SGR

Smart move by China on the Standard Gauge Railway financing

Posted on

This article first appeared in my weekly column with the Business Daily on May 5, 2019

Last week, the Chinese government hosted the second Belt and Road Forum, inviting countries around the world to engage in the conversation on the Belt and Road Initiative (BRI). Of course, African countries are key players in the BRI not only because it serves interests from the Chinese government and private sector, but also because the BRI provides what African governments view as an opportunity to meet the continent’s infrastructure deficit. During the Forum, key developments occurred that affect African governments, one of which concerned Kenya.

It was revealed that the Kenyan government failed to secure USD 3.68 billion from China (in loans and grants) to take the Standard Gauge Railway (SGR) from Naivasha to Kisumu, and on to the Malaba border with Uganda. The Kenya government has consistently sold the SGR as a key infrastructure development and investment it has made on behalf of the Kenyan people. And yet, during a conference focused on infrastructure financing from China, their core infrastructure financing objective from China was not met. The question is, why? And what does this mean for Kenya? In my view this is good news and demonstrates a seriousness from the Chinese government that perhaps the Kenyan government didn’t anticipate.

Image result for SGR Kenya

(source: https://www.standardmedia.co.ke/business/article/2001288399/kenya-railways-revises-sgr-train-schedule)

Firstly, Kenyans seem relieved by this development. Kenyans have grown weary of what they view as a government with fundamental problems with corruption and fiscal accountability, continuing to secure massive amounts of debt. In declining to finance the final stages of the SGR, this seems to signal the Chinese government is coginsant of these concerns. Financial feasibility is a core concern, and given the serious problems with corruption linked to the previous phases of SGR that the Kenyan government has clearly seemed unable to resolve, why should they get more money? So diplomacy issues aside, money is money and it has to be feasibly and prudently used. China has signaled that there are pending issues to be addressed and they have a keen interest on how their money is used.

Secondly, it has given the Kenyan government pause for thought. When what has been profiled as an important diplomatic and developmental project fails to secure financing from the Chinese government, the Kenya government is being asked what went wrong? As a Kenyan economist, this signals that as far as China is concerned, it’s not business as usual. The SGR is an anchor BRI project, and yet it has been put on hold. The Kenyan government needs to use this as yet another signal, that there are fundamental problems with its financial accountability structures. There are no shortcuts on this issue.

Finally, it signals a shift in China’s approach to lending and debt to African governments. While Ethiopia got debt relief, Kenya was unable to secure new debt. So a willingness of China to lend or forgive debt is not the issue. Context is important. In some cases, China has communicated a willingness to forgive debt, in other cases, such as Kenya, China has made it clear that core concerns have to addressed before substantial debt is conferred.

In short, the Belt and Road Forum is a key turning point in how China lends to Africa. It is up to each African government to demonstrate that it is a responsible custodian of public finances. Not because of China or any other external party, but because their countries will never develop as long as African governments continue to misappropriate public funds. Let African governments play this as they will, African publics are watching.

Anzetse Were is a development economist

Are we building pro-poor infrastructure?

Posted on

This article first appeared in my weekly column with the Business Daily on November 19, 2017

Last week I attended a conference that had infrastructure development in Kenya at its heart. Several interesting points were made by some of those who attended that provide important food for thought as Kenya continues on the path of aggressive infrastructure development. The topic of conversation was the Standard Gauge Railway (SGR) and the issues that are beginning to emerge as it starts activity.

The first point made was that it can be argued that the way in which the SGR has been built is anti-poor, and by anti-poor I mean it functions in a manner that locks out low income individuals and traders from accessing passengers. The SGR is lined by electric fences on either side and the stations are built in a manner that prevents hawkers and traders from selling their wares to those inside. In the past when the train snaked through the country, train stations were a hive of business activity, a point at which passengers could buy various items from local traders. The stations were built in manner that allowed easy access to and from trains. This is no longer the case. The SGR is built in a manner that does not allow local traders or mama mbogas anywhere near the stations or train. Is this fair? Is it fair that the SGR seems to be locking out low income traders from a potential client pool? What does this mean for income growth for local and low income traders?

A modern SGR train. FILE PHOTO | NMG

(source: http://www.businessdailyafrica.com/image/view/-/4193670/medRes/1814174/-/maxw/960/-/113vafl/-/sgr.jpg)

The second issue is how the SGR is barricaded by electric fences on both sides where all locals can do it watch is swish by, looking at the rich who can afford the service while they remain locked out of any development that could have been brought to peri-urban and rural villages along the line. It should be noted that the poverty question is already negatively affecting the SGR. A few weeks ago, it was reported that have people have stolen materials worth KES 1.2 billion from SGR line in the last five months; the most targeted items are steel bars, electricals and signals facilities. It would be naïve to fail to consider that poverty is a motivating factor behind why individuals are stealing SGR components, presumably for resale. While I am not suggesting that such theft should be justified or enabled, the reality is that poverty is causing individuals to make that theft in the first place. It would be interesting to find out if the old railway line had/has the same problem; and if not, why not?

