Banks

China’s new energy strategy in Africa: issues and challenges

The eighth Forum on China-Africa Cooperation (FOCAC), held in November 2021 in Dakar, concluded with the announcement of the opening of a “new era” of China-Africa cooperation in various fields, including that of energy. Announced objective: direct this cooperation towards “quality” development combining financial and environmental sustainability.

Today, the Chinese presence in the energy field in Africa is above all concentrated in fossil and hydraulic energies. What could be the contours of a change towards less risky and less polluting projects? And what are the challenges of such a development for Chinese banks and investors?

A commitment to hydraulic and fossil energy

The breakdown of bank financing in the energy sector over the last decade shows the predominance of hydroelectricity (main renewable energy), followed by fossil fuels (oil then coal) and transmission and distribution projects (T&D ) (Graph 1). The strong presence of China in the hydroelectricity sector can be explained in particular by the fact that Chinese companies and donors took advantage of the vacuum left by other foreign donors at the turn of the 2000s.

Chart 1: Breakdown of financing from Chinese development banks in Africa (USD 43 billion) over 2010-2020. Click to zoom.
Authors’ calculation from Boston University’s CGEF and Johns Hopkins Institute’s CAL databases

The Chinese presence in oil and gas developed in the 1990s, with the “Going Out” strategy. The two objectives pursued by it were learning in the management of energy projects in Africa for Chinese companies and energy security, the African continent representing 20% ​​of China’s gas and oil imports. However, the presence of the Middle Kingdom was especially evident upstream, at the extraction stage, due to a lack of expertise on certain components of thermal power stations.

Since the 2000s, Chinese private sector investment incentives in energy have followed one another. The ambition of the New Silk Roads (Belt and Road Initiative – BRI) is to encourage the private sector to invest in the production of renewable energies – in particular solar and wind, in which China is the world leader.

However, over the last decade, it can be seen that investments in the field of energy in Africa have remained undiversified (Graph 2). Those allocated to oil and gas projects by Chinese state-owned enterprises largely dominate in volume and number of projects.

Chart 2: Breakdown of Chinese investments in energy in Africa (32 billion) over 2010-2020.
Authors’ calculation from Boston University’s CGEF and Johns Hopkins Institute’s CAL databases, Author provided

Bank financing directed towards renewable energies other than hydraulics does not exceed 3% of committed volumes. Business investment in these renewable energies also represents only 3% of total investment. Although China is number one on the planet for the production of solar or wind energy, there is no consortium specialized in the development of projects of this nature abroad, and the PRC mainly acts as a equipment supplier (supply of photovoltaic panels).

Falling Chinese commitments

Commitments for Chinese loans in Africa, all sectors combined, are shrinking. The data available from Boston University or that of John Hopkins used in Chart 3 attests to this decrease since 2017.

This slowdown can be explained by several factors: growing indebtedness of African countries, which has limited their ability to borrow to finance major infrastructure projects; slowdown in China’s domestic growth, which requires a change in its projection abroad; change in China’s energy strategy and mobilization of financing instruments in the various energy sectors.

Chart 3: Evolution of Chinese energy financing in Africa over 2010-2020.
Authors’ calculation from Boston University’s CGEF and Johns Hopkins Institute’s CAL databases, Author provided

The end of the financing of large-scale, unprofitable or polluting projects

Recently, the Chinese projection strategy has evolved and we can see two changes that have already begun in Africa. First, a move towards a more restrictive risk management policy. Second, the growing awareness of the importance of promoting green development and meeting the challenges of environmental protection and climate change.

In Africa, this takes the form of a slowdown in public financing and the abandonment of large-scale polluting projects with excessively marked risk profiles. These decisions naturally have major implications on the contours of energy cooperation with the continent.

China announced in September 2021 that it wanted to withdraw from coal. The ore has become less profitable, politically undesirable, and Africa is only a secondary supplier.

However, the terms of this withdrawal remain to be defined. The mixed successes in the oil sector over the past decade (falling prices) have caused some disappointments to national oil companies on the continent. Thus, China’s supply of African oil is decreasing (from 30% of total imports in 2008 to 18% in 2018) – a trend that should continue with the scarcity of projects in the years to come.

