RVR future bleak after it lost tender to operate standard gauge railway

A train hauls petroleum products from Mombasa port’s Shimanzi Oil Terminal to upcountry.
The rejection by the government to allow Rift Valley Railways to operate the newly built standard gauge railway that is expected to start operations towards the end of the year was a big blow to the troubled rail company.
In early May, RVR lost the priority to run the newly built standard gauge railway after regional presidents meeting at the recent Northern Corridor summit decided to give the deal to a Chinese firm to operate the business.
Kenya’s Transport and Infrastructure Cabinet Secretary James Macharia, while justifying the choice of a Chinese operator, said it makes sense to get the Chinese contractor to operate it for about five years in order to make sure there is accountability.
“The contractors are the ones building the railway, so if we allow them to test it and run it, then it will reaffirm to us that we have received the best returns on investments as opposed to their handing it over, we pay them then start having problems later with a completely different operator,” said Mr Macharia.
There are two major international corridors in East Africa: the Northern Corridor which starts at Mombasa port and the Central Corridor which starts at Dar-es-Salaam port.
The two corridors are currently involved in a vicious competition  after Rwanda recently opted out of the shared standard gauge railway (SGR) deal with Kenya raising doubt on the economic viability of the regional project.
Dar es Salaam has the shortest route to the ocean for Rwanda’s exports and imports and the landlocked country is said to have opted to shipping its goods through Tanzania and not Kenya.
Rwanda’s Finance minister Claver Gatete in late May announced that the country would develop its rail through Tanzania, Rwanda and Burundi because it is a more affordable option.
Rwanda together with Uganda and South Sudan are key pillars in the Kenyan SGR, which links the port of Mombasa to Nairobi.
RVR is the operator of the Kenya-Uganda railway line which was privatised under two substantially identical 25 years concessions in 2006. The concessions required RVR to improve efficiency, standardise operations, increase market share for rail traffic and improve competitiveness of the Northern Corridor.
As a result of the concession agreements, RVR raised millions of dollars from various financiers and its shareholders in a bid to modernise its operations, railway network and wagons as it sought to gain more cargo traffic from the Mombasa port.
The handing over of operations of the SGR to a Chinese company is a big blow to RVR is unlikely to compete with the new operator in terms of pricing and efficiency.
The firm seems not to have fulfilled these conditions resulting in the regional governments to let a Chinese company operate the new standard gauge railway.
According to chief executive officer of the Kenya Ships Agents Ltd, Mr Juma Teteh, RVR is currently only handling less than five percent of cargo leaving the Mombasa port.
Mr Teteh said before the signing of a concession agreement between the governments of Kenya and Uganda and RVR, the then Kenya-Uganda Railways which operated the rail service used to handle six percent of the cargo arriving at the port.
“As things stand now more than  95 percent of goods arriving at the port of Mombasa are transported by road,” he said.
Mr Teteh attributed various reasons for most shippers preferring to use road transporters compared to the railway service.
Key among them was the period taken to transport goods by rail compared to road and the turn-around time for containers.
Mr Teteh said inefficiency and  ineffective marketing by RVR is contributing to lack of adequate users for the railway service.
“At time containers used to take upto 30 days at the port before they are moved to Nairobi. However, generally there is a slight improvement,” he said.
He added that most shippers (importers and exporters) also opt for road transport compared to rail because they are being charged storage charges.
He said it would be difficult for RVR to compete with  with the Standard Gauge Railway (SGR) being constructed by the government as the new railway service will not only have the advantage of speed (80km) per hour compared to the current low speeds RVR is doing.
RVR has has lost the priority to run the newly built standard gauge railway to a Chinese firm which is said to be China Communications Construction Company (CCCC).
Mr Macharia said in terms of capacity for running the SGR, which is different from running the metre gauge, the government was likely to opt for a Chinese operator.
The CS said the government had decided to hire a technical consultant to advise it  on the best way forward in terms of operationalizing new railway.
“This kind of investment is complex. It has elements of electronic controls, signalling of the train, so we need expert advice. Whereas we shall be going the Chinese route, we still need a consultant to advise us on the technical specifications of such an engagement with a view to getting an operator for the concession,” he said.
The decision means that Kenya could end up paying RVR for lost business due to the operationalization of the SGR line. Legal documents amending the concession agreement, signed in August 2010, provide for compensation for lost business.
This mechanism was put in place to ensure that RVR’s operations were not put at risk by the new railway, while offering it equal opportunity and a level playing ground.
In March, Kenya Railways advertised for transaction advisors to recommend the appropriate operating model for the SGR.
“The transaction adviser will recommend the appropriate operating model for the railway, which will then inform the procurement of the operator,” said Kenya Railways, adding that the advisors had up to late last month to submit their bids.
RVR will also continue paying the 1.5 per cent railway development levy on its imports, which include plant and machinery. This means that it will be contributing indirectly to the running of its competitor’s operations.
Mr Macharia said the RVR concession clause was made with the best of intentions but a lot has happened since the 2010 amendments.
Studies by international bodies like the World Bank and others show the RVR operated Kenya-Uganda railway is still operating below capacity and holding back development potential of the two East Africa Community (EAC) member states.
A research on cross-border transport infrastructure by Japan International Cooperation Agency (JICA), indicate that the Kenya-Uganda railway has been deteriorating.
“While the railways of the three case study countries have been privatized based on concession agreements, transport volumes after privatization have decreased and fallen far behind demand, which has increased with economic growth,” the report says in part.
It adds that this has resulted in very long waiting times at ports before loading cargo on trains, leading to a greater dependence on road transport for most cargo.

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