China Eximbank provides RMB 443.1 million government concessional loan for Phase 2 of NOFBI and E-Government Expansion Project (Linked to Record ID#47014)

Project narrative

On October 8, 2012, China Eximbank and the Government of Kenya signed an RMB 460,000,000 ($72,500,000) government concessional loan (GCL) agreement for Phase 2 of the National Optic Fibre Backbone Infrastructure (NOFBI) and E-Government Expansion Project. The face value of the loan was subsequently revised to RMB 443,187,554.60. The borrowing terms of the GCL, which is captured via Record ID#30384, were as follows: a 2% interest rate, a 6.5 year grace period, a 20.5 year maturity, a 1% management fee, and a 0.75% commitment fee. This loan had a 7-year availability period (that commenced on November 28, 2012 and concluded on November 28, 2019) and it was scheduled for repayment in semi-annual installments beginning on March 21, 2019 and ending on March 21, 2033. The borrower made principal repayments worth RMB 16,812,445.00 between July 1, 2020 and June 30, 2021 (Fiscal Year 2020-2021) and RMB 33,624,890.00 between July 1, 2021 and June 30, 2022 (Fiscal Year 2021-2022). The loan’s amount outstanding was RMB 420,311,135.06 as of June 30, 2020, RMB 386,686,244.25 as of June 30, 2021, and RMB 353,061,353.45 as of June 30, 2022. On May 19, 2016, China Eximbank and the Government of Kenya signed a supplemental GCL agreement worth RMB 650 million ($98,650,000) for the same project. This GCL, which is captured via Record ID#47014, carried a 19.6-year maturity (final maturity date: September 21, 2035), a 2% interest rate, a 1% management fee, and a 0.25% commitment fee. Its grace period is unknown. The lender made disbursements worth RMB 55,884,448.34 between July 1, 2020 and June 30, 2021 (Fiscal Year 2020-2021) and RMB 45,038,186.77 between July 1, 2021 and June 30, 2022 (Fiscal Year 2021-2022). The loan’s amount outstanding was RMB 519,103,407.17 as of June 30, 2020, RMB 574,987,855.51 as of June 30, 2021, and RMB 620,026,042.28 as of June 30, 2022. The proceeds of 2012 loan were to be used by the borrower to finance 100% of the cost of a $72,500,000 commercial contract between the Government of Kenya and Huawei Technologies. Co. Ltd., which was signed on July 7, 2010. The proceeds of 2016 loan were to be used by the borrower to finance 100% of the cost of a $98,650,000 commercial contract between the Government of Kenya and Huawei Technologies. Co. Ltd., which was signed on December 17, 2014. On September 18, 2017, China Eximbank, Kenya's National Treasury, Kenya's Ministry of Information, Communication and Technology, Innovation and Youth Affairs, Kenya's ICT Authority, and Kenya Commercial Bank (KCB) Ltd. entered into an Escrow Account Agreement for the two GCLs (loans) supporting the project's second phase and phase 2 expansion (IIE). Under the terms of the Escrow Account Agreement, the Kenya's ICT Authority was expected to open and maintain a USD-denominated debt service reserve account (DSRA) and a KES-denominated revenue account with KCB Ltd. for as long as the borrower had outstanding debt to China Eximbank (under the two loan agreements). Kenya's ICT Authority was expected to maintain the USD equivalent of RMB 22,200,000 between September 18, 2017 (when the Escrow Account Agreement became effective) and March 20, 2020, RMB 57,600,000 between March 21, 2020 and the first repayment date under the 2016 loan agreement, RMB 107,600,000 between the first repayment date and the last repayment date (November 28, 2032) under the 2016 loan (GCL) agreement, and then RMB 63,000,000 until all outstanding debts to China Eximbank (under the 2016 loan agreement) are paid. A forensic audit later revealed that Kenya's ICT Authority made $3,384,913 deposit in the DSRA on March 28, 2018, a $193,705 deposit on May 22, 2018, and a $4,835,766 deposit in the DSRA on August 26, 2020. The same forensic audit identified the cash balance of the DSRA as $9,743,865 (equivalent to RMB 62,547,818) as of October 31, 2021, which it said constituted evidence 'that [the] ICT Authority maintained the required minimum [cash] balance.' The forensic audit also noted that no withdrawals from the DSRA had taken place as of February 2022. Clause 5.2.2.1 of the Escrow Account Agreement states that all revenue generated from the project's second phase and phase 2 expansion (IIE) shall be deposited into the revenue account. A forensic audit later confirmed that Kenya's ICT Authority opened a KES-denominated revenue account at KCB Ltd. and the cash balance of the revenue account was KES 335,118,733 as of December 31, 2021. The second phase of the project involved the laying of sub-backbone and sub-metro fiber optic cable in 46 counties (measuring 4,300 km in length). It was implemented in 265 sites in national government ministries, departments and agencies as well as selected County Government (Governors') offices. The project's phase 2 expansion (IIE) involved the extension of 2500 km of fiber optic cable from the counties to the sub-counties across 518 sites in national government ministries, departments, and agencies as well as selected sub-county hospital (where the contractor installed active and passive equipment). Huawei Technologies. Co. Ltd was the general contractor responsible for project implementation. However, the Government of Kenya’s State Department also implemented the project in conjunction with Information and Communications Technology Authority (ICTA). Phase 2 construction activities began on September 22, 2014. According to the Kenyan Aid Management Platform, the project's second phase was originally expected to reach completion by June 30, 2016. However, it did not secure a final certificate of operational acceptance from the Government of Kenya until December 27, 2017. The project's phase 