China’s lending terms are the best African countries can get.
By Allawi Ssemanda
On October 28, 2021, members of the Parliamentary Committee on Commissions, Statutory Authorities, and State Enterprises (COSASE) literary roasted finance minister, Matia Kasaija who they accused of signing a $200m agreement with Exim Bank of China to upgrade Entebbe international Airport.
They reasoned that loan terms in the agreement are unfair to Uganda and puts our airport at risk should Uganda fail to pay.
Shortly after the meeting, COSASE chairperson Joel Ssenyonyi tweeted: “Today COSASE met Finance Minister who signed a $200m loan agreement with EXIM Bank-China to upgrade our airport. He admitted loan terms were unfair. China has taken over property of some countries due to unfair loan agreements. Govt officials ought to read & scrutinize before signing!”
While it is right our legislators to get concerned when they notice things not going in national interests, it is important our honourable MPs to get facts not just about Chinese loaning but all international loaning agreements. Many argued that some of the terms of the loan meant that the country was giving up its sovereign immunity to the creditor. Of course, this is not true but dancing to some Western capital’s narrative driven by fear of growing Sino-Africa relations characterised by principles of mutual respect and benefit.
When extending development loans, many countries take seriously the issue of controlling and reducing investment risks and ensure the security of capital. This is a common commercial practice. If you study most of Chinese loans contracts, combining practices of commercial banks and official institutions, you will observe that Chinese contracts try to ensure maximum repayment of loans through their contracts.
This is done by among others setting up a revenue account(s) based on the proceeds of the project to provide additional funding for debt repayment. This approach is not meant to give Chinese institutions upper hand or to take over properties of the borrower but rather, an option to relieve pressure on the borrower’s national budget.
Actually, this is a legitimate and commonly accepted commercial practice employed to ensure the capital safety of lenders. Indeed, it was adopted by some Organisation for Economic Co-operation and Development (OECD) creditors we look up to. A March 2021 joint report by AidData, Peterson Institute for International Economics, Georgetown Law, Kiel Institute for the World Economy of Germany, and Center for Global Development concluded that seven percent of OECD official creditors sampled use contract tools and repayment security devices to ensure loan repayments.
In the context of Chinese loans, from available evidence, default clauses are meant to provide security and compel the debtor not to default their obligations. After all, this is the essence of signing an agreement. Put differently, it inclines debtor countries to manage their debts and fulfill repayments plans which makes them “responsible borrowers,” thereby earning international credibility and continue enjoying development aid and loans concessions. This improves the borrowing countries’ reputation in our competitive international development financing markets which arguably is important to their social and economic growth.
Other critics argue that by including cross-default, cross-cancellation, and stability clauses, Chinese loans put the creditor on a disadvantage side. This reasoning ignores the principle of mutual benefits and other important facts when it comes to infrastructure financing.
For the record, Chinese funding is the best deal any developing country can get to address growing infrastructure funding gaps. While traditional funder’s offers may look generous, their multinational banks prefer to fund sectors like administration, social services and the so-called democracy promotion instead of funding the much-needed infrastructure programs. For example, at first 70% of World Bank’s funding went to infrastructure but has been reducing to recently 30% despite huge funding gaps in infrastructure sectors in developing countries.
It is important to note that developing countries are faced with a shortage of funding especially in infrastructure projects which are key for development. A World Bank and McKinsey Global Institute study notes that funding for infrastructure projects such as transport and electricity is lacking and that to ensure socially inclusive development by 2030, there is a need to spend more than $3.3 trillion annually of which 60% must go to developing countries in Africa. African Development Bank (ADB) on the other hand estimates that to meet the demands of their growing population, replace aging infrastructure, African countries must spend between $130-$170b annually on infrastructure. Also, a 2017 study by World Bank – “Why We Need to Close the Infrastructure Gap in Sub-Saharan Africa” suggested that if these countries reduce funding gaps for infrastructure, the region’s GDP per capital will grow by 1.7%.
