After SGR celebration time to ponder reality of hefty loans

With the celebration of the birth of the standard gauge railway (SGR) now over, we must confront the hard part, which is how to raise the money to service the expensive dollar loans we have contracted to build the railway line.

How much have we borrowed from China and what are the terms? What are the bare facts about these Chinese loans?

I reached into my archives to fish out the actual signed loan agreements with China Exim Bank to get the bare facts on what these Chinese loans will cost the taxpayer?

Here are the highlights.

In all, we took a total of three loans: A commercial loan of $1.633 billion and a concessionary loan of $1.6 billion, both signed and committed in May 2014, and a sum of $1.6 billion borrowed from China Exim Bank for the Nairobi-Naivasha section of the SGR, in December 2015.

ANOTHER LOAN

Right now, we are in the middle of negotiating another $4.8 billion to take the line from Naivasha to Kisumu and on to Malaba.

What are the terms of the loans? First, a fixed term of 15 years, inclusive of a grace period of five years. Second, interest of six months of the London Inter Bank Offered Rate (Libor) plus 360 basis points. This comes to about four per cent.

Third, a management fee of 0.75 per cent payable up front plus a commitment fee of 0.75 per cent of the undisbursed amount.

Finally, insurance from the China Export and Credit Insurance Corporation (Sinosure) at a premium of 6.93 per cent payable in two instalments.

Thus, the- all-inclusive cost of servicing these Chinese loans comes to an effective interest rate of 12.5 per cent.

CHINESE LOANS

Contrary to popular belief, Chinese loans are not cheaper than the terms the African Development Bank gave us for the construction of Thika Superhighway.

I will not cram the column with more numbers and statistics.

The big question is this: Where will the dollars to service these expensive loans come from?

As we all know, domestic rail-road services are non-tradeable services.

They don’t earn you the dollar revenues you need to repay the principal and interest on the dollar obligations.

TRADE DEFICIT

The inescapable conclusion is the following: Since our economy constantly runs a merchandise trade deficit, it means that the little export earnings from coffee, tea, tourism, flowers, and diaspora remittances are what we will have to rely on to pay the Chinese.

You can call me a pessimist. But I see us in future falling into a perpetual game of borrowing from Peter to pay Paul, forever juggling and rushing to international markets to borrow the dollars to repay the principal and interest on the SGR as they fall due.

When you find yourself in a situation when you no longer depend on export earnings to repay loans and have to incur debt to repay debt, you are nearing bankruptcy even if the cheerleaders from the IMF keep hoodwinking into believing that you are still within their debt sustainability thresholds.

REPAID MONIES

Consider the following. The $600 million syndicated we borrowed in 2012 was repaid by monies borrowed through the Eurobond of June 2014.

A $750 million syndicated loan borrowed in late 2014 was repaid in early 2017 with another $1.4 billion loan that was syndicated by the PTA Bank.

Just the other day, the government indicated that it will be tapping the Eurobond market this year to repay a $700 million loan we contracted in 2015.

Which begs the question, if we are already juggling and fumbling to repay these small syndicated loans, what will we do when the big Chinese loans come calling?

Which brings me to the operations of the SGR? Initially, the proposal was that the SGR would be gifted with a guaranteed market share.

SIGN AGREEMENT

As a matter of fact, the Chinese forced the government to sign a ‘take-or-pay’ agreement implying that if the SGR does not get enough freight, the Kenya Ports Authority must pay it.

There are many things the government can do to migrate traffic from roads to the SGR. For instance, the government can introduce regulations on truck size, weight and speed limits.

We can introduce regulations on driver hours and emissions and assign specific tariffs for the SGR. Trucking by road feeds a lucrative underground and businesses dealing with many things, including contraband.

And, influential segments of the political elite have interests in trucking. I predict heavy resistance to migration of freight from road to rail.

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