RVR AND THE FUTURE OF THIS REGION

Turning around the fortunes of the Kenya-Uganda railway is not unlike changing a huge ship's course – progress is slow, often imperceptible but once the course is set hard to reverse.

The analogy by Ugandan businessman Charles Mbire was an apt one.

Last week RVR held its first (?) share holder and stakeholder meeting since the Kenyan investment firm Transcentury’s 34 percent investment was bought by the concession’s anchor investor Citadel Capital, an investment company out of Egypt.

Citadel Capital now control 85 percent of the company through Africa Railways. The remaining 15 percent is held by Ugandan firm BOMI holdings that is wholly owned by Mbire.

"For all intents and purposes RVR came out of that board room skirmish unscathed if not more energised following a willingness by its institutional partners to provide the finance to pay off Transcentury...

Transcentury exited the consortium claiming that the investment did not live up to their expectations and that they had bigger fish to fry.

However RVR’s stakeholders in Nairobi last week affirmed the viability of the project and in many instances would have been forgiven for drooling into their soup at the potential of the concession if executed properly.

Decades of neglect mean that road transport has supplanted rail as the preferred means to and from Mombasa.

At the height of its powers in 1970 the railway was handling four million tons of cargo annually a figure that is yet to be attained under the new management, though they project that they will shift five million tons of cargo by the end of 2015. The port of Mombasa handles 20 million tons of cargo annually, suggesting that even if they attain their short term target they will still be a lot of room for expansion.

In the US rail accounts for 43 percent of all intercity volume.

This is key for Uganda and its hinterland because three in every four tons ferried are destined for Ugandan and beyond, clearly we will be among the main beneficiaries of an efficient RVR.

As landlocked country we should jump at any initiative that will help lower our transport costs and the development of the railway is one.

Currently the average transport costs to ferry a ton per kilometer in Kenya and Uganda is US15 cents which is three times as high as the African average.

The size of the rail network --- 1,300km from Mombasa to Nairobi and the dilapidated state in which the new concessionaires found the network and rolling stock will make one of the biggest investment in the region. Already a fully financed $287m turn around program is in progress that started in 2010.

When the British conceptualised the Uganda railway their initial thinking was that it would help in protecting the source of the Nile from its enemies. Uganda was the missing link in their strategy to control the Nile seeing as Egypt and Sudan were already colonies.

Subsequently the railway led to the speedy occupation of Kenya – more specifically the rift valley by white settlers and also made Uganda a viable economy through the export of cotton and coffee.

Citadel Capital have a long term vision to make it the beginning of an intercontinental railway network.

"The strategic importance of this railway has only been squandered by our post-colonial governments.It is a unique investment – an inter-country, Public Private Partnership, Foreign Direct Investment (FDI),an intricate  endeavour which for the time being seems to have the right partners...

As for competition from the widely hyped standard gauge railway? 

"By the time the standard gauge railway is commissioned our business will be mature enough to compete favorably," Citadel Capital's managing director Karim Sadek said.

UMEME EXIT A LESSON

This week the controlling shareholder of power distributor UMEME announced it would be disposing of a significant portion of their interest in the company to pursue another venture in Cameroon.

British private equity firm, Actis Capital owns 60 percent of UMEME having sold 40 percent to the public in 2012.

Earlier this year parliament voted to cancel the UMEME concession citing irregularities in the way the concession was procured. Thankfully the resolution was not binding on government or UMEME.

"With news that Actis Capital was divesting itself of a major portion of its holdings understandably led to speculation that the parliamentary action prompted the move. Umeme denies this but it is not inconceivable that the political risk that came with the resolution played a part...

It takes time to organize such a sale and the parliamentary debate that resulted in the recent resolution started three years ago, must have been factored in.

Since UMEME took over the concession their customer base has doubled to 574,000, with the amount of power going the same way doubling to 2118 gwh in addition the company was collecting all the revenues due to it, including from government. Last year revenues came in at nearly a trillion shillings.

These improvements have come at a cost with the concessionaire investing more $150m (sh390b). This number is interesting on two fronts. One, its a reflection of how derelict the network they inherited was and secondly, this is money would have been ploughed into the system by government were it the owner, money badly needed for infrastructure and social services but also knowing how government works would not have produced the efficiency improvements UMEME has shown during the same period but would have instead enriched a few individuals.

Whereas Actis says it is shifting its attention to bigger projects in Cameroon, its hard to see how an investment in a more stable market can beat the growth potential of the Uganda market where the supply constraints are being sorted out and there is only one person in every ten Ugandans with access to power.

"The truth is that while Actis has done well for themselves--not as well as they would have hoped had they seen out the full concession, Uganda was becoming a hazardous place to do business. Not only were they battling the small power thieves, well connected people, companies and government departments were in on the action too. As if that was not enough they had a government driven by political rather than economic considerations, that was often reluctant to back their business plan...

In addition they suffered rear guard action from regulators and parliamentarians who hung them out to dry or were hell bent on the throwing them out, regardless of the cost to the economy in lost momentum or compensation.

It is difficult to have sympathy for Actis. Capital is a coward and this is what they do. They provide capital, bring together the management expertise and develop projects with a clearly defined exit number in mind.

Two lessons emerge from this experience. 

"One, in the absence of local comparable investors we need to be more supportive of investors like Actis. Secondly, that we need to have a more strategic vision of how we mobilize our own resources to be more meaningful players in our own investments. To illustrate of the ten largest shareholders in the UMEME share sale two years ago only NSSF and maybe the employees and directors and shareholders of UMEME represented Ugandans. Who is to blame when, the juiciest of our investments are snapped up by others?