Political Economy Analysis of Regional Transport Integration in the East African Community Northern Corridor Report -Draft

June 9, 2018 | Author: Craig Mathieson | Category: Documents


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Political Economy Analysis of Regional Transport Integration in the East African Community Northern Corridor Report - Draft April 2014

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Political Economy Analysis of Regional Transport Integration in the East African Community Draft April 2014

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Political Economy Analysis of Regional Transport Integration in the EAC

Contents 1

INTRODUCTION ......................................................................................................... 3 1.1 1.2 1.3 1.4 1.5

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OVERVIEW OF THE NORTHERN CORRIDOR .............................................................................. 4 TRANSPORT AND EAC INTEGRATION ...................................................................................... 5 UGANDA – POLITICAL ECONOMY OF INFRASTRUCTURE .............................................................. 6 KENYA – POLITICAL ECONOMY OF INFRASTRUCTURE.................................................................. 7 METHODS OF THIS STUDY AND REPORT STRUCTURE .................................................................. 8

PORTS ...................................................................................................................... 10 2.1 INTRODUCTION ................................................................................................................ 10 2.2 WHY DID EFFICIENCY IMPROVE AT MOMBASA PORT? ............................................................. 10 2.2.1 Understanding the drivers of port performance .................................................. 12 2.2.1.1 Wide ranging efficiency gains 2008 – present ..................................................... 12 2.2.1.2 Presidential Directive of 2013............................................................................... 14 2.2.1.3 Lingering inefficiencies and challenges ................................................................ 16

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RAILWAYS ................................................................................................................ 21 3.1 INTRODUCTION ................................................................................................................ 21 3.2 WHY DID RAIL TRAFFIC DECLINE ON THE NORTHERN CORRIDOR (1977 – 2006)? ....................... 21 3.2.1 Understanding the drivers of railway performance ............................................. 22 3.2.1.1 Kenya .................................................................................................................... 22 3.2.1.2 Uganda ................................................................................................................. 24 3.3 WHY DID RAIL TRAFFIC DECLINE ON THE NORTHERN CORRIDOR UNDER RIFT VALLEY RAILWAYS (2006-PRESENT)? ....................................................................................................................... 25 3.3.1 Understanding the drivers of a poorly performing railway concession ............... 26 3.4 STANDARD GAUGE RAILWAY – PROSPECTS AND RISKS ............................................................. 30 3.4.1 Political economy risks ......................................................................................... 32 3.4.1.1 Kenya .................................................................................................................... 32 3.4.1.2 Uganda ................................................................................................................. 35

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LESSONS ................................................................................................................... 38

References................................................................................................................................... 42

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Political Economy Analysis of Regional Transport Integration in the EAC

Acronyms and Abbreviations AfDB CFS DFID DWU EAC EARA GoK GoT GoU HIPC ICD IFC KENGEN KEPSA KMA KPA KWATOS KR KSA Ksh MoFPED MoWT MoU NDP NCTTCA ODM OCHA PEAP PIC PSA PSO RVR SCEA SEZ SGR TEU TOR TMEA UBOS UMA UR URA URC URP

African Development Bank Container Freight Stations Department for International Development Dock Workers Union East African Community East African Railway Authority Government of Kenya Government of Tanzania Government of Uganda Heavily Indebted Poor Countries Initiative Inland Container Depot International Finance Corporation Kenya Electricity Generating Company Limited Kenya Private Sector Alliance Kenya Maritime Authority Kenya Ports Authority Kilindini Water Front Automated Operating System Kenya Railways Kenya Shippers’ Authority Kenya Shilling Ministry of Finance, Planning and Economic Development Ministry of Works and Planning Memorandum of Understanding National Development Plan Northern Corridor Trade and Transport Co-ordination Authority Orange Democratic Movement Office for the Coordination of Humanitarian Affairs Poverty Eradication Action Plan Public Investment Committee Production Sharing Agreement Public Service Obligations Rift Valley Railways Shippers’ Council of East Africa Special Economic Zone Standard Gauge Railway Twenty-foot Equivalent Units Terms of Reference Trade Mark East Africa Uganda Bureau of Statistics Uganda Manufactures Association Uganda Railways Uganda Revenue Authority Uganda Railways Corporation United Republican Party

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Political Economy Analysis of Regional Transport Integration in the EAC

1 Introduction This report outlines the political economy drivers behind the performance of the ports and railways of East Africa’s Northern Corridor1. Drawing on this analysis, the report derives a number of lessons and looks forward to identify political economy risks to consider as the Northern Corridor’s railways and ports are further developed. The purpose of the report is to inform the planning and investment decisions of the East African Community (EAC), its constituent countries, and the World Bank. The scope of the analysis covers performance of rail and ports in Kenya and Uganda. Specifically, this includes analysing the reasons for efficiency improvements at the Port of Mombasa between 2008 and present; explaining the decline in rail traffic on the KenyaUganda railway since the breakdown of the old East African Railways and Harbours Association in 1977; and the prospects and risks associated with the development of a Standard Gauge Railway (SGR) in Kenya and Uganda. Political interests have played a large role in determining the performance of transport infrastructure in Kenya and Uganda. Planning and delivering successful transport infrastructure is unlikely without supporting political interests and the active involvement of political elites. Railway in the two countries is an example of unsuccessful infrastructure as a result of a lack of political support. Prior to privatisation of the railway, there were very few incentives for elites in Kenya or Uganda to foster efficiency enhancing reforms. Instead, particularly in Kenya, railways were an important source of patronage during President Moi’s years in office. At the time of the railway privatisation in 2006, the incentives to use the railways as a source of patronage had been largely removed but there were few incentives for political elites to ensure it was a success. Instead, the railway was seen as a loss-making asset of which government could be relieved, even if its poor condition deemed it unlikely to be a success in the hands of the private sector. Yet it is also evident that in the two countries political interests and the active involvement of political elites are not sufficient conditions to successful reforms, even in the presence of a capable and supporting bureaucracy. The preservation of transport infrastructure can fall victim to numerous political economy constraints most prominently poor planning processes, opposition from rival elites, and corruption. For example, analysis of the planning process required for transport infrastructure in Kenya and Uganda demonstrated that it is vulnerable to disgruntled middle-men that compete for the contracts for large infrastructure programmes. In the past such middle-men have acted as spoilers to procurement processes after losing out on access to contracts and the associated patronage and rents. This is seen particularly in Kenya, most prominently in the case of the Standard Gauge Railway (SGR). We describe this issue in greater detail in section 3.4. The planning process also can suffer from collective action problems given the need for collaboration between governments. While the Standard Gauge Railway is an example of nascent coordination between the Kenyan and Uganda governments and aligned interests, the

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This paper is part of a larger set of political economy studies in the transport sector in the East Africa Community (EAC). The other studies examine the port of Dar es Salaam, the central railway line in Tanzania, and the inland ports on Lakes Tanganyika and Victoria.

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Political Economy Analysis of Regional Transport Integration in the EAC Tanga-Arusha-Musoma-New Kampala Railway and Lake Victoria Ports Project2 suffered as a result of divergent interests and a lack of trust between the Ugandan and Tanzanian governments.3 Transport infrastructure planning can be constrained by the personalized decision making of political elites which offers a means of fast tracking time consuming procedures, but can also exclude technocrats leading to poor value commercial agreements or/and disjointed planning systems. For example, until recently, different arms of the Government of Uganda were in parallel discussions with three different Chinese firms, leading to MoUs for SGR construction. This has led to a tangled situation and considerable efforts by the Government of Uganda to develop a single consortium and shared work plan4 – this is described in more detail in 3.4.1.2. The operation of transport infrastructure can also be subject to such interference. The Port of Mombasa is an example of how powerful interest groups, in this case the Dock Workers Union (DWU) and port service providers, can resist reforms supported by key politicians and the President. One crucial implication of this analysis, particularly relevant for future EAC and World Bank support to transport provision in the region, is that political will is not a sufficient pre-condition for successful transport infrastructure or services in Kenya and Uganda. Rather, an additional critical factor to ensuring success is whether the interests of other critical stakeholders, such as industry groups, business elites, political opposition, are aligned to change, or at least not aligned against it. The next section of this paper examines political economy factors that affect operation of Mombasa port. The subsequent one examines this issue for railways in Kenya and Uganda. The final section offers suggestions for improving transport infrastructure planning and operations, especially for the World Bank.

1.1 Overview of the Northern Corridor The Northern Corridor is one of two principal transport corridors that serve the countries of the EAC. The corridor comprises of a system of trunk roads running from the Port of Mombasa to Bujumbura via Malaba and Goma, and a meter gauge railway network connecting Mombasa to Kasese, with major stops at Nairobi, Malaba and Kampala. The railway line also contains a branch line to the Port of Kisumu to allow for the transporting of goods by wagon ferry to Port Bell and Mwanza over Lake Victoria, but this is used very infrequently. The road network is the dominant mode of transport on the corridor, carrying more than 95 percent of the corridor’s total traffic (Stakeholder Interview 5/3/2014). The 1985 Northern Corridor Transit and Transport Agreement between Burundi, Kenya, Rwanda and Uganda established a multi-country mechanism to manage the Northern Corridor. 2

The Tanga-Arusha-Musoma-New Kampala Railway and Ports Project is a joint initiative between the governments of Uganda and Tanzania. In Uganda the project includes the construction of Bukasa inland port and an accompanying rail link. In Tanzania the project includes construction of a new port at Mwambani-Tanga, expansion and modernisation of Musoma port, upgrading of the railway line from Tanga to Arusha (438km), and the construction of railway lines from Arusha to Musoma and Tanga to Mwambani. The project is in the planning phase without financing or construction contracts in place (Stakeholder Interview ibid.). 3 The companion Lake Tanganyika and Lake Victoria ports political economy study examines this issue in greater detail. 4 Wabaki, M. 2013 ‘Museveni to Meet Feuding Rail Contractors’ The East African, November 26

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Political Economy Analysis of Regional Transport Integration in the EAC The Democratic Republic of Congo later signed the Agreement in 1987. The Agreement commits member states to allow for the movement of transit goods across their borders and pledges them to harmonize regulations, initiate joint investments and explore other ways of reducing transport costs. The Agreement established the Northern Corridor Trade and Transport Authority (NCTTA) to implement the member states objectives. NCTTA has the responsibility for furthering the objectives of the Common Market Protocol Act of the EAC (2010). While the NCTTA has done an effective job in monitoring the transport infrastructure along the Northern Corridor, it lacks the capacity to enforce agreements. While landlocked states are highly dependent on the corridor as a route for transit traffic, (DFID 2012), intra-EAC trade is very low, only constituting 11.6 percent of total trade by EAC states (ibid.). Critically, the cost of transporting goods on the Northern Corridor is high compared to regional corridors. It is estimated that the cost of transporting a freight container per km is 60-70 percent higher on the Northern Corridor than it is in Europe (Kessides 2012).

1.2 Transport and EAC integration Following the collapse of the first EAC between Kenya, Tanzania, and Uganda in 1977, the EAC was re-launched with the EAC Treaty of 1999 and the formal start of the new EAC in 2001.5 The integration process has four key elements:    

Establishing a free-trade area and customs union; Cooperation for the provision of public goods and services; Negotiation of a common market; Political union under a federal constitution (after the monetary union).

Brief Background to EAC Integration The EAC was formed in 1967 and functioned until 1977, when it collapsed as a result of internal disputes. From 1993 to 2000 there was ‘East African Cooperation’, which largely involved member states agreeing to cooperate in key sectors such as trade, health, law, science, infrastructure and industry. The EAC was relaunched in 1999 and scaled up in 2001. Burundi and Rwanda joined subsequently in 2009.

Overall, integration has been progressing at a relatively fast pace. While the implementation of the common market protocol is behind schedule, the Single Customs Union was launched in January 2014 and there has been progress towards greater harmonisation around macroeconomic policy and regulatory frameworks (Byiers et al. 2013). Recently, cooperation in the provision of public goods has progressed rapidly as Kenya, Uganda and Rwanda have focussed on port performance and railway construction on the Northern Corridor. This has been part of the three countries initiative to fast-track the integration process acting as the ‘Coalition of the Willing’, as they have become known. The Coalition of the Willing is the result of an alignment of interests among the current presidents of Kenya, Uganda and Rwanda. While Government of Uganda has consistently advocated for EAC integration based on factors such as the need to lower the cost of landbased imports, the Rwandan and Kenyan positions as champions of EAC integration is a more recent development. The new Kenyatta administration has a number of reasons to support fast tracking integration efforts. EAC markets have become an important destination for exports, now representing 5

See the lake ports political economy study for more information about the collapse of the first EAC and the effectiveness of the revived one.

