If Kenyan leaders get a chance to meet Chinese President Xi Jinping at the BRICS Summit in South Africa today (22-24 August, 2023), they would likely try to convince China to fund the remaining section of the Standard Gauge Railway to Malaba. They might also put forward their case for debt renegotiation.

But Kenya, just like many African countries, will jostle for Xi’s attention with a long list of Heads of State. And they will find it difficult to secure bilateral lending, compared to a few years ago.

New-look China loans

China’s Ministry of Foreign Affairs announced on Friday that while in South Africa, President Xi will co-chair with South African counterpart Cyril Ramaphosa, the China-Africa Leaders’ Dialogue—a platform that African countries will likely use to seek favours such as new investments, lending and debt relief from the Chinese leader.

China is the continent’s largest trading partner and is the top bilateral lender to African nations. Loans from China have gone into building railways, ports, highways and power dams across Africa.

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Already, Malawian President Lazarus Chakwera has hinted that “debt repayments talks with China” will be on the cards during the BRICS Summit, in a post on X, formerly Twitter.

For Kenya, more crucial is China’s oversized role in Nairobi’s borrowing profile, in which repayment had become an issue. President William Ruto’s administration had said it would seek to renegotiate the loans Kenya took from China to build the SGR. It however remains unclear whether the country ever lodged the application.

Since becoming Kenya’s fifth President last year, Dr Ruto has endeared himself to the West, especially the US. He had taken an antagonistic stance towards China, blaming the Asian giant for Kenya’s debt woes. At the height of the campaigns, he threatened to deport foreign nationals, including Chinese. He faulted them for working illegally in Kenya and operating small retail businesses that could be run by Kenyans.

That was politics. In reality, Dr Ruto is finding it difficult to isolate China, an economic and diplomatic powerhouse.

President William Ruto after meeting a Chinese delegation led by diplomat Wang Yi, a member of the Political Bureau of the Communist Party of China and Director of the Office of Central Committee for Foreign Affairs on July 22 at State House, Nairobi.

Kenya courts China for JKIA terminal, runway

 

China is Kenya’s largest bilateral lender. The Asian country is the third largest external creditor just behind the World Bank and Commercial Eurobond Investors.

 

That means any efforts to configure Kenya’s debt to sustainable levels must sync in line with the three players. This year, Kenya will pay China and Chinese lenders Kes89.4 billion as redemption and Kes23 billion as loan interest. Nairobi is under obligation to pay Eurobond investors Kes241 billion redemption and Kes16.4 billion in interest.

 

Despite the lack of clarity on how these huge payments will be restructured, the new regime has been fishing for new mega loans even though China’s foreign policy is shifting.

 

When Dr Ruto met senior Chinese diplomat Wang Yi in State House Nairobi, he presented key projects—a major highway, and the greenfield terminal and runway at the country’s Jomo Kenyatta International Airport —to the Chinese delegation.

 

The President said the government plans to upgrade JKIA and the ports of Mombasa and Lamu. He noted that the development of a new greenfield terminal and a new runway at JKIA, the dualling of Rironi-Naivasha-Nakuru-Mau Summit will elevate Kenya’s competitiveness.

 

These projects, he said, can be pursued either under Public-Private Partnerships or Government-to-Government agreements. “We are ready to expedite discussions and conclude on details on the proposed projects for implementation,” Ruto said.

 

A day later, Transport CS Kipchumba Murkomen led the Kenyan delegation in a bilateral meeting with a Chinese team led by Deng Li, the Vice Minister of Foreign Affairs. Mr Murkomen remarked: “Our discussions were centred on pending projects in the roads and transport sector as discussed with President Ruto. I am very pleased with the outcome of our engagement as we continue to widen and deepen our mutual relations.”

 

Kenya, Uganda SGR financing woes

 

But, further briefs by State House and China about the meeting did not reference the Standard Gauge Railway (SGR), which stalled in Naivasha, about 80km northwest of the capital Nairobi.

 

The initial SGR plan, which was part of the East Africa Railway Masterplan, was to build a railway running from Mombasa to Malaba, the border with Uganda. It was then supposed to cross to Rwanda, South Sudan and the Democratic Republic of the Congo (DRC).

 

Kenya had secured about US$5 billion for the Mombasa-Nairobi stretch with an extension to Naivasha. In 2018, the SGR ended abruptly at Naivasha after China Exim Bank declined to fund the section to Malaba without a new feasibility study due to reservations about the railway’s financial viability.

