Railpolitik: the strengths and pitfalls of Chinese-financed African Railways

Ethiopia is tapping into both Chinese and Turkish financing for its railway ambitions. The difference illuminates the pros and cons of China’s model of overseas infrastructure development.

By Chen Yunnan

Chinese railways are crisscrossing the world. Driven in part by domestic competition in a saturated infrastructure construction market, Chinese state-owned enterprises (SOEs) are increasingly seeking projects overseas, constructing new transboundary high-speed rail projects across Southeast Asia, and in Africa, new standard gauge railway (SGR) projects in Nigeria, Kenya, and Ethiopia. These projects have become a way to offshore China’s excess capacity in its industrial sectors, boosting Chinese manufacturing through a ‘supply chain export’ model where railways, locomotives and equipment are offered as a package to recipient governments in Africa and elsewhere, and conditional on the generous loan finance from China Eximbank that supports them.

These projects have constituted some of Africa’s largest lending from China. Up to 2016, 31% of China’s total lending in Africa has been in the transport sector: of this, over a third went to the railway sector. Many projects feed into existing domestic and regional corridor plans, but they have also become absorbed into China’s Belt and Road Initiative (BRI), particularly in the east African region. Railways also hold symbolic power in the China-Africa relationship. The first Chinese-built railway, the Tanzania-Zambia (Tazara) cross-border ‘friendship railway’, was built in the 1970s, at the height of the Cold War and China-Soviet tensions, when China was on a desperate search for international allies. It remains a potent symbol of contemporary solidarity and cooperation between China and its African partners.

But as this case study of Ethiopia’s engagement with China’s railway financing shows, the “China model” of supporting railway expansion in Africa comes with both strengths and constraints. Though “debt sustainability” concerns loom large in conversations about railway projects, the difficulties experienced in Ethiopia’s railway projects are more directly linked to its creditor-debtor and employer-contractor relationships formed under those deals. A parallel case of a Turkish-financed railway project, constructed sequentially after a major Chinese-line, highlights the pros and cons of the politically-oriented China model vis a vis a more transactional, commercially-motivated project.

Research for this case study in 2018 and 2019 involved several months of fieldwork investigations, including site visits to operational and under-construction railways, as well as around 40 interviews with representatives from the Ethiopian Railway Corporation (ERC), Chinese and Turkish contractors, and other managing agencies working on the project. Interviews were semi-structured, and conducted in English and Mandarin Chinese.

Ethiopia rail
Images: Chen Yunnan

Ethiopia’s Railway Ambitions

Ethiopia has had perhaps one of the most ambitious railway development schemes in Africa, leveraging Chinese as well as other foreign finance for its railway network. In 2007, the Ethiopian Railway Corporation (ERC) was created to oversee the construction of a new planned network spanning 5,000km. This network was seen as part of a wider industrialization and export-oriented growth strategy to connect major planned industrial zones across the country—many of which have Chinese involvement—to the sea port in Djibouti, which was also financed and constructed by Chinese institutions. Crucially, this is the justification on which the railway is supposed to make economic sense.

Economic potential—in generating trade and connectivity, and in encouraging technology transfer through foreign investment—is one of the main allures of railway technology. In China’s own domestic experience, the development of its locomotives industry benefited directly from German and Japanese technology. Further back, the construction of many of China’s main arterial railways, and the creation of professional railway institutions owed much to colonial-era foreign concessional railways by British and American companies. However, this form of technology transfer is not automatic. The Tazara railway’s decline after the departure of Chinese engineers showed a failure of management and the insufficiency of knowledge transfer.

As well as a new urban light rail project in Addis Ababa, Ethiopia has so far constructed two new standard gauge railway lines. The first, from Addis Ababa, crosses the border towards Djibouti (marked in red below) ; the second, a branch from the city of Awash northward to Weldiya, eventually to connect the trunk line to the north city of Mekele in Amhara (marked in green below). All these projects, including the light rail, are notable for being the first electrified railway projects in sub-Saharan Africa.

Ethiopia railmap

A Tale of Two Financiers

The Ethiopia case is particularly illuminating because at the same time, the country is tapping into two very different pools of funding and construction expertise to realize its railway ambitions.

Ethiopia’s first route, from Addis Ababa to the port of Djibouti, is Chinese constructed, by a joint consortium of China Railway Engineering Corporation (CREC) and China Civil Engineering and Construction Corporation (CCECC), and financed by China Eximbank through a loan of US$2.5bn. The second line from Awash to Weldiya, is a Turkish/European project, built by Yapi Merkezi, and financed by a consortium of lenders including Turkish Eximbank, who lent US$300mn, and Credit Suisse at a tune of US$1.1bn. While both are similarly financed through commercial loans and an EPC (Engineering, Procurement and Construction) contract, the different financiers and contractors at play has entailed a significant divergence in how the ERC and other agencies have been able to leverage their contractor and financier relationships, with implications for project implementation and for the agency and choice of recipient host governments.

