Uganda canceled a railway contract with a Chinese state-owned company in January, saying it will instead look to Turkey to build and finance a $2.2 billion rail line to Kenya.
For nearly eight years, the proposed standard gauge railway (SGR) linking the Ugandan capital of Kampala to Malaba on the border with Kenya has been in limbo.
Uganda is a landlocked country. It relies on ground connectivity to access regional ports in Kenya and Tanzania. But its colonial-era rail metre-gauge network has fallen into disrepair. Service is unreliable. As a result, cargo is transported by road, which is costlier and more pollutive. Like so many other countries, Uganda turned to China to build and finance the construction of a modern railway line.
The Backstory of the Uganda SGR
In 2015, Uganda awarded the Kampala-Malaba rail line’s construction contract to China Harbor Engineering Company (CHEC), a state-owned firm that’s built ports and metro projects across five continents.
At the time, Uganda was not the only country in the region choosing to build an entirely new railway network based on different specifications. Regional states envisioned an integrated network of SGRs.
The shift toward standard gauge would be much costlier than rehabilitating the existing metre-gauge networks. A master plan study for the East Africa Community recommended a gradual approach toward developing SGRs. But Ethiopia, Kenya, Uganda, and Tanzania all pushed to build their own SGRs because of their reliability and ability to handle greater speeds and larger loads.
Littoral states in the region sought to attract transit trade traffic serving those in the landlocked interior. And landlocked states like Uganda looked for outlets to sea.
Uganda aimed to connect to the Kenyan port of Mombasa via Kenya’s own SGR. But Kenya’s SGR was never built to the Ugandan border.
The first phase of the Kenyan SGR was completed in 2017, connecting Mombasa to the capital of Nairobi. A subsequent phase built an SGR line from Mombasa to the nearby dry port of Naivasha.
Marred by controversy and concerns over debt sustainability, the extension of Kenya’s SGR to the Ugandan border was all but abandoned.
In Kenya, rumors had spread that the Mombasa Port was staked as collateral for the SGR loan. Similarly, in Uganda, local media claimed that China would be able to seize Uganda’s only international airport in arbitration.
China has its own misgivings about lending in East Africa. China Ex-Im Bank has refused to finance both the Ugandan SGR and the second phase of the extension of the Kenyan SGR. As a result, Uganda canceled its contract with the state-owned China Harbor and Engineering Company (CHEC).
But East Africa is no outlier. Globally, Chinese development banks have pulled back from risky overseas infrastructure financing.
China Retreats from Africa Infrastructure
Since the early 2000s, China has pushed domestic firms to “go out” and export their overcapacity and oversupply — known as the “whole industry chain export” or “export-supply chain” strategy. As traditional bilateral and multilateral donors and lenders stepped back from Africa, China stepped in.
According to the Center for Global Development, Chinese development banks financed $23 billion in infrastructure projects in sub-Saharan Africa from 2007 to 2020.
China has been uniquely positioned to service the needs of infrastructure-hungry developing countries. It’s home to the world’s largest engineering, procurement, and construction (EPC) companies. Seven of the world’s largest ports by volume are in China. And China is the world’s largest holder of foreign currency reserves, exceeding $3 trillion.
During the 2000s, as its current account surplus rose astronomically, China redirected its foreign exchange to finance infrastructure abroad. This culminated in the Belt and Road Initiative, which was announced in 2013.
But the unrestrained push to build infrastructure and power plants overseas has led to debt distress and overcapacity in countries in Africa and Asia. Projects like Kenya’s SGR risk becoming “white elephants.”
As a result, China has dialed back its support for infrastructure financing in Africa and elsewhere in the world. Globally, Chinese development financing commitments dropped from $87 billion in 2016 to $3.7 billion in 2021. Beijing is retooling its economic relationship with Africa, moving away from expensive, big-ticket projects.
Is Turkey an Alternative to China in Africa?
Uganda now says it has signed a memorandum of understanding with Yapi Merkezi, a private Turkish firm, to build the SGR to Malaba. It’s a preliminary agreement pending the securing of financing.
While China continues to dominate the infrastructure construction market in Africa, Turkey — and Yapi Merkezi in particular — has positioned itself as an alternative to Chinese firms, including on rail.
Yapi Merkezi has constructed one section of Ethiopia’s standard gauge railway. It’s also building four of the six phases of Tanzania’s SGR.
In Uganda, a Turkish company Polat Yol Yapi is building a 57-mile road that will improve connectivity to Ethiopia, Kenya, and South Sudan. Turkey’s Albayrak has also operated Somalia’s Mogadishu port since 2014.
The broader region of East Africa is crowded with competition. Other players include Japan and the United Arab Emirates.
But it would be a mistake to count China out. Contracts for two more recent phases of Tanzania’s SGR have gone to Chinese companies. And the East African reports that CHEC is still maneuvering to involve itself in the Uganda-Kenya and other rail Uganda projects. Chinese contractors also often construct projects financed by the World Bank and other multilateral lenders.
In Uganda, a Chinese company, the China Road and Bridge Corporation is revamping the Kampala-Malaba Metre Gauge Railway — at a modest cost of $51 million. Kenya is also rehabilitating the metre gauge railway on its side of the border, linking Malaba with the terminus of its SGR.
Even with Turkey’s apparent entry into the Ugandan SGR project, key questions remain unanswered. Does Uganda actually need an entirely new railway line? And will it generate the revenue to be able to repay loans for the SGR? In the end, the Turks and their prospective financiers may come to the same conclusion as the Chinese: that the Ugandan SGR simply isn’t bankable. And Uganda may just have to come to terms with a functioning metre-gauge railway as being good enough and within its means.