Kenya shows

Mombasa port not collateral for Kenya’s Chinese loans

File image courtesy of Port of Mombasa

Posted on April 19, 2022 at 11:49 p.m. by

The Maritime Executive

In December 2018, a letter purporting to be from Kenya’s Office of the Auditor General was leaked to the public. It included a warning that Kenya had staked its prized Mombasa port as collateral for a $3.6 billion loan from China to build the Mombasa-Nairobi Standard Gauge Railway (SGR).

The revelation was serious. It emerged during the same period when reports were circulating of the impending transfer of Hambantota Port to settle some of Sri Lanka’s debt to China. The rumor has thrust the port of Mombasa into the spotlight as yet another example of “Chinese debt-trap diplomacy”.

Although the Chinese and Kenyan governments have denied that the port of Mombasa was used as collateral, the exact terms of the SGR loan have remained a mystery. From then on, the rumor continued to circulate.

However, a new report released last week by the China Africa Research Initiative (CARI) at the Johns Hopkins University School of Advanced International Studies shows that the Auditor General erred in concluding that the port of Mombasa was used as security for ready.

“To our surprise, our team discovered that the collateral rumor stemmed from a seemingly small but critical misreading by the Auditor General (AG). The AG wrongly characterized KPA as the borrower, responsible for repaying the SGR loans,” the report’s authors found.

For context, four stakeholders were involved in the financing of the RMS: the National Treasury of Kenya, the borrower; Kenya Railway Corporation (KRC), the project company; Kenya Ports Authority (KPA), main client of the project and owner of the port of Mombasa; and China’s Exim Bank, the lender. Under the terms of the contract, KPA agreed to be SGR’s main client – not the borrower, nor the guarantee.

Furthermore, the report argues that it is likely that the AG misunderstood how a waiver of sovereign immunity – a standard feature of international commercial project finance – works in practice.

In the documents leaked by the AG, he accused the Kenyan government of having “waived immunity” over KPA’s assets, expressly guaranteeing that they could be used to repay the Chinese loan. It was a mistake, the report said.

It is rare to find an international commercial loan or sovereign bond contract that does not contain the sovereign immunity waiver clause. As one US attorney noted, “The omission of a waiver of sovereign immunity in an international commercial loan agreement would be professional misconduct.”

Essentially, the clause provides an avenue for resolving international loan disputes. Under international law, sovereign states and the entities they control enjoy sovereign immunity. They are generally immune from prosecution and cannot be compelled to appear in a foreign court – unless they waive their sovereign immunity.

For example, a published cache of loan contracts signed by Cameroon with banks and export credit agencies from Austria, Belgium, India, Turkey and the United Kingdom shows that all required similar clauses.