President’s ‘no new projects’ decree to rein in loan mongers

Wednesday March 18 2020

Workers building the Changamwe roundabout in Mombasa. President Uhuru Kenyatta has issued a directive freezing all new government projects until ongoing ones are completed.


I am not surprised to see MPs allied to Deputy President William Ruto coming up to oppose President Uhuru Kenyatta’s recent ‘no new projects’ declaration.

In ethnically divided Kenya, what obsesses us is how such decisions are likely to affect the political fortunes and interests of the elites of our communities.

Who cares whether the president’s declaration has economic merit or not?

And, coming at a time when the ongoing anti-corruption campaign was beginning to train guns on the energy sector, as underscored by the recent high-profile prosecutions of top executives of Kenya Power, it was inevitable that the declaration was going to be interpreted in ethnic terms.

We forget that the Jubilee government and Cabinet is structured around an ethnic arithmetic formula under which ministerial portfolios and parastatal jobs are shared between the two main ethnic groups in the coalition.


According to this unwritten formula, the energy sector is supposed to be under the control of the Rift Valley elite.

And, with sector having some of the largest multi-billion-shilling infrastructure projects in the pipeline, the freeze on new projects was not going to go down well with the political elite of the Rift Valley.

Yet, I still see economic merit in President Kenyatta’s declaration and in granting the National Treasury more powers over new projects.

We were at a point where the Treasury was beginning to look like a mere conveyor belt for decisions and commitments made elsewhere.

Cabinet secretaries, principal secretaries and CEOs of parastatals were busy committing the country to projects, signing memoranda of understanding and commercial agreements all over the place without the consent of the Treasury.

Today, the Treasury is the last to be consulted when a ministry or state department decides to undertake a project with any contractor.

It’s as if we have forgotten that one of the key mandates of a Cabinet minister in charge of finance is to fund our national assets by leveraging on our sovereign rating to borrow from international capital markets.


Yet, we were now in a position where it looked like the Treasury was out-sourcing this critical role to Chinese contractors, who have been hawking projects that come complete with financing.

This practice of allowing a foreign contractor to perform the dual role of building and arranging financing of our large infrastructure projects is unfair to us.

And, these new projects are the main reason why we have accumulated too many expensive Chinese loans.

The notion that Chinese loans are cheap is a big myth. Take the standard gauge railway (SGR) loans, for example.

In all, we took a total of three loans: A commercial loan of $1.633 billion (Sh163 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.

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. That 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.


I recently came across the terms and financial proposals for the new project under which we want — the American construction conglomerate Bectel Corporation Ltd to build for us the Nairobi-Mombasa highway.

The terms are more or less the same as Chinese loans, especially when you bring into the picture what is called an ‘exposure’ fee of 18. 6 per cent.

Why are we paying loans at rates higher than our dollar sovereign borrowing rate?

In the Bectel case, why can’t we just go and borrow the entire $3.5 billion at the rate that we borrowed from capital markets for 30 years last year?

I find President Kenyatta’s decision to give the Treasury powers of approving all new projects significant in other ways.

It is time the Treasury started re asserting itself in the public finance management space.

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