Angola Mode Resource for Infrastructure

Angola Mode

The Angola mode which is sometimes known as resource for infrastructure is a mechanism that entails the trade of natural resources used for construction of infrastructure. It can also be defined as contracts in which infrastructure development is exchanged for natural resources. Habiyaremye (2014) contends that the Angola mode is a trade structure in which African natural resources are exchanged for the financing and development of various infrastructure projects that are carried out by Chinese companies. On the other hand, Wiart (2012) defines the Angola mode as a complex process of compensation that is enforced by China with the aim of managing risk in African countries more efficiently. The nation which receives financing from China can change resources to cash to overcome fund shortages and develop its industries. The Angola mode connects development aid, trade, and investment with oil and mineral resources. The World Bank was the first to use this term to refer to these kinds of contracts. This was because Angola was the first African country to ever sign such a contract in which it agreed to give away a large quantity of its resource to China. According to Chen (2010), the natural resource was to be used as a security that guaranteed repayment from Angola. In particular, the natural resource that was demanded by China was oil. In return, Angola was provided with loans from the Chinese Exim Bank. The loans were contingent to be used for Chinese goods and services for the sake of infrastructure development in Angola. Habiyaremye (2016) affirms that the intervention of China, which has gone ahead and introduced these contracts in other African countries, has led to an improvement in Sino-African relations. Further, these contracts and trade framework have brought about a new form of dynamics to the growth of African economies resulting in them being among the fastest growing economies in the world.

How It Works

Understanding how the Angola mode mechanism works entails the following. First of all, based on the interpretation of the existing literature on the given topic, Wiart (2012) provides the following structure to give a clear idea of how the contract agreement works.

Therefore, the specific explanation of how the Angola mode works starts from the Chinese Exim Bank extending a line of credit to Angola. This credit is managed by two factions; the Angola Ministry of Finance and the Chinese Ministry of Commerce as reiterated by Habiyaremye (2016). In case a tender is announced, it is expected that a total of three pre-approved Chinese companies will compete for the project offered by the Angolan government. The Angolan state agency, GAT oversees the implementation of the project while sectorial ministries are responsible for managing public works.

The credit that has been made available to Angola is held in an escrow account in China under the name of the African government. No direct cash is provided to the Angolan government and instead disbursements are made directly to contractors by the Chinese Bank once the project is completed.

In exchange for the line of credit received from the Chinese government, Angola allows China to exploit its mineral resources. This is taken as a line of repayment by the Angolan government. This repayment option is explained as follows. Firstly, according to Dannenberg, Yejoo, and Schiller (2013), the repayment is carried out in the form of revenue from oil that is sold under the arrangement made between Angola and China. It is then deposited in an escrow account where the specific amount that is meant to be included in the loan is deducted. On the other hand, Chen (2010) suggests that repayment is carried out in the form of oil being produced directly by Chinese companies in Angola. The repayments of the loan have been claimed to be given in the form of direct shipments of oil from block 18.

Why Angola Accepted the Deal

Angola accepted the deal offered by China without any hesitation for a number of reasons. One of such reasons is that the African nation was in a desperate position financially as it had very few options for financing. Dent (2011) asserts that at the time when China came knocking with this deal, Angola was just coming out of a prolonged civil war that had lasted for over 27 years. This war was responsible for the poor development of the nation and destruction of its infrastructure. Therefore, at that time Angola was experiencing infrastructure deficiency that was associated with much constraint for its development. This is significant since the nation’s main focus after the end of the civil war in 2002 was development (Sogge & Foreign Direct Investment, 2011). Angola’ belief was that this was the only way for it to once again be mentioned as one of the most developed African nations. The deficiency of infrastructure in Angola at the time delayed the country’s ability to obtain significant resources such as electricity leading to frequent power cuts that brought about loss of production thereby negatively affecting various business operations in the country. Additionally, the poor infrastructure in Angola affected its ability to participate in international trade. Therefore, the deal proposed by China would be essential for boosting its export potential as it provided the country with adequate financing. Langmia (2011) asserts that poor infrastructure has the potential to depress the productivity of firms by up to 40%. Another relevant reason why Angola accepted the deal from China without hesitation is that it was highly unappeased by the conditional package that had been offered by the International Monetary Fund (IMF). For this reason, it accepted the Chinese deal as the Angolan government found it more reasonable and manageable in terms of repayment. The fact that it would be able to make payments for the loans it received from China using the resources that it already had in abundance was appealing. This means that Angola found it easy to make repayments to the Chinese from its resources which it was richly endowed with.

China Exim Entry into Angola

China Exim Bank entry into Angola was facilitated by its role in financing the nation’s infrastructure development. China used it to provide concessional loans to Angola that would help the developing African nation improve its infrastructure.  Brautigam (2009) asserts that the bank extended a line of credit to Angola. The bank recorded contract amounts by various Chinese companies undertaking projects in Angola and paying them directly upon the completion of their projects.

China’s Loans to Angola

The loans provided by China Exim Bank started to be given in 2004 as opined by Taylor (2011) when the bank extended to the Angolan government a $2 billion loan that was meant for public infrastructure development in the country. In 2006, the credit was doubled and the following year the bank further provided an additional $500 million to the loan (Dannenberg et al., 2013). Three years later in 2010, China Exim Bank provided the Angolan government with another $6 billion bringing the bank’s total loan to the African nation to a whopping $10.5 billion (Dent, 2011). In addition to the financing from China Exim Bank, two more Chinese banks have also invested a momentous amount of money in the funding of Angola’s development through construction of its infrastructure. One of these banks is China Development Bank (CDB). The bank has provided a total of $1 billion credit that was directed towards the development of Angola’s agricultural sector (Corkin, 2011). The other bank is China International Fund Ltd (CIF). CIF has given $2.9 billion in loans for various construction projects in Angola. Overall, the total Angolan loan to China is $ 14.5 billion (Habiyaremye, 2016).

