East African Standard: October 11, 2005
On Friday October 14, the hammer comes down crashing on tables at Treasury to announce the winner of the tender for the concessioning of the 2,350 km Kenya-Uganda Railways.
This will mark the end of a rigorous three-year process to identify a private sector operator for what has been billed as the biggest turn-around project ever in East Africa.
Ten days ago when bids for the project were opened, there was an element of surprise in the number and size of bid documents that were presented. Out of the initial seven pre-qualified bidders, only two tabled showed up.
Treasury officials were quick to explain that some of the pre-qualified bidders, including Canac Incorporated of Canada, China Railway First Group and the New Limpompo Bridge Projects of Mauritius had thrown in the towel while others had teamed up to form the two consortia that presented bids for the concessioning contract.
Bidder population aside, the opening of the tenders on September 30 was not without drama. Psychological warfare appeared to have become part of the game with the protagonists rolling out presentation schemes that were clearly aimed at dimming their opponentï¿½s morale.
On the one hand there was the RITES Group-led consortium consisting of the Rail India Technical and Economic Services, Magadi Soda Company of the United Kingdom and Maersk Sealand Group ï¿½ a private international shipping company. This group was keen on showcasing Rail Indiaï¿½s vast experience in the management of similar contracts in Africa.
Sheltam Railways Group of South Africa leads the second consortium of contenders that includes Comazar Limited, a private Pan Africa railway operator, Primefuels Group, a liquid fuels logistics provider in East Africa, Mirambo Holding, an investment company registered in Tanzania and CDIO Institute for Africa, an engineering and technology firm with an interest in transfer of industrial knowledge and capacity building.
This consortium -- which has hired accounting firm PricewaterhouseCoopers as financial advisors and Protekon, a Pan-African railway consulting group as technical and operations advisors -- was dramatic in its bid presentation.
It arrived at Treasury Building in a convoy of cars, including an armoured security van with armed escort, carrying nearly 10 boxes of bid documents.
Mr Vishal Agrawal, the lead advisor of the group says the elaborate presentation of the bid documents was meant to convey the seriousness with which the consortium takes the assignment.
The railway concessioning project is also unique in the fact that it is yet another privatisation process where the World Bank, through its private sector arm the International Finance Corporation (IFC), is acting as the lead advisor to the Government.
Sources indicate that despite the smoothness of the bids opening session, IFC had been under immense pressure by one of the bidding consortia to suspend the bid opening date.
The pressure is understood to have been coming from the RITES-led consortium, which was thrown into disarray two weeks to the D-day after Maersk failed to get the approval of its board to become part of the group. "The Maersk board thought that despite the immense interest the company has in a well-functioning railway transport system, it falls outside the boundaries of the companyï¿½s core business," our source said.
This development meant that the remaining members of the RITES-led consortium, Rail India Technical and Economical Services Limited and Magadi Soda had to divide between them whatever shareholding had been reserved for Maersk.
Mr Roy Puffett, the Managing Director of the Sheltam Group, who was in Nairobi for the bid opening, expressed confidence that his consortium had taken the pole position in the race for control of East Africa's longest rail line. "We have presented a watertight bid, thanks to the efforts that the PricewaterhouseCoopers team put into the process," he said. "Our bid is complete to the extent that should we be declared the winners, we will embark on the work immediately."
A timetable of the tender process indicates that the winning group should start selecting the employees it will take over from Kenya Railways as well as the resources he needs for the business in one and half months before beginning operations in December. The official handing over of the railway system to the concessionaire will take place in March 2006.
It is estimated that out of the 6,300 permanent Kenya Railway employees, the concessionaire will retain between 2,800 and 3,600.
Stringent financial and operational conditions have been set for the 25-year contract. The bid winner is expected to pay an upfront fee of not less than US$3 million (Sh220 million) in Kenya and US$2 million (Sh150 million) in Uganda.
The operator is also expected to pay a variable annual fee equivalent to five per cent of the gross revenue and a fixed annual concession fee for five years for passenger services.
The concessionaire is also expected to make a minimum investment of US$5 million per annum for the first five years, upgrade the line with a 100 pound track on the main line as well as grow the business volume by 175 per cent by year five and 60 per cent of the Gross Domestic Product thereafter. He will be required to take out a Performance Bond to guarantee compliance with the requirements.
In return, the bid winner will be free to set freight rates within the Monopolies and Price Control Act. The concessionaire and the Government will take partial Risk Guarantee of US$30 million (Sh2.4 billion).
The concession covers the provision of freight over the entire railway network and passenger services at a specified frequency in specified sections of the network. The freight concession will last 25 years while the passenger concession is for five years.
Privatisation of the railway system is seen as key to the success of the economic recovery project that the governments of Kenya and Uganda have embarked on.
After years of mismanagement and pilferage, the regional railway system is in bad shape. Kenya Railways, which constitutes the biggest fraction of the total concession is, for example, technically insolvent.
As at June 2004, the corporation held a negative working capital position of Sh20.5 billion, illiquid and unable to settle its liabilities in the short term.
Besides, the company is running a gloomy performance outlook with operating losses estimated at Sh1.7 billion in the current financial year.
Over the years as the railway infrastructure deteriorated, so has been the freight traffic. From a peak performance of more than 4.3 million tonnes of freight recorded in 1983, the system handled a paltry 1.89 million tonnes of freight in the fiscal year 2004/5.
After numerous unsuccessful attempts to use public funds to bring back life into the corporation, the government decided to change course in 1998 with the commissioning of a consultant to undertake a study for the privatisation of the corporation.
It was then that the consultant, CPCS Transcom, recommended unitary concession as the preferred option for the transaction.
In July 2002, the Government engaged the IFC to design a transaction structure and prepare tender documents for the concessioning of the railway.
One year later, the governments of Kenya and Uganda, in the spirit of regional cooperation, decided to undertake a joint concession of the two railway lines. The project is expected to lead to a seamless flow of freight across the common borders with the goal of increasing the market share for railways in the freight traffic.
Under the proposed ownership structure, a holding company will be formed to manage both the Kenyan and Ugandan sections of the railway. Both governments will sign separate agreements with the bid winner for the formation of the two separate concession firms for each country. The lead investor will have a shareholding of 35 per cent in the holding company, 15 per cent of the shareholding will be reserved to Ugandan investors and another 15 per cent shareholding awarded to Kenyan investors. Other members of the consortium will share the remaining shares.
It is estimated that concessioning of the railway will yield economic benefits at the rate of US$40 million per annum. Kenya Railway will receive US$5 million per year in concession fees in the first five years. This is expected to rise to an average of US$10 million per annum by the twelfth year.
The government expects to rake in US$3 million (Sh235 million) per year in corporate taxes besides the huge saving that will be made in road maintenance estimated at US$4 million per year and an additional US$2 million a year in saving on fuel imports.