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Who Is Afraid of Commuter Ride-Hailing Apps? Tech Meets Matatu, and Why Nairobi Does Not Need State-Run Public Transport

8 min read. DAVID NDII explores the disruptive power of ride-hailing apps on public transportation in Nairobi and why both the government and the matatu industry should be embracing the commuter ride-hailing apps instead of fighting them.

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Who Is Afraid of Commuter Ride-Hailing Apps? Tech Meets Matatu, and Why Nairobi Does Not Need State-Run Public Transport
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Technology platforms have become disruptors in unexpected places. They have over the years disrupted the music distribution business, the book trade, and even the hospitality industry, but none has been as turbulent as Uber’s disruption of public transportation.

A couple of days ago, the commuter ride-hailing app services Little Shuttle and SWVL announced that they were suspending their operations. Little Shuttle and Little Cab ride-hailing apps are products of technology company Craft Silicon. SWVL is an Egyptian start-up that has invested in the country to do this specific business. Launched seven months ago, SWVL is reported to have 150 buses serving 100 routes, and has raised Sh1.5 billion from investors to expand its operations.

The National Transport and Safety Authority (NTSA) subsequently issued a statement giving its reasons for the suspensions. The agency explained that the two companies had obtained the “wrong” licence—known as a Tour Service Licence (TSL)—which it deemed to be a violation of Passenger Service Vehicle (PSV) regulations. NTSA also accused the operators of failing to register their vehicles with the authority as required by Section 26 of the Transport and Safety Act No. 33 of 2012. “The two companies have never contacted the Authority to show any intention to operate as commuter service providers”, the NTSA avers.

Technology platforms have become disruptors in unexpected places. They have over the years disrupted the music distribution business, the book trade, and even the hospitality industry, but none has been as turbulent as Uber’s disruption of public transportation.

Section 26 of the Transport and Safety Act, the provision that NTSA claims has been violated, states that “[a] person shall not operate a motor vehicle whose tare weight exceeds three thousand and forty-eight kilogrammes for the carriage of goods or passengers for hire or reward unless the vehicle is licensed by the Authority in accordance with this Part and in such manner as the Cabinet Secretary may prescribe. Violating the provisions, i.e., operating a commercial vehicle without a prescribed licence is a criminal offence that can attract a fine of Ksh. 300,000 or imprisonment for a term of five years.”

The other ground for suspension is that the two operators have violated PSV regulations. To be licensed under these regulations, the operator is required to be a corporate body which may be a company, a cooperative society (SACCO) or other collective registered under the Societies Act, and have a minimum of 30 vehicles owned by the operator or under a franchise arrangement with the owners.

Regulation 7 (f) requires passengers to be “issued with receipts for fares paid, and as from 1st July 2014, operate a cashless fare system.” Another regulation requires “a transport safety management system based on ISO3900.” Obviously, these regulations are not enforced—and therein lies the paradox. The shuttle services that the NTSA has suspended were the closest thing to compliance with the spirit of these regulations that we have seen since the collapse of the Kenya Bus Service (KBS) franchise several years ago. It is in fact not apparent from my reading of these regulations that Little Shuttle and SWVL have violated these regulations in any substantive way.

The NTSA is disingenuous. Investors do not determine for themselves what licences they need. They go to the government and say, look, I want to run a business of the following nature, what do I need? The government then makes the determination and advises the investor accordingly. In the statement announcing the suspension of operations, Little Shuttle’s Chief Executive Officer disclosed that they were operating on the basis of a national Transport Licensing Board (TLB) licence—also issued by the NTSA—which does not restrict them to specific routes. Someone at the NTSA must have determined that a national TLB licence is what they required. Moreover, if it was deemed that there was no suitable licence, the Transport and Safety Act gives the Cabinet Secretary the power to “exempt any person or class of persons or any motor vehicle or class of motor vehicles from all or any of the provisions of this Act.” The NTSA could have advised the investors to apply for exemption.

In his statement, the Little Shuttle CEO alludes to cartels: “I am not sure if the decision to stop us was from the authorities or they were under pressure from the public transport cartels.” There is a whole range of actors that this could apply to, either working independently or in concert. There are the investors, that is, the vehicle owners, the crew who operate the vehicles and control the revenue, route cartels who control access to particular routes and the police extortion racket. The industry has also been associated with money-laundering syndicates. As one of the biggest cash businesses around, it is as close to the ideal laundromat as you can get.

A key challenge that bona fide investors in the matatu industry face is that they are hostage to crew and route cartels. Precisely because PSVs do not issue receipts as required by law, the owners have no way of keeping tabs on revenue. Moreover, even if they could do so, they would still be compelled to give the crew leeway to pay bribes. Students of economics may recognise this as a principal-agent problem. 

The principal-agent problem arises in contractual relationships where the principal (the vehicle owner) cannot observe whether poor performance by the agent (the crew) is because of external factors (e.g. poor market conditions) or lack of effort or dishonesty on the part of the agent. We say that the interests of the principal (maximum effort by the agent) and the incentives of the agent (maximum income for least effort) are not compatible.

