SGR train

Projects negotiated and procured in the same way as the SGR contract allow you to sign opaque commercial contracts and MOUs by circumventing oversight institutions, including Parliament and the Controller of Budget.

| Dennis Onsongo | Nation Media Group

Sh500 billion SGR court ruling plays into the hands of ‘deal makers’

The Supreme Court’s ruling this week that the KSh500 billion Standard Gauge Railway, the largest infrastructure project in Kenya’s history, was procured legally has settled a matter in which the issues at stake had far-reaching implications for diplomatic relations with China and Kenya’s access to infrastructure financing from Beijing.

The highest court in the land was making a decision on a ruling by a Court of Appeal in June 2020 that had declared that the SGR contract was procured not only illegally, but unconstitutionally.

As expected, the 2020 Court of Appeal ruling had been received with a deep sense of foreboding and concern in China, especially in the corridors of Exim Bank of China, which financed the SGR project.

China Road and Bridge Corporation, the entity that negotiated and signed the construction contracts and built the railway, had also been left legally exposed by the 2020 Court of Appeal decision.

The Court of Appeal, composed of Martha Koome (now Chief Justice), Gatembu Kairu, and Jamilla Mohammed, had in a judgement delivered on June 19, 2020, found that the Kenya Railways Corporation failed to comply with and violated both the constitutional and procurement law. In setting aside the ruling, the Supreme Court stated as follows: “It has not been demonstrated that KRC, acting not as a procurement entity but on the directive of the Executive, failed to comply with the Constitution.”

The court’s view was that the SGR project was procured under a ‘G-to-G’ arrangement between Kenya and China, which is permitted under the law.

Yet, it was not just the diplomatic relations between Kenya and China that were at stake in this high-stakes legal issue.

That matter raised the broader policy implications for and questions about the very popular arrangement of attracting foreign financing through what has become known as “contractor-negotiated loans”, where large infrastructure projects are awarded without being subjected to international competitive bidding.

The SGR contract was the typical contractor-negotiated loan. The scenario is all too familiar: In the first stage, an MOU is hurriedly signed with the Cabinet Secretary. This will be followed by the signing of a commercial agreement by the ministry or parastatal.

In the third stage, the National Treasury will be invited to sign a financing agreement with a Chinese bank that will have been brought into the picture by the foreign contractor. In this way, a new expensive commercial loan will have been introduced into our national debt register behind the back of Parliament.

This week’s ruling has major political implications because it has put the thumb of approval on a procurement method loved by today’s nouveau riche.

The greedy elite like contractor-negotiated loans that invariably come through the so-called G-to-G arrangement for several reasons: First, projects negotiated and procured in the same way as the SGR contract allow you to sign opaque commercial contracts and MOUs by circumventing oversight institutions, including Parliament and the Controller of Budget.

As a powerful politician, it enables you to conspire with your Chinese cronies to push a project into the government’s spending programme without having to wait for appropriations from Parliament.

Secondly, since the MOUs and commercial agreement can be procured and concluded without subjecting the project to international competitive bidding, you can pad it with as many backhanders and kick-backs as you choose.

It does not surprise that, in the majority of cases, contracts of this nature will invariably have provisions for huge advance payments that must be made even before a spade has been lifted.

The third reason why today’s oligarch loves this type of deal is that debt service is a first charge on the consolidated fund and therefore has to be honoured before appropriations by Parliament are paid.

It means that repayment of the money borrowed from China is almost guaranteed.

The biggest problem is that Kenya has no register of the number of MOUs and commercial agreements signed until the details of the finance agreement have been disclosed by the National Treasury in the external debt register.

If the Court of Appeal judgement remained, several large infrastructure projects procured through the contractor-negotiated financing model would have remained legally exposed. Kenya has taken too many Chinese loans.

While the huge loans to finance the SGR are what hit the headlines, the government has also borrowed heavily for projects of little economic impact — such procurement of equipment for the National Youth Service (NYS) and drilling materials — from China.

Going through the external debt register, the sheer number and size of loans Kenya has taken from China under contractor-negotiated arrangement is mind-boggling, including billions for buying MRI equipment, procuring equipment for electricity projects, power materials, rehabilitation of technical institutes, modernisation of Kenya Power distribution systems and building of Kenyatta University.

In the last 10 years, the county has been on a spending spree, pouring hundreds of millions, sometimes billions of US dollars and Chinese Yuan into everything from roads, railways, ports and transmission lines to geothermal wells, surveillance cameras and dam construction projects, many of which are incomplete.

The SGR procurement was also structured as ‘tied aid’, where only Chinese contractors could participate.

The 2020 Court of Appeal had put the legality of these type of procurements into question because tenders are closed to contractors from countries that have lent money to several large infrastructure project in the country.