Monday, May 31, 2010

The Rise of ICBC: New Environmental Challenges

Industrial and Commercial Bank of China, the world's largest bank, is increasing its African exposure. Much of this has been done in collaboration with Standard Bank of South Africa, which serves as a partner and, perhaps, tutor. In Ethiopia, however, ICBC seemed to be going solo when it apparently agreed to finance the export of turbines for a controversial dam. Read more about it in Peter Bosshard's May 27, 2010 article in Pambazuka.
This new development has several important implications. China's main financier in Africa, China Eximbank, has over the years formulated and then revised its environmental policy. After a long learning process, China Eximbank now uses international consultants to do its environmental and social appraisals. Will ICBC have to repeat this same lengthy learning process? And perhaps more to the point, will we witness a "race to the bottom' --- or pressure to conform to global standards --- among China's banks as they go global in Africa?

Wednesday, May 19, 2010

Interview with Paul Fortin on the Chinese Agreement in the Congo

An interesting, if a bit dated, (thanks, Dan) interview in the Belgian newspaper Le Soir. Journalist Collette Braeckman interviews Paul Fortin, the Canadian lawyer and former head of Gecamines, and the man who negotiated the DRC's China deal. Although the interview is in French, and happened in 2008, here are the main points:
  • Fortin stoutly defends the agreement, explaining that it was not negotiated in secret with high level leaders, but in Beijing over two months, with a team of 15 experts from the Congo.
  • He explains that the infrastructure agreement came first, in September, negotiated with Pierre Lumbi, the Minister of Infrastructure. But the infrastructure loan needed to be secured, as in Angola. Unlike Angola, Congo didn't have readily available resources to secure the loan. It was necessary to develop new resources. As Fortin says, "To finance this, I needed to find 10 million tons of copper as security. Its a form of barter." [DB: at $3000 per ton, 10 million tons comes to $30 billion. That's quite a security. Of course there are costs involved in producing that copper.] 
  • "Congo was inspired by the Angola example, except that in Angola, the oil was available immediately, whereas in the Congo, the copper will only be available after three years."
  • Calling it "the contract of the century", Fortin said: "it's a new idea. To have thought  it up, and then worked it out over four months, this is an incredible coup."
  • "Everything is happening very quickly, and the Congolese are going to be able to see the results of these agreements very soon. With others, it's slow, there are conditionalities, they give you something, they take it back, they hesitate. The Chinese asked no questions, it was a business deal, and that's all. The team that discussed all this with us was not condescending. Their negotiators were very simple, and very direct."
As we've seen in video clips on this blog, the work did begin soon after the agreement was signed, despite the reservations of the international community. In The Dragon's Gift, I point out how important the construction business is for Chinese companies in Africa. It seems that this deal was indeed negotiated with Chinese construction companies, no mining company was involved. (A mining company was recruited to join later, but I'm not sure it remained a partner to the deal. Does anyone know?). This reinforces an important point. In seeing China's activity in Africa as all about a desperate search for resources, we are missing the complexity of the business engagement. In 2008 alone, after all, official statistics from MOFCOM tell us that Chinese companies signed infrastructure contracts worth $40 billion in Africa.

Tuesday, May 18, 2010

China's $23 Billion Deal in Nigeria: How Real Is It?

The Nigerian National Petroleum Corporation (NNPC) announced on Thursday last week that it had signed an MOU with China State Construction Engineering Corporation Ltd. to construct three oil refineries (about 250,000 bbl/day capacity each) and a petrochemical plant. The total cost would reportedly be $23 billion (or $23.8 billion, according to Beijing's official mouthpiece People's Daily, which also announced the MOU). If we disregard the petrochemical plant, the projected cost would be about $30,666 per capacity-barrel (a measure I think I just invented).

The endeavor still needs to secure loan financing: a combination of supplier's credits guaranteed by SINOSURE, and loans from a consortium of Chinese banks (as far as I know, SINOSURE is simply an export insurance/guarantee agency; it doesn't supply finance itself). This is clearly not a Chinese, but a Nigerian investment. As the People's Daily noted: "Nigeria State Petroleum Corp is responsible for the construction funds."

According to All Africa, 80% of the funding would be supplied by CSCEC, and 20% by NNPC.  If CSCEC merely supplies loans, this doesn't imply any equity shares in the refinery.

