Kenya: New Sh368bn Loan to Make Kenya's SGR the Most Costly

President Uhuru Kenyatta (left) greets Chinese President Xi Jinping at the Great Hall of the People in Beijing on April 25, 2019 ahead of the second Belt and Road Forum for International Cooperation.

Kenya is shortly expected to sign a Sh368 billion loan for the construction of the Naivasha-Kisumu leg of the Standard Gauge Railway (SGR), bringing the total debt for the project to Sh845 billion and making the cost effectively Sh800 million per kilometre -- one of the most expensive projects of its kind in the world.

President Uhuru Kenyatta and Opposition leader Raila Odinga are in China to persuade that country's leadership to extend the loan.

The inclusion of Mr Odinga in the delegation came as a surprise, as he has been a fierce critic of the government over the SGR project.

The cost of Sh800 million for every kilometre of railway between Mombasa and Kisumu is twice the international average.

People familiar with the trip say the new loan is a "done deal" now that the issues raised during President Kenyatta's previous trip to Beijing had been addressed.


An advance delegation left the country on Monday. It comprised Treasury Principal Secretary Kamau Thugge, Kenya Railways Corporation acting managing director Philip Mainga and officials from the Transport ministry.

Transport and Infrastructure Cabinet Secretary James Macharia and his Treasury counterpart Henry Rotich are also expected in China for the signing ceremony.

It is understood negotiations around the latest loan have been a lot tougher than the first two. Besides viability issues, the numbers coming through are not as promising as initially thought.

Phase One of the SGR gobbled up Sh327 billion before factoring in loan interest fees and land acquisition costs. About 90 per cent of this amount, or Sh294 billion, was a part-concessional-part-commercial loan from Exim Bank of China.

The Kenyan government was expected to contribute the remaining 10 per cent, which translates to about Sh32.7 billion, from the Railway Development Levy, while land acquisition was to cost Sh15 billion, but this amount was inflated and the country ended up with a bill of almost two times the amount.


Phase 2A, the stretch between Nairobi and Naivasha, has already consumed another Sh150 billion.

Phase 2B is the Naivasha to Kisumu line and included the development of a new high-capacity port in Kisumu.

It is expected to cost Sh368billion and is the subject of the current loan negotiations in China. There is a final Phase 2C, which will take the line from Kisumu to Malaba.

Cumulatively, stretching the line from Mombasa to Kisumu will cost a total of Sh845 billion for the 996-kilometre line, making it the biggest infrastructure project Kenya has ever undertaken.

Together with interest and land acquisition, the line will cost over Sh1 trillion, which is almost the total amount of money collected by the taxman every year.

Last year, SGR operations posted Sh10 billion in losses despite costing the taxpayer at least Sh12 billion to operate. It costs about Sh1 billion a month to run the line between Nairobi and Mombasa.


Delays by Uganda to complete negotiations and break ground for construction of a line from the border with Kenya to Kampala had made taking the line beyond Naivasha less promising from a financial perspective.

Also, some of the sticky issues around the deal include what assets will be tied up on the loan.

In the first phase, the government was said to have handed over the port of Mombasa as security for the loan. It denied the claim.

The other issue that needs to be resolved is where disputes will be settled should they arise.

The initial contract had indicated that all disputes of the government-to-government deal will be arbitrated in Beijing, but Kenya is understood to be pushing to shift the arbitration location to a more neutral location such as Geneva or any other internationally acceptable court.


In Beijing, when President Kenyatta and his Chinese hosts sit to discuss details of the financing, Mr Odinga will be an unlikely, but invited, guest at the table.

Mr Odinga was for a long time one of the harshest critics of the financing model of President Kenyatta's pet project, saying in various forums that the President's borrowing spree was akin to mortgaging Kenya to China.

Accusing President Kenyatta's government of corruption, Mr Odinga said the cost of the Mombasa-Nairobi line was exaggerated and could have cost less.

And when the President launched construction of the line from Nairobi to Naivasha, the opposition leader claimed it was all for the benefit of members of the first family.

In June 2014, Mr Odinga wrote to the President lamenting that the SGR project, "which is a key and vital development in the expansion and modernisation of Kenya's infrastructure, has raised serious credibility concerns".

He said the project should have cost Sh227 billion but was inflated to Sh327 billion by the Jubilee administration. "We know the people responsible," he warned, "and it is not the Chinese".


But now, as he basks in the glory of his March 2018 deal with Mr Kenyatta, Mr Odinga has become one of the staunchest supporters of the project, and was last evening cruising to China to lend support to his new political ally.

Speaking in Kisumu at the weekend, Mr Odinga said the project would be a big boost to the economy of Kisumu by creating jobs.

"We are going to establish a special economic zone in Kisumu and make the city the hub of East Africa," he told a crowd.

Mr Odinga was not available for comment, but his spokesman Dennis Onyango said the ODM leader's stand on the first phase of the SGR had not changed, and that there was no value for money.

"However," added Mr Onyango, "now that we are already committed to it as it is already here, we need to beef it up to make value for money by extending it to Kisumu and Busia."


But Kiharu MP Ndindi Nyoro interpreted Mr Odinga's about-turn as inconsistent and read malice in his earlier opposition to the project.

"His position on being the most inconsistent politician in the region is unrivalled," said Mr Nyoro.

"In Mr Odinga's books, Eurobond was a 'scam' before the handshake and a revolutionary financing vehicle afterwards. Kenya was taking so much debt before the handshake, but we appear able to absorb more debt now and he's headed to China to take more. That's Raila."

But Mr Onyango denied that Mr Odinga had changed his position on the SGR, saying that, by extending the line beyond Nairobi to Kisumu and Busia, "the catchment area for the SGR is expanding". "It will tap into opportunities in the Democratic Republic of Congo, northern Tanzania, Uganda, Burundi, and Rwanda," said Mr Onyango.


In Murang'a, political observers Allan Mugachi and George Gathuru linked Mr Odinga's about-turn to the number of projects being taken to his western Kenya political base.

"He will not only support the SGR, but also all the other projects by the government that he was opposed to, including the Northern Collector Tunnel water project, since his region is turning out to be the biggest beneficiary of the 'handshake'," Mr Mugachi noted.

Mr Gathuru agreed, noting that for Mr Odinga, what matters is the fact that "he is in government and his region will benefit from the projects".

Only last week, Mr Odinga called for caution over foreign loans. "We are here to think about what we can do for ourselves as Africans before we go to the World Bank, EU or to the Chinese," he told delegates at a summit on infrastructure financing in Nairobi.

Reporting by Lucas Barasa, Paul Wafula, Ndung'u Gachane, and Justus Ochieng

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