Wednesday 18 September 2019

China's cold feet derail Kenyan transport hopes

Saturday Insight

China is now the single largest financier for infrastructure in Africa, funding one in five projects and constructing every third one, according to a Deloitte report (stock picture)
China is now the single largest financier for infrastructure in Africa, funding one in five projects and constructing every third one, according to a Deloitte report (stock picture)

David Herbling and Dandan Li

Gleaming concrete sleepers run across a new railway bridge in Kenya, the latest stretch of a Chinese-built line from the coast all the way to Uganda.

Only, it does not quite reach the border. Instead, the railroad ends abruptly by a sleepy village about 75 miles west of the Kenyan capital, Nairobi. Construction of what was intended to be a flagship infrastructure project for eastern Africa was halted earlier this year after China withheld some $4.9bn (€4.4bn) in funding needed to allow the line's completion.

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Beijing's sudden financial reticence appeared to catch the governments of Kenya and Uganda off guard.

The reason for China's attack of cold feet may lie in the project's high profile. Chinese state media repeatedly used the Mombasa-Nairobi Standard Gauge Railway as a showcase for president Xi Jinping's Belt and Road initiative. But with concerns rising globally that Belt and Road was loading poorer nations with unsustainable debt, Xi signalled in April that Beijing would exert more control over projects.

That extra rigour is beginning to be felt worldwide. A planned light-railway system that was the most high-profile Belt and Road project in Kazakhstan is on hold after the collapse of a local bank.

In Zimbabwe, a giant solar project hit a funding shortfall after the Export-Import Bank of China backed out of providing financing, RWR Belt and Road Monitor reported this month.

The Chinese "are adopting a more cautious approach to their debt exposure in Africa", said Piers Dawson, a consultant at London-based investment consultancy Africa Matters Ltd. He cites "increased noise around its sustainability and potential default".

China is now the single largest financier for infrastructure in Africa, funding one in five projects and constructing every third one, according to a Deloitte report.

With infrastructure needs that the African Development Bank estimates at $130bn to $170bn yearly, governments are only too willing to take out Chinese loans.

The downside is that Kenya was one of three African countries identified in a March 2018 report by the Center for Global Development as at risk of debt distress as a result of its Belt and Road participation. The first half of the Kenya-Uganda railway, a 470km stretch between the port city of Mombasa and Nairobi, is operational but not yet making money. Beijing baulked at funding the extension to Uganda amid concerns it may be a step too far beyond viability.

Kenya and landlocked Uganda had coordinated their plans for the new railway to reduce transport costs and the time it takes to move goods. Yet with the realisation that China may not release more funds, Kenyan president Uhuru Kenyatta has given the go-ahead to link the line to a narrower-gauge railway that is over 90 years old. Uganda, which had banked on Chinese funding too, has decided to refurbish the colonial-era line on its side of the border. But that still means shouldering more debt.

China is already Kenya's biggest external creditor, with some 22pc of the country's external debt as of December, according to treasury data. The situation does not bode well for Kenyatta's legacy, which he was building around the railroad. Knowing that alternatives and probably more expensive debt could further widen Kenya's deficit, Kenyatta is courting private investors to build the link between the new and old railroads. Uganda will meanwhile include the $205m needed to rehabilitate its old tracks in the budget, but has not said how it plans to raise the funds.

Back in 2013, when Kenyatta asked Beijing to fund the railway, a condition was that China supply the constructors. Export-Import Bank of China financed the $3.6bn line to Nairobi, China Road and Bridge Corp built it, and China Communications Construction Co was picked as the operator. Revenue from the railway is supposed to repay the loan, but critics say the cost was too high.

Beijing's tighter scrutiny of Belt and Road projects comes as China shifts the programme away from low-cost loans on to a more commercial basis involving its private sector. Clearer rules for state-owned enterprises, and building overseas auditing and anti-corruption mechanisms were among other steps floated by officials at the time of the Belt and Road Forum in April.

China supports the Kenya railway project but requires a reasonable and sustainable financing plan, according to a person involved with the project. Because China now requires high-quality projects and a more thorough feasibility study, the process of approving loans has slowed in general, but it does not mean the project is terminated, said the person.

China's ambassador to Kenya, Wu Peng, was asked in May by local newspaper the Daily Nation about expectations president Kenyatta's visit to China would secure funding for the missing section of the railway. "I really don't know where those expectations came from," Wu was cited as saying.

Bloomberg

Bloomberg

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