Re­vealed: Hid­den traps in SGR deal

Con­fi­den­tial con­tracts skewed against Kenya and gov­erned by Chi­nese laws give tough con­di­tions that ex­pose na­tional as­sets to seizure

Daily Nation (Kenya) - - FRONT PAGE - BY ED­WIN OKOTH @Ed­win­cowino [email protected]­tion­

Kenya’s key strate­gic as­sets at home and abroad will not be pro­tected by “sovereignty” and risk be­ing seized by the Chi­nese gov­ern­ment should there be a de­fault in re­pay­ing the Stan­dard Gauge Rail­way loan, a copy of the con­tract seen by the Sun­day Na­tion re­veals.

The ini­tial agree­ment for the Mom­basa-nairobi rail­way signed on May 11, 2014 also de­tails how the pact will be gov­erned by Chi­nese laws with all dis­putes be­ing ar­bi­trated in Bei­jing. In ad­di­tion, the con­tract, and a sub­se­quent one on the Nairobi-naivasha phase, also have a con­fi­den­tial­ity clause gag­ging Kenya from mak­ing the deal pub­lic “with­out prior writ­ten per­mis­sion of the lender (China)”.

This comes more than two weeks af­ter Pres­i­dent Uhuru Keny­atta, re­spond­ing to a ques­tion from NTV’S Mark Ma­sai dur­ing a live tele­vi­sion in­ter­view on De­cem­ber 28 last year, promised to re­lease the SGR con­tract to put to rest any “porojo” (ru­mours) that the Chi­nese could seize the Port of Mom­basa.

This week, State House spokesper­son Kanze Dena, in re­sponse to our en­quiries, said the con­tract “can be re­leased any­time, even this week”.

SGR deal

How­ever, the signed SGR deal seen by the Sun­day Na­tion sug­gests the risks go 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, as the case may be in any ju­ris­dic­tion,” reads Clause 5.5 of the Pref­er­en­tial Buyer Credit Loan Agree­ment on the Mom­basa-nairobi SGR.

The con­tract is signed by Na­tional Trea­sury Cab­i­net Sec­re­tary Henry Rotich and Mr Li Riogu, then Chair­man and Pres­i­dent of the State-owned Ex­port -Im­port (Exim) Bank of China.

In the deal, Kenya is also com­pelled to im­port goods, tech­nol­ogy and ser­vices from China.

Ac­cord­ing to ex­perts in­ter­viewed for this ar­ti­cle, the blan­ket ref­er­ence to “any as­set” not only ex­poses the Kenya ports Au­thor­ity (KPA), whose leaked au­dit re­port last month raised ques­tions about its vul­ner­a­bil­ity in case of de­fault, but also al­lows the Chi­nese lenders to take over other crit­i­cal re­sources — any­thing from air­ports and nat­u­ral re­sources to em­bassies abroad.

When we put the im­pli­ca­tions of this clause to Mr Rotich, the Trea­sury Cab­i­net Sec­re­tary gave a terse re­sponse: “Where did you get such in­for­ma­tion? Send me where you got it from. Not aware about such a thing.” The ap­par­ent ex­po­sure of Kenya’s as­sets gets even more cu­ri­ous given the clause that says the loan agree­ment would be “gov­erned by and con­strued in ac­cor­dance with the laws of China”.

The ini­tial SGR loan agree­ment, signed slightly over one year af­ter the Ju­bilee ad­min­is­tra­tion came to power, is also de­signed to be kept se­cret, as cap­tured in clause 17.7 of the loan pact. This raises ques­tions on the Free­dom of In­for­ma­tion re­quire­ments by the Kenyan Con­sti­tu­tion.

“The bor­rower (Kenya) shall keep all the terms and con­di­tions here­un­der or in con­nec­tion with this agree­ment strictly con­fi­den­tial. With­out the prior writ­ten con­sent of the lender (China), the bor­rower shall not dis­close any in­for­ma­tion here­un­der or in con­nec­tion with this agree­ment to any third party un­less re­quired by ap­pli­ca­ble law,” reads the con­fi­den­tial­ity clause.