2 expansion (IIE) secured a final certificate of operational acceptance on November 7, 2020. There are some indications that the China Eximbank loans for Phase 2 of the NOFBI and E-Government Expansion Project have financially underperformed vis-a-vis the original expectations of the lender. According to a Kenyan government audit, ‘the NOFBI project network has been operational since 2014 and has been used by most of the data service providers in the [c]ountry. However, although the financing agreement [with China Eximbank] indicated that the Government [of Kenya] would sell out excess capacity commercially to the public and bill them to finance the loan repayments, there has been no billing done over the last five […] years it has been in operation. Further, the Service Provision Framework Agreement between the NOFBI Project Managers and the Internet Service Providers has not been implemented. The Government [of Kenya] has, therefore, been funding the operations of commercial entities without recovering the cost which amounts to lack of prudent use of public resources. In addition, no records have been provided detailing the users that have been connected to NOFBI for the last five […] years, their utilization levels, and the amount payable by each.' This project has also become a target of parliamentary scrutiny and controversy. On May 11, 2021, James Opiyo Wandayi, a member of the Kenyan parliament, said ‘[d]uring this financial year that we are reviewing, the case of National Optic Fibre Backbone Infrastructure (NOFBI) came to us. This is a project which, of course, was well intended, and I still believe it is well intended even as we speak. It is a project that has cost taxpayers a [whopping] Kshs21 billion and still counting. This is because the last phase of it is still under implementation. This is one project that was conceived and implemented in the most opaque manner and in blatant disregard of the existing laws. If you look at the first phase of this project, it cost taxpayers Kshs4.2 billion. For those who do not know, this is the project that was supposed to enhance internet connectivity across the country. It was supposed to lay down the trunks, infrastructure, and highways for internet from Nairobi to the countryside. The first phase of this project cost taxpayers Kshs4.2 billion and it was, indeed, fully funded by the Government of Kenya. There was some attempt to undertake an open tendering process and, as a result of this, three companies were contracted. These were Huawei, a company from China and two other local companies. They were contracted to undertake that project. However, when that project entered the second phase, which cost taxpayers Kshs7.2 billion, there is no evidence how the company that was eventually contracted was ever contracted. There was no evidence how that company came on board. We have laboured through and through to find out how that company came on board. Incidentally, the same company did the first phase - that is Huawei Technologies. We were at pains to understand how a contract of Kshs7.2 billion could have been awarded to a company on the basis of nothing really. There was no open tendering, no direct procurement as we know it under the law, and there was no restricted tendering. They were citing some nebulous terminology of government-to-government tendering procurement process, which is not known in any law. Moreover, it is an issue that is still left pending. However, even more seriously, the same company was awarded another contract to implement the third phase of this project, now at a [whopping] Kshs9.8 billion. This is what they are calling Phase 2 expansion of the NOFBI Project. Still, we are unable to find out how that company was awarded that contract and how it was procured. Indeed, for both Phase 2 and Phase 2 expansion of this project, the company that was awarded the contract was unable to produce even a letter of award. We struggled to get the letter of award that was given to the company. We could not lay our hands on any. Nobody was willing to go on record that they are responsible for the procurement of this company. Therefore, that is just one example. However, just to conclude on that particular aspect of NOFBI Project, there was the matter of revenues that would then be generated from this project, especially Phase 1 which was completed. There was some [loose] agreement that was purportedly entered into between the Information, Communication and Technology Ministry and Telkom Kenya that would allow Telkom Kenya to be collecting revenue as it carries out maintenance on the infrastructure. However, the profits that would be realised would then be channeled to an escrow account, which would then help the country and the public to pay back the loans that were procured from China. As we speak, eight or so years down the line, no single cent has been deposited in the escrow account. It therefore means that the public is going to continue to carry this burden of the debt from other sources and yet, there is money that is being generated from that project. This is because we know - and there was evidence - that Telkom Kenya was charging the commercial data service providers such as Safaricom, Orange and many others. Therefore, when Telkom Kenya came before us, they were not shy. They just told us: “It is true we have been collecting money.” Indeed, they admitted that they had by that time collected up to about Kshs1.7 billion. However, they were not going to remit anything to the Government of Kenya on account of the fact that the costs they had incurred in maintaining this infrastructure was more than what they had collected. However, there was no independent authority or entity that had audited their accounts with regard to this revenue collection from the NOFBI infrastructure.’