Fight or Flight: Seeking Remedies in Retaining East Africa’s Infrastructure Sovereignty
East Africa’s infrastructure financing is taking a dramatic turn. Once heavily reliant on foreign debt, the region is now drawing interest from Indian conglomerates and Dubai-based firms, signaling a pivot toward diversified strategies. Yet, as the players change, the risks remain the same.
Take the proposed $1.85 billion deal between Kenya and India’s Adani Group to lease Jomo Kenyatta International Airport (JKIA) for 30 years. On paper, a massive upgrade to Kenya’s largest airport, promising to elevate its status as a hub for commerce and tourism. But beneath the allure of investment lies an unsettling reality – handing over long-term control of the nation’s key gateway to a foreign corporation.
In Uganda, the China Eximbank loan for the Entebbe International Airport modernisation project ignited similar concerns. Although the loan terms did not technically make the airport collateral for the debt, the contract mandated that all airport revenues be funnelled into a lender-controlled escrow account. This arrangement gives China a claim on Uganda’s primary aviation revenue stream for two decades, prioritising debt repayment over domestic needs.
The Infrastructure Imperative
Effective infrastructure enables countries to connect with international markets, reducing trade costs and fostering regional integration. Physical infrastructure facilitates the movement of goods and people across borders, which is essential for active engagement in global trade. Quality infrastructure directly affects trade capacity by lowering transportation and logistical costs, thereby enhancing a country’s competitiveness. Countries with better-developed infrastructure benefit from lower trade costs, which support economic specialisation and comparative advantages.
For less-developed countries (LDCs), including those in East Africa, high trade costs stifle their manufacturing sectors and limit their access to global markets. For example, LDCs face trade costs equivalent to 227% of ad-valorem tax rates, compared to significantly lower rates of 125% and 98% in middle-income countries and 82% in high-income countries. This disparity underscores the need for infrastructure improvements to lower trade costs and foster economic integration in sub-Saharan Africa (SSA).
An Academic Note
Foreign debt from China’s Belt and Road Initiative (BRI) has become the primary funding mechanism for East African infrastructure, exposing these countries to significant economic and strategic risks. The concept of ‘debt-trap diplomacy’ suggests that high-interest loans tied to critical national assets may go beyond mere financial strain, offering creditor nations the potential to influence local policy and diminishing autonomy. A pertinent example is Kenya’s Mombasa-Nairobi Standard Gauge Railway, a costly infrastructure project that is yet to meet expected revenue levels, straining national budgets and risking asset repossession. Such projects, when underperforming, often lead to a ‘debt rollover’ scenario, in which new debt is needed to repay previous obligations, stalling long term economic growth.
Current literature calls for East African nations to shift from opaque foreign loans towards diversified, transparent regional financing models, which could enhance fiscal autonomy and encourage sustainable growth. Regionally based investment platforms could boost local development, reduce external debt reliance, and strengthen East Africa’s financial sovereignty.
The Debt Trap
As East Africa’s debt burden in the pursuit of regional connectivity mounted, with Kenya’s SGR requiring a $3.6 billion loan from China’s Export-Import Bank, while Ethiopia’s Addis Ababa-Djibouti Railway depended on a $2.5 billion loan from the same institution, these loans, with high interest rates and short repayment terms, have created unsustainable debt-service requirements that far outstrip project revenues. By June 2023, Kenya’s debt-to-GDP ratio neared 70%, a steep rise from less than 50% a decade prior, while Ethiopia has sought debt restructuring support from the IMF to manage similar levels of debt distress.
The large-scale loans financing East Africa’s infrastructure projects often come with limited flexibility in repayment, as they carry sovereign guarantees and sometimes require collateralisation of national assets. Collateralising national assets for foreign loans poses profound risks to East Africa’s economic sovereignty. The Adani-JKIA proposal, structured as a 30-year lease with Adani controlling key revenue streams, risks diminishing Kenyan oversight and has sparked public outcry, legal challenges, and fears of job losses. In Uganda, China Eximbank’s loan for Entebbe Airport mandates that all airport revenue goes into an escrow account for debt repayment, limiting Uganda's financial autonomy. Such terms illustrate how infrastructure financing can compromise sovereignty, redirecting essential revenue away from local priorities and placing significant control of critical national assets into foreign hands.
