The “debt trap” meme claims that China is intentionally lending vast sums of money to poor developing countries in Africa, and elsewhere, with the express intent to seize physical assets in those countries when they inevitably can’t repay their debts.
This fanciful narrative sounds compelling, but the problem is that there’s literally no evidence from the past twenty years since China became the world’s largest bilateral creditor to support the claim. It just isn’t true.
The reality of how China actually secures its loans to these countries is far more complicated.
Anna Gelpern, a law professor at Georgetown University, and Brad Parks, executive director of AidData, a development finance research institute at the College of William & Mary, were part of a team of experts that did an extensive forensic analysis of 620 Chinese loans spanning more than 20 years that revealed the financial methods Beijing employs to guarantee these debts.
Anna and Brad join Eric to discuss the findings from their new report, “How China Collateralizes.”
Show Notes:
- AidData: How China Collateralizes by Anna Gelpern, Omar Haddad, Sebastian Horn, Paulina Kintzinger, Bradley C. Parks, Christoph Trebesch
- AidData: How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments by Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, Christoph Trebesch
- Reuters: China’s collateral demands curbing emerging countries’ ability to manage finances, study shows by Duncan Miriri
About Anna Gelpern and Brad Parks:
Anna Gelpern is a Scott K. Ginsburg Professor of Law and International Finance at Georgetown Law and a nonresident senior fellow at the Peter G. Peterson Institute for International Economics. She has published research on government debt, contracts, and regulation of financial institutions and markets. She has co-authored a law textbook on International Finance and has contributed to international initiatives on financial reform and government debt. She co-directs the Sovereign Debt Forum, a collaboration among Georgetown Law’s Institute of International Economic Law and academic institutions in the United States and Europe, dedicated to cutting-edge research and capacity building in sovereign debt management.
Bradley Parks is the Executive Director of AidData at William & Mary. He leads a team of over 35 economists, political scientists, computational geographers, software engineers, program evaluators, policy analysts, and media and communications professionals who work with governments and international organizations to improve the ways in which overseas investments are targeted, monitored, and evaluated. He is also a Research Professor at William & Mary’s Global Research Institute. Prior to joining AidData, Dr. Parks was part of the initial team that set up the U.S. Government’s Millennium Challenge Corporation (MCC). He oversaw the MCC’s annual country selection process from 2005 to 2010. As Acting Director of MCC Threshold Programs, he managed the implementation of a $35 million anti-corruption and judicial reform project in Indonesia and a $21 million customs and tax reform project in the Philippines.
Transcript:
ERIC OLANDER: I’m Eric Olander. And today, we’re going to revisit an issue that we’ve been covering on this show, I think, going all the way back to 2010, when we started this podcast, almost 1,000 episodes ago. And it’s the question of Chinese loans and Chinese debt, not only to Africa, but elsewhere around the world.
Now, a lot of you will be very familiar with the notion of the debt trap. This is something that really came about starting in 2017, when an Indian pundit by the name of Brahma Chellany wrote a project syndicate article, and it just captured the imagination of people not just in India, but also in the United States, in Africa and around the world. And it’s this idea that China is intentionally lending money out to developing countries, specifically in Africa with the intent to overwhelm them.
And then when these countries cannot repay that debt, they will seize assets. This has been thoroughly debunked over and over and over again by the folks at Boston University, at AidData, at Chatham House, at Deborah Brautigam at Johns Hopkins University. Yet as regular listeners to this show will know very, very well, it still persists.
It is one of the most durable memes in the China-Africa relationship that just refuses to die, no matter how much evidence is put forward about it today. But we’re going to talk today about a very specific part of the Chinese development finance universe that’s out there and is specifically focused on collateral. So when a Chinese loan is put out, a lot of people will say, well, the Port of Mombasa or the Standard Gauge Railway or the Port of Hambantota in Sri Lanka, that is the collateral.
And in the event that they cannot repay that loan, then the Chinese will come in and take that asset. And I just want to play a soundbite for folks. And just to say, it’s not just a Western narrative.
This is a narrative that is deeply embedded in the discussions in Nigeria and Kenya. Let me play you a clip now just to hear how you hear this play out. And this was about three years ago.
