The Kenya Railways Corporation has defaulted on a Sh167.5 billion loan borrowed from China through the Treasury to build the standard gauge railway (SGR), shifting the spotlight on the financial health of the high-speed rail.
Treasury documents show unpaid SGR loans accounted for 62 per cent of the Sh266.5 billion debt offered to State agencies through the Treasury.
This will see Kenya Railways pay penalties to the Treasury estimated at Sh1.6 billion for the loan breach that attracts a fine of one percent of the outstanding arrears.
Kenya tapped over half a trillion shillings from China, led by the Export Import Bank of China, to fund the construction of SGR from Mombasa to Naivasha.
Taxpayers have been forced to shoulder the burden of the SGR loans because revenues generated from the passenger and cargo services on the track are not enough to meet the operation costs.
This has forced the Treasury to pay the Chinese loans from taxes to avoid the country being labelled a defaulter.
An earlier contract between China’s Exim Bank, the Kenya Ports Authority (KPA) and Kenya Railways requires the port agency to provide one million tonnes of cargo to the railway per year, rising to six million by 2024.
“The on-lent loan arrears, which include principal and accrued interest not paid in FY 2023/2024, amounted to Sh266.5 billion. Out of this, Sh167.5 billion relates to Kenya Railways Corporation (SGR) Project which is yet to be serviced accounting for 62 percent of the total arrears,” The Treasury says in the 2023/24 annual public debt management report.
The SGR on-lent loan hit Sh737.5 billion in June, up from theSh539 billion originally borrowed from the China Exim Bank for construction of the Mombasa-Naivasha SGR line.
This means that the debt has grown by 36.8 percent, as unpaid interest and principal instalments accrue for Kenya Railways.
As per the on-lent loan agreement signed with the China Exim Bank, Kenya Railways was supposed to have started servicing the SGR loans in 2020.
It was initially anticipated that the Treasury would service interests maturing during the SGR construction, then Kenya Railways would take over repayments five years after the construction was concluded.
Competition from the road transport have made it difficult for the corporation to service the loans from SGR operations.
Over the five years to 2023, SGR generated Sh73.4 billion from both cargo and passenger operations.
SGR operations generated Sh15 billion and Sh13.57 billion revenues in 2021/22 and 2020/21 fiscal years when its combined operation expenses (operations and maintenance) stood at Sh35.6 billion.
This means that over the two years, the SGR operations have grossed an operating loss of Sh7 billion.
“SGR freight services is facing stiff competition from road transporters who offer door-to-door solutions. Whereas the rail head-cost is low, associated costs such as handling, last mile and empty returns have marginally reduced our competitive advantage,” Kenya Railways noted during the year to June 2022, raising the concern as an operational risk.
It notes that out of the wagons loaded at the Port of Mombasa on a daily basis, those plying by SGR constitute less than two-thirds, which has seen its trains operate with an idle capacity of about 36 percent.
The Treasury notes that Kenya Railways has not remitted any cash for the repayment of the SGR loan since the railway line started operations.
“The cumulative stock of on-lent loans amounted to Sh1.19 trillion. This included loans to Kenya Railways Corporation amounting to Sh737.5 billion which accounted for 61 percent of the total on-lent loans. The cumulative amounts of on-lent loans repaid during the period under review was Sh64.6 billion which represented 7 percent of total on-lent loans,” the Treasury says.
Kenya Railways, however, says that the ability to repay the loan is pegged on performance of freight and passenger services since 2020.
SGR posted revenues of Sh17.63 billion last year, including Sh14.69 billion from freight. This was an increase from Sh14.72 billion in 2019.
Passenger service revenues increased to Sh2.94 billion from Sh1.72 billion last year.
The new line opened in 2017.
Running alongside a dilapidated track British colonialists built a century ago, it cut the Nairobi-Mombasa journey to four hours from 12 for passengers and to eight hours from 24 for cargo.
In the year to June 2022, the Auditor-General reported that penalties and interest on the on-lent loan had accrued to Sh1.9 billion, due to the non-payment of the China Exim Bank loan.
