China's investment in Africa, particularly its infrastructure-for-resource loans to a number of African countries, has a been mixed blessing.
Its infrastructure deals with African countries have brought a number of benefits, including better loan repayment terms with no conditionality but, according to Ana Cristina Alves, a senior researcher at the South African Institute for International Affairs, "not everything is rosy and there are many challenges".
Alongside problems of poor infrastructure quality and limited economic diversification resulting from these deals, there is growing concern over issues such as a lack of transparency attached to loans, the impact these multibillion-dollar arrangements could have on countries' debt sustainability, and the practices of Chinese companies on the ground.
Alves was speaking at a conference on the combined economies of Brazil, Russia, India, China and South Africa (Brics) and Africa hosted by the South African Institute for International Affairs and the Brics Policy Centre in Johannesburg earlier this week.
Between 2001 and 2012, the Export-Import Bank of China extended $67-billion (about R694-billion) in infrastructure-related loans.
These loans typically take the form of credit lines for infrastructure development, where repayment is guaranteed by revenue from resource sales to China, said Alves.
The difference between Western and Chinese loans
This is not new in Africa. Some countries, like Angola, have received financing from Western banks using oil revenues to pay for the loans.
The difference between Western and Chinese loans, however, is that Chinese loans have been geared towards infrastructure and have longer repayment terms and lower interest rates.
In addition, these loans are typically administered on a project basis through the borrower's account with the Export-Import Bank of China, with payments made directly to Chinese contractors after completion of the construction project, said Alves.
This means that the money never leaves China, giving less opportunity for embezzlement of funds, she said.
As a result, China has gained increased political capital, long-term resource supply contracts and increased market penetration for its construction firms into Africa.
African countries, meanwhile, have benefited from more affordable repayment terms, which has improved their bargaining power with traditional Western donors and financial institutions.
Competition brings costs down
Increased competition for these deals among Chinese construction firms has brought construction costs down.
Most importantly, African countries have gained hard infrastructure more quickly and for less, meaning improved transport and power supply networks, which has improved the business environment and helped with poverty alleviation.
While it is still early to fully evaluate the impact of these kinds of loans on African development, Alves said there is a risk that the long-term impact could negate short-term benefits.
Although these credit lines come with no conditionalities for host countries, they are often tied to the procurement of services, goods and labour in China at a minimum of 50%, leaving a small margin for local content in the target country, said Alves.
"These deals have actually done very little for economic diversification," she said.
Because so much procurement takes place in China, it inhibits multiplier effects in the host economy.
Little provision for local beneficiation
There is very little provision for local beneficiation, technology and skills transfers around the infrastructure and resources sectors, she said.
This is a missed opportunity for African countries and a threat to the survival of local industries.
The low quality of the infrastructure being built is another major concern, said Alves.
There is, however, an increasing awareness of these problems among African leaders, who have become more vocal in their critique of China's engagement with Africa, and the Chinese were attuned to Africa's criticism.
"But in practice, there is not much they can do," she said.
The Chinese government can only control state companies to a certain extent, and its influence over private deals is limited.
Part of the problem lies with African countries
A big part of the problem lies with African countries — namely the weak agency and institutional capacity of African governments, poor governance and accountability structures, and feeble regulatory frameworks, said Alves.
There is, however, leeway to change this, she said.
"African governments need to become much more assertive and African civil society needs to be more vocal in defending their rights and interests," she said.
The impact of broader economic activity such as trade flows between Africa and other Brics countries, including South Africa, comes with a similarly cautionary note.
According to figures from the Centre for the Study of the Economies of Africa, bilateral trade between Africa and the Brics group rose 10-fold, to $340-billion, between 2002 and 2012, and eclipses intra-Brics trade, which is estimated at $230-billion.
In 2010, investments from Brics represented 25% of foreign direct investment inflow to Africa.
African countries experience gains
In 2012, they represented 25% of green-field projects with resource-rich countries such as Angola, Nigeria and Sudan.
African countries have experienced gains such as falling consumer goods prices and improved terms of trade for the continent thanks to increased global demand for commodities, said Matfobhi Riba, economic affairs officer at the United Nations Economic Commission for Africa. But a number of risks remain for African countries, she said.
"Trade-led growth does not necessarily have significant impact on job creation and welfare. The commodity boom has not come with job creation … rather, we've seen problems of [rising] youth unemployment and inequality."
The pattern of trade with Brics potentially reinforces an existing pattern with traditional partners, said Riba, which is "anti the transformative agenda [that] Africa is looking to embark on".
The concentration on import and export partners, where African countries simply switch dependence from traditional trade partners to countries like China, is bad for resilience against external shocks, she said.
Brics countries compete with their African counterparts in both global and domestic markets, said Riba. This has important implications for small and medium enterprises, which dominate business activity in Africa.
Brics companies rivalry could be good
Competition from Brics companies could be a good thing, particularly when it results in improved innovation and productivity from domestic firms.
But threats from Brics-based companies include hindering the ability of local enterprises to gain a foothold in the domestic market.
A major disadvantage facing small local companies is access to finance, especially given the entry of Brics companies that were backed by cheap state financing.
In terms of infrastructure development, this affected the ability of local firms to develop domestic expertise.