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The future of State capture: Lessons from the Standard Gauge Railway

Friday December 20 2019

By LUIS FRANCESCHI
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As every decade comes to a close, we are forced to look back as some of its most defining moments. 2020 will mark ten years since the inauguration of the new Constitution, and we ask ourselves, has our fate changed?

If the country’s collective psyche were to introspect on some of this decade’s most significant moments, the growing infrastructural drive would feature prominently.

Maybe, the Standard Gauge Railway (SGR) would dominate the discussion. There has been nothing as polarising in the public mind as the SGR has been. One could even argue that the SGR single-handedly ushered in the new era of government projects.

The economic viability of the project elicited much conversation. Support for the railway has fluctuated over time while the voices of dissent grow more tumultuous. None has been as consistent and eloquent in discounting the project’s promise as Dr David Ndii.

His column has relentlessly questioned the railway’s capacity to freight the projected 22 million tonnes a year that would in turn yield enough return to pay China back the initial 3.2 billion dollars loan.

The project’s first phase (Mombasa to Nairobi) was said to cost 11 per cent of the government’s revenue and 5.4 per cent of the country’s GDP. The entire railway (Mombasa to Malaba) would cost 73 per cent of government revenue and 15 per cent of the country’s GDP. The country’s public debt would increase by at least 4 per cent at completion of the project.

Despite such madness, there was much fanfare at the start of the project.  Many are however, now disillusioned with its second phase. Kenya failed to gather all the funds required for its second phase and the railway, now taunted as the “railway to nowhere”, terminates at Suswa, 418 kilometres from its intended destination – Malaba.

Notwithstanding the current vexation with the project, the truth is that there are many more pressing concerns. While the project was sold to the public as capable of repaying its own debt, the projected 22 million tonnes freight that would make such an endeavour possible has proven illusory.

According to the Kenya Institute for Public Policy Research and Analysis (Kippra), the operational capacity of the railway is at 9.75 million metric tonnes – less than half of that projected. The SGR is and will continue to incur an unmitigated cost to the public purse.

Most of us now realise with trepidation that we might have borrowed our way into a most devastating outcome. The reality of this mountainous debt and the dysfunctional infrastructure it has given us is not just a creation of institutions weakened over time but also a culmination of the art of manipulation of law.

The Standard Gauge Railway – An East African perspective

To appreciate the full cost of the SGR, we need to compare it to its Tanzanian and Ethiopian counterparts. We then juxtapose these against what has been hailed as Europe’s most expensive infrastructural project: The UK Crossrail project costs $23 billion, more than six times the cost of the Mombasa-Nairobi SGR.

Data sourced from contract information from KRC, ERC, TRC and the Crossrail Project

Viewed against the countries’ individual gross domestic products, it is evident that Kenya has most strenuously funded its SGR. Whereas each kilometre of the Crossrail is 28 times more expensive than the cost of a kilometre of the Kenyan SGR, the Kenyan track costs about 1.74 times more per kilometre than that of its East African counterparts.

Data sourced from contract information from KRC, ERC, TRC

It is crucial to note is that Kenya’s and Ethiopia’s SGR projects impacted significantly the amount of their debt to China and generally, their ratio of debt relative to GDP. As of 2017, Ethiopia and Kenya ranked the second and third highest Chinese debtors on the Continent respectively. Their debt relative to GDP has also risen exponentially compared to Tanzania’s.

Data sourced from the SAIS China-Africa Research Initiative (CARI) at the Johns Hopkins University www.sais-cari.org

Ethiopia’s account

The Addis-Djibouti standard gauge railway (Ethiopia-SGR) was partly financed by commercial loans from the Exim Bank of China and by concession loans from the government of China. It opened to commercial service in January 2018. A flagship project of China’s Belt and Road Initiative in the Horn of Africa, it was constructed in parallel with Kenya’s SGR.

The line cuts travel time from the capital Addis Ababa to Djibouti from two days by road to 12 hours. It traverses several industrial zone clusters in Addis Ababa and Dire Dawa, and also serves the government’s wider export-led industrialization strategy.