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Political Economy Analysis of Regional Transport Integration in the EAC 26.3 percent of total exports (Africa Economic Outlook 2013). Kenya also is keen to ensure that the port of Mombasa does not lose business to Dar es Salaam. Furthermore, the Rwandan and Ugandan Presidents have been steadfast in their support for Kenya’s attempts to thwart efforts by the International Criminal Court to prosecute President Uhuru Kenyatta and his Vicepresident, William Ruto on account of the electoral violence that rocked the country in 2007. This has had the effect of bringing the Kenyatta administration closer to them. The presidents of Rwanda and Uganda, Paul Kagame and Yoweri Musevini, respectively, have long been outspoken proponents of greater EAC integration. In particular, regional integration also offers a means of reducing the very high cost of imported inputs and stimulating investment opportunities which would reduce dependencies on international donors. Transport costs in East Africa are among the highest in the world. It currently costs approximately $5000 to import a 20 foot container to Rwanda and $3000 for Uganda. East African integration creates opportunities to develop a regional identity for Rwanda that has the potential to encourage citizens to look beyond the divisions that plunged the country into cycles of political instability and social upheaval in the past. Contrastingly, EAC markets represent a small proportion of Tanzanian exports (Byiers et al. 2013), and recent discoveries of gas may decrease the existing incentives for EAC integration, or at least the incentives to move forward at the pace of the Coalition of the Willing. However, while integration is accelerating and trade within the EAC is increasing - the IMF estimates it has tripled over the past decade (Winston and Castellanos 2011) - there is a severe need for improved infrastructure. The Port of Mombasa has been operating in excess of capacity and freight road traffic contributes to the socio-economic costs, some external, of transport, such as congestion, pollution, safety and premature deterioration of the infrastructure, when overloading is not policed.

1.3 Uganda – political economy of infrastructure Infrastructure is now a key priority for the Government of Uganda. The current National Development Plan prioritizes 15 ‘Core Projects’ which focus on infrastructure and power, for example. Recent trends in public spending also demonstrate increasing budgetary allocations to infrastructure over the last five years in the face of decreasing allocations to the social sectors (Mathieson, C. 2013). It is in this context that the Government of Uganda has been supporting efforts to construct an SGR rail link from Mombasa, via Nairobi, and onto Kampala and west, and a new port at Bukasa. The current focus on infrastructure is a departure from the previous strategy for national development which focused on reducing poverty through social expenditure rather than fostering economic growth through large scale infrastructure investment. The national planning system changed from the Poverty Eradication Action Plan (PEAP) (1997-2007) to the National Development Plan (NDP) (2010/11-2014/15) to demonstrate this change in emphasis. This transition coincided with the return to multi-party politics in 2005, and a more assertive insistence by President Museveni on promoting prosperity and reducing investments in the social sectors which were previously pushed for by the donor community. Museveni’s decision to re-orient policy resulted in a manifesto that focused more on growth rather than poverty reduction. Around this time Uganda also became less reliant on international aid as a result of economic growth and graduation from highly indebted poor country (HIPC) status in 2006. The discovery of significant oil reserves promises to lessen the country’s aid dependence even 6

Political Economy Analysis of Regional Transport Integration in the EAC further. The new trends have been reinforced by China’s progression to become the lead investor in most key sectors in 2010 (Hickey 2011) and a reduction in the poverty level to 24 percent by 2009/10 (UBOS 2011). In addition to the development of national transport infrastructure, improving the efficiency of the Port of Mombasa has long been an objective for the Government of Uganda and President Museveni in particular. The port is of great strategic importance to Uganda given that it handles approximately 80 percent of the country’s imports and the Ugandan importers have long-standing complaints over theft, inefficiencies, and high costs in Mombasa port. The President’s efforts to improve the efficiency of the port are also part of his consistent focus on encouraging private sector development and attracting foreign direct investment. This was demonstrated early in his time in office when the government created new investment incentives, such as returning assets to the Asian community that had been expelled by Idi Amin in 1972. Subsequently, the President has gone to great lengths to offer investors incentives to start operations in Uganda. This has included issuing directives to the Uganda Land Commission to give land to investors at no cost, even when this contravenes legal provisions (Booth, et al 2013). On occasion the President has also issued directives to the Central Bank to provide credit guarantees on behalf of local investors or even to provide interest free loans (ibid.). However, while it is clear that improving transport infrastructure is a priority for the President, there are limits to what he can achieve, even if he supports it. Projects are routinely subject to long delays as a result of protracted litigation by contractors contesting the award of tenders. In addition, the involvement of State House in the awarding of tenders or the evaluation of expressions of interest means that the formal organs of the state whose responsibility it is to play these roles get sidelined. Consequently, the Government often awards contracts at much higher cost to the taxpayer than a more rational system would produce. The marginalization of formal organs responsible for evaluating and awarding tenders as well as project supervision can translate into publically financed projects being implemented without the necessary technical oversight, leading to poor quality delivery and inflated costs. Uganda’s land-locked status is also a severe barrier to the President’s efforts to improve transport infrastructure. Uganda relies on neighbouring coastal countries for effective and efficient transport services. However, such cooperation is typically strained as a result of collective action problems between countries and lack of a powerful regional organization to overcome them, which the lake ports study examines in detail. For example the proposed Tanga-Arusha-Musoma-New Kampala Railway and Ports Project suffers from a lack of trust between Tanzania and Uganda. Successful delivery of the project requires investments by both governments. However, it appears that both countries have delayed the necessary investments amid uncertainties around whether the partner will deliver. The lack of progress in Tanzania causes concern for the development of the Ugandan element of the project (11/3/14) and until recently a lack of progress in Uganda and increasing ties to the Port of Mombasa (through the Coalition of the Willing) provoked parliamentary discussion in Tanzania about the viability of the whole project6.

1.4 Kenya – political economy of infrastructure Infrastructure development is also a key objective of the Government of Kenya. This is reflected in the Kenya Vision 2030, launched in 2007, which includes plans for a new port 6

Ngwega, N. 2013 ‘Tanzania: Tanga – Musoma Railway Project Still Viable, Says Ministry’

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Political Economy Analysis of Regional Transport Integration in the EAC development at Lamu, railway construction on the Kenya-Uganda railway line, and a range of investments from Lamu to Ethiopia and South Sudan. These projects were conceived under the Kibaki government which also emphasized the importance of new infrastructure for fostering economic growth. President Kenyatta looks to be even keener than the previous government to implement these projects. The two parties in the governing Jubilee coalition, President Kenyatta’s National Alliance and Deputy President Ruto’s United Republican Party, tend to cooperate, in contrast to coalition arrangements in the previous government.7 Importantly, Kenyatta and Ruto have a strong incentive to cooperate as they both face challenges from the International Criminal Court (ICC) charges. They also share power relatively equally, with the President consulting his deputy on a range of decisions. This is the result of a legally binding Memorandum of Understanding signed between the two leaders in May 2013 (Booth 2013). Nevertheless, strains in the coalition have emerged at times over power-sharing issues and access to resources. The clearest example to date is the controversy surrounding the SGR which the paper describes in detail in section 3.4. The core of the dispute stems from key Ruto supporters who were pushed out of the project after playing a lead role in brokering it. The Kenyatta administration portrays itself as a pro-business government and the president has ambitious visions for Kenya’s development. The current leadership also has broad-based business interests that benefit from such outcomes as well. Kenyatta’s family, in particular, is one of the richest in Eastern Africa with a business portfolio including a commercial bank, international schools, hotels, insurance companies, the country’s largest dairy producer, and many other ventures. Similarly, Ruto owns properties and land in the tourism sector. Upon being sworn into power the President and Deputy President made a pledge to create a ‘business friendly’ government and to consult the business community regularly when making decisions affecting the economy and businesses. The President also promised to appoint private sector leaders to key advisory posts in government. Anecdotal evidence indicates that the government has been consulting the Kenya Private Sector Alliance (KEPSA) regularly since the electoral term began (Booth et al. 2013). However, perverse political economy factors often impede developing infrastructure necessary to support targeted levels of economic growth. While the President has led the way on reforms of the Port of Mombasa, inefficiencies persist as a result of powerful interests who profit from the status quo (described further in section 2.2). Further, the SGR project is at risk of delays as a result of disgruntled brokers that lost out on the deal and are using their informal associations with URP to frustrate the process.

1.5 Methods of this study and report structure The research for this paper was carried out between November 2013 and April 2014. The methodology drew on a number of political economy approaches to focus on actors, power, interests and incentives. Research involved a desk review of literature, and in-country

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It is crucial to note that Kenyatta and Ruto willingly entered an alliance, as opposed to the previous one between Mwai Kibaki and Raila Odinga. The latter was the result of the highly flawed (you need to either support this, or delete the emotive expression) 2008 election and subsequent post-election violence.

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Political Economy Analysis of Regional Transport Integration in the EAC interviews with a wide range of stakeholders from the public and private sector. If not otherwise stated, information was gained from stakeholder interviews. The report contains four sections. Section two focuses on ports, first explaining the drivers of improvements in the efficiency of the Port of Mombasa between 2008 and 2013, then identifying risks associated with plans for port expansion. Section three addresses railways on the Northern Corridor. It first outlines the drivers of the deterioration of the Kenya-Uganda railway between 1977 and 2006, then going on to describe the reasons for the decline of rail traffic under the Rift Valley Rail concession (2006-present). It finishes by outlining the risks associated with the development of SGR in Uganda and Kenya. Section four provides a conclusion to the study.

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Political Economy Analysis of Regional Transport Integration in the EAC

2 Port of Mombasa 2.1 Introduction The Port of Mombasa is central to Kenyan coastal politics and thus an important factor in national politics. At the local level, the port is a major employer and is an important symbol in a regional political narrative, which views the central government as Nairobi-focussed and neglecting the needs of coastal people. At the national level, the Coastal Province has been particularly significant in the last three general elections, in which Presidential candidates must receive at least 25 percent of votes in five of eight provinces (World Bank 2011). This has forced the leaders of national parties to appease regional political interests and provided a platform for coastal politicians to oppose privatisation and efforts to reduce staff numbers at the port. The current Kenyan government is subject to the local pressure from the Dock Workers’ Union (DWU) and coastal politicians. However, along with the previous regime, it has been able to bring about a number of efficiency improvements at the port that have not threatened these powerful interests. Nevertheless, it has been unable to address enormous inefficiencies Container Freight Stations (CFSs) create. The government’s plans to concession berths 20 and 21, currently in development, also remain at risk given the local vested interests of the DWU and local brokers (described in more detail below). These are particular challenges in the Jubilee government where the Orange Democratic Movement (ODM) party is in opposition, but dominant in the Coastal region.

2.2 Why did efficiency improve at Mombasa Port? Mombasa port is a crucial to East Africa’s transport infrastructure, connecting Kenya, Uganda, Rwanda, Burundi, South Sudan, Eastern Democratic Republic of Congo and parts of Tanzania with Western Europe, Asia, North and South America and other parts of Africa. Established as an institutional structure in 1895 by the Imperial British East Africa Company to discharge materials for the construction of the railway line to Uganda, the port now has an annual throughput of over 22 million tons, works with 33 shipping lines and provides direct connectivity to over 80 ports around the world (Stakeholder Interview 4/3/14). The performance of the port throughout the 1980s and 1990s was very poor, and deteriorated drastically in the last decade of Moi’s 24 year reign. By 2003 the port had large debts and equipment was old or obsolete. Traffic at the Port of Mombasa has grown fairly rapidly in recent years, almost doubling from 11.93 million tons in 2003 to the existing through-put of 22.31 million tons in 2013. This represents an annual growth of around 9.2 percent per year (figures provided by KPA).

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Political Economy Analysis of Regional Transport Integration in the EAC

While the port has struggled to increase capacity to meet this demand, port authorities have been able to realize a number of notable efficiency improvements. For examples, import container dwell time in 2013 was less than half the time required in 2006 and ship turnaround time was reduced by around 30 percent between 2008 and 2013.

The reduction in dwell time can be explained as the result of a number of factors including: 

Automation of key port areas namely, container operations, conventional cargo operations, marine operations, and ICD operations have improved service delivery and revenue collection.



Creating off-site Container Freight Stations (CFS) to function as an extension of the port significantly decreased congestion inside the port.



Moving to 24/7 operations in 2008 eliminated delays deriving from restricted working hours. Close to 30 percent of the cargo exits the port between 6PM and 6AM daily. 11

Political Economy Analysis of Regional Transport Integration in the EAC



Port capacity grew with the construction of berth 19, which extended container terminal by 240 meters and an extra stacking yard of 5 hectares. This increased container capacity by an additional 200,000 TEUs per year. KPA also repaired existing stacking yards and created an additional gate lane at gate 18.

As mentioned, another key performance improvement was the reduction of ship turnaround time from 4.9 days in 2008 to 3.7 days in 2013. This was the result of: 



Dredging the port to a depth of 15 meters, which was completed in April 2012 at a cost of Kshs. 5.4 Billion ($66 million8), to accommodate larger vessels and Mombasa Port – institutional arrangements After independence the port was managed by the increase the port competitiveness. East African Railways and Harbours Association until The project involved dredging and the break-up of the EAC in 1977, after which Kenya widening of navigation/main Ports Authority (KPA) was established. In 1986, KPA channels and turning basin. The and the Kenya Cargo Handling Services Limited new container terminal was were integrated as part of a restructured KPA. dredged to 15m while the existing one had been dredged to 12.5 KPA operates under the Ministry of Transport and Infrastructure and is responsible for the meters. Investment in new equipment. KPA acquired ten (10) Rubber Tyred Gantry cranes, three Ship to Shore Gantry cranes with twin lift capabilities in 2011, and recently procured eight Reach Stackers to boost the earlier stock of eleven top loaders.

2.2.1 Understanding the drivers of port performance

administration of the Port of Mombasa, as well as maintenance, operation, improvement and regulation of all the sea ports of Funzi, Kilifi, Kiunga, Lamu, Malindi, Mtwapa, Shimoni and Vanga on the mainland coast of Kenya. The Authority also manages three Inland Container Depots in Nairobi, Kisumu and Eldoret.

KPA is managed by a board of 13 members, seven of which are represented by government officials, and six appointed. Under the board, is a Managing Director which deals with the day-to-day management of the port.