The third issue is that we have not unpacked how SGR will affect the trucker’s economy. To be clear, I am of the view that development should be embraced and potential game changers such as the SGR are important but there ought to be serious consideration given to the knock-on effects so that the economic station of Kenyans is improved, not compromised by new developments. It is estimated that an average of 4,000 trucks are on the roads transporting various goods in and out of the East Africa region. While the SGR will be important in decongesting Kenya’s roads and hopefully making the movement of goods cheaper, informal traders and small and medium enterprises (SMEs) will be hit. Those who will lose jobs include truck drivers (an estimated 8,000), and informal businesses and SMES who sell spare parts to, and repair and maintain trucks. All these Kenyans will lose their jobs or have their businesses negatively impacted. How will this be managed?

Image result for mama mboga kenya

(source: http://biznews.co.ke/2017/08/28/graphs-how-mama-mboga-butcheries-and-bakers-are-affected-by-the-plastic-bags-ban/)

So the question remains: Is the infrastructure we’re building pro-poor? Does it build or diminish commerce and trading activity along its path? Does it build or compromise income sources of the poor? Given the high levels of informality in business activity in Kenya, we ought to be cognisant of the effects of infrastructure built in a style that locks out indigenous enterprise.

The issues raised above are difficult with no easy answers but they are realities with which we have to grapple and resolve so that future projects avoid or address potential negative effects of new infrastructure development in the country.

Anzetse Were is a development economist; anzetsew@gmail.com

The expense of the SGR and related implications

Posted on

This article first appeared in my weekly column with the Business Daily on November 29, 2015.

It is now well known that the Standard Gauge Railway (SGR) is being developed under the leadership of the Kenyan government and will connect Mombasa to Malaba (with a branch line to Kisumu) onward to Kampala, Kigali (with a branch line to Kasese) and Juba (with a branch line to Pakwach). What is also well known is that Ethiopia is developing Ethiopia Rail (ER) which will link Addis Ababa to Djibouti. The importance of the SGR to Kenya is, yes, the potential dividend that will arise from bolstering infrastructure in the country; indeed the government expects the project to reduce freight costs from $0.20 per tn/km to $0.08 per tn/km. But importance also lies in the fact that the SGR is expensive. Indeed, last week Treasury made the point that the SGR has caused an upwards revision of the fiscal deficit from the initial 7.4% of GDP to 12.2%.

(source: http://i2.wp.com/nairobiwire.com/wp-content/uploads/2015/05/sgr2.jpg?resize=1121%2C682)

So is the approach towards the construction of the SGR the most cost effective possible? A comparison with the ER would be useful. As early as 2013, experts raised questions about the costing of Kenya’s SGR; Kenya is being charged $6.6 million per kilometer compared to $4.9 million per kilometre for Ethiopia’s ER. This is particularly a concern because, as experts have pointed out, there are no major rivers or lakes or big hills to justify the high cost of the SGR. In addition, parts of the ER will be a double track, not a single track as the SGR will be in its entirety. The SGR freight will have an average speed of 80KPH while the ER will go up to 120KPH; experts state that it is doubtful those speeds will be reached by the SGR because it is a single track and stoppages will be needed to allow other trains to pass. The SGR passenger train will have an average speed of 120 KPH while the ER will have an average speed of 160 KPH with future provision for 225KPH. Questions also arise because Kenya is spending more to buy its trains and rolling stock than Ethiopia. Why?

Ethiopia has also been smarter with regards to reaping human development dividends from rail construction, specifically the Light Rail Transit System (LRT). Ethiopia has been using the development of the LRT to build domestic technical capacity. Reports indicate that foreign contractors conduct training for local staff at the Institute of Technology in Addis Ababa University. Further, the Ethiopian government is sending promising undergraduates to Russia, India and China to continue their education. Indeed, the Ethiopian government is doing all it can to ensure that the all other rail network projects including ER will be carried out by Ethiopian enterprises. Are there such plans and activities going on with regards to Kenya’s SGR?

(source: http://www.hgomezgroup.com/wp-content/uploads/2015/02/techtransfer_620.jpg)

The basic sense one gets when comparing Kenya and Ethiopia is that the latter has been able to get a better deal overall and is leveraging all experience to build domestic capacity and reduce future dependence on external contractors for rail construction. Kenya on the other hand has agreed to a plan that appears to not be the most cost effective and there have been no plans announced indicating intentions by the Kenyan government to use SGR construction to build domestic capacity. I have long argued that if Kenya does not leverage all infrastructure development projects to build domestic technical capacity, Kenya will be relegated to eternal dependence on others to do the basics of building infrastructure of the country. The prudence of such a strategy is questionable. Kenya is in a position to learn from Ethiopia; pressure ought to be applied to ensure such learning happens.

Anzetse Were is a development economist; email: anzetsew@gmail.com