The railways that Nigeria has funded with Chinese loans are not making even enough money to fund their maintenance. We should reduce our debt burden by handing over the railways to China to operate and canceling the underlying debts.
In a little-remarked press statement, Fact About Chinese Loans, dated June 18, 2020, the Debt Management Office (DMO) sought to clear the air on “statements and reports credited to several persons on the subject of Loans obtained from China”. In a June 2, 2020 piece, African HITCs: Will China Seize Our Railways and Ports?, we pointed out the shortcomings of Chinese lending to developing countries and classified Nigeria amongst the countries we describe as Highly Indebted to the Chinese (HITC).
“The policy shift would not only make the Chinese bear the brunt of the poor policy analysis that has underpinned their lending; it could also stimulate private investment in infrastructure in Nigeria”.
The Debt Management office’s statement intended to address the sort of concerns that we raised in our piece. Allegations that the documentation for Chinese lending to Nigeria is written in Chinese seem to have the statement. House of Representatives (HOR) Member, Ben Igbakpa made claims about the language of the document in a Channels Television interview.
Another political controversy broke out on Wednesday, July 28 when Members of the House of Assembly announced that they have uncovered a controversial clause in a Chinese loan agreement. The said clause requires Nigeria to waive its sovereignty over assets financed with Chinese loans in case of default.
The Debt Management Office Clarifications
The Frequently Asked Questions-style DMO press statement addressed the following issues:
How Much Loan has Nigeria Taken from China?
Nigeria borrowing from China stands at USD3.121 billion at March 31, 2020, representing 11.28% of the External Debt Stock of USD27.67 billion at the same date
What are the Terms of the Loans from China?
Chinese loans have concessional interest rates of 2.50% p.a., Tenor of Twenty (20) years and Grace Period (Moratorium) of Seven (7) years.
What Were the Loans Used For?
Eleven projects for which these loans are used include: Idu-Kaduna railway, Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project, (Abuja, Kano, Lagos and Port Harcourt), Lagos- Ibadan railway.
What Is the Process by which the Loans were Obtained?
They have been obtained with the approval of the National Assembly (NASS) as required by Section 41 of the Fiscal responsibility Act, 2007.
How Rigorous is the Loan Documentation?
As with all external loan agreements, the documents for the Chinese loans were reviewed by the legal officers of the Federal Ministry of Justice and the opinion of the nation’s Attorney General was sought before the loans were contracted.
Can China Take Possession of the Projects Financed by them if Nigeria Defaults in the Servicing of the Loan?
Repayment has been planned for in Nigeria’s domestic and external budgets. The loans have been invested in projects that are “either revenue generating or have the potential to generate revenue”.
Half-truths and Evasions?
The Debt Management Office media statement went beyond the agency’s mandate to keep records of Nigeria’s debt to offering policy and economic justifications for the Chinese loans. The DMO for instance argued in its statement “The impact of these Loans is not only evident but visible. For instance, the Idu – Kaduna Rail Line has become a major source of transportation between Abuja and Kaduna. Also, the new International Airport in Abuja, has improved air transportation for the populace, while the Lagos – Ibadan rail line when completed, will ease traffic on the busy Lagos – Ibadan Expressway”.
The media statement does little to address the key concerns with Chinese lending. The issue is not that Chinese trains cannot be seen moving people between cities or whether new airport terminals are serving travelers or not. So far the funds are not free gifts but loans that have to be repaid, questions have to be asked if decisions to borrow from the Chinese have been made with the best calculations on sustainability i.e. the economic return of the projects and Nigeria’s ability to pay back the loans.
As we wrote in the June piece, “there is very little analysis of alternative ways to meet objectives or the project’s capacity to finance loan repayment. The railways lines built with Chinese funds in Nigeria are being subsidized by 60% by the Government; they are permanent losses that ”. In Nigeria as in Kenya, Chinese loans have been used to build or refurbish uneconomic passenger railways rather than freight trains to move goods for companies and individuals that can pay the full economic cost of the service.
