China To Take Over Kenya’s Largest Port Over Unpaid Loan

Debt-trap diplomacy takes hold of continent

Image Credits: Etienne Oliveau / Stringer / Getty.

No more Mr. Nice Chinese Guy.

After years of “benevolent” handouts to various African countries by Beijing, all of which however came in the form of loans, of which few have led to viable, long-term projects and cash-flow generating assets, and led to accusations that China is pursuing a “new colonialism” of the African continent (and more recently, nations along the One Belt, One Road corridor), China is demonstrating to the world what happens when its debtors refuse to pay up.

But first a brief detour: readers will recall that China’s ambitions for Africa are hardly new, and were discussed here over 6 years ago for the first time in “The Beijing Conference”: See How China Quietly Took Over Africa.”

And while back then few noticed, in September of 2018, during a major conference with African leaders, China’s president Xi Jinping proposed an additional $60 billion in financing for Africa in the forms of assistance, investment and loans, the western media was quick to label the latest round of Chinese financing a “debt trap”, to which a top Chinese official responded at the time that Beijing is merely helping Africa develop, rejecting criticism it is loading African countries with unsustainable financial burdens.

It turns out, the official was not exactly telling the truth, because far from handing out free money the African Stand reports that China is likely to take over Kenya’s lucrative Mombassa port if Kenya Railways Corporation defaults on its loan from the Exim Bank of China.

Call it a “debt-for-sovereign equity” exchange with a twist.

China’s aggressive strategy emerged when a leaked audit report showed that the Kenyan government had inexplicably waived its sovereign immunity on the Kenya Ports Asset when signing the agreement, thus exposing the Kenya Port Authority to foreclosure – and confiscation – by China’s Exim Bank.

The report said that “the payment arrangement agreement substantively means that the Authority’s revenue would be used to pay the Government of Kenya’s debt to China Exim bank if the minimum volumes required for [rail] consignment were not met”, auditor F.T Kimani wrote. “The China Exim bank would become a principal over KPA if KRC defaults in its obligations, reports Africa Stand and All Africa news.

KRC accepted the multi-billion dollar loan from the Chinese institution to build the Mombassa-Nairobi standard gauge railway (SGR), with construction services provided by China Roads and Bridges Corporation (CRBC), a division of state-owned conglomerate China Communications Construction Company (CCCC), which is why some have said the loan was a low-risk, full recourse vendor financing, one where it is China who gets all the upside while sticking the naive natives with all the potential downside, as the “worst-case scenario” now confirms.

The China-built, China-funded standard gauge railway, also known as the Madaraka Express, is a diesel-powered passenger and freight rail service connecting Nairobi and Mombassa. Its construction was plagued by cost overruns, and outside observers questioned its economic viability, but China was not worried: after all, if the 80% China-funded project failed, Beijing would have full recourse.

Sure enough, SGR reported a 10 billion Kenyan shilling loss in its first year of operation, with current estimates that the railway generates about 600 billion Kenyan shilling in revenue.

Meanwhile, in addition to putting the port at risk for a Chinese takeover, at stake is also the Inland Container Depot in Nairobi, which receives and dispatches freight hauled on the new cargo trains from the seaport.

So what happens if China does takeover the port? Implications would be grave, including the thousands of port workers who would be forced to work under the Chinese lenders. Management changes would immediately follow the port seizure since the Chinese would naturally want to secure their interests.

Further, revenues from the port would be directly sent to China for the servicing of an estimated Sh500 billion lent for the construction of the two sections of the SGR.

In other words, a Chinese-funded project in Africa, is about to be confiscated by China, which will appoint Chinese management, upstream all revenues to China (and, eventually, profits after enough fat is trimmed), and provide China with its own strategist port in east Africa.

A brilliant “investment” scheme? Why yes, and it won’t be the first time China has used it: 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 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.

More recently, in September 2018 Zambia lost Kenneth Kaunda International Airport to China over failure of debt repayment.

And while some may gawk at the unprecedented loophole that was left to grant China what is effectively the takeover of a strategist sovereign assets, some suspect that backdoor financial dealings may have been involved becuase as African Stand writes, it is “indiscernible” how KPA signed the loan agreement as a borrower, in one of the toxic clauses subsequently exposing its assets to the Chinese clamp.

“…any proceeding(s) against its assets (KPA) by the lender would not be protected by sovereign immunity since the Government waived the immunity on the Kenya Ports Assets by signing the agreement,” the auditor wrote.

Whatever the reason for the glaring oversight, and the imminent “confiscation” of this critical African asset by Beijing, slowly but surely China’s intrepid vision behind first colonizing Africa (using China-funded loans) and subsequently much of Asia with the “One Belt, One Road” initiative is becoming quite clear.