We can’t meet SGR obligations, say policy experts

The joke doing the rounds after the launch of the multi-billion-shilling Standard Gauge Railway on June 1 was that the beach is now only four hours away from Syokimau, on the outskirts of Nairobi.

But to the economic and public policy experts who convened in Nairobi Saturday, the prediction was that tears will shortly follow once it is realised that there was no business case for the expensive loan -- issued in dollars from Chinese banks -- used to build the rail and which needs to be paid back beginning 2019.

When the dollars from China’s Export-Import Bank are converted into shillings at current exchange rates and added to what the Government pumped into the project, the total railway cost declared by the National Treasury works out to Sh425.9 billion.

If you add the interest, it inches closer to Sh500 billion.

The wet blanket on Jubilee’s victory dance over the passenger train between Mombasa and Nairobi is that when the railway was mooted, the promise was that it had the capacity to carry enough cargo to pay for itself.

Now it is done, the loans are almost due, but the operational capacity is in question.

“The new emphasis...is that now we can go to Mombasa in four hours. It is as if that was the principal reason we spent a horrendous amount of money on the railway. The original argument was that we needed to get our cargo off the roads and onto the rail,” said Kiriro wa Ngugi, a public policy expert.

Gets tricky

The facts are that Kenya borrowed $3.23 billion. At today’s rates, that works out to Sh332.7 billion. At least $1.6 billion (Sh164.8 billion) was a concessional loan to be repaid within 20 years, after a seven-year grace period.

Kenya has been paying Sh1.6 billion ($16 million) every six months in interest since 2014 when the money was released.

When the repayments on the principal begin in 2021, the country will be paying Sh14 billion every year for the next 13 years until 2034.

The second loan is a commercial loan worth $1.63 billion (Sh167.9 billion). This is where it gets tricky for the government.

The interest rate is set at six months LIBOR +360 points; which means it will be calculated based on the international bank interest rate, plus 3.6 per cent.

It is a floating rate, and it is difficult to have a definitive figure of exactly how much the Government will pay every six months when the National Treasury has to honour its debt obligations, but the estimates on this loan work out to over Sh20 billion a year.

The repayments on the principal begin in 2019 and have to be finished by 2024.

Total repayment for both loans will be at least Sh40 billion annually in 2021, according to estimates using the National Treasury’s documents.

Kenya borrowed billions in dollars, it has to repay the money in dollars. So when the shilling weakens against the dollar the country will have to pay more.

“There’s that excitement and we shall not begrudge Kenyans for being excited, but in the midst of this excitement, we are likely to lose the implication (to the economy) of sinking all that money into the Standard Gauge Railway,” said Njonjo Mue, a human rights lawyer, who hosted the meeting.

Looked at another way, the railway will have to be as profitable as Safaricom, which made a profit of Sh40 billion this year, so that every year, the country will be handing the Chinese a similar amount to repay the loan.

There is potential of frequent cash crunches and cyclical borrowing of short-term loans to repay the Chinese loans when they fall due.

Weekend Business tried to reach National Treasury Cabinet Secretary Henry Rotich to confirm how much had been paid to date, but he did not respond to phone calls or a text message by the time we went to press.

Economist David Ndii, who works as the lead policy advisor for the National Super Alliance, said there was no proof that the Government can move 22 million tonnes of cargo on the railway every year to raise the money required to pay the Chinese loan.

“Let them show us how they will ferry 22 million tonnes on that railway. It is not possible!” he said.

To raise the kind of money to comfortably repay the loan from the proceeds of the railway will require the country to move 1.4 million 20-foot containers per year.

That works out to 4,000 per day and to do that will need “48 very large trains running 24 hours a day” ferrying cargo.