A media frenzy broke out in Kenya on November 5, 2022 Release of three Chinese loan contracts signed between the Kenyan government and China Export Import Bank (Eximbank), to finance two phases of Standard Gauge Railway of Kenya (SGR).
The 700 km railway connects the port of Mombasa to Nairobi via Naivasha. It has been plagued with controversy from the start. Concerns ranging from procurement, its enormous cost and the government’s reluctance to allow detailed scrutiny of the contracts that underpin Kenya’s biggest infrastructure project since independence.
The publication of the three contracts by the new Kenyan Minister of Transport and Infrastructure came almost four years after rumors began to circulate that Kenya had staked its prized Mombasa port as collateral for the initial $3.6 billion loans for the rail project. The Minister’s disclosure of the contracts was intended to clarify matters. Instead, the air is thick with skepticism and the complaints of selective disclosure.
Our study
In April 2022, a team of researchers from Johns Hopkins University published a guidance note and work document summarizing nearly two years of investigations into the collateral rumour. The team was made up of academics and professionals with extensive practical expertise in commercial law, international project finance and auditing.
Our team discovered that the collateral rumor stemmed from a critical error made by the Office of the Auditor General of Kenya. The government’s chief auditor had mislabeled Kenya Ports Authority, owner of the port of Mombasa, as the “borrower” in charge of repaying China Eximbank SGR loans.
The Harbor Authority was not a borrower, we concluded.
Recently released loan agreements confirm that “the Republic of Kenya, represented by the National Treasury of Kenya” is the borrower and is “fully liable for the payment and repayment obligations” of the loan agreements. The contracts stipulate that this obligation remains whether or not the Kenya Railways Corporation and the Kenya Ports Authority fulfill their own obligations.
The recently published loan contracts corroborate previous statements by the Kenyan and Chinese governments. The Government of Kenya has pledged to repay this sovereign debt with government revenues, just as it repays Eurobonds and the World Bank.
In other words, these are sovereign loans, signed by the central government, not by state-owned companies in Kenya.
We also analyzed the “Take or Pay Agreement (TOPA)” signed between the Kenya Railway Corporation and the Kenya Ports Authority. In this agreement, a copy of which was shared with us by colleagues in Kenya, the Kenya Ports Authority had agreed to ship a fixed amount of freight on the railway each month or pay the shortfall to Kenya Railway Corporation. This income was to be deposited by the company in an escrow account and used to help repay the Chinese loan. But the port authority’s legal responsibility under Kenyan law rests with the Kenya Railway Corporation, not the Chinese bank.
The Kenya SGR Credit Enhancements were carefully and creatively designed to improve the bankability of a railway project which has significantly improved the Kenya Ports Authority’s competitive position in the region. Yet, like most large investments with significant environmental, security, and connectivity benefits, the benefits of this project will mature over time, while the upfront costs are high.
Credit enhancements like TOPAs increase the bankability of projects, showing the government’s commitment to raising various revenues to repay the lender. But ultimately the debt is guaranteed by the sovereign.
Our research focused only on the collateral charge. It did not address concerns about procurement or corruption that may have taken place around this project. The other contracts were not released. Nevertheless, the three loan contracts are sufficient to establish that the port of Mombasa was in no way given as security for the Chinese loans.
The office of the Auditor General of Kenya is renowned for its integrity, and we commend the keenness with which the office and its courageous leaders approach their task of protecting Kenyan taxpayers. Its officers seem to have good reason to worry about the Kenyan government’s corruption and mismanagement. It is with this in mind that the Auditor General leaked letter in Parliament must be understood.
Sovereign immunity
However, as noted in our research, the Auditor General’s report opinion that the Government of Kenya had “waived immunity” over the assets of the Kenya Ports Authority and “expressly guaranteed” that they could be used to repay the Chinese loan was incorrect.
Since all sovereign governments enjoy immunity from suit under international law, they are routinely required to waive this sovereign immunity in international contracts. This is how if a dispute arises, it can be arbitrated. Sovereign immunity waivers are general and relate to the resolution of disputes, not the specification of any particular asset as collateral.
Our conclusion, therefore, was that the waiver of sovereign immunity did not mean that the assets of the Kenya Ports Authority were deliberately put at risk.
bitter experience
The Kenyan auditor general was also concerned that the loan agreement would specify that arbitration of disputes would take place at the China International Trade and Economic Arbitration Commission. He is “one of the oldest and most active arbitration institutions in the world.”
It is normal for arbitration to take place outside the borrowing country. However, the Auditor General was not alone in his concern on neutrality of a Chinese room. Kenya may insist that the presiding arbitrator be chosen by both parties from among a neutral third country. This should allay some concerns about fairness, should a dispute arise.
However, our research team suggests that two factors contributed to the Auditor General’s interpretation. First, because of sometimes bitter experience, the Auditor General’s office did not trust the Kenyan government to protect the interests of Kenyan citizens.
Second, and equally important, the Auditor General’s office and Kenyans in general were likely prepared to be wary of the Chinese bank as well due to widespread rumors of “China debt traps”. This was triggered by the case of Port of Hambantota in Sri Lanka. There, the same Chinese bank was accused in the pages of the New York Times (wrongly, as it happens) to take over a loss-making port when Sri Lanka was facing balance of payments difficulties.
The geopolitically heavy accusation of deliberate “Chinese debt traps” and “asset seizures” distracts from a real problem: infrastructure, like natural resources, is prone to corruption. Yet Kenya faces risks by unilaterally issuing contracts for a single lender and a single company. Almost 20 years ago, government, industry and civil society actors came together in London to build the Extractive Industries Transparency Initiative.
Governments join, commit to transparency, and Extractive Industries Transparency Initiative publishes complex contracts. A similar global initiative for public infrastructure is clearly needed. Since Kenyan taxpayers will ultimately bear the cost of the project, they have a right to know all the details. And they also have the right to have the information discussed fairly and professionally.