Members of Parliament now want a clause in the Sh364 billion Standard Gauge Railway (SGR) loan contract with China that attaches the Port of Mombasa as collateral to be reviewed.
The National Assembly Public Investments Committee (PIC), in a report tabled before the House, says the loan agreement was skewed against the Kenya Ports Authority (KPA) and should be renegotiated.
The committee chaired by Mvita MP Abdulswamad Nassir says the loan repayment agreement casts the KPA and the Kenya Railways Corporation (KRC) as borrowers and therefore liable to repay the loan in case the debt to China Exim Bank is not repaid.
Kenya waived its immunity in the matter, meaning in case of a default, the country would surrender KPA assets, the main one being the Port of Mombasa.
“A reading of the agreement left no doubt that the KPA and the KRC were borrowers and therefore liable to repay the loan through their assets without immunity. This put the assets of KPA at risk in the event of a default,” reads the report.
“The committee recommends that the National Treasury should renegotiate the entire payment arrangement agreement with a view to discharging the KPA from the contract and replacing it with the KRC,” the report further reads.
The KPA in its response to the committee indicates that it does not have capacity to hold sovereign authority and therefore could not plead sovereign immunity.
“Only the government of Kenya had such capacity. The clause could not be enforced against KPA. This was a mistake apparent on the face of the record,” the KPA told the committee.
The agency further told the committee that it had no copies of the preferential credit loan agreement since it was not a party to the agreements.
More shocking is that the committee noted that the placement of KPA in the repayment of the loan was done without the approval of the board, parent ministry and the Cabinet.
According to the report, the repayment of the loan agreement in clause 17.5 referred to the KPA as the borrower, contrary to the details that the authority's only obligation was to facilitate minimum freight volumes to meet the requirements of the long-term service agreement.
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“It was inconceivable that the KPA could sign an agreement with the KRC agreeing to provide a certain tonnage of goods for transport through the SGR and be held liable in the event of failure in a free-market economy where transporters were at liberty to use any mode of transport including road,” reads the report.
According to the payment agreement, in the event of default by KRC to pay China Eximbank collected freight and service charges, the KPA would be compelled to deposit the amount due to the KRC into a bank account designated by China Eximbank.
According to the report, both KPA and KRC indicated to the committee that the required tonnage had not been met, thus forcing the KPA to pay China Exim Bank, through the KRC.
The report, however, does not disclose the amount that has so far been paid by the KPA to China.
According to the report, the loan amount consisted of a preferential credit loan agreement of May 11, 2014 for Sh161.6 billion and a buyer credit loan agreement of the same date for Sh202.36 billion, all totalling Sh363.96 billion from China Exim bank.
The committee, however, noted that the two loans had separate agreements which were not produced for audit review.
In a shocking revelation contained in the report, both the KPA management and the KRC management claimed to have no access to such documents.
The two loan agreements were also not provided to Parliament and the committee’s written requests to both Attorney-General Paul Kihara and the National Treasury for submission of the said documents remained unanswered until the time the report was tabled in the House.
The committee recommended that the Head of the Public Service should submit the two SGR loan agreements to the Office of the Auditor-General for verification during the 2022/2023 audit cycle.
The committee has also faulted the terms of the agreement, which it points out are unfavourable to the KRC, the government of Kenya and the KPA since all disputes were to be referred to China.
According to the agreement at Paragraph 17.2, in case of any dispute, it shall be referred by any party to the China International Economic and Trade Arbitration Commission ("CIETAC") for arbitration in accordance with CIETAC's applicable rules. The place of arbitration shall be Beijing.
The report is scheduled to be considered by the House next week.