RVR at a crossroads as East Africa goes for standard gauge to fix infrastructure mess
Saturday August 31 2013
With East Africa planning to develop a new wide gauge rail network running from the Kenyan coast to the Central African hinterland on one hand and hostile statements from sections of the political leadership on the other, the future of Kenya-Uganda railway concessionaire Rift Valley Railways (RVR) hangs in the balance.
As Kenya Railways Corporation announced it had completed designs for a new $4.5 billion wide gauge railway line from Mombasa to Malaba, Nairobi and Beijing were putting the final touches to a high profile visit by President Uhuru Kenyatta to China.
Securing a financing deal for the proposed line was expected to be one of the outcomes of the visit.
Significantly for RVR, the visit came against a backdrop of ominous statements from Nairobi, that the concession agreement would be reviewed over alleged poor performance.
In an interview last month, Kenya’s Cabinet Secretary Michael Kamau told The East-African that though the government was concerned about the performance of RVR, which he claimed was transporting 0.9 million tonnes, down from the 1.5 million tonnes that Kenya Railways used to transport before the concession, the government was not looking at terminating the arrangement.
“What we are focusing on is how we can push RVR to improve performance. And that’s why we have undertaken to review, jointly with Uganda, the company’s performance on a monthly basis rather than the early cycle of every six months,” said Mr Kamau.
READ: RVR’s performance to be reviewed every month
But RVR is betraying little, if any, signs of being rattled.
“We are aware of all the political and business developments in the region but our bible is the concession agreement and we are focused on meeting our side of the bargain,” RVR Group chief executive Darlan Fabio told the media at a recent briefing in Kampala.
Data shows that despite the infrastructure hiccups, port and corridor efficiency has dramatically improved due to ongoing reforms and infrastructure improvements at the key East African ports of Mombasa and Dar es Salaam.
On Tuesday, President Uhuru Kenyatta, Uganda’s Yoweri Museveni and Rwanda’s Paul Kagame officially opened the Ksh5.6 billion ($66.7 million) berth, which is expected to raise the port’s capacity by 33 per cent.
READ: New $66.7m berth to confirm Kenya as regional trade hub
They also attended the EAC infrastructure conference in Mombasa, as the political class took a lead in fixing the region’s infrastructure mess.
In a speech during the commissioning of Kenya’s Berth 19, President Kenyatta said the government would focus on improving transport infrastructure from the port to further cement Mombasa as the region’s key entry point.
“The standard gauge project is intended to increase rail freight from the current 4 per cent to at least 50 per cent in the next few years,” he said.
Analysts said that the presence of the three presidents was a pointer to a new political alignment shaping up in the EAC.
In a meeting in Uganda at the end of June, Kenyatta, Kagame and Museveni are said to have agreed on boosting the region’s infrastructure.
Each of the three presidents was given cross-border responsibilities: Kenya was to take the lead on the pipeline, Mombasa port and electricity generation and distribution; Rwanda on the Customs, single visa and EAC e-identity card; and Uganda the railway and political federation.
The East Africa Logistics Survey 2013 released by the Shippers Council of East Africa in June showed rail transport costs on the Northern Corridor are estimated at $0.06 per tonne-km, compared with $0.07-0.09 per tonne-km for road transport.
This reflects a very minimal cost differential between road and rail, leaving shippers with no incentive to choose one mode over the other. Estimates indicate that the railway accounts for less than 4 per cent of cargo evacuated from the port of Mombasa and 5 per cent from the Dar es Salaam port.
A majority of respondents ranked the quality of logistics services in East Africa as average. On mode of transport and logistics services, airline operators are highly ranked. Port and rail services ranked low in quality and competence in service delivery.
“These low evacuation rates are attributed to lack of adequate wagons and a depleted rail infrastructure that has been largely neglected with minimal investment since the 1900s,” said the Shippers Council.
“Frequent delays, breakdowns, and service disruptions make rail transport more unpredictable than road transport,” said the survey, adding that interviews with RVR revealed that rail transport has high infrastructure and maintenance costs and the income from operations is artificially low, because freight rates are restricted to low levels due to politically assisted competition from the road sector.
Experts think the coming into operation of the standard gauge railway will suck the life out of RVR, a thinking that Mr Kamau disputes.
“Cargo at the port of Mombasa is growing at 10 per cent; by 2017 we project the port will be handling 32 million tonnes. At peak performance the SGR will carry 28 million tonnes, meaning there will be enough cargo for RVR to continue operating,” said Mr Kamau.
According to statements from Nairobi, RVR, which won a 25-year contract to run the 1,330km Mombasa-Kampala line in November 2006, was falling short of expectations.
Officials in the Kenyan government claim that in the over seven years since RVR took over rail operations, the share of cargo transported by rail had fallen from 15 per cent to three per cent.
In Kenya, where the concessionaire also operates a passenger service, statistics show that revenue passenger kilometres (that is, the number of revenue-paying passengers aboard the vehicle by the distance travelled) dropped from 389 million in 2009 to 365 million kilometres in 2012 while cargo carried on the Kenyan segment increased slightly from 1,060 million tonnes in 2009 to 1,135 million tonnes last year.
