Kenya chokes on hefty infrastructure debts to China but are the projects viable?

Some of the 32 standard gauge railway (SGR) line passenger locomotive wagons and engines leave Mombasa West Railway Station for Nairobi on February 2. (Photo: Gideon Maundu/Standard)

The admission that the Standard Gauge Railway (SGR) will not repay its own loans and will require taxpayers to subsidise it to the tune of Sh15 billion is a damning verdict on the feasibility of Kenya’s biggest infrastructure project.

The line has to be extended to Uganda if it is to reap any returns, which means Kenya will have to sink in even more resources in the project in both expansion and subsidies in coming years.

“The problem may be that we will have to add more money into the project than anticipated,” Institute of Economic Affairs CEO Kwame Owino said.

Resorting to taxpayers to foot the bill for the investments brings home the experience of other beneficiaries of Chinese-funded mega projects. After more than a decade of taking out huge loans to build large-scale infrastructure, most of which has not yet produced adequate returns, Sri Lanka is now struggling to make payments.

But with a debt-to-GDP currently of about 75 per cent, over 95 per cent of all government revenue is currently going towards debt repayment and the little island nation south of India is looking for alternatives. It wants to pawn off the mega infrastructure projects to its debtors, the biggest being China ($8 billion of the $64.9 billion debt).

But surprise, they do not want the empty Mattala International Airport and portions of the Hambantota deep sea port. India has also rejected an offer to take over the empty northeastern Trincomalee port under the debt-to-equity swaps. The Sri Lanka case questions whether Kenyan can provide enough exports, attract enough imports and generate enough traffic to pay for road, rail, pipeline and port projects it has embarked on.

Copy-paste projects

A global risk firm, Control Risk, also questioned the viability of copy-paste projects across East Africa. Control Risk says with every country blindly competing to become the East Africa’s hub, the region is creating quail-like projects that cannot be supported by the business in the region.

“Regional rivalries increase the risk of over-supply. There are signs that some projects are driven less by sound economic logic than by political ambition and the prospect of easy short-term debt financing from China,” Control Risk says.

“These could prove economically unviable and even impose an excessive burden on public finances, raising longer-term sovereign risks,” the report on 2017 risks warns. While huge infrastructure projects are important drivers to African economies, the recent report by Control Risk prepares us for the case of Sri Lanka and is a wake-up call to the government to realign Kenya’s mega infrastructure projects.

Control Risk also warns that the East African region is especially too antagonistic, driven by ambition to become the regional supremo yet the success of the mega projects depends on the region staying together as a bloc.

The rivalry that played into the foiled attempt by Kenyan Cabinet Secretary Amina Mohamed’s bid to become Africa Union Commission Chairperson may be the biggest risk to Kenya’s investment delivering a return to pay off huge debts taken to develop them. The antagonism has already played out in the mega project first prompted by Kenya, which tried to out-dance Tanzania into forming the coalition of the willing to push for the joint standard gauge railway project with Uganda and Rwanda at the cost of $13 billion.

Uganda chose a Tanzanian route, saying it was cheaper, had more access infrastructure and presented fewer complications in securing land for it. This left Kenya with burnt fingers, since it had already done the Mombasa to Nairobi section and was forced to branch the project to Naivasha to gain some economic sense and get a decent return from setting up an industrial hub next to cheap geothermal power.

However, the Chinese who are funding the Ugandan line are reported to have taken a tough stance on Uganda, insisting on the Kenyan connection, even changing terms to ensure Kenya will extend its Naivasha line to Malaba. Shortly after, Rwanda has announced plans to develop rail links to Indian Ocean ports through Tanzania because they were cheaper and shorter than the route transiting Kenya.

Uganda, Rwanda and troubled Burundi, all landlocked, have maintained fluid relations with both Kenya and Tanzania and have made conflicting decisions that may render some of the projects unviable.

Tanzania and Uganda also pulled out of the Lamu Port-Southern Sudan-Ethiopia Transport project (Lapsset) after they had strung Kenya along over alleged elites’ appetite for land in anticipation for compensations. Uganda abandoned initial plans for a joint line linking its oil-rich western Hoima region to Lamu port in order to bring down the costs of that project, which had been estimated at $5 billion by Nagoya, Japan-based Toyota Tsusho Corp, to $4 billion across Tanzania to Tanga port.

Kenya is now faced with the expensive cost of going it alone for a shorter line that may cost about $2.1 billion for the 1.6 billion barrels of oil discovered in Turkana, with potential of higher finds announced by Tullow Oil.

Control Risk also said the bilateral relations and any economic or political misfortunes in the neighbourhood also pose a major challenge. A case in point for Kenya is South Sudan, which is stuck in civil war yet it is the main upstream source of oil ensuring the viability of the Lapsset project.

Kenya may have to rethink projects that have not yet been embarked on, revoke others to concentrate on a few and work with regional countries to find short-term alternatives.

“We may need to pick up aspects of the Lapsset project that can be funded with priority of what is required and leave the rest to private financing so that we do not stretch our resources,” says Mr Owino.

China, whose real estate construction makes up a quarter of its $10 trillion economy, are the mother of white elephant projects both at home and abroad, fuelling their double-digit economy by constructing huge infrastructure based on bloated future projections and not near term feasibility studies.

Some would rightfully argue that Kenya’s debt-to-GDP ratio just points above 50 per cent, making debt-funded growth sustainable.

However, this can change drastically under exchange rate shocks, which can shoot repayment levels up the roof if the shilling loses ground against the dollar.

It can also change gradually as it becomes necessary to pay back debts since the Kenya Revenue Authority (KRA) may not be able to meet its revenue targets, even as the Government expands the budget further.

China has become a significantly huge lender on the back of the SGR and last year’s budget support. The Treasury budget documents show that Chinese loans have doubled from Sh227 billion ($2.2 billion) in 2014 to Sh414 billion ($4 billion) last year. To service this, Kenya will wire Sh150 billion in the next four years to the Chinese government, Exim Bank of China and China Development Bank, and Sh21.2 billion this year alone.