From an economic perspective, actual uptake of the railway by the industrial zones it was intended to serve remains low. Most the railway’s freight cargo is made up of imports, not exports.

Integration with export and industrial zones is low and most exporters continue to use road transport, despite the higher time and financial cost, due to its greater flexibility and reliability compared to the train’s twice-daily schedule.

Ethiopia’s growing debt burden does not augur well for the Ethiopian Railways Corporation (ERC) which has not only been unable to meet its loan repayments but also unable to front the remainder of the management fees for Chinese companies operating the railway.

As a result, the Chinese restructured Ethiopian debt in September this year, extended the repayment period by twenty years, and cancelled all of Ethiopia’s interest-free loans up to the end of 2018. Whether this will alleviate Ethiopia’s situation is yet to be seen.

Tanzania’s account

As Ethiopia and Kenya shored up Chinese debt, Tanzania undertook the same (SGR) task in 2017 but did so without Chinese financial backing. Consequently, China’s lending to Tanzania was, in 2017, much lower – at 0.04 per cent relative to GDP – compared to Ethiopia and Kenya, both of which saw stiff peaks in 2014/2015 when a lot of funding for infrastructure projects in both countries began.

Tanzania managed to negotiate a much cheaper outcome (relative to GDP) compared to both Kenya and Ethiopia and remained solely in charge of the project’s financing.

It received $1.2 billion from the Export Credit Bank of Turkey for the project’s first phase – Dar es Salaam to Morogoro Section (300 km); and $1.46 billion from the Standard Chartered Bank for the second phase – Morogoro to Makutopora (426 km).

The remaining three sections: Dodoma – Rusomo are yet to be financed though the World Bank has expressed interest to fund the last portion, Isaka to Kigali.

Both Kenya and Ethiopia received most of the funding – $3.2 billion and $3.4 billion respectively – for their SGRs from China as concession loans from the government of China or/and commercial loans from Exim Bank of China.

The result of this is a shared future of public debt between Ethiopia and Kenya and an aberration, with regard to SGR financing, in Tanzania’s tale.

Data sourced: SAIS China-Africa Research Initiative (CARI) at the Johns Hopkins University www.sais-cari.org

David Ndii summarises in two words the problem with Kenya and Ethiopia’s agreement: ‘Unpleasant Arithmetic. Both countries understood from the beginning that their railways were constructed on conditional probabilities. As it would be impossible for the SGRs to breakeven by ferrying passengers, the idea that the railways would support future export processing zones catalysed the construction process.

It is generally accepted that ferrying imports is only half as lucrative as ferrying exports. To make a profit, the trains would have to make two trips carrying imported goods for every one trip carrying exports. Now forced to contend with that fact seeing as both SGRs do not have nearly enough imports to freight, and that most importers prefer to use roads rather than the railway, Ethiopia and Kenya have to scratch their pockets to pay for their SGRs.

In contrast, in constructing the Dar es Salaam-Isaka-Kigali/Keza-Musongati line, a Project Information Sheet by the African Development Fund (ADF) identified one of the main reasons for the line as developing the areas’ mineral resources which remain untapped.

These include huge cassiterite, colombo-tantalite, tungsten, natural gas reserves in Lake Kivu, and precious stones (ruby and sapphire) in Rwanda; gold, diamond, nickel and natural gas in Tanzania; and nickel, gold, copper, cobalt, among other vast mineral deposits in Burundi.

The Tanzanian SGR is meant for transporting exports and this justifies its construction. Success in mining in all three countries will not only subsidize the passenger line but will also repay any debt Tanzania and the other countries incur in building the railway in the first place.

Why did Kenya build its SGR?  What institutional failure enabled this and what can we learn about this for our future? The answer to this from a legal perspective begins with understanding the nature of the Chinese Government to Government agreement (g2g agreement). Particularly, of interest to us is the model of g2g agreement used and how its design impaled our statutory institutions.

