is expected to push Kenya’s public debt to a new high of close to $60 billion, with a new $2.5 billion Eurobond on the cards.

In this past week’s Forum on China–Africa Co-operation (FOCAC), the Chinese leader Xi Jinping fought off allegations that Beijing has been ensnaring African states into a debt trap.

President Xi said on Friday that the Belt and Road Initiative will focus on transparency and clean governance, adding that the massive infrastructure and trade plan should result in "high-quality" growth for everyone.

China’s plan to rebuild the ancient Silk Road to connect China with Asia, Europe and beyond has become mired in controversy as some partner nations have bemoaned the high cost of the infrastructure projects.

China has not said exactly how much money will be needed for the mega project, but some independent estimates suggest it will run into several trillion dollars.

Beijing has repeatedly said it is not seeking to trap anyone with debt and effectively used this week's summit to recalibrate the policy and address the concerns.

"Everything should be done in a transparent way and we should have zero tolerance for corruption," Xi said in a keynote speech. "Building high-quality, sustainable, risk-resistant, reasonably priced, and inclusive infrastructure will help countries to fully utilise their resource endowments."

Unlike the first summit in 2017, where Xi said Chinese banks would lend about $60 billion to support the BRI, he did not give a figure for new financing support.

—Additional reporting by James Anyanzwa and Onyango K’Onyango

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