How solid is this news? CSCEC is a Beijing firm, a Shanghai stock exchange-listed company, and a subsidiary of China's largest state-owned construction company. It's a very respectable company, unlike the mysterious Hong Kong-based China International Fund we've seen a lot of lately.

But it's still early. An MOU is a sign of intention:  more than a first date, but much less than a wedding ceremony. The chances of this being derailed, like other large Chinese projects in Nigeria, are high. Yet it also has all the hallmarks of China's more successful deals in Africa. No bids. Creative loan financing. Chinese concern about loan repayment. "Agency of restraint" that locks some of a county's natural resources into directly useful infrastructure. Note these provisions, in particular:
...the operational mode of the new refineries will be different from that of the existing ones, ... government will have no shares or financial contribution to make in the construction and management of the plants as the entire project will be executed with loans sourced by NNPC and the Chinese firm. The refineries are to be managed by CSCEC consortium upon completion until the full recovery of their loan used on the project.
With this much detail, it sounds like the project(s) are indeed fairly advanced. They also sound like BOT (Build, Operate, Transfer), projects, rather than BOOT (Build, Own, Operate, Transfer). This would differ from the model set up with Sicomines in the DRC. Chinese lenders will expect the loans to be secured, probably with oil export proceeds sent to a Chinese escrow account. Also in contrast to the DRC, there is no talk of a resource concession linked directly to the deal.

SINOSURE is very conservative. If they do get involved in guaranteeing the loans, they will want to make very sure they don't lose their shirt.  But will the Nigerian government provide a sovereign guarantee? There could be more wrangling around sovereign guarantees such as we saw in the DRC with the $9 billion (now $6 billion) copper project.

Could this still be win-win for Nigeria? It would be terrific if Nigerians could finally refine their own oil. They presently import about 85% of their fuel needs, despite being a major oil producer. Some 20,000 Nigerians are expected to find direct and indirect employment through the construction and operation of the plants. But ultimately the benefit for Nigerians rests not just in employment and in the national pride of refining their oil, but in the cost of refining versus importing it. International tenders and competitive bidding are supposed to ensure that countries get value for their money. Not that this always works.

A quick search of refinery construction costs yielded one recent report of a refinery planned for Kuwait of 615,000 bbl/day capacity, for $19 billion ($30,894 per barrel of capacity). But that contract was canceled after opposition members objected that even though it was an international tender, it had not been done properly. (The companies were South Korean, Japanese, and American). The projected costs of the Nigerian project seem to be in line with the estimates for the proposed Kuwait construction. Another project proposed in South Africa was estimated to cost $10 bn for a 400,000 bbl/day capacity refinery, or $25,000 per barrel of capacity.

I remember analyzing the cost of producing irrigated wheat in Nigeria while on a World Bank mission there in 1987. We found that it cost 10 times as much in foreign exchange to produce irrigated wheat in Nigeria as was saved by not importing the wheat. If they do come to pass, let's hope these oil refineries are a more efficient venture. But if they don't come to pass, this will reinforce what Peter Bosshard said in response to my post on Nigerian power plants: 
Because of financial and political spoils, signing a contract for a big infrastructure project is more attractive than actually building and operating it. This is one reason why so many deals are announced but then never materialize. (See more on this in his blog post: Money for Nothing (Or How Corruption Fuels Dam Building in Nigeria).
So ... who wants to take bets on these projects going forward? A hat tip to Peter Lewis for this story.

Monday, May 17, 2010

Chinese Aid in Cambodia: How Much?


China is not very transparent about its aid on a country or regional basis. There is no place on the internet where you can download Chinese aid statistics, in contrast to Western donors who report their aid to the OECD's Development Assistance Committee (DAC). This is why in recent testimony to the U.S. Congress, an expert on Southeast Asia, Ernest Bower, could say:
The best estimates to quantify Chinese aid in Southeast Asia have come from a Congressional Research Service Report which estimates that aid increased from $36 million in 2002 to over $6.7 billion in 2007. By comparison, the same source recorded US aid to Southeast Asian countries to be $452 million in 2007.
Bower presumably said this with a straight face. I've written skeptically about that very questionable Congressional Research Service (CRS) report in an earlier post, "Billions in Aid". The report uses a very peculiar definition of Chinese "aid":  all capital flows with links to the Chinese government, its state-owned companies, or its banks. Commercial bank loans, investment, export credits: they're all called "aid". The report explains this definition, but then it compares its Chinese "data" (all gleaned from the internet by a group of students, itself problematic) to official development assistance (ODA) from the West, which explicitly does not include commercial bank loans, investment, or export credits.

