The future of State capture: Lessons from the SGR – Part 2

What you need to know:

  • Many may agree that the construction of the SGR will produce economic upside for Kenya. The unanswered question is what the off-setting costs are and whether these outweigh the benefits.
  • The question at this stage is not whether Kenya needed the SGR or whether it will foster economic growth.  The train has already left the station so far as those questions are concerned. 
  • The relevant questions now are: What are the terms? How much do we have to pay? By when? Is this a fair, legitimate and reasonable transaction?

At the beginning of the decade, a World Bank report found that infrastructure development in Africa was responsible for more than half of Africa’s improved growth performance and that it had the potential to contribute to even more in the future.

This rhetoric gained traction and at the 2005 G8 summit at Gleneagles (UK), the Commission for Africa made a compelling case for African governments to redirect their attention to building and managing sustainable infrastructure. These discussions gave birth to the Infrastructure Consortium for Africa (ICA).

The Consortium and other development institutions found purpose in championing infrastructure development as a solution to reducing poverty and increasing economic growth in Africa. The 2010 World Bank report’s findings were only an ancillary addition to the discourse that would dominate the decade which now draws to a close.

Africa’s empty coffers

Despite their enthusiasm, African governments knew that they could not afford to finance infrastructure development at the scale advocated for. They needed to at least double the financial resources they were allocating to the sector.

In 2008, the World Bank estimated that the region would need about 93 billion dollars a year to meet the infrastructure deficit.

According to the African Development Bank’s African Economic Outlook 2018, the annual infrastructure deficit in Africa was estimated at $108 billion. In order to meet this financial need, African governments had to find development partners.

China and the promise of the decade

For many African countries, multilateral development banks (MLBs) appeared to be the solution to finance their infrastructure development.

MLBs provided concessionary loans which were extended on terms substantially more generous than market loans; either by lowering interest rates below the market rate, by extending grace periods or a combination. As a result, the social cost of borrowing from MLBs tended to be low for most developing countries.

For instance, according to Warlters and Auriol (2005), every dollar borrowed from the International Development Association by the Kenyan Government had a social cost of six cents on the country.

This was a very low social cost primarily because Kenya an IDA country then, did not pay interest, had a high discount rate, and was extended a long repayment grace period.

The reason African governments were wary of MLBs is because of the political conditionality attached to their funding and the drawn-out scrutiny that characterises the financing process.

China on the other hand, was ready and willing to finance infrastructure development in the region at what seemed to be low interest rates. It promised unconditional soft loans and access to capital. 

Crucially, the loans from China came wrapped up with a complete delivery model for the infrastructure such that a Chinese consortium would assess, design, plan, construct and possibly manage the infrastructure in addition to providing the financing.

China’s package included easy access to money, little scrutiny and full delivery. African governments welcomed such financing and by 2017, the gross annual revenues for Chinese engineering and construction companies in Africa totalled $51.19 billion. Today, the top five countries - Algeria, Angola, Ethiopia, Kenya, and Nigeria - account for 53 per cent of all Chinese companies’ 2017 construction project gross annual revenues in Africa.

Chinese gross annual revenue in East Africa (million dollars)

Data sourced from Johns Hopkins University, SAIS China-Africa Research Initiative (Chinese Contract Data)

Chinese annual revenue in Africa (millions of dollars)

Data sourced from Johns Hopkins University, SAIS China-Africa Research Initiative (Chinese Contract Data)

The Angola model; how China packaged concessional loans

Most African nations suffer from low credit ratings. They are high-risk borrowers and this increases the costs of lending to Africa. China hit the nail on the head when it mitigated the risk by using asset or commodity-backed loans. Such commodities were mineral resources including oil and gas.

Though the asset or commodity-backed concessional loan was not novel, China built the model to scale and applied it systematically in Africa. In 2004, China completed its first Chinese oil backed loan in Angola.

The Angolan government would use Chinese credit facilities backed by petroleum-based guarantees to finance investments, but these investments would not be delivered directly to the Angolan government.

