Are AidData findings influenced by global politics?

by Admin (Posted on March 12, 2022March 12, 2022)

By Allawi Ssemanda

Last week a USA based research lab AidData published a Policy Brief entitled “Is Beijing a predatory lender? New evidence from a previously undisclosed loan contract for the Entebbe International Airport Upgrading and Expansion Project.” The brief analysed concessional loan agreement the government of Uganda signed with Exim Bank of China for a $200M loan to upgrade and expand Entebbe International Airport.

Media later used this brief to frame Sino-Africa development cooperation with Financial Times headlining it as; “China Lenders squeeze African borrowers even harder” while others described the terms of loan as aggressive.

The report criticised Exim bank describing its lending terms as predatory and aggressive. Some of reasons advanced for this is that the terms require Uganda government to set up a jointly owned account (Escrow) where all revenues generated from the airport will be saved and later use part of it for loan repayment once annually. The report claims this limits government’s fiscal autonomy since collected revenue from the airport cannot be used to support public services and confidentiality clauses in the agreement.

 

However, if critically analysed, AidData’s report cherry picked facts and one can argue that it is meant to strengthen Sino-Africa skepticism narrative and claims of China’s debt diplomacy often advanced by some western capitals who are arguably worried of growing China-Africa relations.

 

At face value, one can argue that Entebbe Airport loan terms are unfavourable for dictating all revenue from the airport be saved to an escrow account till completion of debt repayment. But if critically analysed, these terms are a common practice by lenders especially when it comes to infrastructure projects funding but AidData singled out China which one can argue is due to lack of understanding of common commercial practice in lending or should make their findings questionable.

In March 2021, AidData, Center for Global Development, Georgetown Law, Kiel Institute for the World Economy and Peterson Institute for International Economics jointly published a report entitled “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments,” and observed that 17% of sampled OECD official creditors use security clauses to ensure safety of their loans.

AidData claims that terms  Exim Bank gave Uganda for Entebbe Airport loan “limits the fiscal autonomy of the government”, if compared with US’ Agency for International Development terms to Liberia’s GEMAP Activities (The Governance and Economic Management Assistance Program) which compelled Liberian government to hire is international financial controllers and granting them cosignatory authority on opened Escrow account, Entebbe Airport-Exim bank loan terms are much friendly considering the fact that it is Ugandan side that has full control of escrow account.

It should also be note that, with in international infrastructure development financing market, multinational development banks, bilateral government aid agencies, commercial banks and other development financial institutions are fundamentally different in how they operate. They have different means of risk management and control and this has been so for long. What we may point at as the difference today is that these lending institutions reducing and few are ready and willing to offer infrastructure loans to developing countries. While budget constraints facing Western countries may partly explain reasons for this occurrence, fundamentally, it can be attributed to liberal market ideology that makes livelihood projects a more likely beneficiary of official development assistance (ODA).

Consequently, infrastructure development assistance to developing countries is always ignored. As the number of ODA providers reduce, commercial institutions have shown less interest to support Africa’s infrastructure, arguably due to risks involved.  This is because, infrastructure investment involves substantial capital and increased risk. Perhaps, in sprit of Beijing’s philosophy of a shard future for mankind, Chinese creditors are filling the huge infrastructure funding gap in developing countries. But to ensure safety of their sovereign loans, they always included clauses such as cross default in the contracts. Certainly, such measures are not predatory as AidData suggested but are meant to encourages the debtor country to become “responsible” borrower in the process of development financing.

Regarding confidentiality clauses which results into making loan agreements a secret, the principle of confidentiality is not Chinese creditors’ invention. It is widely practiced in international loan contracts. Many times, creditors and sovereign debtors don’t publish full details of loan contracts. International creditors including developed countries have confidentiality clauses in their agreements. They are used among others by the Organisation for Economic Co-operation and Developmen (OECD), the OPEC Fund for International Development, the Arab Bank for Economic Development in Africa (BADEA), the Kuwait Fund for Arab Economic Development and the Islamic Development Bank.

 

The March 2021, AidData joint report concluded that, “almost all OECD official creditors and non-OECD creditors have not publicly released their loan contracts.” Therefore, Chinese creditors not publishing details of loans given to developing countries alone cannot qualify their lending to be branded predatory.

What is important Uganda and perhaps other African countries to note is; Sub-Saharan African countries are still faced with a challenge of infrastructure funding gaps. A recent study by McKinsey and Company argues: ‘unless addressed, infrastructure deficits in Sub Saharan African countries’ key sectors will continue affecting economic growth and development stressing that “80% of infrastructure projects fail at the feasibility and business-planning stages,” describing the phenomenon as “Africa’s infrastructure paradox.”

Meanwhile, commercial loans to developing countries, have been limited for a long time. This has become a major challenge to the world economy. The main reason is that infrastructure investment and financing requires significant capital input and involve a longer payback period and hence, few creditors are willing to venture into it.

While it is important for Uganda not take loans beyond our capacity, there is nothing wrong with taking loans to support infrastructure development. As Bent Flyvbjerg, a Danish professor once observed; “Infrastructure is the great space shrinker, and power, wealth and status increasingly belong to those who know how to shrink space, or know how to benefit from space being shrunk.” So, taking loans to shrink development gaps is no bad!

Therefore, it is perhaps important before we jump to welcome China’s critics who maybe driven by international politics, maybe we should pause and ask questions like; are Chinese loans helping our countries to realise our development agenda? Do we have a better option to Chinese loans? Could Global politics be behind harsh criticism of China’s lending to African countries?

Allawi Ssemanda, is the Executive Director of Development Watch Centre; a foreign policy think tank .  Twitter: @AllawiSsemanda

 

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