Over the last 15 to 20 years, Chinese investment has cut a swathe through Sub-Saharan Africa, with debt from government and commercial lenders underpinning the construction of infrastructure such as roads, railways and airports. Elsewhere, a recent reform by OECD export credit agencies is tipped to boost the economic windfall for developing countries hosting infrastructure and other projects. Moreover, ESG considerations have come to the fore, in a continent especially vulnerable to the effects of climate change and where local environmental rules can sometimes be threadbare. Jacob Atkins looks at three trends shaping project and export financing in Africa.
- The rise of ESG
Sub-Saharan Africa is likely to feel some of the worst effects of global warming, according to the Intergovernmental Panel on Climate Change. West and Southern Africa in particular are set to experience more severe water shortages and poorer crop yields, and many cash-strapped governments on the continent lack the resources to mitigate the impacts.
A gamut of other issues, like high unemployment, corruption and pollution, also persist.
Governments in Sub-Saharan Africa haven’t been at the forefront of green lending or environmental, social and governance (ESG) initiatives, but there are signs that is changing as ESG projects win support from commercial banks and export credit agencies (ECAs).
“If you compare five years ago with now, African governments are starting to realise that ESG is very important, not only for the financing community, but also for a more sustainable economy,” says Alarik d’Ornhjelm, Deutsche Bank’s head of structured trade and export finance for the Middle East and Africa.
While ESG considerations are still not the “key driver” for ministries seeking investment for projects – who might complain about the potential gap between local norms and lenders’ expectations on international norms – it looms much larger in financing executions than previously, he tells GTR.
Issues like air quality and noise pollution from road projects, for example, or the resettlement of displaced residents, are now given more attention by host governments.
Faruq Muhammad, Standard Chartered’s global head of structured export finance, tells GTR “if there is a project which fits within the ESG sustainable lending criteria, there is a preference for ECAs, insurers and lenders to try and allocate their resources to those projects”. As a result, he says, there are fewer “white elephant” projects being supported in the market.
Globally, an effort is afoot to prioritise sustainability in export finance. The International Chamber of Commerce (ICC) is releasing a white paper in September this year proposing “product and policy recommendations aimed at increasing the flow of export financing towards sustainable activity”.
Members of the ICC Export Finance Committee’s Sustainable Working Group hope the paper will spur conversations about what role export finance can play in boosting sustainable finance and lift what they say is an average of 20% of industry volumes that currently support sustainable activity.
The global shift away from coal, and increasingly oil and gas, is also being felt in Africa.
Several banks, for example, are shunning the proposed US$3.5bn East Africa Oil Pipeline running from landlocked Uganda’s oil fields to a port in Tanzania, under development by French energy giant Total and partners including China National Offshore Oil Corporation. The project nevertheless enjoys support from French President Emmanuel Macron and is being progressed.
Banks and ECAs also piled into another Total project, a US$20bn liquefied natural gas development in Mozambique, despite protests from green groups given the project’s contribution to greenhouse gas emissions both pre and post-development. An ongoing Islamist insurgency forced the company to declare force majeure in April this year.
China, whose Export-Import Bank (China Exim), development institutions and state-owned banking giants lent US$153bn to the continent as a whole between 2000 and 2019, has historically been seen as less concerned about the environmental or social impacts of projects it finances. But there are signs that may be changing.
“What you see when you look at this over time is that a lot of these Chinese firms were kind of ham-fisted about ESG issues 15 or 20 years ago, but now they’re becoming more sophisticated,” says Bradley Parks from AidData, a research lab at William & Mary public research university in Virginia, which tracks Chinese development finance.
The Chinese government and firms understand that they need to address ESG to stay competitive, Parks tells GTR. “Nowadays, it’s not at all unusual to see Chinese state-owned enterprises implementing big ticket projects where these firms are quite attentive to ESG issues.”
Late last year, the Industrial and Commercial Bank of China (ICBC) abandoned its role as lead financier of the proposed Lamu coal-fired power station, slated for construction on an island off the coast of Mombasa.
ICBC also walked away from a mooted coal-fired power plant in Zimbabwe in June this year, reportedly describing it as a “bad plan due to environmental problems”. While banks globally have come under pressure to accelerate the energy transition by halting finance for new fossil fuel projects, both the Kenyan and Zimbabwean developments were also targeted by protest groups equally concerned about local environmental impacts.
Since Beijing’s “Go Out Policy” of spurring overseas investment by Chinese firms began in 1999, ESG has been subordinated to the policy goal of expanding Chinese firms overseas, Parks says. He believes that if that goal now requires Chinese developers and lenders to pay heed to those same ESG concerns, they will.
But there is plenty of room still to be made up.
An AidData analysis of Chinese-financed infrastructure projects found that those established under the aegis of the Belt and Road Initiative (BRI) were much more likely to run into an “implementation obstacle” such as corruption scandals, local protests or negative environmental impacts, than those that weren’t.
Parks says that may be the result of pressure by policymakers to see rapid results from BRI investments.
- OECD reforms – present and future
From April this year, ECAs in many developed countries are free to back projects that have a bigger role for products and labour in host countries. Lenders expect African countries to reap the biggest rewards from this change.
The OECD Arrangement – a club of export credit agencies from wealthy countries – has boosted the percentage of local costs allowed for projects that receive ECA backing to 40% for high-income countries and 50% for other nations, potentially allowing greater local employment and flow-through economic benefits.