This played on TV 47 News in Kenya. And it was talking about how the Auditor General in Kenya misread or misunderstood part of the Standard Gauge Railway loan contract and mistakenly thought that the Port of Mombasa was going to be put up as collateral. And for those of you who are interested in this, I highly recommend that you read some of the research done by Deborah Brautigam at the China-Africa Research Initiative at Johns Hopkins.
She spent a lot of time debunking this, yet nonetheless, it carried through into the media and into public perception. Let’s take a listen to this, and this will lay out what we’re going to talk about today.
SOUNDBITE: Three years since a report by then Auditor General Edward Oko revealed that the country risks losing its Mombasa port should it fail to service the $364 billion Shilling China SGR loan, recent financial storms at the Kenya Ports Authority, the government entity tasked with servicing the debt, suggest that the port’s takeover by China is imminent sooner rather than later. According to the National Assembly Public Investments Committee that has since launched a fresh probe into the Auditor General’s findings, China is also at liberty to seize other assets at the KPA as well as the Kenya Railway Corporation, as per a contract signed between the two and the China Exim Bank if KPA and the KRC failed to hold their end of the bargain. With the committee in a race against time to save face for the country, it has also pointed an accusing finger at those who penned the contract, reiterating that the government would not have found itself in a tight spot had they renegotiated a more favorable deal.
ERIC OLANDER: So once again, just want to emphasize that report was factually incorrect when it was broadcast a few years ago, but does represent a lot of the discussion that took place in Kenya. We also had a similar discussion that took place in Uganda a couple of years ago related to the Entebbe Airport and a $200 million China Exim Bank loan there to refurbish one of the cargo terminals. There was a news report that came out that said that they were going to surrender it to the Chinese.
Again, that did not bear out as well. Well, there’s a new report that came out that explains why this is not the case, how China collateralizes. Now, I mentioned this word collateral at the beginning, and that is the key issue here, because what does China put up as collateral for these loans?
And it turns out that according to this research, once again, it’s not going to be physical assets. Now, there were a number of people who contributed to this report. We are thrilled to have two of the authors with us today, our old friend Brad Parks, who’s the executive director at AidData, which is the Development Finance Research Institute at the College of William and Mary in Virginia, and Anna Gelprin, who is a legend in this business and somebody that we’ve been following very closely for many years and thrilled to have on the show for the first time.
Anna is a professor of law at Georgetown University and a non-resident senior fellow at the Peterson Institute for International Economics. Brad and Anna, thank you so much for taking the time to join us today.
ANNA GELPERN: Yeah, thanks for having us.
ANNA GELPERN Thanks so much, Eric. It’s a pleasure. Long time no see.
ERIC OLANDER: So, Anna, let’s start with you.
Before we get too into the weeds about what you guys wrote in this report, maybe you can talk to us a little bit about collateral in the context of these Chinese loans. What is it and just some baseline that we can understand what we’re talking about here?
ANNA GELPERN: So, let’s start with collateral in general. I think most folks will be familiar with it in their personal life. If you’ve bought a house, if you’ve bought a car, if you don’t pay, the creditor can take the asset.
Now, what’s interesting here is it’s a piece of property that puts this creditor ahead of other creditors, right? They have a direct line to your house, your car, without having to go to court necessarily. And I think that’s partly the image that might be behind the myth that you were describing.
People think of collateral as a thing you physically grab. Now, when you stop and think about it, it’s actually a pretty useless thing when it comes to infrastructure, in particular, if your goal is to get repaid. Because who are you going to sell it to?
How are you going to turn it into cash? How much is it going to cost to operate a port or an airport, right? So, the commercially sensible thing to do would be to get cash as collateral.
Now, your typical question is, this is very confusing, because if you have cash to put up as collateral, why are you borrowing money to begin with, right? And what we’re seeing here, what we’re seeing in the report that you described and that Brad will certainly elaborate the whole institutional setup, is it’s not so much a sitting present port pot of cash, but cash flows typically from exports, although in the Kenya case, it’s domestic revenues from port fees, right, that are to be deposited in a particular bank account. And instead of being able to grab a thing, the creditor is first in line to a bank account and or to a stream of revenues.
In most cases, it’s offshore foreign currency revenues. In the Kenya case, since we started with that, it’s domestic revenues associated with port and railway operation.