To mitigate this problem the industry has come up with a fixed daily revenue target, which in essence changes the contract between the owner and crew from a wage to a vehicle lease. In economic theory, we call this the incentive-compatible contract. An incentive-compatible contract seeks to motivate the parties to achieve mutually beneficial outcomes. This particular incentive-compatible contract has an extremely high social cost. 

Because the crew gets to keep the revenue above the daily target, they are motivated to maximise the number of passengers, and this they do at the expense of road and passenger safety. The cashless system the government sought to enforce would have gone some way towards resolving this problem, which is probably partly why it was resisted—not to mention the resistance by those others with vested interests in a cash business, notably the money-laundering syndicates and the police extortion cartel.

The ride-hailing apps portend a more robust solution to this problem; because of the ubiquity of mobile payments, they can easily combine revenue tracking and cashless payments. And since the revenue is tracked electronically, this makes it possible to enter into a wage contract between the owner and the crew. Crew on a wage contract have no incentive to compromise safety in order to maximise revenue.

That said, it is not evident that the commuter ride-hailing services are an immediate threat to the matatu industry. The two suspended services appear to be more of an alternative to personal cars than direct competitors for matatus. This can only be a good thing in terms of reducing congestion on the roads. Still, the development has caused sufficient concern somewhere, perhaps because the reputation of the disruption caused to the conventional taxi industry precedes Little Shuttle and SWVL. But it is also the case that sometimes these regulatory hurdles are extortion rackets that are intended to extract bribes or a share of the business.

The principal-agent problem arises in contractual relationships where the principal (the vehicle owner) cannot observe whether poor performance by the agent (the crew) is because of external factors (e.g. poor market conditions) or lack of effort or dishonesty on the part of the agent.

There is another vested-interest candidate—the government itself. It is now one and a half years since the government hastily painted some red lines on some of Nairobi’s thoroughfares and declared the lanes thus demarcated dedicated Bus Rapid Transit (BRT) lanes. The red paint has since faded. It is said that the buses are being assembled in South Africa, after local samples failed to make the grade. But other than the now faded lines, there is no evidence of actual BRT infrastructure being built. A BRT system is a metro light rail on the cheap but it also costs. The first phase of the Dar es Salaam system covering 21 kilometres took three years to build at a cost of $140 million (Sh14 billion) while the second phase covering another 19 kilometres will cost $160 million (Sh16 billion).

Nairobi is one of several African cities that do not have municipal public transport. For all their notoriety, matatus, dala dala and tro tros manage to move the cities quite efficiently. They are accessible, responsive, affordable, flexible as well as colourful and entertaining. A number of surveys conducted in Nairobi over the last decade or so indicate that public transport—predominantly matatus—accounts for between 50 and 55 per cent of commutes in the city; 40 per cent of commuters walk, while between 8 and 12 per cent use private cars.

By way of comparison, London’s elaborate public transport system comprising of buses covers 35 per cent of the commutes. The iconic underground moves 10 per cent. For all the congestion hullabaloo, a recent paper titled Commuting in Urban Kenya: Unpacking Travel Demands in Large and Small Kenyan Cities, published in the academic journal Sustainability, observes that average commuting journeys in Nairobi are comparable to those of major cities in the United States such as New York and Los Angeles.

This data is telling us that Nairobi is none the worse for lack of a municipal public transport system. Municipal systems are hugely expensive to build and to run, requiring operational subsidies. At £17.6 billion (Sh2.3 trillion) and counting, CrossRail—London’s new train system which has been under construction since 2009—is billed as the most expensive public infrastructure project in Europe. As observed, the Dar es Salaam BRT has already cost $300 million (Sh30 billion) and is nowhere near solving the city’s congestion problem.

There is, in fact, a parallel between what the commuter ride-hailing apps are trying to do and the story of mobile telephony in Africa. The phenomenal growth of mobile telephony in Africa is, to a large extent, a leapfrogging of the largely non-existent landline telephony. The same applies to the innovations around mobile telephony, notably mobile money, reflecting the poor reach of financial services referred to nowadays as financial exclusion. Mobile telephony systems and services are estimated to account for close to 9 per cent of Africa’s GDP, only marginally below manufacturing at 10 per cent, which is remarkable for a sector that is only two decades old.

To mitigate this problem the industry has come up with a fixed daily revenue target, which in essence changes the contract between the owner and crew from a wage to a vehicle lease. In economic theory, we call this the incentive-compatible contract

Like landline telephony, public urban transport systems are characterised by rigidity. Customers must go to the bus or train and follow fixed routes and timetables, just as in the old days when we used to have to go—sometimes for miles—to reach a telephone. To send money urgently, you went to the Post Office to send a telegraphic money order which was physically delivered to the recipient who in turn physically went to cash it at the Post Office.

The disruptive power of ride-hailing apps is what the Little Shuttle CEO refers to in his memo as “supply and demand software technology.” In plain English, this is about using customer ride request data—how many customers want to travel, when and where—to provide services that are responsive to demand in terms of capacity, routes, scheduling and pricing. But this is not entirely new; one of the reasons why matatus eclipsed scheduled bus services is precisely because they were more responsive.

As observed, between 8 and 12 per cent of Nairobi’s estimated three million commuters use private vehicles This works out to something in the order of 300,000 commuters and, assuming two people per car, 150,000 vehicles that spend eight hours or more hogging parking spaces—Sh150 billion worth of idle capital, over and above fuel, pollution and congestion costs.