Con­cerns raised

Af­ter con­cerns were raised last month that KPA could po­ten­tially be seized in case of a de­fault in loan re­pay­ment, Chi­nese of­fi­cials dis­puted the claim in care­fully worded state­ments.

Chi­nese For­eign Min­istry Spokesper­son Hua Chun­y­ing said: “We have checked with the rel­e­vant Chi­nese fi­nan­cial in­sti­tu­tion and found that the al­le­ga­tion that Kenyan side used the Mom­basa Port as a col­lat­eral in its pay­ment agree­ment with the Chi­nese fi­nan­cial in­sti­tu­tion for the Mom­basa-nairobi Rail­way is not true.”

It is a state­ment that could be true if viewed with a nar­row lens, con­sid­er­ing that there is no spe­cific ref­er­ence to the port in the con­tract seen by the Sun­day Na­tion, but the sweep­ing state­ment that makes all as­sets fair game bears the trap. The Chi­nese have re­peat­edly re­jected ac­cu­sa­tions that they were in­volved in debt-trap diplo­macy by bur­den­ing poor coun­tries with un­sus­tain­able loans. On Thurs­day, Ms Dena, the State House spokesper­son, told the Sun­day Na­tion there was no con­fi­den­tial­ity clause block­ing the pub­lic re­lease of the en­tire SGR con­tract.

“It has noth­ing to do with se­crecy, we have been on hol­i­day and we are still set­tling back. There is no diplo­matic bar­rier prevent­ing Kenya from mak­ing the loan deal pub­lic. The doc­u­ment will be made avail­able even this week to ev­ery­one, through the me­dia houses,” Ms Dena said.

Law So­ci­ety of Kenya Nairobi Branch Chair­man Charles Kan­jama said the se­crecy clause is stan­dard for such agree­ments. He is, how­ever, con­cerned the sovereignty waiver on the as­sets and re­ly­ing on Chi­nese laws are signs of doubt by the lender.

“The agree­ment is be­ing made in Kenya, the rail­way is built in Kenya and the as­sets they are talk­ing about are in Kenya, so why is it be­ing gov­erned by the laws of China? Had there been more trans­parency or choices of who funds the rail­way then Kenya may have got a bet­ter deal,” Mr Kan­jama said.

Lend­ing coun­tries

Daly and Inad­mar Ad­vo­cates part­ner and cross bor­der com­mer­cial con­tract spe­cial­ist Shi­tul Shah said lend­ing coun­tries only ask for col­lat­eral when they had ques­tions on the “cred­i­bil­ity” of the bor­rower

But even more in­trigu­ing is the clause in the con­tract that says any dis­putes on the loan would only be re­solved in Bei­jing through the China In­ter­na­tional Eco­nomic and Trade Ar­bi­tra­tion Com­mis­sion (Cietac).

“The ar­bi­tra­tion award shall be fi­nal and bind­ing on both par­ties. The ar­bi­tra­tion shall take place in Bei­jing,” reads the agree­ment, ef­fec­tively block­ing other in­ter­na­tional com­mer­cial dis­pute res­o­lu­tion av­enues.

Kenya has fur­ther signed never to dis­pute the choice of Cietac as an ar­bi­tra­tor and to take its de­ci­sion.

Mr Shah said al­though par­ties to a con­tract have the free­dom to agree on which law would gov­ern the agree­ment, China’s choice of the ar­bi­tra­tor and the spec­i­fi­ca­tion that the ar­bi­tra­tion would he held in Bei­jing is “sus­pect”.

“Nor­mally, you would need an in­de­pen­dent ar­bi­tra­tor, be­cause this is about me­di­a­tion, which should be made neu­tral and im­par­tial by all means. Spec­i­fy­ing the me­di­a­tor and the un­neu­tral ground to carry out the me­di­a­tion is sus­pect. This can be chal­lenged in law,” Mr Shah, who also prac­tices in New York and Lon­don, told the Sun­day Na­tion.

