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Generational Dynamics Web Log for 3-Jan-2019
3-Jan-19 World View -- China may seize Kenya's Mombasa Port as debt repayments triple

Web Log - January, 2019

3-Jan-19 World View -- China may seize Kenya's Mombasa Port as debt repayments triple

Kenya's debt repayments to China triple in July

by John J. Xenakis

This morning's key headlines from

Kenya's debt repayments to China triple in July

Kenya's Standard Gauge Railway (SGR), from Mombasa Port to Nairobi, built with funding from China
Kenya's Standard Gauge Railway (SGR), from Mombasa Port to Nairobi, built with funding from China

Starting in July, Kenya's annual debt repayment of loans to China triples to $900 million.

Kenya has been on a borrowing binge in the last five years, having borrowed a total of $50 billion. These loans have been used to build roads, ports and railways, and were to be repaid with the revenue from this infrastructure, but as with many loans, hopes and promises were not kept.

Some $2.7 billion in loan repayments will be due to foreign lenders in 2019-20, a third of it to China. In addition, Kenya must pay $780 million for 2014 Eurobond note, including $2 billion in commercial loans in the first half of 2019. This includes retiring a $787 million loan from Britain's Standard Chartered Bank and another $371 million loan from Trade and Development Bank, formerly PTA Bank.

The reason that payments to China are tripling in 2019 is because a five-year grace period that China granted to Kenya in 2014 is now expiring.

All of these loans are denominated in foreign currencies, usually US dollars. Payments must be made out of the country's foreign reserves, which are at $9 billion September 2018. Standard Media (Kenya) and The Nation (Kenya) and Tuko TV (Kenya)

Concerns grow that China may take control of Kenya's port at Mombasa

Kenya's government borrowed $4 billion from China to build the Mombasa-Nairobi Standard Gauge Railway (SGR), a train that would operate between the Port of Mombasa and the capital city Nairobi. It was supposed to pay for itself with revenue to the Kenya Ports Authority (KPA), but revenues have been far below the projections.

China requires that all the deals that China makes with countries under the umbrella of the Belt and Road Initiative (BRI) be kept top secret, even within the country making the deal. However, new details about the SGR deal are now coming to light in a report by Kenya's Auditor-General Edward Ouko, including a requirement that revenue of the Kenya Ports Authority would be used to clear the debt of $2.27 billion owed to the Exim Bank of China.

The auditor also notes that the contract specifies that if there's any disagreement or dispute between Kenya and the bank, then the disagreement would be referred to arbitration within China, "whose fairness is resolving the disagreement may not be guaranteed."

According to the auditor, "Exim Bank would become a principal over KPA if [Kenya] defaults in its obligations and the Chinese bank exercises power over the escrow account security."

China's foreign ministry spokesman was asked about this a week ago, and responded as follows:

"Regarding the issue you mentioned, we have checked with the relevant Chinese financial institution and found that the allegation that the Kenyan side used the Mombasa Port as a collateral in its Mombasa-Nairobi Railway payment agreement with the Chinese financial institution is not true. The report you just cited said that the Kenyan side also has made clarifications on it.

At present, the China-Kenya cooperation on the Mombasa-Nairobi railway is progressing smoothly. When cooperating with African countries including Kenya, Chinese companies and financial institutions will always conduct joint and thorough scientific study on the feasibility of the projects and then proceed to determine the construction and funding plans and scales to guard against causing debt risks and fiscal burdens for Africa."

This is an evasive answer (standard practice from a Chinese official), because the auditor's report does not claim that the port itself was used as collateral.

Kenya media is becoming increasingly concerned that China's "Debt Book Diplomacy" is going to ensnare Kenya in the way that it's forced other countries to give control of its infrastructure to China.

The poster child for how it works is the Port of Hambantota, a Chinese infrastructure project in Sri Lanka, funded with a loan from China, with almost all the labor performed by Chinese workers. Sri Lanka was unable to repay the loan, and the government was forced to give the Port to China. So now Sri Lanka has a large seaport owned by China, and a large Chinese enclave with hundreds of Chinese families, with no benefit to itself and to its own people.

There are examples in Africa as well.

In 2007, Democratic Republic of Congo (DRC) entered into a $10 billion resource-financed infrastructure agreement with China, where copper and cobalt mining licenses would be allocated to a Chinese consortium. In exchange, the consortium would secure financing of $6.56 billion worth of infrastructure projects and invest $3 billion in mining projects. The agreement came to light only when DRC could not make the debt payments, and China's Exim bank took control of a portion of the mines.

In 2010, the government of Ghana informally secured $3 billion loan from China without parliamentary scrutiny and over 15 years Ghana would supply 750 million barrels (13,000 barrels per day) for servicing the debt. When oil prices crashed, China's Exim bank demanded that the amount of oil used to service the debt would increase from 13,000 to 15,000 barrels per day, and that the agreed fixed price to be paid would be reduced from $100 to $85 per barrel According to Ghana’s then Finance minister, that $15 difference would have seen Ghanaians pay $6.4 billion to repay a $3 billion loan. Ghana was forced to cancel half of the agreed $3 billion loan.

In all three of these cases, the details of these agreements were kept secret, per China's demands, until they were revealed because debt repayments could not be met, and China then enforced repayment by seizing assets.

It's now feared that the same thing will happen in Kenya, and China will seize Kenya's Port of Mombasa. The governments of both Kenya and China insist that there's no problem, but it still remains the case that the SGR is generating far less revenue than had been assumed when the original loan agreement was signed in 2014.

China has used "debt trap diplomacy" in several countries. They loan a country to build infrastructure proects that will strategically benefit China by helping China to exploit the countries natural resources, but and only marginally benefit the local population. They require that the loan money be used to purchase parts and services from Chinese firms, and that almost all workers must be Chinese. So instead of benefiting the local factories and workers, the money goes back to China to benefit factories and people there. And then the country still has to repay the loan, which means that they're repaying the loan twice.

In the case of Kenya, China is being accuse of "neo-colonialism, racism and blatant discrimination" towards Kenya workers. Racism is rampant, and the Chinese allow Kenyans to perform only menial tasks. The Chinese are supposed to train the Kenyans, many of whom have engineering degrees, to do the jobs, but instead blatantly exclude the Kenyan workers. The Nation (Kenya) and China Foreign Ministry (24-Dec) and African Stand

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