Nairobi’s public transport imperative is to put more of these people on matatus and this seems to be precisely what the suspended ride-hailing services had set out to do. A smart government would be doing its best to make commuting by private vehicles costly. How so? For starters, the Nairobi County government needs to go back to a time tariff for street parking. Leaving a private car in a street parking all day should be extremely punitive. I would propose a rate of Sh100 per hour. We may also want to think about applying congestion charges on the city’s main arteries: Mombasa Road, Waiyaki Way, Thika Road, Jogoo Road, Ngong Road and Langata Road.

Assuming that each of the minibuses serves 40 commuters who would otherwise travel in private cars, we are talking of each bus displacing 20 private vehicles on the road. If only 20 per cent of driving commuters take to these services, we are talking of replacing 30,000 cars with only 1,500 minibuses. This would certainly have a discernible impact on de-congesting the roads. And the less congested the roads become, the faster the trips, the more attractive using public transportation becomes, and the more profitable the entire industry becomes. Far from fighting them, both the government and the matatu industry should be embracing the commuter ride-hailing apps.

David Ndii
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David Ndii is a leading Kenyan economist and public intellectual.

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Elite Feuds: Are the SGR Protesters in Mombasa Pawns in a Larger Battle for Control of Port Services?

5 min read. The evidence suggests that the protestors in Mombasa are actually crying for the scraps of what was already a broken system that benefitted the elite few. If the protests against the directive to transport all cargo on the SGR are successful (an unlikely outcome), this will result in the protection of businesses that have long enjoyed near-monopoly advantages at the expense of the wider public interest in Mombasa.

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Elite Feuds: Are the Sgr Protesters in Mombasa Pawns in a Larger Battle for Control of Port Services?
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Protests in Mombasa against a directive that all cargo passing through the Port of Mombasa should be transported via the Standard Gauge Railway (SGR), and cleared at the Inland Container Depot (ICD) in Nairobi, have continued despite a meeting between the political leadership of Mombasa County and the national government where – the public was told – the directive had been suspended. At the heart of the debacle, of course, lies the question of the high cost that was involved in building the SGR, and the fact that since it was launched in January 2018, the SGR freight service has not been able to compete favourably with trucks plying the Mombasa-Nairobi highway.

The protestors have argued that they are protecting jobs. A study commissioned by the County Government of Mombasa has shown that 2, 987 employees working in Mombasa for Container Freight Stations (CFSs), fuel stations, and as truck drivers have already been laid off since the SGR began its freight operations, and that over 8,000 more jobs are under threat following the directive. Granted, the fear of economic exclusion and the loss of jobs is bound to be a politically explosive issue anywhere in Kenya. But could the protestors in Mombasa be gullible participants in a larger battle between entrenched business interests for private control of cargo storage facilities? The evidence suggests that the protestors in Mombasa are actually crying for the scraps of what was already a broken system that benefitted the elite few.

It is notable that the leading protagonists in the SGR drama, and the politics surrounding the establishment of inland storage facilities at Nairobi and Naivasha – especially before the March 9 handshake – were President Uhuru Kenyatta and the County Governor of Mombasa, Hassan Joho, a powerful businessman with interests in freight stations at the Coast.

Both Kenyatta and Joho are members of families that own huge tracts of land in the country. The Kenyatta family is known to own massive acreage up-country, especially in the Central highlands and in Naivasha, and modestly less along the Coast, where Arab, Indian and some Swahili families (the Johos consider themselves Swahili) have dominated land ownership since long before Kenya’s independence.

Could the protestors in Mombasa be gullible participants in a larger battle between entrenched business interests for private control of cargo storage facilities?

History is replete with examples of struggles over the location, and therefore the control of commerce and collection of rent for port storage all over the world. With the expansion of its capacity in recent years the Port of Mombasa has become increasingly important to powerful economic players with control over land, and with influence over the country’s politics. In fact, the nexus between political influence, land ownership and port business became clearer when services at the port almost ground to a halt in 2008 following the post-election violence that broke out that year.

Business interests

Due to lack of container storage space, ships were forced to queue out at sea for indefinite periods of time while importers paid high ship delay surcharges. In fact, matters got so bad – cargo entering Mombasa could take up to 10 days to clear – that the then Managing Director, Abdallah Mwaruwa, was sacked two years into his appointment. It was in this context that a group of private investors proposed to the Kenya Ports Authority (KPA) that they provide storage units in order to ease the burden on the container terminal. Soon thereafter, Container Freight Stations (CFSs) – managed privately but licensed as sites for customs clearance by the Kenya Revenue Authority (KRA) – rapidly spread in and around Mombasa.

There are now more than 20 CFSs scattered throughout the town around which operates a ring of local powerbrokers and owners of extensive and commercially viable pieces of land in and around Mombasa. The CFSs have persisted and multiplied with the expansion of the port itself but ironically, they are threatened by the expansion in port infrastructure, in particular the SGR and its inland dry ports.

The nexus between political influence, land ownership and port business became clearer when services at the port almost ground to a halt in 2008 following the post-election violence that broke out that year.

