africa infrastructure financing china's role

8/3/2019 Africa Infrastructure Financing China's Role

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Building Bridges:China’s Growing Role as Infrastructure

Financier for Sub-Saharan Africa

Executive Summary

Vivien Foster

William Butterfield

Chuan Chen

Nataliya Pushak



Building Bridges– Executive Summary

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greatly intensified in recent years. Both bilateral trade and Chinese foreign directinvestment (FDI) in Africa grew aboutfourfold between 2001 and 2005,accompanied by a major influx of

Chinese enterprises and workers into theregion. The natural resource sector, principally petroleum and to a lesser extent minerals, has been the major focus for both Chinese FDI to Africa andAfrican exports to China. Nevertheless,China remains a relatively small player in Africa’s petroleum sector relative tothe OECD countries. The growth incommercial activity between China andAfrica has been accompanied by a

significant expansion of Chinese officialeconomic assistance to the region, whichis focused mainly on infrastructure andtypically channeled through the ChinaEx-Im Bank.

To provide a clearer picture of the valueand nature of this finance, a database of projects with Chinese finance wasconstructed, initially based on pressreports and subsequently verified from public Chinese language Web sites. Thedatabase covers 2001–07. On the basisof this database, it can be estimated thatChinese financial commitments toAfrican infrastructure projects rose fromless than US$1 billion per year in 2001– 03 to around US$1.5 billion per year in2004–05, reached at least US$7 billionin 2006—China’s official “Year of Africa”—then trailed back to US$4.5 billion in 2007.

About half of the 40 confirmed projectsinvolved Chinese commitments of lessthan US$50 million. However, Chinesefinance has shown itself capable in abouthalf a dozen cases of raising very largecontributions of over US$1 billion invalue for single projects. Overall, at least

35 countries in Sub-Saharan Africa have benefited from Chinese finance or areactively discussing fundingopportunities.

African leadership has typicallywelcomed China’s fresh approach todevelopment assistance, which eschewsany interference in domestic affairs,emphasizes partnership and solidarityamong developing nations, and offers analternative development model based ona more central role for the state.However, a number of civil societycommentators have expressed concernsabout the social and environmental

standards applied. The China Ex-ImBank has its own environmentalstandards, and its policy is to follow theenvironmental regulations of the hostcountry.

Sectoral Distribution of Chinese

Infrastructure Finance

In terms of sectoral distribution, a largeshare of the Chinese finance is allocatedto general, multisector infrastructure projects, within the framework of broad bilateral cooperation agreements thatallow resources to be allocated inaccordance with government priorities.However, it is clear that the two largest beneficiary sectors are power (mainlyhydropower) and transport (mainlyrailroads).

In the power sector, China’s activitieshave focused on the construction of largehydropower schemes. By the end of 2007, China was providing US$3.3 billion toward the construction of tenmajor hydropower projects amounting tosome 6,000 megawatts (MW) of installed capacity. Once completed,these schemes will increase the totalavailable hydropower generation




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capacity in Sub-Saharan Africa byaround 30 percent. There have also beensome activities in thermal generation andtransmission, but on a much smaller scale.

China has made a major comeback in therail sector, with financing commitmentson the order of US$4 billion for thissector. They include rehabilitation of more than 1,350 kilometers of existingrailway lines and the construction of more than 1,600 kilometers of newrailroad. To put this in perspective, theentire African railroad network amountsto around 50,000 kilometers. The largest

deals have been in Nigeria, Gabon andMauritania.

In the information and communicationtechnology (ICT) sector, China’sinvolvement mainly takes the form of equipment sales to national incumbents,either through normal commercialcontracts or through intergovernmentalfinancing tied to purchases of Chineseequipment by state-owned telecomincumbents. An important focus has been the development of national backbone infrastructure. In total in2001–07, Chinese telecom firmssupplied almost US$3 billion worth of ICT equipment, mainly in Ethiopia,Sudan, and Ghana.

In the road and water sectors, China has been involved in financing a significantnumber of projects, but the sumsinvolved are much smaller than in theother three sectors; no more thanUS$700 million overall has gone to thetwo sectors combined.

