Hard sell: State taskforce passes verdict on SGR cargo deal
Freight costs associated with handling and storage can push up charges by more than 100 per cent, with owners paying Sh142,000 compared to Sh65,000 via road. [File, Standard]The Government has admitted that the Standard Gauge Railway (SGR) is a hard sell to businesses, as it costs twice as much to ferry cargo by rail than by road.
The Report by the Joint Technical Committee on the Improvement of Efficiency and Cost-Effectiveness of Transportation of Cargo Using SGR suggests that no transporter will opt for the new rail against road unless the State arm-twists them.
The report shows that Government figures have only been capturing the headline figure while avoiding the cargo handling costs that make using the Mombasa-Nairobi cargo service an expensive option.
While it costs Sh50,000 ($500) to move a 20-foot (ft) container from the SGR terminus in Miritini to the Inland Container Depot (ICD) in Nairobi, costs associated with the handling and storage of cargo at the port tend to push up this cost by more than 100 per cent, which in effect sees cargo owners part with a total of Sh142,000 ($1,420).
This is in comparison to road transport where cargo owners would pay truckers Sh65,000 to have a similar 20-foot container moved from Mombasa to Nairobi. A 40-foot container costs Sh85,000 by road.
“The difference between road and rail for 20-foot and 40-foot containers amount to Sh77,000 ($770) (118 per cent increase) and Sh127,000 ($1,270) (149 per cent increase), respectively,” says the report.
The additional costs are incurred due to re-marshalling, storage and demurrage.
Additional costs are also met on the price of empty return by rail, shipping line margins and Kenya Ports Authority (KPA) shunting of empties to container depots.
Increasing congestion
The multi-stakeholder team looked at road transport, which has in the past been faulted as being costly to cargo owners while increasing congestion on roads and contributing to high wear of roads.
It also evaluated the SGR, which has in the past been termed as a cheaper and faster alternative – but other costs of handling cargo were not factored in before concluding that transport on the railway was cheaper.
The report feeds into the fears that using the line may not be feasible. The Chinese, however, had demanded a guarantee that the line will get business.
A report by the Auditor General’s office cited that KPA was under an obligation to feed sufficient cargo to the Chinese-built railway project.
Failure to provide the requisite cargo would mean Kenya has gone against a critical clause in the loan agreement of guaranteeing specified “minimum volumes required for consignment”.
The report indicated that KPA’s assets, which include the Mombasa port, could be taken over if the SGR does not generate enough cash to pay off the debts.
“The China Exim Bank would become a principle in (over) KPA if Kenya Railways Corporation (KRC) defaults in its obligations and China Exim Bank exercise power over the escrow account security,” the audit reads in part.
To forestall this and make the port more attractive and lucrative to traders as well as transporters, the State ran promotional tariffs and strongly urged businesses to use the railway to meet Chinese conditions.
The use of the Madaraka Express Freight Service has, however, substantially grown after a year of cajoling importers. Still, even with guaranteed cargo under the promotional tariffs, SGR reported a near Sh10 billion loss in its first year of operations.
Kenya Railways in January had to contend with realities that the venture was a business and freebies would only sink it in its infancy.
The State rail agency hiked the cost of moving cargo between Mombasa and Nairobi, with cargo owners being charged Sh50,000 to transport a 20-foot container between the two cities, while a 40-foot container costs Sh70,000.
Under a promotional tariff that was running last year, cargo owners paid Sh25,000 per 20-foot container and Sh35,000 for a 40-foot container between Mombasa and Nairobi, which is 50 per cent of the approved tariff.
Kenya has a tough balancing act to keep the SGR sensibly operational even as it risks losing the competition to the Port of Dar es Salaam and Tanga ports as a result of forcing importers to use an expensive line. In a series of meetings last year reported by The Standard, manufacturers and other leading importers in Uganda said it does not make sense for its business people to import through SGR. They noted that it only makes sense to export through it.
One of the leading manufacturers in Uganda, Mukwano Group of Companies, was adamant that it made no economic sense to import its raw materials via the port of Mombasa through SGR.
“When the Kenya Revenue Authority (KRA) approached us with a proposal to ferry our imported raw materials through the SGR, we decided to make a quick study of the costs involved and decided we better stick to our trucks,” said Mukwano General Manager for Sales Sangam Kader in a recent interview in Kampala.
“To begin with, the demurrage charges we were to incur are mind-boggling. For example, when we ferry cargo from the port of Mombasa through the SGR, we have to pay again for that container to be returned empty, unlike trucks where we are not charged. This is something that is not sustainable.”
A major logistics company in East Africa, Uganda’s Unifreight, is another importer that has openly shunned SGR.
Jennifer Mwijukye, the founder and managing director of Unifreight, said Ugandan importers had threatened to boycott the Mombasa port and take their business to Dar if Kenya compelled them to use the rail.
“We were serious and I was in that meeting with Kenyan officials. When they saw we would not back down, they beat a hasty retreat and changed the narrative. They would only compel Kenyan importers and leave the rest of us,” said Ms Mwijukye in an interview in Kampala.
Feasibility study
The indictment of the new railway infrastructure is despite the high cost that it has come with. Kenya spent Sh327 billion for the first phase of the SGR and is spending another Sh150 billion for phase two to Naivasha.
A further Sh400 billion will be spent in a third leg taking the railway to Kisumu.
However, funding for the latter section has hit a snag, with Beijing calling for a feasibility study of the whole project that is proving hard to break even.
Uganda is also weighing its options, toying with the idea of revamping its medium gauge line, which would derail the viability of the SGR even further.
Meanwhile, Kenya will start repaying a loan for what is shaping up to be a white elephant. This year, Kenya will pay over Sh56.7 billion, or 0.7 per cent of the economy, for the SGR according to Treasury documents.
Paying back for the loss-making railway will reduce Kenya’s disposable income by 8.8 per cent as the five-year window period expires in 2019.
Kenya Railways hopes that if they fix efficiency at the port, they may still save face and make the SGR less expensive hence attract freighters away from the road.
The report indicates that numerous State agencies at the hub have also been increasing the time taken by importers to clear their goods, thus increasing inefficiency.
According to the technical committee, only essential Government agencies should be stationed at the port, while others can do the job outside the port.
This would mean that the one-stop service shops set up at the port have been unnecessary, congesting spaces while slowing down importers clearing their goods.
It recommends reducing Government agencies at the port from 27 to just four.
“The only processes required at the port are cargo movement from vessel to the rail side, cargo loading, train marshalling, cargo quality inspection, and customs clearance.
“The critical agencies required at the port are Kenya Ports Authority, Kenya Revenue Authority, Kenya Railways and Kenya Bureau of Standards,” said the report.
“Any other interventions could take place outside the port in line with international practices to reduce inefficiencies.”
Dramatic shift
But there has been some good news on cargo handling. Linking of the Nairobi inland port to the SGR has moved almost 10 times the number of containers on a daily basis.
Further, cargo hauled by railway had a shorter dwell time of 2.6 days at the port in September compared to 5.7 days for cargo evacuated by road.
Gross movement per hour has also doubled for the Mombasa port that serves more than 30 shipping lines that connect to over 80 seaports worldwide.
In Mombasa, the ship turnaround time has also improved from 102 hours in 2015 to 70 hours in 2018 in the quarter under review against a set target of 72 hours.
This dramatic shift, however, came at a price to the inland container depot in Nairobi.
It is now home to congestion that has choked businesses as a result of clearance delays following the realignment of cargo operations.
While Mombasa is becoming efficient, Nairobi is choking under congestion that is attracting additional storage and detention charges, according to the Kenya International Freight and Warehousing Association.
