RVR fights to keep concession on track amid rising criticism
RVR has cited dilapidated infrastructure as one of its major burdens since winning the concession. FILE
Three years after South Africa’s Sheltam Rail was kicked out of the Rift Valley Railways (RVR) consortium that had won the Kenya-Uganda rail concession, it could be déjà vu all over again as the current operator of the rail line spiritedly fends off renewed official criticism of its performance.
The concession has in recent weeks taken a sustained bashing from top government officials over what Nairobi and Uganda feel is its underperformance, a charge stridently denied by RVR.
The apparent chill in relations has its roots in the troubled history of the concession. Sheltam in 2006 edged out the Indian-fronted Magadi Soda consortium for the rail concession but it then rapidly became clear that it had taken many for a ride, as it struggled to stump up equity that would have reassured financiers that it was a viable operator.
Sheltam’s other big failing was basic: despite a meticulously packaged brownfield bid that was even named as Euromoney Project Finance magazine‘s Africa Deal of the Year in 2007, it had little technical expertise in running a railway, even though it shared a parent firm with Comazar, the biggest private railway operator in Africa.
Given the inordinately high expectations that Nairobi and Kampala had of a quick turnaround, the Roy Puffet-led concession quickly foundered under pressure, resulting in Sheltam’s eventual exit in 2010 following World Bank-brokered firefighting talks in London.
“They just didn’t know what they were doing,” Mr Brown Ondego, the shoot-from-the-hip executive vice chairman at the restructured RVR, said of Sheltam’s attempt during a recent low-key media roundtable put together to counter the murmurs of discontent around the current concession.
The renegotiated deed of amendment brought in the Egyptian private equity firm Citadel Capital as the majority shareholder following a tussle with the other shareholders, and which also resulted in the politically-connected listed Kenyan investment firm TransCentury increasing its stake from 20 per cent to 34 per cent.
Uganda’s Bomi Holding, with a 15 per cent stake, rounded out the new-look consortium.
But after a détente of sorts in relations since the 2010 restructure, the two governments are again impatiently breathing down RVR’s neck.
There is a sense in RVR’s Nairobi boardroom that the South Africans’ shambolic management of the earlier concession still rankles in Kampala and Nairobi, leading to the straitjacket operating environment the current turnaround is afforded.
Among the first signs that all was not well in government quarters came during the parliamentary vetting of Kenya’s Transport and Infrastructure Cabinet Secretary, Michael Kamau, in May.
“We have had a seven-year concession, and since it started, cargo transported by rail has gone down from 15 per cent to three per cent, we will look at the concession again and see whether it is working,” said Mr Kamau.
Now the Cabinet Secretary, Mr Kamau was last week again quoted saying that Kenya and Uganda would through a commission review the railway’s performance monthly, an admission of sorts that the oversight role has been relegated to the backburner.
“Both countries express concern over RVR, especially looking at its entire performance. We noted that the cargo handled by RVR has been declining,” Mr Kamau was quoted as saying.
It was instructive that the Cabinet secretary was speaking at a function to sign off on a Chinese-anchored deal to construct a standard-gauge railway that would serve Kenya, Uganda and Rwanda.
And in a live television interview last Sunday Mr Kamau reiterated that view. “Even if RVR operated at full capacity we would still need at least four other lines [to move cargo from Mombasa],” he said.
Interestingly, the government in its Economic Survey of 2013, covering the activities of 2012, noted that earnings in the railway sub-sector had increased 22.4 per cent in the year under review and attributed this to the increased tariff levied on transported cargo and “the restructuring of the operations of the Rift Valley Railways”. The concessionaire retains the right to unilaterally vary tariffs.
The hardening of official position has left RVR baffled. The operator says it is meeting all the key performance indicators as set out under the restructured deed of amendment, with much hand-wringing over what it feels is an unfair progress report on the concession.
At its peak in 1983 some 4.3 million tonnes were moved by the railway, before a precipitous decline to 1.9 million tonnes by the end of 2005. Today RVR handles 1.5 million tonnes annually, and projects to raise this to five million by 2015 once the initial investment period is over.
