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China Was Never Going to Seize the Port of Mombasa if Kenya Defaulted on its SGR Debts

An oil tanker carrying 200,000 barrels of crude oil worth Ksh 1.2 billion is berthed at Kipevu Oil Terminal in Kenya's port city of Mombasa August 26, 2019. AFP.

For many Kenyans, the Port of Mombasa is much more than just a container terminal that facilitates shipping trade with the outside world. It’s a prized national asset that serves as an indispensable economic hub for all of East Africa and a facility that hundreds of thousands of people, maybe even millions, depend upon for their livelihoods.

So last December, people were shocked when leaked images of a report from the Kenya Auditor General’s office revealed, for the first time, the terms of the Chinese loans used to finance the $3.2 billion Nairobi to Mombasa Standard Gauge Railway (SGR) line. To say that people were stunned would be putting it mildly.

If the Kenyan government defaulted on its loans for the SGR, according to the Auditor General report, then the China Exim bank would take control of the port’s “escrow account,” which would effectively cede the port to the Chinese.

The story exploded as it fed into all of the fears about Chinese “predatory lending” or the “debt traps” that U.S. officials have been warning about for years. In Kenya, it also tapped into the country’s painful colonial history and the sense that, once again, it was losing control of its sovereignty to distant foreign powers.

Given that the documents leaked online just before the Christmas holiday, Kenyan officials struggled to respond and were immediately on the defensive. They tried in vain to reassure the public that the port was not at actually at-risk, but it didn’t matter, people saw proof for what they had long feared: Kenya was vulnerable and China was preying on that weakness to secure strategic assets like the prized Port of Mombasa.

How Did the Chinese Respond? They Didn’t.

Throughout this whole episode, the Chinese government effectively said nothing and left President Uhuru Kenyatta to largely fend for himself. In typical fashion, they retreated to their usual communications methods of avoiding comment, publishing a few bland CGTN Africa news stories and issued the standard denial at the regular foreign ministry press briefings in Beijing.

Publicly, the Chinese looked stoic as if none of the vitriol directed their way had any impact. But privately, they fumed. The accusations stung that they were engaging in debt-trap diplomacy, had any kind of mal-intent with their loans and that China was, in fact, behaving very much like the colonial powers they had so often condemned.

At academic conferences or over tea, scholars, government officials and other Chinese stakeholders would express their displeasure over how they were being characterized but they would never dare say so publicly.

So How Did the Chinese Regard the Mombasa-Collateral Issue?

Until now, there’s been little, if anything, written about the Chinese point of view on the terms of the Phase 1 SGR loan that were revealed in the leaked Auditor General report. But now, we have some of the first insights into how Chinese officials think about issues such as Sovereign Guarantees (aka collateral) to secure the massive loans they make for big projects like the SGR.

University of Sheffield scholar Huang Zhengli has spent years conducting research on China’s impact on urban planning in Africa, particularly in Kenya. She’s conducted a number of interviews with Chinese stakeholders about loan collateralization and the broader Sovereign Guarantees like the one that secured the SGR loan with the Port of Mombasa.

Huang recently published a post on a forum on the Chinese social networking platform WeChat where she summarized some of the key findings from the interviews she’s conducted with various Chinese stakeholders involved in this issue. The following is an unedited transcript of Huang’s post that has been re-published here with her consent:

“It is true that Eximbank, like many other bilateral and multilateral financial institutions including World Bank, uses Sovereign Guarantee as a term to secure loans for many African projects, including the SGR project in Kenya. However, the agreement did not specify the ownership of the port as a Collateral. Rather, when elaborating the economic (paying-off) capacity of the country, Kenya government referred to the income of the port as the main source of forex income, and stated that with the building of the SGR and the increasing business of the port, the operating income of both the SGR and the port will be used as a means for debt payment.

“In the event that debt payments prove to be serious trouble for the Kenya Government, Sovereign Guarantee means that the two governments will start a negotiation process to address the issue. There is no way that the Chinese side would expect the transaction of ownership of the port as payment, not only because it is politically and practically impossible, but also because the financial eligibility of the SGR project per se is much more important for the Chinese entities involved.

“My interviewees suspected that these statements are misinterpreted by some people, potentially on purpose, to confuse the public media and stigmatize the project. Again, I’ve never seen any official documents myself and I don’t think ALL of my interviewees have seen the original documents themselves, but I think it is helpful to present their opinions here. “

Key Takeaways From Huang’s Interviews

  • The Chinese were never going to take control of the port, even in the event of a default. There are two reasons for this:
    1. Taking of the Port of Mombasa would be a strategic disaster for Beijing and its desire to repel accusations that it’s a predatory lender. It would undermine faith in the Belt and Road Initiative around the world.
    2. By owning the port, the Chinese would also own all of the headaches that come in running it. They would have to assume responsibility for the labor, dealing with the government and the countless other stakeholders who are involved with the running of this facility. It would be a logistical nightmare.
  • The fact that her interviewees saw some kind of conspiracy in all of this, that people were intentionally trying to “confuse the public media and stigmatize the project” reveals that they still have a long way to go in understanding how to successfully operate in pluralistic societies.
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