From their inception, CFSs have been a source of aggravation for importers, shipping lines and the residents of Mombasa. The decentralisation of customs clearance to these facilities has caused problems of oversight, with accusations of corruption, including malpractice and smuggling. Many CFSs are also known for their incompetence, mishandling of cargo, overloading and fraudulent documentation. Containers have been damaged and cargo has disappeared. Clearing is deliberately delayed in order to extract higher fees from importers, which increases consumer prices.

Since 2012, powerful players, including major shipping lines and the governments of Uganda and Rwanda, have successfully lobbied to circumvent the facilities altogether, removing themselves from the CFS conversation long before the SGR was launched. In this way, some goods bound for Uganda are cheaper than those destined for Kenya. Less powerful importers have continued to operate at the mercy of CFSs whose owners have accrued greater profits, even as the cost of clearing cargo at the port has increased.

For Mombasa residents, CFSs have increased congestion, as cargo is moved around twice – from the port to the CFS, and then again out of the CFS to final destinations – worsening traffic, causing accidents and damaging roads.

Joining the handshake system

The threat that the SGR and its inland container depots posed to the CFSs in Mombasa was clear even before the SGR began its operations. The tussle between Uhuru Kenyatta and Hassan Joho between 2013 and 2017, while touching on various issues around the fate of devolution, was, in reality, deeply personal. To transfer cargo handling to Nairobi, and then to Naivasha, is to not only transfer the problems that CFSs have caused in Mombasa to other towns, but it is also to provide ample business opportunities to other large landowners there – members of families such as the Kenyattas – moving it away from the hands of families such as the Johos. This was a major contribution to Joho’s opposition to Jubilee before the 2018 handshake.

Amid claims that the SGR is threatening the Coast economy, companies associated with Hassan Joho and Mohammed Jaffer – both key financiers of Raila Odinga’s campaign for the presidency since at least 2007– are reported to have acquired lucrative deals with the SGR and the ICD in Nairobi under unclear circumstances; if you can’t beat the system, do business with it!

The tussle between Uhuru Kenyatta and Hassan Joho, while touching on various issues around the fate of devolution, was, in reality, deeply personal.

In sum, if the protests against the directive to transport all cargo on the SGR are successful (an unlikely outcome), this will result in the protection of businesses that have long enjoyed near-monopoly advantages at the expense of the wider public interest in Mombasa.

On the other hand, the state is likely to respond – as it did – with more violence, as such protests threaten entrenched business interests with influence on public policy that are located away from the Coast.

My argument is that the “protection” of CFS businesses in Mombasa from the noose of the SGR will not go a long way in fixing the economic problems afflicting the county in particular, and the Coast region in general.

Someone should impress it upon the protestors that scraps from a broken system benefitting the elite few will not end the region’s long-felt sense of exclusion.

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From Game Changer to Railway to Nowhere: The Rise and Fall of Lunatic Line 2.0

8 min read. It goes without saying that the recently commissioned 120-kilometre Nairobi-Naivasha extension of the new railway line ending at Suswa is an economic puzzle, as the bulk of the cargo that comes through the port of Mombasa is either destined for Nairobi, or is in transit to Uganda and beyond. It is a misguided “if we build they will come” scheme since Suswa offers none of the advantages associated with a viable location for an industrial park.

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From Game Changer to Railway to Nowhere: The Rise and Fall of Lunatic Line 2.0
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Two weeks ago, Uhuru Kenyatta commissioned the 120-kilometre Nairobi-Naivasha extension of the new railway line commonly referred to as Phase 2A. Phase 1, which runs from Mombasa to Nairobi, was completed and launched with great fanfare in 2017. Not so this time round. On the day of the launch, a local daily headlined its story thus: “Uhuru to launch expensive SGR [Standard Gauge Railway] train to ‘nowhere.’” The “nowhere” caught on, with one international media house carrying the headline, “The railroad to nowhere China built has opened in Kenya” and another, “Kenya struggles to manage debt for railway to nowhere.”

The “nowhere” refers to Duka Moja (literally meaning “one shop”), a sleepy trading centre on the Maai Mahiu-Narok road where the railway line comes to an abrupt end. Duka Moja lies about 20 kilometres beyond the last train station at Suswa, a slightly busier cattle market about five kilometres down the highway turn-off at Maai Mahiu. There is little to take commuters there, unless one is a cattle trader. Naivasha town, which would be the destination for commuters, is a good 30 kilometres by road from the train station at Suswa but only an hour and a half’s drive from Nairobi. There being no station at Duka Moja means that the stretch will lie unused until “Phase 2B” is built—if it ever is.

The entire Phase 2A extension is an economic puzzle. The bulk of the cargo that comes through the port of Mombasa is either destined for Nairobi, or is in transit to Uganda and beyond. In 2018, the port handled 21.8 million metric tonnes of dry cargo of which 9.6 million tonnes—44 per cent—was transit cargo. This suggests only two logical destinations for rail freight: Nairobi and Malaba. After offloading in Nairobi, the only other logical line for rail freight is one that serves transit cargo, terminating at Kisumu or Malaba as the case may be.

