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China's ‘win-win’ cooperation: Unpacking the impact of infrastructure-for-resources deals in Africa

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This paper discusses China's use of infrastructure-for-resources loans in Africa as a win–win economic cooperation tool. This formula, offering generous loans for infrastructure in exchange for resource access, came into being largely as a default cooperation tool, inspired by China's own domestic experience, its competitive advantages and Africa's receptivity to this kind of barter deal. Embodying the principle of mutual benefit, China has consistently combined the extension of financial assistance for infrastructure construction in Africa with the expansion of Chinese business interests and the pursuit of resource security goals. The analysis focuses on whether this instrument is actually promoting African development or fuelling instead China's economic growth at the expense of African economies. The author argues that the impact has been mixed. Although there are some meaningful positive signs, many challenges persist, and as such the long-term developmental impact of this particular tool remains uncertain. The responsibility to ensure a positive outcome rests, however, on the African side as much as on China. Available online: http://www.tandfonline.com/doi/full/10.1080/10220461.2013.811337#.UfDrsNJTCSp
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China's ‘win-win’ cooperation:
Unpacking the impact of infrastructure-
for-resources deals in Africa
Ana Cristina Alves
a
a
South African Institute of International Affairs , Braamfontein ,
South Africa
Published online: 12 Jul 2013.
To cite this article: Ana Cristina Alves (2013) China's ‘win-win’ cooperation: Unpacking the impact
of infrastructure-for-resources deals in Africa, South African Journal of International Affairs, 20:2,
207-226, DOI: 10.1080/10220461.2013.811337
To link to this article: http://dx.doi.org/10.1080/10220461.2013.811337
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China’s ‘win-win’ cooperation: Unpacking the impact of infrastructure-
for-resources deals in Africa
Ana Cristina Alves*
South African Institute of International Affairs, Braamfontein, South Africa
This paper discusses China’s use of infrastructure-for-resources loans in Africa as
a winwin economic cooperation tool. This formula, offering generous loans for
infrastructure in exchange for resource access, came into being largely as a default
cooperation tool, inspired by China’s own domestic experience, its competitive
advantages and Africa’s receptivity to this kind of barter deal. Embodying the
principle of mutual benefit, China has consistently combined the extension of
financial assistance for infrastructure construction in Africa with the expansion of
Chinese business interests and the pursuit of resource security goals. The analysis
focuses on whether this instrument is actually promoting African development or
fuelling instead China’s economic growth at the expense of African economies.
The author argues that the impact has been mixed. Although there are some
meaningful positive signs, many challenges persist, and as such the long-term
developmental impact of this particular tool remains uncertain. The responsi-
bility to ensure a positive outcome rests, however, on the African side as much as
on China.
Keywords: China; Africa; infrastructure-for-resources loans; developmental
impact
Introduction
Over the past decade, the extension of credit lines for infrastructure has featured as a
recurrent economic statecraft instrument used by China in resource-rich African
countries.
1
These loans have been largely portrayed by Beijing as a winwin
economic cooperation tool, through which China offers the provision of much
needed infrastructure in exchange for access to natural resources that it lacks at
home. In addition to seeking markets for its construction companies and materials,
China has used these credit lines to obtain long-term supply contracts and often
favoured access to resource assets
2
critical to sustain its economic growth. The
benefits for the African side come in the form of large-scale and quick infrastructure
provision and the expected multiplier effects for the host economy.
Although expanding, the academic literature on infrastructure-for-resources
loans remains relatively scarce and tends to focus on operational issues such as loans
structure, agents involved, internal dynamics and African agency.
3
Although these
analyses offer critical insight towards a better understanding of this instrument of
Chinese economic statecraft, its developmental impact remains largely under-
researched by academia. Some specialised reports
4
compiled by international
organisations, non-governmental organizations and private consultancy companies
*Email: Ana.Alves@wits.ac.za
South African Journal of International Affairs, 2013
Vol. 20, No. 2, 207226, http://dx.doi.org/10.1080/10220461.2013.811337
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offer some insights in this regard, but the information is scattered and the analysis
fragmented.
This paper proposes to contribute to the existing literature by providing a
comprehensive analysis of the motivations and operational aspects that characterise
this tool complemented by a preliminary assessment of infrastructure-for-resources
loans impact on Africas development. In order to pursue this goal the analysis will
focus on three questions that underpin the three main sections of this study: what
interests on the part of both China and states in Africa led to the emergence of this
economic cooperation tool? How is this economic cooperation instrument struc-
tured? And, lastly, how effective has it been in providing mutual benefits, particularly
regarding its developmental impact in Africa?
This study is based on primary sources, namely observations and interviews with
qualified informers between 2008 and 2013 in Southern Africa and China,
complemented by secondary sources through extensive desk research.
China
Africa: a perfect match?
Chinas infrastructure-for-resources formula is largely the product of a timely
convergence of interests between China and African countries at the dawn of the 21
st
century. On the one hand there arose a rapidly developing China loaded with cash,
with a booming construction industry and in dire need of commodities to fuel its fast
growth pace; on the other hand, there was the African continent, generously
endowed with natural resources and largely unexploited, but lacking the infra-
structure and capital to transform this advantage into wealth and escape the poverty
cycle.
Unpacking China’s motivations
After two decades of fast economic growth, by the end of the 1990s Chinas domestic
economy had reached a stage where it was compelled to look overseas. With
competition becoming increasingly fierce in the domestic market and production
capacity outpacing domestic demand in some sectors (i.e. electronics and textiles),
Chinese firms had to venture outside, searching for new markets, efficiency gains
(regional free trade agreements and inter-regional preferential policies) and strategic
assets (technology, diversification, managerial skills and foreign brands).
5
Also by the end of the 1990s, internal demand for key commodities, namely oil
and strategic minerals, had largely outstripped domestic local production and China
increasingly had to source these from overseas. Ensuring a steady supply of key
resources to sustain economic growth is a core national interest of China and, as
such, unlike the other sectors, an endeavour exclusively pursued by state-owned
enterprises (SOEs).
