Shipping & Logistics

Concession model in question as RVR hands back assets

Railways train. FILE PHOTO | NMG
Railways train. FILE PHOTO | NMG 

A number of pressing questions still linger as Kenya joins the list of African states whose train concessions deals have failed after a complete take-back of its assets from the Rift Valley Railways (RVR) tomorrow.

Key to these is the probity of loans borrowed from international financial institutions, which include the World Bank and the African Development Bank (AfDB). 

But first, the story of RVR’s sojourn in Kenya. In 2010, shortly after indicating its willingness to buy into the loss-making RVR, Egyptian private equity (PE) firm Citadel sought long-term land leases in East Africa.

The idea was take control of the whole supply chain of its Cairo-based food business Gazour, by producing raw materials cheaply in the region and exporting to Egypt.

“Citadel Capital is particularly interested in the opportunity presented by East Africa’s domestic market with a bias for investments in basic needs like food transport,” Mr Karim Sadek, Citadel’s boss at the time told the Business Daily in an interview.

The PE firm later acquired a 51 per cent stake in RVR. The deal inherited meant RVR would both be maintaining tracks and running the transport service despite well documented evidence showing the model had failed elsewhere in the continent.

That perhaps was the first point at which the PE began to derail its business.

“It is possible to operate trains profitably only if the public sector bears the cost of infrastructure maintenance,” said Kenya Railways (KR) managing director Atanas Maina in an earlier interview. 

The deal handed to RVR, Mr Maina said, would work well in areas where extra revenue came from auxiliary services such as the agribusiness initially floated by Citadel.

“The core service may remain movement of people and cargo, but extra income from areas like development of real estate become a major revenue earner, which in turn cross-subsidises train operations losses,” he said.

The KR has consistently accused the train concessionaire of failure to maintain infrastructure to “accepted standards” and inability to meet the freight volume targets. Passengers too dumped the train transport citing its inability to stick to its own schedule.

At the end of it, Kenya is taking back the business, but the RVR is left with a heap of debt that includes the Sh16.4 billion ($164 million) borrowed in 2011 from a list of international financiers that include the World Bank’s International Finance Corporation (IFC) and the AfDB.

The AfDB had commissioned studies which discredited the model of concession that Kenya handed RVR, yet still went ahead to saddle the business with loans.

In the study titled, ‘‘Railway Concession in Africa: Lessons Learnt,’’ the AfDB notes that most deals were ill-conceived and remained unstable after being awarded to underperforming holders.

The AfDB notes: “Several countries have cancelled or amended their concessions to bring back infrastructure investment responsibility to governments.” 

In a 2011 study titled ‘‘Africa Railway Concessions: Lessons Learned and Potential Solutions for a Revival of the Sector’’, the World Bank noted the model preferred by Kenya -  where  the governments collect high concession fees and put infrastructure development in the hands of private sector - was doomed to fail.

The study, which tracks the continent’s train concessions since they began in 1995 states that “only the hybrid models where the public sector takes on track investment is a demonstrated solution to private sector unwillingness to invest in track renewal”.

It cites Cameroon’s and Madagascar’s hybrid public-private rail deals as examples of successful concession agreements on the continent. Despite that discovery, the IFC still extended a loan of Sh2.2 billion, which is part of the international loans that have gone bad.

The AfDB tops the list of RVR’s international lenders with Sh4 billion