macroafricaintel | Nigeria-China relations may work this time

By Rafiq Raji, PhD

This past week, Nigeria’s president Muhammadu Buhari was in China. He was given full honours by the Chinese government. Nigerian authorities are hailing the trip as a huge success. They point to the more than US$6 billion worth of investments agreed between Nigerian and Chinese businesses – earlier statements credited to Nigeria’s foreign minister, Mr Geoffrey Onyeama, by Reuters suggested a US$6 billion infrastructure loan was agreed, later debunked by President Buhari’s spokesman. In fairness to Mr Onyeama, he did not say a new agreement was signed. Quoting him in the 12 April 2016 Reuters article: “It won’t need an agreement to be signed; it is just to identify the projects and we access it.” With more clarity on what actually took place, it is now known that what President Buhari did was to re-negotiate loans already agreed with the Chinese by previous Nigerian administrations, especially that of President Goodluck Jonathan. Since that is the case, it seems the loans might actually be more than US$6 billion. As I recall in November 2014 amid much fanfare, China Railway Construction Corporation Limited signed a US$12 billion contract for the 1,402-kilometre Lagos-Calabar coastal railway – the line would be a significant boost for the Niger-Delta and Southeastern regions of Nigeria and is currently a source of divisions in the Nigerian legislature: southern lawmakers accuse their northern colleagues of deliberately removing the project from the 2016 budget, putting President Buhari in a bind somewhat as he reportedly threatened to withhold his assent of the budget until the railway project is put back into the bill – China’s largest single overseas contract at the time, probably still is. If you assume the typical 85 percent Chinese funding format for Sino-Nigerian infrastructure projects, we could say the loans President Buhari successfully re-negotiated might actually be at least US$10 billion for the Lagos-Calabar railway modernization project alone. And there are others. There is the US$8.3 billion Lagos-Kano railway modernization project (contract was initially signed in 2006); Chinese funding commitment using the same ratio would be about US$7 billion. Although some of the funding for these projects were provided by the Chinese government to earlier Nigerian administrations – and diverted to other means by Nigerian authorities to the dismay of their Chinese counterparts – there could be about US$13 billion (taking a median figure) in re-negotiated debt obligations for the Nigerian side. It is probably why Nigerian authorities might not want too much focus on the loans because they are likely more than has been reported. While I worry about Nigeria’s rising debt burden, what worries me more is that most of the borrowings usually end up being spent wastefully on recurrent expenditure. Only recently, Nigeria’s top scribe revealed US$3 billion (600 billion naira) is borrowed monthly by the government to pay wages, based on media reports. Still, if indeed the funds – Chinese or otherwise – are actually used for the designated infrastructure projects and are completed, it would not be overly concerning. Although Nigerian authorities have not revealed whether the local content of the infrastructure projects was re-negotiated as well, it is likely Chinese companies would still supply the labour, equipment and materials for them. Notwithstanding, if Nigeria gets the infrastructure in the end, it would be just as well.

A currency swap agreement with the Industrial and Commercial Bank of China (ICBC) – that country’s largest bank – was also signed by Nigeria’s central bank during the trip; and has since been a source of controversy of some sorts. Most initially wondered why the agreement was not with the Chinese central bank, the People’s Bank of China (PBOC). News making the rounds is that both central banks actually agreed in principle on a currency swap – potential size of US$4-5 billion – with modalities still being negotiated. It is being reported in the media that the Central Bank of Nigeria (CBN) actually proposed a US$10 billion currency swap. A demurral by the Chinese is why about half of that is being considered as more likely. Still, it would be a relatively good outcome. As there are potential downsides, its significance should not be exaggerated however. A currency swap is a two-way instrument. Just like Nigerians would be able to buy Chinese goods using the naira – as opposed to first purchasing the US dollar and then converting to Chinese Yuan – the Chinese would also be able to buy Nigerian goods in naira. And what do the Chinese buy from Nigeria? Crude oil mostly. And since the naira is overvalued, Nigeria would lose significant value for that commodity in that case. That is in addition to the valuable US dollars the country would lose if crude oil sales come under the arrangement. Also bear in mind; the Chinese would be in possession of the US dollar equivalent of the Chinese Yuan Nigeria keeps with the PBOC as foreign exchange reserves. There are other concerns. With the swap, Nigeria’s net position would likely more often be negative. How so? China sells at least four times as much goods to Nigeria, mostly manufactures. And if Nigeria is looking to diversify its economy, it is not in its best interest to make it easier to import Chinese goods. Probably to put some modicum of dignity on the fact that Nigeria was actually in China with a begging bowl, the Nigerian president kept harping on the trade imbalance in favour of China – China accounts for more than 80 percent of its total trade with Nigeria. But is that the fault of the Chinese? You correct a trade imbalance by first building your own industries or say only importing as much as you export. Whereas China’s exports to Nigeria are largely manufactures – machinery, equipment, processed goods, etc. – and very diversified, more than 80 percent of China’s imports from Nigeria are crude oil and gas. In 2013 – most recent annual data available from the National Bureau of Statistics of China – China’s exports to Nigeria was US$12 billion (88 percent of total trade) and its imports were US$ 1.6 billion (12 percent of total trade), putting its total trade with Nigeria in that year at US$13.6 billion. Nigerian authorities put total 2015 trade with China at US$14.9 billion. In two columns in February 2016 – “Africa should renegotiate EPAs for manufactures’ trade parity” – I make a case for manufactures’ trade parity as a model for correcting the significant trade imbalances that exists between African countries and their western and eastern trade partners. So is there any advantage to the swap agreement? Oh yes. Nigerian banks are saved some hassle. And Lagos would effectively be the West African hub for Renminbi transactions. But in light of the aforementioned concerns, the CBN has to ensure that Nigerians are protected as it negotiates the terms.

