More questions greeted the government’s move to make public the standard gauge railway (SGR) financing agreement, with details of the collateral Kenya put up, which a parliamentary committee had highlighted, being a key issue.
Roads, Transport and Public Works Cabinet Secretary Kipchumba Murkomen had promised to make public the highly secretive SGR contract during his vetting, but the three documents he released to the public had no details of the collateral.
A parliamentary committee last year said in a report that Kenya had used Kenya Railways Corporation (KRC) and Kenya Ports Authority (KPA) as collateral in the Sh477 billion SGR loan procured from the Export and Import (Exim) Bank of China.
Immediately Mr Murkomen shared the document claiming it to be the SGR contract, city lawyer Ahmednasir Abdullahi posted on his Twitter account: “This isn’t the SGR contract. This is one of the finance agreements. The SGR contract is dynamite ... you won’t see it easily ...”
Another city lawyer, Donald Kipkorir, posted on his Twitter account: “True disclosure of SGR contracts are those of management and commission involving Kenya Railways, China Road and Bridge Corporation and Africa Star Railway Operations Company. These are the contracts where billions went to ... other contracts are red-herrings and hot air.”
The 24th report of the Public Investments Committee (PIC) of the National Assembly on the audited accounts of the country’s state corporations, among them KRC and KPA, which was adopted by the 12th Parliament, noted that it requested the Attorney-General and National Treasury to make available the SGR contract without success.
It noted that the two state corporations had their assets used as collateral in the Payment Arrangement Agreement (PAA) between them and Exim Bank of China for the loan. The signing of the PAA was done without the requisite approvals of the KPA board, the Ministry of Transport and the Cabinet.
This saw PIC recommend that the Ethics and Anti-Corruption Commission should investigate the signing of the agreement and for the National Treasury to renegotiate the entire PAA and discharge KPA from the contract and replace it with KRC.
The report of the PIC, then chaired by current Mombasa Governor Abdulswamad Shariff, indicates that clause 17.5 of the contract referred to KPA as a borrower and not the government of Kenya.
“A reading of the agreement left no doubt that KPA and KRC were borrowers and therefore liable to repay the loan through their assets without immunity. This put the assets of KPA at risk in the event of a default,” the report reads.
Phase I of the SGR project involved the construction of a 480-kilometre line from Mombasa to Nairobi at a cost of Sh327 billion. The 120-kilometre extension to Naivasha cost the country Sh150 billion. The two loans were procured from the Exim Bank of China.
The audit by the Office of Auditor-General that PIC was acting on noted that KPA’s only obligation was to facilitate a guarantee of the minimum freight volumes.
“Under this clause, the agreement provided that each of the borrowers, in this case KRC and KPA agrees that in any proceedings against them or any of their assets – present or future – in connection with the agreement, no immunity from such proceedings shall be claimed by it or with respect to its assets,” the auditors noted. “KRC and KPA irrevocably waive any right of immunity whether characterized as sovereign immunity or otherwise.”
PIC directed the Head of Civil Service to submit the two SGR loan agreements to the Audit General for audit verification during the 2022/2023 audit cycle. It is not clear whether this has been complied with.
The payment agreement shows that KPA’s revenue and assets had expressly guaranteed the repayment of the loan, with the auditors saying it is a material fact which had not been disclosed in its financial statements for the year ended June 30, 2018.
When KPA management appeared before the committee, it said: “Clause 17.5 must be read within the context of the entire payment arrangement agreement for the Mombasa-Nairobi SGR project.”
“From the outset, the agreement described the Government of the Republic of Kenya as the borrower. KPA was not a borrower as it did not have the capacity to hold sovereign authority and therefore could not plead sovereign immunity. Only the government had such capacity,” the KRC management had told the committee. “The clause could not be enforced against KPA. This was a mistake apparent on the face of the record.”
In the documents released by Mr Murkomen, there was no specific mention of the collateral, but clauses in them pointed to the parliamentary committee’s findings.
“Any long-term service purchase agreement with take-or-pay terms (or similar arrangement or agreement) entered into or to be entered into between the railway operator (being the end-user as of the date of this agreement or any of its legal assigns or successors) and users of the railway (including, without limitation, the Kenya Ports Authority), in form and substance reasonably satisfactory to the lender,” Section 1.26 of the loan agreement states.
This means that KRC and KPA cannot enter deals with other parties that may hurt China’s interests and that anything that is likely to compromise the collateral must be approved by China.
The PIC report noted that KPA’s response that the agreement did not include KPA and KRC could not be sustained “as the contract itself had clear words terming the KPA and KRC as borrowers and that they should not claim immunity”.
The committee observed that the drafters of the long-term service agreement “should have foreseen this and clarified in the agreement if KPA’s explanation was to be believed”.
“The committee recommends that the National Treasury should renegotiate the entire payment arrangement agreement with a view to discharging the KPA from the contract and replace it with the KRC,” the PIC report reads.
The PIC report reveals that although KPA indicated that it began disclosing information relating to the loan payment agreement with KRC in 2020, this ought to have been disclosed from the time the agreement was signed.
It further notes that it was inconceivable that KPA could sign an agreement with the KRC agreeing to provide a certain tonnage of goods for transport through the SGR and be held liable in the event of failure.
This is notwithstanding that as a free-market economy, transporters were at liberty to use any mode of transport, including road.
“It was not clear to the committee what KPA stood to gain by entering into such an agreement,” the PIC report states, even as data from both KPA and KRC indicated that the required tonnage had not been met thus requiring KPA to pay the loan through KRC.
“The agreement substantively meant that KPA’s revenue would be used to pay the Government of Kenya’s debt to China Exim bank if the minimum volumes required for consignment were not met,” the auditors warned.
The auditors further warned that KPA’s assets were exposed to the risk of takeover by the Exim Bank of China since it signed the PAA.
In December 2018, at State House in Mombasa, former President Kenyatta promised to make public the SGR contract. Following the comments, the Chinese government opposed the disclosure.
Chinese Ambassador to Kenya Wu Peng said that Chinese laws are against making such contracts public as it would be detrimental to Chinese commercial interests even as he said that no Kenyan assets were attached as collateral for the SGR loans.
A right to know
In May, Justice John Mativo ruled that Kenyans have a right to know the assets used as collateral in securing the SGR loans in a petition filed by Muslims for Human Rights. But the government did not obey the court order to make the contract public.
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 to the payment of billions of dollars in loans owed to the Asian giant.
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 and a strategic foothold along a critical commercial and military waterway.
“The case is also 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,” stated the New York Times of December 12, 2017.
In September 2018, Zambia lost its international airport to China over debt repayment.
The Auditor-General had also noted that the terms of the PAA were unfavourable to the government, KRC and KPA in terms of dispute resolution.
This is because all disputes are to be referred to the China International Economic and Trade Arbitration Commission as provided in the PAA of November 6, 2014. The agreement notes that each arbitration award shall be final and binding on all parties.