In December of 2018, a letter appearing to come from the Office of Kenya’s Auditor General leaked to the public

It carried a warning that Kenya had allegedly staked its valuable Mombasa Port as collateral for a $3.6 billion loan from China for the construction of the Mombasa-Nairobi Standard Gauge Railway (SGR).

The revelation was serious. It emerged during the same period when reports were circulating of imminent transfer of Hambantota Port to satisfy part of Sri Lanka’s debt to China. The rumor put Mombasa Port in the spotlight as another example of “China debt-trap diplomacy”.

Although both the Chinese and Kenyan governments have denied that Mombasa Port was used as collateral, the exact loan terms for the SGR loan have remained an enigma. Hence, the rumor has continued to circulate.

However, a new report released last week by the China Africa Research Initiative (CARI) at the John Hopkins University School of Advanced International Studies shows that the Auditor General erred in concluding Mombasa Port was used as the loan collateral.

“To our surprise, our team found that the collateral rumor stemmed from a seemingly tiny but critical misreading by the Auditor General (AG). The AG mistakenly labelled KPA as a borrower, responsible for repaying the SGR loans,” found the report’s authors.

For context, four stakeholders were involved in the SGR financing: Kenya’s National Treasury, the borrower; Kenya Railway Corporation (KRC), the project Company; Kenya Ports Authority (KPA), the main project customer and owner of Mombasa Port; and China’s Exim bank, the Lender. Under the terms of the contract, KPA agreed to be the SGR’s major client - not the borrower, and not the collateral.

Further, the report asserts that it is probable the AG misunderstood how a waiver of sovereign immunity - a standard feature of international commercial project finance – works in practice.

In the AG’s leaked documents, he charged that Kenya’s government had “waived immunity” on KPA’s assets, expressly guaranteeing that they could be used to repay the Chinese loan. This was a mistake, says the report.

It is rare to find an international commercial loan or sovereign bond contract that does not contain the sovereign immunity waiver clause. As one American lawyer noted, “leaving out a sovereign immunity waiver in an international commercial loan contract would be a professional malpractice.”

Essentially, the clause provides for a dispute resolution avenue in international lending. Under international law, sovereign states and the entities they control have sovereign immunity. They are generally immune from lawsuits and cannot be compelled to appear before a foreign court – unless they waive their sovereign immunity.

As an example, a published cache of loan contracts signed by Cameroon with banks and export credit agencies from Austria, Belgium, India, Turkey and the UK shows that all required similar clauses.