The Case for an EU-Africa Partnership for Sustainable Infrastructure

Infrastructure and well-functioning transport grids are the backbone of interconnected economies and their societies. A look at the African continent’s approach to infrastructure development suggests that a common European initiative for establishing a Partnership with Africa could greatly benefit both sides. With the goal to enable Sustainable Infrastructure Development, an EU-Africa Partnership would further local economies and ensure reliable access to educational and health facilities as well as social and economic hubs.

EIC, as representative of European international contractors, has conducted a study that demonstrates that the need for a Partnership on Sustainable Infrastructure comes from a lack of available finances to execute necessary public projects in the waste, water and roads sector. One observation of the study is that new financiers, like China, successfully promote projects that do not necessarily align with the economic and societal needs of Europe’s neighbouring continent.

On the base of its study, EIC recommends the implementation of an EU strategy consisting of three main pillars:

  1. Enhanced EU Infrastructure Financing: provision of adequate financing instruments for the African continent;
  2. Reciprocity in EU External Aid: adhering to mechanisms that ensure fair competition in face of a "systemic rival" and
  3. Sustainable Procurement of Infrastructure Projects: development of (compliance) instruments that make sure the Global Development Agenda is being respected in tender procedures and project implementation.

 

The main findings of the study and the recommendations that EIC has elaborated are summarised in the section below.

Press requests and questions about the study, as well as other enquiries may be directed at the EIC Secretariat.

Why is Africa’s infrastructure development so important?

The countries of the African continent are undergoing the fastest and most extensive changes globally. An additional 1,2 bn people will live on the continent by 2040. It is expected that urban concentration trends will require the construction of 130 new cities with populations of 3 million people each. This trend urgently calls for more infrastructure development.

A large percentage of rural areas are not linked to socially and commercially relevant infrastructure. Africa has a paved road density of 31 km per 100 km2, compared to 134 km per 100 km2 in other developing regions and 180 km per 100 km2 in Central Europe. This results in the lowest access levels to power (74 %), water (63 %) and communication (20%) globally. The continent’s financial needs to improve infrastructure access levels amount to USD 130-170 bn annually, with a current financing gap of EUR 68-108 bn.

 

Africa needs a substantial programme for infrastructure investment and maintenance to achieve the Sustainable Development Goals (SDGs), cope with the impacts of the ongoing climate crisis, and to reduce migration. The goal is to improve the connection of capitals, power and production sites, ports, border crossings and secondary cities with high quality road, water and sanitation networks as well as all-season road access to educational and health facilities.

What role do international donors and China play in financing Africa’s infrastructure?

According to the OECD, Official Development Assistance (ODA) net disbursements have been largely provided by the International Financing Institutions, including the World Bank (31%), the EU (30%), the Global Fund (11%) and the African Development Fund (10%). The majority of investment was made in social development (44%), economic infrastructure development (20%) and productive activities (10%).

These numbers show the international donor community’s priorities over the past two decades. Although social development, including education and civil participation, are vital factors in societal development, they strongly depend on basic infrastructure. Efforts for economic development have neglected infrastructure as a factor, creating a substantial funding gap.

The current funding gap has been filled, to some extent, by China. While China’s lending to Developing Countries did not exceed 0,5 % of its GDP in 2002, the share of new sovereign loans to Africa now exceeds all other Western donors combined, totalling USD 19 bn in 2017. Although China’s capital flows to developing countries have fluctuated over the years, the trend is constantly increasing.

How does China’s infrastructure lending differ from Western donors?

Western donors are committed to untying their official development assistance, but China remains reluctant to adhere to the global financial architecture and its regulations. Chinese lending is tied to the direct contracting of Chinese contractors, be it for projects in Africa or under the Belt and Road Initiative in Asia. Chinese lending offers differ substantially from regulations of the OECD DAC and the WTO with regard to minimum risk or market-based premiums, minimum interest rates and terms and conditions of repayment profiles, amongst others.

Benefitting from a state-directed export of construction services and various subsidies, Chinese contractors are increasingly dominating the world’s infrastructure markets. In Africa alone, 62% of 2018’s international turnover has been generated by contractors of Chinese state-owned origin.

The state-directed system does not only provide monetary benefits to its state-owned enterprises. Construction contracts, negotiated bilaterally, usually include preferential treatment covering visa, tax and tariff liberalisation, reducing costs and hurdles for imported labour, equipment and material, and granting preferential licensing. State-directed conclusion of projects, direct disbursements of financial means to Chinese contractors and a close link with financiers allow for Government-to-Government package deals.

Why is it so difficult to assess Chinese lending and what does it imply for international statistics?

China is not a member of institutions of the global financial architecture, including the OECD Development Assistance Comittee and the Export Credit Group (including their reporting systems), or the Paris Club. While being one of the largest international donors, China does not report on its lending practices.

China disburses its capital flows directly to its state-owned companies via state entities such as the China Exim Bank. Further, China’s capital disbursement mechanisms are not disclosed by the receiving enterprises or statistics offices of developing countries.

