US embassy cable - 05NAIROBI5102

UNCLAS NAIROBI 005102 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/EPS 
DEPT PASS to USTR FOR BILL JACKSON 
DEPT PASS TO DEPT OF LABOR ATTN ILAB FOR KELLY BRYANT 
TREASURY FOR ANN ALIKONIS 
LONDON AND PARIS FOR AFRICA WATCHERS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: KPRV, EAID, ELAB, ECON, KE, UG 
SUBJECT: Kenya and Uganda Privatize the Railroad 
 
Ref: Nairobi 1668 
 
Sensitive-but-unclassified.  For USG channels only. 
 
1.  (SBU) Summary: Kenya and Uganda are at last moving to 
revive the storied 1,500 mile rail line from Mombasa to 
Kampala by concessioning the railroad on both sides of the 
border to a private sector consortium led by a South African 
firm.  This form of privatization is a welcome attempt to 
fix a major piece of the region's infrastructure whose 
dismal performance has for years been a serious fiscal 
burden and a major constraint on regional economic 
development.  Despite the recent passage of long overdue 
privatization legislation in Kenya, it is premature to view 
the railroad deal as the start of a new wave of badly needed 
privatization in Kenya.  End summary. 
 
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The Railroad: From Rolling Stock to Laughing Stock 
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2.  (U) The 1,460 mile railroad linking the East African 
port of Mombasa with Kampala, nicknamed the "lunatic 
express," is the stuff of lore.  It was begun in 1898 and 
completed in stages, finally reaching Kampala in 1937.  Long 
before that, it was used by the British colonial authorities 
to open up, exploit, serve, and subjugate the interior of 
their East African empire.  Kenya's present-day capital, 
Nairobi, did not exist before the railway, and was built to 
service it.  In the more recent decades since independence, 
however, the state-owned Kenyan portion of the railway has 
been run into the ground by inept management, rampant 
patronage and corruption, and a dearth of new investment. 
 
3.  (SBU) As such, far from being a lifeline for the growth 
and development of Kenya and the wider region, the railway 
has long since become an albatross and a chokepoint.  Twenty 
years ago, 80 percent of the cargo going to Uganda from 
Mombasa port was transported by rail.  Today, because of the 
severe deterioration of rail beds and rolling stock, only 20 
percent does so (reftel).  Cargo that does go by rail is 
slow and irregular, confounding businesses and raising costs 
across the economy.  The consequent diversion of most cargo 
transport to roads has further compounded the container 
logjam at Mombasa port and has greatly contributed to the 
severe overtaxing of Kenya's equally neglected, potholed 
road network (septel). 
 
4.  (U) In terms of the fiscal burden, Kenya's Transport 
Ministry, which oversees the Kenya Railways Corporation 
(KRC), reports that subsidies to keep KRC afloat amounted to 
over $40 million over the past three years, and the company 
is reported to be in debt to the tune of nearly $270 million 
-- both huge numbers in the Kenyan context. 
 
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The Solution: A 25 Year Concession 
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5.  (SBU) In essence, the plight of the railroad became so 
dire that a consensus emerged that bringing in a private 
operator was the only way to improve service and get the 
capital investment needed to rehabilitate the rolling stock 
and bring in needed locomotives.  Recognizing this, while 
also seeing the potential a revived regional rail network 
held for the region's economic development, the governments 
of Kenya and Uganda began working seven years ago to 
negotiate a scheme to privatize the railroad on both sides 
of the border.  Rather than pursue pure privatization, the 
two governments opted instead to "concession" the rail line 
for a 25-year period to a private operator, in essence 
handing over management and operations (and any potential 
profits) to a private contractor in exchange for agreed-upon 
capital improvements and a share of annual revenues. 
 
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All Aboard! Here Comes Rift Valley Railways! 
-------------------------------------------- 
 
6.  (SBU) This process, undertaken with assistance from the 
World Bank and partially funded by USAID/Kenya, finally 
culminated on October 14, 2005, when the Governments 
announced that a consortium led by South African firm 
Sheltam Trade Close Corporation had won the competition for 
the concession, beating out seven initial bidders, and one 
other finalist, a consortium led by Rail India.  Under the 
terms of the deal as disclosed publicly, the consortium 
offered upfront payments of $3 million to the GOK and $2 
million to the Government of Uganda (GOU), to remit 11.1% of 
gross revenues each year to be shared by the two 
governments, and to pay $1 million annually to the GOK for 
the right to run passenger service in Kenya.  Thanks to the 
last minute passage of an amendment to the Kenya Railways 
Corporation Act prior to a divisive constitutional 
referendum in late November, the way is legally paved for 
Sheltham to take control of the money-losing KRC parastatal 
(and its Ugandan counterpart) on April 1, 2006.  After 
winning the concessioning tender, the Sheltam consortium 
quickly announced its intention to rename the railroad Rift 
Valley Railways. 
 
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Working on the Railroad - No More 
--------------------------------- 
 
7.  (U) KRC is expected to terminate 5,600 of its 9,200 
employees, many of whom are casual workers whose salaries 
have been paid irregularly by the cash-strapped parastatal. 
The deal mandates that 30 KRC employees will be transferred 
to the concessionaire and spells out the criteria for hiring 
others upon privatization.  According to KRC contacts, the 
World Bank is providing a Ksh9.6 billion (about $128 
million) loan for the project, mainly to fund severance and 
retirement benefits, retrain retrenched workers, and set up 
a retirement benefit scheme.  Under the deal, the Kenyan 
government will shoulder KRC's outstanding debts, and it has 
said it will service that debt using the proceeds paid to it 
by the concessionaire. 
 
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Comment 
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8. (SBU) It's far too early to call the railroad 
concessioning a success, but the two governments and the 
World Bank deserve credit for pushing this through, and the 
bottom line is nearly anything will be an improvement over 
the current dismal performance of KRC.  While we don't know 
much about Sheltam, we also hope that its African roots and 
experience will give it an advantage in resuscitating the 
once-great East African railway system. 
 
9.  (SBU) It's also too early to say if this deal marks the 
start of a new wave of privatization in Kenya.  The railway 
deal was cleverly anchored in existing railway legislation 
and thus did not depend on the much-delayed new 
privatization law, which only passed in parliament in 
October.  We suspect that the latter law will take a great 
deal of time to implement, and will not bear tangible fruit 
in the form of privatized parastatals for a year at least, 
and likely longer given ongoing policy paralysis and 
leadership instability in Kenya. 
Bellamy