The section above describes the efficiency improvements after 2007/08, and what changes resulted from these improvements. This section will describe why these changes were able to happen after so many years of poor performance. It distinguishes between two phases of efficiency improvements at the port. First, the wide ranging improvements that occurred from around 2008 as a result of reforms in the years after President Kibaki took power, and second, the improvements that occurred between 2013 and 2014 after President Kenyatta issued a Presidential Directive to improve port operations in 2013.

2.2.1.1 Wide ranging efficiency gains 2008 – present A number of reforms that started from 2003 onwards were responsible for the improvements in efficiency since 2008. The investments and management required for these reforms were the result of a number of changes in Kenya’s political economy: 1. Port of Mombasa as a source of rents and patronage 8

Converted at March 2012 currency rates – Oando.com

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Political Economy Analysis of Regional Transport Integration in the EAC

It is important to view the efficiency reforms in the context of the previous governments under the Moi presidency. During the last decade of President Moi, the performance of the port deteriorated as a consequence of under-investment in port infrastructure and services, mismanagement of port resources, corruption and centralised government control of the ports (World Bank 2011). This was part of a wider trend where Moi used key parastatals as a source of rent generation and political patronage, with very little productive investment or management -this is described in more detail in section 3.2.1. Moi typically selected Chief Executives and Senior Management of KPA based on financing or support they had provided to political parties rather than merit based recruitment (World Bank 2011). 2. Port of Mombasa as a road to economic growth As a consequence of the aforementioned port mismanagement, by the end of Moi’s Presidency in 2002 the port had accumulated large debts, had outstanding bills to a number of suppliers of goods and services, and its machinery and equipment was dated and near obsolete. However, with the introduction of the Kibaki Presidency in 2002, improving the efficiency and effectiveness of the port became an important means of delivering on his key campaign pledge of fostering rapid economic recovery after years of poor economic performance and neglect of infrastructure. President Kibaki was well placed to do undertake these needed changes. He served as a successful Minister of Finance under Presidents Kenyatta and Moi between 1969 and 1981. He also received significant electoral support from Kikuyu business groups for whom economic growth would produce increased business opportunities (Booth, et al. 2013). President Kibaki’s government developed the Economic Recovery Strategy for Wealth and Employment Creation (ERS), which prioritised budgetary allocations and institutional reforms that targeted critical infrastructure, such as Port of Mombasa, Jomo Kenyatta International Airport, and the Northern Corridor. As a result the economy recovered from under one percent annual GDP growth in 2003 to seven percent in real terms in 2007. In addition, many Kenyan companies expanded their regional operations, which also created more pressure to improve efficiency at the port. Kibaki also instituted a number of key personnel reforms in the port. He installed professional management at KPA, ending the previous system of political appointees and the accompanying lack of required technical capacity. Most important, KPA recruited a new Managing Director, Brown Ondengo, from an international shipping line as part of a World Bank initiative. The initiative also involved installing a so-called ‘Dream Team’ of well-known Kenyan professionals led by Dr. Richard Leakey (World Bank 2011). Many in the private sector argue Ondengo was instrumental in initiating successful key reforms, and was an effective manager of political and technical interests. For example, KPA professionalized its Board of Directors by appointing people based more on technical experience than political affiliation. In turn, the board selected senior staff positions through competitive processes. Not all elements of the reform program were successful, however. For example, efforts to introduce a firm to manage container terminal operations failed after the foreign firm withdrew not long after starting citing a lack of cooperation from KPA. As a consequence of managerial, institutional and procedural reforms, the major channels through which public resources had been extracted for private gain were closed. The improvements in Mombasa Port were highly visible to many. For example, KPA was removed from Transparency International’s list of ‘most corrupt institutions’ in Kenya (World Bank 13

Political Economy Analysis of Regional Transport Integration in the EAC 2011). The reforms did not completely end corruption and the management was still subject to interference from political and business elites, however. Nevertheless, the new management style improved planning and execution, and new procurement systems generated a significant increase in internally generated resources which were used to modernize equipment and undertake expansion critical for efficiency improvements (ibid.). These changes fostered a remarkable turnaround of KPA’s finances. From 2004 to 2007, KPA had an annual turnover of close to Kshs. 15 billion (over $218 million9) and a profit of between Kshs. 3 to 5 billion ($43 to $72 million10). Similar scenarios unfolded in Kenya Airports Authority, KENGEN, the Postal Corporation, Telkom, and Mumias Sugar Corporation. They also reflect the changing role of public enterprises in Kenya’s political economy under the Kibaki Presidency, where they were a means of delivering economic growth. This stands in sharp contrast to the Moi Presidency where public enterprises were an important means of developing a Kalenjin elite and extracting rents (Stakeholder Interview 27/2/14 and Confidential 2013).

2.2.1.2 Presidential Directive of 2013 President Kenyatta has built on these changes to continue improving port performance with the Presidential Directive of 2013. It is already producing results. For example, transit time between the Mombasa and Malaba border point has fallen from 11 days to three days, partially as a result of the removal of weigh bridges and police check points (Figures provided by KPA). The Presidential Directive of 2013 involved:

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Improved interagency coordination. The directive instructed KPA to take an administrative lead at the port, and to be accountable for delivering measurable targets related to port efficiency. This resulted in a number of streamlined processes where there had previously been overlap and a lack of cooperation between agencies working at the port. For example, it introduced a unified inspections system where multiple agencies work together to inspect goods.



More effective implementation of the 24-7 policy. While this had previously been a policy of KPA, many bodies were not operating 24-7, such as banks, CFSs, and transporters. After the declaration, banks opened 24-7 and most CFSs began operating 24-7 when there is customer demand.



It abolished the transshipment bond, which reduced costs for importers and removed unnecessary processes.



Kenyatta demanded reducing the number of weigh bridges and police check points along the Northern Corridor. While this is not directly tied to port operations, importers and transport service providers are benefitting enormously from it as the change allows faster transit time.



It relocated key positions, such as the Commissioner for Customs, to Mombasa for more efficient cargo clearance at the port.

March 2007 rate – Oanda.com March 2007 rate – Oanda.com

10

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Political Economy Analysis of Regional Transport Integration in the EAC We discuss the political economy factors that influenced these decisions below. 1. Pressure from business interests The Presidential Directive is in large part a response to private sector pressure from businesses close to the ruling coalition. The President and Deputy President have their own business interests and have strong ties to the business community, which has long been pushing government to address port inefficiencies. Responding to their pressure by addressing bottlenecks at Mombasa port fits with the pro-business strategy which the Jubilee government has demonstrated since its term started. In particular, the Presidential Directive came shortly after a sustained lobbying effort from shippers’ and importers’ associations. Throughout 2013 shippers, as represented in the Shippers’ Council of East Africa (SCEA), the Kenya Private Sector Alliance (KEPSA) and the East Africa Business Council (EABC)11, held several meetings with representatives of the new government to lobby for efficiency enhancements at the Port (Stakeholder Interview 3/4/14). The directive incorporated many of their suggestions. Further, in March 2013 KEPSA met with President Kenyatta and Deputy President Ruto to present their ‘National Business Agenda Phase II’ on how the government can enable private sector growth. A key point on the agenda was ways to modernize Kenya’s transport and infrastructure network (Stakeholder Interview 11/4/14). The business community also uses informal channels to lobby for reforms. In particular, large importers (especially for cement) have placed substantial pressure on the Government to improve efficiency in the transport sector as delays frustrate their supply chain management. The Government of Uganda has also been lobbying the Government of Kenya for the removal of bottlenecks at the Port of Mombasa and the introduction of heightened security measures to reduce pilferages and damage to cargo. Officials at KPA indicated that such lobbying efforts result in pressure from superiors and directives (Stakeholder Interview 6/4/14). 2. The threat of Dar es Salaam Lobbying efforts from Uganda’s government and the private sector have more traction as a result of the increasing competitiveness of the Port of Dar es Salaam. The Ports of Mombasa and Dar es Salaam are in direct competition with transit goods to Uganda, Rwanda, and the DRC. While Mombasa Port continues to hold a significantly greater share of this market, increasing Tanzanian investments in the Port of Dar es Salaam and the Government of Tanzania’s pursuit of transit business to inland markets have resulted in its share steadily increasing. In 2012 Mombasa handled 18.9 percent less transit traffic to/from the DRC, Rwanda, and Uganda compared to the previous year12 and total traffic at the Port of Dar es Salaam grew by three percent more than that at Mombasa in 2012, for example (SCEA 2013). Further, the Port of Dar es Salaam now transports the majority of Rwanda’s transit goods and in January 2013 the Government of Uganda signed a Memorandum of Understanding with the Government of Tanzania to facilitate greater use of the Port of Dar es Salaam for Uganda’s transit traffic13. 11

The EABC is a particularly powerful organization. Its chairman is Vimal Shah, one of the wealthiest men in Africa. Among his business interests are Bidco Oil Refineries, the largest manufacturer of edible oils in East and Central Africa. 12 2012 ‘Dar es Salaam Overtakes Mombasa in Cargo Handling’ East African Business Week. February 1. 13 Kaijage, F. 2013. ‘ Ministry Signs Memorandum of Understanding for Uganda Goods Flow Resumption’ IPP Media. January 26.

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Political Economy Analysis of Regional Transport Integration in the EAC

3. The role of EAC integration The Port of Mombasa has also become a critical element of plans for EAC regional integration and development of inland economies. President Kenyatta has been spearheading EAC integration as part of the ‘Coalition of the Willing’ or the governments of Kenya Rwanda, and Uganda, who have shared interests in more rapid efforts at regional integration. In particular, improved port performance may bring down transport prices. The port will be especially critical for effective operation of the SGR once completed since high levels of port efficiency will be important to ensure that it transports optimal levels of cargo and generates the necessary revenue in order for the Government of Kenya to meet the loan repayment requirements to China Exim Bank. The paper discusses this issue in greater detail in section 3.4.

2.2.1.3 Lingering inefficiencies and challenges While there have been a number of efficiency and capacity improvements at the port, a number of challenges and risks remain. This section will first analyse the problems Container Freight Stations (CFSs) impose on the port. It then assesses the concession risks surrounding of the new berths. 1. Container Freight Stations (CFSs) CFSs are privately managed off-dock yards intended to relieve the port of congestion by receiving/dispatching cargo and loading/offloading group cargo from containers. They operate similarly to Inland Container Depots (ICD) as they are under the control of customs and other government agencies. CFSs were first introduced in Mombasa in 2000, however only three CFSs were nominated to handle cargo in 2008 (Figures from KPA). There are now 11 handling containers and a large number handling automobiles. CFSs greatly improved port efficiency by reducing congestion. After their introduction the percentage of cargo cleared outside of the free storage period decreased from 70 to 45 percent (KSC 2011). However, since their introduction, the performance of CFSs has deteriorated. A study by Kenya Shippers’ Council found that importers now incur an extra Kshs. 1.64 billion ($19.9 million14) annually as a result of inefficiencies in CFS operations (2011). Importers now not only face delays in cargo clearance, but have to pay an additional cost for such delays to the CFS operators as a result. This is good for CFS owners, but imposes costs on importers and transporters. These inefficiencies partly exist due to poor management and coordination of partner agencies at the Port. Numerous examples exist (KSC 2011 and Stakeholder Interview 4/3/14):

14 15



When shipping lines delay submitting ship manifests to port and customs authorities, CFS operators also must postpone processing of their documents.



The KWATOS and CAMIS computer systems regularly fail causing delays to the release of containers from the port.15

Calculated at March 2011 currency rates – Oando.com) Kilindini Waterfront Operating System and Cargo Management Information System.

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Political Economy Analysis of Regional Transport Integration in the EAC



Lengthy documentation procedures have contributed to long truck turnaround times, which delays when CFS operators can transfer goods from port to the CFS.



Disputes between importers and customs over interpretations of the tariff structure can lead to delays in the release of consignments from CFS yards, which contributes to congestion at the CFS.