Where did you get such in­for­ma­tion? Send me where you got it from. Not aware about such a thing.” Trea­sury CS Henry Rotich

Other ex­perts with knowl­edge of Kenyan gov­ern­ment con­tracts, who spoke in con­fi­dence, said a neu­tral coun­try or or­gan­i­sa­tion is usu­ally pre­ferred. One gave the ex­am­ple of a con­tro­ver­sial Sh30 bil­lion pipe­line se­cu­rity com­mer­cial con­tract Kenya signed in 2017 with the Is­raeli com­pany Rafael Ad­vanced De­fense Sys­tem lim­ited whose ar­bi­tra­tion clause nom­i­nates Lon­don.

In the SGR con­tract, the Exim Bank also makes it a manda­tory re­quire­ment that the com­mer­cial loan be in­sured by the China Ex­port and Credit In­sur­ance Cor­po­ra­tion (Si­nosure). All charges re­gard­ing the man­age­ment of the loan, which run into bil­lions of shillings, are to be paid by Kenya.

Apart from the $1.6 bil­lion com­mer­cial loan and $1.6 bil­lion con­ces­sional loan from the China Exim Bank to build the first phase of the SGR, sev­eral other loan deals have been signed, stir­ring de­bate on Kenya’s abil­ity to re­pay.

The on­go­ing sec­ond phase of the SGR be­tween Nairobi and Naivasha, costs at least Sh160 bil­lion. The deal signed in De­cem­ber 2015 is sim­i­larly skewed against Kenya. The phase be­tween Naivasha and Mal­aba, whose fund­ing has not been se­cured, is ex­pected to cost Sh500 bil­lion. Like the first phases, this would in­clude sup­ply of lo­co­mo­tives, wag­ons and coaches.

How­ever, the fi­nan­cial vi­a­bil­ity of the SGR pas­sen­ger and freight ser­vice has re­mained a sub­ject of de­bate since its launch in May 2017. CRBC, the Chi­nese op­er­a­tor of what is the big­gest sin­gle in­fra­struc­ture project since in­de­pen­dence, is re­port­edly paid at least Sh1 bil­lion per month to run the ser­vice.

Au­di­tor-gen­eral Ed­ward Ouko is yet to re­lease any re­port on the SGR as re­quired by law for a project of such mag­ni­tude (see sep­a­rate story). His of­fice did not im­me­di­ately re­spond to our en­quiries on whether there was any au­dit re­port for the project that started in 2014.

Aware of the heavy bur­den the project was go­ing to have on a de­vel­op­ing econ­omy like Kenya’s, the Chi­nese ne­go­tia­tors made sure they were well pro­tected.

For ex­am­ple, the agree­ment spec­i­fied a ‘take-or-pay’ ba­sis agree­ment with KPA, en­sur­ing com­mit­ment to have cargo from the port trans­ported on the rail­way line to guar­an­tee its use and rev­enues.

SGR cargo

Be­fore the deal was sealed, Kenyan ne­go­tia­tors found it hard to as­sure China that in­deed most cargo would pass through the SGR.

In a com­pro­mise, the gov­ern­ment sad­dled KPA with long-term Ser­vice Pur­chase Agree­ment and a ‘take or pay’ deal with Kenya Rail­ways Cor­po­ra­tion to fa­cil­i­tate ef­fi­cient move­ment of cargo and at­tract busi­ness for the rail­way.

"This is a key is­sue for the Bank,’’ Exim bank of­fi­cials said dur­ing the ne­go­ti­a­tions in a strat­egy that put the port at the cen­tre of the deal.

Yes­ter­day, Trans­port and In­fra­struc­ture Cab­i­net Sec­re­tary James Macharia said there was no cause for alarm.

