If you think the SGR is value for money, let’s make a bet

Sunday June 18 2017

By KWAME OWINO
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In the last couple of weeks, I found that the “Concorde Fallacy” is not well known by many Kenyans despite their pride accompanying the formal launch of the first phase of the standard gauge railway.

The predominant view in Kenya today is that this passenger and cargo service will unleash great potential. I watched respected banking professionals repeat unexamined, implausible claims that up to 1.5 per cent growth in national output from here henceforth will be directly attributable to this railway line.

While there are people urging caution, it appears that Kenyans are on a high regarding the Standard Gauge Railway project, assuming that any questions on the project’s viability are motivated by political partisanship and even the absence of patriotism.  

Those who cite comparative statistics revealing that Kenya overpaid for an old engine and a single track retort that despite that sunk cost and waste, the line could pay for itself by being made to work efficiently.

This is the classic case of “Concorde Fallacy”, whose name comes from joint investment by the British and French governments to produce a fantastically fast airplane that was technically superb but impossible to run profitably.

These governments continued to support this project believing that some return would be possible in the future.

EXPANDING PUBLIC LIABILITY

Many fair-minded people look at the record of this administration with procurement and take comfort in the view that construction expenditure is sunk cost and Kenyans should look to the efficiency that the passenger and cargo service will generate, or the so-called multiplier effects.

The real lesson of the Concorde Fallacy is that projects which have serious cost overruns and whose economic logic is poor cannot be salvaged by wishing away the sunk cost.

In Kenya’s case, the proper question to ask is: After running a debt of more than Sh400 billion, should we even contemplate the extension and even the use of this service?

Instead the conversation that we have is that the standard gauge railway is already in Nairobi and so should be completed anyway.

Forgotten in this argument is that extending construction requires more funds and will only expand the public liability beyond the Sh400 billion already incurred.

QUESTIONABLE ECONOMICS

It is not rational to concede that the facility is expensive and overpaid for and think that its extension will redeem the uneconomic nature of the project.

Being that the standard gauge railway is truly the single largest investment that independent Kenya has made in infrastructure, every taxpayer will keep their fingers crossed that it leads to that permanent bump of an additional 1.5 percentage points in Gross Domestic Product each year.

My contention is that few fixed projects have the ability to raise Gross Domestic Product (GDP) by that amount, and on a long term basis.

The reason is that the record of infrastructure projects leading to growth is poor to begin with, as this study by Atif Ansar and others showed. It suggests that the larger the project, the more likely that it will fail to reach expectations when measured regarding fitness for economic purpose.

For good or bad, this project will define for Kenya whether success can be made from a public relations-led infrastructure project underpinned by questionable economics.

POPULATION TIME BOMB

So the truth about the viability of the standard gauge railway is an empirical question that will be answered as the operations begin and as its real returns come to fruition.

It is essential that those who are so convinced of its potential show that confidence by having some skin in the game. In the quest to stand behind my reasoning that the SGR project is unlikely to be the elixir of Kenya’s growth, I propose a wager.

Any person who is convinced that this project will meet basic economic tests of return on investment should take my wager to put at stake the equivalent of a non-trivial sum set apart in an escrow account with the winner donating it to a charity at the end of the loan payment period.

This wager is not a matter of flippancy on my part but a mirror of a similar bet by two scholars, Paul Ehrlich and Julian Simon in 1974. That bet sought to resolve whether the so-called population time bomb would create world instability.

Any Kenyan could take this bet and we would publish the contract and its results to the public in addition to putting our money where our mouths are. Any takers?

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame