China-Africa cooperation model needs to evolve

By Song Wei Source:Global Times Published: 2016/10/10 1:28:39

Illustration: Peter C. Espina/GT

Energy cooperation between China and Africa has a solid historical foundation and rich experiences have accumulated during the process. The commodity-backed loan agreements known as the "Angola Model" in which the recipient countries in Africa use their raw materials to secure low-interest loans from China have promoted the bilateral cooperation between China and Africa in recent decades. But there is an urgent need for the two parties to improve this conventional cooperation model as the bilateral cooperation has continued to expand and China has taken an increasingly leading role in global economic governance.

Admittedly, the Angola Model is a successful model for cooperation between China and Africa. Based on this model, energy cooperation between the two sides has grown rapidly. In 2015, China was involved in the launch of two multilateral development banks - the BRICS' New Development Bank and the Asian Infrastructure Investment Bank (AIIB) - which allow the global energy investment of Chinese policy banks to overshoot that of major Western multilateral development banks. With the increase of its economic strength, China's foreign aid funding has also expanded rapidly. Over the past decade, China's financing for development has doubled and international cooperation in the energy field has also expanded.

But the Angola Model is subject to potential risks under the current global economic governance framework. First, there are security risks. Among the top 20 energy-dependent recipient countries that have received the most Chinese loans, 13 are rated by the OECD as high-risk regions. Second, there are potential repayment risks. The commodity-backed loan agreements may not only hinder the macroeconomic development of African countries but could also be susceptible to fluctuations in raw material prices in the international market, resulting in huge potential risks with non-performing loans. Third, there may be an environmental risk. China's overseas investments in energy mostly focus on the extraction of fossil fuels and construction of hydropower stations, and this may bring environmental risks in recipient countries. Lastly, there are potential social risks. Chinese investment may be opposed by local stakeholders, even though it is also subject to regulation by the international system.   

I would suggest that China should build on the Angola Model in its energy cooperation with Africa in order to achieve financing sustainability in the continent.

First, China should explore more means for financing projects in Africa. Sovereign wealth funds could be an option. Some West Asian and North African countries such as Egypt have a significant number of sovereign wealth funds with a rising amount of assets under management, which could be used to support investment in public facilities. China could explore ways to link these sovereign wealth funds with its aid funds in Africa. Meanwhile, China could also increase the ratio of mixed loans. By developing multiple financing channels such as commercial financing and public-private partnerships, China could rationalize the ratio of its aid funds and dilute the risks of concessional loans.   

Moreover, China should capitalize on the technological advancement of its industries. The country could reinforce its support for clean-energy industries such as solar energy, wind energy and nuclear energy, and encourage firms with innovation capability such as small and medium-sized firms to get involved in energy cooperation between China and Africa. By doing so, China not only can build up its competitive industrial capacity in Africa but can also honor its commitment made at the 2015 UN Climate Change Conference in Paris. Furthermore, China could also explore the possibility of developing trilateral cooperation with developed countries in helping Africa. Duplicated investments in Africa could be avoided if China seeks to coordinate with developed nations in aid projects such as the US' Power Africa program. Such practices could also help China improve its technological capability as it interacts with these developed countries.

Last but not least, risk evaluation should be enhanced and a risk index system could be established. A real-time dynamic database for risk evaluation could be developed to specifically track risks in recipient countries based on international rating criteria and models. Meanwhile, third-party appraisers could be selected through public tender in order to ensure risk evaluation is conducted in a professional, independent and objective manner. The third-party appraisers could be encouraged to make field investigations regarding all stakeholders and pay more attention to the soft environment assessment for potential projects. 

The author is an associate researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

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