China’s $2bn bauxite facility: Lessons from the infamous CDB $3bn loan

Ghana, like any other resource-rich country, has the right to leverage its natural resources for its development. Accordingly, the ruling NPP government is seeking to swap bauxite for infrastructure with China under the Sinohydro-Ghana infrastructure-for-bauxite agreement signed in Beijing this week. Under this agreement, China through Sinohydro will construct $2 billion worth of roads, hospitals, bridges and other infrastructure in exchange for access to Ghana's bauxite deposits. Full details of the agreement are not public, but it is already causing concerns among academics, analysts and the general public.

This resource-for-infrastructure model of financing projects, however, is not new in Ghana-China relations. Largely, this model was used by the Chinese to build the Bui Hydro Dam as well as the Atuabo Gas Plant. In fact, the Chinese have long recognized a particular economic complementarity between resource-rich Ghana, faced with infrastructure challenges, and Beijing, who is proficient with infrastructure construction firms but also confronted with the need for oil and other minerals for its growing economy.

Using access to proven natural resources as collateral for loans is appealing to Ghanaian policymakers because it helps to fill infrastructure vacuum and to fulfil political campaign promises. However, if not well-managed, this approach can have adverse implications for Ghana’s development, particularly on natural resource governance and debt management.

There is an ongoing debate as to whether the $3billion facility from China is a loan or barter. The ruling NPP calls it a barter trade agreement with no chance of adding to the debt stock of Ghana, while the opposition NDC sees it as a loan. We will not go into that debate now suffice to say that whether the $2billion facility is a loan or not, (and while there may be differences between the $2billion and the China Development Bank, CDB, $3billion loan agreements), there are still useful lessons from the botched CDB loan to Ghana regarding how to negotiate, secure and implement large projects supported by external financing.

The $3billion CDB Loan Facilityname

In 2010, former President Mills led a delegation to China to finalise negotiation for a $3 billion CDB loan facility to Ghana. The loan was to help finance major infrastructure projects (including the Atuabo Gas Plant). Ghana committed to supply 13,000 barrels of oil daily for fifteen-and-a-half years to pay the $3 billion loan.

The disbursement of the loan was embarrassingly slow, and the gas project was far behind schedule. The government eventually decided to forgo half of the CDB loan (almost 4 years after the original agreement was signed). What happened? What lessons can be gleaned? The following challenges contributed to the collapse of a portion of the CDB loan facility:

Local/Domestic Politics

There was widespread opposition from the minority in Parliament and civil society groups about the terms of the agreement, including the commitment fees being paid by Ghana. Lack of proper and timely consultation and due diligence on the part of the government led to the alienation of the main opposition party, donors, civil society and local communities, hindering progress on the agreement and the projects

Weak institutional capacity and Poor management of the project

There were accusations about Ghana Gas inability to properly manage and negotiate with Chinese multinationals for acceptable raw gas purchase agreement; and further accusations of poor financial management on the part of Ghana Gas, leading to the eventual absorption of Ghana Gas into Ghana National Petroleum Company

Institutional and Regulatory constraints

Interestingly, there were clauses in the financing Agreement that were largely inconsistent with existing regulations. For example, the conflict between the Agreement and Ghana’s new Petroleum Revenue Management Act on the disbursement of oil proceeds; the requirement of 60% Chinese content in the project conflicted with Ghana’s local content regulations.

Fiscal and External challenges

Ghana couldn’t secure counterpart funding required for a timely disbursement of the loan facility. And, Ghana’s foreign exchange earnings dipped in 2013, with external deficit increased from about 5% in 2011 when CDB agreement was signed to about 10.5% of GDP by 2014.

Summary of Lessons from the CDB Loan Experience

As far as possible, the government should consult and court support from key stakeholders before negotiating and approving large external facilities

Government should ensure proper due diligence. It should consider engaging parties that have the technical knowledge and expertise to examine every clause in any agreement before agreeing and signing

Government as the receiver of the facilities should build or use institutions that have the capacity to manage and engage multinational firms and can also oversee major infrastructure projects undertaken

To mitigate against (inevitable) cyclical external natural resource price shocks, government and its economic team should put in place external and fiscal policy buffers.

As seen in the infamous $3 billion CDB loan and the collateralization of Ghana’s oil, the facility could help with the development of Ghana’s ailing infrastructure, but the accompanying terms may not lead to long-term developmental benefits in Ghana’s oil sector. Ultimately, any bad outcome from the $2billion facility and for that matter any other deals with the Chinese primarily lies with the Ghanaian government (not the Chinese).