14 July 2008
Nairobi — Faced with a protracted strike by its unionisable employees, the tribulations of the Rift Valley Railways Ltd (RVR) appear to be worsening by the day.
RVR was contracted more than a year ago by the Kenya and Uganda governments to own and run the 900-kilometre Kenya-Uganda railway connecting the port of Mombasa with landlocked Uganda under a 25-year concession -
The EastAfrican has learnt that away from the limelight, the troubled company has been holding intense discussions with two international companies on a rescue plan that includes transfer of management and equity to these foreign investors.
The first is a consortium led by Australian company, Toll Holdings Ltd, that also includes a UK-based equity fund PME Africa Infrastructure Opportunities Plc (PME).
The second, is a consortium led by Optima Management Ltd of the United Kingdom, said to be linked to Magadi Soda.
Two weeks ago, the two groups of investors presented proposals on how the troubled company can be turned around to an inter ministerial committee headed by the Office of the Prime Minister.
Sheltam Ltd of South Africa is the largest shareholder of RVR, owning 35 per cent of the shares. Others are the Trancentury Group, Prime Fuels and Mirambo Ltd, Centum Investment Company Ltd and Babcock and Brown.
Until recently, top Kenyan government officials appeared to be leaning towards the Australian company whose proposal included a $40 million capital injection into RVR by PME.
Apparently, the local shareholders of RVR, namely Transcentury Ltd and Centum Ltd, prefer to deal with the Magadi Soda consortium while Sheltham Ltd is leaning towards the Australians.
But The EastAfrican has learnt from discussions with key government officials that the state is now more inclined towards conducting a comprehensive review of the performance of the concession with a view to terminating the contract altogether.
By the time The EastAfrican was going to press, the Office of the Prime Minister and the Ministry of Transport had released the terms of reference for the review of the performance of RVR under the concession. The review of the concession must be completed within 45 days.
Meanwhile, RVR last week announced the entry into the company of Mirambo Holding Ltd and Prime Fuels Ltd as shareholders.
The two, who were among the original shareholders of the company, have been engaged in a long-running ownership dispute with Sheltam Ltd over the company.
RVR said in the statement that the shareholders of the company had mandated the board to asses the present funding and management structure of the group, and to make appropriate recommendations by July 28, an obvious reference to the talks going on with Toll Holdings.
Under a similar situation in 2003, Toll Holdings took over management of a similar railway concession in New Zealand from Wisconsin Central which had won a long term concession to run New Zealand Rail.
In that transaction, the government of New Zealand agreed to take over the infrastructure, while the rail operation was sold to Toll Holdings who agreed to pay an access charge.
A few months later, Toll Holdings started complaining that the access fees were too high. The matter ended up in arbitration.
Although the company lost, it still refused to pay the full amount leaving the government of New Zealand to cover the difference.
The government was very unhappy at being forced to subsidise a foreign private company, and the general mood in New Zealand was turning against the privatisation of existing or former state-owned companies.
If - as expected - the review planned by the government finds that RVR has not lived up to the terms and targets of the concession, and is eventually thrown out, the circumstances may force the government to look afresh into how the concession was procured in the first place.
Already, there are murmurs from government officials involved in the discussions, at the manner in which the whole transaction was negotiated.
"How do you contract as many as 25 lawyers in such a transaction?" asked a top government official involved in the discussions, but who did not want to be named.
The Kenya Railways handed over all operational assets to RVR on November 1, 2006 for a period of 25 years for freight, and five years for passenger services.
Under the agreement, performance is to be measured in two ways: freight volume targets and minimum investment.
The freight volume target is measured annually but for the initial period, the performance targets is to be measured for the period up to June 2009.
The agreement specifies a minimum investment of $5 million per annum for the first five years.
The Kenya Railway Corporation (KRC) regulates and monitors the performance of the concession on behalf of the government.
In a recent brief to the government, KRC said that RVR's performance had consistently remained below par.
It noted that while the railway was moving 1.5 billion net tonnes kilometres per annum when RVR took over, the concessionaire had only managed to move 1.4 billion units in the first 12 months of the concession.
According to the concession agreement, the target at the end of the second year is 1.88 billion net tonne kilometres.
The railway network in Kenya has a capacity to move 12 billion net tonnes kilometres.
The brief by the KRC also noted that the quality and quantity of passenger services had a rating of 22 per cent against the concession target of 80 per cent.
"In addition, RVR has failed to operate all passenger services as envisaged in the concession agreement," he added.
With regard to maintenance, KRC noted that while the defunct Kenya Railways Corporation had handed over to RVR the railway when only 34 per cent of the line was on speed restriction, RVR had implemented a 100 per cent speed restriction on the mainline from Mombasa to Malaba - a clear indication of the decline in the maintenance and safety standards.
The report said that due to lack of maintenance, rolling stock availability had declined since RVR took over.
The daily average availability of locomotives - the report added - had dropped from 63 when RVR took over to 54.
Wagons in operation had dropped from 2,330 at commencement to 1,902 at the beginning of this year.
On staff matters, the brief by KRC said that RVR had so far retrenched 600 employees and dismissed over 200 of the 3,400 employees it inherited from the defunct Kenya Railways Corporation.
"Without an alternative means of undertaking operations and maintenance, RVR's capacity to meet minimum maintenance standards is in serious doubt," the report added.
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