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Kenya Railways Should Be A Retail Giant

[vc_row][vc_column width=”2/3″][vc_column_text]The SGR debate on both print and social media has been extremely stimulating over the last two weeks, peppered largely by opinion, bias and, in a few entertaining posts, actual experience. But as Bitange Ndemo aptly covered in his opinion piece in this paper last Wednesday, the greater opportunity here is the potential to convert the real estate within and surrounding the SGR stations into catalysts for a 24-hour economy.

The aviation industry already does this well by utilizing airports as retail hubs. Data from Airports Council International shows that 44% of global airport revenue comes from non-aeronautical services offered within an airport. With millions of passengers travelling in and out of this prime real estate, concessions within the airport have a captive market made up of customers who want to eat, drink or just shop. The numbers are revealing: 54% of global concessions are dedicated to selling food and drink, 36% to non-duty free items and only 10% are dedicated to duty free sales.

In the United Kingdom, Network Rail is the owner and operator of Britain’s rail infrastructure with over 1.7 billion journeys taken by passengers annually. Over 30 passenger and freight train operators use the rail infrastructure, which thus requires Network Rail to maintain the tracks and signals at optimal performance for both efficiency and safety. It does this through an investment of £50 billion (Kshs 6.7 trillion) in not only the train related infrastructure, but also the stations through which passengers flow. Just like our very own Kenya Railways, Network Rail is one of the largest land and property owners in Britain and between 2009 and 2014 it generated £1.4 billion (Kshs 187.6 billion) from commercial activities that it reinvested in its rail estate. It generates revenue in commercial activities by leveraging off the 510,000 square feet of retail space at 18 of the largest stations across the country that enjoy a combined annual footfall of about a billion people.

This is where it gets interesting. Network Rail reported that the retail sales at its train stations showed a growth of 5.6% compared to high street retail sales of just 0.75% in the same period in 2014. One way of explaining this could be the fact that online retail sales are growing at a similar rate, creating a decline in mall and high street footfall. What’s obvious though is that your railway passenger,who might have become an online shopper, still has to travel to and from work or visit family and their presence at a railway station is an enormous opportunity to get a share of their wallet.

Based on the social media narrations of those who’ve taken the Madaraka Express to and from Nairobi, a number of passengers have missed the train due to inevitable traffic delays en route to the station. In the aviation industry, “dwell time” refers to the time passengers have to mill about the airport waiting to board a plane and is used as an indicator of potential retail spend. The distance of the SGR stations from the CBD both in Nairobi and Mombasa speaks to the obvious fact that passengers will now have to get to stations earlier if they want to catch the train without huffing and puffing their way to a heart stopping screeching embarkation two minutes before departure. Classic dwell time opportunity lies here for retail operators within and proximate to the airport to tap into not only SGR passenger wallets, but the neighboring residents as well.

Network Rail for instance has been using sensor technology at its busiest stations that has revealed that there are tens of millions more visitors in addition to passengers at the stations, who come to shop, eat and drink. From Syokimau to Miritini and every station in between, Kenya Railways can transform the lives of small business owners through concessions at its prime commercial real estate at the SGR stations in much the same way its predecessor line created bustling towns from Mombasa to Kisumu at the turn of the 20th century. By ensuring that only quality operators provide these critical services relating to dining and shopping, Kenya Railways can set a benchmark for the retail business model in Kenya.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Driving on borrowed funds

[vc_row][vc_column width=”2/3″][vc_column_text]Mutua stops John in BuruBuru and asks for the quickest way to Westlands.
John asks, “Are you on foot or in the car?”
Mutua says, “In the car.”
John says, “That’s the quickest way.”

In case you missed it, there is an obscenely symbiotic relationship between the growth of credit supply in Kenya and the now ubiquitous traffic jams that are spreading beyond this cities of Nairobi and Mombasa. Rather than rehash what I have written before, I pulled out some data from the Economic Survey 2015 that was put together by the Kenya National Bureau of Statistics so as to get a verified position of my thesis. First let me give credit where it’s due. The 2015 Economic Survey, all 334 pages, is a treasure trove of statistical information on all aspects of the Kenyan economy. It is a very useful tool for looking at historical information about education, health, banking, government and many other sectors as well being able to extrapolate trends if you’re so inclined. Well, the data on vehicle importation was eye-popping to say the least. In the last four years, the annual importation of motor vehicles has grown from Kshs 62.8 billion in 2011 to Kshs 101.7 billion in 2014, a 62% growth in value terms. I know what you’re thinking, as you roll your eyes at this number: it must be the confounded boda bodas that are driving this growth.

