Is Chi­nese in­fra a trap for Africa?

Le­gal and in­sti­tu­tional frame­works must be strength­ened to pre­vent run­away cap­i­tal ex­penses that the coun­tries with lim­ited fi­nan­cial re­sources can ill-af­ford

Business Standard - - OPINION - DIPESH DIPU The writer is an en­ergy and in­fra­struc­ture sec­tor con­sul­tant and an ad­junct fac­ulty in fi­nance at ICFAI Busi­ness School, Hy­der­abad

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.

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 will­ing­nessto-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-for­money 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.

In­fra­struc­ture that does not pay off debts and leads to coun­tries hav­ing to com­pro­mise on their sovereignty begs a few ques­tions

Photo: PTI

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

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