Opportunities in the Railways Sector

An Expert's View about Railways in Kenya

Posted on: 19 Aug 2012


The development of Kenya’s railway sector dates back to May 30, 1896 when construction of the rail line from the Port of Mombasa via Kisumu (completed in 1901) and finally to Kampala (completed in 1931) began. The total run length of this rail system within Kenya was 930 KM from Mombasa to Kisumu. Additional connections were later made to the main line connecting Central Province, Nanyuki in 1913, Lake Magadi in 1915, Naro Moru in 1927, and finally to the foothills of Mount Kenya in 1931. The Solai and Kitale branches were completed in 1926, and the Kisumu line was extended to Butere in 1932.

Unfortunately, the railway sector has not had any meaningful investment in infrastructure since 1985, and has suffered from inefficiencies and underperformance due to deferred investment in capital projects and maintenance. The resulting deterioration has eroded the railway’s customer base. In 2006, the Ministry of Transport tendered for the concession of the line, and on October 1st 2006 selected a winner, Rift Valley Railways Ltd (RVR). MoT granted RVR a five-year concession for passenger services, and a 25 year concession for goods and cargo. The five-year passenger services concession that ended on June 30, 2012 has been extended for an interim period of 12 months in line with the concession agreement. The 25-year concession for goods and cargo will end on June 20, 2031.

To accomplish the goals outlined in Vision 2030, Kenya’s 20-year economic blueprint, the Government of Kenya (GoK) has lined up several construction, rehabilitation and redevelopment projects for the country’s rail sector. Some of these projects have been fully implemented, some are in various stages, while others are still in the pipeline. These projects include the Nairobi Commuter Rail; the Mombasa-Kampala Standard Gauge Rail Network; and the Lamu Port, South Sudan-Ethiopia (LAPSSET) Transport corridor.

Market Demand

Kenya is the most developed economy in Eastern Africa. With a nominal 2011 gross domestic product (GDP) of USD 35.8 billion, it is also the economic, commercial, and logistical hub of the entire region. Kenya’s population is estimated at 41 million, a large number of whom are welleducated English-speaking, multi-lingual professionals, with a strong entrepreneurial tradition. It is also a very ‘young’ country with almost 70 percent of Kenya’s population under the age of 35. An estimated 50 percent of the population lives below the poverty line, and the country's GDP per capita is approximately USD 888.

Kenya's strengths include its human resources, natural assets, and strategic location. After experiencing 7.1 percent GDP growth in 2007, the economy slowed to 1.6 percent growth in 2008, the result of political unrest following a highly contested Presidential election. In 2009, the economy grew at 2.6 percent and further improved to 5.6 percent in 2010. 2011 growth is predicted to have been in the range of 4.5-5.0 percent, somewhat lower than earlier projections of 5-6 percent growth, due to a combination of factors including high inflation, drought, and a weak shilling causing prices of imported goods to skyrocket. A 5 percent growth has been projected for 2012. The average annual inflation rate was 16.2 percent in 2008, dropped to 9.2 percent in 2009 and fell further in 2010 to 4.1 percent. High inflation reemerged in 2011, however, hitting a yearon- year high of 19.72 percent in November 2011 before falling slightly to 18.93 percent in December 2011. Average inflation for 2011 was 14 percent. However, Kenya’s economic prospects are expected to significantly if the commercial viability of its recent discovery of oil in Turkana County in North-West Kenya in March 2012 is confirmed.

Kenya’s total rail network has 2,778 kilometers of narrow (meter) gauge, and is managed by the Kenya Railways Corporation, a state corporation mandated to provide rail and inland waterways transport. Kenya’s Vision 2030 identifies the private sector as key towards developing much needed flagship infrastructure projects. However, the GoK estimates that approximately US$44 billion is required to address Kenya’s infrastructure requirements over the next five to eight years. To help overcome this financing gap, the government is focused on creating an attractive publicprivate partnership (PPP) framework via a recently approved PPP Bill 2011 draft that is to be tabled in Parliament sometime this year. This new PPP legislation is expected to provide government bodies with the legal capacity to enter PPP contracts, create certainty and investor confidence, reduce negative impacts on risk profiles of PPP projects and provide a clear approval process for PPPs among others.

The government hopes that with the passage of this law, the scope of PPPs will cover economic infrastructure including power generation, ports, airports, railway, roads, water supply, irrigation, among others; as well as social infrastructure which includes housing, medical facilities, prisons, education facilities, solid waste management facilities among others.

