Why China Won’t Hold Kenya to ‘Debt Trap Diplomacy’

Dr. Guo Ce, a lead commercial counselor for China in Kenya. Generous, enthusiastic, and convinced China’s investment in Kenya will succeed.  Photo: Arielle Emmett

In late October last year, about six weeks after I arrived in Kenya, I interviewed a Chinese minister and commercial counselor in Nairobi.  Dr. Guo Ce bowled me over with his enthusiasm and immense hope for Kenya’s development and long-term partnership with his homeland.

A few weeks later, he asked me to withdraw this blog post.

Originally he thought our interview subject matter would be published exclusively in an internal  Fulbright report. Therefore he called me back to the Chinese consulate for a second meeting, at which time he delivered a  stern reprimand, correcting what he said were flaws and inaccuracies in my draft, and asking me to delete pictures I had taken of his lovely wife, Secretary Zhang Hong.

[For the record, it’s true that I told Dr. Guo that this interview’s subject matter would go into a Fulbright report and/or a scholarly book I’m planning to write.  However, I never said I wouldn’t reflect on our interview in a  blog post. (1)]

In this second meeting, Dr. Guo challenged the accuracy of several news items I mentioned.  One was the press reports on the alleged Chinese take over of the Hambantota International Port in Sri Lanka, which the New York Times in July 2018 described as yet another example of China’s “debt trap” diplomacy and seizure of foreign assets.  The “debt trap” accusation is relevant here.  It applies to Chinese infrastructure building in Kenya, a main component of my Fulbright research.  So let me focus on this a bit.

Dr. Guo was perturbed about my interpretation of the Hambanota port case as an example of Chinese lending practices that could, in theory (and in practice) result in the re-appropriation of strategic national assets like ports and railroads once the borrowing country fails to make good on its loan payments.  This is a great fear expressed among Kenyans, especially in the media, and also among my graduate law students in Nairobi.

Dr. Guo told me to explain these issues in proper context.  The context is this:  China does not grab assets per se or use African projects it finances and builds such as ports or railroads as collateral.  Instead, the country negotiates loan repayment through Sovereign Guarantees which are legally binding in documents pledged to China’s EXIM Bank.  One such scheme is known as “Take or Pay.”  “Take or Pay” means that borrowing governments guarantee to China operating income from infrastructure projects that can be used as a means of debt repayment.  I will discuss this in greater detail in  a later post; the subject is complex, and the loan guarantee practices of Western businesses and banks, including the World Bank, are similar! (source:  Dr Zheng Li Huang, Email to Dr. Oscar M. Otele, University of Nairobi, June 19, 2019).

I acknowledge now that his assertions regarding the Sri Lankan port, and China’s intentions in Kenya with respect to its big infrastructure projects, are valid and technically correct.  However (and this is a big caveat), I’ve also learned that China can de facto recover foreign assets it has helped build by allowing quasi-private companies (almost all of them backed by China state-owned companies, which act as major shareholders) to assume operational leadership of these projects when host countries fall behind in their payments.  Bottom line:  Business results and long-term profitability count more for China than polite labels.  (I’m reminded of the late Deng Xiao Ping’s famous 1961 saying: “It doesn’t matter whether a cat is black or white; as long as it catches mice, it is a good cat.”)

[For a rebuttal on what happened to Hambantota, a port now jointly held by the Hong Kong-based China Merchants Port and the Sri Lanka Ports Authority, see this recent Op/Ed that appeared in South China Morning Post, a Hong Kong newspaper now owned by Alibaba, a giant Chinese  trading conglomerate (2). ]

Now that I’m back in the US, I’m going to release my original post along with Dr. Guo’s corrections.  Frankly, since I’m still in  shock after my post-African reentry to North Carolina culture, much like an astronaut who landed on the wrong moon, I don’t give a damn about political delicacies like censorship.

So, with revisions, here is my optimistic report written a year ago. I hope this is of value to China-Africa watchers.

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The Chinese Juggernaut

Freedom was the first topic I discussed with Dr. Guo Ce, the economic and commercial counselor of the Chinese  Consulate in Nairobi.  He surprised me with his openness and willingness to acknowledge that change will happen to China sooner than we think.

“The West and China are completely different,” he said.  “Up until now the Chinese government has follow the control theory, but this is temporary.”  Guo believes that China’s tight control of the press and political dissent will eventually loosen as the society grows even more secure.  “Right now we enjoy peace and safety in China,” he said.  “When I come home from a movie at 11 pm at night, the feeling of safety is particularly good.  In Washington DC, in some parts, you can’t even walk at night.  In China, you can walk anywhere because it’s safe.”

[My thought:  the streets of Urumqi, in Xinjiang, where a million  Muslim Uighurs have been sent to “reeducation camps,” and thousands separated from their children, are reported to be unsafe.  Hong Kong has erupted into violent protest these past several months.  So all is not safe, even if the inside of mainland China is predominantly so.]

Guo impressed me with his optimism for China-Africa relations despite political missteps and China’s reputation for aggressive lending practices and media reports of mistreatment of Kenyan workers.  He says both countries can learn from experience, even the bad ones, and eventually come out way ahead.

