Kenya’s Port of Mombasa is Reportedly Considered Collateral for the Country’s Railway Loans from China

On December 20, a report authored by the Auditor-General’s office of Kenya was circulated, showing that, in 2013, the Kenyan government waived sovereign immunity in the course of negotiating a $3.3 billion loan from the Export-Import Bank of China for construction of the Standard Gauge Railway (SGR), which reportedly has the effect of collateralizing the Port of Mombasa under this debt.  In other words, there is a view that, if Kenya defaults on its loans from China, taken to build its ambitious standard gauge railway (SGR) project, China could take control of the operating entity in charge of one of the region’s most economically and strategically significant ports.

According to the document, in the event of a loan default, the Export-Import Bank of China has the authority to step in as principle shareholder of the Kenya Ports Authority (KPA), the current owner/operator of Mombasa Port.  In this scenario, it also appears any dispute related to the loan would be referred to arbitration in China.

Although Kenyan authorities envisaged SGR, contracted to China Communications Construction Company (CCCC), as a profitable venture, the rail network’s passenger and freight services have not generated the revenues originally anticipated.  This has led to increased discussion of the consequences of the revenue stream being inadequate to service the debt.  The loan has an interest rate of 3.6%, a 5-year grace period and a 15-year repayment term. Per these terms, the first principal repayment is due in 2019. 

Even preceding this revelation, there have been a number of allegations of corruption related to the project and general concern that the country took on excessive debt to achieve its SGR objectives.  One report estimated payoffs to Kenyan authorities inflated the value of the contract by as much as $1.15 billion.  Altogether, China is reportedly responsible for 70% of Kenya’s rising debt.  Other problems that have arisen during the project include allegations of poor working conditions, mistreatment of workers and issues with regard to quality control and project delays