House of Commons - International Development Committee

DFID and China - International Development Committee Contents

Written evidence submitted by Christian Aid

EXECUTIVE SUMMARY

Christian Aid works in nearly 50 countries worldwide, supporting local organisations to deliver urgently needed services directly to poor communities, and to scrutinise and hold their own governments and the international community to account.

In Africa, Christian Aid works in 20 countries, primarily through supporting the activities of local development, faith, human rights, producer and community based organisations who work to end poverty. Through our engagement with our African partners on debt cancellation, trade justice and aid, we have become aware of the very significant increase in the flows of Chinese-made consumer goods and Chinese finance for especially infrastructure, but also other development interventions. Although these are fairly recent trends African citizens, whether as consumers, small producers, wage earners, or part of civil society, are already experiencing their impact.

Christian Aid partner organisations across Africa have voiced concerns about issues as wide ranging as the impact of illegal logging by Chinese companies, job losses as a result of cheap imports of Chinese footwear and clothing, the failure to implement safety, environmental and labour legislation by Chinese companies, as well as the future impact on development spending of huge new Chinese loans to African governments.

We therefore welcome the opportunity provided by this submission to share our views on the implications for poverty reduction in Africa of the emergence of China as a major financier, investor and trader, and an emerging donor, on the continent.

Our submission will focus on the positive role DFID could play in the evolving aid and development policies of the Chinese government, especially towards Africa, and in assisting African governments to properly manage and regulate the increasing flows of Chinese finance, investment, trade and aid.

The submission will briefly outline the extent of trade, investment, finance and aid flows between China and Africa, and their impacts to date. It will then argue that the extent and impact of these flows necessitate three urgent interventions by DFID. First, DFID should increase efforts to assist African governments to make policy choices and use policy instruments that would ensure that these new finance, trade, investment and aid flows contribute to poverty reduction. Second, DFID should increase efforts to ensure that the World Bank and other bilateral donors stop requiring economic and policy reforms that would lessen the ability of African governments to regulate new flows of Chinese trade, investment and finance. Third, DFID should use its leverage as one of the largest and best regarded bilateral donors and multilateral players to encourage its Chinese counterparts, through its considerable existing bilateral dialogue on poverty and international development and through multilateral avenues, to encourage (a) responsible lending at China EximBank and the China Development Bank, (b) untying of aid, and (c) integrating UN frameworks such as the rights-based approach to development, the millennium development goals, UN Global Compact and the EITI into its lending, aid and investment operations in Africa.

OUR RECOMMENDATIONS FOR THE UK GOVERNMENT ARE AS FOLLOWS

We welcome DFID's existing support for capacity development in Africa to understand and engage with the new Chinese presence on the continent.

In addition to funding for policy think tanks in South Africa, DFID should also support regional organisations and governments who want more capacity to negotiate directly with the Chinese government and corporations, as well as the Africa Union Commission and civil society organisations and parliamentary bodies monitoring new loans and corporate activity in their countries and advocating for better loan management and corporate regulation.

DFID should encourage Chinese officials to align Chinese aid to international development principles and goals, and not OECD DAC aid management instruments or principles, given that these are unsuitable for a "south-south" cooperation framework.

DFID should use its leverage as a reputable bilateral aid agency to encourage the Chinese government and Chinese SOEs to sign up to the EITI and the UN Global Compact, as well as voluntary codes, especially to promote sustainable logging among Chinese SOEs.

DFID should intensify its support for building the capacity of African governments to use trade policy instruments and trade remedies to safeguard especially the footwear, clothing and textile industries. Similarly, it should channel support to those African governments who want more capacity to enforce labour, environmental (including forest management) and tax legislation.

DFID should assist African governments who want to improve their debt management capacity and increase the transparency of loan agreements.

Finally, DFID should encourage the Chinese government to assess and mitigate the social and environmental impacts of large infrastructure projects financed by the China Exim Bank.

INTRODUCTION

1. China's renewed engagement in Africa since the turn of the century has led to a polarised debate in the development community. Some—especially in Africa—argue that China's "non-interventionist and non-ideological" Africa strategy is a welcome antidote to western donors' heavy intervention in African policies and the dominant ideology of market fundamentalism informing these interventions. Others argue that Chinese intervention is repeating some of the worst mistakes of western aid, namely turning a blind eye to the human rights violations or autocratic regimes of African governments in receipt of Chinese finance and investment, thereby prolonging their hold on to power.