On the other hand, the strategic stakes around gas are increasing, in a context where twenty Western countries have committed themselves within the framework of COP26 to no longer finance projects in the field of fossil energies. The Dakar FOCAC declaration supporting green investments and financing for gas projects illustrates this perfectly.

Senegalese President Macky Sall at the Forum on China-Africa Cooperation (FOCAC) in Dakar, November 29, 2021.
Seyllou / AFP

China could fill the void created. Because Africa has the largest gas deposits discovered over the decade, a fact to be compared with the figures for Chinese gas consumption, which are constantly increasing.

Changes in the renewable energy sector

The past decade has seen the financing of large, risky hydro projects, typically with a capacity of over 50 MW. The greening of the BRI could lead to their size being reduced. Indeed, these major projects take time to set up, and the increasingly strong apprehension of the environmental and social consequences makes them lose their appeal.

However, large-scale hydraulics will continue to be at the heart of China’s presence in Africa. This is evidenced by the forecasts of the International Energy Agency (IEA), which anticipates that 70% of additional hydropower capacity over the period 2021-2030 in Africa should come from Chinese operators. The challenge in this sector is therefore to guarantee solid environmental and social preliminary studies, and credible transparency mechanisms to reduce the risk profile of these projects.

The rare Chinese renewable energy projects are carried out by the private sector. The small size of the projects sometimes coincides with that of the companies, while their transaction costs are prohibitive for the large Chinese state companies, which favor large-scale hydro projects.

However, a rapprochement on the ground between private companies and state-owned companies can sometimes be observed, and the multiplication of BRI greening initiatives, the more drastic application of environmental and social standards should help Chinese public and private companies to better project itself into the non-hydraulic renewable energy sectors.

Involve Chinese commercial banks and private companies more

Two strategic policy banks dominate the financing sector, and six state-owned enterprises the investment sector. Of the USD 43.4 billion in Chinese energy financing recorded over the decade 2010-2020 in Africa, the China Eximbank and the China Development Bank represent 60% and 37% respectively. Commercial banks alone have a marginal share (3%, with 3.3 billion USD).

State enterprises are the other major Chinese economic actors, both beneficiaries of bank financing as contractors, but also present in investment in large-scale projects (30 billion USD since 2010). The government is also counting on the participation of private companies as investors or contractors, mainly for wind and solar projects, but the projects have remained confidential until now (2 billion USD since 2010).

Most of these sovereign loans follow the so-called turnkey project model. The contractor takes care of all the engineering, from design to installation, including the choice of materials. He then approaches Chinese banks for financing, but this does not imply a presence of the company during the operation phase.

However, this model is losing momentum for two reasons. First of all, because this situation is a vector of moral hazard, since companies have an interest in “overselling” the interest of projects, exploiting the lack of visibility of banks. Then, because this system of loans, which attaches little importance to the viability of projects, generally includes a clause forcing developers to take out costly insurance. The latter are tailored to large amounts of financing for fossil fuels, because insurance premiums do not evolve gradually, but not for renewable energies.

What is at stake is the entry into a “new age of internationalization” for Chinese state-owned and private enterprises. From the status of builders, they should evolve towards that of developer-investors with capacities for risk assessment and increased environmental and social impacts, to no longer depend on very costly guarantees.

The existing model’s weak incentive to build analytical capacity, and preferences for government-to-government agreements, have limited their ability to assess risk, and therefore competitiveness on these projects. To increase their skills, Chinese actors must be more open to external co-financing or to multiple sources of financing.

The greening of the BRI as a springboard

With the proliferation of BRI greening initiatives, publications encouraging compliance with stricter environmental and social standards have spread. In order to attract investors and develop co-financing, these measures must now be operationalized.

The greening of the BRI, but above all of China’s energy mix and industrial policy, redefines Beijing’s resource diplomacy and should support its transition to a lower carbon model. This move towards more sustainable “New Silk Roads”, which implies significant changes, could pave the way for dialogue and enhanced cooperation between Chinese financial players and their counterparts in the energy sector.

– _Matthys Lambert and Achille Macé are co-authors of this article. _

About the author

on100dayloans

Leave a Comment