More pain for Kenyan taxpayers as SGR deal bites

Tuesday June 11 2019


Taxpayers will be forced to step in and bail out Kenya Railways in meeting hefty operations and maintenance costs for the standard gauge railway (SGR), according to a copy of the agreement obtained by the Nation.


The deal signed between China Roads and Bridges Corporation (CRBC) and Kenya Railways (KR) on May 30, 2017 compels the latter to seek funding from the Treasury should it find itself unable to pay maintenance bills for the Mombasa-Nairobi line.

“In the event that KR is unable to secure budget allocation from the Treasury for any of the periodic maintenance, the operator shall have no obligation to undertake periodic maintenance in the relevant calendar year,” reads Clause 23.5.1 of the agreement.

The deal defines periodic maintenance to include rolling stock, track and stations and whose budget is supposed to be prepared one year in advance and submitted to Kenya Railways.

The Chinese railway operator, which built the line, is also allowed to only maintain the line within the budget the Treasury is able to foot through taxpayers and leave the rest to the detriment of the line, with the contract only compelling them to disclose the consequences to KR.


Already, CRBC has sent Kenya Railways a bill of Sh31 billion which remains unpaid as the railway operations enter their second year. About Sh800 million is from accumulated penalties for delayed payments, according to an invoice seen by the Nation.

Treasury Cabinet Secretary Henry Rotich did not respond to queries regarding the taxpayer guarantee even as other State officials remained tight-lipped on the skewed deal exposed by the Nation on Sunday.


The operation and maintenance contract introduces a new operating company — partly owned by CRBC and undisclosed minority shareholders — which has saddled Kenya Railways with hard-to-meet operating expenses, spelling doom for its profitability and threatening to turn SGR into Kenya’s biggest white elephant.

Taxpayers are also supposed to start paying the first instalment of the Sh327 billion loan borrowed from the China Exim bank in 2014 to build the railway line from January 2020 after the expiry of the five-year grace period last month.

In the deal, KR was compelled to lend the operator Sh3.5 billion in a sweetheart deal without any interest on repayment, which is also swapped with services whose costs can easily be varied upwards in a case where Kenya became the lender to the Chinese company that built the railway line at over Sh400 billion. Its repayment starts in January 2020. A special reserve account was also set to be maintained with Sh3 billion as part of the starting preconditions to cushion the operator’s cash flow.

Under the confidential contract, the operator has the right to manage the fare-ticketing system and any associated software and hardware as well as collect passenger fares, including non-cash revenues, including payment utilising the M-Pesa cash transfer platform.


Even sweeter for CRBC, the operating company known as the Africa Star Railway Operations Company, which is registered in Kenya, has been used to relieve the Chinese operator from any liabilities under the contract. Even where some financial culpability has been found on CRBC, it cannot be more than 10 per cent of their quarterly fixed earnings, even if the losses are from the operator’s fault. Furthermore, the operator was only required to give a performance bond of Sh600 million.

Kenya Railways also signed to allow smooth processing of work permits for Chinese nationals to work in the running of the train, including accepting Chinese professional qualifications just like Kenyan ones and facilitating ease of moving train parts for repair in China and importing train parts into the country without paying any tax.

The contract empowers the Chinese operator with an “non-exclusive licence to use, copy, modify any intellectual property KR has”. This essentially means the Chinese can change the logo Kenya Railways has or even rebrand the line using their own words during the operation period.