Ratio Blog: Will Commodities Finally Sort out the Railways?

Friday, 12 March 2010

Keeping corporate tax payers happy is nice, but maybe not as pressing as keeping corrupt contractors in business. But maybe the need to get Uganda’s oil out to the market is an incentive to reduce their takings and make them do the work? Andrea’s weekly column for the Star. I’ve been trainspotting a bit (in a country-analyst kinda way, not by actually sitting next to any hardware), and I wonder if we’re about to see a substantial shift in dynamics: The railway matters to Uganda – or at least it should: A functioning railway would make a huge difference to the costs of imports and exports, and so improve the country’s competitiveness. This does not only affect land-locked Uganda, but also its neighbouring regions like Rwanda, eastern DRC and Southern Sudan. It’s a no-brainer: Kenya’s Mombasa seaport is the most important entry point for goods into the region, and there is really no good reason why the Kenya-Uganda railway should have been left to rot so much over the decades, and that revamping it has taken so long to begin, and is progressing so slowly. Admittedly, Ugandan ministers have said before that Uganda did not have enough money to fix cracks   and cracks they were well aware of   in the Owen Falls bridge. Since that bridge is a bottleneck for road supplies into Uganda, the statement indicates maybe an underdeveloped appreciation of transport infrastructure, or possibly just an overdeveloped reliance on the expectation that if it’s urgent, some aid agency will eventually take pity and cough up the cash. Transport infrastructure is a textbook case of what’s necessary to develop an economy. And there are complexities to it: The massive capital requirements, the long-term nature of the investment, the fact that it typically requires some sort of government involvement. But it’s not rocket science. It’s been done elsewhere. Examples of non-potholed roads exist. Except if well-connected people get to make off with a large percentage of the financing, then the actual investment in infrastructure won’t happen, no matter how much money was officially allocated. Uganda’s CHOGM investments were a giant party for the well connected, covered with a thin, crumbly layer of road tarmac. There is a political dimension to this: Of course it would make a government more popular with the general population if it ensured, say, a functioning railway – but it usually works out to the more immediate monetary benefit of the government representatives involved if they swap, say, concessions and contracts for a contribution to their next campaign, house construction or even offshore bank account. Citadel may have inadvertently picked a fight with Kenyan Transcentury by acquiring the 49% of railway concession partner Sheltham (Ratio Blog: New Kid on the (Private Equity) Block ), but the Ugandans were well pleased to see someone with both motivation and, more importantly, cash turn up to tackle the railway whose rehabilitation has been advancing about as sluggishly as its trains trundle through East Africa’s beautiful landscape. Of course sorting out the railway would be generally useful, but Uganda has a whole new and powerful interest in it: Its new star export product, oil, is stuck under a lake at the far Western border of the country and it needs to make its way to the markets. Right now, there is no alternative but to truck it – expensive, slow and, if you remember Kenyans predilection for tipping over and emptying fuel trucks to ‘access the free fuel’ (quote from one honourable who clearly has an imprecise grip on the concept of property rights), also dangerous. Uganda is still considering the options: President Museveni is quite emphatic that all crude should be refined in Uganda, whereas many oil sector experts say that a refinery of the size he envisions is overdimensioned for the regional market and that in order to make refining more efficient, ideally different kinds of crude need to be combined – easier at a location like Mombasa. Tullow Oil are currently working on the development plan to move from exploration to production, and transport is elemental. One of the options is extending and reverse-engineering the pipeline from Kenya. This will take time and massive investment. Railway transport could offer a faster intermediate solution. Because of the substantial revenues (official as well as unofficial), Uganda’s government is keen to make quick progress in the oil sector, and the fact that Museveni has to win an election next year adds to the pressure. So the interests associated with Uganda’s new commodity development should hopefully override some of the other vested interests – or possibly even just incompetence – that have held back the railway rehabilitation so far. Kenya is currently proposing large-scale transport and infrastructure projects that I suspect may be unrealistic in their scope and for which the government lacks the technical and management capacity (never mind the good governance) to see them through. But commodities are a recurring factor: Oil for the Southern Sudan link to the Lamu port/pipeline/railway project, and oil most likely also for the proposed Uganda-Kenya standard gauge railway. Rwanda has felt the impact of the supply interruptions during Kenya’s post-election crisis and is disadvantaged by high transport costs, but there are allegations that the US American involvement in a planned railway extension from Dar es Salaam to Kigali – where Texan BNSF seems to be nudging out German Deutsche Bahn  is driven not by US American kindness and generosity, but by an interest in eastern DRC’s minerals. Will East Africa’s commodities finally create the necessary momentum to fix the railways? 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