2. While both of these assertions hold some truth, this debate has not helped African citizens or governments who are committed to sustainable human development and poverty eradication, to harness the increasing flows of Chinese credit, trade, investment and aid to achieve their national development goals.

3. China's rhetoric on aid differs from that of traditional donors. It does not want to engage in western-style aid partnerships with African countries. Rather, it views its collaboration with Africa as "south-south cooperation", a concept which originated in the NAM and G77 discourses of the 1970s, and used by members of these groups to chart an alternative development path to that of dependency on western aid, finance and trade. As such, the Chinese government views its relationship with Africa in a framework of solidarity, which includes policy initiatives ranging from diplomacy to commercial expansion, rather than one of dependency.

4. In this context, Chinese "aid" is primarily an instrument of its foreign economic policy, which in Africa, aims to secure access to stable supplies of raw materials—needed to fuel its economic boom—at stable prices. "South-south cooperation" is a framework that explicitly promotes two-way benefits between "cooperating" partners. This explains why the Chinese government gives aid as a complement to already existing credit and investment deals, mostly tied to resource extraction and processing, and to infrastructure construction. These deals benefit Chinese energy users and construction companies, as well as African countries in dire need of foreign exchange and infrastructure.

5. Notwithstanding this particular relationship, China should not be treated as an "exceptional" aid, trade or financial partner to Africa. Like others in the international development, finance and investment community, Chinese credit agencies, development bodies and corporations operating in Africa should adhere to internationally accepted rules and norms—more specifically, those agreed at the UN level, governing trade, credit, finance and investment flows.

6. Likewise, African governments should endeavour and where needed, receive assistance, to strengthen their capacity and political will to improve, monitor and regulate the labour, environmental, safety and social practices of all firms operating in their territories. They should be free to use trade policy tools such as import tariff raises and quota restrictions, as well as support mechanisms for local industries, to promote economic development. Finally, they should endeavour, and where necessary receive assistance, to manage new public loans to avoid a future debt crisis.

RESPONSIBLE LENDING AND BORROWING

7. Chinese concessional loans to low-income but resource-rich African countries such as Nigeria, Angola, Sudan, Chad, and others is fast superseding the concessional loans that used to be provided by traditional creditors such as the IMF and IDA. The World Bank estimates that China Exim Bank, the largest such institution in the world, has disbursed more than USD12.5 billion for large-scale infrastructure projects in sub-Saharan Africa, of which more than three quarters have gone to resource-rich countries.[1] In addition, the China Development Bank, which funded the controversial Three Gorges Dam, is actively seeking out opportunities in Africa. It will administer the USD5b credit for Chinese companies announced by the Chinese government at the Africa Development Bank meeting in Shanghai in 2007.

8. Concessional loans are the preferred means of development assistance from China to Africa, and outweigh the volume of grants by far.

9. China is increasingly disbursing low interest loans to African governments in resource rich countries using commodities such as oil as collateral for the loan. Chinese diplomats refer to this as the "Angola model". In Angola, the Ministry of Finance is managing an estimated loan portfolio of USD4.5 billion, negotiated with China Exim Bank. This loan is payable at Libor + 1.5% over 17 years, including a grace period of five years, in exchange for 10,000 barrels of oil per day.

10. These loans come with very stringent conditions attached—the finance is tied to the use of Chinese companies to undertake the work. China Exim Bank requires that "no less than 50%" of the contract's procurement of equipment, materials, technology or services must come from China. In Angola the EximBank loan stipulates that 70% of the public tenders for the construction and civil engineering contracts financed by the loan have to be awarded to Chinese enterprises approved by the Chinese government.[2] The loan operates as a current account held in China under the name of the Angolan government. The money in this account is paid directly to Chinese construction companies.[3]

10. According to China Exim Bank, it will consider infrastructure or industrial projects, or those that promote social welfare, for loans. The Bank stipulates that all projects "must have good social benefits".[4]

11. The emergence of China as an alternative source of funding has been welcomed by African governments, given the urgency of building or upgrading infrastructure, coupled with their inability to raise money from commercial sources and the focus of traditional aid on social services. They view China Exim Bank finance as a welcome alternative to that of the IMF and IDA, which have explicitly interfered in the economic policy choices and administrative functioning of governments since the 1980s.

