Kenya: The need to match hardware and software

The East African Tea Trade Association is a venerable institution, established more than 60 years ago. The new building was opened by Mr JGH Thwaites, scion of the famous Ceylon botanist who developed the Assam tea seed variety, in October 1994. Today it hosts the regional tea auctions, where more than 600 million kilograms of tea from 10 countries — Kenya, Uganda, Tanzania, Rwanda, Burundi, Democratic Republic of Congo, Malawi, Madagascar, Zambia and Zimbabwe — were sold in 2018.

This makes Mombasa the second-largest black tea auction centre in the world after Colombo in Sri Lanka, with Kenya the third-largest tea producer worldwide behind China and India. Auctions are held weekly, on Mondays and Tuesdays, a blend of modern technology and idiosyncratic practice.

As custom dictates, teas are sold under the names of the factories where they are produced, being sorted into standard paper sacks of various leaf sizes known as “grades”. The standard unit is a single pallet of 20 such packs.

Buyers are provided with samples before the auction, on which a valuation is based. Each lot is sold (“knocked” as its termed) to the highest bidder so long as the price has reached the minimum set by the broker. In an industry once dominated by the London market, it’s now highly globalised. With some 70 international buyers present, Pakistan is currently the largest Mombasa buyer, accounting for 40% of sales.

Nearly half of Kenyans live below the poverty line. (Greg Mills)

Nearby the East African Tea Trade Association is Global Tea and Commodities Ltd, the second-largest Kenyan tea exporter, its whirring production lines spitting out 10,000 tea bags a minute for the likes of Harrods and Typhoo. Still, just 20% of Kenyan tea production is exported as “processed”, the remainder going as “bulk”. Producers claim that this could ratio could improve and more value could be added with the right tax incentives.

So far, despite big expenditure on infrastructure, Kenya has not put in place the package of policy necessary to turn obvious opportunity into real jobs. To the contrary, if anything, it seems to be moving in the opposite direction.

The Standard Gauge Railway, the largest and most costly infrastructure project undertaken in the country since independence, was supposed to enhance these threads of globalisation. Constructed by the China Road and Bridge Corporation, and delivered 18 months before schedule, the first passengers boarded on 1 June 2017, the 54th anniversary of Kenya’s independence from Britain.

The idea was, at least on paper, to boost Kenya’s new economy by reducing congestion on the roads and leveraging Mombasa’s situation as the gateway to a 140 million-strong market in East and Central Africa. Without the Standard Gauge Railway, the argument went, the rickety Cape (narrow) gauge Rift Valley Railway, constructed more than 100 years earlier as the “Lunatic Express” and in dire needed of refurbishment, would not prove up to the task.

Packing for Harrods in Mombasa. (Greg Mills) 

That was in theory. The practice has, so far, proven slightly different, for three core reasons:

First, the railway has proven very expensive.

Funded by a loan from China’s Exim Bank for 90% of the $3.6-billion project costs, the remaining 10% was sourced from the government of Kenya. This was a lot of money for a railway which did not possess, at least in the public eye, a viable revenue model. It was also one-third more expensive than the Ethiopian government paid the Chinese for a similar (though electric, not diesel) railway from Djibouti to Addis, raising suspicions of impropriety in a country infamous for the slogan “It’s our turn to eat”.

And since this was a government-to-government loan deal, it could be wrapped with finance and a constructor and delivered quickly, but with no public tender and little scrutiny.

The problem with logistics in Kenya is, second, not only that there is congestion and road transport is expensive. This much is true. There were 3,000 trucks on the Mombasa-Nairobi stretch of road at peak. The road freight system was indubitably unwieldy and dangerous.

The issue, however, is not just about transport. It is about development — how to leverage the port and the access it offers to markets to create jobs both directly and indirectly? Hence it needs to be connected to free trade zones and deal with inefficiencies, on the one hand, and provide the incentives for business on the other. Creating new business for Kenya is crucial, given the high rates of unemployment and burgeoning youth population.

$3.6 billion of hardware but is there a gold-standard software to match. (Greg Mills)

Kenya’s population is expected to mushroom to 80 million by 2045. By that time, many Kenyans will be living in its cities, both due to migration and as towns expand to become cities. Projections suggest the numbers of Kenyans living in urban settlements will increase from one-third to 54% by 2030. Already just under half of Kenya’s 48 million people live below the poverty line, an estimated 3.9 million of them in urban slums.

This especially affects Kenya’s young people under 35, two-thirds of the population. Today 800,000 join the labour market annually. Most of this cohort can only acquire menial work if they are lucky enough to find any at all. Most are poorly educated, with more than 40% having never attended or completed primary school, and under one-fifth completing secondary school, partly because they are sent out to work and fend for themselves at a very early age.

