Kenya and Uganda Privatize the Railroad

UNCLAS NAIROBI 005102

SIPDIS

SENSITIVE

DEPT FOR AF/E, AF/EPS
DEPT PASS to USTR FOR BILL JACKSON
DEPT PASS TO DEPT OF LABOR ATTN ILAB FOR KELLY BRYANT
TREASURY FOR ANN ALIKONIS
LONDON AND PARIS FOR AFRICA WATCHERS

SIPDIS

E.O. 12958: N/A
TAGS: KPRV EAID ELAB ECON KE UG
SUBJECT: Kenya and Uganda Privatize the Railroad

Ref: Nairobi 1668

Sensitive-but-unclassified. For USG channels only.


1. (SBU) Summary: Kenya and Uganda are at last moving to
revive the storied 1,500 mile rail line from Mombasa to
Kampala by concessioning the railroad on both sides of the
border to a private sector consortium led by a South African
firm. This form of privatization is a welcome attempt to
fix a major piece of the region's infrastructure whose
dismal performance has for years been a serious fiscal
burden and a major constraint on regional economic
development. Despite the recent passage of long overdue
privatization legislation in Kenya, it is premature to view
the railroad deal as the start of a new wave of badly needed
privatization in Kenya. End summary.

-------------- --------------
The Railroad: From Rolling Stock to Laughing Stock
-------------- --------------


2. (U) The 1,460 mile railroad linking the East African
port of Mombasa with Kampala, nicknamed the "lunatic
express," is the stuff of lore. It was begun in 1898 and
completed in stages, finally reaching Kampala in 1937. Long
before that, it was used by the British colonial authorities
to open up, exploit, serve, and subjugate the interior of
their East African empire. Kenya's present-day capital,
Nairobi, did not exist before the railway, and was built to
service it. In the more recent decades since independence,
however, the state-owned Kenyan portion of the railway has
been run into the ground by inept management, rampant
patronage and corruption, and a dearth of new investment.


3. (SBU) As such, far from being a lifeline for the growth
and development of Kenya and the wider region, the railway
has long since become an albatross and a chokepoint. Twenty
years ago, 80 percent of the cargo going to Uganda from
Mombasa port was transported by rail. Today, because of the
severe deterioration of rail beds and rolling stock, only 20
percent does so (reftel). Cargo that does go by rail is
slow and irregular, confounding businesses and raising costs
across the economy. The consequent diversion of most cargo
transport to roads has further compounded the container
logjam at Mombasa port and has greatly contributed to the
severe overtaxing of Kenya's equally neglected, potholed
road network (septel).


4. (U) In terms of the fiscal burden, Kenya's Transport
Ministry, which oversees the Kenya Railways Corporation
(KRC),reports that subsidies to keep KRC afloat amounted to
over $40 million over the past three years, and the company
is reported to be in debt to the tune of nearly $270 million
-- both huge numbers in the Kenyan context.

--------------
The Solution: A 25 Year Concession
--------------


5. (SBU) In essence, the plight of the railroad became so
dire that a consensus emerged that bringing in a private
operator was the only way to improve service and get the
capital investment needed to rehabilitate the rolling stock
and bring in needed locomotives. Recognizing this, while
also seeing the potential a revived regional rail network
held for the region's economic development, the governments
of Kenya and Uganda began working seven years ago to
negotiate a scheme to privatize the railroad on both sides
of the border. Rather than pursue pure privatization, the
two governments opted instead to "concession" the rail line
for a 25-year period to a private operator, in essence
handing over management and operations (and any potential
profits) to a private contractor in exchange for agreed-upon
capital improvements and a share of annual revenues.

--------------
All Aboard! Here Comes Rift Valley Railways!
--------------


6. (SBU) This process, undertaken with assistance from the
World Bank and partially funded by USAID/Kenya, finally
culminated on October 14, 2005, when the Governments
announced that a consortium led by South African firm
Sheltam Trade Close Corporation had won the competition for
the concession, beating out seven initial bidders, and one
other finalist, a consortium led by Rail India. Under the
terms of the deal as disclosed publicly, the consortium
offered upfront payments of $3 million to the GOK and $2
million to the Government of Uganda (GOU),to remit 11.1% of
gross revenues each year to be shared by the two
governments, and to pay $1 million annually to the GOK for
the right to run passenger service in Kenya. Thanks to the
last minute passage of an amendment to the Kenya Railways
Corporation Act prior to a divisive constitutional
referendum in late November, the way is legally paved for
Sheltham to take control of the money-losing KRC parastatal
(and its Ugandan counterpart) on April 1, 2006. After
winning the concessioning tender, the Sheltam consortium
quickly announced its intention to rename the railroad Rift
Valley Railways.

--------------
Working on the Railroad - No More
--------------


7. (U) KRC is expected to terminate 5,600 of its 9,200
employees, many of whom are casual workers whose salaries
have been paid irregularly by the cash-strapped parastatal.
The deal mandates that 30 KRC employees will be transferred
to the concessionaire and spells out the criteria for hiring
others upon privatization. According to KRC contacts, the
World Bank is providing a Ksh9.6 billion (about $128
million) loan for the project, mainly to fund severance and
retirement benefits, retrain retrenched workers, and set up
a retirement benefit scheme. Under the deal, the Kenyan
government will shoulder KRC's outstanding debts, and it has
said it will service that debt using the proceeds paid to it
by the concessionaire.

--------------
Comment
--------------


8. (SBU) It's far too early to call the railroad
concessioning a success, but the two governments and the
World Bank deserve credit for pushing this through, and the
bottom line is nearly anything will be an improvement over
the current dismal performance of KRC. While we don't know
much about Sheltam, we also hope that its African roots and
experience will give it an advantage in resuscitating the
once-great East African railway system.


9. (SBU) It's also too early to say if this deal marks the
start of a new wave of privatization in Kenya. The railway
deal was cleverly anchored in existing railway legislation
and thus did not depend on the much-delayed new
privatization law, which only passed in parliament in
October. We suspect that the latter law will take a great
deal of time to implement, and will not bear tangible fruit
in the form of privatized parastatals for a year at least,
and likely longer given ongoing policy paralysis and
leadership instability in Kenya.
Bellamy