In October 2018, we were informed that the financing agreement for Phase 2B, the 250-kilometre stretch from Naivasha to Kisumu, would be signed at the margins of the China-Africa Summit (FOCAC). Upon his return, Cabinet Secretary for Transport James Macharia informed the country that the Chinese authorities had asked for a feasibility study “of the whole project”. He was quick to add that he was confident that they would be able to produce one in no time, since they now had data from the Mombasa-Nairobi line which had by then been in operation for close to a year. There are two observations to be made here. Firstly, it is the Chinese who have been running the railway, and it is they, and not the government, who have the data on its operations. Secondly, CS Macharia implies that no feasibility study had been undertaken. This is not quite true. There exists a feasibility study for the Mombasa-Nairobi line carried out by the contractor, China Road and Bridge Company. The economic evaluation—which takes up 17 pages of the 143-page document—is the shoddiest thing of its kind that I have seen.

In April this year, the Kenyan delegation left for Beijing amid much fanfare, again anticipating that they would sign the financing of Phase 2B at the margins of the Belt and Road Initiative (BRI) Summit. This time China dropped the bombshell; the project would not be financed. The government had not been paying attention. A couple of weeks prior, China’s Ministry of Finance had released a document titled Debt Sustainability Framework for Participating Countries of the Belt and Road Initiative. It was posted on their website, and was the theme of China’s Finance Minister’s speech at that BRI summit. The long and short of it was that the era of chequebook diplomacy was over. China was bringing sovereign risk assessment on board. More interestingly, China had not formulated its own framework, stating in the document that it was adopting the IMF/World Bank Debt Sustainability Framework for Low Income Countries. Evidently, the administration had missed that memo.

Once the financing fell through, a hastily conceived “Plan B” proposing to revamp the old meter gauge line and integrate it with the new railway was unveiled. The initial announcement indicated that the revamped line would terminate in Kisumu at a cost of Sh40 billion ($400 million). Within days, this plan was abandoned in favour of another routing terminating at Malaba on the Kenya-Uganda border. It was to be a public-private partnership (PPP) project costing Sh20 billion ($200 million). The latest on these “Plan Bs” is that the Chinese contractor’s quotation far exceeds the government’s preliminary estimates.

In April this year, the Kenyan delegation left for Beijing amid much fanfare, again anticipating they would sign the financing of Phase 2B at the margins of the Belt and Road Initiative (BRI) Summit. This time China dropped the bombshell; the project would not be financed.

From the outset, the public has been led to believe that the SGR train has a freight capacity of more than 22 million metric tonnes. This column has challenged the operational feasibility of carrying this much freight on a single-track railway line, particularly one that is also used by passenger trains. A paper prepared for the Kenya Railways Board by the Kenya Institute for Public Policy Research and Analysis (KIPPRA), a government policy think-tank, puts the actual operational capacity at 9.75 million metric tonnes. These cargo capacity numbers imply that the railway is capable of carrying only transit or domestic cargo but not both (in 2018 the port handled 9.6 million tonnes of transit cargo).

If the extension to Naivasha is to be of any use, it stands to reason that the railway should prioritise transit cargo. And if transit cargo can utilise all of the railway’s capacity, why then is the government hell-bent on forcing Nairobi-bound freight onto the railway? In order for it to comply with the terms of financing entered into with the lender, the Exim Bank of China, is the readily apparent reason. The loan is secured with an agreement referred to as “take or pay” which obliges Kenya Ports Authority (KPA) to deliver to the railway enough freight to service the debt, failing which KPA will cover the revenue deficit from its own sources.

According to a schedule attached to the agreement, the freight required to service the loans averages 5 million tonnes a year, equivalent to five trains a day between 2020 and 2029 when repayment of the first two loans for the Mombasa-Nairobi section will be completed. The freight comes down to two million tonnes a year thereafter, equivalent to two trains a day until 2034, the completion date for the second loan. A third loan, which financed Phase 2A, does not feature in the agreement as it had not been negotiated, but it is possible that the agreement was revised to factor it in.

Whatever the case, the contract is moot; the revenue streams are calculated at a tariff of $0.12 (Sh12) per km/tonne, which works out to $870 (Sh87,000) per 20-foot container of up to 15 tonnes from Mombasa to Nairobi, compared to the $500 that the railway is currently charging which translates to a rate of $0.069 per km/tonne. Even at this cost the railway cannot compete with trucking because of additional handling charges and “last mile” transport from the railway depot to the owners’ premises which, according to a government report, increase rail freight costs to US$1,420 (Ksh.142,000) compared to a total trucking cost of $850 (Sh85,000). If we use the current rate of $500 to calculate the freight required to pay the loan, KPA needs to deliver 10.4 million tonnes a year, which is more than the 9.75 million tonnes operational capacity given in the KIPPRA report.

On the ground, things are different. According to data published by the Kenya National Bureau of Statistics, the railway earned Sh4 billion from 2.9 million tonnes of freight last year, a rate of Sh2.91 per km/tonne. In the first two months of this year, it earned Sh959 million from 662,000 tonnes, a slight improvement in revenue yield to Sh2.99 per km/ton. Either way, the actual revenue per km/tonne is still just a quarter of the rate used to calculate the loan repayments. As this column has maintained from the outset, there was never a likelihood that the railway was going to pay its way. The debt was always going to be paid by the taxpayer. It is difficult to fathom why the government and the Chinese lender bothered with this shoddy securitisation charade for debt that has an implicit sovereign guarantee anyway.

