The haste with which President William Ruto issued the cargo clearance directive—during his inaugural speech—may have caught by surprise those industry stakeholders who understand the complex nature of our logistics industry.
The return of the cargo clearance and port operations to Mombasa—decided without serious considerations—was a major campaign issue for Ruto to lure coastal voters. Mombasa has been reeling in economic pain for the last five years after the government issued an order directing that clearance of all Nairobi-bound cargo be undertaken at the Athi River Inland Container Depot (ICD).
Ruto’s directive overturned a notice issued in June 2018 that stopped importers from nominating cargo to any of the Container Freight Stations (CFSs) that had proliferated in Mombasa since 2007. That notice read in part:
“This is to notify all shipping lines that containers destined to Mombasa for local clearance shall not be allowed to be nominated by clients or endorsement of Bill of Lading to any CFS.”
It further read: “The nominations shall be done by Kenya Ports Authority (KPA) based on vessel rotation, volumes, and individual CFS capacity, therefore you are required to inform your clients in your various ports of loading accordingly.”
KPA issued this directive to create cargo volume for the Standard Gauge Railway (SGR), which links the port of Mombasa to the Athi River ICD. The government required the shipping lines to henceforth use a Through Bill of Lading (TBL) instead of Merchant Haulage. TBL refers to a single bill of lading covering receipt of cargo at the point of origin for delivery to the ultimate consignee at a named place in the hinterland, in this case, the Athi River ICD.
In Merchant Haulage of containerized cargo, the responsibility of the shipping line ceases upon discharge of the container at the port. This is the point where the consignee takes delivery of the goods and is given a time frame within which to return the empty container.
The abrupt 2018 notice disturbed a logistics industry that had grown organically for over a decade. In 2007, there was very serious congestion at the port due to capacity constraints in the face of growing cargo volume, which affected the turnaround times of merchant ships.
For the first time in their history with the port, shipping lines threatened to levy a Vessel Delay Surcharge (VDS), a highly punitive fee for unusual delays, which can go as high as KSh30 million a day depending on the size of the vessel or the type of the cargo.
The abrupt 2018 notice disturbed a logistics industry that had grown organically for over a decade.
A need arose to create extra capacity outside the port’s yard to avoid VDS. This is how the CFSs came into being as a temporary measure to address the prevailing congestion. However, it is their business model that was interesting; viewed as an extension of the port, they were to apply the KPA Tarif. Since over 60 per cent of the cargo could not be cleared within the 7 free days the KPA allowed, the income of CFSs came from storage charges levied against importers who could not clear cargo within the free period, profiting from inefficiency.
CFSs became highly lucrative and within a few years had proliferated in number to over 10 stations. This gave the port relief to expand infrastructure—rehabilitation of berths, construction of a second container terminal, and dredging of the channel.
CFSs also invested in modern equipment to improve efficiency and become competitive after the KPA allowed importers to nominate cargo to the CFSs of their choice. Cargo clearance became easier and the storage charges business model could no longer hold.
With no room for tariff adjustment, CFSs had to innovate to remain afloat. They, therefore, introduced tailor-made plans with their customers, largely serving as distributive points and storage facilities for the cargo already cleared by the Kenya Revenue Authority (KRA) through the KRA offices hosted on their premises.
The CFSs became popular among the importers. Those with excellent marketing skills managed to convince over 80 per cent of their clients to nominate cargo to their stations with KPA nominating the rest.
In a 2017 study on the future of CFSs in the wake of the construction of the SGR, Maritime Business and Economic Consultants found that the stations employed 1,804 people, who earned a total monthly salary of KSh102 million monthly. “Out of this number, 1,276 were permanent staff and 528 contracted staff,” noted the study which was led by Gichiri Ndua, an economist and former KPA managing director who oversaw most much of the modern port development. According to the study, CFSs invested over KSh20 billion in 2017.
Following the 2018 directive that importers must clear all cargo with a Nairobi address at Athi River ICD, CFSs lost business. Some closed down, those with the ability moved to Nairobi and others scaled-down business to handle only Mombasa-based cargo, which is less than 10 per cent of the port’s total volumes.
Crucial questions arise following the yet to be gazetted presidential directive. Are CFS operators likely to move their capital back to Mombasa? Will they be willing to move the capital they have invested in other logistics chains that have emerged? What if the SGR addresses the last mile transport challenge, which is the element that makes it costlier than road transport? How many jobs will be lost in Nairobi if operations go back to Mombasa?
CFS operators and other logistics providers are keeping a close eye on how events unfold following the new order. Recently, KPA published a notice that allowed importers to nominate cargo to CFSs of their choice, giving them the choice of either using rail or road. Even with the new terminal, the KPA’s cargo clearing capacity is limited and requires space outside the port, either at CFSs or at ICDs. Indeed, Ndua’s report notes that if the 21,830 Twenty-Foot Equivalent Units (TEUs) handled by CFSs in 2017 were to be dumped at the port, one would not be able to set foot in the terminal.
Another critical consideration is the investment that the government has made in the ICDs in Nairobi and Athi River at the expense of the port. In the last five years, the government has focused all its attention on infrastructure projects at the ICDs in Nairobi and Naivasha. After suffering serious teething problems that led importers to pay huge demurrage charges at ICDs following the 2018 directive, the KPA improved infrastructure, including creating smart gates that now allow for a seamless flow of cargo.
Even with the new terminal, the KPA’s cargo clearing capacity is limited and requires space outside the port, either at CFSs or at ICDs.
