What happens in the dark

The nation of Zambia grieved the loss of its founding father, Kenneth Kaunda. A man whose charisma and charm saw him rise in stature on the international scene even as his reputation was in shambles back home. 1960 Zambia was thought to be an African jewel with a bright future- despite the internal tensions between its white minority population and the black Africans. The country enjoyed the benefits of a stable economy held up by it’s lucrative copper exports.

The Zambia Kenneth inherited seemed set to be a dominant player in the region and even offered assistance to it’s southern counterparts that were still under the impossible white- minority dominion. But like an evil omen portentous of the upcoming doom, world copper prices dropped, plunging the Zambian economy into a downward spiral from which it has never fully recovered. Ill-suited and ignorant of how to handle an economy in crisis (like many of his contemporaries) Kenneth Kaunda resorted to heavy borrowing. Like a kid with candy, enough was never enough and by the 1980s Zambia, an African country that had previously exhibited great potential, was now the most heavily indebted country on the continent.

"For weary African dictators, those tired of the west spitting in their face, those wanting to flex their imaginary muscles a little bit, maybe attempt to scare the U.S and Europe a little...China was heaven sent."

Before we vilify his legacy, we must acknowledge that many African leaders during his time and many after entered high debt contractual agreements on behalf of their citizens; the ostensible reason being to develop their poor nations. Newly independent countries took on huge debt obligations with the idealistic perception that in time, once those debts had been paid off, we would have little Italys scattered across the continent. Never mind that they didn’t read the fine print when signing those contracts with their former colonial masters; they were former teachers, priests, a lawyer or two (Africans that whose status was elevated just by the mere fact that they could hold intellectual conversations in English, and perhaps French), what did they know about the economic theory? No, we cannot blame them and yet; a look around present day Africa tells a tale of lessons that were never learned.

The rise of china on the global scene as a potential U.S rival started as myth, turned into a joke and solidified into cold hard fact in less time than anyone would have thought possible. For weary African dictators, those tired of the west spitting in their face, those wanting to flex their imaginary muscles a little bit, maybe attempt to scare the U.S and Europe a little (you won’t date me so I’ll go out with the guy with bigger muscles, never mind that he walks kinda funny), China was heaven sent. “Non-interventionist”, they said, “the Chinese are friends of Africa”, they touted as they congratulated themselves on their on ingenuity. For those dictators that had over stayed in power and needed to quell the restlessness of the masses- massive amounts were borrowed in the name of developmental projects to improve the living conditions of those with in their borders. Everywhere you looked; a new road construction project, new dam project, oil refinery galore and yet, a close look at these deals reveals deep secrets kept from public scrutiny.

In a march 2021 report conducted by AIDDATA titled “How China lends- A rare look into 100 debt contracts with foreign governments”,details of the contractual agreements entered into by developing countries and China (those that could be easily obtained) revealed a picture messier than all J.Lo’s relationships. The contracts, though not vastly different from standard loan agreements signed between donor and borrower countries, went much further from the norm in certain respects begging the questions; what is all for? Is it worth it? Isn’t there another way?who will carry this burden? Below are some of the more alarming terms of these contracts. Beware, you might be in for a real scare.

• High/ Confidentiality clauses;

The borrower countries are forbidden from exposing not just the terms or details of the agreements stipulated under the contracts but are even forbidden from revealing existence of the loan itself. This essentially means that the leaders of a nation can borrow from China and not reveal the details of debt or even the existence of the debt taken on behalf of the citizens.

{Expansive debtor confidentiality undertakings that extend beyond contract negotiation present multiple political and debt management problems. First, they try to hide government borrowing from the people whose taxes are bound to repay it. Second, they impede budget transparency and sound

fiscal management. Third, they hide the sovereign’s true financial condition from its other creditors. Creditors may charge the government higher interest rates to reflect the uncertainty and potential for subordination. Fourth, potential for hidden debt can impede debt restructuring. At this writing, Zambia’s bondholders are refusing to proceed with debt renegotiation citing insufficient information about China’s claims on the country (Bavier andStrohecker 2021). More broadly, a lack of trust in the debtor’s financial reporting can derail crisis response and recovery.}(How china lends by Gelpan, Horn, Morris et al. 25)

Investigative journalists in Ecuador discovered a video recording of the signing of a debt agreement between China Development Bank (CBD) and the country’s ministry of Finance. The stipulations under the contract caused public outcry and drew attention to the deal. The CBD’s response to the Ministry of Finance and the Ecuadorian government was to threaten withdrawal of funding for other unrelated developmental projects in the country and a demand for a thorough investigation to be conducted to reveal the source of the leak. The government was then instructed to whitewash (place them in a favourable light) previous oil- backed loan agreements in a bid to massage the damage done to the bank’s reputation.