Instead, they would provide the necessary funds for Chinese public enterprises to develop infrastructure and industrial projects in exchange for petroleum and minerals. Chinese investments would thereafter be recovered from extracted and imported petroleum.

The figures published by the Finance Ministry of Angola at the end of 2011, estimate that China invested $14.5 billion through various agencies. The diagram below describes the investment model and flow applied in Angola.

Many speculate that in 2006 in Angola, $4 billion in such loans helped China acquire the exploitation rights to several oil blocks; that the same model was used to secure the mining rights to the Democratic Republic of Congo’s copper and cobalt mines; and that China has made similar deals with at least seven other resource-rich countries, including Nigeria.

The ingenuity of the model is in its opaqueness. It is very difficult to determine how much the parties have invested and how much has been recovered.

The pledged assets or/and commodities may end up yielding more for the lender than the actual price of the development (including a “normal” profit element). Only the contracting parties have knowledge of the resources pledged in the contracts. Moreover, the contracts are inaccessible, and the details are often shrouded in secrecy.

There is nothing like free lunch, and such easily accessible loans seem to become overwhelming and expensive sooner than expected. It seems that Kenya used a variation of the Chinese concessional loan. We pledged strategic assets more than commodities to secure the loans and in the event of default we risk losing sovereign assets.

Secretive processes do not fit in with the spirit of Africa’s new age constitutions and in particular, the Constitution of Kenya 2010. The Kenyan Constitution gives importance to the right of access to information and the public participation principle such that any secret infrastructure contract could be easily challenged and exposed in court.

How then, according to a Time Magazine article, did Chinese debt become the methamphetamines of infrastructure finance in Africa? What institutional loopholes enabled the permeation of this sort of financing whose possibly long-term negative effects far outweigh any temporary benefits? We answer this question from the Kenyan legal institutional perspective.

A government to government deal

Among the various statutes put in place to inform government spending, two were of utmost importance: The Public Procurement and Asset Disposal Act (PPADA) and The Public Finance Act (PFA).

These, coupled with the Access to Information Act (AIA), were meant to conjoin the principles of accountability, transparency, and public participation espoused in the Constitution with the business of public finance and public spending.

Incidentally, the government to government agreement (g2g) between Kenya and China for construction of the SGR fell within the purview of bilateral agreements between the government of Kenya and other foreign governments.

Legally speaking, this had two major effects. The first is that it removed the SGR financing process from the application of the Public Procurement and Asset Disposal Act (PPADA).

The second is that it removed the proceeds of the loan from the oversight procedure of both the public and the Consolidated Fund as provided for under the Public Finance Act (PFA). 

The open question is whether the right to access information as provided under the Access to Information Act (akin to the US Freedom of Information Act) allow access to the agreements between Kenya and China concerning the SGR.

The Public Procurement and Asset Disposal Act (PPADA)

Section 4 (2)(f) of PPADA excludes the procurement and disposal of assets under bilateral or multilateral agreements between the Government of Kenya and any other foreign government. Buttressing this is section 6(1) which provides that where any provisions of the Act conflict with any obligations of the Kenyan government arising from a treaty to which we are party, the terms of the treaty shall take precedence.  There are certain conditions that must be fulfilled but we are now past that point; the contract having long been awarded and the railway built.

The SGR g2g agreement was therefore removed from operation of the PPADA. What this means is that competitive tendering was ousted; the requirement for open tendering was set-aside; and the restrictions on direct procurement outside of legislated conditions were inapplicable.

The Public Finance Act

Section 50 (7)(c) of this Act provides that funds made available to the government by way of a loan from another government are disbursed directly to the suppliers where the loan is raised for the purpose of financing goods and services provided by a supplier outside Kenya.

The result is that the funds for the SGR contract were paid directly to CRBC, being the entity primarily responsible for the development of the SGR, instead of the same being paid out of the Consolidated Fund. 

