kenyaimagine.com

Home

Economics

The shame of the Rift Valley Railways deal.

Written by Peter Ndiangui

Saturday, 16 August 2008

We have complained in these pages about the bad job the IFC did as a transactional advisor on the RVR deal that put Sheltam and other partners in charge of running the Kenya-Uganda Railway.

Much of the trouble stems from Sheltam's lack of experience running a logistics business. The rail business is complex. Kenya Railways needed a big capital injection to strategize and execute a plan that would rapidly increase efficiency and make rail travel an enjoyable experience for cargo forwaders and consumers. Of course, executing such a strategy would have meant undertaking new projects that required a change of train carriers; I would be surprised if the deal was silent on getting the rail gauge right. To have a company that used to sell railway spare parts in South Africa as the lead stake-holder - its CEO running a complex railway network with no money, but hoping to bootstrap from its operations - is, in this situation, not really a good idea.

This being one of the first major private-public partnerships (PPPs), the incompetence demonstrated by the finance minister, the 9th parliament, public officials, and more so the IFC, is worrisome. For example, I doubt that there is an iota of legislation in place to govern deals such as these, or to ensure that they work for the benefit of the mwanananchi. Legislation is especially important in cases, such as these, where PPPs go stale: it ought to be ensured that both parties have exit points that won't leave the mwanananchi hurting. Indeed, the very idea of concessioning public assets needs to be approached cautiously: the bidding process demands greater rigour, to ensure only partners with the necessary capabilities are signed; the 10th Parliament and the next finance minister need to introduce robust legislation for the management of PPPs.

Globally, very few corporations can run rail-tracks and make money from them. The profit drive on already-developed assets needs to be thought through when putting together service level agreements. Will the firm run the cabins and cargo or will they also be required to perform rail-line maintenance? How often will the maintenance be carried out? How do we measure and monitor the maintenance? What about replacement of the rail-line? When should we expect the first centimetre of replacement? How fast should the replacement be done? What are the penalties for violating service agreements? When may we cancel the concession? It is unclear to me that the concession RVR and the finance minister inked answered these questions plainly; but I am persuaded that if it had, the present fights would not have occurred. Even so, the IFC should have been able to decipher the capability of the consortium and its ability to deliver if the concession was at all robust.

Since its economic impact is unignorable, the government needs to come up with a strategy for righting this concession, and quickly. That the Prime minister is issuing ultimatums is all good, but he needs also to consider the legal challenges ahead, the perception of a Government that doesn't respect investors, and, even more important, the long term approach to PPPs. PPP-management legislation is long overdue.

__________________________________________

Peter Ndiangui
		About the author:

Articles by this Author:

Venture Capital in Africa
African Finance Corporation to replace IFC

View all articles by this author

Set as favorite

Bookmark

Email This

Trackback(0)

TrackBack URI for this entry

Comments (11)

Subscribe to this comment's feed

Show/Hide comments

...
written by Ngigi wa Kamau , August 19, 2008

Incidentally, there are very few cases of PPP successes anywhere in the world.

The British Rail Disasters, the Sydney Tunnel fiasco, Melbourne Toll roads crises et al ad infinitum highlight the problem with PPPs as marketed by International Financial Institutions. They are sold as transfers of risk from the public sector yet they depend on the guarantees of the public to succeed. For example, all loans advanced to the consortium are underwritten by the government.

As such, PPPs especially in infrastracture represent as swindle aimed at maximising profit for transaction advisers, investment bankers, favoured consortia....and virtually no one else.

It is a blessing in disguise that RVR has suffered its present blues this early in our national dance with exotic sounding solutions. Empirical evidence from around the world disfavours PPPs and hence we will be unlikely to adopt any new arrangements without greater consideration of the public interest. Those bypasses that were meant to be ceded to private operators will now attract greater scrutiny.

Ngigi

report abuse

vote down

vote up

Votes: +0

...
written by abdulmote , August 19, 2008

The neo-liberalists policy of privatisation has been pursued by Kibai's government much more aggressivley than by his predecessors. Indeed, it is apolicy meant to favour the elitist few at the expense of the public. Unfortunately, considering their underdeveloped status, African goverments are pursuind such a trend at the peril of their own people. The resulting infussion of capital by foreign or even indeed local investors will not necessarily equate to the improvement of the people's lives. Lack of broad capacity to attract competing investors and pre-existing poverty levels lives the masses exposed to undesirable control and exploitation of the public through the 'private monopolies' brought about to bear. Africans need to think much more deeply upon their economic status and what effective and suitable policies should be put in place for the benefit of the same, rather than just to swallow everything without questioning the prudence of what the Westerners have to offer.

