Resources-for-Infrastructure (RFI) deals between China and African countries are not always win-win as advertised. For example, the Angola-China deal trading oil for infrastructure spending did not pan out as conceived. However, this new RFI deal between China and Ghana should pan out differently because Ghana has negotiated a more favorable deal than other African countries have in the past.
In sum, Ghana has negotiated a deal with Sinohydro under which Ghana will receive $2 billion in financing for infrastructure—roads, railways, and bridges—in exchange for access to 5 percent of Ghana’s bauxite reserve. The deal, which is part of a $19 billion credit facility between both countries, also includes 100 vehicles to be donated to Ghana’s Police Service, $43 million in grants, and $37 million in debt waivers.
This deal has stirred controversy and debate within Ghana and across Africa concerning debt sustainability and the environmental degradation that could result from mining bauxite in the Atiwa forest. But considering the summary of the deal and information available in the public domain, Ghana appears to have negotiated a favorable deal with Sinohydro for three reasons.
First, this deal will not cause Ghana’s public debt to increase because China’s claim for repayment is not secured by Ghana’s general revenue. Rather, it is secured by revenues from aluminum sales. This distinction is important because it has implications for public expenditures. When loan repayment claims are against the general revenue, governments cannot prioritize other expenditures over the repayments. That is, if the indebted government desired to spend $1 million on building a new clinic, the government could not choose the clinic over repayment because that would lead to a default and higher borrowing costs in the future. But when a repayment claim is tied to a specific revenue stream, such as aluminum sales, the government is not obligated to use revenues from other sources to repay the debt. In this case, Ghana can spend the entire $1 million on building the hospital and not worry about debt repayment. This deal is similar to the revenue bonds that American and European municipalities issue to build toll roads and bridges; the repayments are tied to the tolls collected, not the general revenue. Thus, because Ghana’s obligation to repay the $2 billion is tied to aluminum revenues, Ghana will not face the dilemma of choosing between repayment and building schools or hospitals.
Second, Ghana remains in charge under this deal. Other RFI deals have made the Chinese responsible for both extracting and exporting the resources. Here, by contrast, Ghana remains responsible for extracting the bauxite, setting up the refinery to process the aluminum, and then exporting and selling the aluminum. Furthermore, this deal allows Ghana to build-up its industrial capacity through the value-added processing of bauxite to aluminum. In short, this will be a process setup by Ghanaians, run by Ghanaians, and owned by Ghanaians. China will simply receive its share of the sales.
Third, this deal will contribute to Ghana’s infrastructure. Specifically, Ghana negotiated the deal so that it will receive the $2 billion in infrastructure financing before it must begin mining bauxite or processing the aluminum. This will give Ghana the space to design an environmentally responsible bauxite mining process. Furthermore, these newly built roads, rails, and bridges will contribute to closing Ghana’s infrastructure gap. A recent World Bank report shows that Ghana needs to spend $2.3 billion per year over the next decade to close its infrastructure gap. This level of infrastructure spending will have the additional benefit of adding 2.7 percentage points to the GDP per year.
Despite these favorable points, mining for bauxite in the Atiwa Forest comes with serious risks to the environment. Atiwa is home to the sources for three rivers that supply drinking water to five million residents in Accra. It is also the habitat for rare and endangered species such as the West African White-naped Mangabey monkey, Mylothris atewa, and Anthene helpsi – the latter two being rare butterfly species found only in the Atiwa forest. The government, in consultation with environmental groups and stakeholders, therefore needs to formulate an effective environmental pollution mitigation plan to protect the forest ecosystem.
In conclusion, Ghana has negotiated well and received a better RFI deal that ensures it will develop necessary infrastructure, maintain control of the bauxite extraction process, and add value to the bauxite before selling it on the international market. For African countries to transition from being mere exporters of raw materials to also being value-added processors, they must trade the resources they have to acquire the infrastructure upon which a new economic model can be built. This deal accomplishes precisely this feat.
Francis Kiazolu is a Senior Derivatives and Securities Analyst at PRA Group, Inc.