Friends of the Rail Forum

ABOUT TURN IN EAST AFRICA
23rd May 2008

The extent of traffic increase expected through concessioning the dilapidated metre-gauge railways of Kenya and Uganda has not materialised and both governments – according to the latest press reports - want out. Rift Valley Railways (RVR), the current concessionaire, been a whole year-and-a-half on the job. When they had been at it 12 months – more than enough, politicians evidently think, to turn a completely run-down railway around - managing director Roy Puffed told the press: “By June next year, RVR will have invested a total of $US29 million into the business - more than four times the required investment outlay.”

Writing in The Nairobi-published East African when RVR paid $US5 million at takeover in 2006, Charles Onyango-Obbo wondered why anyone would want to outlay anything for a railway in such a sorry state – a railway “that Is a symbol of the incompetence and corruption that have robbed our nations of greatness. In Uganda, most of the railway line has been stolen or eaten up by bush because of years of disuse. Stations are sprawling graveyards of ugly rusted coaches.” A hundred years ago, Onyango-Obbo recalled, “it took the British colonialists six years to build the nearly 1,200km of the Kenya-Uganda Railway”, a mammoth task at the time, in the face of countless hazards, which earned it a nickname – “the Lunatic Line”. Six years, he pointed out, was the time it took Kenya Railways to deviate only 5km of track at Nairobi many decades later.

In terms of the concession agreement, RVR was to assume responsibility for ferry services on Lake Victoria. A year into the deal, RVR said it was still waiting for the Ugandan government to (a) hand over the vessels and (b) lift the suspension it imposed on marine service operations in 2006. This followed the sinking of a ferry when it collided with another, subsequent investigations revealing “various omissions in management, particularly drunk captains.”

Rail infrastructure and rolling stock were in appalling condition at takeover, with many locomotives inoperable, but only people who know something about running an efficient railway would understand how long it takes a magician to sort out situations like this.

And there have been one or two major problems, of course, along the way. Persisting unrest in the wake of the late-December elections saw kilometre-long sections of the main-line physically torn up near Nairobi. Within recent weeks, flood damage to ancient, ill-maintained bridgework in Uganda has put everything out of action again, this time for at least two months.

With the Kenya Ports Authority continuously blaming an increasingly unmanageable build-up of incoming cargo at Mombasa on RVR’s failure to move it out quickly, the two governments seem confident that somebody can be found to manage matters better. “Uganda has apparently already moved to identify other concessionaires, the East African reported on 19 May. “Both the minister and URC officials have confirmed that they are in talks with a German concessionaire whom they are lining up...”

Somebody, it appears, has remembered that – back in 2004 - Thormaehlen Schwesstechnik AG called on the Sudan People's Liberation Movement/Army with a proposal to build a new 1,435mm gauge line through Uganda to Mombasa. This obviously attractive concept dovetails neatly with Kenya’s latest railway “master plan”, which envisages the reconstruction (and electrification) of its entire network to this gauge, and its extension to the Sudan.

Hopefully the fairy godmother in Washington DC (aka the World Bank) will agree to pay the bills.

Railways Africa

John, I have read this about 4 times and I am totally confused!

What are they trying to say, or is the writer confused as well. It all seems a mix of the future and sort of OK and a disaster - which does not make sense.

Has RVR been a disaster, or is it just a question of time?

Kevin, I'm not sure myself! Here's the East African piece that it refers to. It's written on 19th May 2008 (see the url), but on the webpage itself it says "May 19, 2006"! Oops!

Kenya, Uganda want out of RVR deal

URC officials have confirmed that they are in talks with a German concessionaire whom they are lining up, first, to start with the Gulu-Juba line between northern Uganda and Southern Sudan. CHARLES KAZOOBA reports


Uganda and Kenya are said to be looking for an exit route from the joint concession with Rift Valley Railways Ltd, just a year after handing over the management of their railway networks and assets to the South African consortium.

The EastAfrican has learnt that authorities in the two countries are taking issue with what they describe as RVR’s continued underperformance, wastage of concession assets and infrastructure and failure to remit revenue to the two governments.

Reliable sources say that technocrats from the Uganda Railways Corporation, Kenya Railway Corporation and Uganda’s Finance Ministry and its Kenyan counterpart met in Nairobi from Tuesday, May 13, to Thursday, May 15 to come up with a common position on RVR and to find a way forward. The meeting, according to one of the senior Ugandan officials who attended, was one of the “diplomatic avenues” aimed at ending the troubled marriage between the concessionaire and the two countries.

