Audit Reveals Massive SGR Ticketing Fraud as China Loan Penalties Soar to Sh34 Billion

Kenya Railways faces double crisis as passengers exploit weak controls while Chinese debt obligations spiral out of control

Kenya Railways Corporation is grappling with a devastating financial crisis as a damning audit report exposes widespread fraud in the Standard Gauge Railway (SGR) ticketing system while loan penalties from China continue to balloon to an astronomical Sh34.1 billion.

Auditor General Nancy Gathungu’s latest report for the financial year ending June 2024 has laid bare a system riddled with loopholes that passengers are systematically exploiting to travel without paying, while the corporation simultaneously buckles under the weight of unpaid Chinese loans and mounting legal battles.

Passengers gaming the system

The audit reveals shocking weaknesses in SGR’s revenue collection mechanisms that have created a paradise for fare dodgers.

Despite employing revenue inspectors, overcrowded commuter trains make it nearly impossible to verify that all passengers have valid tickets.

“Commuter service trains are usually congested, making it difficult for inspectors to confirm that all passengers were receipted,” the report states, highlighting how the chaos of packed carriages has become a cover for systematic fare evasion.

The fraud extends beyond simple overcrowding. Passengers have discovered multiple ways to manipulate the ticketing system:

Receipt Recycling Scheme: Used tickets are being dropped into open trays at stations, where unscrupulous passengers retrieve them for reuse during evening services or the following day. The corporation’s failure to properly safeguard or destroy used receipts has created an underground economy of recycled tickets.

Mobile Money Manipulation: The audit exposes critical flaws in mobile payment processing. Cashiers prioritize cash-paying customers, leaving mobile money users to wait – a delay that many exploit by alighting at their destinations before being receipted. Even more alarming, passengers are gaming the system by showing fake M-Pesa messages to cashiers who simply record reference numbers read aloud by customers.

“Considering that there are instances where dishonest people tamper with M-Pesa messages, chances of the cashier recording doctored messages could not be ruled out,” Gathungu warns in her report.

The audit identifies a perfect storm of internal control failures that have enabled this fraud to flourish.

The same cashiers who issue tickets are responsible for checking them, creating opportunities for collusion.

Meanwhile, supervisors and inspectors are frequently absent from trains, leaving the system essentially unmonitored.

These control weaknesses have resulted in confirmed revenue losses of Sh133.8 million from the Meter Gauge Railway alone, with the SGR losses likely far higher given the scale of the fraud described.

China debt crisis deepens

While passengers exploit ticketing loopholes, Kenya Railways faces an even more existential threat from its Chinese creditors.

The corporation’s failure to service its massive Sh646.16 billion loan from China Exim Bank has triggered punishing penalties and interest charges now totaling Sh34.1 billion.

The breakdown is staggering: Sh5.3 billion in penalties and Sh28.85 billion in accumulated interest – costs that Gathungu emphasizes “could have otherwise been avoided” if the loans had been paid on schedule.

“These penalties expose the public to avoidable expenditures that could otherwise have been avoided. This expenditure is not a proper charge to public funds,” the Auditor General states bluntly.

The financial crisis extends beyond Chinese loans. Kenya Railways faces pending lawsuits worth Sh27.97 billion and has provided guarantees on behalf of the corporation amounting to Sh166.8 million.

Combined with the Chinese debt penalties, the corporation’s total contingent liabilities present an existential threat.

“The Corporation is at risk of operations interruption should the contingent liabilities crystallize,” Gathungu warns, painting a picture of a railway system on the brink of collapse.

Operational mismanagement

The audit also reveals broader operational failures, including Sh1 billion in long-outstanding prepayments to suppliers such as Kenya Power, Nairobi City Government, and other state agencies that have remained unpaid for over a year without satisfactory explanation.

The convergence of systematic passenger fraud and mounting Chinese debt obligations presents Kenya Railways with a crisis that threatens the viability of the entire SGR project.

While passengers exploit weak controls to travel for free, the corporation hemorrhages money through avoidable penalties and interest charges that now exceed Sh34 billion.

The audit findings raise fundamental questions about the sustainability of Kenya’s flagship infrastructure project and the competence of its management.

With operations at risk of interruption and public funds exposed to massive liabilities, urgent reforms are needed to salvage what remains of the SGR’s financial viability.

The irony is stark: as ordinary Kenyans find increasingly creative ways to avoid paying train fares, their government faces the crushing reality of unpaid billions to Chinese creditors – a financial double blow that could ultimately derail the entire railway project.