The Chinese government is reassessing its role in landmark infrastructure projects in Africa due to concerns over commercial viability, while some African governments themselves are rejecting Chinese financing conditions. This trend is opening a new avenue for concessional funding and boosting the role of development finance institutions while seeking broader collaboration with commercial institutions.

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In November, Uganda’s state-run Uganda Railways Corporation will begin a USD 267 million rehabilitation of its railway network. The country’s dilapidated 1,266 kilometres metre-gauge network was built a century ago by its former British colonial power. Bulk cargo operators have been seeking investment in the railway for years as regional road systems struggle to cope with the number and weight of lorries on Uganda’s roads. The rehabilitation of the aging metre-gauge track is far less extensive than the initially envisaged construction of a standard gauge railway to link the landlocked country to similar regional networks.

Uganda had previously failed to secure USD 2.2 billion in Chinese funding for its section of the Standard Gauge Railway (SGR) regional project. The ambitious SGR was originally designed to connect Kenya’s Indian Ocean seaport of Mombasa to Uganda, South Sudan, Rwanda, Burundi and other regional countries. However, delayed oil production in Uganda has raised Chinese concerns over repayment and Chinese partners have decided not to sign off on Uganda’s SGR project. China’s CNOOC co-owns the country’s fields and final investment decision has been indefinitely postponed by its partner oil companies Tullow and Total following disagreements over tax policy (See UGANDA: CRUDE PIPELINE SUSPENSION IS MAJOR SETBACK TO OIL SECTOR DEVELOPMENT).

Instead, the rehabilitation project will be partially financed by a USD 23.7 million grant from the European Union and the Ugandan government is seeking further investment from international development finance institutions. The rehabilitation works will now be undertaken by French firm Sogea-Satom, rather than a Chinese firm as originally envisaged. However, Uganda may struggle to raise the required financing due to mounting concerns over political instability, insecurity, and debt sustainability that has raised alarm bells among development partners (See UGANDA: PROTESTS, TRADE DISRUPTION, AND OIL DELAYS DESTABILISE POLITICAL OUTLOOK).

Uganda’s railway negotiations reflect a changing pattern in Chinese investment on the continent, particularly in East Africa, as well as some West African countries. EXX Africa looks at two key trends that are redefining China’s role in Africa. Firstly, some African countries are themselves rejecting Chinese investment or cancelling existing agreements. Secondly, China’s concerns over repayment and debt sustainability are motivating it to withdraw from previously pledged commitments or to refuse further financing agreements, as in the case of Uganda’s SGR. EXX Africa examines the evidence for both trends and the implications for development financing on the continent.

Africa rejects Chinese infrastructure deals

Over the past year, several African countries, including Kenya, Tanzania, and Sierra Leone, have cancelled large-scale Chinese-funded infrastructure projects. This activity has prompted suggestions that China’s role in Africa is changing and that its dominant financing role has come under threat.

Bagamoyo port, Tanzania

BAGAMOYO PORT CONSTRUCTION, TANZANIA

Most notably, in June, Tanzanian President John Magufuli appeared to cancel a USD 10 billion port construction project in Bagamoyo, reportedly saying that the financing terms presented by Hong Kong-based conglomerate China Merchants Port Holdings were ‘exploitative and awkward.’ Bagamoyo Port, financed by China and Oman’s sovereign wealth fund, would have become the largest port in East Africa as a 20 million TEU (20ft-equivalent unit) container port. The project has faced heavy delays over the past five years.

The Bagamoyo project was a major connectivity initiative being pursued by China in East Africa under its Belt and Road Initiative (BRI) programme. The project included construction of several rail lines and roads to oil fields. As per the agreement, the port, once built, would have been leased to China for a period of 99 years, during which Tanzania would not have had any say on who else could invest in the port upon its operationalisation. There was also a threat that the Chinese-operated Bagamoyo port would undermine the ongoing USD 522 million expansion of Dar es Salaam port that would enable it to triple its current capacity when complete by the end of 2019. As a result of the publicity of the terms of the agreement, Tanzanians had started to turn against the Bagamoyo project and the country’s populist president therefore indicated he would cancel it.