The port of Mombasa may face capacity constraints should the number of importers opting to use road transport grow huge. Container traffic at the port has been recording a growth of 10 per cent per year on average in the last decade and the facility is currently handling over 33 million tonnes a year. The feasibility study carried out by China Road and Bridge Corporation (CRBC) on the SGR in 2011 projected that the port will handle 41 million tonnes of cargo by 2028.
Another dilemma facing the implementation of Ruto’s directive is how the neighbouring countries using the port at Mombasa will take it. The port is a regional infrastructure serving the Northern Corridor—Uganda, Rwanda, Democratic Republic of Congo, South Sudan and Burundi. Uganda is of crucial importance. It provides the KPA with 70 per cent of the total transit cargo. In March this year, Kenya Railways Managing Director Philip Mainga took the Ugandan Finance, Planning and Economic Development Parliamentary Committee on a fact-finding tour of the Naivasha Inland Container Depot.
The delegation was led by Henry Musasizi, Uganda’s Minister of State General Duties at the Ministry of Finance, Planning and Economic Development. The team had earlier visited the Dar es Salaam port in Tanzania, before making their way to the Mombasa Port and the Naivasha ICD.
In May last year Kenya and Uganda joined forces to rehabilitate the old meter-gauge railway to enhance the seamless movement of goods. Kenya has provided a linkage between the SGR and the rehabilitated metre gauge railway line from Naivasha to Malaba using the Kenya Defence Forces.
Currently, it costs an average of US$2,100 (about KSh225, 120) to move a 20-foot container from Mombasa to Kampala by road. In December 2021 Kenya Railways (KR) gazetted promotional tariffs to ferry cargo from the Mombasa port to Malaba at US$860 (KSh100,198) for a 20-foot container weighing up to 30 tonnes and US$960 (KSSh111,849) for a container weighing above 30 tonnes. Charges for a 40-foot container weighing up to 30 tonnes stood at US$1,110 (KSh129,326) and at US$1,260 (KSh146,802) for those above 30 tonnes.
A few days before President Uhuru Kenyatta left office, State House announced that Kenya had issued Burundi, Rwanda, DRC, Uganda and South Sudan with the title deeds to the location where a special economic zone is being established at the Naivasha ICD. The five countries were said to have been reluctant to put up inland container depots without title deeds.
But perhaps the biggest headache has to do with the Chinese loan. Kenya signed a “take or pay” loan with the Exim Bank of China. What this 15-year agreement means is that the KPA undertook to “take” a minimum amount of cargo on the new railway every year failure to which it would draw from its revenues to “pay” for the shortfall.
Kenya’s loan repayment to Exim Bank of China this financial year will jump to US$800 million, an increase of over 126.1 per cent compared to last financial year. If the KPA does not provide sufficient cargo to finance the repayment, Kenya will have to pay the loan from public coffers, which are already depleted.
According to data from the Kenya National Bureau of Statistics (KNBS), in the five years that the SGR has been in operation, it has generated US$4.6 billion from cargo freight. Passenger trains generated US$760 million over the same period, indicating that it is cargo that is keeping it afloat. The KPA is therefore the SGR’s main client.
There is an erroneous narrative held by politicians who attach a lot of value to the port as the main job creator in Mombasa. This was perhaps the case a decade and a half ago, but it no longer holds because of technological developments in cargo handling logistics. The only jobs available today are those involving the physical handling of cargo.
Kenya’s loan repayment to Exim Bank of China this financial year will jump to US$800 million, an increase of over 126.1 per cent compared to last financial year.
With the full rollout of the KRA’s Integrated Customs Management System (iCMS) which replaced the decade-old Simba System, and KenTrade’s upgraded National Open Single Window System, cargo clearance is completely paperless and does not involve any physical contact. It can be done from anywhere. Therefore, clearing and forwarding jobs will not come back to Mombasa.
Also, since last year when the system became operational, licensed shipping lines and agents operating in Kenya are required to use the Maritime Single Window System (MSW) to prepare and submit vessel pre-arrival and pre-departure declarations to government agencies electronically.
The revival of Mombasa’s economy may lie elsewhere. As a starting point, the government must up its game by putting up modern training equipment and infrastructure and providing maritime training and education so that the country can equip its citizenry with skills to unlock the much-touted Blue Economy, the next economic growth frontier.
By 2020, the biggest maritime training institute in the country, Bandari Maritime Academy (BMA) in Mombasa, offered only 6 of the over 30 courses offered in maritime training as recommended by International Maritime Organization (IMO). Kenya does not even possess a training vessel to offer the trainee time at sea.
Lack of fishing gear and an ill-trained workforce limit Kenya’s efforts to venture into deep sea fishing. The International Convention on Standards of Training, Certification and Watchkeeping for Fishing Vessel Personnel, which came into force on 29 September 2012, set certification and minimum training requirements for the crew of seagoing fishing vessels of 24 meters and above.
Because of this shortcoming, Kenya has left its sea waters to Distant Water Fishing Nations (DWFN) which mainly fish tuna species. Kenya lies within the rich tuna belt of the West Indian Ocean, where 25 per cent of the world’s tuna is caught.
Training would also open opportunities in other areas such as shipbuilding and repair, as well as seafaring, the biggest foreign earner for the Philippines, which supplies 40 per cent of seafarers’ jobs globally.
During his inaugural ceremony President Ruto promised to establish the Dongo Kundu Special Economic Zone in Mombasa to process leather among other activities. If implemented, it will represent an opportunity for job creation for the region.
