Africa We Want

NORTH & CENTRAL CORRIDORS : Can Uganda’s Turkish move push China to return to Kenyan leg of .

Plans have been revived for a massive East African railway project linking the Kenyan port of Mombasa with neighbouring Uganda, Rwanda and South Sudan - but China may no longer be its main financier. By South China Morning Post

Plans have been revived for a massive East African railway project linking the Kenyan port of Mombasa with neighbouring Uganda, Rwanda and South Sudan - but China may no longer be its main financier. By South China Morning Post

China had initially agreed to bankroll the project under its multinational Belt and Road Initiative. State-owned Exim Bank had advanced US$5 billion to build the Kenyan section from Mombasa to the capital Nairobi with an extension to Naivasha, which was completed in 2017.

But that is where construction stopped, after Chinese lenders grew cautious over commercial viability concerns and wanted a new feasibility study done. Exim Bank of China also never released funds to build the Ugandan section after the Kenyan side stalled.

Uganda cancelled its US$2.4 billion deal with China Harbour Engineering Company in January following Exim Bank’s refusal to fund the project further.

The landlocked country has since contracted Turkish firm Yapi Merkezi to build the 273km (170 miles) standard gauge railway (SGR) section from the Kenyan border town of Malaba to Ugandan capital Kampala.

Funding was expected from British export credit agency UK Export Finance and Standard Chartered Bank, Ugandan officials said.

Kenya, on the other hand, hopes to persuade Beijing to help fund the section from Malaba to Naivasha, about 80km northwest of the capital Nairobi.

Exim Bank’s refusal in 2018 to release advance funds for this section came at a time of increased caution among Chinese policy lenders, amid accusations of the country being engaged in “debt trap diplomacy” in Africa, which Beijing vigorously denies.

Uganda now expects to start building its Malaba-Kampala section by September. Benon Kajuna, transport director at the Ugandan works and transport ministry, said “preparations are in high gear” for the SGR line from Naivasha to Malaba and further west to Kampala. The railway will then be extended to the Rwandan capital Kigali, as well as South Sudan and the Democratic Republic of the Congo.

“We are going to get financing from UK Export Finance, and we hope to start construction soon after we have done the evaluation of the bid, possibly in September,” Kajuna told a technical meeting in Kampala late last month of officials from Uganda, Kenya, Rwanda and South Sudan.

Kenyan roads and transport minister Kipchumba Murkomen said a feasibility study for the Naivasha-Malaba line will be ready for Chinese lenders by July 1, as his country continues with attempts to persuade China to fund the section.

Kenya will seek better loan terms including concessional funding, grants and extended repayment periods this time, he said. By seeking favourable terms, Kenya is trying to avoid problems that characterised the first phase of the SGR.

Kenyan defence minister Aden Duale’s recently released book For the Record claims that the cost of building the railway was inflated compared to similar projects in neighbouring Ethiopia and Tanzania.

Kajuna: SGR now has been constructed from the port of Mombasa up to Naivasha in Kenya. Preparations are in high gear for the construction from Naivasha - Kisumu - Malaba. Preparations are in high gear for the construction of Malaba - Kampala #SGRProgress

Uganda’s plans make a strong case for the SGR’s commercial viability, and could make it attractive for China to fund the remaining section in Kenya, observers said.

Mark Bohlund, a senior credit research analyst at REDD Intelligence, said Turkish financing of the Ugandan leg of the SGR increased the likelihood that China would provide additional financing for the Naivasha to Malaba section, as freighting goods into Uganda should significantly increase revenue.

“Repayments of loans to China Exim Bank and China Development Bank have reduced China’s overall exposure to Kenya over the past two years and this should facilitate the signing of new loans,” Bohlund said.

Tim Zajontz, research fellow at the Centre for International and Comparative Politics in Stellenbosch, South Africa, said Chinese financing for large-scale African infrastructure projects was now much more targeted.

“Not only is the economic viability of projects taken much more seriously by Chinese banks nowadays, infrastructure finance is also being realigned with Chinese geostrategic interests in the light of intensifying competition with Western actors,” he said.
Zajontz, who is also a lecturer in global political economy at the Dresden University of Technology, said Uganda’s agreement with Yapi Merkezi had changed the economic parameters of the SGR.

“Should the deal actually materialise, this would mean that the SGR can better capture the Ugandan and regional cargo markets which would also increase the rates of return of Kenya’s SGR,” he said.

Considering Kenya’s rather dire fiscal situation, “a possible finance agreement for the Naivasha-Malaba section would probably entail an operational concession for a Chinese firm to ensure returns on the investment”, he added.

But, according to Aly-Khan Satchu, a sub-Saharan Africa geoeconomic analyst, “the days of freewheeling, big ticket [Chinese] financing without a robust and bankable return on investment are behind us”.

While China remains the most important creditor and lender to sub-Saharan Africa, “I believe it will be far more careful in how it deploys its loan book on the continent and will also factor in a geoeconomic and geopolitical strategy into its decisions”, Satchu said.

“Therefore, I do not expect China to play a further financing role for the Kenya section. I believe China remains keen to manage its overall Kenya Inc exposure lower but [also] that the West will continue to lean in, especially in the context of the G7 being relatively friendless on the African continent.”

Nevertheless, Satchu said he did not believe China was wedded to any belt and road project and would “be happy for others to do the heavy lifting of making the railway viable, which in my opinion only happens when it finally becomes regional and reaches the [Democratic Republic of] Congo”.

Bohlund said the belt and road, China’s multibillion-dollar global infrastructure development strategy, was always a rather loose-fitting cover for lending that in many cases was more driven by the earlier “go-out policy” aimed at giving Chinese companies a global edge in their industries.

“While new [belt and road] loan announcements have fallen significantly, disbursements to projects in Cameroon, Kenya and other places are likely to be maintained, as the most significant bilateral infrastructure plans for Africa in the near term,” Bohlund said.

Zajontz said the Kenyan SGR was no longer the poster child for gainful cooperation under the belt and road plan. He said political controversies over Kenya’s railway debt, court rulings over procurement irregularities and popular resentment against policies passed by Nairobi to boost traffic on the SGR had inflicted reputational damage on the Chinese initiative.

“The Chinese government is of course interested in damage control. Extending the SGR to the Ugandan border would mute spiteful remarks about Kenya’s railway to nowhere,” Zajontz said.

However, he said economic considerations would ultimately determine the Chinese decision, even if that means what started as a flagship belt and road project is brought to completion by non-Chinese financiers.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Author: MANZI


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