Kenya signed a secret agreement with the Chinese allowing a mystery company with unknown local shareholders to run the Standard Gauge Railway, documents seen by the Sunday Nation show.
Publicly, China Road and Bridge Corporation (CRBC), a State-owned Chinese company with Kenyan offices, will run the trains for 10 years, but a “special purpose operating company” was formed in May 2017 to run the operations.
The company, Africa Star Railway Operation Company Ltd, is majority-owned by CRBC, but the other shareholders remain a mystery with details unavailable at the Registrar of Companies in Nairobi.
And it’s a lucrative, lopsided deal for the operator. Last month, the operator sent Kenya Railways a fee note of Sh30 billion, which it claims are pending payments. Sh800 million out of it is made up of penalties for late payments, according to papers seen by the Sunday Nation.
The contract frees the operator of all liabilities and forces Kenya Railways to pay a fixed monthly service charge – which must be paid quarterly and in advance, the documents show.
Before the operations started, documents show, Kenya was compelled to lend the operator an interest free Sh3.5 billion, according to the documents. A special reserve account was also set up to be maintained with Sh3 billion to cushion the operator. The contract also put punitive clauses pushing Kenya to start operating the railway by June 1, 2017. Any delay in starting the line would attract a fine of Sh24.2 million a day, the contract shows.
In the first six months of operation, the operator was to earn Sh13.3 billion for the passenger service trains, even as the service was being marketed and travellers yet to get familiar with it. The fixed service monthly payment is for running two pairs of passenger trains, one pair of cargo trains and another pair of empty container trains between Nairobi and Mombasa. If more trains come into service, the cost goes up, the contract shows.
“KR (Kenya Railways) acknowledges that the Operator intends to create, no later than twelve (12) months after the execution date, a special purpose operating company incorporated under the laws of Kenya to act as the operator under this agreement,” says the contract.
While the Sunday Nation has seen the SGR operations and maintenance deal signed between CRBC and Kenya Railways Corporation (KRC), a separate document detailing the operations allowing Africa Star to take over the operations is said to have been taken away by lawyers.
Sources at the Transport ministry, who asked not to be named for fear of retribution, said the secret contract was signed at White Sands Hotel in Mombasa in the presence of a handful of officials hours before President Uhuru Kenyatta launched the Madaraka Express Mombasa-Nairobi train on May 31, 2017. KRC was represented by Mr Atanas Maina, who has since been suspended over corruption charges.
The contract stops KRC from publishing any information provided to it by the operator, and indicates that a copy has to be submitted to CRBC for approval — except in circumstances where such publication is required by law.
“KR and the operator shall keep confidential and shall not disclose to any third party any documents, data, or other information furnished directly by the other party hereto in connection with the Agreement or in connection with the business or commercial operations of the parties whether such information has been furnished prior to, during or following completion or termination of the agreement,” reads Clause 39 of the contract. The secrecy is legally bound to be kept even after the agreement expires.
The Sunday Nation contacted both Kenya Railways and the Transport ministry for responses to questions on the contract and to give officials a chance to explain what is essentially a complex document governing the most expensive infrastructure project in the country’s history.
Transport Cabinet Secretary James Macharia, contacted on Thursday, referred the Sunday Nation to the contracting parties – Kenyan Railways and the Chinese. KRC and CRBC were unresponsive despite several e-mail and phone reminders. Efforts to get a comment from the ministry and the two agencies will continue, after the publication of this report is fully explained in balanced way.
One of those lingering questions is why a new company was required to operate the SGR while the CRBC, which signed the deal, already has a local branch. Africa Star did not respond to our queries over its role and ownership even as records search yielded nothing.
The operations and maintenance contract is the latest secret SGR document to be revealed by the Sunday Nation following our expose on the Mombasa-Nairobi line loan agreement that, among other things, waived Kenya’s sovereignty over strategic assets upon failure to service the more than Sh400 billion debt.
A website associated with Africa Star, but which provides few details, indicated they are “mainly engaged in railway passenger transport and freight services”. Africa Star’s offices are at the Syokimau Railway Station and while the Sunday Nation did not access them, Kenya Railways sources claimed that all the firm’s staff are Chinese and access is restricted by tight security.
Another issue that officials will need to clear up is why the Chinese operator is freed of all liability as well as how the billions of shillings paid in management fees represent value for money.
The contract makes operations almost risk free for the operator. Even network expansion, additional services and change in law that affects the operator adds to the bill, according to the contract.
Although the fees is supposed to be “fixed”, certain factors which are beyond Kenya’s control can vary the cost. These include the price of lubricants and fuel, metal and equipment in China.
“The Fixed Services Payment, which shall … be payable notwithstanding the occurrence of any relief event, force majeure event or compensation event,” the contract says in Clause 26.5.1. Simply put, even if the SGR doesn’t operate, payments to the operator will remain.
The loading and offloading fees are also charged despite the Chinese operator having bought and installed dysfunctional cranes at the port of Mombasa.
All these are demanded even as the same contract limits the maximum number of trains to be run on the line. The line which generates far less than half its costs every month has gobbled about Sh1.8 billion every month in the 16 months it has operated even as its contentious revenues remain less than Sh6 billion in a year.
KRC, in a May 14, 2019 letter, protested the Sh30 billion bill sent by CRBC, disputing the amount charged on the use of VIP trains.
“The Operator has charged for two VIP trains in the 4th quarter. KRC is of the opinion that the two VIP trains operated as E2&E1 do not qualify for Variable Services Payment charges. Using VIP coaches on normal train operations does not necessarily translate to a VIP train service. We recommend that the operator withdraws the payment request and revise appropriately,” the corporation wrote.
Under the confidential contract, the operator has the right to manage the ticketing system and any associated software and hardware.
The operator also collects passenger fares, including non-cash revenues like M-Pesa.
Last November, the Sunday Nation revealed a ticketing scam where the Chinese railway operators were suspected to have rigged the system. There have been no reports on the investigation.
Another curious clause in the Sunday Nation analysis is that the operator can only foot repair bills of less that Sh100,000 in what has left KRC badly exposed to paying for maintenance fees that are expected to pile in the coming years. Expenses to maintain the line are also not supposed to go beyond Sh5 million per year.
Further, the operator cannot be held responsible for any legal claims from third parties involving damage to property, death, illness or personal injury.
“The operator (Africa Star) shall be relieved from all rights and obligations under this agreement. CRBC shall provide parent company guarantee of the obligations of the operating company under this Agreement,” it reads.
Furthermore, the operator was only required to give a performance bond of Sh600 million.
KRC also signed to allow a smooth processing of work permits for Chinese nationals to work in the running of the train including accepting the Chinese professional qualification just like their Kenyan counterparts and facilitating ease of moving train parts for repair in China and importing train parts into the country without paying any tax.
The contract further empowers the Chinese operator with a “non-exclusive license to use, copy, modify any intellectual property KR has”.
Terminating the agreement is also made an equally costly affair with KRC required to pay for transport of equipment and staff back to China after clearing any outstanding obligations owed to the operator.
Also, just like the financing deal for SGR, Kenya agreed to waive any sovereignty or any immunity on KRC and its assets whenever there is a dispute.
In what appears like a major step though, the operation contract unlike the financing agreement, allows for arbitration of disputes to be made by a neutral party.
The language of arbitration is also set as English and the place for hearing the arbitration allowed to be in Nairobi.
With ongoing wearing of the used locomotives purchased in 2017 to run the line, increasing cost of operations and the limitation of the line capacity at 16 trains per day, SGR’s trip to profitability may be a steep slope based on the conditions of the operations contract.