Nigeria’s 25-year rail transportation revival plan has taken off significantly under the Buhari-led administration.
The plan that set out under the Obasanjo Administration only started under the Yar-Adua/Jonathan administration with the construction of the Abuja-Kaduna standard gauge and the Abuja light rail which the Buhari administration has completed alongside three others.
Currently, Nigeria has four functioning rail routes; the Abuja Metro of about 37km, the 186km Abuja-Kaduna railway, the Ajaokuta-Itakpe-Warri 326km railway project, and lastly, the Lagos-Ibadan project of 156km, with an extension of another 7km.
Of these four rail projects, only the Ajaokuta-Itakpe-Warri standard gauge rail was loan-free and funded from the budget. The rest of the rail lines were completed with the help of concessional loans from the Chinese government through the Chinese Export-Import (EXIM) Bank.
The Collins dictionary defines concession as an arrangement where someone is given the right to sell a product or run a business, especially in a building belonging to another business. In more explicit terms, a concession agreement is a contract that gives a company the right to operate a specific business within a government’s jurisdiction or on another firm’s property, subject to particular terms.
The Chinese Connection
Concessional loans are not uncommon or peculiar to loans obtained by the Nigerian government. While these loans have pros, one of the most significant cons are conditions that appear to unduly favor the lender.
Chinese lending to low and middle-income countries like Nigeria is a popular subject of conversation, some have argued that China’s model is “debt-trap diplomacy” while others have said that China’s contracts are intentionally vague to encourage dependency and undercut borrowers’ sovereignty. Yet others say there is not enough evidence to substantiate the “loan shark” title and that the narrative around the Sri-Lankan case cited often as evidence of China’s disingenuous strategy is mostly false and misunderstood.
Several news reports of China taking over projects and facilities in sovereign states aid the perception of China as a loan shark, although China has denied such allegations in these countries and such intentions in Nigeria.
With China being the largest bilateral lender for public sector loans across the African continent and the terms of China’s lending largely unknown, concerns around infrastructural projects like the railway revival and the possibility of Chinese takeover is rife.
What do Chinese Loan Contracts Read Like
Recently released data on China’s lending practice has allowed analysts to examine these loans and among other findings, these loans appear to “give Chinese lenders an advantage over other creditors”. The loan provisions also contain unusual confidentiality clauses and other clauses that allow the lender to terminate the agreement and demand full repayment upon default to other lenders. Some of the other provisions are a commitment to exclude the debt from collective restructuring initiatives like the Paris Club and the World Bank’s Debt Service Suspension Initiative.
It appears Chinese loans are firmly in their control and to their advantage, but not too far off commercial contracting practices. As described in AIDDATA’s report “they blend standard commercial and official lending terms, and introduce novel ones, to maximize commercial leverage over the sovereign borrower and to secure repayment priority over other creditors.”
China is not unique for failing to publish detailed information about its lending terms. There is no uniform public disclosure standard or practice for bilateral official lenders nor is there one international standard for sovereign lending. Although governments and multilateral organizations publish data on their lending activities with varying degrees of detail.
However, the absence of transparency makes it difficult for the borrowing country’s citizens to demand transparency and accountability. This is especially true for countries like Nigeria where corruption and government waste are rampant and one of the greatest drawbacks to development.
Nigeria’s growing loan liabilities, its struggle to finance its own budget, and the heavy burden of debt servicing on the country’s loan-funded budget are cause for worry. Over 80% of Nigeria’s total bilateral debt stock as of Q3 2021 is owed to China including the loans financing the resurgence of Nigeria’s rail transport.
While the details of loans offered to Nigeria by the Chinese EXIM Bank are not known, it is likely that the terms are no different from the terms captured in the analysis of their lending patterns. Cross-default, cross-cancellation, and stabilisation clauses are common with Chinese loan contracts and the China EXIMm bank is noted “to use some of the most aggressive commercial versions of standard-form clauses; not illegal but stringent”.
Default on any one of Nigeria’s Chinese loans could potentially lead to a debt crisis if these clauses are triggered.
The Shadow of Concessional Take-over
Beyond highly publicized anecdotal news reports, there is not a lot of evidence of Chinese loan implementation or enforcement.
One such highly publicized example in Africa is the Ugandan government default.
News of Uganda’s default on their Chinese EXIM Bank loan and the speculation of take-over of the Entebbe International Airport was widely reported.
Both the Chinese government and the Ugandan government denied a takeover but the wording of their denials was interesting. China’s statement read in part “Not a single project in Africa has ever been “confiscated” by China because of failing to pay Chinese loans. On the contrary, China firmly supports and is willing to continue our efforts to improve Africa’s capacity for home-driven development.” The Ugandan government’s statement also read in part “I wish to make it categorically clear that the allegation that Entebbe Airport has been given away for cash is false…There isn’t an ounce of truth in it,”.
Neither provided any clarification on the state of Uganda’s loan, whether it is in default, and/or how the Chinese are going about enforcement.
Another report however discussed attempts at renegotiation and restructuring and concessions by the Chinese lenders. The prevalent conclusion is that the Chinese government played hardball and Uganda’s case should serve as a warning to other African borrowers.
It must be noted that China has continued to loudly and vehemently deny the takeover of country assets.
Again, the lack of transparency in these processes provides a kindling for the Chinese “loan shark” reputation and does not put to rest worries of the possibility of takeovers.
Is Nigeria Vulnerable?
Nigeria’s debt servicing to revenue ratio has continued to rise.
It rose steadily from 2016 through to 2019 and jumped in 2020 to 97.78% before it dropped to 86.98% by the first half of 2021.
For every N100 Nigeria made as revenue, it spent N86.98 servicing its debt.
The high debt servicing to revenue ratio coupled with the increasing deficit financing of the budget is cause for concern.
The president has said Nigeria’s loans are still sustainable, the Debt Management Office has also said the same thing in its 2019 National Debt Sustainability Analysis report. The World Bank also agrees, but they consider the country’s loan burden to be vulnerable and costly.
In a June 2020 publication on the Debt Management Office Website, written like a FAQ on Nigeria’s China loans, the question was asked “can China take possession of the projects financed by them if Nigeria defaults in the servicing of the Loan?”
DMO’s response? They started with a “firstly” and stated that Nigeria makes provisions in its budgets to service its loans. But there was no “secondly”; they failed to answer the question they had raised about China’s ability to “take over” a project and chose rather speak to their own ability to stop the “takeover” from happening.
Nigeria’s railway resurgence is much needed and much welcome, the hope is that Nigeria continues to be able to service its Chinese loans, all of it without default. It is also hoped that the country never has to test the terms of China’s stringent loan agreements.