Resource-backed loans have contributed to crippling debt levels in Africa and are shrouded in secrecy, a new report has found.
These loans to governments, collateralised with oil or minerals, have been hidden from scrutiny for far too long and that must change, say the report’s authors.
The report, compiled by the Natural Resource Governance Institute (NRGI) and entitled ‘Resource-Backed Loans: Pitfalls and Potential’, explores both the risks and opportunities the loans represent and offers policy recommendations that borrowers and lenders can implement to improve the practice, with a greater focus on borrowers.
A resource-backed loan is a borrowing mechanism by which a country accesses finance in exchange for, or collateralised by, future streams of income from its natural resources, such as oil or minerals.
Researchers considered 52 resource-backed loan transactions between 2004 and 2018, with a total value of more than $164-billion; 30 of the loans, with a combined value of $66-billion, were extended to sub-Saharan African countries.
Of the loans to sub-Saharan African countries considered by the researchers, 53% of the amount borrowed came from two Chinese policy banks: China Development Bank (CDB) and the China Eximbank.
Most of the remainder was provided by international commodity traders, mainly to Chad, Congo-Brazzaville and South Sudan.
“African leaders have often taken out these loans to help with their own short-term political ambitions, but their countries have ended up severely indebted and with the risk of losing collateral worth more than the value of the loan itself.
“They should stop agreeing to such perilous deals, which are often negotiated by poorly managed State-owned enterprises that often bypass Parliaments and national budgets,” says NRGI Africa co-director Evelyne Tsague.
The report shows how loans from commercial oil trading companies are particularly problematic, with specific regard to loan terms and repayment difficulties.
“These deals, sometimes labelled as oil advances, often resemble pay-day loans: they have short maturities, high interest rates and fees, and no commitments on how the money will be used. Countries should stay away from oil advances containing such harmful terms,” advises NRGI senior economic analyst and report co-author David Mihalyi.
HIDDEN FROM SCRUTINY
The Democratic Republic of Congo (DRC) was the only country covered by the report to have published a resource-backed loan contract, which it agreed with Sicomines – a joint venture with State-owned mining company Gécamines and a consortium of Chinese companies – in 2008.
However, 12 years after it was signed, and five years since the related copper and cobalt mining started, there is no comprehensive, publicly available information about the resulting funding for infrastructure or the repayment plan.
The 2008 contract exempted Sicomines from tax payments until full repayment of the loan; however, this violated the mining law at the time.
The DRC’s Parliament then approved a special law for the exemption.
The revised mining code of 2018 increased royalties and taxes for mining companies with an aim to increase revenues, but officials have stated that companies with a special “convention de collaboration” like Sicomines do not have to comply with the code.
GHANA AND GUINEA
Controversy also surrounds both Ghana and Guinea’s recent deals, involving the exchange of bauxite with Chinese companies for financing of infrastructure projects.
Ghana’s government is obligated to repay a $2-billion loan it agreed with Chinese State company Sinohydro in 2018. The repayment schedule requires a rapid ramp-up of bauxite production and refining, which the International Monetary Fund (IMF) has warned may not be possible and therefore could lead to loss of collateral.
Guinea signed a $20-billion loan in 2017, equivalent to 200% of the country’s gross domestic product.
Bauxite production, designated to repay the loan, has already started, but there is little publicly available information on how the country will repay such an enormous loan and under what conditions.
Bauxite production in both countries carries significant environmental risks, but the affected citizens and the civil society organisations that represent them have been effectively shut out of any consultations about the loans, says NRGI.
It also points out that, of the eleven sub-Saharan African countries that took out resource-backed loans, eight received poor or failing scores on the Resource Governance Index, which includes among its assessments measures of transparency and accountability of countries’ resource sectors.
POTENTIAL FOR IMPROVEMENT
The NRGI’s report is, however, not wholly critical of resource-backed loans.
The authors highlight how borrowing countries obtain cheaper financing through the loans and can use them to generate economic returns that in the long term exceed their financing costs. The report also finds that countries have successfully renegotiated for improved loan terms.
However, given the largely negative experiences documented in the report, NRGI advises government officials to be cautious in agreeing to resource-backed loans and to institute safeguarding measures.
These are outlined in the report as policy recommendations and include ensuring that key loan terms are vetted by Finance Ministries and made known to the public; obtaining flexibility of repayments; “shopping around” with a variety of lenders to optimise terms; and employing legal experts for contract negotiations.
The authors also note that there have been positive developments in the global loan landscape.
China has issued debt sustainability guidelines for borrowers. Recent steps taken by the Extractive Industries Transparency Initiative, the IMF and others have improved the transparency norms applicable to resource-backed loans.
“There have been improvements but there is a long way to go, especially as these commitments are yet to become standard practice. Both borrowers and lenders share a common interest in avoiding bad loans.
“We must learn from the mistakes made in the past. All parties to resource-backed loans should be transparent and accountable and push forward together to find more sustainable solutions,” Mihalyi notes.