China’s decision to opt out of funding Kenya’s Standard Gauge Railway (SGR) project highlights the difficulty that Kenya is facing in repaying its loans. As the Chinese government no longer feels assured of being paid back in full, it has made the decision to step away from the project and, in turn, deny funds to the struggling economy.
The ambitious project of connecting Uganda’s capital Kampala to Naivasha, a port city in Kenya, via Malaba can soon become a reality. According to recent reports, Kenya and Uganda have been looking for an alternate financier to fund this 273-km rail line which will run through the two countries.
The proposed route will begin in Kampala and travel all the way to Malaba, located at the border between the two countries. From there, it will connect to Kenya’s SGR (Standard Gauge Railway) that has already been operational up till Mombasa. These nations are now engaged in discussions with European parties for alternate financial assistance to make this mega project a reality.
The fact is that the 609 km Kenyan SGR line was the largest infrastructure development project in East Africa and with an extension to Uganda, it will be a game changer for both the countries. It will not only increase trade between them but also reduce the time taken to travel between them as both the economies have to be linked for easy movement of goods and people. Moreover, the project will be beneficial for other East African countries as well as it will facilitate movement of goods to and from their ports of landing and those of the two countries.
The project will undoubtedly bring relief to the economies of Kenya and Uganda as it will foster economic growth and open up potential investment opportunities. These countries have for long, been struggling with their infrastructure particularly their transport systems. This extension of the SGR line will be of immense help in improving the existing transport system. The population density of East Africa is increasing, and with the railway system running through it, the area will get better connected with increased trade and more opportunities to explore.
Apart from strengthening trade relations between the two countries, the railway line will considerably reduce travel time between remote regions that are otherwise difficult to access by road. The SGR line will also benefit the tourism industry in both countries as more people can now easily access these far off regions. Moreover, it will also provide adequate transport for huge cargo shipments.
The Loan Burden: Kenyan and Ugandan Economies At Risk?
With more and more developing countries turning to foreign loans for infrastructure and development projects, the issue of loan burden has become an ever pressing dilemma. In this article, we take a look at how Kenya and Uganda are faring with their loan burden.
In March 2021, a senior Kenyan government official revealed that Kenya was not willing to take on any new loans from Beijing, China. This announcement came on the heels of continuous deliberations with China on the terms of the loan, terms which Kenya deemed too demanding. The official went on to reiterate the country’s ambition to continue the Standard Gauge Railway (SGR) line from Naivasha to Kampala, strengthen the connection of Malaba, Kisumu, and Naivasha, and open the transport route to Uganda.
Meanwhile in its neighbouring country, Uganda has made much progress on its SGR project. The project, which has drawn funding from a Chinese lender, was originally estimated to cost $2.2 billion. It was met with numerous stalls, delays, and cancellations of contracts due to the lack of funds and agreement on issues such as project deadlines and delivery dates. In January 2021, the Government of Uganda contracted Yapi Merkezi, a Turkish firm, to take on the incomplete project and finally commence construction this calendar year.
With these events, one wonders if African countries such as Kenya and Uganda, that resort to foreign loans for infrastructure projects are really worth the risks they bring. This is because foreign loans come with stringent repayment terms, notably interest rate and schedule of payment. As such, this could add a significant and unnecessary burden to the respective countries.
Uganda is banking on improvements to its transportation infrastructure to bolster its export economy and compete on the regional and global stage.
In 2019, while in China, then Kenyan President Uhuru Kenyatta sought to secure $3.68 billion. The segment, designed to link the port of Mombasa with the Great Lakes Region’s landlocked states, would include the upgrade of Kenya’s 120-year-old metre gauge railway from Naivasha to Kisumu and onward to the Malaba border near Uganda. Unfortunately, the President failed to obtain the necessary funds; instead obtaining some $400 million to upgrade the railway to Malaba.
Beyond external funding support, regional coordination is key for the execution of such a project. Effective coordination between Malaba and Kampala is critical for Uganda to boost speed of transportation and lower the cost of exports. A collaboration between the East African states in regards to railway and infrastructure projects fosters centralised decision-making, better budgetary control and cost-effective interconnectivity.
The Western-funded SGR project will provide a much-needed upgrade to the transportation of goods, services and people taking place between East African countries. The new project promises to reduce the cost of transportation between cities in the region while also cutting travelling time and releasing the overburdened road networks.
China’s Hesitancy to Fund the SGR to the Uganda Border
The Standard Gauge Railway (SGR) line is a fundamental contributor to infrastructure improvements throughout East Africa. The railway links Mombasa, Kenya to South Sudan, Rwanda, and Uganda, and China’s participation in building the railway has been critical. Unfortunately, China’s recent decision not to fund the last segment of the railway to the Uganda border has put Kenya in a precarious position and put the completion of the project in doubt.
The lack of Chinese investment in this final segment is the primary cause of the project’s current stall. Beijing evaluated the situation and determined that without Uganda’s involvement the project was too risky for their resources. This, combined with the Kenyan government failing to commit any financial resources to the AGEs expansion, have left the project underfunded and, therefore, incomplete.
The importance of the SGR cannot be understated. The railway would complete a vital infrastructure link between five nations in East Africa, allowing goods and services to move more quickly and efficiently. Economy and trade among countries involved would have a big boost, benefitting citizens in all countries. As of right now, the SGR is at a standstill until Chinese and Kenyan governments can reach agreement on how to carry on with the project.
Beyond government-level waivers and agreements, there are also local businesses and communities who are now feeling the effects of the SGR’s holdup. Many small industry and services companies have come to rely on easy and efficient transport of goods and services along the SGR route. Additionally, citizens who are regularly reliant on the railway for travel are also negatively impacted, as the costs associated with transport have risen since the SGR was suspended.
The importance of the SGR cannot be ignored, and Chinese and Kenyan governments must reach a consensus on how to finance and continue the project. Beijing’s hesitancy to fund this last segment demonstrates the need for more engagement and cooperation at all levels, in both countries, if the SGR is going to be the engine for economic growth that it was designed to be.