At the turn of the 21
st
century, Chinas growing external reliance on strategic
resources and the need to carve out a position for its enterprises in the global market,
combined with its swelling foreign exchange reserves (already the second largest
stock in the world by the late 1990s), led to the implementation of a groundbreaking
policy that came to be known as the go global policy. In Zhu Rongjis report on the
work of the government in 2000, a first reference was made to the governments
active support of Chinese business expansion abroad, namely through cooperation
agreements:
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... In particular, strong efforts should be made to open up emerging markets in
Africa, Latin America, Eastern Europe and the Commonwealth of Independent
States .... Chinese enterprises which are relatively strong should be encouraged
to make investments and set up factories abroad, engage in processing trade
and exploit natural resources through cooperative agreements.
6
The need to secure a steady supply of resources has been a critical dimension of
Chinas go global policy since its inception in the early 2000s. Despite being a
leading producer of a wide range of minerals
7
and among the top producer of many
others, Chinas growing demand for a number of strategic minerals largely
outstripped domestic supply and, as a result, Beijing became a net importer of
chromium, cobalt, copper, iron ore, manganese, nickel, petroleum, platinum group
metals and potash.
8
Chinas external reliance on mineral metals is expanding rapidly
even in commodities in which it is a leading producer, such as tin (imported since
2008) and lead (imported since 2009). Chinas largest external reliance is on oil; it has
become the worlds second largest oil consumer and importer after the US. Even
though new Chinese offshore oil finds are expected to offset some of the decline
registered in its mature onshore fields, its imports are expected to continue growing
in coming years owing to fast-growing domestic demand. At present over half of
Chinas oil consumption is met by imports.
9
Chinas foreign trade structure illustrates well this liability. One of the most
notable changing traits in its foreign trade over the past decade has been in fact the
increasing share of minerals in its global imports. In 2010 mineral commodities
accounted for 64% of Chinas imports, totalling $375 billion up from $40 billion a
decade ago.
10
In order to minimise its increasing vulnerability, Beijing has pursued a
strategy of diversifying its supply sources. While Asia and the Middle East still
account for a significant share of Chinas mineral commodities supply, its imports
from other resource-rich regions, namely Africa and South America, have expanded
more rapidly in recent years.
11
Along with supply diversification, the acquisition of production assets and
reserves abroad plays a key role in Chinas resource security strategy, not only as a
means to ensure a steady supply in the long run but also to have a greater say in
future market developments, upon which China is becoming increasingly dependent.
According to A Capital Dragon Index, 51% of the $68 billion of Chinese outward
direct investment in 2011 targeted natural resources.
12
Over the past decade Chinese
resource companies have steadily expanded Chinas footprint in overseas commod-
ities markets (oil and strategic minerals), their assets now spanning from
neighbouring Central Asia, Southeast Asia and Australasia to faraway regions
such as South America and Africa.
For this purpose Chinese companies, SOEs in particular, have benefited from a
series of governmental incentives in the context of the go out policy. These
incentives may be divided into two categories: fiscal incentives and financial
inducements. The first category includes measures such as five-year tax exemptions,
tariff exemptions when importing goods from China, which are combined with
preferential treatment in insurance, and foreign exchange-related issues. The second
category, financial inducements, includes preferential access to credit at subsidised
interest rates for large Chinese companies, particularly SOEs, and the extension of
large concessional credit lines to targeted countries that work as a doorway for
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Chinese companies, as these credit lines come tied to procurement of services,
products and often labour in China.
Chinese concessional loans are disbursed by state policy banks and are largely
portrayed by China as a paramount example of its winwin economic cooperation,
particularly in Africa, where these credit lines have enabled developing countries to
put in place critical infrastructure neglected by traditional cooperation partners for
decades and key to their economic and social development.
Chinas construction industry is a powerhouse on its own. According to IBIS
World Market Research, the industry has grown at an average of 22% over the past
five years; it is estimated to generate nearly a quarter of international construction
trade.
13
In a context of contraction for most players, Chinas became the largest
construction market in 2010. According to Global Construction 2020 report, China
will account for one-fifth of the global construction industry by 2020, up from the
current 14%.
14
Although most Chinese construction companies were state-owned until recently,
the sector has become more liberalised. Construction SOEs, however, still dominate
the industry and consequently the ventures overseas, particularly in developing
regions such as Africa. Here they enjoy not only privileged access to infrastructure
contracts in the framework of concessional credit lines, but also strong competitive
advantage owing to lower costs in overall bidding prices and access to cheap credit,
labour and building materials through its supply chains.
15
The extension of infrastructure-for-resources loans to African countries enables
Beijing to promote the expansion of its construction companies abroad and at the
same time access strategic resources. These deals, targeting primarily resource-rich
countries, are often guaranteed by long-term resources supply, and have even
facilitated access to resource assets in the borrowing country for Chinese state
companies in a number of cases.
Unpacking Africas needs
Over the past decade Africa became a particularly fertile terrain for this kind of win
win economic cooperation instrument. This is mostly due to inherent complementa-
rities stemming from Africas massive infrastructure deficit and endemic scarcity of
capital, combined with a large pool of underdeveloped resources assets.
Africa ranks at the very bottom of most infrastructure indicators. The situation
in Sub-Saharan Africa is particularly daunting, especially in low-income countries.
The root of the problem is that investment has not kept pace with demographic
growth, creating a huge deficit over the years. Most of the existing infrastructure in
the continent dates from colonial times, a large part of which has been severely
damaged by internal wars or neglect.
Africas major infrastructure deficit lies in the power sector.
16
The combined
power generation of Sub-Saharan African countries (total population 800 million)
equals roughly that of Spain (population 45 million). The sector is plagued by lack of
interconnectivity of electricity grids and by frequent outages. The situation is also
dire in transportation infrastructure. The continent has an average of 204 km of
roads per 1000 square kilometres (the world average is 944 km) and only 25% are
paved. Railroad density is extremely sparse for the continents population and for the
needs of extractive industries. Although there are a reasonable number of ports along
the coasts of the continent, they are plagued by fundamental problems regarding
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capacity, performance and handling costs. In addition to a physical deficit, there is
poor connectivity between roads, railways and ports, which is at the base of serious
logistic problems across the continent.
17
In addition, access to water is very limited.