As a consequence, neither the IMF nor the World Bank are able to properly assess China’s external lending. The Paris Club and the OECD lack data on official-to-official debts and restructurings, and Trade Credit Agencies are unable to assess China’s private and official export credits.

Several studies have sought to shed light on the world’s debt to China. It is assumed that official data has to be adjusted upwards by 50%. In 2017, the world owed ca. USD 5 trillion to China.

What does Chinese debt imply for Developing Countries and HIPCs?

Capital flows to (overpriced) infrastructure projects are on the rise and so is external debt. Circa 50 developing countries, mostly located in Africa, face debt to China amounting to 15% or more of their GDP.

After the debt release of $ 40 bn by the former G8 members in 2005, debt in developing countries, and especially in Sub-Sahara Africa, decreased constantly. Since 2011, however, debt levels have been on the rise again with 50% of debt owed to non-Paris Club members, predominantly to China.

For IMF and Paris Club lenders, the debt levels alone are alarming. Concern is voiced about China’s lending conditions that do not entail proper debt restructuring and repayment portfolios. Opaque contracts obscure repayment conditions that usually effect discounts on resources (Barter Deals).

In some cases (such as the Colombo Port in Sri Lanka or the Mombasa Port in Kenya), criticism is directed at debt-related takeover of economically vital infrastructure, with a risk of so called “debt traps” for weak economies.

What does the Chinese Infrastructure Delivery Model imply for fair competition?

According to a McKinsey study, nearly one third of the surveyed Chinese contractors generated a profit margin of more than 20%. This is highly unusual in the construction sector and factors in favor of such high profit margins are low wages, lax regulations and preferential treatment.

Due to Chinese tied contracting, there are no possibilities for European international contractors or local African firms to compete for Chinese-financed tenders. In international open procurement, market-dependent contractors are usually undercut by 20% or more due to Chinese abnormally low bids. There has been criticism on the opaque nature of Chinese bidding and with regard to collusion of bids, falsification of track records (and other types of tender documents), and undue influence.

Meanwhile, European Development Financial Institutions and Multilateral Development Banks continue to select bidders based on the lowest price – usually Chinese enterprises. In 2018, the World Bank awarded 35 % of its total Transport Infrastructure investments to Chinese firms.

How do Chinese Abnormally Low Tenders affect Sustainability and Ethics?

The success of the Chinese infrastructure delivery model relies on short delivery periods between conception and execution of projects. African policy makers embrace bids that foresee project delivery within one legislative period. Fast delivery, however, is facilitated by shorter project planning phases, direct contracting, direct disbursements and setting of preferential project implementation conditions - not, as it is often the case, by short construction periods.

Contrary to international competitors, Chinese contractors are not obliged to observe international best practices on managing environmental, social, health & safety, and good governance principles. This includes anti-corruption laws and local content requirements. Unfortunately, noncompliance and unaccountability have led to several cases of substandard labour conditions on construction sites across the African continent. Chinese projects are considered to be highly risky for the environment.

Beyond consequences for workers and citizens, a lack of project implementation standards often leads to lower quality, shorter life span and higher maintenance needs of works, resulting in “White Elephant” projects and a waste of resources.

How do other development financiers react?

China’s expansion in Africa and East Asia and has been labelled as “Win-win” approach. However, the Belt and Road Initiative and other Chinese activities have evoked concern of independent research tanks about the impact this may have on the African continent. China is confronted with allegations of being lenient with autocratic regimes, of being strictly resource-driven and of exploiting the underdevelopment of African economies while establishing Chinese monopolies and thus fuelling its domestic economy and increasing its global influence via connectivity.

In 2015, Japan set up a financing architecture to draw level with Chinese infrastructure lending in the Asia-Pacific region. It consists of three pillars:

  1. The expansion of assistance through its Export Credit Agency NEXI, its Bilateral Development Bank JICA and its Eximbank JBIC, coordinated by the Japanese Ministry of Economic Affairs.
  2. An enhanced collaboration with the ADB.
  3. Measures to increase funding and insurances for high risk projects.

Based on these pillars, Japan introduced the USD 200 bn “Partnership for Quality Infrastructure” with a specific Africa Envelope to increase attention to the quality of infrastructure in developing countries. Key aspects include economic efficiency, safety, environmental and social sustainability, local economic and social inclusion, and resilience against natural disasters.

Following the Japanese example, the U.S. approved the USD 60 bn “Better Utilisation of Investments Leading to Development” (BUILD) Act to increase impact in developing countries, especially on the African continent.

 

What is the EU’s current position on infrastructure development in Africa and China’s role as development financier?

The EU's External Investment Plan (EIP) seeks to leverage up to EUR 55 bn until 2020 with a guarantee of EUR 4 bn and the new “Africa Europe Alliance for Sustainable Investment and Jobs”, including a total investment goal of EUR 155 bn for Central and South Africa. However, infrastructure investment currently decreases by ca. 20% for the development of only few key corridors and economic hubs under the Programme for Infrastructure Development in Africa (PIDA) and the EU Africa Infrastructure Trust Fund.