More tonnage
With total port throughput rising 9.9 per cent in 2012 to 21.92 million tonnes from the preceding year, according to the Survey, the increased movement of cargo should ordinarily provide more tonnage for RVR, the capacity of which government officials remain skeptical about.
Also, with 92 per cent of freight moved by road, Kenya and Uganda’s impatience with the lack of tangible results from the concession has only grown.
But RVR says that as per its agreement with the government, the volume cap was not to match pre-concessioning numbers but to haul 1.9 billion Net Tonne-Kilometres (NKT), a measure of total tonnage moved over distance — by June 2014.
The concession is currently moving 1.3 billion NKT and expressed surprise that it is being criticised for not meeting its target a year ahead of schedule.
RVR argues that volumes are not rising as fast because it inherited a dilapidated infrastructure, from dead rolling stock to a rail line neglected for decades.
To fix this, it takes time, not just money, the firm noted, that lead times for locomotives and spare parts can reach up to five years, made worse by supplier demands for upfront payment.
The concession says it is rehabilitating 40 wagons monthly and has 940 out. It has also rehabilitated 73km of the worst track sections chiefly around curves, at a cost of $20 million (Sh1.7 billion). This, it says, has cut transit times between Mombasa to Nairobi by six hours.
It was impossible to verify this claim independently. To further bolster efficiency, it recently installed GPS-based technology estimated at $9.3 million to centrally control the movement of trains and freight, a project overseen by Brazilian rail operator Americana Latina Logistica, which was brought in to provide much needed technical expertise.
In further defence of performance, RVR’s top brass contend turnaround effort began in 2010, when the current shareholders and debt financiers were roped in, and notes that the government had already lost four years before Sheltam’s exit.
RVR noted that it was currently meeting all the other key terms set out, including the crucial payment of an 11.1 per cent concession fee for the use of conceded assets to both the Kenya and Uganda governments.
“We are paying on time; there is no delay on the payment of concession fees,” Mr Darlan De David, the RVR chief executive officer, had said at the roundtable.
So far, the concession has paid $53 million to the Kenyan and Ugandan governments, and pays $570,000 (Sh50 million) to Nairobi monthly, noting that prior to the concession, the Treasury was paying $3.4 million (Sh300 million) in salaries to a bloated railway workforce.
A third requirement was $40 million investment in capital expenditure over five years to buy or upgrade assets, which would be offset as stipulated in the conceded assets account that was set up to mitigate risk to private shareholders.
RVR says it realised this threshold was inadequate given the state of disrepair, and has half-way through the five-year investment period exceeded this requirement four-fold, having put it $156 million (Sh13 billion) so far, and noted that it had in 18 months invested more than the government sank in 18 years prior to the deal.
RVR shareholders have so far raised $287 million in funding for the concession, comprising $164 million as debt, and $82 million as equity. Current cash flows from the concession stand at $41 million.
Metric gauge
While this is a far cry from the $125 million Sheltam set out with, it is apparent that the concession will soon need more funding given the scale of reinvestment needed.
Barring a rapid turnaround in fortunes, the concession is now mulling plans to cross-list on the Kenyan and Ugandan bourses, ideally around 2017.
It knocks back suggestion the proposed standard-gauge railway, touted as more modern, will jeopardise RVR operations, saying the existing metric gauge is widely used in Australia, Japan and Latin America.
The firm is, however, unhappy about forking out fuel levy, a total of $11m last year, in what it feels places it at a disadvantage as the cash is spent on road instead of improving rail infrastructure while paying taxes on key imported hardware.
“We are basically subsidising our competition,” Mr Ondego said.
But as the concession moves along, it is questionable whether Kampala and Nairobi will remain patient with what they see as a slow turnaround pace given the potential of the railway and which has in recent times been buoyed by a string of hydrocarbon discoveries in East Africa.
The passenger business, now on rolling one-year concessions, is yet to endear itself to Kenyans, even as the government struggles to raise funding for investment in basic infrastructure.
However, RVR, which is asking to be judged by the terms of agreement, has its work cut out to pacify restless officials.