Actually it’s not. In 2011, there were 140,215 motorcycle registrations, which was actually the highest in the last four years. By 2014, there were 111,124 motorcycle registrations or a 20% drop. Conversely, lorries and trucks grew from 5,247 in 2011 to 10,681 in 2014, a growth of 103%. Now, I find that quite interesting. What are these lorries hauling? Is this growth in any way related to long distance transportation of goods across East Africa or is it related to the SGR construction where countless Chinese trucks criss cross Mombasa Road moving building materials? I did note that many of them did not bear Kenyan registration plates when I last drove past an SGR construction site so my point might actually be moot (since the KNBS numbers describe actual vehicle registrations) and the growth in truck importations could directly be linked to long distance transportation or phenomenal growth in the building construction industry. But I digress, as I wanted to demonstrate vehicular traffic of the jaw-dropping fame that has now consumed us as a country. In the same period, saloon car registrations grew from 11,026 in 2011 to 15,902 in 2014. That sounds low doesn’t it? 44% growth in 4 years? Well you just wait for the kicker. Registration of station wagons grew from 31,199 to 53,542 or 71% growth in the same four-year period! These are your Proboxes, Toyota Wishes, Nissan Wingroads, Subaru Imprezas, and all manner of station wagons that, together with saloon cars, have transformed our roads into the collective sludge of traffic non-movement. What is financing this phenomenal growth in vehicular traffic? The Kenyan banking industry is.

So I pulled up a fairly decent report issued quarterly by the Central Bank of Kenya. The report, titled “Developments in the Kenyan Banking Sector” provides information on sectoral distribution of loans in the banking industry. Using the quarter one 2012 and quarter one 2015 reports, the not-so-surprising revelation is that lending to the personal/household sector (which is where unsecured consumer lending is recorded) is the single largest borrowing segment in the entire Kenyan banking industry. Let me say that again: loans to individual Kenyans are higher than loans to any other singular sector of the economy. (If I handed in this piece on time, my copy editor would have been able to insert an illustrative table, but time doesn’t allow for this insertion, unfortunately). By December 2011, the banking industry had lent out 318.8 billion to the retail sector, which was 27% of the Kshs 1.1 trillion gross loans and advances. Four years later, the banking industry had lent out 518.2 billion to the same retail sector out of the Kshs 1.97 trillion gross loans and advances. So even as the growth in loans and advances has almost doubled in four years, lending to the personal sector has steadily maintained its rate at just a quarter of total bank lending. The bulk of these loans are personal, unsecured loans that are taken to purchase motor vehicles.
I called up an old friend, who heads up the Risk Department in a Tier One bank here in Kenya. He confirmed my numbers that personal consumer lending at his bank makes up about 55% of the total bank loan book. He dropped another bombshell as a parting shot. He had just returned from a credit conference in South Africa where a consultant had made a presentation on the state of credit in many African economies. In South Africa particularly, the rate of borrowing in most households was at 75%. In Kenya, the research had it at 68%. While the banking industry (and to a lesser but noteworthy extent, the Savings and Credit Cooperative Society industry) have democratized access to credit in this country, a key unintended consequence has been to democratize access to vehicle ownership for Kenyans. What we see on our roads daily will not go away. And for those whose hopes had risen with the increase of excise duty on the smaller capacity vehicles as was done in the last budget, you need to peg your hopes down a notch. Increased taxation will not stop vehicle buyers from purchasing cars; it will only increase the size of loans being requested by consumers. For as long as the banking industry is willing to continue growing its personal unsecured lending segment, there will be more cars on our roads that can only mean even more mind numbing traffic and idiotic over lappers. It might actually be faster to walk to Westlands from BuruBuru than to drive in the next five years!

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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How American trains opened up their economy

[vc_row][vc_column width=”2/3″][vc_column_text]A large two engined train was crossing America. After they had gone some distance one of the engines broke down. “No problem,” the engineer thought, and carried on at half power. Farther on down the line, the second engine broke down, and the train slowed to a dead stop. The engineer announced:
“Ladies and gentlemen, I have some good news and some bad news. The bad news is that both engines have failed, and we will be stuck here for some time. The good news is that you decided to take the train and not fly.”