Financing Mechanisms
Infrastructure projects in East Africa frequently require a blended financial approach, including project finance structures, debt and equity financing, and sometimes mezzanine financing, each carrying its implications and challenges. Project financing in infrastructure often involves establishing a special purpose vehicle (SPV), a legal entity created to manage the project and its debt. This approach allows governments to pursue large projects without inflating national debt ratios by keeping these liabilities off the official balance sheet. However, off-balance-sheet debt can create hidden vulnerabilities. For instance, Kenya’s SGR SPV keeps debt off the balance sheet, yet underperforming revenues mean the government covers shortfalls, masking true debt levels and, consequently, undermining fiscal stability. Consequently, the Kenyan government remains indirectly liable for the debt, affecting the country’s debt sustainability despite the formal isolation of the SPV.
Debt financing continues to be popular due to its predictable cash flows; however, sovereign guarantees introduce considerable risk. When governments guarantee debt, they must assume responsibility if SPV revenues fall short, which exposes public finances. Kenya’s loan guarantee for the SGR project demonstrates this risk, as the government must now cover substantial portions of debt service, draining funds that could otherwise support essential services. While public-private partnerships (PPPs) theoretically offer risk-sharing opportunities, private sector involvement has been challenging to secure without additional guarantees. PPP models like build-operate-transfer (BOT) and design-build-finance-operate (DBFO) have been applied in East African highway and energy projects but remain underutilised. Uganda’s Entebbe Expressway was developed under a PPP, yet the government remains liable for revenue shortfalls. To optimise PPPs, East African countries could revise terms to limit government liability and encourage more significant risk-sharing from private investors, thereby reducing sovereign debt exposure.
Adverse Effects
The economic effects of foreign-funded infrastructure projects extend beyond debt ratios, impacting fiscal policy flexibility and the ability to make independent economic decisions. High debt-to-GDP ratios limit East African countries' capacity for counter-cyclical spending during economic downturns, as debt service payments consume a large share of public revenue. Since these debts are typically denominated in foreign currencies, East African nations also face substantial forex risk, especially during local currency depreciation. A 10% currency devaluation can increase debt obligations by a similar percentage, putting stress on national reserves and sparking inflationary pressures domestically. Currency volatility in countries like Kenya and Uganda has worsened their debt service burden, further straining central bank reserves.
Dependence on foreign creditors, particularly China, poses risks to East African nations' bargaining power in areas such as trade agreements and domestic policy choices. Kenya’s concerns about potentially losing operational control of Mombasa Port illustrate the geopolitical leverage that creditor nations hold. Chinese loans often come with requirements that limit local contractor involvement and constrain operational autonomy, perpetuating dependency and compromising economic sovereignty.
A Way Out
East African nations should prioritise diversifying their financing sources and adopting sustainable financial models that lessen reliance on foreign debt. By establishing regional infrastructure investment funds, East African countries can pool resources through the African Development Bank (AfDB), promoting locally driven project financing. The AfDB’s Africa50 infrastructure fund and recent bond issuances for regional projects underscore the potential for such regional approaches. These funds could attract both private and institutional investors, enabling East African countries to fund their projects without ceding economic control to foreign entities.
Secondly, encouraging local businesses and investors to participate in PPPs would allow East African nations to retain a larger share of control over projects. Incentivising domestic pension funds and institutional investors to participate would also spread financial risk across the local economy rather than concentrating it on government finances. Projects that focus on sustainability, like renewable energy and water management, offer access to green financing, a rapidly expanding global financing option with favourable terms. Thus, issuing green or sustainability-linked bonds would provide long term, lower-interest funding for projects that align with environmental goals. With growing interest in sustainable investing worldwide, green bonds could attract European and North American institutional investors, broadening East Africa’s creditor base and reducing dependence on Chinese finance.
Conclusion
East Africa needs diverse, locally driven financing to achieve infrastructure sovereignty. Reliance on foreign debt restricts economic flexibility and heightens geopolitical risks. True resilience requires prioritising financial sovereignty over switching foreign lenders. The growing involvement of diverse international investors through PPPs offers East African countries a chance to balance external influence with local control. Embracing these partnerships thoughtfully can drive sustainable development while preserving economic sovereignty. Regional investment funds, optimised PPPs, and sustainable financing can drive East Africa’s infrastructure growth while protecting national interests. Focusing on regional and sustainable models supports financial sovereignty and reduces debt burdens. This approach enhances resilience, strengthens self-sufficiency, and aligns with long term economic growth goals.
