47218 noTE no. 42 ­ oCT 2008GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure China's emerging role in Africa Part of the changing landscape of infrastructure finance Vivien Foster, William Butterfield, Chuan Chen, and Nataliya Pushak I n 2006, which China named the "Year of a year in 2004­05, peaked at $7 billion in 2006, Africa," it quadrupled its investment commit- and then fell somewhat to $4.5 billion in 2007 ments to infrastructure in Sub-Saharan (figure 1). At least 35 countries in Africa have Africa, to more than $7 billion. In 2007 China received financing from China or are discussing committed another $4.5 billion. Such funds funding opportunities. And while about half the could make a significant contribution toward projects have involved financing commitments of meeting Africa's infrastructure investment less than $50 million, the amounts for single proj- needs. In the power sector, where Africa faces ects can be very large. Of the confirmed projects, some of its largest gaps, China is investing $5.3 about half a dozen involved commitments from billion, including $3.3 billion in projects that, China of $1 billion or more each. if completed, will increase the region's hydro generation capacity by 30 percent. China's growing role in Africa has generated much Structure of China's loans discussion. A new study seeks to add concrete numbers and solid analysis. China's approach to financial assistance, part of a broader phenomenon of south-south economic Trade between Sub-Saharan Africa and China cooperation, differs from that of traditional donors. reached $59 billion in 2007, up from just $9 Unlike traditional official development assistance, billion in 2001. Accompanying this boom in trade the financing is channeled not through a devel- is growing investment by China in African infra- opment agency but through the Export-Import structure. China's role in financing infrastructure Bank of China. Ex-Im Bank loans account for the in the region can be understood by looking at vast majority of China's infrastructure finance for the evident economic complementarities. Africa Africa. Consistent with the rationale of promoting counts among its development challenges a major trade, the financial support is typically tied to the infrastructure deficit. China has developed one of participation of Chinese contractors. the world's largest and most competitive construc- tion industries, with particular expertise in the For a growing number of infrastructure loans the civil works critical for infrastructure development. Ex-Im Bank is using a deal structure known as China's fast-growing manufacturing economy is "Angola mode," in which repayment is made in generating demand for oil and mineral inputs that natural resources (figure 2). Under this arrange- has rapidly outstripped domestic resources. Africa ment, increasingly used for countries unable to is already a major natural resource exporter, and provide adequate financial guarantees to back with enhanced infrastructure it could develop this potential even further, accelerating economic PPIAF Approved Logo Usage development in the region. Vivien Foster is lead economist in the Sustainable Develop- ment Department of the World Bank's Africa Region. William China's commitments of infrastructure finance for Logo - Black Butterfield is a former consultant to the World Bank. Chuan Africa, which had oscillated around $500 million Chen was formerly a professor at the Department of Civil a year in the early 2000s, have grown substantially Engineering at Tsinghua University. Nataliya Pushak is a since 2003. They hit a range of $1.3­1.7 billion PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY consultant to the World Bank. Logo - 1-color usage (PMS 2955) Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY 2 loan with a grant element of 35 percent is consid- FIguRe 1 ered to be concessional. Given the wide variation Big growth in financial flows from China in financial terms across countries, a subset of the Annual commitments by China to infrastructure projects in Sub-Saharan Africa, 2001­07 Chinese loans do fall above the concessionality threshold. 10 9 The average grant element associated with private 8 billions) creditors to Sub-Saharan Africa is 5 percent, while 7 that associated with official creditors rises to 54 (US$ 6 5 percent. 4 3 Commitments 2 Financial flows by sector 1 0 2001 2002 2003 2004 2005 2006 2007 Most of China's infrastructure finance for Africa Chinese sources in 2001­07 was divided fairly evenly between Total press reports two main sectors: power (especially hydropower) and transport (especially railroads), followed by Source: World Bank­PPIAF Chinese Projects Database, 2008. telecommunications (mainly equipment supply). Water projects attracted the least. China's overall financing activity by sector shows a focus on the types of projects that contribute to expanding the productive potential of the economy. their loan commitments, the money is never directly transferred to the government. Instead, Power a framework agreement covering a program of By far the largest infrastructure gaps in Africa infrastructure investment is signed with the arise in the power sector. Generation capacity and government. The beneficiary government then household access in the region are around half the awards