However, infrastructure investment and financing requires substantial capital and increased risk and very few traditional funders are ready to take this risk. Guided by Chinese leadership’s philosophy of a community with shared prosperity, in the last several decades, only the Chinese government and state-owned banks have shown willingness to provided a large amount of infrastructure low interest loans to low-and middle-income countries to boost their infrastructure funding gaps. It should also be noted that financing critical sectors like infrastructure in developing countries often involve a long payback period. However, this does not mean they should not try to devise devices to ensure safety of their sovereign loans. Therefore, these commonly-accepted clauses like cross default and cross cancellation Chinese creditors include in loan contracts should not be taken as tricks of loan sharks but rather devise used to ensure safety of their funds. It should be noted that the text used in Chinese loans agreements are ones generally accepted by the market and these terms are consistent with the principles of balance and of rights and obligations of parties involved.
Therefore, for COSASE chairperson Joel Ssenyonyi to castigate finance minister that he signed a bad deal with Exim Bank, the honourable Ssenyonyi is not only wrong but the MP spoke from an uninformed point. Taking the Entebbe-Exim Bank agreement as an example, it is not fair to make conclusions basing on clauses; 15.1 addressing Governing Law, 15.4 which addresses Waiver, and 15.5 that’s talks about waiver of Immunity and conveniently ignore clause 15.5 which talks about Good Faith Consultation. This clause is very clear: “The parties hereto undertake to use their best efforts to resolve any dispute arising out of or in connection with this agreement through consultations in good faith and mutual understanding…” over time, China has proved to be a brotherly country to all African countries and promotes mutual trust and benefit that by all means, it cannot avoid good faith consultation where necessary.
On many occasions, despite legally binding treaties with borrower countries, through good faith consultations, China has always re-negotiated with African countries and accepted debt restructures, and on several occasions, Beijing has out of goodwill and wish written off debts to many African countries. In 2020 for example, China cancelled the Democratic Republic of Congo’s interest-free loans estimated to be over $28M that had matured. In March 2021, researchers at Johns Hopkins University noted that between 2000 and 2019, China wrote off accumulated arrears of 94 interests’ free loans for African countries that totaled over 3.4 billion USD. All the above shows that despite offering loans with default clauses, China considers African countries close allies and is not interested in seizing their properties but ensuring borrowing countries join China in growing and developing together so as to realize Chinese leadership philosophy of a shared future with shared prosperity.
Therefore, Ssenyonyi’s claim that “China has taken over property of some countries due to unfair loan agreement,” lacks ground truth and is hearsay driven by Beijing fear in some Western capitals who are worried about growing Sino-Africa relations. Of course, their concern is not that they so much love their former colonies in Africa, their fear is due to geopolitical reasons and knowing that empowered Africa can’t stand their failing hegemony. Even if there are countries whose property were seized which is not true, Uganda is different with different financing needs and our development structures are sufficiently diverse and heterogeneous. Comparing us with little rumoured little variety reduces the validity of his conclusion.
Whereas Indira Gandhi taught us that questioning is the basis of all-knowing, it is not to question endlessly but to use those questions as a means of advancing towards a big and better answer. The arguments critics advance against default clauses are negative energy and full of pessimism. Arguably, important questions at this time should be how should Uganda maximise the nearly complete mega airport to its advantage but not fronting pessimistic questions. Quoting Keith Yamashita, a renowned consultant of top companies in his book A More Beautiful Question, Warren Berger argues that questions that show pessimism are a danger to progress.
This he adds has unintended negative consequences such as what he described as diminished questions. Berger argues that for countries to progress and innovate, leaders should avoid small questions and think in an expansive manner with bigger questions.
In this context, examples of bigger questions are: How should Uganda maximise expanded Entebbe Airport? Why are we borrowing? What is in it for Uganda and Ugandans if we borrow money from China to support our needed infrastructure? For that matter, I will recommend the honourable members of COSASE to read Warren Berger’s A More Beautiful Question.
The writer is the author of Global Governance and Norm Contestation: How BRICS is Reshaping World Order