One major material difference between the two railways’ construction are the different standards and technologies used between the two sets of contractors. The Chinese Addis-Djibouti line, completed in 2018, uses Chinese Class 2 technical standards, and CTCS (Chinese standard) signaling systems that controls locomotive speeds above 120km/h. The Turkish-built Awash-Weldiya line, meanwhile, employs European technical standards, including social and environmental safeguards, and employs ERMTS (European standard) signaling systems. As of 2019, the project was over 95% complete. It will likely require several more years for electrification and testing before it will become operational however, as well as a further challenge of integrating the operation of the two railway lines.

The two railway projects also show a very different creditor-debtor relationship, influenced by the nature of how the financing for the projects arrived. This in turn impacts the relationship between the ERC and the project contractors, as well as the implementation of the projects. For instance, the Turkish contractors Yapi Merkezi won the Awash-Weldiya project through a traditional competitive bid, where crucially, their promise to broker finance from European creditors for the EPC contract was key in winning them the bid. Meanwhile, the Chinese railway project was premised on a strategic bilateral relationship: financing was pledged first via high-level discussions between Chinese and Ethiopian governments. Contractors were subsequently determined on the Chinese side, through a selection process of the major national railway contractors—while this process is competitive, it is limited to only Chinese firms and decided in Beijing, not in Addis Ababa. Though the Turkish project also enjoyed export credit financing, the project due to its blended finance nature was far more commercial and transactional in its relationship between host and contractor.

The implications of this for the ERC’s scope of agency is significant. Contrary to common perceptions, the major advantage of choosing Chinese finance has been the flexibility in the financial relationship. Ethiopia has long-faced challenges in its foreign exchange that has seen it struggle to service external debts. With its Chinese partners, the ERC has been delaying payments on loans and on the management fees to the contractors for the first year since the project started operating. In September 2018, Ethiopia renegotiated the tenor of loan to 30 years from the original 15-year agreement, signalling a major concession on the part of China. With its European lenders, however, Ethiopia has never missed a payment.

In this area, Ethiopia has seen increased scope for maneuver. It has prioritized its European private creditors where it has less leeway, due to higher reputational and financial costs in non-repayment. Conversely, the strategic and political relationship that Ethiopia holds with China as a regional partner means it has been able to exploit the flexibility of Chinese finance that the bilateral Ethiopia-China relationship offers. Put simply, the political elevation of the railway as a ‘Belt and Road’ project means it is politically unfeasible to allow it to fail, giving the Ethiopian government significant leverage and flexibility over loan repayments.

The Double Edge of Chinese Loans

Despite the corollary of this, the ERC faced a bigger struggle when facing its Chinese contractors in applying pressure and getting compliance compared to the Turkish, where they had a more transactional commercial relationship. In this sense, the tied nature of financing has been a constraint to the exercise of agency. Firstly, in the inability to choose the contractor, which was a condition of financing in both Chinese funded light rail and standard gauge railways. Secondly, in the appointment of Chinese construction company representatives as the employer’s representative,, a position which generally takes the project owner’s side (in this case the ERC) in holding contractors to account on the project implementation and construction. This was the case in the Addis-Djibouti railway, where ERC were compelled to select CIEEC as the employer’s representative. This had repercussions for the level of trust and accountability between the ERC and contractors, as the ERC perceived the employer’s representative and contractors to be in a form of ‘collusion’, and not adequately representing the ERC’s interests.

The political model of finance, despite its advantages in terms of loan repayment, has led to an ineffective employer-contractor relationship. One example of this can be seen in when the project owner (ERC) tried to push the contractor CREC to fulfil a commitment to procure and provide spare parts for maintenance work on the light rail. Pushing the contractor directly was ineffective. Contractors were slow to respond to demands and, with the ERC behind on payments to the contractors for railway operations and management fees, their leverage over the firms was limited. Instead, according to the ERC’s manager on the light rail, they had to pull on political levers, calling on the Chinese embassy and economic counsellor’s office, who then applied direct pressure to the firms to order and pay for parts, and to pay for a new maintenance workshop.

This poor relationship between host and contractor also has implications for the long-term sustainability of the project, particularly for skills and technology transfer. Interviewees at the ERC expressed a sense of missed opportunity in the construction phase of the Addis-Djibouti railway, in terms of the potential for learning and knowledge transfer on railway construction for local staff. There is also a distrust of the firms’ interests in technology transfer on the part of Ethiopian respondents, who see genuine capacity building as a conflict of interest with the incentives of the Chinese companies to hold onto their intellectual property and knowledge, ensuring their continued involvement in the railways’ management. ERC has since learned from this experience and built in an engineering skill transfer component in its Yapi Merkezi deal.

The very fact the two contractors—specialists in construction, not operation—remained in the first place to take over the operations and management signals a failure of capacity building during the early phase. Significantly, CREC and CCECC were both pressured to extend their operation and management role beyond the initial six years agreed in contracts..