The European Commission and the High Representative for Foreign Affairs and Security Policy published a Joint Communication titled “EU-China – A strategic outlook” on 12 March 2019, to start a discussion that should refine Europe’s approach to be more realistic, assertive and multifaceted with regard to China, and acknowledging China as ‘systemic rival’. The paper stressed that the EU is committed to engaging with China to uphold the rules-based international order. In its Conclusions from 22 March 2019, the European Council concurred that the EU and its Member States should ensure fair competition globally, to protect consumers and to foster economic growth and competitiveness.

EIC welcomes this step, but urges European decision makers to adapt a more progressive industrial and development policy for developing countries, especially in Africa, and on China. EIC especially criticises the lack of available finances, subsidies and insurance instruments, and points out that the shift from hard to soft development targets has led to a decrease of the visibility of development assistance. The latter is also attributable to the loss of control over project procurement and implementation via the Blending instrument, which channels capital flows via Multilateral Development Banks instead of its national European Development Financial Institutions.

EIC Recommendations

EIC recommends establishing a EU-Africa Partnership for Sustainable Infrastructure within the ‘Africa Europe Alliance for Sustainable Investment and Jobs’. The goal should be to improve Africa’s infrastructure connectivity, to increase the visibility of European development assistance, to ensure a level playing field based on fair competition and to promote the Sustainable Development Goals.

The more detailed catalogue of EIC recommendations is structured in three pillars:

  1. Enhanced EU Infrastructure Financing
  2. Reciprocity in EU external Aid
  3. Sustainable Procurement of Infrastructure Projects

 

Recommendation 1: Enhanced EU Infrastructure Financing

The EU and its Member States remain the largest global development donor, but EU development assistance is too fragmented to promote Europe as an attractive and competitive partner and financier of large-scale infrastructure projects in Africa. Therefore:

  • EIC calls upon the EU and its Member States to rebalance the sectoral ODA portfolio and to put a stronger emphasis on infrastructure, and especially on transport and water, since these sub-sectors only account for 10 % of EU ODA, compared to 50 % of Japanese ODA.
  • EIC observes an urgent need for the EU to draw level with Asian and U.S. Development Finance Institutions, Exim Banks and policy banks, aid agencies etc. in terms of both volume and management capacity for infrastructure finance in third markets, especially in Africa. To remain competitive, the EU must (1) pool development finance, (2) establish a complementary EU financing institution with a broad mandate to ensure European interests and (3) streamline the project implementation cycle for EU-financed infrastructure.
  • EIC points to its innovative concept of “Blending 2.0” as a financial tool to catalyse commercial finance for public infrastructure projects in Africa that are critical for social and economic development but do not generate sufficient direct project income. The concept is composed of EU grand funding subsidizing interest rates for concessional development loans. EDFIs can then partially syndicate loan tranches to commercial banks to the extent that commercial bank finance to be guaranteed via comprehensive insurance cover from Export Credit Insurance Agencies
  • EIC questions the EU’s practice to provide the bulk of its infrastructure ODA to Africa via “blending” with non-European actors. By transferring EU ODA to the World Bank or the African Development bank, the EUI loses visibility and gives up control of project implementation.

EIC calls for the introduction of a special “window” within the EU External Investment Plan (EIP) dedicated to non-viable transport infrastructure investments.

 

Recommendation 2: Reciprocity in EU External Aid

Chinese official lending practices distort fair international competition because they are incompatible with the tried and tested multilateral rules on export and development finance. Europe needs a strong response to China’s overseas lending practices. Together with other OECD governments, the EU and its Member States should point out problems brought on by the currently unlevel playing field for official finance. Preventing a potential collapse of the current multilateral official finance system should be a priority on the agenda of the G-7, the G-20 and of MDBs.

  • EU institutions and Member States should call upon China to implement and adhere to all decisions, recommendations and guidelines of the OECD Development Assistance Committee.
  • EU Institutions and Member States should call upon China to implement and adhere to all obligations determined by the OECD Arrangement on officially Supported Export Credits.
  • As long as China does not follow the same official financing rules and practices as its OECD counterparts, EU institutions and Member States should not allow Chinese companies to participate in infrastructure tenders financed from EU ODA, especially if such companies are state-owned.

Recommendation 3: Sustainable Procurement of Infrastructure Projects

The UN 2030 Agenda for Sustainable Development lists 17 Goals for all stakeholders to promote prosperity while protecting the planet. Ending poverty must go hand in hand with strategies that spur economic growth, address social needs including education, health, social protection and job opportunities and that tackle the issues of the current climate crisis and environmental protection. All financiers should work together to ensure that their financial support exclusively benefits sustainable and resilient infrastructure projects. Further, a stronger emphasis on stakeholder communication and early contractor involvement would help achieve value-for money. Therefore:

  • Sustainable procurement should aim at a selection of the “Most Economically Advantageous Tender” instead of the lowest evaluated offer.
  • Environmental, social and health and safety (ESHS) standards should be stipulated in the work requirements stated by the Standard Procurement Documents of European and international DFIs.
  • A comprehensive prequalification system should ensure full compliance with the highest international environmental, ethical and social standards and allow for a verification of alleged track records.
  • International bidders should put a stronger emphasis on stakeholder communication to achieve value-for-money.