|Khartoum Refinery. photo credit: KRCSD.com|
This refinery was financed by CNPC (there is no mention of China Eximbank, which was still a relatively small player in the 1990s), probably through a supplier's credit. According to a 2002 report by the IMF, the financing was secured by crude oil exports -- not access to a new concession, but as a guarantee.
At first, the debt service payments for the refinery were non-transparent, i.e. not included in the government's budget. The IMF made greater transparency a condition, and by 2002, as the Fund noted, Sudan's "budget now fully incorporates the debt service payments for the construction of the Khartoum refinery" (p. 21).
The IMF and the World Bank were concerned that Sudan had scaled back on debt payments owed to their two institutions in 2001. The value of Sudan's crude oil exports amounted to US$1.3 billion in 2001 (p. 10), but much of this value belonged to Sudan's foreign investors. In 2002, Sudan's net foreign exchange receipts were projected to be only around $120 million. Debt service for the refinery (which mainly supplied Sudan and its neighbors, including Ethiopia) amounted to $60 million annually. This left only about $60 million "for payments to the World Bank, the Fund, and other creditors (p. 38, n. 22)."
How did CNPC step ahead of the IMF and the World Bank, who are generally recognized as any borrower's "preferred creditors" (i.e. they are supposed to be paid first)? The debt service on the Khartoum refinery was fully secured by Sudan's crude oil exports. As the IMF noted, if debt service was not met, "the CNPC has the right to lift the equivalent amount of crude oil in kind. Nonpayment is thus not a realistic option (ibid)." Through securing its credit by crude oil, CNPC effectively became Sudan's most preferred creditor.
In its letter to the IMF, Sudan noted that in addition to including the repayments for the refinery in the budget, i.e. making it all more transparent, it planned to "implement a system that will ensure cash payment, as budgeted, of oil collateralized debt service payments in order to avoid in-kind lifting, thus further increasing transparency of oil revenues and avoiding distortion of oil delivery obligations" (p. 68). This was implemented.
What can Nigeria, Chad, Niger and Ghana learn from Sudan's experience?
First, clearly, securing the refinery with future oil revenues (and, perhaps, having Chinese managers) allowed Sudan to refine its own products rather than exporting crude and importing refined products, which is what Nigeria does today as a result of its failure to keep its refineries working. (We don't know how profitable/cost-effective the Chinese-built Khartoum Refinery, is in comparison with other, similar refineries. This information would be useful for countries contemplating similar arrangements.)
Second, be transparent. If a poorly governed country like Sudan can practice budget transparency for Chinese finance, there's no reason why others can't.
Third, price your domestic petroleum sales at or even above the market, as Sudan has done, in order to keep the petroleum sector above water and repay your creditors. Nigeria has far to go in this regard.
Fourth, you may be able to get away with the preferred creditor arrangement, but it won't be a walk in the park. It's easy to see from this why the IMF and the World Bank dislike the Chinese model of commodity-secured credits. They do effectively enable Chinese creditors to step ahead of the IMF and the World Bank in having Chinese credits repaid. This was one of the issues in the long stand-off over the $9 billion Chinese credit to the DRC.
Finally, keep in mind that by tying up your future revenues, you could at some point find yourself so squeezed that half of your net foreign exchange earnings are tied up in payments for just one project, as in Sudan.
The structure of the Sudan-China deal is not the same as the DRC-China deal. From the way you describe it, it is evident that the Sudan-China deal is a traditional infrastructure contract, though it is not clear from your or the IMF's description whether the deal is a build operate and transfer (BOT) project or a turnkey project.
By contrast, the DRC-China deal is not a traditional infrastructure contract. Unlike the Sudan-China deal, the DRC-China deal does not use natural resources as collateral but as payment (see the DRC-China Framework Agreement). The structure of the DRC-China deal is not one that you will find in any standard foreign direct investment book, even if there are many oversimplifying descriptions of the deal in the China-in-Africa literature
In terms of the DRC-China deal, China directly invests in both mining and infrastructure, which requires the deal to comprise both mining and infrastructure sub-contractual arrangements. Conversely, in the Sudan-China deal, China only invests in infrastructure (i.e. the refinery), which only requires the deal to take on any form of traditional project finance.