So what does China get in return? China seeks influence primarily. In any case, it is not really giving much away. On 8 April 2016, acting on instructions from Chinese authorities, Kenya forcefully repatriated eight Taiwanese – charged and acquitted by a Kenyan court in a cyber crime case – to China, not Taiwan. It probably had no choice in the matter. Apart from the many Kenyan infrastructure projects being funded by China, Kenya is also currently negotiating a US$600 million Chinese loan. Nonetheless, the relationship with China is an excellent opportunity. China does not see the relationship as competitive. What Nigeria – and indeed Africa at large – could gain from China is what China is giving up. There is an opportunity in labour-intensive manufacturing as China ascends to advanced stuff. Still, power and infrastructure deficits are constraints. Even so, Nigeria could use special economic zones with designated infrastructure assets to get around them. Progress on this front has been slow, however. More importantly, the real potential gain from the China-Nigeria relationship is if it engenders the transfer of skills and technology from China. This is possible. China is helping Ethiopia in diverse ways in this regard – see my column on 22 December 2015: “East African countries seem to have cracked the Chinese code.” This should also be Nigeria’s emphasis. Fundamentally, China would be happy to help if it finds a Nigerian side that espouses some of the values it holds dear. Integrity and honesty are few examples. At this point, it is important to point out that there are aspects of Chinese culture that are not entirely pleasant. Racism is entrenched in Chinese culture and is at the root of its unpleasant labour practices in Nigeria and other African countries. Still, if the Chinese find honest Nigerian partners who fulfill their promises, there is no limit to the potential gains for the Nigerian side. In this Nigerian president at least, they may have found one such partner. That is also the impression one senses from the Chinese side.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz. http://businessdayonline.com/2016/04/nigeria-china-relations-may-work-this-time/ 

Thematic | Power shortages may yet weigh on African growth in 2016

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 29 Dec 2015. See link viz. http://businessdayonline.com/2015/12/power-shortages-may-yet-weigh-on-african-growth-in-2016/ 

Sub-Saharan Africa (SSA) is expected to grow by 4% in 2016, based on International Monetary Fund (IMF) projections in October 2015. Yet again, the sub-continent would be pulling below its weight. And a downward revision is still likely. A persistent power deficit remains a significant constraint. Some of it is due to poor planning. Inadequate investment – in some cases due to misplaced priorities as opposed to a paucity of funds – is also why. The influence of its development partners who favour supposedly environment-friendly power sources may also be a factor. Some of the incremental power shortages in 2015 were weather-related; with much of the sub-continent’s hydropower generation capacity unraveling in the year. Drought-hit countries in southern Africa – Zambia, Namibia, and Botswana – had to resort to expensive electricity imports to bridge the gap. In South Africa, a belated maintenance programme for its ageing coal-fired power plants forced power rationing (“load-shedding”) that likely cut economic growth by at least 1 percent in 2015. For an economy already beset by persistent labour unrest, high interest rates, weak demand from China – its largest trading partner – and negative political events, it did not need this additional headwind. Similarly, Nigeria – which constitutes one-third of SSA’s Gross Domestic Product (GDP) and is Africa’s largest economy – needs to generate 10-13GW of power by the end of the first half of 2016 to meet current needs and incremental demand from new development initiatives. Even the most optimistic scenarios do not see it having that level of generation capacity by end-2016. It currently has less than 4GW functional power generation capacity. Gas and transmission infrastructure are major constraints.