The absence of industry to soak up these numbers of unemployed can be seen in the import versus export figures. Whereas 1,600 containers arrive in Mombasa each day (of 1.2 million annually), of which 400 are in transit for the region outside Kenya, exports account for just 100.

So far the linking of logistics with fresh employment initiatives has not happened. To the contrary, business complains that things have become more difficult, in part because of the impact of a loss of logistics services to the port. The government has neither aggressively pursued free trade agreements which characterise successful industrial zones elsewhere.

East African Tea Association Auction Floor is the second largest in the world. (Greg Mills)

The third problem is that the Standard Gauge Railway revenue model reputedly hinges less on passengers than freight. The daily running cost of the Standard Gauge Railway is purported to be Sh30-million or $300,000. This debt sits on the balance sheet of the Kenya Ports Authority.

If it fails to meet these obligations, and defaults, there is a question about what the Chinese will expect and do, and the extent to which the Kenyans can negotiate fresh terms. The question on everyone’s lips is: Will the Chinese take over Mombasa as they did the port in Sri Lanka, an option refuted by the government? The failure to issue the port concession for the past three years has heightened such fears.

To meet these repayments Kenya has to get freight on to the rails. By the government’s own admission at the start of the project, this requires not only doubling Mombasa’s annual throughput from the 2012 figure to 32 million tons, but increasing the percentage of rail freight to 50% of the total.

In March 2018, just three months after the commencement of freight services, the government forced all container traffic off the roads and on to the rail. For a while, the Standard Gauge Railway offered cheaper tariffs: $250 one way for a 6m container (and $350 for a 12m container), plus $100 for the empty return journey and $250 for the delivery from the Inland Container Depot (ICD) near Nairobi to the client. The comparable truck journey cost $850, irrespective of a 6m or 12m container, directly from the port to the client.

The discounted Standard Gauge Railway tariff ended in December 2018, rising to $500 and $700 for a 6m and 12m container respectively, plus the additional delivery charges. And the blanket ban on trucks is still in place.

This has hammered the Container Freight Services (CFS) which were set up in 2005 in response to port congestion, allowing container movement to holding depots outside the port where they were cleared by customs prior to onforwarding up the road to Nairobi. The route from the port to the client comprised: Ship-truck-CFS-truck-client, with an average time of three days for delivery. Now it goes ship-truck-marshalling depot-train-ICD-truck-storage (for clearance)-truck-client with delivery times about 10-12 days.

This loss of business has been worsened by the opening of a fuel pipeline in November 2018, again a mandatory option for importers, which costs around 30% more than the traditional truck method.

The business of the 21 CFSs dotted around Mombasa, which is still permitted on loads to Mombasa itself, has fallen by as much as 60%, with a loss of as much of 75% of their 2000 or so jobs. They survive on the scraps, some road freight on the route to Nairobi being permitted given that the trains cannot, for the moment, keep up with the backlog, moving eight trains a day with 108 containers on each.

Absent alternatives, business in Mombasa is angry, preferring to view the Standard Gauge Railway through the prism of corruption. Their anger towards government has risen unusually not because of what it has failed to deliver, but precisely because it has delivered, for once, exactly what it promised.

This also explains why far from encouraging a new tax regime and growing business, the government has a fiscal hole to fill. Mombasa’s businesses continually complain of being squeezed constantly by the Kenyan Revenue Authority. The failure to refund the 16% of VAT for export businesses is a major bone of contention. In response, the common refrain from the tax authorities is that “we don’t spend the tax, we just collect it”.

“The politicians,” says one angry CFS operator, “are building one economy in Nairobi by destroying that in Mombasa.”

He’s right, at least in the short term. But it does not have to be like this. There is enough love to spread around, in part through improving several things at once. The record shows this is possible.

The traffic through Mombasa’s dusty roads weaves to avoid the Mkokoteni — the men, and sometimes boys, dragging heavy barrows of vegetables and fruit, the dodgem tuk-tuks (“when you switch on the engine they pronounce their name”), boda-bodas, and matatus. Yet Mombasa’s traffic flow has eased, and not only because of the downturn in business or the completion of some new roads.

Apparently, three years ago, Kenyan President Uhuru Kenyatta “came to the coast for a month and things got tidied up”. The solution was simple: Increase the number of lanes across the four-lane Nyali Bridge to the north of the city, depending on the flow of traffic, and station officers to police key intersections. Eureka. Things work for a reason, but they also don’t work for good reason.

A similar systemic process is needed with the railway and the port, which puts in place a package of policy and tax reforms around export businesses, and incentivises growth and job creation.

Kenyans are famously hard-working and entrepreneurial. A failure to match the new hardware with better policy and systems software is an opportunity missed. DM

Dr Mills has been in Mombasa and Nairobi for the Brenthurst Foundation. His latest book, Democracy Works: Rewiring Politics to Africa’s Advantage is being launched in South Africa this week.