New railway is not value for money

So far, the raging debate on the proposed standard gauge railway is focusing on dodgy procurement. 

There are also questions about the cost although, on the whole, it is not evident that it is grossly overpriced. Many people seem to be under the impression that it is otherwise a good investment. It is not.

Three hundred billion shillings is not loose change. If it proceeds, it will be the biggest loan that we have borrowed to date. It will increase our external debt by close to one third, our debt to GDP ratio by nine percentage points and our interest payments on external debt by 50 per cent. 

The annual repayment of the principal amount translates to over Sh600 million per county - you may want to think what your county could do with an extra Sh600 million every year for the next 10 years.

If we are going to put ourselves in debt to this extent, we need to be sure we are getting value for money. Are we?

I have a simple back-of-the-envelope method I use to check whether a project makes commercial sense.

At the very minimum, a commercial project should pay the cost of capital. Let us put the cost of capital at 7.5 per cent per year, about the rate that we can expect to pay on the sovereign bond we are about to float. This means that the project needs to generate a surplus of Sh22.5 to pay for capital.

To generate this kind of surplus, the railway would have to have a turnover of at least Sh120 billion. Assuming that it charges the prevailing tariff of US$1,000 per container, it would need to carry 1.4 million 20-foot containers a year, 4,000 a day. That would take about 48 very long trains every 24 hours. The busiest single line railways in the US, for instance, run 20 trains a day.

What about cargo? The Mombasa port is now handling containers about one million TeUs (twenty feet unit equivalent). That means the new rail would have to enjoy a monopoly of Mombasa port cargo to pay its way. This is probably why the Chinese financiers are asking for guaranteed cargo. But what they do not seem to appreciate is that the Kenya State does not have the same command and control power that the Chinese State has.

One can argue that the cargo volume will grow. That is true. But we are not demolishing the old line. And the new one comes only to Nairobi at first.

It does not make sense to load cargo going beyond Nairobi on the new line only to transship it to the old line that could have carried it from Mombasa in the first place.

TANZANIA'S CENTRAL LINE

More importantly, the region is building competing transit corridors not least our very own LAPSSET. But the most immediate competition is Tanzania’s central line. This line goes from Dar-es-Salaam to Isaka, about 100 km south of Mwanza.  It is being extended to Kigali, with a branch line to Musongati in Burundi. At 1,400 km, the distance from Dar to Kigali is 25 per cent shorter than Mombasa to Kigali.

If our Chinese friends make good their pledge to build the mother of all ports at Bagamoyo, Mombasa will have a hard time competing for transit cargo to and from Rwanda and beyond. 

The Lamu port, if completed, will also take a chunk of domestic and northbound cargo. And Djibouti is also angling for South Sudan and Ethiopian business as well. No massaging of data, or growling at critics, will make this railway make commercial sense.  

The long and short of it is that the railway will be paid for by taxpayers’ money. Our constitution has set out five principles that public finance must fulfill. Two of these are pertinent.

Article 201(c) requires inter-generational equity that is fairness between current and future generations. Article 201(d) requires that public money be used in a prudent and responsible manner. Let us take 201 (d) first.

The fact that the railway cannot pay its way does not mean it is imprudent. It may be that it has huge indirect public benefits which are not captured by the revenues -- what we call in economics positive externalities, are very high.

A good example of this was JF Kennedy’s mission to put man on the moon. Its direct economic returns were zero, but the technological advances it engendered are said to far exceed its cost.

But it is hard to see what the public benefits beyond those that accrue to the owners of the cargo that is carried are. And the fact that alternative modes of carrying cargo on the same route, including modernising the existing one, means that even the additional economic benefits to those are not that significant. 

A good example of this was JF Kennedy’s mission to put man on the moon. Its direct economic returns were zero, but the technological advances it engendered are said to far exceed its cost.

But it is hard to see what the public benefits beyond those that accrue to the owners of the cargo that is carried are. And the fact that alternative modes of carrying cargo on the same route, including modernising the existing one, means that even the additional economic benefits to those are not that significant.  

LAMU TO THIKA

If we must build a railway, it is doubtful that this particular one is the best value we can get for our money. It seems to me that a new line from Lamu to Thika represents better value for money. Three reasons.

First, it is a cheaper and faster alternative to the proposed LAPSSET route, as there is already a line from Thika to Nanyuki that only needs rehabilitation. All it would require to make LAPSSET a reality is a container terminal in Nanyuki and a good road from Nanyuki to Juba, as the road to Ethiopia is already under construction. The economic rationale for replicating the Mombasa-Nairobi line when we are struggling to secure funding for the LAPSSET infrastructure has totally escaped me.

Second, it would connect both the Northern Corridor and the proposed LAPSSET corridor to both Mombasa and the new Lamu port. Choice for the customer, and competition between the two ports, can only be a good thing.

Third, it will stimulate development of the historically marginalised regions along its route. It will carry livestock and livestock products to the ports for export, coal and cement from Kitui, and food from the million acres of the lower Tana that we are about to irrigate.  

Let us now consider 201(c), the inter-generational equity provision. This provision requires that we do not burden future generations unnecessarily, and vice-versa. It would be unjust to borrow money to consume today, for example, to throw the Golden Jubilee party, which would be repaid in 20 years.

That is obvious enough. What is less obvious is that it is equally unjust to tax poor people today for an investment that will benefit future generations who, in all likelihood, will be wealthier than we are today. 

It should be readily apparent that taxing people who don’t have enough to eat to finance a project whose benefits will be realised in 50 years is as unconscionable as burdening our children and future generations with debt whose benefits they will not enjoy.

BORROW LONG-TERM

So, how else then can we finance such a long-term investment as a good railway project? There are various ways, but the most obvious is to borrow as long term as possible. As it happens, we do have access to long term cheap loans from the World Bank -- 40-year maturity, 10-year grace period at 0.5 per cent interest. 

If it were World Bank IDA or the African Development Bank’s (ADF) money, the repayment works out to a third of the Chinese loan, and we will not start paying until 2024, by which time the economy will be much bigger, there will be a lot more cargo to carry, and in effect, the public financial burden less onerous.

But this funding will not be available for long, as it is only available to the poorest countries, a status that we will soon graduate from. What a smart government would do is take advantage of this to finance as many long term capital projects as the World Bank and AfDB are willing to finance.

There is no shortage of commercially viable infrastructure projects, energy ones notably, for the Chinese to finance. At any rate, the Chinese are likely to win most of the construction work even when it is competitively tendered.

It’s hard to see what is smart about getting into the kind of murk they now find themselves in on this project. All it does is to reinforce the negative perceptions that many people have about the way they are doing business with African governments.

It is a lose, lose, lose project. We lose, the President loses, the Chinese lose. It is not worth it.