Investment of the Loans

From this information, it becomes clear that the loans received by the Angolan government were invested in various forms of development projects. Hsueh and Nelson (2013) are of the opinion that infrastructure development was on top of the list of these projects since the nation wanted to improve its status after the civil war that lasted close to 3 decades and made it lag behind many of its African counterparts. This includes the nation’s rail and road sector. Some of the railway projects in Angola include rehabilitation of the existing railway lines and construction of new lines. There are various Chinese companies in Angola which are responsible for road construction in the country. Gu (2009) indicates that the most active are the China Road and Bridge Corporation (CRBC). However, some of the loans were also invested in agricultural a sector that has been one of Africa’s strongest source of economic activities for a long time. It is also essential to mention that some of the loans were invested in the construction of hydroelectric power plants. This was critical for Angola due to the negative impact that electricity deficiency had on its economic growth at the end of the civil war.

Comparison of the Loans Provided by Exim Bank and Other Western Donors

A comparison can be made between the loans provided by Exim Bank and other Western donors to Angola. This comparison will take into consideration the terms offered by Exim Bank and other Western donors. The main issue that emerges based on the comparison between the two is the fact that the terms offered by Exim Bank are fairer compared to those of other Western donors. This is the main factor that has compelled Angola to accept Chinese financing over the other Western donors. For instance, Dannenberg et al. (2013) assert that loans by Exim Bank were being given at an interest rate of 1.5 percent which surpassed the rate offered by London Inter-Bank, which is taken as the benchmark rate of interest in international financing. In addition, Exim Bank provides flexible and sufficient timeframe for Angola to repay the loans it receives from China. This is not the case for other Western Donors. Dannenberg et al. (2013) point out that the repayable period offered by Exim Bank to Angola is over 17 years which includes a grace period of five years.

Chinese Petroleum Companies in Angola

The Chinese companies in Angola gained entry into the African state after the oil backed loans were provided by the Chinese government. Cheru and Obi (2010) informs that these loans are extended by the Chinese government through the China Exim Bank and are always mainly focused on the promotion of public investment in the Angolan oil-rich economy through the Angolan Ministry of Finance.

The intention of these companies is to gain access to Angola’s oil that is essential for powering its various industries given that China is unable to do so using its own oil resources. Further, Gu (2009) explains that these companies have the intention of becoming Angola’s largest oil trading partners. This explains why the terms of the loans entail an agreement according to which the Chinese companies are contracted to undertake the required projects and then get paid directly by the China Exim Bank that writes down the agreement on the contract against the loans that have been provided to the Angolan government.

Exim Bank versus the IMF

In respect to policy issues, the China Exim Bank is multifaceted in its policy statements regarding the issue of its loans to Angola. The first policy of the Exim Bank suggests that it has no regard for any form of commercial risk in the course of its dealings with China. Another policy presupposes that the loans are given to Angola with the view of accessing oil equity. On the other hand, the IMF policy underlies that in the course of its development, the bank will neither interfere in the political affairs of the country nor will it influence political decisions within the country.

The terms and conditions of the agreement with China Exim Bank are generally anchored on giving China exclusive rights to use oil resources and be the main trading partner of the country. The concessional loans given to Angola through the Exim Bank are aimed at enhancing infrastructural development to boost the oil sector while at the same time the country is expected to become the exclusive trading partner of Angola. For instance, Corkin (2011) asserts that at least 50% of the materials, equipment, and even technology used in oil exploration in Angola have to come from China. On the other hand, the terms and conditions of the IMF loans to China are always anchored on the spirit of accountability by the country. The IMF emphasises the strengthening of the public financial management and promoting fiscal transparency in the oil sector. Wiart (2012) indicates that during the slump in oil prices in 2009 at the time of the global financial crisis, the IMF required Angola to devalue its currency with the view of gaining strength in terms of its performance within the market by lowering the price of oil hence getting back on track in terms of its own excellent performance.

Exim Bank provides more generous terms than the IMF. Corkin, Uneasy allies: China’s evolving relations with Angola (2011) show that the loans provided by the Exim Bank have interest rates that range from 1.25% to 3%. On the other hand, the interest rates given by the IMF are about 16.4%, which is extremely high compared to the rates given by the China Exim Bank in the course of their operations for the infrastructural development in the oil sector of Angola. In the light of these disparities in interest rates and even the project development in the oil sector, the Exim Bank seems to have a better deal for Angola in terms of infrastructural development and the growth of the oil sector in Angola.

There is a reason why Angola found it advantageous to negotiate with China and thus ended its negotiation with the IMF. The key reason why Angola found it advantageous to negotiate with China and thus brought to an end its negotiations with the IMF is the fact that the Chinese Bank had more generous interest rates compared to the financing offered by the IMF where the country has to bear a high interest rate of 16.4% (Dannenberg et al., 2013).

Conclusion

China has come up with a strategy for the development of the oil-rich Angola through the Exim Bank. The country is focused on acquiring a large share in the oil sector and becoming a potential trade partner through the agreements on its loans to improve infrastructure and technology in the oil sector. The International Monetary Fund (IMF) has not found it easy to compete with the Exim Bank because of the favourable interest rates it offers. The IMF played an instrumental role in the oil sector in Angola during the 2009 financial crisis when the prices slumped through an emergency loan. Nevertheless, the country still prefers the Chinese approach to the financing of its oil sector.

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