I spent a lovely summer in the village of Pewaukee, Wisconsin in the United States, which has a population of 8,236. It is part of the bigger city of Pewaukee that itself has a total population of 13,195 as at the last census in 2010. Tucked away in a corn and soya bean growing topography in central Wisconsin, the nearest large city is Milwaukee which lies about 17 miles East and Chicago which is a fast ninety minute drive to the south. The central focal point of the village is Lake Pewaukee which is about the size of our own Lake Elementaita and is surrounded by million dollar homes. The lake therefore attracts residents to its shores during the weekend and the local authorities have ensured a well maintained pier exists for the public to walk along, bring their chairs and sit, swim and generally enjoy free safe and secure access to a public asset. There are also clean public toilets and changing facilities and I once found a man in a waterproof overalls waist deep in the water cleaning out the waterfront area near the pier. Pewaukee is fairly safe and front doors are often left unlocked and the local police’s idea of excitement is catching a wayward driver doing 35 miles per hour in a 25 mile per hour zone. Enough said. The serenity is, however, often interrupted by the ear splitting warning horn of cargo trains that often traverse through the village as the railways tracks are part of the wider interstate web of railway track that opened up the United States to progress, new population settlements and vibrant trade in the 19th century.

On one lazy, languorous afternoon we sat by the lake and watched a cargo train trundle past. It took all of five minutes. But five minutes is 300 seconds of a long, rumbling iron snake carrying containers arranged in a double stack on wagons. So we did some quick back of a grease stained serviette calculations. Having lost count after about 30 wagons (the relentless heat and humidity does wear one down when conducting a mind numbing activity like counting train wagons) we figured that the train was easily carrying 200 containers. Assuming that a Kenyan truck on the nail biting treacherous Mombasa to Nairobi journey carries one 40-foot container, this particular train we were observing could easily eliminate 200 trucks from the road, just like that. It goes without saying that 200 trucks off Mombasa road would also mean far less damage to the road and, heaven be praised, less traffic on that critical East African artery. But surely I’m exhibiting bouts of insane fantasy so let me get back to reality.

The railroad system in the United States can be traced to the dawn of the 19th century and was primarily built to haul cargo and later, as more railway lines were built on the back of a rapidly developing financial system in Wall Street that provided funding options, passenger trains emerged. The railroad system thus opened up significant trade opportunities for manufacturers of goods as they could find and reach new markets in a cost effective manner. Towns soon started popping up along the railway routes as the trains needed skilled craftsmen to repair the steam locomotives which developed difficulties along the journey. It is also noteworthy that by the mid 19th Century, over 80% of farms in the Corn Belt (from Ohio to Iowa states) were within eight kilometres of a railway. Access to markets had led to the creation of many large scale farming communities.

Like any industry, the railways in the United States have gone through great highs and spectacular lows. Competition from trucks did affect the railway in the mid 20th century particularly with the rapidly developing interstate highway system. However deregulation of much of the industry in the early seventies removed the stumbling blocks that had made it economically unviable thus making the American freight railway system one of the best in the world.

Which brings me to our Chinese driven standard gauge (SGR) railway that is currently under expedited construction. I did a little research and was pleased to see that actually I wasn’t exhibiting bouts of insane fantasy. A typical freight train on Kenya’s SGR, once complete, will consist of 54 double stack flat wagons and measure 880 metres long. 54 double stack wagons converts to 108 containers. Poof! 108 trucks gone just like that off our roads, assuming of course that the wagon is carrying two 40 foot containers rather than 20 foot ones.

It bears some reflection as to what role the SGR can play in the reversal of the importation pressures placed on the shilling. Since our oil will have its own pipeline to take it to the port when it is eventually extracted, our higher capacity trains should not return to the Mombasa port empty. As American history shows, the railroads were a core component of the growth of the economic powerhouse as they were used to crisscross raw material and finished goods to domestic markets. What impact will having the faster delivery mechanism called SGR have on future production of agricultural and finished product in Kenya? I want to believe that this is being given careful consideration within the facilitative roles of Ministries of Agriculture as well as Industrialization. Otherwise both these engines of facilitation will have catastrophically failed.

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Twitter: @carolmusyoka [/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]