Despite its vast hydrological resources, Africa has limited access to potable water,
which impairs millions of livelihoods and businesses, and irrigation remains a serious
challenge for agriculture (under 5% of agricultural land is irrigated). Africa ranks a
little better in information and communication technology (ICT) infrastructure;
mobile phone subscriptions in Africa have grown faster than in any other region of
the globe. In 2008 four out of 10 Africans owned a mobile phone. Internet access
figures, however, lag considerably behind, and ICT in general varies dramatically
across countries.
Despite some progress in recent years, Africas infrastructure still lags behind that
of other developing regions and remains a major constraint for business on the
continent, ultimately impairing its development. The World Bank estimates that
redressing Africas infrastructure deficit will cost $75 billion a year and that there is a
current gap of $35 billion.
18
Most African countries, particularly, in the Sub-Saharan
region, not only lack the cash flow for this massive undertaking, but they also suffer
from poor credit ratings in international financial markets. A significant number of
these countries, however, are well endowed with natural resources.
For decades African mineral wealth remained locked underground for a variety of
reasons, such as low commodity prices, lack of investment, geographical obstacles,
political instability and poor infrastructure. The gradual stabilisation of the
continent over the past decade and the concomitant surge in demand for mineral
commodities driven by emerging economies, and especially China, have prompted a
renewed interest in the African continent.
Africas resource bounty undoubtedly plays a key role in the surge of foreign
direct investment (FDI) to the region and its concomitant economic growth in recent
years. While the rate of Chinas economic growth has begun to slow, the pressure on
commodity prices remains high, which is forecast to maintain FDI rates in Africa.
According to Ernst and Young, Africas FDI is expected to reach $150 billion by
2015, up from $85 billion in 2010.
19
With investment pouring in, the true dimension of Africas mineral reserves is
becoming apparent. With regard to energy resources, as of 2011 Africa accounted for
8% of global known oil deposits. Africa boasts one of the fastest regional growth
rates in oil reserves, which have doubled in the past two decades. The largest known
reserves are located in Libya (47.1 billion barrels), Nigeria (37.2 billion barrels),
Angola (13.5 billion barrels) and Algeria (12.2 billion barrels). In terms of
production, Africa is the third-largest regional producer, with a world total share
of 10.4%. Nigeria is the top African oil producer (2.5 million barrels per day or bpd),
followed by Angola (1.8 million bpd), Algeria (1.7 million bpd) and Egypt (750
thousand bpd).
20
In addition, a number of new oil producers have surfaced in recent
years * namely Ghana, Chad and Uganda * with a few more in the making,
including Ethiopia, Somalia and Niger. To complete the picture, massive natural gas
reservoirs have been discovered off the eastern coast of the continent, as well as large
coal deposits in Mozambique, and vast uranium reserves in Namibia and Niger.
This picture is complemented by Africas endowment in non-fuel minerals, in
which Southern Africa appears as a prize. South Africa and Zimbabwe are leading
producers of platinum. South Africa is also leading producer of manganese (75% of
the worlds reserve base) and holds massive deposits of gold, copper and nickel,
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among others. The copperbelt region, spanning across Zambia, the Democratic
Republic of the Congo (DRC) and Angola, holds vast deposits of copper and cobalt.
Africa also has large untapped iron ore deposits, predominantly located in West
Africa and scattered across Gabon, Guinea, Liberia and Sierra Leone.
Against this background it comes as no surprise that Chinas interest in African
resources has increased significantly over the past decade. Chinese national oil
companies have acquired oil equity in Sudan, Angola, Equatorial Guinea, Ethiopia,
Gabon, Chad, Uganda and Libya. Chinese national oil companies are also
prospecting for oil in several other African countries (Niger, Tanzania, Ethiopia,
and Sao Tome and Principe). Chinese mining companies have made significant
inroads in a number of African countries, namely, Guinea, Liberia, the DRC,
Zambia, Zimbabwe and South Africa. Notably, part of these assets has been directly
or indirectly secured by the extension of concessional loans for infrastructure.
Chinese economic cooperation and infrastructure-for-resources loans
Concessional loans are largely portrayed by China as a paramount example of its
winwin economic cooperation: Concessional loans are mainly used to help
recipient countries to undertake productive projects generating both economic and
social benefits and large and medium-sized infrastructure projects, or to provide
complete plant, mechanical and electrical products, technical services and other
materials.
21
This resonates particularly well in Africa, where infrastructure critical
for its economic and social development has been neglected by traditional
cooperation partners for decades.
Unlike NorthSouth cooperation, Chinese assistance has a very distinctive
pragmatic nature, ultimately justified by its developing economy status.
22
Rooted in
the core principles of non-conditionality, sincerity, equality, and mutual benefit
solidarity and common development,
23
Chinese cooperation is designed to benefit
both the recipient country and China. While providing assistance, Chinas conces-
sional loans are also an instrument to pursue economic goals overseas.
24
Chinese foreign aid assumes many different forms, namely, technical cooperation,
human resource development, medical aid, emergency humanitarian aid, overseas
volunteer programmes, debt relief and financial aid. Chinese concessional loans are
one of the three financial resources provided by Chinas foreign aid, the other two
being grants and interest-free loans.
25
While the latter two are sourced from Chinas
state finances, concessional loans are provided by the ExportImport (Exim) Bank of
China (i.e. they are market sourced).
26
Concessional loans for infrastructure have been used in the past by China as a
foreign policy instrument (i.e. the Tazara railway), with generally positive results for
Chinas political aims in Africa in the 1960s and 1970s. After a long break, the use of
concessional loans as a foreign policy instrument resurfaced in the late 1990s.
27
Unlike in the 1970s though, the goals pursued by this type of economic inducement
are now primarily economic.
Even though EXIM Bank concessional loans also target industry, resource
development and agriculture, they are primarily earmarked for infrastructure
construction (61% in 2009),
28
mostly in resource-rich countries. A substantial part
of these loans has facilitated Beijings access to resource supply and assets (oil,
minerals and other commodities), hence the name infrastructure-for-resources
deals.
