What you need to know:
- The SGR loan comes in two parts: roughly half of the loan is purportedly “concessional” with an interest rate of 2 per cent; and the other half is commercial and has an interest rate of 6.93 per cent.
- The feasibility of the project, its construction, financing, and operation were inextricably linked making it difficult for us to ascertain whether the government complied with its obligations under Section 50(1).
In this week’s article we end our exploration of debt in Africa. We look inward using the case of the Standard Gauge Railway (SGR) to explore debt ills. Inspired by the Court of Appeal judgement on June 19, 2020, Rayaan Anjarwalla, a brilliant young man who recently joined St Andrews University, writes below about his interest in other solutions to our debt-development problems. Here is what he had to say.
We often talk of judge, jury and executioner. In the case of the SGR, China was judge, jury, executioner and manufacturer of the noose; and the government of Kenya willingly slipped it on. Throughout this series on debt we have focused on unsustainable debt in Africa. In this, the last article of the series, we will discuss what we believe to be the primary cause of this problem.
Debt in Africa has traditionally been raised for development, but as shown in our previous article the theory does not always hold, and despite high levels of debt and debt forgiveness schemes there has not been a commensurate increase in development in Africa.
Kenya’s debt levels now could have qualified for the Highly Indebted Poor Countries programme and as the second article of this series describes, so does that of many of the countries which took part in HIPC. We must ask ourselves why and what can be done to fix it in the long term.
This year, Kenya’s repayment to the Exim Bank of China (and the Chinese government) for the SGR stands at Sh71.4 billion. This comes on the heels of a judgement issued by the Court of Appeal that found that the CRBC procurement contracts for the railway were illegal. Using the SGR loan as an example, we will show that the debt problem in Kenya and Africa is caused not by the absence of necessary laws, but by the blatant disregard of these laws on the part of African governments.
Debt only for development
As explained in our previous articles, debt in Africa has traditionally been raised on the pretext of development expenditure on the continent, almost always for infrastructure projects. In Kenya, this is required by law. Section 15 (2)(c) of the Public Finance Management Act (PFMA) mandates that:
“over the medium term, the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure”.
This, in principle, is sound fiscal policy. Such funds would allow for infrastructure that could boost a country’s production capacity. This would then theoretically, provide funds to repay the debt and perhaps allow for an economic surplus. The SGR serves as a good test case. Has practice met the theory?
This year the SGR debt repayments totalled Sh71.4 billion, after being held at Sh31 billion during a five-year grace period. In the financial year 2021/2022 the repayments will amount to Sh111.4 billion per year. However, in the last year, the SGR recorded revenue of only Sh10.1 billion, with an approximate operational cost of Sh18 billion. This is 65.56 per cent below what Kenya Railways anticipated. Not only has the project been unable to generate profit greater than the interest cost of the loan, it has also been unable to generate any profit at all.
The SGR’s prospects are not promising either. As Ndii noted in 2018 the feasibility study of the project stated that the SGR would transport 22 million tonnes of cargo annually. As each train can only carry 3,000 tonnes, this would require 20 trains per day moving down the track. However, according to KIPPRA, the operational capacity of the railway is 12 trains per day. From the onset, the SGR has been incapable of meeting its targets.
The government’s SGR loan guarantee
In Kenya, where the government or a government entity guarantees a loan, as the Kenya Railway Corporation did, there exists a legal obligation in Section 58(1) of the PFMA to ensure:
(b) The borrower is capable of repaying the loan, and paying any interest or other amount payable in respect of it;
(c)The financial position of the borrower over the medium term is likely to be satisfactory;
How did a dead-end project such as this one be guaranteed by the government? Perhaps a few of the reasons for this are that first, as the Court of Appeal found, the procurement process was performed illegally. Second, the cost of the project may have been inflated to allow for money to be siphoned off. Lastly, one of the feasibility studies for the project was done by the China Road and Bridges Corporation (CBRC) - an inherently conflicted party.
The Court of Appeal ruling of June 19, 2020 found that the SGR’s procurement process was illegal and did not meet the statutory standards put in place to ensure that projects are reasonably priced and of sufficient quality. The ruling read in part:
“We substitute therefore an order declaring that Kenya Railways Corporation, as the procuring entity, failed to comply with, and violated provisions of Article 227 (1) of the Constitution and Sections 6 (1) and 29, of the Public Procurement and Disposal Act, 2005 in the procurement of the SGR project.”
Seeing that the government must conduct a feasibility study to evaluate the necessity of any project it undertakes, the SGR’s feasibility study, leaves much to be desired. The China Road and Bridges Corporation (CRBC) carried it out at no cost, but on the condition that they would be contracted to build the SGR, should the project be approved. This was a glaring conflict of interest, especially since there was no third- party independent validation of the feasibility study.