CFS operators have devised a number of mechanisms to create additional charges for cargo handlers. The most common charge is that CFSs levy is for customs verification. CFSs charge $59 per container for this service, which they levy on 30 percent of containers, despite a KPA ruling which stated that legally CFSs are not entitled to make such a charge. Rather, these requests may only legally come from the cargo owner. KPA is not at the moment enforing this ruling (Stakeholder Interviews 3/3/14 – 6/3/14). There are also widespread reports that the majority of CFS operators cause unjustified delays to create the need for extended storage time (Stakeholder Interviews 3/3/14 – 6/3/14). Due to poorly designed CFS regulations, if all cargo was transferred to and cleared from CFSs on time, they would receive no income. KPA allows cargo owners four days free storage, including in CFSs’. The fifth day automatically attracts re-marshalling charges of $110 for a twenty-foot container, and $165 for forty-foot container plus storage charges to be accrued daily (KSC 2011). Stakeholders report that CFS operators can unjustly delay the transportation of cargo to a CFS after it is removed from the ship to incur charges after the free period expires. Data from KPA show that on average 14.1 percent of containers are delivered to CFSs 48 hours after the last sling, despite the regulation requiring CFSs to remove all cargo within this time period. One particular CFS delivers 34 percent of containers after 48 hours, and another located within the port, delivers 19.6 percent of containers after this period. Such practices give CFS operators greater scope to levy storage charges. Stakeholders also report that CFSs slow operations at critical times, such as Fridays, so the goods are charged for weekend storage. While CFS owners are clearly to blame for this state of affairs, the distorted regulatory structure, if KPA enforced it, would make CFSs financially unviable. Despite active lobbying by several industry groups such as Kenya International Freight Warehousing Association (KIFWA) and Kenya Shippers’ Association (KSA), to improve CFS operations and remove their perverse incentive to deliberately delay processing cargo, KPA has done very little to address the problem. In fact, CFS operators have been effective in resisting government directives, such as those stipulating the relocation of CFSs currently located in the port and within central Mombasa. Furthermore, a failure to gazette regulations on CFS operations means they face very little effective regulation. Instead CFSs are loosely regulated by KPA, Kenya Maritime Authority (KMA), and Kenya Revenue Authority (K RA). KMA has a mandate for regulating the operations of maritime service providers according to the Merchant Shipping Act of 2009 however this regulation has not been gazetted so KMA is left handling complaints and adjudication. Stakeholder interviews and a report by the Kenya Shippers’ Council (2011) indicate that the failure to gazette the necessary regulation is a result of pressure from CFS owners not to do it. Almost all CFSs owners are or are closely to powerful political/business interests in Mombasa.16 For example, Portside CFS, owned by Mombasa County Governor Hassan Ali Joho, 16

Stakeholder interviews indicated that Awanad CFS is owned in part by Hezron Awiti Bollo, MP on the Parliamentary Committee for Transport and former Chair of KIFWA; Compact CFS is owned in part by M.G. Waweru, former Commissioner General of Kenya Railways; Mitchell Cotts is owned in part by

17

Political Economy Analysis of Regional Transport Integration in the EAC remains inside the port despite instructions from KPA to re-locate, and the CFS is one of the most inefficient as well. Governor Joho often is able to resist demands from KPA and President Kenyatta given his influence in the Coast and his role in the ODM. Other CFS owners are similarly as powerful (Stakeholder Interviews 3/3/14 – 6/3/14). This largely explains the failure of the Presidential Initiative to overcome CFS inefficiencies. The most visible example of the power of CFS owners is the detrimental impact the warehouses have on Mombasa traffic. A number of CFSs are located in prime locations near Mombasa port and close to the centre of the city. Since they have opened, horrendous traffic jams have developed in Mombasa as cargo trucks shuttle back and forth between the port and various CFSs throughout the city. The current costs created by CFS inefficiencies may become a dormant issue when the new berths are in operation because it will create more storage capacity in the port. However given their vested interests in the status quo, they could find a way to maintain a role in container storage by resisting certain aspects of the reforms and such precedents exist in Kenya. We discuss how they could do this below. 2. Concessioning of Berths 20 and 21 In 2011 berth occupancy for container and oil terminals was over 80 percent, while acceptable global standards are between 60-70 percent (KSC 2011). Further, KPA predict that traffic will increase from 894,000 TEUs in 2013 to 1,877,000 TEUs in 2020 (SAPROF Report 2013). Two berths are currently being constructed that will provide important additional capacity to meet increasing demand.17 The Government of Kenya plans to concession the operations of the new berths and for KPA to act as the landlord. The DWU and CFS owners may try to interfere with this process. The Dock Workers Union (DWU) represents around 4500 workers from the Port of Mombasa (Stakeholder Interview 5/3/14) and has been very effective in halting privatisation and commercialisation efforts in the past, even when reforms were supported by President Kibaki. KPA identified the ‘land-lord’ model as the preferred option for the port in 2002 and received Board approval (ibid.). It was expected that this would involve a concession or lease of cargo handling operations, and for KPA to operate as a corporate body with more autonomy from the Ministry of Transport and other government institutions. However, this reform never materialised, primarily as a result of resistance from coastal politicians and the DWU. As recently as 2009 the DWU organised a five day strike which halted plans by the Privatisation Commission to award a contract to a firm to design and implement a privatisation plan (ibid.). The DWU also have close links to coastal politicians, who act on behalf of dock workers in the legislature (Stakeholder Interview 4/3/14). The coastal vote is important in Kenya’s new political system that demands Presidential candidates receive at least 25 percent of the vote in five out of eight Provinces (World Bank 2011).

Duncan Ndegwa, former Governor of the Bank of Kenya; Kencot CFS’s ownership links to former President Moi and his family. 17 The new container terminal has three phases. Phase I, funded by JICA, has two terminals (berth 20 and 21). Phase II will have one terminal (berth 22), and same with Phase III (berth 23). KPA is negotiating with JICA to fund Phase II also. Phase II is planned to be completed in July 2019, while Phase III (which has no funding) in January 2022.

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Political Economy Analysis of Regional Transport Integration in the EAC Many coastal residents and most coastal politicians see privatisation leading to job and asset and further political and economic marginalization. The former Chair of the Coastal Parliamentary Group was quoted stating that “only coastal natives should manage the facility” and that the port was their “coffee and tea,” comparing the port to the cash crop of other regions of Kenya (World Bank 2011). Another motivation for Coastal politicians to resist private concession of the port is to ensure that local interests can control the awarding of contracts issued by the port, which provide rent seeking opportunities and a means of rewarding coastal firms and people (ibid.). Coastal politicians, for example, actively lobby for the Managing Director of KPA to be from the region. Coastal politicians are generally aligned to the ODM party at present, including the Governor of Mombasa Country. However, the Jubilee government was able to attract the votes of MPs in two Coastal districts during the last election and more recently coastal politicians allied to ODM entered into a bi-partisan agreement with coastal politicians aligned to the Jubilee coalition to form their own party18 which could dilute its strength on the coast. It is not clear how Kenyatta’s efforts to secure the coastal vote will affect his administration’s capacity to concession port operations to a private provider. It is reasonable to conjecture that he will take an accommodating stance prior to the 2018 election, however. While the DWU publicly supports the Government of Kenya’s plans to concession operation of the new berths, the organisation aims to have a stake in the project, preferably through a share in it (Stakeholder Interview 5/3/14). This is not guaranteed and KPA is aiming to structure the concession so that the DWU is unable to participate (Stakeholder Interview 4/3/14). If this scenario unfolds, it is very likely that the DWU will find grounds on which to oppose the concession. Precedent shows that the DWU can completely change its position on a public issue over a short period of time and act on it. The SGR provides a good example. The organisation recently moved from being a staunch opponent of SGR - even hiring lawyers to build a case against the project - to a placid supporter. It is curious on the surface that the DWU reacted so strongly to the SGR as it is an issue that does not have a huge impact on its members. Stakeholders interviewed reported that the DWU’s initial opposition to SGR was linked to David Langat, a broker that lost out on the SGR contract and tried to create a challenge to the procurement process using his political connections to the port19 with the aim of re-tendering the project (Stakeholder Interviews 21/1/14 - 7/3/14). We describe this in more detail in section 3.4. The DWU’s about face occurred when Langat received compensation for this through a portion of another procurement contract. Another threat to a private concession of berths 20 and 21 comes from brokers that may lose out on the contract and create opposition to the project with the aim of having it re-tendered or receiving a substantial pay-off as compensation. This is currently unfolding over the SGR and the government has recently re-tendered other large public contracts under similar circumstances, including the green field construction of a new terminal at Jomo Kenyatta International Airport20. David Langat, for example, has previously used the DWU to further his 18

Sanga, B. 2014 ‘Coast Jubilee, ODM leaders Unite to Form Regional Party’, The Standard, 9 March Langat exemplifies the weakness of political parties in Kenya. While he was a prominent financier of Ruto’s United Republican Party, he is also substantial business interests along the coast, including in the transport sector and in the port. Thus, while the DWU are closely linked to the opposition ODM, Langat’s economic power in Mombasa allowed him to mobilize the union to advance his interests. 20 In 2012 the Transport Minister at the time, Amos Kimunya, cancelled the Kshs 55 billion ($674 million at March 2012 currency rates – Oando.com) contract after a Chinese firm in conjunction with a UK 19

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Political Economy Analysis of Regional Transport Integration in the EAC business interests. He brokered the deal for Toyo Construction and thus may attempt to become involved in the operations and/or win construction bids. Finally, CFS owners could cause large disruptions if the port expansion damages their businesses interests. Currently, KPA claims that the expanded port will obviate the need for CFSs due to expanded storage capacity within the port. It is unclear at this time how CFS owners will react to losing their business, but, as this section has demonstrated, they are a powerful constituency and the government may not be able to impose this outcome on them (Stakeholder interviews - 3/4/14 – 6/3/14).

company won the award on the grounds that KAA had been unduly expedited the process and made the decision without Board approval. Kimunya also subsequently alleged corruption. However, the Public Procurement Oversight Authority later ruled that the procurement process was legal. Stakeholders interviewed stated that Amos Kimunya cancelled the contract to secure it for another firm for whom he acted as a broker.

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Political Economy Analysis of Regional Transport Integration in the EAC

3 Railways 3.1 Introduction The Northern Corridor railway was constructed by the British Colonial administration between the late 19th century and the early years of the 20th century. The railway was managed by East Africa Railways and Harbours between 1949 and 1977, after which the dissolution of the East Africa Community prompted the establishment of the national railway authorities: the Kenya Railways Corporation and the Uganda Railways Corporation. Railway cargo traffic peaked in the mid-1970s and subsequently declined in both Kenya and Uganda (more detail in the following section). Today in Kenya, freight levels are less than 40 percent of those in the early 1970s. While the decline was less severe in Uganda and freight levels partially recovered in the 1990s, freight levels are also less than those forty years ago. This section will highlight the political economy factors behind this decline by first analyzing management of the railway by the Kenyan and Ugandan governments (between 1977 and 2006), then focusing on the period during which Rift Valley Railways (RVR) has been responsible (2006-present).

3.2 Why did rail traffic decline on the Northern Corridor (1977 – 2006)? The annual volume of freight transported by Kenya Railways declined from a peak of 4.426 million tons in 1973 to 1.5 million tons in 201321. Performance was particularly poor during the 1990s. While Kenya Railways required locomotive availability of 70 percent or above, between 1992/93 and 2000/01 wagon availability remained below 50 percent. Furthermore, wagon turnaround time increased from 15.2 days in 1991/92 to 22.6 days in 1997/98 and fluctuated thereafter at about 20 days (Kenya Railways Annual Reports). The railways financial performance was also poor during this period. Kenya Railways suffered heavy operational losses and was subject to a net loss in each financial year after 1995 (Kenya Railways Annual Reports: several years). By June 2004 Kenya Railways had accumulated debt amounting to $277 million with losses rising at about $39 million annually (Kenya Railways: Annual Reports, various years). Throughout this period Kenya Railways was technically insolvent and was unable to service most of its long-term debt.

21

Kenya national Bureau of Statistics: Economic Survey and Statistical Abstract, various years from 1984 to 2013 and Kenya Railways Annual Reports.s

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Political Economy Analysis of Regional Transport Integration in the EAC

The level of traffic on Uganda’s railway network fluctuated quite dramatically during the same time period. In broad terms, performance decreased rapidly in the 1980s and partially recovered in the 1990s. However, it was generally poor, with traffic not exceeding one million tonnes throughout this period (CPCS 2009). Freight traffic decreased from 750,000 tonnes of container cargo in 1977 (World Bank 1994) to between 200,000 and 350,000 tonnes throughout the 1980s (CPCS 2009). This gradually improved from the 1990s, with net tonnage climbing back up to 495,000 in 1993 and 900,300 by 2002 (World Bank 1994). However, Uganda Railways’s financial situation remained weak. It faced average annual losses of Ushs 5.63 billion ($3.2 million22)between 2000 and 2003 (Ntambirweki 2005).

