High Court order on disclosure of secret offers rare a glimpse into the nature of Chinese lending

High Court order on disclosure of secret offers rare a glimpse into the nature of Chinese lending

By Kabakua Mbogori

On May 13, 2022, the High Court of Kenya at Mombasa (Constitutional Petition No. E 032 of 2021) declared unconstitutional the failure by the government to disclose the contracts relating to the construction of the Standard Gauge Railway(SGR) signed with Chinese lenders. Two petitioners, Khelif Khalifa and Wanjiru Gikonyo, went to Court after their request for information on the SGR contracts were declined by the Attorney General (AG) and the Ministries of Transport and Finance. In its defence, the government primarily relied on non-disclosure clauses, the Official Secrets Act cap 187, and legitimate government interest to deny the petitioners access to the subject information.

But before getting into a detailed analysis of the ensuing arguments in that matter, let us paint a brief picture of Chinese lending policies. China pursues a secretive model of bilateral and commercial lending abroad. Debt Agreements between Chinese lenders and foreign governments are closely guarded using strict non-disclosure provisions. Due to this lack of transparency, it is nearly impossible to have meaningful public debates on such agreements’ merits and/or demerits. But thanks to a fairly revealing discussion paper published early last year, we now have a glimpse of Chinese lending methods.  

Secret debts  

In March 2021, five western scholars — Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, and Christoph Trebesch — published a paper ‘How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments’ – the first of its kind, detailing rare insights into the terms of Chinese debts to developing countries. Gelpern is a professor of law at Georgetown University, United States, and an expert in sovereign debt and financial regulation; Horn is an economist with the World Bank and formerly a researcher with Kiel Institute for the World Economy; Morris is a senior fellow at the Center for Global Development- a non-profit based in Washington D.C. and London; Parks is the Executive Director of AidData, a research lab at William & Mary College, Virginia, United States; Trebesch is a Professor of Economics at the University of Kiel and the Kiel Institute for the World Economy.

While the authors and their affiliate institutions are western-based- which may immediately invoke suspicions of bias against China- the methodology employed makes the paper credible. They have analyzed 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania. The authors have also compared these contracts with those of other bilateral, multilateral, and commercial creditors. While not entirely shocking, their conclusion is a serious indictment of government-sponsored Chinese commercial lenders. The paper gives us three main insights.  

First, the contracts contain unusual confidentiality clauses that prohibit borrowers from revealing the terms or even the existence of the debt. Such confidentiality obligations make it difficult to establish the true financial position of countries such as Kenya. In addition, citizens cannot hold governments accountable for these secret contracts. As we shall see shortly, these difficulties made the petitioners in the instant petition to seek the High Court’s intervention.

Second, some contracts require sovereign borrowers to provide what the paper calls “cash collateral”. Chinese lenders require borrowers to maintain a special bank account that may be used to set off the loan in case of financial difficulties on the borrower. This serves as the security for the debt. Some contracts require borrowers to fund these accounts with revenues from projects financed by the Chinese lender. Hence, revenues from such projects remain out of the control of the borrowing government. This could perhaps explain the SGR management model in the Kenyan context, where a Chinese operator is literally in charge. In addition, the contracts may include “Take or Pay” clauses designed to guarantee business for the projects undertaken. 

Such a clause was the subject of litigation in Constitutional Petition No. 159 of 2018, Consolidated with Constitutional Petition No. 201 of 2019, in which a “Take or Pay” clause in an Agreement between Kenya Ports Authority and Kenya Railways Corporation was challenged (The case touched significantly on the SGR, and it was heavily relied upon by the respondents in the instant petition in their preliminary objection on the ground of res judicata, although the objection did not succeed).