Lowest possible cost
When the government guarantees a loan, it has the following obligation under Section 50(1) of the PFMA:
“In guaranteeing and borrowing money, the national government shall ensure that its financing needs and payment obligations are met at the lowest possible cost in the market which is consistent with a prudent degree of risk, while ensuring that the overall level of public debt is sustainable.”
The SGR loan comes in two parts: roughly half of the loan is purportedly “concessional” with an interest rate of 2 per cent; and the other half is commercial and has an interest rate of 6.93 per cent. At the time that the loan was agreed upon the then standard London Inter-bank Offered Rate (LIBOR) interest rate stood at approximately 2 per cent for commercial loans.
The feasibility of the project, its construction, financing, and operation were inextricably linked making it difficult for us to ascertain whether the government complied with its obligations under Section 50(1).
The government has a Constitutional obligation under article 35:
“Every citizen has the right of access to:
information held by the State;”
“The State shall publish and publicise any important information affecting the nation”.
In the case of the SGR the government failed to comply with this obligation as both the procurement contracts and the loan agreement were hidden from the people of Kenya. In fact, when the case was taken to court, the government refused to hand over documents relating to the case. When they were leaked and attached to the case, they successfully requested the court to remove them from the records and thus from the public eye on the grounds that the documents were improperly accessed and confidential.
While reliance on confidentiality in the context of defense related contracts is understandable, what can possibly be confidential about the terms and conditions relating to the construction of a railway for purely commercial, non-military purposes?
Debt control obligation
Under Section 12(1)(b) of the PFMA, the National Treasury has the obligation to:
manage the level and composition of national public debt, national guarantees and other financial obligations of national government within the framework of this Act and develop a framework for sustainable debt control;
In order to evaluate what “sustainable debt” is, the World Bank conducted a study which estimated that the maximum debt to GDP ratio that can be reached before causing an economic slowdown, is 77 per cent. Kenya ensures that its debt remains sustainable by creating a “debt ceiling” which is the maximum amount of debt that the country is allowed to hold. Last year Parliament raised the debt ceiling to approximately Sh9 trillion which allows Kenya to take on debt up to a debt to GDP ratio of 100 per cent, well above a sustainable level. Kenya is again failing at its obligation to control its debt.
It should be noted that neither the mandarins at the Treasury nor the other checks and balances put in place in our system of Government have proved effective in preventing the accrual of unsustainable debt.. While Covid-19 may be a medical pandemic, its immediate effects will soon pass. Kenya, however, is well on its way to a debt pandemic, the effects of which will beggar our nation for generations. It is also worth remembering official recorded debt amounts may not include debt incurred by state corporations and other government-controlled entities that are more or less insolvent.
So, what is to be done?
The Court of Appeal judgement is unprecedented in Kenya. Public interest litigators were at the vanguard of calling for debt justice. Should the matter be taken to the Supreme Court, the question will be what the effect of the judgement will be? Will the debt incurred in connection with the SGR be deemed illegal as a matter of Kenyan law? There is little doubt that the Chinese government will not simply accept such a position.
So how do we build on the Court of Appeal’s accomplishment and in doing so, force prudence on the part of the Government?
First, there should be a unification of public interest litigators within each country in Africa under a single umbrella body. An example of such a body exists in Colombia, called Dejustica. There is undoubtedly a case to be made for greater Parliamentary and public scrutiny when the Government wishes to incur debt. One of the key roles of the public interest umbrella organisation would be to participate in a process of public review, thus ensuring transparency and openness.
Second, there needs to be greater individual accountability in the spending of government money as well as in the raising of debt. While the craven attitudes of our political class no longer surprise us and the vagaries of politics will largely be responsible for their fate, we need a carrot and stick approach with our civil servants. Public officials found to have conducted themselves fraudulently or negligently should be held personally liable for the loss.
Much of what is proposed will not require the enactment of new laws but the compliance and enforcement of existing ones. It will require our judges to have the courage the Court of Appeal demonstrated on June,19, 2020.
Kenya has the guns to tackle its own debt crisis, just no one to fire them and no target to hit. We need some marksmen, immediately. A combination of a courageous Judiciary and organized public interest litigation will be the marksmen we need to hold our Government to account and prevent a tsunami of debt from overwhelming us.
This article is part of a long series of articles on the rule of law in the context of politics and ethics. The series is researched and co-authored by: Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates; Kasyoka Salim, Research Associate at ALN Anjarwalla & Khanna, Advocates; Wandia Musyimi, Research Associate at ALN Anjarwalla & Khanna, Advocates; Zara Tayebjee, Barnard College of Columbia University; Rayaan Anjarwalla, St Andrews University; and Prof Luis Franceschi, Senior Director, Governance & Peace, The Commonwealth, London.