Meanwhile, back on the ranch, the “railway to nowhere” epithet seems to have stung Uhuru Kenyatta: “Let me tell you. Mai Mahiu… Suswa is not nowhere. This is Kenya. And let me tell you. Whether you like it or not, once I am done with my work and go home, after 20 years when I come back here, Maai Mahiu and Suswa will be more developed than Nairobi.”

Kenyatta was alluding to the plans to set up industrial parks in that locality, some of which we are told will take advantage of the proximity to the geothermal power and steam resources in the region. This is another one of the administration’s misguided “if we build they will come” schemes. Before any further comment, it is worth remarking that Konza Technocity—which is also smack on the railway line—remains a field of dreams. The viability of locations for industrial parks is determined by their proximity to big markets, or raw materials, or labour. It is far from evident that Suswa offers any of these advantages. If we think about export processing for overseas markets, the most cost-effective location is at the coast. It does not make sense to transport raw materials hundreds of kilometres inland and the finished goods back to the port. This is one of the reasons why Athi River has struggled as an Export Processing Zone.

But even were Suswa a most inviting location for industrial parks, the Sh150 billion price tag is exorbitant. The first three berths of the Lamu Port—one of which has been completed—carry a price tag of $480 million. The cost of Phase 2A is enough to build another three (which would put Lamu port’s capacity on a par with Mombasa), plus a highway connecting Lamu to the interior; and you could throw in an airport together with all the housing and social amenities Lamu needs to become a viable port and industrial city.

There is reason to suspect that Mr. Kenyatta reacted in one of his uninhibited moments. The land at Suswa on which the railway terminates is part of an expansive holding—over 70,000 acres—known as Kedong Ranch. Owned by a company of the same name, Kedong Ranch Ltd, the land was expropriated from the Maasai community in the colonial era. Like many other holdings, it was not restituted to the community but instead became available for purchase under Jomo Kenyatta’s willing buyer-willing seller policy. In 1963, Prime Minister Jomo Kenyatta had given an undertaking to the Lancaster House constitutional conference that “tribal land” would be “entrenched in the tribal authority” and it would not be possible for anyone to “take away land belonging to another tribe.” He reneged on this undertaking.

In the Kedong case, the principal beneficiary was Muhotetu Farmers Company, a land-buying entity from Nyeri (Muhotetu is an acronym for “Muhoya” and “Tetu”, both localities in Nyeri County), which until recently owned 40.66 per cent of Kedong Ranch Ltd, according to documents filed in one of several court cases involving the company. Other shareholders include Family Circle Investments—with 6.83 per cent—Jackson Angaine and Jeremiah Nyaga. Angaine and Nyaga were respectively Minister for Lands and Settlement and Minister for Education in Jomo Kenyatta’s first post-independence government. It would have been very unusual in those days for people like Angaine and Nyaga to partake of such largesse without there being a share for the Kenyatta family.

But even were Suswa a most inviting location for industrial parks, the Sh150 billion price tag is exorbitant. The first three berths of the Lamu Port carry a price tag of $480 million. The cost of Phase 2A is enough to build another three plus a highway connecting Lamu to the interior

Two years ago, Muhotetu Farmers Company’s shareholding was acquired by a company going by the name of Newell Holdings Ltd. for Sh2.1 billion in a transaction that some shareholders have challenged in court as highly irregular. They claim that the company did not hold a general meeting to approve the deal, and that shareholders were not offered the right of first refusal (pre-emptive rights) as required by law. Suspicion is heightened by the claim by some shareholders that they were credited with the proceeds of the sale well before the date of the transaction. The import of this is that Muhotetu Farmers Company shareholders will have been excluded from compensation for the railway line terminating on the land, and from benefitting from the appreciation of value that may accrue from the proposed industrial parks—if they ever take off. We need not go to the trouble of sleuthing to establish who the owners and/or beneficial interests of Newell Holdings are as we can confidently surmise that they are powerful people within the government.

Not too long ago we saw Uhuru Kenyatta personally propositioning the leaders of Uganda and South Sudan with land grants in Suswa to build dry docks for their countries. If it looks like a duck, swims like a duck, and quacks like a duck, what else could it be but a duck?

As we say in Gĩkũyũ, ona ĩkĩhĩa mwene nĩ otaga (if a burning house cannot be salvaged, the owner might as well enjoy the warmth of the fire).

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Why Directive on SGR Cargo Could Kill Kenya’s Small Towns and Cities

9 min read. RASNA WARAH explains why the decision to force importers to use rail transport could retard urban growth along the Mombasa-Nairobi highway, entrenching Nairobi’s position as the nerve centre of economic activity in the country.

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Why Directive on SGR Cargo Could Kill Kenya’s Small Towns and Cities
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A recent study by the University of Nairobi’s School of Business says that Mombasa County has suffered economically due to the government’s decision to force importers to use the standard gauge railway (SGR) instead of road transport from the port of Mombasa. The study says that since the implementation of the government directive the county has lost Sh17.4 billion – equivalent to 8.4 per cent of its annual earnings – and 2,987 jobs.

The study further notes that towns along the Mombasa-Nairobi highway have also been adversely affected, as businesses that depended on trucking – such as small restaurants, lodgings and other services that depend on long-distance drivers – are having to shut down. (I will not go into the viability or non-viability of the SGR itself, as this topic has been ably tackled by others, including the economist David Ndii.)