“KPA guar­an­teed the quan­tum of cargo to be fer­ried by SGR vide the "Take or Pay" Agree­ment in or­der to en­sure its fi­nan­cial vi­a­bil­ity. Al­ready the vol­ume of cargo is way ahead of the an­tic­i­pated quan­tum. For ex­am­ple, the op­er­a­tion has hit 15 train pairs in a day, which was the pro­jected vol­ume by mid 2019. Fur­ther, with the on­go­ing in­vest­ment in clinker and bulk cargo han­dling, the ac­tual turnover will out­strip pro­jec­tions over the life of the loan re­pay­ment pe­riod, thus re­sult­ing in ex­cess cash flows and re­serves. This will mit­i­gate any loan re­pay­ment risks on a sus­tain­able ba­sis,” he said.

But in an­other strat­egy to se­cure the Chi­nese lenders, ac­cord­ing to the con­tract, two es­crow ac­counts were set up with full con­trol of the Chi­nese es­pe­cially at de­fault or when rail­way rev­enues fail to meet the loan obli­ga­tions.

The agree­ment states that while the rev­enue ac­count would be in Kenya Shillings, the re­pay­ment one would be in US Dol­lars. Any costs as­so­ci­ated with the run­ning of the ac­counts are to be borne by Kenya.

One al­ter­na­tive source of fund­ing for Kenya to cover its part in fi­nanc­ing was agreed to be the es­tab­lish­ment of the Rail­way De­vel­op­ment Levy on all im­ports into the coun­try.

The gov­ern­ment also in its fi­nanc­ing model for the project would ini­ti­ate road tran­sit toll levy, green tax in new ve­hi­cle reg­is­tra­tion and an in­sur­ance levy, fuel levy and the sale of the cur­rent Me­tre Gauge Rail­way — as­sets es­ti­mate to be ca­pa­ble of rais­ing Sh41 bil­lion.

There would also be var­i­ous port levies on im­ports and ex­ports in ad­di­tion to a road haulage tax to dis­cour­age the use of trucks and di­vert some cargo to the rail­way.

The Chi­nese lender, ac­cord­ing to the con­tract, has the pre­rog­a­tive to

open an ac­count in Kenya’s name and keep records of the loan bal­ance. Kenya, which has lit­tle con­trol over the ac­count, is ex­pected to ac­cept the bank records as the out­stand­ing bal­ance.

Fur­ther, the deal stip­u­lates that even if Kenya gets al­ter­na­tive funds to off­set the loan in lump­sum, the Chi­nese bank has the right to refuse such pay­ment or give con­di­tions be­fore ac­cept­ing. This op­tion would also re­quire ad­vance no­tice, mak­ing the loan hard to buy off.

Some of the skewed clauses ap­pear to have been no­ticed years be­fore the ac­tual agree­ment was signed but the warn­ings were ig­nored — be­fore those who raised the is­sues later changed tune.

One such per­son was then KRC manag­ing di­rec­tor Nduva Muli, who would later be ap­pointed Prin­ci­pal Sec­re­tary in the Trans­port when the Ju­bilee ad­min­is­tra­tion took over be­fore be­ing forced out in 2015 over cor­rup­tion al­le­ga­tions.

Af­ter re­ceiv­ing bud­get al­lo­ca­tion in 2011 to con­duct a fea­si­bil­ity study, Trans­port Per­ma­nent Sec­re­tary Cyrus Njiru abruptly blocked the process.

“I have there­fore been di­rected to ad­vise you not to go ahead with the study as this is not con­sis­tent with the con­sen­sus within gov­ern­ment,” the PS wrote.

In a memo (No. 3073) to the Board of Di­rec­tors, Mr Muli warned that Kenya would get a bad deal if it did not carry out its own fea­si­bil­ity study to find out the most suitable route, cost and fi­nanc­ing modal­i­ties, in line with “nor­mal prac­tice in in­fra­struc­ture projects”. Other im­por­tant as­pects would be en­vi­ron­men­tal im­pact, rolling stock re­quire­ments and pro­jected traf­fic data.