But it's the Congressional Research Service! Can we blame Bower for not second-guessing this report?

Maybe.

With just a little searching, he could at least have found some real data on Chinese ODA in Cambodia. Several years ago, the Chinese embassy in Phnom Penh began to report its official development aid disbursements for Cambodia. These are collected in the annual Cambodia Aid Effectiveness Report (the most recent one I could find was November 2008 which lists all the years from 1992 to 2008, with estimates for 2009 and 2010). This fits with statements in a Brookings report, among others, that the Chinese participated in the Cambodia Development Cooperation Forum in 2007, and contributed data on their aid disbursements. This is something that donors across Africa would love to see happen there (and I would love to know more about how/why this happened!).

So how much official aid is China giving to Cambodia? And how does this compare with "the West"?

China's aid to Cambodia has been in the media several times, with very large sums mentioned. In 2006, the BBC wrote that China's "aid" commitments were $600 million, the same as the total commitments from all the other donors combined. This has been very widely circulated as an alarming "fact".  Similarly, in December 2009, when a visiting Chinese leader signed off on 14 separate agreements, it was widely reported that China was providing $1.2 billion in "aid" to Cambodia. (In fact this news about Chinese commitments came from the Cambodians, not the Chinese, who rarely have press releases containing aid or loan figures.)

But let's look at apples and apples.  According to the official data, Beijing disbursed $53.2 million in official aid in 2006, $92.5 mil in 2007, and was expected to disburse $127.9 mil in 2008, $67.1 mil in 2009, and $47.5 mil in 2010.

China surpassed the US as a donor to Cambodia in 2006, when the US disbursed $51 million, an annual figure that has remained fairly consistent in recent years. But Japan's aid was higher than China's for every year until 2009 when China was expected to overtake Japan. Aid from the UN agencies was far, far higher than aid from China, every year, as was aid from Europe. In fact, from all non-Chinese donors, Cambodia received official development assistance disbursements of $660 million in 2006 and $698 in 2007 (for more recent years, the data on some donors was incomplete).

How should we interpret the large figures mentioned in the press? For one thing, the Chinese practice is to sign a number of different official agreements concerning aid, export credits, and even investment together. Agreements are usually negotiated separately, and well beforehand, but then held off until a high-level Chinese official is visiting, so that they can be signed together in a big ceremony. This also means that these agreements refer to commitments that will take place (or be disbursed) over a number of future years. Unlike other donors, the Chinese do not make new commitments annually, even though, of course, they have their own annual budget for aid expenditures. So these multi-year figures should not be compared with annual commitments or disbursements from other donors.

Further, some of the commitments signed in 2009 are clearly export credits, not aid. We have a Cambodian report on the 14 agreements signed at the time the figure of $1.2 billion was mentioned:
  1. Exchange of notes on the construction of a new office building for the Senate
  2. Exchange of notes on the restoration and conservation of a temple in Takeo
  3. Agreement about economic and technical cooperation with a grant of Yuan 50 Million [approx. US$7.3 million]
  4. Agreement about economic and technical cooperation with a loan of Yuan 50 Million [approx. US$7.3 million] [this will almost certainly be the typical 'interest-free loan' -- DB]
  5. Framework agreement about a concessional loan for the construction of National Road 57B
  6. Framework agreement about a concessional loan for the construction of National Road 59
  7. Agreement about a concessional loan for the construction of National Road 57B
  8. Agreement about a concessional loan for the construction of National Road 59
  9. Agreement about a general loan for the use of preferential buyers credits
  10. Framework agreement on the provision of communication equipment to the Ministry of Economy and Finance
  11. Agreement about favorable export buyers credit for infrastructure at the Kompong Trabaek River in Prey Veng
  12. Agreement about favorable export buyers credit for the project to construct the National Road from Sen Monorum to Dac Dam in Mondolkiri
  13. Agreement about favorable export buyers credit for the project to construct power lines to distribute electricity to areas around Phnom Penh
  14. Agreement on transport and infrastructure cooperation
These agreements are very vague. The concessional loans would qualify as official development assistance or ODA, but according to DAC rules, the favorable ("preferential") export buyers credits would not qualify as ODA. Even if they were concessional, they would not be reported as ODA by the Chinese if they were following DAC rules. (For me, this list raises even more mysteries. Why are some roads financed by concessional loans and some by preferential export buyers credits?)