report abuse

vote down

vote up

Votes: +0

...
written by Makaba80 , August 20, 2008

We are in a unique situation in Kenya, we were previously told that no power sharing arrangement has ever worked in Africa, we are doing our fourth month and the future portends well unless something really drastic happens, furthermore, the Kibaki Raila combination seems to be the elixir we had been denied for five years now. The PPPs should be treated in the same vein, by virtue of the fact that they have failed elsewhere shouldn’t be a deterrent for us to go the same route, in any event the arrangement that we currently have has failed, the govt. is simply unable to run vital infrastructure and goes to allocate a negligible portion of its budget each fiscal year to fund new capital projects and maintain the dilapidated ones. It’s therefore almost a foregone conclusion that the private sector has to be engaged to bridge that deficit; this is where concessioning comes in. The RVR case is that of fraud, some people thought they would gain from that privatisation and therefore went for a bidder that would buy into such an arrangement, this bidder turned out not to have the slightest idea of how to run railway business, this bad example mustn’t be used to demonise the whole idea of PPP.

report abuse

vote down

vote up

Votes: +0

carts & horses
written by Ngigi wa Kamau , August 20, 2008

@Makaba80,

Well, you argue that failure of PPPs elsewhere should not preclude us from jumping on the bandwagon. Well, firstly, RVR's concession is at this point a clear failure despite fraud being employed to acquire the railway assets.

The problem at the heart of PPPs lies this crisis - no private operator ever pays the full market cost of asset acquisition. Further, the public is never fully compensated for the inconvenience of losing accountability since relations between new operators & the public are reduced to those of customer/provider contra citizen/service provider. The costs of an ineffective railway system are currently falling squarely on public shoulders through deterioration in road infrastructure, loss of port competitiveness through cargo delays etc.

Additionally, Compare the cost of building a new railway line and RVR's acquisition of an existing and well maintained railway line. Alternatively examine the market value of a well functioning railway as determined by the potential revenue that could be earned by introducing some very cheap adjustments in the management & operation of railway operations in East Africa. The fees paid to the Uganda & Kenya governments were peanuts and meant to mask the effective gifting of public assets to well connected individuals through a convoluted process.

PPPs are successes only under very controlled conditions e.g. the short Stockholm - Arlanda airport railway line. 15 minutes is the travel time it takes and it diverts a large volume of traffic away from roads to the underground.

In Sub Saharan Africa, infrastructural PPPs represent a case of putting the cart before the horse.

Ngigi

report abuse

vote down

vote up

Votes: +0

...
written by Makaba80 , August 21, 2008

Ngigi,

I agree absolutely that the cost of delayed transport and congestions are astronomical and isn’t justified, but has it occurred to you that it cannot be in South Africa’s interest that Kenya runs a flawless transportation infrastructure to the hinterland, which includes DRC, Uganda, Rwanda, Burundi, Sudan, Tz etc, which would then have a greater multiplier effect especially in attracting investors making it more competitive in attracting opportunities that would otherwise go to it? It is a fact that SA and Kenya are economic powerhouses this end of Africa, RVR could as well be a conduit through which SA is pursuing this strategy.

As for your worries about Kenyans losing accountability to the new operators, how accountable have the Ministries of Roads and Transport been to Kenyans on the dilapidated conditions of our roads/railway/port/ferries etc? In my opinion we’d have nothing to lose; we are at the bottom of a pit the only way can only be upwards. I also believe that the leadership we have at the moment will not permit any fraudulent deals and would ensure any consequent concessionaires are well controlled. I absolutely trust that this is the arrangement that’ll deliver us to the Promised Land.

Be that as it may, other than to criticise the PPPs, you haven’t given us what you think would be the solution because we both agree that what we have at present isn’t working.

report abuse

vote down

vote up

Votes: +0

...
written by Ngigi wa Kamau , August 21, 2008

Government accountability has increased exponentially over the past 5 years with the expansion of Kenya's democratic space. Thus, infrastructural projects have been undertaken with increasingly positive results. It is hackneyed to keep harping on about how dilapitated our infrastructure is when in fact, great improvements are being made.

Consider the ongoing construction & rehabilitation of the Nairobi-Kisumu highway, the Thika-Nairobi Highway (the busiest road in the country), work done on the Mombasa-Nairobi Highway, the Thika-Garissa artery is being redone & expanded, the Limuru -Mai-Mahiu/Naivasha bypass etc. It is thus unfair to say that we remain at the bottom of the proverbial pit. A lot has been done but much more remains to be done. A little objectivity would not hurt.

As for whether I have proposed a solution, although it was implicit in my earlier responses let me be explicit for you sake. I favour full public ownership of infrastructure because this allows for the full accounting of infrastructural spillovers. Let me explain.

