KISERO: SGR is largest such project for Kenya, riskiest for loan default - Daily Nation

SGR is largest such project for Kenya, riskiest for loan default

Tuesday September 4 2018

President Uhuru Kenyatta (left) with President

President Uhuru Kenyatta (left) with President of the People's Republic of China Xi Jinping at the opening session of the The Forum for Africa-China Cooperation, 2018 FOCAC Summit in Beijing, China. PHOTO | BAYO OMOBORIOWO  

By JAINDI KISERO
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By all indications, the highlight of President Uhuru Kenyatta’s visit to China this week will be the signing of the Naivasha-Malaba section of the standard gauge railway (SGR).

I thought is an opportune time to revisit this massive project by placing it in the context of one of the most popular subjects in contemporary development literature — namely, China’s debt diplomacy.

The Naivasha-Nairobi section is also significant in terms of the sheer size of the project and its likely impact on the country’s external indebtedness.

But first, some background and facts on the Naivasha-Malaba section. This project has been on the cards for several years. As a matter of fact, the related financial contract has been under negotiation since 2014.

A key aspect of this project is that the route it will follow was decided at a Cabinet meeting on September 15, 2015. The Cabinet decided that the line will run from Naivasha to Narok, then Bomet, Kisumu, Yala, Bumala and eventually Malaba.

NEW TERMINAL

In addition, a new terminal for the railway is to be built in Kisumu consisting of a new fully equipped, high-capacity port, a passenger station and a freight exchange centre. The facility in Kisumu will cost the country $140 million.

The Naivasha-Malaba section of the SGR will provide a reliable railway link to the entire region through Kampala in neighbouring Uganda and on to Kigali in Rwanda and Juba in South Sudan.

The negotiated lumpsum contract price for the project is a whopping $4.9 billion.

This is inclusive of civil works, 29 locomotives for the main line, four locomotives for passenger services and two others for shunting.

Clearly, this is going to be the single-largest capital expenditure project in the history of Kenya.

PUBLIC DEBT

With public debt now at a level where we are now spending 29 per cent of revenues on debt servicing, this project is bound to push the country deeper into indebtedness.

Today, as you look at trends in Africa, and the developing world in general, you will observe that China cares little whether the project they are financing has commercial short-term viability or not.

Unlike other lenders, the Chinese do not bother about whether cash flows from the port or railway they have built will generate enough revenue to service the loan they have lent you.

STRATEGIC NATIONAL ASSETS

It seems to me that the important considerations for the Chinese are the following.

First, that the loan they are giving you is collateralised by strategically important national assets — a port, a railway such as the SGR or national resources.

Secondly, that the project enhances and fits in well with their Belt and Road Initiative (BRI).

Under this initiative, the Chinese are involved in developing major trading and transport corridors. Projects such as the SGR will be financed and supported in pursuit of expanding the BRI network.

We are at a point where we cannot afford to take more loans from China.

CHINESE LOAN

I say so because, these days, the trend you see is that when a country is not able to pay back a Chinese loan, they just sieze the hard infrastructure assets they built for you, such as ports and railways.

For example, when Sri Lanka found itself in a position where it could not pay debts to China, the country formally handed over its strategically located Hambantota port to the Chinese.

The Chinese moved quickly to seize the key port because it is a link to major Indian Ocean trade routes connecting Europe, Africa and the Middle East to Asia and, therefore, sitting very well with the BRI. China is also encouraging its companies to bid for outright purchase of strategic ports.

Last year, a Chinese company purchased the Mediterranean port of Piraeus, which will serve as the linking node for the BRI in Europe.

CHINA EXIM BANK

Then there is the case of Djibouti. Having found itself saddled with Chinese debt, the Horn of Africa country was forced to lease strategically positioned land to China.

In total, Kenya plans to borrow a whopping $5.2 billion for development of the Naivasha-Kisumu-Malaba SGR section, the new Kisumu port and the inland container depot in Naivasha.

The cost of electrification of the railway, which is estimated at between 15 per cent and 20 per cent of the civil works, will also be borrowed from China Exim Bank.

If we do not tame our appetite for Chinese debt, we should not be surprised in future if China seizes and turns the port of Mombasa — the gateway to East Africa — into another Hambantota. If, by bad luck, we are unable to pay the loans, China will be salivating to take over the strategic national resources.

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