A team tasked with reviewing the skewed contract between Kenya and the Chinese firm operating the Sh327 billion standard gauge railway (SGR) has hit a dead end.
This comes after China Road and Bridge Corporation (CRBC), the contractor, refused to provide key information protected by the confidentiality clauses in the controversial contract, on the grounds that it was “sensitive and private”.
“The negotiation for a review of the operation and maintenance contract did not progress because the operator refused to provide information that would enable the team to determine reasonable costs of SGR operations,” a highly-placed source said.
This comes even as Kenya readies itself to pay the first Sh25 billion instalment for the construction and locomotives loan next month, following the expiry of the five-year grace period in line with the May 11, 2014 loan agreement to finance the Jubilee government’s pet project. Another Sh25 billion will fall due in June next year.
Kenya has already set aside Sh35 billion in the supplementary budget to take care of the repayment to China’s Exim Bank next month.
By the end of 2020, Kenya is expected to have repaid at least Sh50 billion of the loan.
A multi-agency team was formed after concerns were raised on the need to take a fresh look at various contracts that had been awarded to CRBC to ensure that Kenya protected its interests and assets, as well as removed any touchy issues.
To revisit the contracts, the team comprising officials from the Presidential Delivery Unit, the Office of the Attorney-General, Kenya Railways (KR), Ministry of Transport, the National Treasury and CRBC was set up.
It was led by Transport Principal Secretary Esther Koimett, whose previous role as Kenya’s Investment Secretary and now as the ministry’s accounting officer put her in good stead.
But, after a number of preparatory meetings, the process stalled and appears to have been shelved altogether.
“We asked for data to help us come up with the regression analysis formula and inform the renegotiations, but this was not provided,” the source said.
Based on the operations contract, Kenya Railways currently owes CRBC over Sh31 billion in fixed and variable costs, which have to be paid by the exchequer since the operator had not been able to break even.
The total debt for the SGR project in January 2020 will be over Sh60 billion.
Meanwhile, CRBC claims that it is becoming increasingly difficult to continue working without the payments from Kenya Railways, and has come up with measures to sustain its operations.
It has communicated these measures to KR and the Ministry of Transport.
As at November 1, the invoiced amount was $476 million (Sh47.6 billion). Kenya Railways approved Sh43 billion and so far Sh7.3 billion has been paid.
Kenya Railways is also struggling to pay security fees for the trains. It is also supposed to come up with Sh170 million as insurance premium.
To deal with the cash flow problems, CRBC says it will be forced to suspend salaries for expatriates and insurance medical cover as well as the transfer allowance if KR does not pay it soon.
CRBC came into the picture during the Grand Coalition government headed by President Mwai Kibaki, when some of the initial contracts were signed.
The firm sought favour with top officials from KR and the Transport ministry with the blessing of the Prime Minister’s office.
It was allowed to do a “free” feasibility study, which turned out to be the document that set it apart as the preferred supplier of almost everything.
After the study, it was awarded the contract to build the railway line from Mombasa to Nairobi, having found a financier back home.
It also bagged the next contract to procure coaches and locomotives, known as rolling stock.
Together with its affiliates, it got the contract to supervise the construction, and finally, to operate and maintain the line.
But CRBC is operating the trains through its subsidiary, Africa Star Railway Operation Company, adding to the confusion over who to deal with.
Trouble started when it emerged that Kenya could have exposed its assets, among them the Mombasa port, as security for the loan.
It also emerged that the contract was hurriedly drawn up in a government-to-government deal.
The worst provisions had to do with security. The contract put Kenya’s strategic assets at home and abroad at risk of being seized by the Chinese government in the event of a default.
Also, any disputes are to be governed by Chinese laws. To operate the trains, CRBC charges a fixed Sh1.3 billion per month, or about Sh40 million daily.
It also loads other charges, known as variable costs, when it increases trips during peak seasons or when it does more than three return trips a day.
“Kenya took the demand risk and that is why it is our job to ensure the trains are full while the CRBC assumed the operations risk,” the source said.
Mid this year, the operator sent Kenya Railways a fee note of Sh30 billion in pending payments.
It also slapped Kenya with penalties amounting to Sh800 million for late repayments of its operation fees.
The contract also frees the operator of all liability but forces KR to pay the fixed monthly service charge, which must be paid quarterly and in advance.
“What we need is a formula that can help determine the fixed and variable costs. What we have is an arbitrary fee such that we cannot work backwards or accurately to forecast as required in any costing model,” another source said.
A special reserve account with Sh3 billion to cushion CRBC was also opened.
The contract also made it imperative to start operations by June 1, 2017. Any delay would attract a Sh24.2 million fine daily.
The money generated from ticket sales is deposited in a reserve bank account, together with all payments from Kenya Railways.
This must be done within 24 hours. “The Operator shall also, as an agent of KR, manage a system for collection of non-cash revenue, including payment utilising the M-Pesa cash transfer platform,” the contract says.
During a live NTV interview on December 28 last year, President Uhuru Kenyatta promised to release the SGR contract to put to rest any “porojo” (rumours) that the Chinese could seize the Port of Mombasa if Kenya defaulted on its payments.