ERIC OLANDER: That was the big point that Deborah uncovered and tried to clarify when the Auditor General mistakenly said the port itself was the collateral. And in fact, it’s the revenue generated by the port, as you pointed out, is the collateral. Very important distinction there, because the port was never physically at risk of falling into Chinese hands in that case.
Brad, let’s talk about this report. It’s a groundbreaking report. It’s the first time that such a report has ever been done.
You looked at 620 collateralized public and publicly guaranteed loans between 2000 and 2021. It’s a typical aid data type of project where you take a massive amount of information and then consolidate it down and start to extract out some themes that come through it. Let me just read a couple headlines and then I’d like you to get into what is important about what you uncovered.
Almost half of the $911 billion of publicly guaranteed loans to developing countries you guys found is collateralized. And this impacts 57 countries, totaling around $418 billion. That is a lot of money that we’re talking about here.
One last point that I want to bring up and then I want to hand it over to you is you said that not all of the different actors in this are behaving the same way. So not every bank is collateralizing the same way. The China Development Bank you found collateralized two thirds of its lending, while the China Exim Bank did only about a quarter, and then commercial banks collateralized only about a third.
Let me leave it there with you, Brad, to tell us some more highlights of what you found. And tell us a little bit about how you went about going through this data and this research to better understand this part of the development finance process.
ANNA GELPERN Sure. So this project took shape after Anna and I and a broader group of collaborators published a study called How China Lends in 2021. And we learned through analysis of a subsample of 100 debt contracts between government borrowers and Chinese creditors that collateralization is a feature rather than a bug of the way in which Chinese creditors lend to public sector borrowers in overseas jurisdictions.
And we also found in that study that these escrow accounts or restricted bank accounts played a very central role. But we only had sort of a slice of the pie, right? We only had those 100 contracts.
And so while we knew that this was an important part of the puzzle, we knew we also wouldn’t really understand the true scale and scope and nature of the collateralized lending portfolio unless we looked at the entire portfolio. So first we just started by taking AidData’s global Chinese development finance data set and trying to limit it to only those loans that qualify as so-called public or publicly guaranteed debt. So that’s about $900 billion of lending to low-income and middle-income countries.
Then from that $900 billion, our task was to figure out what percentage of that is supported by one or more sources of collateral. And so that required sifting through about 12,000 different sources of information. And the main buckets of information were the contracts themselves.
So in this report, we not only disclosed a whole host of debt contracts, but also the security agreements. So if there was an escrow account agreement or a mortgage or a deed of security, that was a rich source of information in order to be able to figure out, is this loan collateralized or not? And if so, what are the sources of collateral that underpin the debt transaction?
Second big category were the public disclosures of borrowers via stock exchange filings or sovereign bond prospectuses and annual reports of state-owned enterprises. And then another key source was the surveillance reports, the macroeconomic surveillance reports of the IMF through its Article 4 consultations with its member states, and then debt sustainability analyses that are routinely conducted by the World Bank and the IMF together. So that’s how we figured out that of the 900 billion, roughly half of that are these public sector loans that are supported by collateral.
So once we knew, okay, we’ve got these 620 loans, they’re all supported by collateral, then our goal was to come up with a systematic way of categorizing what’s the nature of the collateral, right? And so we wanted to be able to differentiate in a principled way between not just liquid and illiquid collateral, but we wanted to use kind of a defined framework. And so there’s something in the U.S. called the Uniform Commercial Code that is a way in which collateral is classified. And we sort of developed a methodology that’s really inspired by that Uniform Commercial Code to be able to say, okay, is the source of collateral land? Is it inventory? Is it bank account?
Is it accounts receivable? And so for each one of the 620 collateralized loans, we figured out, okay, what are all the sources of collateral that are at play here? And most of these loans are not supported by a single source of collateral.
It’s often multiple sources. It’s cash. It’s the bank account and the future deposits in the bank account.
Or sometimes it is an illiquid source of collateral and the liquid source. So we found that roughly 90% of the collateral is liquid or 90% of the lending portfolio is supported by at least one source of liquid collateral, which typically you’re talking about foreign currency, dollars or euros that the borrower deposits in an offshore bank account, a restricted bank account that the creditor can monitor. It can limp it withdrawals and it can unilaterally debit that account.
But that’s often kind of the base package. Then you often have additional enhancements on top of the package. So, you know, there can be contract rights that are assigned.
