Chinese Debt Trap and Port of Mombasa

China is engaged in territorial disputes with several countries including Japan, Taiwan, Vietnam, South Korea, Malaysia, Indonesia, Philippines and Brunei and is paranoid about its maritime routes being strangled at certain chokepoints. The Standard Gauge Railway (SGR) project  commenced operations in the year 2017 linking Mombasa ,the key seaport of Kenya, to the capital city of Nairobi and substantially reducing the distance and freight transportation duration. The capital component of the SGR is $ 3.2 billion sponsored by the Export-Import Bank of China and executed by China Road and Bridge Corporation.  A concern rose last year that if Kenya defaults on the SGR loan would Mombasa Port be the collateral for the loan .  Such a misconception arose from  Kenya’s international compulsions to  enhance bankability of the SGR project which required incorporating clauses in the project’s take-or-pay agreement as well as customary sovereign immunity waiver clauses . The Western media however misconstrued the project structure and termed it as a “ debt trap “ whereby the borrowing entity cedes strategic assets as debt-for-equity swap. The common perception was that once the borrowing country was unable to repay the loan it would be squeezed for diplomatic concessions and outright pledging of strategic assets.

Emirate Geostrategic Route to Africa

Sovereign funds of the United Arab Emirates  are being utilised  to acquire ports as part of its strategy for flexing its diplomatic, financial and  military influence in Asia and Africa considering the growth potential and rapid economic rise of these two continents. Scoping up strategic assets from debt stricken countries at abysmally low cost in the name of developing their ports, ostensibly through introducing state of the art technology,  as regional trading and maritime hubs is the public reason.

Sovereign Clause and Commercial Transaction Advisor

However , prior to sanctioning sovereign clauses in the lease or sale of strategic assets to external investors with unknown shareholding certain essential requirements should be ensured as any bidder will recover its initial investment and rake in subsequent revenues. These conditions include appointing an independent international commercial transaction advisor, conducting of due diligence of receivables and payables and third party audit of balance sheet, ascertaining the likely increase in cost of doing business, ensuring naval and defense assets security in the harbor, correlating port expansion plans with updated navigational and hydrographic studies ,ruling out any conflict of commercial interests,  ensuring that the jurisdiction from where the investment is flowing is compliant with Financial Action Task Force (FATF) guidelines  , analyzing upsurge in freight and logistics charges which directly impact on exports and valuation of port assets and infrastructure by international consultants selected through a transparent and competitive bidding process .Negotiations should focus on eliminating undesirable exclusivity clauses and optimum term of the agreement. Also an international feasibility study be conducted prior to such economic and commercial trade off ,with well defined TOR’s, to determine the delicate balance between foreign direct investment and export sales or export proceeds. In no circumstances should efficiency in cargo handling be used as a ruse or pretext for hasty sale of strategic assets as such efficiency in container/cargo handling can be brought about by reducing container “ dwell “ time or container clearing time at terminals.

By Nadir Mumtaz