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Finance costs threaten the Nairobi-Mombasa express

A showpiece for Beijing-Nairobi cooperation the Standard Gauge Railway project is also one of the world's costliest

Concerns are rising about Kenya's capacity to repay the hefty loans it took from Chinese contractors and banks to finance the Standard Gauge Railway (SGR) as the cost of servicing the country's debts consumes an ever larger share of state revenues.

The Kenya Railway Corporation (KRC), which has the worst debt of the parastatals, lost 24 billion shillings ($240 million), in the 2020/21 financial year. Persistent losses at KRC are blamed on SGR operations whose revenues have lagged far behind operating costs ever since its launch (AC Vol 55 No 4, No way to run a railway).

Besides operating fees for running the railway paid to management company Afristar, which is owned by China Road and Bridge Corporation, KRC has to repay the Ksh324bn ($3.2bn) it borrowed from China's Exim Bank in May 2014. The grace period on that lapsed last year.

To meet the revenue targets needed to finance the loan repayment, an agreement signed by KRC committed a quota of Mombasa port cargo freight to the SGR. The deal required the port to pay compensation if it failed to meet targets.

Import cargo previously handled by the Kenya Ports Authority was also transferred to the SGR, and a permanent inland terminal was established to handle the freight arriving exclusively via the SGR – all this was meant secure the railway's commercial viability (AC Vol 61 No 8, Freight storm hits the port).

Yet the SGR continues to slide deeper into the red. It earned $5.7m in its first year of operations, against the $12m needed for the project to break even.

The government's audit report confirmed that the Kenya Ports Authority was listed as a principal security alongside KRC in the loan deal with Exim Bank. The parliamentary advisory committee says KPA signed the deal against advice.

The Treasury's projected debt repayments to Exim Bank are set to more than double, revised from KSh42.67bn ($420m), to KSh96.7bn ($960m), in the financial year starting July 2021.

Repayments also account for 24.15% of the $4 billion external debt obligations for the next financial year ending June 2022.

Competition posed by routes such as Tanzania's central line running from Dar-es-Salaam to Isaka, about 100 kilometres south of Mwanza with a planned extension to Kigali and a branch line to Musongati in Burundi, will also bite into the SGR's commercial viability. At 1,400kms, the distance from Dar to Kigali is 25% shorter than Mombasa to Kigali.

If China keeps its pledge to build a megaport at Tanzania's Bagamoyo as well, Mombasa will struggle to compete for transit cargo to and from Rwanda and beyond.

There are also commercial concerns about the development of Kenya's Lamu port, part of the wider Lamu Port South Sudan-Ethiopia Transport (Lapsset) Corridor, a $24bn project connecting the Kenyan coast with inland markets.

Since being inaugurated in May, Lamu has seen only five container ships dock at the facility.

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