There can be, you know, you can surrender an equity stake in a project company, for example. So that was really the first step was just kind of figuring out the nature of the collateralization. And, you know, we confirmed in this larger sample that the preference for liquid collateral is very strong.
And then I think one of the big innovations of this study is we hunted for the actual bank accounts supporting these loans. And then we determined how much cash is being held in these bank accounts at given time steps, at given junctures in time. And what we found is that there is a lot more money stashed away in these restricted bank accounts than we previously understood.
So there’s 14 countries for which we had sufficient information to say, OK, how much money are we talking about in a way that enables us to make an apples to apples comparison? And so what we said was, OK, useful denominator would be your total public debt service to external creditors as a sovereign in a given year. So tally that up, right?
Let’s say you are paying your external creditors a billion dollars every year. What percentage of that billion dollars is refenced for the use of one creditor, right? It’s sort of encumbered revenue that puts one creditor, in this case, a Chinese creditor at the front of the repayment line.
And we found that in that subset of countries where we had really detailed information on the bank accounts and the money in the bank accounts, that it constituted, on average, 24 percent of all of their public debt service to all external creditors, Chinese or otherwise. So that was kind of a wake up call. We’d had no clue in the original study that the amounts of money were that large.
ERIC OLANDER: And that’s presumably a lot more than you expected to see.
ANNA GELPERN Is that correct? Much more. Yes, much more.
I think some of the other things that really stood out to us is that notwithstanding cases like the Standard Gauge Railway, where the revenues are coming from the project asset, like the revenues in the Standard Gauge Railway are from the railway itself. But that is not really representative of what we see in the broader dataset. Eight or nine times out of ten, actually, what’s the dollars and euros that are being deposited in these offshore lender-controlled accounts are coming from commodity revenues.
Really, one of your key sources of liquidity as a sovereign that you would use for any number of things to pay contractors, to pay salaries, to pay any number of debts to external creditors. So the fact that such large amounts of money were offshore ring-fenced for the exclusive use of one creditor raised questions for us about fiscal autonomy and whether the folks who were responsible for doing macroeconomic surveillance are aware of these accounts and the balances in the accounts. I think the other things that immediately jumped out was whether, well, many of these sources of collateral are not formal collateral.
We describe them as quasi-collateral. And what we mean by that is that there is not a formal lien or charge where you would have a registration requirement and where you would say, look, this piece of land has been pledged as a source of collateral, so it goes in a collateral registry. So all other creditors can see, look, the borrower pledged this source of collateral.
That’s not really what’s happening. Most of the time what’s happening is that these funds are being deposited in bank accounts and the bank account is often sitting at the creditor institution. It’s not a third-party bank, right?
And so that allows or it sort of frees the borrower from the typical public notification requirements that would come with a formal collateral arrangement. And that’s just more difficult to monitor. So if you are the IMF or the World Bank, it’s substantially more difficult to determine, look, are all creditors on even footing or are some creditors senior and others junior?
ERIC OLANDER: Anna, Brad laid it out. You mentioned at the beginning of your remarks that this type of collateral is very common. I have a house.
If I don’t pay the mortgage on my house, the bank will come and take my house, sell it, and then repay what I owe. But the way that it works, as Brad is laying it out and as you found in the research, is that it’s not quite as transparent as that. It’s not quite as straightforward as that.
I guess I have two questions that maybe you can kind of address. One, is this unusual in the context of international development finance? Do the Americans, the British, the Germans, the Japanese, do they use these techniques or are these uniquely Chinese?
And then I guess the other question is, I’m listening to Brad go through some of these things. Is there anything that gives merit to the critics that say what the Chinese are doing is unethical? Because I can hear in my mind some conversations that I’ve had with China Exim Bank officials who are very serious about the fact that they are dealing with their taxpayers’ money.
And they will say, we are lending money to countries that are much higher risk. We are lending money to countries that, you know, you in the West will talk a good game about but will not lend to. So because there’s higher risk, we want to make sure that we’re protected and we want to our money back.
That’s not unreasonable for the taxpayers of China who are funding this. But I’m just trying to understand if what we’re seeing and hearing here is normal and if there’s anything untoward about it.
ANNA GELPERN: So I’m so glad you framed it that way, Eric. And in some ways, this is one of the places where we are not quite on the same page with that paper of Deborah’s that is really terrific in many ways. But we also had we had more documentation at this point flesh this out.
