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Mombasa Port Economy’s Slow and Painful Death

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The Transport Cabinet Secretary James Macharia has snubbed Senate Committee on Roads and Transport on three occasions now, failing to respond to why the government has not revoked the notice that directed all Nairobi bound imported cargo to be evacuated through the Standard Gauge Railway (SGR).

Interior Cabinet Secretary Dr Fred Matiang’i and Mr Macharia had agreed to lift the order in a meeting with stakeholders on the eve of the Heroes Day or Mashujaa Day celebration on 20th October, an event Mombasa residents had threatened to protest due to the heavy toll the directive has had on the Mombasa economy, which is largely logistics driven.

Local traders and truck hauliers have over two months now been holding weekly protests. The directive has brought a lot of strain on Mombasa’s economy and small towns along the Northern Corridor that heavily relied on heavy commercial trucks.

Jobs on the line

Before the SGR started cargo freight, trucks were evacuating over 1,200 containers every day from Container Freight Stations (CFSs) in over 800 trucks. CFS operators are now only allowed to handle Mombasa bound cargo, which is less than 10% of the total Mombasa port volumes.

This has led to massive layoffs by the CFS operators and truckers. Maritime Business and Economic Consultants, in a study of the future of the CFS in the wake of the SGR done in 2017 found out that CFSs employed 1,804 employees, raking a monthly salary of Ksh102 million.

“Out of this number, 1,276 are permanent staff and 528 contracted staff,” the study led by Mr Gichiri Ndua, an economist and former Kenya Ports Authority (KPA) managing director said.

At any given time, there were over 500 casual staff mainly involved in container cleaning, transfer of vehicles from port to CFSs and general labour used for stripping, the report observed.

The permanent capacity constraint of the SGR against the impressive growth in the cargo volumes through the port of Mombasa has led experts to question the rationale behind the government to vanquish road transport, which will come in handy when the railway and road will be expected to co-exist smoothly in the next few years.

The government should look into the possibility of SGR coexisting with other players, including truckers, who have also lost business.

 “Over the next few years, as cargo throughput increases and the SGR becomes more efficient, the two models will co-exist and therefore share on 40:60 at best for rail and road respectively,” according to the Ndua study.

Mombasa Port container traffic has been recording an average growth of 10% in the last decade and the facility recently handled over 32 million tons a year. The feasibility study carried out by the China Road and Bridge Construction (CRBC) on SGR in 2011 projected that the port will handle 41 million tonnes of cargo by 2028.

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Kenya Institute of Public Policy Research and Analysis (KIPPRA), a government policy think tank, has put the operational capacity of the railway in terms of the rolling stock already acquired and configuration of the line, at 12 trains daily at maximum, at 8.7 million tonnes a year. The 2011 feasibility study estimated that the SGR would handle over 22 million tons.

The Internal Container Depot (ICD) in Embakasi also has a serious capacity constraint, which is given at 450,000 TEUs per year. The government has been forced to lease extra storage area outside the ICD to handle overstayed cargo.

This compares poorly with Mombasa, which has an overwhelming combined capacity of slightly over 2 million TEUs, with CFSs contributing 700,000 TEUs assuming cargo dwell time of 7 days (time between the cargo being received up to the time of evacuation).

Road still has a role to play

SGR is currently handling Nairobi bound cargo alone. With the extension of the railway line to Suswa and the planned rehabilitation of the Medium Gauge Railway (MGR) line to Malaba, it is expected that it will also handle transit cargo to make any economic sense. With the existing capacity, experts say, the SGR will not be able to handle both the domestic and transit cargo.

Without expanding the railway infrastructure, which looks likely in the foreseeable future, the extra cargo will be only be evacuated through road.

Mombasa Port yard capacity is highly constrained and cannot survive without support of CFSs. The reported holding capacity of port at 70% utilization, the recommended rate for a port to be categorized as not congested, was 22,500 TEUs. The port on average held 16,000 TEUs in 2017.

