Filling Asia’s “Infrastructure Gap”

:
Assessing the Risks and Opportunities of Different Approaches
Center for Strategic and International Studies
Washington, D.C.
29 July 2015
China-Africa Infrastructure Financing
David H. Shinn
George Washington University
Introduction
While this conference is focused on Asia’s infrastructure gap, I have been asked to
address the Chinese approach to infrastructure financing in Africa. There is, of course, much
more Chinese infrastructure engagement in Asia than in Africa.
It is important to understand that with a few exceptions, China is developing
infrastructure in Africa by providing concessionary financing that is almost always tied to the use
of Chinese companies, usually state-owned. Chinese infrastructure projects rarely constitute
foreign direct investment or foreign aid unless one uses an unusually broad definition of
infrastructure. There are occasional gifts of public buildings such as a stadium, foreign ministry,
presidential palace, or military barracks.
The overwhelming majority of Chinese-financed infrastructure projects in Africa involve
concessionary loans; in some cases, the concessionary component of the loan qualifies as foreign
aid. There are a few cases where Chinese state-owned companies are building infrastructure,
defined broadly, that seems to qualify as foreign direct investment. For example, Sinohydro
Resources Ltd. is building a cement plant in Mozambique where it will hold 55 percent of the
shares; this would appear to qualify as foreign direct investment.
My remarks will focus on China’s financing and building of African infrastructure
because that is where the action is. To its credit, China responded to requests from African
governments for infrastructure beginning about 15 years ago when North American and
European countries and the World Bank were stepping back from large infrastructure projects.
While China responded so as to meet the requests of African leaders, it also saw an opportunity
to win huge contracts for Chinese companies, most of them state-owned.
Measuring China’s Infrastructure Financing

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Measuring the value of overseas contracts won by Chinese companies and financed by
China is an art and not a science. The estimates vary widely. There is no centralized Chinese
database recording these flows. The information is compiled by organizations such as the World
Bank based on official Chinese statements and media reports. Determining when a project
represents a commitment, when it is subject to further negotiations, and how much of the project
is funded by Chinese sources involves a lot of guess work.
A Brookings Institution study titled Financing African Infrastructure concluded that
China financed each year from 2007 through 2012 on average about $5 billion worth of
infrastructure projects in Sub-Sahara Africa. In 2012, the Brookings Institution estimate for
infrastructure financing in Sub-Sahara Africa was $4.4 billion.
The Infrastructure Consortium for Africa (ICA), a group of organizations hosted by the
African Development Bank (ADB), developed much higher estimates for China’s financing of
infrastructure in Africa in its Infrastructure Financing Trends in Africa – 2013. Although it
includes North Africa in its estimates, there were no flows to North Africa from 2011 through
2013. The ICA estimated Chinese infrastructure financing in Africa at $14.9 billion in 2011,
$13.4 billion in 2012, and $13.4 billion in 2013.
It is not clear why there is such a huge difference between the Brookings Institution and
ICA estimates, although it may have to do with how each study defines an effective commitment
and/or involve a broader definition of infrastructure used by the ICA. The ICA ranks China as
the single largest financer of infrastructure in Africa. At $13.4 billion in 2013, China financed
almost twice as much infrastructure as the $7 billion estimate for runner up United States. Other
countries, development banks, and coordination groups were well behind China and the United
States.
Regional and Sector Focus of Financing
The geographical focus for Chinese financing of infrastructure has been changing over
the years. According to the ICA, more than half of the financing went to West Africa in 2012
followed by East Africa and Southern Africa. Central Africa received a small amount and North
Africa nothing. In 2013, East Africa received 70 percent of China’s infrastructure financing
followed by West Africa and Southern Africa. Central Africa received a small amount and North
Africa nothing. According to the Brookings Institution, Ghana and Ethiopia were the largest
recipients of Chinese infrastructure financing from 2009 through 2012. Other major recipients
were Cameroon, Zambia, and Nigeria.
In earlier years, Chinese financing tended to follow opportunities in Africa’s energy and
extractive sectors. Since 2010, China has broadened its infrastructure financing to non-resource
rich countries, especially those that have strong economies. Most of the financing still goes,
however, to resource rich countries.
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Increasingly China has provided financing for the transport and hydropower sectors,
although energy remains important. From 2005 to 2012, 53 percent of China’s financing in SubSaharan Africa went to transport, 34 percent to energy, 8 percent to telecommunications, and 5
percent for water supply and sanitation. Most of the financing is done by the Export-Import
Bank of China.
Financing for infrastructure is usually tied to projects implemented by Chinese
companies that use a percentage of Chinese labor; the percentage of Chinese labor varies
significantly from country to country. For example, the China Civil Engineering Construction
Corporation is building the Ethiopia-Djibouti railway while the China Roads and Bridges
Corporation is constructing the Mombasa-Nairobi highway.
A recent initiative is the $2 billion Africa Growing Together Fund, a co-financing
arrangement by the People’s Bank of China and the ADB. Resources from the fund will finance
over a ten year period eligible sovereign and non-sovereign guaranteed development projects in
Africa. Theoretically, this fund will finance projects by both Chinese and non-Chinese
companies.
Investment in Infrastructure
The China-Africa Development Fund (CADF) is a $5 billion private equity fund that
invests in Sino-African joint venture companies. By the end of 2012, CADF had committed $2.4
billion to 61 projects in 30 African countries and disbursed $1.8 billion for 53 projects. The
CADF website does not provide any information about the projects, but the fund would seem to
be inappropriate for most infrastructure projects. CADF says it is looking to emphasize
agricultural and industrial projects rather than infrastructure projects.
China’s $650 billion sovereign wealth fund also wants to invest globally in agriculture,
technology, real estate, and infrastructure. Again, there may be limited opportunity to invest in
infrastructure projects as they generally are not designed to turn a profit.
Hydropower Case Study
The China Africa Research Initiative at Johns Hopkins University did an excellent
analysis earlier this year titled Chinese-Financed Hydropower Projects in Sub-Saharan Africa.
Since 2000, Chinese construction companies and banks have shown sustained interest in 53 large
hydropower projects in Africa. By the end of 2013, however, only 17 of these projects had
secured Chinese financing. The total cost of the 17 projects is about $13 billion, of which China
is believed to have committed about $7 billion.
Chinese companies are building 6 additional large hydropower projects in Africa financed
by non-Chinese sources. China Exim bank provided at least some financing for 16 of the
projects, sometimes as sole financier, and sometimes as part of a consortium. The Industrial and
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Commercial Bank of China provided some financing for one project in Ethiopia. The China
Development Bank had not yet financed any hydropower projects in Africa.
The study spells out the 5 kinds of loan instruments provided by China Exim bank. Most
Chinese financing required the host government to supply 10 or 15 percent of the project cost up
front. China’s National Development and Reform Commission approves projects above $300
million, while China’s State Council must sign off on projects valued above $1 billion. Chinese
companies secure projects through one of 3 processes: tender negotiations, tender invitations, or
public bid invitations.
China is an important player in African infrastructure development but most of the
activity is based on concessionary loans tied to construction of projects by Chinese companies.

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