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A freight train runs on the Mombasa-Nairobi railway track in July 2022. Photo by Dong Jianghui/Xinhua via Getty Images

Kenya Standard Gauge Railway contracts: what released documents say, and what they don’t

A media frenzy has erupted in Kenya over the November 5, 2022 release of three Chinese loan contracts signed between the Kenyan government and China Export Import Bank (Eximbank), to finance two phases of Kenya’s Standard Gauge Railway (SGR).

The 700-km railway runs between the port of Mombasa through Nairobi to Naivasha. It has been dogged by controversy from the start. Concerns range from procurement, its massive cost and the government’s reluctance to allow detailed scrutiny of the contracts underpinning Kenya’s largest infrastructure project since independence.

The release of the three contracts by Kenya’s new Transport and Infrastructure minister came nearly four years after rumours began circulating that Kenya had staked its valuable Mombasa Port as collateral for the initial US$3.6 billion railway project loans. The minister’s disclosure of the contracts was intended to clear the air. Instead, the air is thick with scepticism and claims of selective disclosure.

Our study

In April 2022, a team of researchers at Johns Hopkins University published a policy brief and working paper summarising nearly two years of investigations into the collateral rumour. The team was made up of academics and professionals with extensive practical expertise in commercial law, international project finance, and auditing.

Our team discovered that the collateral rumour originated in a critical mistake by Kenya’s auditor-general’s office. The government’s chief auditor had wrongly labelled Kenya Ports Authority, owner of Mombasa Port, as a “borrower” responsible for repaying the China Eximbank SGR loans.

The ports authority was not a borrower, we concluded.

The recently released loan contracts confirm that the “the Republic of Kenya, represented by the National Treasury of Kenya” is the Borrower, and is “fully liable for the payment and repayment obligations” of the loan contracts. The contracts state that this obligation remains, whether or not Kenya Railways Corporation and Kenya Ports Authority perform their own obligations.

The newly published loan contracts support previous statements by the Kenyan and Chinese governments. Kenya’s government has pledged to repay this sovereign debt with government revenues, just as it repays Eurobonds and the World Bank.

In other words, these are sovereign loans, signed by the central government, not Kenya’s state-owned companies.

We also analysed the “Take or Pay Agreement (TOPA)” signed between Kenya Railway Corporation and Kenya Ports Authority. In that agreement, a copy of which was shared with us by colleagues in Kenya, Kenya Ports Authority had committed to ship a set amount of cargo on the railway each month or pay the shortfall to the Kenya Railway Corporation. These revenues were to be deposited by the corporation into an escrow account and used to help repay the Chinese loan. But the port authority’s legal responsibility under Kenyan law was to Kenya Railway Corporation, not to the Chinese bank.

Kenya’s SGR credit enhancements were carefully and creatively designed to enhance the bankability of a railway project that has significantly upgraded the Kenya Ports Authority’s competitive position in the region. Yet – like most large investments with significant environmental, safety and connectivity advantages – the benefits of this project will ripen over time, while the upfront costs are high.

Credit enhancements like TOPAs increase the bankability of projects, showing the government’s commitment to raise various revenues to repay the lender. But ultimately the debt is guaranteed by the sovereign.

Our research dealt only with the collateral accusation. It did not deal with concerns about procurement or corruption that may have taken place around this project. The other contracts have not been released. Nevertheless, the three loan contracts are sufficient for establishing that Mombasa Port was not in any way pledged as collateral for the Chinese loans.

Kenya’s auditor-general’s office is renowned for its integrity, and we commend the concern with which the office and its courageous leaders approach their task of protecting Kenyan taxpayers. Its officers appear to have ample reason to be concerned about corruption and mismanagement in the Kenyan government. That’s the light in which the auditor-general’s leaked letter to Parliament must be understood.

Sovereign immunity

However, as we noted in our research, the auditor-general’s opinion that Kenya’s government had “waived immunity” on the Kenya Ports Authority’s assets and “expressly guaranteed” that they could be used to repay the Chinese loan was incorrect.

Given that all sovereign governments have immunity from lawsuits under international law, they are routinely required to waive that sovereign immunity in international contracts. This is so that if a dispute arises it can be arbitrated. Waivers of sovereign immunity are general and relate to dispute settlement, and not to the specification of any particular asset as collateral.

Our conclusion therefore was that the waiving of sovereign immunity did not mean that Kenya Ports Authority’s assets were deliberately put at risk.

Bitter experience

The Kenyan auditor-general was also concerned that the loan contract specifies that dispute arbitration would take place at the China International Trade and Economic Arbitration Commission. It is “one of the oldest and busiest arbitration institutions in the world.”

It is normal for arbitration to take place outside of the borrowing country. Nevertheless, the auditor-general was not alone in worrying about the neutrality of a Chinese venue. Kenya can insist that the presiding arbitrator be selected by both sides from a neutral third country. This should dispel some of the worries about fairness, should disputes arise.

However, our team of researchers suggest that two factors contributed to the auditor-general’s interpretation. First, through sometimes bitter experience, the auditor-general’s office did not trust the Kenyan government to protect the interests of Kenyan citizens.

Second, and just as importantly, the auditor-general’s office and Kenyans more generally, were likely primed to also be suspicious of the Chinese bank due to the widespread rumours of “Chinese debt traps”. This was sparked by the case of Hambantota Port in Sri Lanka. There, the same Chinese bank was accused in the pages of The New York Times (erroneously, as it happens) of seizing a loss-making port when Sri Lanka was facing balance of payments difficulties.

The geopolitically fraught accusation of deliberate “Chinese debt traps” and “asset seizures” is a distraction from a genuine problem: infrastructure, like natural resources, is prone to corruption. Yet Kenya faces risks in unilaterally publishing contracts for a single lender and company. Nearly 20 years ago, government, industry and civil society stakeholders came together in London to build the Extractive Industries Transparency Initiative.

Governments join, commit to transparency, and Extractive Industries Transparency Initiative publishes the complex contracts. A similar global initiative for public infrastructure is clearly needed. Since the Kenyan taxpayers will ultimately shoulder the cost of the project, they have a right to know all the details. And they also have the right to have information debated fairly and professionally.

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