 

This coincided with a period when Chinese policy lenders turned cautious amid accusations from the West that China was engaging in “debt trap diplomacy” in Africa. Beijing vigorously denies these assertions.

 

The Ugandan section also suffered similar financial hitches from China. Uganda was forced to cancel its US$2.3 billion railway deal with China Harbour Engineering Company in January 2023. This was after China Exim Bank declined funding Malaba-Kampala SGR link. The country has since contracted Turkish firm, Yapi Merkezi, to build the 273km section from Malaba to Kampala.

 

British export credit agency, UK Export Finance and Standard Chartered Bank was expected to finance the deal, Ugandan officials said.

 

Kenya, on the other hand, said it will persuade Beijing to fund Naivasha-Malaba section. Observers, however, note that the conditions under which China funded the section from Mombasa have changed.

 

China’s Belt and Road Initiative

 

First, China advanced the loans for the Kenyan SGR about a year into Xi’s presidency. This was soon after unveiling the transcontinental strategy the Belt and Road Initiative (BRI). At the time, it was easy to secure funding as China was strengthening its diplomatic and economic relations with Africa. Globally, BRI has since funded projects worth over US$1 trillion in the 10 years that it has been in existence.

 

But Chinese lenders are no longer dishing out loans as they used to about a decade ago. They have become “more circumspect, cautious, and risk-averse” over commercial viability concerns.

 

The funding drought goes beyond Kenya and Uganda. In 2020, China Exim Bank pulled out of Nigeria’s 203km Kaduna-Kano railway project citing Covid-19 pandemic. It also raised concerns about Nigeria's ability to repay the loan. China Exim Bank’s withholding of $339 million from Ethiopia in 2021 was premised on Addis Ababa’s ability to repay.

 

“African countries are experiencing a squeeze in Chinese global overseas infrastructure investments due to China clamping down on excess debt, slower growth in the Chinese economy due to Covid-19, and pressure from executives of State Owned Companies (SOEs) concerned about their long-term profitability,” says Paul Nantulya, a China specialist at the Africa Centre for Strategic Studies in Washington.

 

Nantulya adds that China is also reacting to bottom-up pressure by local civil society organisations, parliaments, and economic justice campaigners around debt-sustainability. Also ruffling the Chinese are claims on alleged assert seizures which are growing louder over the years. This is despite the absence of evidence that China has seized assets due to borrower’s failure to pay.

 

Covid-19 induced financing shocks

 

Between 2008 and 2021, Chinese lenders advanced $498 billion in loans, reaching its peak in 2016. Since then, it has declined, exacerbated by shocks including the Covid-19 pandemic.

 

In 2022, China extended $10.5 billion in loans for 28 separate projects, which was a major drop since the mid-2010s when financing hit $80 billion for 150 projects according to the Chinese lending database at Boston University’s Global Development Policy Centre.

 

In 2020, Michael Pettis, an expert on China’s economy told the South China Morning Post that the drop in Chinese lending has something to do with a lack of experience and familiarity with international lending. This ecompasses international lending to developing countries, which saw China underestimate the risks. Inexperience also saw China fail to take into consideration the normal cyclical factors that affect lending. According to Prof Pettis, this isn't an especially Chinese story. Professor Pettis teaches finance at Peking University’s Guanghua School of Management, specializing in Chinese financial markets,

 

He said this has been the case in the past 100 years that a country has first gone out internationally. From the US in the 1920s to the USSR (1950s and 1960s) to Japan (1970s and 1980s).

 

Reducing funding for African projects

 

“In every case, the country underestimated risks and expanded lending very rapidly at first, only to pull back sharply after a few years when it began to recognise how difficult and risky development lending can be,” Pettis said.

 

But it doesn't mean China will cut funding completely for Africa’s projects. It’s only that lending is evolving. For instance, China is encouraging Chinese companies to invest overseas through public-private partnerships. The companies are moving from engineering, procurement and construction to “a strategic investor” in building major infrastructure projects in Africa.

As China's lending model evolves, the Asian giant is encouraging its companies to invest overseas through public-private partnerships. In Nigeria, China Harbour Engineering for Construction invested in the US$1.5 billion Lekki port after the original developer, Singapore’s Tolaram Group, failed to secure financing from European and Nigerian banks. The Nairobi Expressway is modeled in a similar financing model.

