It is said that success leaves clues. Where do the two wealthiest Americans, Warren Buffet and Bill Gates, invest a significant amount of their money? Railroads!! Buffet went all out and bought one. Before he went on to purchase Burlington Northern and Santa Fe Railway (BNSF), the largest railroad in the USA, he said this of Bill Gate’s investment in Canadian National Railway after it was privatized in the mid-90s. ‘My friend Bill Gates bought a lot of that (CNR Stock), but he is smarter than me’. Success leaves clues and offers lessons. What lessons are there for Kenya?
At its inception, the ‘Lunatic Express’ was the lifeline of the territory that would become a country called Kenya. The railroad was essentially the originator of the country. Numerous Kenyan towns including Nairobi owe their existence to the Kenya-Uganda Railway. I would hazard that Kenya and Uganda would not exist without the railway. That is the power of the railways. It shapes continents, countries and people’s destinies, and if managed well, their wealth. Kenya and other African countries have done a dismal job of leveraging this technological inheritance for the greater good of their economies and people. But there is a glimmer of hope. With the coming of the Standard Gauge Rail, henceforth christened Maendeleo (Development) Rail (MR), and notwithstanding the rent seeking behavior that has characterized its construction, we may be at the dawn of a new age of railroading and transportation in East Africa. That said, what happens to Kenya Railway and its concession Rift Valley Rail (RVR)?
Re-Gauge
By omission and commission, Kenya Railway has been in a steady decline since its construction by the British. The government and concessionaires have made multiple attempts to revive what could be the lifeline of the economy and a real job creator. The approach, however, smacks of a scarcity mentality, i.e. let’s get as much now and the future be damned. The concessionaire has done this by using underhanded methods to divert funds from their major financiers and the government has insisted on taking the easier route of concession fees as a mainstay of revenue from the railway while building another over-priced standard gauge railway, Maendeleo Rail.
For RVR to be competitive, it must change. It needs to be re-gauged in structure and function. Competition in the railway and transport systems is good for the economy. It lowers transportation cost transportation and spurs several other benefits such as jobs creation leading to GDP growth. Re-gauging to the standard gauge would give RVR access to cheaper standardized equipment, to start. This task, as daunting as it may seem can be done. With proper planning, equipment, and well-trained personnel it would take less time and cost than it would take for Maendeleo Rail (MR) to get to Kisumu! The functional re-gauging would require a mindset change in how RVR views itself and conducts business. It should see itself less as just a railway but rather as a transportation and logistics solutions enterprise. The narrow perspective of how railroads viewed their function was identified by Jim Collins, in his book From Good to Great, as the major cause of why a sizable number of Class 1 North American railroads failed in the 1960-1980s period. A broader view of transportation would see railway firms look to purchase trucking companies, add a couple of container and bulk handling ships on Lake Victoria for regional trade, and one or two cargo ships traversing the open seas with destinations in the Near and Far East and various African Ports.
Railway IPO
In the early 1900s, Railroad stocks comprised of more than 50% of the market capitalization of New York stock exchange. They were the Apple, Facebook, and Google of their time. If stock for both railways in Kenya was floated it would not only provide a much-needed boost to the Nairobi Stock exchange, it would also subject the railways to real market forces and competition. Notwithstanding Kenya Airways current problems it can be argued that floating KQ stocks on the exchange was good for both KQ and the economy.
Lessons of a successful railway IPO can be gleaned from the experience of the privatization of Canadian National Railway (CNR) in the 1990s. Then CEO Paul Tellier, backed by an excellent executive team, in less than 5 years transformed a near moribund corporation into a startling success. Tellier was succeeded by erstwhile Chief Operating Officer, Hunter Harrison. The turnaround is considered legendary in the annals of the North American railroad industry history. Harrison, in particular, was able to transform almost bankrupt money-losing crown cooperation (sounds familiar) into the most profitable, efficient, best in class railroad in North America at the time. Had you invested $70,000 in CNR at the time of the IPO in 1995 and reinvested all your dividends, you would have reaped $1,000,000 in 10 years. A lot of people, including employees did just that and retired millionaires. Some invested a lot more than that and made a whole lot more, including one Bill Gates, who to this day remains the largest shareholder. How this turnaround was done is captured best in the book by Harry Bruce, The Pig that Flew: The Battle to Privatize Canadian National. The revival of Canadian National holds instructive lessons for both Kenya Railway (RVR) and Maendeleo Rail.
With the current majority stakeholders shopping around for a purchaser of their stake, the government should buy back the concessions and privatize Kenya Railways through an IPO on the Nairobi and Uganda Stock markets. This will not only increase the public participation in the ownership of the railway but will allow the railway to have another avenue to source funds to manage its operations, attract quality industry executives and hire young outstanding recruits who can be groomed for long-term leadership in the industry. The new shareholders, local and international, will also bring a new level of accountability that would lead to a better performing railway. Similarly, Maendeleo Rail should also be slated for privatization on the stock market to benefit from the same and to allow for more options in paying off the massive debts incurred. I predict if this happened, three years after the IPO, KR/RVR and MR, if managed properly, will rival Safaricom and East African Breweries in market capitalization and earnings per share.
Government Support
Railways are in a unique position as they are the only mode of the transportation system that is tasked with building and maintaining its infrastructure. Initial government support, not a bailout but a hand up, would be needed to boost the kitty for the re-gauging and maintenance project. The railways have been paying road use fuel levy on the diesel they consume, should they not get some of that back for their infrastructure?
Before Canadian National Railway (CNR)-- a government-owned crown cooperation was privatized-- the Canadian government invested considerable funds in getting the tracks, rolling stock and locomotives up to scratch. They were rewarded mightily when CNR issued its initial Public Offering IPO. This is an example that the Kenya government could learn from.
The potential of the railway is not always been self-evident. Even in North America, the region with the most profitable and efficiently run freight rail system in the world, things did not improve until the Staggers act of 1980 in the US, and The National Transportation Act, 1987, and the Canadian Transportation Act, 1996, in Canada. The Acts deregulated the market and allowed for mergers, acquisitions, and a new competitiveness that among other things allowed railroads to charge market rates for their services. The North American railroads have gone on and continue to make massive profits and have re-emerged as pillars of the region’s economies and growth. With a few tweaks to the Kenya railway regulatory framework, there is no reason for Kenya Railway not to regain its profitable pre-independence ways again. Equally, there is no reason Maendeleo rail cannot generate enough revenue to pay off its debts quickly.
Success leaves clues. If the powers that be could jettison a scarcity mentality that encourages rent seeking behavior and short-term gains that benefit a few and adopt more of a long-term abundance mentality, that would trigger a virtuous cycle leading to profitable railway enterprises. That, in turn, will trigger greater prosperity for all. There is a lot to learn and gain from the experiences Tellier, Harrison, Gates and Buffet.