Admittedly, Kenya is on a borrowing binge from China and Western banks, so much so that many top Western and Kenya experts believe that the country’s debt burden will eventually force a default and, in worse case, a Chinese re-appropriation of assets.  But that picture is muddied, and I’ll address that in future posts with economist David Ndii.

Kenya ranks behind Angola and Ethiopia as the third most indebted African country to China.  The government here borrowed $9.8 billion from China as of year-end 2017.  At least that’s what the published record says; it might be more.  Around $3.2 – $3.6 (depending on your source) billion in Chinese money financed the first phase of the Kenyan Standard Gauge Railway (SGR), the signature 472 km infrastructure project running between Nairobi and Mombasa on the southern coast, with a second phase for the railway planned to link key cities in Kenya (including Kisumu and Malaba) with Uganda, Rwanda, and South Sudan.  Kenya has not had a major railway infrastructure upgrade since independence in 1963, and many folks here believe the new rails are absolutely needed.

(Intellectual and uber brilliant economist David Ndii does not agree.  He says that the SGR is another government boondoggle and that it will never pay for itself.  I’ll publish my transcript of Ndii’s interview next.)

The great railway plan

In the case of the SGR, though, construction was essentially supervised, built (with both Chinese and Kenyan labor), and operated  by the Chinese,  and controversy has reigned.  Aside from the labor and salary disputes, and there have been many, the BCC reports that the diesel-powered SGR costs $5.6m per kilometer for the track alone, more than triple the international standard and four times the original estimate.   

The Kenyan government has responded that SGR cost more because of the challenging terrain, the need for additional bridges and tunnels, along with land purchases and materials to support heavy cargo loads, which will be the main revenue source.  By comparison, the Chinese-financed, 756 km Addis Ababa-Djibouti line launched last year is an all-electric project and cost just about the same as Kenya’s line — $3.4 billion.  The Ethiopian train is also 250 km longer (source: BBC.)  Why so expensive in Kenya for a much shorter line that, given the threat of pollution and climate change to wildlife should rightfully be powered by electricity, not diesel?  Dr. Guo responded that the terrain and need to build elevated trestles over Nairobi National Park to prevent destruction of animals was one major reason.

And while  Kenyan Transport and Infrastructure Cabinet Secretary James Macharia recently argued that Kenya’s electrical infrastructure is still too spotty to support an electric train, critics are skeptical.  A University of Nairobi professor told me that electric power still is the only responsible choice, given Kenya’s commitment to saving its animals, a huge draw for tourists and ecologists.  Moreover, he claims that many folks in Kenya who ceded their land for SGR purposes still haven’t received their compensation.

American Ties

Still, Dr. Guo Ce, who attended Boston University School of Law 25 years ago, and his wife, a Georgetown University graduate,  can’t help but celebrate the railway accomplishment.  To them, SGR symbolizes Chinese partnership and growing influence in the African world.  He and Zhang Hong proudly exhibit a Chinese ink wash painting of the new train juxtaposed against an image of the Great Wall.  Both the Train and the Wall are ascending into a limitless horizon which I originally described as having a “gauzy chasm between the two.”  Dr. Guo questioned this and said there is no chasm between the two projects…at least symbolically speaking.

“Some people in China are asking, if we have some of the poorest areas in Chinese mountains that need attention, why are we giving money to African countries?” Guo continues.  The answer is to open new markets.  The country can’t prosper internally if it doesn’t extended its trade and economic power beyond its own  borders.

Kenya is an ideal match for China’s construction and finance capabilities, since the big state-owned companies have huge troves of cash. “In Kenya, infrastructure is very low (i.e., poor),” he said.  “So the first thing to do is to connect the main areas from Mombasa to Nairobi and Nairobi to Kisumu using SGR and the highways from Nairobi to Nakuru. This is very important to promote the environment of investment and potentially, to open markets and opportunities for trade for the poor.”

The Chinese-built railway, even the roads here, are considered politically necessary.  “They are symbolic of big plans.”  The Jubilee government’s promise to do big things.  So the port and oil terminals being built at Lamu, on the eastern coast of Kenya, are part of that busting out all over master plan to increase Indian Ocean trade traffic (Somalia and Kenya are in dispute over territorial waters leading to Lamu).  The ultimate goal is to produce a continuous railway and road artery to the hinterlands of Marsabit and Turkana (where the oil is, though perhaps not a commercially viable find),  northern Kenya, Ethiopia, Uganda, and Sudan.   Once again, China is a contractor, building the LAMU port, but most of the financing is coming from Japan and the World Bank.  (In many cases, China is hired as the contractor; it underbids both European and US firms, so it has become the main infrastructure contractor in Kenya).

