Chinese loans traditionally challenge aid

Fast and large loans make China an increasingly strategic partner for many African countries. Chinese loans give poor countries the opportunity to finance major infrastructure projects. At the same time, the position of traditional donors in the region is challenging, writes Annie Sturesson, who works at the Ministry of Finance in Uganda.

In March 2015, Ugandan President Yoweri Museveni attended the Boao Forum, a Chinese economic conference. The trip paid off with a bang. The president came home with $ 3,1 billion in loan deals. At a ceremony with Chinese President Xi Jinping, Museveni praised the strong cooperation between the countries:

"When I hear your speeches, I am pleased to note that you are talking about a win-win situation, not chauvinism, not arrogance - your position as China has been coherent. "

Since 2007, Uganda has negotiated four loans with China. Several more large loans are under negotiation, including an $ 8 billion loan for a regional rail project for standard gauge that will be the country's largest infrastructure project ever. China is soon expected to become Uganda's largest lender, larger than the World Bank and the other multilateral development banks.

The most recent Chinese loan for a hydropower plant amounted to over one billion dollars, which is twice as much as the World Bank's total loan portfolio for Uganda for the next three years.

According to a lending expert at Uganda's Ministry of Finance, China has opened up completely new opportunities for the country. ”The Chinese provide large loans of billions of dollars and it goes fast ", he says.

Makes lower demands

The speed of Chinese loans is due to the fact that the Chinese EXIM Bank places fewer demands on the design of projects than, for example, the World Bank or the African Development Bank. Loans from the World Bank include a long quality review process with requirements for evaluating the consequences for the environment and the local population. From negotiation to payment, it takes at least 2 years and sometimes up to 4 years. Negotiations are also delayed by the fact that all loans, including the Chinese ones, must be approved by the Ugandan parliament.

The multilateral banks consider that requirements for government investigations and detailed project documents are part of their institution building in Uganda and necessary to ensure the quality of the projects. A source at the World Bank in Kampala states that if Uganda had asked them to analyze the two most recent hydropower plants, they would have advised the government not to fund the projects. Political pressure and the personal interests of powerful individuals are considered to influence the choice of expensive and risky mega-projects. Ugandan media reported, for example, that President Museveni negotiated on his own initiative with a Chinese company on the regional railway project, despite the fact that a financing agreement had already been concluded with another Chinese company and also at a lower price.

Fast cash = more expensive cash?

Fast money often comes with a higher price tag. The interest rate for the Chinese loans from EXIM is on average 4 percent. This is higher than the World Bank's soft loans of less than 1 percent, but lower than the loans of 5 percent and up that are set at the market price.

Loans from EXIM are also tied to Chinese companies and only go through a limited procurement process. Bonded loans risk weakening the borrower's negotiating position and leading to higher costs.

However, the lending expert at Ugandan finance ministries, who regularly participates in negotiations with China, does not believe that fixed-term loans are a major problem as contracts are negotiated based on market research.

"Our contracts are negotiated in lump sums, so it is not in the companies' interest to delay and delay the projects ", he adds.

China is outside aid coordination

China differs from traditional donors by being outside local aid coordination groups. According to the EU, which coordinates the donor group for infrastructure, China has a standing invitation to the group but has so far shown no interest in participating.

The Ugandan Ministry of Finance's willingness to get China to join other donors seems weak. ”We have a good bilateral working relationship with China as it is now. If China wants to join the other donors, it is up to them. " says an economist who handles loans from China.

That China stays away from donor groups is not unique to Uganda. A study by the British think tank Overseas Development Institute (ODI) believes that it is a clear policy for China to distance itself from traditional donor-recipient relations and instead market more equal South-South partnerships and win-win partnerships.

The study also believes that separate talks with China strengthen partner countries' negotiating position vis-à-vis traditional donors. The Ugandan Ministry of Finance's different dialogue with China can thus be seen as a conscious strategy to strengthen its role and signal that there are alternatives to traditional aid.

In recent years, Uganda's relationship with Western donors has become increasingly complex. Budget support from European countries and the World Bank, which ten years ago financed more than a quarter of Uganda's total public spending, has in principle completely ceased as a result of recurring corruption scandals and a bill with severe penalties for homosexuality in 2014. Chinese loans, which do not come with any requirements for respect for human rights, thus constitute a more reliable cash flow. ”The Chinese are here for business. We know what they are looking for - good business. But with other donors, it's harder. Instead, they try to get involved in our affairs ", says an economist at the Ministry of Finance.

Hope and challenges from the country in the east

With faster and larger loans, China has changed its playing field. For Uganda, Chinese loans mean important financing for mega projects. “We used to look to the west but now to the east - there is hope, " says an economist at Uganda's Ministry of Finance.

But for a country with weak institutions and a private sector with a large political involvement, large and fast loans also entail great risks. A win-win partnership, which benefits not only Chinese business interests but also the people of Uganda, requires the country to play its cards right and invest in projects that are economically and socially profitable.

For the multilateral development banks, competition from Chinese loans can contribute to a positive drive for change. New instruments and collaborations are needed to be able to offer larger and faster financing opportunities - but without compromising on the quality of different projects. Sweden is a major donor to both the World Bank and the African Development Bank, as well as a co-founder of the new Asian Development Bank. Therefore, Sweden has an important role to play in this change work.

Annie Stursson

This is a debate article. The author is responsible for analysis and opinions in the text.

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