Kenya could lose the ports of Mombasa to the Chinese government if Kenya Railways Corporation (KRC) defaults in the payment of Sh227 billion owed to Exim Bank of China.
The government borrowed the billions to construct the Mombasa-Nairobi standard gauge railway (SGR), against opposition that the project by the China Roads and Bridge Construction (CRBC), a Chinese State-owned company, could become a white elephant. The country’s sovereignty is now at stake.
A report by Auditor-General Edward Ouko states that the payment agreement substantively means that the revenue of the Kenya Ports Authority would be used to clear the debt.
This is if the minimum volumes required for consignment are not met.
“Exim Bank would become a principle over KPA if KRC defaults in its obligations and the Chinese bank exercises power over the escrow account security,” a management letter sent to the KPA reads.
Mr FT Kimani signed the letter on behalf of Mr Ouko.
The audit shows that KPA’s revenue was Sh42.7 billion as at June 30, 2018, a 7.9 percent increase from the Sh39.6 billion recorded the previous year.
“The KPA assets are exposed since the authority signed the agreement in which it has been referred to as a borrower under clause 17.5,” Mr Kimani said.
“Any proceedings against its assets by the lender would not be protected by sovereign immunity since the government waived the immunity on the KPA assets by signing the agreement.”
The auditor notes that the agreement is biased since any non- performance or dispute with the bank would be referred to arbitration in China, “whose fairness is resolving the disagreement may not be guaranteed”.
The auditor accuses the KPA management of not disclosing the guarantee documents in its financial statements.
Despite the danger of losing the lucrative port, the auditor recommended that the authority discloses the pertinent issues and risks related to the guarantee in the statements.
The KPA is also required to confirm in the management representation letter that its assets are not a floating charge to the government of Kenya loan.
In December 2017, the Sri Lankan government lost its Hambantota port to China for a lease period of 99 years after failing to show commitment in the payment of billions of dollars in loans.
The transfer, according to the New York Times, gave China control of the territory just a few hundred miles off the shores of rival India.
It is a strategic foothold along a critical commercial and military waterway.
“The case is also one of the examples of China’s ambitious use of loans and aid to gain influence around the world – and of its willingness to play hardball to collect,” says the New York Times of December 12, 2017.
In September 2018, Zambia lost its international airport to China over debt repayment.