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.
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.
David Ndii is Managing Director of Africa Economics.
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