Nigeria’s airports could also have been opened up for private investment under public-private partnerships. This is a policy objective that the Ministry of Aviation announced but has completely abandoned after the building of the Murtala Mohammed 2 Airport more than a decade ago. These are not abstract arguments. Nigeria is due to spend 96% of its revenue in 2020 on servicing loans without debt rescheduling. The nation’s debt burden would have been more bearable if Nigeria had given more thought to how to pay back the Chinese (and other) loans and sustainable ways of funding infrastructure.
The DMO’s statement also completely ducked the question about sovereignty. Do the loan agreements with China contain clauses that allow the Chinese to assume control of Nigerian assets if Nigeria is unable to service the loans? All that the DMO had to say on this controversial issue is that “Repayment has been planned for in Nigeria’s domestic and external budgets”. It did not confirm or deny the existence of the controversial clause in the loan agreements with the Chinese.
Paying Back China in Its Own Coin
In our June article, Africa’s Chinese Loans: Will Beijing Seize Our Railways and Ports?, we noted that China often has cared more about its own policy objectives. These include exporting Chinese workers and industrial goods abroad, tied to the finance it provides, and also expanding its political influence. There is very little consideration for the viability of the projects it is lending towards or the ability of the borrowing country to pay back. We still stand by the claim that Chinese loans are disbursed with little or no economic analysis, either concerning the particular projects being funded or the broader policy or economic context of the borrowing country. But we have changed our minds regarding the criticism that China includes clauses in contracts that allow it to seize projects if countries are unable to service loans.
Transferring ownership of the infrastructure assets, railways, and airports, built or refurbished with Chinese loans is actually a very good policy. The Chinese will run and maintain the assets until the funds Nigeria has borrowed is fully recouped. The Federal Government has to explain to Nigerian citizens that providing healthcare and educating young Nigerians are far more important than servicing Chinese loans.
This would not be an infringement on Nigeria’s sovereignty or pose any threats to security. As of January 2017, about 70% of the railway routes in the United Kingdom are operated partially or wholly by French, Dutch, German, and other foreign rail companies.
The policy shift would not only make the Chinese bear the brunt of the poor policy analysis that has underpinned their lending. It could also stimulate private investment in infrastructure in Nigeria. As with many other free market policy reforms, Public-Private Partnerships have been promoted more by lip service. Actual implementation to expand and improve the quality of infrastructure services is lacking.
Handing Nigeria’s exorbitant railways to the Chinese funders to operate may provide a fillip to PPPs. This would be a positive development as while the Nigerian government lacks the funds to build infrastructure and the political will to charge fees that enable asset maintenance and replacement, the economy has a sufficient level of activities to pay for appropriately priced infrastructure services.
The Minister of Transportation, Mr. Rotimi Amaechi, is eager to secure another $500 million in Chinese loans to invest in railways. If China believes so much in the Nigerian economy, it should be able to invest this sum itself and run the railway services without piling more debt on Nigeria.
The DMO is yet to reply to our email requesting the amount Nigeria is due to pay back to Nigeria in 2020 as debt service.
About the Debt Management Office
The Debt Office Management coordinates the management of Nigeria’s debt.
Established in 2000 as a separate public debt management office, the DMO aims to :
Prudently raising financing to fund government deficits at affordable costs and manageable risks in the medium- and long-term;
provide good debt management practices that make a positive impact on economic growth and national development,
particularly in reducing debt stock and cost of public debt servicing in a manner that saves resources for investment in poverty reduction programs;
consciously avoiding debt crisis and achieving an orderly growth and development of the national economy;
improving the nation’s borrowing capacity and its ability to manage debt efficiently in promoting economic growth and national development;
and projecting and promoting a good image of Nigeria as a disciplined and organized nation, capable of managing its assets and liabilities.
So far, the DMO has largely played the role of keeping the books for Nigeria’s debts. Fiscal and economic policy decisions that determine the cost of Nigerian debt and its sustainability have been taken by Nigerian politicians.