This constraint was offset by the CFSs, with a holding capacity of 38,470 TEUs. An average holding of CFSs at any given time was 21,830 TEUs, thus 58% capacity utilization.

Before the SGR started cargo freight, trucks were evacuating over 1,200 containers every day from Container Freight Stations (CFSs) in over 800 trucks. [ Photo / KPA ]

“What is of more major concern is that CFSs hold more containers than the port. Indeed, if the 21,830 TEUs were to be dumped in the port, one would not get a place to step in at the terminal,” Ndua’s report observed.

Although they had stabilized logistics industry, development of CFSs in the manner they did in Mombasa was largely unforeseen. The original idea was for the stations to earn profits by charging demurrages for cargo that was not cleared within the free storage period, which then stood at 7 days. Therefore, they were to serve as an extension of the port with a mandatory requirement for them to apply KPA tariff.

Due to the increased cargo volumes over time that was not matched with infrastructural projects development, the port reached a point of rupture in 2007.

The shipping turnaround deteriorated and, for the first time in history, KPA faced a Vessel Delay Surcharge (VDS), a highly punitive fee the shipping lines levy for unusual delays, which can go as high as Ksh30 million a day depending on the size of the vessel or the type of cargo.

The congestion was so serious that an estimated 60% of the cargo volume through the Port of Mombasa could not be cleared within the free storage period.

Therefore, for the initial CFS investors, this business model was highly lucrative, although they also became very unpopular due to what importers saw as deliberate delays to earn more profits.

Port becoming competitive?

They proliferated very fast and in a span of a few years, the number had grown to over 10 CFSs. The extra capacity they created gave KPA a breathing space to develop more infrastructural projects-new container terminal, extension and deepening of berths and dredging of the channel to allow huge vessels.

This, in turn, increased efficiency at the port and with the CFS business becoming more competitive, KPA gave importers leeway to nominate cargo to the stations of their choice.

The huge infrastructural development at the port and acquisition of modern equipment by CFS operators meant that the demurrage model could not sustain their businesses. CFSs investment profile is estimated at over Ksh20 billion.  

With no room for tariff adjustment, CFSs had to innovate to remain afloat. They then introduced tailor-made arrangements with their customers, largely serving as distributive points as well as storage areas for the already cargo cleared by the Kenya Revenue Authority (KRA) by offices they hosted.

Some CFSs allowed cargo to stay in their yards for up to 60 days. The CFSs became so popular among the importers that those with good marketing skills had over 80% of the cargo nominated to stations by importers themselves as opposed to the KPA.

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It is this cargo that is now finding its way to ICD in Nairobi, which must be cleared within 4 free storage days. This has disrupted a system that had worked well for over a decade for traders and which is causing importers nightmare with inefficiencies and high costs.

KPA is inflexible in allowing containers to stay at the yard after the expiry of free storage period both at ICD and port yard; putting importers in an awkward position should there be any disruption along the logistic chain. They are either paying high storage charges or risk their goods getting auctioned by the taxman according to laid down procedures.

The grave mistake the country made was to sign the financing contract on the “take or pay’ arrangement. What this meant is that the KPA, on completion of the SGR, was to commit a certain amount of the cargo through SGR to help the government get revenue that would, in turn, pay the Chinese loan.

Loss of logistics business

Interesting, as a cargo handler, KPA could not guarantee any cargo unless it forced the volumes through SGR as it is doing today.

The government has already spent a lot of resources to build good road network around the port of Mombasa, connecting the container terminal to Mombasa- Nairobi highway through Dongo Kundu by-pass.

The road network, part of which is still under construction has also created good linkage with CFSs. All this is now likely to be under-used unless the government looks into measures that SGR can coexist with other players, including truckers, who have also lost business.

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GITHUA KIHARAhttp://www.businesstoday.co.ke
Githua Kihara is commentator on logistics matters. Email: [email protected]
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