“Off the back of that I would expect countries [in Africa] now to push for even more local content,” says Ed Harkins, managing director of UK-based ECA consultancy GKB Ventures. “You’d expect to see a shift or higher demands from end customers for higher levels of local employment and content and rightly so.”
The changes follow lobbying by banking and business groups, who argued that the previous rules defy “market realities” and were hobbling big projects in countries where localisation requirements are rising.
Standard Chartered’s Muhammad says the OECD reform is already flowing through the project pipeline in Sub-Saharan Africa.
“Banks like us would have started having these conversations with [engineering procurement and construction contractors] well in advance of when the actual change came in,” he says. “The impact is already coming into projects that we’re currently discussing.”
Business at OECD (BIAC), which lobbies the organisation on business matters, is calling for sweeping reforms to the arrangement, arguing its rules are being left behind by market developments and the rise of China’s export finance firepower. As GTR reported in April, negotiations over modernising the arrangement are ongoing.
Muhammad says that in the same way the Arrangement allows preferential terms for green projects, such benefits should be extended to financing for other aspects of what he describes as the “ESG framework”, such as healthcare projects and critical infrastructure.
“Banks are pushing to relook at the OECD consensus and allow for more favourable terms for some of this critical infrastructure, like hospitals, roads and bridges,” he says.
The impact of the reform is playing out as some ECAs are increasingly interested in African deals. Industry sources say the appetites of both the Export-Import Bank of the US (US Exim) and UK Export Finance (UKEF) are noticeably higher now than in the past.
US government officials said in July that they will “re-imagine” and rekindle the Trump administration’s Prosper Africa strategy by promoting private US investment and trade with the continent, focusing on renewable energy, health, infrastructure and agriculture, according to Reuters.
Last year, UK trade minister Liz Truss outlined an ambition for the country to become “the partner of choice in Africa” as she announced £620mn in UKEF financing across six projects in Gabon, Ghana, Uganda and Zambia.
Earlier this year UKEF also chipped in €241mn to a lending facility to support the government of Côte d’Ivoire to build six hospitals in towns across the country, and said it had an appetite for up to £2bn in new business in the country after doubling its capacity in recent years.
The hospital project is the latest in a spate of healthcare financing in West Africa, following a €78mn UKEF-Standard Chartered facility for a new hospital in Ghana announced in July 2020 and a €55mn facility announced in July this year for medical centres in the same country, led by Deutsche Bank.
Deutsche Bank’s d’Ornhjelm says that such deals are examples of transactions that were not considered a priority in the recent past but are now attracting increasing interest “because those projects will develop a more sustainable way of life, like access to healthcare or transportation”.
- Chinese debt time bomb
Away from the ongoing pandemic, the development being watched most closely on the continent is how it copes with the maturity of China’s lending splurge over the past two decades.
Parks says there is no doubt a “backlash” underway against the staggering debts racked up by some African countries.
Governments in debt distress or at high risk of becoming distressed and where China is a major lender include Djibouti, the Republic of Congo, Cameroon and Ethiopia, according to a 2020 analysis of World Bank data by the China Africa Research Initiative (CARI).
Angola took out US$42.6bn in Chinese loans between 2000 and 2019, according to CARI’s own tracking of the Asian giant’s lending in Africa. In 2016, the country accounted for more than half of the US$28.3bn borrowed from China by African governments overall.
China is taking part in the G20’s Debt Service Suspension Initiative (DSSI), created at the outset of the Covid-19 pandemic to delay repayments for sovereign loans, and has already allowed Angola to defer some payments.
China’s finance minister Liu Kun said in November 2020 that the country had provided US$2.1bn in official debt relief to developing countries, without specifying which ones.
But relief may be short-lived as relations become strained. Kenya’s government in August withdrew a request to extend its repayment holiday to China Exim, which financed the country’s landmark Standard Gauge Railway project, after the bank stopped disbursing payments to other projects in the country, according to Business Day newspaper.
AidData’s research suggests a bigger problem facing some borrowers in the region is the mountains of “hidden debt” in the form of implicit and explicit public guarantees of project financing, which signal an even bigger debt problem faced by some sovereign borrowers.
Many Chinese-financed projects are backed by a sovereign guarantee, which effectively becomes public debt if a project does not perform.
“We’ve found that there’s a substantial number of countries around the world that are carrying 10% of GDP or more in off-public balance sheet debt which could quickly be converted to public debt in a situation of financial distress… and make an already bad situation much, much worse,” Parks says.
“What we’re likely going to see in the next year or two is that countries in Africa are in the worst of all worlds where they’re carrying high levels of public debt to China and Chinese creditors and high levels of hidden debt to Chinese creditors.”
According to CARI’s figures, total lending to Africa by Chinese institutions has fallen every year since 2016.
Andreas Voss, Deutsche Bank’s head of trade finance for financial institutions in Africa, says China has re-thought its lending practices on the continent: “This kind of free unconditional money from China – I think these times are over.”
Standard Chartered’s Muhammad says he has noticed that Sinosure and some Chinese lenders are being constrained by their exposure limits in some heavily indebted African countries, pushing Chinese contractors to look for alternative funding including European ECA-supported financing for planned projects.
“We’ve seen fewer projects with China Exim or Sinosure-covered financing in Sub-Saharan Africa. I think what we are seeing is that both China Exim and Sinosure are closely looking at their exposures in the region.”