So very much in line with our first paper, How China Lends, we’re seeing is elements that are absolutely common, that are totally ubiquitous, that are combined and adapted and scaled in unusual ways. Right. So the kind of thing you’re going to hear and I will address whether it’s reasonable or not separately, I think sort of usual and reasonable are two very different things.
So escrow accounts, restricted accounts, you know, redeemment accounts, revenue accounts are absolutely ubiquitous in international project finance. But as Brad flagged, what you have and let’s say you have a project financing in a war-torn, low-income country that just badly needs infrastructure. Right.
It is really hard to see how a private sector outfit and even some traditional official lenders would come in and basically put a whole bunch of upfront investment into a road, a railroad, you know, an airport, you name it, and only secure it by some combination of project assets. Remember, we’re in a very distressed environment. And prospective revenues from a project that A, may never come to fruition, and B, even if the thing is built, it may not actually be profitable.
Right. It may not produce any revenues. So these are extraordinarily high risk projects in many cases that would justify doing things, and I’m easing into reasonable now, things like you’d pay collateral in all the land, all the assets, all the equipment, all the bank accounts, all the future revenues.
Right. And you, you know, you make sure that the revenues flow offshore just so that you have no transfer risk. Now, what we’re seeing here is you have these infrastructure projects, but the collateral is not this very speculative future revenue from this project, but rather a very established stream of commodity export revenues.
So Wakanda has been exporting vibranium since forever. Right. We know there’s a market.
We know there’s their revenues from it. And so you take this very high risk project and you make it very safe. Right.
By collateralizing it with unrelated revenues. There’s one more piece to this, which is another analogy that, you know, we hear is pre-export finance. Right.
So, for example, you know, farmers are selling export crops, but they need short term funding upfront to, you know, plant harvest, you name it. Right. And there again, typically you would have collateral and collateral like structures.
So, you know, when the crops are sold, the money goes to the creditor. Right. Because they finance this export crop.
Again, what we have here is what’s being financed is not the actual export of vibranium. Right. But the construction of domestic infrastructure.
And let’s go back to the point that you flagged, which I think is very valid, which is, first of all, this is super risky. And if you’re playing with taxpayer money, you want to make it safe. And second, who else is going to build infrastructure on better terms in these countries?
Right. Is anybody going to go in there and lend without collateral or lend secured by toll road revenues that, you know, we really don’t think will ever materialize? Right.
For example. So is it understandable? I would say it’s understandable.
Is it commercially plausible, reasonable? Yes. Is it a creative adaptation of existing techniques?
Yes. But the result, as Brad said, is that instead of, you know, short term export finance, you have long term infrastructure finance. And instead of, you know, risk sharing with these very risky infrastructure projects, you have a form of de-risking.
Right. That comes from using established commodity revenues as collateral. And there, I think, is the policy challenge.
How should we think about borrowers pledging or ceding control over future revenues on a large scale in exchange for this kind of finance? Right. And I think that’s a really important policy question to debate.
ERIC OLANDER: Yeah. I mean, it’s predicated on the basic logic. And this is what the Angolan oil for infrastructure deal was that China is cash rich, but resource poor.
Angola is resource rich and cash poor. So there you’ve got the match. And the oil serves as the collateral in that sense.
I mean, it didn’t work out in the end for Angola in that deal. But everything, Brad, that Anna has been saying sounds quite reasonable, given the risk, the burdens for taxpayers. The problem seems to come, though, on this question of transparency that you made and that it’s not fair to talk about other taxpayers, say you and I, who pay taxes into the IMF.
And then we are on the hook for bailing out Wakanda in the event that Wakanda can’t actually pay back its debts. But we don’t have the visibility into their books because they’re sitting in Chinese bank accounts in many respects. I guess my question here, and this is something that came up in the report that we heard at the top of the hour in the auditor general misreading the contract, where does accountability lie for that?
Everybody puts all of the accountability on the Chinese side, but the borrower is 50 percent of this relationship. And I guess my question is, if the borrower is agreeing to these terms that are not transparent, aren’t they also equally culpable for the problems associated with these collateralized loans?