Geographic Distribution of Chinese

Infrastructure Finance

In terms of geographic distribution,Chinese finance has been highlyconcentrated, with about 70 percent

going to just four countries: Nigeria,Angola, Sudan, and Ethiopia.

China’s involvement in Nigeria, dating back to 2004, began relatively modestlywith a number of projects in the telecomand power sectors. A substantial scale-up took place in 2006, when US$5 billion of infrastructure projects wereagreed, including the 2,600-MWMambilla hydropower scheme and two

major projects to upgrade and modernizethe country’s railway system. However,the status of all of these projects iscurrently under review by Nigeria’s newadministration.

In Angola, Chinese involvement dates back to the peace accords in 2002. Theengagement was substantially scaled upin 2004, when a very substantial line of concessional credit was agreed with theChina Ex-Im Bank to allow thegovernment to repair infrastructuredamaged in the country’s 27-year civilwar. So far, the government of Angolahas drawn three installments totalingUS$4 billion from this credit line. Thefirst installment, for US$2 billion, isknown to have been backed by 10,000 barrels per day of oil exports.

In Sudan, China has financed close toUS$1.3 billion of infrastructure projects,including the development of more than2,200 MW of thermal generatingcapacity, the 1,250-MW Merowehydropower scheme, and a number of other significant investments in the rail,road, and water sectors.




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China’s engagement in Ethiopia amountsto a total of US$1.6 billion. The mainfocus has been on the ICT sector, particularly the Ethiopia MillenniumProject to create a fiber-optic

transmission backbone across thecountry and roll out the expansion of theGSM network. Most of these werefinanced under export seller’s creditarrangements with the Chinesetelecommunications operator ZTE for the supply of equipment to the Ethiopiannational telecommunications incumbent.

Economic Complementarities

The growing ties between China and

Africa, including China’s emerging roleas a major financier of infrastructure inthe region, can be understood in terms of the economic complementarities thatexist between the two parties. On the onehand, Africa counts among itsdevelopment challenges a major infrastructure deficit, with investmentneeds estimated to be at least US$20 billion per year and an associatedfunding gap on the order of US$10 billion per year. China has developedone of the world’s largest and mostcompetitive construction industries, with particular expertise in the civil workscritical for infrastructure development.On the other hand, as a result of globalization China’s fast-growingmanufacturing economy is generatingmajor demands for oil and mineralinputs that are rapidly outstripping thecountry’s domestic resources. Africa isalready a major natural resourceexporter, and with enhancedinfrastructure could develop this potential even further, acceleratingeconomic development in the region.

Meeting Africa’s Infrastructure Needs

Sub-Saharan Africa lags behind other developing regions on most standardindicators of infrastructure development, prompting African leaders to call for greater international support in this

sphere. By far the largest gaps arise inthe power sector, with generationcapacity and household access in Africaat around half the levels observed inSouth Asia and about a third of thelevels observed in East Asia and Pacific.Unreliable power supply leads to lossesin industrial production valued at 6 percent of turnover. Furthermore,Africa’s limited infrastructure servicestend to be much costlier than those

available in other regions. For example,road freight costs in Africa are two tofour times as high per kilometer as thosein the United States, and travel timesalong key export corridors are two tothree times as high as those in Asia. It isestimated that Africa’s deficientinfrastructure may be costing as much asone percentage point per year of per capita GDP growth.

Since 1999, China’s construction sector has seen annual growth of 20 percent,making China the largest constructionmarket in the global economy. Thecompetitiveness of Chinese contractorscan be gauged by examining how wellthey fare in international tenders for projects funded by multilateral aidagencies such as the World Bank and theAfrican Development Bank. In recentyears, they have accounted for more than30 percent by value of civil workscontracts tendered by these twomultilateral agencies, which makes themsubstantially more successful thancontractors of any other nationality.Chinese contractors have been particularly successful in the road andwater sectors and in countries such as




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Ethiopia, Tanzania, and the DemocraticRepublic of Congo.

