Even as the controversy that has greeted the disclosure by Transport Cabinet Secretary Kipchumba Murkomen of confidential Standard Gauge Railway loan contracts between Kenya and China Exim Bank continues to rage, The Weekly Review
Coming against the backdrop of a recent pronouncement by Murkomen that the Kenya Kwanza administration of President William Ruto plans to extend the SGR to Malaba through Kisumu, the revelations have brought to the fore the issue of whether Kenya still has the capacity to take on more Chinese debt and what the extension of the line to Malaba would entail for Kenya in terms of aggravating the country’s external indebtedness.
Murkomen earlier this month observed that the SGR has to reach the Kenya-Uganda border to serve its purpose. He cautioned, however, that this would depend on the availability of funds.
“This project will only make sense when it goes past Naivasha as compared to the current situation where we are forced to transport goods by the lake, instead of through the Kisumu port,” he offered.
In just over 10 years, loans from China have grown exponentially and to a level where China now holds 20 per cent of Kenya’s external debt stock, the third on the queue after the World Bank and the Eurobond holders, but much bigger than the share held by the African Development Bank, PTA Bank and the International Monetary Fund.
As at June 30, 2021, according to the recently published annual debt report, amounts outstanding on loans from China Exim Bank alone came to a whopping Sh759 billion.
With an economy that constantly runs a merchandise trade deficit and that relies on the little export earnings from coffee, tea, tourism, flowers and diaspora remittances, Kenya will be hard-pressed were the new administration of President Ruto to insist on proceeding with extension of the line.
According to the Cabinet memo, the massive loan that the Kenyatta administration had approved was for building a length totalling to 216.3 kilometres, including an 8.9km branch line to a greenfield port that was to be built in Kisumu as part of the project.
The details in the Cabinet memo show that the $4.8 billion figure is a lump sum, inclusive of civil works, 35 locomotives (29 mainline locomotives, four for passenger services and two for shunting), 724 wagons and 64 passenger coaches.
The plan was to electrify this section of the SGR. The memo discloses that the cost of electrification of the line was estimated at 20 per cent of the cost of civil works. The background of the plan by the previous administration to extend the line to Malaba through Kisumu is narrated in the document as follows.
After Mombasa to Naivasha had been completed, the Kenya Railway Corporation (KRC) signed a memorandum of understanding with the Chinese EPC contractor, China Communication Construction Company (CCC), to undertake a feasibility study and preliminary designs for the Naivasha to Malaba section, following which a ministerial committee was set up to review the feasibility study.
As at February 2016, the commercial contract for civil works and rolling stock had been concluded and approved by the KRC board.
The understanding was that the commercial contracts would only become effective after successful negotiations with China Exim Bank and when the plans had reached financial closure.
Two additional separate commercial contracts were planned: first, a US$140 million contract for the Kisumu port, and secondly, US$233 million to fund expansion and modernisation of the Embakasi Container Terminal that was to be built by China Road and Bridge Corporation.
At a meeting on September 18, 2015, the Cabinet had approved the preferred route for the extended line to Malaba through Kisumu: it would run from Naivasha through Narok, on to Bomet and up to Kisumu, then from Kisumu through Yala to Bumala and Malaba.
The decision by the Cabinet to divert the route away from the Central Rift Valley corridor through Nakuru to Narok was a significant development because talk about town at that time was that politically influential elite had, on learning about the new route, gone on a buying spree of land along the route in anticipation of hefty compensation payments.
According to the Cabinet memo, the budget for acquisition of land along the route of the railway line was set at an estimated figure of a whopping Sh8 billion.
Which is why speculation is rife that the land-grabbing elites are among the forces pushing the government to extend the line.
Meanwhile, the release this week of the confidential SGR loan contracts by Murkomen was greeted with scepticism , with critics insisting that the minister should have disclosed more SGR contracts including those for civil works and the ones for the EPC contractors.
Yet, in reality, Murkomen’s disclosures had in many ways struck a blow for transparency around the hitherto secret contracts. Indeed, the real contentious issues around Chinese contracts and loans have all along been three: the secretive nature of the loans, the debates around the China debt trap narrative and whether Chinese loans are more expensive than loans borrowed from the West.
Murkomen’s disclosures were keenly awaited because the expectation was that the minister would reveal new facts to forever settle the vexed question around whether or not the port of Mombasa was at risk of being confiscated by the Chinese if Kenya failed to pay up.
It remains to be seen whether the furore that erupted will force the minister to publish two key agreements relevant to the Mombasa Port question, namely, the ‘take or pay agreement’ between the Kenya Ports Authority and KRC, and the Escrow agreement.
To illustrate just how much Chinese loans come with stringent terms, here are highlights of the terms of one of the three loan agreements disclosed by Murkomen that covered the Nairobi-Naivasha section that was signed in December 2015.
With a tenure of 20 years, one would assume that this facility was the typical long-term loan with a generous grace period and fairly-priced interest rates.
It has a grace period of five years and attractsinterest rates at a floating rate, with a margin of three per cent above Libor that calculates to about 3.5 per cent, considering the prevailing Libor rate at the time the contract was signed.
But, as the saying goes, the devil is in the detail. Included in the terms is a condition that interest is to be calculated in six-month periods instead of the conventional 12 months. The implication is that over the 20-year period, the effective interest rate on this loan will be much higher.
There are two other significant terms in the loan agreement: a management fee of 0.5 per cent of the facility and a commitment fee on the undisbursed amount of 0.5 per cent, which must be cleared by the end of the grace period.
But what was not disclosed in the contracts Murkomen put out that makes the Chinese loans even more expensive is the cost of insurance.
The agreement states that the government must make an upfront payment of an insurance premium at 6.93 per cent premium payable in two instalments to the China Export Credit and Insurance Corporation (Sinosure). Calculated, this figure comes to 15 per cent of the total contract amount. Effectively, this means that the Chinese take back 15 per cent of the loan amount upfront.
Kenya’s appetite for Chinese loans in the last ten years has been unprecedented. The government has also borrowed heavily for projects of little economic impact — such as procurement of equipment for the National Youth Service and drilling materials — from China.
Going through the external debt register, the Kenya’s borrowing from China ranges from loans for buying MRI equipment, procuring of power materials and rehabilitation of technical institutes to modernisation of Kenya Power distribution systems and building of Kenyatta University.
It is a reflection of the power and influence the Chinese companies wield. Indeed, Chinese EPC contractors are adept at putting deals together and getting financing approved by the Treasury. This is the way the game is played: A Chinese contractor, with his local allies and agents, approaches a CS or parastatal MD to hawk a project that he has conceived and which has not been budgeted for by Parliament.
The contractor comes with a promise to arrange financing. An MoU is hurriedly signed between the contractor and the CS or parastatal boss. Then follows a commercial contract between the parastatal or its parent ministry and the contractor.
Finally, the National Treasury is invited to sign financing agreements with Exim Bank of China. This way, a new project funded by the Chinese will have entered the budget. This is how the SGR projects came about.
Why do corrupt elite prefer the route of introducing projects through these shady MoUs and commercial contracts to the conventional competitive procurement route?
It makes it easy to conspire with the Chinese to push a project into the government’s spending programme even when it has no money for it.
Secondly, since the deal can be procured and concluded without subjecting the project to international competitive bidding, the greedy elite are able to pad the budgets of the project with as many backhanders and kickbacks as they choose.
