Nairobi is ending its contract with the Chinese-owned Operator Five Years Earlier, Standard Gauge Railway will be taken over by Kenyan State Railway.
Kenya is terminating its contract with Chinese-owned Africa Star Railway Operation Company (Afristar) for the operation of the Standard Gauge Railway, a move expected to save the country more than US$120 million in annual fees.
The East African Nation announced that it would assume all the functions of the railway by May next year, five years earlier than originally planned.
Under the initial contract that China Road and Bridge Corporation (CRBC) signed with the Kenyan government, the Chinese company was to operate both passenger and freight trains for 10 years, but Kenya Railways said this was subject to review after five years. The passenger service started operations in June 2017 while the freight section launched in January 2018.
Afristar is a subsidiary of Chinese State-owned CRBC, which built the 480km (300 mile) SGR, running from the port city of Mombasa to the capital Nairobi. The Export-Import Bank of China (Exim Bank) funded its construction to the tune of US$3.2 billion.
China Communications Construction Company, CRBC’s parent company, built an extension of the railway to Naivasha, a town in the Central Rift Valley, with Exim Bank funding US$1.5 billion for its construction.
Afristar was incorporated in Kenya in 2017 specifically to run the SGR, which is part of the Belt & Road Initiative, Chinese President Xi Jinping’s pet trade and infrastructure development plan that has seen the construction of highways, railways and power plants across Africa, including the Addis Ababa-Djibouti Railway.
But Kenya Railways, the state entity that manages the country’s railway assets, said earlier this week that it had already taken over some of the line’s operations, including security, ticketing and fuelling of trains.
Kenya Railways Chairman Omudho Awitta said the transfer of operations to Kenya would be phased, and “will go on smoothly to May 2022 when we take over all operations”.
“We have negotiated with the contractor so that we take over the running of the Standard Gauge Railway,” Awitta said. He said they were “prepared for it and we are ready to go”.
In 2019, Afristar appointed four Kenyans to senior positions, including deputy general manager, as part of the localisation process, ahead of the takeover of operations.
Kenyan Transport Minister James Macharia said the “separation was mutual”. “We are transitioning from management by the Chinese contractor to Kenyan staff,” he said.
China’s embassy in Nairobi said the transfer of functions was “a normal move according to their contract” but declined to give details.
The SGR is the country’s biggest and most ambitious infrastructure project since the old British-built railway, the infamous Lunatic Express, was built more than a century ago.
However, since it launched, the service has consistently failed to generate enough revenue to pay for itself and the loans. The line earned a total of US$110 million last year, dipping from US$120 million in 2019 amid disruptions from the coronavirus pandemic, according to official data.
Kenya pays Afristar more than US$10 million a month to operate the railway but last year legislators were told that Kenya had defaulted on paying the Chinese company some US$380 million in fees for operations and maintenance. The default came as the country struggled to service debt as the pandemic hit tax revenue.
The contract with Afristar has also come under a cloud with Kenya’s Solicitor General recommending that the operations and maintenance agreement be terminated.
In addition, a court in Nairobi declared last year that the rail contract between Kenya and CRBC violated the country’s procurement laws. However, the ruling had little impact given that the railway’s construction had been completed.
Facing a biting revenue shortfall, Kenya has struggled to service debts, including the loans used to build the railway. It had to seek debt relief from China in January, with Beijing approving a US$378 million debt service holiday that was due to China between January and June.
Kenya was in January supposed to make the first instalment of the Exim Bank loan for the Naivasha extension.
According to the National Treasury’s loan register, another US$1.6 billion loan from Exim Bank to build the first phase of the SGR from Mombasa to Nairobi will come due from July.