3.2.1 Understanding the drivers of railway performance 3.2.1.1 Kenya In Kenya, the deterioration was partly the result of economic stagnation and the development of the road network. In the 1970s substantial road infrastructure represented increased competition for railways. During this period a requirement was abolished that had made it mandatory for a number of key government contracts to be carried by rail. Compounding this, it constructed oil pipeline was constructed between Mombasa and Nairobi in 1974 which deprived Kenya Railways of one of its key commodities. However, deliberate mismanagement of the railway under President Moi was the main cause. 1. Parastatals as a source of rent extraction and political patronage The break-up of East Africa Railways and Harbours was a patronage windfall for Moi. He used the port of Mombasa and Kenya Railways as sources of patronage as part of a larger objective to secure power through creating an elite network of Kalenjin who would be loyal to him. At the time, Kenya Railways (KR) was one of the biggest land-owners in the country with a secured market and a healthy turnover. As a result it was a prime target for patronage and rent-seeking and over the next two decades, Kenya Railways was subject to extensive rent 22

Converted at March 2003 rates – Oando.com)

22

Political Economy Analysis of Regional Transport Integration in the EAC extraction (Stakeholder Interviews 21/1/14 – 28/2/14). A review of reports on Kenya Railways by parliament’s Public Investment Committee highlights a number of financial irregularities on which no action was subsequently taken. Examples include selling land at prices below market value without any third party sales presence to the political elites of the time and the looting of staff pension funds (Republic of Kenya, National Assembly 1998). Alongside this plunder there was very little investment in the rail sector and the condition of the track and rolling stock steadily declined. Moi also appointed political allies to management of Kenya Railways (Stakeholder Interviews 21/1/14 – 28/2/14 and internal Kenya Railways review documents shared with the team). Although the Kenya Railways Act states that the Board and Directors should be appointed by the Minister responsible for transport, in practice this was exercised by the Office of the President. This had the result of weakening ministerial oversight and the effectiveness of the Board, which contained many members without any relevant experience. During this time, there were countless examples of poor management as a result of incompetence or ulterior interests, further weakening the performance of the rail sector. One example of the railway’s growing mismanagement during this period was a major reequipment programme in 1977, where the Government of Kenya purchased 48 large diesel electric locomotives from the USA and West Germany, and 1200 new wagons from the UK (Central Bureau of Statistics 1979). However, the new equipment was not fully compatible with what was already in use and its workshop was not able to service much of the new rolling stock as it aged. It subsequently fell out of operation. The new equipment had no impact on Kenya Railways operations. While ton/km rose slightly from 2,057 million in 1979 to 2,281 in 1980, it then steadily declined to 1,860 in 1985 (Kenya Railways Annual Reports: several). Furthermore, despite financial challenges constraining the ability of Kenya Railways to renew existing rolling stock, the workshop intended for railway maintenance was used for nonrailway projects, such as Nyayo Car Manufacture (Atieno, K.O. 2004).23 2. Rail used for popular politics Political interference in Kenya Railways also constrained the commercial performance of the organization, most notably in the setting of tariffs and staffing levels. An internal Kenya Railways review acknowledges that tariffs could not be raised in-line with inflation during the 1980s as a result of political influence over management, and that as a consequence, asset renewal fell accordingly (Kenya Railways Unknown Date). In 1991 reforms were introduced to allow Kenya Railways to set tariffs independent of government, however after rates were increased and a number of loss-making passenger services were stopped, Kenya Railways was forced to renege on several reforms by again reducing tariffs and reinstating passenger services (Atieno, K.O. 2004). Kenya Railways was also forced to honor a number of Public Service Obligations (PSOs) imposed by government. During the 1980s and early 90s Kenya Railways was required to carry certain commodities for government at subsidized tariffs, such as maize, wheat, fluorspar, molasses, sisal, and soda. This cargo accounted for about one-third of its total tonnage at the time (Grosh 1991). While agreements were in place to compensate Kenya Railways for the losses incurred in honoring the PSOs, these payments were not adequately made.

23

Nyayo Car was a project by the Moi administration to design and manufacture cars in Kenya. Due to lack of funds and difficulties in design, the car never entered into production.

23

Political Economy Analysis of Regional Transport Integration in the EAC Popular political considerations also meant that Kenya Railways was heavily overstaffed. After taking control of the railway in 1977, staffing costs as a percentage of operating costs were 36 percent in 1980 and increased to 48 percent in 1988. By 1992 Kenya Railways employed 22,000 staff, which was assessed as 15,000 more than necessary (Atieno, K.O. 2004). While staff numbers reduced to 10,215 in 2000/01, the proportion of the wage bill to revenue remained high as salaries were increased to motivate staff (ibid.). 3. Increasing preference for the road sector As the plundering continued, and the performance and efficiency of Kenya Railways declined, the road haulage sector took increasing advantage of the opportunity deteriorating rail performance presented. Moi and his elite became increasingly interested in the haulage sector. Most prominently, Moi’s family runs one of the country’s largest trucking companies (Siginio Freight) (Stakeholder Interviews 21/1/14 – 28/2/14). Political interests in the trucking industry led to an increasing preference for road improvement over rail investment. President Moi also created favorable conditions for truckers by not enforcing axle load regulations, and issuing government contracts for political patronage (World Bank 2011). For example, the National Cereals and Produce Board was forbidden from transporting fertiliser and inputs using the rail line (Stakeholder Interview 27/2/14). Politically well-connected firms and individuals won these tenders, further entrenching crony capitalism. Moi also realized that road construction was far more amenable for political targeting than a functional railway. While the rail lines cover a very small area of the country, historically situated to serve very narrow interests (generally areas where the colonial settlers were based and areas of extractive potential), roads can cover the entire country and the opening up of new roads or the improvement of existing roads can be a very visible way of rewarding particular groups. The evidence that road construction in Kenya often follows an explicit political logic is strong (Burgess et al 2010): the president uses his unconstrained powers to massively distort national road building in favor of those districts where his ethnicity is well-represented (an additional 10.44 km of paved roads per district every three years). The President's district of birth receives an additional 46.33 km of paved roads every three years; (b) the second largest ethnic group in the cabinet seems to receive an additional 11.85 km of paved roads per district every three years; (c) the public works ministry is a strategic position for road investments as the district of birth of the public works minister obtains an additional 8.53 km of paved roads every three years.

3.2.1.2 Uganda A large part of the decline in the railways in Uganda was due to the deterioration in the maintenance and operations along the Kenyan section of the railways. The railway to Uganda must traverse close to 1000 KM in Kenya before reaching the Ugandan border. In addition, Kenya’s much larger market size compared to Uganda limits the influence of the latter over the former. As a result, Uganda was very much a somewhat helpless victim to events in Kenya. Nevertheless, it bears responsibility for the poor performance of the railways within its borders. In Uganda, rail was also the victim of popular political interference and a prioritisation of road infrastructure. However, in general it suffered from considerably less interference than the Kenyan line. Uganda Railways presented fewer opportunities for rent seeking given lower 24

Political Economy Analysis of Regional Transport Integration in the EAC levels of traffic, less land holdings, and a smaller number of staff. However, political economy factors undermined rail performance in Uganda as well. The operations of Uganda Railways were subject to high levels of official and informal interference by political elites. For example, as a result of a number of Public Service Obligations (PSOs), the Government of Uganda required Uganda Railways to transport certain goods from key parastatals at subsidised tariff rates. Since the government routinely failed to make these payments, the railway was starved of the money it needed for maintenance (Ntambirweki 2005). Uganda Railways was also subject to systemic overstaffing and low labour productivity for most of its history. However, commercialisation processes in the early 90s were successful in rationalising its workforce from 7,280 in 1988 to 4,100 by 1993. This measure contributed to the slight improvements in its financial position and performance (World Bank 1994). However, the impact of these reforms was undermined by government recruitment of excessive numbers of support staff and an increased use of unverified overtime by staff. These processes resulted in the wage bill significantly exceeding its budgeted amount throughout the early 2000s (Ntambirweki 2005). Further, Uganda Railways operated passenger services that were not commercially viable on up to 60 per cent of its route. Political interference prevented the railway from charging tariffs sufficient to cover their costs (Ntambirweki 2005). This constrained financial performance and its ability to invest in required equipment and infrastructure improvements. The situation marginally improved with the commercialisation process.

3.3 Why did rail traffic decline on the Northern Corridor under Rift Valley Railways (2006-present)? Unsurprisingly, as a result of the aforementioned factors, both Kenya and Uganda railways were in very poor condition and fell into severe disrepair by the late 1990s. Both railways were losing millions of dollars per month, accumulating debts, and investing nothing or very little in the maintenance of infrastructure and rolling stock as a consequence. This resulted in low and decreasing freight volumes. As a result, the governments of Kenya and Uganda decided to rid themselves of the problematic railways and bring in private investors and operators. In 2003 the two governments agreed to concession the railway under a single ownership and management entity. After three years of further preparation, the concession was awarded to Rift Valley Railways (RVR), a consortium led by a South African firm Sheltam Rail (Pty) Ltd (forthwith Sheltam) on a 25 year basis. Shortly after, the concession won Euromoney Project Finance Magazine‘s Africa Deal of the Year for the concession’s innovative governance mechanisms and the way the deal had been closed despite the challenging environment (World Bank, EAC, TMEA 2012). However, in 2010 the concession collapsed. Rather than leading to a revival of the railway, net tonnage had decreased from 2,304 million tons in FY 2006/07 to 1,619 million tons in FY 2011/12 (Kenya National Bureau of Statistics: Economic Survey and Statistical Abstract, various years.). RVR’s investments were far below what they needed to be to significantly improve capacity or efficiency as well. By 2010 it had barely invested $1 million, compared to the 25

Political Economy Analysis of Regional Transport Integration in the EAC minimum investment target specified in the concession agreement of $7 million (World Bank, EAC, TMEA 2012). RVR also failed to pay the agreed concession fees between 2008 and 2010, causing it to accumulate a $5 million debt to Government of Kenya and Government of Uganda (ibid.).

After the collapse of the first concession the RVR consortium was restructured in 2012. Following protracted discussions, Citadel Group from Egypt, through its subsidiary, Ambiance Ventures Ltd, bought out Sheltam and a number of other stakeholders, with the exception of Kenyan firm Transcentury. Ugandan firm Bomi Holdings Ltd also entered the concession. The revised concession structure was: 51 percent Ambience Ventures (Citadel), 34 percent Safari Rail (Transcentury), and 15 percent Bomi Holdings Ltd. The revised concession introduced a number of efficiency improvements including new equipment and rolling stock, external management support, and rehabilitation of the track. The concession structure changed once more in March 2014, with Citadel buying out Transcentury’s shareholding, and rumours of interest from foreign firms which could see further changes. It is not entirely clear why new investors want to come into RVR at this time. The most practical reason would be to be in a privileged position to bid for operating part of the SGR if it materializes. Part of RVR’s poor performance results from factors external to the concession. For example, shortly after the concession started Kenya experienced violence following elections in 2007, which affected port and transportation operations severely. Furthermore, rail is inherently disadvantaged in Kenya as a result of the fuel levy which is charged on all fuel but only used for roads, effectively forcing rail to subsidise its competition. However, many of the problems were caused by the two governments and Sheltam. We discuss these factors in greater detail below.

3.3.1 Understanding the drivers of a poorly performing railway concession The fundamental reasons for poor performance derive from flaws in the design and implementation of the concession, as well as the behavior of the two governments and RVR. 26

Political Economy Analysis of Regional Transport Integration in the EAC The following section outlines the key political economy factors that negatively impacted the concession. 1. Less than satisfactory due diligence and concession preparation It is now apparent that the due diligence process overestimated the managerial, financial and technical capacity of the concessionaire, and underestimated the investment required to rehabilitate the track and rolling stock (World Bank, EAC, TMEA 2012). It is equally clear that Sheltam severely, and convincingly, misled the Governments of Kenya and Uganda as well as their transactions advisors, IFC and CanRail, respectively, about its experience in the rail industry. Rather than operating a series of railways in the region, as Sheltam claimed, the company created a series of shell corporations to disguise its lack of experience in the rail sector. Many people in the Government of Kenya and Uganda who were close to the deal had suspicions about Sheltam’s bid. First, the company did not undertake its own due diligence on the condition of railway, but accepted the estimates of those who were anxious to rid themselves of it, the governments of Kenya and Uganda. Second, the bid only solicited two legitimate proposals, Sheltam and RITES of India, but none from experienced operators. Many were not surprised that serious investors were not interested in owning and operating the broken railroad. Third, while RITES asked for subsides to operate the railroad, Sheltam offered a very generous concession of 11.1 percent of net revenue, more than twice the level of the bid request. Sheltam’s poor financial condition was apparent even before it signed the concession agreement and started operations. Just days before the signing ceremony, Sheltam declared it was unable to provide the $5 million fee required at the contract signing due to the late withdrawal of Grindrod Ltd, one of the original concession partners (Stakeholder Interviews 21/1/14 – 28/2/14). This was the beginning of an agonizingly slow process where Sheltam struggled to find equity partners. Sheltam’s timing could not have been worse as this was occurring during the financial meltdown in 2008. Its inability to find equity partners held up commitments from IFC and KfW, the German development bank, to lend to RVR. The cumulative impact is that not only did RVR not have funds for maintenance and rehabilitation it was struggling to pay its concession fees as well. Sheltam’s lack of expertise became immediately clear. Sheltam chose to operate the railway itself rather than using external technical expertise as the two governments had expected. In addition, for several months after the concession award there was virtually no senior management team in place. Sheltam also provided technical support from a company it owned and made RVR pay for it (Stakeholder Interview 12/3/14). According to Uganda Railways, the Uganda regulator for RVR, the company didn’t even open a bank account in Uganda for months after the concession and operated the railway on a cash basis in the interim. The concession preparation process also severely underestimated the cost of rehabilitating the track, which had significant consequences for the concessionaire. Investment requirements were originally estimated to be about $100 million, but were later revised to at least $300 million. Sheltam had not anticipated such extensive rehabilitation needs and as a result was only able to repair a small fraction of what the concession agreement stipulated in part due to its inability to raise sufficient funds. As a result, RVR was unable to compete with the service offered by trucks, which were considerably faster and more reliable. A World Bank, EAC and