What does this mean for the country’s future prospects? Well, for one, small towns along the Mombasa-Nairobi highway, such as Voi and Kibwezi, might experience depopulation, which will have negative economic and social consequences for them. (On the other hand, stops along the SGR route may also experience a boom, but that is something we can only speculate about at this stage.) It may also mean that inland dry ports and cargo terminals that are near Nairobi will further reinforce the position of the capital city and its environs as the nerve centre of economic activity – a phenomenon known as “urban primacy” – which does not augur well for devolution and balanced economic development.

The six-lane Nairobi-Mombasa highway envisioned by the government may also not solve these problems because if importers are still forced to use the SGR, the towns along its route will not benefit substantially because it is trucks, and not private motor vehicles, that usually drive small-scale trade in these towns. (It also seems counterproductive to build a superhighway along the same route as the SGR; if the government’s intention was to promote railway use, why build a bigger road alongside it?)

Urban primacy – the concentration of people, capital, revenue and industrial production in one city – is common in countries that are in the early stages of urban development. In most so-called developing countries, the capital city is typically where people and economic activities are concentrated. Some countries, like India, have commercial hubs like the port city of Mumbai that are not capital cities but that do generate a disproportionately large amount of the country’s GDP, but these are usually the exception rather than the rule.

However, “primate cities” can be bad for the national economy as a whole because they create imbalances in the distribution of resources and populations that can lead to uneven development and political tensions. Kenyans’ clamour for devolution was a response to the fact that the capital Nairobi and selected agriculturally productive regions benefitted the most from the country’s public resources while cities, towns and other regions in the rest of the country did not.

Even Mombasa, a city with a long history going back centuries, and a natural deep-water harbour, has been unable to compete with Nairobi when it comes to public investments. This explains why, despite the city being at least a thousand years old, Mombasa’s population has only grown to about one million, about a fifth of Nairobi’s population. Yet until about a century ago, Nairobi did not even exist; it is an “accidental city” that grew rapidly due to a variety of factors, including being designated the capital of Kenya.

Devolution was expected to change all that, but as the government’s policy on SGR cargo has shown, national governments can still undermine the economy of a region by placing or diverting resources elsewhere.

Little town blues

Unlike many Kenyans who have a rosy image of an idyllic rural or small-town life, with birds chirping, cows mooing and fresh air wafting in through the windows, and who believe that big cities are bad and full of vices, I am a die-hard urbanist who believes that the future lies in cities. Living in small-town Malindi has intensified my belief, not only because I do not get to enjoy the pleasures of urban living, like cinemas, street lighting and good restaurants, but also because I see a clear correlation between economic stagnation and an undiversified economy.

Malindi has depended largely on tourism, which is sporadic and dwindling. Lack of investment in this town has ensured that it does not attract people with a variety of skills. There is no university or large industry here that brings in a wide range of professionals and skilled labour. So the town has remained a backwater with nothing much happening and which mainly attracts sex tourists.

Devolution was expected to change all that, but as the government’s policy on SGR cargo has shown, national governments can still undermine the economy of a region by placing or diverting resources elsewhere.

Downtown Malindi has resembled a cattle market for decades – the chaos of boda bodas, the lack of pavements and street lighting and zero urban planning have made the experience of going to the central business district extremely nerve-wracking. Malindi is what happens to urban areas when they are not planned, when there is little respect for the citizens inhabiting them, and when there is little incentive to make them more attractive and environmentally sustainable.

Malindi dulls the senses of the locals, and makes them cynical. They have come to believe that Malindi is – and will remain – a town with poor infrastructure, a crumbling paradise for them and their grandchildren. Those who manage to escape the town never come back. Promises of infrastructure development usually do not materialise, even with devolution. The lack of opportunities and amenities in this seaside town has also ensured that Malindi remains an economically and socially divided city with a small group of wealthy foreigners, a very large majority of poor people, and a tiny middle class.

There are many who believe that this is the nature of urbanisation – that cities and towns cannot be planned and that they grow spontaneously and haphazardly and quite often accidentally, and so urbanisation is a process that should be allowed to evolve naturally. While this may be true – most cities start out as small, disorganised villages – urban planning and management are what makes cities liveable. Imagine a city with no sewerage system, no public park, no bus stop, no paved roads, no street lighting and no public services. Would it even be worth living in such a city? What would be the point?

In the early 1990s especially, when a wave of liberalisation and privatisation was sweeping the world, United Nations- and World Bank-types advocated for market forces to determine the provision of basic services such as water. It was assumed that the private sector would step in when governments didn’t – or couldn’t – provide basic services and that this would lead to greater efficiency. The withdrawal of the state from service provision – a conditionality of the IMF-World Bank structural adjustment programmes (SAPs) – led to immense hardship in poor countries, especially in the areas of health and education. Urban decay became the norm as services collapsed or became unaffordable.

