Kenya must pick best options when taking foreign loans

The Olkaria geothermal power plant in Naivasha. The geothermal field currently produces 198 megawatts of power. PHOTO | FILE | NATION MEDIA GROUP

What you need to know:

  • The recent World Bank report about the stock of debt Kenya holds from China has elicited debate because the numbers are quite staggering.
  • Kenya’s debt to China stood at Sh262 billion in June 2015, up from Sh82.9 billion in 2014, and Sh14.7 billion in 2010.

There has been a lot of discussion about the wisdom of Kenya’s approach to take external debt to finance its development activities.

It is certainly true that borrowing is not, in itself, wrong. Many countries in the world have prospered by taking on loans at times of economic growth to finance ambitious infrastructure projects which can spur the country’s growth trajectory.

What is important, though, is for those in positions of authority to ensure that they take on debt prudently and that the country receives the best possible terms available.

The recent World Bank report about the stock of debt Kenya holds from China has elicited debate and with good reason because the numbers are quite staggering.

Kenya’s debt to China stood at Sh262 billion in June 2015, up from Sh82.9 billion in 2014, and Sh14.7 billion in 2010.

That is a rise of close to Sh250 billion in just seven years. China overtook Japan to become Kenya’s top bilateral foreign financier in 2014, a position which Japan had held for 10 years.

What is interesting, though, is a comparison of the lending terms of Chinese loans and those of other major bilateral lenders.

Take the example of two major projects: The Olkaria Geothermal V Power Plant, which is a centrepiece of efforts to provide stable and affordable electricity supply and the Standard Gauge Railway, which is also a flagship Vision 2030 project.

The Olkaria V power plant is facilitated by funding from Japan.

The terms for that project involve funding at an interest rate of 0.2 per cent, with a 30-year repayment period and a 10-year grace period before payment begins.

Now compare that with the terms of the Standard Gauge Railway. According to official figures, the 600 kilometre project constitutes the first phase of a much bigger regional project that will eventually link Mombasa-Nairobi-Kampala-Kigali.

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On the Kenyan side, the Government of Kenya will finance 10 per cent of the amount of $400 million and the remaining 90 per cent ($3.6 billion) will be financed by Exim Bank China through two separate loans: A semi-concessional loan ($1.6 billion) at an interest rate of 2 per cent, paid over 20 years and with a grace period of seven years, and a commercial loan ($2 billion) at an interest rate of 6-month LIBOR (a benchmark interest rate which is effectively the market rate) plus 3.6 per cent paid over 15 years and with a grace period of five years.

There is no question about which of the two options is more attractive. And this appears to be a consistent pattern with Chinese funding.

According to a 2011 report on Chinese foreign aid from the State Council and a presentation given by China-Exim bank, the institution offers loans at an interest rate of between two and three per cent with a maturity of 15 years and a 5-7 year grace period.

Let’s consider two other lenders who rank among the five top bilateral lenders to Kenya.

The German Development Bank (KfW), for example, has extended $113m in loans for the drilling of 20 exploration and appraisal geothermal wells in phase one of the Bogoria-Silali project in Rift Valley.

According to the Geothermal Development Company (GDC), the project will generate 200MW of power when fully developed, adding much needed capacity to the national grid.

Yet the financing terms are more generous than China’s which means that taxpayers will pay less than if they had borrowed from the Asian giant. Official documents indicate that the interest rate will be 1.75 per cent with a grace period of five years and a repayment period of 10 years.

In another example, France in January 2014 offered a Sh22 billion loan to help finance key Vision 2030 projects. The conditions were, likewise, much softer than Chinese financing with a 20 to 25 years maturity with a grace period of two years and an interest rate of less than two per cent.

Most importantly, unlike Chinese funding, all these funds were “untied” which means that the contracts can be given to any firm.

The point is not that borrowing is bad for a young economy which needs to expand. Rather, the key message is that prudence should be exercised to see which one burdens taxpayers least.

Kenya must take the best options for foreign debt by comparing the effectiveness and impact of the project, the conditions of loan agreement and any other points which may affect its nation and people.

The writer is a public finance analyst