Go slow on expensive China loans

President Uhuru Kenyatta on Tuesday launched the construction of the Kenya National Referral and Research Hospital (KNRRH), a top-tier military health facility that will provide specialised services to the security sector agencies and the general public.

We are building a massive 700-bed and fully equipped military referral hospital to be located at the Kabete Barracks on Nairobi’s Waiyaki Way. The cost of the project was not disclosed during the ceremony.

Do we need the military hospital? The answer is yes. Indeed, the Ministry of Defence has made a fairly persuasive case for the project.

With the increase in Kenya’s security forces’ operations, the case for enhancing capacity in medical and surgical care cannot be gainsaid. Mark you, the only referral hospital for security services we have is the Defence Forces Memorial Hospital on Mbagathi Road.

My only beef with the project is its financing and the manner it was procured. Contractors were invited to quote for an ‘engineering, procurement contract (EPC)’ contract funded by an export credit agency.

And, the conditions for winning the tender were made so stiff as to eliminate participation by any local players. First, the contractor was required to have had an annual construction turnover of more than Sh20 billion for the last four years.

Secondly, you were required to have completed a similar project of a value of at least Sh2 billion in the last 10 years. Your lead architect must have been involved in the design of at least one hospital project of the value of over Sh1 billion in the last 10 years.

Reading through the bidding documents, I couldn’t help but feel that the onerous conditions for eligibility were crafted in this manner so as to give Chinese EPC contractors an advantage over any other contractors.

When you study trends, you will find that most of the construction companies with the experience, technical and financial capacity as spelt in the bidding documents for the 700-bed hospital will invariably be Chinese EPC contractors.

They have mastered the game of putting together what is known as ‘contractor negotiated loans’. Is there any other export credit agency that can rival China Exim Bank at funding hospital projects of the size of the proposed military hospital? Consider the following: The largest hospital project to be completed in Kenya in recent times — namely the 650-bed Kenyatta University Referral Hospital — was constructed by the EPC contractor China Jianxi with funding negotiated from China Exim Bank. Similarly, the 250-bed Mama Lucy Hospital in Kayole, Nairobi, was built and equipped by another Chinese EPC contractor, China Wu Yi.

Clearly, Chinese EPC contractors rule the roost when it comes to construction of large turnkey projects. I don’t suffer from Sinophobia. My concern is that we are at a point where it no longer makes sense to take more expensive China Exim Bank loans especially when you consider that the game is all about creating jobs for Chinese EPC contractors and buying Chinese hospital equipment.

This project will force us to take a massive loan. To build the Kenyatta University Referral Hospital, we had to take a 744 million yuan loan ($ 114 million) from China Exim Bank that we will be repaying until March 2031.

And when you compare the terms of these Chinese loans with the terms you get from entities such as the International Development Association (IDA) of the World Bank or even the Africa Development Bank, Chinese Exim Bank loans are way too expensive.

We have taken too many Chinese loans and to the detriment of productive activity in the macro economy. Under the administration of Mwai Kibaki, borrowing from China was kept under control.

Indeed, the reason big spending on infrastructure under Mwai Kibaki made a bigger and positive impact on the economy was that most of the money spent was from local sources. We floated our first infrastructure bond during the Kibaki era.