In October, Tanzania’s government issued a strict set of conditions for the Bagamoyo project, including a guarantee of compensation for any losses incurred during project implementation, as well as to revoke tax waivers granted to the Chinese companies, including waivers of a land tax, workers’ compensation tax, a skills development levy, a customs duty, and value added tax. The conditions are unlikely to be approved by China and the project may now have been ‘killed off’ completely (See SPECIAL REPORT: IS EAST AFRICA CHANGING ITS ATTITUDE TOWARDS CHINESE INVESTMENT?).

Lamu power plants, Kenya

LAMU, KENYA

Also in June, Kenyan judges at the National Environmental Tribunal said officials had failed to conduct an appropriate assessment of the impact of Kenya and East Africa’s first coal plant that was planned to be constructed in Lamu, a UNESCO World Heritage Site and nature reserve area. The tribunal cancelled the license for developer Amu Power and thwarted plans for the 1,050 megawatts plant that is majority financed and built by Chinese firms.

Even though the ruling was seen as a blow to the government of President Uhurru Kenyatta in its boost of power generation expansion, the tribunal’s cancellation of the license has also been interpreted as retaliation against China’s refusal to fund the next phase of the Standard Gauge Railway (SGR) connecting Naivasha to Kisumu (See KENYA: THE KENYATTA LEGACY UNDER SIEGE).

Freetown airport and port, Sierra Leone

FREETOWN ESTUARY, SIERRA LEONE

In Sierra Leone, President Julius Maada Bio cancelled a Chinese funded USD 400 million loan agreement signed by his predecessor to build a new international airport at Mamamah. The project faced resistance from the IMF, the World Bank, and its own feasibility study. Bio specifically singled out the airport project’s alleged graft and massive debt burden. The cost would have represented 11 percent of the country’s GDP, according to some estimates. Bio has also been cautious about the suggestion by China that it build and finance a USD 1.2 billion bridge across the Freetown estuary to Lungi International Airport as an alternative to the Mamamah airport idea.

At the Forum on China-Africa Cooperation last September, the government has cooled on some major Chinese-funded infrastructure projects, the latest of which is a plan to expand Freetown port, which desperately needs expanding. The scheme aims to expand Freetown’s Queen Elizabeth II Quay with construction and finance from China under the Belt and Road Initiative (BRI). China’s Tidfore Group is slated to spend USD 708 million on the design and construction of four new terminals and yards. Finance would come from the Industrial and Commercial Bank of China and its Exim Bank on a sovereign guarantee by the Sierra Leone government. According to local sources, China has told the government that there is no risk to government finances because the project is fully insured, and ‘off balance sheet’.

However under a concession agreement signed in September 2017, the government in Freetown has allowed a joint venture of BVI-based Sky Rock Management and the National Port Development Sierra Leone to manage the project as ‘developers’ and act as an intermediary between the Sierra Leone government and the Chinese contractors. The agreement commits the government to a Development Levy Fee to be collected by Tidfore for 16 years, generating some USD 950 million, a profit of 25 percent on the project cost. Tax officials in Freetown have complained that the levy, which would be charged over and above all usual port handling charges, would raise the cost of freight using the port so high that shippers would avoid using it, leading to an overall loss of revenue and threatening repayments of the loan (See SIERRA LEONE: MINING CONTRACT REVIEW COULD BOOST TRANSPARENCY AND ACCOUNTABILITY).

China’s repayment concerns

Over the past year, also, some major African projects, including massive rail construction projects in Uganda, Ethiopia, Djibouti, and Kenya, have come under scrutiny, leading China to write-off some loans and refusing to commit to further financing. The SGR regional project in East Africa offers the most striking evidence of Chinese cooling to African infrastructure development.

