Powering Africa: The Role of China

The story of China’s involvement in African infrastructural financing is often told through the lens of perceived economic colonization. Where the West is concerned, China, the most significant bilateral creditor to the continent in the last two decades, is involved in unsustainable financing practices contributing to what some analysts have referred to as a ‘debt trap.’ Although China prioritizes infrastructural funding in return for resource access with implications for the continent, the ‘barter’ model ensures that planned projects are executed/reach financial close. This may mean many things, depending on the factors under consideration. However, in a continent where only 10% of infrastructure projects reach financial close (Mckinsey 2020), this also means that most Chinese-backed infrastructural projects; majority of which are in the transportation and power sector, are generally implemented to completion. As Chinese loan commitments to African countries decline (especially in the last 3 years) and as some African countries default on loan repayments and engage in debt restructuring talks, what does this mean for African infrastructure, especially in the power sector?

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Trends in Chinese Financing

2018 was a great year for African infrastructural financing. Financial commitments had just crossed the $100 billion mark for the first time and China significantly contributed to this, having increased commitments by 65% in the previous 3 years (ICA Africa, 2020). For the energy sector, this upward trend amounted to the largest financial commitment for the sector at almost $ 45 billion, compared to previous years. It also meant that progress was being made toward closing the financing gap across the continent. And if China’s sustained interest continued to translate to higher financial commitments, it meant that China’s contribution would boost infrastructural access for large swathes of the African population, given the project implementation style favored by China. In terms of infrastructure financing options for African countries with rising populations and attendant infrastructural gaps, Chinese funding in 2018 presented some apparent guarantees. Firstly, the trajectory of China’s commitments showed that if the next three years mimicked the last three, African governments could access more from China’s large lending portfolio. Secondly, it was a critical year for African politics. According to the Electoral Institute for Sustainable Democracy in Africa (EISA, 2018), over 20 African countries held elections in 2018. Considering that perceived access to collective and developmental goods could have an effect on voter decisions (Weghorst & Lindberg, 2013), increased infrastructural financing commitments with a possibility for more (based on earlier trends) provided an opportunity for some of the governments vying for reelection to position as business-friendly, and open to infrastructural investments. For example, in 2018, China committed to a $153 million loan facility for infrastructural development under its Belt and Road Initiative in Zimbabwe, which formed part of President Emmerson Mnangagwa’s campaign positioning.?

Fast forward to 2023, and a lot has changed since 2018. China remains an important bilateral lender to African governments, eclipsing OECD countries like France, US, UK and Germany when it comes to development commitments to African countries (Carnegie, 2021).

Distribution of Bilateral Official Development Assistance and Loan Commitments by OECD-Development Assistance Committee Countries (2005-2019)

Source: What Do We Know About Chinese Lending in Africa? Carnegie Endowment for International Peace (2021)

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However, recently released data from the Chinese Loans to Africa (CLA) Database which tracked Chinese loan commitments to ‘’African governments and state-owned enterprises’’ over a 20-year period (2000-2020) shows that Chinese lending is declining. According to CLA data, Chinese financiers made commitments amounting to $153 billion dollars between 2000 and 2019. These commitments peaked in 2013 when China launched the Belt and Road Initiative to support extensive infrastructure projects with the aim of connecting Africa, Asia and Europe via roads, maritime and rail networks. Now, while China continues to prioritize lending to infrastructure sectors like energy, financing seems to be taking on a different shape. Before 2019, Chinese financiers, popular of which is the Export-Import Bank of China (China Eximbank) provided non-concessional loans at low-interest rates with extended payment periods which were favorable to African governments (Carnegie, 2021). But this approach is increasingly being abandoned for a more commercial-focused approach, as more Chinese creditors come on board. One key trend may be responsible for this.

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Amidst a range of macroeconomic imbalances, an increasing number of African countries have defaulted on Chinese loans, necessitating restructuring talks. In the past, when Chinese lenders were fewer, debt restructuring arrangements were much easier to reach. However, as Chinese lenders increase, there is a rising need to ensure debt sustainability, necessitating a more commercial-based lending approach. This may have also influenced China’s approach to providing financing to ‘high-risk’ borrowers, accounting for the apparent decline. However, researchers of the China Africa Research Initiative note that what appears to be a decline may really be a lending restructuring.

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Chinese Resource-Backed Lending: Who Benefits?

Analysts opine that lending restructuring may be based on an apparent need to favor more predictable jurisdictions over ‘high-risk’ borrowers, to serve investment sustainability purposes. On the other hand, the persistence of the Resource Financed Infrastructure (RFI) arrangement which China is known for, indicates that China will prioritize an arrangement that serves its interest, irrespective of the borrower category. And this can be seen in the case of Angola. CLA data shows that at almost 30%, Angola is the highest beneficiary of Chinese lending commitments in Africa, making Angola the largest African debtor to China. In spite of this, China has sustained resource-backed financing to the country.?Similar arrangements have been brokered at different times between China and countries like Guinea, the Democratic Republic of Congo and Ghana.?

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This model could provide an opportunity for African countries to secure much-needed financing using available resources, while guaranteeing development of essential infrastructure. However, considering that the lending party will always prioritize its interests, the onus is on African decision-makers to read the fine print and ensure that such agreements work in their best interest.

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Tidiani Jeff Tall is CEO of Lidera Green Power, a renewable energy independent power producer (IPP) based in Madagascar. He previously held transformational leadership roles at KONE (elevators & escalators), and Lafarge (building materials), after starting his career in debt capital markets at Morgan Stanley, and strategy consulting at Roland Berger. Jeff is a graduate of Ecole Polytechnique Paris and Institut Fran?ais du Pétrole (IFP School), as well as a participant in the first session of the Emerging Leaders Program at Harvard Kennedy School.