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China-backed railway agreement puts Kenya’s sovereignty at risk

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Kenya, the largest economy of East Africa, is on the verge of falling into a debt trap and losing a part of its sovereignty to China thanks to unscrupulous and dodgy deals it had to be agreed with in order to secure funds for construction of a railway line between port city Mombasa and Nairobi.

In June 2020, the Court of Appeal ruled that the engagement of China Road and Bridge Corporation (CRBC) as the contractor for the railway project was amounted to violation of the Constitution of Kenya as well as the Public Procurement and Disposal Act.

There have been doubts in minds of Kenyan people for long time about country’s key strategic assets could be seized by China should there be default in repaying the loan taken for Mombasa-Nairobi Standard Gauge Railway (SGR), a part of China ambitious Belt Road Initiative (BRI).

The railway line would offer China easy access to Central Africa through Mombasa, a strategically important port on the Indian Ocean as well as South Atlantic Ocean in the future. China is certainly interested in Mombasa port since almost all neighbouring countries on it for deliveries of goods and access to international markets.

Earlier, the fears were restricted to losing Mombasa port. However, the leaked documents show the risk is beyond the port. “Neither the borrower (Kenya) nor any of its assets is entitled to any right of immunity on the grounds of sovereignty or otherwise from arbitration, suit, execution or any other legal process with respect to its obligations under this Agreement,” reads the clause 5.5 of the Preferential Buyer Credit Loan Agreement on the Mombasa-Nairobi SGR.

The blanket reference to “any asset” exposed vulnerability of Kenya in case of default as Chinese can take over critical sources such as airports, natural key resources or even diplomatic missions abroad. Global ratings firm Moody’s Investor Service also has raised concerns over Kenya losing strategic assets to China over the pile of debt it owes Beijing.

Interestingly, the clauses of the loan pact not just bars Kenyan government from sharing the details with people but also asserts the agreement would be “governed by and construed in accordance with the laws of China”. Beijing government has repeatedly rejected accusations that are involved in debt-trap diplomacy by burdening poor countries with unsustainable loans. However, one of the clauses offers China “right to refuse” any payment Kenya manages to secure to offset the Chinese loan in lump sum.

The amount of Chinese loan taken by Kenya has increased tenfold since the launch of BRI in 2013. According to Kenya National Bureau of Statistics and Kenya National Treasury, China’s share of Kenya’s bilateral debt was 24 percent in 2013. In next five years, the share increased to 72 percent. In January 2020, Kenya’s debt to China stood at Ksh 693 (USD 6.47 billion) from Ksh 80.9 billion (USD 756 million) in 2014.

Kenya’s debt stock: External


Source: Budget Statement for 2018/19, Government of Kenya

The contract to operate trains on the Mombasa- Nairobi railway line is awarded to a Chinese company called Africa Star Railway Company by paying it a hefty sum. However, the detail about the deal has been kept secret. China had claimed that the USD 3.8 billion Mombasa- Nairobi SGR would reach break-even point by 2020.

Kenya is supposed to repay the Chinese loan with the revenue generated through passenger tickets and freight charges. However, the railway line would make Ksh 10 billion against running costs of KSH 12 billion, as per Kenya National Bureau of Statistics (KNBS), thus increasing the taxpayers’ burden as well as plunging the country into massive debt.

Kenya’s parliament has warned that the country is falling behind in its debt service payments for the SGR line. Kenya is supposed to pay USD 888 million in interest and principal instalments to pay off Chinese loans. In its fiscal year 2020-2021 budget report, the National Assembly’s Budget and Appropriations Committee has said that the Kenya Railway failed to pay USD 357 million to Africa Star Railway Company.

Member of Parliament Kimani Ichung’wa said payments are not made, the Chinese operator would pull out of the daily operations, passenger and cargo trains, and thus aggravating financial burden further.

The possibility of such disastrous situation was prophesied by many before 2014. Among them was Nduva Muli, former managing director of Kenya Railway Corporation. Muli had warned about a bad deal after Kenya government ignored carrying our own feasibility study to find our appropriate route, financial modalities, cost and revenue.

Interestingly, Chinese carried out own feasibility study secretly but it lacked market study or financial modelling reports to indicate viability. The study also lacked an environmental and social assessment. The Kenya Railway had also raised concerns over the higher projected cost, which was endorsed by rail experts as well. However, Chinese were overly optimistic and managed to convince Kenya government to go ahead with the plan.

Were not Chinese aware about possible fall in revenue? The overall behaviour of Beijing in this episode raises doubts over its intentions. Two escrow accounts were established in order to safeguard lenders in the wake of default by Kenya. However, both accounts were set up with full control of Chinese, a clear departure from the global norm of hiring a neutral party.

Even if there is dispute, Kenya would have no option but to agree with Beijing’s terms as one clause in the Mombasa- Nairobi loan pact says any disputes on the loan would only be resolved in Beijing through the China International Economic and Trade Arbitration Commission (Cietac). And shockingly, Kenya has been made to sign that it would never dispute the choice of Cietac as an arbitrator and to take its decision.

If one studies the clauses in the loan agreement in detail, one could easily come to conclusion that Kenya would not be able to repay loan and thus allowing China to seize Kenyan assets.

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