the infrastructure projects, supported by a levels observed in South Asia and a third of those in credit from the Ex-Im Bank, to a Chinese construc- East Asia and Pacific. China's central focus in this The "Angola tion firm. At the same time, it awards a Chinese sector is on the construction of large hydropower petroleum company the rights to begin produc- mode" relies projects. By the end of 2007 China had committed tion of the oil or other natural resources that will at least $3.3 billion toward the construction of 10 on natural constitute repayment of the loan. More than $3 major hydropower projects. Once completed, these billion of infrastructure projects were identified resources will provide a combined generating capacity of that use the Angola mode as a basis for financ- more than 6,000 megawatts, a significant fraction to repay ing, in countries such as Angola, the Republic of of the 17,000 megawatts of hydropower generat- Congo, Gabon, Ghana, Guinea, and Nigeria and infrastructure ing capacity existing in Africa today. However, it is backed by resources such as oil, iron, bauxite, and not clear whether the two hydropower projects in loans cocoa. Guinea and Nigeria that account for 60 percent of the committed amount will move forward. Financing terms Beyond hydropower, China has also been active in building thermal power stations. The most The China Ex-Im Bank's terms and conditions significant have been in Sudan, where more than are agreed on a bilateral basis, with the degree of 1,400 megawatts of thermal power capacity are concessionality depending on the nature of the being added with China's support, and in Nigeria, project. On average, the Chinese loans offer an where China Ex-Im Bank is financing construction interest rate of 3.1 percent, a grace period of 4 of three thermal power stations with a combined years, and a maturity of 13 years. However, there is capacity of 800 megawatts. significant variation in all these parameters across countries, with interest rates ranging from 1 to Rail 6 percent, grace periods from 2 to 10 years, and China's first big foray into African infrastructure maturities from 5 to 25 years. Based on the OECD was the construction of the Tanzania­Zambia rail- Export Credit Agreement definition, the average way in the 1970s. Recent years have seen renewed grant element of these loans is 18 percent, while a activity by China in the African rail sector, with China's emerging role in Africa 3 financing commitments on the order of $4 billion. These include rehabilitation of more than 1,350 FIguRe 2 kilometers of existing railway lines and the How the "Angola mode" works construction of more than 1,600 kilometers of new railroad. Beneficiary country China Awards company Provides The largest deals have been in Nigeria, Gabon, and license to extract payment in natural resources kind for Mauritania. In Nigeria the China Ex-Im Bank has Chinese financial loan The financial committed $1 billion for construction of the Abuja petroleum company flows from Rail Mass Transit System and another $2.5 billion China Beneficiary Ex-Im for rehabilitation of 1,315 kilometers of the Lagos­ China offer government Bank Kano line. China Ex-Im Bank is also preparing an important to finance the 560-kilometer Belinga­Santa Clara Chinese infrastructure Provides financial loan rail line in Gabon as part of a $3 billion package contractor development Instructs company for project centered on the Belinga iron ore reserve. In Mauri- to construct priority construction opportunity for infrastructure projects tania a 430-kilometer railroad linking Nouakchott Africa to phosphate-rich Bofal is being financed by a $620 million China Ex-Im Bank loan. Roads Water and sanitation China has supported road projects across Africa. Most of the water and sanitation projects were More than 18 recent projects with financing from smaller in scale and more focused on meeting China have been recorded, for construction or immediate social needs. About $320 million rehabilitation of more than 1,400 kilometers of was committed to this sector, 60 percent of road. But the total amount for confirmed road which was absorbed by projects in Angola. The projects, at around $550 million, is substantially largest recorded project has been in Mauritius, smaller than that reported for power and rail. where China Ex-Im Bank committed $64 million Indeed, only two of the projects with financing to the construction of a water treatment plant from China exceeded $100 million, both of which and distribution network in 2007. China's water were in Angola and part of a China Ex-Im Bank supply projects include a number of smaller dams line of credit provided in 2004. (not related to hydropower) in Cape Verde and Mozambique. Telecommunications China's involvement in telecommunications takes the form mainly of equipment sales to service Financial flows by country providers. Some of these involve normal commer- cial contracts between Chinese manufacturers Cases of Chinese infrastructure finance for which and public and private operators in Africa. But the amount of commitments was available and some entail intergovernmental financing tied to confirmed were recorded in 27 countries across purchases of Chinese equipment by state-owned Sub-Saharan Africa. Despite this broad reach, telecommunications