Under pressure from China’s Ministry of Commerce (MOFCOM) and the ERC, the firms have later set up a capacity building center outside of Addis Ababa, conducting in-house training sessions themselves for staff in maintenance, engineering, and even driver training. Further funding via Chinese aid have supported student exchange for ERC workers at several Chinese universities with railway specializations, and in 2018, MOFCOM pledged funds for a new railway academy, which will specialize in railway vocational training.

In this, the flexibility of this coordinated Chinese model abroad compensated for the poor employer-contractor relationship. The Chinese contractors have continued to fulfil the operation and management parts of the contract, despite late loan payments on the part of the cash-strapped ERC. The comprehensive breadth of skill transfer initiatives involved from both state actors and contractors, in financing new colleges, student exchanges and training courses, are advantages that competitors like Turkish Yapi Merkezi, cannot fulfil, and do not have an interest in.

Furthermore, these state-led and firm-led training and technology transfer initiatives offers not only the transfer of technology, equipment and contractors, but also whole systems of management: the dissemination of China’s own railway technical and managerial standards, operating procedures and protocols, all of which will have a similar impact on the development of Ethiopia’s young railway bureaucracy—in the same way that China’s own railway borrowed from European and foreign partners. This can generate potential path-dependence effects that can ‘lock-in’ advantage for Chinese firms and technology in the future. This can already be seen in the case of the Turkish-built railway, where despite the use of European construction techniques, the design of the railway itself had to conform to Chinese locomotives, and the signaling system to be integrated with the Chinese system that carries the rest of the network.

Railpolitik

The burst of Chinese lending overseas following the global financial crisis has been a boon for the development of Africa’s nascent railway sector, and a means to offshore China’s domestic capacity and promote its own railway technology. After this initial exuberance, however, the tide has been slowing down. Debt sustainability has become a keenly politicized issue in Ethiopia and elsewhere, particularly given the railway’s operational challenges. Low uptake, power supply issues, and regional ethnic grievances have complicated the operation of Africa’s first electric railway. This has become a risk to its economic profitability in the long-run—and thus the sustainability of the debt that financed it.

Notably, none of the China-financed railway projects have had independent financial feasibility studies conducted. They were driven instead by the interests of winning contracts for Chinese firms and technology manufacturers overseas, and to satisfy the infrastructure ambitions of Ethiopian political elites. However, the lingering question of the projects’ financial feasibility has induced greater risk aversion on the part of both Chinese and Ethiopian partners, seen in the skeptical comments from state insurer Sinosure, and also puts into question the future expansion of the railway network. A branch extension from the Turkish-built line from Weldiya to Mekele in the North, contracted to the China Communications Construction Corporation (CCCC), for example, has also stalled due to lack of financing. Further loans from China Eximbank will not be forthcoming until the Addis-Djibouti line can be proven to work.

As China’s Belt and Road Initiative continues to broaden in scope, the case of Ethiopia’s railways illustrates the strengths and pitfalls of China’s coordinated model of infrastructure finance. Compared to the European and Turkish project, the advantage of Chinese lending for Ethiopia’s railway infrastructure has been significant leniency and flexibility in the creditor-debtor relationship. This has enabled the ERC to expand its agency in the relationship and ability to manage and prioritise its multiple lending partners. However, there is a trade-off to this flexibility: it has not necessarily lead to a better project. In the case of the Addis-Djibouti railway, it has undermined the ability of host government agencies to oversee and control foreign contractors, which is crucial for new institutions like the ERC, as it seeks to build its own experience and capacity through working with foreign partners.

Chen Yunnan is a Senior Research Officer at the Overseas Development Institute (ODI) and PhD Candidate at Johns Hopkins School of Advanced International Studies. She was previously a Global China Initiative fellow at the Global Development Policy Centre, Boston University. At the SAIS China Africa Research Initiative (CARI), her research focused on the rise of China in global development, particularly infrastructure finance in Africa. She has worked at the Institute of Development Studies, Sussex, and China Dialogue, London. She holds an MA in political science from the University of British Columbia, and a BA in politics, philosophy and economics from the University of Oxford.

 

How does 2020 bode for China’s overseas investment? A Chinese lawyer’s take

Zhang Jingjing previews legal challenges awaiting a few controversial projects and welcomes a groundbreaking move by China’s Supreme Court

The last year of the 2010s was certainly eventful from the perspective of China’s Going Global strategy. Beijing held the 2nd Belt and Road Forum in early 2019 as both a celebration and a moment of reckoning, as China’s signature global development program was questioned by some host countries on its financial sustainability and from the international environmental community on its green merits. A correction of course (the publication of a Debt Sustainability Framework and the creation of a green coalition) was presented at the forum as a response to international concerns. But the rest of the year still saw major controversies erupt in different parts of the world. These surrounded, for example, a power plant in Kenya, a resource–infrastructure swap deal in Ghana, and a river dredging project deep in the Amazon forest.

