Transparency is derailing China’s debt trap diplomacy

Chinese funding for subpar infrastructure projects across the developing world has long been labeled as a predatory exercise in debt trap diplomacy. The exact details of these white elephants, however, are often kept opaque. 

Recently released documents surrounding the Chinese-funded Mombasa to Nairobi railway in Kenya now demonstrate just how predatory Beijing’s secret lending can be. 

The deal, inked by then-president Uhuru Kenyatta and the China Exim Bank in 2014, provided Kenya with 85 percent of the financing for the multi-billion-dollar project. At the time of signing, there were early indications that the deal was too good to be true. Without a competitive or public tender, the Chinese state-owned China Road and Bridge Construction (CRBC) was awarded the construction contract. This was subsequently ruled to violate Kenyan law, but only after construction was complete. 

Despite local court orders to make the loan agreement public, confidentiality clauses in the deal were used by President Kenyatta to inhibit public oversight. Kenya has now been through two parliamentary and presidential election cycles since the deal was signed, with limited public scrutiny of what critics term the “gravy train.” 

Heeding public calls for transparency, the government of recently elected president William Ruto has published several loan documents linked to the project that demonstrate the predatory nature of Beijing’s lending. In addition to the non-competitive construction tender, the deal requires all “goods, technologies and services” in the railway’s construction to be preferentially sourced from China. Additionally, these imports were exempted from Kenyan taxes and duties. Together, these provisions have shortchanged the Kenyan economy of opportunities associated with the construction of the most expensive infrastructural project in the country’s history. 

The agreement also runs roughshod over the rule of law in Kenya. In the event of a dispute, the Exim loan stipulates that arbitration can only take place in Beijing, without the right to appeal. More generally, the deal is “governed by and construed in accordance with the laws of China.” The rush to relegate the agreement to Beijing’s jurisdiction hints at the fear of a relatively impartial trial in Kenya. Local courts have been willing to rule against the Nairobi government when civil society has litigated the conditions of the deal, and there is a real risk that they would be equally unintimidated by Beijing.  

The corrosive nature of the railway loan is made worse by the project’s lackluster economic performance. Since beginning service in 2017, the railway project has struggled to turn a profit. Earlier this year, it was revealed that Kenya had already paid Chinese lenders more than $10 million in penalties associated with the railway’s fragile finances. 

The costly drawbacks of Beijing’s loan conditions are a prime example of what scholars call China’s “sharp power.” Unlike military hard power or cultural soft power, China’s sharp power represents the manipulative erosion of good governance to advance Beijing’s position within the global order. Infrastructural investment and business engagement can make a positive difference in developing countries, regardless of the foreign counterpart. But China’s exercise of sharp power in Africa adds unforeseen costs that are predominantly borne by civil society and communities, such as greater corruption, environmental degradation and diminished political accountability. 

While China’s sharp power takes a variety of forms, the Kenyan railway deal represents just the tip of the iceberg of Beijing’s predatory lending and corrosive contracts. Among a sample of 100 Chinese government loans to developing countries, researchers last year found that all loans since 2014 included confidentiality clauses. These clauses not only hide loan conditions from citizens and civil society but also prevent other lenders from accurately assessing the borrower country’s debt profile.  

Although Beijing’s loans are shrouded in mandated secrecy, it appears that the manipulative terms of the Kenyan railway loan are not unique. Last November, lawmakers in Uganda revealed that a China Exim loan to expand the country’s sole international airport similarly mandated arbitration in China under Chinese law. 

Discussions of China’s debt trap diplomacy often focus on the risk of asset seizure in cases of loan default. While these discussions about worst-case scenarios are important, they overlook the pernicious everyday sharp power provisions that routinely accompany Beijing’s lending. 

More than eight years since it was signed, the details of the China Exim loan for the Mombasa-Nairobi railway are only just coming to light. By giving citizens greater oversight of their fiscal liabilities, transparency will further derail China’s predatory debt trap diplomacy. 

Oliver McPherson-Smith is a research fellow at the Hoover Institution and the co-author of “China’s Sharp Power in Africa: A Handbook for Building National Resilience” with Glenn Tiffert.