When a private operator acquire a concession, the full cost of building & maintaining that piece of infrastructure can only be recovered from users. This imposes a high cost on direct users i.e. motorists whereas the benefits of infrastructure extend to great groups. For example, those who benefit from traffic diversions and thus gain faster travel times, regions that are opened up by improved infrastructure and hence gain faster GDP growth etc.

Full public ownership ensures that these spillover benefits are recovered more broadly through taxation & levies. This is more efficient in that positive externalities brought about by infrastructure can be paid for by a broader swathe of the public.

If PPPs were the panacea for global infrastructure, imagine a world in which all roads are in private hands and tolls were charged on each. What would be the impact on the cost of doing business?

Ngigi

report abuse

vote down

vote up

Votes: +0

How about better structured PPP's
written by pndiangui , August 21, 2008

Well as Ngigi points out let us not confuse the involvement of Private sector in infrasructure development to mean the wholesome concessioning we have seen with RVR. We can innovate finance products that will not take away public accountability to the Government mandate as the overseer of these efforts.
For instant for RVR, Rail infrastrcture backed bonds paying a premium of 12% might have attracted an oversubscription in the NSE and London Stock exchange. With improved efficiency through competitive recruuitment of Kenya Railways managers the government could have used increased passanger and cargo freight fees to pay the intrest of bond holders as it uses the principals to service and expand the rail/cabins giving the Mwananchi a better experience and value for money while taking the very same Mwananchi off the expensive more oil-dependant Matatu's.

report abuse

vote down

vote up

Votes: +0

Railway was dead before RVR
written by Kim G , August 22, 2008

Additionally, Compare the cost of building a new railway line and RVR's acquisition of an existing and well maintained railway line. Alternatively examine the market value of a well functioning railway as determined by the potential revenue that could be earned by introducing some very cheap adjustments in the management & operation of railway operations in East Africa. The fees paid to the Uganda & Kenya governments were peanuts and meant to mask the effective gifting of public assets to well connected individuals through a convoluted process.

Thats the biggest myth I've been hearing about the RVR saga, that they acquired a "well functioning, well maintained" operation and that they ran it down. KR was on its last legs, thats why the governments went with the option of concessioning. Most of the locomotives were scrap, wagons were rusting in railway yards because they lacked basic spares. Even if RVR hadn't come, the railway would be dead by now.

I think we would have been better off if the concession had been given to Indian Railways. They have the technical capacity and the will to do a good job. Like someone said above, RVR was just a conduit for politically-connected people to make money from public infrastructure. Thats why they havent invested much in the concession and RVR is always short of money.

report abuse

vote down

vote up

Votes: +0

@ Kim G
written by Ngigi wa Kamau , August 25, 2008

I'd hate to be a pedantic shyte but please note that I highlighted the cost of the railway line NOT Operation.

Have you considered the cost of laying down steel sleepers and the wood & ballast miscellany?

The fact that creaking wagons & locomotives use this rail shows that KR did at least one thing right. All RVR had to do was improve the engines/wagons and their speed to enhance cargo clearance. This is something KR could have easily done with some political will.

Two Words: Crony capitalism.

Ngigi

report abuse

vote down

vote up

Votes: +0

Who should invest in the Railway business
written by wuod aketch , August 25, 2008

The East African community should make sure that the Railway services are functioning as their success will mean economic and social development in the region. Given that Uganda, Rwanda and Burundi depend on the port of Mombasa, the railway crossing Kenya is the lifeline of their economic development. Kenya should also try to link Lake Victoria to the ocean by rail (the actual one run by RVR is nonsense). The three countries, Kenya, Uganda and Tanzania will greatly benefit from the traffic on the Lake and the railway linking the ports of Kisumu to Mombasa through the Railway line.
If East Africa wants to remain under developed while having the
the capacity of becoming an economic giant, do not heed the propositions that I have written above.

report abuse

vote down

vote up

Votes: +0

A functioning Railway means less damage to the Kenyan roads
written by wuod aketch , August 25, 2008

If the railway can relieve the country (Kenya) of the trailers and heavy duty traffic by transporting goods from East to West then the state of our roads will be manageable.
Mombasa, which is ideally situated, could become the busiest port in Africa if the railway was up and running. I think that most goods from the emerging economic giants like China and India would transit here heading for west Africa, especially the Democratic Republic of Congo.
Raila are you listening? With the increase in activity in Mombasa, we could then afford to name two MDs at KPA, one from the Coast and the second being one employed because of his competence. The consequences of the failure of the RVR on development of Kenya, the region and Africa as a whole are numerous.

report abuse

vote down

vote up

Votes: +0

Show/Hide comment form