A section of the Standard Gauge Railway running through Makueni County, Kenya. FILE PHOTO | SALATON NJAU
By DICTA ASIIMWE
In Summary
- China now demands that Uganda secure guarantees from Kenya that it is still interested in and will source financing for the Naivasha-Malaba section of the standard gauge railway (SGR).
- While the Ugandan government attributes the potential delay to China’s desire to take on a bigger portion of the financing responsibility in the wake of the agreement that the lender will run operations for 10 years in order to recoup its investment, sources say Beijing is concerned about Uganda’s ability to meet its repayment obligations.
The Malaba-Kampala section of the standard gauge railway
will take a while longer to be completed after China’s Export Import
Bank set new loan preconditions for Uganda.
A document prepared by officials from Uganda’s Ministry of
Finance, Planning and Economic Development and seen by this paper shows
that a key demand by the Chinese is that Uganda secure guarantees from
Kenya that it is still interested in and will source financing for the
Naivasha-Malaba section of the standard gauge railway (SGR).
It also wants guarantees on compensation for those people
affected by the project and a new feasibility and bankability study
showing that construction of the SGR makes business sense.
Kampala has now been forced to revise the completion date for
the construction of the SGR from the Northern Corridor’s target of March
2018, to sometime around 2020, The EastAfrican has learnt.
While the Ugandan government attributes the potential delay to
China’s desire to take on a bigger portion of the financing
responsibility in the wake of the agreement that the lender will run
operations for 10 years in order to recoup its investment, sources say
Beijing is concerned about Uganda’s ability to meet its repayment
obligations.
Minister of Works and Transport John Byabagambi confirmed in an
interview in Kampala that there will be delays, setting the new expected
date of completion of only the Malaba-Kampala section to 2020. The
target set by the Presidents of Rwanda, Kenya and Uganda was for the
first train to be flagged off from Mombasa to Kigali in March 2018.
Statements by officials in Kigali and Nairobi following the
Heads of State summit held in Kampala last month, suggested that the
Kenya, Uganda and Rwanda coalition, which was supposed to build the SGR
was crumbling.
But different ministers including Rwanda’s Finance Minister
Claver Gatete and Mr Byabagambi say the project will continue. Mr
Byabagambi now says that the only challenge is Uganda will miss the 2018
deadline because the Ministry of Finance, Planning and Economic
Development hasn’t yet raised money for compensation for those affected
by the project.
Exim Bank wants Uganda to first compensate all those whose land
is on the Malaba-Kampala SGR route before a financing agreement can be
reached.
Mr Byabagambi said compensation was moving on smoothly noting
that the only concerns will emerge as they move towards the more
built-up areas.
The Ministry has so far paid out Ush20 billion ($5.8 million) to
project affected persons. And the same amount is to be paid out this
week, but that’s way below the required compensation amount of over
Ush300 billion ($87.7 million) for the Malaba-Kampala section of the
SGR.
Mr Byabagambi said that in the 2016/17 financial year, another
Ush110 billion ($32.1 million) has been allocated for compensation. This
means that the process of compensation could be completed in the
2017/18 financial year.
This newspaper understands that a new application providing answers to the questions was submitted to the Chinese this month.
On Kenya’s part, Transport Cabinet Secretary James Macharia
reportedly said Nairobi could terminate the SGR at either Naivasha or
Kisumu. The Chinese are financing the Kenya leg of the SGR as well and
have already agreed to do so up to Naivasha.
Secretary to the Treasury Keith Muhakanizi who was part of the
delegation that went to China to negotiate the terms of the loan,
however, said that he has made progress and will soon get Kenya to
provide the necessary assurances, so that Uganda can get the financing
for the SGR.
President Yoweri Museveni had praised China as a genuine
development partner that doesn’t set conditions before lending, like the
West, but the country now wants Uganda to prove that construction of
the standard gauge railway makes business sense, before a $2 billion
loan is provided, and that once the project is completed, it will
generate enough money to repay the loan.
In a 2014 interview with the Financial Times, President Museveni
said China would be the source of funding of about $10 billion for
Uganda’s infrastructure.
The SGR is a pet project that came into being following a 2013
pronouncement by Presidents Paul Kagame of Rwanda, Kenya’s Uhuru
Kenyatta and Uganda’s Yoweri Museveni.
As a result, the project was never tested as a business, but
experts like Dr Fred Muhumuza, an economist at Makerere University says
that the SGR could become a white elephant and that it will add little
value to the Northern Corridor, since not enough exports are coming out
of the region. The region is building an SGR to ease importation of
goods.
Dr Muhumuza said that imports don’t create jobs and therefore
the country will have difficulty in generating revenue to pay back the
several infrastructure loans.
Government officials on the other hand say building the SGR
would take pressure away from the roads, and that’s the business value
of building the SGR.
Uganda had done feasibility and studies for the railway, but the
Chinese rejected these documents for being insufficient in stating the
business case for funding the SGR project.
Having borrowed at least $3.3 billion from the Exim Bank to
construct several projects including the Karuma and Isimba electricity
dams, the Kampala Entebbe Expressway and other projects, Ugandan public
officials are familiar with the processes of acquiring money from this
bank. As a result, Uganda gave the contract for construction of the SGR
to a Chinese company, a precondition for acquiring the loan.
But the rules appear to be changing with sources in the Ministry of Finance, Planning and Economic Development telling The EastAfrican
that the Chinese are waiting for 2018, to see if Uganda can complete
the hydroelectricity projects so that there is revenue to pay back some
of the loans.
Mr Muhakanizi, however, disputed this analysis arguing that
China is still comfortable lending to Uganda. Uganda has a 40 per cent
debt-to-GDP ratio.
Mr Muhakanizi said this means Kampala’s debt is sustainable
since it is below the 50 per cent threshold set by the East African
Community Monetary Union committee.
But with a fiscal balance of over 6.4 per cent and a tax to GDP
ratio of less than 13 per cent, Uganda is missing the other monetary
union targets that would show the country’s capacity to pay back loans
The country also hopes to add 50MW to its grid when the 147MW
Rusizi III hydropower project is complete, but it will be shared between
Burundi, Democratic Republic of Congo and Rwanda.
The government also plans to import power from the region,
however this option is hindered by incomplete high voltage electricity
transmission lines and substations both in Rwanda and Uganda.
The delay and lack of infrastructure are blamed on Isolux
Ingenieria, a Spain-based engineering firm contracted to build the power
lines and sub-stations
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