In Summary
  • The Chinese have repeatedly rejected accusations that they were involved in debt-trap diplomacy by burdening poor countries with unsustainable loans.
  • Daly and Inadmar Advocates partner Shitul Shah said lending countries only ask for collateral when they have questions on the “credibility” of the borrower.
  • Auditor-General Edward Ouko is yet to release any report on the SGR as required by law for a project of such magnitude.

Kenya’s key strategic assets at home and abroad will not be protected by “sovereignty” and risk being seized by the Chinese government should there be a default in repaying the Standard Gauge Railway loan, a copy of the contract seen by the Sunday Nation reveals.

The initial agreement for the Mombasa-Nairobi railway signed on May 11, 2014 also details how the pact will be governed by Chinese laws with all disputes being arbitrated in Beijing.

In addition, the contract, and a subsequent one on the Nairobi-Naivasha phase, also have a confidentiality clause gagging Kenya from making the deal public “without prior written permission of the lender (China)”.

This comes more than two weeks after President Uhuru Kenyatta, responding to a question from NTV’s Mark Masai during a live television interview on December 28 last year, promised to release the SGR contract to put to rest any “porojo” (rumours) that the Chinese could seize the Port of Mombasa.

This week, State House spokesperson Kanze Dena, in response to our enquiries, said the contract “can be released anytime, even this week”.

IMMUNITY

However, the signed SGR deal seen by the Sunday Nation suggests the risks go beyond the port.

“Neither the borrower (Kenya) nor any of its assets is entitled to any right of immunity on the grounds of sovereignty or otherwise from arbitration, suit, execution or any other legal process with respect to its obligations under this Agreement, as the case may be in any jurisdiction,” Clause 5.5 of the Preferential Buyer Credit Loan Agreement on the Mombasa-Nairobi SGR reads.

The contract is signed by National Treasury Cabinet Secretary Henry Rotich and Mr Li Riogu, then-Chairman and President of the State-owned Export-Import (Exim) Bank of China.

In the deal, Kenya is also compelled to import goods, technology and services from China.

According to experts interviewed for this article, the blanket reference to “any asset” not only exposes the Kenya Ports Authority (KPA), whose leaked audit report last month raised questions about its vulnerability in case of default, but also allows the Chinese lenders to take over other critical resources — anything from airports and natural resources to embassies abroad.

CONFIDENTIALITY

When we put the implications of this clause to Mr Rotich, the Treasury Cabinet Secretary gave a terse response: “Where did you get such information? Send me where you got it from. Not aware about such a thing [sic].”

The apparent exposure of Kenya’s assets gets even more curious given the clause that says the loan agreement would be “governed by and construed in accordance with the laws of China”.

The initial SGR loan agreement, signed slightly over one year after the Jubilee administration came to power, is also designed to be kept secret, as captured in clause 17.7 of the loan pact.

This raises questions on the Freedom of Information requirements by the Kenyan Constitution.

“The borrower (Kenya) shall keep all the terms and conditions hereunder or in connection with this agreement strictly confidential.

"Without the prior written consent of the lender (China), the borrower shall not disclose any information hereunder or in connection with this agreement to any third party unless required by applicable law,” the confidentiality clause reads.

PORT

After concerns were raised last month that KPA could potentially be seized in case of a default in loan repayment, Chinese officials disputed the claim in carefully worded statements.

Chinese Foreign Ministry Spokesperson Hua Chunying said: “We have checked with the relevant Chinese financial institution and found that the allegation that Kenyan side used the Mombasa Port as a collateral in its payment agreement with the Chinese financial institution for the Mombasa-Nairobi Railway is not true.”

It is a statement that could be true if viewed with a narrow lens, considering that there is no specific reference to the port in the contract seen by the Sunday Nation, but the sweeping statement that makes all assets fair game bears the trap.

The Chinese have repeatedly rejected accusations that they were involved in debt-trap diplomacy by burdening poor countries with unsustainable loans.

On Thursday, Ms Dena told the Sunday Nation there was no confidentiality clause blocking the public release of the entire SGR contract.

“It has nothing to do with secrecy, we have been on holiday and we are still settling back.

"There is no diplomatic barrier preventing Kenya from making the loan deal public. The document will be made available even this week to everyone through the media houses,” Ms Dena said.

COLLATERAL

Law Society of Kenya Nairobi Branch Chairman Charles Kanjama said the secrecy clause is standard for such agreements.

He is however concerned the sovereignty waiver on the assets and relying on Chinese laws are signs of doubt by the lender.

“The agreement is being made in Kenya, the railway is built in Kenya and the assets they are talking about are in Kenya, so why is it being governed by the laws of China?

"Had there been more transparency or choices of who funds the railway then Kenya may have got a better deal,” Mr Kanjama said.

Daly and Inadmar Advocates partner and cross-border commercial contract specialist Shitul Shah said lending countries only ask for collateral when they have questions on the “credibility” of the borrower.

ARBITRATION

But even more intriguing is the clause in the contract that says any disputes on the loan would only be resolved in Beijing through the China International Economic and Trade Arbitration Commission (Cietac).

“The arbitration award shall be final and binding on both parties. The arbitration shall take place in Beijing,” the agreement says, effectively blocking other international commercial dispute resolution avenues.

Kenya has further signed never to dispute the choice of Cietac as an arbitrator and to take its decision.

Mr Shah said although parties to a contract have the freedom to agree on which law would govern the agreement, China’s choice of the arbitrator and the specification that the arbitration would he held in Beijing is “suspect”.

“Normally, you would need an independent arbitrator, because this is about mediation, which should be made neutral and impartial by all means.

"Specifying the mediator and the unneutral ground to carry out the mediation is suspect. This can be challenged in law,” Mr Shah, who also practices in New York and London, told the Sunday Nation.

LOAN

Other experts with knowledge of Kenyan government contracts, who spoke in confidence, said a neutral country or organisation is usually preferred.

One gave the example of a controversial Sh30 billion pipeline security commercial contract Kenya signed in 2017 with the Israeli company Rafael Advanced Defense System limited whose arbitration clause nominates London.

In the SGR contract, the Exim Bank also makes it a mandatory requirement that the commercial loan be insured by the China Export and Credit Insurance Corporation (SinoSure).

All charges regarding the management of the loan, which run into billions of shillings, are to be paid by Kenya.

Apart from the $1.6 billion commercial loan and $1.6 billion concessional loan from the China Exim Bank to build the first phase of the SGR, several other loan deals have been signed, stirring debate on Kenya’s ability to repay.

FEASIBILITY

The ongoing second phase of the SGR between Nairobi and Naivasha costs at least Sh160 billion.

The deal signed in December 2015 is similarly skewed against Kenya.

The phase between Naivasha and Malaba, whose funding has not been secured, is expected to cost Sh500 billion.

Like the first phases, this would include supply of locomotives, wagons and coaches.

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