Shock of Sh120bn hidden cost in the Chinese railway deal

The controversy surrounding the standard gauge railway tender deepened on Tuesday after the Treasury admitted a bilateral deal with China was shelved in favour of a commercial loan in order to circumvent scrutiny from Parliament.

Treasury secretary Henry Rotich told the parliamentary Public Investments Committee (PIC) that government did not sign any sovereign guarantee with China to secure funding for the project which will now cost tax payers Sh120.5 billion more.

“There is no sovereign agreement that we have signed in this matter. If we were to sign such agreement, the House will have to approve in line with section 59 of the Public Finance Management Act,” Mr Rotich said.

The government has always maintained that no competitive tender was floated for the Mombasa-Nairobi line because it was a government-to-government arrangement.

READ: State defends award of rail deal to Chinese firm

Mr Rotich put the project cost at Sh447.5 billion when financing costs are taken into account while previous government statements maintained it would cost Sh327 billion including works and rolling stock.

“We negotiated directly with the Chinese government lending arm — Exim Bank — which requires insurance for any commercial loan,” Mr Rotich said. On Monday, Kenya Railways acting managing director Alfred Matheka said Exim Bank charged an insurance premium of Sh13 billion on its portion of the loan of Sh140 billion.

Mr Rotich said the increased figures take into account the cost of interest, insurance, management and commitment fees which had not been factored in the cost of civil works and facilities, locomotives and rolling stock.

Giving a breakdown of the cost of interest on the loan, insurance, management and commitment fees, Mr Rotich said the concessional loan of $1.6 billion (Sh137.6 billion will attract Sh31.5 billion or two per cent per annum for 20 years.

The management fee, pegged at 0.7 per cent will cost Sh1.4 billion while the commitment fee will amount to Sh3.6 billion or 1.5 per cent per annum of the principal amount.

On the commercial loan secured through China Exim Bank amounting to $1.63 billion (Sh140.4 billion), the insurance cost charged at 6.93 per cent will amount to Sh53 billion over the term of the loan.

“The total Chinese loan will amount to Sh375.8 billion (85 per cent) while the government counterpart funding is Sh49 billion (15 per cent) to bring the cost to Sh424.9 billion,” Mr Rotich said.

However, he said there was another Sh22 billion not necessarily included in the contract for compulsory acquisition of 2,253 hectares of land for the rail corridor (Sh8 billion), development of Embakasi Inland Container Depot (Sh11 billion) and consultancy services Sh3 billion.

The construction of the 609 kilometer railway from Mombasa to Nairobi was launched in December last year. However, Nandi Hills MP Alfred Keter said the project was overpriced because it did not go through competitive bidding.

On Monday Transport secretary Michael Kamau said the project was the cheapest in East Africa when compared to an ongoing project in Ethiopia and another proposed in Uganda.

READ: MPs query standard gauge railway insurance

The cost per kilometre for the 609 kilometre section is $3.98 million (Sh338 million) for class one standard gauge compared to the 327 kilometre class two standard gauge rail being constructed in Ethiopia at $3.84 million (Sh326 million) per kilometre. The cost in Uganda will be $9.5 million (Sh808 million) per kilometre.

“The Sh447.5 billion includes all interest payment, insurance and commitment fees over the next 20 years. The figures by the ministry of Transport didn’t include charges other than the cost of civil works and locomotives, facilities and rolling stocks,” Treasury principal secretary Kamau Thugge said.

The committee, which is investigating the procurement of China Roads and Bridges Corporation (CRBC) to undertake the Sh1.2 trillion Mombasa-Nairobi-Malaba-Kampala-Kigali/South Sudan, questioned the procedure that was adopted in procuring, awarding and financing of the contract.

Attorney General Prof Githu Muigai informed MPs that he cleared the signing of commercial contracts and not the procurement procedures after getting assurances from Kenya Railways that it will secure express approval from the Treasury.

“There are two commercial contracts that have been executed. We gave three conditions before they were signed…this included the need for approval by Treasury, our approval and that procurement be subjected to financing agreement which will follow Section 6(1) of the Public Procurement and Disposal Act,” Prof Muigai said.

Mr Matheka said the loans carried an interest rate of two per cent per annum and have a 15 year tenure, including a grace period of five years. A management fee of 7.5 per cent payable upfront and a commitment fee of 15 per cent on undisbursed amounts were also attached.

Prof Muigai and Mr Rotich said no financing contracts have been signed and that the commercial contracts so far entered into will only be executed once the funding agreement is executed.

“If the financing agreement does not mature, there will be no obligation on the part of Kenya to the Chinese. The contract will cease to exist,” Muigai added.

MPs accused the corporation of ignoring advice from Attorney- General Githu Muigai, former solicitor- general Wanjuki Muchemi and former permanent secretary Cyrus Njiru that the contract be awarded competitively.

Public Procurement Oversight Authority director- general Maurice Juma could not explain why Article 227 of the Constitution and section 6(1) of the Public Procurement and Disposal Act which require procuring entities to conduct competitive bidding in contracts involving public funds were ignored.