Crossing Rivers, Feeling Stones: The Rise of Chinese Infrastructure Finance in Africa

5 July 2018

As Chinese firms and capital play an increasingly dominant role in African infrastructure development, what are the potential opportunities for promoting sustainable development? And what social and environmental risks could this trend entail?


Across African cities, Chinese-emblazoned signs litter construction sites, airports, railways, and ports. Infrastructure – both its financing and construction – is an increasingly important and salient part of the maturing China–Africa relationship. During the boom years of the 2000s, reports and statistics of China’s economic relations with Africa were dominated by trade – particularly the import of African minerals and natural resources. In the decade following the global financial crisis in 2008, China’s role as an infrastructure financier and developer in Africa has become increasingly prominent. African countries have become important markets for Chinese state-owned enterprises (SOEs), supported by loan finance from China’s policy banks. This trend brings much-needed capital to countries where poor infrastructure has been an economic bottleneck and private investment has historically been lacking. However, the rapid burst in borrowing for infrastructure brings associated risks, both to African economies’ financial and social sustainability. African governments must navigate a careful path between both new and old financiers; they must also build domestic capacity that allows them to better exercise their bargaining power in these partnerships.
 

Chinese infrastructure goes global

This growth of China’s infrastructure finance in Africa came at a time when traditional donors such as the World Bank and other international financial institutions (IFIs) had retreated from financing large infrastructure projects, in part due to greater concerns over environmental and social risks. The 2008 global recession further dented Western countries’ capacity for overseas lending, as well as the private sector’s appetite for infrastructure investment in Africa. Since then, it has been the “rising powers” – China in particular – that filled this gap. China’s domestic overcapacity and sizeable foreign reserves created an impetus to offshore this excess capacity, supporting new overseas investments as part of the country’s long-standing policy of Chinese companies “going out.” Figures from the China Africa Research Initiative (CARI) at the Johns Hopkins University School of Advanced International Studies (SAIS) show this dramatic increase. Foreign direct investment (FDI) stocks rose to US$25 billion in 2013, from just over US$9 billion in 2009; meanwhile, committed loan finance to Africa peaked at over US$18 billion in 2013, more than three times its 2009 level of US$6 billion.[1]

Discourse around infrastructure has also been prominent in the Forum on China–Africa Cooperation (FOCAC) summits, which also increasingly emphasises industrial cooperation and capacity building. While finance from China Eximbank or China Development (the two main export credit agencies) for infrastructure projects is comparatively less stringent compared to that of the IFIs in the requirements made of borrowing governments, infrastructure finance is still an instrument of China’s export promotion: project finance is conditional on the contracting of Chinese firms, and corresponding procurement of Chinese technology, equipment, and services. The largest recipient of China’s infrastructure finance in Africa to date has been Angola, with much of these funds having gone to support its national oil company, Sonangol. However, Chinese loans to Africa have by no means been limited to oil producers or resource-sectors.

In the last five years, some of the largest loans to Africa have been towards transport and energy infrastructure, partly spurred by China’s Belt and Road Initiative (BRI), which has incorporated several major African port, railway, and industrial park projects. One major example is the new Kenyan standard gauge railway (SGR) line from Mombasa to Nairobi, financed through China Eximbank loans to the tune of US$3.6 billion, with a second phase to be financed through a further US$1.5 billion. Large SGR projects in Nigeria and the cross-border railway between Addis Ababa, Ethiopia, and Djibouti have also been funded through substantial commercial loans from China Eximbank.[2] Typically, these cover 85 percent of the total project cost. Large Chinese loans have also supported renewable energy projects, including the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) in South Africa, and the 600 Megawatts Karuma hydropower project in Uganda.[3]
 

Opportunities and risks in Chinese development finance

Though the China-Africa relationship has frequently been portrayed in the media as motivated by resource extraction that is environmentally damaging – an example of a recent Memorandum of Understanding (MOU) signed for a bauxite mine in Ghana has raised alarms over its environmental impact – many infrastructure cooperation projects have positive implications for sustainable development in Africa. China’s domestic technical capacity in renewable energy has also seen a “going out” process, and the country has financed wind farm projects in Ethiopia, solar power projects in South Africa, as well as multiple hydropower projects across the continent, including large projects in Ethiopia, Uganda, and Cameroon.[4] Countries with significant hydropower generation resources, such as Cameroon and Ethiopia, have leveraged the capital and – more importantly – willingness of Chinese institutions to fund large hydropower plants, a sector that private investment and traditional donors and financial institutions have, in the last two decades, considered too risky. In the transportation sector, governments such as Ethiopia have leveraged Chinese finance to fund and construct new green infrastructure projects, including urban light rail (Addis Light Rail) and the landmark cross-border railway project linking the Ethiopian capital to the port of Djibouti – both projects are fully electrified, as part of the government’s clean energy rationale, to exploit greener forms of energy from its substantial hydropower resources without depending on imported diesel.