However, Uganda’s State Minister for Works and Transport John Byabagambi has confirmed the position, saying, “It is no longer a viable venture.”

Mr Byabagambi added, “We are saying that if the situation does not change, we shall terminate the agreement soon. We are very serious.”

Kenya’s Transport Minister Chirau Ali Mwakwere confirmed that in-house consultations had taken place between the parties to look into the performance of the concessionaire. The minister, however, said that while no decision has been made yet, the performance percentage of goods and speed of trains was below expectations, as was the injection of inputs to improve the system.

Mr Mwakwere added that, for any drastic measures to be taken, every clause of the agreement would have to be assessed. A full evaluation meeting, the minister said, is scheduled for June next year, but that does not stop the parties from carrying out routine consultations to evaluate performance, which so far has proved disappointing.

In 2005, the Rift Valley Railways consortium, in which South Africa’s Sheltam Rail Pty has a controlling interest, won the bid to manage some 900 kilometres of line from Kenya’s Indian Ocean port of Mombasa through Nairobi and across the Rift Valley to Kisumu on the shores of Lake Victoria.

“RVR is not performing to the standards demanded of them. The concession agreement states that 30 per cent of capacity must go to cargo, but they are carrying less than 10 per cent,” said Mr Byabagambi.

Uganda has apparently already moved to identify other concessionaires. Both the minister and URC officials have confirmed that they are in talks with a German concessionaire whom they are lining up, first, to start with the Gulu-Juba line between northern Uganda and Southern Sudan.

The chairman of the Parliamentary Committee on Physical Infrastructure, Nathan Byanyima, had at the close of April urged Uganda’s Finance and Works and Transport Ministries to evaluate RVR’s operations.

Mr Byanyima said Uganda’s transport minister had intimated that Kenya was equally disappointed with RVR.

Said the MP, “The same scenario has played out in Kenya. Our minister told us that the Kenyans had expressed similar concern over underperformance.”

According to an assessment last year by the Kenya Railways Corporation, done in the first three months after RVR took over, the company transported 405,170 tonnes of goods compared with 433,509 tonnes transported by the Kenya Railways Corporation in the three months preceding the concession — a 6. 5 per cent drop. Revenues for the first three months after the takeover amounted to Ksh1.08 billion ($15.65 million).

The evaluation was based on the reports that RVR has been submitting to the residual KRC, its regulator.

Bad blood, particularly between RVR and Uganda, was sparked off after one of the country’s locomotives, managed by RVR, was damaged in an accident in Nairobi mid last year and the concessionaire failed to either repair or replace it.

The EastAfrican was informed that the badly damaged locomotive has been abandoned at the Nalukolongo premises of URC.

Acting URC chief executive officer Emmanuel Lyamulemye estimates that a new locomotive costs $2 million. But he said the Ugandan locomotive was worth $1 million before the accident due to wear and tear. Uganda owns at least 40 locomotives whereas Kenya has more than 100.

“RVR has not performed at all. They have not fulfilled their conditions. They have not improved the railway infrastructure, neither do they service the locomotives. Kenya is saying the same thing,” said Mr Byabagambi.

Under the agreement, RVR was to pay an entry fee of $3 million to Kenya and another $2 million to Uganda before taking over the running of the network. The company was also supposed to pay in $24 million in equity as proof of ability to raise money from its own sources to the run the railway.
RVR-Uganda was supposed to provide the government a performance bond of 10 per cent of $300 million, the value of the conceded assets.

On November 1, 2007, the South African firm could neither raise the money for the entry fee nor the equity. In the end, Sheltam had to invite local shareholders Transcentury Ltd and ICDCI Investments Ltd, and an Australian company, Babcock and Brown, to buy equity in RVR.

Mr Lyamulemye corroborated the minister’s position on phone from Nairobi during the meeting with their Kenyan counterparts and RVR, saying “Their performance is very poor. They have mismanaged the locomotives, wagons and the infrastructure. They have failed to maintain them. They are very unco-operative.”

The URC official, however, said the damage costs could be deducted from RVR’s conceded assets account as provided for by the agreement.

RVR has further not remitted revenue to the government. Mr Lyamulemye told The EastAfrican that they are supposed to remit 11 per cent of gross revenue on a quarterly basis. Said the URC chief, “They have not invested any monies, and have not remitted any revenue, yet they continue to be unco-operative.”

But when The EastAfrican talked to the RVR leadership, the concessionaire sounded upbeat about their operations. “We are very comfortable with what is going on,” RVR managing director Roy Puffet said via his cellphone.

