SGR: Kenyans lose out as local content clause not legally binding

Kenyans risk losing close to Ksh95 billion ($912.84 million) worth of tenders and contracts in a deal that saw a Chinese firm win a contract to build the Ksh327 billion ($3.14 billion) standard gauge railway (SGR) line between Mombasa and Nairobi.

Purported negligence on the part of the government when signing the construction contract with China Road and Bridge Corporation CRBC) in May, 2014, has left Kenyan workers, suppliers and manufacturers exposed in the guise that their goods and services don’t meet the approved quality threshold.

Last week President Uhuru Kenyatta censured the Chinese contractor saying the firm had dishonoured the original agreement by failing to purchase its supplies from Kenyan companies.

The president said he was concerned that the contractor had not met its local content obligations and demanded 40 per cent of the labour, goods and services used in the construction of the railway line should originate from Kenya.

The EastAfrican has, however, learnt that the much-hyped 40 per cent local content requirement was not secured in the original Engineering, Procurement and Construction (EPC) contract between the Kenyan government and the construction company.

The requirement was simply an “understanding” between the two parties, which has left local workers and suppliers the losers in the multibillion dollar deal.

This has created a loophole for the Chinese contractor to import materials and equipment for the the project at will.

READ: Tax threat to SGR as Chinese contractor rejects local cement, steel

Kenya Railways Corporation (KRC) — the project’s implementing agency — confirmed that the 40 per cent local content condition was merely an informal agreement between the government and the contractor, implying that the latter is not legally bound to dish out jobs to Kenyans and to procure construction materials and equipment from local manufacturers.

“Of importance to note is that while CRBC is adhering to this, the issue of 40 per cent local content was not a preceding requirement at the time of signing the contract nor a condition for awarding the contract; this arrangement came much later following negotiations with the government,” Atanas Maina, KRC’s managing director told The EastAfrican.

“The issue of 40 per cent local content is not part of the Engineering Procurement and Construction (EPC) contract signed between KR and CRBC. The contractor has however given its undertaking to the government to ensure that this requirement is complied with, and KR is monitoring this on a monthly basis,” added Mr Maina.

When contacted for comments, CRBC officials could not confirm whether or not the provision of a 40 per cent local content was part of the contract, saying that it was only a “requirement” by the Kenya government.

“The 40 per cent local content is required by the government of Kenya and we are making efforts to fulfil this target,” said Julius Li Juguang, the company’s spokesman in-charge of the Mombasa-Nairobi SGR project.

Mr Maina however said KRC has constituted a team to work out the costing of the local content but explained that Ksh220 billion ($2.11 billion) has been set aside to cater for the construction and civil works part of the project which involves among others, track laying, bridges and signalling.

About Ksh107 billion ($1.02 billion) will be spent on the procurement and installation of locomotives, wagons and equipment and other supplies.

Mr Maina however said the total spending on goods, work and services procured locally stood at Ksh36 billion ($345.92 million) by September 30, 2015.

“Analysis is under way on the various components of the report received from the EPC contractor CRBC,” he said.

A source privy to such agreements said the local content requirement automatically becomes part of any major contract entered into between the state and the private investors, adding that, “the issue of local content must be respected because it forms part of the contracts signed between the government and the private investors.”

According to KRC the railway line is being constructed using Chinese building standards and every material used in the project has to meet the specifications of the standards.

“This means that some of the more advanced equipment and materials would inevitably have to be imported from China and other countries simply because they are not available locally,” said Mr Maina.

Kenya is battling to protect and promote the growth of its domestic industries by introducing laws that ensure local firms benefit from huge government spending.

In 2013 the government introduced amendments to the public procurement and disposal law which reserves 30 per cent of public tenders and contracts for youth, women and persons with disability.

Procuring entities are required to allocate at least 30 per cent of their procurement spend for the purpose of buying goods, information and communication technology (ICT) equipment, software, works and services from micro and small enterprises owned by youth, women and persons with disability.

Foreign companies participating in international tenders are also required to source at least 40 per cent of their supplies from local contractors for the purpose of ensuring sustainable promotion of local industry.

The SGR project is being funded 90 per cent by the Chinese Exim Bank and 10 per cent by the Kenyan government through the Railway Development Levy Fund.

The 472km railway line will carry freight trains at speeds of up to 80kph, and passenger trains at up to 120kph. It will run from the port in Mombasa to Nairobi then to Malaba, Kampala and Kigali.

But there are also plans to re-route and extend the Mombasa-Nairobi line by another 120km in the Nairobi-Naivasha section at an estimated cost of Ksh157 billion ($1.5 billion).

The additional stretch will link Mombasa and Nairobi to a special industrial zone to be created in Naivasha, the home of Kenya’s Ol Karia geothermal power plants.

The SGR is expected to boost trade in the region by offering a quicker and cheaper alternative to moving cargo from the port of Mombasa, which is currently dependent on the congested highways and the old railway.

It is also expected to reduce transport costs and time by half between Mombasa and the hinterland.

The project is to be implemented by Kenya, Uganda and Rwanda, with each country financing its section of the railway. Construction work for the Kenyan section is being implemented in three phases, with phase one from Mombasa to Nairobi to to be completed in 2017. Phase two will run from Nairobi to Malaba with a branch line in Kisumu while phase three will run from Malaba to Kampala.