Zhang Jingjing started practicing law in the late 1990s, helping Chinese pollution victims win cases against polluters. She is one of the few Chinese lawyers in the overseas investment scene who stands side by side with affected communities. Based out of the University of Maryland Law School, over the past few years her nascent legal initiative, the Transnational Environmental Accountability Project, has been involved in a number of legal battles centering on China-related overseas projects. In one of those cases, her amicus curiae brief, delivered for the first time by a Chinese environmental lawyer at an Ecuadorian court in Cuenca, played an unprecedented role in bringing about a historic court order to suspend mining activities at a gold mine operated by Chinese mining company Junefield.

Panda Paw Dragon Claw spoke with Zhang Jingjing recently to get her take on the year ahead. Her insights about the evolving legal landscape surrounding a few high-profile Chinese outbound investment cases and the Chinese Supreme Court’s new interest in Belt and Road cases are as refreshing as ever.

Zhang Jingjing Boke2
Zhang Jingjing inspecting a borehole in a village affected by bauxite mining in Boke, Guinea. (Image provided by Zhang Jingjing)

Panda Paw Dragon Claw (PPDC): In the past two years you have been deeply involved in a case in Guinea, West Africa, where a consortium of Singaporean and Chinese companies led one of the world’s largest bauxite mining operations, affecting the livelihood and environment of local communities. Could you share with us the latest developments with this case?

Zhang Jingjing(ZJJ): Chinese businesses have been very active in Guinea’s bauxite mining sector. SMB, the consortium that consists of Singapore’s Winning Shipping and two Chinese companies [Shandong Weiqiao Group and Yantai Port Group], entered Guinea in 2015 after their bauxite supply chain got cut by an export ban from Indonesia in 2014 due to heavy pollution caused by the business.

Since the operation began, SMB’s activities have been shrouded in controversies over impact on the environment and livelihood of local communities. The mining roads, full of heavy-duty vehicles transporting reddish bauxite ores, create large amounts of dust pollution. Open pit mining disrupts the local hydrology, dwindling precious drinking water resources for villages and polluting water from wells and boreholes that villagers depend on. Mining areas were never, or poorly, rehabilitated with recovered topsoil and vegetation. Those existing problems have barely been resolved yet. SMB, pressured by a major anti-mining riot in 2017, is still updating an Environmental and Social Impact Assessment (ESIA) of their existing mining sites. And despite this ongoing situation, big Chinese investments are pouring into the sector, with Chinalco and Henan International Mining all lining up to enter the scene on bauxite.

PPDC: What is on the horizon for SMB and other Chinese bauxite involvements in Guinea in 2020?

ZJJ: SMB is set to expand its operations this year with new mining sites, a planned aluminium refinery, and new railway construction. Land acquisition and other preparations are already underway. ESIAs for the new mining sites and railway construction are already being carried out but so far information about the expansions is scant.

This represents a major upgrade of its operation from a purely extractive nature – mining bauxite and then shipping ores all the way back to China – to a more value-added business of aluminum making. What’s important is the possible model for that business. Shandong Weiqiao Group, a member of the SMB consortium, is China’s largest aluminum maker and is known for its unique model of captive coal power plus aluminum electrolysis (an extremely power-intensive process). Captive power, self-generated electricity unconnected with the power grid and not subject to grid dispatching, helps keep costs low (a crucial component for the model) but is highly controversial in China for staying outside the environmental regulatory regime on the power sector. Weiqiao Group’s captive power plants in China are known for pollution problems. If this model is now exported to Guinea, we can certainly expect much more significant environmental impacts.

PPDC: Are there efforts to make SMB accountable for its practices in Guinea?

ZJJ: Local communities and civil society groups have been making complaints to the consortium about pollution. Unfortunately, such complaints have now been internalized as a kind of routine for the companies. SMB prepares small compensations to be doled out when complaints are made. It has also initiated Corporate Social Responsibility (CSR) projects that provide small scale livelihood support for affected local communities. But these cannot substitute legal obligations to minimize and mitigate negative impacts.

Guinean civil society is even more concerned after SMB recently won a bid to develop the controversial Samandou iron mine located in a key biodiversity hotspot area, given the consortium’s previous environmental records in the bauxite sector.

Guinea adopted a relatively modern Mining Code in 2011, incorporating some of the good practices from regulatory regimes of other African countries. It provides relatively strong protection to affected communities but is poorly implemented in reality. The country also has a basic Environment Act in place. However, Guinean NGOs and communities have never initiated any legal challenges to corporate ESIAs, nor have they had experience bringing environmental lawsuits to the court. With the massive inflow of Chinese investment into bauxite and iron mining, both Guinea’s governance capabilities and the capacity of its civil society to safeguard community interests are put to great test.

