Columnists

Why Chinese loans are painful

PORT

The port of Mombasa. FILE PHOTO | NMG

Are we about to lose control and ownership of the Port of Mombasa to the Chinese? I don’t think so. Indeed, the point in the widely-circulated management letter by the Office of the Auditor-General to the Managing Director of Kenya Airports Authority (KPA), Daniel Manduku, was that since Mombasa port had been pledged as collateral under the terms of the borrowing from Exim Bank of China for the Standard Gauge Railway- the port remains exposed and more or less mortgaged to the Chinese.

And how did we end up mortgaging this critical national asset to the Chinese? It is because during the negotiations, the Chinese insisted that we sign what is called a ‘take or pay agreement’ under which KPA was forced to undertake to consign ‘ a defined minimum volume of freight to the Standard Gauge Railway’(SGR).

Last year, this very arrangement forced the government to make the unpopular decision of ordering that all cargo destined for the Embakasi ICD be transported exclusively by SGR. It did not matter to the government that the decision was going to hurt interests of truckers.

Indeed, this take or pay agreement ignored the fact that KPA and the Kenya Railways Corporation are separate legal entities and that the asset being built actually belonged to KRC.

They took the view that since both KRC and KPA were owned by the government, the national asset being assigned to the lender did not matter.

Clearly, what mattered to the parties at that point was a guarantee that the line would raise adequate revenues to help service the Sh327 billion loan Kenya was taking from Exim Bank.

Take or pay agreements have mainly been common in the electricity sector where Kenya Power has signed ‘ capacity’ charges agreements’ with independent power producers, obliging the monopoly off-taker to pay those private power producers even if it has not used any power from them.

But it would appear that there was another motive pushing the Chinese to insist on a take or pay agreement. There was the history and experience with the Tazara Railways, which they did not want to see repeated. The line that the Chinese had built to connect Dar es Salaam port to Zambia had fallen into deep trouble.

Over the years, and mainly as a result of inefficiencies at the Dar port, traffic had migrated to the roads, hurting the viability of the line and repayment of loans to China Exim Bank.

They decided to force a freight agreement between the Kenya Ports Authority and the Kenya Railway Corporation to guarantee freight traffic.

The Chinese financiers also demanded a major expansion of the Embakasi Internal Container Depot to cater for increased railway traffic. Whichever way you look at it, KPA remains deeply exposed to these expensive loans.

What are the bare facts about these Chinese loans? In all, we took a total of three. First, both a commercial loan of $1.633 billion and a concessionary loan of $1.6 billion, both by China Exim Bank and signed and committed in May 2014.

Second, a loan of $1.6 billion borrowed for the Nairobi-Naivasha section of the SGR that was signed and committed 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. This comes to about four percent.

Third, a management fee of 0.75 percent payable upfront plus a commitment fee of 0.75 percent of the undisbursed amount.

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

Thus, the- all-inclusive cost of servicing these Chinese loans comes to an effective interest rate of 12.5 percent. Where will the dollars to service these expensive loans come from?

Show me the sector in this economy that is generating large volumes of foreign exchange?