However, these believers in the free market forgot that there are some things that even the private sector cannot be trusted to handle well, such as deciding which sections of a city should be allocated to public parks and whether the city should have a sewerage system. On the contrary, given the profit motive of the private sector, it is more likely than not to view a piece of idle land as real estate that can make a profit rather than a space that should be reserved and preserved for the public good. Which explains why nearly all public parks in Nairobi have been grabbed by private developers and why the art deco-style bungalows in Nairobi’s Parklands area have almost all been demolished to pave way for ugly apartment blocks. No one tried to save these parks and houses by declaring them as part of Nairobi’s heritage. On the contrary, the authorities and powerful individuals colluded in their destruction.

The difference between a liveable city and one which is unliveable lies in how it views its citizens, its heritage and its environment. Planning is an essential part of this process. Urbanisation without good urban planning is simply urban growth.

Cities and socio-economic development  

Cities are the key to economic and social development. All over the developing world, indicators for health and education are better in urban than in rural areas, and Kenya is no exception. Kenyan urban populations tend to be healthier, more literate and wealthier than their rural counterparts. Agglomeration benefits and economies of scale brought about by populations concentrated in one area also make cities economically efficient.

The 2009 Kenya census shows that nearly one-third of the country’s population is now urban, but urbanisation levels are still way below those of other African countries. In fact, along with Burundi, Rwanda and Uganda, Kenya has among the lowest urbanisation levels in the world. This has implications for the country’s economic prospects.

Even though urbanisation is shifting the locus of poverty to cities and to the informal settlements (slums) within them, rural poverty still remains a problem. While it is easier to ascertain the role of the formal economy in national development, the role of the informal urban economy is not so clear, but is nonetheless significant. Studies show that African cities are characterised by informality, both in housing and in economic activity. The informal economy accounts for as much as 40 per cent of GDP in African countries, and accounts for more than 60 per cent of urban employment in Africa. This “underground” or “invisible” economy is what keeps cities functioning, and should not be underestimated. It is what pushes rural folk to cities and quite often keeps them there for generations.

The difference between a liveable city and one which is unliveable is how it views its citizens, its heritage and its environment. Planning is an essential part of this process. Urbanisation without good urban planning is simply urban growth.

This does not mean that rural development and agriculture should be neglected. The World Bank’s Commission on Growth and Development makes a clear link between agricultural productivity and urbanisation; it emphasises that improved agricultural productivity complements, rather than hinders, urban growth. In fact, many towns in Kenya, such as Nakuru and Eldoret, grew because of agriculture. These farming towns have an agricultural base that sustains them and that creates other economic opportunities for people living in them.

I would, therefore, argue that Kenya remains poor because present and past governments have neglected the country’s urban areas, and failed to see the link between sustainable urbanisation, sound urban planning and economic development. The directive on SGR cargo is a clear example of this blindness.

Cities and devolution

The 1963 Local Government Act created 175 local authorities in Kenya that were financed partly by their own revenues. These local authorities were abolished under the new constitution. As required by Article 184 of the constitution, national legislation should provide for the governance and management of urban areas. The Urban Areas and Cities Act (Revised 2015 edition) does provide for a system of city and municipal boards and town committees that are charged with the task of adopting urban policies and strategies, including on service delivery and land use.

However, the population threshold set out by the Act is too high. The Act defines a city as one that has a population of more than 500,000, and currently only two cities (Nairobi and Mombasa) have attained this population level. It defines a town as one that has a population of between 70,000 and 249,000, which places only Kisumu, Nakuru, Eldoret and Kehancha (Migori County) in this category.

When it comes to declaring a territory a city, size should not matter. Geneva, for example, has a population of just 200,000 yet it is still considered a city and Switzerland’s capital Bern has a population of just 130,000. Yet these cities enjoy all the amenities of urban life.

The 2017 Amendment Bill seeks to reclassify urban areas as those that have populations of at least 50,000, which could see the creation of a lot more municipal boards across the country. However, the criteria for the creation of these boards are rather restrictive, and could serve as a deterrent, especially in poor and largely rural counties.

I would, therefore, argue that Kenya remains poor because the present and past governments have neglected the country’s urban areas, and failed to see the link between sustainable urbanisation, sound urban planning and economic development. The directive on SGR cargo is a clear example of this blindness.

One of the conditions for the creation of a city or municipal board is that the city or town must have the capacity to generate sufficient revenue to sustain its operations. This is difficult for many of the poorer counties that rely on the national government to carry out operations, including the building of roads that are not part of the national highway network. Another condition is to have the capacity to effectively and efficiently deliver services, which was a tall order even back when cities and towns in Kenya were managed by city councils and municipalities. Public-private partnerships in service delivery could be an option, but these options are likely to remain unaffordable for the majority.

One of the pitfalls of devolution is that urban areas may suffer under a system where devolved funds are used to cater mostly for rural populations in the counties, rather than to the needs of urban dwellers. While this is understandable given the marginalisation of several regions under the previous centralised system, neglecting urban areas may come to haunt counties in the future.

But what happened to Mombasa was completely avoidable. To deliberately undermine an economic activity that employed thousands of people is nothing but economic sabotage on the part of the central government. This decision is likely to impact Mombasa’s fortunes in profound ways.

I hope the city of Mombasa will not become the unfortunate casualty of a misguided government policy – based largely, I believe, on the realisation that SGR was a costly project that will most likely not pay for itself – that could have long-term and far-reaching effects not just on Mombasa but on the coastal region as a whole.

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