Will the faster SGR kill slow moving Rift Valley Railways?

Rift Valley Railways faces new challenge in the wake of Standard Gauge Railway

When the Standard Gauge Railway started operations last week, it ushered in a new era of speed, efficiency and cost-effectiveness on rail. It will bring competition on the Mombasa-Nairobi route.

The freight train made a maiden trip Tuesday but is not expected to be in operation until December. That is when cargo shippers expect to see a radical shift in the amount of money charged by transporters.

Kenya Railways Corporation (KRC) said it would cost Sh50,000 ($500) to move a 20-foot container from Mombasa to Nairobi on the new line while other cargo will attract Sh7 ($0.07) per tonne per kilometre. The firm said the charges would be periodically reviewed depending on demand.

This is cheaper in comparison to the current truck rates, which, according to the Shippers Council of East Africa (SCEA), charge between $860 (Sh86,000) and $970 (Sh97,000) to move a 20-foot container from Mombasa to Nairobi.

“When the service becomes operational, we expect road transporters to reduce prices by about 20 per cent to become competitive,” said SCEA Chief Executive Officer Gilbert Langat.

He expects the SGR to account for up to 30 per cent of cargo leaving Mombasa in its initial days, with the possibility of it increasing with time.

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The SGR freight service is expected to be a major competitor — and not just to the truckers. With the Government and operators out to prove the rail is worth the Sh327 billion used to build it and deliver on the promises of a better business environment — and road transporters bringing down their costs to retain business — this spells trouble for Rift Valley Railways (RVR).

The company, which runs the old line between Mombasa and Kampala on concession has, according to reports, been charging between Sh67,000 and Sh145,000 depending on the size of the container and Sh24 per tonne-kilometre. This is higher than both the SGR and truckers.

Common measure

Isaiah Okoth, the RVR Group Chief Executive who was appointed to turn around the concessionaire, disputes the charges and claims by critics that the company will be killed by the SGR.

He said the firm does not charge cargo owners depending on containers moved but on the tonnage, adding that RVR is currently charging as low as Sh4.5 per tonne per kilometre, in comparison to Sh7 that will be charged by the SGR freight service.

“In rail, the most common measure for pricing is net tonne per kilometre and that is what we use. This is because a container can be a 20-footer but carrying clothes and the weight is 10 tonnes. But it could also be carrying steel and weigh 40 tonnes,” Mr Okoth told Weekend Business.

“That tonnage sitting on rail is the one that puts pressure and that is what determines how much fuel is used. It is for this reason that we do not use price per container but the cost per net tonne per kilometre.”

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He said the firm currently charges Sh5 per tonne per kilometre on average to move cargo over the more than 1,000 kilometres of rail it runs in Kenya and Uganda. The cost, however, goes up over short distances, such as Mombasa to Nairobi, at about Sh5.8 per tonne per kilometre.

Earlier computations that compared RVR’s pricing with that of the SGR service were based on information from four years ago, when factors that are at play in determining charges were different, he added.

“They have been using 2013 data when pricing factors such as fuel were different. It has since come down. Somebody picked up the wrong data and used it to show how bad RVR is,” Mr Okoth said.

He added that while speed is good for passenger trains — conceding that it is one of the reasons RVR’s passenger service between Mombasa and Nairobi failed — it is not necessarily good for cargo, where customers will usually have several weeks of inventory and use cargo being delivered to add on to that inventory.

“Pricing is not the key strategy. The key strategy for me is customer service, which entails delivering clients’ cargo in an efficient, secure, timely and cost-effective manner. Sometimes it is not about how fast the speed is but delivering cargo when the client needs it,” Mr Okoth said.

“If, for instance, you take grain being delivered to a miller, they have a certain amount of grain they process a day and probably want to keep a week’s inventory. When you start pumping them with product, they might not have storage for it.”

Last-mile solutions

SGR will move cargo from Mombasa to Kenya Ports Authority’s Inland Container Depot in Nairobi which, according to RVR, could be an opportunity for it in the provision of last-mile solutions to cargo owners.

“The cargo being brought to Nairobi will require a last-mile solution and we believe we are positioned to tap into some of those opportunities. We see an opportunity in distributing cargo,” Mr Okoth added.

He said the cargo destined for onward travel could be loaded on the metre-gauge rail for delivery to towns in Kenya and Uganda as well as to premises of entities such as the National Cereals and Produce Board, where the old line has direct access to.

“From Nairobi, I can take cargo to different towns as well as directly to different customers. Some of the lines, especially to clients’ premises, are not active but it is just an issue of making a business case,” he said.

RVR is yet to agree on such an arrangement with its new rival. “We are not in agreement but have expressed our interest in working together,” he said. He added that the taking over of the passenger service by SGR would free up resources that can be redeployed to enhance the cargo service.

“We have been struggling with the passenger business but now they have taken this over, which is something we have agreed with KRC. Globally, it is subsidised but we are not subsidised, meaning we were running it commercial but could not charge a lot.”

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