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S E C R E T NAIROBI 000181 SENSITIVE SIPDIS NOFORN E.O. 12958: DECL: 2020/02/17 TAGS: PREL, EAID, KE, XW, ECON, EINV, ENRG, EFIN, PGOV, CH, PINR SUBJECT: Chinese Engagement in Kenya REF: 10 STATE 10152 CLASSIFIED BY: Christopher Walton, Economics Officer, State, Econ; REASON: 1.4(B), (C), (D) 1. (S/NF) Summary: China's engagement in Kenya continues to grow exponentially. China enjoys a large trade surplus with Kenya; exports increased by more than 25 percent a year from 2004 to 2008. The China National Offshore Oil Company (CNOOC) is drilling for oil in the Isiolo region. China may be a potential partner in the development of the new mega-port at Lamu. In addition, China is heavily involved in various infrastructure projects across Kenya primarily with roads. China is also providing weapons to the GOK in support of its Somalia policies and increasing their involvement with the Kenyan National Security and Intelligence Service (NSIS) by providing telecommunications and computer equipment. Recently, China signed an economic and technical cooperation agreement with the GOK providing new development grants. To date, China and the U.S. do not collaborate on development projects in Kenya. End summary. 2. (U) China enjoys a large trade surplus with Kenya, exporting more than 30 times its imports. For 2008, China exported $917 million of goods to Kenya while China imported $29 million worth of Kenyan goods. China's exports in 2008 grew by 39 percent over 2007 capping the fourth straight year of at least 25 percent export growth, including a 54 percent increase in 2007 and a 79 percent increase in 2005. China is now the third largest exporter to Kenya after the United Arab Emirates, which principally exports oil to Kenya, and India. In comparison, the U.S. exported $440 million worth of goods to Kenya in 2008 while importing $343 million worth of Kenyan goods. 3. (U) The CNOOC is drilling for oil in the Isiolo region of Kenya (see ref A). The exploratory well will cost $26 million dollars and drilling will be complete in April 2010. Numerous oil companies have drilled 31 exploratory wells in Kenya over the last 50 years without success. However, CNOOC is making a credible effort to find oil in an area geologically similar to Southern Sudan, with its substantial oil finds. As reported ref A, we had heard that CNOOC would announce results from the exploratory well by January 2010; we are now hearing an announcement may come in April. 4. (U) The GOK is highly interested in developing a major port complex in Lamu, which has much greater potential as a deep water port than Mombasa. The GOK originally held discussions with Qatar over the development of the Lamu port in return for a substantial allocation of farm land. Negotiations involving development of the Lamu port reportedly occur inside the "black box" of President Kibaki's inner circle at State House. We understand, however, that talks with Qatar are off, and that the Chinese are in play as a potential partner for the port development project and associated regional infrastructure (road and rail infrastructure to Southern Sudan and Ethiopia, and pipeline infrastructure to Southern Sudan and Uganda). China's interest in the Lamu project is reportedly linked to the presence of oil in Southern Sudan and Uganda which could be exported via Lamu as well as the greater export potential to Ethiopia, Southern Sudan and Uganda. The addition of oil from Isiolo would add additional impetus to China's interest in the port development which is estimated to cost more than $5 billion. 5. (SBU) China is currently developing a number of infrastructure projects in Kenya. Currently, China Wuyi, Syno Hydro, and China Overseas Engineering Corporation are working on the Thika Road project, a major eight lane highway from Nairobi to Thika town. Another Chinese firm, Shengli Engineering & Consulting Company was the prime contractor for the Mombasa-City Centre-Gigiri road upgrade project. In addition, the second phase of a project to upgrade the Jomo Kenyatta International Airport (JKIA) is being worked by China National Aero-Technology International Engineering Company (CATIC). The first phase of the project was completed by the Chinese company, China Wu Yi. TBEA International, another Chinese firm, is developing a 120 MW thermal plant in Longonot and 600 MW coal-fired power station in Mombasa as an independent power producer. TBEA is also undertaking projects that involve construction of 132 kV lines and sub-stations in the Rift Valley, Central, Western and Coast provinces. During a recent visit to the Olkaria geothermal development site in the Rift Valley Province, Econoff observed that Great Wall Drilling, another Chinese company, was exploring for geothermal energy. The KenGen Olkaria Geothermal Development Manager told Econoff that while he would prefer to buy quality American drills, pipes, and other geothermal-related products, American companies could not compete with China on price and price won every time in Kenya. 6. (S/NF) In January 2010, the GOK received from the GOC via CATIC weapons, ammunition, supplies, and textiles for making uniforms in support of the GOK's Jubaland initiative. 