Chinese SGR operator faces 50 percent pay cut

Parliament wants the standard gauge railway (SGR) operating costs cut by half and the terms of the loan taken to finance its construction renegotiated to ease pressure on taxpayers.

The Transport committee of the National Assembly said the current huge operating losses on the SGR, coupled with the Chinese debt repayment obligations, warranted an urgent review to protect taxpayers already strained by the economic fallout due to the Covid-19 pandemic.

“The committee recommends that renegotiation on the current Operating Agreement by planning to reduce the operation costs by at least 50 percent be initiated by the government,” the committee said in a report following an inquiry into the use of the SGR.

“The government should initiate the process of renegotiating the terms of the SGR with the lender due to the prevailing economic distress occasioned by the effects of Covid-19, the global pandemic that has affected the world’s economic growth.”

Taxpayers spend an average of Sh1 billion per month on the operations of the Chinese-built Mombasa-Nairobi railway.

But the cost could rise up to Sh1.8 billion due to variables such as the price of lubricants and fuel, loading and unloading fees, maintenance charge and various other management fees.

Transport ministry data shows that revenue collection by China’s Africa Star Railway Operation Company, which runs both passenger and cargo services on the SGR, has trailed expenditure—exposing taxpayers to a huge bill for sustaining operations.

For instance, in the three years to May the SGR posted a combined operating loss of Sh21.68 billion, having netted Sh25.03 billion in revenue over the period against operational costs totalling Sh46.71 billion — a gap that taxpayers have to plug.

The operation loss has already caused the Kenya Railways Company (KRC) to default on an estimated Sh40 billion payout to Africa Star.

The SGR operation agreement requires the government to foot a fixed service monthly payment, which is paid quarterly in advance at a rate of $28.8 million (Sh3.1 billion).

The recommendation by Parliament for a 50 percent cut on the operation costs, if successful, could see the government part with Sh1.5 billion quarterly.

Apart from the operating fees, Kenya is obligated to honour repayment of the Sh324 billion it borrowed for the project from the Exim Bank of China in May 2014 and started repaying last year after expiry of the five-year grace period.

Loan repayments to China’s Exim Bank jumped from the Sh31 billion in the year to June to Sh71.4 billion in the current fiscal period, reflecting a 130 percent increase.

Controversial directive

The recommendations by Parliament followed a probe into a controversial government directive that all conteinarised cargo and local import destined for Nairobi and the hinterland be moved through the SGR from the port of Mombasa.

The directive and another one which required that all transit cargo to be transported through the SGR to the newly established Naivasha Inland Container Deport (ICD) have since been rescinded.

The SGR has struggled to attract adequate cargo volumes, with investors balking at the tariffs for transporting goods from the Port of Mombasa to the ICD in Nairobi.

The freight services formed the main economic justification for the $3.2 billion (Sh323.20 billion) President Uhuru Kenyatta’s administration pumped into the project through loans largely procured from Exim Bank of China from May 2014.