During the course of 2015, about a quarter of South Africa’s 45GW power generation capacity was offline due to compulsory maintenance and repairs. Almost half of the outages were unplanned, a symptom of its ageing power plants. While the state power utility provider has indicated there would be no power cuts until April 2016, load shedding is expected to continue into the first quarter of 2017. Two new coal-fired power stations are expected to add almost 10GW to the country’s grid by 2018. Long-term plans include a 9.6GW nuclear power plant and at least 20GW to be sourced from renewable sources. The country’s coal-dominated energy mix may remain for another 20 years, however. In the Nigerian case, authorities envisage emergency repairs and construction of identified critical gas infrastructure should enable the addition of 2GW generation capacity by the first quarter of 2017. Still, this would be below what the country needs. Additional capacity is planned. With Nigeria and South Africa accounting for more than half of SSA’s US$ 1.7 trillion economy, at least 0.5 percent would again likely be shaved off growth in 2016 on the back of power shortages alone.

An increasingly dogged market-driven approach by African authorities is good reason to be optimistic. South Africa, Ghana, Zambia, and Nigeria increased electricity tariffs in 2015. Upward revisions of hitherto subsidized tariff regimes have been forced by burgeoning revenue gaps, as commodity prices remain low. In Nigeria, workers’ unions are already resisting the move. With the opportunity costs so high, consumers might actually not mind the higher tariffs if stable and reliable power supply can be guaranteed. The alternative – use of standby generators – is prohibitively expensive and inconvenient. In some African countries, tariff hikes have been due to expensive emergency electricity imports to meet supply shortfalls. For instance, emergency power supply measures are expected to cost Zambian authorities at least US$ 1 billion (4% of GDP) in 2016-17. Low water levels at its Kariba dam – which produces almost half of its 2.3GW generation capacity – fell to 21% of capacity in November 2015. Consequently, its power deficit widened to above 40% as the shortfall increased to 1GW from 700MW previously. Authorities of drought-hit Namibia have also sought short-term solutions, as its 1GW Kudu gas-fired power plant is not expected to come on stream before 2019. In the Ghanaian case, ship-mounted power plants berthed off its shores are expected to bridge a current supply deficit of almost 500MW. An additional 1.25GW capacity is also planned for 2016 by Ghanaian authorities.

As the world becomes more environmentally sensitive, there is pressure on African authorities to focus more on renewable power sources as they seek to close their countries’ power supply gaps. Nuclear power has not enjoyed similar endorsements. Safety concerns and skill gaps are popular arguments, weak in one’s view. China plans to build – or has under construction – more than eighty nuclear power reactors. This would be in addition to about twenty it already has operational. At 75%, France has the highest nuclear power share of total power production in the world. French nuclear power stations source uranium from Niger, a country that imports electricity from neighbouring and underpowered Nigeria. There is a heated debate ongoing in South Africa around a circa 10GW nuclear power plant planned by its authorities. Apart from the potential fiscal consequences if not well and transparently planned, a major part of the debate is safety and environment-related. A curious angle in the debate also revolves around technological know-how. This is needless. South Africa already sources 4% of its power needs from nuclear sources, based on International Energy Agency (IEA) data. In any case, automation has reduced the amount of skilled manpower needed for day-to-day operations of new power plants, regardless of the source. With nuclear power plants now so much safer, an accident would practically require an Act of God. And in that case, no amount of caution would matter. With the costs of a longstanding power deficit already so high, it would be unwise for African authorities not to consider all options.

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Thematic | East African countries seem to have cracked the Chinese code

By Rafiq Raji, PhD

Africa can still industrialize. Its relationship with China, if well harnessed, provides it with an opportunity to do so. Labour-intensive manufacturing jobs are leaving China as wages rise. African countries are targeting these. “Industry partnering and industrial capacity cooperation”, a key milestone of the Forum of China-Africa Cooperation (FOCAC) 2016-18 action plan of “The Johannesburg Declaration” is aimed at ensuring the smooth transition of these jobs to the continent. But only a few seem to have the necessary conditions to accommodate them. East African countries – Ethiopia and Kenya in particular – seem better prepared. They have been making significant efforts at ramping up their power generation capacity and electricity grids. The US$ 24 billion China-backed Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) corridor project being built in Kenya is also gathering pace. Ethiopia, which does not have a sovereign route to the sea, has also partnered rather well with neighbouring Djibouti to overcome this constraint. With Chinese backing, Kenya and Ethiopia have also been building roads and railway lines linking ports. Although China has declared its intention to help other African countries in this regard, these two East African countries seem to have had a good head start. A key commonality they also have is that they are non-resource intensive economies. Their increasing success on the back of China’s help is a counter-argument to well-voiced views of an exploitative intent. That said, China’s interest in Africa is strategic as well as economic. Its continued support for African countries in spite of its economic slowdown buttress this view.

