From SGR operations to dollar deals: Inside Kenya Railways audit queries

The dealings between Kenya Railways Corporation (KRC) and Africa Star Railway Operations Company (Afristar), which operates the Standard Gauge Railway (SGR), are again under scrutiny as an internal audit points to breaches in the public finance management laws.

The audit recommends that Kenya Railways take over SGR operations from Afristar “as a matter of priority” to avoid further costs to the taxpayer.

The audit, undertaken by the Ministry of Transport’s internal audit unit, has raised concerns about Afristar’s continued oversight of the operations of SGR, including the possibility of billing for tasks that Kenya Railways has already taken over.

It says KRC has taken over many of the functions, but Afristar continues to be domineering in the operations of the railway line.

The audit also questions why the firm, with local operations and procured to undertake local work, is paid partly in dollars, without a clear indication of who, between the firm and Kenya Railways, pays for foreign exchange fluctuations.

The auditors also noted that KRC authorised a Sh1billion ($110.56 million) payout despite the absence of documents required to release the funds.

Afristar was formed in 2017 to operate both passenger and cargo services. This was expected to give KRC time to acquire the necessary expertise to manage the railway.

The deal was to operate and maintain SGR for 10 years, but subject to review after five years. KRC was expected to take over operations in a phased approach over five years ending in 2022. This was, however, extended to December 2025. 

The draft report recommends that KRC part ways with the operator to avoid further taxpayers shouldering bills running into billions of shillings paid to Afristar if it continues to operate the railway line. 

“The Afristar management should be vacated… as a matter of priority to ease the burden on the taxpayer for expenditure on functions which are within the control of the organisation (KRC),” reads the report by the auditors. 

“The Afristar company, having invoiced and earned their entitlements of Sh18 billion as observed in this report, should not further burden the taxpayer where such extension of contract vitiates the objective clauses  listed at the inception of their contractual mandate in the year 2015/2017.”

KRC was expected to take over operations in May 2022, which would have coincided with the fifth anniversary of SGR, with the Madaraka Express having made its maiden journey between Mombasa and Nairobi on June 1, 2017.

The cargo service started operations in 2018. According to Kenya Railways, the handover did not take place as 

Past reports have shown a strained relationship between KRC and Afristar, which was seen in allegations of fraud in ticketing by senior Afristar officials, claims of Afristar hiding information from KRC and at some point KRC considering terminating the operations and maintenance contract.

Kenya Railways uses money drawn from the Railway Development Levy Fund (RDLF), which is financed by imports to Kenya, levied at two per cent of the declared customs value.

“At the time of this audit, and on reviewing the file, KRC has undertaken a phased takeover of the SGR management where the functions of passenger ticketing, fuel management, track management, security and staff currently fall under KRC authority and leadership. Further review established that the operator company had issued a demand for Sh18 billion being their unpaid dues… a consideration with Sh12 billion payout approved by the board and the RDLF advisory committee and the balance of Sh6 billion subjected to an eligibility ascertainment test,” said the audit report. 

“During the (2023/24) year, the management requested, got approval and received Sh18 billion to clear the pending bills owed to the company SGR related pending bills (Afristar Company Ltd) for SGR operations and maintenance pending bills.”

“However, from the billing invoices attached to payment vouchers amounting to $110.56 million (Sh14.26 billion) … we could not ascertain if the whole expense relates to the Afristar operation and maintenance contract intervention activities since the billing statement extracts include; previous accrued amounts as balances brought forward which in the absence of a certified, trade creditors schedule, evidenced ageing analysis of the debts and successive list of published end year financial statements, we could not relate to the contract period.”

According to the audit report, Afristar is partly paid in Kenya shilling and in dollars. This is despite all indications showing that there are no reasons why the firm should be paid in foreign currency.  

The auditors also raised concerns about the cost of local currency fluctuations, pointing out that this could cause a further strain on taxpayers who have to bear the cost of a weak shilling. 

“The payments are made at 60 per cent in local currency and 40 per cent in US dollars. This audit could not ascertain with finality why a company, registered in Kenya, with local physical addresses, domiciled in Kenya, with bank accounts in Kenyan banks, would be paid in a foreign currency for procured services undertaken in Kenya,” said the auditors.

“Further, the USD currency market fluctuations would potentially negatively impact the contract cost, creating an unnecessary additional cost burden to the taxpayer. This variation in contract costs is not recorded, recognised, or addressed by the management.”

Over the 2023/24 financial year, which is the period covered by the audit report, the shilling exhibited dramatic volatility, depreciating to the historical low of Sh160 to the US dollar in December 2023 but started strengthening in the course of 2024 to stand at Sh129 in April, where it has held to date.