Addressing China’s Natural Resource

Requirements

China’s natural resource imports fromSub-Saharan Africa reached US$22 billion in 2006. Petroleum aloneaccounts for almost 80 percent of thistrade, with the balance being timber andminerals. As a result, China nowdepends on Africa for around 30 percentof its oil imports, 80 percent of its cobaltimports and 40 percent of its manganeseimports. Overall, Angola is by far thelargest trading partner, followed by

Republic of Congo, Equatorial Guinea,Sudan and South Africa.

Even so, it is important to remember thatthis expansion takes place from a verylow base. China’s oil companies remainrelative latecomers to petroleumexploration and production in Africa. Inrecent years, China’s oil companies havesecured oil exploration and drillingrights in Angola, Chad, the Republic of Congo, Côte d’Ivoire, EquatorialGuinea, Ethiopia, Gabon, Kenya, Mali,Mauritania, Niger, Nigeria, São Toméand Principe, and Sudan. However, theUS$10 billion of Chinese oil sector investments recorded in this study are barely a tenth of the US$168 billion thatother international oil companies havealready invested in the region.Moreover, most of Africa’s oil exportscontinue to go to OECD countries. In2006, 40 percent of Africa’s oil production was exported to the UnitedStates and 15 percent to Europe,compared with only 16 percent to China.

Similarly, Chinese companies havesecured projects for minerals (includingcopper, iron, and bauxite) in countries

such as the Democratic Republic of Congo, Gabon, Guinea, Zambia, andZimbabwe. The investmentcommitments associated with these areestimated at around US$2 billion. In

some cases, official assistance hassimultaneously been used to provide railand power generation infrastructureneeded to facilitate export of mineralssuch as bauxite in Guinea or copper andmanganese in the Democratic Republicof Congo. However, only 7 percent of Chinese infrastructure finance is directlylinked to natural resource exploitation;most of the resources are directed to broader development projects.

Financing Aspects

China’s approach to financial assistanceis different from that of traditionaldonors, and forms part of a broader phenomenon of south-south economiccooperation between developing nations.The principles underlying this supportare therefore ones of mutual benefit,reciprocity, and complementarity and aregrounded in bilateral agreements between states. Unlike traditional ODA,Chinese infrastructure finance ischanneled not through a developmentagency but through the Ex-Im Bank,which has an explicit mission to promotetrade. Given the export promotionrationale, the tying of financial supportto the participation of contractors fromthe financing country is a typical feature.A similar approach is being taken by theIndia Ex-Im Bank and has in the past been used by export credit agencies of other countries.

The vast majority of infrastructurefinancing arrangements discussed in thisstudy were financed by the China Ex-ImBank, which (like any ex-im bank) isdevoted primarily to providing export




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seller’s and buyer’s credits to support thetrade of Chinese goods. These creditsreached a total of US$20 billion in 2005,making the China Ex-Im Bank one of the largest export credit agencies

worldwide. In addition, the China Ex-ImBank is the only Chinese institution thatis empowered to provide concessionalloans to overseas projects.

The China Ex-Im Bank is increasinglymaking use of a deal structure—knownas the “Angola mode” or “resources for infrastructure”—whereby repayment of the loan for infrastructure developmentis made in terms of natural resources (for

example, oil). This approach is by nomeans novel or unique, and follows along history of natural resource–basedtransactions in the oil industry. In thecase of the China Ex-Im Bank, thearrangement is used for countries thatcannot provide adequate financialguarantees to back their loancommitments and allows them to package natural resource exploitationand infrastructure development. Thestudy documents eight resource-backeddeals of this kind (including the creditline to Angola) worth more than US$3 billion and covering petroleum, mineralresources, and agricultural products.