China’s industrial leap came on the back of special economic zones (SEZs). Its “open-door policy” – which started in 1978 – saw it create four (4) SEZs spread across two major provinces by October 1980. More than thirty years later, China would have almost two hundred economic and technological development zones (ETDZs) or industrial parks. Varied countries that have since tried to copy this Chinese model have had mixed results. There is a consistency, however. African countries have performed poorly. Power deficits, corruption and cumbersome bureaucracies have been adduced for why. Within the sub-continent, however, East African countries seem to have done relatively better. Chinese-backed free trade zones can be found in a number of African countries. Prominent ones are the Eastern Industry Zone (EIZ) in Dukem, near Addis Ababa in Ethiopia and the Lekki Free Trade Zone (LFTZ) on the outskirts of Lagos, Nigeria. Although both were approved as “Overseas Economic and Trade Cooperation Zones” by the Chinese commerce and trade ministry in 2007, the former has developed faster it seems.

In November 2015, Ethiopia launched the second of its US$ 475 million Chinese-funded two-line 34km Addis Ababa light railway transport (LRT) system. Under a Build-Operate-Transfer (BOT) contract, construction began by the China Railway Engineering Corporation in December 2011. The current Chinese management is expected to transfer operations to an indigenous team in five years time. An LRT is also being built by the Chinese in Lagos, Nigeria. One of the planned seven lines of the Lagos Urban Rail Network (LURN) – the 27km “blue line” – is expected to be ready before the end of 2016. Construction work, which began in July 2010, is being done by the China Civil Engineering Construction Company (CCECC) under a design and build contract. The project has met with several delays. There is one key difference between the two examples. The former was predominantly Chinese-funded.

There are also interesting contrasts to be made between Kenya’s Mombasa-Nairobi Standard Gauge Railway (SGR) and Nigeria’s Lagos-Kano Railway projects. The China Import and Export (Exim) Bank-funded Mombasa-Nairobi SGR is expected to open commercially in 2017. China’s Exim bank also provided US$ 1 billion part funding for the estimated US$ 8 billion Lagos-Kano railway project. In August 2015, Nigeria’s current president revealed that a substantial part of the loan was diverted to other projects by the preceding administration. The project stalled consequently, albeit the Kaduna-Abuja section has been completed.

There is clearly one key characteristic of the relatively successful East African projects highlighted above. Chinese funding was provided directly to a Chinese company or consortium to build, operate and transfer the projects, thus reducing the risk of diversion or funding shortfalls. Comments by Nigerian officials ahead of the FOCAC summit in December 2015 suggest there was a desire to restructure the country’s infrastructure arrangements with China along these lines as well. In a show of confidence, Kenyan authorities actually secured an additional US$ 1.5 billion Chinese loan at the summit for an extension of the SGR from Nairobi to Naivasha, a rift valley town where industrial parks are planned. The 290MW Olkaria geothermal power plants are located in Naivasha. Other industrial parks are planned along the SGR route by Kenyan authorities. This strategic approach is admirable.

On a trip to China a few years ago, a Chinese man nodded repeatedly during a conversation and one erroneously thought he was showing agreement. It turned out our views couldn’t be more different. Although, the above examples do not qualify as a robust sample, it does seem Chinese-funded projects that are constructed and operated by Chinese companies are completed on target. It is not likely the Chinese would make this point all too clear in negotiations with their African counterparts. Labour on these projects is also largely Chinese, unfortunately. But that is common to almost all Chinese-sponsored projects on the continent. And even as Chinese authorities seek to change this practice, they are entrenched. Thus, progress would likely be slow. In the meantime, African authorities have to make the best of what is clearly not ideal. That pragmatism may be the reason why the East Africans have gained more from their relationship with China.

Views were published on BusinessDay Nigeria Newspaper on 22 Dec 2015. See link viz. http://businessdayonline.com/2015/12/east-african-countries-seem-to-have-cracked-the-chinese-code/