Kenya's Standard Gauge Railway The Standard Gauge Railway (SGR) is the largest infrastructure project constructed in Kenya since independence in 1963. Promulgated in 2008 by Kenya and Uganda, the idea of the SGR was part of the Northern Corridor Initiative that links the Kenyan coastal city of Mombasa to the landlocked countries of the Great Lakes Region. Even before Kenya's Treasury signed a memorandum of understanding (MoU) with China's Exim Bank in July 2013, opinion was divided among consultants, policy makers, and civil society activists on the economic viability of a standard gauge railway. For instance, a Canadian consultancy report and later World Bank study about the proposed SGR said that building the railway did not make economic sense. In August 2009, Kenya's Ministry of Transport (MoT) and China Road and Bridge Corporation (CRBC) signed a memorandum of understanding whereby CRBC was to undertake a free feasibility study on the SGR project. In January 2011, CRBC submitted the feasibility report to the Ministry. The report recommended that the SGR be changed from an electric engine to a diesel engine. The implication of the free feasibility study was that its findings would be utilized by the two governments, but it also potentially suggested that the procurement process would favor CRBC, which had already done the feasibility study. This arrangement also was consistent with China's Exrport Import (Exim) Bank's approach, which usually requires that a Chinese firm that conducted a feasibility study proceeds to implement a project. In January 2012, through Kenya's embassy in China, Kenya Railways Corporation (KRC) requested financing from China's Exim Bank to build the SGR. The financing from Exim Bank has had multiple parts. It included a concessional loan of U.S. $1.6 billion for a period of twenty years, with a grace period of seven years and a two percent interest rate, and also a commercial loan of U.S. $1.63 billion for ten years with a five-year grace period. Although planning for the SGR started before President Uhuru Kenyatta came to power in March 2013, the project became a key component of his administration's vision for Kenya's future. The ground breaking took place on December 12, 2014, amidst protests about potential environmental risks of the SRG. In spite of these concerns, Kenyatta's ruling coalition was determined to complete phase one by May 2017, ahead of the August 2017 general elections. Construction on phase two, which runs 120 Kilometres, began in late 2016 and ended in August 2019. Phase three, from Narok, southwest of Nairobi, to Kisumu in western Kenya, is yet to begin. Crucially, China's Exim Bank did not approve the loan for phase three of the SGR as expected in August 2018, casting doubts over the extension of the SGR to other parts of East Africa. According to the original plan, extension of the railway into Uganda was contingent on completion on the Kenyan side.

Procurement and Debt Sustainability Despite the fact that Kenya has laws governing procurement, the SGR procurement process was not transparent. The governments of Kenya and China allowed the feasibility study for the project to be conducted by CRBC without allowing other firms to do a feasibility study. This decision to only allow CRBC to conduct a feasibility study was challenged by the Law Society of Kenya (LSK) which argued that Kenyan laws require competitive bidding for a feasibility study. However, a Kenyan court ruled in favour of the government, and stated that the whole procurement process was legal. After the award of tender for the whole project was given without competitive bidding, sub-tenders such as design supervision did not follow competitive bidding processes but instead were just handed to the Chinese firm. Two Kenyan parliamentary committees, learning of this lack of competitive bidding, recommended cancellation of the sub-tenders, but they were ignored by President Kenyatta. Because there was no competitive bidding for the entire project, it was difficult to tell whether the government obtained value for money in the construction of the SGR. The construction of Kenya's SGR also increased the country's debt to China by almost 750 percent between 2014 and 2019. Although the SGR was designed to accommodate 22 million tons of cargo per year, in reality since its launch the SGR has been underutilized. During the 2017-2018 financial year, it lost around $5 million. In 2018, only 5.039 million tons of cargo were ferried from Mombasa to Nairobi, while 3.25 million tons of cargo were transported between January and September 2019, implying that the the SGR was seriously underutilized and thus not generating expected revenues. By mid-2020, the SGR had amassed losses estimated at U.S. $200 million, and KRC was required to pay a fixed quarterly operation fee estimated at U.S. $28.8 million to Afristarthe SGR operator. Following the inability of KRC to meet operating costs in 2020, a parliamentary oversight committee recommended renegotiation of the "operating agreement by planning to reduce the operating costs by at least 50 percent." Although Kenya's economic growth is projected at 6.6 percent in 2021, the country's growing debt problems and the economic effects of COVID-19 may place it on the brink of defaulting on its debt to China Exim Bank for phase one of the SGR. Environmental and Land Appropriation Consistent with its 2007 Guidelines, China Exim Bank conducted an Environmental and Social Impact Assessment (ESIA) before approving funding for the SGR. The bank's assessment considered the SGR's potential hazards such as pollution, health problems, land acquisition problems, and forced resettlement. The Chinese embassy in Kenya also said it wanted to ensure that CRBC complied with Kenyan environmental and social laws. It claimed that the project achieved this goal through regular visits, meetings, training, and warnings of Chinese managers who did not comply with local laws. But many Kenyan activists did not agree. In September 2016, activists filed a petition at the National Environment Tribunal alleging that the SGR traversed Nairobi National Park which is protected and cannot be traversed. In the same month, the tribunal issued an injunction stopping the work until the case was heard. Although the Ministry of Transport had conducted an ESIA for the whole route, civil society activists argued that since the ministry was an interested party in the project, the report was not objective and urged the government not to allow construction of the railway through the park. In response to these concerns, CRBC explored more than ten routes and selected one that bypassed the park. This shift suggests that CRBC responded to public opinion, although local media reports claim that despite bypassing the park the railway has adversely affected animal migration patterns. Safeguarding socioeconomic rights of displaced communities was another challenging aspect of the SGR. Compensation was managed externally by Kenya's National Land Commission (NLC), which had to deal with exorbitant compensation claims. Localization and Transfer of Technology CRBC was expected to follow Kenyan labour laws in addressing local labour issues. By mid2015, CRBC employed more than 10,000 local workers as masons, mechanics, carpenters, and heavy construction equipment operators. Furthermore, at least 1,000 Kenyans had worked on the project from the level of foreman and middle manager. Over three years the construction of the SGR saw in total the creation of 38,000 temporary jobs. However, there were reported cases of wage discrimination by Chinese managers in both phases of the SGR. The project recruited workers from both rural and urban counties. Some workers were sourced from Nairobi because of the unavailability of certain skills in counties near the railroad. Some of these workers from Nairobi were resented by the locals as they were seen as "outsiders," and this became a source of tension in the construction of the SGR. Another source of tension was the frequency of strikes by Kenyan workers. A Chinese manager at a construction site complained that Chinese companies often complied with local labour laws and yet he could not fathom why they could not sort out their labour issues amicably with Kenyan workers.

Technological skill transfer also was a key component in the construction of the SGR. CRBC established training, in Kenya, in railway operation and management and railway engineering. CRBC also established an advanced training program in China for some 18,000 Kenyans. Under the management of China's Ministry of Commerce, high performing trainees were offered opportunities to travel to China for further study.

Please remember the following text:

b) Analyze the reasons that could have informed such project structuring (5 marks)

Q. 2. Assess Kenya's Standard Gauge Railway Financing Deal and project loan agreement for the challenges inherent in the arrangement (20 marks)

Q. 3. a) Assess the Kenya Standard Gauge Railway to identify and discuss the major lessons that can be learned by partner states like Uganda that wish to implement similar projects in the future (10 marks).

Make sure your answers are relevant to the case study by referring to specific paragraphs and line numbers containing the facts supporting your arguments as evidence.