The China Ex-Im Bank’s terms andconditions are agreed on a bilateral basis, with the degree of concessionalitydepending on the nature of the project.The World Bank’s Debtor ReportingSystem offers some insight into Chineselending to Sub-Saharan Africa, including both infrastructure and non-infrastructure loans. On average, theChinese loans offer an interest rate of 3.6 percent, a grace period of 4 years, and amaturity of 12 years. Overall, thisrepresents a grant element of around 36

percent, which qualifies as concessionalaccording to official definitions. Thevariation around all of these parametersis considerable across countries; thusinterest rates range from 1 to 6 percent,

grace periods from 2 to 10 years,maturities from 5 to 25 years, andoverall grant elements from 10 to 70 percent. Chinese loans comparefavorably with private sector lending toAfrica but are not as attractive as ODA,which tends to provide a grant elementof around 66 percent to Africa. TheChinese Ministry of Commerce’sdatabase for Chinese contractors provides some data on grant-funded

projects, each of which is typically lessthan US$30 million in value.

In the context of recent debt relief initiatives, Chinese lending to Africa has prompted a renewed discussion aboutdebt sustainability. A comparison of recent debt relief figures with estimatesof potential indebtedness to Chinasuggests that some of the major beneficiaries of Chinese finance,accounting for more than one third of thetotal, were countries that did not benefitfrom Western debt relief initiatives, suchas Angola, Sudan, and Zimbabwe. Theonly beneficiaries of Western debt relief that have contracted relatively largedebts to China are Guinea, Mauritania,and Nigeria. It is also worth noting thatChina has itself provided US$780million of debt relief to Africancountries in recent years.

The Wider Landscape

China is by no means the only major emerging financier for infrastructure projects in Africa. India has also beenusing its Ex-Im Bank to support thedevelopment of power projects incountries such as Nigeria and Sudan




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where it is developing natural resourceinterests. Indian infrastructure deals inAfrica averaged US$0.5 billion per year in 2003–07, associated with significantnatural resource investments. In

addition, Arab countries provided anaverage annual US$0.5 billion for infrastructure finance in Africa in 2001– 07. This has taken the form of relativelysmall projects (on the order of US$20million) with a heavy emphasis on roadinvestments.

Overall, infrastructure resources provided to Africa by the emergingfinanciers jumped from around US$1

billion per year in the early 2000s toaround US$8 billion in 2006 and US$5 billion in 2007. These flows are now broadly comparable in magnitude to theODA of OECD donors (amounting toUS$5.3 billion in 2006) and to theresources emanating from private participation in infrastructure, or PPI(amounting to more than US$8 billion in2006).

Resource flows of the magnitude provided by the emerging financiers arelarge enough to make a materialcontribution toward meeting Africa’sinfrastructure financing needs of US$22 billion per year. The contribution is mostmaterial in the power sector. In ICT,emerging financiers’ contribution is lesssignificant and, moreover, comes on topof already abundant sources of financefrom PPI. In transport and water, thecontribution of emerging financiersremains relatively small in relation toneeds.

Notwithstanding some overlap, there is asignificant degree of complementarity inthe main areas of focus for each of thethree major sources of external finance.PPI seeks the most commercially

lucrative opportunities in ICT. Emergingfinanciers focus on productiveinfrastructure (primarily power generation and railroads). TraditionalODA focuses on the finance of publicgoods (such as roads and water supply)and plays a broader role in power systemdevelopment and electrification. Asimilar pattern of specialization emergeswith respect to geography, with differentcountries relying to differing degrees on

the various sources of finance.

Conclusion

The advent of China and other emerging players as important financiersrepresents an encouraging trend for Africa, given the magnitude of itsinfrastructure deficit. The investmentsmade by these emerging financiers areunprecedented in scale and in its focuson large-scale infrastructure projects.With new actors and new modalities,there is a learning process ahead for borrowers and financiers, both new andold alike. Salient issues are thedevelopment of national capacity tonegotiate complex and innovative deals,and to enforce appropriateenvironmental and social standards for project development. In sum, the keychallenge for African governments ishow to make the best strategic use of allexternal sources of infrastructurefunding, including those of emergingfinanciers, to promote growth and reduce poverty on the continent.




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For media inquiries related to this report:

Cosma Gatere

Media Manager, World Bank Phone: +1 (202) 458-7170

E-mail: [email protected]

For more information on the Public-Private Infrastructure Advisory Facility:

Email: [email protected] Wide Web: www.ppiaf.org Telephone: +1 (202) 422-7466

africa infrastructure financing china's role

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