Constructing the SGR – A legal enterprise

In our previous pieces about Goldenberg and Anglo-Leasing, we discussed the role institutions had in enabling mega corruption scandals. Institutions were deliberately weakened to facilitate state capture. This trend did not change despite having a new constitution in 2010, which promised a country founded on the rule of law.

In some cases, the law was ignored, manipulated, or subverted. In others, it was amended to favour other interests than the common good and it became largely inadequate to respond to grand corruption. Sadly, law becomes sterile where there is no political will and poor enforcement.

Migai Akech wrote a wonderful seminal article, “Abuse of Power and Corruption in Kenya: Will the New Constitution Enhance Government Accountability?” where he called for the harmonisation of statute and constitutional law. The reason for this harmonisation was to remove the legislative ambiguities and wide allowances for discretion that statute law gave to state officers. Through statutory administrative discretion, individuals found avenues for the type of corruption that characterised the Goldenberg/Anglo-Leasing debacle.

The SGR is hence a fixture of our new dispensation. The outcome of the project is however pitiable. The transactions involved are shrouded in mystery and speculation. The inaccessibility of the project’s contracts mocks the right of access to information and the Public Participation principle, both enshrined in the Constitution.

People have speculated that the Mombasa-Nairobi contract and the subsequent one on the Nairobi-Naivasha phase, also have a confidentiality clause gagging the Government of Kenya from making the deal public "without prior written permission of the lender (China).

Just this week, we learnt that a team tasked with reviewing the contract between Kenya and CRBC hit a dead end as CRBC failed to provide key information protected by the confidentiality clauses in the contract, on grounds that they were “sensitive and private”.

The primary enabler of this sort of subversion of the Constitutional ideal is statute law. We continue to see, the wide discretionary avenues for administrative power that Migai Akech was worried about within the new era’s statute law.

The poisoned chalice: Statute law

Among the various statutes put in place to guide government spending, two were of utmost importance: The Public Procurement and Asset Disposal Act (PPADA) and The Public Finance Act (PFA). These, coupled with the Access to Information Act (AIA) Act, were essentially meant to conjoin the principles of accountability, transparency, and public participation espoused in the Constitution with the business of public finance and public spending.

These Acts might have been ideal overseeing a project as transformative as the SGR had it not been for the loopholes written into law. Instead, they have enabled the opaqueness that has characterised the SGR’s process. Core to this argument is understanding the SGR’s financing.

On 3rd August 2012, following an exchange of correspondence between the National Treasury and the Government of China, the Cabinet decided that the financing of the SGR would be sourced from the Government of China under Government to Government terms (g2g agreement).

The discussions between the National Treasury and the Government of China were to the effect that part of the financing would be a concessional loan from the Government of China. The other would be a commercial loan from the Exim Bank of China. Accordingly, Kenya Railways Corporation (KRC) and China Road and Bridge Corporation (CRBC) negotiated and signed two commercial contracts; one for the SGR line and a second one for the supply and installation of facilities, locomotives and rolling stock.

The g2g agreement had three major effects: The first was to make the terms of the agreement inaccessible even under the AIA; the second was to remove the SGR process from the application of the PPADA; and the third was to remove the proceeds of the loan from the oversight procedure of both the public and the Consolidated Fund as provided for under the PFA.

Consequently, three of the most powerful tools for transparent and accountable public finances were effectively evaded. The SGR has undoubtedly revealed the monstrous regulation blackhole innate to g2g loans.

Next week, we will take a deeper look at the g2g and how it made impotent all the constitutionally aligned statutory oversight, regulation, and reporting mechanisms designed to oversee public finance and reign in public spending.

This article is part of a long series of articles on the rule of law in the context of politics and ethics. The series is researched and co-authored by:

•Prof Luis Franceschi, founding dean of Strathmore Law School and Visiting Fellow, University of Oxford.

•Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates.

•Kasyoka Mutunga, Research Associate at ALN Anjarwalla & Khanna, Advocates

•Wandia Musyimi, Research Associate at ALN Anjarwalla & Khanna, Advocates