PPCFR5_web
A puddle frog on a large leaf at night in the Atewa Range Forest Reserve, Ghana. (Image: Alamy)

PPDC: In the past year, another bauxite mining project has garnered much more international attention. In exchange for Chinese supported infrastructure, Ghana plans to open up the precious Atewa forest for bauxite mining, using the ores as repayment for the US$2 billion deal. What is the prospect for this project in 2020?

ZJJ: It is almost certain that the project will encounter fierce opposition for its environmental and social impact. Ghanaian society is still very much traumatized by the havoc wreaked by Chinese small-scale gold miners (galamsey). Today you can still see the scarred landscape left by such illegal activities. Even though the individual Chinese miners were not part of any national strategy, they nevertheless shaped the Ghanaian impression of Chinese investment and would definitely overshadow the massive resource–infrastructure swap deal.

Unlike Guinea, Ghana’s governance capabilities are more advanced, and the country has an active civil society, including a great number of environmental lawyers. They are already mobilizing to challenge the deal through legal means.

PPDC: The company behind the Ghana deal, Sinohydro, is also currently at the center of another major infrastructure project in Peru. The Amazon Waterway project aims to dredge the Amazon river to facilitate transportation and commerce but has met with strong opposition from indigenous groups for its potential impact on fisheries and local culture. How is this case being handled in Peru?

ZJJ: The project’s Environmental Impact Assessment (EIA) is being challenged from multiple angles now by indigenous groups, which will likely affect the timetable of this major infrastructure program that Peru and Brazil have planned for over two decades. Even though reports are saying that approval of the EIA is imminent (as early as April this year), I have learned that local civil society will keep challenging it. Lawsuits might be on their way.

A few Latin American countries, including Peru, have enshrined indigenous rights in their constitutions, particularly the right to be informed and consulted before projects like this can go ahead [Free, Prior and Informed Consent, FPIC]. It is therefore unsurprising that local groups are now challenging the EIA for lack of prior consultation with indigenous people and have sent the case all the way to the Supreme Court in Lima.

None of the legal actions are directly targeting the Chinese company. Rather, their objective is to revert administrative approvals and decisions made by host country authorities. If those challenges are successful, they will invariably delay the progress of the project and bring losses to the developers. This is a prospect that any Chinese investors in the region should be aware of.

PPDC: You have been following a few other cases in 2019, including legal challenges to coal power projects around the world. What signals have you picked up from them?

ZJJ: A tidal wave of “climate litigation” is coming. Kenya’s Lamu power plant case, in which Chinese companies are deeply involved, is but one outstanding example of how a combination of lively civil society and an independent judiciary can become a formidable obstacle for environmentally questionable projects.

Globally, with climate change becoming an increasingly urgent concern, climate litigation is set to become more commonly used by communities and activists to challenge not only coal power but also government policies allowing such projects. In the past year, Indian farmers and fishermen have brought the International Finance Group (IFC) to court in the United States for funding a coal power plant in Gujarat. Bosnia-Herzegovina’s China-funded Tuzla 7 coal power plant is also bogged down by legal challenges.

Just a few weeks ago, the Dutch Supreme Court delivered a historic ruling ordering the government to cut greenhouse gas emissions 25% below 1990 levels by the end of 2020, after NGO Urgenda sued the Dutch government. Those developments around the world foreshadow the bumpy legal roads ahead if China continues funding and building coal power plants overseas.

PPDC: So far, those legal battles have all been fought in host countries. But people often wonder, can China’s own legal system be activated to make Chinese investment accountable overseas?

ZJJ: In transboundary cases, it is a commonly accepted principle to give host countries jurisdiction over lawsuits on environmental and social impacts. This is because their judiciary can more easily ascertain facts concerning damages and infringements on their native ground.

This doesn’t mean China’s regulatory regime has no role to play in injecting responsibility into its overseas investments. In fact, a host of policy items have been promulgated to steer outbound investment towards a more sustainable path. The 2017 Guidance on Promoting Green Belt and Road, published jointly by four ministries, calls on Chinese companies to abide by host country laws, global treaties and international high standards. But such policy items are often mere aspirational statements without binding force. The very few binding rules, such as the National Development and Reform Commission’s (NDRC) Measures on Outbound Investment, are low-level departmental rules with limited force. So China does need to install higher level outbound investment laws and regulations to introduce accountability to its companies going global.

What is really encouraging is that at the end of 2019, China’s Supreme People’s Court issued a groundbreaking opinion on how the judiciary system should support the Belt and Road Initiative, stating that China should “proactively contribute its judicial resources to global environmental governance”. More specifically, it calls on the Chinese judiciary to strengthen environmental public interest litigation and tort litigation to “stop environmental violation” and “enforce liability for damages”.

