China's loans to South Africa - IV
24 January 2019
The first brief gave an overview of South Africa’s debt situation, how the loans from China fit into this, and why it is we need to look at the experiences other countries have had with Chinese debt. The second and third briefs covered the experiences Sri Lanka, Pakistan, Argentina, Zambia, Kenya and Ethiopia have had with Chinese loans. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.
THE LESSONS LEARNED
In the points below, I begin by summarising each lesson learned from the six countries researched, followed by a synopsis of how it might apply to South Africa.
1. Repayment difficulties:
None of the six countries analysed have been able to, or will likely be able to, avoid repayment difficulties on their Chinese loans, or national debt generally. Zambia was never able to turn a profit from the TAZARA railway line, and the debt could not be paid back over several decades and governments. It is unlikely that Kenya’s SGR railway line will be able to turn a profit either. Ethiopia has begun debt restructuring despite having one of the world’s fastest growing economies. Pakistan looks likely not to be able to generate enough revenue for repayment, and Sri Lanka defaulted on their loan. Argentina has continued to struggle with debt repayments generally, and at the end of last year asked to be released from a $50 billion loan from the IMF. However, there is yet to be reports on repayment issues specific to Argentina’s Chinese loans.
Could South Africa be an exception and avoid repayment difficulties? As discussed in the first brief in this series, South Africa may have already reached the threshold level of debt-to-GDP in relation to debt servicing difficulties. So what if South Africa does encounter repayment troubles on its China loans? In contrast with other major creditors, China does not formally participate in multilateral mechanisms, such as the Paris Club, in dealing with sovereign loans and defaults. Chinese debt relief is done in an ad-hoc, case-by-case basis, and as such there is no guiding framework to define China’s approach to debt relief and restructuring. We therefore have to rely on anecdotal evidence from other countries.
From what has been analysed in these briefs, Zambia’s TAZARA shows China’s sympathetic side to repayment difficulties, whereas in Sri Lanka on the other hand, China has been relentless due to a strong strategic interest in the infrastructure it helped fund.
In August 2017 the Chinese government imposed new regulations on capital outflows, made up of a list of ‘encouraged’ investments; this includes Belt and Road Initiative (BRI) infrastructure and natural resources. While South Africa is not on the BRI route, it is plausible that if South Africa’s loans were used for infrastructure related to the extraction of resources crucial to the Chinese economy, such as coal, that this will increase the likelihood of any debt renegotiations being to South Africa’s detriment.
2. Cost overruns:
Cost overruns of the infrastructure projects have been experienced in almost all the countries analysed, resulting in higher than the planned debt levels and linked interest expenses.
Because cost overruns have been the general rule with Chinese as well as South African infrastructure projects – such as the cost overrun of over R 52 billion on the Medupi and Kusile power stations – I can see no reason why any new infrastructure projects off the back of Chinese loans would not experience the same. It would therefore be prudent for the government to plan its infrastructure spend to be below the total initial amount of the loans, similar to Argentina’s downward renegotiation of its contracts.
Corruption has tainted the loans to at least four of the six countries analysed. There are few reports of corruption in the Zambian loans, but when taking into consideration Zambia’s current score of 37 out of 100 on the Transparency International Corruption Index (South Africa scores 43), the lack of corruption reporting could be because of the lack of information about the loans, amongst other possible reasons.
In South Africa, China South Rail has already allegedly been complicit in the irregular awarding of a tender worth over R25 billion by Transnet in 2014. This included a R5 billion kick-back to Gupta linked Trillian Capital for ‘consulting fees,’ and R509 million more being spent than should have been on one train deal alone. Without transparency, incentives and the opportunities for corruption can only rise. It is therefore essential that all terms and conditions of the loans, and full details of the projects attached to them, be made publicly available in order to deter corruption and hold all those involved to account.
4. Lender of last resort:
For Zambia, Kenya and Sri Lanka, because certain projects did not pass feasibility studies, China was the lender of last resort. In Argentina’s case it simply could not find funding elsewhere. As such, China was naturally in an opportune position when negotiating the terms of the loans.
It has become general knowledge that South Africa’s largest parastatal, Eskom, has in the last year or more been unable to raise enough of its required financing through the bond markets – where it had traditionally raised funds in the past. In light of this, the R37 billion loan from China to Eskom last year makes it reasonable to presume that China has become South Africa’s lender of last resort, making it all the more probable that the terms of the loans are largely skewed in China’s favour.
5. Terms for construction inputs:
In Zambia, Sri Lanka and Pakistan, a term of the loans was that China was to supply the vast majority of the inputs. As such, local labour, suppliers and construction companies could not directly benefit from the projects.
Given the economic slump in which South Africa finds itself, the high unemployment rate and having lost out on the last commodity rally as a result of the ‘lost decade’ during Zuma’s presidency, negotiating the terms of inputs along the lines of those achieved by Kenya, by giving priority to South African inputs, is an absolute must.
Only in Zambia, Pakistan and Argentina were the terms of the loans largely unknown, so while secrecy is a common feature of Chinese loans around the world, it is not the rule. As discussed in the first brief in this series, President Ramaphosa and other officials have unfortunately given inadequate reasons as to why secrecy should be the case here.
7. Chinese loan dependency:
Sri Lanka, Pakistan and Argentina have become heavily dependent on Chinese loans and would likely not have adequate funding without them. If China is or becomes South Africa’s lender of last resort and government does not manage to adequately service its debt or find funding elsewhere, South Africa runs the risk of becoming Chinese loan dependant. That or go into debt restructuring at the behest of the IMF.
8. Threats to national sovereignty:
In Sri Lanka the Chinese loans resulted in an assault on the country’s sovereignty on potentially two fronts. First, China now owns the Hambantota port and 15 000 acres of land surrounding it. Second, there have been reports that a Chinese state owned company working in Sri Lanka actively tried and influence the country’s general elections. In Argentina’s case, land was allocated to China for a satellite hub as collateral, rent free for 50 years.
Sri Lanka and Argentina were and are in quite different positions in comparison to South Africa; the former took on loans at a much faster rate and the latter was already in a dire position. Nonetheless, it is prudent to be aware of the risks. While it is unlikely that China would seek control of South African land, if South Africa defaults on loans used to fund assets of strategic importance to China, such as coal supplies, it is possible that China may try to take effective ownership of the assets as it did the Sri Lankan port – arguably an arrangement that no other creditor would ask for.
In conclusion of this brief, if government takes heed of the experiences other countries have had with Chinese debt, the loans could prove to be a much needed boost to South Africa’s economy. Ethiopia stands as an example of a recipient government which has not compromised the economic viability of Chinese debt. A further safeguard may also come from China itself; a possible indication that lessons have been learnt with regards to reckless lending and borrowers, in September last year Chinese president Xi Jinping stated at a summit for African leaders that ‘[r]esources for our cooperation are not to be spent on any vanity projects but in places where they count the most.’
Researcher, Helen Suzman Foundation.
John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the
Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for
Global Development, at 19.