Earlier, junior officials working with RVR-Uganda blamed their woes on the delayed approval of the partial risk guarantee (PRG) by Uganda and the failure to establish a joint railway commission between Uganda and Kenya that would monitor the railway operations.

We could be doing much better but the Uganda Parliament delayed approving the partial risk guarantee, which would have enabled us to source loans,” one of the officials, who preferred anonymity, said.

But Mr Lyamulemye dismissed the reasoning, saying “Many issues we are raising did not require the partial risk guarantee.”

The Parliamentary Committee on the National Economy, in its report to the House in February 2007, said it stayed approval of the partial risk guarantee because it was not provided for in the first agreement, which prompted the government to amend it before returning to the committee.

However, the Kenya government readily provided a PRG worth $45 million as it did not have to be approved by parliament but only by the Cabinet.

The PRG is an instrument recently introduced by the World Bank to mitigate the risk of investing in emerging Third World economies. It is designed to provide cover to private investors against termination resulting from either breach of agreement by governments or a change of national policy.

The Uganda and Kenya railways concession is one of the components of the East African Community’s Trade and Transport Facilitation Project aimed at boosting trade among the partner states. The EAC Customs Union implementation is another component. The Tanzania Railway Corporation is also in the process of concessioning its operations.

Ugandan officials say they anticipate minimal losses after terminating the concession. The URC chief said they have so far looked at three alternatives: Completely stop railway services (a worst case scenario); reconstitute URC in the interim period after doing away with RVR; or identify another concessionaire (estimated to take another two years).

“If both governments agree, we shall terminate the concession. Uganda will not lose anything, after all RVR has not invested anything,” Mr Lyamulemye said.

He said they would recover their losses by seizing the performance bond of $3 million. “The concessionaire will also pay liquidation damages. The only losses we envisage are the condition (worn out) of our assets and disruption of railway services.”

Additional reporing by Catherine Riungu in Nairobi

East African

Thanks John - that clarifies it - this article says it is not working and they want out.

I wonder how the "carry 30%" of the goods works? I am sure that this would not have been agreed to if there was not a certainty that the traffic would be in place. The inference therefore would be that the goods were available for rail carriage, but that this did not occur due to the infrastructure.

Perhaps this expalins the Mombasa story, which would then be a cause and effect relationship.

KENYAN MEETING ON RAIL CONCESSIONING
Saturday, 31 May 2008

According to The East African (published in Nairobi), “the Kenya government convened a crucial inter-ministerial meeting chaired by Prime Minister Raila Odinga on 22 May to discuss what is quickly turning out as one of the most messy attempts at privatising a public utility in Kenya's history.

“The meeting, convened by a letter by public service head Francis Muthaura, and which went on up to 22:00, was attended by Finance Minister Amos Kimunya, Transport Minister Chirau Ali Mwakwere, several permanent secretaries and the top management of the Kenya Railways Corporation.

“Although the details of what transpired at the meeting remain scanty, sources told The East African that it mainly dwelt on the legal implications of cancelling the contract with RVR - reflecting the growing concern within the government over the railway network's deteriorating performance.

“It is noteworthy that even before Thursday's meeting, the board of the residual Kenya Railways Corporation - the entity that supervises and monitors the operations of RVR on behalf of the government - had directed its management to issue a "notice of default" against RVR on the grounds that the South Africans had not paid concession fees for the period October-December 2007 amounting to $US1.98 million.

“According to the concession agreement, the money was due to be paid on January 30 this year.

“KRC also says that the company has also not paid concession fees for the period January-March 2008, an amount estimated at $1.74 million, which was due by April 30.

“However, RVR has countered that it has been paying concession fees to both the governments of Kenya and Uganda promptly until the time violence broke out in Kenya early this year.

"’As per the concession agreement, a Political Risk Event was declared because the railway line between Kenya and Uganda was closed due to political rioting in Kenya,’ said RVR in a statement by managing director Roy Puffet, published as a full-page advertisement in The East African newspaper.

“More significantly,” the paper continues: “the Treasury meeting reportedly went to great lengths to discuss alternative methods of privatising the railway network - with opinion appearing to converge on the method known as "open access system," where the government maintains the permanent way, with multiple private-sector players being given trackage rights.

“The open-access system has recently emerged as the popular model of privatising railway networks, especially in the European Union. It is also a popular model in the USA, Canada, Mexico and Japan.”