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Unpacking Chinas infrastructure-for-resources loans
In general this type of loan is rooted in two legal instruments: a framework
cooperation agreement signed by the two governments stating the general terms
(volume, purpose, interest rate and maturity) and a loan agreement signed by the
China Exim Bank and the borrower. What makes these loans concessional is that
the interest rate (based on Libor plus 23% per annum) is below the benchmark of
the Peoples Bank of China, with the difference being subsidised by the central
government (and only this portion is considered aid in Organisation for Economic
Cooperation and Development Development Assistance Committee terms). The
reimbursement period is relatively long, being up to 1520 years, including a 57
year grace period.
29
Structured mostly as an export credit facility, these credit lines
come tied to the procurement of services, goods and often labour from China (a
minimum of 50%), leaving in general only a small margin for local content in the
recipient country. The capital never actually leaves China. It is administered on a
project basis through the borrowers account with Exim Bank in China, and
payments are made directly to Chinese contractors against completion of the
construction project.
Although not all China Exim Bank loans extended to African countries are
backed by resources, the ones extended to well-endowed countries often are, and
these constitute in fact the bulk of the banks portfolio on the continent. The main
reason for this is that Chinas concessional loans require a sovereign guarantee,
which is largely problematic in developing countries owing to their low creditworthi-
ness. In resource-rich countries China has solved this problem by locking in proceeds
from the sale of commodities such as oil or minerals from the borrowing country to
secure the loan. In most cases this locked revenue originates from the sale of the
specified commodity to a Chinese SOE. Usually a resource-focused parastatal of the
borrowing country is placed as the guarantor of the loan. Although most contracts
refer to a given volume of oil or minerals to service the loan, it is agreed that this
figure will in fact fluctuate according to market price oscillation, which might imply
adjustments to the term of the loan.
30
It should be noted that, although China made use of a similar financial facility to
secure loans from Japan in the 1970s,
31
commodity-secured financing in Africa is by
no means a Chinese invention. This mechanism was broadly used in the early/mid
1990s, largely to deal with the African context of chronic capital shortages, low
creditworthiness and at the same time high potential and in some instances
experience in commodities exports. This formula was first developed in London by
private banking institutions (British, French, Dutch and later South African) to
mitigate the risk of lending to resource-rich African governments (i.e. Angola) or in
funding the development of specific mining projects in the continent (i.e. Lumwana
copper mine in Zambia; Golden Pride gold mine in Tanzania).
32
A number of state
banking institutions have also adopted this financing model in their dealings with
Africa in recent years. This is the case of the Brazilian Development Bank (BNDES),
which extended a similar export credit facility to Angola and is seeking to apply this
same financing model in Mozambique (for coal) and Ghana (for oil).
33
Chinas infrastructure-for-resources credit lines in Africa are distinguished by the
sheer size of the loans (often multibillion dollars), their expanding geographical
footprint and the fact that they are designed solely as a state venture: the loan is
extended by Chinese state banks, the services providers are Chinese construction
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SOEs, materials and equipment are sourced from state enterprises back in China,
and Chinese national resource companies retain the off-taker rights, being the
proceeds from each sale used to service the loan. In line with Chinas going out
policy, infrastructure-for-resources loans are thus drafted in a way that minimises
lending risks and favours the expansion of Chinese companies*particularly
construction and resources SOEs*into African markets. They are also designed to
ensure long-term supply and collateral access to resources assets.
Not surprisingly, many of the first countries to receive Chinas infrastructure-for-
resources loans were oil-rich countries, namely Angola, Sudan and Nigeria.
34
However, the blueprint for infrastructure-for-resources deals is often attributed to
the concessional credit line extended to Angola in 2004 by China Exim Bank,
probably owing to the magnitude of the funding involved*hence the term Angola
mode for these arrangements.
Ebbs and flows of infrastructure-for-resources loans in Africa
In 2002 and 2003, Angolas government dispatched several diplomatic missions to
developed countries, aiming to organise a donors conference to raise the necessary
funding to start the countrys much-needed reconstruction following three decades of
civil war. All of these missions returned with conditions attached to any potential
funding, pressing Luanda to abide by International Monetary Fund (IMF) rules. In
2003 Beijing offered a way out of this predicament for Angola by proposing the
extension of a $2 billion unconditional oil-backed loan for infrastructure projects
listed in Luandas public works budget. A second batch of $2.5 billion was extended
in 2007. Thanks to this funding from China Exim Bank, Angola was able to kick
start the reconstruction of the country immediately and within a decade put in place
a significant part of the needed infrastructure, namely roads, railroads, sanitation,
housing and water and electricity supply lines.
This loan was to be repaid with the proceeds of oil sales from Sonangol (Angolan
national oil company) to the Chinese company UNIPEC (SINOPECs Trading).
Although the infrastructure projects funded were not directly related to the oil
industry, which is largely located offshore, the deal has clearly worked as a gate-
opener for Sinopec to enter Angolas oil sector. Tellingly, Sinopec acquired its first
equity stake in the Angolan oil industry shortly after the extension of the first loan.
The asset in question (50% of block 18) was being sold by Shell to the Indian ONGC
when Sonangol decided to exercise its right of first refusal and sell it instead to a joint
venture it established in the meantime with SINOPEC (SonangolSinopec Interna-
tional).
35
Nigeria under Olegun Obasanjo also embraced Chinese infrastructure-for-oil
deals, reportedly to the tune of a total of $12 billion.
36
Chinese national oil
companies (i.e. CNPC, CNOOC and Sinopec) obtained access to their first stakes in
the Nigerian oil industry in exchange for engaging in major infrastructure projects.
These include the rehabilitation of the Kaduna oil refinery ($2 billion) by CNPC, and
both the LagosKano 1350 km railway and the Mambilla hydroelectric station with
funding from China Exim Bank ($2.5 billion), secured by Nigerian oil blocks.
37
Soon afterwards, China began its outreach to minerals producers based on
similar package-deals aimed at funding greenfield mining projects and related
infrastructure in exchange for mining concessions and minerals supply. The largest
ones were signed with Gabon and the DRC. In 2006 the Gabonese government
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granted a Chinese consortium led by a construction company (China National
Machinery and Equipment Corporation, CMEC) the right to develop Belinga mine,
allegedly the largest known untapped deposit of iron ore in the world.