The difference of these two types of investment contracts is fundamental as it translates different intentions and interests of the foreign investor(s). In the Sudan-China deal, China is interested in making a monetary profit, failing which it will accept payments in kind. In the DRC-China deal, China is not interested in monetary profit, but in the natural resources (i.e. copper and cobalt), which it needs to fuel its growing economy.
Thanks for your comment, Dunia. You and I may be the only people deeply interested in these details (actually, people at the IMF are also deeply interested, too...) But here's my take on your comment:
The Khartoum Refinery is not a BOT or a typical turnkey project, but a joint venture, run by a company 50% owned by CNPC, and 50% by the government of Sudan (GOS). It refines crude from another joint venture between CNPC and the GOS, which is the same crude that is used to secure the repayment of the infrastructure. The oil investment and the refinery are separate investments but connected through the guarantee/security provided by the natural resource. This appears to be a sovereign guarantee in Sudan (i.e. guaranteed by the government itself).
I think there may be more similarity between this model and the DRC than you do, Dunia, even though the Sudan deal uses the natural resource as collateral, and the DRC deal uses the resource export "directly" to repay several different loans. In both cases there is strong Chinese interest in a natural resource, but there is also strong interest in using that natural resource as a means to finance infrastructure that the host countries consider to be critical for their modernization (and that is profitable for the Chinese companies that build it). The DRC deal was originally structured with a sovereign guarantee.
In both cases, from what I've seen, the deals are structured with profit in mind -- on the infrastructure and on the resource side -- and the Chinese financiers are quite clear that they see these as profitable ventures (as Li Ruogu explained to me, that's why they don't require concessional financing). In both cases the natural resource is used also as collateral (in the DRC case, if there is not enough copper/cobalt in the existing mines to repay the loans, the venture has a guarantee of an additional concession).
As to "China's" interests, it may be helpful to disaggregate "China" into the actual actors involved, e.g. Sinohydro, China Railways, China Eximbank, and to look at their interests, which include securing profitable infrastructure contracts for Chinese companies. This is broader than simply securing natural resources.
Thanks for your reply, Prof. Brautigam.
A rejoinder, if I may:
BOT or turnkey projects and joint ventures wouldn't be mutually exclusive. In fact, is it not usual for BOT or turnkey projects to provide for a joint venture? In any event, I do get your point that the Sudan-China deal isn't a typical infrastructure contract.
The details that you have provided about the Sudan-China deal in your reply are more specific than the ones in your original blog post. Maybe those details were in the attached IMF report, but I couldn't find them when I read it. With the specific details you give in your reply, striking similarities do emerge. I can see them now. (And, by the way, if a copy of the Sudan-China deal is publicly available, I'd be grateful if you could send it to me)
The best way of determining whether a deal creates a security interest in natural resources would be to look at the terms of the deal. If the terms, as in the case of the DRC-China deal (it's available online), don't expressly create a security interest in the natural resources, on what basis can we conclude that the deal uses resources as collateral? In 1989, the UN Conference on Trade and Development (UNCTAD) published a report in which it clearly said that security in the form of collateral is not significant in major infrastructure and industrial works. Perhaps, the Sudan-China deal is an exception.
I know this might sound like some hair-splitting distinctions, but collateral and sovereign guarantees aren't synonyms, although both are guarantees (i.e. they both shift investment risks). The mere fact that Sudan gave a sovereign guarantee to China shouldn't necessarily imply that the oil is collateral for the infrastructure loans.
I agree that "China's interests" must be disaggregated. However, Prof. Brautigam, the deals we are talking about are bilateral, and in modeling and classifying these contractual relationships, I think it's okay to personify each side of the transaction.
Most probably, I could've put it more clearly, but I didn't mean to say that the deals weren't profitable to China. I simply said that in the DRC-China deal China wasn't interested in a MONETARY profit, since the profit that it gets is the natural resources that it will use for its own purposes. But there's no doubt - and I also agree with you on this point - that if the parties are disaggregated the individual actors (e.g. Sinohydro, China Railways, Eximbank, etc.) are interested in making a decent monetary profit.
Finally, I could've explained why I think these "details" (as you call them) of the deals may be central to the issue of debt sustainability, but if I do I'm sure this exchange will go on forever...
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