China- Africa Loan : Industrialization of Africa; Risks and Benefits of Chinese Loan

Slow shift towards public-private partnerships to fund infrastructure projects, where costs are repaid through fees like road tolls

Beijing has encouraged Chinese companies to get involved in such deals, which could lower repayment risk but are also more profitable 

In the Kenyan capital Nairobi, a new four-lane highway is taking shape.

Funded and built by China at a cost of US$600 million, it will cut right through the heart of the city in a bid to reduce traffic jams.

The 27km (17-mile) highway also marks a slow shift away from public debt finance to a new way of funding infrastructure like roads and power plants in Africa: through public-private partnerships.

How China is fueling economic growth in African nations

These long-term deals take various forms and can involve equity investment, but they all see taxpayers repaying the companies that build the projects through fees like road tolls. For the Nairobi Expressway, state-owned China Road and Bridge Corporation will recoup its investment over 27 years through toll charges from motorists.

The shift is happening as many African countries are struggling to repay massive debts owed to China for such projects. Analysts say this type of private project finance can lower repayment risk and help African governments reduce their loans and budget deficits. It is also more profitable.

Investments made through public-private partnerships are usually backed by state guarantees, such as from the China Export and Credit Insurance Corporation, or Sinosure. China has long preferred a model of state-to-state lending.

Among other African projects agreed under such partnerships, China is involved in toll roads in Mozambique and Uganda. In Nigeria, Chinese banks and Sinosure are funding a US$2.8 billion gas pipeline that is being built by consortiums of Nigerian and Chinese companies.

These arrangements have been encouraged by Beijing. President Xi Jinping urged private Chinese companies to play a greater role in the continent at the Forum on China-Africa Cooperation in 2018, and to “make at least US$10 billion of investment in Africa in the next three years”.

Zhou Yuyuan, a senior fellow at the Centre for West Asian and African Studies at the Shanghai Institutes for International Studies, said there were also examples of Chinese companies taking equity stakes under these partnerships.

He said the Hwange coal-fired power station in Zimbabwe was one such project, with state-owned Sinohydro Corporation investing about US$176 million – on top of US$1 billion in concessional loans from the Exim Bank of China – representing a 15 per cent equity stake.

Sinohydro had also invested in the Kafue Gorge Lower hydropower project in Zambia, Zhou said.

There was also a move towards joint tenders for public-private partnerships, he said.

“Chinese companies from Anhui and Shandong provinces are jointly bidding for part of the North-South Corridor Project in Zimbabwe in the form of [a build-operate-transfer model],” he said, referring to a road and rail project.

This type of funding was not common, but he said it was becoming more of a “clear tendency”.

“For Chinese financiers, more joint financing partners will help in … lowering the lending risk. For the companies … [different forms of public-private partnerships] will make the companies more serious and responsible for their operations in Africa and other countries,” Zhou said.

China has funded US$148 billion worth of infrastructure projects in Africa over the past two decades, making it the continent’s biggest bilateral lender, according to the China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies.

But Chinese lending peaked in 2013 and has since been flat or declining, aside from a major deal by China Development Bank in 2016, when it recapitalised Angola’s state-owned oil and gas company Sonangol.

Bradley Parks, executive director of AidData, a research lab at the College of William and Mary in Virginia, said African governments that fell behind on loan repayments or defaulted on outstanding debts would find it difficult to get new loans from Beijing.

“China’s state-owned banks are primarily motivated by profit, so they don’t like to throw good money after bad if they can avoid it,” Parks said.

But he noted that the size of China’s overseas lending programme was driven by domestic industrial overproduction – including of steel, aluminium and cement – and excess foreign currency reserves.

“The authorities in Beijing understand that if these companies cannot find buyers for their excess production, they are more likely to default on their loans and shutter their factories, thereby creating higher levels of unemployment,” Parks said.

To address this, Beijing offers relatively cheap credit for overseas infrastructure projects that rely heavily on industry overproduction, he said.

“We’re in uncharted territory, so it’s not entirely clear how Chinese lenders will navigate these countervailing pressures,” Parks said. “One possibility is that they will search for new borrowers in Africa – like project companies and joint ventures – that pose lower levels of repayment risk than their existing government borrowers.”

Hannah Ryder, the head of international development consultancy Development Reimagined, said African governments were showing more interest in public-private partnerships with all countries – including China – as a means to avoid higher “formal” debt-to-GDP ratios as recorded by the International Monetary Fund.

She said the IMF’s assessments of debt sustainability could have negative impacts on their access to other sources of finance.

That was the same reason African countries had sought resource-backed loans, according to Ryder.

Angola, Zimbabwe, the Democratic Republic of Congo and the Republic of Congo have all agreed such loan deals with China, under which finance is backed by natural resources.

However, Ryder said “creativity” around loan arrangements could be dangerous. For instance, public-private partnerships introduced across Africa by the World Bank and IMF in the 1980s had decimated equitable access to public goods and ultimately created more poverty, she said.

“China itself has mixed experience domestically with PPPs, but Chinese stakeholders are becoming more interested in PPPs because developing countries are asking them to explore them,” she said.

But the uptake from Chinese companies is still low, according to Gyude Moore, a senior policy fellow at the Washington-based Centre for Global Development.

He also said that in Africa, Chinese firms had been more willing to provide loans for roads, power plants and railways than to take equity stakes, but had been more open to equity investment in Asian countries like Laos, Cambodia and Vietnam.

“Many African governments have hesitated to take on equity partners, but this might be the only way [to get finance],” Moore said. “For sovereign debt, all the Chinese policy bank required was a guarantee from the state. With equity, China will assume some risk and will have to pay attention to corporate governance. Maybe it’s not such a terrible thing.”

Writer: Obinna Pascal Amajuoyi

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