Market News

Trains, roads and airports from China: Is the country walking into a debt trap? - BUSINESSDAY

SEPTEMBER 14, 2018

by Emeka Ucheaga



Everyone has heard the old saying, “you must learn from your mistake,” while China has, Nigeria looks to have forgotten the lessons from its recent past when it almost ran into a debt trap. After Nigeria’s external debt ballooned out of proportion in the early 2000s, then President Olusegun Obasanjo began negotiating a debt forgiveness for the country which eventually saw Nigeria successfully negotiate a complicated debt write-off deal of about $18 billion. 
The Country made cash payments of $12 billion while the remainder of the Paris Club debts which exceeded $30 billion were forgiven by its creditors. Today Nigeria’s external debt has swelled to around $22 billion with almost $2 billion of the debt owed to China and that portion is also rising fast as China opens up its cheque book to the country to take as much loans as we want for ‘infrastructure.’ China has become a big lender in recent years since their emergence as an economic superpower, lending to developing economies at what may seem to be friendly rates and almost unpayable principals while collaterizing the loans with national assets. China learnt this trick from Britain which collatarised Chinese aids and guarantees with Hong Kong for 99 years. 
Britain obtained a 99-year lease of Hong Kong in 1898 and only returned the city to China as recent as 1997 after the lease expired. With a painful experience of losing a valuable national asset to a creditor, China seems to have learnt the right lessons. Lamu port in Kenya, which was constructed by China on a Chinese loan of $16 billion, could face a Kenya default in three years’ time and the biggest port in east Africa and adjoining towns may be handed over to China for 99 years. Zambia is the second African country to default and may soon hand over a national asset. China is now proposing to take over the Kenneth Kaunda International Airport, should Zambia Government fail to pay back its huge foreign debt on time. 
The issue of whether Zambia possesses the required economic muscle to repay that debt is in contention considering the amount involved. It is typical of the Chinese strategy. China already owns 60 percent shares of the Zambian National Broadcasting Corporation which means the Chinese have an influence over what should or should not be premiered on their sets. As part of a plan to convert $6 billion of loans that Sri Lanka owes China into equity, after debt levels reached unsustainable levels, the nation was forced to cede control of its port to China under a 99 year lease. Under the deal, signed in July 2017, China Merchants Port (CM Port) will run the $1.5 billion Chinese-built port on a 99-year lease.
The $1.12 billion total price is to be used to reduce the Sri Lankan government’s debt to China. On March 2018, Djibouti signed a partnership agreement with a Singaporean company that works with China Merchants Port Holdings Co. or CMPort—the same state-owned corporation that gained control of the Hambantota port in Sri Lanka—to build the Doraleh Multipurpose Port. The Doraleh Multipurpose Port is significant not only because it sits next to China’s only overseas military base but also because it is the main access point for American, French, Italian and Japanese bases in Djibouti and is used because of its strategic location by parts of the U.S. military that operate in Africa, the Middle East and beyond. Djibouti is a heavily indebted nation with estimated public debt around 88 percent of the country’s overall $1.72 billion GDP. With China alone owning 82 percent of Djibouti’s external debt, a loan default could see China seizing some of the nation’s most prized assets.

Last year, Greece handed China a national asset after defaulting on a Chinese loan forcing the European Union to take measures to stop any further member country from taking Chinese loans. It is worthy to note that in all these loans, no single dollar cash was handed over to the countries involved. In all cases, China executed and built the projects, as is being done in Nigeria’s rail line projects in the country, using Chinese materials, equipment, technicians, that are all imported from China. Nonetheless, the countries owe China and they patiently wait for the country to either default or pay back the loan. After 15 to 25 years, they repossess the assets and now determine for the next 75 years the import rates (in case of Kenya) or rail charges, in case of Abuja to Kaduna rail line and other rail lines under construction by the Chinese in the country.

 According to a recent report by Brookings Institute, “China’s role on the African continent has been defined by the financing of more than 3,000, largely critical, infrastructure projects. China has extended more than $86 billion in commercial loans to African governments and state-owned entities between 2000 and 2014, an average of about $6 billion a year. As a result, China has become the region’s largest creditor, accounting for 14 percent of sub-Saharan Africa’s total debt stock.” China represents approximately half of Africa’s international contractors in construction. Typically, infrastructure-building by Chinese companies for African states are funded by loans backed up by oil or mineral revenues, characterized as “oil-for-infrastructure” barter deals with “no strings attached.” With no clarity on Nigeria’s loan deals, it is safe to assume that these loans may have been backed with crude oil revenues, putting Nigeria in a very difficult position if the infrastructure developed fails to provide sufficient revenue to repay the loans that funded their development. A good example of a Chinese loan teasing to go bad in Nigeria is the $500 million extended to Nigeria to construct the $876 million Abuja-Kaduna rail line. 

According to Nigerian Railways Corporation (NRC), the Abuja-Kaduna rail line conveyed 900,000 passengers in the two years since it was commissioned in 2016. With average fare around N1, 275 for the better part of the 2-year period. Business Day estimates that only about N1.14 billion ($3.1 million) was earned as revenue during the period which is only about 0.63 percent of the principal. If revenues were to stay at this rate, it would take the country about 161 years to repay the US$500 million loan, if Nigeria were handing over all of the revenues that the rail is making to the Chinese. Even if passenger traffic were to double and revenues were to double, assuming the naira does not weaken, it would still take quite a number of years to repay the Chinese loans for the railway purely from relying on the revenues from the rail services.

With Chinese concessionary loans typically around 0.5 percent, NRC will need more than a miracle to avoid defaulting on the Chinese loan. Unfortunately, after the default, a prized national asset which was collaterized for the loan, will be lost to China as has been observed in other countries. This situation looks even more serious if the new airport terminals built by the Chinese which are not being operated commercially yet, are taken into consideration. The Nigerian government last week travelled to China and used the trip to negotiate further borrowings from China including US$3.1 billion for the Mambilla dam, a good project that would only be commercially viable if the government allows a market led power sector. But while the China funded projects are scoring political capital for the government, little attention is being paid to how these projects will become commercially viable and repay the debts that are currently being accumulated for future generations of Nigerians. Another debt trap for the country may be looming.

 

Emeka Ucheaga

SEE HOW MUCH YOU GET IF YOU SELL

NGN
Real Time Analytics