The International Finance Corporation (IFC), the private sector arm of the World Bank Group, has successfully concluded a mandate advising the government of Kenya on the joint selection of a concessionaire to operate and manage the national railway systems of Kenya and Uganda for the next 25 years.
The winning bidder was the Rift Valley Railways Consortium led by Sheltam Rail Company (Pty) of South Africa. The winning bidder will pay initial fees of US$3mn for Kenya and US$2mn for Uganda for the opportunity to operate these railway services, annual concession fees of 11.1% of their gross revenues in each country, and US$1mn per year for the passenger services concession in Kenya. The annual concession fees equate to about US$9.5mn per year based on the current revenues of the two national railway companies.
The Rift Valley Consortium’s winning proposal includes a turnaround and development programme for the two railway systems, expected to lead to a significant increase in freight traffic volumes within the first five years. RVRC will provide an efficient, reliable, and integrated rail system in Kenya and Uganda, and is expected to invest US$280mn in rehabilitating existing assets and a further US$42mn investment in new rolling stock and operating equipment over the term of the concession. Of this total investment of US$322mn, US$80mn is anticipated within the first five years. It is expected that the railway will recover market share, both in absolute and in relative terms, through a concentrated focus on identification and meeting of customer needs.
This transaction represents a number of significant achievements for both Kenya and Uganda. In Kenya, this transaction is the first privatisation where a concession structure has been used. While concessions have been used previously in Uganda to facilitate investment in infrastructure, the conclusion of this transaction marks a major step in the development process of the land-locked country. The joint concession, which is also expected to benefit other land-locked neighbouring countries through increased efficiency and lower transportation costs, has set the stage for future regional cooperation in the East African region.
In addition to the successful collaboration by the governments of Kenya and Uganda and their respective advisors, IFC and Canarail, the transaction also involved collaboration with the World Bank.
Through the East Africa Trade & Transport Facilitation Project, the World Bank will be financing the retrenchment of surplus staff of Kenya Railways not taken up by the concessionaire, the relocation of traders from railway lands to create a safe operating zone, a partial risk guarantee to be made available to potential lenders, and a capacity-building component for the new asset authority and safety regulator that will be created. In addition, both the governments and the winning bidder have agreed to work together to actively promote small business linkage opportunities. Sustainability has been an integral part of the transaction design.
Kenya’s assistant minister of transport, Andrew Ligale, has emphasised the high technical quality of the proposals. In particular, he notes that the joint concession would have a substantial positive impact on the national accounts, with the replacement of outflows in the form of government subsidies with inflows in the form of concession fees. He notes that in the most recent national budget, the government had allocated a subsidy of about US$13mn for Kenya Railways that could now be redeployed to other strategic objectives.
In concluding this transaction, IFC benefited from the donor support of DevCo, a multi-donor affiliate programme, Private Infrastructure Development Group – supported by the UK’s Department for International Development, the Dutch Ministry of Foreign Affairs, and the Swedish International Development Agency. The project was also supported by technical assistance grants from Swedish and Danish Trust Funds at IFC and by a bilateral grant provided by the US Agency for International Development.
IFC’s Advisory Services Department provides advisory assistance, primarily to governments, on private sector participation in the provision of infrastructure services. The Kenya and Uganda Railways concession represents the 10th successful transaction IFC has advised on in Sub-Saharan Africa since 1995. Other transactions include Kenya Airways, Uganda Telecommunications, Moatize Coal in Mozambique, and Gabon Water and Electricity.