Chinese Finance of Overseas Infrastructure

Professor Deborah BrautigamSchool of International Service

American UniversityWashington DC

(1) History LessonsChina’s Domestic Infrastructure Focus in 1978: “120 Projects”

• 30 Electric Power Stations• 6 Trunk Railways• 8 Coal Mines• 10 Steel Plants• 5 Harbors• 9 Non-ferrous Metal Complexes• 10 New Oil & Gas Fields

How to Finance These?

• Deng Xiaoping (1975 “20 Points”)“In order to hasten the exploration of our coal and

petroleum, it is possible that on the condition of equality and mutual benefit, and in accordance with accepted practices of international trade such as deferred and installment payments, we may sign long-term contracts with foreign countries and fix several production sites where they will supply complete sets of modern equipment required by us, and we will pay for them with the coal and oil we produce.”

Japan’s Long-Term Trade Agreement with China (1978)

• $10 billion modern complete plants & turn-key projects from Japan: line of credit (deferred payment basis)

• Repay with $10 billion in exports of crude oil and coal

China’s Finance of African Infrastructure: Past Examples

Tazara/ Tan-Zam Railway (1976)

Kinkon & Tinkisso Hydropower in Guinea (1974)

Bouenza Hydropower in Congo (1980)

Goma Hydropower in Sierra Leone (1986)

Nouakchott Deep Sea Port (1986)

Plaisance Airport Terminal Mauritius (1983)

CAR Broadcasting Station (1983)

Luapula Bridge Zambia (1983)

Woretawoldya Highway Ethiopia (1983)

Rebuilding Railway Botswana (1986)

Hargeysa Water Supply Somalia (1987)

Bardera Dam Somalia (1987)Nouakchott Water Supply

(1987)Madagascar No. 35 Highway

(1988)Ouesso Water Supply

Congo (1990)

(2) From Aid to Economic Cooperation: Building Business

China International Hydroelectric Corporation feasibility study for Imboulou (Republic of Congo) Hydroelectric Station (1982)

2nd Bamako Bridge (King Fahd Bridge), Mali, built by Chinese company … financed by Saudi Arabia (1990-1992)

China and the West

• West: aid (ODA) now de-linked from investment, trade

• China: a different model, mostly not aid/ODA

• Chinese government funds (“economic cooperation”) => investment, trade

(3) Chinese Overseas Finance: Institutions & Instruments

(ODA/Non-ODA)• MOFCOM Grants & Zero-Interest Loans • Eximbank 1994

– Concessional rmb loans (ODA) 1995– Export buyer’s credits 2000– Preferential export buyers credits (not ODA)– Export sellers credits => suppliers’ credits – Guarantees

• Other Policy Loans (China Development Bank)• Equity (China-Africa Development Fund)• Commercial Banks (ICBC, China Constr. Bank)

China Eximbank Annual Disbursements 2002-2009

(worldwide)•

•

China Eximbank (Annual Disbursements)

0246810121416182022242628303234363840

2002 2003 2004 2005 2006 2007 2008 2009

Guarantees

Export buyer's credits

Export seller's credits

Commodity-linked Infrastructure Credits: 4 Varieties

(A) Commodity-Backed line of credit for multiple projects (Angola, Eq. Guinea)

-- Deferred payment in commodities (oil)

-- “Agency of restraint”

Resource-backed Infrastructure Credits & Loans

• Widely misunderstood as ODA (official aid)

• Market-rate line of export buyer’s credit?• Non-transparent• Tied to Chinese goods & services• “Request based”• Secured by resources

Angola: 33 Projects for $1b (2004-2007)

• Ag. Machinery & equipment $22m

• 4 Irrigation systems $93m

• Luanda electricity system: $45m

• Water treatment system repair in 3 cities: $21m

• 5 agricultural training institutions

• 6 polytechnical colleges• 5 secondary schools:

$26m• Kifangondo-Caxito

road: $211m• 86 ambulances• 6 provincial health

centers• Rehab. 7 regional

hospitals …etc. etc.

(B) Commodity-Backed Single Project Loan-Compensatory Trade

Agreement

-- Ghana Bui Dam package (cocoa)

-- Congo Imboulou Dam (oil)

(C) Commodity-Backed lines of credit combined with natural

resource exploitation• DRC: Gécamines JV

• Non-concessional

Source: Le Monde 2009

DRC Infrastructure & “Chinese corridor”

(4) Loan package to develop oil or mineral resource & related

infrastructure Sudan: 1996 concessional loan

Gabon? Mauritania?

So far, rather rare.

Source: MOFCOM (courtesy of Jean-Claude Berthelemy)

0

5000

10000

15000

20000

25000

US

$10,

000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Table 1: Chinese Companies: Annual Turnover from Construction Projects in Africa, 1998-2008

Economic Cooperation Turnover, Top 5 Countries

0

500

1000

1500

2000

2500

3000

3500

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Angola Nigeria Ethiopia Equatorial Guinea Sudan

Other Issues

• Lower embezzlement risks

• But high “kickback” risks with “request-based” project finance

• Collusive bidding risks

• Independent consultant engineers & quality control

• Value for money?