Focus on marketing standard gauge railway services ahead of completion

A status report released last week indicated that the Standard Gauge Railway (SGR) is 90 per cent done with completion of the Nairobi section expected early next year.

By any standard, and despite land acquisition frustrations, the project’s pace of implementation can be termed timely. The SGR now needs to embark on the task of marketing its services to ensure early utilisation.

This is necessary to generate early cash inflows to begin offsetting its debt commitments.

The SGR is perhaps the most significant project ever undertaken by Kenya in recent times. In terms of national and regional impacts, the last such significant project was building of the Mombasa-Nairobi petroleum pipeline in 1978.

When Kenya Pipeline Company (KPC) commissioned the Mombasa-Nairobi line it was to replace rail transportation of petroleum over that section.

At the time, bulk oil transshipment by road in the region was virtually zero. Although there was no legal protection against competition for the pipeline, the seven multinational oil companies did commit to exclusively use the pipeline.

However, there was a proviso by the oil companies that tariffs should be fair and commercial. Fortunately, there was regulation of petroleum prices at the time which permitted a full tariff pass-through to the market.

We can therefore correctly say that KPC had a captive and compliant clientele, which may not necessarily be the case with SGR.

With the imminent completion of the rail, SGR should already have formulated a business model for discussions with stakeholders who include potential clients and competitors (road transporters and RVR).

Free market model

There was an initial mention of the “take or pay” capacity protection framework that guarantees returns for the SGR investment.

There is also the free market model which recognises the existence of competition, in which case SGR would need to offer competitive tariffs based on value added services. Whichever approach, SGR needs to enunciate their strategy in good time to permit smooth and timely entry in the sector.

It is not apparent that SGR has in place an institutional and organisational capacity to begin laying out a market entry strategy and its implementation. In this respect, I think the SGR is seriously running out of time.

KPC actually appointed their nucleus management team in 1974, four years prior to project completion in 1978.

Like KPC, the SGR’s initial project termination will be in Nairobi — with firm plans for an additional stretch to Naivasha.

KPC did experience initial challenges at Nairobi as there was insufficient rail evacuation capacity for transshipping oil to western Kenya and Uganda.

A planned rail loading terminal adjacent to KPC had not been implemented and in the confusion, road transporters made their entry to supplement the inadequate rail capacity. This marked the first ever entry of road transporters into the long haul cargo business which they continue to dominate to this day.

I foresee similar challenges for SGR at Nairobi unless SGR creates sufficient capacity and effective systems to manage the change. Is it correct to assume that the loading of western bound cargo will remain in Mombasa so as to avoid double handling?

Shall the Nairobi bound cargo undergo customs clearance in Mombasa or Nairobi?

Whichever way, there are implications on systems and capacity which may take time to re-arrange.

Road authorities also need to interrogate the potential clogging of Nairobi roads with trucks moving in and out of the container depot.
We need to guard against transferring the notorious Mombasa truck congestion problem to the city of Nairobi.

The trucks residence time in the Nairobi depot is what will determine operations efficiency or otherwise, bearing in mind that trucks lay time is a critical cost input in logistics economics.

To maximise its revenue opportunities, KPC in 1993 extended the pipeline to Eldoret and Kisumu to capture the western Kenya volumes and also extend the exports payload by loading at these two depots instead of Nairobi. KPC has also been planning to further extend the pipeline from Eldoret to Kampala.

Whether it is KPC or SGR, distance is a major multiplier that enhances transportation business economics. The longer the distance, the higher the earnings per unit weight transported and also the lower the unit operating costs.

Optimise use

For this reason, a Kampala destination should of necessity remain the ultimate goal for SGR and this should be pursued tirelessly.

Although most public infrastructure projects are justified more on economic rather than financial returns, there is no doubt that a Uganda destination would enhance the overall health of the SGR project.

Yes, the SGR is a reality with the first phase nearing completion. Efforts now should turn to how we optimise its utilisation and economics to ensure that the project generates enough early cash to pay the loans. The debate now should not be on whether we need the SGR, but how we can get the most out of it.

Even with KPC we had doomsayers who labelled the pipeline a white elephant, arguing that the cash would have been better spent on a pipeline to pump irrigation water from Lake Victoria to the Rift Valley.

Mr Wachira is director Petroleum Focus Consultants. [email protected]