A taxation dispute is threatening to derail the ongoing construction of the $5 billion standard gauge railway (SGR) between Mombasa and Nairobi.

The project, scheduled for completion in 2017, could fall behind schedule after a dispute over VAT erupted between major suppliers to the Chinese contractors and the Kenya Revenue Authority (KRA). This is despite the Kenya government and Chinese Export-Import (Exim) Bank releasing $659 million towards the initial phase of the project.

The taxman is insisting that the more than 150 suppliers pay the 16 per cent tax even though supplies to government projects are usually exempted from the levy. The assessment, they say, also runs against the agreement signed between the government and the contractor, China Road and Bridge Corporation (CRBC). They have halted services until the dispute is resolved.

“We have issues with VAT,” Kenya Railways Corporation (KRC) chief executive Atanas Maina said. “Procurement of major items such as motor vehicles will not take place until the VAT issue is resolved. This is a concern to us because these things have been on the table for too long.”

There is also a controversy over the quality of certain categories of cement and steel produced by Kenyan manufacturers, which CRBC has rejected, claiming they do not meet the required specifications.

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The 500-kilometre railway line, which is to be built according to Chinese railway design standards, will carry freight trains at speeds of up to 80 km per hour and passenger trains at up to 120 kph.

The agreement provides that both imported and locally produced construction materials for the railway line be delivered duty-free.

“The issue of VAT is where we have a problem,” Mr Maina said. “The suppliers are meeting KRA next week [this week] to discuss how they are going to supply to the contractor duty-free.”

A KRA official was optimistic of a breakthrough being achieved at the meeting.

“We just had a meeting with  China Road and Bridge Corporation and Kenya Railways Corporation a few days ago and we have got another workshop with the suppliers next week [this week],” said the official.

While the agreement between the Kenya government and the Chinese contractor provides that 40 per cent of the construction material be procured from local manufacturers, the issue of quality and standards could affect the envisaged benefits to local industries.

“The issue of 40 per cent local content is an understanding between the government and the contractor,” said Mr Maina.

“However, we have signed a contract for the delivery of a project to particular standards and the materials that we expect local people to supply must meet the standards provided by the contractor.

“There is no way we are going to import materials that are found locally. We have had discussions with KAM and Kebs on this matter but we have issues with steel and certain categories of cement which need to be upgraded.

Signed deals

He added: “We have procured samples from local industries and tested them. We have made available to them the information about the contractor. As soon as they upgrade, they can come back to us.”

Bamburi Cement and Athi River Mining (ARM) are among local firms that have signed deals with CRBC for supply of cement.
However, the Kenya Bureau of Standards (Kebs) said only one category of locally manufactured cement does not meet specifications.

“Based on the key physical and chemical performance parameters, there is no fundamental difference between the Kenyan and Chinese cement specifications,” said Patricia Kimanthi, the Kebs corporate communications manager. “Basically, there is only one cement, 52.5, where the specifications are significantly different.”

She said that a market surveillance done late last year showed that the steel in the market was of good quality. The Kenya Association of Manufacturers (KAM), the industry’s umbrella body, said its members should be given time to upgrade their products in line with the proposed specifications.

“We have had meetings with Kenya Bureau of Standards and Kenya Railways Corporation on the issues of standards,” said Betty Maina, chief executive of KAM. “We asked for an independent verification of those requirements and materials.

“We also asked Kebs to confirm to us if there were fundamental differences in parameters for the materials produced locally and those demanded by China Road and Bridge Corporation and their view was that there is nothing fundamentally wrong.

“We are working with Kebs and, if there are some differences in the parameters used, our local manufacturers are able to meet the required specifications.”

Ms Maina emphasised: “Our members have the capacity to meet those standards. What we need is to give the companies time to comply with the requirements.”

The railway line, whose groundbreaking ceremony was held in November 2013, is expected to promote trade relations in the region by presenting an alternative to cargo transporters who mostly depend on road transport. It will significantly reduce transportation expenses and save time, directly affecting prices of commodities and generally easing the cost of doing business in the region.

The project, which is being funded by the governments of China (85 per cent) and Kenya (15 per cent), is to be implemented by Kenya, Uganda and Rwanda as a bloc with each country financing the section of the line on its territory.

Three phases

Construction of the Kenyan unit will be in three phases with phase one, from Mombasa to Nairobi, expected to be completed in 2017. Phase two will run from Nairobi to Malaba with a branch line to Kisumu and phase three from Malaba to Kampala.

The Mombasa-Nairobi-Malaba line, with a branch to Kisumu, is part of the Northern Corridor — a transport artery for Kenya, northern Tanzania, Rwanda, Burundi, eastern DRC, South Sudan and Ethiopia.