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Political Economy Analysis of Regional Transport Integration in the EAC TMEA blamed the servere underestimate of rehabiliaition costs as a consequence of ‘the urge for expediency to reach financial closure’ (2012). (Stakeholder interveiws 25/2/14 – 13/3/14). Interviews with those involved in the concession process revealed that the two governments were more concerned with ridding themselves of a railway that was losing massive amounts of money than building an effective railway system (Stakeholder Interviews 21/1/14 – 13/3/14). The Governments of Kenya and Uganda were aware that the track and rolling stock were in an extremely poor and commercially unattractive condition, and while they did not demand low estimates of the cost of rehabilitation, their preferences were clear. The poor state of the track and rolling stock, and the unrealistic estimated cost of rehabilitation put off many serious potential concessionaires, including Grindrod which pulled out of Sheltam’s consortium at the very last minute. The two governments were aware of Sheltam’s poor financial sitaution at the time of the concession, but chose to proceed with it nevertheless. The governments were reluctant to re-tender given the time it had taken to reach this point (4 years), the costs incurred in arranging the concession, furthrer losses they would incur in supporting the railway until they could find a new concessionaire, and the inevitable political embarrassment that would have resulted in such a late withdrawal. Further, the influential groups within the two governments, primarily the Minstries of Finance, were against rehabilitating the track to make it more attractive for investors (Stakeholder interveiws 25/2/14 – 13/3/14). IFC Advisory Services was a willing participant in the less than satisfactory due diligence process and it was aware of Sheltam’s financial difficulties at the time of the concession. It negotiated it nevertheless because this was the preference of its client, the Government of Kenya. While IFC Advisory Services fulfilled its role, the subsequent problems with the concession left the IFC open to criticism for this outcome. In the view of many stakeholders, the IFC deserves part of the blame for developing a concession in which it was subsequently unwilling to invest. The IFC investment lending unit stressed its independence from the advisory services unit repeatedly during this period. The public, including many in the Governments of Kenya and Uganda, were unpersuaded by this argument, however. Rather, they claimed the IFC didn’t have confidence in the project it helped negotiate for the Government of Kenya and were relying on a technicality to obscure it. Even those who did understand the difference were unwilling to defend the IFC when the political attitude towards RVR turned toxic (Stakeholder Interviews 21/2/14 – 13/3/14). The Kenyan media aptly captured the public mood towards RVR at the time: According to experts who have been involved in such deals, it would have been possible to detect that Mr Puffet [CEO of RVR] did not have money right from the start…To save the situation, the governments and the International Finance Corporation (IFC), which is owned by the World Bank, hastily amended the contracts…To this day, they have not honored their commitment to buy shares directly in the company…to insiders within IFC, this concession left a bad taste within the World Bank Group, with some of the bankers who shepherded it turning out to be the biggest critics of themselves…It is simply considered one of the worst deals they have done, and the World Bank has officially acknowledged as much publicly through the various studies its publishes on infrastructure.24 However, Sheltam also deserves considerable blame for the concession process as well. It was aware that the railway was in poor shape and, more importantly, that the Governments of 24

Onyango, Fredrick. 2010. “How Plan to Privatise Railways Became Kenya’s Public Sector Reform Nightmare.” Daily Nation. It is notable that the article appeared in The Nation since the paper was generally supportive of the Kibaki administration.

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Political Economy Analysis of Regional Transport Integration in the EAC Kenya and Uganda were anxious to rid themselves of the financial burden it imposed on their budgets. As a result, it was negligent in not conducting its own due diligence or, at a minimum, was irresponsible in expecting the governments to provide accurate cost estimates for rehabilitating the railway. 2. Power/influence within the concession The concession was originally structured on a lead investor concept, where the lead would own 35 percent of the concession, which could not be diluted until a number of conditions of the concession agreement were met (World Bank, EAC, TMEA 2012). This structure was to ensure that Sheltam could not easily rid itself of the railway. However, it also placed the lead investor in a position of power over the other investors that could not exercise their interests. For example, when it became apparent that Sheltam could not inject additional equity as required, the minority shareholders were not in a position to address this issue, or hold the lead investor to account, as they had no decision making power. This restricted the ability of the minority stakeholders to address underlying weaknesses in the lead investor’s capacity when they emerged. 3. Collective action Another challenge was the lack of an overarching body, such as the EAC, to manage the various interests of the two countries and private sector in the preparation and regulation of the concession. During the preparation of the concession, an ad hoc steering committee was formed to discuss issues and resolve differences, which included officials from Kenya Railways, Uganda Railways, Ministries of Finance, Ministers and Permanent Secretaries of the Ministries of Transport, representatives of the Attorney Generals and other stakeholders. However, there never existed a formal forum among the many stakeholders around the railway for addressing problems, such as Sheltem’s poor performance. Lack of a common regional legal and regulatory framework also constrained railway operations. While there was an Interface Agreement which provided for a Joint Railway Commission to facilitate coordination and resolution of cross-border issues, the body did not have legal powers to make decisions binding and so was unable to address the problems that occurred during implementation. This also explains part of the delays in addressing the challenges with the first concession. 4. RVR - Government of Kenya relationship One of the largest avoidable problems with the concession was the poisonous relationship that developed between Kenya Railways and RVR, in particular and the Managing Director of Kenya Railways, Nduva Muli, and Puffet. While Kenya Railways had grounds to be critical of RVR given the company’s performance, the public maligning of RVR fostered an enormous amount of hostility in some parts of government towards RVR and among the general public. Muli was vehemently opposed to the concession because he believed the state could run the railway better than a private operator and also because it diminished his role from a railway operator to a railway regulator. While it is unclear whether Muli was operating from sincere conviction or opportunism, he became one of RVR’s fiercest and vocal critics from the beginning. Muli took an expansive view of his regulatory role to closely oversee and comment on numerous aspects of RVR’s operations. Its poor performance combined with Puffet’s confrontational disposition led to numerous and escalating acrimonious exchanges between the two, with Muli claiming Puffet was incompetent, while the latter accused the former of severely 29

Political Economy Analysis of Regional Transport Integration in the EAC overstepping its regulatory role. Relations between the Government of Kenya and RVR improved since 2012 when Egypt’s Citadel Capital bought Sheltam’s shares, replaced RVR’s senior management with an experienced team from Brazil’s America Latina Logistica, and began investing funds for rehabilitation. Nduva Muli, rather than receiving a reprimand for his interference with RVR’s operations, earned an impressive promotion to the Principal Secretary of the Ministry of Transport. His hostility to the RVR concession remains. During his recent vetting by Parliament’s Transport, Public Works and Housing Committee to become Principal Secretary he stated: This [RVR] concession which was signed in 2006 with the aim of injecting new capital and efficiency in management of rail transport has had structural failures…we must bite the bullet by quickly ending this agreement… No private investor will be able to run the railway which is critical to national economic development. If we don’t move to invest in the railway infrastructure and modernize it, the country will lose its geo-strategic aheadness [sic] in the region.25 Muli has also become one of the most vocal supporters of the SGR. We discuss the project in greater detail in the following section.

3.4 Standard Gauge Railway – prospects and risks The EAC Heads of State agreed to work towards upgrading all the region’s railway lines to standard gauge at a summit in December 2011, based on the East African Railways Master Plan (2009) (Stakeholder Interview 28/2/14). The plan includes the construction of a Standard Gauge Railway (SGR) on the Mombasa-Nairobi-Kampala railway line, which will eventually be constructed to Kigali and Juba. Since then, the Government of Kenya has signed a commercial contract with China Roads and Bridges Ltd to construct a SGR track from Mombasa to Nairobi and an ICD at Embakasi, and to provide the necessary rolling stock (Stakeholder Interview 27/2/14). The Government of Kenya plans to operate trains on the line by 2016 and Malaba by 2018. It lacks financing for the latter, however. Finance for the SGR from Mombasa to Nairobi is expected to come from China Exim Bank (40 percent on commercial terms, and 40 percent on government-to-government terms) and Government of Kenya (20 percent), although the financial agreement has yet to be signed26. The governments of Kenya, Rwanda, and Uganda are looking to finance the remaining components of the SGR network as a joint project. They are currently

What is a standard gauge railway? Gauge refers to the distance between the inside edge of the rails on a railway track. The width of a ‘standard gauge’ rail track is 1,435 mm or 4 ft 8 ½ inches (World Bank 2013). This differs from the ‘narrow’ or ‘meter’ gauge currently used on the Mombasa–Kampala RVR railway line. A standard gauge has the primary benefit of being faster, and thus more efficient, than a meter gauge. It is used in Central and Western Europe, the United States of America, Canada, Morocco, Algeria and Japan.

25

Mutai, Edwin. 2013. “Transport PS Nominee Pledges to End RVR Deal.” Business Daily. During interviews key stakeholders reported that China Exim Bank were waiting on parliament’s investigation to conclude before signing the financial contract. We discuss these investigations in detail later in this section. 26

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Political Economy Analysis of Regional Transport Integration in the EAC looking to China Exim Bank as the main financier (Stakeholder Interview 27/2/14). They are also holding discussions with the AfDB Infrastructure Fund, although this option seems less likely27. The Government of Kenya’s contract with China Roads and Bridges Corporation (CRBC) dates back to March 2010 when Amos Kimunya, Transport Minister at the time, cancelled the public procurement process Kenya Railways was already undertaking for feasibility and design of the SGR, as the government made provisional agreements with China Exim Bank for financing.28 At the time, CRBC was in the process of undertaking a feasibility study at no cost. Thr Government of Kenya subsequently signed a commercial contract with China Roads and Bridges Ltd in July 2012 for construction of the Mombasa-Nairobi railway project (including railway track, and ICD), and rolling stock. The contracting process has been heavily criticized and come under intense scrutiny. A number of MPs, journalists, and CSOs have made a range of claims of corruption, lack of transparency, and illegal procedures surrounding the project (Stakeholder Interviews 21/1/14 – 30/1/14). Numerous lengthy investigations of the project have occurred in the media and in parliament. A key criticism has been the lack of any competitive tendering (ibid.). China Roads and Bridges Ltd undertook the feasibility study, designed the project, determined the cost, sought financing, and was the awarded the contract for construction. A number of MPs suggested that this contributed to high costs and highlighted that the cost of the 480km Kenya line is 27 percent higher than the 743km SGR line planned for Ethiopia or double the cost per kilometer.29 Another criticism of the contract has been the way it was initially drafted as a commercial contract, only to be cancelled and re-awarded under alternative arrangements as a government-to-government contract (Stakeholder Interview 29/1/14). Allegations exist that the rationale for this change was to ensure that the contract was not under the purview of the Public Procurement Oversight Authority (PPOA) and thus relieved of the associated scrutiny (ibid.). Critics have also blamed part of the high costs and opaque procurement processes on CRBC since the company has a record of winning contracts through fraudulent means (Stakeholder Interviews 28/2/14). In 2009, the firm was put on a debarment (banned) list by the World Bank, ruling that it and its subsidiaries were ineligible to bid for any World Bank contracts for a period of eight years (World Bank 2011b). This was a response to fraudulent practices during Phase One of the Philippines National Roads and Management Improvement Project. Other unexplained peculiarities remain, such as the existence of a firm registered in Kenya that shares the name of the contracted Chinese firm, China Roads and Bridges. The Kenyan firm was registered in 2008 around the same time China Roads and Bridges Ltd started negotiations with the Government of Kenya30, however the link between the shadow company in Kenya and the Chinese firm is not clear.

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The AfDB have indicated it will raise $100 billion to finance bankable infrastructure projects in SubSaharan Africa, and has identified the SGR from Mombasa to Kigali, the port of Lamu and the harbour at Bagamoyo – source: Kalinaki, D. 2013 ‘AfDB Targets $100 Billion Fund for Infrastructure Projects’, The East African, September 7 28 Mutai, E. 2014 ‘Former PS Says Kimunya Halted Study on Rail Plan’ February 27 29 Kiplagat, S. 2013 ‘Shs 320 Billion ($3.8 billion converted at March 2013 currency rates – Oando.com)is Too Much for a Railway’ the Star, December 21 30 Daily Nation 2014 ‘Kenyans registered 'parallel' China rail firm, House team told’, February 14

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Political Economy Analysis of Regional Transport Integration in the EAC While the proposed SGR remains mired in political controversy, President Kenyatta is determined to push forward with it. Most observers of Kenyan politics believe his political investment in the project is too deep to abandon as it would severely undermine his reputation as a president who can complete big projects. Nevertheless, lack of transparency around crucial details on project design, finance, and cost is causing serious problems for the Kenyatta Administration as the opposition has found an issue that has public resonance. In addition, the Government has not been cooperative with the investigations the legislature has conducted. The main reasons for this are because many of the details the opposition seeks to expose have the potential to be severely embarrassing (such as highly inflated cost estimates) or even illegal (such as bribes). Moreover, Kenyatta’s methods of handling individuals who have been seeking to expose these issues - payoffs - appears to have created a precedent and further delays and risks. This puts President Kenyatta in a difficult situation: either abandoning the project or increasing transparency about it would likely cause him severe political harm. The Government of Uganda has yet to sign any agreements on SGR. It is in discussion with China Exim Bank about financing and stakeholders reported that the Government of Uganda has signed Memorandum of Understandings with two Chinese firms for construction of the Ugandan element of the SGR. It cancelled one of them and may incur serious legal difficulties because of it. While there is a huge amount of momentum behind SGR among the ruling political elites in Kenya and Uganda, the World Bank has concluded that the economic case for the project is poor (World Bank 2013). This advice did not deter the two governments. Some stakeholders we interviewed claimed the Bank’s public position may have served to exclude it from engaging with SGR in a constructive manner, through sharing knowledge and policy advice for example. Others said the Government of Kenya does not want the Bank involved in the project due to the aforementioned issues surrounding corruption, lack of transparency, poor value for money, and lingering resentment from the first RVR concession. We discuss this issue in more detail in section four.

3.4.1 Political economy risks This section highlights a number of risks associated with the SGR project drawing. In Kenya, the primary risks stem from the lack of transparency in the procurement process, which provided grounds for opponents to attempt to stall the project, and the alleged pay-offs that were made to neutralize brokers intent on ‘spoiling’ the project. This created a precedent and an incentive for other spoilers to emerge in the hope of receiving a pay-out. In Uganda there is also a risk that disgruntled brokers will attempt to frustrate the process by criticizing the procurement process, as has happened previously, however the contracting process is at a very early stage. Other risks are that the project will not effectively link to Uganda’s strategic intermodal transport planning given the lack of involvement of senior technocrats in the Ministry of Works and Transport, that the government will only be able to access finance on very unfavorable terms and/or that the Government of Kenya will not build the railway to the Ugandan border. This section explores these risks in more detail.

