East Africa – Graft in Rail Investment

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Investigations into fraud and embezzlement are opened in one of Africa’s oldest railways.

An investigation, which has attracted the attention of the World Bank, suggests that Qalaa Holdings, which took over Rift Valley Railways (RVR) intending to revamp the rail link, has been involved in numerous questionable dealings. The World Bank has opened investigations into RVR, which manages the railway from Kampala to Mombasa in Kenya.

For many years one of the most importance rail routes in Africa has suffered neglect and underinvestment, until Qalaa Holdings, one of the biggest African private equity funds, sought to invest in the service.

An investigation by journalists from the UK, Belgium and Kenya under Finance Uncovered has obtained leaked documents and conducted interviews with rail staff. They noted that the company had created an offshore structure of shell companies to extract millions in advisory fees from RVR. The World Banks’ integrity unit has also opened investigations into fraud and embezzlement.

At the same time a parallel railway line, built by the Chinese, is set to open soon, which will be more efficient that the older line and is expected to absorb customers and profits, hampering more RVR’s already bad financial situation.

The British started the construction of the Kenya-Uganda railway in 1896, intended to secure Lake Victoria from German, Belgian and French colonial expansion. It later became known as the ‘Lunatic Express’ after many thousands died and millions were spent on its construction.

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Tororo, Uganda – CC 2010

In 2010 Qalaa Holdings, an Egypt based fund, took over through an offshore holding, Ambiance Ventures. In the subsequent year the company managed to secure US$287m in investments from a number of sources including the World Bank ($22m), the African Development Bank (AfDB) ($40m), and a number of others.

One central investment has been in new rolling stock, for which $63m was allocated for 20 “brand new” locomotives. However the journalists discovered that no new locomotives were purchased at all, instead they were purchased second-hand and refurbished from US-based National Railway Equipment Company (NREC). In total 20 locomotives were received for $20m rather than the stipulated $63m.

Regarding freight services, Chief Executive of the Kenya Ships Agents Association Juma Ali Tellah has said that many distributors have lost faith in the railways’ ability to transport containers; a blow as much of the railway’s income comes from freight.

“There are too many delays both in the port and during transportation…the skippers never know when their containers will reach destination. It’s not surprising that only a fraction of freight is transported by rail,” Tellah said.

Even though it currently has a monopoly, RVR has struggled to make profits under Qalaa’s management; in 2014 it reported losses of $1.5m. Despite not making a profit Qalaa has collected $4.7m of advisory fees from Africa Railways Limited, the investment vehicle of RVR registered in the British Virgin Islands. The firm has also paid very little corporation tax, and despite getting millions from state-backed development banks, many of its investments are managed through these offshore shell companies; while these corporate structures are not illegal, the investment will not fully benefit the home countries.

(The Observer, Kampala 22/6)

Find out more in the Africa Research Bulletin:

ROADS AND RAILWAYS: East Africa
Economic, Financial & Technical Series
Vol.53, Issue.5, Pp.21292B–21293C

ROADS AND RAILWAYS: Rwanda – Tanzania
Economic, Financial & Technical Series
Vol.53, Issue.4, Pp.21255A–21255C

ROADS AND RAILWAYS: Kenya
Economic, Financial & Technical Series
Vol.52, Issue.12, Pp.21112A–21112C

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