Kenya’s SGR saga: The ‘dirty’ details that were not disclose

The contracts for the standard gauge railway (SGR) were signed in a record two weeks from the day a feasibility study was approved, in spite of the magnitude of the project and the huge financial obligation the government was placing on its citizens.

This, and the fact that Kenya Railways Corporation (KRC) experts dismissed and rejected the initial feasibility study, is contained in commercial contracts that the government failed to disclose, even as it claimed to have made public all the contracts related to the SGR.

The undisclosed contracts that the Nation has obtained were signed towards the tail end of the Mwai Kibaki administration and accelerated by the Jubilee regime immediately after taking power, despite sharp protests from various government agencies and certain quarters within KRC.

As it is, the Kenyan government cannot disclose or release the contents of these contracts – courtesy of non-disclosure clauses placed on all of them – without the approval of the China Exim Bank that financed the construction, and the China Roads and Bridges Corporation (CRBC), which was the executor.

 “Each party understands to maintain the commercial confidentiality of any information, data or document which it gains during the performance of this contract and not to make such information, data or document available to any third party,” reads the confidentiality clause on all the contracts.

This perhaps explains why Transport Cabinet Secretary Kipchumba Murkomen only released snippets of the financial contracts, while ignoring the commercial ones.

While campaigning, President William Ruto promised to make public all SGR contracts, ostensibly as a way of correcting the wrongs done by his predecessor Uhuru Kenyatta.

Despite the government’s contractual inability to disclose the contracts, the Nation can report that the deals were not only rushed but were made with a clear intention to hand the whole SGR project to CRBC from conceptualisation to operation without any avenues for oversight.

Not only did CRBC do the feasibility study that was adopted, but it was given the contracts for building the SGR and provision of rolling stock, allowed to supervise itself and to form a company to operate the Madaraka Express that runs on the SGR.

As if that was not enough, the Kenyan government exempted CRBC from tax on all imported equipment and materials, while allowing the company and financiers to bar arbitration in case of disputes relating to the project from being handled in Kenya.

Even worse, CRBC was given leeway to adjust the prices of individual components of the contract by making the bill of quantities non-binding.

“The contract price is to be adjusted for rises or falls in the cost of labour, goods and other inputs to the works by the addition or deduction of amounts,” says one of the contracts.

All this was done in a record 14 days from June 26, 2012, to July 11, 2012, before being withdrawn on March 14, 2013, just after President Kenyatta won the presidential elections. They were then reactivated on May 11, 2014.

Ideally, such a huge contract requires time for naming negotiating teams, a board meeting by the concerned authority, followed by seeking and getting approvals from the ministry concerned and the Attorney-General.

This is even before you factor in the time needed to draft a bill of quantities for the construction plus the time needed for technical teams from both sides, and lawyers to draft and look at the details in the contracts before financing is sought.

Variations

And, whereas the official cost of the project was put at Sh327 billion, the open-ended nature of the contracts allowed variations in the bill of quantities without justification, leading to irregular variation of contract prices in several instances, making it impossible to know how much the SGR really cost.

For instance, while the Supply and Installations of Facilities, Locomotives and Rolling Stock contract was done in US dollars, the Civil Works contract was in Kenya shillings. Curiously, the portion of repayment for the Sh220,921,502,221 civil works contract is in US dollars.

All this would have been avoided had the government taken time and accepted the reality that the SGR was never going to be feasible unless there was enough funding to build it from Mombasa all the way to Kampala as agreed between the Kibaki administration and the Ugandan government in 2008.

The Kibaki government had come to terms with this reality and abandoned the project altogether before leaving office, only for it to be resuscitated by the Jubilee regime, which only managed to build the railway to Naivasha.

“We took a loan of 20 years on an infrastructure of 100 years. It, therefore, becomes impossible to pay back the loan through the revenue that comes from the railway. Even in 50 years, it would never break even,” said Mr Murkomen while being vetted for the CS position two weeks ago.

Negotiating team

It is not clear at what point the Jubilee government decided to go on with a project it had been warned would not make any financial sense, but it all started with the registration of CRBC Kenya by a Mr Peter Gatere and Leonard Ndung’u.

This was followed by the creation of a negotiating team on behalf of Kenya made up of Solomon Ouna, Alfred Matheka, Maxwell Mengich, Lucy Njoroge, Marianne Kitany, Stanley Gitari and David Mwadali. On the Chinese side were Li Qlang, Xiong Shilling, Yang Jle, Zhou Yihua, Peng Dapeng, Li Changgul, Li Ming and Ghao Mingzi.

At the time, Matheka was the KRC general manager, Mengich was the Infrastructure Management general manager, Ms Njoroge was the procurement manager, Gitari was the head of legal, Mwadali was the railway maintenance manager while Ms Kitany, the current MP for Aldai, was the communications technology manager.

And although these teams were hurriedly put up, the signing of SGR contacts took place at an even faster pace. The first one, for civil works, was signed on July 11, 2012. The second one, for the supply of locomotives and rolling stock, was signed with CRBC on August 29, 2012. The third one, for financing, was signed with China Exim Bank on May 11, 2014.

The civil works contract cost Sh290.9 billion for the 390km stretch between Mombasa and Nairobi which is twice the cost of the Tanzania line which is almost double the length and is electrified. The Supply and Installations of Facilities, Locomotives and Rolling Stock contract amounted to $1,146,791,008.75 (KSh114.6 billion at that time). This has, however, ballooned to Sh139 billion, according to the current exchange rates.

These two contracts were varied by 5 per cent each without proper justifications, courtesy of a variation clause. The civil works contract, for example, was adjusted by KSh10,087,739,827 while the rolling stock one was increased by $54,609,095. Explanations for these variations were given as “price adjustments” without any specifics.

These variations caused the government at one time to complain in a meeting with CRBC officials, but this only earned taxpayers a price reduction of Sh3 billion on the total contract.

“Kenya Railways team considers the unit prices of certain items too high and discussed adjustments with CRBC,” states Minute 7 of a meeting between Kenyan negotiators and the Chinese contractor on June 25, 2012.

Self-supervision

CRBC was soon after awarded a contract to supervise itself through one of its subsidiaries. On May 15, 2014, just a few days before the government announced it had acquired financing for the first phase, a consortium known as TSDI was awarded the contract for supervising the construction of the railway at a cost of $41,184,638 (Sh5 billion). While this particular contract was competitively sourced, TSDI and CRBC are both owned by the Chinese government.

What this means is that companies owned by the Chinese government did feasibility studies for the SGR, financed the project, built the railway, brought rolling stock and are now operating Madaraka Express. The Kenyan taxpayer, on the other hand, is financing the repayments of the huge loans taken for the project, and paying a monthly fee to Afristar, the Chinese government-owned company operating the Madaraka Express at a loss.

Afristar, which is currently being paid Sh1 billion to manage the SGR, has refused to hand over operations to KRC due to an existing debt amounting to dozens of billions of shillings. The Business Daily reported last month that Kenya had been fined Sh1.3 billion for late payments of the SGR loan, even after wiring Sh22.7 billion to China in repayments.

At the moment, the SGR is generating Sh15 billion only a year, against operating costs of Sh18.5 billion. Revenues are expected to tank further after President William Ruto reverted cargo clearance services to the Mombasa port.