Kenya pins rail hopes on PPP funding from China firms for belt and road project

Kenya is in talks with China to get its stalled rail link back on track under a proposed public-private partnership model that would see Chinese companies source funding to build and operate the railway in a bid to recover their investment.

Kenyan President William Ruto is seeking Chinese financing to get the strategically important project - now halted at Naivasha in the middle of the Rift Valley - extended to Malaba, on the border with Uganda.

Ruto made the request directly to his Chinese counterpart Xi Jinping during his visit to Beijing for the belt and road forum in October. The project was originally funded with a US$5 billion loan as part of China's Belt and Road Initiative.

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While the Standard Gauge Railway (SGR) is important for Uganda, Rwanda and the Democratic Republic of Congo - which all rely heavily on Kenyan ports for their imports - Kenya has no headroom to fund its completion with further loans, Ruto says.

Ballooning debt has seen Kenya's loan repayment costs, mainly to China, skyrocket as the local currency has depreciated. The East African country is also facing a debt crisis, with Eurobond payments falling due next year.

"We cannot borrow any more," Ruto said, after Kenya and China celebrated 60 years of diplomatic ties this month.

Instead, Chinese companies could build, operate and then transfer the infrastructure to the Kenyan government after recouping their investments, he said.

In his congratulatory message on the anniversary, Xi said the two leaders "reached important consensus on the future development of relations between the two countries" during Ruto's October visit.

"I attach great importance to the development of China-Kenya relations and am willing to ... work together to build a closer China-Kenya community with a shared future in the new era," Xi said.

Kenya has about US$8 billion in Chinese loans, mostly used by the previous administration for the SGR's initial phase linking Mombasa - East Africa's largest port - on the Indian Ocean with Nairobi and Naivasha, about 80km (50 miles) northwest of the Kenyan capital.

But the planned extension of the 590km track to the Ugandan border has been on hold since China Exim Bank refused to provide further funding without a commercial viability study.

"We have asked China to invest, not to lend us money. We are having that conversation," Ruto told Kenyan media on Sunday. "We are also having a conversation as to what the timeline is, as to when we want this delivered."

Kenya's proposed investment plan is similar to the 27km Nairobi Expressway, which China Road and Bridge Corporation will operate for 30 years to recover its investment, before transferring ownership to the Kenyan government.

If China accepts the public-private partnership funding proposal for the SGR, the project will join a growing trend among Chinese investors who are moving to the financing model to fund Africa's infrastructure.

In Zambia, President Hakainde Hichilema's new administration cancelled a US$1.2 billion contract with a Chinese company, agreed in 2017, to build the Lusaka-Ndola dual carriageway.

The project has since been awarded to a consortium of Chinese investors, including AVIC International Project Engineering, that will fund and build the road, operate it for 22 years to recoup the investment, and then transfer it to the Zambian government.

Other projects that have been built under the PPP model include the Lekki port in Lagos, Nigeria, and the first phase of the Port of Kribi in Cameroon, which was financed by China Exim Bank.

The gradual shift in the belt and road plan's financial governance towards public - private partnerships comes amid reduced bilateral lending for overseas ­projects, as Chinese lenders take a more cautious approach to infrastructure ventures.

With debt finance no longer an option for many African governments, PPPs are being promoted as a viable alternative by Chinese and other actors, according to a recent paper by Kjeld van Wieringen and Tim Zajontz.

The authors, from the European Parliamentary Research Service in Brussels and South Africa's Stellenbosch University, respectively, said Beijing's encouragement of Chinese investments in overseas PPPs was part of Xi's efforts to further globalise China's capital accumulation.

"These efforts were significantly stepped up when debt sustainability concerns mounted in several [Belt and Road Initiative] countries," they wrote, in the open access article published by Sage Journals' Journal of Current Chinese Affairs.

Landlocked Uganda's plans for its section of the SGR - from Malaba to its capital Kampala - were also dashed, when China Exim Bank dropped financing for the US$2.4 billion project.

Uganda has since contracted Turkish firm Yapi Merkezi to build the 273km section, with funding expected from Standard Chartered Bank and British export credit agency UK Export Finance.

But the dream of a railway project that eventually runs from the Indian Ocean to the Atlantic Ocean is still alive, according to Ruto.

"We approached China for the continuation of the railway as a package. Before I went to China, I had a conversation with [Ugandan President Yoweri] Museveni and we agreed on the strategy to extend the railway," he said.

Sub-Saharan geoeconomic analyst Aly-Khan Satchu said he was increasingly of the view that Africa would need to look at the PPP model to unlock new funding from China.

"I definitely feel this is a model that can be deployed continentwide to unlock new Chinese lending and make China an equity partner in Africa's turnaround strategy," he said. "Yes, the PPP model might well prove a silver bullet."

Mark Bohlund, a senior credit research analyst at REDD Intelligence, said the Ugandan leg of the SGR should improve revenues for its Kenyan counterpart, giving China Exim Bank an incentive to provide financing for the extension from Naivasha to Malaba.

The Kenyan government's need to prioritise securing budget support to repay the 2024 Eurobond, as well as payments due to China Exim Bank, could mean that a PPP solution comes into play, he said.

According to Bohlund, PPPs have a mixed track record in developed markets because it is hard to foresee and provide for contingency risks associated with these kinds of investment projects.

"It is hard to see that these won't be present in the case of the Malaba leg. However, the PPP option may be the only option for Kenya to finance [it] ... despite the negative headlines in terms of asset-grabbing that it is likely to generate in some Western media," he said.

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.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.