Uganda and Kenya are seeking at least $6 billion from multiple lenders to jumpstart construction of the joint standard gauge railway (SGR) project, which stalled after the pull-out of the initial financier, China.
Last week, the two partners announced their intention to start construction of the line by December this year to improve flow of cargo and make the Northern Corridor competitive against Tanzania’s Central Corridor.
Transport ministers from the two states signed a deal to finalise a joint resource mobilisation drive in the next four months that will fund the railway line from Naivasha to Malaba to Kampala and from Kampala to Kasese to Mpondwe near Congo, with a branch line from Bihanga to Mirama Hills, near Rwanda.
Once the project is completed, goods from Mombasa to the Ugandan border with DRC, to Rwanda and South Sudan will be ferried by rail.
Now, the Northern Corridor partner states have tasked Kampala and Nairobi to ensure the project is on track.
In Kampala’s plan, the first phase will be Malaba-Kampala and the subsequent legs are supposed to be fast-tracked to link the capital with the borders of its neighbours DRC, Rwanda and South Sudan, to guarantee the project’s viability.
The search for financiers is on and Kenyan and Ugandan officials say financiers from Europe and the Middle East are being drafted into the project although they did not immediately name the targeted lenders.
Hunt for cash
During the announcement of the deal between the two governments in Mombasa on July 28, Kenya’s Transport Cabinet Secretary Kipchumba Murkomen said Nairobi has already done a feasibility study of the project.
“We are now going for financiers either from Europe or United Arab Emirates, or whoever comes with a good deal for our people in East Africa,” Murkomen said.
Kenya’s hunt for cash to build an extension of its SGR from Naivasha to Malaba may see it tie down related facilities, including the Port of Mombasa.
According to the people in the know, the UAE is being considered as a suitable candidate, as it has also offered to improve the port, the main gateway of goods destined for the Great Lakes region.
The EastAfrican has learnt that the UAE has dangled an offer to construct the line to Malaba as long as it is also allowed significant stake in the Port of Mombasa to operate.
Sources said Nairobi had not yet agreed to the deal, as there are political implications – akin to the now controversial Dubai deal with Dar es Salaam.
Yet frustrations over finding a suitable financier may see Nairobi go for UAE as Kenya continues to grapple with high debt, downgraded credit rating and a struggling economy.
Turkey deal
In Kampala, things are smoother, with Yapi Merkezi, the Turkish firm that was exclusively selected as contractor for the Kampala-Malaba line, having submitted its technical and financial bids to the SGR project, to lead towards evaluation, negotiation and contract signing, which is expected to be concluded by November 1.
Yapi Merkezi is also one of the companies building Tanzania’s 754km SGR line. The others are two Chinese firms – China Civil Engineering Construction Corporation and China Railway Construction Company – and Portugual’s Mota-Engil Africa.
"Uganda’s financial bid includes a proposal for a changed model of financing that brings on board a number of export credit agencies (ECAs)," officials said.
“The details on financing are with the Ministry of Finance. The financiers have made contact [with the ministry],” said Eng Perez Wamburu, SGR project coordinator, who confirmed that a number of ECAs have come together to bankroll the Ugandan section, which has been in limbo for years.
Finance Minister Matia Kasaija confirmed that some ECAs “have approached us,” but added that his ministry has also approached other financiers to come into the project during the later phases of development.
Kenya’s State Department of Transport has picked up the Uhuru Kenyatta government SGR plan, which proposed two phases at a cost of about $3.6 billion. The government intends to prioritise Phase 2B, from Naivasha to Kisumu estimated to cost $2.68 billion, while the last leg, 2C, from Kisumu to Malaba, will take another $896 million.
The Kenya-Uganda SGR line has a chequered history.
In November 2022, Uganda formally terminated its contract with China Harbour Engineering Company (CHEC) awarded in 2015, to build the first phase of SGR, a 273km stretch from Malaba to Kampala. The deal was tied to the contractor securing financing from China Exim Bank.
But after years of no progress with the Chinese, President Yoweri Museveni directed his officials in 2021 to open up the project’s financing and seek new lenders, pitching the viability of the railway connecting all the countries of the Northern Corridor.
At the back of the Chinese reluctance was doubt that Kenya would build its SGR – also funded by the China Exim Bank – all the way to Malaba, to link with the Uganda line. Kenya and Uganda have now both ditched Beijing.
Under pressure to tie up its end of the deal and clear the way for other Northern Corridor partner states to get their plans off the ground, Uganda has now set January 2024 as the tentative date for start of construction, Wamburu said.
The attention now turns to securing the required financing.
