Chinese rail loan terms behind road freight ban in Kenya, deal says

Importers were forced to transport their cargo via Kenya Standard gauge railway (SGR) because of a deal signed by his previous government with the Export-Import Bank of China, documents show.

The agreement obliged the Kenya Ports Authority, owner of the port of Mombasa, to guarantee certain freight traffic to the SGR, financed and built by China.

Failure to do so would require payment of the difference in its revenue, according to the payment arrangement agreement – also known as take-or-pay (TOPA) – for the Mombasa-Nairobi SGR project, seen by the South China Morning Post.

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The railway connects Mombasa to the capital Nairobi with an extension to Naivasha, a city in the central Rift Valley, where it ends abruptly after China abandoned its earlier promise to fund the construction of Malaba at the border with Uganda.

The project was funded by a $5 billion loan from China Eximbank, granted by former President Uhuru Kenyatta just over a year after winning his first term as the country’s fourth president.

Part of China’s transcontinental Belt and Road Initiative, the railway was built by China Road and Bridge Corporation, a subsidiary of China Communications Construction Company, which also won a 10-year contract to make operate trains, passengers and freight.

To forestall any possibility of Kenya defaulting on the loans, China Eximbank drew up an extensive financing plan, which included an agreement that Kenya’s Treasury would allocate annual funds for repayments.

“Kenya should allocate a sufficient amount of funds from its annual budget to pay China Eximbank all amounts due and payable under the loan agreements,” he said.

The agreement specifies that all the clauses of the contract will remain in force until the full repayment of the loan in 2035.

Kenya was also required to take out an export credit insurance policy with Sinosure, the Chinese export credit insurance company, for the commercial loan from Eximbank, at a one-time cost of 113 millions of dollars.

In addition to the annual budget allocations, China Eximbank has asked Kenya to put in place a long-term service agreement – ​​the TOPA – between the Kenya Railways Corporation and the Kenya Ports Authority.

Revenues were to be deposited in an escrow account set up by Kenya Railways, the Treasury and China Eximbank, from which loan repayments would be made. The Kenya Ports Authority is responsible for collecting freight and service charges on behalf of the railway company and depositing them in the escrow account.

To make this work, the Kenyan government has issued policy guidelines to ensure the transfer of freight from road to rail transport. In 2019, importers were ordered to use the railway for goods destined for Nairobi and western Kenya, including goods destined for neighboring Uganda and Rwanda.

TOPA became controversial in December 2018 when Kenya’s Auditor General raised concerns that the terms could cede control of the port of Mombasa if Kenya failed to honor the rail loans.

However, experts said there was nothing unusual as an offtake agreement is a common feature of Chinese deals involving mega-infrastructure contracts.

For the Kenyan auditor, the SGR payment arrangement agreement represented a “significant risk” which the port authority had not disclosed in its financial report.

“[The agreement] in essence means that the revenue from the authority would be used to pay the Government of Kenya’s debt to China Eximbank if the minimum volumes required for consignment are not met,” the Auditor General warned in a 2018 letter to the Kenya Ports Authority.

“KPA’s assets have been exposed since the authority signed the agreement where it was qualified as a borrower.”

Critics have pointed to the problem, describing it as an example of China’s debt-trap diplomacy – accusing China of burdening African countries with unsustainable debt that cannot be repaid, in a bid to seize ports and ‘other assets.

China’s Foreign Ministry said in December 2018 that it had “checked with the relevant Chinese financial institution and found the allegation that the Kenyan side used the port of Mombasa as collateral in its payment agreement. .. is not true”.

This claim was debunked in April this year by researchers from Johns Hopkins University’s China Africa Research Initiative, who said Kenya had not used Mombasa Port assets. as collateral, but had instead used its profitability, dynamism and overall financial capacity to support the SGR project.

The study was led by Deborah Brautigam, professor of international political economy at Johns Hopkins University and founding director of the China Africa Research Initiative.

He found that the take-or-pay arrangement mechanism enabled the Kenyan government to create a bankable project while the main owner of the project, Kenya Railway Corporation, was operating at a loss.

“The SGR project has been carefully and creatively constructed to reduce sovereign default risks and improve the bankability of a project with significant benefits for Kenyans now and in the future,” the study said.

“Instead of serving as security or collateral for the loans, the profitable Mombasa Port was tied to the SGR project as a major client. The port’s only role was to help the Kenya Ports Authority, its owner, to ensuring that a defined level of freight would be transported between Mombasa and Nairobi, the capital of the interior of Kenya.

While the study found that the Kenya Ports Authority had agreed to dip into its revenue to make up the difference if freight levels fell below this level, “KPA faces a risk to its cash flow – not to its ports,” he said.

But the port authority may miss its target, due to President William Ruto fulfilling an election promise to redirect cargo imports to Mombasa for unloading, instead of Nairobi or Naivasha.

The Kenyan Treasury assured the bank that the Railway Development Tax – a 2% levy on all imports – “will act as an insurance in case revenues under the take-or-pay agreement fall below the amount required to repay the loan”.

Kenya has given an “irrevocable agreement” that funds deposited or transferred to the escrow account by its railway company will be paid to China Eximbank. The account is supposed to maintain a minimum balance of US$250 million.

The parties to the agreement have agreed that any dispute that cannot be settled by mutual agreement will be submitted to the China International Economic and Trade Arbitration Commission for arbitration in Beijing.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice on China and Asia for over a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

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