Could the list above add up to $1.2 billion? Perhaps, although it seems unlikely to me. But even if the figure of $1.2 billion is realistic, remember that these are agreements for projects that will take place over some years to come. Chinese aid is rising sharply, but it would be an error to view "aid" as rising from "$600 million" to "$1.2 billion" and then compare this with annual ODA commitments from wealthier donors. On an annual basis, ODA from China to Cambodia is likely to follow the trend set by Japan, which has also been concentrated in transportation, and which has averaged around $100 million per year.

One last point: Brendan Brady, a journalist based in Cambodia, wrote in a story on CBC.com that the $1.2 billion referred to Chinese investment. In fact, Chinese companies want to invest in at least two new, large BOT hydropower projects that will, together, cost around $1.1 billion. At least one of these has secured finance from China Eximbank. This could have been part of the discussion in December and the $1.2 billion. But more on that in a subsequent post.

Friday, May 14, 2010

China in Nigeria: Power Myths & Realities

How many times have you read that "China" is building the Mambila Hydropower Project in Nigeria? Folks, as of right now, this project is moribund.

Yes, two Chinese companies, China Gezhouba Group Corporation (CGGC) and China Geo-Engineering Corporation (CGC), signed a contract to construct the dam. But the expected China Eximbank financing was never finalized. The Mambila dam fell victim to the review of President Obasanjo's murky "oil-for-infrastructure" deals ordered by his successor, the late President Yar'Adua, in October 2007. This was nicely detailed in an August 2009 Chatham House report, Thirst for Oil. The Chinese companies have a contract, but without secure financing, the project will not go forward.

Nigeria does have two real cases of Chinese power plant construction, however. Two sites (Papalanto and Omotosho) were chosen for multi-phase gas-fired power plants, and both contracts were signed in 2002. Both had Chinese financing, almost certainly export buyer's credits from China's Eximbank.  (I was given a copy of the terms of these Chinese loans:  $114.9 million each, for two 335MW power plants, signed in 2002, at 6% interest, a grace period of 6 years, maturity in 12 years.)

As opposed to hydropower dams, which use a renewable resource, but are controversial for their environmental and social disruption, gas power plants use a natural resource that Nigeria has in abundance, yet is currently wasting in useless flares (see photos above and below, courtesy of BBC). Each site was projected to reach 1000+MW over time. For the first phase of 335MW, as former president Obasanjo recounted in "My Power Plant Story" (May 12, 2008):
We had to seek loan from China at concessionary rate to support two of the sites ... Omotosho and Papalanto were built to the point of commission before I left government in May 2007. As at today, Papalanto, Omotosho ... are generating power for the grid. 
Obasanjo also pointed out that Omotosho and Papalanto were slated for expansion, and Nigeria did launch second phases at both sites. According to a January 30, 2010 investigative report in the Nigeria Compass by lead reporter Charles Okonji:
  • China National Machinery and Equipment Company (CMEC), the major state-owned firm which had completed the first phase, was awarded the EPC (Engineering, Procurement, and Construction) contract for Phase II of the Omotosho plant, for 750MW of additional thermal power.
  • Shandong No. 3 Electric Power Construction Corporation (SEPCO III), the smaller Chinese firm that built the first phase of Papalanto, was also awarded the contract for the second phase of 750MW at Papalanto.
However, China Eximbank did not finance the second phase of Omotosho, where the Nigerian government defaulted on the financing after providing a down payment. The work stalled. Omotosho is reportedly being pruned down to 500MW. At Papalanto, apparently financing was secured and the work on the 750MW expansion was said to be close to completion with a projected June 2010 commissioning date.

