SGR loans: Why William Ruto needs to tread carefully

Nairobi Expressway SGR toll station in Nairobi on June 28, 2022. [Boniface Okendo, Standard]

On November 16, 2014, slightly over a year after President Uhuru Kenyatta swept into power, four officials, one Chinese and three Kenyans, signed a payment agreement that would breathe life into the most expensive, and perhaps most controversial project in the country's history.

The Standard Gauge Railway, popularly known as the SGR, would gobble up a massive $3.6 billion after this far-reaching agreement was concluded.

The project would also upend the country's economic and political landscape, sharply dividing Kenyans on its viability.

Signing for the Export-Import Bank of China (Exim) was its assistant General Manager Wang Zhijiz. Kenya's National Treasury was represented by its then Cabinet Secretary Henry Rotich while Kenya Railways Corporation (KRC), which would eventually own and operate the railway, was represented by its then Managing Director Athanus Maina.

The Kenya Ports Authority (KPA) was represented by its then Managing Director Gichiri Ndisa.

Pushed into a box

The Four-Parties-Payment Arrangement, which The Standard has obtained, reveals how China was able to push Kenya into a box in what was aimed at ensuring every dollar it extended to Kenya would be paid back.

Not only was Kenya going to force traders to use the SGR, but taxpayers would also have to pay a new levy. The government was also going to be dragged to a court in Beijing, China, should the parties disagree with Exim.

It is a deal that might come to haunt Kenya's fifth President who recently reversed an earlier directive by KPA forcing all cargo bound into the hinterland, as per the agreement, to clear at the Inland Container Depot (ICD).

Exim signed with the government of Kenya three agreements as part of the $3.6 billion (Sh437 billion) loan for the construction of SGR, a 480km modern railway line that was to run from the port city of Mombasa to Nairobi.

Fears had already been expressed over the viability of the project. The World Bank in a 2013 report, for example, found the alternative of upgrading the oldest railway in East Africa, popularly known as the lunatic express, a much cheaper alternative compared to constructing the SGR.

Earlier, the China Road and Bridge Corporation (CRBC), which had mooted the idea of building a new SGR, had offered to do the feasibility study for free. In August 2012, CRBC was allowed to do the study. Their finding was predictable. Rehabilitating the old railway line was just as expensive as building a new SGR, it found.

Moreover, unlike the World Bank, a Bretton Woods institution associated more with the US and Europe, found that the SGR was going to make economic and financial sense.

Chinese funding

Chinese, finding themselves with a massive stockpile of US dollars, were all over Africa paying homage to every leader willing to accept their offers of building roads, railways, sea-ports, airports, bridges, and dams. These infrastructural projects would come with funding from the Chinese government.

Mostly, the money would come from the Exim Bank of China and a few times, in the case of Kenya, the China Development Bank.

Despite the assurance from CRBC that the SGR would be viable and, in a way it would be able to pay for itself, Exim Bank crafted an elaborate financing scheme to ensure Kenya repaid the three loans it took.

The plan included coming up with a take-or-pay agreement that required KPA to guarantee a certain amount of traffic to the SGR, failure to which it would pay KRC the difference. Should KPA be unable to pay the difference, KRC or ultimately, Exim Bank, would pay itself from the revenues of the port authority.

The long-term service agreement between Kenya Railways and KPA is what resulted in the infamous directive requiring all cargo bound for Nairobi to be evacuated through the SGR to the Inland Container Port in Nairobi.

To make this work, the National Treasury promised the Exim Bank that the national government would issue preferential policies. They included the expansion of the ICD in Nairobi as well as its mandatory customs clearance to ensure the operation of the SGR.

It is this directive that President Ruto reversed days after coming to power.

The agreement notes that any of the clauses in the contract shall remain in force until the loan is fully repaid in 2035. The money collected by KPA on behalf of KRC would be put into an Escrow account opened in the name of Kenya Railways at the Kenya Commercial Bank, KCB.

The Escrow account - an account in which funds are held in trust whilst two or more parties complete a transaction - would be set up by Kenya Railways, the Treasury and Exim Bank.

Although the repayment of the SGR was expected to be done separately by the National Treasury through the Consolidated Fund, or the government's bank account at the Central Bank of Kenya, KPA was required to continue giving traffic to Kenya Railways and remitting the money into the escrow account, failure to which it was to pay the difference.

Two-week notice

Should Kenya Ports neither take nor pay for SGR services, it would trigger a visit from the officials of Exim Bank who, having given a 14-day written notice, would ask for immediate payment.

With the directive from President Ruto, analysts fear that Kenya Ports Authority, unable to guarantee the minimum traffic, might be forced to pay more to Kenya Railways, hurting its finances.

The Kenyan government was also required to come up with the Railway Development Levy (RDL) which is charged on all imported goods for home use. Currently, the RDL, which has since been conceived, is charged at the rate of two per cent.

Repayment of the SGR loan was to largely come from Kenya's RDL which would be deposited by the KRA in a special fund to be drawn by Treasury for servicing the Chinese loans.

The money in the escrow account would only come into use when there was not enough revenue from RDL.

Then there was an on-lending agreement between the National Treasury and Kenya Railways which was signed on October 2, 2014. Under this agreement, Treasury was going to kind of lend to Kenya Railways money it received as a loan from the Exim Bank.

Kenya Railways would then use the money for the construction of the SGR.

As long as National Treasury is servicing the SGR loan as it falls due and there is the requisite minimum amount deposited at Escrow accounts, said the payment agreement, KCB ma tryansfer the balance of the escrow account to Treasury as a discharge of its payments towards National Treasury under the on-lending agreement.

Kenya Railways assigned to Exim Bank all the security it had and to the long term service agreement. This includes the right to receivables, amounts owed to KPA for service rendered; any right to claim against or receive damages; get-off or counterclaim amounts or any other payments from KPA.

Exim powers

This security, the agreement read, remains in full force even with payment by Treasury.

Kenya Railways also appointed Exim Bank to be its attorney. This means that Exim was given full power of substitution and delegation, allowing the Chinese Bank to act on behalf of KRC and come after KPA should the port authority fail to meet its end of the bargain. This includes signing, sealing, executing, delivering, doing all deeds instructions on behalf of KRC.

KPA, on its part, is not allowed to make any claim or demand right or counter claim against Kenya Railways.

In the event of a default the security becomes enforceable. Exim Bank will give a 14-day notice to Kenya Railways and Treasury, and should the two not consent Exim will issue notice directly to KPA notifying it about the event of default. It will ask KPA to deposit the amount due to Kenya Railways under the long term service agreement into an account of Exim Bank's choice.

Upon receipt of the written instructions from Exim Bank, Kenya Ports should promptly comply with instructions and make payment, through an electronic transfer, to an account chosen by Exim Bank.

Exim will then use the money to offset the SGR loan.

Validity or accuracy

KPA is not bound to inquire into the validity or accuracy of any amounts as long as it is due and payable to Kenya Railways under the long term service agreement or bank account details specified for payment by KPA in Exim Bank's instructions.

There is no limit to the number of instructions Exim may issue to KPA.

All the amounts paid to Exim Bank shall not be taxed nor deducted in any way. Should it be deducted, Kenya Railways will pay the difference.

Exim Bank will also not bear exchange risk in case the shilling depreciates against the dollar, with Kenya Railways expected to indemnify the Chinese Bank against cost, expenses or liability.

A default is deemed to have occured if KRC, Treasury or KPA, for any reason, fails to pay any amount due and payable under this agreement.

If any of the three is in breach of any of its covenants or fails to perform any of its covenants, that is interpreted as an event of default.

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