Friday, February 8, 2013

Should we view the mega Chinese-DRC project as "aid"?

A reader asked this excellent question:

Thanks for all your excellent articles and The Dragon's Gift - my understanding of Chinese involvement in Africa has been significantly improved. However, regarding this article (n.b. my article on The Economist) I wanted to question one comment on the Sicomines deal in DRC. You say "the Congo Sicomines project, which is financed by non-concessional loans from China Eximbank."
 
However, SAIIA Johanna Jansson's detailed paper on the Sicomines deal (http://www.saiia.org.za/occasional-papers/the-sicomines-agreement-change-and-continuity-in-the-democratic-republic-of-congo-s-international-relations.html) implies that the final version of the deal does comply with OECD-DAC ODA definitions:

pg. 12 The OECD–DAC classifies a loan to a developing country as official development assistance (ODA) if it is: provided by official agencies, including state and local governments, or by their executive agencies; ... is administered with the promotion of the economic development and welfare of developing countries as its main objective; and ... is concessional in character and conveys a grant element of at least 25 per cent. The loans extended by means of the Sicomines agreement are provided by China Exim Bank, which is owned by the Chinese government and thus to be seen as an official agency. The credit line’s main objective is to finance post-conflict reconstruction in the form of infrastructure construction and refurbishment, which is to be considered promotion of economic development. The third and last element of OECD–DAC’s ODA definition is the grant element. This is a way to calculate that the cost for the loan is low enough – that it is concessional.38 The loan conditions provided in the original 2008 agreement did not meet the requirements for concessionality. However, in the revised 2009 version, the interest rate for the infrastructure loans was reduced from 6.6% to 4.4%.39 Currently, the grant element is estimated by the IMF and the World Bank to be at least 42%, which far exceeds the 25% minimum level required by OECD–DAC.40 This means that in its revised form, the loans extended under the Sicomines framework comply with the OECD–DAC’s definition of ODA.
Could you comment further on this difference? I would be very interested to hear your thoughts. 

Here are my thoughts. The finance does not qualify as ODA. The main reason is that although the finance was (supposed to be) extended by an official executive agency of the Chinese government, China Eximbank, it is not China Eximbank that agreed to change the interest rate. Rather, the implementing consortium of companies agreed that if the (variable) interest rate from China Exim Bank, which was set at LIBOR plus 100 basis points, rose above the rate of 4.4% where it was when the agreement was signed, they would pay the difference. This was a business risk they undertook, not a foreign aid transfer.

I wrote about this case in a paper published in 2011; the link is on this blog under the research tab:
The Chinese consortium agreed that if the bank interest rate on the loan (LIBOR plus 100 basis points) rose higher than the rate of 22 April 2008 (about 4.4 per cent), the Chinese consortium would be responsible for the difference.
My source for this was this document: "Avenant No. 3 à la Convention de Collaboration Relative au Developpement d’un Projet Minier et d’un Projet d’Infrastructures en République Démocratique du Congo du 22 Avril 2008 – 2009, October." See Article 7. Note that this agreement is not signed by China Eximbank, but by the Chinese investing consortium members.

Interestingly, the financing that we thought had been lined up for this project appears to be less firm than we all thought. According to Johanna's latest research, as of December 2012, China Exim Bank has still not released any money, and it is increasingly looking as though they may not finance this project. The project sponsors have been shopping the project around to other banks. 

3 comments:

  1. excellent, Deborah. Another great example of rigor in dealing with evidence and fine-print.

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  2. I just stumbled across this entry, but have to ask whether I got that last paragraph right: the China Exim Bank may not provide the funds at all? If no other bank takes it up, does this mean the much talked-about "mega deal" might never happen?

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  3. Thanks for this, Deborah - I only saw this post now! Indeed, after having read your most useful chapter from 2011 I realised that I had accepted the IMF's and the World Bank's concessionality figures at face value. I revisited the avenant and I agree with your analysis, today I do not refer to Sicomines as ODA anymore.

    As regards my 2011 analysis as quoted above, I would just like to comment that had the IMF's and the World Bank's concessionality calculation been reasonable, my claim that Sicomines counts as ODA would have been correct. But as you have shown, the concessionality figures are overly generous. In my forthcoming PhD thesis I delve into more depth with this concessionality calculation.

    Many thanks!

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