China Eximbank provides $176.5 million preferential buyer's credit for Southern Bypass Project

Project narrative

On December 1, 2011, China Eximbank and the Government of Kenya signed a $183.6 million preferential buyer's credit (PBC) agreement [CHINA EXIMBANK PBC No. (2011) 32 Total No. (183) No. (1420303052011211528)] for the Southern Bypass Road Project. The face value of the PBC was subsequently revised to $176,538,461.54. The PBC carries the following borrowing terms: a 2% interest rate, a 6-year grace period, and a 20-year maturity. The loan is scheduled for semi-annual repayments in equal installments from January 21, 2018, to January 21, 2032. The borrower is expected to use the proceeds of the loan to finance approximately 85% of the cost of a $216 million commercial (EPC) contract between Kenya National Highways Authority and China Road and Bridge Corporation (CRBC), which was signed on November 17, 2010. The borrower made principal repayments worth $7,061,538.46 between July 1, 2020 and June 30, 2021 (Fiscal Year 2020-2021) and $14,123,076.92 between July 1, 2021 and June 30, 2022 (Fiscal Year 2021-2022). The loan’s amount outstanding was $169,476,923.08 as of June 30, 2020, $155,353,846.15 as of June 30, 2021, and $141,230,769.23 as of June 30, 2022. The purpose of the Southern Bypass Project was to ease traffic congestion in Nairobi and divert traffic from the city center. The 28.6 km road starts at the junction of the Nairobi–Mombasa Road and Likoni Road, approximately 10 kilometers (6 mi) south-east of the city center. The road then loops through the south-western suburbs of Nairobi, including the northern environs of Nairobi National Park, Uhuru Gardens, Lang'ata, and Dagoretti. In Dagoretti, the road enters Kiambu County and then turns northwards, to pass through Muguga and end in the town of Kikuyu, in a suburb known as Gitaru. At that location, the road connects with the Nairobi-Malaba Road (A104). Under the supervision of the Kenya National Highways Authority (KeNHA), CRBC was the EPC contractor responsible for implementation of the project. The EPC contract went into effect on July 2, 2012. By June 2015, the project had achieved a 81.3% completion rate. However, at that time, CRBC was not in possession of the site for the National Park section due to a lengthy court case by Friends of the Nairobi National Park, which obtained an injunction that stopped KeNHA from constructing the road through the National Park. A court eventually ruled that KeNHA should follow due process and have the section of the National Park that was to be used for road construction appropriately gazetted. Upon gazettement, there were prolonged negotiations around the acquisition of a section of the National Park to facilitate the construction of the project. Negotiations between KeNHA and Kenya Wildlife Service for a grant of easement were subsequently completed and an agreement was signed on September 23, 2015. CRBC was granted possession of the site for the project's National Park section on November 2, 2015. Construction activities were substantially complete as of June 22, 2016 (with a defect liability of 12 months). The project was officially completed on November 1, 2016. The originally scheduled project completion date (per the EPC contract) was July 31, 2015. There are indications that the China Eximbank loan for the Southern Bypass Project has financially underperformed vis-a-vis the original expectations of the lender. In March 2022, reports emerged that the Government of Kenya had delayed payments worth more than 3.6 billion Kenyan shillings that were owed to CRBC and landowners displaced by the project, exposing the Government of Kenya to financial penalties and additional interest payments. Kenya’s Auditor General Nancy Gathungu said that the Treasury had fallen behind in remitting 1.2 billion Kenyan shillings to CRBC for the Southern Bypass Project. Gathungu also said that the Treasury had delayed 2.4 billion Kenyan shillings in compensation to landowners displaced by the project corridor. Gathungu warned that taxpayers would be saddled with more financial penalties and additional interest payments if the Kenyan Government did not regularize its payments: '[a]lthough the management has committed to liaise with the line ministry and the National Treasury for adequate budgetary allocation and timely exchequer releases for prompt payments in the subsequent financial year, the project is at risk of incurring additional costs by way of interests and penalties with the continued delay in making the payments.'