Is Chinese infra a trap for Africa?

For the last few weeks, there have news emanating from Zambia about ZESCO, the State-owned electricity utility, being handed over to the Chinese since Zambia could not pay the multi-billion dollar debt obligations. These have been dismissed as speculations by the Zambian government even though similar speculations are rife about Kenneth Kaunda International Airport at Lusaka and its national broadcaster ZNBC as well. These challenges of infrastructure development and financing are not unique to Zambia, the Democratic Republic of Congo issued mining licences to a joint venture company called Sino-Congolais des Mines (Sicomines) in lieu of infrastructure development, which was termed as Resource-Financed-Infrastructure (RFI) contract. Djibouti, a small but strategically located country on the horn of Africa, also turned into a military base for China after the Chinese built ports. Several other countries, too, including Botswana, Nigeria, Sudan and Ethiopia, have had their share of anxiety about loan repayments for the expensive infrastructure projects developed by the Chinese firms. Well, such developments, in fact, are not unique to Africa, the recent 99-year lease signed by Sri Lanka for their Hambantota port being a case in point, and may extend to South East Asian and other emerging market economies as well. 

One of the key messages from the seventh Forum on China-Africa Cooperation (FOCAC) held in Beijing on September 3-4, was that China will continue to invest further. Chinese leadership tried to allay the notion of debt trap and proclaimed the Belt & Road Initiative (BRI) to be altruistic. The leaders of the African countries themselves appeared to agree, perhaps to pacify their own constituencies back home. While it is early to pronounce judgements on BRI’s intents, financial constraints of infrastructure development are real in Africa and other emerging markets. There is certainly a need to develop infrastructure for wider economic growth. Yet, infrastructure built that does not pay off debts and leads to countries having to compromise on their sovereignty subsequently begs a few fundamental questions.

Chinese President Xi Jinping with a group of leaders from African nations at a photo session during the Forum on China-Africa Cooperation (FOCAC) Summit held in Beijing earlier this month Photo: PTI

The first one concerns the philosophy of infrastructure-led growth. It is often believed that infrastructure development leads to economic growth — such is also justified through economic feasibility studies — and recommends building projects which may not be financially feasible on their own. Such a thought process tends to overlook affordability and willingness-to-pay for the infrastructure by its users. It hinges high hopes on spurring economic activities in the hinterland and thus, encourages governments to commit national resources for their development. Such infrastructure-led growth precincts have been found to be flawed, well, in China itself. African countries, therefore, need to examine these more carefully as in the event of expected growth not materialising, they are likely to have challenges in debt repayments.

The second one concerns the efficacy of the preparatory works. The studies conducted to establish infrastructure needs are dependent on appropriate methods of surveys and assessment of usability, affordability and willingness-to-pay, and option study to deliver services. These are compromised, in particular for government-to-government (G2G) projects, as these studies are conducted or financed by the engineering, procurement and construction (EPC) companies themselves or their “independent” associates. The bias towards making the project numbers more palatable for implementing agencies in the host countries cannot be overruled in such cases. More so, in G2G cases, political push behind the projects create blind spots in identification of project risks and make risk mitigation measures appear easier. These avoidable errors in studies can lead to risk events occurring later, and thus casting aspersions on projects being capable of paying back.

In several cases of infrastructure development, in particular those done through G2G mechanism, the value-for-money assessments are not done to establish the best suited business models. These and the terms of engagement are often negotiated by political leadership. These lead to selection of inappropriate business models for project implementation which do not reflect the risk and reward sharing based on prudent principles. The concessionaires who should be accountable for the revenue numbers forecast by themselves in the feasibility studies are allowed to shift market and price risks to government-owned agencies and make their returns through guaranteed public-funded annuities. 

These concerns are not insurmountable. Involvement of independent consultants and experts in the preparatory stages and in design of public-private-partnership (PPP) models cannot be overstated. Also, their involvement needs to be ensured for independence, failing which such exercises become redundant expenses to buy brand names for reports only to amplify the political narratives.

Yet another challenge that several of the African and indeed other emerging market countries face is the evolving legal and institutional frameworks. There are some African countries that have passed PPP laws yet permit the implementing agencies the freedom to follow procedures that are applicable to more generic public procurements. Such flexibilities create opportunities for short-circuiting prudent processes and circumvent intended checks and balances.

Coupled with tempting predatory financing that Chinese firms are willing to provide, infrastructure project appraisals become merely checkboxes to be ticked. This while the crippling impacts of corruption on institutional processes of project selection, appraisal, approval, implementation and monitoring have not even been mentioned yet. The 2013 World Bank Report on Corruption and PPPs identified vulnerabilities of every process of infrastructure development through public private partnerships. Corruption as a reason for insolvency risks in African countries can be a study on its own right.

While there are merits in Chinese investments in Africa — for one, the continent needs economic growth to overcome poverty and human development challenges, and Europe may find it useful even from immigration perspective — it is critical to get the acts of project identification, appraisal, financing and implementation right. Legal and institutional frameworks must be strengthened to prevent runaway capital expenses that the countries with limited financial resources can ill-afford. Else, a continent that has barely emerged from colonialism may be stepping into yet another one.   

The writer is an energy and infrastructure sector consultant and an adjunct faculty in finance at ICFAI Business School, Hyderabad