38
The $3
billion deal, designed to be financed by China Exim Bank and to be repaid with
revenue from exploration of Belinga mine, includes the construction of a new 560 km
railway line linking Belinga to the Transgabonais, a deepwater mining harbour at
Santa Clara and a hydroelectric dam and a steel mill, in exchange for exploration
rights through the establishment of a joint venture (Compagnie Minie`re du Belinga,
COMIBEL) in which the Chinese own 75% plus the off-taker rights.
In September 2007 China signed a similar deal with the DRC. The initial $5
billion loan was enlarged to $9 billion in January 2008. Under the agreement, $6
billion would be allocated in the first phase to the rehabilitation and construction of
infrastructure and $3 billion to mining exploration. The projects include a 3400 km
highway, a 3200 km railway linking Katangas mining province to Matadi port in the
Congo River estuary, 31 hospitals, 145 health centres, two universities and 5000
housing units.
39
A joint venture termed Sicomines was set up between the Congolese
state miner Gecamines, Sinohydro and China Railway Engineering Corporation. The
venture, owned 68% by the Chinese, planned to undertake the infrastructure and the
development of two mining concessions (copper and cobalt) in Katanga province.
40
The loan is to be repaid with revenue obtained from the exploration of these
concessions.
If, on the one hand, Chinas eagerness to provide cheaper and unconditional
loans and its willingness to embrace large infrastructure projects neglected by
traditional donors has represented a valuable competitive advantage for Chinas
cooperation and economic penetration in Africa, on the other hand, it has often
failed to produce the expected outcomes for both parties.
A number of these package deals have been delayed or cancelled owing to factors
such as damaging terms of the deal, naive planning, insufficient capacity and regime
changes. This is the case with the DRC, for instance, where the project development
has been delayed by traditional donors pressure to renegotiate the contract, seen as
too detrimental to the DRCs economy, resulting in the loan being revised and
downsized to $6 billion total in 2009 at Kinshasas request.
41
The new contract
signed in 2009 is only partially under implementation and the bulk of the loan is yet
to be released, as it is currently pending approval by the relevant authorities on both
sides.
42
In Gabon, the Belinga project has been repeatedly postponed owing to
persistent disagreements over labour and environmental issues and by calls for
renegotiation of the contract, perceived by civil society as too favourable to China. In
mid-2012 rumours emerged in the media that President Ali Bongo was courting BHP
Billiton and Vale to take over the project.
43
Lastly, in Nigeria, most loans and contracts signed under Obasanjo were frozen
by his successor Umaru Musa YarAdua after the elections in 2007, and the future of
these arrangements is still uncertain under the ongoing regulatory revision in the oil
industry. The experience in Nigeria, and later repeated in Libya, has exposed the
vulnerability to regime change of the elitist approach of this particular instrument of
Chinas economic cooperation.
Despite the drawbacks pointed above, China has recently extended a new batch
of infrastructure-for-resources loans in the wake of the financial difficulties of a
number of well-endowed African countries in the context of the global economic
crisis (see Table 1).
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After two years of negotiations, in 2011China Exim Bank extended another $3
billion oil-backed credit facility to Angola for general infrastructure. This time,
however, the deal did not produce any collateral oil assets for SINOPEC. In 2010, the
year Ghana became an oil-producing country, Accra signed a $3 billion loan
agreement with China Development Bank (CDB), the repayment of which is also
secured by oil sales. It should be noted that, in 2007, before the oil bonanza, China
Exim Bank had already extended a similar credit facility to this country: $292 million
to fund a hydroelectric project which was to be repaid with proceeds from cocoa
exports. The first tranche of $1 billion was cleared for disbursal in April 2012. This
initial batch is to fund the onshoreoffshore gas pipeline and the gas processing plant
linked to the Jubilee field as well as the ICT infrastructure for its surveillance.
44
The
remaining $2 billion will target harbour facilities, railway lines and agriculture
projects. In addition to this, China Exim Bank is currently negotiating with Ghana
an additional $6 billion credit facility for social infrastructure (e.g. roads, railroads,
education, electricity and water supply),
45
which is also expected to be repaid with
future oil revenue.
46
Despite the bitter experience in Nigeria, it was announced in February 2012 that
Lagos was negotiating with China Exim Bank and CDB a $3 billion loan for
completion of various projects in the fields of transportation, aviation, education and
agriculture.
47
Moreover, in 2011, Nigeria National Petroleum Company reportedly
signed a memorandum of understanding with China State Construction Engineering
Corporation (CSCEC) for the construction of three greenfield refineries and a
petroleum complex. The project investment amounts to $28.5 billion and is to be
financed by a consortium of Chinese banks. The CSCEC-led consortium will retain
an 80% controlling stake in the projects until costs are recovered.
48
A number of other loans are reportedly in the pipeline. In late April 2012, during
President Salva Kiirs visit to Beijing, South Sudan announced it was negotiating
with China a $8 billion loan for infrastructure, including road construction,
agriculture, hydroelectric plants and telecommunications.
49
It was not disclosed
under what conditions nor which Chinese bank would provide the loan. This
announcement, however, was yet to be confirmed by Chinese authorities at the time
of publication. In March 2013, on the sidelines of the BRICS summit in Durban, it
was announced that Beijing and Pretoria were negotiating a ZAR45 billion (around
$5 billion) CDB loan to TRANSNET (South African SOE in charge of national
logistics freight) to help fund the ZAR300 billion infrastructure upgrade plan.
50
This
loan, however, is less likely to be secured by resources owing to South Africas ability
to repay the loan through more traditional mechanisms.
Table 1. Major resources for infrastructure loans (20112012)
Country Guarantee Main funded projects Concessional loan Year and bank
Nigeria Oil General infrastructure $3 billion 2012 CDB/Exim Bank
(under negotiation)
Ghana Oil General infrastructure $3 billion 2012 CDB
Angola Oil General infrastructure $3 billion 2011 Exim Bank
Source: CRS, China’s Assistance and Government Sponsored Activities in Africa, Latin America and SE
Asia, November 2009; various media reports and interviews.
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It should be noted that China has also extended a number of smaller preferential
credit lines for infrastructure to other African states over the past decade. Among the
most recently announced recipients figure Tanzania (2009: $400million to build a
coal power plant),
51
Zimbabwe (2011: $700 million for various infrastructure)
52
and
Mozambique (2012: $300 million ring road around Maputo). Even though these
credit lines are not guaranteed by resources supply, one cannot help noting that a
significant number of these countries are well endowed with natural resources.
