Egyptian equity fund, Qalaa Holdings (then Citadel Capital), took the East Africa’s mergers and acquisitions scene by storm when it bought South Africa’s Sheltam out of the Kenya-Uganda railway line in 2010.
The move was seen as unmatched appetite for risk, given the aging track’s notoriety for accidents and losses at the time.
But Qalaa has, over time, grown its stake in the Rift Valley Railways (RVR) to 85 per cent, assuming nearly all the risk even as Uganda and Kenya move to build a rival high-speed track.
And when the continent’s three economic blocs – EAC, SADC and Comesa – moved to form a free trade area two months ago, Qalaa answered them by assuming a key role in the $8.5 billion campaign to extend the Suez Canal by 72km to ease cross-country movement of goods.
The Business Daily discussed these investments with the fund’s managing partner for transport and logistics Karim Sadek.
If you were to make the decision again, would you still put money in RVR?
Yes, definitely. We are exceptionally proud of the progress. We have seen a substantial increase in tonnage, a decrease in incidents and the RVR is now well on its way to doubling its haulage capacity.
That’s why we invested an additional Sh8.5bn ($80 million) in the company last year to support the turnaround, bringing our total holding to 85 per cent via acquisition of shares from TransCentury.
We firmly believe that RVR will continue to provide reliable, cost-effective transportation solutions to East Africa’s emerging oil, gas and manufacturing industries, among the many other sectors driving growth in this dynamic region.
I think we have thus far only scraped the surface of what is possible.
Does the ongoing construction of the standard gauge railway (SGR) worry you?
No, as long as governments ensure a fair level-playing field and extend no favours to any player. This applies to areas such as repayment of debt element, which will impact the operating model for the SGR.
We are confident that our metric gauge railway will be competitive in the presence of the SGR.
It is important to note that in regions like Australia, Japan and many of South American countries, standard gauge and narrow gauge lines operate profitably side by side. There’s no reason why this cannot be the case in East Africa.
What plans do you have for RVR?
We are focused on building RVR into a world-class railway operator offering reliable, best-in-class service to our customers. Already, we see RVR capturing market share from the existing competition — trucks — and we expect this trend to continue with operational turn-around.
We have done extensive studies looking at different rail technologies in various economies and transport markets similar to East Africa’s, and our conclusion is that SGR is not cheaper, more reliable or more efficient than RVR’s narrow gauge.
It is, however, faster, but you need to remember that freight clients do not care if a container arrives in Nairobi in 16 hours or eight hours — passengers do. So in a sense, the SGR will not affect RVR’s competitiveness in our core market which is freight.
Any safeguards should high-speed track concessionaire(s) upset your investment calculations?
Compensation from loss of business is an integral part of the concession agreements amending deeds signed in 2010. We believe both countries (Kenya and Uganda) have the capability and intention of honouring their obligations under these clauses.
Tell us about the upcoming RVR investor conference?
The conference is in line with our overall strategy of championing intra-African trade. It is a one-day event organised under the auspices of Egypt’s Minister of Trade and Industry to market East Africa as a potentially lucrative market for Egyptian exports.
Why would you want to market RVR in Cairo instead of Mombasa, Nairobi or Kampala?
Qalaa Holdings aims to increase the volume of Egyptian exports within Africa with the overarching goal of boosting Egypt’s economy and growing intra-regional trade between Egypt and East Africa.
We also want to encourage existing exporters to East Africa to take advantage of rail transport which will not only increase the volume of trade between Egypt and East Africa, but will also minimise risk and reduce the amount of administrative paperwork that currently exists.
What have you seen in Africa that other investors haven’t noticed?
A growing population, a drive towards urbanisation and a young, rising, tech-savvy consumer base coupled with improving political stability and governance.
We also see a horrendous lack of infrastructure that is putting brakes on that growth dividend. Due to an inefficient financial intermediation process, there is also an extreme lack of liquidity which is going to be necessary in financing the required infrastructure growth.
Why tie money for several years in cross-border infrastructure projects?
Africa will need to strengthen its intra-regional trade to better present itself as a competitive trading bloc globally. As a continent, we cannot claim to be advancing on this front with a mere 12 per cent of our trade occurring intra-regionally.
We are still heavily reliant on trade with countries outside Africa, a position that exposes us to global shocks. Qalaa Holdings’ commitment to investing in and developing cross-border infrastructure speaks to the need to minimise transportation costs and enhance borderless trade.
What other segments of logistics have you put your money on?
We have developed an integrated logistics solution for East Africa that allows us to combine rail and road transport to deliver efficient door-to-door services to our clients.
We have recently commissioned the Inland Container Depot (ICD) in Mukono – a 4,000-container customs bonded area with storage and handling terminal located within the industrial area of Kampala. The ICD will facilitate freight transport, particularly for clients moving cargo from the port city of Mombasa to regions beyond Kampala.
In Egypt, Qalaa Holdings through its subsidiary Mashreq is building a one-of-a-kind fuel bunkering facility on the banks of the newly commissioned Suez Canal.
The $382 million (Sh39bn) investment will sit on 210,000 square metres of land and will have an annual storage capacity of 10 million tonnes.
What opportunities in East Africa are you looking at in the near term?
East Africa presents a lot of opportunities. We continue to look to re-invest in Kenya and Uganda’s transportation and logistics sector through RVR as we also consider opportunities in other sectors including, energy, mining, and cement.
Don’t you think political risks cloud the promise of a single African market?
We have successfully survived the Arab Spring and its aftermath in Egypt so we are well aware of the political risks involved with African investments.
However, we don’t think that political volatility in individual African countries should be a barrier to the continent’s growth as these risks are not permanent. We do, however, believe that the private sector can play a role in influencing a country’s economic reform and business agenda.
For African governments to bridge the infrastructure deficit, they will need to come up with workable public private partnership (PPP) frameworks that de-risk projects making them bankable for private sector investors and creating a win-win scenario for both parties.
These types of partnerships have proven successful in unlocking Africa’s infrastructure funding gaps.