If these words are meant genuinely, the opinion in effect opens the doors of Chinese courts to environmental public interest litigation and tort cases on damages happening outside China’s borders, particularly along the Belt and Road. China’s judicial resources, and its experience with trying domestic environmental disputes, are now accessible by communities affected by Chinese investments in countries with underdeveloped environmental governance. This is certainly the best new year present I have received as a Chinese environmental lawyer and an offering that I am keen to activate in the coming year.

This interview has been co-published with China Dialogue

Letter from Ghana: Africa embraces its China partnership reluctantly

African leaders, more than a “benevolent” China, should set the tone for Africa-China relations, argues Kofi Gunu

By Kofi Gunu

When I first became aware of China’s growing influence in Africa, I was only ten years old. Ghana was set to host the 2008 African Cup of Nations, the continent’s biggest soccer competition, and work was progressing steadily on a new multipurpose stadium in my hometown, Tamale—one of the tournament’s host cities. Our remote savannah town swirled with rumors about the Chinese construction firm undertaking the project and the files of Chinese foremen who marched chain gang-style to the construction site each morning. I recall my Catholic priest explaining once that the contractor, apparently frustrated with the negative work ethic of his Ghanaian laborers, had replaced all but a few of them with convict labor imported from China.

Later I would learn that this was nothing more than a myth, one of many urban legends concocted by locals trying to make sense of the strangers in our midst. But for a long time afterwards, the imposing Tamale Stadium stood in my young mind as a symbol of China in Ghana and Africa, at once shrouded in mystery and impossible to ignore.

The scale of China’s involvement in Africa is a point of surprising contention. Western politicians and media, alarmed at the significant diplomatic, economic, and military roles China has assumed on the continent, often exaggerate its efforts. Chinese experts, eager to assuage these fears, hasten to cite studies which show that Chinese investment and aid to Africa is safely smaller than the West’s.

However, nothing can obscure the truth that China is Africa’s biggest economic partner now and into the foreseeable future. China is currently Africa’s largest trading partner. Additionally, according to the Bilateral FDI database and McKinsey, China is poised to surpass the US as Africa’s largest source of foreign direct investment (FDI) stock within the next decade Chinese official development assistance (ODA) and other official flows (OOF) to Africa together added up to 6 billion USD in 2012, making China the third largest country donor to the continent. Besides, since 2012, loan issuance by Chinese institutions to African governments has tripled accounting for approximately one-third of all new sub-Saharan African government debt.

A recent groundbreaking report from Mckinsey & Company, that sought to evaluate Africa’s economic partnerships globally, showed China among the top four partners for Africa across five key dimensions: trade, investment stock, investment growth, aid, and infrastructure financing.

MCKinsey
Source: Dance of the Lions and Dragons, McKinsey & Company, Jun 2017

To objectively analyze China’s footprint in Africa, we must first arrive where reality is. The reality is that China is indispensable to Africa’s development agenda.

This reality is one that many on the continent acknowledge but with mixed feelings. A recent large-scale public opinion survey showed that ordinary Africans appreciate the infrastructural development that closer ties with China has brought. Chinese-led projects and businesses also employ several million people across Africa. African policymakers, a growing number of them Chinese-educated, increasingly look to China, rightly or not, as a model for catalyzing growth and eradicating poverty.

These positive reviews notwithstanding, legitimate questions persist about the motives behind Chinese assistance. Resource-for-infrastructure deals, which may make perfect financial sense to Chinese bankers, set off loud alarm bells on a continent whose vast mineral wealth has been used to enrich everyone but its own people. Citizens decry a political elite that appears incapable of looking beyond narrow political considerations to safeguard Africa’s interests. With a few notable exceptions, African governments lack defined China strategies, master plans for translating increased investment in priority sectors into sustainable development or for ensuring technology and skills transfer. They are waiting for Chinese firms to take the initiative. This lack of confidence in our leaders, far more than a crisis of explanation as proposed in a blog entry by Shou Huisheng earlier this week, is the main reason Africans remain apprehensive about this budding partnership.

Take, for instance, tensions sparked by the influx of hundreds of thousands of Chinese migrants to Africa in recent years. In Ghana, these tensions are felt most acutely in the small-scale mining sector, where the arrival of Chinese prospectors  with machinery and heavy equipment has transformed a hitherto unsophisticated industry into a major driver of ecological catastrophe. Galamsey, as the practice is commonly known, has caused irreversible damage to protected forests and polluted vital water bodies. Matters got to such a point that the government was forced to impose a blanket ban on small-scale mining last year and to arrest several Chinese operators, over the objections of the Chinese ambassador. But far from being placated, many Ghanaians continue to point fingers at the authorities for permitting Chinese nationals to flout the country’s laws in the first place. To quote a caller on a Ghanaian radio program: “The Chinese government will never allow us to go to their country and trash it. Why does our government allow it here?”