While the speed and efficiency of Chinese contractors has often been lauded by African governments, the social and environmental impacts of these large infrastructure projects have raised concerns. China’s problematic domestic record of environmental governance and accountability with respect to impact mitigation, and of poor labour rights, has led to concerns that these practices may be “exported” to developing countries with weaker governance structures.[5] However, in the area of hydropower, where – with large dam projects – ecological impacts and social displacement can be significant, a major weakness of Chinese-financed projects compared to “traditional donors” lies not in the practices of Chinese firms themselves, but the transfer of responsibility for impact management to host-country institutions. Thus, in countries with stronger local institutions, Chinese projects unsurprisingly tend to perform better.[6]

Guided by the foreign policy principle of non-interference that also applies to development finance projects, responsibility for environmental impact assessments – though mandated as a condition of a loan by China Eximbank – are left to the host country to conduct and enforce, as is shown by the case of different hydropower projects in Cameroon, where similar Chinese contractors may be subjected to different levels of pressure from respective project financiers.[7] Unlike World Bank and other IFI supported projects, whose safeguard policies often mandate a comprehensive financial package for displaced people and plans for resettlement compensation, along with an obligation to bring in environmental and social impact specialists where host institutions lack capacity, Chinese actors can offer little assistance. This has ramifications for the social impacts of infrastructure, where large projects such as dams and railways often result in government appropriation of land and the displacement of local communities. Inadequate relocation and compensation mechanisms, which often rely on the resources and capacity of host governments, impact not only the construction and commission of projects – in the case of Memve’ele dam in Cameroon, delays in the social resettlement plans impacted when the project could be commissioned –  but also have reputational consequences for Chinese enterprises and investments abroad, who may be held accountable for the impacts of projects they finance and help build, even if they shared no part in their design.

Building local capacity, both in technical as well as regulatory expertise and skills, will be integral for the long-term sustainability of large infrastructure projects in Africa. The long time-horizons that railway or hydropower projects require to be economically viable makes local ownership and technical capacity imperative. Currently, in the case of Kenya and Ethiopia’s new SGR railways, the Chinese firms responsible for their construction have also been contracted for their operation over the next six years, with the aim of training domestic staff so that the projects can be locally maintained and managed into perpetuity without reliance on Chinese expertise. While these projects showcase positive initiatives of Chinese training local staff and supporting the local economy, the success of these programmes depends on achieving sufficient knowledge transfer between Chinese and local workers, successfully overcoming significant language and cultural barriers. Deeper technology transfer is also hindered by the commercial incentives at play: Chinese SOEs may support knowledge transfer and skills training in some aspects of rail projects, for example, but – like other profit-seeking bodies – they have little to gain from handing over the underlying technology to local firms or industries. The supply-chain export of spare parts and components that comes with adopting Chinese technology also leaves little room for local firms or subcontractors to win commercial opportunities and upgrade their technologies through these industries.
 

Encouraging diversity and technology transfer

African governments face trade-offs in new infrastructure partnerships. While Chinese-financed engineering, procurement, and construction (EPC) projects are politically attractive means to achieve infrastructure development goals, the obligatory use of Chinese contractors and lack of environmental and social safeguards introduces latent and long-term risks to projects’ sustainability. As other financiers, including European banks as well as other emerging powers, move into financing hard infrastructure, African decision-makers should exercise the bargaining power they have as buyers to diversify away from dependence on Chinese technology, even as they procure from Chinese firms. Turkish contractors such as Yapı Merkezi have become small but significant competitors to China in Africa, pulling in Turkish Eximbank as well as private European finance to back new railway projects in Ethiopia and Tanzania, and adopting corresponding European standards and safeguards in their construction.

As well as encouraging greater diversity and competition, pushing foreign firms and consultancies to work alongside Chinese contractors can also be a way to encourage diffusion of stronger norms around environmental and social impact that Chinese financiers’ policies currently lack, and to create channels through which governments can more effectively hold contractors accountable.

Finally, knowledge and technology transfer in these infrastructure projects is crucial to both the management and maintenance of completed projects. Governments should leverage Chinese firms’ and research institutions’ substantial technical expertise and experience in management and construction, and push for training and technology transfer early in project negotiations. This would accelerate the process of building independent domestic capacity and skills in both project management and maintenance, reducing prolonged dependence on Chinese capital and labour. As these infrastructure loans now enter their repayment phase, the financial urgency of making projects viable and sustainable – both economically as well as socially – are in the interests of both Chinese and African partners.
 

Author: Yunnan Chen, PhD Candidate in International Development, School of Advanced International Studies (SAIS) at Johns Hopkins University, China Africa Research Initiative (CARI)


[1] China Africa Research Initiative (CARI). “Our Data.” www.sais-cari.org/data/.

[2] China Eximbank has signed loans of US$1.2 billion to support the new Lagos–Ibadan SGR railway in Nigeria. SGR projects in Ethiopia also received loans of US$2.49bn from Eximbank.

[3] China Africa Research Initiative (CARI). 2018. “Our Data—Chinese Loans to Africa.” http://www.sais-cari.org/data-chinese-loans-and-aid-to-africa.

[4] See, for example: Chen, Yunnan, and David Landry. “Capturing the Rains: Comparing Chinese and World Bank Hydropower Projects in Cameroon and Pathways for South-South and North South Technology Transfer.” Energy Policy 115 (April 2018); Shen, Wei, and Marcus Power. “Africa and the Export of China’s Clean Energy Revolution.” Third World Quarterly 38, no. 3 (March 2017); Chen, Yanning. A Comparative Analysis: The Sustainable Development Impact of Two Wind Farms in Ethiopia. Working Paper No. 2016/7, Washington, DC: China Africa Research Initiative, November 2016.

[5] See, for example: Urban, Frauke, Johan Nordensvard, Giuseppina Siciliano, and Bingqin Li. “Chinese Overseas Hydropower Dams and Social Sustainability: The Bui Dam in Ghana and the Kamchay Dam in Cambodia.” Asia & the Pacific Policy Studies 2, no. 3 (September 2015).

[6] Hensengerth, Oliver. Interaction of Chinese Institutions with Host Governments in Dam Construction: The Bui Dam in Ghana. Discussion Paper 3/2011. Bonn: Deutsches Institut für Entwicklungspolitik, 2011.

[7] Chen and Landry, op. cit.

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