BRAD PARKS: I think one of the unexpected discoveries that we made during the research is that there are well-established processes in many borrowing countries for the executive branch, usually the finance ministry, to go before parliament and say, look, I’m going to borrow from China or any other external creditor, and here’s a draft burden of a loan agreement that I am planning to sign. And then, at least in some set of countries, parliament has a sort of legally defined role in reviewing and ratifying these loan agreements with external creditors. And so that seems like a locus of accountability.
Here’s the problem. What we found was that many times the security arrangements, the collateralization arrangements, especially when it’s cash collateral that is being pledged through an escrow account agreement, those escrow account agreements are often signed after that parliamentary back and forth with the finance ministry. So it’s kind of a workaround.
It’s like a side agreement that the finance ministry signs months after they’ve already gone through the rigmarole of getting parliamentary approval, right? And then if the bank accounts themselves are domiciled outside the country, what we know just from reading the reports of various under general reports is that their ability to obtain information about those accounts and the balances of those accounts is severely limited when the accounts are not domestic, but they’re in China.
ERIC OLANDER: Let me just stop you there. Are they doing that? Is the borrower doing that in order to circumvent parliamentary oversight, or is that a request from the Chinese in order to facilitate the deal to be done?
Again, I’m trying to understand where accountability lies in terms of this kind of shortcuts that they’re taking in terms of oversight and transparency.
BRAD PARKS: We don’t know is the short answer to that question. I will say, I mean, I think that the, and I might want to jump in here as well, but I think that there’s lots of responsibility or accountability to go around, right? Like one thing that bears mentioning is that the transparency of collateralization practices of all external creditors is just abysmal, right?
This is not a uniquely Chinese problem. However, because of the scale of China’s lending to open countries, the stakes are now higher, right? And I think one of the risks of non-disclosure is that when other non-Chinese creditors get kind of a vanishingly rare glimpse that, oh, there’s a lot of money in this offshore account that puts the Chinese ahead of me in the repayment line, you know, put yourself in their shoes, what would you do, right?
The risk of inadvertently setting off a collateral arms race goes up, right? If you say, look, I don’t want to be subordinated and be at the back of the repayment line, we don’t really know how much collateralization is happening with other external creditors. But when we did that 2021 study, we looked at 142 loan contracts from non-Chinese creditors.
Only three of the 142 were collateralized. So that gave us a rough sense that it’s pretty rare among non-Chinese creditors that that’s collateralization today, not collateralization tomorrow, right? Your behavior tomorrow is conditioned on what you’re observing today.
So, you know, when there is kind of a sudden disclosure, this happened in Suriname, that Suriname had distressed debt, it was trying to restructure with a whole host of external creditors, an IMF mission, group of IMF officials went to Suriname, the government affirmed in writing that they did not have any collateralized loans with external creditors. Three months later, they said, oh, sorry, we forgot, you know, we looked under the couch cushions and actually there is a loan, you know, that is collateralized with dollars in an offshore bank account for the exclusive use of one creditor, China Extend Bank. So it wasn’t, that was one loan, it wasn’t that much money, but that disclosure makes all the other creditors wonder and worry, you know, if there’s one, there’s more.
If there’s one, maybe there’s more. And therefore, am I being a fool not to ask for a similar level of security?
ERIC OLANDER: Yeah, Anna, go ahead to add a little bit more.
ANNA GELPERN: Yeah, if I could. I mean, like, all you have to do is to read Angola’s prospectus from December, right, where and, you know, all the brouhaha surrounding their total return swap with J.P. Morgan, right? It’s, I would not be surprised if, you know, today’s sample would give us a much larger chunk of collateralized lending as a proportion of total, or collateralized borrowing, I guess, as a proportion of total borrowing by low and middle income countries.
But also, I think, to be fair, and I’m very confident of kind of the framing we’re approaching this with, but we’re defining collateralization broadly in the same way as the World Bank and the IMF defined it to include both collateralized, so formal pledge of security, interest, etc., as well as de facto control of assets, which is what, you know, Brad was describing as quasi-collateral. And, you know, there’s a lot of nickel and diming. Is this a lien?
Is this a charge? Is this a pledge? You know, substance over form, folks, right?
Who controls these revenue flows? Who controls the assets, I think, is absolutely critical. And unless we’re both clear and transparent, what you have is, you know, everybody out for themselves trying to grab a piece of property.