The Kenya Railways Corporation also complains that the number of wagons available to RVR has dropped from 3,200 when the concession was awarded to less than 1,000 today.
But Mr Fabio paints a different picture. According to him and the other partners in the RVR concession, a distinction should be made between the old RVR and the new RVR.
The rail assets were first leased out to Sheltam Pty, a South Africa registered consortium, in a deal that many observers now agree was poorly structured.
For the three years it ran the concession, Sheltam injected only $15 million in capital — and just $3 million of this was invested in new assets. The operator failed to meet the minimum investment threshold of $40 million.
After the marriage was terminated in 2009, the two governments sought new partners, signing up a new consortium led by Citadel Capital in August 2010.
Together with Nairobi Securities Exchange-listed Trans Century and Uganda based BOMI Holdings, the new concession had by July invested some $156 million, which is nearly four times the $40 million capital expenditure threshold required under the agreement.
“We have invested more in the past 18 months than what was invested in rail in the preceding 18 years,” said Mr Fabio.
That investment is part of a $287 million turnaround plan and, in addition to clearing Sheltam’s arrears, RVR has so far paid the two governments $53 million in concession fees. In two and half years, RVR’s shareholders have also raised $76 million in equity.
Under the concession agreement, RVR is evaluated on three performance indicators. It must pay concession fees to Kenya Railways and Uganda Railway Corporation every quarter.
This translates into some $570,000 monthly and the operator claims it is up-to-date on these payments.
RVR was supposed to invest $40 million as a minimum but with a kitty of $287 million, more than half of which has already been spent, terminating the concession on these grounds would be a tall order.
Finally, the operator is supposed to achieve haulage of 1.9 billion net tonne kilometres (NTK) by June 2014. As of June 2013, performance stood at 1.3 billion NTKs. According to Mr Fabio, recent investments put the operation in line to beat the 2014 target.
Most of the $156 million has gone into repairing the track, installing new technology and restoring rolling stock.
Seventy-four kilometres of track have been replaced between Mombasa and Nairobi, shaving six hours off transit time between the two points, while 2,000 wagons and 28 locomotives have been refurbished.
Culvert repairs and line strengthening on the Ugandan side now allows the heavy class 82 locomotives to run uninterrupted all the way from Mombasa to Kampala. Works on the 500km northern line that runs from Tororo to Pakwach are also nearing completion.
A new satellite communication system and onboard computers installed on board locomotives have brought operational efficiency.
The remaining tranche of $131 million will finance the repair of another 366 kilometres of track between Mombasa and Kampala, acquisition of 20 new locomotives and automated track repair equipment as well as a train simulator for training drivers.
A major bone of contention between the governments, the operator and clients is the 22 days it currently takes a container to transit from Mombasa to Kampala.
RVR blames this on systemic inefficiency and its own studies show that on average, it is responsible for only eight days of this total.
Vessel discharge to release from the warehouses at Mombasa accounts for another eight days while Customs procedures in Kenya and Uganda are responsible for the other six. RVR’s best performance today is four days but it targets 2.5 days by June 2015.
A subject preoccupying analysts today is what RVR’s chances are of competing against the proposed new standard gauge segments, which could be in operation as early as 2018.
Mr Fabio remains unfazed, arguing that at best, the standard gauge will bring just an 11 per cent improvement in speed over a refurbished narrow gauge. That is assuming all the bureaucratic bottlenecks are cleared.
With more than $4 billion going into the track alone, the cost of making the new lines operational including rolling stock and signalling will rack up such a bill that RVR will enjoy an unmatched cost advantage.
Besides, Mr Fabio argues, there is a difference between bulk cargo, passenger and next day parcel deliveries.
“The best cargo systems today operate at between 45 and 65 kilometres per hour and that is something we can match once we are through with our investment programme,” Mr Fabian says.
He adds that in the US, cargo trains average 55-65km/ h while the average is 45km/h in Brazil because conventionally, bulk cargo is not designed for speed but lays an emphasis on security.
As a result, shippers of bulk cargo are content with reasonable speed and tend to be more concerned about the security of their consignments.
By RVR’s own studies, wide gauge railway will only bring an 11 per cent improvement on speed so if the current design speed of the network is 100 km per hour, standard gauge trains will at best operate at 111km/h.
That is not much of a difference and combined with the superior cost advantages, Mr Fabio is unconcerned by the prospects of the new high speed rail. He reckons that the operator of the standard gauge will charge up to four times what RVR would charge per tonne between Mombasa and Malaba.
“It is going to be really difficult for any operator to run the standard gauge line at a reasonable cost to users.”
Mr Fabio is more concerned about the current system bottlenecks. Cargo trains now stop at the border either way, not only wasting valuable time but tying up haulage capacity.
Clearing cargo at the point of origin and sending the documentation electronically could erase the 2-3 days it takes to move a train across the Kenya-Uganda border.
He says there is a need for a dedicated team to handle rail cargo at Mombasa because the current system appears to be more focused on serving road bound cargo. And while RVR works 24 hours, not everybody along the chain does.
Mr Fabian says that if these hurdles are addressed, RVR can hold its own against the standard gauge.
Additional reporting Peterson Thiong’o.