Taxpayers face a huge bill sustaining services on the standard gauge railway (SGR) after it posted a combined operating loss of Sh21.68 billion in the three years to May.
A report to Parliament by the Transport ministry revealed that the China-built railway 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 China’s Africa Star Railway Operation Company, which runs both passenger and cargo services on the SGR.
The below-target performance was attributed to reduced limited storage capacity at the Embakasi Inland Container Depot (ICD), minimum use of the Nairobi Freight Terminal that handles cargo not stored in containers and the rail charges.
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 Inland Container Depot (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.
Kenya requires additional cash from the railway business to ease the taxpayers’ burden of paying the Chinese SGR operator. The Chinese firm runs the SGR cargo and passenger business at an undisclosed management fee. The Treasury also expects the SGR business to generate more revenue to help offset loans taken to build the multi-billion shilling railway.
SGR’s operating costs in the first seven months to December 2017 were recorded at Sh7.398 billion against Sh969 million in sales revenue.
The operating costs jumped to Sh14.051 billion the following year, more than double the Sh5.6 billion raised in sales.
In 2019, the cargo and passenger trains’ operational costs hit Sh17.976 billion while the sales rose to Sh13.581 billion.
In the five months to May, operating costs stood at Sh7.229 billion at a time when the passenger service was suspended due to State restrictions to curb the spread of the coronavirus. Sales hit Sh4.8890 billion, mainly from the cargo train whose operations remained unaffected.
The losses have dimmed hopes that the SGR would generate enough revenues to finance its operations estimated at Sh1.5 billion a month or Sh18 billion a year and pay the Chinese loans.
Kenya borrowed Sh324 billion for the project from the Exim Bank of China in May 2014 and started paying the loan last year after expiry of the five-year grace period.
Parliament in June warned that Africa Star may pull out of operating the SGR cargo and passenger trains if the State did not settle outstanding debt.
The Chinese company manages the ticketing system, landing and offloading of cargo and collection of passenger fares, including non-cash revenues like M-Pesa payments.
Businesses faced with huge operating losses typically resort to cutting back on expenses, which may include layoffs, reduction of non-core expenditure such as advertising, or close shop altogether.
The volume of goods hauled by trains on the SGR remained stable in the first half of the year, boosting earnings despite economic disruption due to the Covid-19 pandemic.
Kenya National Bureau of Statistics data shows that about 1.98 million tonnes of cargo was carried on the SGR between January and June, a slight decline from the 2.20 million tonnes moved in a similar period in 2019. Earnings from cargo services were also steady in the six months to June, hitting Sh5.53 million compared to the Sh.5.63 million netted in a similar period of last year.
Most of the cargo — 1.05million tonnes — was moved between April and June, coinciding with a strong demand for medical supplies and food grain after the government imposed a lockdown to prevent the spread of Covid-19.
The improved demand in June saw earnings top Sh1 billion for the first time since January, raising hopes of better performance in the remainder of this year.
June’s earnings amounted to nearly Sh1.03 billion after President Kenyatta eased curfew hours to 9 p.m.-4 a.m. from previous 7 p.m.-5 a.m. Data shows that freight earnings stood at Sh939.11 million in May and Sh754.5 million a month earlier.
Faced with the challenges of breaking-even on the SGR business, the government has recently toyed with several strategies, including a botched attempt to have all cargo ferried on the railway from the Mombasa port.
The directive would have made it mandatory for all transit cargo to be hauled on the SGR to the inland container depot in Naivasha effective August 2019. Truckers and freighters, however, resisted the order, forcing the government to drop the plans in July this year. The about-turn on the directive was further propelled by Uganda’s stance that cargo haulage on the SGR remains optional. Uganda accounts for about a third of transit cargo landed at the Mombasa port.
KRC also increased passenger fares from Sh700 to Sh1,000 for first-class travel in 2018 and scrapped the subsidy offered to children between the ages of three and 11 in a bid to ramp up revenues.