The Controller of Budget was therefore left out of the payment system and any oversight procedure was subverted.

Moreover, the requirement for public participation, which informs the PFA, was also avoided. There being no systems to guide public participation with regard to g2g loans, the public was not accorded a chance to vet the process. This is despite the fact that the agreement had, as we have realised, the potential to impact us immensely.

However, the SGR loan has morphed into public debt. Therefore, the net effect of this legal structuring is that we find ourselves as Kenyans with a debt which we must pay from taxes collected from us or from future generations but in relation to which we had no oversight. 

Imagine you are the parent of a little boy. He finds someone with money who is willing to build a house for him subject only to a few conditions. You as the parent must pay the loan, but you cannot question the design and cost of the house! This is where we are, today, as Kenya. 

The Access to Information Act (AIA)

The Access to Information Act (AIA) gives effect to the right of access to information provided for under article 35 of the Constitution. It provides under section 5 that every citizen has the right of access to information held by the State.

AIA gives every citizen the expeditious right to access information held by a public entity or a private body at a reasonable cost.

On these grounds, anyone could access the contract by making an application under the Act to the CEO of the Kenya Railways Corporation. There is no mention of anyone having done so, but one could surmise that the probability of success of such an application is low.

The government would probably argue that right to information of g2g agreements is limited under section 6 of the Act for it could jeopardise the commercial interests of a third party or cause substantial harm to the ability of the government to manage the economy of Kenya. It may be a weak argument; perhaps the matter should go to court for clarification.

Corruption and the Secret of Law

Sally Falk Moore, quoted in the book ‘Corruption and the Secret of Law’, once remarked that the “making of rules and social symbolic order is a human industry matched only by the manipulation, circumvention, remaking, replacing, and unmaking of rules and symbols in which people seem almost equally engaged.”

Every decision made regarding the SGR g2g contracts seems opaque to public scrutiny. The government may have been deceived and we made wrong choice. 

The question at this stage is not whether Kenya needed the SGR or whether it will foster economic growth.  The train has already left the station so far as those questions are concerned. 

The relevant questions now are: What are the terms? How much do we have to pay? By when? Is this a fair, legitimate and reasonable transaction?

The debt trap: new forms of State capture

The Infrastructure Consortium for Africa (ICA) is not what most people remember about the G8 summits in 2005. G8 Finance Ministers agreed to cancel 100 per cent of debts of so called Heavily Indebted Poor Countries owed to the IMF, the World Bank and the African Development Bank. Some $130 billion of debt was cancelled for 36 countries. Soon after that, Uganda’s Information Minister, James Nsaba Buturo said, “We will be able to expand our infrastructure.”

Ten years later, a report by Jubilee Debt Campaign (JDC) found that following cancellation, 22 countries had slipped back into debt crisis and a further 71 countries could regress soon too. International debt had increased. The report suggested that the solution would be a fresh round of debt cancellation, coupled with tax justice.

The JDC’s proposal was naive. The problem in Africa is not money, but leadership coupled with defective institutional design. Our institutions are susceptible to unsound fiscal policies.

Economic development depends on resilient institutional strength. Otherwise, institutions fall prey to capture by not only corrupt individuals and corporations, but also by foreign interests.

Many may agree that the construction of the SGR will produce economic upside for Kenya. The unanswered question is what the off-setting costs are and whether these outweigh the benefits. Surely this is a question that every sovereign nation should be capable of answering.

The SGR tale is not yet over, but we will keep paying for it. Unanswered contractual questions walk now hand in hand with a majestic project that ends in the middle of nowhere, next to a volcano with no town in sight.

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:

•Prof Luis Franceschi, founding dean of Strathmore Law School and Visiting Fellow, University of Oxford.

•Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates.

•Kasyoka Mutunga, Research Associate at ALN Anjarwalla & Khanna, Advocates

• Wandia Musyimi, Research Associate at ALN Anjarwalla & Khanna, Advocates

Welcome!

You're all set to enjoy unlimited Prime content.