Now, before we sort of leave this particular topic, I want to go back to your original premise and push back very slightly on the transparency piece, right? So, absolutely, transparency is a huge problem. And it’s, you know, sort of an issue close to my heart.
And absolutely, the biggest problem is with countries that have the lowest governance capacity, if you will, and the highest governance problems, like those 14 countries in which we’re seeing these giant account, you know, balances. Those are the countries that are super risky, that do not do terribly well on governance ratings at all, right? So, again, you could say, whose fault is it?
And how does it make sense in terms of risk management? Yes, these are the countries where you would want more collateral. But these are also countries that are least able to say no to this kind of thing and are most likely to try to evade their own internal accountability structures.
But there’s one more really important thing. I think the Ghana project is a very important data point in that respect.
ERIC OLANDER: And when you’re talking about the Ghana project, you’re talking about the $2 billion Sinohydro bauxite for infrastructure deal. Okay.
ANNA GELPERN: And there, it’s not just… So, there are layers of problems. First of all, Ghana did not classify this as debt for years, even though when you look at the contracts, it literally says debtor, right?
Like government debtor. So, that’s sort of point number one. They framed it as, you know, something like, you know, basically an export finance situation.
BRAD PARKS: Okay. Innovative outside-the-box thinking, I think was the verbatim quote.
ERIC OLANDER: And the reason why they did that is because they said the bauxite was going to pay for the loans. And it wasn’t really just taking money for nothing. It was taking money and then selling bauxite, and that would wash out.
That was the original logic of it.
ANNA GELPERN: So, the trouble with that logic is, at the time of the agreement, Ghana had no capacity to refine bauxite and wasn’t going to have that capacity without substantially more investment. And this structure where, on the one hand, the proceeds of the loan go to build roads, but the loan is repaid with export revenues, is a phenomenally distorted incentive structure. Because if you’re building the road that’s paid for with somebody else’s money, right, another government department, you know, you might not mind the project quite as much as you would if it were your revenues, you know, the project revenues, right?
And ditto if you’re, you know, for example, if you borrowed money to refine bauxite, right, and you got the benefit of the loan, well then, yeah, you might actually have all the incentives to develop refining capacity because you would get the upside from that. But as it stands, the upside goes to the road people. So, you get, in a way, neither component, neither the bauxite component nor the road component, right, has kind of the right incentives for any of the participants, the borrower or the lender.
ERIC OLANDER: And that’s very similar to the situation that we saw in Angola, which is the original resource for infrastructure deal, where the Angolans committed, I think, somewhere around 75 percent of their oil to repay the Chinese debt. That created a cash crunch, forcing up inflation, and the whole thing was fundamentally flawed. Now, you and I know a lot of the folks at Peking University who came up with some of these plans, and they’re very well-intentioned.
I’ve had a chance to meet with a lot of them. They were really looking for very creative financing ways in order to accommodate the capital restraints on the part of the borrower and the needs of what China had. So, in my conversations with these people, I did not detect any malintent of any kind.
And we’re all pretty sophisticated at sensing out this malintent. But Anna, you talk about this was a flawed deal. Brad, we’ve had conversations over the years where the complexity of these contracts sometimes overwhelmed the people who were negotiating them.
And in the aftermath of the Entebbe Airport fiasco, when a parliamentary oversight committee brought the finance minister in front, he had to admit to Parliament that they did not fundamentally understand the contract. And that is what we heard in the report on TV 47 in Kenya as well, that the people did not understand the contract. I do not want to suggest that the people negotiating these contracts are stupid.
I don’t want to suggest that they’re ignorant. I do want to suggest that these are incredibly complicated legal documents that not everybody has expertise in. And it’s something that’s out of the norm for what they’ve done with other development finance partners.
But Brad and Anna, I’d like you to wrap up our conversation here just talking about the complexity of this and how do they find their way out of this, given the fact that hundreds of billions of dollars are now tied up for these countries that are now sitting in potentially dangerous financial situations, given the constraints that they’re facing on their budgets. Brad, we’ll start with you, and Anna will give you the last word.
BRAD PARKS: I think the Ghana-Sinohedro bauxite deal is kind of a cautionary tale because that debt or set of debts was contracted in the run-up to an episode of sovereign debt distress, right? So a public debt stock grows gradually over time. And so as the debt stock gets above certain threshold levels, I think the threshold that the IMF worries a lot about is when you’re over 60 percent of GDP.
