Kenya’s SGR: The Promise and Risks of Rail Megaprojects

By Ian Gorecki 

640px-Kenya_Railways_DF8B_locomotive_on_the_new_SGR_line,_06-06-2017

Africa has a massive need for infrastructure to boost its economic growth, implement the African Continental Free Trade Area, and deliver on the African Union (AU)’s Agenda 2063 goals. Upgrading transportation infrastructure is crucial, as the poor state of roads, railways, and ports raises transit costs to the detriment of export competitiveness. In this context, the AU and African governments have made the revitalization, standardization, and expansion of Africa’s rail transport network a priority.

Current rail infrastructure in Africa is largely a legacy of European colonialism. According to the AU, the approximately 75,000 km of existing railways have decayed due to poor management, old and dysfunctional equipment, and increased competition with road transport. Agenda 2063 calls for the creation of an African Integrated High Speed Railway Network, and the Programme for Infrastructure Development in Africa has outlined plans for modernizing 17,200 km of existing railways and constructing 12,000 km of new railways.

However, construction of new rail infrastructure is expensive and controversial. It often entails megaprojects—with costs over USD$1 billion, multiyear design and build processes, and significant risk. This post will examine the Mombasa-Nairobi Standard Gauge Railway (SGR)—one of two rail megaprojects completed in East Africa in the 2010s (the other being the Addis-Djibouti SGR)—assess its successes and challenges, and consider its relevance to other rail megaprojects in Africa.

Kenya’s New Railway

The Mombasa-Nairobi Standard Gauge Railway (SGR) is a 480 km-long line that connects the port city of Mombasa with the capital city of Nairobi, replacing the colonial metre gauge railway. Construction began in 2013, and the initial segment was completed in 2017 at a cost of approximately USD$3.8 billion. An additional USD$1.5 billion extension to the tourist hub of Naivasha was completed in 2019. While the railway operates passenger services, its primary raison d’être is to improve freight transportation to and from the Port of Mombasa. It is planned as the first step toward an East African regional SGR network, reaching the Ugandan border, its capital city of Kampala, and Rwanda’s capital of Kigali—with branches extending to South Sudan’s capital of Juba.

The SGR has had some important successes. Trains run faster than the former railway or road traffic, and its passenger services are popular. The amount of freight carried by the SGR has risen significantly since commercial operations began, and it has helped to decongest port operations, speed freight transportation, and enhance cargo security. The Kenyatta administration considers the SGR to be a “vital component for the realization of the Kenya Vision 2030” development agenda.

However, the project is also controversial, given concerns about its cost and cost-effectiveness. The Export-Import Bank of China provided loans worth USD$3.2 billion for the construction of the initial section—enormously increasing Kenya’s debt to China. Planners assumed that the SGR would generate enough revenue to cover operating costs and loan repayments, but this has not been the case. While revenues are up, the system is still running at a loss. The Kenyan government has struggled to get businesses to use the line. The cost of moving freight on the SGR is higher than the equivalent journey by truck, mostly because of last-mile costs. The SGR is primarily used for imports, meaning trains return to Mombasa largely empty. A promised uptick in Kenya’s GDP growth has not materialized, and there are serious questions about whether the railroad even has the physical capacity to pay for itself. There is also controversy in Kenya about the transparency of the loan agreement and contracting process. Since the Ex-Im Bank of China made its loan conditional on the selection of a Chinese contractor for construction and operation, the project was never put through a public tender—something the Kenyan Court of Appeals has ruled illegal. There is also controversy over the displacement of people during the railway’s construction.

These challenges are not out of the ordinary for megaprojects, and it is unlikely that the Nairobi-Mombasa segment alone would ever justify its cost. According to the U.S. Department of Transportation, rail is not economically viable for freight transportation at distances under 483 km. The project’s long-term logic relies on it reaching Uganda and Rwanda, providing an efficient costal link for these land-locked countries. However, the Ex-Im Bank of China rejected Kenya’s request for a loan to extend the SGR to the Ugandan border, and declined to loan Uganda funding for its SGR segment—in large part due to concern over the viability of the existing line. Instead, for the time being Uganda and Kenya will upgrade the existing metre gauge railway between their countries, and connect the line with the SGR at Naivasha—although this would require transfers between two incompatible railways.

Lessons from the SGR

Transportation infrastructure is critical for Africa’s economic development. However, history has shown that megaprojects are incredibly complex and risky affairs. Since many other African countries are either currently investing or planning to invest in major rail projects—including TanzaniaEthiopiaNigeriaZambiaSenegalMorocco, and South Africa—it may be helpful to assess some policy considerations drawn from the SGR.

Be warry of common megaproject obstacles. A report by McKinsey cites three main causes of megaproject failure: over-optimism and over-complexitypoor execution; and weakness in organizational design and capabilities. The first is possibly the most significant for the SGR. Designers and politicians were over-optimistic about the speed at which the project would boost Kenya’s economy and the extent to which freight revenues would pay for the project. Most infrastructure projects end up going over budget and under-delivering. The McKinsey report notes that, on average, rail projects go over budget by 44.7 percent, and over-estimate demand by 51.4 percent. Political leaders should be skeptical of any rail megaproject that is promised to “pay for itself” in the short term, and should have a back-up financing plan.

Link up to existing networks. Rail infrastructure needs to be part of an integrated transportation system to be effective. The SGR is disconnected from the existing rail network, and its terminals and depots are often remote from city centers. While the East African SGR system—once fully completed—would provide needed connectivity, the project is being constructed piecemeal, without a clear funding plan to complete the link to Uganda. This poses a risk to its long-term viability. The importance of this interconnectivity is seen in policymakers’ revised plans to link the SGR system to refurbished metre gauge railways.

Be transparent. A lack of transparency has increased political tensions and prevented the Kenyan government from ensuring it was getting the best possible deal. A public investment on this scale should engage all stakeholders. Outside voices and independent analysis—including from local think tanks—should be engaged to assess risk and economic viability and ensure the country is getting a good return on its investment.

Carefully balance needs and resources. While infrastructure is critical for development, governments should still carefully assess any investment to ensure maximum benefit for minimal cost—especially for megaprojects. It should be noted that earlier analysis by the World Bank found that a major refurbishment of the existing metre gauge railway network in the East African Community could have provided most of the benefits of the new SGR, at a fraction of the cost.

Ian Gorecki is a Program Assistant with the Wilson Center Africa Program.

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