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China Has Different Approach to Risk, Says Head of an African Development Fund

The head of the Africa Finance Corp. (AFC), which recently secured its first funding from China, dismissed concerns that Chinese investment is riskier than that of other countries, and said better negotiation can help prevent potential backlash.

The AFC, which funds infrastructure projects across the continent, announced Thursday that it has secured a $300 million loan from the state-owned Export-Import Bank of China (EximBank).

The funds will be used by the Lagos, Nigeria-based development finance institution to support industrial projects and construction, including import substitution projects in West Africa, AFC President and CEO Samaila Zubairu said in an interview with Caixin on Thursday.

AFC’s deal with EximBank, one of China’s three “policy banks,” includes a $200 million five-year loan and a $100 million five-year lending facility. The rate on the loan was competitive, said Zubairu, although higher than the rates offered by European development finance institutions.

Zubairu sees this as the start of a long-term relationship with EximBank, in which AFC will help EximBank turn the opportunities offered by Africa’s large infrastructure deficit into bankable projects, as well as providing them with strategy advice, due diligence and monitoring services.

Africa has a $170 billion infrastructure deficit, including maintenance costs, Zubairu said, with the problem particularly severe in countries that have suffered crises, such as Guinea after the Ebola epidemic of 2014-15. Logistics, transportation and especially energy are all greatly in need of investment, he said.

Chinese investment abroad has been criticized as being costly for recipient countries and less concerned about environmental and political risks than development finance institutions in North America and Europe are. Some projects under China’s ambitious Belt and Road Initiative, which aims to support infrastructure development across Asia, Europe, and Africa, have been canceled or downsized in the last few months due to debt fears.

But it has “not been our experience” that Chinese investors are really that different to any others, Zubairu said, arguing that their due diligence is of a similar standard. Chinese companies’ approach to risk is however different to that of European or North American investors, Zubairu said. “I think they are faster,” he said. “They accept the risk as it is and they try to mitigate it as they go.”

To avoid a backlash, African governments need to negotiate what is in the best interest of their countries when making deals with Chinese investors and consider the entire life cycle of the investment, Zubairu said. “If you negotiate on a pragmatic, sustainable, basis, there will be no backlash,” he said. Better negotiation can help solve, for example, concerns that the jobs created by Chinese investments go to Chinese workers rather than locals, he said.

“Clearly there is room for improvement, but I think that we are trying,” he said, when asked about how well African governments have negotiated deals on Chinese investment and loans in the past. “We can all do better.”

One sign that China is also trying to improve its investment abroad is recent effects by the Chinese government to encourage the private sector to get involved in projects, Zubairu said, although “we’ll have to wait and see how effective it is,” he said. State-owned companies currently dominate Belt and Road projects. AFC is in discussions with “a few” private Chinese firms, Zubairu said.

Li Ruogu, ex-chairman of EximBank, warned in April that many countries along the Belt and Road route have high debts and low credit ratings, making it difficult for them to raise funds. “There are few countries with credit ratings above the ‘BB’ level, and the investment risks are relatively large,” Li told a forum in Beijing.

EximBank and China Development Bank, another of China’s policy banks, have spearheaded Chinese investments in large African infrastructure projects, with these two institutions alone having lent around $100 billion to African governments and state-owned enterprises to date.

At a two-day Forum for China-Africa Cooperation summit in Beijing held in September 2017, Chinese President Xi Jinping promised $60 billion of financing for new projects on the continent.

Contact reporter Ke Baili (bailike@caixin.com)

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