Kenya: China Cannot Seize Port of Mombasa if Debt Default Occurs

Authorities in Kenya have allayed fears that China will seize the Port of Mombasa if the country defaults on loans procured to finance the loss-making Standard Gauge Railway (SGR).

The National Treasury cabinet secretary Ukur Yatani said that Kenya did not offer the strategic national asset as collateral for the $3.2 billion loan sourced from the Export Import Bank of China (Exim China) to finance the SGR project.

“The port of Mombasa has no adverse exposure to any lender or category of lenders through existing loan agreements with the government,” said Yatani.

Though he maintained the government is servicing the SGR loans, concerns are mounting that runaway public debt could see Kenya default on its loan obligations, a risk that could expose the port to seizure by China. In a report to parliament, the Auditor General said that the assets of Kenya Ports Authority (KPA) and Kenya Railways Corporation (KRC) were used as collateral for the SGR loans.

“The agreement provides that each of the borrowers agree that any proceedings against them or their assets (present or future) in connection with the agreement, no immunity from such proceedings shall be claimed by it or with respect to its assets and they irrevocably waive any right of immunity whether characterized as sovereign immunity or otherwise,” said the report.

In trying to prove the Port of Mombasa is safe from claims by Chinese lenders, Yatani stated that all external loans from bilateral lenders have pari passu provisions in the respective agreements requiring equal treatment in the servicing of all debts. Pari-passu is a financing arrangement that gives multiple lenders equal claim to the assets used to secure a loan.

“For this reason, the government of Kenya cannot and has not pledged public assets as security for a debt, because such an action would not only violate provisions in its existing loan agreements with other bilateral creditors, but more importantly because Kenya treats all creditors equally,” he said.

Kenya’s cumulative public debt has ballooned to $65.3 billion, and it is feeling the weight of its financial obligations, particularly servicing the SGR loans. The country is spending 40 percent of tax revenues on servicing public debt, with $315 million paid to China Exim Bank for the SGR loans in the current fiscal year.

The debt burden is mounting at a time when global rating agencies have downgraded Kenya’s credit status, a development that further raises the prospects of debt distress and default. “There are significant risks to the government's fiscal consolidation plan, while external indebtedness will remain high. Consequently, we are lowering our ratings on Kenya to 'B' from 'B+',” said S&P in a statement early this month.

Mombasa Port is among the most strategic assets in Kenya, and it generated $480 million in revenues and $125 million in profits in 2019.