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China’s Resources-for-Infrastructure deals are evolving

Eric Olander
By Eric Olander

Managing Editor, The China Africa Project

Posted on Tuesday, 10 December 2019 06:56

Kenya Railways attendants next to a train along the SGR line constructed by the China Road and Bridge Corporation (CRBC) and financed by Chinese government in Ongata Rongai, Kenya. REUTERS/Thomas Mukoya

China's new policy hopes to bring more transparency on pricing and greater involvement of the private sector to resource investment in Africa.

Decades before China embarked on countless Resource-for-Infrastructure (RFI) deals in Africa, Japan pioneered the model in China as far back as the 1970s.

The rapidly industrialising Japanese economy needed Chinese oil, minerals and other raw materials. China, one of the poorest countries at the time and economically hobbled from failed Maoist policies, couldn’t afford to build basic infrastructure.

Fast forward to the early 2000s and the Chinese bring that same model to Angola where it did a $2bn oil for infrastructure deal that at the time was considered groundbreaking both for its size and its ability to bring vast amounts of capital to build badly-needed roads, bridges and other infrastructure in Africa.

At first, it seemed like the very definition of “win-win.” Everybody gets what they want.

But problems soon began to emerge. Angola committed to use so much of its oil to repay the Chinese infrastructure deal that it didn’t have enough left to sell on the open market and generate needed cash to lubricate the economy.

This caused a massive spike in inflation. Plus, when the initial deal was signed, oil prices were relatively high, making it easier for the Angolan government to repay the Chinese faster. But when the 2008 financial crisis hit, the price of oil crashed, forcing the Angolans to sell a lot more oil to repay that Chinese debt.

By the late-2010s, a consensus began to emerge among development economists that the so-called “Angola Model” may not be the “win-win” scenario that everyone had expected. Commodity prices are inherently volatile and developing countries need to sell enough of their resources to avoid the same inflation trap that crippled Angola.

There was a lot of speculation, in fact, that the Chinese had abandoned RFIs, especially as lending increased to resource-poor countries like Ethiopia and Kenya among others.

But last year, word came that China and Ghana were negotiating a multi-billion dollar deal to exchange a portion of the country’s bauxite reserves for infrastructure.

While much of the reporting of the Ghana-bauxite deal framed it in classic RFI terms, it’s really not, explained Kofi Gunu, a Ghananian Rhodes Scholar at Oxford University pursuing a PhD in international relations.

  • “The government, through the new parastatal it has created, does plan to sell the bauxite/alumina on the open market,” he said. “This is not a direct bauxite-for-infrastructure deal, but instead the proceeds from the sale of bauxite will be used to repay the loan.”

Taking it private

And there’s one other very important distinction.

The bauxite deal in Ghana isn’t with the Chinese government but instead with Sinohydro, a state-owned construction conglomerate.

Although technically still a part of the broader Chinese political structure, there is a big distinction between a state-owned corporation and the government itself. Although they have a common master, the Communist Party, they behave very differently from one another.

 In the Republic of Congo, oil is used to reimburse the costs of the Imboulu hydropower project; in Tanzania, cashew nuts are used to pay for spare parts; Sierra Leone secures its loan by exporting coffee and cocoa; Zimbabwe exports tobacco exports for rural electrification.

Rather than a state-to-state arrangement, as was done in Angola, the Ghana deal is a state-to-corporate arrangement which forms the basis of the new “Sino-Africa Swap Formula,” according to Ehizuelen Michael M. O., Executive Director of the Center for Nigerian Studies at the Institute of African Studies, Zhejiang Normal University.

This new financing model:

This evolution of the RFI will purportedly help African countries to avoid the perils of the “Angola Model” while at the same time finance new infrastructure that doesn’t add to a country’s national debt, a burgeoning problem in many African countries.

Ghana is one of a growing number of African countries to employ the “swap” method, so it’ll be very interesting to watch if any unintended consequences, as was the case in Angola, arise from this new, potentially very innovative, infrastructure financing model.

 

This article first appeared on The China Africa Project

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