China’s Loans to South Africa - Brief V

The first brief gave an overview of South Africa’s debt situation, how the loans from China fit into this, and why we need to look at the experiences other countries have had with Chinese debt. The second and third briefs covered the experiences Sri Lanka, Pakistan, Argentina, Zambia, Kenya and Ethiopia have had with Chinese loans, and the fourth brief summarised the lessons learned from these countries.

“In a time of deceit telling the truth is a revolutionary act.” – George Orwell.

Why not use the BRICS Bank?

First some background on the BRICS Bank, now the New Development Bank (NDB). As highlighted by Prof Chris Alden,[1] NDB’s comparative advantage in a crowded financial environment has been a matter of debate from the outset. Finding an appropriate role for the bank, and one which does not challenge too much the role of established entities like the World Bank and African Development Bank – not to mention national policy banks like China Development Bank involved in lending to Asia, Africa and Latin America – has been an operational constraint. By formal launch in 2014, with (African) government review and slow procedures taking up to two years, NDB was focused on providing bridging finance to help keep projects that were under consideration on line. In terms of lending, NDB got involved in another gap – green project finance. Finally, in 2015 BRICS countries established short term currency lending facility – the BRICS Contingent Reserve Arrangement – and framework for currency swaps.

The mission statement of the NDB, reads as follows:

‘The New Development Bank was formed to support infrastructure and sustainable development efforts in BRICS ... The bank will partner nations through capital and knowledge, achieving development goals with transparency and empathy and creating an equal opportunity for the development of all countries.’[2]

Despite playing a role in founding NDB, for South Africa when the World Bank or IMF are not available or approached, the self-appointed lender of last resort seems to be the China’s Development Bank and Export Import Bank. So what are the possible reasons for why government did not push for the NDB to allocate and administer the loans? Perhaps government is being prudent and does not want the fragile status of Eskom and other parastatals to be exposed to other BRICS countries. Or, given as the NDB’s provisions for transparency in lending, maybe government doesn’t want the loans or state of its parastatals to be so prominently featured in public.

From China’s perspective, participants within multilateral creditors, such as the NDB, are subject to the disciplines and standards of the organisation. It is therefore possible that China does not wish to be bound to these, believing that they have sufficient leverage in bilateral relationships, and that their interests are better served outside of such organisations. This could present a major disadvantage to South Africa because, as traversed throughout these briefs, it means that China is not subject to a known set of standards and is accountable to no-one, leaving wide open the possible terms of the loans and consequences of non-payment.

The Legality of Non-Disclosure

How is it that government can keep secret the terms of the loans? Section 231 of the Constitution holds that the National Assembly’s approval is required for any government to government agreements. Then by default the agreements’ terms and other details are disclosed in parliament and to the public. We can therefore assume that the largest tranche of the Chinese loans which we know nothing about, other than its size of R 370 billion, was also made to parastatals – which despite being government owned and run, are nonetheless juristic entities separate from government. Therefore, section 231 does not apply because government is not obliged to obtain parliamentary approval for agreements between SOEs and its creditors. There is also the possibility that some portion of the loan could be allocated to the private sector.

Conclusion

As confirmed by the ‘watchful’ gaze of the rating agencies, the South African government currently stands on the edge of the zone of possible debt restructuring, or even default. Should either of these events occur it will cripple government’s ability to make sound public investments, what little economic growth there is will fall away, and citizens’ livelihoods will suffer great harm. It is for these reasons that any additional pressure applied to the public purse needs to be intimately scrutinised. Unfortunately, no-one other than government executives have been given the chance to assess the risks associated with the Chinese loans, and everyone else has been left wondering.

In considering what the loans could mean for South Africa going forward, the ad hoc way in which China deals with creditors leaves outsiders with no option but to look at the experiences of other countries. This series of briefs chose Sri Lanka, Pakistan, Argentina, Zambia, Kenya and Ethiopia as test cases, and found that all of them either experienced or are likely to experience repayment difficulties. South Africa can ill afford to put in the same position.

The test countries also show that project cost overruns are to be expected, adding further strains to an already tenuous situation. Corruption too was a theme almost consistent throughout, making disclosure of all the details that more important.

China was often the lender of last resort and therefore had massive leverage when negotiating terms. In South Africa, the inability of SOEs to raise funds in their traditional manner through the bond markets would have it that China has become a lender of last resort here too.

With regards to project inputs, it seems only Kenya negotiated favourable terms for locals, though not without controversy.

Pakistan, Sri Lanka and Argentina are now highly dependent on Chinese loans and it is doubtful whether they could function without them. It is not inconceivable that any struggling country could fall the same way.

When Sri Lanka defaulted on its Chinese loan it was forced to hand over an entire port. This harsh remedy was because the asset is of strategic importance China; as could be the case with coal supply related infrastructure in South Africa, due the crucial importance of coal to the Chinese economy.

Given the remarkable challenges South Africa faces today, how the Chinese loans intricately feed into these, and for all the reasons above, it is worrisome that government refuses to divulge any more information on the loans other the very little it has.

Charles Collocott
Researcher
charles.c@hsf.org.za