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Chinese financing casts long shadow over Africa

The value of loans from Chinese financing of energy and infrastructure projects in Africa almost trebled between 2016 and 2017, from $3 billion to $8.8 billion, with policy lenders China Development Bank and China Exim particularly active in helping bridge Africa’s infrastructure gap.

Almost half of the total $19 billion of Chinese outbound loans poured into infrastructure projects in sub-Saharan Africa since 2014 were made last year (2017).

Notably, Chinese lenders accounted for more than 40% of all infrastructure finance in sub-Saharan Africa in 2017 and its policy banks made more than the four-fifths of a lending by Development Finance Institutions (DFIs) in the region.

Chinese commercial and policy bank lending for infrastructure projects in sub-Saharan Africa totalled $3.6 billion in 2014, $3.4 billion in 2015 and $3 billion in 2016, before spiking almost 300% to $8.8 billion in 2017, driven by a series of large power projects across Africa.

The trends are revealed by new research from global law firm Baker McKenzie and IJGlobal, a trade publication for infrastructure projects, as leaders from the BRICS bloc – Brazil, Russia, India, China and South Africa – meet in Johannesburg this week for their annual summit.

Data is drawn exclusively from fully financed projects and excludes recent announcements of government funding commitments.

Keen interest in Africa’s power projects

Speaking from the BRICS Energy event, which preceded the BRICS Summit, Kieran Whyte, Baker McKenzie’s head of energy, mining and infrastructure in Johannesburg, said the rising impact of Chinese financing and policy lending in Africa is increasingly visible.

“Chinese president Xi Jinping’s recent tour of African countries ahead of the Summit is proof of the increasing interdependence of the maturing but still fast growing Chinese economy and developing economies in Africa,” says Whyte.

“This is much more sophisticated outbound lending than the cliché about China investing in African minerals and rail to get commodities to China to feed manufacturing – the data clearly shows Chinese lending predominantly shifting towards African power projects,” he says.

“All countries need power generation, transmission and distribution assets, which are reliable and meet demand; without this, wider development is a distant dream,” said Jon Whiteaker, editor of IJGlobal.

“It is little surprise then that the power sector has grown to be by far the biggest recipient of Chinese policy lending in Africa. The US government may have recently jump-started its Power Africa programme, but it has increasingly been Chinese lenders which African and Middle Eastern countries have turned to get power projects financed.”

Belt & Road Initiative drives Chinese financing

Globally, infrastructure deals featuring significant Chinese financing have risen more than threefold since 2012, driven among other things by China’s Belt & Road Initiative (BRI), going from 31 deals in 2012 to 105 deals in 2017. The BRI is a world scale Chinese development strategy that combines the creation of a 21st Century Maritime Silk Road and a Silk Road Economic Belt.

Whyte explains that this shift towards power is because China is comfortable operating in the energy sector and is aware power acts as a catalyst for the growth of other sectors in Africa, providing foundations for long term economic development.

“It’s also true that in terms of infrastructure development, many of China’s construction companies are world leaders in the power sector and Chinese goods and equipment are used in the construction process, which further benefits China’s economy,” he says.

Whyte adds that as one of South Africa’s largest trading partners, China plays an important role in infrastructure investment in that country. At the BRICS Summit Energy event this week, China pledged to invest USD 14.7bn in South Africa and to grant loans to state owned enterprises Eskom and Transnet.

Against the background of a geopolitical shift in trade relations, China has noted that it is looking to work with African countries in a participative and inclusive way,

Another recent report by Baker McKenzie and Silk Road Associates; Belt & Road: Opportunities & Risks – the prospects and perils of building China’s New Silk Road details how key opportunities in Africa with regards to the Belt & Road Initiative will be transactions related to major projects in the power and infrastructure sector and related financing.

Notable African projects

Recent examples of large power deals in Africa where at least 50% of the finance was provided by Chinese lenders include:

  • Mambila Hydropower Plant (Nigeria) valued at $5.8 billion
  • Lamu Coal-Fired Power Plant (Kenya), a $2 billion PPP
  • Medupi Coal-Fired Power Plant (South Africa), worth $1,5 billion
  • Kafue Gorge Lower Hydro Power Plant (Zambia) in 2015, worth $1.5 billion

While European DFIs increasingly focus only on lending to renewable energy projects in Africa, coal is still an essential part of energy baseload and vital in a region where grid capacity is almost non-existent and almost two-thirds still live without ready access to power.

Read more: Eskom signs $2.5bn loan agreement with China Development Bank

Read more: Greenpeace responds to China’s $2.5bn loan for Kusile power station

Which countries appear attractive to China?

The African countries seeing most Chinese financing and lending are Kenya and Nigeria, which alone have swallowed up almost 40% of the $19 billion of lending to projects in sub-Saharan Africa since 2014.

However, Chinese banks have been active lenders to infrastructure projects in 19 different countries in the past four years. Chinese policy lending is also set to widen, with Senegal recently becoming the first West African country to sign up to supporting the BRI.

Infrastructure projects in Ethiopia have received $1,8 billion since 2014, Kenyan projects $4,8 billion, Mozambique infra deals $1,6 billion and Nigerian projects $5 billion from Chinese lenders.

South African infrastructure projects have received $2,2 billion from Chinese lenders since 2014, Zambia has received $1.5 billion and Zimbabwe has seen $1.3 billion in loans from Chinese policy lenders since 2014.

Breakdown of the sectors

The power sector in sub-Saharan Africa has received $17,5 billion in loans from Chinese lenders since 2014 ($8,8 billion of this amount was in 2017).

The oil and gas sector has received $3,2 billion ($1,7 billion in 2017) and the transport sector in sub-Saharan Africa received $5,5 billion from Chinese lenders since 2014 (with $500 million received in 2017).

Whyte notes that for investors in Africa, “A big attraction of China’s Belt & Road Initiative for both African governments and project sponsors is that it assists the speed of project implementation. Project stakeholders advise that the whole process is a lot quicker than other options.”

“Chinese policy lenders assist in providing liquidity and contribute to the speed of implementation of projects in Africa, which is necessary for Africa to participate in the roll-out of the fourth industrial revolution and the global energy transition,” he adds.

Nicolette Pombo-van Zyl
Nicolette is the Editor of ESI Africa print journal, ESI-Africa.com and the annual African Power & Energy Elites. She is passionate about placing African countries on the international stage and is driven by the motto "The only way to predict the future is to create it". Join her in creating a sustainable future through articles and multimedia content.