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Kenya struggles to manage debt for railway to 'nowhere'

Kate Hairsine
October 18, 2019

As Kenya's government trumpets the opening of its new, Chinese-built train line to the Rift Valley, critics say the railway serves little purpose and is plunging Kenya into massive debt.

Kenya's President Uhuru Kenyatta waves a Kenyan flag on the new SGR train platform
Kenyan President Uhuru Kenyatta flags off the new train linking Nairobi with the Rift ValleyImage: Reuters/T. Mukoya

It's been lampooned as the railroad to nowhere – 120 km (75 miles) of gleaming new railway tracks that snake from the capital Nairobi, climb the trenches and escarpments of the Central Rift Valley to stop dead at a remote village. 

The end of the new Nairobi-Naivasha line is Suswa in Maai Mahiu county, a region dominated by nomadic Maasai herders, who bring their cattle and sheep to graze here on the valley's fertile floor. 

The $1.5 billion (€1.35 billion) stretch of track, built and funded by the Chinese, is the second phase of a flagship railway project intended to link Kenya's port city of Mombasa with the Ugandan border. 

Commonly referred to as SGR from the abbreviation of Standard Gauge Railway, the railroad is a pet project of President Uhuru Kenyatta, who sees it as central to Kenya's Vision 2030 to transform Kenya into a middle-income country. The SGR is supposed to slash freight haulage costs, cut travel times and boost Kenya's rural economy. 

Waving the Kenyan flag, Kenyatta inaugurated the SGR railway's second phase on Wednesday with the line officially opening to passengers on Thursday. 

Critics of the Nairobi-Naivasha line though say it is unlikely to attract many travelers because it fails to connect any significant population centers with Nairobi.

Where are the goods trains?

The line was originally intended to haul freight – but it will only open up to cargo in a few months. 

Goods trains at SGR Nairobi Terminus
It's unsure when the Naivasha extension will carry containers like these seen here at the Nairobi SGR TerminusImage: Reuters/T. Mukoya

Critics also worry that there won't be much cargo to carry. The government planned to build a special economic zone nearby offering tax breaks and cheap power as a way of encouraging cargo transport along the new line. But fights over compensation for the land have resulted in massive delays. 

With construction on the industrial park yet to start, there is expected to be little demand for cargo services in the near future.

At the line's inauguration, Kenyatta rejected criticism of the SGR project. 

"Some prophets of doom are saying that this railway is going nowhere but as a government, we know what we are doing as we are planning for the future," Kenyatta said as he opened the new stretch of track. 

Connecting inland Africa to the sea

The second phase extends the first 385 km of track from Mombasa to Nairobi, which was completed in 2017 for a cost of $3.2 billion.

Photo of Mombasa's SGR train station at night
Mombasa’s SGR terminus has concentric circles and a central tower representing ripples in the oceanImage: Reuters/Stringer

Originally, a phase three was also planned. This would continue the SGR line from Naivasha through Kisumu, a port on Lake Victoria, onto the Ugandan border town of Malaba. 

This phase three section of the track is seen as critical because it would link Mombasa, East Africa's biggest port, with the landlocked countries of Uganda, Rwanda and South Sudan – giving them a faster and more reliable route to Mombasa's port than the overburdened roads.

But in a blow to Kenyatta, China announced in April that they wouldn't bankroll the $3.7 billion railway extension from Naivasha to Uganda. 

Mombasa-Nairobi line fails to turn a profit 

"China shied away from the extension because they had questions about its commercial viability," said John Mutua, an economist at the Nairobi-based Institute of Economic Affairs. 

The poor performance of the Mombasa to Nairobi line makes it evident Kenya "is already struggling with the SGR," he told DW. 

The railway has had difficulty attracting cargo because it is more expensive than hauling freight by road. Reuters puts the cost of trucking a container from Mombasa to Nairobi at about $800, whereas the railway costs $1,100 – mainly due to extra charges for moving goods from the inland depot in Nairobi.

As a result, the SGR is moving less than half of the freight it needs to carry per year to make it profitable. In its first full year of cargo operations (to May 2019), it generated $57 million in sales, far below the annual operating costs of $120 million and much lower than original projections, according Kenya's Business Daily news site. 

There is one bright spot: the Mombasa-Nairobi line has proved a hit with travelers because of its speed and comfort. The smooth train journey takes around 4.5 hours compared what can be a 12-hour, bone-rattling trip by road. 

Passengers sit inside the SGR train
The SGR train between Mombasa and Nairobi has an occupancy rate of over 95 percent and has reduced the commute time by more than halfImage: picture-alliance/Xinhua/W. Teng

But the passenger service only runs twice a day, and generated less than $17 million in sales – a small figure compared to what cargo is bringing in. Or as the Economist magazine succinctly puts it: "Shuttling passengers is not what the new line was built for."

Kenya's 'borrowing binge'

Concerns about the SGR's viability are compounded by the massive $4.7 billion loans that Kenya, East Africa's biggest economy, took out with China's Exim Bank to fund them. 

And they're not Kenya's only infrastructure loans form China. The country has acquired at least $9.8 billion between 2006 and 2017, making it Africa’s third-largest recipient of Chinese loans, according to the Economist. 

Kenya's total public debt is currently around $60 billion, or 61 percent of the GDP. In other words, it owes more than half the value of its economic output. 

World Bank economist Peter Chacha recently warn Kenya against piling up more debt than it can repay. 

"It is important that future debt management adopt measures to ensure debt is not accelerating," he told The East African. 

Kenya SGR train passes under a bridge
The SGR development is part of China's Belt and Road initiative, a multibillion-dollar infrastructure project to improve regional cooperation and connectivityImage: picture-alliance/Xinhua/W. Teng

The International Monetary Fund moved Kenya debt distress risk from 'low' to 'moderate' in October last year, citing the government’s public investment drive and revenue shortfalls in recent years. This means it believes there is a moderate chance Kenya will default on debt repayments. 

Economist Peter Mutua says also of concern is how quickly Kenya's has accumulation debt during what he termed a "borrowing binge". 

"The rate of debt has increased almost fourfold since 2013, which is very high compared to the size of the economy," he told DW. 

Add to the alarm bells, last week parliament agreed to allow the government to raise its debt ceiling to 9 trillion Kenyan shillings ($87 billion).

Ambitious railway's next phase

As for the railway extension plans, Kenya has secured loans from China to revive the British-built railway line, shut down more than two decades ago, so that goods can move from Naivasha to other East African countries.

The projected cost of $205 million for refurbishment is considerably less than the $3.7 billion quoted for the SGR rail.

Andrew Wasike in Nairobi also contributed to this report.