The impact of infrastructure-for-resources loans on Africas development
In under a decade China has become Africas largest trading partner, an important
investor, and a very significant cooperation partner. These closer ties with China have
undoubtedly played a role in the continents rapid economic growth rates and in
what is increasingly regarded as Africas rising.
53
However, in concrete terms
what has a decade of Chinese infrastructure-for-resources loans done for Africas
development? In what ways has it helped Africa beyond mere economic growth,
namely in regards to economic diversification, governance and social development?
Although it is still too early to make a comprehensive assessment of its
developmental impact, some trends can be clearly identified. While provision
of hard infrastructure across the continent is by far the most apparent and
positive dimension, the impact in soft infrastructure is less evident and raises some
concerns.
Hard infrastructure
Chinas engagement in Africas infrastructure construction has grown exponentially
over the past decade. Although exact figures are difficult to determine, according to
the Infrastructure Consortium for Africa (ICA),
54
China is a critical funder of
African infrastructure. ICA estimates that Beijing accounted for nearly one-fifth
($33.9 billion) of pledged external support to African infrastructure between 2008
and 2011.
55
What is more, in a context of contraction of financial commitments by
all external funding sources (ICA members and private sector) in 2011, China
increased its infrastructure commitments by 66% in relation to the previous year,
totalling $14.9 billion (or 36% of all external funding in 2011).
56
This data suggests
that China has indeed become a critical partner in bridging Africas infrastructure
gap. According to the same source, and in tune with an earlier report by the World
Bank,
57
the bulk of Chinese infrastructure commitments on the continent originate
from loans (not investment), largely extended by China Exim Bank, which allegedly
accounted for 92% of Chinese infrastructure lending in Africa between 2001 and
2007.
58
The total sum of China Exim Bank loans to the region (20012010) is
estimated at $67.2 billion,
59
topping the World Bank figure for the same period.
China Development Bank loans have also been gaining traction in Africa in recent
years.
According to ICA estimates, the bulk of Chinese lending goes to transport (roads,
railways, ports and airports*81% in 2011) followed by energy (generation, transport
and distribution*13% in 2011). In 2011, 80% of commitments were in Central
Africa.
60
Through infrastructure-for-resources loans, China has made a substantial
contribution towards the provision of hard infrastructure across the continent,
South African Journal of International Affairs 217
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ranging from roads, railroads, ports, airports, power generation and distribution
grids to pipelines and refineries. These are making an important input towards
revamping Africas transportation network and power supply and as such
contributing towards a more conducive business environment and the unlocking of
Africas wealth and, indirectly, to poverty reduction in the continent.
Also on the positive side is that, in general, Chinas loans offer better repayment
terms, namely lower interest rates and longer reimbursement time frames. Addition-
ally, they come with no political conditionalities, and by providing an alternative
funding source they increase African countriesbargaining power vis-a`-vis traditional
donors. Also, the way the loan is structured (paying the contractors directly in
China) reduces the chance of large-scale embezzlement by borrowing governments.
Chinese loans are also disbursed much more quickly and the actual provision of
infrastructure is quicker and cheaper. The arrival of Chinese companies has also
impacted positively on the local construction industry by improving competition and
bringing costs down.
On the other hand, the fact that these loans are tied to procurement in China
inhibits multiplier effects in the host economy. Not only is there limited subcontract-
ing of local services by Chinese contractors, as in some cases (i.e. Angola), the local
contractors subcontract Chinese companies to develop the projects since it works out
cheaper. The fact that materials and equipment are imported from China not only
represents a missed opportunity to develop the local construction industry but also
poses a real threat to its survival (i.e. hard competition for local cement plants and
other suppliers of construction materials and equipment). To this is added the poor
quality of some of the infrastructure built by Chinese companies as well as the lack of
maintenance procedures. One must keep in mind, though, that part of the
responsibility for this state of affairs actually lies on the African side, as in most
cases African states do not have in place efficient regulatory frameworks and
supervision mechanisms to ensure certain quality standards are met and to encourage
local content in the construction of projects.
These construction projects under the credit lines also create only a limited
number of jobs for locals, as Chinese companies prefer to source most of their labour
force from China; Chinese labour is less expensive and easier for Chinese companies
to work with (no language or cultural barriers), meaning limited skills transfer for
locals. In addition, Chinese contractors tend to implement Chinese labour practices
in their projects, namely low salaries, long shifts, temporary contracts and poor
safety conditions at work, which nurtures discontent among local workers. Here too
part of the responsibility actually lies with the African governments, who agreed with
those conditions when negotiating the loans with Beijing.
Chinese infrastructure loans have also done relatively little for Africas economic
diversification and helping the continent shift away from resource dependency, so far.
Although some of these loans knit together infrastructure and resources develop-
ment (mostly in the mining sector), they have yet to prove their credentials as a
catalyst for Africas resource-based industrialisation. This is due to the fact that most
projects of this kind have yet to produce any meaningful results owing to various
challenges at the implementation level, as discussed above (i.e. DRC and Gabon). In
addition, provisions for local beneficiation, technological transfer and capacity
building seem to be limited, the responsibility for which is however shared with the
African counterparts that negotiate the contracts. So far, China and African
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governments have not been able to efficiently channel these loans to develop local
industries around infrastructure or resources sectors.
Soft infrastructure
A number of other features of Chinas infrastructure-for-resources lending model
which may impact negatively on the continents already weak soft infrastructure are
raising concerns among traditional donors and, increasingly, African civil society.
These are namely, (A) the non-conditionality and lack of transparency of this kind of
financial support and the negative impact it may have on Africas overall governance;
(B) the possibility that the loans being provided by China may push these countries
into a new cycle of debt, which would be likely to have a negative long-term impact
on the continents economic stability; and (C) the poor environmental and social
responsibility record of Chinese companies engaging in natural resources extraction.
Governance
A number of Chinas resource-rich African partners have consistently appeared at
the bottom of the Mo Ibrahim Index of African Governance, namely, Angola (40 out
of 52 in 2012), Guinea (42), Nigeria (43), Equatorial Guinea (44), Zimbabwe (47)
and the DRC (51).