 The «cash collateral» requirement is also designed to give China preference over other lenders regarding debt repayment. The contracts make it clear that Chinese debt is out of collective restructuring or what has been termed «no Paris Club» clauses. Sometime last year, at the height of the COVID-19 pandemic, there was a stand-off between Kenya and China Exim bank over debt repayments when a request for an extension of a debt moratorium was declined. Kenya had to abandon its debt relief request due to Chinese resistance. In contrast, other G20 countries such as Canada, Denmark, France, Germany, Italy, Japan, the Republic of Korea, and the U.S. agreed to a four-year rescheduling plan with a one-year grace period.

Third, some clauses in these contracts have the potential to influence the debtor’s domestic and foreign policies. For example, a contract may contain a version of a cross-default clause. Such clauses empower the lender to terminate and demand immediate full repayment when the borrower defaults on other lenders. If invoked, such clauses can cause significant damage to the borrower’s economy. Similarly, all contracts reviewed had a clause calling for the termination of diplomatic relations between China and the borrowing country in case of a default. If this happened, the lender could demand immediate repayment.

Court intervention

When Khelif Khalifa and Wanjiru Gikonyo made a formal request to disclose all contracts related to the SGR project, little surprise then that the request was flatly declined. The Principal Secretary, Ministry of Transport, responded to their letter and gave seven reasons why the information sought could not be availed. First, the information sought relates to contracts between two governments. Second, the agreements have non-disclosure clauses. Third, the information falls under Sections 6(1) & (2) of the Access to Information Act, which provides for limitations of the right of access. Fourth, the Petitioners have failed to establish the necessity of the documents. Five, releasing the information will endanger national security. Six, the information is protected under Sections 3(6) & (7) of the State Secrets Act, which deal with acts prejudicial to the safety or interests of the Republic. Lastly, the Petitioners have not exhausted the available dispute resolution mechanism under the Access to Information Act.

The petitioners even sought the intervention of the Commission on Administrative Justice, but the Commission faced the same frustrations with relevant government departments. For example, when the Commission wrote to Kenya Railways Corporation (KRC), the response was that the information requested by the Petitioners are projects between the Government of the People’s Republic of China and the Government of Kenya, and the role of KRC in the contract was merely implementation. The Attorney General was also evasive. Via a letter by the Deputy Solicitor General, the A.G. informed the Commission that the Office of the Attorney General was not the custodian of project documents. The AG further stated that the requested records could not be availed as the same would be in breach of the agreements and might cause serious legal and financial repercussions.

Unconstitutional

Mativo J emphasized that under the current constitutional framework, the right to access information is a fundamental right whose scope the constitution seeks to expand rather than limit. According to the Judge: “Parties, who were once denied access to information based on the now-obsolete provisions of the Official Secrets Act cited by the Respondents on the mere allegation of “secret state dichotomy,” should now access information only subject to the exemptions enumerated at Section 6 (1) & (2) of the Access to Information Act.” The Judge further states in Paragraph 80: “the right to access information held by the State is now constitutionally guaranteed. It can only be limited if the decision or law limiting the right passes an article 24 analysis test.”

The Court emphasized the need to adopt a constitutional construction approach which exemplifies fundamental rights and protection. The Judge concluded that the three arguments by the respondents, namely, that the contract contains non-disclosure clauses, that the disclosure will endanger state security, and that the information sought is privileged, are not legitimate reasons for denial of information in a democratic society. The judge states in Paragraph 90: “No restriction on this right may be imposed on the ground of national security unless the government can demonstrate that the restriction is prescribed by law and is necessary for a democratic society to protect a legitimate national security interest.”

On non-disclosure clauses of the contract, the Court held that information would be denied if releasing such information would cause harm to the commercial or financial interests of the business. Such interests as trade secrets, financial, commercial, scientific or technical information of the business or a third party may deserve protection if the disclosure is likely to cause harm to the commercial or financial interest(s) of the body or third party. The Court found that releasing the information sought was unlikely to cause harm to anybody because the SGR project has been concluded.  

The Court granted an order compelling the government agencies to provide information sought by the petitioners. The AG has appealed the decision.  (

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