The Kenyan government used the Mombasa port to secure the multibillion-shilling loan it took from China Exim Bank to build the standard gauge railway (SGR), leaving the cash-flush Kenya Ports Authority (KPA) exposed to seizure by the Chinese in the event of a default.
A leaked report by the Auditor-General's office shows that the Kenyan government had in 2013 waived the port’s sovereign immunity in order to use it as a security for the Chinese loan.
Auditor-General Edward Ouko refused to confirm or deny the authenticity of the document, which was widely circulated on digital platforms, insisting that his reports are officially submitted to Parliament and not to the public through social media.
“Any reports that from my office are taken to Parliament. A report picked from the social media is not official,” said Mr Ouko, even as he evaded the questions on the authenticity of the document.
The KPA management had up to November 27 to respond to the audit queries raised, according to the leaked report.
The auditors found that the KPA’s assets were committed as collateral for the Ksh327 billion ($3.3 billion) SGR loan that China gave Kenya in 2013.
Treasury, State House
The Ministry of Transport, the Treasury and State House are believed to have played key roles in brokering the deal, which was sealed during President Uhuru Kenyatta’s visit to Beijing.
The leaked document says that China Exim Bank gained power to step in as principal shareholder of the KPA in the event of a loan default, setting up an escrow account for the agency’s proceeds and using the collected revenue to cover the loan repayment shortfall.
The KPA generated Ksh42.7 billion ($427 million) in revenue in the year to June 2017, a 7.9 per cent growth over the previous year, according to its latest financial reports.
“KPA assets are exposed since it signed the agreement where it has been referred to us a borrower under clause 17.5, and any proceedings against its assets by the lender would not be protected since the government waived immunity on the KPA assets by signing the agreement,” the National Audit Office’s letter to the KPA management dated November 16 says.
Ironically, it is the Kenya Railways Corporation — not the KPA — which owns SGR assets and oversees its running as a transport business that is supposed to generate revenue for loan repayment.
Both the SGR passenger and freight service, which commenced last year, are yet to generate even half the revenues anticipated in the feasibility studies, raising fears over Kenya’s ability to service the loan.
Githu Muigai, the Attorney-General at the time of signing the loan deal, did not respond to queries on the matter.
James Macharia, the Transport and Infrastructure Cabinet Secretary, dismissed the report as untrue.
“You know this cannot be true, the idea of waiving a country’s sovereignty. So let’s not dwell on it,” Mr Macharia said.
In addition to the loan, China also provided raw materials, engineers and rolling stocks for the SGR project.
And when the SGR cargo and freight business was launched last year, Kenya once again assigned that task to a Chinese firm, the China Communications Construction Company.
The leaked document shows that the Auditor-General’s office has questioned what it sees as a lopsided contract, adding that “the agreement is biased since any non–performance or dispute with the China Exim Bank would be referred to arbitration in China whose fairness in resolving disagreement may not be guaranteed.”
Of the Chinese loan for the Mombasa-Nairobi track, a total of Ksh319 billion ($3.2b) was spent directly on railway construction, with Ksh213 billion ($2.1b) going to SGR and the rest of it being used in buying the rolling stock (locomotives and wagons).
The loan, whose interest charge floats at 3.6 percentage points above the six months average of London Inter-Bank Offered Rate (Libor), is to be repaid in 15 years with a grace period of five years.
That means the first principal repayment is expected next year and is the basis of growing concern over insufficient cash that the railway is generating from freight and passenger service.
In September, rating agency Moody’s listed Kenya among countries at the highest risk of losing strategic assets to China over a pile of debt.
Chinese debt stood at Ksh554.88 billion ($5.55 billion) or 73.4 per cent of Kenya’s bilateral debt totalling Ksh756.28 billion ($7.56 billion) at the end of September.