12. At the same time, African civil society groups and parliamentarians have been campaigning for a number of years for their governments to adopt more responsible borrowing practices, and for creditors to become more responsible lenders. They have been particularly outspoken against executive control over loan negotiations, given the experience of the debt crisis. They are asking for more transparency in loan negotiations—in particular for parliaments to exercise greater oversight over loan negotiations and institutions such as the Auditor General to have greater powers in auditing financial deals, given that repayments will affect future budget spending on development.[5]

13. The IFIs confide the issue of responsible lending and borrowing to "debt sustainability". In their view, debts are sustainable as long as governments have sufficient reserves of foreign exchange when repayments become due to pay back these loans. Civil society groups in Africa, instead, argue that society, through parliament and other institutions need to approve and monitor the projects financed by credit, and discuss the trade-offs between paying off debts and financing development priorities when repayments become due.[6]

14. Given the huge social and environmental impact of especially infrastructure projects, their implementation need to take account of potential social, poverty and environmental impacts. The European Investment Bank and other infrastructure lenders are already aware of these issues and are increasingly making efforts, under pressure from European civil society, to mitigate the impact of the projects they finance, and to increase transparency. China Exim Bank is not facing similar pressures from Chinese civil society.

15. In view of the above, DFID is well-placed to lead discussions with China Exim Bank governors on debt sustainabiliy, responsible lending, transparency and social and environmental impacts of infrastructure projects.

16. China Exim Bank has indicated in 2007 that it intends to improve its lending practices and standards. This provides an ideal window of opportunity for DFID to use its influence to discuss:

(a) how to ensure that Exim Bank loans to governments such as Mozambique and Ghana, which have respectively signed loan deals of USD2.3 billion and USD1.2 billion with the bank since qualifying for debt relief under the HIPC initiative do not compete with future expenditure on development priorities;

(b) introducing transparency in loan transactions between African governments and China Exim Bank;

(c) the importance of undertaking social and environmental impact assessments before Chinese companies embark on infrastructure projects, learning from the experience of other infrastructure investment banks such as the African Development Bank, the European Investment Bank, and the Development Bank of Southern Africa; and

(d) the benefits of untied aid.

REGULATING FOREIGN INVESTMENT AND CORPORATE SOCIAL ACCOUNTABILITY

17. Up to 80% of Chinese investment in Africa is concentrated in resource-rich countries, mostly in the form of Chinese state-owned enterprises. The bulk of this investment is in the oil and mineral exploration and in the extractive industry. Officially, China sources a third of its oil imports from African countries.

18. Furthermore, the Chinese government is planning to establish five special economic zones in Africa—the first one has already been established in Zambia, a second one in Mauritius, and another zone is reportedly being negotiated in West Africa. The purpose of these zones would be to integrate the production chain from mineral extraction to transformation in the same location. These zones would aim to attract export-producing Chinese companies by offering them a host of incentives, including exemptions from labour, tax, and environmental laws.

19. Chinese construction companies contracted to build infrastructure underwritten by China Exim Bank loans are not counted as foreign direct investment. However, even where Chinese loans allow for open procurement of goods and services for infrastructure projects, Chinese companies often compete unfairly against local companies, given that they are subsidised by cheap capital from the Chinese government, and use cheap Chinese labour. In 2006, the Chinese government has committed to create a USD5 billion China-Africa Development Fund, to encourage Chinese companies to invest in Africa. And in 2007, the Chinese president announced at the ADB meeting in Shanghai that the government will commit a further USD20 billion to fund Chinese investment in Africa.

20. This new inflow of foreign direct investment could potentially stimulate job creation, domestic revenue, and economic activity. But this will only happen if governments are able and willing to ensure that local workers and managers are trained and employed, technology is transferred to local enterprises, local suppliers are given contracts and are able to collect taxes on the profits of companies.

