East Africa has offered traditionally offered scant opportunities for project finance but a recent string of closes over the last year in the power, telecoms and mining sectors are putting the region on the map.

Michael Whitehouse, head of the Rail team at Wragge & Co describes the progress of the region's first major transport concession - Rift Valley Railways.

On 15 December 2006, Kenya's first ever privatisation by concession reached financial close. This landmark project is of huge political and economic significance to the region.

A vital transportation channel for imports and exports, the 2,350 km railway linking Mombassa with Kampala (via Nairobi) was built to be the economic back bone of East Africa. Decrepit trains, sustained under investment and poor management have left Kenya and Uganda's rail service in dire need of attention.

The Kenyan Government asked the International Finance Corporation to advise it on privatising the Kenya Railways Corporation. What began as a single privatisation soon became a joint programme run in conjunction with the concession of the Uganda Railways Corporation because of the benefits of privatising the railway systems as a whole, taking into account the international container traffic.

An international competition was held led by IFC and Canarail (advising Government of Uganda), with Rift Valley Railways, a consortium led by South Africa's Sheltam Rail Company (Pty) Limited, appointed as preferred bidder. The consortium's winning proposal included a turnaround and development programme for the two railway systems. This is expected to lead to a significant increase in freight traffic volumes within the first five years.

Rift Valley Railways will provide an efficient, reliable and integrated rail system in Kenya and Uganda. It is expected to invest US$280 million in rehabilitating existing assets and a further US$42 million investment in new rolling stock and operating equipment over the term of the 25-year concession.

Annual concession fees equate to about US$9.5 million per year. It is expected that the railway will recover market share, both in absolute and in relative terms, through a concentrated focus on identification and meeting customer needs.

The end result was a highly competitive bid producing good fees for the two governments. The joint concession has set the stage for future regional cooperation in East Africa.

The concession advisory team established terms of reference for the two concessions to provide a workable solution for delivering upgrades, increasing freight traffic, retaining and developing passenger services (in Kenya) and revising the employment structure. The team structured a concession for each country - two parallel transactions - combined by an Interface Agreement to provide for financial closing, commencement and establishing a joint railway commission.

The concession design includes a novel conceded asset account so that both government and Rift Valley Railways can record the contributions they each make to the assets used. This innovation vests all public assets in the asset account, which can be audited to monitor the value of the assets and keep track of the value added by the South African investors.

The new account will provide a better basis for reconciling accounts between Government and Rift Valley Railways when the parties go their separate ways - essential when it comes to calculating hand-back terms.

Although Kenya had undertaken a few public offerings in the utilities and telecoms sector, this was its first concession. It required a change in legislation to enable government to complete the deal as, although the privatisation bill reached the statute book during the negotiation period with the preferred bidder, the legislation was not then effective and, consequently, the Kenya Railways Corporation Act was amended to provide for the concessioning method.

The key terms of the transaction include:

• Upgrade of the system standards;
• Increase in traffic volumes for freight in five years;
• Investment in rehabilitating assets;
• Investment in new rolling stock and operating equipment;
• Rehabilitation of passenger services in Kenya.
  

The concessionaire was provided with finance by a consortium of IFC and KfW with finance documents including a Direct Agreement between lenders and governments together with a Partial Risk Guarantee from the World Bank.

The project benefited from the donor support of DevCo, a multi-donor affiliate programme, Private Infrastructure Development Group (supported by the UK's Department for International Development), the Dutch Ministry of Foreign Affairs and the Swedish International Development Agency. It was also supported by technical assistance grants from Swedish and Danish trust funds at IFC and by a bilateral grant provided by the United States Agency for International Development.

The concession process was lengthy. In addition to the usual procurement and negotiation issues, the project had to receive the approval of two sovereign governments, survive a Kenyan general election and fight off injunction applications by pensioners in both countries who were concerned that the asset value in their funds might be dissipated. Those issues, coupled with a multinational transaction team from Kenya, Uganda, South Africa, USA, UK and Germany made the organisation of logistics to attain financial closing a real landmark.

The project at a glance