[ A prerequisite for functional open access on a railway is pristine infrastructure condition and maintenance – two conditions which both governments demonstrably failed to fulfil, prior to the present concessioning. – editor]

Railways Africa

RVR “ON COURSE”
Saturday, 31 May 2008

Efforts to return the Kenya-Uganda railways to profitability are on course, Rift Valley Railway's (RVR) managing director Roy Puffet told John Ngirachu of The Nation (published in Nairobi) on 25 May. Reacting to reports that the government was becoming concerned about the firm's performance, Puffet was quoted saying that the consortium is working on plans to improve performance, while at the same time maintaining routine daily operations.

"As responsible railway operators, RVR wishes to reconfirm its commitment to the Kenya and Uganda governments that we are on course to ensure that this rail service is turned around to be the best railway in Africa." He said RVR has been engaging and regularly updating both the Kenya and Uganda governments on progress rehabilitating the railway and revamping the rolling stock.

Puffet conceded that investment plans by the company had fallen behind schedule, largely due to the complex nature of the concession. "The financing structure of the loans required for a concession are complex by nature and are compounded by the fact that the concession involves two governments, their respective national railways and two international financing institutions.

"This has resulted in unexpected delays in accessing the required funding to start the required capital expenditure programs vital for this type of project".

He added: "Major rehabilitation works can only be undertaken within realistic timelines and we hope that the necessary support from all quarters will be accorded."

Both governments, he told The Nation, had moved to dispel rumours of a pending exit from the concession agreement.

"Both the Ugandan and Kenyan governments have distanced themselves from the media reports," Puffett was quoted saying.

According to a full-page advertisement by RVR in the East African (also published in Nairobi), concession fees were paid to both governments every quarter and on time up until the start of the political unrest in Kenya, when complete sections of line had been removed at Kibera and Eldoret, also in the Kisumu-Butere section. At this point, RVR invoked a "Political Risk Event" as provided in the concession agreement, to cushion against losses.

Recent attacks by the outlawed Mungiki sect paralysed passenger services in parts of Nairobi.

Faced by the appalling state of the railway at the start of the concession, and in the interests of public and asset safety, RVR was forced to reduce the operational speed of all trains – and this resulted in a 50% reduction in the number of derailments.

In terms of the concession agreement, a formal performance evaluation is to take place in June 2009.

Railways Africa

Today's hard copy Daily Nation (Tuesday 3rd June 2008) in Kenya has a long article entitled What must be done to turn Nairobi into a dream city by Ng'ang'a Mubugua which touches on railways in a couple of places.

It speaks of "The rebranding and repositioning of Nairobi as a leading regional hub of tourism and commercial activities" and says that "an efficient transport system" is "the most important" of "eight key attributes that all great cities have in common". It goes on:

Although debate has largely focused on road transport, revolutionising Kenya's arhcaic railway system remains critical if Nairobi is to compete with other cities...

Ugandan President Yoweri Museveni is on record as having said that the regional railway system belongs to the musuem. And last week, Prime Minister Raila Odinga called for a review of the Rift Valley Railways operations over its perceived failure to meet its targets.

However, it is time both the Government, the consortium and other relevant authorities move from rhetoric and blame game to doing something tangible, besides repairing damaged lines and repainting dilapidated trains.

The potential for profitability of city-based rail transport has been enromous as evidenced by the large number of people who cling on to trains.

Revamping the service would unlock the city's great potential. And if need be, the services can be extended to other companies if RVR has failed to tap into this market.

In further comments on the need for "a vibrant cultural and entertainment scene", the article mentions the Kenya Railways Museum:

The rehabilitation of the Nairobi Museum and the National Archives has been a good starting point... But there are others which have as much commercial potential, including the Karen Blixen Museum and the Kenya Railways Museum, all of which have been yearning for aggressive marketing.

On my current trip to Kenya I had the opportunity to speak to a very senior source in the Kenyan Ministry of Transport as well as a few ordinary railwaymen on the ground. Interestingly at both levels there was a feeling that RVR just doesn't have enough money to invest in what is a very dilapidated railway system in order to bring it up to scratch. My senior source suggested that it is up to RVR to find capital in whatever way it can (including partnerships with other investors); my grassroots railwaymen seemed to think it would have been better if a different company had been given the concession in the first place. The Magadi Soda Company's name came up as an organisation that has pots of money and already knows how to run railways in Kenya.

I was also told that there is still an interest in the completely new road, rail, pipeline and fibre-optic highway from a new port in Lamu to Eldoret, with an onward link to Juba in southern Sudan. I'm told that Kuwait has offered to finance the whole deal, but that there is some reluctance to alienate the World Bank, which is funding other projects in Kenya. The project is apparently currently awaiting a feasibility study by international financial institutions. The new railway line would be Stephenson gauge.