The fate of China-Africa relations depends on Africans like this caller who are willing to hold African governments accountable for protecting the continent’s interests as they engage with China. As African heads of state convene in Beijing next month for the Forum on China-Africa Cooperation (FOCAC), ordinary Africans are expecting them to show more agency in articulating a clear and well-prioritized China strategy. China’s presence in Africa will produce win-win dividends, not because benevolent China pre-ordains it, but because farsighted African leaders insist on it.

Kofi Gunu is from Ghana. He graduated from Tsinghua University’s Schwarzman College in 2018 with a master’s degree in global affairs and public policy. Prior to that, he held roles at the Council on Foreign Relations and the Global Green Growth Institute. He is currently completing a year of national service in Accra.

 

China in Africa: discovering the “China Model” through empirical evidence

Empirical research depicts a picture of Chinese involvement in Africa different from common perception

By Shou Huisheng

Africa is a continent where many Chinese ideas about investment and foreign aid are being piloted. As a result, China’s experience there is valuable for its involvement in other developing countries, particularly those along the Belt and Road. Since the early 2000s, “China in Africa” has been a major focus of international attention. The focus of the discussion is on the “China model” as reflected by the patterns of Chinese investment and aid. This blog tries to summarize that discussion, and outline how the international community, in particular Western countries view Chinese involvement in Africa. It is hoped that a better understanding of the discussion will help China improve its practices in other developing countries.

Common Misconceptions

Relying on empirical studies and statistics, many Western scholars have objectively evaluated China’s contribution to African development. They recognize that China’s infrastructure investments and foreign aid in African countries have fundamentally changed their developmental path. Many also acknowledge the uniqueness of China’s “unconditionality” approach. They believe that the “no strings attached” method does indeed give agency back to African countries trapped by Western conditional aid in the decades following World War II.

But such views tend to dwell only in academic circles. In government and public opinion, negative perceptions of Chinese aid and investment prevail and persist. In this regard, Rex Tillerson’s comments are quite representative. Before the former US Secretary of State visited Africa in March this year, he made a speech criticizing Chinese involvement in Africa. “Chinese investment does have the potential to address Africa’s infrastructure gap, but its approach has led to mounting debt and few, if any, jobs in most countries,” he told his audience. “When coupled with the political and fiscal pressure, this endangers Africa’s natural resources and its long-term economic political stability.” Later that week, in Ethiopia, he reminded African countries to “carefully consider” the terms of Chinese investments and the “predatory” model behind them.

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Former US Secretary of State Rex Tillerson expressed disapproval of Chinese involvement in Africa on Mar 6, 2018. Photo courtesy US Embassy in Senegal.

Some experts consider Tillerson’s views to be “singing the same tune” as Hillary Clinton, when she visited Africa in 2011 and 2012, even though things have changed much since then. But such views remain popular today. In sum, the “predatory model”, as understood through such a lens, means three things:

First, that China is promoting neo-colonialism in Africa. It supports proxy regimes, “divides and conquers” African countries, and bases investment and aid decisions on diplomatic and political considerations. Cheap Chinese loans make African countries dependent on China’s economic largess. Chinese investments mainly target primary resources and land, creating an unhealthy economic structure and unbalanced trade in recipient countries. Short-term prosperity may become a long-term trap.

Second, that Chinese investments actively seek corrupt and autocratic governments to work with. Unconditional Chinese aid in fact provides a free pass to these regimes. In other words, China’s autocratic government is actively looking for its own African proxies through aid and investment.

And last but not least, that the Chinese government and its corporations disregard local environmental, social and cultural concerns. They turn a blind eye to labor rights and the interest of minority social groups.

The real model in statistics

The negative perceptions are persistent, but they are not evidence-based. In contrast, some Western scholars have done long-term empirical studies of China’s presence in Africa. They have collected data on Chinese aid and investment, run fact-based analyses and come to conclusions different from popular perceptions. The AidData database developed at William & Mary College, and the China Africa Research Initiative led by Prof. Deborah Brautigam at Johns Hopkins University are two major sources of such analyses. Even though the data quality and methodology could be improved, these quantitative studies do complement the more anecdotal case studies and observations we often see.

Below are a few key observations from the empirical studies:

First of all, Western media has generally overstated the scale of Chinese investment and aid in Africa. People are made to believe that Chinese involvement in the continent is way larger than that of the West. A wide range of figures about the stunning scale of Chinese finances in Africa have been floating around, but many have been proven to be wrong. In addition, Western media often gives the impression that China’s Export Import Bank provides more loans to Africa than the World Bank does, despite the fact that the World Bank remains Africa’s largest development finance provider since 2010. These exaggerations do not just create anxiety in the West. They may also mislead African countries into believing that Chinese loans are easy to get.

The second observation from empirical data is related to resource grabbing. In fact, only 10% of Chinese loans to Africa goes into oil and minerals. And much of that is concentrated in just a few countries. The biggest loan in this area was offered to Sonangol, the state owned oil company of Angola. On the other hand, 56% of Chinese loans flow into transportation, electricity and telecom. In other words, China invests more in African infrastructure than natural resources.