Chinese Berth construction at Lamu, eastern Kenya, part of a huge interconnected master plan to link trade routes to northern Kenya, South Sudan, Ethiopia and Uganda

 

Another thing Dr. Guo doesn’t say — but I’ve noticed — is that the Middle Kingdom has less “compassion fatigue” than the West.  While NGOs, foundations and Western governments have seemingly exhausted themselves giving out loans and grants with plenty of rules and restrictions to solve one African debt crisis after another (and virtually all require strict governance, feasibility studies, and imprimaturs to grow up and act like democratic states, essentially an alien condition in Africa),  China, by contrast, approaches the continent like a kid flipping a shiny new coin.  Everything is new, and faith in paybacks and happy outcomes continues virtually unabated.  This, of course, may backfire in some cases;  even some Chinese export and credit insurers think so; certainly countries like Angola, Sri Lanka and Zambia have run into debt trap doo-doo.  

But overall, China is  betting on Africa in the long-term; and therefore, it has to be okay to forgive certain loans, forget about others, and, when necessary, engineer refinancing and partnership deals that include partial holdings or leases on a few big national assets  when governments can’t repay.

The $1 billion Hambantota International Port in Sri Lanka originally reported to be leased to China for 99 years when Sri Lanka couldn’t repay its debt.  The Port now is held jointly by the Hong Kong-based China Merchants Port and the Sri Lanka Ports Authority, a deal negotiated over 2016-2017.  China Merchants Port is also part of  China Merchants Holdings, a shipping and ports conglomerate of which China Merchants Group, a state-owned company, is a major shareholder (55%).    Source:  South China Morning Post 

The Savvy Politician

Guo Ce has some savvy things to say about Africa.  One of them is that governments have to work in synch with the ingrained cultures of the land.  “Twenty five years ago, when I started out at Boston U School of Law, I used to think that America had the highest standard of government,” he said.  “But since I’ve come to Africa, I’m now convinced that political systems must be rooted in traditional culture,” he explained.  African culture, in particular, is tribal and ethnically divided, he observes.  With 47 different tribes in Kenya, “the very ‘modern’ political system doesn’t fit.”  Though it’s easy to want Africa to play by certain rules or eliminate corruption or even  adhere to certain ideologies — democratic or even Communist, the reality is that Africa will go its own way, even if greed, corruption, halting progress, and over-borrowing and squandering are part of the process.

“Will African countries go Communist, or they will be run by China?” I ask.  This certainly is a fear of some local folks here.

“No,” is Guo Ce’s dual answer.  “Africa is pursuing economic development first.”

Presumably, China will make back its investments, including preferential loans (more than a million Chinese are already on the African continent, a number that suggests things are going okay).  Faster transport of agricultural and manufactured goods should make it easier for cities to interconnect, spreading prosperity even to the countryside. That’s the “rising tide that floats all boats” theory, and Guo Ce, along with Kenyan President Uhuru Kenyatta, his minions, and China’s President Xi, are champions.

At the same time, Guo acknowledges that “big cigar” projects are essentially political statements as much as economic ones.  “Before the president election, the Kenyan government promised to build all these projects,” he said.  Among these are a much debated coal-fired plant in Lamu, a contracting project that will be executed by General Electric and Chinese contractors if it comes to pass (the project is on hold because of environmental concerns.  Dr. Guo dismissed ‘green’ ideologies as ‘fake’; he cites the Lamu coal plant which will use modern coal scrubbers to reduce emissions.  And other renewable power sources such as solar and wind have the disadvantage of not generating power at times because of weather, darkness, or still air. All energy choices, even the choice of a railroad and what powers it, have political ramifications.

[Some officials are clearly perturbed by these plans.  I spoke with a Kenyan government budget officer (name withheld to protect her identity) who lamented that the old British railroad could have upgraded successfully in Kenya.  She said SGR’s exorbitant costs eliminate what she described as “fiscal head room” for Kenya to repair or build out non-existent or horrifically eroded roads and water supplies in the poorest, most remote rural areas.  She showed me a book of photographs she kept; one was of a rural man lying prostrate on a road drinking dirty water out of potholes.  “This is how some people get their water,” she said.  “Simpler things could have opened up the roads that  would have opened country and done so much.” ]

Guo acknowledges that China is chomping at the bit to spread its construction expertise and financial wealth to countries that really need it.  “At the same time, my first consideration is to ensure that loans are repaid to my supporters. When the economy expands” — Kenya’s economic growth in the last several years has been 5 to 6% per year –“we will make back our loans.  More manufacturing facilities here will be built.  We’ll see an impressive expansion of the economy here within ten years.”

 

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  1. I found out much later that the Fulbright Foundation required a surprisingly superficial sign off report, mainly filling in blanks and multiple choice in a template.  Hmmm… Questions about how much we liked the program, and whether it was administered efficiently.  Not much on the content or subject matter that we researched for a grant, and what we found.  For that, I’ll have to write a book later.  Or just convey my thinking in a few articles and posts.
  2. The author, Barry Sautman, argues that  the Chinese have not grabbed the Hambantota asset after all, and that “payments of the principal and interest for the port loans comprised only about 1.5 per cent of Sri Lanka’s external debt repayment obligations due then. The Sri Lanka Ports Authority paid on time, using revenues from Colombo port, which includes a successful container terminal run by China Merchants Port.”   So much for the elliptical business dealings of China, Hong Kong, and the rest of the world.)  So much for defacto vs. dejure ownership of port assets).

     

 

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