Debt trap: Sri Lankan dancers perform at the launch in 2010 of Hambantota port, built with Chinese money. The island had to sign over 70% control to China to service its loan. (Dinuka Liyanawatte/Reuters)
China’s President Xi Jinping has brought with him news of multibillion-dollar investments and cash loans to two of South Africa’s state-owned entities. But this has raised questions about whether South Africa will be caught in a debt-book diplomacy trap.
Sri Lanka is an example of a Chinese loan gone bad. The island nation, after failing to pay back $8-billion to China’s state lenders, had to surrender majority control of its strategic Hambantota port on a 99-year lease to the Asian superpower. The port was developed with loans from China.
According to The New York Times, in July last year, Sri Lanka had to sign over 70% of its control of the port to service some of the debt it owes on a $1.1-billion deal with the state-controlled China Merchants Port Holdings Company.
Critics have warned that this has set a precedent. Countries that are unable to settle their mounting debt obligations to China too might have to sign away territory and sovereignty.
Another country that is at risk of losing its independence to China is Djibouti. According to The Economist, China is the country’s biggest investor and over the past two years it has lent $1.4-billion to the small East African country, which is more than 75% of its gross domestic product.
China plans to make Djibouti a staging post for its mammoth trade route project, the Belt and Road Initiative. The Institute for Security Studies said China is expected to invest an estimated $1.3-trillion to develop infrastructure in Asia, Europe and Africa.
The Centre for Global Development has released a report analysing the debt that nations involved in the trade route plan will owe to China. It found that eight countries — Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan — will find themselves vulnerable to above-average debt.
Eskom will receive a $2.5-billion loan from the state-owned China Development Bank and Transnet a $300-million loan from the Industrial and Commercial Bank of China but critics are concerned that the terms of these deals, which have been guaranteed by the South African government, have not been disclosed.
The loan to Eskom will go towards the completion of its Kusile coal power station, which has been under construction since 2008. The loan is repayable over 15 years, with a five-year grace period. The $300-million loan to Transnet will go to general corporate uses and must be paid back in five-and-a-half years. The railway company said there were no conditions attached to the loan but did not expand on what would happen in the case of a default.
President Cyril Ramaphosa said these loan agreements, among other deals, including a pledge by China to invest $14-billion in South Africa, would strengthen the strategic partnership between the two countries.
According to Garth le Pere, author of China, Africa and South Africa: South-South Co-operation in a Global Era, what happened in the case of the Sri Lankan harbour was highly unlikely to occur in South Africa because of the country’s strong oversight regime.
“South Africa is not a banana republic. We function according to the rule of law,” Le Pere said.
Unlike many African countries, South Africa has a robust regulatory environment and corporate governance that would effectively prevent China from abusing its dominance in the country, he said.
Other lenders such as the World Bank have resolved not to fund South Africa’s coal projects.
“You have to make these compromises whether you like it or not in the absence of any other alternative,” Le Pere said.
He acknowledged that Eskom was a strategic part of the South African economy.
“Without Eskom, this country cannot function, let alone the economy, at a time where Ramaphosa has to make decisions around how do we rebuild the economy and what the strategic path to economic recovery is,” he said.
The South African Institute of International Affairs’ Cobus van Staden said no public detail about the loans was typical of debt agreements with Beijing, which were often opaque and could be a problem, particularly in the case of the indebted parastatals, which “raises the question of what was taken into account”.
“The companies are so troubled that they can’t imagine getting a deal from another lender, so the fact that China would be willing to give this loan, some of that brings with it the power to negotiate the terms, which would be ‘we keep them [details] behind close doors’,” Van Staden said.
What makes Chinese loans so appealing, particularly to developing nations, was that they tended to have fewer strings attached because of the nonintervention principle in China’s foreign policy, Van Staden said.
Le Pere agreed with this and said China also completed projects in record time with far fewer conditions and a very low entry base “that does not make onerous demands on a country’s fiscus, which African countries generally can’t fund”.
But Beijing has its own demands. Typically, Chinese loans are financed by state-owned lenders, who require Chinese materials to be used for construction and for it largely to be done by their own companies. Also, as part of the package, China negotiates favourable access to the country’s natural and strategic assets.
The Democratic Alliance has also called for the terms of the loan to be made public, given the size of the facility, and has asked how Eskom will manage to pay it back.
“This loan is just a small band-aid for the loss-making utility, buying it breathing space but nothing more,” said DA spokesperson on public enterprises Natasha Mazzone.
On Monday, Eskom announced a net loss of R2.3-billion for the 2017-2018 financial year, with just under R20-billion in irregular spending since 2012.
The utility has also had to pay out progressively larger amounts to cover debt, with finance costs rising from about R29-billion in the previous year to almost R32-billion.
But, Van Staden said, China could not afford to take a hit all the time and was quite aware of the risks involved.
“They also aware that China’s reputation also suffers, for example, if incidents like Sri Lanka happen. The world goes nuts. China is aware of the kind of story is being told about it so it also tries to limit its risk in that cycle.”
He added that African leaders also had to be hard-nosed about the debt they were willing to accept and had to start vigorously negotiating loans with other lenders to get better deals.
There has also been a backlash from the green energy sector to the Eskom loan. Greenpeace Africa’s climate and energy campaign manager, Melita Steele, said it was disappointed that China had chosen to “support dirty coal in a country like South Africa”, especially as China was emerging as a leader to counter climate change.
“Kusile will be a mammoth coal-fired power station if it is completed and will use up massive amounts of scarce water resources. Investment in coal will continue to create pollution that will damage people’s health and drive us closer to unstoppable climate change,” Steele said.
At the time of going to print, the Chinese embassy had not responded to questions emailed to it.
Tebogo Tshwane is an Adamela Trust financial reporter at the M&G