Kenya turns to China for $1.5 billion highway expansion

By Duncan Miriri

GILGIL, Kenya, Nov 28 (Reuters) - Kenya and two Chinese state firms are launching construction of a $1.5 billion highway expansion on Friday, marking Beijing's return to major infrastructure development in the East African economy after a years-long hiatus.

The project, split into two phases, will be financed by the partners through a mix of debt and equity using a model that is gaining traction after China's traditional lending model raised concerns over borrowers' debt burdens.

"We don't have any room to borrow any more money," Kefa Seda, director general of the Public-Private Partnerships directorate at Kenya's finance ministry told Reuters ahead of the official launch ceremony.

The project will improve a key transport corridor that links Kenya's port of Mombasa with its western region and neighbouring landlocked states like Uganda, via Nairobi.

AS CHINA REPOSITIONS IN AFRICA, KENYA STRIKES A DEAL

After pumping billions of dollars into infrastructure projects, China cut its lending in Africa around 2019 as worries grew over debt sustainability in countries like Kenya.

Beijing pledged $50 billion in credit and investments over three years, however, at a summit with African leaders last year as it moves to reposition itself on the continent.

Kenya terminated a deal with a consortium led by France's Vinci SA SGEF.PA for the highway expansion project earlier this year.

The new agreement was announced during a state visit by Kenya's President William Ruto to Beijing in April.

Kenya is among Washington's closest African allies. And the rapprochement between Nairobi and Beijing angered U.S. President Donald Trump, prompting Ruto to issue a public defence of the strategy, saying Kenya needed to boost exports into markets like China.

DEBT, EQUITY MIX AND A 28-YEAR TOLL CONCESSION

One phase of the highway project will cost $863 million and see China Road and Bridge Corporation partner with Kenya's state pension fund NSSF to expand two existing stretches of a single-lane, 139-kilometre (86-mile) highway into four- and six-lane dual-carriage roads, the Kenya National Highways Authority said.

In the second phase, Shandong Hi-Speed Road and Bridge International, a subsidiary of China's Shandong Hi-Speed Group, will develop an existing single-lane, 94-kilometre stretch of highway into a six-lane carriageway at a cost of $678.56 million.

Both total cost estimates include financing costs, KENHA said.

Deals for the two portions of the project will be split into 75% debt and 25% equity. NSSF will contribute 45% of the equity funding in the phase it is involved in.

The borrowing could come from Chinese commercial lenders and state entities like Export-Import Bank of China, Seda said.

The firms have until the end of 2027 to complete construction followed by a 28-year concession to collect tolls to recoup their investment and make a return.