Recession: Using a concessionaire to mitigate the consequences of Nigeria’s ballooning Chinese debt
There is no gainsaying that China is one of Africa’s biggest creditors and Nigeria is one of its largest customers. China is said to be Africa’s largest bilateral creditor, as she has disbursed the continent loan worth $152 billion in 18 years – between 2000 and 2018. It is reported that Nigeria has obtained 17 Chinese loans to fund different categories of capital projects, and Nigeria will still be servicing the Chinese loans till around 2038, which is the maturity date for the latest loans obtained in 2018.
More recently, the Minister of Finance, Zainab Ahmed, disclosed that the Federal Government had decided to obtain $17 billion loan, 70 percent of the total loan of $29.96 billion, from China as the World Bank and the African Development Bank’s (AfDB) failed to show much interest in Nigeria during the recession. She further disclosed that the loan from the Chinese bank was meant to make funds available to our own development institutions, so that they can give out loans because access to finance has been difficult for the Small and Medium Enterprise (SMEs). She added that the loan is also to fund critical infrastructures across the country.
The good thing about Chinese lending is that it focuses on individual projects that contribute to structural transformation and economic development. Examples of these revenue making projects which are government owned include; air and sea ports, mining projects, infrastructural projects, national grid and so on. However, these projects may also double as traps from the Chinese (lender) to their African borrowers, because these same projects get used as collateral and consequently are at risk of being forfeited upon default of repayment.
For instance, because $7.4 billion of Zambia’s total $8.7 billion foreign debt is owed to China, it was reported in late 2018 that the Zambian Government was in talks with China that might result in the total take-over of the country’s national electricity company, ZESCO, by the Chinese due to the inability of Zambia to meet its loan repayment obligations. This was not surprising as China was already in control of the country’s broadcasting company, ZNBC, having acquired 60 percent of its ownership. There were also strong fears the main airport in Lusaka, Kenneth Kaunda International Airport, could be the next target. More recently, Chinese firms were seeking control of Zambian mining assets as collateral for potential loan default. In 2018, it was reported that Kenya was at risk of losing its largest and most lucrative port, Port of Mombasa, to its creditor (China) after she defaulted in the loan repayment.
It is not only with the African continent that China strikes loan deals in this kind of way, however it is common with frontier and emerging markets. In Asia for example, after the Sri Lankan government failed to show commitment in the payment of billions of dollars in loans, the government lost its Hambantota port to China as it was leased to the Chinese state-owned China Merchants Port Holdings Company Limited on a 99-year lease in December 2017.
In Europe, going by the magnitude of what the officials saw after the 2008 financial crisis; where Chinese buyers took controlling stakes in strategic infrastructure and mining companies in European countries (including Portugal, Spain, and Greece) that were particularly hard-hit by the 2008 financial crash which occasioned the euro-debt crisis. What the Chinese are now known for during recession, though this in particular is induced by the spread of the novel coronavirus and fallen oil prices, is the takeover and acquisition of their assets by Chinese companies. However, there is a difference in the strategy to their ownership as takeover is common with Africa, whilst acquisition is common with Europe and Asia which has caused their officials to restrict many of their asset purchases by Chinese companies.
Thus, it is quite obvious why the IMF/World Bank, in 2019, were cautioning the heavy Chinese borrowers, particular Africa, enjoining them to consider the terms and covenants of the loans as very important to ensure favourability for themselves should there be any need to restructure their debt sometimes or anytime in the future.
In May 2020, perhaps given the fears that our country is in or entering into recession, the House of Representatives gave a thought to the advice of the IMF/World Bank as it mandated some of its committees to investigate all China-Nigeria loan agreements from 2000 to date. Their intentions were to ascertain the viability of the facilities, then regularise and renegotiate them, especially when the news was out that china may be ready for loan deferment.
The proposal: How Nigeria can ascertain the viability, regularise and renegotiate our Chinese loans
Since most of Chinese loans are targeted at individual projects that contribute to structural transformation and economic development, the federal government should create a concession company which will serve as the concessionaire of the revenue generating projects which the loans are being used for. Some of these projects include; Abuja urban rail system, Abuja-Kaduna rail system, upgrade of airport terminal, Zungeru hydroelectric power project, Lagos-Kano rail line, fibre cables for internet infrastructure, Lagos-Ibadan rail line and others.
Once this is created and as agreed, it implies that the concession company, who are known for efficient and effective management, becomes the debtor of the borrowed funds from China. And because a concession agreement with the government is involved, it implies that the government may pay off the concessionaire or its lender, sooner or later depending on the terms and covenants of the agreement, thereby buying it back. In a period like this where economic activities are slowed, most lenders are willing to give a good haircut on their loan rates and the government who is to play Keynesian role in the economy, at times like this, needs to maximise the opportunity by paying off the discounted loan amount. That is, Rather than deferring repayment, the government should maximise falling values of assets, and the risk that it may fall continuously, in an immediate cash sale or liquidation. With the approval of the federal executive council, the Securities and Exchange Commission (SEC) can grant the restructuring of the credit facility, aimed to reduce the outstanding repayment balance.
This will help to develop our secondary market, particularly for non-performing loans and increase aggression in writing off same. It will equally press for higher capitalisation of our banks, through recapitalisation, and reduce the concerns of our lenders over rollover, repayment or refinancing risks. It will also prompt us into the adoption of improved accounting standards.
By this strategy, the government and the concession company can effectively work hand in hand to address any of the non performing Chinese loans, manage the increasing maintenance costs and deal effectively with the Chinese loans burden. This will create an economic room for keeping affordable and stable, in the face of heightened inflation and in the dip of recession, the price which consumers pay to use these projects whilst also mitigating against exchange rate depreciation of the Naira.