China committed USD 3.2 billion for the first phase of the SGR railway but there are concerns that the project is not commercially viable. The recently launched Mombasa-Nairobi line is already suffering from operational losses, which has intensified fears over repayment on these obligations. China has also become more aware of the international criticism it has recently faced by continuing to lend to indebted countries such as Kenya and Uganda.

Rather than committing to the next phase of the standard gauge railway, China has instead offered to rehabilitate the aging metre-gauge railway line from Naivasha to Kisumu and the Uganda border. This is more than what China has offered Uganda, which had been seeking development funding for its own railway rehabilitation. China has also committed to financing a toll-road connecting western Nairobi to Jomo Kenyatta International Airport, a project which is to be carried out by China Road and Bridge Corporation. New Chinese funding also consists of loans at low interest rates and partnerships with private firms to commission Chinese telecoms firm Huawei to build a new data centre in Konza tech city that is currently under construction near Nairobi.

However, competition for engaging in infrastructure projects in Kenya is intensifying. At the forefront, is US construction firm Bechtel which is hoping to build a new highway from Mombasa to Nairobi, financed by a public-private partnership involving the US Export-Import Bank, the Overseas Private Investment Corporation, and the US International Development Corporation. The US highway would damage the commercial operations of the Chinese-operated SGR between the two cities and potentially force Chinese credit insurers to bail out the project, like they did for the Djibouti to Addis Ababa railway last year. The SGR’s high freight charges (that were raised again by 80 percent earlier this year), as well as its inefficient container terminals and administrative restrictions would make a highway a more palatable solution for cargo operators.

INSIGHT

A growing number of African countries are facing an uncertain outlook over the next year in terms of the servicing and repayment of their debt, while many governments continue to tap into international debt markets to finance massive infrastructure projects. As concerns over the impact of a global trade war on African economies mount and the continent faces a looming debt crisis, the IMF has recently shown some flexibility in its bailout terms. The Fund is preparing to step in as lender of last resort in many debt-burdened or cash-strapped countries while softening its conditionalities in the face of competing Chinese loans.

The role of the IMF at a time of mounting concerns over Africa’s debt is particularly important considering the expected impact of the global trade war on the continent’s economic output. An escalation of the US-China trade stand-off could more than halve the current forecast of just 3.2 percent growth for the sub-continent. Any impact might be softened by a weakening US dollar and falling borrowing costs, but the effect of falling trade flows and economic output should not be underestimated.

Thus, the IMF is set to play an important role in offering debt relief to African countries in coming years. The Fund currently classifies six African countries as being in debt distress, including Mozambique, Sudan, and Zimbabwe. It rates another ten countries as being at high risk of debt distress, including Zambia, Ghana, and Ethiopia. EXX Africa has previously also expressed concerns over some of the continent’s largest economies like Kenya, Nigeria, and South Africa. Although the need for IMF intervention in these economies seems unlikely if the balance of payments remains sound.

The loosening of IMF conditionalities is indicative of its future approach towards other African countries that are likely to require a bailout in coming years. Loosened lending conditions will prove good news for many African governments seeking urgent debt relief, although will do little to improve transparency and curb corruption which remains one of the heaviest obstacles to economic development. African governments are increasingly integrating infrastructure investment options into a more competitive landscape that seeks to bridge the massive annual financing gap. However, accomplishing sustained economic growth, meeting revenue collection targets, and achieving positive indicators will be required to balance growing debt levels and record fiscal expansionism.

This activity has prompted suggestions that China’s role in Africa is changing and that its dominant financing role has come under threat. However, there is no evidence to suggest that African governments are steering away from Chinese investment. Instead, the region is fostering more competition from a broader source of funding. Chinese financing is often more expensive and with shorter maturities than the terms offered by multilateral financial organisations. Some forms of syndicated commercial lending from western banks and export credit agencies offer further competition in the increasingly varied investment climate in Africa.

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