Is Kenya dropping China loans for private deals?

Sunday September 8 2019

Phase 2A of Kenya's standard gauge railway line from Nairobi-Naivasha.

Phase 2A of Kenya's standard gauge railway line from Nairobi-Naivasha. The project was financed by the Chinese. PHOTO | AFP 

AGGREY MUTAMBO
By AGGREY MUTAMBO
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Is Kenya shifting its engagement with China from “loans diplomacy” to private investments?

This past week’s visit to Nairobi by Yang Jiechi, the special envoy of Chinese President Xi Jinping, appears to suggest a recalibration of relations between Nairobi and Beijing.

Mr Yang, a member of the Political Bureau and director of the Office of the Foreign Affairs Commission of the Central Committee of the Communist Party of China avoided any mention of additional loans to Kenya.

Instead, both President Uhuru Kenyatta and the Chinese envoy talked of attracting “private investments” as a way of supporting local firms.

The two also discussed the efficient operation of the standard gauge railway (SGR) and development of the economic belt and industrial park along the railway to make the massive Chinese-funded investment more viable.

Mr Yang, whose Africa leg of the trip included Nigeria and Sierra Leone, was in Nairobi on the invitation of the government. His visit comes at a time Kenyan officials are fighting back criticism on the ballooning public debt, which stood at $540 billion in August. Nairobi owes the Chinese about $6 billion. Kenya has also taken out three Eurobonds in the recent past.

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That appetite for debt has attracted criticism, with observers pointing out that borrowing should be limited to projects that are self-sustaining.

INVESTMENTS

President Kenyatta seemed to have taken cue this week.

"We need to really now focus on how we can get our private sector and investors to work closer together,” he told Mr Yang in Nairobi. “How do we attract Chinese investors, manufacturers, industrialists and other business people to invest in Kenya?"

Principal Secretary in Kenya’s Ministry of Foreign Affairs Macharia Kamau said it is time the private sector took advantage of the government’s infrastructure development to expand businesses.

“Kenya has always been a private sector haven. All the president was trying to emphasise is that now that the government has put the core infrastructure in place, it is the responsibility of private sector to get involved in building ancillary infrastructure and the businesses that need to grow around it,” said Mr Kamau in an interview.

Being part of the general “Economic Diplomacy” policy launched in 2013, the shift, another ministry official said, was to help stabilise the economy and ease future debt repayments.

“If the private sector is supported to come on board to invest in projects that can utilise existing infrastructure, then it will help make those facilities viable,” an official speaking on the background said.

The Chinese say they are willing to support any ventures that could help rebuild relations, signalling a convergence of interest to shift economic interaction.

A spokesperson of Chinese ambassador to Kenya Mr Wu Peng, told The EastAfrican that China is still interested in making Kenya a part of its “Belt and Road Initiative,” but will only enter into projects that are viable.

Kenya’s call for support to the private sector was indicative of retaining wealth in the country, some experts said.

“There has to be a shift from borrowing to injecting foreign direct investment,” said Prof Peter Kagwanja, chief executive of Nairobi think-tank Africa Policy Institute. “The SGR and other heavy investments can only pay themselves if they have goods to carry. These are exports and imports that will come from investments by the private sector by Kenyans and Chinese.”

CHINA-AFRICA RELATIONSHIPS

But the choice of the railway in explaining the new focus may reflect an admission by China that loans extended to merely finance projects could backfire on Beijing. The SGR for example made a loss of $100 million in the first year of operations and its prospects look grim as long as the import/export haul remains low.

At the end of the Forum on Africa Co-operation (Focac) Summit in Beijing last December, Beijing pledged to pump $60 billion into Africa, but segmented the cash into portions of loans, credit lines to private firms, grants to governments as well as in kind support.

“China will encourage Chinese companies to make at least $10 billion of investment in Africa in the next three years, support Chinese companies in Africa to forge alliance of corporate social responsibility and support Africa’s efforts to harmonise policies pertaining private sector investment,” President Xi Jinping pledged.

With Focac directly linked to the global Belt and Road Initiative, Beijing also tightened its standards of accountability in a bid to rid itself of accusations it was fuelling corruption in Africa.

“The strategy to extend the China-Africa relationships beyond nation states is welcome. Chinese debt financing has remained high as Chinese investors shun investment opportunities in Africa,” said Clement Onyango, the director of the Nairobi-based trade advocacy group CUTS Africa Resource Centre.

Going by global trends, he said, Chinese investors are also looking “to relocate their bases to enhance their sales, as seen in motorbike sales in Africa for example.”

But with most financiers still afraid of investing into Africa, Mr Onyango said, co-operation between China and Kenya on a private investment programme could help provide guarantees, pooling investors into the country.

“Enhancing partnerships in foreign exchange-rich value chains like avocado processing would have a direct impact on our balance of trade. The partnership could be improved to go beyond the traditional raw material export through value chain escalations,” he told The EastAfrican.

President Kenyatta said infrastructure projects built by the Chinese had opened up the region and were good for attracting investors.

Experts think this change of tack is timely.

“Attracting Chinese investors to pitch tent in Kenya is a welcome strategy. The only challenge is that the DNA of global economies is shifting to intelligent machine-managed systems,” said James Shikwati, the director of Inter Region Economic Network which promotes free trade.

INCENTIVES

China, he added, has been migrating from labour intensive light manufacturing to high-tech production. That could give hope to Kenya, as long as it rights its policies, including reducing red tape and corruption as long as ventures do not involve public-private partnerships which he argued could be costlier.

Ranked 61 out of 190 on the 2019 World Bank Ease of Doing Business, Kenya has marketed its legal reforms and conducive environment as key to attracting investors. Diplomats around the world are advised to frequently explain it is “easier” to get a business registered, that there is enough electricity and that paying taxes, enforcing contracts and security are adhered to.

Yet critics say bureaucracy in Kenya is a deterrence.

“While the President talks about attracting investors, the bureaucrats under him read from different scripts,” said George Mucee, the practice leader at Fragomen-Kenya, a migration consultancy firm in Nairobi.

“We need to assure them of certainty in government processes like investment permits, enforceability of contracts and government protection against fraudsters,” he added, referring to land transactions especially where some foreigners have been conned.

Taxation incentives, as well as implementation of the special economic zones could add to the incentive, he argued.

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TRADE NOT AID

In global dynamics, trade not aid, is becoming popular.

The UK Department for International Trade announced in July it will use a portion of its £14 billion ($17.2 billion) aid budget to “provide training opportunities for government bureaucrats for skills “that will attract investment into their country.”

At the World Economic Forum Africa summit in Cape Town this past week, Ugandan President Yoweri Museveni said: “By supporting and facilitating growth of trade and business, Africa will attain sustained peace courtesy of a middle class whose focus is on interests (horizontal issues) rather than identity that dominates pre-capitalist societies (vertical issues).

At the 7th Tokyo International Conference on African Development, Japan and Africa agreed on the importance of co-operating on issues such as quality infrastructure, private sector impact investment, industrialisation and economic transformation.

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