incumbents. there is a heavy geographic concentration of finance. Four countries (Nigeria, Angola, Ethio- The largest telecommunications project by far has pia, and Sudan) together account for 70 percent been in Ethiopia. The $1.5 billion Ethiopia Millen- of Chinese financing commitments; Nigeria alone nium Project involves the rollout of a national accounts for nearly 30 percent. The rest of the communications backbone and the associated funding includes sizable volumes on the order of rollout of mobile coverage in rural areas. Another $800­1,000 million provided to Guinea, Ghana, salient example is the National Communication and Mauritania. Backbone Project in Ghana aimed at rehabilitation and expansion of fixed-line communications tech- Nigeria nology in the country. The Ex-Im Bank is helping China's engagement in Nigeria amounts to total to finance this $70 million project, initiated by financing commitments of $5.4 billion. Activi- the Ministry of Communications, through a $31 ties date back to 2002 with the agreement on million concessional loan. the first phase of the National Rural Telephony 4 Project, when China's two telecom giants, ZTE Sudan and Huawei, began actively pursuing equipment Since 2001 China has committed more than $1.3 supply and network rollout projects for both fixed billion in support of Sudan's broader infrastruc- and wireless service in the country. In 2005 China ture development needs. Over the 2001­07 period Ex-Im Bank agreed to finance construction of ther- infrastructure projects with Chinese support were mal power stations at Papalanto, Omotosho, and developing coal- and gas-fired thermal stations, Geregu. Ex-Im Bank financing was substantially adding more than 1,400 megawatts of new ther- scaled up in 2006. Agreements were reached on mal generating capacity. By far the highest-profile almost $5 billion of projects, including major rail- power project in the country is the 1,250-megawatt way construction and upgrading projects and the Merowe dam, where construction has been under 2,600-megawatt Mambilla hydropower project. way since early 2004. At the time the contracts These major rail and hydropower projects agreed were signed, this massive $1.2 billion hydropower to in 2006 are under review by the authorities, project was the largest international project in however, and it is not clear whether they will go which China had ever participated (although it ahead. has now been superseded by the Mambilla hydro- power project in Nigeria). Angola In Angola the line of credit extended by the Ex-Im Bank in 2004 amounted to $2 billion, half of Conclusion which went into repair of infrastructure damaged during the country's 27-year civil war. The loan Sub-Saharan Africa lags behind other developing was backed by an agreement to supply China regions on most standard indicators of infrastruc- with 10,000 barrels a day of Angolan crude. This ture development. That has prompted African was the first major example of what has come to leaders to call for greater international support in be known as the Angola mode. The Center for this sphere. They have typically welcomed China's Chinese Studies at Stellenbosch University in fresh approach to development assistance, which South Africa indicates that the interest rate on eschews interference in domestic affairs and empha- the loan has been lowered from the initial 1.5­1.7 sizes partnership and solidarity among developing percent to 0.25 percent, and that the loan has a nations. China's new role creates challenges for 3-year grace period and a 15-year repayment term governments and civil society actors. But despite (Corkin 2006). In 2007 China Ex-Im Bank issued the potential challenges, Chinese finance offers an another $2 billion loan reportedly devoted entirely important development opportunity for Africa, to infrastructure needs. reaching a scale large enough to make a material contribution toward meeting its vast infrastructure ethiopia needs. In Ethiopia, where China's engagement amounts to $1.6 billion, activities began in 2002 with projects References in the power and road sectors. But the main focus Corkin, Lucy. 2006. "China's Interest and Activity in Angola's of China's infrastructure finance in the country has Construction and Infrastructure Sector." Center for Chinese Studies, been the telecommunications sector. In 2006­07 Stellenbosch University. China agreed to provide financing for the Ethio- Foster, Vivien, William Butterfield, Chuan Chen, and Nataliya pia Millennium Project to create a fiber-optic Pushak. 2008. Building Bridges: China's Growing Role as Infrastructure Financier for Sub-Saharan Africa. Trends and Policy Option series. transmission backbone across the country Washington, DC: PPIAF. GRIDLINES and roll out the expansion of the cellular PPIAF Approved Logo Usage GSM network, with an estimated 8.5 Gridlines share emerging knowledge million new connections. The proj- on public-private partnership and give an ect is being financed under export Logo - Black overview of a wide selection of projects from various regions of the world. Past notes can be seller's credit arrangements. found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing Logo - 1-color usage (PMS 2955) strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. 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