Charging toll fees on roads

 

An example is the 27km Nairobi Expressway built and financed by state-owned China Road and Bridge Corporation for US$668 million. The firm will recoup its investment by charging toll fees for three decades before transferring ownership to Kenya.

 

In Nigeria, there is the US$1.5 billion Lekki port where China Harbour Engineering for Construction became an investor. This was after the original developer, Singapore’s Tolaram Group, failed to secure financing from European and Nigerian banks.

 

The other is in Zambia where a consortium of Chinese companies–AVIC International Project Engineering Company, Zhenjiang Communications Construction Group Limited, and China Railway Seventh Group Limited– was in March awarded a US$649.98 million contract for the upgrade of the 327-km Lusaka-Ndola Road to Dual Carriageway under the PPP model. This road links Zambia’s capital, Lusaka, to Ndola city in the country’s Copper belt province.

 

The Chinese firms will fund and build the road and recoup investment through tollingfor 25 years.

 

Since China Exim Bank is not willing to take all the risk to fund the Kenya–Uganda SGR. This means there is a possibility of a Chinese company or lender taking up equity, and recovering investment from the revenues from the railway. Or just like the Nairobi Expressway, Chinese contractors could fund the 233Km Rironi-Naivasha-Nakuru-Mau Summit road. This is a crucial highway that passes through the Rift Valley into Western Kenya.

 

Read also: Ni hao: Chinese soft power

 

Build–operate–transfer model

 

If that succeeds, they will have snatched the contract from a French consortium of Vinci Highways SAS, Meridian Infrastructure Africa Fund and Vinci Concessions SAS. The group won the contract only for Dr Ruto’s administration to cancel the deal citing costs.

 

Analysts at the South African Institute of International Affairs (SAIIA) have identified three trends in Chinese lending, which Kenyan technocrats could keep in mind while engaging Chinese financiers. SAIIA study noted that while only three Chinese lenders extended most loans to Africa two decades ago, this number has since increased tenfold, giving countries options.

 

Second, ‘small is beautiful’, is a phrase becoming popular in Chinese official language regarding its focus on Africa. It means that projects are increasingly being financed with smaller loans and shorter repayment windows, SAIIA noted.

 

The shift towards smaller projects and away from bank lending is echoed by the expansion of Chinese companies’ involvement into areas other than engineering, procurement and construction (EPC). China firms are now into Build–operate–transfer (BOT) model such as the Nairobi Expressway and Integrated investment, construction and operation (IICO) like the Lekki Port, in Lagos, Nigeria.

 

Third trend shows Chinese companies are spreading beyond engineering, procurement and construction, while African countries are becoming more interested in infrastructure models not solely supported by sovereign debt. The two most popular models are built–operate–transfer and integrated investment, construction and operation, according to SAIIA.

 

China’s smaller loans, short repayment window

 

Cobus van Staden, a senior researcher in SAIIA Foreign Policy Programme, and author of the study said China is growing its portfolio of financing projects with smaller loans with short repayment windows. This follows an announcement of new policy directions by President Xi at the third BRI Symposium in November 2021.

 

“Since then, the shorthand ‘small is beautiful’ has become a repeated phrase in Chinese official language regarding its focus on Africa in particular,” van Staden said.  He said the trend has seen average project footprints falling from 90km2 between 2013 and 2017 to 16km2 by 2021. Further, the average deal size for construction projects also fell from $558 million in 2021 to $325 million in 2022.

 

In addition, van Staden said the projects frequently fall in areas of strength among Chinese companies in line with a stronger focus on public–private partnerships.

 

“Strategic economic planning by the Chinese government and competition among Chinese companies have led to high capacity in renewable energy at all levels of the value chain, as well as data, computing and connectivity. These are areas of high demand in Africa that overlap with the Xi administration’s Global Development Initiative’s focus on health, digital economies and green development. This is framed as China’s contribution to achieving the UN’s Agenda 2030,” said SAIIA study released in July.

 

As Kenya seeks funding from China to build mega projects such as the Rironi-Naivasha-Nakuru-Mau Summit, the SGR extension from Naivasha or for JKIA’s greenfield terminal, it would help Kenyan officials to understand the new lending trends in Chinese loans to Africa.

 

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