{ In 2010, China Development Bank (CDB) extended a 1 billion USD oil-backed loan to the

Ecuadorian Ministry of Finance.24 The use of the loan is divided into two tranches. The first 80% of the commitment is at the free disposal of the Ministry to finance projects of infrastructure, mining, telecommunications, social development and/or energy. The remaining 20% are committed for the purchase of goods and services from selected Chinese contractors (p. 4). The loan is backed by a separate Oil Sales and Purchase Contract between PetroEcuador and PetroChina. This agreement requires PetroEcuador to sell, over the entire validity period of the Facility Agreement, at least 380,000 barrels of fuel oil per month and 15,000 barrels of crude oil per day to PetroChina.25 The oil proceeds are paid by PetroChina into the Proceeds Account which is opened by PetroEcuador with CDB in China and which is governed by Chinese law. PetroEcuador is “not permitted to make any withdrawals from the Proceeds Account except to the extent permitted under the Account Management Agreement” (p. 6). PetroEcuador and the Ecuadorian Ministry of Finance acknowledge that CDB has the “statutory rights under Chinese law and regulation […] to deduct or debit all or part of the balances in the Proceeds Account to discharge all or part of the Republic of Ecuador’s […] liabilities due and owing to CDB” both under the 2010 oil-backed loan as well as under “any other agreement between CDB and the Republic of Ecuador” (p. 6). The figure below illustrates.} (How china lends by Gelpan, Horn, Morris et al. 28)

The insistence on confidentiality makes it impossible to accurately determine the country’s debt position; the country’s debt servicing potential is likely to be overestimated which would spell disastrous results in the future.

• Escrow, Seniority and security.

The Chinese lending banks, most notably China Development Bank and China EximBank heavily rely on escrow or special accounts to guarantee repayment of the amounts borrowed. Borrower countries are required to set up a separate bank account (in a Chinese bank or institution of their choosing) and regularly deposit repayment amounts to said account. The Borrower countries are forbidden from accessing or withdrawing from the accounts and the funds deposited are usually revenues from other government projects or sources.

{ The most common way of securing repayment in the Chinese contract sample is the use of escrow or special accounts. Sovereign borrowers commit to maintain and fund bank accounts either at the lending institution or at a bank “acceptable to the lender” throughout the life of the loan, and to route through these accounts project revenues and/or cash flows that are unrelated to the project funded by the loan. Debt contracts describe the accounts as part of the debt repayment process; however, they function above all as a security device.

In 38% of the Chinese account arrangements, the account is financed from unrelated sources,

either instead of or in addition to project revenues. In our sample, these sources include the

export revenues from oil (Ecuador and Venezuela), bauxite (Ghana), and revenue from financial assets (Costa Rica). Other contracts require the borrower to provide sufficient funding from sources that are not limited to project revenues, but they do not specify the source(s).} (How china lends by Gelpan, Horn, Morris et al)

The lender banks reserve the right to access and deduct amounts from the accounts without notifying the borrower government. In the event of a national crisis, such as covid 19 pandemic or other crises, the borrower nation is hemmed in tight with most of its revenues already committed to payment of strict debt obligations. This stipulation also goes in contravention of the “Paris club” practices that allow for a developing nation to renegotiate/ restructure the terms of its debt payments to lender nations in the event of default on loan repayment. Under the Paris club conventions, lender countries can come together and re-negotiate with a country under threat of defaulting on a loan or loans given out to it. Chinese banks force borrowers to undermine the agreements under the Paris club leaving them in a vulnerable negotiating position should things go south. For instance a country may fail to qualify for further debt assistance from the world bank or IMF if the country is thought to be in bed with china for fear that in the event of loan default, Chinese lenders get first priority over all the rest.

• “Threat clauses” : Policy, cancellation, stabilization.