Market Data

A variety of public and private sector projects are available – or are planned – for private investment. Various types of PPPs are available and include management contracts, leases, concessions, BOT (Build, Operate, and Transfer) or BOOT (Build, Own, Operate, and Transfer), ROT (Rehabilitate-Operate-Transfer) among other arrangements approved by the government. Major Vision 2030 flagship planned/ongoing railways’ projects include:

Nairobi Commuter Rail

Kenya Railways Corporation and Infraco, an affiliate of the World Bank and European development agencies, signed an agreement on April 15, 2009 to develop a commuter rail service linking Nairobi to Thika, Limuru and Kitengela. These two entities are currently in the process of building 12 new commuter- train stations all aimed at modernization and expansion of commuter services within the Nairobi Metropolitan.

The commuter rail line in the city will be 100-kilometer (62-miles) and is estimated to cost 16 billion Kenya shillings (US$178 million). The objective of this project is to provide a reliable, safe, efficient and affordable commuter rail service and improve public transportation in Nairobi in order to achieve social-economic development. This move is projected to increase ridership from current 30,000 to 200,000 passengers per day. Additionally, an improved rail system could result in thousands of city residents opting to live outside of the city due to the availability of rapid scheduled transport into and out of town.

The revenue target is set at USD 92,000 per day compared to today’s USD 6,050. This target factors in a proposed increase of chargeable fare by 237% from USD 0.32 to USD 0.76, with the premium justified by much shorter commuting time compared to bus and van traffic on congested roads. The project is composed of:

_ Construction of new railway stations and expansion of Nairobi Railway

_ Construction of new railway lines

_ Rehabilitation locomotives and passenger coaches

Project Status:

The construction of the first commuter railway station at Syokimau was completed in April 2012. Procurement is ongoing for the Nairobi Platform, Makadara and Imara Daima Stations and the provision of signaling for the spur line to the Mombasa Road railway station. The designs of the construction of the Embakasi-Jomo Kenyatta International Airport (JKIA) six kilometer railway branch line and a detailed design of the JKIA Railway Line are complete. Upgrading and repair of twenty passenger coaches and two locomotives is 10% complete.

Standard Gauge Rail (SGR) Network:

1) Mombasa – Kampala SGR:

Kenya Railways Corporation intends to replace the current narrow gauge 1,000 mm rail between the Kenyan port of Mombasa and Kampala, Uganda’s capital, with a standard gauge (1,500 mm) railway line. This project is planned for completion by 2017. The existing line is limited in terms of maximum load capacity and speed. The Kenya and Uganda governments will undertake the Mombasa-Kampala standard gauge rail to reduce freight congestion at Mombasa Port, which received 20 million tonnes of transportable freight in 2011; reduce road congestion and accidents, rapid wear and tear on roads, and the overall cost of doing business in the East Africa Region, whose transport cost element constitutes about 45 percent of the final cost of goods.

According to projections, the new railway line will increase the movement of cargo to a minimum of 4000 tons at an average speed of 120 kilometers per hour, compared with today’s transport of 800 tons at 45 kilometers per hour. The new rail system will also be able to handle increased transport demands that are projected to be in excess of 30 million tons by 2030, up from the current 17 million tons.

Project Status:

The Kenyan and Ugandan governments have both approved a bilateral agreement to herald the design and the construction of the new standard gauge railway line.

2) Lamu Port, South Sudan and Ethiopia Transport (LAPSSET) Corridor

LAPSSET is a multi-modal second transport corridor that will provide landlocked Ethiopia and Southern Sudan with access to the Indian Ocean seafront through Kenya. With an estimated cost of US$22 billion, the project involves the development of a new transport corridor from the new proposed port at Lamu on the Kenyan coast through Garissa, Isiolo, Maralal, Lodwar, and Lokichoggio to branch at Isiolo to Addis-Ababa the Ethiopia capital and Juba, the capital of newly independent Southern Sudan. The project is planned to kick off with the construction of a new port at Lamu, which will serve as the maritime entry point of the LAPSSET corridor, which will also include a new 2300 kilometers of high capacity standard gauge railway networks between Nairobi-Moyale-Addis Ababa, Rongai-Lodwar-Juba, and Lamu-Lokichoggio-Juba; additionally, the corridor will have an expansive road network, an oil refinery at Lamu, an oil pipeline, Lamu Airport and free port at Lamu (Manda Bay) in addition to construction of three international airports at the three planned resort cities of Turkana, Isiolo and Lamu.

According to a preliminary design by Japan Port Consultants, the railway line is estimated to cost US$ 8.1 billion with an estimated completion date of 2018.

Project Status:

The World Bank has funded the feasibility study and design of the transport corridor linking Kenya to Southern Sudan. The feasibility study for the corridor components and design of three berths and associated facilities in Lamu are completed. On March 2nd 2012, the Kenya government officially launched LAPSSET with the ground breaking for the development of the first of three berths at Lamu Port.

Read the full market research report

Posted: 19 August 2012

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