How Africa Borrows From China: And Why Mombasa Port is Not Collateral for Kenya's Standard Gauge Railway

In December 2018, rumors began circulating that Kenya had staked its valuable Mombasa Port as collateral for US$ 3.6 billion in Chinese loans for the Standard Gauge Railway (SGR). New research from CARI shows why the collateral rumor is wrong. A CARI team of scholars and practitioners of international commercial law, auditing, and project finance spent nearly two years collecting and investigating all available SGR contracts and documentation.1 Solving the mystery of the collateral rumor through reconstructing the contractual arrangements also allowed the team to diagram for the first time how China Eximbank and its borrowers structure financing relationships and payment flows in a large Belt and Road Initiative (BRI) project (Figure 1), blending project finance into sovereign loans. The collateral rumor originated in a critical mistake by Kenya's Auditor General (AG). In a routine audit, the AG wrongly labeled Kenya Ports Authority (KPA), owner of Mombasa Port, as a "borrower" responsible for repaying the China Eximbank SGR loans. The AG-and many others-also misunderstood the "waiver of sovereign immunity" clause signed by Kenya's National Treasury, KPA, and Kenya Railway Corporation (KRC). Instead of a deliberate debt trap, we find that the railway project was carefully and creatively designed to reduce the risks of a sovereign default and enhance the bankability of a project with high costs but significant long-term benefits for Kenya and the region.