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Letter to the Editor: Why China Will NOT Seize the Port of Mombasa if Kenya Defaults on SGR Debt

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.

Hi Eric,

Just caught this statement [in your September 28 column “China Faces a Critical Test”: “And let’s not forget that, should Kenya Railways default on the Nairobi-to-Mombasa SGR loan, there’s always the Port of Mombasa that serves as collateral“] and wanted to reach out to you as this is not an accurate picture of the loan arrangement. Won Kidane (an international lawyer) and I did a deep dive into these issues and summarized some of it in a recent policy brief.

These are unfortunately somewhat complex issues that involve technical terms (“floating charge” “waiver of sovereign immunity” “escrow account,” etc.) from accounting, law, and project finance – all areas that need some degree of expertise or study to understand and, like the “sovereignty” controversy in Nigeria, are easy to politicize.

Here’s how we tried to explain it:

As explained to Kenya’s Parliament in 2014, the SGR loan repayment is backed by general revenues from the railway but the loan contract provides two further guarantees.

  1. The state-owned Kenya Port Authority (KPA) signed a “take-or-pay” agreement in which it agreed to guarantee a minimum amount of cargo to be transported to Nairobi by rail.
  2. KPA was tasked with imposing a 1.5 percent Railway Development levy on all imports to help Kenya finance the railway (in 2018 the Railway Development levy would have provided $261 million).

“If Kenya runs into difficulties with repayment of the SGR loan, the most likely outcome is an extension of the repayment period through a “friendly consultation.” If Kenya is required to pay and still could not pay, it appears that Sinosure would possibly cover the payments to China Eximbank, as per the insurance policy.”

professor debroah brautigam, director of the china-africa research initiative at johns hopkins university

KPA has become a principal in the loan arrangements, as part of the guarantee structure.

Although we did not see the loan contract, the Kenyan reporter who did see it said that there is “no specific reference to the port” as collateral. 

The Nation was among a number of Kenya media outlets that incorrectly portrayed the SGR loan agreement endangering the country’s sovereignty and assets like the Port of Mombasa.

The collateral, or “asset” that could be at risk in case of default is not the port’s ownership, but the port’s revenues, which, in theory, could be attached in a law suit since they are part of the guarantee structure. In 2019, KPA’s annual revenues were estimated to be over $500 million. It is a very profitable state-owned company. That’s why they were called in to help with the guarantee.

The entire structure of the loan as explained to the Kenyan Parliament suggest that China Eximbank isn’t interested in seizing the railway or the port. They are interested in getting repaid for their loan.

Best, as always.

Deborah Brautigam

Deborah Brautigam is the Bernard L. Schwartz Professor of International Political Economy at Johns Hopkins University and Director of the China-Africa Reseaerch Initiative.

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