61
Against this backdrop, concerns have been expressed over
Chinas expanding engagement in the continent as it is feared that Chinas no strings
attached approach to investment and development assistance might undermine
long-standing efforts in improving governance and transparency through the
application of strict conditionalities by traditional partners. Although, as mentioned
before, there is less chance of large-scale embezzlement in the Chinese formula, it is
by no means immune to rent-seeking.
Moreover Chinese infrastructure-for-resources loans allow countries with no
credit-worthiness in the international market to contract loans against resources
output, allegedly allowing them to circumvent IMF and World Bank transparency
requirements. A closer look at the case of Angola, however, demonstrates that, even
though Chinas credit lines may have contributed to Luandas disengagement in 2004
from Washington Consensus mechanisms like the IMF, the Heavily Indebted Poor
Countries initiative (HIPC) and the Extractive Industries Transparency Initiative,
62
the Angolan government has been repaying its creditors and improving transparency
in public accounts. For instance, the Ministry of Finance has become increasingly
transparent, making public information previously undisclosed, including the
governments public accounts, the management of Chinas Exim Bank loan and
audited financial reports on Endiama and Sonangol, diamond and oil parastatals,
respectively. Moreover it resumed ties with the IMF in 2009 and notable progress has
been made in diversifying the economy away from oil exports. This suggests that
Chinas infrastructure-for-oil loans do not necessarily entail a decline in transparency
and economic performance.
Furthermore, China has shown some openness towards a number of interna-
tional regulation initiatives to improve governance, transparency and sustainability
of natural resources development in Africa, namely the Kimberley process,
63
the
Extractive Industries Transparency Initiative
64
and the Equator principles;
65
Chinese
firms compliance with these initiatives has, however, been a matter of contention in
all these cases.
66
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Debt sustainability
Chinas financing to Africa has already surpassed that of traditional donors and
multilateral financial institutions as mentioned above. Notably, it has been
expanding its credit in Africa in the framework of various Western initiatives for
debt relief, namely the HIPC
67
and the Paris Club, which together had forgiven $89
billion in debt to Sub-Saharan Africa by 2007,
68
while Chinas equivalent figure in
debt relief for 20002009 was below $3 billion.
69
The perception that China (as well as other new emerging donors) is free-riding
on long-standing debt-relief efforts by traditional donors and multilateral institu-
tions while adding to the debt burdens of African countries is, however, contested by
a number of studies. As underlined by the Organisation for Economic Co-operation
and Development (OECD), the major beneficiaries of Chinese loans are resource-
rich states that did not benefit from HIPC (i.e. Angola, Sudan, Nigeria) and in which
debt ratios have actually declined in recent years.
70
In addition, China debt relief in
Africa has benefited mostly HIPCs and its subsidised export buyers credit facilities
would be considered concessional by current standards of the Development
Assistance Committee (DAC) of the OECD.
71
While supporting that Chinese loans
have not impaired Africas debt sustainability so far, the African Development Bank
considers that this may become a problem in the future as Chinas engagement in the
continent intensifies, drawing attention to the case of the DRC, which had to modify
the original terms of Chinese financial assistance in 2009 to qualify for completion of
HIPC debt relief.
72
Environmental impact
The increasing number of complaints involving Chinese companies disregard for
environmental protection in Africa, particularly the ones engaging in resources
extraction, has led Beijing to take some measures aimed at improving the
environmental impact of Chinas overseas investments. These are: the inclusion of
an environmental safeguard among the nine principles regulating Chinese companies
investments overseas, issued by the State Council in October 2007; the announce-
ment of similar initiatives in a number of ministries (e.g. the Ministry of Commerce)
and agencies (state banks); and the agreement signed in January 2008 between the
Chinese State Environmental Protection Administration and the International
Finance Corporation to introduce the Equator Principles in China.
73
Chinas
Industrial Bank became in November 2008 the first Chinese financial institution
to adopt the Equator Principles.
Despite progress at the political level, the lack of an efficient supervision
mechanism at the bottom of the hierarchy has led to slow progress. Although the
above measures do not necessarily apply to Chinas overseas investments, they offer a
blueprint from which Chinese financing institutions such as the China Exim Bank
may extract guidance in the near future. The implementation of the Equator
Principles in their projects overseas, however, remains below expectations.
As for China Exim Bank, it adopted its own environmental policy in 2004, which
was complemented by further guidelines issued in August 2007 concerning social and
environmental impact assessment and urging companies to comply with host country
policies. No reference was, however, made to any international regulations. Never-
theless, the signature of a memorandum of understanding with the World Bank in late
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2007 to exchange information on project evaluation procedures and look for
opportunities to cooperate in development projects in other countries, may have a
positive impact on China Exim Bank environmental and transparency standards in the
future.
In the face of Africas endemic weak institutional capacity and growing criticism
among African civil society and political leaders,
74
China has much to gain in
assuming a more proactive stance in refining its practices and investing more in the
strengthening of African governance structures. Infrastructure loans should make
provisions to also support soft infrastructure, namely in improving the capacity of
implementing agencies, most of which are plagued by structural inefficiencies. This
could include capacity building, technical assistance, project management advisors,
and technical and financial monitoring assistance.
In addition, China would gain from developing a multilateral angle to its
infrastructure commitments in Africa in addition to its current bilateral approach.
This would entail engaging with African regional organisations in the construction of
cross-border regional infrastructure critical to foster inter-regional trade. Presently,
China is one of the top financers of African infrastructure but does not figure in any
of the top 20 regional infrastructure projects completed in the last five years listed by
ICA.
75
This would entail working more closely with regional banks (i.e. the African
Development Bank and the Development Bank of Southern Africa) in the same
manner as Beijing is already doing in Southeast Asia.
In order to grasp the potential economic benefits beyond the physical
infrastructure, Africa needs to leverage the true dimension of its bargaining power
with China. If on the one hand Africa has a huge infrastructure gap, on the other
hand, it has a large pool of underdeveloped resources, an expanding consumer
market and increasing clout in multilateral fora. Refining local content laws and
untying the loans to procurement in China would be a start * Brazil has done this
quite successfully.