First off, the blocks were UK Export Finance (UKEF), which Ugandan officials approached in 2021 to consider financing the 273km Kampala-Malaba leg.
People familiar with the deal told The EastAfrican that UKEF will lead the project ECAs and provide the biggest chunk of financing, estimated at $2.6 billion, for the critical Kampala-Malaba section.
Contacted, the lender did not deny nor confirm its funding for the rail projects.
“We do not comment on speculation about potential transactions,” said Patrick Lillie, its press officer. “Previous speculation about loan requests and loan values did not originate from UKEF.”
Besides UKEF, European, Chinese and Middle East-based lenders are also understood to be in the picture, to provide loans that will help Uganda extend its SGR to Mpondwe at the border with DRC, Mirama Hills to connect with Rwanda and Elegu to South Sudan.
This corroborates what Gen Katumba Wamala and Kipchumba Murkomen said in the joint communiqué issued in Mombasa.
“The Republic of Kenya, the Republic of Rwanda, the Republic of South Sudan and the Republic of Uganda signed on 11th May 2014 and ratified the Standard Gauge Railway Protocol for the development and operation of the (SGR) connecting the Port of Mombasa to Kampala, Kigali and Juba,” said the communique.
Connecting to Rwanda
People involved in the project say that once the commercial contract for construction of the Malaba-Kampala section is signed, Kampala will embark on the next phase to extend the SGR to the DRC border, and to Bihanga-Mirama Hills to Rwanda.
“It’s our desire to have financing for the western route as soon as possible, but the reality is that we shall start seeking funds for Kampala-Kasese after signing the contract for the first phase this year,” an official who is not authorised to speak on behalf of the government told The EastAfrican this week.
Last week, Katumba and Murkomen noted that it was crucial for Uganda to ensure the SGR is extended to the border with Rwanda, South Sudan and DR Congo as soon as possible to improve the viability and attractiveness for financing.
Observers argue that the tight timelines suggest both governments are confident about reaching financial close this time round.
Indeed, in his budget speech for 2023/24, Finance Minister Kasaija said 49 percent of the right of way for the Kampala-Malaba SGR had been acquired and construction would commence this financial year and provided Ush535 billion ($146.7 million) as compensation for project-affected persons.
In 2014, Kenya, Uganda and Rwanda entered into a tripartite agreement to construct a railway from Mombasa through Kampala to Kigali.
Kenya built its line in two phases but abruptly terminated it in Naivasha after China declined to finance the last leg after failing to strike an agreement with Uganda and fearing that Kenya was also now saddled with too much debt.
In April 2019, then Kenyan president Uhuru Kenyatta went to Beijing hoping to secure $3.68 billion — in loans and grant — to take the SGR line from Naivasha to Kisumu and Malaba but China declined. Nairobi henceforth started looking for funds to upgrade the metre gauge railway segment as a priority.
The new administration of President William Ruto has rekindled the plans to complete the SGR project and Kampala is upbeat that this time it will not be derailed.
Lapsset railway line
Still, Kenya plans to link Mombasa and Lamu ports and Isiolo in the north with a modern railway line by end of June 2027. As per plans by the previous government, Kenya plans to build a $24.9 billion Lamu Port South Sudan-Ethiopia Transport (Lapsset) railway line to open up northern Kenya and connect Kenya with South Sudan and Ethiopia.
The planned line will move from Mariakani in Mombasa to Lamu then onward to Isiolo and Moyale, which borders Ethiopia.
Meanwhile, against steep competition from Tanzania’s Dar es Salaam port, Kenya has agreed with Uganda to increase the usage of rail to haul Uganda cargo using the SGR from Mombasa to Naivasha and the metre gauge line from Naivasha to Malaba border in coming months.
Uganda’s commitment is a relief for Kenya as it will shore up its rail revenues, crucial to repaying its loan with China. The SGR from Mombasa to Naivasha was financed by the Chinese at a cost of $4.7 billion.
Kenya signed a 15-year agreement “take or pay” loan with the Exim Bank of China where the Kenya Ports Authority undertook to “take” cargo on the new railway every year failure to which it would draw from its revenues to “pay” for the shortfall.
Kenya’s loan repayment to Exim Bank of China this financial year has jumped to $800 million, an increase of over 126 percent compared with the last financial year.
According to data from the Kenya National Bureau of Statistics for 2022, in the five years that the SGR has been in operation, it has generated $4.6 billion from cargo freight. Passenger trains generated $760 million over the period, indicating cargo is keeping it afloat. - ANTHONY KITIMO/JULIUS BARIGABA, Additional reporting by Aggrey Mutambo, The EastAfrican
