China's Foreign Aid: The Economist still doesn't get it



credit: Derek Bacon for The Economist

The Economist still doesn't get it on China's foreign aid. They merrily mix apples and lychees in a new special report on state capitalism, writing:

"And government bodies such as Eximbank, China’s foreign-aid bank, have made no bones about their enthusiasm for tying foreign aid to commercial advantage. One of China’s favourite tools is oil for infrastructure. China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material. Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola."

What's wrong with this? Nearly all of it.

(1) "...Eximbank, China's foreign-aid bank..."

Eximbank is China's export credit agency, i.e. it finances trade deals like the 2009 deal where my old friend Mort Arntzen's American shipping company OSG bought a handful of Chinese tankers. Yes, China Eximbank also manages China's foreign aid concessional loan program, but this is a small part of Eximbank's total portfolio. Standard & Poor's credit rating review of China Eximbank in 2005 found that the concessional loan portfolio made up only 3% (three percent) of Eximbank's assets. 

(2) "...their enthusiasm for tying foreign aid to commercial advantage..."

Yes, China does tie its official foreign aid, while other countries have moved away from this (the UK led this move, but the US is a laggard here). However, tying export credits to your own country's exports is still the norm. Why else would countries have a government instrument to intervene in trade?

(3) "One of China's favorite tools is oil for infrastructure".

Not really. This kind of tool is relatively rare. If you consider all the transactions financed by Chinese banks in Africa, for example, oil-secured infrastructure loans that are unrelated to developing an oil asset (including refinery/pipeline) seem to be limited to Angola, the Congo-Brazzaville, and (in the works) Ghana.* Latin America has seen more deals like this: at very high interest rates. And coming right after a sentence about foreign aid implies that China's oil-secured infrastructure loans are "foreign aid" -- when they're not, by anyone's official definition.

(4) "China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material." 

This isn't quite how it works. This makes it sound as though the Chinese dangle a few hospitals in front of an African president and then say: you can have this if you guarantee us a supply of your oil!

Here's how it really works. The Chinese bank will offer to provide export-secured finance (these exports can be anything -- as I wrote recently in The Guardian, in Ethiopia, all of the country's exports to China were used to secure a loan). I'm not sure what a "soft loan" is technically, but all of these loans have been at market rates. The "guaranteed supply" of whatever export is already going to China is simply the mechanism for ensuring repayment of the loan (the proceeds are deposited into an escrow account). China doesn't dangle promises of schools, hospitals, etc. -- the proposals about what infrastructure to finance with the loan are made by the borrower. They might include schools, but they usually focus on productive infrastructure: roads, rail, electricity production.

(5) "Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola." 

No.  First, China's oil companies were not building infrastructure in Angola. The Chinese have world-class construction companies, and that's who got the business. Second, the loan was not "low-interest" but was made at LIBOR (London Interbank Offered Rate) plus a margin of 1.5% (this changed in later tranches). LIBOR is a market rate, and LIBOR plus 1.5% is actually a higher rate than some western commercial bank oil-secured loans given to Angola, as an excellent study by Global Witness makes clear.

For more detail than you probably want on how China's foreign aid really works, see some of my published papers here.
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* Nigerians proposed using this model, but it apparently never happened. Although there is some evidenced that an early suppliers credit to finance two power plants was secured by oil exports, the loans were never repaid. If this system was used, it broke down. In Sudan, this model was apparently used very early on in the mid-1990s, but I believe it was limited to the construction of a joint-venture oil refinery. In Niger and Chad oil-related construction (refinery /pipeline) is also being financed this way.

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.