3.4.1.1 Kenya 1. Threat of parliamentary committee investigations The commercial contract was devoid of any competitive tendering and lacked transparency. Many details only emerged after parliamentary and media investigation. While opposition has 32

Political Economy Analysis of Regional Transport Integration in the EAC come from a number of sources, including non-governmental organizations such as the Dock Workers Union (DWU), the most strident opponents have been elements of the legislature. Parliamentarians from the opposition party, the Orange Democratic Movement (ODM), and some individuals from the coalition partner United Republican Party (URP). Parliament has launched two investigations into the SGR procurement process. The investigation of the National Assembly’s Committee on Transport, Public Works and Housing, headed by William Maina Kamada, a Kenyatta ally, concluded that the process was above board. The Public Investment Committee’s (PIC) investigation, headed by ODM MP Anda Keynana Wehliye was far more critical. It has raised a number of questions around the contract approval process, the commercial terms of the contract, and the adequacy of the feasibility study. Nevertheless, the PIC inexplicably approved the project in late April without stating why they were dropping the ongoing investigations. Even more mysteriously, they unexpectedly concluded the investigations just days before the Prime Minister of China, Li Keqiang, visited Kenya to hold the very high-profile signing ceremony for the railway. The Law Society of Kenya also recently filed a lawsuit with the High Court. The lawsuit asks the court to terminate the contract due to the aforementioned numerous Constitutional irregularities (Muyanga 2014). The court decided it would not hear the case (Maina 2014). 2. Threat of disgruntled brokers A major source of opposition to the SGR currently is brokers that lost out on the SGR deal. Brokers facilitate contracts between outside investors and the Government of Kenya, and receive a significant payment for the service. Such brokers emerged during Moi’s presidency, facilitating business between Kenyan Asians and government officials. Individuals currently involved have also developed extensive networks among Chinese investors (Booth et al. 2013). They now occupy a central, but largely secretive, role in allocating government contracts. Two prominent brokers, David Langat and Jimi Wanjigi, reportedly provided campaign finance to URP prior to the most recent election, on the expectation that they would benefit from the SGR contract (Stakeholder Interviews 27/2/14 – 28/2/14). Both individuals have been allegedly involved in brokering a number of large contracts between investors and government. Langat is a Kalenjin who previously managed Siginio Freight for the Moi family before going on to develop his own business portfolio that includes operations in retail (Nyali shopping centre, Mombasa), construction, tourism (including Sunrise Hotel, Mombasa), two tea farms (employing thousands of Kalenjin), a transport and logistics company, and a bank. Well placed stakeholders reported that he recently he brokered the contract for construction of Berths 20 and 21 at the Port of Mombasa for Japan’s Toyo Construction. Jimi Wanjigi, son of former Cabinet Minister Maina Wanjigi, was a key broker under the Kibaki regime linking Asian capital to government contracts and was allegedly a central figure in the Anglo Leasing Scandal. More recently he was involved in brokering a number of deals with deceased Internal Security Minister, George Saitoti (Stakeholder Interviews 27/2/14 – 28/2/14). On losing out on contracts, Langat and Wanjigi reportedly used their influence to create opposition to the contract with the aim of having the tender re-contracted or receiving some form of informal compensation. Several key sources reported that the most vocal opponents of the SGR project, such as URP MP for Nandi Hills Alfred Keter and MP Wehliye, were acting on behalf of Langat (ibid.). In a short amount of time, Keter was able to identify a large amount of critical information, with the support of a lawyer, related to the due diligence process, previous China Roads and Bridges/Government of Kenya contracts, the financial feasibility, the 33

Political Economy Analysis of Regional Transport Integration in the EAC World Bank’s debarment of China Roads and Bridges Ltd and other related issues. The DWU initially staunchly opposed SGR on the grounds that the Port of Mombasa was part of the collateral for the loan, which threatened dock workers’ jobs, however the DWU subsequently changed its position to tacitly support the SGR project (Stakeholder Interviews 27/3/14 – 28/3/14). The strongest evidence that the source of the leaks about the SGR are coming from disgruntled Kalenjin is that The Standard newspaper, owned by ex-President Moi has been the most vocal media critic of the project and also has published lengthy investigations of it. The country’s largest media house, the Nation Group, by contrast has been relatively silent, but supportive of the project. The media group tends to align with the interests of the Kikuyu business elite. Kenyatta’s initial response to the growing public controversy surrounding SGR was to silence Langat by awarding him a $200 million contract to provide laptop computers to schools across the country (Stakeholder Interviews 27/3/14 -28/3/14). However, this contract award was later cancelled by the Public Procurement Administrative Review Board due to irregularities in the procurement process and the opposition is, for the moment, vigilantly watching how Kenyatta is handling the disgruntled, but powerful brokers. Kenyatta is thus caught in a very difficult situation. On the one hand, he has staked his legacy on the SGR and even mentioned it prominently in his address on Kenya’s 50th year of independence. At the same time, the opposition has found an issue that has public resonance and has every incentive to drag out the investigations as long as possible. 3. Setting a precedent for gainful opposition Attempts to halt opposition to SGR by providing compensation have created a precedent which could lead to an unmanageable number of opponents. Not only are powerful brokers keen to be involved in contracts around the railway, there is also the threat emanating from lower level opposition. The government has perhaps set itself another SGR trap by promising ex ante compensation for land loss.31 This is already causing opportunistic politicians to ask for payments even before CRBC has mapped the rail line.32 Precedent demonstrates that while successful public policy and infrastructure requires the support of the political leadership, this may not be enough to ensure execution of the initiative. The Strategy for Revitalizing Agriculture (SRA) is an example of a failed initiative that was supported by key Kikuyu political leaders aligned to President Kibaki, but unsuccessful as it threatened the Kalenjin leaders in the coalition (Poulton, C. and Kanyinga, K. 2013). Strategy for Revitalizing Agriculture The Strategy for Revitalizing Agriculture was developed under the 2002 NARC government and substantially incorporated into the Agriculture Development Strategy of the 2008-2013 government of national unity. It called for a reduced role for the state in the agriculture sector in order to foster agricultural transformation. The strategy was relatively high profile and had the support of many well-placed senior government officials, most of whom were Kikuyu. For these individuals reform of the agriculture sector and the associated general economic benefits were attractive given the economy-wide interests of many leaders in the Kikuyu community. However, the SRA would have had reduced the size (and critically, number of jobs) in the Ministry of Agriculture, which in recent governments has been led by Kalenjin Ministers, and within which there are state organizations that have recently benefited, or been staffed by Kalenjins – such as the Agricultural Finance Corporation (AFC), and the National Cereals and Produce Board (NCPB). As such, recent Kalenjin Ministers of 31 Nation Correspondent. 2014. “Railways to Compensate Landowners.” Nation. Agriculture have been burdened by commitments to their support baseThe and the Minister at the time, 32 Musyoka, Alloys. 2014. “Kwale Summons SGR Officials Over Pay for Land.” Kipruto arap Kirwa, could not undermine parts of the state that benefittedThe theStar. Kalenjin community, especially given that he was the only Kalenjin Minister in the NARC government at the time. 34 Source: Poulton, C. and Kanyinga, K. 2013 Source:

Political Economy Analysis of Regional Transport Integration in the EAC

Kibaki encountered a similar situation when he attempted to introduce elements of privatization at the Port of Mombasa, which coastal politicians and the DWU successfully blocked as mentioned in section 2.2. Thus, despite Kenyatta’s staunch backing of the SGR project, there is a risk that the current opposition could develop further and form a credible threat to its construction and operation.

3.4.1.2 Uganda SGR is still very much in the planning stages in Uganda and there are a number of risks that threaten further progress. Most prominently, there is a significant risk that the Government of Kenya will not be in a position to borrow the funds necessary for the construction of the SGR from Nairobi to Malaba. In this case there would be no commercial logic in constructing a SGR line in Uganda. However, even if the Government of Kenya was able to construct the SGR to Malaba, there is a risk that the Government of Uganda will not be in a position to acquire finance for the project as it may simultaneously be pursuing a number of other large infrastructure projects (Stakeholder Interview 12/3/14). The Government of Uganda has limited collateral with which to secure a large number of infrastructure loans, and if the finance provided to Government of Kenya by China Exim bank is a fair precedent (reports from EAC meetings are that Uganda and Rwanda have agreed to adopt a similar model to Kenya), substantial collateral will be required. As the lake ports study discusses, the Government of Uganda may have recently obliquely signaled it does not intend to go forward with the project when it said it was not planning to borrow funds for it, but intends for the private sector to largely finance it. Given the poor commercial case for the project, private finance for it is unlikely. It is unclear whether this is the new official policy. 1. Centralised decision making leading to poor value for money Recent examples of contracts between the Government of Uganda and private sector indicate that there is a considerable risk that the government will enter into contracts for a SGR that represents poor value for money for Ugandan citizens. Contemporary cases provide examples where, either as a result of negotiating poor contractual terms (sometimes outside formal institutions of the state) or weak oversight of construction, costs have been very high. Production Sharing Agreements (PSAs) between the Government of Uganda and oil companies is a good example of a poor deal for Ugandan citizens as a result of the President’s centralized handling of the process. The original Lake Albert PSAs were negotiated by the President and a very small group of his advisors rather than the appropriate technical experts (Vokes 2012). The government refused to make these documents public, however a UK-based activist group, Platform, leaked the documents which showed that in the most likely cost and production scenarios, the PSA negotiated by Tullow would give the company a return of between 30 and 35 percent on the original investment. This is a high profit level for the oil industry, even after taking the risks of it into account. Further, while the DR Congo negotiated a bonus payment of $3.5 million upon signing the PSA for its Block 1 in 2008, Uganda received bonuses of only $200,000 and $300,000 for Block 2 and 3 respectively. Negotiations on the construction of the SGR have also been dominated by the President and a group of close advisors. Senior officials in the Ministry of Works and Transport now have very 35

Political Economy Analysis of Regional Transport Integration in the EAC little information on the project (Stakeholder Interview 11/3/14). Instead, different arms of the Government of Uganda have undertaken parallel discussions with three different Chinese firms, leading to Memorandum of Understandings with two for construction of the railway and the new port of Bukasa. The three firms are China Communication Construction Company (CCCC), China Harbour Engineering Corporation (CHEC) and the China Civil Engineering Construction Corporation (CCECC). This has led to a tangled situation where the Government of Uganda has held discussions with the three firms in the aim of developing a single consortium and shared work plan.33 However after the President became involved, he selected CCCC and CHEC to work on the project, and cancelled the MoU with CCECC.34 Because CCECC had already begun work at the direction of the government, the firm has the legal right to sue the Government of Uganda, and challenge the procurement process. The lake ports political economy study discusses the status of this case in greater detail. Presidential leadership in projects represents a mechanism to short-cut lengthy procedures such as procurement, which can often cause crippling delays, and some form of Presidential support is generally needed to execute projects effectively. For example, Karuma Dam was delayed for several years as a result of parliamentary discussions on the procurement process, until the President decided to intervene and award the contract to a Chinese firm.35 The project then commenced immediately. However, while this may be a solution to some projects, some of the time, the president can only intervene selectively and this decisionmaking process leads to further de-institutionalization of the civil service and poor oversight during implementation. 2. Sufficient capacity for oversight and execution According to statements from the Uganda People’s Defense Forces (UPDF), the President intends to involve the military’s Engineering Brigade in the construction process, although it has no relevant experience in railway construction. The idea of its involvement stems from the early 2000s when plans to promote railway transport emerged and the government started engaging Chinese firms about the possibility of undertaking the work. Since then, the President has been promoting the prospect of the UPDF engineering brigade rehabilitating the TororoGulu-Pakwach line (Stakeholder Interview 11/3/14). Brigadier Timothy Sabiiti, the commander of the UPDF engineering brigade, in a recent media briefing at Mbuya Military Headquarters, said the army’s engineering brigade would start railway reconstruction in July 2014.36 The UPDF is likely not capable of venturing into railway building and rehabilitation however. The UPDF has for many years been grappling with what to do about ageing and dilapidated barracks and has never even been drafted into building and

33

Wabaki, M. 2013 ‘Museveni to Meet Feuding Rail Contractors’ The East African, November 26 Tonny, B. 2014. ‘President Museveni Holds Meeting With Chinese on Upgrading Uganda’s Railway to Standard Gauge. State House of Uganda 35 The project was financed by China Exim Bank, with whom the Government of Uganda is currently in negotiations for SGR. Other projects in Uganda financed by China Exim Bank include the National Backbone and E-Government Project Phase I at $30 million, equipment supply to Local Government’s (Kampala City Council) at $10 million, the Kampala- Entebbe Express-Way Project at $350 million, the Supply of road, sanitation and firefighting equipment Phase II at $100 million, the National Backbone and E-Government Project –Phase II at $61million (Atuhaire, A. and Akella, J. 2013. ‘Questions Over Karuma Dam’. The Independent. 4 October). 36 Pere, T. 2012. ‘How Uganda Railways Collapsed’. The New Vision, February 21. 34

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Political Economy Analysis of Regional Transport Integration in the EAC repairing Uganda’s roads37, of which there are many in an abysmal state. This in itself raises questions about what capacity they have for taking on a far more challenging engineering feat. Aside from the risk of a poorly negotiated project, precedent also dictates that the SGR project could be the victim of weak oversight, which could also inflate project costs. There are a number of previous projects that have run over costs, and where quality has been low. All of them were large-budget infrastructure projects, in which State House and President Museveni have played a central role (examples include the PSA for oil, and those provided below). The President’s style of managing government business involves centralized one-man decision making, however as there is a limit to how many issues he can focus on at any one time. Such a constraint inevitably leaves a large number of issues out of his control. The construction of the northern by-pass, a road of only 21 km, is an excellent example. It has the distinguished record of being the most expensive road of that length ever built in the world, at a cost of Ushs 130 billion ($52 million). The 250MW Bujagali dam, estimated to cost up to $1.2 billion by the time of completion, up from an estimated $480 million at the beginning of the project will, too, have the distinguished record of being the most expensive dam per megawatt is another good example of poor oversight.38 This raises questions about the capacity of the government to effectively oversee the construction of the SGR, especially given that the Government of Uganda has no experience in this area. While the Mombasa-Nairobi SGR project faced severe delays in the Kenyan legislature, in Uganda such opposition is unlikely given the fragmented nature of the opposition. However, it is notable that Uganda’s political elite have recently become more fragmented as the NRM splits into factions that are increasingly voicing criticism of the President. Nevertheless, the opposition remains vastly outnumbered in parliament (205 to 56) by NRM and groups allied to the NRM. The most significant opposition groups are fractionalized and lack polices/vision with which to oppose government.

