By Allawi Ssemanda
This week, Ugandans on social media have been discussing China’s infrastructure loan terms particularly default clauses and escrow accounts with some making wrong conclusions of how Uganda “surrendered” airport to China. Of course, the claims that Uganda negotiated a bad deal lack international lending facts and so are wrong.
I will start with debt clauses. Critics argue that some provisions in financing agreement between Exim Bank of China and Uganda put our airport and other government assets at risk of being sized by China should Uganda fail to pay. Some reason that this is because, the agreement gives Chinese side advantage over the borrower and therefore should be renegotiated.
This issue of default clause is not new and should not be the basis of criticising Uganda-Exim bank deal. It is important to note that infrastructure financing is an expansive venture which involves huge amounts of funds and hence, increased risks. Therefore, default clauses in official credit market are not new and in this particular case are not meant to leverage Chinese creditors but rather to simply safeguard creditor’s funds.
A March 2021 study by Peterson Institute for International Economics, Kiel Institute for the World Economy of Germany, Georgetown Law and AidData observed that default clauses are not only used by Chinese creditors but have also been adopted by some members of Organizations for Economic Co-operation and Development (OECD), one of major groups that extend development assistance in form of loans to developing countries.
In this debate, it is important to recall that infrastructure financing is a very expansive venture which involves huge amounts of funds and hence, increased risks. According to African Development Bank (ADB), African countries especially in Sub-Saharan Africa including Uganda, to reduce the region’s infrastructure funding gap and sustain its growing population, the region must spend $130-$170 billion annually. This is re-emphasized by World Bank’s study: “why we need to close the infrastructure gap in sub-Saharan Africa,” which underscores infrastructure funding gaps as a bottleneck to African countries’ growth.
Despite this dire need for infrastructure funding, international creditors and commercial loans meant to fund infrastructure projects in developing countries for decades has been declining. Also, the so-called traditional funders who may appear generous are not interested in Africa’s pressing needs like infrastructure financing but prefer to finance other sectors like administration and so-called democracy programmes. Using World Bank as an example, at first 70% of its funding went to infrastructure and has been reducing to now 30%. Experts argues that the decline of western countries support to African countries infrastructure is because infrastructure financing requires significant capital input, involves high risks such as defaults and takes a long period to payback.
Despite urgently needed financing for infrastructure projects in African countries, these projects continue to attract little attention from traditional funders while very few commercial institutions are willing to take them in due to high risks involved.
But China is funding these seemingly risky projects. However, like any serious creditor, to ensure safety of their sovereign loans, Chinese creditors include commonly-accepted clauses like cross default and cross cancellation in their agreements. Key to note is that the text in these agreements is generally the same which is accepted by the market. Also, terms included in contracts offered by of Chinese creditors represent principles of fairness and balances well rights and responsibilities of involved parties. That said, China has on many occasions written off debts of several African countries and renegotiate some where the borrower finds genuinely fails to meet contract terms. Also, in Entebbe airport – Exim Bank contract for example, clause 15.5 of the contract offers solution in such scenario: “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…” Therefore, the talk of Uganda surrendering airport to China are unfounded.
There has also been criticism that Uganda has no full rights for funds on escrow account Uganda Civil Aviation Authority (UCAA) agreed to open. As discussed earlier, financing infrastructure projects is an expansive venture and infrastructure loans take longer period to be paid back. Understandably, in this case, creditors try to ensure they minimise likely risks. However, escrow account is commonly acceptable practice since it helps to ensure safety of creditor’s capital. Also, setting up a revenue account based on the proceeds of the project helps both parties involved in the agreement since the practice is meant to provide additional funding for debt repayment. The borrower benefits since it relieves the pressure on the creditor or government’s budget. This practice is not only for China but other countries including OECD have it. The Peterson Institute for International Economics, Kiel Institute for the World Economy of Germany, Georgetown Law and AidData study revealed that 7% of OECD member countries have similar options which acts as their repayment security devices.
Put differently, such default clauses are not brought to leverage the debtor but rather to constrain them to fulfil their obligations and become a responsible “borrower” in this case paying your loan/debt which is the main essence of signing an agreement when one is taking loan.
China-Africa brotherhood has stood a test of time that no one should doubt the other. Arguably, inspirit of a shared future, shared prosperity and South-South cooperation heart, China has not been hesitant to take risks other lenders feared. Indeed, in the past two decades, Beijing has provided almost all African countries with concessional and bilateral loans as well as commercial funds giving these countries support needed to improve infrastructure sector, grow their economies, and create jobs through industrialisation among others.
While some claim that this is Beijing’s long-term to strategy to grow her influence over Africa, this is not the first time China is offering infrastructure and developmental assistance to African countries.
For a fact, China unequivocally supports sovereignty of developing countries that one insinuating that Beijing is interested in seizing national assets of a sovereign country is not just a joke but it is an insult to China. While under colonial bondage, many African countries received support from China thereby contributing to their struggles to snap the shackles of colonial minority humiliation. In 1960s while China’s per capita GDP was less than that of Sub-Saharan Africa, China supported and southern Africa’s infrastructure with $400 million which helped in construction of the famous Tanzania-Zambia Railway (TAZARA).
Lastly, those claiming Uganda surrendered the airport, their argument is simply pessimistic. Why would one think a country with functioning government like Uganda will default meeting her loan obligations?
Also, critics of China’s development assistance to African countries claim that Chinese loans to African countries are not transparent due to confidentiality clauses. It is important to note that, globally, there is no standard public disclosure when it comes to bilateral official lending. This is a common practice with sovereign debtors and creditors. Indeed, 2021 March study by Peterson Institute for International Economics, Kiel Institute for the World Economy of Germany, Georgetown Law and AidData observed that “almost all OECD official creditors and non-OECD creditors have not publicly released their loan contracts.” Other official lenders that have confidential clauses include; African Development Bank, the OPEC Fund for International Development, The Arab Bank for Economic Development in Africa also known as (BADEA), the Kuwait Fund for Arab Economic Development among others.
From above, one can argue that Sino-Uganda and Sino-Africa relations in general has been tested and no side can work to injure the other’s interests! Therefore, critics of these engagements are arguably driven by West’s narrative who seem to be worried that empowered African countries will not stand their hegemonic interests and hence, framing of Sino Africa relations with claims of “debt trap.” With the current trend of giving attention to so-called China’s “debt trap” and so-called Chinese hidden interests in Africa, I am tempted to think as Africans, we are again falling in West’s old playbook – divide and rule.