[Part 1 - The nature of China-Africa infrastructure-for-resource deals]
Introduction Part 1 of the series will give context into how the individual strengths and shortcomings of China and several African nations, allowed them to become a perfect fit for each other. There will be an overview of the infrastructure-for-resource deals China has been striking since the early 2000s, some of their key terms and the disputes that have arisen from them. This will lay the foundation for the discussion of how to negotiate these deals better.
1.1. The China-Africa match-up Africa is endowed with natural resources. It boasts massive oil production in Nigeria and large coal deposits in Mozambique. Zimbabwe among the top platinum producers and South Africa is a leading producer of manganese. Copper and cobalt in Zambia and large iron ore deposits across Gabon, Guinea and Liberia.
However, for all its resources, many of them remain underdeveloped. Africa has an infrastructure deficit and endemic scarcity of capital to develop the infrastructure, this has resulted in African states ranking at the bottom of most infrastructure indicators.
On the other hand, China is the world’s second-largest economy at over $13 trillion and is predicted to become the world’s largest economy by 2033. China is the world's largest manufacturing economy and exporter of goods. China has also been one of the world's fastest-growing consumer markets and economies for several decades.
However, to sustain the fast growth of its economy in the 1990s, China had to look outside its borders for the provision of key commodities. Ever since, Beijing has become a net importer of, copper, nickel, iron ore (China imports 67% of total global iron ore), nickel, petroleum and several commodities. Over a third of China’s oil comes from Africa and China’s reliance on imported mineral metals has been growing even in commodities in which it is a top producer, such as tin and lead.
China’s strong reliance on the import of strategic commodities resulted in the state encouraging local firms to make investments abroad and exploit natural resources through cooperative agreements in emerging markets.
There was an intersection of interests between China and African countries at the start of the century. On one side, there was a rapidly developing China equipped with money, a growing construction industry and in need of commodities to support its rapid growth pace.
Conversely, there was the African continent, endowed with largely unexploited natural resources, but lacking the infrastructure and capital to turn this advantage into wealth. This created the space for China to grow into the single largest financier of infrastructure projects in Africa. 1.2. Infrastructure-for-resource deals To grant concessional loans, states such as China require a sovereign guarantee, which is problematic in African countries because of their typically low creditworthiness. Funders like the European Union progressively disengaged from providing financing in countries like Benin as a result.
However, in resource-rich countries, China opted to retain the off-taker rights or lock-in proceeds from the sale of commodities from the borrowing country to secure the loan (the commodity is typically sold to a Chinese State-Owned Enterprise). In return, countries like Benin offer China preferential tax exemptions and contractor preferences in roadway, and administrative infrastructure projects.
In Angola, China provided a $2 billion oil-backed loan for infrastructure projects in 2003. The China Petroleum & Chemical Corporation acquired its first equity stake in the Angolan oil industry promptly after that loan extension. China also gets 95% of South Sudan’s crude petroleum exports as of 2017. This includes a sixth of South Sudan’s total daily output being sent to the Export-Import Bank of China in exchange for infrastructure funding.
Typically, these loans are structured mostly as an export credit facility. These credit lines come with minimal interest rates, 25 year repayment periods with 5-7 year grace periods, and technical assistance. These credit lines come attached to the procurement of services, materials and labour from China (at least 50%), leaving very little room for local content in the host country.
This presents China with an opportunity to reduce its massive overcapacity by using Infrastructure projects in Africa as outlets for Chinese steel. 1.3. Flaws of the infrastructure-for-resource deals Many of these deals have been delayed or called off due to factors such as insufficient capacity, detrimental terms of the deal, unsound planning, and regime changes. in Nigeria, most contracts and loans signed under President Obasanjo were frozen by his successor, and these arrangements remained uncertain under the ongoing regulatory revision in the oil industry.
In Gabon, the Belinga project has repeatedly faced postponement due to disagreements over environmental issues and labour and by calls for a renegotiation of the contract; which the public believed to be too favourable to China (who own 75% of the joint venture and the offtake rights).
In Benin, the diverse tax exemptions granted to Chinese contractors allows them to build large reserves of stock. This allows Chinese contractors to win subsequent tenders by providing extremely low prices, winning even the tenders financed with Beninese public funds.
There is no doubt that infrastructure-for-resource loans provide value for African states that are in need of them. However, the results are a mixed bag and the benefits are skewed towards China.
These problems surely arise from missteps in the negotiation process. Be it lack of involvement by the public and key players, one-sided deals that future regimes refuse to enforce or a lack of consideration for the broader impacts of a deal in the host state. It appears that African states continuously end up with deals that make little practical sense for their context, especially a lack of local content on projects taking place within the borders of the state.
When issues of this fashion arise across the continent, one must look away from the pitfalls of any particular African nation and understand that there exists a more fundamental misunderstanding of China as a negotiating counterpart. Part 2 of this series aims to give insight into that counterpart by providing an analysis of how Chinese culture crucially affects the negotiation process and makes them a truly unique party to be negotiating with. The aim is to equip African states with an understanding of the factors, mindsets, and tactics governing the Chinese negotiating style; so that African states are better prepared to deal with the tactics it will face and approaches it can use to have successful negotiations.
PART 2: https://www.linkedin.com/pulse/negotiating-china-toolkit-african-nations-part-2-how-zach-kauraisa/ [Click here] END.
About the Author Zach Kauraisa obtained his LLB from the University of Namibia and an LLM in International Oil and Gas Law and Policy at the Centre for Energy, Petroleum, Mineral Law and Policy. For inquiries, email: email@example.com
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