Africa needs infrastructure, China wants to build it. So what's the problem?

Africa faces a severe infrastructure crisis. Roads, ports, airports, hospitals and telecommunications are all needed to generate the economic growth necessary to support a population that is expected to double by 2050. But that kind of investment doesn't come cheap. It's estimated that over the next ten years Africa will need to spend around $100 billion a year -- an unattainably high figure for Africa's already financially strained governments.

Unlike economies in other regions, particularly Asia and Latin America, African governments are largely cut off from global capital markets to raise money for infrastructure development due to perception that the continent is just too risky for most international investors. Similarly, after half a century of pumping vast amounts of money into Africa, legacy donors in the U.S. and Europe are curtailing their engagement in Africa amid populist upheavals at home.

Africa Looks East

With few other options available, African leaders are increasingly turning to China for the loans and investments to build out the continent's infrastructure. And China is more than happy to oblige. Chinese banks, both private and state-owned, have loaned tens of billions of dollars to African governments to build thousands of kilometers of roads and railways, new hospitals, new airports, new internet communications hubs and so on. The scale of China's infrastructure building boom in Africa is truly breathtaking as the continent is undergoing a dramatic transformation powered by Chinese money, technology and labor.

But... it ain't free.

Unlike decades past when Africa soaked up billions of dollars in aid and financial assistance from the West that was often written off due to corruption and mismanagement, the Chinese are playing by a very different set of rules. Although the majority of the Chinese money comes in the form of what are known as concessional loans with below market interest rates. Nonetheless, there is still interest accruing on that debt that needs to be repaid. The Chinese are also securing their loans in Africa with natural resource commitments. So rather than pay back their debts with cash, countries like Angola, Sudan and the DR Congo are using oil and minerals as either collateral or a direct form of payment.

While at first glance it would make sense that cash poor economies would use natural resources to pay for infrastructure, after all, central bankers in these countries often don't have many other options. However, this structure is creating a whole new set of problems. In Angola, for example, so much of the country's oil is committed to paying back Chinese loans that they can't generate enough money to sustain the economy, prompting a severe capital crisis which is fueling destructive levels of inflation.

Difficult Choices Ahead

Every week seemingly brings a new announcement of Chinese-financed mega project somewhere in Africa. This week's announcement of a $5.8 billion power station in Nigeria that will be financed and built by Chinese state-owned companies is typical of the scope and scale of Chinese lending activity in Africa. And with the Chinese money spigot opening even wider as Beijing ramps up spending on its hugely ambitiously One Belt, One Road (OBOR) global trading initiative, the Chinese are seemingly more eager than ever to loan money.

Although there are no precise figures, it's believed that Beijing has already spent $250 billion around the world building OBOR-related infrastructure, including a new military base in Djibouti, the new Standard Gauge Railway in Kenya and an upgrade to the Suez Canal in Egypt. No one knows for sure how much the Chinese plan to spend on OBOR but some estimates run as high as five TRILLION dollars. Yeah, that's a trillion with a "t".

All this Chinese money must be so tempting for Africa's cash-starved, infrastructure-challenged states but they should proceed cautiously warn a growing number of analysts. "Over-investing in physical infrastructure without establishing corresponding governmental institutions and legal structures can lead to economic and financial fragility," said Ricardo Reboredo, a researcher who studies Chinese development in Africa. Additionally, he adds, all those new ports and roads can also be used to make it even easier for low-cost Chinese imports to flood local markets in Africa, adding yet more pressure to the economy.

Ricardo joins Eric & Cobus this week to discuss the infrastructure financing dilemma in Africa and whether it's wise for African leaders to borrow so much money from China.

Join the discussion. Do you think it's wise for African governments to borrow so much money from China to build infrastructure? If not, how do you suggest these countries find the necessary financing to develop? Let us know what you think.

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