AFRICA BUSINESS AND ECONOMICS

New Report Highlights China’s Indispensable Role in Building African Infrastructure

May 3, 2021 by Eric Claude Olander from The China Africa Project

African infrastructure financing is in freefall, plummeting from $100 billion annually in 2014 to just $31 billion last year, according to a new report published by the global law firm Baker McKenzie.

It appears that both bilateral and multilateral creditors have pulled back, said the report’s authors. 

The report highlighted China’s outsized role in African infrastructure financing during the period of 2008 through 2020. Together, the China Exim Bank and the China Development Bank provided almost $34 billion in financing, three times as much as that of the next largest provider, the Japan Bank for International Cooperation.

Chinese deal values for African infrastructure projects last year were well below their 2017 peak, reported a Baker McKenzie partner in Hong Kong: “There has been a slowdown in the number of infrastructure deals from China. In the short-term, we expect to see more targeted lending — fewer projects of a higher quality using sophisticated structures — and new finance options such as factoring used to deploy Chinese capital into the region.”

Although there’s been a lot of discussion of late within the new Biden administration in the U.S. to mobilize a coalition to rival Chinese infrastructure financing in places like Africa, Baker McKenzie’s Global Head of Project and Trade & Export Finance, Michael Foundethakis said he doesn’t expect Washington’s spending outlays to match those of Beijing’s: “The U.S. hasn’t kept pace with Chinese lending into Africa. The recent change in administration is likely to renew focus on impact—building and financing strategic long-term projects in the region, but bankability and risk-sharing remain a priority for U.S. lenders.”

Key Highlights From Baker McKenzie’s Report on African Infrastructure Financing

  • DEVELOPMENT FINANCE INSTITUTIONS VS. COMMERCIAL BANKS: DFIs continue to be the main providers of long tenor infrastructure finance in Africa — particularly as international banks have largely withdrawn from the region. Trends indicate that these institutions have taken a step back from project finance in general — facing higher capital requirements and ongoing uncertainty associated with the pandemic. But the vacuum is unlikely to be filled by commercial banks. In 2020, just 84 projects were supported by commercial bank finance and their involvement in DFI and ECA deals continues on a downward trend. Instead, local and regional banks, specialist infrastructure funds and private equity and debt are stepping in to collaborate with DFIs and access returns.
  • PRIVATE EQUITY INVESTORS: The number of Private Equity (PE)-backed deals in support of African infrastructure has declined over the last three years. But the proportion of infrastructure-related deals compared to all inbound PE investments was highest in 2020 — signaling growing desire to finance fundamental energy, telco and mobility projects in the region.

Although Chinese Infrastructure Financing is Down in Africa, Business is Booming For China’s State-Owned Contractors

Chinese development financing in Africa may be down sharply, but that doesn’t appear to be having much of an impact on China’s state-owned construction companies that have edged out the competition to become the dominant player in the continent’s infrastructure development sector.

Chinese contractors, according to data from Deloitte, accounted for 31% of the 121 infrastructure projects built last year in Africa and there’s no indication that momentum will slow this year. In East Africa, that trend is even more pronounced with Chinese contractors building half of all of the projects.

Why Are Chinese Construction Companies So Dominant in Africa?

  • PRICE: “[They can] deliver high-quality civil works at very competitive prices compared to their Western counterparts… The amenities built into the project implementation may be significantly lower in the Chinese bid than the Western one. Africa is largely a utility and price-sensitive market. If a contractor offers comparable quality at lower prices – they will consistently win bids in this market” — W. Gyude Moore, senior policy fellow at the Centre for Global Development and a former Liberian minister of public works
  • SPEED: “Chinese can offer competitive bids – although some argue the quality of their projects is inferior. They can offer faster completion and lower costs – as the Chinese workers have a different set of work ethics and patterns” — Yun Sun, director of the China program at the Stimson Center in Washington

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