37

Unlike the Rwanda Defence Forces whose holding company, the Horizon Group, has for some years now been building and repairing roads and bridges in rural Rwanda. 38 Bichachi, O. July 2012. Allow Bukasa Project to Gather More Dust. The Observer.

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Political Economy Analysis of Regional Transport Integration in the EAC

4 Lessons This section draws on the previous analysis to outline a number of lessons that are applicable to the EAC transport integration process. The section organizes lessons into general ones, those applicable to the World Bank, and those for the EAC. General There are three main lessons to take from the study. First, presidential support is typically necessary, but not always sufficient for major reforms in the ports and on the railways. Second, brokers occupy a central, but largely secretive space in the negotiations around many contracts and large infrastructure projects. Third, reforms in the ports and in the railway tend to be successful when they work around or do not disturb the interests of powerful potential spoilers. We discuss each below. In Kenya and Uganda, Presidential support can ensure a project moves forward quickly, and avoids potentially lengthy and burdensome delays. The Karuma and Bujagali dams in Uganda are good examples of this. Construction had stalled for years on the latter in particular due to endless negotiations around contracts. The close involvement of the President was necessary to award the contracts and to build the dam. However, while bypassing formal processes can avoid delays, it can also lead to projects that are divorced from formal planning systems and can undermine the capacity of the civil service to take important decisions. This creates a risk that projects are carried out in a fragmented, rather than holistic, manner. It can also lead to projects representing poor value for money when the President centralizes decision-making and excludes the necessary technocrats from negotiations. This was the case with Government of Uganda’s negotiation of PSAs for oil extraction. In addition, our analysis demonstrates that while presidential support is necessary for reforms, in itself it is not enough for successful implementation. Political will is typically insufficient for reform when the changes may harm other powerful interests. Kibaki’s attempts to introduce elements of privatization at the Port of Mombasa, which were blocked by Coastal politicians and the dock workers, are a clear example. Challenges to the proposed SGR, which are currently delaying signing the financing agreement with China Exim Bank despite Kenyatta’s staunch backing of the initiative, is another one. In Uganda examples of stalled presidential priority projects also exist, such as the development of the Namanve Industrial Park and introduction of national identity cards. In each case, bureaucratic wrangling, interference by well-connected politicians and other elites as well as the pursuit of commissions by have created severe delays.39 The central role of brokers in negotiating many projects and contracts has also emerged from our analysis. Brokers operate in the space between the formal private sector and the political system (brokers often have their own private sector interests, and have close links to political parties that they may be financing). Many of these individuals have developed significant additional influence as funders of political parties. They are largely absent from stakeholder analysis that confines itself to political parties, formal private sector, and civil society however. In addition, it is not easy to obtain credible information on their activities because they tend to want to keep their shadowy activities away from the public. Nevertheless, brokers are now an important link between financiers/investors and high value government contracts. As a result,

39

See, for example, Obore, C., 2014. ‘Museveni duped in factory land deal’. The Daily Monitor, March 1.

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Political Economy Analysis of Regional Transport Integration in the EAC it is difficult to undertake credible political economy studies in many sectors without looking at the central role of project and contract brokers. Brokerage services are available from well-connected locals and foreigners. A salutary example of the latter in Uganda is Rosa Whitaker. She served as Assistant United States Trade Representative for Africa and subsequently became a lobbyist with significant interest in Uganda where she links foreign investors directly to the State House. Local brokers typically include members of the business community and public figures with strong connections to key decision makers. Such is their influence and hold on formal institutions that tender awards they may dispute often become subject to appeal after appeal, in courts of law, government agencies, and directly to powerful individuals who are at least able to cause tender reevaluations or swing decisions in their favour.40 The final general lesson is that successful reforms tend not to threaten vested interests, such as the recent Presidential Directive on port performance in Kenya, or those undertaken in the port from the mid-2000s to introduce equipment and automation. Neither threatened key groups such as the coastal politicians or dock workers. It is now evident we cannot ignore the interests and power of these constituencies when considering port reforms. CFS owners have successfully opposed attempts to address the inefficiencies they create and the DWU has shown that it can undermine efforts at port privatisation drawing on their close links to regional politicians. Kenya Railways also played a crucial role in the failure of the first RVR concession because they were against to it and had the power to act on their opposition. Identifying reforms that work around the insurmountable interests against reform involves being realistic and bypassing the fundamental political economy constraints rather than tackling them head-on. In the case of the Mombasa-Nairobi SGR project, the opposition may be manageable. Kenyatta could likely neutralise the key sources of opposition by providing some form of compensation in the form of another contract. However, it is not clear if the Government of Kenya can find the necessary contracts, and can ensure they pass procurement scrutiny by the opposition in Kenya’s legislature given its political incentives to expose corruption. It is also unclear what would happen in the improbable event that the government decides to move forward with the project by improving transparency around it and re-bidding suspect contracts. For the World Bank The study also has three main lessons for the Bank. First, it needs to take seriously project risks up front. Second, the Bank needs to take extra care to guard its reputation since it is a convenient source of blame. Third, the Bank needs to adjust its business strategy to an environment where it is increasingly competing for projects with less than scrupulous financiers. The due diligence process for the Kenya-Uganda railway concession was less than satisfactory. In turn, the appointed concessionaire did not have the requisite technical, financial or managerial capacity to operate a railway. While a number of wider factors contributed to this outcome, such as the lack of private sector interest in concession and the large costs involved in repeating the tendering process, several stakeholders raised questions around the advisory role of the IFC, especially in overseeing the due diligence process in Kenya, acting as the transaction advisor for the Government of Kenya, and offering financial support to RVR. The IFC advisory team supported the development of the concession and helped to close the deal

40

Atuhaie, A.B., 2006. ‘ID Scandal: Museveni summons Musumba’. The Daily Monitor, March 27.

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Political Economy Analysis of Regional Transport Integration in the EAC even when there were questions around the financial and managerial capacity of the concessionaire. This alone harmed the Bank’s reputation. That IFC Investment Services subsequently was unwilling to release funds for exactly these reasons compounded the negative impact for the IFC and the Bank more broadly. Even though IFC successfully supported the governments to renegotiate the concession, ill-feelings towards the Bank over the project persist, especially in the Kenya. It is hard to fault any specific action the IFC took. The most questionable action, negotiating the concession even after it was clear Sheltam did not have the requisite finance, was the choice the Governments of Kenya and Uganda took, not the IFC. The latter attempted to negotiate the best terms for its client, the Government of Kenya. Likewise, IFC Investment Services was acting responsibly by not lending to a company whose finances and capacities were highly questionable at the time. Rather, it is a situation where the whole was greater than the sum of its parts as the Bank became a convenient target of scorn from politicians and the public when the concession ran into difficulties. Blaming the Bank for failed government projects often is good politics even when it is not true or only partly true, and there were numerous signs that the RVR concession would be problematic. The lesson is not necessarily that IFC runs risks by acting as a transactions advisor and a lender on the same project. Instead, the lesson is that IFC and the Bank more broadly need to be mindful of the risks of challenging projects up-front and not hold unrealistic views that they will be manageable as it appeared happened with RVR. Bank engagement with the SGR demonstrates clearly that while the organization may wish to avoid politics, it can’t stop others from trying to pull the Bank into these battles. It also shows that providing what it assumes to be purely technical analysis does not provide sufficient insulation from political battles. The Bank 2013 study on railways in East Africa presents a purely technical analysis that concludes rehabilitating the existing line is far more financially prudent than building a new SGR. While the Bank did not intend this to be a political statement, opponents of the SGR regularly cite the Bank as a key ally in their opposition. In addition, those in the Government of Kenya and Government of Uganda that remain upset about the Bank’s role in RVR and support SGR see the study as unwelcome interference. In addition, according to some observers, the decision of the Government of Tanzania to rehabilitate the central line in Tanzania, with the support of the World Bank, is deepening the growing rift within the EAC between Kenya, Rwanda, and Uganda on the one hand and Tanzania on the other. The former governments have been pressing Tanzania to move to Standard Gauge. This is the current EAC policy to which Tanzania agreed. Some in the Kenyan and Ugandan Governments do not believe the Bank is supporting national priorities or EAC agreements in this area. It’s impossible to say what would have happened had the Bank avoided taking a position and/or taken a more sympathetic stance to supporters of SGR, so we will not offer suggestions for how the organization could have engaged more productively around the issue. In fact, due to the secretive nature of the project thus far, it is quite likely those close to it are not interested in the Bank’s engagement on the project and could be amplifying their pique to disguise this. The key point is that the Bank needs to be sensitive to political realities, especially when addressing priority government projects. The lesson is not to slip into the comfortable, but misguided belief that technical analysis can be apolitical, but to be mindful of political context and act in ways that take into account a range of political consequences to Bank actions. One idea to consider is a more aggressive public relations strategy to convey the message that the Bank strongly supports projects which are in the best interest of the people

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Political Economy Analysis of Regional Transport Integration in the EAC of the country, is committed to delivering high-quality projects at reasonable costs, and is always open to working with the government to secure these objectives. The presence of China as an investor in the EAC - as well as other foreign private and public financiers - in sectors where the World Bank is active creates an additional complication as it must now engage in a context where it influence is receding, especially over projects that are at odds with the World Bank’s preferences in a specific sector, such as SGR. China’s role and influence in Kenya and Uganda is not a new phenomenon, rather it has developed over time to the availability of funds and government decisions to look for financiers who are largely indifferent to issues of governance. In Kenya, after the Anglo Leasing corruption scandal in 2002, relations between the Kibaki government and the traditional donor community deteriorated. As a result, the government looked towards China for loans and grants. At this time Chinese government firms received contracts for expansion of roads, airports and the port. This trend continued in the Jubilee government in what has been termed the ‘look East’ initiative. This initiative is in part motivated by economic considerations, but also a response to the way Kenya has been treated by Western donor governments. The ICC case provoked a hostile response from the Kenyan leadership and President Kenyatta was angered by President Obama’s decision to not visit Kenya, the birth place of his father, instead visiting neighboring Tanzania in 2013. This pique was compounded at a Somalia Conference in London in May 2013 when Kenyatta was not able to get a photo opportunity with the British Prime Minister. Shortly after these events President Kenyatta made state visits to Russia and China. In the visit to China, the Government of Kenya signed agreements worth around $5 billion, including the commercial contract for SGR. In Uganda, loans and grants from Chinese banks has provided the government with increased autonomy from traditional development partners as well. This has allowed the government to shift spending towards its priorities, investments in infrastructure, and away from donor interests in poverty reduction and social sector spending. The transition from the Poverty Eradication Action Plan (PEAP), in which traditional donors had a large degree of involvement in planning and implementation, to the National Development Plan (NDP), in which traditional donors had virtually no involvement, is an apt example. Barring a crisis at home, China’s financial role in the EAC is likely to grow in future. On issues where Chinese capital supports projects the Bank does not endorse, constructive engagement from the Bank may nevertheless be useful for sharing knowledge and assisting in associated policy making. China’s presence as a large lender in the EAC also requires the Bank to be more politically astute than it could afford to be in the past when funding was more difficult to for governments in the region to access. Reshaping the Bank’s business strategy to adjust to impact of Chinese capital is beyond the scope of this study. Suffice it to say the Bank’s influence will likely continue to wane if the status quo prevails. For the EAC As mentioned in section 3.3.1, the preparation and regulation of the RVR process would have benefitted from the presence of an overarching body able to manage the various interests from Uganda and Kenya. If/when the SGR is constructed from Mombasa to Kampala, the EAC could play an important role in preparing a concession, and regulating operations of the railway line. The EAC has indicated that it has allocated funding for an East Africa Railway Authority (EARA), however this has yet to be established. EARA, if constituted, could be in a

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Political Economy Analysis of Regional Transport Integration in the EAC position to manage interstate interests and address collective action problems, with the backing of the wider EAC. The companion lake ports political economy study addresses the issue of the EAC in greater detail. Briefly it concludes that rifts within the EAC prevent the organization from playing a leading role in coordinating regional investments. There are no good reasons to believe the organization will gain such power while these differences persist.

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