The loans handed out by Chinese banks are linked together by a single thread; tag at one end and the other end starts to unravel. Despite the fact that loans might be handed out by different Chinese banks to develop completely different projects, all contracts have standard stipulations and failure to meet the terms of one contract will adversely affect the outcome of other seemingly unrelated projects. The threat of cancellation looms over the borrower nation; A loaded gun if you will, making the borrower country jump at the Chinese beck and call. Through its extensive cross-cancellation clauses, failure to adhere on one deal jeopardises every other deal.

{ Chinese lenders in our contract sample retain the right to cancel the loan and demand immediate repayment under a wide range of circumstances, including political and economic developments not directly connected to the lending relationship. In contrast, the sovereign debtor’s exit options are limited once the contracts are signed. For instance, cross-default and cross-cancellation clauses in some of the Chinese contracts trigger if the debtor takes action adverse to “any PRC entity” in the borrowing country. Such terms position Chinese state-owned institutions to act in concert, amplifying their collective bargaining power vis-à-vis the developing country. All CDB contracts include the severing of diplomatic relations with China as an event of default. Events of default in 90% of the contracts in our Chinese sample include broadly defined policy changes in the creditor or in the debtor country. Normally in the event of default, the lender can accelerate principal and interest repayment.Default triggers of the sort we have identified in Chinese debt contracts potentially amplify China’s economic and political influence over a sovereign borrower} (How china lends by Gelpan, Horn, Morris et al 37)

What might trigger cancellation you ask? An event of cancellation occurs if any borrower government agency or public entity;

• condemns, nationalizes, seizes or otherwise expropriates all or any substantial part of the property or other assets of a PRC Entity or its share capital,
• assumes custody or control of the property or other assets or of the business or operations of a PRC Entity or its share capital,

• takes any action for the dissolution or disestablishment of a PRC entity or any action that would prevent a PRC entity or its officers from carrying on all or substantial part of its business or operations,
• takes any action, other than actions having general effect in the borrower country, which would disadvantage a PRC entity in carrying out its business or operations in the country, or
• commences any action or proceeding in relation to the matters described in a, b, c …32

Don’t cry for me, Argentina!

{$2 billion CDB loan for the Belgrano Cargas Railway includes among its cross cancellation triggers default or cancellation of Argentina’s $4.7 billion syndicated loan from Chinese banks to build two hydroelectric dams on the Santa Cruz River in Patagonia.33 CDB invoked this clause and threatened to cancel the railway project when a new government in Argentina sought to cancel dam construction on environmental grounds.34 The Argentinian government quickly reversed course. Using cross-defaults to link otherwise unrelated projects makes it harder for the borrower to walk away from any of them, and gives Chinese lenders as a group more bargaining power—and more policy influence.} (How china lends by Gelpan, Horn, Morris et al 39)

If you thought that was bad, you haven’t heard about the stabilization clauses that make the contract immune to changes in economy, politics or policy. In effect these clauses mean that the contract stands in the face of whatever changes might take place in the country; for worse or worse, developing nations are trapped in the marriage.

{Economic equilibrium clauses … [also known as “increased cost clauses,” which promise that], although new laws will apply to the investment, the investor will be compensated for the cost of complying with them. Compensation can take many forms, such as adjusted tariffs, extension of the concession, tax reductions, monetary compensation, or other…

This variant of the stabilization clause can pose a special challenge for human rights and sustainable development policies. It effectively creates carve-outs within the rule of law, limits the borrower’s selfgovernance, and potentially blocks state-of-the-art environmental, public health, labor, and other potentially vital and popular regulations (see, for example, Global Witness 2011 for a more detailed

discussion).} (How china lends by Gelpan, Horn, Morris et al)

Hit and Run! Also termed “illegality and Exit”

Policy changes in the borrower country can be viewed as loan default which triggers an immediate exist from the deal and demand for full repayment.

{The trouble with illegality clauses in contracts with governments or state-owned entities is that some of them may have a voice in the policy decision triggering their termination rights. At the extreme, termination could become discretionary, the lender’s prerogative.} (How china lends by Gelpan, Horn, Morris et al 41)

The contracts signed on behalf of citizens of poor countries unbeknownst to them, contracts with far reaching implication not only on the utilization of revenues generated from a nation’s resources but also the actual ownership of said resources (Read about Sierra Leone) ought to be made and up for debate. The terms of these contracts essentially leave even new administrations (in-case of government change) hand-cuffed and unable to effect meaningful development for their citizens. It’s about high time African governments read the fine print of these contracts before signing our futures away.

THE END