There is an emerging discourse that the Chinese firms exaggerate costs of these projects to their benefit. This is one of the key reasons cited by Mahathir in pulling out of the HSR deal in Malaysia.
By Rama Omonya
The new Prime Minster of Malaysia, Mahathir Mohamed just announced, to the shock of investment world that Malaysia is pulling out of the High Speed Railway (HSR) deal with Singapore. The futuristic HSR deal, signed by the previous Malaysian government in December 2016, would have seen the 350km line reduce travelling time between the two cities to 90 minutes when completed in 2026.
The HSR had been described by political leaders as a "game changer" in that it would have benefited both countries by enhancing the infrastructure for economic growth and job opportunities. Construction would have cost Malaysia 110 billion ringgit ($28b).
Mahathir's reasons for scraping the deal is that it was to "avoid [Malaysia] being declared bankrupt." Mahathir's government is faced with liabilities that exceed 1 trillion Ringgit (approx. $251b) due to state guarantees on borrowing. That is nearly double the 687-billion-ringgit federal government debt number disclosed by the former administration. Mahathir also said his government was also in the process of renegotiating with Chinese partners over the terms of a $14b rail deal aimed at connecting the South China Sea. This, I am certain, will happen to Uganda in future.
How relevant is this development for China- Africa relationship?
It is estimated that China's commercial loans to African governments is in excess of $80 billion between 200-2014 and they are funding over 3000 largely critical infrastructure projects in Sub Saharan Africa. China is thus the region's largest creditor with 14% of the debt stock. In 2015, at the China-Africa Co-operation (FOCAC), president Xi Jinping pledged more $60 billion in commercial loans.
For Uganda, the Parliament's Committee on National Economy for the 2016/17 financial report puts the stock of external debt for both the public and private sector at 41.4 per cent of gross domestic product (GDP), up from 40.2% in the preceding financial year. Ministry of Finance puts it at approximately 33.8% of the GDP (2017 FIGURES). When you factor in undisbursed loans, however, the ratio of total public debt to GDP is closer to the threshold of 50%, experts say.
The International Development Association of the World Bank (IDA) is Uganda's biggest creditor. Debt owed to IDA has declined from 61.9 per cent of the total stock in 2010/11 financial year to 45.2%. Over the same period, debt owed to China has increased from 3.3 per cent to 20.3%. It is believed that most of the debts are secured by sovereign guarantees to insulate risks such as political risks. Unfortunately, most of these contracts are kept in secret and majority of citizens have no idea what is binding their posterity.
It is understandable why the crave for Chinese financing in Africa. Unlike the western led group of World Bank, EU and other western agencies, China does not tie their finances to stringent conditions such as human rights or governance standards. The other important aspect is that China does not only provide finances but prefers the Engineering, Procurement, Construction (EPC) model for its companies executing the projects funded by them. It also provides technology, human resource, design, materials and project consultancies. This is where the problem lies for African countries.
There is an emerging discourse that the Chinese firms exaggerate costs of these projects to their benefit. This is one of the key reasons cited by Mahathir in pulling out of the HSR deal in Malaysia. There are choruses about the inflated costs for; the Entebbe Express Highway (although authorities have attempted to explain the topographical nature as a basis for the high cost), construction for Karuma and Isimba etc, the planned Standard Gauge Railways (SGR) and many others. The UNRA probe found that only 1500 kilometers of tarmac was built and yet the shillings 9 trillion allocated could build 5000 kilometers of tarmac.
Of course there are serious capacity issues with most African governments including Uganda in assessing the genuine project costs. The World Bank recommended Institutional strengthening - "that there is a need to build capacity of institutions across the entire project cycle to prepare quality projects, carry out rigorous appraisal, construct the assets efficiently and at minimum cost, and monitor and maintain these assets". The UNRA Commission similarly recommended that "UNRA puts measurers in place to match, within reason, the cost of construction of sister countries by eliminating the fat built in and front loaded in the Bills of Quantities in Uganda"
The other major economic concern about Chinese money is that they always negotiate as a condition that Chinese firms be contracted using the EPC model. This is plough back mechanism because they end up procuring materials such as steel, aluminum, cement and other materials from their country denying Ugandan manufacturers the economic value chain benefits. Uganda Manufacturers Association has gone on record crying foul of such practices. Their loans do not create sufficient manufacturing thrust in the borrowing countries but rather in China. This is partly what the Trump administration call Chinese "Predatory Economics"
It would be consoling if the infrastructure, for which we are heavily indebted, were generating the much needed revenues. This seems not to be the case. The World Bank 2016 Economic Outlook titled Unleashing the power of public investment management: from smart budgets to smart returns stated that Uganda's public investments are falling short of generating the desired economic return.
It found that for every dollar invested in Uganda's capital infrastructure, only seventh-tenth has been generated. This is way below the $3 generated in other fast growing countries. Besides, most of the infrastructure monies are lost to corruption.
The UNRA probe findings above is perhaps a testament to why this is so. Corruption is another explanation as sh4 trillion was misappropriated or stolen within a period of seven years in the road sector alone. If we were to institute probes for dams and other infrastructure projects, we would find similar trends or even worse.
With the removal of age limit, a decent projection of 20 more years is not farfetched for Mr Museveni. . This should provide a good assurance for the Chinese lenders. However, political terrain is the hardest to predict. Should there be new leaders in Kampala whose views about "Chinasation" of our debt stock differs with the current one, we could see a Malaysia happening. Therefore, the real risks of any new government reneging on its sovereign guarantee undertaking is big and China will have to struggle to recover such debts.
Governments, especially in developing worlds, often keep many capital infrastructure contracts as "top secret" documents away from probing public eye. Just like Mahathirs government is discovering that the actual debt stock is nearly twice than what was declared by the previous government. We may find ourselves in that situation after change of guards. And that should worry all of us.
In the wake of the Malaysian story, policy thinkers in China must be scratching their heads hard. How can they safeguard against the Malaysia scenario? One of the measures China could be thinking is strengthening the terms in sovereign debt contracts that enable them to enforce their debts judicially and may be that which can enable sovereigns to restructure their debts. The Mozambican debt experience of 2013 shows how the guarantee contract gave exclusive jurisdictions to British Courts to handle the matter can be cumbersome for a sovereign state. Will China opt for jurisdictions of western courts? That would be an interesting development or will they buy the rather expensive political risks insurance? The later usually pushes the costs of financing since financer have a clever way of factoring the insurance premiums in their deals.
What should we do?
In the meantime, we should pay kin attention to the costs of our infrastructure projects. Lest we will pay for infrastructure that we never had. Also, the Government should ensure all contracts especially those relating to infrastructure financing and extractive resources are made public.
Public scrutiny can help governments especially in countries with high corrupt practices in public affairs like ours. The president could really mean well for Uganda, but does his bureaucrats and politicians do the same? If it is really Hakuna mchezo, then the Malaysian example should make people scratch hard, their bold heads!
The writer is a Partner with ABN Advocates, with specialty in policy and development analysis