Once the public debt stock is at or significantly above that level, there are incentives for governments to haul public debts, something other than public debt. And so I think that is one of the lessons that may travel from Ghana elsewhere, that for low-income and middle-income countries that are heavily indebted, where there are strong pressures to continue to execute public infrastructure projects, those tend to be fertile conditions for a lot of these innovative approaches or improvisational approaches that can exceed the capacity of the borrowing government to really understand what they’re signing up to and whether that’s something that’s in their long-term best interest. So yeah, I just think it’s useful to kind of do the autopsy, then take a step back for all sovereigns to take a step back and say, let’s look before we leap.
If it sounds too good to be true, it probably is. Ana, let’s hear from you.
ANNA GELPERN: So a topic very near and dear to my heart, which is neither the borrowers nor the creditors, to be fair, often really understand the contracts they’re getting into. Some of the EXIM contracts that we saw for Kenya, I’m sure a well-intentioned court would probably decipher and enforce the intent of the drafters, but it’s mighty muddled, shall we say. And I think part of this is this insane secrecy that surrounds public borrowing and public lending for a mix of reasons that are just not justifiable, right?
There is a small subset of bilateral official lending that could probably be kept secret. I don’t need to know about your submarines. But the fact that very few official lenders publish even their general terms and conditions and that borrowers go out of their way for a number of reasons, be it debt limits, be it political sensitivities of all kinds, to keep their actual debt contracts out of public view means that we get really, our debt discourse, the way in which we talk about debt, the way in which debt accountability is structured, is incredibly impoverished. And for countries where the stakes are incredibly high, it’s just inexcusable, right? So the multilaterals absolutely need to be tracking not just whether certain threshold conditions are met, they need to understand the full flow of funds.
They don’t just need to look at a snippet of a contract to see if they have to waive the negative pledge clause or not. They need to see the whole darn thing in order to—this is really, to me, the biggest lesson of our project, is that you don’t know what is going on if you see only one part of the picture. You really, you just do not know.
We still won’t know all the economics of this because it depends on so many different transfer pricing data points, right? How much the commodity is being sold for, what is the interest rate on the account, etc. Like, maybe a great deal, maybe a terrible deal.
Nobody knows. And this is because there’s this incredibly unjustifiable secrecy surrounding this. Every official bilateral lender, Chinese, non-Chinese, I don’t care, needs to publish their general terms and conditions.
And it’s much easier, by the way, to publish your full contract than to book reports about bits of contracts. All of this is way overdue. You know, we have an initiative, you know, hashtag public debt is public that really is part of our mission, is trying to make the point that you don’t know the numbers until you see all the words.
And I really hope that that’s the lesson that people take away from this report rather than, oh, my God, China has collateral. I need some, too. Right.
That would be the wrong lesson.
ERIC OLANDER: And just a reminder that the secrecy is on both sides of this, that Kenyan President William Ruto ran for office on a platform that said he would publish the terms of the Standard Gauge railway contract in accordance with Kenyan constitutional law. He has not done that, even though he was sued by a civil society activist. He’s only published part of it.
And so, again, the secrecy demands are on both sides. Anna, Brad, thank you so much. This is absolutely essential reading, and it pairs nicely with the report that AidData did several years ago, How China Lends.
And so if you really want to see the full picture of the lending and the collateralization of it all and how these collateral loans work, go to AidData’s website. We’ll put a link to it in our show notes as well. Brad Parks is the executive director at AidData at the College of William and Mary, and Anna Gelperin is a professor of law at Georgetown and a non-resident senior fellow at the Peterson Institute for International Economics.
I also want to mention the fact that you were joined by a number of your esteemed colleagues in the space to do this. Too many to name here, but I want to congratulate both of you on another excellent contribution to the discourse that’s so important for all of us to use in order to, again, push back on some of these myths that still pervade the conversation so much. So Brad and Anna, thank you so much for your time today.
ANNA GELPERN: Thanks so much, Eric. It’s such a pleasure and privilege.
BRAD PARKS: Yeah, thank you for showing interest in the topic.
ERIC OLANDER: And we’ll be back next week with another episode of the China in Africa podcast. On behalf of Cobus, Geraud, Lucy, and the rest of the CGSP team around the world, I want to thank you very much for listening and for watching.