76
Including other sectors in the loans (agriculture and manufac-
turing), and ensuring local beneficiation, technological and skills transfer are other
dimensions that need to be developed.
Concluding remarks
The above analysis suggests that Chinas infrastructure-for-resources loans have
a mixed impact in Africas development. On the one hand, the provision of
infrastructure is making a strong contribution to the economic take-off of a significant
number of African countries and arguably improving the lives of millions across the
continent with better roads and other hard infrastructure features; on the other hand,
the shortcomings pointed out in this study may in the long run offset these immediate
benefits. The existing flaws, particularly in terms of labour practices, local content,
governance, debt sustainability and environmental impact, threaten to perpetuate the
dire inequality indicators in the receiving countries if not properly addressed.
Most of the problems diagnosed in this study, however, are ultimately a reflection
of the institutional constraints found in most African countries. These include weak
institutional capacity to negotiate the deals with Beijing on an equal footing; poor
governance and accountability structures; and feeble regulatory frameworks or,
where they exist, weak capacity to implement them. To this is added the fact that
China has relatively little experience in dealing with such issues and perhaps less
incentive to address them at this point, as, in the absence of efficient regulations in
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the host countries, its companies will naturally import their domestic practices and
rely on their economies of scale which guarantee a bigger margin of profit. This state
of affairs is precluding the potential economic benefits of this particular Chinese
economic cooperation tool to effectively spill over to the rest of the host economy
and ultimately filter down to the masses.
Nonetheless, the study suggests that there is enough leeway at present to change
this situation. As China accumulates experiences on the continent, it is becoming
more aware of the need to go beyond the elites and engage with all stakeholders and
in a more constructive way. The analysis shows that changes in Chinas policy are
mostly ad hoc and prompted by strong external pressure or by reaction to changing
circumstances, meaning that there is plenty of room for governments to be more
assertive when negotiating with Beijing and for African civil societies to be more
vocal in defending their rights and interests.
In the last summit of the Forum on ChinaAfrica Cooperation in Beijing, July
2012, Hu Jintao pledged $20 billion in loans for infrastructure and manufacturing
over the next three years, demonstrating that China is attuned to African economic
needs. Despite clear signals of greater assertiveness in Chinas foreign policy with the
arrival of the new President Xi Jinping, his March 2013 tour to Africa demonstrated
that the commitment to Africa remains intact. During his visits to South Africa,
Tanzania and the Republic of Congo new infrastructure loans were pledged,
indicating that this will remain a critical dimension of the relationship.
African governments and civil society thus have not only the opportunity but also
the responsibility to make the most out of this unique opportunity. They need, first,
to make sure that these loans feed into their own long-term development/
industrialisation planning; second, to develop the necessary regulations, implement-
ing institutions and mechanisms on the ground to ensure their expectations are met;
and third, to be more assertive and engage on the basis of their own agency when
sitting at the table with Beijings bureaucrats. Only then will Africa stand to benefit
as much as China from infrastructure-for-resources loans.
Notes on contibutor
Ana Alves obtained her PhD in International Relations from the London School of
Economics and is currently the Senior Researcher in the Global Powers in Africa
Programme at the South African Institute of International Affairs.
Acknowledgements
This article is an updated and modified version of a paper published in Portuguese: Ana Alves,
‘Cooperac
¸
a
˜
o de beneficio mutuo: analisando o impacto dos acordos infraestrutura por
recursos da China em A
´
frica’ [‘Winwin cooperation: analysing the impact of China’s
infrastructure-for-resources deals in Africa’], in Esteves P & A Abdenur (eds) Os BRICS e a
Cooperac
¸
a
˜
o SulSul [The BRICS and South South Cooperation], Rio de Janeiro: PUC-Rio
(forthcoming, 2013). The author would like to thank the anonymous reviewers and the journal
editor for their insights and useful comments which helped improve the original manuscript.
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32. For a detailed study on commodity backed nance in Africa see: JBIC London Ofce,
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33. Personal interview, BNDES International Department, Rio de Janeiro, Brazil, 23 May
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34. Foster V, W Buttereld, C Chen & N Pushak, Building Bridges: Chinas Growing Role as
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35. Alves A, The oil factor in Sino-Angolan relations at the start of the 21st century.
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43. AAP, Gabon renegotiates Chinese iron ore mine deal, Business Spectator, 12 June 2012,
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47. Ahmed I, Ngozi in Beijing for $3bn Chinese loans, Daily Trust, 22 February 2012,
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ICA members: the World Bank, International Finance Corporation (IFC), European
Commission (EC) and European Investment Bank (EIB). All G8 countries are members
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58. Ibid., p. 40.
59. Cohen M, Chinas EXIM lend more to Sub-Sahara Africa than World Bank, Fitch
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63. The Kimberley Process Certication process imposes extensive requirements on its
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prevent conict diamonds from entering the legitimate trade.
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67. IMF and International Development Association (IDA) instrument created in 1996 and
enhanced in 1999, to provide debt relief to the worlds most heavily indebted poor
countries. The criteria that a country needs to meet before becoming eligible under the
initiative can include good governance, accountability for public funds and the adoption
of a national anti-corruption strategy.
68. Foster V, W Buttereld, C Chen & N Pushak, Building Bridges: Chinas Growing Role as
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2008, p. 48.
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71. Ibid.
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9SdM (accessed 10 May 2013).
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Africa’s and South America’s rich endowments of resources and great need for infrastructure development make them perfect candidates for China’s “infrastructure-for-resources” loans. Over the past decade, such an arrangement for pursuing China’s resource-security goals overseas – namely, securing long-term supply contracts and accessing exploration rights – has proved more effective in Africa than in South America. This article discusses the reasons for this regional variation by providing a comparative study of China’s economic statecraft in Angola and Brazil, focusing on the deployment of infrastructure-for-oil deals. It argues that the variation in China’s energy-security outcomes (long-term supply and access to oil equity) in Angola and Brazil can be attributed mostly to fundamental differences between the institutional structures of each country’s oil industry. Although this foreign policy instrument has worked well for the centralised structure encountered in Angola, it has been less suitable for the far more liberalised and regulated environment that characterises Brazil’s oil sector.
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