7. (S/NF) As of late August 2009, Telkom Kenya awarded Zhongxing Telecommunications Equipment Company (ZTE) a contract to provide landline telephone monitoring equipment to the NSIS. Telkom Kenya awarded the contract to ZTE after being pressured to do so by the NSIS Director General Michael Gichangi and the NSIS Director of Operations Division Joseph Kamau. Gichangi's preference for ZTE is based on kickbacks he received from the company while on a visit to China. Kamau received monthly payments of over $5000 from ZTE which were used to pay medical bills. 8. (S/NF) As of September 2008, ZTE was building e-Government infrastructure on the NSIS headquarters compound. The project involved a secure network for Kenyan e-Government activities, including software and computer-based security, and a two-story complex that would house the entire Kenyan governments' network files. As of early March 2009, Chinese technicians were working on a project in the basement of the NSIS headquarters. The presence of the technicians was well known throughout the NSIS and was causing some concern over the level of cooperation between the NSIS and its Chinese counterparts. 9. (U) The GOK and GOC recently signed an Economic and Technical Cooperation Agreement. The agreement provides a $7.3 million grant from China to Kenya. Of the grant, $150,000 will finance a computer program for the Ministry of Finance while the remaining funds can be used by the GOK to fund development projects of their choice. The agreement also covered Chinese funding of feasibility studies for the potential development of Lamu port. In addition, China committed to funding portions of the Northern Corridor road project, which links Mombasa and Nairobi to Ethiopia and Southern Sudan, as well as parts of the new Mombasa-Kampala standard gauge railway. Currently, China's Shengli Engineering Construction is refurbishing The Moi International Sports Complex at Kasarani with $12.8 million of grant-in-aid money from China. In Early 2009, China provided a $1 million grant to the GOK for the construction of a 100 bed hospital in Nairobi. In 2008, the GOK received approximately $381 million in interest-free and preferential loans, with $145 million intended for the planned ring roads aimed at decongesting Nairobi. Since 2008, the GOK has implemented campaigns to attract investment from the $1 billion China-Africa Development Fund. 10. (U) China's companies working in Kenya tend to import a substantial number of Chinese workers. This importation of labor from China tends to limit the number of Kenyans who directly benefit with wages and knowledge transfer from the projects. The low Chinese bids on major projects also push local firms out of the process, especially in infrastructure areas where capacity building of local firms would be useful. In addition, the Kenya Wildlife Service (KWS) noticed a marked increase in poaching wherever Chinese labor camps were located and in fact set up specific interdiction efforts aimed to reduce poaching (see ref B). KWS also reports that 90% of the ivory smugglers detained at JKIA are Chinese nationals. 11. (U) The U.S. mission in Kenya has no current or pending development partnership arrangements with the GOC or any informal collaboration at the program or project level. The GOC does not participate in donor coordination in Kenya. Donors have encouraged the GOK to bring China into the donor coordination process, but no progress has been made to date. While we do not recommend it, a potential area for collaboration could include agricultural development, a USG strength and an area of Chinese interest in Africa. However, the GOC does not participate in the multilateral agricultural donors group in Kenya. The GOC could be invited to join this donors group, predicated on their willingness to sign a Memorandum of Understanding ensuring their support of Kenya's long term agriculture strategy. The World Bank recently announced a new initiative to work in cooperation with Chinese infrastructure development in Africa. This new effort seems to be aimed at working with China and African countries to maximize the benefits of Chinese development aid to the African people. 12. (SBU) Comment: Collaboration between the USG and China in Kenya should be approached cautiously as there appears to be little dovetailing of our interests to date. The GOC has been silent on the implementation of the reform agenda, which we consider essential to Kenya's future stability and prosperity; the GOC turns a blind eye to the flooding of the Kenyan market with Chinese counterfeit goods, such as batteries, which directly damage U.S. market share here; and the GOC has not demonstrated any commitment to curb ivory poaching. We expect China's engagement in Kenya to continue to grow given Kenya's strategic location. If oil or gas is found in Kenya, this engagement will likely grow even faster. Kenya's leadership may be tempted to move ever closer to China in an effort to shield itself from Western, and principally U.S., pressure to reform. Given the possibility of a backlash by the Kenyan people against China, perhaps over the issue of imported Chinese labor or mishandling of natural resources, there may be benefits to keeping our distance, at least publicly, from China. RANNEBERGER