The financing for the second stage of Papalanto could also have been from China Eximbank. Building Bridges, a 2009 report* on Chinese infrastructure projects in Africa done by researchers at the World Bank, states (p. 26) that $300 million (or, on p. 57, $298 million) of the financing for Papalanto was secured from China Eximbank with a deal for China National Petroleum Company (CNPC) to purchase 30,000 barrels of oil per day from Nigeria's national oil company. Given that the first phase of Papalanto was financed in 2002 at $114 mil and that the first phase, at 335MW was less than half the size of the second phase, at 750MW, this financing of $298 or $300 million seems certain to be for Phase II. Would be interesting to know more about this oil-backed infrastructure deal. I haven't seen another hint of it anywhere. Has anyone else?

Ironically, despite their ongoing expansion, the Omotosho and Papalanto plants (first phase) were both operating well below capacity in 2009 ... due to inadequate gas supplies. A resource Nigeria has in abundance continues to burn across the Niger Delta, and Nigerians continue to experience famously "epileptic" power supplies. Perhaps it's time to reconsider the finance for Mambila?

*The 2009 report is confusing because it does not mention that the two power plants were constructed in two stages, with the first phase (2002-2007) financed by China. Yet it states that the size of the two stations will be 335MW, (actually the size for the first stage only). The second stage was for an additional 750 MW, although this was apparently scaled back to 500MW at Omotosho. The report also said that China Eximbank was financing the construction of the power plant at Geregu (built by the German company Siemens). This is highly unlikely, given that the purpose of China Eximbank is to finance exports from China, not Germany. Since the Building Bridges study provides no documentation for their information, it is hard to double check their sources. 

Saturday, May 8, 2010

The Dragon's Gift: Advising Britain's New Government?

As Britain tries to figure out how to form a government, I am pleased that someone put The Dragon's Gift into a list of recommended reading for that new government. Today's Guardian newspaper features experts who give their advice and offer "essential reading" for the new power holders (whomever they turn out to be). Pankaj Mishra, the award-winning novelist and essayist, picks up the theme of China's rise and recommends "With regard to Africa, where Britain has a substantial aid commitment, Deborah Brautigam's The Dragon's Gift offers a more thoughtful assessment of China's intentions and motives in the continent ..." 

Now if only I could get someone to recommend The Dragon's Gift to my own government ...

Also this weekend, a nice review of The Dragon's Gift by Helmut Reisen, "Pourquoi La Chine Investit L'Afrique," appears in Les Enjeux, the magazine of French newspaper Les Echos.   

 

Monday, May 3, 2010

List of Tariff-Free Entry Products for African LDCs: Update

In an earlier post I celebrated the "release" of the list of products given tariff-free entry into China from Africa's least developed countries. I said that this list had been very hard to find. In fact, I had asked Chinese officials several times for the list without success. Now, thanks to Liu Rongkun, an astute M.A. candidate at American University's School of International Service, we see that China's Ministry of Commerce (MOFCOM) actually published the entire list in July 2007. (In Chinese, naturally.) Liu Rongkun points out that the latest round of tariff-free entries announced in November 2006 took effect July 1, 2007. MOFCOM published the list four days later, on July 5th, 2007 along with the list of countries included under "least developed." According to Liu Rongkun's research, this initial list of 27 countries has been expanded several times as new African LDCs have "exchanged notes" with Beijing to formalize this benefit. As of late 2009, it probably now includes 31 countries -- only those who follow the "one-China" policy, naturally.

Liu Rongkun also reminds us that at the November 2009 FOCAC ministerial meeting in Egypt, China's Prime Minister Wen Jiabao announced that by 2012, 95% of products produced in Africa will be tariff-free if exported to China. This probably still applies only to LDCs. But stay tuned for changes in the tariff list.

Finally, keep in mind, as China's ambassador to Malawi commented: "This policy does not only encourage Chinese enterprises to invest in Africa ... people all over the world who invest in Africa can enjoy this treatment." This is of course good to hear. But this makes it all the more curious as to why versions of this list have not been translated into languages in use in Africa and circulated widely by MOFCOM. It also makes it all the more useful to have the list in English (and thanks again to Standard Bank researchers who did that hard work). Now, who will do the translations into French, Portuguese, Swahili ... ?!