But Mr Muli would later re­alise the Chi­nese had been se­cretly con­duct­ing their own fea­si­bil­ity study and his March 16, 2008 let­ter was three months late. He re­ceived their re­port six days later. Nev­er­the­less, he made his point.

Rail­way ben­e­fits

“The gov­ern­ment does not have in­for­ma­tion to safe­guard its in­ter­est dur­ing ne­go­ti­a­tion of the pro­posed G-to-g (gov­ern­ment-to-gov­ern­ment) ar­range­ment and also dur­ing con­struc­tion to en­sure the en­vis­aged spec­i­fi­ca­tions and ben­e­fits of the new rail­way line are achieved,” he wrote to the board, claim­ing Kenya Rail­ways had been side­lined.

When Kenya Rail­ways fi­nally gave its as­sess­ment of the Chi­nese study, it was scathing. The Chi­nese were overly op­ti­mistic. There were no mar­ket study or fi­nan­cial mod­el­ling re­ports to in­di­cate vi­a­bil­ity. The study also lacked an en­vi­ron­men­tal and so­cial as­sess­ment.

Kenya Rail­ways anal­y­sis pointed out that the pro­jected cost was higher per kilo­me­tre and the speed was slower for both pas­sen­ger and freight ser­vices.

The Kenyan ex­perts also noted: “The study ap­pears to be gen­er­ous with bridges/tun­nels form­ing 7.2 per cent of the to­tal length of the line (in­clud­ing 60 long bridges). In ad­di­tion, it is also over-gen­er­ous with the num­ber of sta­tions. This could have in­flated the cost of the line.

“A rail­way (un­like a road) must be de­signed, built and op­er­ated as a busi­ness for prof­itable tak­ing in or­der to avoid the ex­pen­sive in­vest­ment turn­ing into a white ele­phant. The study by CRBC falls short of de­liv­er­ing a bank­able project.”

The warn­ings were never heeded. A year af­ter com­ing to power, Pres­i­dent Keny­atta’s ad­min­is­tra­tion would seal the deal, dis­miss­ing all con­cerns.

The cost, which was first set at Sh220 bil­lion, later jumped to Sh327 bil­lion as pub­licly avail­able in­for­ma­tion on the real amount kept chang­ing. Land ac­qui­si­tion costs would also climb ten times to Sh30 bil­lion. Mr James Shik­wati, who runs an African think tank on pub­lic pol­icy, says China’s deals with a coun­try de­pend on how the lead­ers present them­selves on the ne­go­ti­a­tion ta­ble. He blames Kenya’s ‘ten­der­preneur’ cul­ture by the elites for the bad deal.

The In­ter Re­gion Eco­nomic Net­work founder said China in­vests in the US and Eu­rope and the con­tracts they en­ter into are fairer, a con­cept he refers to ‘wa­ter tak­ing the shape of the bot­tle’. In other words, the Chi­nese sim­ply play along the way the hosts al­low.

“It is time we start chang­ing our po­lit­i­cal elite ecosys­tem where peo­ple only care about their cut in the deal and it doesn’t mat­ter whether it is vi­able or how ex­pen­sive it is,” Mr Shik­wati told the Sun­day Na­tion.

China is now Africa’s sin­gle largest trad­ing part­ner and con­tin­ues to bag and fund mega in­fra­struc­ture projects.


Chi­nese work­ers stand at the con­struc­tion site of Stan­dard Gauge Rail­way (SGR) dur­ing the Pres­i­den­tial In­spec­tion of the SGR Nairobi­naivasha Phase 2A project in Nairobi, Kenya, on June 23, 2018.


Pres­i­dent Uhuru Keny­atta (left) con­fers with Trans­port and In­fra­struc­ture Cab­i­net Sec­re­tary James Macharia dur­ing a rou­tine in­spec­tion tour of the Stan­dard Gauge Rail­way project.


The rail­way line is run by a Chi­nese com­pany.

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