The third notable fact is that roughly one third of Chinese loans require or allow African countries to repay in energy, minerals or agricultural products. China calls such arrangements “resource-backed loans”. These are often the target of “resource-grabbing” criticism in Western media. But in reality, even though the Chinese government and companies purchase large quantities of energy and mineral products, they seldom control the ownership of such resources. For instance, even if China imports 49% of Angolan oil, most of the country’s oil is controlled by American companies, with Chinese firms controlling less than 10%. The main purpose of having loans repaid in commodities is to hedge against financial risks, rather than controlling resources. This is a reasonable arrangement, given China’s own experience of attracting foreign investments with the same approach in the early years of its Reform and Opening. From as early as 1975, Deng Xiaoping encouraged commodity-backed investment deals with Japan, which allowed China to get access to much needed funding for development. China repaid much of those Japanese loans in commodities throughout the 1980s and 90s.

Data also shows that the destination countries of Chinese policy loans are no different from those of the World Bank, despite perceptions that they predominantly go to countries with rich resources and corrupt governments. Between 2000 and 2014, Ethiopia was the second largest recipient country of Chinese loans in the continent. The country isn’t particularly rich in natural resources, and China’s involvement there is mainly in building industrial parks, driven by the country’s large population and potential market size. Over the same period, Ethiopia was also the World Bank’s top borrower in Africa.

There also appears to be no strong correlation between an African country’s political ties with China and the likelihood of receiving Chinese aid and investments. Zimbabwe traditionally has a strong tie with China. However, it does not even make the top ten list of Chinese lending in Africa. Moreover, unlike ODA, China usually does not cancel a country’s loans. Chinese policy banks and commercial banks usually choose to extend a loan or lower the interest rate to deal with payment issues. Even Zimbabwe, widely seen in the West as China’s proxy regime in the region, complained about how difficult it was to get a cancellation of debts. Chinese bank officials have made it clear that they don’t waive debts against market principles.

Orange and Apple

And finally, the data tells us to differentiate numerous types of Chinese finances in Africa. In the West, people tend to group Chinese money all in one basket and consider it all directed by China’s diplomatic and political priorities. But Chinese ODA and commercial loans follow different logic. Statistics from AidData show a very weak correlation between Chinese ODA and a country’s natural resource endowment. It also has very little to do with political systems or governance capabilities. This is in line with the non-intervention principle that China upholds.

Western countries’ ODA tends to go into African countries with large populations. Chinese ODA is not, however, tied to population size. The one clear feature of Chinese aid is that it leans more towards low-income African countries. These characteristics indicate that Chinese foreign aid is more development-oriented than political or commercial-oriented.

Chinese commercial lending, however, is different. The same analysis from AidData shows that it has a much stronger propensity to go after natural resources, thanks to the Chinese market’s large appetite for African resources. They are also more likely to be associated with corrupt and autocratic regimes. Researchers at AidData offered two plausible explanations. First, some Chinese companies and government departments do regard corruption as a “lubricant” to commercial activities, and have brought certain problematic domestic practices to Africa. Another explanation is that Chinese commercial entities are less risk-averse than their Western counterparts, as commodity-backed arrangements and the likes effectively reduce risks in investing in such countries.

Both explanations have some validity. And the two factors could indeed work together. Considering that the economic growth of the continent in the past 20 years has been driven largely by energy and resource demands from China and other emerging markets, rather than the ODA or investments from Western countries, it is reasonable to state that Chinese commercial lending, with its distinct features, are better suited to the pragmatic needs of African countries. Being a “business partner” with corrupt governments is something ideologically repulsive to many Western actors. Convincing Western society that this could be overall beneficial to African development is a huge challenge for China. And for the moment, China should do its best to make its ODA and commercial investments more transparent in Africa.

To be clear, the main reason for the lack of statistics-based, quantitative research on Chinese aid and investment is the low transparency on the side of the Chinese government. Researchers have observed that existing statistics actually tell a quite positive story about China’s involvement in Africa and have suggested the Chinese government to be more upfront with collecting and releasing statistics. But apparently China still has lots to worry about when it comes to transparency (one of the biggest concerns is possibly domestic public opinion, strands of which see China’s involvement in Africa as “handing free gifts to other countries” while many regions of China are still relatively poor). Short-term improvement of the dataset is therefore unlikely. Nevertheless, the government should attach more importance to the matter and begin to invest more into setting a more quantitative and objective basis for assessing Chinese aid and investments overseas. The recent setting-up of China’s international aid agency (CIDCA) is a welcome move to facilitate the process.

Dr. Shou Huisheng is Senior Fellow at the Statecraft Institution, Research Fellow at the National Strategy Institute, Tsinghua University. Dr. Shou received his doctoral degree in political science from University of Illinois Urbana-Champaign. The blog is based on a recent speech he made recently.