21. Furthermore, evidence shows that many Chinese companies, most of them state-owned enterprises, violate national safety, labour and environmental legislation.[7] Not only do these enterprises need to improve their labour and environmental practices, but African governments also need the muster the political will, and outside assistance where needed, to improve their monitoring and enforcement of labour and environmental legislation.

22. DFID, as part of its ongoing dialogue with Chinese officials on development and aid, should encourage the Chinese government to:

(a) sign its state owned enterprises up to the UN Global Compact; and

(b) sign up to the Extractives Industry Transparency Initiative and as part of its development assistance to African governments, help build the capacity of these governments to regulate foreign investors and enforce labour and environmental legislation. Furthermore, DFID should strongly and urgently oppose any further attempts by the European Union to negotiate "investment" agreements with African governments as part of Economic Partnership Agreements, as this could further erode attempts of African governments to control and regulate the quality of Chinese investments on the continent.

PROTECTING AND PROMOTING LOCAL INDUSTRIES AND PRODUCERS

23. So far, only seven African countries source a significant share of their total imports from China. They are Sudan, Ghana, Tanzania, Nigeria, Ethiopia, Kenya, and Uganda.

24. Chinese imports of textiles, clothing and footwear pose a serious threat to the emergence of a manufacturing industry in especially southern and eastern African countries. In this region, many clothing and textile factories have closed down in recent years as a result of Chinese imports, resulting in massive job losses and growing poverty among affected households, given the lack of other job opportunities.[8]

25. The South African government has recently negotiated an import quota with the Chinese government as part of a broader strategy to revive and promote the country's textile and clothing industry. This and other trade policy tools should be available to all African government who want to promote industrial development and job creation as part of their broader development strategy. World Bank and IMF loan conditions have restricted the ability of many African governments to freely use such instruments, and continue do to so in some cases.

26. To address these challenges, DFID should continue to monitor the use of economic reform conditions as part of World Bank and IMF loans, and lobby the international financial institutions to stop requiring non-fiduciary structural economic reforms in exchange for concessional loans or grants.[9]

INTERNATIONALLY AGREED DEVELOPMENT PRINCIPLES

27. Chinese grant aid to African countries is delivered by a number of government departments. Aid provision does not seem as yet to be guided by an overall aid strategy of the Chinese government. Instead, aid is provided following the preferences of the recipients.

28. Given that a "Chinese aid strategy" would be inconsistent with the principles of "south-south cooperation", it would not be very useful to push the Chinese government to become a member of the OECD DAC club, and take on the accompanying development approaches such as the Paris Declaration principles, or results-based aid management.

29. Instead, multilateral agencies such as the EU and DFID, as a reputable bilateral donor, should encourage the Chinese government to integrate internationally agreed development principles and goals—specifically the rights-based approach to development, sustainable development, and the millennium development goals—into its discussion of aid projects with African governments.

OUR RECOMMENDATIONS TO DFID

30. We welcome DFID's existing support for capacity development in Africa to understand and engage with the new Chinese presence on the continent. In addition to funding for policy think tanks in South Africa, DFID should also support regional organisations and governments who want more capacity to negotiate directly with the Chinese government and corporations, as well as the Africa Union Commission and civil society organisations and parliamentary bodies monitoring new loans and corporate activity in their countries and advocating for better loan management and corporate regulation.

31. DFID should encourage Chinese officials to align Chinese aid to international development principles and goals, and not OECD DAC aid management instruments or principles, given that these are unsuitable for a "south-south" cooperation framework.

32. DFID should use its leverage as a reputable bilateral aid agency to encourage the Chinese government and Chinese SOEs to sign up to the EITI and the UN Global Compact, as well as voluntary codes, especially to promote sustainable logging among Chinese SOEs.

33. DFID should intensify its support for building the capacity of African governments to use trade policy instruments and trade remedies to safeguard especially the footwear, clothing and textile industries. Similarly, it should channel support to those African governments who want more capacity to enforce labour, environmental (including forest management) and tax legislation.

34. DFID should assist African governments who want to improve their debt management capacity and increase the transparency of loan agreements.

35. Finally, DFID should encourage the Chinese government to assess and mitigate the social and environmental impacts of large infrastructure projects financed by China Exim Bank and the China Development Bank.